SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended May 31, 2001 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
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U.S. ENERGY CORP.
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(Exact Name of Registrant 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)
Registrant's Telephone Number, including area code: (307) 856-9271
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Securities registered pursuant to Section 12(b) of the Act:
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NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
The aggregate market value of the shares of voting stock held by
non-affiliates of the Registrant as of August 17, 2001, computed by reference to
the average of the bid and asked prices of the Registrant's common stock as
reported by the National Market System of NASDAQ on that date, was approximately
$30,467,400.
Class Outstanding at August 17, 2001
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Common Stock, $0.01 par value 9,609,104 shares
Documents incorporated by reference: Portions of the documents listed below have
been incorporated by reference into the indicated parts of this report as
specified in the responses to the referenced sections of this filing.
Annual Meeting Proxy Statement for the fiscal year ended May 31, 2001 into
Part III of the filing.
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
fact included in this Report, are forward-looking statements, including without
limitation the statements under Management's Discussion and Analysis of
Financial Condition and Results of Operations and the disclosures about Rocky
Mountain Gas, Inc. and plans for developing its coalbed methane acreage. In
addition, whenever words like "expect," "anticipate" or "believe" are used, we
are making forward-looking statements.
Although we believe that our forward-looking statements are reasonable, we
don't know if our expectations will prove to be correct. Important future
factors that could cause actual results to differ materially from expectations
include: Domestic consumption rates for natural gas; domestic market prices for
natural gas, uranium, gold, and molybdenum; the amounts of gas we will be able
to produce from our coalbed methane properties; the availability of permits to
drill and operate coalbed methane wells; whether and when gas transmission lines
will be built to reasonable proximity to our coalbed methane properties; and
whether and on what terms the capital necessary to develop our properties can be
obtained. The forward-looking statements should be carefully considered in the
context of all the information set forth in this Annual Report.
PART I
ITEM 1 AND ITEM 2. BUSINESS AND PROPERTIES.
(A) GENERAL.
U.S. Energy Corp. is a Wyoming corporation (formed in 1966) in the business
of acquiring, exploring, developing and/or selling or leasing mineral
properties, and the mining and marketing of minerals. In this Annual Report,
"we", "Company" or "USE" refers to U.S. Energy Corp. including subsidiaries
unless otherwise specifically noted.
In fiscal 2001, we were engaged in three industry segments: minerals,
commercial operations, and contract drilling/construction operations. In the
minerals segment, we have three principal mineral sectors: coalbed methane gas,
uranium and gold (properties and other assets included in the latter two sectors
are in "care and maintenance" status). The uranium properties are located on
Sheep Mountain in Wyoming, and in southeast Utah; we also hold a royalty
interest in uranium claims on Green Mountain, Wyoming, now held by Kennecott
Uranium Company (see below). The gold property is located in Sutter Creek,
California, east of Sacramento. Interests are held in other mineral properties
(principally molybdenum), but are either non- operating interests or undeveloped
claims. We also operate a small oil field in Montana. Our fiscal year ends May
31.
The coalbed methane gas business is conducted through Rocky Mountain Gas,
Inc. ("RMG," a Wyoming corporation owned 41% by USE and 41% by Crested Corp.;
Crested is a 70.5% majority-owned subsidiary of USE, see below). Properties of
RMG are held in Wyoming and southeastern Montana. As of the filing date of this
Annual Report, RMG holds approximately 257,000 gross mineral acres of coalbed
methane properties:
For detailed information about our coalbed methane properties and business
strategy, please see "Minerals - Coalbed Methane" below.
USE and Crested Corp. ("Crested") originally were independent companies,
with two common affiliates (John L. Larsen and Max T. Evans). In 1980, USE and
Crested formed a joint venture ("USECC")
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to do business together (unless one or the other elected not to pursue an
individual project). As a result of USE funding certain of Crested's obligations
from time to time (due to Crested's lack of cash on hand), and Crested
subsequently paying these debts by issuing common stock to USE, Crested became a
majority-owned subsidiary of USE in fiscal 1993. In fiscal 2001, Crested issued
another 6,666,666 shares of its common stock to reduce Crested's debt owed to
USE by $3.0 million, which increased USE's ownership of Crested to 70.5%. All of
USE's (and Crested's) operations are in the United States. Principal executive
offices are located in the Glen L. Larsen building at 877 North 8th Street West,
Riverton, Wyoming 82501, telephone 307.856.9271.
Most of the Company's (USE's) operations are conducted through
subsidiaries, the USECC joint venture with Crested, and jointly-owned
subsidiaries of USE and Crested.
Until September 11, 2000, USE, USECC and Kennecott Uranium Company
("Kennecott") owned the Green Mountain Mining Venture ("GMMV"), which held a
large uranium deposit and uranium mill in Wyoming. On September 11, 2000, USE
and Crested settled litigation with Kennecott involving the GMMV by selling
their interest in the GMMV and its properties back to Kennecott for $3,250,000
and receiving a royalty interest in the uranium properties. Kennecott also
assumed all reclamation obligations on the GMMV properties. Other uranium
properties and a uranium mill in southeast Utah are held by Plateau Resources
Ltd., a wholly-owned subsidiary of USE. The Utah uranium properties are in a
care and maintenance status.
The gold assets held by Sutter Gold Mining Company ("SGMC"), a
majority-owned subsidiary of USE, are in care and maintenance status because the
current price of gold does not permit raising the capital necessary to put the
assets into production.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
During the three fiscal years ended May 31, 2001, we operated in three
business segments: (i) minerals, (ii) commercial operations, and (iii) contract
drilling/construction (principally in fiscal 2000 and the first quarter of
fiscal 2001). The principal products of the operating units within each of the
reportable industry segments for the three fiscal years ended May 31, 2001 were:
INDUSTRY SEGMENTS PRINCIPAL PRODUCTS
Minerals (including methane) Acquisition of coalbed methane
properties, and exploration and
development of such properties for
coalbed methane gas. Sales and leases of
mineral-bearing properties and, from
time to time, the production and/or
marketing of uranium, gold and receipt
of advance royalties on molybdenum.
Commercial Operations Operation of a motel and
rental of real estate, operation of an
aircraft fixed base operation (fuel
sales, flight instruction and aircraft
maintenance), and various contract
services, including managerial services
for subsidiary companies.
Contract Drilling/Construction Contract drilling of coalbed methane gas
wells, construction of drill sites, gas
pipe lines, reservoirs and reclamation
of locations.
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Percentage of Net Revenue contributions by the three segments (and by
interest on cash accounts) in the last three fiscal years were:
Percentage of Net Revenues During the Year Ended
---------------------------------------------------
May 31, May 31, May 31,
2001 2000 1999
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Minerals 3% 2% 2%
Commercial Operations 18% 36% 27%
Construction Operations 15% 46% 0%
Interest and Other 64% 16% 71%
In fiscal 2001, we received $442,800 in revenues from the minerals segment
as compared to $132,600 in fiscal 2000. During fiscal 2001 there were $108,500
from molybdenum advance royalties and $334,300 from uranium contract deliveries
and the sale of an uranium delivery contract. During fiscal 2000 we recorded
$132,600 from advance molybdenum royalties. During fiscal 1999, there were
revenues from mineral sales of $150,600 from molybdenum advance royalties and
$87,600 for uranium contract deliveries.
Commercial operations during fiscal 2001 generated revenues of $2,519,400,
compared to $2,786,800 during fiscal 2000, with the decrease due to a slower
tourist season at the commercial operations in southern Utah.
Contract drilling and construction operations for third parties in the
coalbed methane business resulted in revenues of $2,238,600 during fiscal 2001
compared to $3,584,900 during fiscal 2000. No revenues were recognized in this
segment in fiscal 1999, and in fiscal 2001, we temporarily suspended third-party
services in the coalbed methane business.
(C) NARRATIVE DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT (INCLUDING ITEM 2 -
PROPERTIES).
MINERALS
COALBED METHANE
GENERAL. Rocky Mountain Gas, Inc. ("RMG") was incorporated in Wyoming on
November 1, 1999 for business in the coalbed methane industry in Wyoming and
Montana. RMG is a subsidiary of the Company (owned 41.7% by the Company and
41.7% by Crested).
Methane is the primary commercial component of natural gas produced from
conventional gas wells. Methane also exists in its natural state in coal seams.
Natural gas produced from conventional wells generally contain other
hydrocarbons in varying amounts which require the natural gas to be processed.
Methane gas produced from coalbeds generally contains only methane and is
pipeline-quality gas after simple water dehydration.
Coalbed methane production is similar to conventional natural gas
production in terms of the physical producing facilities. However, the
subsurface mechanisms that allow gas movement to the wellbore are very
different. Conventional natural gas wells require a porous and permeable
reservoir, hydrocarbon migration and a natural structural or stratigraphic trap.
Coalbed methane gas is trapped (adsorbed) in the coal itself and in the water
contained in the pore space, until released by pressure changes when the water
in the coal is removed. In contrast to conventional gas wells, new coalbed
methane wells initially produce water for several months. As the formation water
pressure decreases, methane gas is released from the structure.
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Methane is a common component of coal since methane is created as part of
the coalification process. Coals vary in their methane content as measured by
standard cubic feet per ton. Whether a coalbed will produce commercial
quantities of methane gas depends on the coal quality, its content of natural
gas per ton of coal, the thickness of the coalbeds, the reservoir pressure, the
existence of natural fractures, the permeability of the coal, and saturated with
water to help hold methane in coalbed.
Due to the shallow coal seams in the Powder River Basin, of Montana and
Wyoming, the drilling, discovery, development and production of coalbed methane
has significant economic advantages compared with conventional natural gas
targets. Over the past several years, coalbed methane has become an important
source of pipeline quality gas in the United States. Methane gas production from
coalbed reservoirs has grown from virtually nothing a decade ago to
approximately seven percent of the total United States gas production today.
Development of coalbed methane in the Powder River Basin of northeastern Wyoming
and southeastern Montana continues at a high level in calendar 2001 and is
expected to continue for several years.
The principal coals in the Powder River Basin ("PRB") include the thick
coal seams of the Tongue River member of the Paleocene Fort Union Formation,
which are among the thickest in the world. Individual coalbeds range in
thickness from a few feet up to 250 feet. A typical well might penetrate
multiple coal zones in depths over a 200 to 1,200 foot range. Based on reports
filed by other companies with the State of Wyoming, reserves per coalbed methane
well in the PRB can vary considerably but a typical estimate can exceed 300
million cubic feet (MMcf) of gas per well. Given the expected low drilling and
completion costs, these levels of reserves make coalbed methane wells attractive
to gas companies.
OVERVIEW OF RMG. As of the filing date of this Annual Report, we hold
approximately 257,000 gross mineral acres under leases from the United States
Bureau of Land Management, the states of Wyoming and Montana, and private land
owners. Assuming the exercise of options held by Suncor Energy Natural Gas
America Inc. ("SENGAI"), a subsidiary of Suncor Energy Inc., (NYSE "SU" Calgary
Alberta, Canada), our working interest is 6.25% (5% net revenue interest) on
112,000 acres in the Castle Rock prospect in southeast Montana. The rest of the
Castle Rock prospect is owned 37.5% working interest, 30% net revenue interest,
by Quaneco, L.L.C.; and a 50% working interest, 40% net revenue interest by
SENGAI (assuming SENGAI exercises its option). We own a 25% working interest
(20% net revenue interest) on 74,500 acres in the Kirby prospect (southeast
Montana); and a 50% working interest (from 30% to 50% net revenue interest) on
70,500 acres in other prospects (all in Wyoming). Our interest in the Castle
Rock prospect will revert to 50% overall if SENGAI doesn't exercise its option;
in this event, we would continue to own a 50% working interest (40% net revenue
interest), and Quaneco L.L.C. would own a 50% working interest (40% net revenue
interest) in the Castle Rock prospect. CCBM, Inc. ("CCBM") a subsidiary of
Carrizo Oil & Gas, Inc. has the option to acquire half of our interest in the
Castle Rock prospect on similar terms as SENGAI if SENGAI does not exercise its
option. See below. Our original agreement with SENGAI would result in ownership
of a 12.5% working interest 10% net revenue interest, in Castle Rock, but one
subsequent agreement with CCBM resulted in them owning one half of our position.
In fiscal 2000 and 2001, we spent a total of $5,800,000 on land
acquisition costs for the coalbed methane properties we now hold, including
$5,500,000 paid to Quaneco L.L.C. to buy a 50% working interest (40% net revenue
interest) in the Castle Rock and Kirby prospects, and $51,200 in leases and
related costs for other prospects in Wyoming.
In fiscal 2001, we sold to SENGAI an option for 75% (or 37.5% of 50%) of
our working interest in our acreage in the Castle Rock prospect for $1,278,800
which was applied to our purchase commitment with Quaneco L.L.C.; if the options
are exercised in 2002 and 2003 by SENGAI, we will receive an additional
$2,942,800 in February 2002. In July 2001, we sold a 50% working interest in all
our coalbed methane leases except Castle Rock to CCBM for $7,500,000, plus other
considerations. If SENGAI does not exercise its
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option to purchase the Castle Rock prospect, CCBM has first right to purchase
50% of RMG's acreage for additional consideration.
We also have drilling programs in place with SENGAI and CCBM for up to
$7,250,000 funded by each for the respective properties in which they are
involved with us. One of the drilling programs with CCBM started work on the
Clearmont prospect in Wyoming in August 2001; the drilling program with SENGAI
on the Castle Rock prospect is anticipated to begin in September 2001. These
first two programs should be sufficient to drill approximately 60 coalbed
methane wells to completion or abandonment stage. A third drilling program
(which would be the second program on the Castle Rock prospect) will be
commenced if SENGAI exercises its option on the first acreage block on the
Castle Rock prospect with SENGAI paying for up to an additional $4,000,000 in
drilling and development costs. We have a carried working interest in all of the
wells drilled in these programs.
As of the filing date for this Annual Report, we had set casing on 10
locations (80 acre spacing units) on the Clearmont prospect and are drilling
twin holes on each prospect into two targeted coal formations. No reserves have
been established to date. Drilling permits for 10 additional wells have been
issued for the Clearmont prospect, and applications are pending for another 32
permits on the Clearmont prospect, which are expected to be issued by September
1, 2001.
We anticipate that from 30 to 60 wells will be drilled by the end of
calendar 2002 under the drilling programs with SENGAI and CCBM. Additionally,
the Company expects to commence a drilling program to drill 4 to 12 wells on the
Kirby prospect. Attaining these objectives will depend on when and where the
necessary drilling permits can be obtained.
After the drilling programs have been completed, we will need additional
capital to continue development efforts. The Company plans to obtain the capital
from institutions and/or joint ventures or other means, including the possible
sale of disposable company assets. We have estimated that our total capital and
operating reserve requirements will be up to $50,000,000 to execute our coalbed
methane strategy through calendar 2003 by developing our existing properties
beyond the initial drilling programs now in place, and acquiring and developing
more properties. See Item 7.
PRINCIPAL AGREEMENTS FOR DEVELOPMENT OF COALBED METHANE PROPERTIES.
Summaries of terms in the three principal agreements now in place follow. The
agreements are filed as exhibits to this Annual Report.
SUNCOR - OPTION AND FARMIN AGREEMENT. On February 8, 2001, RMG closed the
Option and Farmin Agreement with SENGAI.
By the Option and Farmin Agreement, 75% of RMG's 50% working interest (and
25% of Quaneco L.L.C.'s 50% interest) in 112,000 acres in southeast Montana has
been optioned for a cash sale to SENGAI, in two blocks, one of 105,265 acres
which expires February 8, 2002, subject to force majeure (option exercise amount
is $3,684,299 total, RMG's 75% share would be $2,763,224), and 6,301 acres for
the second block of acreage expiring on February 8, 2003 (option exercise amount
is $239,452 total, RMG's share would be $179,589).
In addition, SENGAI has committed to pay for all costs up to $2,000,000 in
a $2,250,000 drilling program on the first block of acreage, starting in the
fall of 2001. RMG will pay the remaining $250,000 for the drilling program (on
its behalf and for Quaneco L.L.C., which completes RMG's drilling commitment to
Quaneco; see below). SENGAI must complete the drilling program regardless of
whether it exercises the options. Upon exercise of the first option, the
agreement provides that SENGAI will have "farmed in" for
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a share of the working interests in the first block of acreage, so that the
working interests in the first block would be (i) 12.5% RMG (now 6.25% with CCBM
owning the other 6.25%; see "Carrizo - Purchase and Sale Agreement" ); (ii)
37.5% Quaneco L.L.C.; and (iii) 50% SENGAI. If the first option is not
exercised, all of the work paid under the drilling program will benefit RMG (and
now Carrizo) and Quaneco in their respective working interests. If the first
option is not exercised, SENGAI will have no rights in the Castle Rock prospect
or in any wells drilled on it.
If the first block option is exercised, then within 18 months of that date,
SENGAI will pay RMG and Quaneco L.L.C., in proportion to their 75% and 25%
shares of option payments, an additional $841,379 for the first block of
acreage. This payment will not be received by the parties in cash, but will be
made by Suncor America paying 75% (instead of 50%) of drilling and related well
costs on a second drilling program until the 25% differential so paid equals
$841,379. It is anticipated this second phase will cover up to $4,000,000 of
drilling and development costs. To the extent this second phase drilling program
does not result in SENGAI spending enough to carry RMG and Quaneco for the
$841,379 (i.e., pay for RMG's (and CCBM's) and Quaneco's working interest shares
of costs in wells), SENGAI will pay the difference to RMG and Quaneco parties in
cash.
The first block option must be exercised before SENGAI can exercise the
second block option.
SENGAI is the operator of record for all activities in the first drilling
program, and will continue as operator for the entire Castle Rock prospect (less
the second acreage block if the option thereon is not exercised). The first and
second drilling programs cover costs to drill, test, complete, production test
and shut-in (or plug if not economically viable) coalbed methane wells.
Gathering system construction, compression and other costs related to input of
gas buyer's transmission line are not included. SENGAI, as operator, is limited
to billing no more than 10% of the drilling programs for its overhead expenses.
CARRIZO - PURCHASE AND SALE AGREEMENT. On June 29, 2001, RMG signed and
closed on July 10, 2001 a Purchase and Sale Agreement with CCBM, Inc., a
Delaware corporation which is wholly-owned by Carrizo Oil & Gas, Inc., Houston,
Texas (NMS "CRZO"). Carrizo Oil & Gas, Inc. is engaged in the exploration,
development and production of oil and gas, primarily in the Texas and Louisiana
Gulf Coast regions. The agreement between CCBM and RMG is intended to finance
the further development of the acreage prospective for coalbed methane currently
owned by RMG in Montana and Wyoming, and to acquire and develop more acreage in
Wyoming.
RMG has assigned CCBM an undivided 50% interest in all of RMG's existing
coalbed methane properties for a purchase price of $7,500,000 by a promissory
note payable in principal amounts of $125,000 per month plus interest at an
annual rate of 8%, over 41 months (starting July 31, 2001) with a balloon
payment due on the forty-second month. The 50% undivided interest is pledged
back to RMG to secure the purchase price, and will be released 25% when 33.3% of
the principal amount of the purchase price is paid, another 25% when total
principal payments reach 66.6% of the principal amount of the purchase price,
and the balance of the total 50% undivided interest when all of the principal
amount of the purchase price, has been paid. The purchase price could be
reduced, based on allocations made by the parties as to each prospect now in
RMG's inventory, if defects exist in RMG's acreage and such defects are not
cured to CCBM's satisfaction. RMG believes the minor title defects already
identified by CCBM will be cured satisfactorily or otherwise accepted by CCBM so
that any incurable defects will not affect the purchase price in material
amounts.
To start development, and as part of the consideration for the acquisition,
CCBM has agreed to fund $5,000,000 for an initial drilling program. On these
wells, CCBM will pay for all drilling and completion expenses; RMG will be
"carried" for its 50% interest in these wells, and will not be required to pay
any of such costs. After the initial $5,000,000 has been spent, which should be
sufficient to drill between 30 to 40
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wells, RMG and CCBM each will pay for their 50% share of costs in subsequent
wells. Without CCBM's consent, none of the drilling funds can be used for
operations associated with water disposal wells, gas compression beyond 100
PSIG, or for facilities downstream of compression beyond 100 PSIG. CCBM will
earn a 50% working interest in each well location (80 acres) and production
therefrom. CCBM's ownership so earned will be earned regardless of the status of
payments on the promissory note.
Drilling under the CCBM agreement started in August 2001. Amounts remaining
out of the $5,000,000 will be carried over to drilling efforts in calendar 2002
and 2003, or applied to property acquisitions, as agreed upon by the parties. If
less than the entire $5,000,000 is spent within two years (subject to extensions
due to force majeure), CCBM shall pay RMG one-half the unspent portion of the
$5,000,000. However, this payment obligation back to RMG is subject to RMG
complying with all of the terms and provisions of the purchase and sale
agreement, the joint operating agreement, and the procedures therein set forth
regarding authorizations for expenditures to drill $5,000,000 worth of
"reasonable wells". This means wells which meet these economic criteria: (1)
individual well cost (including hook-up to sales) must meet a projected internal
rate of return in excess of 15% at prevailing market prices; (2) the wells must
be on acreage blocks that are touching and contain minimum sizes (Kirby
prospect, at least 2,560 acres; Clearmont, at least 640 acres; and Arvada, at
least 480 acres); and (3) no more than 10 wells per calendar year at Oyster
Ridge will qualify as reasonable. The intent of this provision is for CCBM to
spend $2,500,000 on behalf of RMG. If CCBM fails to do this despite a total of
$5,000,000 of reasonable well proposals by RMG, then CCBM shall be obligated to
pay any remaining unspent portion of the $2,500,000 directly to RMG.
In addition to its one-half share of revenues in proportion to its one-half
share of the working interest, CCBM will be entitled to a credit (applied as a
prepayment of the purchase price for the undivided 50% interest in RMG's
acreage), equal to 20% of RMG's net revenue interest from wells drilled with the
$5,000,000 drilling budget, until the amount of that credit in favor of CCBM
equals $1,250,000. This latter amount would be reduced proportionate to any
reductions in purchase price due to title defects (see above).
RMG is the designated operator under a Joint Operating Agreement (JOA)
between RMG and CCBM. The JOA will govern all operations on the properties
subject to the purchase and sale agreement between RMG and CCBM subject to
pre-existing JOA's with other entities, as well as all operations or properties
in the area of mutual interest ("AMI").
The AMI is established for a four year term starting June 30, 2001 and
ending June 30, 2005. It covers the entire state of Wyoming, and the Powder
River Basin of Montana, subject to the pre-existing AMI with Suncor. Operations
within the AMI will be governed by the JOA between RMG and CCBM.
All operations subject to the Carrizo Agreement will be overseen by a
management committee, with two members each from CCBM and RMG. All four members
must be present in person or by proxy to conduct a management committee meeting,
to be held at least quarterly. However, RMG shall have a tie- breaking vote
concerning all general operations until the $5,000,000 drilling commitment has
been expended and until the purchase price has been paid. Once the $5,000,000
drilling commitment has been expended and the full purchase price is paid, RMG
will allocate (with Quaneco's consent) to CCBM one of RMG's managing member
positions with Powder River Gas LLC, which is the operative entity for the
Montana acreage RMG holds with Quaneco L.L.C.
With respect to the Castle Rock prospect in Montana, which is subject to
the agreement with SENGAI, RMG will be entitled to all cash proceeds paid by
SENGAI to RMG if SENGAI exercises its option (deadline February 8, 2002). If
SENGAI doesn't exercise its option, CCBM will have the right to increase their
ownership up to 50% of RMG's interest in the subject 112,000 acres in Montana,
for the equivalent value per net mineral acre that would have been due to RMG
under the Suncor Agreement. If CCBM does not exercise this purchase right, all
the acreage will belong solely to RMG and that acreage will be removed from the
AMI
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with CCBM except the wells and acreage earned in the phase I drilling program.
In the meantime, with respect to SENGAI's initial drilling program on this
acreage, RMG will be entitled to have CCBM pay for $225,000 of RMG's drilling
obligations; for this funding (part of the $5,000,000 drilling program with
CCBM), CCBM will receive an undivided 6.25% working interest on each well so
drilled and the 80 acre spacing allocated to each such well, ie. one-half of our
12.5% working interest, during the 2001 SENGAI drilling program.
Under the agreement, CCBM will use its best efforts to seek out, obtain and
secure financing to raise no less than $20,000,000 to be used to acquire more
properties in the AMI. If CCBM's efforts are not successful by June 30, 2002,
the AMI shall be reduced to a 6 mile radius from all existing properties held
jointly by RMG and CCBM unless RMG agrees to an extension of this time frame to
no later than December 31, 2002.
QUANECO - AGREEMENT. On January 3, 2000, RMG purchased a 50% working
interest and 40% net revenue interest in the Castle Rock and Kirby prospects in
the PRB of southeast Montana consisting of approximately 185,000 net mineral
acres from Quaneco, L.L.C. (formerly Quantum Energy, L.L.C., Cleveland, Ohio
and Oklahoma City, Oklahoma). The acreage includes 88,410 net acres of BLM land,
14,916 net acres of state land (Montana), and 82,775 net acres of fee land. In
fiscal 2000 and 2001, RMG paid the cash purchase price of $5,500,000.
A separate provision in the Agreement required RMG to spend $2,500,000 to
drill and complete 25 wells, as identified and agreed to by the operating
company Powder River Gas, LLC (see below). Under the subsequent agreement with
SENGAI, SENGAI will pay $2,000,000 in their first drilling program on this
prospect, and RMG will pay $250,000. Of this amount, $225,000 will be paid to
RMG by CCBM and paid over to SENGAI, leaving RMG with a net obligation of
$25,000 which has already been met. RMG has previously performed work and paid
costs for a credit of approximately $250,000 on the Castle Rock and Kirby
prospects, such that when RMG pays the $250,000 for its share of SENGAI's first
drilling program, all of RMG's drilling obligations to Quaneco will have been
fulfilled, and RMG's, Quaneco's and SENGAI's working interests will be as agreed
with SENGAI (see above), and CCBM will own one-half RMG's 12.5% working
interests, or 6.25%.
The Kirby prospect, owned originally by RMG and Quaneco, and now CCBM as
well, is operated through Powder River Gas, LLC, a Wyoming limited liability
company. Initial CBM well sites have been selected by the management committee
in which Quaneco and RMG currently have equal representation; drilling,
completion and gathering system costs will be authorized by the committee and
funded according to the working interests of each owners. USECC has the right to
provide drilling services on the first 25 wells drilled by Powder River Gas, LLC
based on competitive drilling rates in the area surrounding the wells to be
drilled. Thereafter, USECC will have the right to submit bids on a competitive
basis to Powder River Gas LLC for drilling contracts on additional acreage. CCBM
has recently acquired 50% of RMG's interest in the Kirby prospects leaving
ownership interest at 25% RMG, 25% CCBM, and 50% Quaneco.
PROSPECTS AND ACREAGE. Our prospects and acreage are located in the Powder
River Basin in Montana and Wyoming, and in the Wind River, Green River, Washakie
and Big Horn basins of Wyoming:
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Castle Rock, Powder River County, MT 112,000 acres
Kirby, Big Horn and Rose Bud Counties, MT 74,500 acres
Oyster Ridge, Lincoln and Uinta County, WY 63,000 acres
Clearmont, Sheridan County, WY 4,000 acres
Sussex, Johnson County, WY 640 acres
Finley, Converse County, WY 160 acres
Baggs North, Carbon County, WY 120 acres
Gillette North, Campbell County, WY 80 acres
Arvada, Campbell County, WY 540 acres
CASTLE ROCK: The Castle Rock project consists of approximately 112,000
acres located in the north eastern portion of the Powder River Basin of Montana,
west of Broadus, Montana. Coals present are in the Tongue River member of the
Fort Union formation and appear comparable to coals currently being developed by
other operators south of the Castle Rock acreage near the Montana/Wyoming
border. The proposed Bison pipeline, tentatively scheduled for completion in
2003, will cross the property if constructed as currently planned. The Northern
Border pipeline is located 200 miles to the north. The federal leases are
generally 10 year term and fee and state leases are generally two to five year
term.
KIRBY: The Kirby project consists of approximately 74,500 acres located in
the northwestern portion of the Powder River Basin in Montana located in Big
Horn and Rosebud Counties, Montana, north of Sheridan, Wyoming. Coals are in the
lower portion of the tertiary Fort Union formation and are similar to productive
coals in the Wyoming portion of the Powder River Basin to the south. Redstone
(recently acquired by Montana Dakota Utilities) has established significant
coalbed methane production 12 miles south of Kirby at the CX field. At least two
other operators are currently planning to drill and develop nearby acreage.
CMS's Bighorn Gas Gathering recently extended a new 20" pipeline to within 10
miles of the Kirby project. Exploration drilling is currently scheduled to begin
at Kirby during the fall of 2001.
OYSTER RIDGE: The Oyster Ridge project consists of approximately 63,000
acres located in southwestern Wyoming in the Ham's Fork Coal Field adjacent to
the Green River Basin. RMG and CCBM has a 100% working interest in most of the
properties subject to a 25% participation option held by Anadarko Petroleum on
43,000 acres. The area is prospective for coalbed methane production from two
primary Cretaceous age coals, the Frontier and the Adaville. The Kern River
pipeline which services southern California, crosses the property. Exploratory
drilling and completion operations on previously drilled wells resumed at Oyster
Ridge in June of 2001.
CLEARMONT: The Clearmont project consists of approximately 6,000 gross
acres located in the western Powder River Basin of Wyoming. RMG (and now CCBM
jointly) owns working interests ranging from 25% to 100%. The area is
characterized by several shallow Fort Union coalbeds (most notable the Roland
and Anderson coals) as well as several deeper coals that hold significant
exploration potential. Substantial coalbed methane production and development is
ongoing in the immediate area including Federated's Box Elder Creek project 12
miles to the west and the Pennaco/CMS Wild Horse Creek project 15 miles to the
east. The Clearmont project is located at the convergence of the WBI Bitter
Creek and the Bighorn Sheridan Lateral pipelines. A 20 well exploration and
development drilling program began at Clearmont in August 2001 and could be in
production in 2002 depending on drilling results and gas prices.
SUSSEX: RMG and CCBM hold 640 acres in this project area located in Johnson
County, Wyoming. This State lease lies 3 miles south of Sussex, Wyoming. RMG has
a 100% working interest.
FINLEY: RMG and CCBM hold 160 acres in this project area located in
Converse County, Wyoming. This prospect is a State lease 12 miles east of
Edgerton, Wyoming. Review for a two well test is underway.
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BAGGS NORTH: This prospect contains 120 acres located in Carbon County,
Wyoming. This State lease is located 7 miles north of Baggs, Wyoming. RMG and
CCBM hold a 100% working interest in this prospect.
GILLETTE NORTH: RMG and CCBM holds a 100% working interest in 80 acres in
this project area located in Campbell County, Wyoming. This State lease lies at
the north end of the City of Gillette. Potential exists for one billion cubic
feet of gas on this 80 acres alone. Existing coalbed methane wells lay in the
section immediately north. Permitting of 2 wells has begun on RMG's property.
RMG intends to conduct test drilling and production techniques in this area that
lies in the heart of the current coalbed methane play in the Gillette area.
ARVADA: This prospect contains 540 acres located in Campbell County,
Wyoming. RMG and CCBM hold a 100% working interest, and a 60% net revenue
interest.
COALBED METHANE WELL PERMITTING
Drilling coalbed methane wells requires obtaining permits from various
governmental agencies. The ease of obtaining the necessary permits depends on
the type of mineral ownership and the state in which the property is located.
Intermittent delays in the permitting process can reasonably be expected
throughout the development of any play. For example, there is currently a
temporary moratorium for drilling coalbed methane wells on fee and state lands
in Montana. We may shift our exploration and development strategy as needed to
accommodate the permitting process. As with all governmental permit processes,
there is no assurance that permits will be issued in a timely fashion or in a
form consistent with our plan of operations.
On March 16, 2000, the Northern Plains Resource Council, Inc. ("NPRC")
filed suit against the Montana Board of Oil and Gas Conservation (Board)
requesting an order of the court compelling the defendant to prepare a
Supplemental Environmental Impact Statement ("SEIS") for coalbed methane
development, which could further delay development. RMG and others have filed a
motion to intervene to participate in this litigation and to ensure that some
drilling can be performed during any environmental analysis. The Board has
agreed to limit issuance of CBM well permits to 200 pending completion of the
SEIS which is currently scheduled to be completed in the Spring of 2002.
The Wyodak Environmental Impact Statement (EIS) for the Powder River Basin
in Wyoming issued in the fall of 1999, allowed the permitting of 5,000 CBM wells
to be drilled on Federal lands in Wyoming. More CBM well applications have been
submitted causing the BLM to begin a second EIS for the Powder River Basin Area
in Wyoming. The new EIS was to commence in early summer 2000. Development on
Federal lands in Wyoming has been stopped with the balance of the Wyodak EIS
permitted wells (4,000) occurring on fee and state lands. The BLM has started an
environmental assessment ("EA") reviewing drainage issues which could allow an
additional 1,500 new CBM well permits in the same region. This was scheduled for
scoping in early April 2000 with completion expected the following October.
Completion has been delayed and is not expected until late 2001 or early 2002.
Again, there is no assurance that the EA and EIS will negatively impact RMG's
business or operations.
In addition, the Wyoming and Montana Departments of Environmental Quality
have regulations applying to the surface disposal of water produced from CBM
drilling operations. CBM operators are currently seeking changes in permit
requirements and department policy that would allow operators more flexibility
to discharge water on the surface. If these changes are not made, it may be
necessary to install and operate treatment facilities or drill disposal wells to
reinject the produced water back into the underground rock formations adjacent
to the coal seams or lower sandstone horizons. If we cannot obtain the
appropriate permits or if applicable laws or regulations require water to be
disposed of in an alternative manner, the costs
11
to dispose produced water will likely increase. These costs could have a
material effect on operations in this area, including potentially rendering
future production and development in the affected areas uneconomic.
In Montana, we have pending applications to the BLM for approximately 60
permits to drill into shallow gas sand formations on Federal land held with
Quaneco and would be converted to production status upon receiving approval from
the Montana Board of Oil and Gas. These wells would evaluate potential CBM
production as well as conventional gas. Regarding other acreage held with
Quaneco in Montana, the State of Montana may lift its moratorium for CBM wells
on private and state ground in Montana, and start issuing new permits on these
lands in Spring 2002 (a voluntary moratorium is currently in place for wells on
private and state ground in Montana). We have not determined to what extent we
will participate in this procedure, and are evaluating how best to protect our
position to have reasonable exploration for CBM wells proceed on state and fee
ground. We have permits in place until Spring 2002 in order to conduct
exploration in expectation that commercial production will be approved on
completion of the EIS and EA.
In August 2001, Montana and Wyoming announced an agreement for water
quality officials in both states to coordinate monitoring of water flows in the
Powder River and Little Powder River drainages, to determine the impact of
coalbed methane well water production on river water. Although usually well
water is potable, it may contain high sodium absorption ratios which can impair
use of the water for irrigation purposes in clay-based soils. The respective
agencies will propose regulations to establish thresholds for potential
pollutants and require strict monitoring by local water quality officials. If
test results indicate some well water flows adversely impact river water
quality, operators could be required to put the water flow into holding ponds or
take other steps to eliminate or reduce water flows or pollutants in the water.
Implementation of the agreement is expected to benefit continued coalbed methane
development in these areas by opening up the water discharge permitting process
in the affected areas. Currently, we don't have acreage which would be impacted
by these regulations but future acreage could be acquired in the affected areas.
GATHERING AND TRANSMISSION OF CBM GAS
Companies involved in CBM production generally outsource their gas
gathering, compression and transmission. We intend to outsource compression and
gathering needs as well, possibly on a competitive basis with transmission
companies in the immediate area. Negotiations with various transmission
companies have been initiated in order to better manage future capital
investment, but no contracts have been signed to date.
Coalbed methane production growth in the Powder River Basin has
historically been impeded by a shortage of gathering system capacity and
transport capacity out of the Basin. However, two large diameter gathering
pipelines were completed in September 1999 and a third was ready for service in
early 2000. The two completed pipelines will provide an additional 900 million
cubic feet, (MMcf), of daily gas capacity as set forth below:
Fort Union Gas Gathering, LLC's 106-mile, 24" gathering pipeline, commenced
operations September 1, 1999, with an initial capacity of 450 MMcf per day; and
Thunder Creek Gas Services, LLC's 126-mile, 24" gathering pipeline,
commenced operations September 1, 1999, with an initial capacity of 450 MMcf per
day.
Additionally, CMS Energy's 110-mile, Big Horn Gas Gathering pipeline, that
connects to the northern terminus of the Fort Union pipeline, is continuing to
be expanded in length and has an initial capacity of 256 MMcf per day which can
readily be upgraded to 500 MMcf per day with the addition of booster
compression. Further, on June 19, 2000, Big Horn Gas Gathering announced the
extension of its pipeline to serve producers in the Sheridan area. This 50+ mile
extension will place a 20" high pressure pipeline within 5 miles of the
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Montana border and within close proximity to the development planned by RMG,
CCBM, and Quantum on their Kirby Prospect area.
Wyoming Interstate Gas Company's 143-mile, 24" Medicine Bow Lateral
pipeline commenced operations in November 1999 with an initial capacity of 260
MMcf per day. This pipeline will transport natural gas from the Thunder Creek
and Fort Union pipelines at the south end of the Powder River Basin to
interconnect with multiple interstate pipelines accessing markets to the east
and along the front range of Colorado. This system is already being expanded as
demand for transportation space grows. Further transmission lines are being
planned by other companies in the area.
MINERALS - URANIUM
GENERAL. We have interests in several uranium-bearing properties in Wyoming
and Utah and in a uranium processing mill in southeastern Garfield County, Utah
(the "Shootaring Mill"). All the uranium- bearing properties are in areas which
produced significant amounts of uranium in the 1970s and 1980s. At some future
date, we could develop and operate these properties (directly or through a
subsidiary company or a joint venture) to produce uranium concentrates ("U3O8")
for sale to public utilities that operate nuclear powered electricity generating
plants. However, until uranium oxide prices improve significantly, all of the
uranium properties are in a care and maintenance mode, meaning work is performed
to keep the assets in stand-by mode and ready for later activity and permitting
work is done as needed (monitoring and reporting) to keep existing permits in
effect.
SHEEP MOUNTAIN - WYOMING
Unpatented lode mining claims, underground and open pit uranium mines and
mining equipment in the Crooks Gap area are located on Sheep Mountain in Fremont
County, Wyoming and are adjacent to and west of the GMMV mining claims. From
December 21, 1988 to June 1, 1998, these assets were held by Sheep Mountain
Partners ("SMP"). On June 1, 1998, USE received back from SMP all of the Sheep
Mountain mineral properties and equipment, in partial settlement of disputes
with Nukem, Inc. ("Nukem") and its subsidiary Cycle Resource Investment Corp.
("CRIC"). The Judgment against Nukem impressing the CIS uranium supply contracts
in constructive trust with SMP remain in dispute. See "Legal Proceedings." The
Sheep Mountain Mines 1 and 2 were first operated by Western Nuclear, Inc., a
subsidiary of Phelps Dodge Corporation, in the late 1970s.
THE PROPERTY INTERESTS OF USE IN UTAH THROUGH PLATEAU RESOURCES LIMITED
("PLATEAU") ARE:
Plateau Resources Limited is a wholly-owned subsidiary of USE. See "Plateau
Shootaring Canyon Mill" below.
The Tony M Mine properties contains underground uranium deposits in San
Juan County, Utah, and are located partially on Utah State leases.
Plateau is the lessee of the Tony M Mine properties and has posted a bond
securing Plateau's obligations to reclaim these properties. The Tony M mine was
originally developed by Plateau at the time Plateau was owned by Consumers Power
Company ("CPC"), a Michigan public utility. Significant areas of uranium
mineralization have been accessed and delineated by the prior owner's
underground workings. When the Tony M Mine was in production (while Plateau was
owned by CPC), it produced ore containing from three to eight pounds of uranium
concentrates per ton. Some of this ore was processed at the Shootaring Mill. In
addition, low grade uranium ore was stockpiled at the Tony M Mine and at the
Shootaring Mill.
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Plateau also acquired the Velvet Mine and the nearby Woods Complex in the
Lisbon Valley area in southeastern Utah. The Velvet Mine was fully developed and
permitted by its prior owner and is located approximately 178 miles by road from
the Shootaring Mill. The Woods Complex was formerly an operating uranium mine
with a remaining undeveloped resource. Access to this resource would be by
extending a drift approximately 2,500 feet from the former Woods Mine. The Woods
Mine property is not permitted, but we do not expect difficulty in obtaining a
new permit, should we seek one, because the surface facilities would occupy the
site that has been disturbed from previous operations.
THE GREEN MOUNTAIN MINING VENTURE ("GMMV") PROJECT
GMMV. In fiscal 1991, we entered into an agreement to sell 50 percent of
our interests in the Green Mountain uranium claims, and certain other rights, to
Kennecott Uranium Company ("KUC" or "Kennecott"), a subsidiary of Kennecott
Energy and Coal Company of Gillette, WY. Kennecott Energy and Coal Company is a
subsidiary of Rio Tinto plc, formerly RTZ plc of London. In consideration of the
sale to Kennecott, we received $15,000,000 cash and a commitment by Kennecott to
fund the first $50,000,000 of GMMV expenditures pursuant to Management Committee
budgets. At the same time we and Kennecott formed the GMMV and entered into a
joint venture agreement (the "GMMV Agreement") to develop, mine and mill uranium
ore from the Green Mountain Claims, and market uranium oxide. For detailed
explanation of the GMMV agreement, please see U.S. Energy Corp.'s 1999 Form 10-K
at pages 8-11, and footnote F to the financial statements.
The GMMV holds 521 unpatented lode mining claims (the "Green Mountain
Claims") on Green Mountain in Fremont County, Wyoming, including 105 claims on
which the Round Park (Jackpot) uranium deposit is located, and the Sweetwater
Mill, (approximately 23 miles south of the proposed Jackpot Mine)., are held by
the Green Mountain Mining Venture ("GMMV"), which until September 11, 2000 was
owned 50% by Kennecott and 50% by USE and Crested.
In fiscal 2000, Kennecott filed a lawsuit to dissolve the GMMV and we
counterclaimed for damages. This lawsuit was settled on September 11, 2000.
Kennecott paid USECC $3,250,000 to acquire all of our (and Crested's and
USECC's) interest in the GMMV, its properties and the Sweetwater Uranium Mill
(with certain exceptions), and all parties' claims in the lawsuit have been
dismissed. Kennecott also assumed all reclamation and other liabilities
associated with the GMMV, its properties, the Sweetwater Mill and all
liabilities associated with the GMMV since its inception, including the
historical liabilities associated with the Sweetwater Mill prior to its
acquisition by the GMMV. We and Crested together have retained a 4% net profits
royalty in any future uranium oxide produced from the GMMV mining claims through
the Sweetwater Mill (currently in a standby mode and not operational).
The ion exchange facility on the Sheep Mountain properties will not be
transferred to Kennecott, nor will the cleanup liabilities associated therewith
be assumed by Kennecott. However, we and Kennecott have agreed to cooperate in
the disposal of the facility into the Sweetwater Mill's disposal and impoundment
areas. Also, certain items of mining equipment held by the GMMV were assigned to
USE and were removed from the GMMV properties in fiscal 2001.
At such time as Kennecott has completed necessary reclamation work on the
Green Mountain unpatented lode mining claims (including the Round Park uranium
deposit proposed to be mined through the Jackpot Mine) Kennecott will quit claim
all such mining claims to us and Crested, as well as certain equipment currently
being used at the mine (including a compressor and standby generator). Kennecott
plans to keep the Sweetwater Mill.
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PROPERTIES
The Green Mountain Claims include the Big Eagle Properties on Green
Mountain, which contain substantial uranium mineralization, and are adjacent to
other mining claims. The Big Eagle Properties contain two open-pit mines, as
well as related roads, utilities, buildings, structures, equipment and a
stockpile of 500,000 tons of uranium material with a grade of approximately .05%
U3O8. The assets include two buildings (38,000 square feet and 8,000 square
feet) formerly used by Pathfinder Mines Corporation ("PMC") in mining
operations.
The Round Park (Jackpot) mining claims contain deposits of uranium which
have been estimated to contain 52,000,000 pounds of U3O8; the grade averages 4.6
pounds of U3O8 per ton of mineralized material. The GMMV had planned to mine
this mineralized material from two decline tunnels (-17 percent slope) in the
Jackpot Mine driven underground from the south side of Green Mountain. The first
of several mineralized horizons in the Round Park deposits, is about 2,300 feet
vertically down from the surface of Green Mountain. This work was halted in July
1998.
SWEETWATER MILL. In fiscal 1993, the GMMV acquired the Sweetwater uranium
processing mill and associated properties located in Sweetwater County, Wyoming,
approximately 23 miles south of the proposed Jackpot Mine, from a subsidiary of
Union Oil Company of California ("UNOCAL"), primarily in consideration of
Kennecott and the GMMV assuming environmental liabilities, and decommissioning
and reclamation obligations. The Sweetwater Mill was designed as a 3,000 ton per
day ("tpd") facility.
As consideration for acquiring the Sweetwater Mill, GMMV agreed to
indemnify UNOCAL against certain reclamation and environmental liabilities,
which indemnification obligations are guaranteed by Kennecott Corporation
(parent of Kennecott Uranium Company). The GMMV is responsible for compliance
with mill decommissioning and land reclamation laws, for which the environmental
and reclamation bonding requirements are approximately $24,330,000, which
includes a $4,560,000 bond required by the Nuclear Regulatory Commission
("NRC"). None of the GMMV future reclamation and closure costs are reflected in
the consolidated financial statements.
The reclamation and environmental liabilities assumed by the GMMV (and now
Kennecott's sole responsibility) consist of two categories: (1) cleanup of the
inactive open pit mine site near the Mill (the source of ore feedstock for the
mill when operating under UNOCAL), including water (heavy metals and other
contaminants) and tailings (heavy metals dust and other contaminants requiring
abatement and erosion control) associated with the pit; and (2) decontamination
and cleanup and disposal of the Mill building, equipment and tailings cells
after Mill decommissioning. The Wyoming DEQ exercises delegated jurisdiction
from the United States Environmental Protection Agency ("EPA") to administer the
Clean Water Act and the Clean Air Act, and directly administers Wyoming statutes
on mined land reclamation. The Sweetwater Mill is also regulated by the NRC for
tailings cells and mill decontamination and cleanup. The EPA has continuing
jurisdiction under the Resource Conservation and Recovery Act, pertaining to any
hazardous materials which may be on site when cleanup work is started.
PLATEAU'S SHOOTARING CANYON MILL
ACQUISITION OF PLATEAU RESOURCES LIMITED ("PLATEAU"). In August 1993, USE
purchased from Consumers Power Company ("CPC"), all of the outstanding stock of
Plateau which owns the Shootaring Canyon uranium processing mill and support
facilities in southeastern Utah (the "Shootaring Mill") for a nominal cash
consideration. The Shootaring Mill holds a source materials license from the
NRC. In the purchase of the stock from CPC, we agreed to various obligations, as
disclosed in USE's 1998 Form 10-K at pages 15 and 16.
15
SHOOTARING MILL AND FACILITIES. The Shootaring Mill is located in
southeastern Utah and occupies 19 acres of a 265 acre plant site. The mill was
designed to process 750 tpd, but only operated on a trial basis for two months
in mid-summer of 1982. In 1984, Plateau placed the mill on standby because CPC
had canceled the construction of an additional nuclear energy plant.
Plateau also owns approximately 90,000 tons of uranium mineralized material
stockpiled at the mill site and approximately 172,000 tons of mineralized
material stockpiled at the Tony M Mine. Included with mill assets are tailings
cells, laboratory facilities, equipment shop and inventory. The NRC issued a
license to Plateau authorizing production of uranium concentrates, however,
since the mill was shut down, only maintenance and required safety and
environmental inspection activities were performed and the source materials
license with the NRC was for standby operations only. Plateau applied to the NRC
to convert the source materials license from standby to operational and upon
increasing the reclamation bond, the NRC issued the new license on May 2, 1997.
Plateau has a cash bond in favor of the NRC in the amount of $8,511,200 plus an
additional $1,136,800 in government securities for bonding future reclamation.
Plateau obtained approval of a water control permit for the tailings cell
from the Utah Water Control Division and is awaiting the NRC's review of the
operating license conditions so Plateau can continue with construction of
tailing facilities if it so desires.
TICABOO TOWNSITE
Plateau owns Canyon Homesteads, Inc., a Utah corporation, which developed
the Ticaboo, Utah townsite 3.5 miles south of the Shootaring Mill. The townsite
includes a motel, restaurant, lounge, convenience store and single family,
mobile home and recreational vehicle sites (all with utility access), located on
a State of Utah lease near Lake Powell, and is being operated as a commercial
enterprise. An amendment was entered into on April 1, 1997 on the Utah State
lease covering the Ticaboo Townsite whereby the State will convey portions of
the Townsite lease to Canyon on a sliding scale basis as they are sold. USE and
Crested are developing the Townsite in limited fashion and are selling home and
mobile home sites.
SHEEP MOUNTAIN PARTNERS ("SMP")
SMP PARTNERSHIP. In February 1988, USE acquired uranium mines, mining
equipment and mineralized properties (Sheep Mountain Mines) at Crooks Gap in
south-central Fremont County, Wyoming, from Western Nuclear, Inc. These Crooks
Gap mining properties are adjacent to the Green Mountain uranium properties.
USECC mined and milled uranium ore from one of the underground Sheep Mines
during fiscal 1988 and 1989. Production ceased in fiscal 1989, because uranium
could be purchased from the spot market at prices below the mining and milling
costs of USECC. In December 1988, USECC sold 50 percent of the interests in the
Crooks Gap properties to Nukem's subsidiary Cycle Resource Investment
Corporation ("CRIC") for cash. The parties thereafter contributed the properties
to and formed Sheep Mountain Partners ("SMP"), in which USECC received an
undivided 50 percent interest. SMP is a Colorado general partnership formed on
December 21, 1988, between USECC and Nukem, Inc. then of Stamford, CT ("Nukem")
through its wholly-owned subsidiary CRIC. Each group provided one-half of
$315,000 to purchase equipment from Western Nuclear, Inc.; USECC also
contributed its interests in three uranium supply contracts to SMP and agreed to
be responsible for property reclamation obligations. The SMP Partnership
agreement provided that each partner generally had a 50 percent interest in SMP
net profits, and an obligation to contribute 50 percent of funds needed for
partnership programs or discharge of liabilities. Capital needs were to have
been met by loans, credit lines and contributions. Nukem is a uranium brokerage
and trading concern.
SMP was directed by a management committee, with three members appointed by
USECC and three members appointed by Nukem/CRIC. The committee has not met since
1991 as a result of the SMP
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arbitration/litigation. During fiscal 1991, disputes arose between the SMP
partners which resulted in litigation. See Item 3, Legal Proceedings.
PROPERTIES. Until June 1, 1998, SMP owned 80 unpatented lode mining claims
on the Crooks Gap properties, including two open-pit and five underground
uranium mines and an inventory of uranium ore. In connection with a partial
settlement of litigation/arbitration between USECC and Nukem/CRIC, SMP conveyed
these mineral properties and equipment to USECC. Any future production from the
properties will continue to be subject to sliding-scale royalty payable to
Western Nuclear, Inc. (1% to 4% on recovered uranium concentrates). As of the
filing date of this Annual Report, USE, Crested and/or USECC own 98 unpatented
lode mining claims and a 644 acre Wyoming State Mineral Lease in the Crooks Gap
area.
An ion exchange plant is located on the properties which can be used to
remove natural soluble uranium from mine water. USE began reclamation of this
facility during the first quarter of fiscal 2002. The plant is being disposed of
at the Sweetwater Mill impoundment facility (see above).
PERMITS. Permits to operate existing mines (now in care and maintenance
status) on the Crooks Gap properties have been issued by the State of Wyoming.
Amendments are needed to open new mines within the permit area. As a condition
to issuance of the permits, a NPDES water discharge permit under the Clean Water
Act has been obtained. Monitoring and treatment of water removed from the mines
and discharged in nearby Crooks Creek is generally required. During the past two
years, USECC did not discharge wastewater into Crooks Creek, and the mine water
is presently being discharged into the USECC McIntosh Pit.
URANIUM MARKET INFORMATION.
URANIUM SPOT MARKET. Uranium restricted spot prices were $8.75/lb. U3O8 on
June 30, 2001, an increase of 8% from $8.10 at June 30, 2000. During the first
half of 2001, total spot market volume was approximately 7 million pounds U308
which was about the same volume as the first half of 2000.
URANIUM LONG-TERM MARKET. The long-term market has been active in 2001 with
the long-term contracts reported by market analysts to have exceeded 35 million
pounds of U3O8 during the first half of 2001. The uranium price indicator
published by Tradetech was at $10.00 per pound U3O8 at June 30, 2001, up from
the $9.75 at beginning of the second quarter of 2001.
GOLD
SUTTER GOLD MINE (CALIFORNIA)
SUTTER GOLD MINING COMPANY. In fiscal 1991, USE acquired an interest in the
underground Sutter Gold Mine and related properties (the "SGM") located in the
Mother Lode Mining District of Amador County, California. The entire Lincoln
Project is now owned by Sutter Gold Mining Company, a Wyoming corporation
("SGMC"), a majority-owned subsidiary of USE.
SGMC has a plan to put the SGM into production. However, implementation of
this plan will require substantial capital financing. Persistent low prices for
gold have made financing difficult, and in fiscal 1999 resulted in a substantial
write down of the SGMC assets. See "Managements Discussion and Analysis of
Financial Condition and Results of Operations" for fiscal 1999.
Due to the depressed gold price and lack of available funding, SGMC has
deferred the start of construction of a 1,000 ton-per-day gold mill complex and
development of the underground mine. The tourist visitor's center has been
leased to a third party for $1,500 per month plus a 4% gross royalty on
revenues.
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There is one caretaker employee at the Sutter operation. Except for limited
infrastructure improvements in 2000, the assets are in a care and maintenance
mode and the exploration permits are being kept current as necessary with the
current thinking of moving the project from a "large" mine to that of a smaller
ton per day operation.
PROPERTIES. SGMC holds approximately 216 acres of surface and mineral
rights (owned), 54 acres of surface rights (owned), 55 acres of surface rights
(leased), 154 acres of mineral rights (leased), and 366 acres of mineral rights
(owned), all on patented mining claims near Sutter Creek, Amador County,
California. The properties are located in the western Sierra Nevada Mountains at
from 1,000 to 1,500 feet in elevation; year round climate is temperate. Access
is by California State Highway 16 from Sacramento to California State Highway
49, then by paved county road approximately .4 mile outside of Sutter Creek.
Surface and mineral rights holding costs will be approximately $90,000 from
June 1, 2001 through May 31, 2002. Property taxes for fiscal 2001 are estimated
to be $30,000.
The leases are for varying terms, and require rental fees, advance
production royalties, real property taxes and insurance.
PERMITS AND FUTURE PLANS. In August 1993, the Amador County Board of
Supervisors issued a Conditional Use Permit ("CUP") allowing mining of the SGM
and milling of production, subject to conditions relating to land use,
environmental and public safety issues, road construction and improvement, and
site reclamation. The permit will allow construction of the mine and mill
facilities in stages as the project gets underway, thereby reducing initial
capital outlays. Additional permits (for road work, dust control and
construction of mill and other surface improvements) need to be applied for in
due course. In August and September 1998, the Amador County Board of Supervisors
certified the Final Subsequent Environmental Impact Report ("FSEIR") and
approved all of the amendments requested by SGMC. Amendments to the CUP will
remove two tailings dams, eliminate the need to use cyanide on-site, and
eliminate mine related traffic on two county roads. The certification and
decision has been challenged in a lawsuit filed by a local citizens' group,
currently under appeal, see "Legal Proceedings."
VISITOR'S CENTER. In fiscal 2000, SGMC spent approximately $298,000 for
surface infrastructure related to improving access to the mine site, and to a
lesser extent tourist related improvements. The visitors center is being
operated by a third party.
MOLYBDENUM
As a holder of royalty, reversionary and certain other interests in
properties located at Mt. Emmons near Crested Butte, Colorado, USE and Crested
are entitled to receive annual advance royalties of 50,000 pounds of molybdenum,
or cash equivalent. AMAX Inc. (which was acquired by Cyprus Minerals Company and
was renamed Cyprus Amax Minerals Company in November 1993 and was acquired later
by Phelps Dodge) delineated a deposit of molybdenum containing approximately
146,000,000 tons of mineralization averaging 0.43% molybdenum disulfide on the
properties of USE and Crested.
Advance royalties are paid in equal quarterly installments until: (i)
commencement of production; (ii) failure to obtain certain licenses, permits,
etc., that are required for production; or (iii) AMAX's return of the properties
to USE and Crested. The advance royalty payments reduce the operating royalties
(6% of gross production proceeds) which would otherwise be due out of
production. There is no obligation to repay the advance royalties if the
property is not placed in production. Phelps Dodge ceased making the quarterly
installments in July 2001.
18
The Agreement with AMAX also provides that USE and Crested receive
$2,000,000 when the Mt. Emmons properties are put into production and, in the
event AMAX sells its interest in the properties, USE and Crested are to receive
15% of the first $25,000,000 received by AMAX. USE and Crested have asserted
that the acquisition of Cyprus Amax by Phelps Dodge would entitle USE and
Crested to such payment, and that position has been presented to Phelps Dodge,
the successor company to Cyprus Amax. This position has been rejected by Phelps
Dodge and USE and Crested are considering remedies. USE recognized $108,500,
$132,600 and $150,600 of revenues in fiscal 2001, 2000 and 1999 related to this
royalty interest.
OIL AND GAS
FORT PECK LUSTRE FIELD (MONTANA). We operate a small oil production
facility (three wells) at the Lustre Oil Field on the Ft. Peck Indian
Reservation in northeastern Montana. We receive a fee based on oil produced.
This fee and other assets of the Company collateralize a $750,000 line of credit
from a bank.
COMMERCIAL OPERATIONS
REAL ESTATE AND OTHER COMMERCIAL OPERATIONS. We own varying interests,
alone and with Crested, in affiliated companies engaged in real estate, and
other commercial businesses. The affiliated organizations include Western
Executive Air, Inc. ("WEA") and Canyon Homesteads, Inc. (through Plateau).
Activities of these and other subsidiaries in the business sectors include
ownership and management of a commercial office building, the townsite of
Jeffrey City, Wyoming and the townsite, motel, convenience store and other
commercial facilities in Ticaboo, Utah.
WYOMING. The Company and Crested own a 14-acre tract in Riverton, Wyoming,
with a two-story 30,400 square foot office building (including underground
parking). The first floor is rented to affiliates, nonaffiliates and government
agencies; the second floor is occupied by the Company and Crested. The property
is mortgaged to the WDEQ as security for future reclamation work on the Sheep
Mountain Crooks Gap uranium properties.
The Company and Crested (through WEA) also own a fixed base aircraft
operation, with fuel sales, and aircraft maintenance, at the Riverton Regional
Airport, including a 10,000 square foot aircraft hangar and 7,000 square feet of
associated offices and facilities. This operation is located on land leased from
the City of Riverton for a term ending December 16, 2005, with an option to
renew on mutually agreeable terms for five years.
The Company and Crested also own 17 semi-developed lots on 26.8 acres and
63 acres of undeveloped land near the Riverton Regional Airport, and three
mountain sites covering 16 acres in Fremont County, Wyoming.
USECC owned various buildings, 290 city lots and/or tracts and other
properties at the Jeffrey City townsite in south-central Wyoming, where about
130 people presently live. USECC sold these properties during May 2001.
In Riverton, Wyoming, the Company owns four city lots and a 9-acre tract
with improvements including two smaller office buildings and two other buildings
with 12,000 square feet of office facilities, and repair and maintenance shops
containing 8,000 square feet.
COLORADO. In connection with the AMAX transaction on the Mt. Emmons
molybdenum properties near Crested Butte, Colorado, USECC acquired an option
from AMAX (later Cyprus Amax) to purchase approximately 57 acres for $200,000 in
Mountain Meadows Business Park, Gunnison, Colorado. See
19
"Minerals - Molybdenum" above. The property was zoned commercial and industrial,
and is adjacent to Western State College. In fiscal 1995, USECC and Cyprus Amax
agreed to exercise the option by USE and Crested agreeing to forego six quarters
of advance royalties from Cyprus Amax (the option purchase price was $200,000),
plus payment of certain expenses i.e. real property taxes from 1987 and other
expenses amounting to $19,358. Thereafter, USE (together with Crested) signed
option agreements with Pangolin Corporation, a Park City, Utah developer, for
sale of the 57 acres, and a separate parcel owned in Gunnison County, Colorado.
Although initial payments on the option agreements were received, the
developer is in default on the balance. In July 1998, the Company filed a
lawsuit seeking recovery of the balance owing on promissory notes and contracts.
See "Item 3 - Legal Proceedings."
UTAH PROPERTIES. Canyon Homesteads, Inc. (a Plateau subsidiary) owns a
majority interest in a joint venture which holds the Ticaboo Townsite in
Ticaboo, Utah (see "Minerals - Uranium-Shootaring Canyon Mill - Ticaboo
Townsite" above). In fiscal 1995, USE acquired the minority interest in the
joint venture from a nonaffiliate.
Commercial operations are not dependent upon a single customer, or a few
customers, the loss of which would have a materially adverse effect on the
Company.
RESEARCH AND DEVELOPMENT
No research and development expenditures have been incurred, either on the
company's account or sponsored by customers, during the past three fiscal years.
ENVIRONMENTAL
GENERAL. Operations are subject to various federal, state and local laws
and regulations regarding the discharge of materials into the environment or
otherwise relating to the protection of the environment, including the Clean Air
Act, the Clean Water Act, the Resource Conservation and Recovery Act ("RCRA"),
and the Comprehensive Environmental Response Compensation Liability Act
("CERCLA"). With respect to mining operations conducted in Wyoming, Wyoming's
mine permitting statutes, Abandoned Mine Reclamation Act and industrial
development and siting laws and regulations also impact us. Similar laws and
regulations in California affect SGMC operations and Utah laws and regulations
effect Plateau's operations.
Management believes the Company complies in all material respects with
existing environmental regulations.
CROOKS GAP. An inoperative ion exchange facility at Crooks Gap currently
holds a NRC license for possession of uranium operations byproducts. USE applied
to the NRC for permission to decommission and decontaminate the plant, and to
dispose low level waste into the Sweetwater Mill tailings cell, which is
currently underway and is anticipated to be completed in September 2001.
OTHER ENVIRONMENTAL COSTS. Actual costs for compliance with environmental
laws may vary considerably from estimates, depending upon such factors as
changes in environmental laws and regulation (e.g., the new Clean Air Act), and
conditions encountered in minerals exploration and mining. USE does not
anticipate that expenditures to comply with laws regulating the discharge of
materials into the environment, or which are otherwise designed to protect the
environment, will have any substantial adverse impact on the competitive
position of the Company.
20
EMPLOYEES
As of August 17, 2001, USE had approximately 55 full-time employees.
Crested uses approximately 50 percent of the time of USE employees, and
reimburses USE on a cost reimbursement basis.
MINING CLAIM HOLDINGS
TITLE. Nearly all the uranium mining properties held by the GMMV, USE,
USECC and Plateau are on federal unpatented claims. Unpatented claims are
located upon federal public land pursuant to procedure established by the
General Mining Law. Requirements for the location of a valid mining claim on
public land depend on the type of claim being staked, but generally include
discovery of valuable minerals, erecting a discovery monument and posting
thereon a location notice, marking the boundaries of the claim with monuments,
and filing a certificate of location with the county in which the claim is
located and with the BLM. If the statutes and regulations for the location of a
mining claim are complied with, the locator obtains a valid possessory right to
the contained minerals. To preserve an otherwise valid claim, a claimant must
also pay certain rental fees annually to the federal government (currently $100
per claim) and make certain additional filings with the county and the BLM.
Failure to pay such fees or make the required filings may render the mining
claim void or voidable. Because mining claims are self-initiated and
self-maintained, they possess some unique vulnerabilities not associated with
other types of property interests. It is impossible to ascertain the validity of
unpatented mining claims solely from public real estate records and it can be
difficult or impossible to confirm that all of the requisite steps have been
followed for location and maintenance of a claim. If the validity of an
unpatented mining claim is challenged by the government, the claimant has the
burden of proving the present economic feasibility of mining minerals located
thereon. Thus, it is conceivable that during times of falling metal prices,
claims which were valid when located could become invalid if challenged.
RMG's properties and mineral leases of BLM, state and fee lands require
annual cash payments of approximately $233,000 during fiscal 2002. RMG is
obligated for $48,900 of this amount to keep the leases in effect.
PROPOSED FEDERAL LEGISLATION. The U.S. Congress has, in legislative
sessions in recent years, actively considered several proposals for major
revision of the General Mining Law, which governs mining claims and related
activities on federal public lands. If any of the recent proposals become law,
it could result in the imposition of a royalty upon production of minerals from
federal lands and new requirements for mined land reclamation and other
environmental control measures. It remains unclear whether the current Congress
will pass such legislation and, if passed, the extent such new legislation will
affect existing mining claims and operations. The effect of any revision of the
General Mining Law on operations cannot be determined conclusively until such
revision is enacted; however, such legislation could materially increase the
carrying costs of mineral properties which are located on federal unpatented
mining claims, and could increase both the capital and operating costs for such
projects and impair the ability to hold or develop such properties.
ITEM 3. LEGAL PROCEEDINGS
Material pending proceedings are summarized below. Other proceedings which
were pending in fiscal 2001 have been settled or otherwise finally resolved.
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
In 1991, disputes arose between USE/Crested, and Nukem, Inc. and its
subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation
and operation of the Sheep Mountain Partners
21
partnership for uranium mining and marketing, and activities of the parties
outside SMP. Arbitration proceedings were initiated by CRIC in June 1991 and in
July 1991, USECC filed a lawsuit against Nukem, CRIC and others in the U.S.
District Court (District of Colorado) in Civil No. 91B1153. Later, USECC filed
another suit for the standby costs at the SMP mines against SMP in the Colorado
State Court. The Federal Court stayed both the arbitration proceedings and the
State Court case. In February 1994, all of the parties agreed to exclusive and
binding arbitration of the disputes before the American Arbitration Association
("AAA"), for which the legal claims made by both sides included fraud and
misrepresentation, breach of contract, breach of duties owed to the SMP
partnership, and other claims.
The AAA panel (the "Panel") entered an Order and Award (the "Order") in
April 1996 and clarified the Order on July 3, 1996, finding generally in favor
of USE and Crested on certain of their claims (including the claims for
reimbursement for standby maintenance expenses and profits denied SMP in Nukem's
trading of uranium), and in favor of Nukem/CRIC and against USE and Crested on
certain other claims, and imposing a constructive trust in favor of Sheep
Mountain Partners on uranium contracts Nukem entered into to purchase uranium
from CIS republics. USECC filed a petition for confirmation of the Order and on
June 30, 1997, and the U.S. District Court confirmed the Order in its Second
Amended Judgment (the "Judgment"). Thereafter, Nukem/CRIC appealed the Judgment
to the 10th Circuit Court of Appeals ("CCA").
A three judge panel of the 10th CCA issued an Order and Judgment on October
22, 1998, which unanimously affirmed the Federal District Court's Second Amended
Judgment without modification. The ruling affirmed (i) the imposition of a
constructive trust in favor of SMP on Nukem's rights to purchase CIS uranium,
the uranium acquired pursuant to those rights, and the profits therefrom; and
(ii) the damage award against Nukem/CRIC. As a result of the ruling of the 10th
CCA, USE and Crested received an additional $6,077,264 (including interest and
court costs) from Nukem in February 1999 for a total net monetary award of
$15,468,625 in the arbitration/litigation, and equitable relief in the form of
USE's and Crested's interest in SMP, which holds the constructive trust over the
CIS contracts. Nukem/CRIC filed two motions for entry of final satisfaction of
Judgment. The U.S. District Court denied both motions, Nukem again appealed to
the 10th CCA, which again affirmed the District Court's ruling, and held that
Nukem/CRIC had not demonstrated that the Judgment had been satisfied because
they had not provided USECC with an accounting of the partnerships assets.
In February 2001, the U.S. District Court appointed a Special Master to
determine the amounts, if any, owed by Nukem to SMP pursuant to the constructive
trust. The Special Master entered an Order on July 2, 2001 regarding the
formulation of an accounting plan. The District Court has set a hearing for
October 5, 2001 on the status of the accounting.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the United States District Court,
Denver, Colorado, Case No. 98WM1630, against Contour Development Company, L.L.C.
and entities and persons associated with Contour Development Company, L.L.C.
(together, "Contour") seeking compensatory and consequential damages of more
than $1.3 million from the defendants for dealings in real estate owned by USE
and Crested in Gunnison, Colorado. The Contour defendants asserted a
counterclaim asking for payment of attorneys fee and costs. Discovery has been
completed and the final pretrial conference is scheduled for October 2, 2001,
when the court will schedule the trial date. Trial is expected in early 2002.
See "Business - Commercial Operations - Real Estate and Other Commercial
Operations - Colorado Properties" above.
22
SGMC LITIGATION
In 1993, Amador County issued a conditional use permit ("CUP") to allow
SGMC to develop the SGM near the town of Sutter Creek, Amador County,
California. A number of conditions were attached to the original CUP which
accommodated local citizen and government agency concerns about noise, waste
disposal, traffic and other aspects of the proposed mining operation.
In 1997 and 1998, SGMC proposed amendments to the CUP for a new design of
the SGM which would lower its environmental impact by reducing traffic,
potentially eliminating the use of cyanide on-site, and removing two large
tailings dams which would have been built to hold mine and mill waste. The new
design also would significantly reduce capital and operating costs for the
mine/mill complex, but cover more land for waste disposal and other purposes.
The certification and approval by the Amador County Planning Commission of the
Final Subsequent Environmental Impact Report ("FSEIR") and CUP amendments on
July 14, 1998 was appealed (by a local citizens project opposition group) to the
Amador County Board of Supervisors. In August and September 1998, the Board of
Supervisors certified the FSEIR and approved the amendments to the CUP.
On September 28, 1998 a lawsuit was filed in Amador County Superior Court,
California (Case No. 98 CV 3298) by Concerned Citizens of Amador County as
plaintiffs, against the County of Amador and the Amador County Board of
Supervisors, and against SGMC as a real party in interest. The lawsuit
challenges the actions of Amador County and its Board of Supervisors in
certifying the FSEIR and approving the amended CUP. A hearing was held on June
7, 1999 and the Court denied all claims by the Plaintiffs Concerned Citizens who
appealed the decision. Oral arguments were made to the appellate court on August
20, 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A meeting of shareholders was held at the company's offices at 877 North
8th West, Riverton, WY on December 8, 2000. The matters considered by the
shareholders was re-election of two directors, Keith G. Larsen and John L.
Larsen. Both were so elected to serve for a term expiring on the third
succeeding annual meeting.
INFORMATION CONCERNING EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS.
ROBERT SCOTT LORIMER, age 50, has been the Chief Accounting Officer for
both USE and Crested for more than the past five years. Mr. Lorimer also has
been Chief Financial Officer for both these companies since May 25, 1991, their
Treasurer since December 14, 1990, and Vice President Finance since April 1998.
He serves at the will of each board of directors. There are no understandings
between Mr. Lorimer and any other person, pursuant to which he was named as an
officer, and he has no family relationship with any of the other executive
officers or directors of USE or Crested. During the past five years, Mr. Lorimer
has not been involved in any Reg. S-K Item 401(f) listed proceeding.
DANIEL P. SVILAR, age 72, has been General Counsel for USE and Crested for
more than the past five years. He also has served as Secretary and a director of
Crested, and Assistant Secretary of USE. His positions of General Counsel to,
and as officers of the companies, are at the will of each board of directors.
There are no understandings between Mr. Svilar and any other person pursuant to
which he was named as officer or General Counsel. He has no family relationships
with any of the other executive officers or directors of USE or Crested, except
his nephew Nick Bebout is a USE director. During the past five years, Mr. Svilar
has not been involved in any Reg. S-K Item 401(f) proceeding.
23
MAX T. EVANS, age 76, has been Secretary for USE and President of Crested
for more than the past five years. Mr. Evans had been a director of USE for more
than the past five years, prior to April 17, 1997. He serves at the will of each
board of directors. There are no understandings between Mr. Evans and any other
person pursuant to which he was named as an officer. He has no family
relationships with any of the other executive officers or directors of USE or
Crested. During the past five years, Mr. Evans has not been involved in any Reg.
S-K Item 401(f) proceeding.
PART II
ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Shares of USE common stock are traded on the over-the-counter market, and
prices are reported on a "last sale" basis by the National Market System ("NMS")
of the National Association of Securities Dealers Automated Quotation System
("Nasdaq"). The range by quarter of high and low sales prices is set forth below
for fiscal 2001 and 2000.
High Low
---- ---
Fiscal year to ended May 31, 2001
----------------------------------
First quarter ended 8/31/00 $ 3.00 $ 1.75
Second quarter ended 11/30/00 3.375 1.75
Third quarter ended 2/28/01 4.00 2.00
Fourth quarter ended 5/31/01 6.25 3.563
Fiscal year ended May 31, 2000
----------------------------------
First quarter ended 8/31/99 $ 5.09 $ 3.25
Second quarter ended 11/30/99 4.50 3.19
Third quarter ended 2/29/00 3.88 3.13
Fourth quarter ended 5/31/00 3.63 2.06
(b) Holders
(1) At August 17, 2001 , the closing bid price was $4.23 per share and there
were approximately 733 shareholders of record. As of August 17, 2001, we have
7,202,697 shares of common stock issued and outstanding, which do not include
shares owned by our subsidiaries or shares in officers' and directors' names
that are subject to forfeiture.
(2) Not applicable.
(c) We have not paid any cash dividends with respect to common stock. There are
no contractual restrictions on our present or future ability to pay cash
dividends, however, we intend to retain any earnings in the near future for
operations.
24
ITEM 6. SELECTED FINANCIAL DATA.
The following tables show certain selected historical financial data for
USE for the five years ended May 31, 2001. The selected financial data is
derived from and should be read with the financial statements for USE included
in this Report.
May 31,
-------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Current assets $ 3,330,000 $ 3,456,800 $ 12,718,900 $ 14,301,000 $ 4,400,900
Current liabilities 2,396,700 6,617,900 5,355,600 6,062,100 1,393,900
Working capital (deficit) 933,300 (3,161,100) 7,363,300 8,238,900 3,007,000
Total assets 30,465,200 30,876,100 33,391,000 45,019,100 30,387,100
Long-term obligations(1) 14,981,500 14,025,200 14,526,900 14,468,600 14,377,200
Shareholders' equity 7,320,600 4,683,800 10,180,300 17,453,500 12,723,600
(1)Includes $8,906,800, $8,906,800, $8,860,900, $8,778,800, and $8,751,800 of accrued reclamation
costs on mining properties at May 31, 2001, 2000, 1999, 1998 and 1997, respectively. See Note K of
Notes to Consolidated Financial Statements.
For Years Ended May 31,
--------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenues $ 14,497,700 $ 7,773,800 $ 10,853,600 $ 11,558,500 $ 5,790,200
Income (loss) before minority
interests, equity in
income (loss) of affiliates,
and income taxes 1,701,100 (11,148,200) (16,057,800) 365,000 (3,706,000)
Minority interest in loss
(income) of consolidated
subsidiaries 220,100 509,300 4,468,400 (772,500) 672,300
Equity in loss of affiliates -- (2,900) (59,100) (575,700) (690,800)
Income taxes -- -- -- -- --
Preferred stock dividends (150,000) (20,800) -- -- --
------------ ------------- ------------- ------------ ------------
Net income (loss)
to common shareholders $ 1,771,200 $ (10,662,600) $ (11,648,500) $ (983,200) $ (3,724,500)
============ ============= ============= ============ ============
25
May 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Per shares financial data
Revenues $ 1.77 $ 1.01 $ 1.52 $ 1.74 $ .85
Income (loss) before minority
interests, equity in income
(loss) of affiliates and
income taxes $ .21 $ (1.45) $ (2.25) $ .05 $ (.55)
Minority interest in loss (income)
of consolidated subsidiaries .03 .06 .63 (.12) .10
Equity in loss of affiliates -- -- (.01) (.08) (.10)
Income taxes -- -- -- -- --
Net income (loss)
per share, basic $ .23 $ (1.39) $ (1.63) $ (.15) $ (.55)
======== ======== ======== ======== ========
Net income (loss)
per share diluted $ .21 $ (1.33) $ (1.63) $ (.15) $ (.55)
======== ======== ======== ======== ========
Cash dividends per share $ -0- $ -0- $ -0- $ -0- $ -0-
======== ======== ======== ======== ========
ITEM 7. 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended May 31, 2001, we experienced an increase in working
capital of $4,094,400 consisting mainly of the non-cash recognition of the
deferred GMMV purchase option of $4,000,000. At May 31, 2000, we had a working
capital deficit of $3,161,100 as compared to working capital of $933,300 at May
31, 2001.
Components of the increase in working capital were increases in accounts
receivable trade $264,300; current portion of long term notes receivable of
$225,000; assets held for resale and other of $137,000; along with decreases in
accounts payable of $279,500; deferred GMMV purchase option of $4,000,000; and
current portion of long-term debt of $141,700. These increases in working
capital were offset by reductions in; cash of $230,900; accounts receivable
affiliates of $434,700, and inventory of $87,500, along with an increase in the
outstanding balance under the line of credit of $200,000.
On September 11, 2000, we entered into a settlement agreement with
Kennecott relating to a legal dispute between the joint venture partners in the
GMMV operations. As a result of this settlement, we received certain GMMV
equipment; cash payments of $3,250,000, and the ability to recognize the
$4,000,000 deferred GMMV purchase option as revenue. This transaction resulted
in the reclassification of the deferred purchase option and the decrease in
accounts payable trade. The transaction also resulted in the reduction of
26
accounts receivable affiliates as the Company had an outstanding receivable from
GMMV at May 31, 2000. Accounts receivable trade at May 31, 2000, consisted
primarily of amounts due for contract drilling and construction work. These
receivables were collected during the year ended May 31, 2001. This reduction in
accounts receivable trade was offset by amounts due from the auction of certain
mining and drilling equipment during the last month of the fiscal year ended May
31, 2001. Accounts receivable affiliates were reduced due to the collection of
accounts receivable from GMMV and accounts and notes receivable from employees.
The reduction of debt from employees consisted of the payment of cash,
settlement agreements, and the receipt of 5,000 shares of the Company's common
stock which was pledged for the indebtedness. These shares were recorded as
treasury shares at the value of the principal portion of the debt reduction.
During the year ended May 31, 2001, we sold our controlling interest in
Ruby Mining Company ("Ruby") to Admiralty Corporation ("Admiralty") of Atlanta
Georgia. Admiralty has developed technology that differentiates ferrous from
non-ferrous metals in sea water. This technology is used to explore for and
recover sunken treasures. Admiralty paid us $100,000 and signed a promissory
note for $225,000 for the purchase of Ruby. At the time of this report, the
promissory note was in default but we believe that Admiralty will pay the amount
due or we will reach other terms to satisfy the debt. We maintained a 4%
ownership position in Ruby by retaining 900,000 shares of its common stock. We
may hold or sell all or a portion of this stock.
Other assets increased by $137,000 as a result of increased deferred
compensation as a result of funding of the 1996 Stock Award Program. Inventories
decreased by $87,500 as of May 31, 2001 as a result of our leasing all of the
commercial operations in southern Utah to third parties with the exception of
the motel which has no retail inventory. Current portion of long term debt was
reduced by $141,700 from the proceeds of the sale of certain equipment. The line
of credit was drawn down by an additional $200,000 during fiscal 2001 to finance
operations. After May 31, 2001, the amount borrowed under the line of credit was
reduced to $350,000. As of the date of this report, the total amount available
under the line of credit has been reduced to $750,000, including the $350,000
that has been drawn down. The reduction in the limit on the line of credit is as
a result of the sale of a portion of the equipment which had been pledged on the
line of credit during the first quarter of 2002.
During the year ended May 31, 2001, investing and financing operations
generated cash of $174,100 and $1,578,200, respectively while operation
activities consumed cash of $1,983,200, for a net decrease in cash of $230,900.
Although operations resulted in a profit of $1,771,200, a large portion of this
gain was the non-cash transaction of recognizing $4,000,000 of deferred income
from GMMV as income although we had received the cash in a previous period.
Investing activities provided cash as a result of the sale of various
pieces of equipment and percentages of coalbed methane properties. This increase
in cash of $3,211,000 was offset by the acquisition of coalbed methane
properties of $2,011,000; the development of coalbed methane properties of
$455,600; the purchase of equipment of $1,719,400; and an increase in restricted
investments of $417,700. The equipment purchases consisted of $1,250,000 for the
purchase of our corporate aircraft (which had previously been leased) and
$469,400 for equipment used in our drilling and construction operations.
Cash was consumed in financing activities as the result of paying $828,400
on our debt. This reduction of debt was offset by new debt of $1,938,800. The
increase in debt during fiscal 2001 was to fund the purchase of a corporate
aircraft, the purchase of drilling and construction equipment and the partial
financing of our real estate operations in southern Utah of $300,000.
We issued 8,532 shares of our restricted common stock valued at $19,200
during year ended May 31, 2001 as non-cash compensation to our outside
directors. We also issued 15,000 shares of our common stock valued at $70,600 as
compensation to a consultant and 53,837 shares of common stock valued at
$288,000
27
to our employee retirement plan. As a partial retirement of employee debt, we
received 5,000 shares of stock valued at $20,600, which became treasury stock.
CAPITAL RESOURCES
The primary sources of our capital resources are cash on hand; collection
of receivables; projected equity financing of our coalbed methane affiliate RMG;
production of coalbed methane gas; sale of excess mine, construction and
drilling equipment; sale of partial ownership interest in mineral properties;
proceeds under the line of credit; receipt of contracted amounts from the sale
of interests in coalbed methane properties, and the final determination of the
SMP arbitration/litigation. We also will continue to receive revenues from our
commercial operations in southern Utah along with the rental and fixed base
airport operations in Wyoming.
We currently have a $750,000 line of credit with a commercial bank. At the
time of this report, this line of credit has been drawn down by $350,000. We
also have a $500,000 line of credit through our affiliate Plateau Resources.
This line of credit is for the development of the Ticaboo town site in southern
Utah. Plateau has drawn down this financing facility $300,000 which is repayable
over 10 years. All payments on these lines of credit are current as of the
filing date of this report.
Subsequent to May 31, 2001 we received $796,000 for 199,000 (restricted
under rule 144) shares of common stock through a private placement. We also
received $288,400 during fiscal 2001 and $310,200 during the first quarter of
2002 from employees as they exercised options. We continue to seek equity or
industry partner financing for RMG.
We have entered into agreements with two companies to sell a portion of our
interest in our coalbed methane properties. The first agreement is an option and
farm-in agreement with Suncor Energy Natural Gas America Inc. ("SENGAI"), a
subsidiary of Suncor Energy Inc. of Alberta, Canada. SENGAI is obligated to fund
$2,000,000 of a $2,250,000 drilling program in 112,000 acres in part of our
Montana coalbed methane properties. SENGAI, under the agreement, may exercise
its option by paying $3,684,300, of which we would receive $2,763,200, in
February of 2002. Should SENGAI exercise this option it would own a 50% working
interest and a 40% net revenue interest in the 112,000 acres. Our interest would
be reduced to 12.5% working interest and 10% net revenue interest should SENGAI
exercise its option, subject to further reduction to 6.25% and 5% respectively
by separate agreement with Carrizo.
We also have entered into a purchase and sale agreement with CCBM, Inc.
("CCBM"), a wholly owned subsidiary of Carrizo Oil & Gas, Inc. of Houston Texas.
CCBM signed a promissory note in the amount of $7,500,000 to purchase a 50%
undivided interest in all of our coalbed methane properties. The promissory note
bears interest at an annual rate of 8% and is payable at the rate of $125,000
per month plus interest for forty-one months with a balloon on the forty-second
month.
CCBM is also obligated to fund an initial drilling program in the amount of
$5,000,000 of which $2,500,000 will be credited to RMG's benefit. Of this amount
$250,000 will be committed to satisfy RMG's commitment under the SENGAI drilling
program (as well as the remaining obligation under the Quantum agreement). For
this advance of funds, CCBM will receive a 50% interest in RMG's interest in
those wells drilled under the SENGAI initial drilling program and a 6.25 %
working interest, and a 5% net revenue interest in the 112,000 acres which are
subject to the SENGAI option. Should SENGAI not exercise its option, CCBM has
the option to purchase an additional 18.75% of the total ownership in the
112,000 acres at the same price per net acre in the SENGAI agreement. If this
occurs both RMG and CCBM would own undivided 25% interests in the 112,000 acres.
28
We believe that these cash resources will be sufficient to sustain
operations during fiscal 2002. We will continue to pursue equity and industry
partner financing to fund our portion of RMG's obligations under the drilling
programs.
CAPITAL REQUIREMENTS
The primary requirements for our working capital during fiscal 2002 are
expected to be development of coalbed methane properties; the cost of
maintaining our uranium properties; the SGMC gold properties holding costs, and
general and administrative costs.
DEVELOPMENT OF COALBED METHANE PROPERTIES
-----------------------------------------
The majority of the fiscal 2002 development costs associated with the
coalbed methane properties of RMG has been funded through the SENGAI and CCBM
agreements. 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 development
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 URANIUM PROPERTIES
------------------------------
SMP URANIUM PROPERTIES
The care and maintenance costs associated with the Sheep Mountain uranium
mineral properties were approximately $33,300 per month during fiscal 2001. We
continue to implement cost cutting measures to reduce the holding cost while at
the same time preserve the assets. We are obligated to reclaim the GMIX plant
which was used to extract uranium from mine waters. We have begun the process of
reclamation and are moving any burying the GMIX plant in the Sweetwater mill
tailings cell which was an asset of the GMMV and is now owned by Kennecott. It
is anticipated that the reclamation will be completed during the second quarter
of 2002. Costs of such reclamation are dependent on the work that is required by
the regulatory agencies as the project progresses.
PLATEAU RESOURCES URANIUM PROPERTIES
Plateau owns the Ticaboo townsite, motel, convenience store, boat storage,
restaurant and lounge. Prior to fiscal 2002, we operated all of these entities.
A decision was made to lease out all but the motel operations during fiscal
2002. This decision relieved us of the obligation and expense of employees,
inventory and risk of loss for the leased 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 GOLD PROPERTIES
Due to the depressed market price of gold, the development of the gold
properties has been deferred into the future. SGMC developed a tourism business
to cover the holding costs of the properties until such time as the price for
gold recovers. A decision was made to lease out the tourism business to a third
party. The revenues received from the lease cover a majority of our holding
costs associated with the mining property. We plan, if possible, to concurrently
run a gold mine operation with the mine tour when gold values improve. We have
one employee at the SGMC properties to preserve the core assets and properties.
SGMC
29
is in the process of evaluating the potential of selling certain of the non
essential land positions that it has acquired in developing a mine plan.
DEBT PAYMENTS
-------------
Debt to non-related parties at May 31, 2001 was $2,294,500 as compared to
$1,184,200 at May 31, 2000. The increase in debt to non-related parties consists
primarily of debt due on the financing of equipment and our corporate aircraft
which was previously leased. The balance of the debt to non-related parties, is
for the purchase of land and buildings by SGMC. All payments on the debt are
current.
At May 31, 2001, the Company had borrowed $850,000 of its line of credit.
As of the date of this report the outstanding amount under the line of credit
was $350,000. This debt is secured by the pledge of equipment and real estate
assets of the Company.
FEDERAL INCOME TAX ISSUES
-------------------------
The tax years through May 31, 1996 are closed after audit by the IRS.
RECLAMATION COSTS
-----------------
With the exception of any amounts that may become needed in excess of the
cash bond on the GMIX reclamation project, it is not anticipated that any of our
working capital will be used in fiscal 2002 for the reclamation of any of its
mineral property interests. The reclamation obligations are long term and are
either bonded through the use of cash bonds or the pledge of assets.
The reclamation liability on the Plateau uranium properties is $7,382,100
which is reflected on the Balance Sheet as a reclamation liability. This
liability is fully funded by cash investments which are recorded as long term
restricted assets.
The reclamation costs of the Sheep Mountain properties are $1,496,800 and
are covered by a reclamation bond which is secured by a pledge of certain of our
real estate assets.
The reclamation of SGMC gold properties is approximately $27,900. This
reclamation obligation is bonded with a cash bond.
RESULTS OF OPERATIONS
---------------------
FISCAL 2001 COMPARED TO FISCAL 2000
- -----------------------------------
Revenues:
- ---------
Revenues during fiscal 2001 increased $6,723,900 over revenues for the
previous year to $14,497,700. This increase was primarily as a result of an
increase in mineral sales, management fees and other revenues, the resolution of
the GMMV litigation with Kennecott and the gain on sales of surplus assets.
During fiscal 2001, we recorded $442,800 in revenues from mineral sales
compared to $132,600 during the previous year. The increase was the result of
the sale of a uranium delivery contract to a non- affiliated company, and a
delivery made under that market related contract before the sale of the
contract. There were no similar sales during the same period of the prior year.
30
As a result of the settlement of the Kennecott litigation, $7,132,800 was
recorded as revenue during fiscal 2001. This revenue has two components: (1)
Non-cash revenues as a result of the recognition of $4,000,000 of a deferred
GMMV purchase option payment that was received in 1997 and (2) the receipt of
cash from Kennecott as a result of the settlement, $3,132,800 - net of accounts
receivable from GMMV.
During the fiscal 2001, we recognized a gain of $602,100 from the sale of
equipment that was determined to be surplus. One large component of this amount
was the sale of certain GMMV assets that were distributed to the Company upon
the resolution of the GMMV litigation. Increased other revenues were also
recorded during 2001 in the amount $437,100. This increase in other revenues was
primarily as the result of the final royalty payment received from the sale of
The Brunton Company of $233,000, and the sale of a real estate property in
Colorado of $264,600.
These increases in revenues were offset by decreases in contract drilling
and construction revenues, $1,346,300, commercial operations revenue, $267,400,
and interest revenue of $113,900. Contract drilling and construction revenues
decreased during fiscal 2001 due to reduced activity for third parties. Revenues
from commercial operations decreased as the operations at SGMC and Plateau were
leased out. The decrease in interest revenues was as a result of reduced amounts
of cash held in interest bearing accounts.
Costs and Expenses:
- ------------------
Costs and expenses decreased by $6,125,400 during fiscal 2001 to
$12,796,600 from $18,922,000 during the previous year. This reduction in costs
and expenses came as a result of reduced contract drilling and construction
operation expense of $2,428,700; reduced commercial operation expense of
$151,100; a reduced provision for doubtful accounts of $708,600; and general and
administrative costs and expenses of $3,805,900. These reductions in costs and
expenses were offset by increases in mineral operations costs and expenses of
$658,000; oil production costs and expenses of $4,600; abandonment of mining
equipment of $123,800; and interest expense of $182,500.
Contract drilling and construction costs and expenses were reduced as a
result of the curtailment of contract operations for third parties during fiscal
2001. General and administrative costs during fiscal 2000 were significantly
higher than those experienced during fiscal 2001 due to a non-cash charge to
operations of $3,139,100 as a result of the issuance of common shares of RMG
stock below the market. Other reductions in General and Administrative costs and
expenses during fiscal 2001 were related to a reduction of staff.
Operations for the fiscal year ended May 31, 2001, resulted in earnings of
$1,771,200 or $0.21 per share fully diluted as compared to a loss of $10,621,000
or $1.33 per share fully diluted for the fiscal year ended May 31, 2000.
FISCAL 2000 COMPARED TO FISCAL 1999
- -----------------------------------
Revenues:
- --------
During fiscal 2000, the Company recognized revenues in three segments;
minerals in the form of advance royalties on its molybdenum property, $132,600,
contract drilling and construction work in the coalbed methane industry,
$3,584,900, commercial operations in southern Utah and other rental properties
in Wyoming, $2,786,800. The Company also recognized other revenues from oil
sales of $159,200 from its interest in the Lustre Field on the Fort Peck
Reservation, interest revenues of $813,600 on cash equivalents invested in
interest bearing accounts, and management fees of $277,300 for services provided
to the GMMV.
Total revenues during fiscal 2000 were $7,773,800, a decrease of $3,079,800
from revenues of $10,853,600 in fiscal 1999. This decrease was as a result of
decreased revenues in mineral sales of $105,600;
31
commercial operations of $191,000; revenues from the partial settlement of the
SMP arbitration/litigation of $6,077,300; management fees and other revenues of
$307,100; interest revenues of $34,000, and the gain on disposal of assets of
$25,700. These decreases in revenues were offset by increased revenues from
contract drilling and construction operations of $3,584,900 and oil sales of
$76,000.
The decrease in mineral sales is as a result of the Company recognizing
revenues of $87,600 from the sale of uranium under a SMP contract during fiscal
1999. No revenues were recognized from sales of uranium during fiscal 2000. This
decrease in uranium sales plus the a decrease in the market price for
molybdenum, which reduced the advance royalty from Cyprus Amax during fiscal
2000 by $18,000, accounted for the reduction in mineral sales revenues.
Commercial operations decreased by $191,000 as a result of reduced
equipment rental revenues received by the Company for the rental of equipment to
the GMMV during fiscal 2000 as compared to fiscal 1999. Commercial operations at
the Ticaboo operations in southern Utah increased by $405,200 during fiscal
2000. The reduced activity at GMMV during fiscal 2000 also was the main
contributor to the reduced management fee revenue when compared with fiscal
1999.
Costs and Expenses:
- ------------------
Costs and expenses were reduced in fiscal 2000 by $7,989,400 to $18,922,000
from $26,911,400 during fiscal 1999. This reduction was primary as a decrease in
the impairment of mineral properties of $13,224,400. No impairment of mineral
properties was taken during fiscal 2000. During fiscal 1999, the Company
determined that an impairment should be taken on the SGMC assets of $10,718,300
and the Yellow Stone Fuels Corp. ("YSFC") assets of $2,506,100. The impairment
of the SGMC and YSFC assets related to the recoverability of the Company's
investment in the mineral properties and equipment based on the then market
prices for gold and uranium. Other decreases in costs and expenses were a
$51,600 reduction in commercial operations as a result of cost cutting efforts
and $9,100 in oil production costs due to less repair expenditures being made on
the wells during fiscal 2000.
Increases in costs and expenses during fiscal 2000 over fiscal 1999 are
$341,400 in mineral operations; $4,164,400 in contract drilling and construction
operations; provision for doubtful accounts of $343,600, and interest expense of
$38,300.
Costs and expenses in mineral operations during fiscal 2000 increased as a
result of increased activities for the Company's own account where mineral
operations in previous years were associated primary with joint ventures that
either reimbursed a portion or all of the costs. Contract drilling and
construction costs recorded during fiscal 2000 have no comparative costs and
expenses during fiscal 1999. These costs include all labor, equipment operating
and repair expenses and other costs associated with contract drilling and
construction. Prior to fiscal 2000, there were no contract drilling and
construction operations.
General and Administrative costs and expenses increased by $408,000 during
fiscal 2000. Included in this increase is non-cash compensation of $3,139,100
which was as a result of the issuance of common shares of RMG stock below
market. The increase in General and Administrative costs and expenses was offset
by reductions of General and Administrative costs and expenses at SGMC and other
Company operations resulting in a net decrease in General and Administrative
costs and expenses of $2,731,100.
The increase in provision for doubtful accounts of $343,600 during fiscal
2000 was primarily as a result of the valuation to market of the collateral held
for the loan to the Company's ESOP retirement plan. Interest expense increased
by $38,300 during fiscal 2000 as a result of additional equipment financing
activity.
32
Operations resulted in a loss of $10,621,000 or $1.33 per share fully
diluted as compared to a loss of $11,648,500 or $1.63 per share fully diluted
during fiscal 1999.
FUTURE OPERATIONS
-----------------
We have generated losses in two of the last three years as a result of
holding costs and permitting activities in the mineral segment along with
impairments of mineral assets. We have maintained some of our investments in
gold and uranium properties that continue to generate no operating revenues.
These properties require expenditures for items such as permitting, care and
maintenance, holding fees, corporate overhead and administrative expenses.
Success in the minerals industry is dependent on the price that a producer can
receive for its minerals. We cannot predict what the long term price for gold
and uranium will be and therefore cannot predict when, or if, we will generate
net income from these operations. We believe we have sufficient capital
resources to maintain our mineral properties on a standby basis through fiscal
2002. Development activities of the mineral properties and expansion of
commercial operations are dependent on the Company obtaining equity financing or
commercial loans. It may also be necessary to generate cash through the sale of
equipment or other assets.
At May 31, 2001 we are committed to be in the coalbed methane business well
into the future. Uranium prices and market projections are being evaluated.
Decisions to liquidate part or all of the Company's uranium holdings are being
considered. We are also evaluating its commitment to the gold business and at
what time the price for gold may recover.
EFFECTS OF CHANGES IN PRICES
----------------------------
Mineral operations are significantly affected by changes in commodity
prices. As prices for a particular mineral increase, prices for prospects for
that mineral also increase, making acquisitions of such properties costly, and
sales advantageous. Conversely, a price decline facilitates acquisitions of
properties containing that mineral, but makes sales of such properties more
difficult. Operational impacts of changes in mineral commodity prices are common
in the mining industry.
NATURAL GAS. Our decisions to expand into the coalbed methane gas industry
were predicated on the projections for natural gas prices. We believe that the
energy demands of the United States of America will sustain natural gas prices
at their current levels or higher during the foreseeable future.
URANIUM AND GOLD. Changes in the prices of uranium and gold will affect our
operational decisions the most. Currently, both gold and uranium are at
historical low prices. We continually evaluate market trends and data. We do not
plan to go forward with any additional development of our uranium and gold
properties until the market price for these metals increase and remain at
profitable levels.
MOLYBDENUM AND OIL. Changes in prices of molybdenum and petroleum are not
expected to materially affect our operations during fiscal 2002. A significant
and sustained increase in demand for molybdenum would be required for the
development of the Mt. Emmons properties by Phelps Dodge since it has other
producing molybdenum mines.
ITEM 8. FINANCIAL STATEMENTS
Financial statements meeting the requirements of Regulation S-X for the
Company follow immediately.
33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To U.S. Energy Corp.:
We have audited the accompanying consolidated balance sheet of U.S. ENERGY CORP.
(a Wyoming corporation) AND SUBSIDIARIES as of May 31, 2001, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of U.S. Energy Corp. and
subsidiaries as of May 31, 2001, and the results of their operations and their
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
GRANT THORNTON LLP
Denver, Colorado,
July 27, 2001
34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To U.S. Energy Corp.:
We have audited the accompanying consolidated balance sheet of U.S. ENERGY CORP.
(a Wyoming corporation) AND SUBSIDIARIES as of May 31, 2000, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period ended May 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of U.S. Energy Corp. and
subsidiaries as of May 31, 2000, and the results of their operations and their
cash flows for each of the two years in the period ended May 31, 2000, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado,
September 11, 2000
35
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
May 31,
-----------------------------
2001 2000
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents $ 685,500 $ 916,400
Accounts receivable:
Trade, net of allowance of $27,800 1,319,300 1,055,000
Affiliates 74,200 508,900
Current portion of long-term notes 225,000 --
Assets held for resale and other 983,800 846,800
Inventory 42,200 129,700
------------ ------------
Total current assets 3,330,000 3,456,800
INVESTMENTS AND ADVANCES:
Affiliates 16,200 9,600
Restricted investments 9,778,700 9,361,000
------------ ------------
Total investments and advances 9,794,900 9,370,600
PROPERTIES AND EQUIPMENT:
Land 1,271,800 1,499,100
Buildings and improvements 7,404,800 7,825,000
Machinery and equipment 5,536,900 10,386,200
Proved oil and gas properties, full cost method 1,773,600 1,773,600
Unproved coalbed methane properties,
excluded from amortization 5,881,700 4,727,200
Other mineral properties and mine development costs 1,520,600 1,494,700
------------ ------------
Total property and equipment 23,389,400 27,705,800
Less-Accumulated depreciation,
depletion and amortization (7,285,100) (10,948,900)
------------ ------------
Net property and equipment 16,104,300 16,756,900
OTHER ASSETS:
Accounts and notes receivable:
Real estate sales 42,400 58,600
Employees 180,300 295,200
Deposits and other 1,013,300 938,000
------------ ------------
Total other assets 1,236,000 1,291,800
------------ ------------
Total assets $ 30,465,200 $ 30,876,100
============ ============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
36
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
May 31,
-----------------------------
2001 2000
------------ -------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,404,300 $ 1,683,800
Deferred GMMV purchase option -- 4,000,000
Current portion of long-term debt 142,400 284,100
Line of credit 850,000 650,000
------------ ------------
Total current liabilities 2,396,700 6,617,900
LONG-TERM DEBT 2,152,100 900,100
RECLAMATION LIABILITY 8,906,800 8,906,800
OTHER ACCRUED LIABILITIES 2,777,800 3,073,500
DEFERRED TAX LIABILITY 1,144,800 1,144,800
MINORITY INTERESTS 1,177,800 1,124,600
COMMITMENTS AND CONTINGENCIES
FORFEITABLE COMMON STOCK,
$.01 par value; 433,788 and 396,608
shares issued, forfeitable until earned 2,748,600 2,584,600
PREFERRED STOCK,
$.01 par value; 1,000 shares authorized,
200 shares issued and outstanding 1,840,000 1,840,000
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 20,000,000 shares
authorized; 8,989,047 and 8,763,155
shares issued, respectively 90,000 87,700
Additional paid-in capital 38,681,600 37,797,700
Accumulated deficit (28,300,000) (30,071,200)
Treasury stock at cost, 949,725 and 944,725
shares, respectively (2,660,500) (2,639,900)
Unallocated ESOP contribution (490,500) (490,500)
------------ ------------
Total shareholders' equity 7,320,600 4,683,800
------------ ------------
Total liabilities and shareholders' equity $ 30,465,200 $ 30,876,100
============ ============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
37
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended May 31,
--------------------------------------------
2001 2000 1999
------------ ------------ -------------
REVENUES:
Mineral sales $ 442,800 $ 132,600 $ 238,200
Contract drilling/construction 2,238,600 3,584,900 --
Commercial operations 2,519,400 2,786,800 2,977,800
Oil sales 147,900 159,200 83,200
Management fees and other 714,400 277,300 584,400
Interest 699,700 813,600 847,600
Litigation settlements, net 7,132,800 -- 6,077,300
Gain (loss) on sales of assets 602,100 19,400 45,100
------------ ------------ ------------
Total revenues 14,497,700 7,773,800 10,853,600
COSTS AND EXPENSES:
Mineral operations 3,309,200 2,651,200 2,309,800
Contract drilling/construction operations 1,750,500 4,179,200 14,800
Commercial operations 3,236,200 3,387,300 3,438,900
Oil production 60,100 55,500 64,600
General and administrative 4,051,500 7,857,400 7,449,400
Provision for doubtful accounts -- 708,600 365,000
Impairment of mineral assets 123,800 -- 13,224,400
Interest 265,300 82,800 44,500
------------ ------------ ------------
Total cost and expenses 12,796,600 18,922,000 26,911,400
------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTEREST
AND EQUITY IN LOSS OF AFFILIATES 1,701,100 (11,148,200) (16,057,800)
MINORITY INTEREST IN LOSS
OF CONSOLIDATED SUBSIDIARIES 220,100 509,300 4,468,400
EQUITY IN LOSS OF AFFILIATES -- (2,900) (59,100)
------------ ------------ ------------
(Continued)
The accompanying notes to consolidated financial statements are an
integral part of these statements.
38
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
Year Ended May 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
INCOME (LOSS) BEFORE
INCOME TAXES 1,921,200 (10,641,800) (11,648,500)
PROVISION FOR INCOME TAXES -- -- --
------------ ------------ ------------
NET INCOME (LOSS) 1,921,200 (10,641,800) (11,648,500)
PREFERRED STOCK DIVIDENDS (150,000) (20,800) --
------------ ------------ ------------
NET INCOME (LOSS) TO
COMMON SHAREHOLDERS $ 1,771,200 $(10,662,600) $(11,648,500)
============ ============ ============
NET INCOME (LOSS) PER SHARE,
TO COMMON SHAREHOLDERS
BASIC $ .23 $ (1.39) $ (1.63)
============ ============ ============
NET LOSS PER SHARE, TO
COMMON SHAREHOLDERS
DILUTED $ .21 $ (1.39) $ (1.63)
============ ============ ============
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 7,826,001 7,673,475 7,137,114
============ ============ ============
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 8,487,680 8,008,895 7,137,114
============ ============ ============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
39
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional
-------------------- Paid-In Accumulated
Shares Amount Capital Deficit
------ ------ ---------- ------------
Balance May 31, 1998 7,523,492 $75,200 $28,526,200 $ (7,760,100)
Funding of ESOP 89,600 900 357,500 --
Issuance of employee options
below market value -- -- 262,000 --
Issuance of common stock
for services rendered 131,136 1,300 386,400 --
Issuance of common stock
for exercise of YSFC exchange 677,167 6,800 2,591,500 --
Fair value of warrants and options
issued for services rendered -- -- 176,000 --
Fair value of warrants issued for
exercise of YSFC exchange -- -- 167,000 --
Issuance of common
stock to acquire SGMC
special warrants, net of
offering costs 89,059 1,000 278,900 --
Purchase of treasury stock -- -- -- --
Forfeitable shares earned 40,170 400 269,400 --
Net loss -- -- -- (11,648,500)
--------- ------- ----------- ------------
Balance May 31, 1999 8,550,624 $85,600 $33,014,900 $(19,408,600)
========= ======= =========== ============
Treasury Stock Unallocated Total
--------------------- ESOP Shareholders'
Shares Amount Contribution Equity
------ ------ ------------ --------------
Balance May 31, 1998 865,943 $(2,460,800) $(927,000) $ 17,453,500
Funding of ESOP -- -- -- 358,400
Issuance of employee options
below market value -- -- -- 262,000
Issuance of common stock
for services rendered -- -- -- 387,700
Issuance of common stock
for exercise of YSFC exchange -- -- -- 2,598,300
Fair value of warrants and options
issued for services rendered -- -- -- 176,000
Fair value of warrants issued for
exercise of YSFC exchange -- -- -- 167,000
Issuance of common
stock to acquire SGMC
special warrants, net of
offering costs -- -- -- 279,900
Purchase of treasury stock 64,589 (123,800) -- (123,800)
Forfeitable shares earned -- -- -- 269,800
Net loss -- -- -- (11,648,500)
------- ----------- --------- ------------
Balance May 31, 1999 930,532 $(2,584,600) $(927,000) $ 10,180,300
======= =========== ========= ============
Total Shareholders' Equity at May 31, 1999 does not include 339,208 shares
currently issued but forfeitable if certain conditions are not met by the
recipients. "Basic and Diluted Weighted Average Shares Outstanding" also
includes the 812,915 shares of U.S. Energy common stock held by majority-owned
subsidiaries, which, in consolidation, are treated as treasury shares.
The accompanying notes to consolidated financial statements are an
integral part of these statements.
40
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(CONTINUED)
Common Stock Additional
------------------------ Paid-In Accumulated
Shares Amount Capital Deficit
------ ------ ----------- -------------
Balance May 31, 1999 8,550,624 $ 85,600 $ 33,014,900 $(19,408,600)
Funding of ESOP 123,802 1,200 370,200 --
Issuance of common stock
to outside directors 6,020 100 21,000 --
Issuance of common stock
for purchase of subsidiary stock 73,109 700 259,900 --
Forfeitable shares earned 9,600 100 88,000 --
Treasury stock from consolidation
of subsidiaries Ruby Mining Co.
and Northwest Gold, Inc. -- -- -- --
Unrealized gain on sale of
subsidiary stock -- -- 1,053,700 --
Non-cash compensation
paid by subsidiary -- -- 2,990,000 --
Writedown of unallocated
ESOP contribution -- -- -- --
Net Loss -- -- -- (10,662,600)
--------- ------------ ------------ ------------
Balance May 31, 2000 8,763,155 $ 87,700 $ 37,797,700 $(30,071,200)
========= ============ ============ ============
Treasury Stock Unallocated Total
---------------------- ESOP Shareholders'
Shares Amount Contribution Equity
------ ------ ------------- -------------
Balance May 31, 1999 930,532 $ (2,584,600) $ (927,000) $ 10,180,300
Funding of ESOP -- -- -- 371,400
Issuance of common stock
to outside directors -- -- -- 21,100
Issuance of common stock
for purchase of subsidiary stock -- -- -- 260,600
Forfeitable shares earned -- -- -- 88,100
Treasury stock from consolidation
of subsidiaries Ruby Mining Co.
and Northwest Gold, Inc. 14,193 (55,300) -- (55,300)
Unrealized gain on sale of
subsidiary stock -- -- -- 1,053,700
Non-cash compensation
paid by subsidiary -- -- -- 2,990,000
Writedown of unallocated
ESOP contribution -- -- 436,500 436,500
Net Loss -- -- -- (10,662,600)
------- ------------ ------------ ------------
Balance May 31, 2000 944,725 $ (2,639,900) $ (490,500) $ 4,683,800
======= ============ ============ ============
Total Shareholders' Equity at May 31, 2000 does not include 396,608 shares
currently issued but forfeitable if certain conditions are not met by the
recipients. "Basic and Diluted Weighted Average Shares Outstanding" also
includes the 827,108 shares of U.S. Energy common stock held by majority-owned
subsidiaries, which, in consolidation, are treated as treasury shares.
The accompanying notes to consolidated financial statements are an
integral part of these statements.
41
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(CONTINUED)
Common Stock Additional
----------------------- Paid-In Accumulated
Shares Amount Capital Deficit
------ ------ ------------- -------------
Balance May 31, 2000 8,763,155 $ 87,700 $ 37,797,700 $(30,071,200)
Funding of ESOP 53,837 500 287,500 --
Issuance of common stock
to outside directors 8,532 100 19,100 --
Forfeitable shares earned 29,820 300 193,900 --
Issuance of common stock
for services rendered 15,000 200 70,400 --
Treasury stock from payment
on balance of note receivable -- -- -- --
Sale of Ruby Mining -- -- 25,800 --
Issuance of common stock
for exercised options 118,703 1,200 287,200 --
Net income -- -- -- 1,771,200
--------- ------------ ------------ ------------
Balance May 31, 2001 8,989,047 $ 90,000 $ 38,681,600 $(28,300,000)
========= ============ ============ ============
Treasury Stock Unallocated Total
----------------------- ESOP Shareholders'
Shares Amount Contribution Equity
------ ------ ------------- -------------
Balance May 31, 2000 944,725 $ (2,639,900) $ (490,500) $ 4,683,800
Funding of ESOP -- -- -- 288,000
Issuance of common stock
to outside directors -- -- -- 19,200
Forfeitable shares earned -- -- -- 194,200
Issuance of common stock
for services rendered -- -- -- 70,600
Treasury stock from payment
on balance of note receivable 5,000 (20,600) -- (20,600)
Sale of Ruby Mining -- -- -- 25,800
Issuance of common stock
for exercised options -- -- -- 288,400
Net income -- -- -- 1,771,200
------- ------------ ------------ ------------
Balance May 31, 2001 949,725 $ (2,660,500) $ (490,500) $ 7,320,600
======= ============ ============ ============
Total Shareholders' Equity at May 31, 2001 does not include 433,788 shares
currently issued but forfeitable if certain conditions are not met by the
recipients. "Basic and Diluted Weighted Average Shares Outstanding" also
includes 814,496 shares of common stock held by majority-owned subsidiaries,
which, in consolidation, are treated as treasury shares.
The accompanying notes to consolidated financial statements are an
integral part of these statements.
42
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended May 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,771,200 $(10,662,600) $(11,648,500)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Minority interest in loss of
consolidated subsidiaries (220,100) (509,300) (4,468,400)
Depreciation 831,500 699,500 726,400
Impairment of mineral assets 123,800 -- 13,224,400
Equity in loss from affiliates -- 2,900 59,100
SMP settlement -- -- 5,026,000
Gain on sale of assets (602,100) (19,400) (45,100)
Provision for doubtful accounts -- 708,600 465,000
Common stock issued to fund ESOP 288,000 371,400 358,400
Non-cash compensation 232,800 3,191,000 267,900
Common stock and warrants
issued for services 70,600 21,100 825,700
Deferred income (4,000,000) -- --
Other -- -- (168,800)
Net changes in assets and liabilities:
Accounts and notes receivable 76,500 (536,500) 946,500
Other assets 20,000 283,400 (44,900)
Accounts payable and accrued expenses (575,300) (217,200) (1,318,800)
Reclamation and other -- 45,900 82,100
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (1,983,100) (6,621,200) 4,287,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of coalbed methane gas properties (1,187,800) (4,727,200) --
Development of mining properties (4,400) (22,200) (18,100)
Proceeds from sale of property and equipment 3,211,000 26,300 375,300
Increase in restricted investments (417,700) (200,600) (271,300)
Purchase of property and equipment (1,719,400) (2,542,500) (1,057,900)
Investments in affiliates 292,400 (12,500) 54,200
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 174,100 (7,478,700) (917,800)
The accompanying notes to consolidated financial statements are an
integral part of these statements.
43
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Year Ended May 31,
---------------------------------------------
2001 2000 1999
------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock $ 288,400 $ -- $ --
Proceeds from issuance of preferred stock -- 1,840,000 --
Proceeds from sale of stock by subsidiary -- 2,160,000 --
Proceeds from long-term debt 1,938,800 1,392,400 249,000
Net proceeds from lines of credit 200,000 650,000 --
Purchase of treasury stock (20,600) -- (123,800)
Repayments of long-term debt (828,400) (1,246,300) (395,200)
Cash acquired in purchase of subsidiary -- 47,200 1,423,300
------------ ------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 1,578,200 4,843,300 1,153,300
------------ ------------ ------------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (230,900) (9,256,600) 4,522,500
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 916,400 10,173,000 5,650,500
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 685,500 $ 916,400 $ 10,173,000
============ ============ ============
SUPPLEMENTAL DISCLOSURE
Income tax paid $ -- $ -- $ --
============ ============ ============
Interest paid $ 265,300 $ 35,800 $ 44,500
============ ============ ============
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Satisfaction of receivable - affiliate
with stock in affiliate $ 3,000,000 $ 196,700 $ 275,000
============ ============ ============
Acquisition of assets through issuance of debt $ 1,250,000 $ -- $ 555,000
============ ============ ============
Issuance of stock for retired employees $ 194,200 $ 88,100 $ --
============ ============ ============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
44
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
A. BUSINESS ORGANIZATION AND OPERATIONS:
U.S. Energy Corp. and subsidiaries (the "Company" or "USE") was
incorporated in the State of Wyoming on January 26, 1966. The Company engages in
the acquisition, exploration, holding, sale and/or development of mineral and
coalbed methane gas properties, the production of petroleum properties and
marketing of minerals and methane gas. Principal mineral interests are in
uranium, gold, molybdenum and coalbed methane. None of the Company's mineral
properties are currently in production. The Company holds various real and
personal properties used in commercial activities. The Company also performs
contract drilling and construction work on third party properties. Most of these
activities are conducted through the joint venture discussed below and in Note
D.
The Company was engaged in the maintenance of two uranium properties, one a
joint venture with Kennecott Uranium Company ("Kennecott") known as the Green
Mountain Mining Venture ("GMMV"), and the second known as Sheep Mountain
Partners ("SMP"). Both of these ventures have been involved in significant
litigation (see Note K). All issues and disputes in the SMP litigation have been
resolved with the exception of rights and the profits therefrom on certain CIS
related uranium contracts. The resolution of the other issues resulted in the
payment of cash to the Company and the receipt of the SMP mineral properties and
one uranium delivery contract. The remaining issues have been referred to a
special master for resolution by the U.S. District Court of Colorado. The
litigation with Kennecott has been settled. Sutter Gold Mining Company ("SGMC"),
a Wyoming corporation owned 66.3% by the Company at May 31, 2001, manages the
Company's interest in gold properties. The Company also owns 100% of the
outstanding stock of Plateau Resources Limited ("Plateau"), which owns a
nonoperating uranium mill and support facilities in southeastern Utah.
Currently, the mill is nonoperating but has been granted a license to operate
subject to certain conditions. Rocky Mountain Gas, Inc. ("RMG") was formed in
fiscal 2000 to consolidate all methane gas operations of the Company. The
Company owns and controls 84% of RMG as of May 31, 2001.
The Company has generated significant net losses prior to fiscal 2001
resulting in an accumulated deficit of approximately $28,300,000 at May 31,
2001. The Company has a working capital balance of approximately $933,300 at May
31, 2001. The Company's cash balance has decreased from $916,400 at the prior
year end to $685,500 at May 31, 2001. At year end, the Company did not have the
working capital necessary to continue to fund anticipated development activities
in its coalbed methane properties. The Company has therefore entered into joint
ventures to develop its properties. In order to reduce its overhead costs, the
Company reduced its staff during 2001. In addition, the Company continues to
believe that it will ultimately receive more cash from the final settlement of
the SMP litigation. Taken together, the Company believes it will be able to meet
its obligations during the upcoming year.
45
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of USE and subsidiaries include the
accounts of the Company, the accounts of its majority-owned subsidiaries Plateau
(100%), Energx, Ltd ("Energx") (90%), Four Nines Gold, Inc. ("FNG") (50.9%),
SGMC (66.3%), Crested Corp. ("Crested") (70.5%), Yellowstone Fuels Corp.
("YSFC") (35.9%) Rocky Mountain Gas ("RMG") (82%), Northwest Gold, Inc. ("NWG")
(96%) and the USECC Joint Venture ("USECC"), a consolidated joint venture which
is equally owned by U.S. Energy Corp. and Crested, through which the bulk of
their operations are conducted.
Prior to fiscal 2001, Ruby Mining Company ("Ruby") which was 91% owned by
the Company, was also consolidated. During 2001, Ruby was sold to a third party
and therefore is no longer consolidated.
With the exception of YSFC, investments in joint ventures and all 20% to
50% owned companies are accounted for using the equity method (see Note E). YSFC
was an equity investee through February 1999, at which time the Company
purchased the majority of the shares of common stock of YSFC owned by outside
shareholders by issuing 677,167 shares of Company's common stock. As a result of
the common directors and control of YSFC by USE and its employees, YSFC was
consolidated as of March 1, 1999. SGMC was an equity investee through March 1998
when the Company purchased special warrant units from certain investors and
increased its ownership to 59%, requiring consolidation subsequent to April 1,
1998 (see Note F). Investments of less than 20% are accounted for by the cost
method. All material intercompany profits, transactions and balances have been
eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be restricted cash equivalents.
RESTRICTED INVESTMENTS
Based on the provisions of Statement of Financial Accounting Standards No.
115 ("SFAS 115"), the Company accounts for its restricted investment in certain
securities as held-to-maturity. Held-to-maturity securities are measured at
amortized cost and are carried at the lower of aggregate cost or fair market
value.
INVENTORIES
Inventories consist primarily of aviation and automobile fuel, associated
aircraft parts, mining supplies, gold ore stockpiles and retail inventory for
commercial operations. Retail inventories are stated using the average cost
method. Other inventory is stated at the lower of cost or market.
46
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
PROPERTIES AND EQUIPMENT
Land, buildings, improvements, machinery and equipment are carried at cost.
Depreciation of buildings, improvements, machinery and equipment is provided
principally by the straight-line method over estimated useful lives ranging from
3 to 45 years.
The Company capitalizes all costs incidental to the acquisition and
development of mineral properties as incurred. Mineral exploration costs are
expensed as incurred. The costs of mine development are deferred until
production begins as these costs will be recovered through future mining
operations. Once commercial production begins, mine development costs incurred
to maintain production will be amortized using a units-of- production method
over the estimated useful life of the ore-body. Costs are charged to operations
if the Company determines that an ore body is no longer economical. Costs and
expenses related to general corporate overhead are expensed as incurred.
The Company has acquired substantial mining property assets and associated
facilities at minimal cash cost, primarily through the assumption of reclamation
and environmental liabilities. Certain of these assets are owned by various
ventures in which the Company is either a partner or venturer.
The Company follows 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 including 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 development projects are not amortized until proved reserves
associated with the projects can be determined or until impairment occurs. If
the results of an assessment indicate that the properties are impaired, the
amount of the impairment is added to the capitalized costs to be amortized.
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.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in income.
Abandonments of properties are accounted for as adjustments of capitalized costs
with no loss recognized.
LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment when events or
changes in circumstances indicate that the related carrying amount may not be
recoverable. If the sum of estimated future cash flows on an undiscounted basis
is less than the carrying amount of the related asset, an asset impairment is
47
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
considered to exist. The related impairment loss is measured by comparing
estimated future cash flows on a discounted basis to the carrying amount of the
asset. Changes in significant assumptions underlying future cash flow estimates
may have a material effect on the Company's financial position and results of
operations. An uneconomic commodity market price, if sustained for an extended
period of time, or an inability to obtain financing necessary to develop mineral
interests, may result in asset impairment. During fiscal 2001, the Company
recorded an impairment on its mineral assets of $123,800 in YSFC. During fiscal
1999, the Company recorded an impairment of $10,718,300 on its mineral assets in
SGMC and $2,506,100 on its mineral assets in YSFC. As of May 31, 2001,
management believes no further impairment is necessary. See Note F for further
discussion.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, receivables, other current assets,
accounts payable and accrued expenses approximates fair value because of the
short-term nature of those instruments. The recorded amounts for short-term and
long-term debt, approximate fair value due to the variable nature of the
interest rates on the debt.
REVENUE RECOGNITION
Advance royalties which are non-refundable are recognized as revenue when
received (see Note F). Non-refundable option deposits are recognized as revenue
when the option expires.
Revenues from gold and uranium sales are recognized upon delivery. Revenues
are recognized from the rental of certain assets ratably over the related lease
terms. Revenues from commercial operations, which represent primarily real
estate activity and an airport fixed base operation, are recognized as goods and
services are delivered. Revenues from long-term construction contracts are
recognized on the percentage-of- completion method. If estimated total costs on
any contract indicate a loss, the Company provides currently for the total
anticipated loss on the contract. Oil and gas revenue is recognized at the time
of product delivery.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes". This statement requires recognition of deferred income tax assets and
liabilities for the expected future income tax consequences, based on enacted
tax laws, of temporary differences between the financial reporting and tax bases
of assets, liabilities and carryforwards.
SFAS 109 requires recognition of deferred tax assets for the expected
future effects of all deductible temporary differences, loss carryforwards and
tax credit carryforwards. Deferred tax assets are reduced, if deemed necessary,
by a valuation allowance for any tax benefits which, based on current
circumstances, are not expected to be realized.
48
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
NET (LOSS) INCOME PER SHARE
The Company reports net (loss) income per share pursuant to Statement of
Financial Accounting Standards No. 128 ("SFAS 128"). SFAS 128 specifies the
computation, presentation and disclosure requirements for earnings per share.
Basic earnings per share is computed based on the weighted average number of
common shares outstanding. Diluted earnings per share is computed based on the
weighted average number of common shares outstanding adjusted for the
incremental shares attributed to outstanding options to purchase common stock,
if dilutive.
COMPREHENSIVE INCOME
There are no components of comprehensive income which have been excluded
from net income and, therefore, no separate statement of comprehensive income
has been presented.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes fair value accounting and reporting standards for
derivative instruments and hedging activities. The Company adopted SFAS No. 133
in the first quarter of fiscal 2001 and such adoption had no significant effect
on the Company's financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
C. RELATED-PARTY TRANSACTIONS:
The Company provides management and administrative services for affiliates
under the terms of various management agreements. Revenues from services by the
Company to unconsolidated affiliates were $132,500, $39,900 and $584,400 in
fiscal 2001, 2000, and 1999, respectively. The Company has $74,200 of
receivables from unconsolidated subsidiaries as of May 31, 2001.
As of May 31, 2001, the Company had notes receivable due from certain
directors and employees of the Company totaling $180,300 due December 31, 2001.
This indebtedness is secured by 161,500 shares of the Company's common stock.
During fiscal 2001, this debt was reduced by $114,900.
49
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
D. USECC JOINT VENTURE:
The Company operates the Glen L. Larsen office complex; an aircraft hangar
with a fixed base operation, office space and certain aircraft; holds interests
in various mineral operations; conducts oil and gas operations; and transacts
all operating and payroll expenses through a joint venture with Crested, the
USECC joint venture.
E. INVESTMENTS IN AND ADVANCES TO AFFILIATES:
The Company's restricted investments secure various decommissioning,
reclamation and holding costs. Investments are comprised of debt securities
issued by the U.S. Treasury that mature at varying times from three months to
one year from the original purchase date. As of May 31, 2001 and 2000, the cost
of debt securities was a reasonable approximation of fair market value. These
investments are classified as held-to- maturity under SFAS 115 and are measured
at amortized cost.
The Company's investment in and advances to affiliates are as follows:
Consolidated Carrying Value at May 31,
---------------------------
Ownership 2001 2000
------------- ----------- -----------
Powder River Gas LLC -- $ 16,200 $ 9,600
Equity loss from investments accounted for by the equity method are as
follows:
Year Ended May 31,
---------------------------------------------
2001 2000 1999
---------- ----------- -----------
Ruby Mining Company** $ -- $ (2,900)** $ (3,100)
YSFC*** -- -- (56,000)***
---------- -------- ----------
$ -- $ (2,900) $ (59,100)
========== ======== ==========
** Consolidated beginning December 1, 1999. This represents the equity loss
through November 30, 1999. Ruby was sold during fiscal 2001 and is no longer
consolidated.
*** Consolidated beginning March 1, 1999. This represents the equity loss
through February 28, 1999.
Condensed combined balance sheets and statements of operations of the
Company's equity investees for fiscal 2000 include Ruby Mining Company.
See Note F for a discussion of the reduction in the carrying value of such
investee assets.
50
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
F. MINERAL CLAIMS TRANSACTIONS AND MINING PROPERTIES:
GMMV
- ----
During fiscal 1990, the Company entered into an agreement with Kennecott, a
wholly-owned, indirect subsidiary of The RTZ Corporation plc, for Kennecott to
acquire a 50% interest in certain uranium mineral properties in Wyoming known as
the Green Mountain Properties. During the life of the venture, the parties
entered into various amendments to the GMMV agreement.
As a result of sustained depressed uranium prices, the GMMV properties were
maintained on a standby basis. During fiscal 2000, certain disputes arose in the
GMMV venture and Kennecott sued the Company. On September 11, 2000, the parties
settled all disputes by Kennecott paying the Company $3.25 million and Kennecott
assuming all reclamation liabilities of the GMMV Properties.
SMP
- ---
During fiscal 1989, the Company, through USECC, entered into an agreement
to sell a 50% interest in their Sheep Mountain properties to Nukem's subsidiary
CRIC. USECC and CRIC immediately contributed their 50% interests in the
properties to a newly-formed partnership, Sheep Mountain Partners ("SMP"). SMP
was established to further develop and mine the uranium claims on Sheep
Mountain, acquire uranium supply contracts and market uranium. Certain disputes
arose among USECC, CRIC and its parent Nukem, Inc. over the operation of SMP.
These disputes have been in litigation/arbitration for the past ten years. See
Note K for a description of the investment and a discussion of the related
litigation/arbitration.
Due to the litigation and arbitration proceedings involving SMP for the
past ten years, the Company has expensed all of its costs related to SMP and has
had no carrying value of its investment in SMP for either 2001 or 2000 as
proceeds from litigation and arbitration proceedings were accounted for under
the cost recovery method of accounting as discussed in Note K. The Company's
direct loss generated from its investment in SMP, which represents mine standby
costs incurred directly by the Company, was $399,300, $711,300 and $704,10 for
the years ended May 31, 2001, 2000 and 1999, respectively.
As part of a partial settlement agreement dated June 1, 1998, the Company
was awarded the return of its Sheep Mountain uranium mines and certain other
properties. Accordingly, all mine standby costs and other holding costs were
expensed by the Company during fiscal 2001, 2000 and 1999.
PHELPS DODGE
- ------------
During prior years, the Company conveyed interests in mining claims to AMAX
Inc. ("AMAX") in exchange for cash, royalties, and other consideration. AMAX
merged with Cyprus Minerals ("Cyprus Amax") which was purchased by Phelps Dodge
Mining Company ("Phelps Dodge") in December of 1999. The properties have not
been placed into production as of May 31, 2001.
51
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
AMAX and later Cyprus Amax, paid the Company an annual advance in royalty
of 50,000 pounds of molybdenum (or its cash equivalent). During fiscal 2000,
Phelps Dodge assumed this obligation and made payments to the Company during
fiscal 2001. Phelps Dodge is entitled to a partial credit against future
royalties for any advance royalty payments made, but such royalties are not
refundable if the properties are not placed into production. The Company
recognized $108,500, $132,600 and $150,100 of revenue from the advance royalty
payments in fiscal 2001, 2000 and 1999, respectively. Phelps Dodge has not made
the payment of the advance royalty during the first quarter of 2002. The Company
considers this a breach of Phelps Dodge's contractual obligations.
Phelps Dodge may elect to return the properties to the Company, which would
cancel future obligations under the advance royalty obligation. If Phelps Dodge
formally decides to place the properties into production, it is obligated to pay
$2,000,000 to the Company. Also, per the contract with AMAX, the Company is to
receive 15% of the first $25,000,000, or $3,750,000, if the molybdenum
properties are sold, which the Company believes has occurred.
The Company has recently entered into discussions with Phelps Dodge
concerning the purchase of the properties from Cyprus Amax.
SUTTER GOLD MINE COMPANY
- ------------------------
SGMC was established in 1990 to conduct operations on mining leases and to
produce gold from the Lincoln Project in California. SGMC is in the development
stage and additional development is required prior to the commencement of
commercial production. SGMC has not generated any significant revenue and has no
assurance of future revenue. All acquisition and mine development costs since
inception were initially capitalized. Since test production in 1992, SGMC has
focused its efforts on obtaining a reserve study, developing a mine plan and
pursuing financing or a partner to assist in the financing of its mineral
development and ultimate production. Due to the decline in the spot price for
gold and the lack of adequate financing, SGMC has put the development of the
mine on hold. Until the time when development begins, SGMC will require capital
contributions from affiliates or other sources to maintain its current
activities. SGMC will continue to be considered in the development stage until
the time it generates significant revenue from its principal operations.
Primarily as a result of the sustained decline in gold prices and the lack
of significant financing necessary to further develop the Lincoln Project, the
Company evaluated the carrying value of its SGMC assets for impairment. The
Company determined the carrying value of its assets exceeded its fair value.
Accordingly, in fiscal 1999 and 1998, the Company recorded an impairment in the
amount of $10,718,300 and $1,500,000 respectively, which is classified as
Impairment of Mineral Assets in the accompanying Consolidated Statements of
Operations. The impairment related to mineral properties and mine development
costs ($10,315,700 and $1,500,000 for 1999 and 1998, respectively) and equipment
($402,600 and $-0- for 1999 and 1998, respectively).
In connection with a private offering, on March 21, 1997, the Company and
Crested accepted a Contingent Stock Purchase Warrant which provides the Company
and Crested the right to acquire, for no
52
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
additional consideration, common shares of SGMC's $.001 par value common stock
having an aggregate value of $10,000,000 (US). The Stock Purchase Warrant has a
term of ten years extending to March 21, 2007, and is exercisable partially or
in total, semi-annually beginning on June 30, 1997. However, the Stock Purchase
Warrant is only exercisable to the extent proven and probable ore reserves, as
defined in the Stock Purchase Warrant, in excess of 300,000 ounces are added to
SGMC's reserves. In addition, SGMC has the right to satisfy the exercise of all
or any portion of the Stock Purchase Warrant with the net cash flows, as
defined, at $25.00 (US) for each new ounce of proven and probable ore in excess
of 300,000 ounces up to a maximum of 700,000 ounces. Accordingly, the Company
has allocated the carrying value of SGMC shares exchanged for the Contingent
Stock Purchase Warrant to its investment in such contingent warrants. The Stock
Purchase Warrant benefits the Company and Crested on a basis of 88.9% and 11.1%,
respectively.
During 1999, the Company issued 89,059 shares of common stock to acquire an
additional 207,500 SGMC Special Warrants. This purchase increased the Company's
ownership of SGMC to 63%. During fiscal 2000, the Company issued an additional
15,357 shares of its common stock to acquire 5,500 additional SGMC Special
Warrants. This purchase increased the Company's ownership of SGMC to 66%.
Additional financing will be required in order to develop SGMC.
YELLOW STONE FUELS CORP.
- ------------------------
In fiscal 1998, the Company became contractually obligated to exchange its
common stock for common stock of YSFC, plus interest, because certain conditions
were not met (See Note J). As a result of depressed market prices for uranium,
YSFC was not successful in the public offering of its common stock. As a result,
the terms of the exchange agreement became effective between the Company and
YSFC shareholders. The Company therefore issued 677,167 shares of its common
stock. The exchange offer for YSFC remained effective until September 13, 1999.
Due to continued low uranium market prices and the inability to raise
financing to place the YSFC properties into production, the Company recorded an
impairment of $123,800 in fiscal 2001 and $2,506,100 in 1999 related to YSFC's
mineral assets, which is classified as impairment of mineral assets in the
accompanying Consolidated Statements of Operations. The impairment was
specifically related to the YSFC mining equipment in fiscal 2001.
PLATEAU RESOURCES LIMITED
- -------------------------
During fiscal 1994, the Company entered into an agreement with Consumers
Power Company to acquire all the issued and outstanding common stock of Plateau,
a Utah corporation. Plateau owns a uranium processing mill and support
facilities and certain other real estate assets through its wholly-owned
subsidiary Canyon Homesteads, Inc. in southeastern Utah. The Company paid
nominal cash consideration for the Plateau stock and agreed to assume all
environmental liabilities and reclamation bonding obligations. At May 31, 2001,
Plateau had a cash security in the amount of $9,664,000 to cover reclamation of
the properties (see Note K).
53
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
The Company is currently evaluating the best utilization of Plateau's
assets. Evaluations are ongoing to determine when, or if, the mine and mill
properties should be placed into production. The primary factor in these
evaluations relates to the current depressed uranium market. Commercial revenues
are being generated from the townsite assets which include a motel, C-store,
lounge, restaurant, boat storage facility and housing.
The convenience store, lounge and restaurant, and boat storage facility are
leased to third party companies. The Company receives rent on these facilities
and a percentage of the revenues of each operation. The Company is also
considering the possibility of selling the mill facility.
ENERGX, LTD.
- ------------
Energx is engaged in the operation of oil wells in Montana. Energx is owned
by 90% by the Company and 10% by the Assiniboine and Sioux Tribes. Revenues from
the sale of oil during fiscal 2001, 2000 and 1999 was $147,900, $159,200 and
$83,200, respectively.
During fiscal 2001, the Company sold its controlling interest in Ruby
Mining Company to Admiralty Company. The Company retained 900,000 shares of Ruby
Mining common stock; received $100,000 upon closing, and a promissory note in
the amount of $225,000. Although the promissory note is currently in default,
management believes that Admiralty will pay the balance due during the second
quarter of 2002.
ROCKY MOUNTAIN GAS, INC.
- ------------------------
During fiscal 2000, the Company organized RMG to enter into the coalbed
methane gas business. RMG is engaged in the acquisition of coalbed methane gas
leases and the exploration, development and production of methane gas from those
properties. The Company owns and controls 84% of RMG. RMG sold 55,500 shares and
1,206,333 shares of its common stock in a private placement during fiscal 2001
and 2000 respectively, for total proceeds of approximately $3,721,900.
RMG entered into an agreement with Quantum Energy, L.L.C. (Quantum has
since changed its name to ("Quaneco")) on January 3, 2000 to purchase a 50%
working interest and 40% net revenue interest in approximately 185,000 acres of
unproven leasehold interests in the Powder River Basin of southeastern Montana.
The terms of the Quantum agreement were payments of $3,200,000 on closing,
$1,000,000 on or before May 1, 2000 and $1,300,000 on or before December 31,
2000. RMG also had a $2,500,000 work commitment to drill approximately 25 wells
on the Quantum properties by November 30, 2000.
During fiscal 2001, RMG and Quaneco entered into an Option and Farmin
Agreement with Suncor (Natural Gas) America, Inc. ("SENGAI") on 112,000 acres in
southeast Montana. SENGAI paid $1,705,000 for the right to exercise the option,
of which $1,278,800 was due to RMG. These funds were applied to the final
payment due under to Quaneco agreement. All amounts due to Quaneco had been paid
as of May 31, 2001.
54
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
SENGAI also committed to assume $2,000,000 of the remaining $2,250,000
drilling commitment that RMG had under its drilling commitment to Quaneco. If
SENGAI exercises its option on the acreage an additional $3,923,700 will be due
to the Company and Quantum, of which $2,942,800 will be due to the Company. Upon
Exercise of the option, SENGAI is also committed to fund a disproportional
$841,400 on the second drilling program on the properties.
If SENGAI exercises its option, RMG will own a 12.5% working interest and a
10% revenue interest in the 112,000 acres (subject to the CCBM agreement).
Should SENGAI not elect to exercise its option, RMG will revert to a 50% working
interest, 40% revenue interest in the acreage.
RMG also acquired a 100% working interest (82% revenue interest) in 63,000
net mineral acres in southwest Wyoming. These coalbed methane gas leases are in
the greater Green River Basin. RMG purchased these leases for cash and drilling
commitments.
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 purchased an undivided 50% interest 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 annual rate of 8% over 41 months
(starting July 31, 2001) with a balloon payment due on the forty-second month.
The 50% undivided interest is pledged back to RMG to secure the purchase
price, and will be released 25% when 33.3% of the principal amount of the
purchase price is paid, another 25% when the total principal payments reach 66%
of the principal amount of the purchase price and the balance when the total
principal amount is paid.
CCBM has also agreed to fund $5,000,000 for an initial drilling program. If
CCBM fails to expend $5,000,000 in the drilling program or $2,500,000 for RMG's
benefit, CCBM will be obligated to pay any remaining unspent portions of the
$2,500,000 directly to RMG. If CCBM defaults on its purchase obligation CCBM
will still earn a 50% working interest in each well location (80 acres) and
production therefrom. CCBM's ownership will be earned on these wells regardless
of the status of the payments on the promissory note.
CCBM will be entitled to a credit (applied as a prepayments of the purchase
price for the production of the undivided 50% interest in RMG's acreage), equal
to 20% of RMG's net revenue interest from wells drilled with the $5,000,000
until CCBM equals $1,250,000 from production proceeds.
55
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
OIL AND GAS PROPERTIES AND EQUIPMENT INCLUDED THE FOLLOWING:
- ------------------------------------------------------------
May 31,
-----------------------------------------
2001 2000 1999
------------ ------------ -----------
Oil and gas properties:
Subject to amortization $ 1,773,600 $ 1,773,600 $ 1,773,600
Not subject to amortization:
Acquired in fiscal 2001 1,154,500 -- --
Acquired in fiscal 2000 4,727,200 4,727,200 --
Acquired in fiscal 1999 -- -- --
Acquired prior to fiscal 1999 -- -- --
----------- ----------- -----------
7,655,300 6,500,800 1,773,600
Accumulated depreciation, depletion
and amortization (1,773,600) (1,773,600) (1,773,600)
----------- ----------- -----------
Net oil and gas properties $ 5,881,700 $ 4,727,200 $ --
=========== =========== ===========
The Company began drilling of its coalbed methane properties during the
first quarter of fiscal 2002. At such time as production begins on these
properties the cost associated with the development of such production will be
added to the amortization base. Production is projected to begin in the second
half of fiscal 2002 or the beginning of fiscal 2003.
G. DEBT:
LINES OF CREDIT
- ---------------
The Company had a $1,000,000 line of credit from a commercial bank. The
line of credit had a variable interest rate (8.5% as of May 31, 2001). The
weighted average interest rate for 2001 was 9.8%. As of May 31, 2001, $850,000
was outstanding on this line of credit. The line of credit is secured by certain
real property and a share of the net proceeds of fees from production from
certain oil wells. As of August 17, 2001 the line of credit had been paid down
to $350,000 and the limit on the line of credit was reduced to $750,000 due to
the sale of certain of the collateral after May 31, 2001.
56
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
LONG-TERM DEBT
- --------------
The components of long-term debt as of May 31, 2001 and 2000 are as
follows:
May 31,
---------------------------
2001 2000
----------- ------------
USECB installment notes - secured by equipment;
interest at 7.9% to 11.4%, matures in 2002-2015 $ 1,670,200 $ 315,500
SGMC installment notes - secured by
certain mining properties, interest at
7.5% to 8.0%, maturity from 2001 - 2007 624,300 740,800
RMG installment note - secured by
coalbed methane leases, interest at 8%;
repaid in fiscal 2001 -- 106,200
FNG installment note - secured by FNG
equipment, interest at 8.9%;
repaid in fiscal 2001 -- 21,700
----------- -----------
2,294,500 1,184,200
Less current portion (142,400) (284,100)
----------- -----------
$ 2,152,100 $ 900,100
=========== ===========
Principal requirements on long-term debt are $142,400, $123,800; $126,500;
$105,000; $94,600; $1,702,200 for the years 2002 through 2006 and thereafter,
respectively.
H. INCOME TAXES:
The components of deferred taxes as of May 31, 2001 and 2000 are as
follows:
May 31,
----------------------------------
2001 2000
--------------- ---------------
Deferred tax assets:
Deferred compensation $ 279,000 $ 213,400
Net operating loss carryforwards 8,180,000 9,583,200
Tax Credits 15,000 17,900
Non-deductible reserves and other 840,000 1,146,000
Tax basis in excess of book basis 2,850,400 3,876,500
-------------- --------------
Total deferred tax assets 12,164,400 14,837,000
-------------- --------------
Deferred tax liabilities:
Development and exploration costs 2,157,200 2,014,300
-------------- --------------
Total deferred tax liabilities 2,157,200 2,014,300
-------------- --------------
10,007,200 12,822,700
Valuation allowance (11,152,000) (13,967,500)
-------------- --------------
Net deferred tax liability $ (1,144,800) $ (1,144,800)
=============== ==============
57
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
The Company has established a valuation allowance of $11,152,000 and
$13,967,500 against deferred tax assets due to the losses incurred by the
Company in past fiscal years. The Company's ability to generate future taxable
income to utilize the NOL carryforwards is uncertain.
The income tax provision (benefit) is different from the amounts computed
by applying the statutory federal income tax rate to income before taxes. The
reasons for these differences are as follows:
Year Ended May 31,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
Expected federal income tax $ 602,200 $(3,618,200) $(3,960,500)
Net operating losses not previously
benefitted and other 2,213,300 (10,600) 422,100
Valuation allowance (2,815,500) 3,628,800 3,538,400
----------- ----------- -----------
Income tax provision $ -- $ -- $ --
=========== =========== ===========
There were no taxes currently payable as of May 31, 2001, 2000 or 1999
related to continuing operations.
At May 31, 2001, the Company and its subsidiaries had available, for
federal income tax purposes, net operating loss carryforwards of approximately
$25,000,000 which will expire from 2002 to 2021 and investment tax credit
carryforwards of $15,000 which, if not used, will expire from 2001 to 2002. The
Internal Revenue Code contains provisions which limit the NOL carryforwards
available which can be used in a given year when significant changes in company
ownership interests occur. In addition, the NOL and credit amounts are subject
to examination by the tax authorities.
The Internal Revenue Service has audited the Company's and subsidiaries tax
returns through the year ended May 31, 1996. The Company's income tax
liabilities are settled through fiscal 1996.
I. SEGMENTS AND MAJOR CUSTOMERS:
The Company's primary business activity is the sale of minerals and the
acquisition, exploration, holding, development and sale of mineral bearing
properties, although the Company has no producing mines. Other reportable
industry segments include commercial operations, primarily real estate
activities and, an airport fixed base operation, and construction activities.
The following is information related to these industry segments:
58
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
Year Ended May 31, 2001
------------------------------------------------------------------
Drilling/
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ---------- ------------
Revenues $ 442,800 $ 2,519,400 $ 2,238,600 $ 5,200,800
============= ============= =============
Interest and other revenues 9,296,900
--------------
Total revenues $ 14,497,700
==============
Operating (loss) profit $ (2,866,400) $ (716,800) $ 488,100 $ (3,095,100)
============= ============= =============
Interest and other revenues 9,296,900
General corporate and other expenses (4,280,600)
Equity in loss of affiliates --
--------------
Income before income taxes $ 1,921,200
==============
Identifiable net assets at May 31, 2001 $ 18,424,900 $ 5,616,400 $ 1,050,500 $ 25,091,800
============= ============= =============
Investments in affiliates 16,200
Corporate assets 5,357,200
--------------
Total assets at May 31, 2001 $ 30,465,200
==============
Capital expenditures $ 1,280,200 $ 1,326,800 $ 256,000
============= ============= =============
Depreciation, depletion and
amortization $ 129,700 $ 271,100 $ 324,700
============= ============= =============
59
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
Year Ended May 31, 2000
------------------------------------------------------------------
Drilling/
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ---------- ------------
Revenues $ 132,600 $ 2,786,800 $ 3,584,900 $ 6,504,300
============= ============= =============
Interest and other revenues 1,269,500
---------------
Total revenues $ 7,773,800
===============
Operating (loss) profit $ (2,518,600) $ (600,500) $ (594,300) $ (3,713,400)
============= ============= =============
Interest and other revenues 1,269,500
General corporate and other expenses (8,195,000)
Equity in loss of affiliates (2,900)
---------------
Loss before income taxes $ (10,641,800)
===============
Identifiable net assets at May 31, 2000 $ 17,543,700 $ 4,880,900 $ 2,163,300 $ 24,587,900
============= ============= =============
Investments in affiliates 9,600
Corporate assets 6,278,600
---------------
Total assets at May 31, 2000 $ 30,876,100
===============
Capital expenditures $ 4,749,300 $ 944,600 $ 1,551,800
============= ============= =============
Depreciation, depletion and
amortization $ 72,600 $ 148,100 $ 155,400
============= ============= =============
60
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
Year Ended May 31, 1999
--------------------------------------------------------------------
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ---------- ------------
Revenues $ 238,200 $ 2,977,800 $ -- $ 3,216,000
============== ============= ===========
Interest and other revenues 7,637,600
----------------
Total revenues $ 10,853,600
================
Operating loss $ (2,071,600) $ (461,100) $ (14,900) $ (2,547,600)
============== ============= ===========
Interest and other revenues 7,637,600
General corporate and other expenses (16,679,400)
Equity in loss of affiliates (59,100)
----------------
Loss before income taxes $ (11,648,500)
================
Identifiable net assets at
May 31, 1999 $ 10,632,900 $ 8,107,300 $ 144,700 $ 18,884,900
============== ============= ===========
Investments in affiliates 24,600
Corporate assets 14,481,500
----------------
Total assets at May 31, 1999 $ 33,391,000
================
Capital expenditures $ 725,400 $ 944,200 $ --
============== ============= ===========
Depreciation, depletion and
amortization $ 300,200 $ 348,600 $ 77,600
============== ============= ===========
During fiscal 1999 and 1998 approximately 100% of mineral revenues were
from the sale of uranium. There were no uranium sales during fiscal 2000.
J. SHAREHOLDERS' EQUITY:
The Board of Directors adopted the U.S. Energy Corp. 1989 Stock Option Plan
(the "Option Plan") for the benefit of USE's key employees. The Option Plan, as
amended, reserves 2,750,000 shares of the Company's $.01 par value common stock
for issuance under the Option Plan. During fiscal 1992, the Company issued
371,200 non-qualified options to certain of its executive officers, Board
members and others at prices ranging from $2.75 to $2.90 per share. These
options will expire on April 14, 2002 and April 30, 2002. During fiscal 1999,
the Company issued 837,500 options under the Option Plan, including 299,462
non-qualified and 538,038 qualified options. The non-qualified options were
issued at a price below fair market value, resulting in the recognition of
$262,000 in compensation expense at the time of issuance. During fiscal 2001,
the Company issued 1,499,000 options under the Option Plan, including 918,763
non- qualified and 580,237 qualified options. Various employees exercised
118,703 of the outstanding options raising $288,400 of capital.
61
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
The Board of Directors of USE adopted the U.S. Energy Corp. 1989 Employee
Stock Ownership Plan ("ESOP") in 1989, for the benefit of USE employees. During
fiscal 2001, 2000 and 1999, the Board of Directors of USE contributed 53,837,
123,802 and 89,600 shares to the ESOP at prices of $5.35, $3.00 and $4.00 per
share, respectively. The Company has recognized $288,000, $371,400 and $358,400
in fiscal 2001, 2000 and 1999, respectively related to these contributions. USE
has loaned the ESOP $1,014,300 to purchase 125,000 shares from the Company and
38,550 shares on the open market. These loans, which are secured by pledges of
the stock purchased, bear interest at the rate of 10% per annum. The loans are
reflected as unallocated ESOP contribution in the equity section of the
accompanying Consolidated Balance Sheets.
In May 1996, the Board of Directors of USE approved an annual incentive
compensation arrangement ("1996 Stock Award Program") for its CEO and four other
officers of the Company payable in shares of the Company's common stock. The
1996 Stock Award Program was subsequently modified to reflect the intent of the
directors which was to provide incentive to the officers of the Company to
remain with USE. The shares are to be issued annually pursuant to the
recommendation of the Compensation Committee on or before January 15 of each
year, beginning January 15, 1997, as long as each officer is employed by the
Company. The officers will receive up to an aggregate total of 67,000 shares per
year for the years 1997 through 2002. The shares under the plan are forfeitable
until retirement, death or disability of the officer. The shares are held in
trust by the Company's treasurer and are voted by the Company's non-employee
directors. As of May 31, 2001, 282,158 total shares have been issued to the five
officers of the Company under the 1996 Stock Award Plan.
In December 1997, the Company entered into a warrant purchase agreement
with an investment advisory firm to purchase 225,000 shares of the Company's
common stock at an exercise price of $10.50/share expiring December 2, 2000. The
warrants were issued in exchange for services to be provided during the period
from December 1997 to December 1998. The Company determined the fair value
associated with these warrants to be $186,000, which will be recognized ratably
over the term of the related advisory agreement. Accordingly, $108,000 was
recognized as expense in fiscal 1998 and $78,000 in fiscal 1999.
During fiscal 1998, the Company and YSFC entered into an Exchange Rights
Agreement (the "Agreement"). Under the Agreement the YSFC private placement
shareholders and related broker agent had the right, but not the obligation, to
exchange their shares in YSFC for USE common stock if YSFC's common shares were
not listed and available for quotation on the NASDAQ marketing system by March
1998. The Company exchanged 677,167 shares of its common stock during fiscal
1999, at a fair value of $2,591,500, for 1,131,500 shares of YSFC common stock
or 9% of the outstanding shares of YSFC. During fiscal 2000, the Company issued
an additional 57,752 shares of its common stock valued at $206,900 for an
additional 96,250 shares of YSFC common stock or an additional 1% of the
outstanding shares of YSFC common stock. The exchange rate for USE shares was
the price paid for the YSFC's common shares plus 10% per annum return to the
investor from the date of purchase. The number of USE shares exchanged was based
on the exchange rate for a share of USE common stock for the five business days
prior to the date of notice given by the YSFC shareholder to exchange their
shares.
In January 1998, the Company entered into a warrant purchase agreement with
another investment advisory firm to purchase 200,000 shares of the Company's
common stock at an exercise price of $7.50/share
62
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
expiring January 20, 2000. The warrants were issued in exchange for services to
be provided during the period from January 1998 to January 1999. The Company
determined the fair value associated with these warrants to be $264,000, which
was recognized ratably over the term of the related advisory agreement.
Accordingly, $27,000 was recognized as an expense in fiscal 2000 and $176,000 in
fiscal 1999.
In February of 1999, the Company entered into a warrant purchase agreement
with a consulting firm to purchase 20,000 shares of the Company's common stock
at an exercise price of $2.62 expiring January 31, 2002. The warrants were
issued in exchange for services to be provided during the period from February
1999 to February 2000. The Company determined the fair value associated with
these warrants to be $36,000, which is recognized ratably over the term of the
consulting agreement. Accordingly, $9,000 was recognized as an expense in fiscal
1999 and $27,000 in fiscal 2000.
Also, during fiscal 1999, the Company issued warrants in exchange for
outstanding YSFC warrants, which were originally issued for services provided by
outside consultants in connection with the agreement discussed above. The
Company issued 67,025 warrants at an exercise price of $3.64 expiring September
19, 2002. The Company determined the fair value associated with these warrants
to be $167,000, which was recorded as an additional investment in YSFC during
fiscal 1999.
In February 1999, the Company entered into a consulting agreement with an
individual to provide consulting and other services for a period of 24 months,
commencing on February 8, 1999 and ending on January 31, 2001. As consideration
for services to be performed, the Company granted the individual 25,000 shares
of the Company's common stock at a grant price of $2.75 per share and entered
into a 5 year warrant purchase agreement to purchase up to 75,000 shares of the
Company's common stock at an exercise price of $2.25 per share, expiring
February 8, 2004. The Company determined the fair value associated with the
stock grant to be $68,750 and the warrants to be $140,000, which were recognized
ratably over the term of the consulting agreement. Accordingly, $69,550;
$104,400; and $34,800 were recognized as an expense in fiscal 2001, 2000 and
1999, respectively related to this agreement.
During fiscal 2000, the Company issued 200 shares of its $.01 par value
mandatorily convertible preferred stock for $2,000,000. A commission of $160,000
was paid to an independent broker on this transaction. This preferred stock is
mandatorily convertible into either 677,667 shares of common stock of RMG or
into shares of common stock of the Company at the market price of the Company's
common stock on the date of conversion. The preferred shares are convertible at
the earlier of the date RMG completes an initial public offering of its common
stock or April 11, 2002. The convertible preferred shares pay dividends at the
rate of 7.5% per annum while they are outstanding. These preferred shares have
been reflected outside of shareholders' equity in the accompanying consolidated
balance sheets due to the convertible nature of the securities into common stock
of RMG.
During fiscal 2001, the Company entered into a consulting agreement with a
company to provide consulting and other services for a period of 18 months,
commencing on May 14, 2001 and ending on November 14, 2002. As consideration for
services to be performed, the Company issued the Company 15,000 shares of the
Company's common stock at a grant price of $4.70 per share and entered into two
stock option agreements to purchase up to 10,000 shares of the Company's common
stock at an exercise price of
63
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
$4.70, expiring May 14, 2003. This option is exercisable upon the condition that
the Company's common stock market price closes at or above $6.50 per share for
ninety (90) consecutive days prior to the expiration date of May 14, 2003. The
fair value of this grant was estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used for the grants: expected dividends; expected volatility of 73%;
risk-free interest rate of 4.29%; and expected life of two years. The exercise
price of all options equaled or exceeded market price of the stock at the date
of grant. The second option is to purchase 20,000 shares of the Company's common
stock at an exercise price of $4.70 per share will be granted to the Company if
and when the Company's common stock market price closes at or above $10.00 per
share for ninety (90) consecutive days prior to its expiration date on May 14,
2003. The fair value of the option was $19,780 which is being amortized over the
service period.
The Company entered into two five year option Agreements on July 31, 2001,
to allow outside consultants to purchase 80,000 shares of its common stock at
$4.30 per share. The Company determined that the value of the Options is $52,144
which will be recognized as expense during fiscal 2002 to 2003. The fair value
of this grant was estimated on the date of grant using the Black-Scholes
options-pricing model with the following weighted-average assumptions used for
the grants: no expected dividends; expected volatility of 73%; risk-free
interest rate of 4.27%; and expected life of five years. The exercise price of
all options equaled or exceeded market price of the stock at the date of grant.
The Board of Directors of the Company issues shares of stock as bonuses to
certain directors, employees and third parties. The stock bonus shares have been
reflected outside of the Shareholders' Equity section in the accompanying
Consolidated Balance Sheets as such shares are forfeitable to the Company until
earned. During fiscal 1993, the Company's Board of Directors amended the stock
bonus plan. As a result, the earn-out dates of certain individuals were extended
until retirement. For the years ended May 31, 2001, 2000 and 1999, the Company
had compensation expense of $358,500; $201,000; and $173,300, respectively,
resulting from these issuances. A schedule of total forfeitable shares for the
Company is set forth in the following table:
64
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
Issue Number Issue Total
Date of Shares Price Compensation
-------------- --------- ----- ------------
May 1990 40,300 $ 9.75 $ 392,900
June 1990 66,300 11.00 729,300
November 1992 10,660 N/A N/A
May 1993 20,000 3.375 67,500
November 1993 18,520 3.00 55,600
January 1994 18,520 4.00 74,100
January 1995 13,520 3.75 50,700
February 1996 7,700 15.125 116,500
December 1996 28,380 10.875 308,600
December 1996 8,452 11.50 97,200
August 1997 7,320 10.875 79,600
August 1997 5,706 10.875 62,100
May 1998 67,000 6.56 439,500
-------- ------------
Balance at
May 31, 1998 312,378 2,473,600
May 1999 67,000 $ 4.00 268,000
Shares earned (40,170) -- (269,900)
-------- -----------
Balance at
May 31, 1999 339,208 2,471,700
May 2000 67,000 $ 3.00 201,000
Shares earned (9,600) -- (88,100)
-------- ------------
Balance at
May 31, 2000 396,608 2,584,600
May 2001 67,000 $ 5.35 358,400
Shares earned (29,820) -- (194,400)
-------- ------------
Balance at
May 31, 2001 433,788 $ 2,748,600
======== ============
During 2001, 2000 and 1999; 29,820, 9,600 and 40,170 shares were earned,
respectively.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for employee stock options or similar equity
instruments. However, SFAS 123 allows the continued measurement of compensation
cost for such plans using the intrinsic value based method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), provided
that pro forma disclosures are made of net income or loss and net income or loss
per share, assuming the fair value based method of SFAS 123 had been applied.
The Company has elected to account for its stock-based compensation plans under
APB 25; accordingly, for purposes of the pro forma disclosures presented below,
65
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
the Company has computed the fair values of all options granted using the
Black-Scholes pricing model and the following weighted average assumptions (no
options were granted during 2000):
2001 2000 1999
---- ---- ----
Risk-free interest rate 4.29% -- 4.65%
Expected lives -- -- 10 years
Expected volatility 73.1% -- 102%
Expected dividend yield -- -- 0%
To estimate expected lives of options for this valuation, it was assumed
options will be exercised upon expiration at the end of the ten years. All
options are initially assumed to vest. Cumulative compensation cost recognized
in pro forma net income or loss with respect to options that are forfeited prior
to vesting is adjusted as a reduction of pro forma compensation expense in the
period of forfeiture. Pro forma stock-based compensation, net of the effect of
forfeitures, was $2,746,600, $0 and $2,314,700 for 2001, 2000 and 1999,
respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss and pro forma net loss per
common share would have been reported as follows:
Year Ended May 31,
------------------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Net loss to common shareholders
As reported $ 1,771,200 $ (10,662,600) $ (11,648,500)
Pro forma $ (975,400) $ (10,662,600) $ (13,963,200)
Net loss per common share
As reported, Basic $ .23 $ (1.39) $ (1.63)
As reported, Diluted $ .22 $ (1.33) $ (1.63)
Pro forma, Basic $ (.12) $ (1.39) $ (1.96)
Pro forma, Diluted $ (.12) $ (1.33) $ (1.96)
Weighted average shares used to calculate pro forma net loss per share were
determined as described in Note B, except in applying the treasury stock method
to outstanding options, net proceeds assumed received upon exercise were
increased by the amount of compensation cost attributable to future service
periods and not yet recognized as pro forma expense.
66
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
A summary of the Stock Option Plan activity for the years ended May 31,
2001 and 2000 is as follows:
Year Ended May 31,
--------------------------------------------------------------------
2001 2000 1999
---------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding at beginning
of year 1,300,200 2.79 1,300,200 2.79 534,700 3.00
Granted 1,499,000 2.69 -- -- 837,500 2.00
Forfeited (82,500) 2.88 -- -- (67,000) 1.00
Expired (149,000) 4.00 -- -- -- --
Exercised (118,700) 2.60 -- -- (5,000) 1.00
---------- --------- ---------
Outstanding at end of year 2,449,000 2.66 1,300,200 2.79 1,300,200 2.79
========== ========= =========
Exercisable at end of year 2,449.000 2.66 1,300,200 2.79 1,300,200 2.79
========== ========= =========
Weighted average fair
value of options
granted during the year $1.83 -- $2.54
The following table summarized information about employee stock options
outstanding and exercisable at May 31, 2001:
Weighted
Weighted Number of Average Number
Average Options Remaining of Options
Exercise Outstanding at Contractual Exercisable at
Price May 31, 2001 Life in years May 31, 2001
-------- ------------ ------------- ------------
$2.00 291,800 7.33 291,800
2.69 1,430,000 8.62 1,430,000
2.75 31,400 .92 31,400
2.88 462,500 7.33 462,500
2.90 233,300 .87 233,300
2,449,000 2,449,000
========= =========
67
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
K. COMMITMENTS, CONTINGENCIES AND OTHER:
LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
The partners in SMP have been involved in a legal dispute over the past 10
years. After a ruling from the American Arbitration Association ("AAA") on the
matter, in April 1996, Nukem, Inc., asked for and received a remand to the AAA
Panel of the ruling. The Panel clarified its order on July 3, 1996. The Panel's
Orders were confirmed by the U.S. District Court of Colorado and Nukem appealed
to the 10th Circuit Court of Appeals ("CCA"). The CCA affirmed the lower Court's
Judgment. Nukem moved for Satisfaction of Judgment which was denied by the
District Court. Nukem again appealed but the 10th CCA ruled against Nukem and
affirmed the lower Court's order holding that Nukem must account to Sheep
Mountain Partners on the CIS contracts. The U.S. District Court has appointed a
Special Master to determine the value of the purchase rights, the pounds of
uranium purchased under those rights and the profits therefrom as ordered in the
Judgment. The Special Master is currently conducting an accounting.
KENNECOTT LITIGATION
On November 10, 1999, Kennecott Uranium Company and Kennecott Energy
Company ("Kennecott") filed a civil action against defendants U.S. Energy Corp.,
Crested Corp., and USECC in the Sixth Judicial District Court, Campbell County,
Wyoming, No. 224006. On September 11, 2000, the parties entered into a
settlement agreement to resolve all issues in the lawsuit. Under the settlement
agreement, USECC sold all of its interests in the GMMV and the GMMV properties,
to an affiliate of Kennecott. The purchase consideration was $3,250,000 in cash
and a 4% net profits royalty interest in certain of the mining claims at the Big
Eagle and Jackpot Mines. Kennecott assumed all reclamation obligations on the
GMMV properties.
SUTTER GOLD MINING COMPANY LITIGATION
On September 28, 1998, a lawsuit was filed in Amador County Superior Court,
California by Concerned Citizens of Amador County as plaintiffs, against the
County of Amador, the Amador County Board of Supervisors, and Sutter Gold Mining
Company as a real party in interest. The lawsuit challenges the actions of
Amador County and its Board of Supervisors in certifying the Final Subsequent
Environmental Impact Report (FSEIR) and approving the amended Conditional Use
Permit (CUP).
A hearing was held on June 7, 1999, and on August 30, 1999, the Honorable
Susan C. Harlan, Judge of the Superior Court in Amador County, issued a detailed
written Memorandum of Opinion, denying every cause of action of
Appellants'/Petitioners' Petition for writ of Mandate, and upholding the
County's certification of the FSEIR and approval of the amended CUP. In
September 1999, the Concerned Citizens appealed Amador County Superior Court's
decision to the Court of Appeals of the State of California Third Appellate
District. On appeal, Appellants presented a more targeted approach, alleging
only two violations of the Planning and Zoning Law and two violation of
California Environmental Quality Act. SGMC and the
68
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
County filed their respective Respondent Briefs. Oral arguments were made to the
Appellate Court on August 20, 2001. A decision is expected soon.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the United States District Court,
Denver, Colorado, Case No. 98WM1630, against Contour Development Company, L.L.C.
and entities and persons associated with Contour Development Company, L.L.C.
(together, "Contour") seeking compensatory and consequential damages of more
than $1.3 million from the defendants for dealings in real estate owned by USE
and Crested in Gunnison, Colorado. The Contour defendants asserted a counter
claim asking for payment of attorney's fees and costs. Discovery has been
completed and the final pretrial conference is scheduled for October 2, 2001,
when the court will schedule the trial date. Trial is expected in early 2002.
RECLAMATION AND ENVIRONMENTAL LIABILITIES
Most of the Company's mine development, exploration and operating
activities are subject to federal and state regulations that require the Company
to protect the environment. The Company conducts its mining operations in
accordance with these regulations. The Company's current estimates of its
reclamation obligations and its current level of expenditures to perform ongoing
reclamation may change in the future. At the present time, however, the Company
cannot predict the outcome of future regulation or its impact on costs.
Nonetheless, the Company has recorded its best estimate of future reclamation
and closure costs based on currently available facts, technology and enacted
laws and regulations. Certain regulatory agencies, such as the Nuclear
Regulatory Commission ("NRC"), the Bureau of Land Management ("BLM") and the
Wyoming Department of Environmental Quality ("WDEQ") review the Company's
reclamation, environmental and decommissioning liabilities, and the Company
believes its recorded amounts are consistent with those reviews and related
bonding requirements. To the extent that planned production on its properties is
delayed, interrupted or discontinued because of regulation or the economics of
the properties, the future earnings of the Company would be adversely affected.
The Company believes it has accrued all necessary reclamation costs and there
are no additional contingent losses or unasserted claims to be disclosed or
recorded. The Company has not disposed of any properties for which it has a
commitment or is liable for any known environmental liabilities.
The majority of the Company's environmental obligations relate to former
mining properties acquired by the Company. Since the Company currently does not
have properties in production, the Company's policy of providing for future
reclamation and mine closure costs on a unit-of-production basis has not
resulted in any significant annual expenditures or costs. For the obligations
recorded on acquired properties, including site-restoration, closure and
monitoring costs, actual expenditures for reclamation will occur over several
years, and since these properties are all considered future production
properties, those expenditures, particularly the closure costs, may not be
incurred for many years. The Company also does not believe that any significant
capital expenditures to monitor or reduce hazardous substances or other
environmental impacts are currently required. As a result, the near term
reclamation obligations are not expected to have a significant impact on the
Company's liquidity.
69
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
As of May 31, 2001, the Company has recorded estimated reclamation
obligations, including standby costs, of $8,906,800 which is included in
Reclamation and Other Long-term Liabilities in the accompanying Consolidated
Balance Sheets. None of these liabilities have been discounted, and the Company
has not recorded any potential offsetting recoveries from other responsible
parties or from any insurance companies.
The Company currently has four mineral properties or investments that
account for most of its environmental obligations, SMP, GMMV, Plateau and SGMC.
The environmental obligations and the nature and extent of cost sharing
arrangements with other potentially responsible parties, as well as any
uncertainties with respect to joint and several liability of each are discussed
in the following paragraphs:
SMP
- ---
The Company is responsible for the reclamation obligations, environmental
liabilities and liabilities for injuries to employees in mining operations with
respect to the Sheep Mountain properties. The reclamation obligations, which are
established by regulatory authorities, were reviewed by the Company and the
regulatory authorities during fiscal 2001 and the balance in the reclamation
liability account at May 31, 2001 of $1,496,800 is believed by management to be
adequate. The obligation will be satisfied over the life of the mining project
which is estimated to be at least 20 years. The Company self bonded this
obligation by mortgaging certain of its real estate assets, including the Glen
L. Larsen building, and by posting cash bonds.
GMMV
- ----
During fiscal 1991, the Company acquired developed mineral properties on
Green Mountain known as the Big Eagle Property. The GMMV also acquired a uranium
mill known as the Sweetwater Mill. As part of the settlement of the GMMV
litigation with Kennecott in September 2000, the Company was released from any
and all reclamation and environmental obligations related to the GMMV.
SUTTER GOLD MINING COMPANY
- --------------------------
SGMC's mineral properties are currently on standby status and have never
been in production. Reclamation obligations are covered by a $27,800 reclamation
cash bond which SGMC has recorded as a reclamation liability as of May 31, 2001.
PLATEAU RESOURCES, LIMITED
- --------------------------
The environmental and reclamation obligations acquired with the acquisition
of Plateau include obligations relating to the Shootaring Mill. Based on the
bonding requirements, Plateau transferred $2,500,000 to a trust account as
financial surety to pay future costs of mill decommissioning, site reclamation
and long-term site surveillance. In fiscal 1997, Plateau increased the NRC
surety to a cash bond of $6,784,000 in order to have its standby license changed
by the NRC to operational. As of May 31, 2001, Plateau held a cash deposit for
reclamation in the amount of $9,664,000 which management believes will satisfy
the obligation of reclamation.
70
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
EXECUTIVE COMPENSATION
- ----------------------
The Company is committed to pay the estates of certain of their officers
one years' salary and an amount to be determined by the Boards of Directors, for
a period of up to five years thereafter. This commitment applies only in the
event of the death or total disability of those officers who are full-time
employees of the Company at the time of total disability or death. Certain
officers and employees have employment agreements with the Company.
L. DISCONTINUED OPERATIONS.
In February 1996, the Company completed the sale of 100% of the 8,267,450
outstanding shares of common stock of Brunton to a third party for $4,300,000 in
accordance with a Stock Purchase Agreement dated January 30, 1996 (the "Purchase
Agreement"). The Company received $300,000 at execution of the Purchase
Agreement and approximately $3,000,000 at closing. The Company has also since
been paid in full on the $1,000,000 balance. In addition, the Company was
entitled to receive 45% of the profits before taxes as defined in the Purchase
Agreement related to Brunton products existing at the time the Purchase
Agreement was executed for a period of 4 years and three months, beginning
February 1, 1996. The Company received payments of $297,100, $52,000, $94,900
and $292,600 for profits in 2001, 2000, 1999 and 1998, respectively.
M. SUBSEQUENT EVENT
Subsequent to May 31, 2001, the Company received $796,000 for 199,000
shares of its restricted common stock through a private placement. The Company
also received $310,200 subsequent to May 31, 2001 as a result of employees
exercising their options to purchase the Company's common stock.
During the first quarter of fiscal 2002, the Company began drilling
operations on its coalbed methane properties.
71
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
(CONTINUED)
N. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
---------------------------------------------------------
May 31, February 28, November 30, August 31,
2001 2001 2000 2000
------------ ------------ ------------ ------------
Net Revenues $ 781,200 $ 873,100 $ 8,900,300 $ 3,943,100
Net Earnings (loss) $(1,341,800) $(1,857,800) $ 5,676,200 $ (705,400)
Earnings (loss) per Share, basic $ (0.17) $ (0.24) $ 0.73 $ (0.09)
Basic Weighted Average
Shares Outstanding 7,847,680 7,819,446 7,818,430 7,818,430
Earnings (loss) per share,
diluted $ (0.15) $ (0.23) $ 0.69 $ (0.09)
Diluted Weighted Average
Shares Outstanding 8,243,135 8,216,054 8,215,038 8,215,038
Three Months Ended
--------------------------------------------------------
May 31, February 28, November 30, August 31,
2001 2001 2000 2000
------------ ------------ ------------ -----------
Net Revenues $ 2,440,400 $ 1,932,400 $ 1,926,900 $ 1,474,100
Net Earnings (loss) $(5,581,400) $(2,610,400) $(1,317,600) $(1,111,600)
Earnings (loss) per Share, basic $ (0.73) $ (0.33) $ (0.18) $ (0.15)
Basic Weighted Average
Shares Outstanding 7,697,569 8,021,781 7,258,291 7,258,291
Earnings (loss) per share,
diluted $ (0.70) $ (0.33) $ (0.18) $ (0.15)
Diluted Weighted Average
Shares Outstanding 8,027,914 8,021,781 7,258,291 7,258,291
72
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS ON SCHEDULE
To U.S. Energy Corp.:
In connection with our audit of the consolidated financial statements of U.S.
ENERGY CORP. (a Wyoming Corporation) AND SUBSIDIARIES referred to in our report
dated July 27, 2001, which is included in the Company's annual report on Form
10-K, we have also audited Schedule II for the year ended May 31, 2001. In our
opinion, this schedule presents fairly, in all material respects, the
information to be set forth therein.
GRANT THORNTON LLP
Denver, Colorado
July 27, 2001
73
U.S. ENERGY CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance Additions
beginning charged to Balance end
of period expenses Deductions of period
----------- ----------- ------------- -----------
May 31, 1999 $ 27,800 $ 465,000 $ 465,000 $ 27,800
===========
May 31, 2000 27,800 708,600 708,600 $ 27,800
===========
May 31, 2001 27,800 -- -- $ 27,800
===========
74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
(a) During the previous eleven years, Arthur Andersen, LLP of Denver, Colorado
was engaged as the independent accountant to audit the Company's financial
statements. Arthur Andersen LLP has reported on all fiscal years from May 31,
1990 through May 31, 2000, and assisted in Management's review of the company's
financial statements for the quarters ended August 31, 2000 and November 30,
2000. On September 8, 2000, the company's board of directors at the
recommendation of its audit committee, ordered its Chief Financial Officer to
seek bids from various accounting firms to conduct its annual audits.
(I) On January 31, 2001, Arthur Andersen LLP was advised by the Company that it
had been replaced.
(II) Arthur Andersen LLP's audit reports for the last two fiscal years have not
contained an adverse opinion or a disclaimer of opinion, and neither such report
was qualified nor modified as to uncertainty, audit scope or accounting
principles.
(III) The decision to change accountants was made by the board of directors.
(IV) During the two most recent fiscal years and during the interim period from
May 31, 2000 to the date of replacement of independent accountant, there have
been no disagreements with Arthur Andersen LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
(V) Not applicable.
(b) On January 31, 2001, the Company engaged Grant Thornton LLP of Suite 1800,
1600 Broadway, Denver, Colorado 80202 as its new independent accountant,
pursuant to the recommendation of the audit committee.
The concurrence letter from Arthur Andersen LLP was filed as an exhibit to
the Form 8-K Report reporting the change in accountants, filed February 5, 2001.
PART III
In the event a definitive proxy statement containing the information being
incorporated by reference into this Part III is not filed within 120 days of May
31, 2001, we will file such information under cover of a Form 10-K/A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 with respect to directors and certain
executive officers in incorporated herein by reference to our Proxy Statement
for the 2001 Annual Meeting of Shareholders. The information regarding the
remaining executive officers is contained in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference to
the Proxy Statement for the 2001 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated herein by reference to
the Proxy Statement for the 2001 Annual Meeting of Shareholders.
75
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by reference to
the Proxy Statement for the 2001 Annual Meeting of Shareholders.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, REPORTS AND FORMS 8-K.
(1) The following financial statements are filed as a part of the Report in
Item 8:
Consolidated Financial Statements Page No.
U.S. Energy Corp. and Subsidiaries --------
Report of Independent Public Accountants
Grant Thornton LLP.................................................34
Report of Independent Public Accountants
Arthur Andersen LLP................................................35
Consolidated Balance Sheets - May 31, 2001 and 2000.............36-37
Consolidated Statements of Operations
for the Years Ended May 31, 2001, 2000 and 1999.................38-39
Consolidated Statements of Shareholders'
Equity for the Years Ended May 31, 2001, 2000 and 1999..........40-42
Consolidated Statements of Cash Flows
for the Years Ended May 31, 2001, 2000 and 1999.................43-44
Notes to Consolidated Financial Statements......................45-72
Report of Independent Certified
Public Accountants on Schedule.....................................73
Schedule II - Valuation and Qualifying Accounts....................74
(2) Not applicable.
76
(3) Exhibits Required to be Filed. Each individual exhibit filed herewith is
sequentially paginated corresponding to the pagination of the entire Form
10-K. As a result of this pagination, the page numbers of documents filed
herewith containing a table of contents will not be the same as the page
number contained in the original hard copy.
Exhibit Sequential
No. Title of Exhibit Page No.
- ------- ------------------------------------------------------------------ ----------
3.1 USE Restated Articles of Incorporation.......................................[2]
3.1(a) USE Articles of Amendment to
Restated Articles of Incorporation...........................................[4]
3.1(b) USE Articles of Amendment (Second) to
Restated Articles of Incorporation
(Establishing Series A Convertible Preferred Stock...........................[9]
3.2 USE Bylaws, as amended through April 22, 1992................................[4]
4.1 Amendment to USE 1998 Incentive Stock Option Plan
(To include Family Transferability of Options Under SEC Rule 16b..............80
4.2 USE 1998 Incentive Stock Option Plan
and Form of Stock Option Agreement 1/99......................................[8]
4.3 USE Restricted Stock Bonus Plan,
as amended through 2/94......................................................[5]
4.4 Form of Stock Option Agreement, and Schedule
Options Granted January 1, 1996..............................................[6]
4.5 Form of Stock Option Agreement and Schedule,
Options Granted January 10, 2001...........................................81-85
4.6 [intentionally left blank)
4.7 USE 1996 Officers' Stock Award Program (Plan)................................[7]
4.8 USE Restated 1996 Officers' Stock Award Plan and
Amendment to USE 1990 Restricted Stock Bonus Plan............................[7]
10.1 USECC Joint Venture Agreement - Amended as of 1/20/89........................[1]
10.2 Management Agreement with USECC..............................................[3]
10.3 Professional Services Agreement and Option
R. J. Falkner & Company, Inc...............................................86-89
10.4 Professional Services Agreement and Warrant
Riches and Resources, Inc..................................................90-93
10.5-10.60 [intentionally left blank]
10.61 Closing Agreement - Addendum to Agreement
for Purchase and Sale of Assets (see Exhibit 10.62)........................94-97
77
10.62 Agreement for Purchase and Sale of Assets
(Rocky Mountain Gas, Inc. and Quantum Energy LLC)............................[9]
10.63 Purchase and Sale Agreement
CCBM, Inc. (subsidiary of Carrizo Oil & Gas, Inc.)
and Rocky Mountain Gas, Inc. .................................................*
16. Concurrence Letter from Arthur Andersen LLP
on Change of Accounting Firms...............................................[10]
21.1 Subsidiaries of Registrant....................................................98
* To be filed by amendment.
- -------------
[1] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31,
1989.
[2] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31,
1990.
[3] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31,
1991.
[4] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31,
1992.
[5] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form S-1 registration statement, initial filing (SEC
File No. 333-1689, filed June 18, 1996).
[6] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31,
1996.
[7] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31,
1997.
[8] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31,
1998.
[9] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form 10-K for the year ended May 31, 2000.
[10] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form 8-K filed on February 5, 2001.
(b) Reports filed on Form 8-K.
During the fourth quarter of the fiscal year ended on May 31, 2001,
the Registrant filed no Form 8-K Reports.
(c) Required exhibits are attached hereto and listed above under Item 14
(a)(3).
(d) Required financial statement schedules are listed and attached
hereto in Item 14(a)(2).
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
U.S. ENERGY CORP. (Registrant)
Date: August 28, 2001 By: /s/ John L. Larsen
------------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: August 28, 2001 By: /s/ John L. Larsen
------------------------------------
Director
Date: August 28, 2001 By: /s/ Keith G. Larsen
------------------------------------
Director
Date: August 28, 2001 By: /s/ Harold F. Herron
------------------------------------
Director
Date: August 28, 2001 By: /s/ Don C. Anderson
------------------------------------
Director
Date: August 28, 2001 By: /s/ David W. Brenman
------------------------------------
Director
Date: August 28, 2001 By: /s/ Nick Bebout
------------------------------------
Director
Date: August 28, 2001 By: /s/ H. Russell Fraser
------------------------------------
Director
Date: August 28, 2001 By: /s/ Robert Scott Lorimer
------------------------------------
Principal Financial Officer/
Chief Accounting Officer
79