FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal quarter ended August 31, 2002 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____ to ____
Commission file number 0-6814
U.S. ENERGY CORP.
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(Exact Name of Company as Specified in its Charter)
Wyoming 83-0205516
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West, Riverton, WY 82501
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (307) 856-9271
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Not Applicable
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(Former name, address and fiscal year, if changed since last report)
Check whether the Company: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Company was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
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State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 10, 2002
- --------------------------------------- ------------------------------------
Common stock, $.01 par value 12,075,493 Shares
U.S. ENERGY CORP. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Condensed Consolidated Balance Sheets
August 31, 2002 and May 31, 2002...................................3-4
Condensed Consolidated Statements of
Operations for the Three Months Ended
August 31, 2002 and 2001.............................................5
Condensed Consolidated Statements of Cash Flows
Three Months Ended August 31, 2002 and 2001........................6-7
Notes to Condensed Consolidated
Financial Statements..............................................8-10
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................11-16
ITEM 4. Controls and Procedures.............................................17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings...................................................17
ITEM 6. Exhibits and Reports on Form 8-K....................................18
Signatures..........................................................18
Certifications...................................................19-20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
August 31, May 31,
2002 2002
------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,036,400 $ 2,564,300
Accounts receivable:
Trade, net of allowance of $27,800 916,800 768,800
Affiliates 47,700 132,800
Current portion of long-term notes 219,100 229,000
Assets held for resale and other 1,060,900 1,111,100
Inventory 56,400 86,600
------------ ------------
Total current assets 4,337,300 4,892,600
INVESTMENTS: 9,981,400 10,015,500
PROPERTIES AND EQUIPMENT:
Total property and equipment 22,190,900 22,142,300
Less-accumulated depreciation,
depletion and amortization (7,736,200) (7,584,200)
------------ ------------
Net property and equipment 14,454,700 14,558,100
OTHER ASSETS:
Accounts and notes receivable:
Real estate and equipment sales -- 36,800
Employees 57,900 65,000
Deposits and other 970,700 969,900
------------ ------------
Total other assets 1,028,600 1,071,700
------------ ------------
Total assets $ 29,802,000 $ 30,537,900
============ ============
See notes to condensed consolidated financial statements.
3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
August 31, May 31,
2002 2002
------------- -------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,071,100 $ 758,600
Prepaid drilling costs 300,500 242,100
Current portion of long-term debt 379,000 205,700
Line of credit 200,000 200,000
------------ ------------
Total current liabilities 1,950,600 1,406,400
LONG-TERM DEBT 2,383,100 2,353,300
RECLAMATION LIABILITY 8,906,800 8,906,800
OTHER ACCRUED LIABILITIES 2,485,900 2,544,200
DEFERRED TAX LIABILITY 1,144,800 1,144,800
MINORITY INTERESTS 445,500 575,300
COMMITMENTS AND CONTINGENCIES
FORFEITABLE COMMON STOCK,
$.01 par value; 500,788 shares issued,
forfeitable until earned 3,009,900 3,009,900
PREFERRED STOCK,
$.01 par value; 1,000 shares authorized,
no shares issued and outstanding -- --
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; unlimited shares
authorized; 11,720,818 shares issued 117,200 117,200
Additional paid-in capital 48,278,500 48,278,500
Accumulated deficit (35,689,400) (34,567,600)
Treasury stock at cost, 959,725 shares (2,740,400) (2,740,400)
Unallocated ESOP contribution (490,500) (490,500)
------------ ------------
Total shareholders' equity 9,475,400 10,597,200
------------ ------------
Total liabilities and shareholders' equity $ 29,802,000 $ 30,537,900
============ ============
See notes to condensed consolidated financial statements.
4
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended August 31,
CONTINUING OPERATIONS 2002 2001
------------ ------------
OPERATING REVENUES:
Motel, real estate and airport operations $ 418,700 $ 358,100
Gas sales 28,300 --
Management fees 45,800 65,300
------------ ------------
492,800 423,400
COSTS AND EXPENSES:
Motel, real estate and airport operations 219,800 343,800
Gas operations 187,900 --
Mine holding costs 208,500 550,200
General and administrative 1,121,400 1,145,900
Other 15,200 --
------------ ------------
1,752,800 2,039,900
------------ ------------
OPERATING LOSS (1,260,000) (1,616,500)
OTHER INCOME & EXPENSES
Gain on sales of assets 5,200 177,500
Interest income 218,300 133,900
Interest expense (114,200) (45,700)
------------ ------------
109,300 265,700
------------ ------------
LOSS BEFORE
MINORITY INTEREST: (1,150,700) (1,350,800)
MINORITY INTEREST IN GAIN OF
CONSOLIDATED SUBSIDIARIES 28,900 24,300
------------ ------------
LOSS BEFORE INCOME TAXES (1,121,800) (1,326,500)
PROVISION FOR INCOME TAXES -- --
------------ ------------
NET LOSS FROM
CONTINUING OPERATIONS (1,121,800) (1,326,500)
DISCONTINUED OPERATIONS,
NET OF TAX -- (1,900)
------------ ------------
NET LOSS (1,121,800) (1,328,400)
PREFERRED STOCK DIVIDENDS -- (37,500)
------------ ------------
NET LOSS AVAILABLE
TO COMMON SHAREHOLDERS $ (1,121,800) $ (1,365,900)
============ ============
NET LOSS PER SHARE BASIC
FROM CONTINUED OPERATIONS $ (0.10) $ (0.16)
FROM DISCONTINUED OPERATIONS -- --
------------ ------------
$ (0.10) $ (0.16)
============ ============
NET LOSS PER SHARE DILUTED
FROM CONTINUED OPERATIONS $ (0.10) $ (0.16)
FROM DISCONTINUED OPERATIONS -- --
------------ ------------
$ (0.10) $ (0.16)
============ ============
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 10,761,093 8,192,316
============ ============
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 10,761,093 8,192,316
============ ============
See notes to condensed consolidated financial statements.
5
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended August 31,
-------------------------------
2002 2001
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,121,800) $ (1,365,900)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest in loss
of consolidated subsidiaries (28,900) (24,300)
Depreciation 157,500 130,000
Noncash services 11,600 --
Amortization of debt discount 83,800 --
Gain on sale of assets (5,200) (177,500)
Noncash compensation 129,000 --
Prepaid Drilling 58,400 234,200
Net changes in assets and liabilities 34,100 659,000
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (681,500) (544,500)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase and exploration of gas properties (534,500) (44,500)
Proceeds from the sale of gas interests 625,000 275,000
Proceeds from sale of property and equipment 42,200 388,700
Increase in restricted investments 34,100 28,200
Purchase of property and equipment (31,600) (48,200)
Net change in investments in affiliates (100,900) 61,300
------------ ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 34,300 660,500
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 1,026,600
Proceeds from issuance of stock by subsidiary -- 1,000,000
Proceeds from long-term debt 194,300 283,100
Net repayments on lines of credit -- (500,000)
Repayments of long-term debt (75,000) (89,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 119,300 1,720,700
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (527,900) 1,836,700
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,564,300 685,500
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,036,400 $ 2,522,200
============ ============
See notes to condensed consolidated financial statements.
6
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended August 31,
-----------------------------
2002 2001
------------ ------------
(Unaudited) (Unaudited)
SUPPLEMENTAL DISCLOSURES:
Income tax paid $ -- $ --
============ ============
Interest paid $ 114,200 $ 45,700
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Sale of equipment by issuing of note receivable $ -- $ 210,000
============ ============
Non-cash consideration for Gas Property Purchase $ 150,000 $ --
============ ============
See notes to condensed consolidated financial statements.
7
U.S. ENERGY CORP. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) The Condensed Consolidated Balance Sheet as of August 31, 2002 and the
Condensed Consolidated Statements of Operations and Cash Flows for the three
months ended August 31, 2002 and 2001, have been prepared by the Company without
audit. The Condensed Consolidated Balance Sheet as of May 31, 2002 has been
taken from the audited financial statements included in the Company's Annual
Report on Form 10-K for the period then ended. In the opinion of the Company,
the accompanying financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the financial
position of the Company as of August 31, 2002 and May 31, 2002 and the results
of operations and cash flows for the three months ended August 31, 2002 and
2001.
2) Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. It is
suggested that these financial statements be read in conjunction with the
Company's May 31, 2002 Form 10-K. The results of operations for the periods
ended August 31, 2002 and 2001 are not necessarily indicative of the operating
results for the full year.
3) The consolidated financial statements of the Company include 100% of the
accounts of USECB Joint Venture ("USECB" or "USECC") which is owned 50% by the
Company and 50% by the Company's subsidiary, Crested Corp. (Crested). The
consolidated financial statements also reflect 100% of the accounts of its
majority-owned and controlled subsidiaries: Energx Ltd. (90%), Crested (70.5%),
Plateau Resources Limited (100%), Sutter Gold Mining Co. (66.3%), Yellow Stone
Fuels Corp. ("YSFC") (35.9%), Four Nines Gold, Inc. (50.9%), Northwest Gold,
Inc. (96%) and Rocky Mountain Gas, Inc. ("RMG")(91.7%). All material
intercompany profits and balances have been eliminated.
4) Accrued reclamation obligations and standby costs of $11,392,700 at
August 31, 2002 and $11,451,000 at May 31, 2002 are the reclamation liability at
the SMP mining properties and the reclamation and holding liabilities at the
Shootaring Uranium Mill. The reclamation of these properties will not be
completed until such time as all the uranium mineralization contained in the
properties is produced or the properties are abandoned. The reclamation work may
be performed over several years and is bonded with either cash or certain of the
Company's real estate assets.
5) Components of Properties and Equipment at August 31, 2002 consist of
natural gas properties, mining properties, and buildings and equipment.
Accumulated
Amortization
Cost and Depreciation Net Value
-------------- ---------------- -------------
Natural gas properties $ 6,829,300 $ (1,802,200) $ 5,027,100
Buildings and other equipment 15,361,600 (5,934,000) 9,427,600
-------------- --------------- -------------
$ 22,190,900 $ (7,736,200) $ 14,454,700
============== =============== =============
The Company has impaired a portion of historical costs associated with its
properties in prior periods. The Company will provide additional impairments if
necessary in the future.
At August 31, 2002, $5,027,100 is invested in coalbed methane properties
(what we paid for proved and undeveloped properties, plus what we have spent on
exploration of these properties). A considerable amount of time is required from
the drilling of test wells before determination that a prospect is economically
feasible (contains economic reserves of gas at prevailing prices and operating
costs), or not.
8
U.S. ENERGY CORP. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
This period of time (up to 24 months in some cases) is necessary because
the water contained in the coal seam must be pumped off to allow the trapped gas
to begin flowing.
One of our properties is producing at volumes and the gas is selling at
rates which have been uneconomic in the first quarter but which are improving
(both volume and price) at report date. The evaluation process is well underway
at another property, but not yet completed, and the evaluation process at the
largest properties (Castle Rock and Kirby) has not moved past the drilling of a
small number of initial test wells (dewatering has not yet started). Therefore,
there is no impairment necessary to the carrying values of the coalbed methane
properties.
6) On July 10, 2001, RMG closed a Purchase and Sale Agreement with CCBM,
Inc. ("CCBM"), a wholly-owned subsidiary of Carrizo Oil & Gas, Inc. of Houston,
Texas. CCBM has a right to purchase an undivided 50% interest as part of the
purchase and sale agreement in all of RMG's existing coalbed properties. CCBM
signed a $7,500,000 Promissory Note payable in principal amounts of $125,000 per
month plus interest at annual rate of 8% over 41 months (starting July 31, 2001)
with a balloon payment due in the forty- second month. At August 31, 2002, the
payments under the CCBM note were current.
During the quarter ended August 31, 2002, the Company's subsidiary RMG
purchased an average 25% net revenue interest and an average 31% working
interest in eighteen coalbed methane wells drilled on 930 net acres in the
Powder River Basin. Thirteen of the eighteen drilled wells are currently
connected to gathering lines and produce at a combined rate of approximately one
million cubic feet of gas per day (1,000 mcf) from the two primary coals on the
properties: the Cook coal (11 wells) at 650 feet, and the Canyon coal (2 wells)
at 450 feet. One of the wells is used as a water inspection well.
7) The Company presents basic and diluted earnings per share in accordance
with the provisions of Statement of Financial Accounting Standards No. 128,
"Earnings per Share". Basic earnings per common share is based on the weighted
average number of common shares outstanding during the period. Diluted earnings
per share does not include the dilutive effect of common stock equivalents for
the three months ended August 31, 2002 and 2001 because stock options and
warrants which comprised common stock equivalents would have been anti-dilutive.
Those options and warrants are convertible into 2,896,830, and 769,536 shares of
common stock, respectively.
8) During the quarter ending August 31, 2002, the Company made the decision
to permanently discontinue its airport operations at the Riverton Wyoming
Regional Airport. The assets the Company owns that were used in the airport
operations will either be sold or converted for use in the Company's other
operations. The Company will continue to own the main hanger where the Company's
aircraft is stored.
9) The Internal Revenue Service (IRS) has audited and closed the Company's
tax years through May 31, 2000 with no material changes and no change in the
amount of tax due.
10) Certain reclassifications have been made in the May 31, 2002 financial
statements to conform to the classifications used in August 31, 2002.
9
U.S. ENERGY CORP. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11) In July 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." The statement requires
entities to record the fair value of a liability for legal obligations
associated with the retirement of obligations of tangible long-lived assets in
the period in which it is incurred. When the liability is initially recorded,
the entity increases the carrying amount of the related long-lived asset.
Accretion of the liability is recognized each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The standard is effective for fiscal
years beginning after June 15, 2002, with earlier application encouraged. The
Company is currently evaluating the effect of adopting SFAS No. 143 on its
financial statements and has not determined the timing of adoption. The Company
has reviewed other current outstanding statements from the Financial Accounting
Standards Board and does not believe that any of those statements will have a
material adverse affect on the financial statements of the Company when adopted
12) The accompanying condensed financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. We
have sustained substantial losses from operations in recent years, and such
losses have continued through August 31, 2002. In addition, we have used, rather
than provided, cash in our operations.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the condensed
consolidated accompanying balance sheet is dependent upon continued operations
of the Company, which in turn is dependent upon our ability to meet our
financing requirements on a continuing basis, to maintain present financing, and
to succeed in our future operations.
We continue to pursue several items that will help us meet our future cash
needs. We are aggressively pursuing our claims against Nukem. We are also
currently working with several different sources, including both strategic and
financial investors, in order to raise sufficient capital to finance our
continuing operations. Although there is no assurance that funding will be
available or that the outcome in the Nukem litigation will be positive, we
believe that our current business plan, if successfully funded, will
significantly improve our operating results and cash flow in the future.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
-----------------------------------------------------------
The following is Management's Discussion and Analysis of significant
factors which have affected our liquidity, capital resources and results of
operations during the periods included in the accompanying financial statements.
For a detailed explanation of the Company's Business Overview, it is suggested
that Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three months ended August 31, 2002 be read in conjunction
with the Company's Form 10-K for the year ended May 31, 2002. The discussion
contains forward-looking statements that involve risks and uncertainties. Due to
uncertainties in our business, actual results may differ materially from the
discussion below.
CRITICAL ACCOUNTING POLICIES
OIL AND GAS PRODUCING ACTIVITIES
We follow the full cost method of accounting for oil and gas properties.
Accordingly, all costs associated with acquisition, exploration 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. Unproved properties are assessed
periodically to ascertain whether impairment has occurred. Such assessments
could cause the Company to reduce the carrying values of the properties.
In addition, the capitalized costs are subject to a "ceiling test," which
basically limits such costs to the aggregate of the "estimated present
value, "discounted at a 10-percent interest rate of future net revenues from
proved reserves, based on current economic and operating conditions, plus the
lower of cost or fair market value of unproved properties. Decreases in future
gas prices will cause a reduction to the estimated present value and may result
in an impairment of our proved properties.
Reclamation liabilities are recorded based on the Company's best estimate
of future reclamation and closure costs based on currently available facts.
Period to period changes in the liability may result from the passage of time
and revisions to either timing or the amount of the original estimate.
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.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended August 31, 2002, our cash position decreased by
$527,900 to a Cash balance of $2,036,400 as compared to a Cash balance at May
31, 2001 of $2,564,300. This decrease in Cash came as a result of $681,500 being
consumed in operations. The reduction in Cash from operations was partially
offset by cash provided by investing and financing activities in the amounts of
$34,300 and $119,300, respectively.
Operations during the quarter ended August 31, 2002, resulted in a net loss
of $1,121,800. The major non-cash components of the net loss for the year were:
Depreciation and Amortization of $157,500; non-cash
11
services of $11,600; Amortization of a debt discount of $83,800; non-cash
compensation of $129,000; Prepaid Drilling of $58,400 and the net change in
assets and liabilities of $34,100.
Non-Cash services relate to the amortization of compensation paid to a
financial consultant in a prior period which is being amortized over the life of
the consulting contract. Prepaid drilling increased as a result of the
advancement of drilling cash requirements by participants in the Company and its
subsidiary Rocky Mountain Gas Inc., ("RMG") coal bed methane drilling programs.
These funds are used to fund ongoing drilling obligations under the terms of the
coalbed methane contracts.
During fiscal 2002, the Company entered into a financing agreement with an
independent company whereby the Company secured a $1,000,000 loan which accrues
interest at 8% per annum and is due quarterly commencing on September 1, 2002.
The entire debt is due on May 30, 2004. At the option of the lending company,
all or a portion of the $1,000,000 debt may be repaid with the common stock of
the Company or the Company's subsidiary, RMG, at the rate of $3.00 per share for
the Company's shares or $1.50 per share for RMG's shares. In addition the
lending company received detached warrants to purchase 120,000 shares of the
Company's and 120,000 shares of RMG's common stock at $3.00 and $1.50 per share,
respectively and a beneficial conversion provision. As a result of this
transaction, the Company recognized a $670,100 discount on the $1,000,000 loan
at May 31, 2002. The amortization of the discount over the term of the loan
resulted in the amortization of loan discount of $83,800 during the quarter
ended August 31, 2002.
Investing activities provided $34,300 during the quarter ended August 31,
2002. The primary components of this increase in Cash were Proceeds from the
sale of gas interests of $625,000; Proceeds from the sale of equipment of
$42,200, and an increase in restricted investments of $34,100 for a total of
$701,300 provided by investing activities. Investing activities also used a
total of $667,000 during the quarter ended August 31, 2002. The major components
of the cash used in investing activities were the purchase and exploration of
gas properties of $534,500; the purchase of certain property and equipment of
$31,600, and the continued investment in affiliates of $100,900.
RMG assigned CCBM an undivided 50% interest in all of RMG's existing
coalbed methane properties (with the exception of Castle Rock of which only a
6.25% working interest was assigned) for the purchase price of $7,500,000 by a
promissory note payable in principal amounts of $125,000 per month plus interest
at 8% per annum over 41 months (starting on July 31, 2001) with a balloon
payment due on the forty-second month. The note is secured by a pledge of CCBM's
interest in the properties of RMG being purchased by CCBM. Payments recorded on
the promissory note principal were $625,000 during the quarter ended August 31,
2002, were taken against our full cost pool of coalbed methane gas properties.
CCBM has made all payments due under the terms of the promissory note. CCBM also
agreed to pay $5,000,000 to drill and complete coalbed methane wells on RMG's
properties. One half of this amount, $2,500,000 will be credited against any
drilling or property exploration costs that are the obligation of RMG. As of
August 31, 2002, the total amount expended by CCBM towards this work commitment
was $2,675,500 leaving a balance under the work commitment of $2,324,500
approximately half of which will be spent to cover RMG's commitments in the
exploration of the joint properties
On June 4, 2002, RMG purchased an average 25% net revenue interest and an
average 31% working interest in 18 coalbed methane wells drilled on 930 net
acres in the Powder River Basin. Thirteen of he 18 drilled wells are currently
hooked up and produce at a combined rate of one million cubic feet of gas per
day (1,000 mcf) from the two primary coals on the property; the Cook coal (11
wells) at 650 feet and the Canyon Coal (2 wells) at 450 feet. One of the 18
wells is used as a water injection well. The total purchase price for the
property for RMG was $650,000, $500,000 of which was paid in cash and $150,000
in common stock of the Company which was issued during the year ended May 31,
2002. RMG also spent an additional $34,500 in funding its portion of drilling
and exploration costs on its coalbed methane properties.
12
Financing activities during the quarter ended August 31, 2002 provided
$119,300. This increase in Cash was as a result of the Company financing its
annual liability insurance premiums and the purchase of various pieces of
equipment. This increase in Cash was offset by the payments made by the Company
during the quarter ended August 31, 2002 on its long term debt of $75,000.
Working capital decreased by $1,099,500 from $3,486,200 at May 31, 2002 to
working capital of $2,386,700 at August 31, 2002. This decrease in working
capital was primarily as a result of the increased cash receipts discussed
above.
CAPITAL RESOURCES
The primary sources of our capital resources are cash on hand; collection
of receivables; receipt of monthly payments from CCBM for the purchase of an
interest in RMG's coalbed methane properties; CCBM funding of drilling and
exploration programs; projected production from RMG's coalbed methane
properties; sale of excess mine, construction and drilling equipment; sale of
real estate properties which are no longer needed in the core business of the
Company; sale of partial ownership interest in mineral properties; proceeds
under the line of credit; equity financing of the Company's subsidiaries; and
the final determination of the Sheep Mountain Partners ("SMP")
arbitration/litigation. We will also continue to receive revenues from our
commercial operations in southern Utah.
Drilling and exploration capital requirements will be satisfied for the
majority of fiscal 2003 from the CCBM work commitment of which there is
$2,324,500 remaining as of August 31, 2002. Approximately one-half of this
amount will be paid by CCBM on behalf of RMG for its obligations for drilling
and property exploration of coalbed methane properties. There is also a balance
of $5,750,000 at August 31, 2002, due from CCBM under its purchase agreement.
Under the terms of the promissory note, this amount will continue to be paid at
the rate of $125,000 per month plus interest until November 2004 at which time a
balloon payment of $2,375,000 is due. CCBM's interest in RMG's coalbed methane
properties is pledged as security for the note to RMG. After CCBM has paid
$2,500,000 (33%) of the principal amount of the promissory note, RMG will
release 25% of the undivided interest in the coalbed methane properties
purchased by CCBM; another 25% when $5,000,000 (66.6%) of the principal is paid,
and the balance of the total 50% undivided interest when all of the principal
amount of $7,500,000 of the purchase price has been paid.
Under the agreement with CCBM, CCBM also agreed to use its best efforts to
obtain financing to raise no less than $20 million to be used by RMG to acquire
more coalbed methane properties. CCBM has not been successful in raising these
funds within the terms of the agreement due to market conditions for coalbed
methane gas. RMG has extended the time for CCBM to raise the funds to June 30,
2003. If CCBM is unsuccessful in raising the funds to purchase additional
coalbed methane properties or for any reason determines to discontinue
participation in the exploration of RMG's coalbed methane properties, RMG will
continue to seek equity or industry funding to develop its properties.
The Company has shut down it mines and has discontinued its mining and
construction operations. It therefore has surplus equipment and buildings from
these operations. During fiscal 2001 and 2002, the Company sold the majority of
its surplus equipment. In addition, the Company owns various raw land which is
held as investment property or was intended to be used in mining operations.
These properties are no longer needed for the core business of the Company and
will be sold. The Company currently has an offer to sell a piece of property in
California which was previously held for the development of a mill tailings site
for its subsidiary Sutter Gold Mining Company, ("SGMC"). This property was never
developed for a tailings site so has no reclamation liability attached to it.
The Company continues to market home and mobile home lots in southern Utah.
These fully developed properties are not important to the operations of the
Company. The lots were a portion of the assets
13
that the Company acquired when it purchased the Shootaring uranium mill and
Ticaboo townsite. The Company has also listed the commercial operations at
Ticaboo for sale. It is the intention of management of the Company to sell this
commercial property. The Company also has determined to sell the Shootaring
uranium mill. It is the goal of the Company's management to sell the mill as a
unit but proposals to sell the mill parts have also been considered. No firm
proposal is currently being considered on the mill.
To assist in financing the holding costs of the SGMC properties (which are
shut down), the Company developed a mine tour business. After operating the mine
tour business for approximately one year, it was determined to lease out the
tour business. Proceeds under the lease agreement partially defray the holding
costs of the mine property. The Company is currently discussing the potential of
either a sale of the property to an industry partner or a possible joint venture
agreement to operate the property.
We currently have a $750,000 line of credit with a commercial bank. As of
May 31, 2002, this line of credit has been drawn down by $200,000. The line of
credit will expire in November of 2002. Due to the sale of mining equipment,
which was held as collateral for the line of credit, the limit of the line of
credit may be reduced. 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 Townsite in southern Utah. Plateau has drawn down $300,000 of this
financing facility which is repayable over 10 years. All payments on these lines
of credit are current as of the filing date of this report.
We have been involved in litigation with Nukem, Inc. involving Sheep
Mountain Partners, ("SMP") for the past eleven years. The U.S. District Court of
Colorado has appointed a Special Master to determine the value of the purchase
rights, the pounds of uranium, and the profits under certain contracts Nukem
entered into with 3 CIS Republics, which have been impressed in a constructive
trust. The Special Master is currently conducting the accounting. The Federal
Court has ordered that the accounting be completed and filed with the Court by
December 6, 2002 with a further status hearing to be held on December 13, 2002.
The ultimate outcome of this litigation cannot be determined but management of
the Company believes that it will be beneficial to the Company.
We believe that these cash resources will be sufficient to sustain
operations during fiscal 2003.
CAPITAL REQUIREMENTS
The primary capital requirements during fiscal 2003 are expected to be
exploration of coalbed methane properties; the cost of maintaining our uranium
properties that are shut down; the holding costs of the SGMC properties which
are also shut down, and general and administrative costs. Estimated capital
requirements for the balance of fiscal 2003 are: $830,000 for the exploration
and holding costs of coalbed methane properties; costs to maintain uranium
properties and associated real estate assets in the amount of $450,000; SGMC
properties holding costs of $210,000, and general and administrative costs of
$2,915,000. These allocations and estimates may vary depending on the level of
acquisition and drilling RMG participates in during the year.
EXPLORATION OF COALBED METHANE PROPERTIES
The majority of the fiscal 2003 exploration costs associated with the
coalbed methane properties of RMG has been funded through the CCBM agreement.
Under the CCBM purchase and sale agreement, if properties are drilled that are
owned 50% by RMG, we may be required to fund the drilling costs for the interest
ownership of the remaining non-participating parties. Should we be required to
fund any non-participating entities portion of the exploration programs, there
is a back-in provision on each property which gives RMG a disproportionate
amount of the production revenues until our cost and additional amounts are
recovered before the non-participating parties begin to receive production
funds.
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MAINTAINING MINERAL PROPERTIES
SMP URANIUM PROPERTIES
The holding costs associated with the uranium properties formerly owned by
Sheep Mountain Partners ("SMP"), are approximately $28,000 per month. We
continue to implement cost cutting measures to reduce the holding cost while at
the same time preserving the properties. We have begun the process of
reclamation on certain of these properties and will continue to do work during
fiscal 2003. It is estimated that $50,000 in reclamation work will be completed
on the SMP properties during fiscal 2003. The Company is seeking final approval
from the regulatory agencies of the reclamation work completed on the GMIX water
treatment plant during fiscal 2002.
PLATEAU RESOURCES URANIUM PROPERTIES
Plateau owns the Ticaboo Townsite, which includes a motel, convenience
store, boat storage, restaurant and lounge. Prior to fiscal 2002, we operated
all of these entities. A decision was made, during fiscal 2002, to lease out all
but the motel operations. This decision relieved us of the obligation and
expense of employees, inventory and risk of loss from the business operations.
Additionally, Plateau owns and maintains the Tony M uranium mine and
Shootaring Canyon uranium mill. We are pursuing alternative uses for these
properties including the potential sale of the uranium mill. There are no major
reclamation projects anticipated on the mill or mine properties during fiscal
2003.
SUTTER GOLD MINING COMPANY PROPERTIES
We have one employee at the SGMC properties to preserve the core assets and
properties. SGMC is in the process of evaluating the potential of selling
certain of the non-essential land positions that it has acquired. SGMC is also
considering other alternatives such as equity financing or obtaining industry
partners to develop the property.
Carrying values for the SGMC properties, as of May 31, 2002, are lower than
the fair market value of the properties. These assets consist primarily of raw
land that was purchased for a mill tailings cell but is no longer needed under
the new mine development plan. The land is in the path of a proposed highway
development project by the State of California.
The Sutter properties contain no proven or probable reserves.
DEBT PAYMENTS
Debt to non-related parties at August 31, 2002 was $2,962,100. Payment
requirements on the convertible debt referenced above during the balance of
fiscal 2003 is $60,000 of interest and $379,000 in principal payments. As of
August 31, 2002, the Company borrowed $200,000 under its $750,000 line of credit
with a commercial bank. The line of credit expires in November of 2002.
RECLAMATION COSTS
The reclamation obligations are long term and are either bonded through the
use of cash bonds or the pledge of assets. It is anticipated that only $50,000
of reclamation work will be performed during fiscal 2003. The reserves to pay
the reclamation obligations are either real estate holdings of the Company that
are pledged or restricted cash investments.
15
The reclamation liability on the Plateau uranium mining and milling
properties in Utah is $7,382,100 which is reflected on the Balance Sheet as a
reclamation liability. This liability is fully funded by cash investments that
are recorded as long term restricted assets.
The reclamation costs of the Sheep Mountain uranium properties in Wyoming
are $1,496,800 and are covered by a reclamation bond which is secured by a
pledge of certain of our real estate assets.
RESULTS OF OPERATIONS
During the quarter ended August 31, 2002, the Company recorded an operating
loss of $1,260,000 as compared to a operating loss of $1,616,500 for the quarter
ended August 31, 2001. This reduction of $356,500 in the operating loss was
primarily as a result of increase in revenues of $69,400 and a reduction of
$287,100 in costs and expenses.
The components of increased revenues were in motel and real estate
operations of $60,600 and gas sales of $28,300. These increases in revenues were
offset by reduced management fees of $19,500. Motel revenues increased during
the quarter ended August 31, 2002 over the same quarter of the previous year as
a result of increased return business at the Company's operations at Ticaboo in
southern Utah. RMG recognized its first ever methane gas production from the
field it purchased during the quarter ended August 31, 2002. Management fees
decreased as the Company has discontinued a portion of its operations and
therefore does not recognize management fees on any of its related businesses
with the exception of RMG.
Costs and expenses were reduced primarily as a result of cost cutting and
expense management programs implemented by the management of the Company. A
total of $287,100 in cost reduction was recognized during the quarter ended
August 31, 2002 when compared to the quarter ended August 31, 2001. These
reductions were in Motel operations of $124,000; Mineral holding costs of
$341,700 and General and Administrative costs of $24,500. These reductions of
costs were partially offset by costs associated with RMG's production of methane
gas of $187,900.
Net income from other income and expenses was reduced by $156,400 during
the quarter ended August 31, 2002 from the quarter ended August 31, 2001. This
reduction in net income from income and other expenses was as a result of
reduced Gain on the sale of assets of $172,300, increased interest income of
$84,400 and increased interest expense of $68,500. The Company sold significant
portions of its mining and drilling equipment during fiscal 2001 and the first
quarter of fiscal 2002. During the same quarter of fiscal 2002 the Company did
not recognize similar revenues as the remaining assets were not sold. Interest
income increased during the quarter ended August 31, 2002 as a result of higher
levels of cash invested in interest bearing investment accounts.
Operations for the three months ended August 31, 2002 resulted in a loss of
$1,121,800 as compared to a loss of $1,326,500 for the same three months of the
prior year. This $204,700 reduction in the loss from operation is as a result of
the increases in revenues and reduction of expenses discussed above. Operations
therefore resulted in a loss of $0.10 per share for the three months ended
August 31, 2002 as compared to a loss of $0.16 per share during the prior year.
16
ITEM 4. CONTROLS AND PROCEDURES
In the 90 day period before the filing of this report, the chief executive
and chief financial officers of the Company have evaluated the effectiveness of
the Company's disclosure controls and procedures. These disclosure controls and
procedures are those controls and other procedures we maintain, which are
designed to insure that all of the information required to be disclosed by the
Company in all its periodic reports filed with the SEC is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by the Company in its reports filed or submitted under the Securities
Exchange Act of 1934 is accumulated and communicated to Company management,
including the chief executive and chief financial officers of the Company, as
appropriate to allow those persons to make timely decisions regarding required
disclosure.
Subsequent to date when the disclosure controls and procedures were
evaluated, there have not been any significant changes in the Company's
disclosure controls or procedures or in other factors that could significantly
affect such controls or procedures. No significant deficiencies or material
weaknesses in the controls or procedures were detected, so no corrective actions
needed to be taken.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the Legal Proceedings as
reported by the Company in Item 3 of its May 31, 2002 Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99.1 Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code
(b) REPORTS ON FORM 8-K. The Company filed three reports on Form 8-K for
the quarter ended August 31, 2002 reporting events of June 5, 2002, regarding
the completion of the acquisition of the Bobcat property; June 19, 2002,
regarding the Phelps Dodge litigation; and August 19, 2002, regarding the Order
of the Special Master for Nukem to provide monthly reports.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, there unto duly authorized.
U.S. ENERGY CORP.
(Company)
Date: October 14, 2002 By: /s/ John L. Larsen
-------------------------------
JOHN L. LARSEN,
CHAIRMAN and CEO
Date: October 14, 2002 By: /s/ Robert Scott Lorimer
-------------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer and
Chief Accounting Officer
18
CERTIFICATION
I, Robert Scott Lorimer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of U.S. Energy Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
DATED this 14 day of October, 2002.
/s/ Robert Scott Lorimer
-----------------------------------------
Robert Scott Lorimer
Chief Financial Officer
19
CERTIFICATION
I, John L. Larsen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of U.S. Energy Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
DATED this 14 day of October, 2002.
/s/ John L. Larsen
----------------------------------------
John L. Larsen,
Chief Executive Officer
20