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 November 30, 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
--------------------------
Not Applicable
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(Former name, address and fiscal year, if changed since last report)
Check whether the Company: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Company was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 13, 2003
- --------------------------------------- ------------------------------------
Common stock, $.01 par value 12,137,210 Shares
U.S. ENERGY CORP. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Condensed Consolidated Balance Sheets
November 30, 2002 and May 31, 2002................................3-4
Condensed Consolidated Statements of
Operations for the Three and Six Months Ended
November 30, 2002 and 2001..........................................5
Condensed Consolidated Statements of Cash Flows
Six Months Ended November 30, 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...................11-17
ITEM 4. Controls and Procedures............................................17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..................................................18
ITEM 4. Submission of Matters to a Vote of Security Holders................18
ITEM 6. Exhibits and Reports on Form 8-K...................................18
Signatures.........................................................19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
November 30, May 31,
2002 2002
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,241,700 $ 2,564,300
Accounts receivable
Trade, net of allowance for doubtful accounts 668,900 768,800
Affiliates 174,800 132,800
Current portion of long-term notes receivable, net 188,400 229,000
Assets held for resale and other 1,154,200 1,111,100
Inventory 40,300 86,600
------------ ------------
Total current assets 4,468,300 4,892,600
INVESTMENTS 9,949,800 10,015,500
PROPERTIES AND EQUIPMENT:
Total Property and Equipment 21,515,700 22,142,300
Less accumulated depreciation,
depletion and amortization (7,190,900) (7,584,200)
------------ ------------
Net property and equipment 14,324,800 14,558,100
OTHER ASSETS:
Accounts and notes receivable:
Real estate and equipment sales -- 36,800
Employees 51,800 65,000
Deposits and other 897,100 969,900
------------ ------------
Total other assets 948,900 1,071,700
------------ ------------
TOTAL ASSETS $ 29,691,800 $ 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
November 30, May 31,
2002 2002
------------ ------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,844,500 $ 758,600
Prepaid drilling costs 139,200 242,100
Current portion of long-term debt 318,000 205,700
Line of credit -- 200,000
------------ ------------
Total current liabilities 2,301,700 1,406,400
LONG-TERM DEBT 2,806,500 2,353,300
RECLAMATION LIABILITY 8,906,800 8,906,800
OTHER ACCRUED LIABILITIES 2,313,700 2,544,200
DEFERRED TAX LIABILITY 1,144,800 1,144,800
MINORITY INTERESTS 611,000 575,300
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 or outstanding; -- --
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; unlimited shares authorized;
11,753,035 and 11,720,818 shares issued, respectively 117,500 117,200
Additional paid-in capital 48,664,900 48,278,500
Accumulated deficit (36,954,100) (34,567,600)
Treasury stock at cost, 959,725 shares respectively (2,740,400) (2,740,400)
Unallocated ESOP contribution (490,500) (490,500)
------------ ------------
Total shareholders' equity 8,597,400 10,597,200
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 29,691,800 $ 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 Six Months Ended
November 30, November 30,
------------------------------ -------------------------------
2002 2001 2002 2001
---- ---- ---- ----
CONTINUING OPERATIONS
OPERATING REVENUES:
Motel and real estate operations $ 291,000 $ 849,900 $ 729,900 $ 1,208,000
Coalbed methane sales 60,800 -- 89,100 --
Management fees 90,600 83,300 116,200 148,600
------------ ------------ ------------ ------------
442,400 933,200 935,200 1,356,600
COSTS AND EXPENSES:
Motel and real estate operations 237,700 675,000 457,500 1,018,800
Coalbed methane operations 114,700 -- 302,600 --
Mineral holding costs 489,600 565,900 698,100 1,116,100
General and administrative 1,157,000 875,000 2,293,600 2,020,900
------------ ------------ ------------ ------------
1,999,000 2,115,900 3,751,800 4,155,800
------------ ------------ ------------ ------------
OPERATING LOSS (1,556,600) (1,182,700) (2,816,600) (2,799,200)
OTHER INCOME & EXPENSES
Gain on sales of assets 188,200 365,200 193,400 542,700
Interest income 267,400 372,200 485,700 506,100
Interest expense (166,000) (50,900) (280,200) (96,600)
------------ ------------ ------------ ------------
289,600 686,500 398,900 952,200
------------ ------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST (1,267,000) (496,200) (2,417,700) (1,847,000)
MINORITY INTEREST IN GAIN OF
CONSOLIDATED SUBSIDIARIES 2,300 (2,300) 31,200 22,000
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,264,700) (498,500) (2,386,500) (1,825,000)
PROVISION FOR INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET LOSS FROM CONTINUING
OPERATIONS (1,264,700) (498,500) (2,386,500) (1,825,000)
DISCONTINUED OPERATIONS,
NET OF TAX -- (52,200) -- (54,100)
------------ ------------ ------------ ------------
NET LOSS (1,264,700) (550,700) (2,386,500) (1,879,100)
PREFERRED STOCK DIVIDENDS -- (37,500) -- (75,000)
------------ ------------ ------------ ------------
NET LOSS AVAILABLE TO
COMMON SHAREHOLDERS $ (1,264,700) $ (588,200) $ (2,386,500) $ (1,954,100)
============ ============ ============ ============
NET LOSS PER SHARE, BASIC AND DILUTED
FROM CONTINUED OPERATIONS $ (0.12) $ (0.06) $ (0.22) $ (0.22)
FROM DISCONTINUED OPERATIONS -- (0.01) -- (0.01)
------------ ------------ ------------ ------------
$ (0.12) $ (0.07) $ (0.22) $ (0.23)
============ ============ ============ ============
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 10,765,889 8,192,316 10,763,464 8,386,672
============ ============ ============ ============
See notes to condensed consolidated financial statements.
5
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
November 30,
------------------------------
2002 2001
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,386,500) $ (1,954,100)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Minority interest in loss
of consolidated subsidiaries (31,200) (22,000)
Noncash services 23,300 26,500
Noncash interest 167,500 --
Noncash compensation 254,700 273,400
Depreciation 304,100 265,800
Gain on sale of assets (193,400) (616,900)
Prepaid Drilling (102,900) 522,700
Net changes in assets and liabilities 738,800 100,500
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES (1,225,600) (1,404,100)
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of coalbed methane properties (863,100) (475,000)
Proceeds from sale of property and equipment 531,000 959,700
Increase (Decrease) in restricted investments 65,700 (186,400)
Purchase of property and equipment (215,300) (109,300)
Proceeds from the sale of coalbed methane interests 1,000,000 650,000
Other 66,900 61,300
------------ -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 585,200 900,300
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 2,004,200
Proceeds from issuance of stock by subsidiary -- 1,000,000
Proceeds from long-term debt 712,800 283,100
Net payments on lines of credit (200,000) (650,000)
Increase in treasury stock -- (59,300)
Repayments of long-term debt (195,000) (196,300)
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 317,800 2,381,700
------------ -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (322,600) 1,877,900
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,564,300 685,500
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,241,700 $ 2,563,400
============ ===========
(continued)
See notes to condensed consolidated financial statements.
6
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Six Months Ended
November 30,
--------------------------
2002 2001
---- ----
(Unaudited) (Unaudited)
SUPPLEMENTAL DISCLOSURES:
Income tax paid $ -- $ --
========== ==========
Interest paid $ 112,700 $ 96,600
========== ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
CLOSING OF RMG BOBCAT PURCHASE $ 150,000 $ --
========== ==========
ACQUISITION OF ASSETS THROUGH THE ISSUANCE OF DEBT $ 180,000 $ --
========== ==========
ISSUANCE OF STOCK WARRANTS FOR SERVICES $ 26,000 $ --
========== ==========
DISCOUNT ON CONVERTIBLE DEBT $ 299,800 $ --
========== ==========
ISSUANCE OF STOCK FOR SERVICES $ 60,900 $ --
========== ==========
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 November 30, 2002 and the
Condensed Consolidated Statements of Operations for the three and six months
ended November 30, 2002 and 2001 and the Consolidated Statement of Cash Flows
for the six months ended November 30, 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 November 30, 2002 and May 31, 2002, the
results of operations for the three and six months ended November 30, 2002 and
2001 and cash flows for the six months ended November 30, 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 November 30, 2002 and 2001 are not necessarily indicative of the operating
results for the full year.
3) The consolidated financial statements of the Company include its
majority-owned and controlled subsidiaries: Energx Ltd. ("Energx")(90%), Crested
Corp. ("Crested") (70.5%), Plateau Resources Limited ("Plateau")(100%), Sutter
Gold Mining Co. ("SGMC")(66.3%), Yellow Stone Fuels Corp. ("YSFC") (35.9%), Four
Nines Gold, Inc. ("FNG")(50.9%), Northwest Gold, Inc. ("NWG")(96%), Rocky
Mountain Gas, Inc.("RMG") (91.7%) and the USECC joint venture ("USECC"), a
consolidated joint venture which is equally owned by the company and Crested,
through which the bulk of their operations are conducted. All material
intercompany profits and balances have been eliminated.
4) Accrued reclamation obligations and holding costs of $11,220,500 at
November 30, 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 November 30, 2002 consist of
coalbed methane properties, land, buildings and equipment.
Accumulated
Amortization
Cost and Depreciation Net Value
------------- ---------------- ------------
Coalbed methane properties $ 6,782,300 $ (1,830,900) $ 4,951,400
Buildings, land and equipment 14,733,400 (5,360,000) 9,373,400
------------- -------------- ------------
$ 21,515,700 $ (7,190,900) $ 14,324,800
============= ============== ============
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 November 30, 2002, $4,951,400 was 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
8
is economically feasible (contains economic reserves of gas at prevailing prices
and operating costs), or not. 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 coalbed methane
properties is producing at volumes and the coalbed methane is selling at rates
which have been uneconomic in the six months ended November 30, 2002 but which
are improving (both volume and price) at this 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).
The Company and its partners in the coalbed methane properties have hired
an outside firm to prepare a reserve report on the producing properties. The two
reports are to be finalized in February and April, 2003. If an impairment is
necessary, it will be recorded on the Form 10-K for the year ended December 31,
2002 or the first quarter Form 10-Q for 2003.
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 November 30, 2002, the
payments under the CCBM note were current.
During the six months ended November 30, 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 injection 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 and six months ended November 30, 2002 and 2001 because stock options
and warrants which comprised common stock equivalents would have been
anti-dilutive. Those employee options and investor warrants are convertible into
3,828,163 and 809,536 shares of common stock, respectively.
8) During the six months ended November 30, 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 hangar where the
Company's aircraft are 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 November 30, 2002.
9
11) During the Company's December 16, 2002 Board of Directors meeting, the
directors unanimously voted to change the Company's year end from May 31 to
December 31 effective December 31, 2002.
12) 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 will adopt this pronouncement January 1, 2003.
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.
13) 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 November 30, 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
U.S. ENERGY CORP. & SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following is Management's Discussion and Analysis of significant
factors which have affected our liquidity, capital resources and results of
operations during the periods included in the accompanying financial statements.
For a detailed explanation of the Company's Business Overview, it is suggested
that Management's Discussion and Analysis of Financial Condition and Results of
Operations for the six months ended November 30, 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 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 using the
unit-of-production method based on estimated reserves. Investments in unproven
properties and major development projects are not amortized until proven
reserves associated with the projects can be determined. Unproven properties are
assessed periodically to ascertain whether an 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
proven reserves, based on current economic and operating conditions, plus the
lower of cost or fair market value of unproven properties. Decreases in future
gas prices will cause a reduction to the estimated present value and may result
in an impairment of the Company's proven 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 proven and unproven 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 proven
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.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended November 30, 2002, our cash position decreased
by $322,600 to a cash balance of $2,241,700 as compared to a cash balance at May
31, 2001 of $2,564,300. This decrease in cash came as a result of $1,225,600
being consumed in operations. This reduction in cash from operations was
partially offset by cash provided by investing and financing activities in the
amounts of $585,200 and $317,800, respectively.
11
Operations during the six months ended November 30, 2002, resulted in a net
loss of $2,386,500. The major non-cash components of the net loss for the year
were: depreciation and amortization of $304,100; non-cash services of $23,300;
non-cash compensation of $254,700; gain on sale of assets of $193,400; non-cash
interest on convertible notes of $167,500; prepaid drilling of $102,900 and the
net change in assets and liabilities of $738,800.
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 decreased as a result of the use of
cash previously advanced for drilling requirements by non-affiliated
participants in Rocky Mountain Gas, Inc., ("RMG") coalbed methane drilling
programs. These funds are used to fund ongoing drilling obligations under the
terms of the coalbed methane contracts. Non-cash compensation is the
amortization compensation relating to forfeitable shares of the Company's stock
pursuant to an approved stock bonus program and the funding of the employee ESOP
retirement plan.
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 Company also entered into a similar financing agreement during the six
months ended November 30, 2002 whereby the Company secured a $500,000 loan which
accrues interest at 8% per annum and is due in quarterly installments beginning
March 1, 2003. The $1,000,000 debt is due on May 30, 2004 and the $500,000 debt
is due on November 19, 2004. At the option of the lending companies, all or a
portion of these debts may be repaid with the common stock of the Company or the
Company's subsidiary, RMG, at the various rates for the shares. In addition, the
lending companies received detached warrants to purchase shares of the Company's
and RMG's common stock and a beneficial conversion provision. As a result of
this transactions, the Company recognized a $670,100 discount on the $1,000,000
loan at May 31, 2002 and a discount of $299,800 on the $500,000 loan as of
November 30, 2002. The amortization of the discounts over the term of the loans
resulted in non-cash interest of $167,500 during the six months ended November
30, 2002.
Depreciation consists of ongoing depreciation of the Company's buildings
and equipment and also includes $51,100 of amortization of capitalized costs
relating to producing coalbed methane gas properties owned by RMG.
Investing activities provided $585,200 during the six months ended November
30, 2002. The primary components of this increase in cash were proceeds from the
sale of coalbed methane interests of $1,000,000; proceeds from the sale of
equipment of $531,000, and an decrease in restricted investments of $65,700.
Investing activities also used a total of $1,078,400 during the six months ended
November 30, 2002. The major components of the cash used in investing activities
were the purchase and exploration of coalbed methane properties of $863,100 and
the purchase of certain property and equipment of $215,300.
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
accepting 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 $1,000,000 during the six months
ended November 30, 2002, were taken against our full cost pool of coal bed
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 November 30, 2002, the total amount expended by CCBM
towards this work commitment was $3,051,400 leaving a balance under the work
commitment of $1,948,600 approximately half of which will be spent to cover
RMG's commitments in the exploration of the joint properties.
12
On June 4, 2002, RMG purchased an average 25% net revenue interest and an
average 31% working interest in 18 coal bed methane wells drilled on 930 net
acres in the Powder River Basin. Thirteen of the 18 drilled wells are currently
hooked up and produce at a combined rate of about 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 $128,400 in funding its portion of drilling
and exploration costs on its coalbed methane properties.
Financing activities during the six months ended November 30, 2002,
provided $317,800. 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. The increase in cash, as a result of proceeds from long
term debt, $712,800, was offset by the payments made by the Company during the
six months ended November 30, 2002 on its long term debt of $195,000 and line of
credit of $200,000.
Working capital decreased by $1,319,600 from $3,486,200 at May 31, 2002, to
working capital of $2,166,600 at November 30, 2002.
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 exploration properties; proceeds
under the line of credit; equity financing of the Company's subsidiaries; and
the final determination of the Sheep Mountain Partners ("SMP")
arbitration/litigation. 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 2002 from the CCBM work commitment of which there is $1,948,600
remaining as of November 30, 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 $5,375,000
at November 30, 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. CCBM can discontinue
making payments at any time subject to certain earn-in provisions and penalties.
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 coal bed 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
13
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 sold a piece of property
in California in December 2002, 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 that the Company acquired when it
purchased the Shootaring uranium mill and Ticaboo townsite. The Company has also
listed the commercial operations at Ticaboo for sale. It is the present
intention of management of the Company to sell this commercial property. 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 had been drawn down by $200,000. The
outstanding balance under the line of credit had been paid off as of November
2002. The line of credit was renewed during December 2002 for a period of six
months. We also have a $500,000 line of credit through our affiliate Plateau
Resources Ltd ("Plateau"). This line of credit is for the development of the
Ticaboo Townsite 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
March 3, 2003. The ultimate outcome of this litigation cannot be determined but
management of the Company believes that it will be beneficial to the Company.
During its regular meeting on December 16, 2002, the Board of Directors
unanimously voted to change the Company's year-end from May 31 to December 31
effective December 31, 2002. We believe that these cash resources will be
sufficient to sustain operations during the balance of 2002.
CAPITAL REQUIREMENTS
The primary capital requirements during the balance of 2002 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 2002 are: $60,000 for the exploration
and holding costs of coal bed methane properties; costs to maintain uranium
properties and associated real estate assets in the amount of $150,000; SGMC
properties holding costs of $210,000, and general and administrative costs of
$370,000. These allocations and estimates may vary depending on the level of
acquisition and drilling RMG participates in during the year.
14
EXPLORATION OF COALBED METHANE PROPERTIES
-----------------------------------------
The majority of the 2002 exploration costs associated with the coalbed
methane properties of RMG has been funded through the CCBM agreement. Under the
CCBM purchase and sale agreement, if properties are drilled that are owned 50%
by RMG, we may be required to fund the drilling costs for the interest ownership
of the remaining non-participating parties. Should we be required to fund any
non-participating entities portion of the exploration programs, there is a
back-in provision on each property which gives RMG a disproportionate amount of
the production revenues until our cost and additional amounts are recovered
before the non-participating parties begin to receive production funds.
MAINTAINING MINERAL PROPERTIES
------------------------------
SMP URANIUM PROPERTIES
The holding costs associated with the uranium properties formerly owned by
Sheep Mountain Partners ("SMP"), are approximately $28,000 per month. We
continue to implement cost cutting measures to reduce the holding costs while at
the same time preserving the properties. We have begun the process of
reclamation on certain of these properties and will continue to do work during
2003. It is estimated that $50,000 in reclamation work will be completed on the
SMP properties during 2003. The Company is seeking final approval from the
regulatory agencies of the reclamation work completed on the GMIX water
treatment plant during 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 2001, 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
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 was no longer needed under
the new mine development plan. A portion of this land was sold in December 2002.
The SGMC properties contain no proven or probable reserves.
DEBT PAYMENTS
-------------
Debt to non-related parties at November 30, 2002 was $3,124,500. Payment
requirements on the convertible debt referenced above during 2003 is $120,000 of
interest. Principle due under other long term debt during 2003 total $318,000.
15
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 2003. The bonding for these
reclamation obligations is either real estate holdings of the Company or
restricted cash investments, both of which are pledged to regulatory agencies.
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 six months ended November 30, 2002, the Company recorded an
operating loss of $2,386,500 as compared to a operating loss of $1,954,100 for
the same period of the previous year. Major components of this increase of
$432,400 in the operating loss for the six month periods were reduced revenues
of $421,400; reduced other income of $369,700; increased coalbed methane
production costs of $302,600; increased general and administrative expenses of
$272,200 and increased interest expense of $183,600. These increases in the net
operating loss were offset by reductions of $561,300 in motel and real estate
operations; $418,000 in mineral holding costs; increased minority interest in
the gain of consolidated subsidiaries of $9,200; no discontinued operations and
dividends paid on preferred shares during the six months ended November 30,
2002.
Revenues from motel and real estate operations decreased by $478,100 during
the six months ended November 30, 2002 to $729,900 as compared to the same
revenues during the previous year of $1,208,000. This decrease was primarily as
a result of reduced revenues from fueling services at the Company's airport
operations in Wyoming. Additionally, revenues from motel operations in Utah
decreased by $68,900 as a result of decreased tourism as a result of drought
conditions and world wide terrorism concerns. These reductions in revenues were
offset by revenues of $89,100 from coalbed methane production during the six
months ended November 30, 2002 while there were no revenues from coalbed methane
production during the same period of the prior year. This is the first
production of coalbed methane that the Company's subsidiary RMG has recorded. Of
the total costs and expenses associated with coalbed methane operations for the
six months ended November 30, 2002, $302,600, only $151,700 were associated with
the field operations of the coalbed methane produced during the six months ended
November 30, 2002. The balance of the costs associated with coalbed methane
operations were those costs incurred in pumping water and operating other fields
which are not yet producing coalbed methane in quantities sufficient to be sold
into the pipelines.
Components of the reduction in other income were reductions in the gain on
the sale of assets of $349,300 and interest income of $20,400. The Company did
not sell as many assets during the six months ended November 31, 2002 as it did
during the previous year as the bulk of surplus mining, drilling and real estate
property that was designated as surplus was sold during the previous two years.
Interest income decreased as a result of smaller amounts of cash invested in
interest bearing accounts.
General and Administrative costs increased primarily as a result of
increased costs associated with legal services needed to respond to regulatory
agencies and increased administrative labor and professional services at RMG to
maintain property files and analyze aspects of coalbed methane production.
Interest expense increased as a result of the amortization of the discount taken
on the convertible note financings which were completed at the end of fiscal
2002 and during the six months ended November 30, 2002 as discussed above under
liquidity.
16
Costs and expenses associated with motel and real estate operations
decreased by $561,300 as a result of reductions in tourist activity at the
operations in southern Utah as discussed above and the reduction of the amount
of fuel pumped at the Company's commercial airport operations in Wyoming.
Mineral holding costs have been significantly reduced as a result of the
properties being shut down and limited work being performed on them during the
six months ended November 30, 2002.
Costs and Expenses for the quarter ended November 30, 2002, decreased by
$116,900 from those reported during the same quarter of the previous year.
Revenues and other income and expenses also were reduced during the quarter
ended November 30, 2002 when compared to the same quarter of the previous year
by $490,800 and $396,900, respectively. All these reductions are for the reasons
as indicated above under the discussion of the six months ended November 30,
2002. The quarter ended November 30, 2002, resulted in a loss from operations of
$1,264,700 as compared to a loss of $588,200 for the same three months of the
previous year.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
----------------------------------------------------
On December 16, 2002, the annual meeting of shareholders was held for the
election of three directors. Don C. Anderson, Nick Bebout and H. Russell Fraser
were elected as a directors for a term expiring on the third succeeding annual
meeting and until their successor is duly elected or appointed and qualified.
With respect to the election of the directors, the votes cast were as follows:
NAME OF DIRECTOR FOR ABSTAIN
---------------- --- -------
Don C. Anderson 8,834,230 114,860
Nick Bebout 8,740,690 114,860
H. Russell Fraser 8,740,250 114,970
The Registrant's Board of Directors consists of seven members of Messrs.
Don C. Anderson, Nick Bebout, H. Russell Fraser, John L. Larsen, Keith G. Larsen
and Harold F. Herron. There is a vacant seat due to the resignation of David W.
Brenman.
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 one (1) Report on Form 8-K on
September 5, 2002 concerning a research report and an amended report on Form
8-K/A on September 24, 2002 amending the Form 8-K on the research report during
the quarter ended November 30, 2002, under item 5.
18
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: January 13, 2002 By: /s/ John L. Larsen
--------------------------------
JOHN L. LARSEN,
CHAIRMAN and CEO
Date: January 13, 2002 By: /s/ Robert Scott Lorimer
--------------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer and
Chief Accounting Officer
19
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 13 day of January, 2003.
/s/ Robert Scott Lorimer
-------------------------------
Robert Scott Lorimer
Chief Financial Officer
20
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 13th day of January, 2003.
/s/ John L. Larsen
-------------------------------
John L. Larsen,
Chief Executive Officer
21