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 February 28, 1999 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.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Wyoming 83-0205516
- -------------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West, Riverton, WY 82501
- --------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (307) 856-9271
---------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
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 April 13, 1999
- ---------------------------------- --------------------------------------
Common stock, $.01 par value 7,817,368 Shares
U.S. ENERGY CORP. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Condensed Consolidated Balance Sheets
February 28, 1999 and May 31, 1998.............................3-4
Condensed Consolidated Statements of
Operations Three and Nine Months
Ended February 28, 1999 and
February 28, 1998................................................5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 28, 1999
and February 28, 1998............................................6
Notes to Condensed Consolidated
Financial Statements.............................................7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................8-13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................14-15
ITEM 4. Submission of Matters to Security Holders for Vote..............15
ITEM 5. Other Information...............................................15
ITEM 6. Exhibits and Reports on Form 8-K................................15
Signatures......................................................16
See Notes to Condensed Consolidated Financial Statements
2
PART I. FINANCIAL INFORMATION
Item 1Financial Statements.
U.S. ENERGY CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
ASSETS
February 28, May 31,
1999 1998
------------- --------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $10,572,200 $ 5,650,500
Accounts receivable
Trade, net 134,600 195,800
Related parties 1,103,100 1,878,400
SMP settlement receivable, net - 5,026,000
Current portion of long-term
notes receivables - 335,800
Inventory 152,200 113,700
Assets held for resale and other 1,195,100 1,100,800
TOTAL CURRENT ASSETS 13,157,200 14,301,000
INVESTMENTS IN AFFILIATES
Affiliates 650,200 871,800
Restricted 9,133,300 8,889,100
9,783,500 9,760,900
PROPERTY AND EQUIPMENT 32,038,500 31,256,600
Less accumulated depreciation,
depletion and amortization (12,310,500) (11,806,300)
19,728,000 19,450,300
OTHER ASSETS: 1,755,200 1,506,900
$ 44,423,900 $ 45,019,100
See Notes to Condensed Consolidated Financial Statements
3
U.S. ENERGY CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
LIABILITIES AND SHAREHOLDERS' EQUITY
February 28, May 31,
1999 1998
-------------- ------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,183,600 $ 1,836,400
Deferred GMMV Purchase Option 4,000,000 4,000,000
Current portion of long-term debt 269,500 225,700
TOTAL CURRENT LIABILITIES 5,453,100 6,062,100
LONG-TERM DEBT 738,100 278,200
RECLAMATION LIABILITY 8,943,000 8,778,800
OTHER ACCRUED LIABILITIES 3,885,600 4,266,800
DEFERRED TAX LIABILITY 1,144,800 1,144,800
MINORITY INTERESTS IN SUBSIDIARIES 4,117,500 4,561,300
COMMITMENTS AND CONTINGENCIES
FORFEITABLE COMMON STOCK
$.01 par value; 312,378 shares issued
forfeitable until earned 2,473,600 2,473,600
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 100,000 shares
authorized none issued or outstanding; - -
Common stock, $.01 par value; 20,000,000 shares
authorized; 7,623,492 and 7,523,492
shares issued,respectfully 76,200 75,200
Additional paid-in capital 28,819,000 28,526,200
Accumulated deficit (7,715,400) (7,760,100)
Treasury stock at cost 911,643 and 865,943
shares, respectfully (2,584,600) (2,460,800)
Unallocated ESOP contribution (927,000) (927,000)
TOTAL SHAREHOLDERS' EQUITY 17,668,200 17,453,500
$ 44,423,900 $ 45,019,100
See Notes to Condensed Consolidated Financial Statements
4
U.S. ENERGY CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
February 28, February 28,
-------------------- -------------------
1999 1998 1999 1998
------ ------ ----- -----
REVENUES:
Mineral sales $ 67,800 $ 46,200 $ 152,500 $1,015,300
Commercial operations 435,600 697,800 2,430,500 3,107,300
Oil Sales 29,600 48,400 83,300 125,000
Gain (loss) on sale of assets (9,200) - 45,100 (200)
Interest 185,400 211,100 619,700 573,900
SMP litigation settlements, net 6,077,200 - 6,077,200 -
Management fees and other 42,100 162,100 432,800 508,100
---------- ---------- ---------- ----------
6,828,500 1,165,600 9,841,100 5,329,400
COSTS AND EXPENSES:
Mineral operations 675,300 375,400 1,861,300 1,098,600
Commercial operations 853,600 641,300 2,676,900 2,278,800
Oil production 17,800 8,800 56,800 52,300
General and administrative 1,965,100 1,454,700 5,388,600 2,865,200
Interest 14,500 17,000 45,900 49,900
Construction costs 4,700 11,300 20,200 33,400
---------- ---------- ---------- ----------
3,531,000 2,508,500 10,049,700 6,378,200
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND EQUITY IN LOSS
OF AFFILIATES 3,297,500 (1,342,900) (208,600) (1,048,800)
MINORITY INTEREST IN LOSS
(INCOME) OF CONSOLIDATED
SUBSIDIARIES 7,500 (27,700) 312,500 (90,300)
EQUITY IN LOSS OF AFFILIATES (15,600) (205,900) (59,200) (612,200)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME
TAXES 3,289,400 (1,576,500) 44,700 (1,751,300)
PROVISION FOR INCOME TAXES -- -- -- --
NET INCOME (LOSS) $3,289,400 $(1,576,500) $ 44,700 $(1,751,300)
========== =========== ========== ===========
NET INCOME (LOSS) PER SHARE $ 0.43 $ (0.23) $ 0.01 $ (0.26)
BASIC AND DILUTED
========== =========== ========== ===========
BASIC WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 7,739,364 6,850,913 7,748,228 6,842,679
========== =========== ========== ===========
See Notes to Condensed Consolidated Financial Statements
5
U.S. ENERGY CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
February 28,
------------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 44,700 $(1,751,300)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Minority interest in (loss) gain
of consolidated subsidiaries (312,500) 90,300
Increase in reclamation liabilities 164,200 -
Depreciation, depletion and amortization 556,800 683,500
Equity in loss from affiliates 59,200 612,200
(Gain) loss on sale of assets (45,100) 200
Non-cash compensation 293,800 31,300
Other (187,400) (609,900)
Net changes in components of working capital 4,695,700 (1,175,500)
----------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 5,269,400 (2,119,200)
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of mining properties (28,900) (16,500)
Proceeds from sale of assets 303,900 4,000
Increase in restricted investments (244,200) (415,600)
Purchase of property and equipment (1,064,400) (1,306,800)
Changes in notes receivable 274,900 732,100
Investments in affiliates 31,100 (481,300)
Deferred GMMV purchase option - 4,000,000
----------- ----------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (727,600) 2,515,900
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of options and warrants
for common stock - 347,900
Purchase of treasury stock (123,800) -
Proceeds from long-term debt 753,000 307,700
Repayments of long-term debt (249,300) (244,700)
----------- ----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 379,900 410,900
----------- ----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 4,921,700 807,600
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 5,650,500 1,416,900
----------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $10,572,200 $ 2,224,500
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Income tax paid $ 21,000 $ -
=========== ===========
Interest paid $ 45,900 $ 49,900
=========== ===========
See Notes to Condensed Consolidated Financial Statements
6
U.S. ENERGY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1) The Condensed Consolidated Balance Sheet as of February 28, 1999 and the
Condensed Consolidated Statements of Operations for the three and nine months
and Cash Flows for the nine months ended February 28, 1999 and 1998 have been
prepared by the Company without audit. The Condensed Consolidated Balance Sheet
as of May 31, 1998, has been taken from the audited financial statements
included in the Company's Annual Report on Form 10-K for the year then ended. In
the opinion of the Company, the accompanying financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to fairly
present the financial position of the Company and its subsidiaries as of
February 28, 1999 and May 31, 1998, the results of operations for the three and
nine months ended February 28, 1999 and 1998, and the cash flows for the nine
months then ended.
2) Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these financial
statements be read in conjunction with the Company's May 31, 1998 Form 10-K. The
results of operations for the periods ended February 28, 1999 and 1998 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 subsidiaries: Energx Ltd. (90%), Crested (52%), Plateau
Resources Limited (100%) Sutter Gold Mining Co.("SGMC") (59%) and Four Nines
Gold, Inc. (50.9%) All material intercompany profits and balances have been
eliminated.
4) Deferred GMMV Purchase Option at February 28, 1999 and May 31, 1998
consists of the $4,000,000 Signing Bonus received when the Company and Crested
entered into an Acquisition Agreement with Kennecott Uranium Company to acquire
properties. (See GMMV discussion in Item 2).
5) During the nine months ended February 28, 1998, the Company and Crested
received $11,103,800 in settlement of the monetary portion of the SMP
Arbitration Order and Award. The Company recognized revenues of $6,077,200
during the quarter ended February 28, 1999 as a result of this settlement with
the balance of the revenue recognized at the year ended May 31, 1998. The
Company and Crested Corp. continue to pursue the enforcement of the equitable
portion of the SMP Arbitration Order and Award.
6) Accrued reclamation obligations and standby costs of $12,828,600 are the
Company's share of a reclamation liability at the SMP mining properties and the
full obligation at the Shootaring Uranium Mill. The reclamation work may be
performed over several years and will not be commenced until such time as all
the uranium mineralization contained in the properties is produced or the
properties abandoned. It is not anticipated that either of these events will
occur for sometime into the future.
7) In February 1997, SFAS No. 128 "Earnings per Share" was issued and
specifies the computation, presentation and disclosure requirements for earnings
per share. SFAS 128 is effective for periods ended after December 15, 1997 and
requires retroactive restatement of prior period earnings per share. The
statement replaces "primary earnings per share" with "basic earnings per share"
and replaces "fully diluted earnings per share" with "diluted earnings per
share." Adoption of SFAS 128 did not have an effect on the Company's previously
reported net income (loss) per common share.
7
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 the Company's liquidity, capital resources and
results of operations during the periods included in the accompanying financial
statements.
Liquidity and Capital Resources
During the nine months ended February 28, 1999, the Company and its 52%
owned subsidiary Crested Corp. ("Crested") received $11,103,800 in cash as a
result of a partial settlement of Sheep Mountain Partners ("SMP") arbitration.
Of this amount $6,077,200 was recognized by the Company as revenue during the
nine months ended February 28, 1999 and $5,026,600, net, during the year ended
May 31, 1998. Primarily as a result of receiving these funds the cash position
of the Company increased to $10,572,200 at February 28, 1999 from $5,650,500 at
May 31, 1998. Other increases in components of working capital were increases in
Assets held for resale and Other assets of $94,300 and Inventory of $38,500. The
components of the other assets was an increase of $103,900 in prepaid insurance
and $21,400 the increase in assets held for resale as a result of improvements
to assets held for resale by the Company's subsidiary Plateau Resources Ltd.
("Plateau"). Inventories increased by $38,500 as a result of operational needs
of the Company's subsidiaries Plateau and Western Executive Air, Inc.
The Current portion of long term debt increased by $43,800 during the nine
months ended February 28, 1999. This increase in debt was as a result of
financing the Company and Crested's annual insurance premium and a purchase of
land for a tailings pond by SGMC. Total long term debt increased as a result of
the two financings by $753,000. During the nine months ended February 28, 1999,
there was also a reduction of long term debt through cash payments of $249,300
for a net increase in long term debt of $503,700.
During the nine months ended February 28, 1999, the Company and its
consolidated subsidiaries purchased one piece of property, various pieces of
mining equipment and the development of boat storage at Ticaboo for a total of
$1,064,400. In the normal course of evaluating equipment needs, the Company and
its subsidiary also received $303,900 in proceeds from the sale of various
pieces of equipment that were no longer needed to complete certain of the
operations of the Company and its subsidiaries.
During the nine months ended February 28, 1999, the Company purchased a
total of 45,700 shares of its common stock from the open market at a total
purchase price of $123,800. These purchases were made under a stock repurchase
plan which was announced on September 28, 1998.
As part of the agreements to purchase Kennecott's interest in the GMMV, the
Company and Crested received a $4,000,000 signing bonus. This amount is carried
as a deferred purchase option until such time as the anticipated acquisition of
the Kennecott interest was concluded or standby costs are offset against the
$4,000,000 until it is reduced to zero. The Acquisition Agreement with Kennecott
Energy was not closed as planned so the $4,000,000 will be used to offset future
holding costs.
Capital Resources
General: The primary source of the Company's capital resources for the
remaining three months of Fiscal 1999 are the cash on hand at February 28, 1999;
the potential receipt of cash from the equitable portion of the SMP Arbitration
Order and Award which impressed a constructive trust in favor of SMP
8
on contracts Nukem entered into with three CIS republics; possible equity
financing from affiliated companies, and proceeds under the line of credit after
it is renewed. Additionally, the Company and Crested will continue to offer for
sale various non-core assets such as, lots and homes in Ticaboo, real estate
holdings in Wyoming, Colorado and Utah and mineral interests. Interest, rentals
of real estate holdings and equipment, commercial operations at Ticaboo,
aircraft chartering and aviation fuel sales, also will provide cash.
Line of Credit: The Company and Crested had a $1,000,000 line of credit
with a commercial bank. The line of credit was secured by various real estate
holdings and equipment belonging to the Company and Crested. The Company and
Crested are negotiating with the commercial bank to increase the line of credit
to $3,000,000. No assurance can be given that the line of credit will be
increased. The bank has however indicated that the line of credit will be
renewed for at least its original amount. It is anticipated that this renewal
will occur prior to year end at May 31, 1999. The line of credit will be used to
finance short term working capital needs.
Financing: Equity financing for Sutter Gold Mining Company ("SGMC") and
Plateau Resources Ltd. ("Plateau") are dependent on the market price of gold and
uranium, respectively. As of February 28, 1999, the prices for these metals
remained depressed and it is not known when they will recover. The Company and
Crested continue to be optimistic concerning the future markets for these metals
but can not accurately forecast what the prices will be in the short or long
term markets. If the price for these metals do not increase in the short term,
working capital of the Company and Crested will be impacted negatively due to
holding costs of the properties and the ability to raise equity funding could be
impaired.
Summary: The Company believes that cash on hand at February 28, 1999, the
anticipated proceeds from equity portion of the SMP Arbitration Award and
proceeds from the renewed line of credit if necessary, will be adequate to fund
working capital requirements through fiscal 1999. However, these capital
resources will not be sufficient to provide the funding for major capital
expansions and development of the Company's mineral properties. For these
expansions the Company and Crested continue to seek equity financing or joint
venture partners.
Capital Requirements
General: The primary requirements for the Company's working capital during
fiscal 1999 are expected to be the costs associated with the development
activities of Plateau, care and maintenance costs of the former SMP mineral
properties, payments of holding fees for mining claims, the Company's portion of
the costs associated with the GMMV properties should the Company elect to
participate in the holding costs and corporate general and administrative
expenses.
SGMC: The Company owns a majority interest in SGMC and is therefore
potentially responsible for the ongoing administrative and development costs of
the properties owned by SGMC. The Company is therefore assisting SGMC in its
efforts to secure financing to place the properties into production. SGMC has
sufficient cash reserves to fund its ongoing permitting and administrative
expenses. It is anticipated that an additional $15 million is needed to complete
the development of the mine and construction of the cyanide-flotation mill.
Prior to the time that such construction and development costs are undertaken
SGMC will require either additional debt or equity financing. In addition to the
development of the mine and mill complex, SGMC plans to construct a visitors
center on its property which will generate additional cash flows.
Due primarily to the sustained decline in gold prices during Fiscal 1998,
the Company recorded a $1,500,000 impairment on its investment in SGMC. If
financing is not obtained in Fiscal 1999 and/or gold prices further decline from
present levels, the Company will reevaluate the need for an additional
impairment on its investment in SGMC, which includes the Stock Purchase Warrant
that is contingent on SGMC identifying ounces of gold in excess of 300,000
ounces. The Company acknowledges that it may
9
be required to record a significant impairment under Generally Accepted
Accounting Principles should financing not be obtained by SGMC to develop the
project or if gold prices decline further. Currently, SGMC is in discussions
with various investment firms to raise the necessary capital for this project.
SMP: As part of a settlement agreement reached during the fourth quarter of
1998, the SMP mines and associated properties were transferred to the Company
and Crested. The holding and reclamation costs associated with these mining
properties are now the responsibility of the Company and Crested. The holding
costs historically have been approximately $85,000 per month. The Company and
Crested continue to search for improved techniques that will reduce these
monthly costs. The future reclamation costs on the SMP properties are covered by
a reclamation bond which is secured by the pledge of certain of the Company and
Crested's real estate assets. The dollar amount for the reclamation bond is
reviewed annually by State regulatory agencies. The Company and Crested
currently have a reclamation liability on the SMP properties of $1,451,800 which
is shown as such in the long-term liability section of its balance sheet.
It is not anticipated that the SMP properties will be placed into
production during Fiscal 1999. The Company and Crested have determined that the
SMP mining properties should be maintained and prepared for production in the
future when the price of uranium concentrates increases into the $15 per pound
range or at such time as the Company and Crested are able to obtain long term
delivery contracts with favorable price terms and the Sweetwater Mill which is
owned and operated by the GMMV, is placed into production. There are no major
reclamation obligation requirements during the balance of Fiscal 1999 that the
Company and Crested are aware of on the properties.
In addition to receiving the SMP mining properties back in the settlement
of a portion of the SMP arbitration issues, the Company and Crested also
received one of the market related delivery contracts which had previously
belonged to SMP. There was one delivery under this contract during the third
quarter of Fiscal 1999. The delivery requirement was sold to a third party and
the Company and Crested received $35,000 during the third quarter of 1999. As of
February 28, 1999, the Company has no additional delivery or financing
commitments for the sale or purchase of uranium during Fiscal 1999.
The Company and Crested continue to fund efforts to collect the equity
portion of the SMP Arbitration Order and Award. Additional court actions have
been taken in an effort to collect amounts that the Company and Crested believe
are due them under the Order and Award. It is not known when these matters will
be resolved and what the cost of resolution will be. Please refer to Part II,
Item I. Legal Proceedings.
GMMV: During July 1998, the GMMV Management Committee unanimously agreed to
place the Jackpot Mine and Sweetwater Mill on active standby status. This
decision was made as a result of uncertainties in the short term uranium market.
These same uncertainties resulted in the failure of the attempt of USECC to
acquire Kennecott's interest in the GMMV. The Company and Crested had until
October 31, 1998 to complete the financing efforts to purchase Kennecott's
interest. The financing was not successfully completed and the Acquisition
Agreement, which was signed on June 23, 1997, expired on October 31, 1998.
After October 31, 1998, the mines and the mill continue to be maintained.
Kennecott's obligation to fund the first $50 million in expenditures is now
satisfied. The Management Committee of the GMMV is currently discussing what
level of expenditures should be made to maintain the properties. A final
decision on these expenditures has not been reached but the Company, Crested and
Kennecott are desirous that the expenses be held to a minimum. Although
Kennecott's $50 million work commitment has been satisfied, the entire $16
million loan under the Acquisition Agreement was not advanced by Kennecott. The
GMMV Management Committee is still discussing how and when the balance of $1.5
million under the loan can be spent. The Company and Crested have notified GMMV
and Kennecott that they will not be able to
10
participate in the ongoing holding costs of the mine and mill which could
potentially cause a dilution of their interests in the GMMV. The GMMV Management
Committee has not resolved how to proceed.
Expenditures through October 1998 were covered under the $16 million dollar
loan from Kennecott Energy pursuant to the Acquisition Agreement. From that time
forward the Company and Crested have continued to fund the operations at the
GMMV mineral properties. At the time of the filing of this report all but
approximately $450,000 of the monies advanced by the Company and Crested have
been reimbursed by GMMV. The Company and Crested continue to discuss with
Kennecott the resolution of the outstanding amounts.
Plateau: Plateau owns and maintains the Tony M uranium mine and Shootaring
Uranium mill. The Company and Crested are currently working to obtain the
necessary permits from the State of Utah to place the Shootaring mill into
production. The Company and Crested are seeking debt or equity financing of
between $6 million and $9 million to put the mill and Tony M mine into
production. Until such time as the financing is received and profitable
contracts are obtained, the Company and Crested will not put the properties
owned by Plateau into production. Historically, the net holding costs of the
Plateau properties have been $70,000 per month.
During the nine months ended February 28, 1999 the reclamation liability on
the Plateau properties was increased by $82,100 to provide for estimates made by
regulatory agencies. The Company does not anticipate placing the Plateau
properties into production during Fiscal 1999. It is also anticipated that the
reclamation liabilities, which are fully bonded by a cash bond, associated with
the Plateau properties will not be performed until well into the future.
Plateau also operates the Ticaboo Townsite and commercial operations. Those
operations consist of a motel, convenience store, restaurant - bar, mobile home
lot rentals, projected sale of home lots and boat storage facilities. Plateau is
currently expanding its boat storage and real estate sales business. It is
anticipated that following the initial development stage these operations will
be funded from profits on sales.
Yellow Stone Fuels Corp. ("YSFC"): In Management's opinion, YSFC had
sufficient cash to complete its projected 1999 exploration program on its
in-situ uranium properties. YSFC owes the Company and Crested $400,000 on a
convertible promissory note plus interest at 10% per annum which was due on
March 31, 1999. Additionally, YSFC is indebted to the Company and Crested for
the interest accrued on the note and additional amounts that the Company and USE
have advanced to YSFC for a total indebtedness at February 28, 1999 of $654,700.
YSFC has sufficient cash on hand to retire this indebtedness. YSFC has indicated
its desire to pay the total indebtedness in cash but it is not certain that a
cash payment will be made as YSFC may elect, at its option, to pay the
promissory note with shares of its common stock.
Pursuant to the Exchange Rights Agreement between USE, Yellow Stone Fuels
Corp. ("YSFC") and American Fronteer Financial Corp. ("AFFC") signed in
September 1997, The Company agreed to issue free-trading shares of its Common
Stock to those individuals who invested in YSFC's restricted Common Stock
through AFFC ( a broker-dealer firm, formerly RAF Financial Corp.), if YSFC's
Common Stock was not approved for NASDAQ/NMS listing in March, 1999. Because
YSFC was not so listed and doesn't currently expect such listing to be granted
in the future, the Company has filed a registration statement on Form S-4 with
the Securities and Exchange Commission, for the exchange of restricted YSFC
Common Stock for free-trading registered shares of the Company's Common Stock.
The exchange is to be an ongoing offer for six months after SEC effective
date. The number of the Company's shares to be issued will be determined by a
ratio: Investors get free trading shares of the Company's Common Stock, equal to
(x) original investment in YSFC, plus 10% from investment date to
11
exchange date, divided by (y) the average closing bid price for shares over
the five trading days before the individual investor's exchange documents are
received by the Company.
If the exchange offer is fully taken up, the Company will have increased
its ownership of YSFC from the present 25.6% to 36%. The number of the Company's
shares to be issued in such even will depend on the Company's share values
during the term of the exchange.
Subsequent to the end of the second quarter, on March 5, 1999 the SEC
declared the S-4 registration statement effective, and the exchange offer is now
open to the YSFC investors.
Term Debt: Debt to third parties at February 28, 1999 was $1,007,600 as
compared to $503,900 at May 31, 1998. The increase in debt to third parties
consists primary of debt due on the financing of annual insurance premiums, the
purchase of property by SGMC, and various purchases of equipment.
Reclamation Obligations: It is not anticipated that any of the Company's
working capital will be used in Fiscal 1999 for the reclamation of any of its
mineral property interests. The reclamation costs are long term and are either
bonded through the use of cash bonds or the pledge of assets. It is not
anticipated that any of the mining properties in which the Company owns an
interest in will enter the reclamation phase prior to May 31, 1999.
Other: The Company and Crested currently are not in production on any
mineral properties, and development work continues on several of their major
investments. The Company and Crested are not using hazardous substances or known
pollutants to any great degree in these activities. Consequently, recurring
costs for managing hazardous substances, and capital expenditures for monitoring
hazardous substances or pollutants have not been significant. The Company and
Crested are also not aware of any claims for personal injury or property damages
that need to be accrued or funded.
The tax years through May 31, 1992 are closed after audit by the IRS. On
October 5, 1998 the Company and USE met with the Appeals Office of the IRS in
Denver, Colorado to discuss resolving issues raised for Fiscal 1993 and 1994.
The Company and Crested have resolved all outstanding issues for those years
without incurring any cash commitments for additional taxes due. The IRS is
currently concluding its review of Fiscal 1995 and 1996 for the companies but no
final reports have been issued so no representations can be made as to their
ultimate outcome.
Results of Operations
Nine months ended February 28, 1999 Compared to Nine months ended February
28, 1998.
During the nine months ended February 28, 1999, revenues increased from
those revenues reported during the same period of the previous year by
$4,511,700 to total revenues of $9,841,100. The major increase in revenue was as
a result of the Company receiving revenues from the settlement of the monetary
portion of the SMP Arbitration Award of $6,077,200. Revenues from Mineral Sales
decreased by $862,800 during the nine months ended February 28, 1999 compared to
the same period of the previous year. This decrease was a result of the Company
recognizing $969,100 in revenue from a SMP contract delivery during the nine
months ended February 28, 1998, as compared to the Company only recognizing
$35,000 in revenues from the delivery of uranium to SMP contracts during the
nine months ended February 28, 1999. Revenues from Management Fees decreased by
$75,300 during the nine months ended February 28, 1999 over the same period of
the previous year as a result of decreased activity at the GMMV.
Costs and expenses for the nine months ended February 28, 1999 increased by
$3,671,500 over the same period of the previous year. The increase in costs
primarily came as a result of non-billable costs
12
associated with the increased activity on mineral properties, Sutter Gold
and Plateau permitting of mine and mill properties, real estate development and
bonuses paid as a result of the partial settlement of certain SMP arbitration
award issues. Commercial operations increased by $398,100 primarily as a result
of increased administration costs at Ticaboo and the Company's aircraft
operations. General and administrative expenses increased by $2,523,400 mainly
as a result of the consolidation of Sutter during the nine months ended February
28, 1999. The consolidation of Sutter operations increased general and
administrative expenses by $1,402,800. Sutter's operations were not consolidated
during the nine months ended February 28, 1998, as the Company only owned 39%
until March of 1998. Other increases in general and administrative expenses were
a non-cash bonus of 100,000 shares of the Company's common stock, valued at
$293,800, to two employees for their work on the SMP arbitration. The Company
also paid the taxes on these bonuses in the amount of $209,000. There was also
an increase in the administrative costs of Plateau of $173,800 due to expanded
operations. Mineral operations increased by $762,700 primarily as a result of
the Company becoming responsible for the holding costs of the SMP properties as
a result of a partial settlement of the SMP arbitration.
The projects which are being developed, are currently not in the production
phase so are not generating cash flow. With the decline in the market price of
uranium concentrates, it is not anticipated that the properties will be placed
into production in Fiscal 1999.
As a result of the partial SMP settlement in the third quarter, partially
offset by increased costs discussed above, operations for the three and nine
months ended February 28, 1999 resulted in net gains of $3,289,400 and $44,700
respectively or $0.43 and $0.01 per share as compared to net losses of
$1,576,500 and $1,751,300 respectively for the three and nine months ended
February 28, 1998.
Year 2000 Issue
Computer programs written in the past utilize a two digit format to
identify the applicable year. Any date sensitive software beyond December 31,
1999 could fail, if not modified. The result could be among other possibilities,
disruptions to the operations and the inability to process financial
transactions. The Company has evaluated the operating systems on all headquarter
and field office computers and consulted with all of the vendors of the computer
software which is being used by the Company and affiliates. The vendors have
confirmed to the Company that all of the Company's software and information
systems are Year 2000 compliant.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Sheep Mountain Partners Arbitration/Litigation
In 1991, disputes arose between USE/Crested, d/b/a USECC and Nukem, Inc.
and its subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the
formation and operation of the Sheep Mountain Partners partnership for uranium
mining and marketing, and activities of the parties outside SMP. Arbitration
proceedings were initiated by CRIC in June 1991 and in July 1991, USECC filed a
lawsuit against Nukem, CRIC and others in the U.S. District Court of Colorado.
Later, USECC filed another suit for the standby costs at the SMP mines against
SMP in the Colorado State Court. The Federal Court stayed the arbitration
proceedings and the State Court case was also stayed. In fiscal 1994, all of the
parties agreed to exclusive and binding arbitration of the disputes before the
American Arbitration Association, ("AAA") for which the legal claims made by
both sides included fraud and misrepresentation, breach of contract, breach of
duties owed to the SMP partnership, and other claims.
Following hearings before a three member panel of the AAA, the Panel
entered an Order and Award on April 18, 1996 and supplemented it on July 3,
1996, which were ultimately confirmed by the U.S. District Court of Colorado.
Please see "Item 3. Legal Proceedings " in the Company's 1998 Form 10-K for more
details of this arbitration/litigation. Nukem appealed the decision of the U.S.
District Court to the 10th Circuit Court of Appeals and on September 24, 1998,
oral arguments were made to a three judge panel. On October 22, 1998, the 10th
Circuit Court of Appeals affirmed the Second Amended Judgment issued by the
Federal Court confirming the Arbitration Order and Award and issued its Mandate
on November 13, 1998. Thereafter, Nukem and CRIC filed a motion in the U.S.
District Court seeking full satisfaction of the judgment against them and
offering to deposit the net amount due USECC of $5,971,596 in full satisfaction
of the Second Amended Judgment. Plaintiffs USECC filed a response requesting the
Court to deny Defendants Motion and filed a motion to compel the company which
posted the supersedeas bond for Nukem to pay the judgment. The District Court
denied the motion of Nukem and CRIC and Nukem paid USECC $6,077,264 on February
9, 1999. Since then, USECC has filed certified copies of the Second Amended
Judgment in Illinois and elsewhere to enforce the Judgment. Proceedings in aid
of execution are pending in a Federal and State Court in Illinois.
Ticaboo Townsite Litigation
In fiscal 1998, a prior contract operator of the Ticaboo restaurant and
lounge, and two employees supervising the motel and convenience store in Utah
(owned by Canyon Homesteads, Inc.) sued USE, Crested and others in Utah State
Court. After a five day trial, a jury denied the claims of two of three
plaintiffs but awarded the third plaintiff $156,000 in compensatory and punitive
damages plus $90,000 in attorneys fees against USE. USE filed motions including
a motion for judgment notwithstanding the verdict ("JNOV") which were denied by
the Court. USE posted a supersedeas bond for $275,000 and is appealing the
judgment. The opening brief of USE is due on May 11, 1999.
BGBI Litigation
USE and Crested are defendants and counter- or cross-claimants in certain
litigation in the District Court of the Fifth Judicial District of Nye County,
Nevada, brought by Bond Gold Bullfrog Inc. ("BGBI") on July 30, 1991. BGBI (now
known as Barrick Bullfrog, Inc.) is an affiliate of Barrick Corp., a large
international gold producer headquartered in Toronto, Canada. The litigation
primarily concerns extra-lateral rights associated with two patented mining
claims owned by Parador Mining Company Inc. ("Parador") and initially leased to
a predecessor of BGBI, which claims are in and adjacent to BGBI's Bullfrog open
pit and underground mine near Beatty, Nevada. USE and Crested assert certain
interests in the claims under an April 1991 assignment and lease with Parador.
The lease and assignment are subject to the lease to BGBI's predecessor. Please
see "Item 3, Legal Proceedings " of Registrant's 1998 Form 10-K for more details
of this
14
litigation. The record on appeal has been filed with the Nevada Supreme
Court and the Company, USE and Parador have requested that the record be
supplemental because it was incomplete. Thereafter, briefs will be filed by BGBI
and the Company, USE and Parador.
Department of Energy Litigation
On July 20, 1998, eight uranium mining companies with operations in the
United States (including USE, Crested, YSFC) and the Uranium Producers of
America (a trade organization) filed a complaint against the United States
Department of Energy (the "DOE") in a lawsuit (file no. 98 CV 1775) in the
United States District Court, Cheyenne, Wyoming alleging inter alia that the DOE
unlawfully transferred uranium to USEC Inc. which became a publicly traded
corporation. Please see "Item 3. Legal Proceedings " of Registrant's 1998 Form
10-K for more details of this litigation. The DOE has filed a motion to dismiss
the complaint claiming that the U.S. Congress withdrew its consent to be sued in
connection with the USEC Inc. privatization and that USEC Inc. must be joined as
an indispensable party. The motion was heard on January 8, 1999 in Cheyenne,
Wyoming and the District Court took the motion under advisement.
Contour Development Litigation
On July 28, 1998, USE filed a lawsuit in the United States District Court,
Denver, Colorado against Contour Development Company, L.L.C. and entities and
persons associated with Contour Development Company, L.L.C. (together,
"Contour") seeking compensatory and consequential damages of more than $1.3
million from the defendants for dealings in certain real estate. Please see
"Item 3. Legal Proceedings " of Registrant's 1998 Form 10-K for more details on
this litigation. The parties have reached an agreement to settle the litigation
and documents are being circulated for authority to resolve the disputes.
ITEM 4. Submission of Matters to Security Holders for Vote
On December 4, 1998, an annual meeting of shareholders was held and two
proposals were presented to shareholders for a vote. The results of the meeting
were reported in the Company's Form 10Q for the fiscal quarter ended November
30, 1998.
ITEM 5. Other Information
On December 28, 1998, the Utah Department of Water Quality began public
advertisement of a notice for a public hearing on the water discharge permit for
the Shootaring Canyon uranium mill. The state issued the permit on March 17,
1999 and will be reviewed by the NRC to determine if the permit is in
compliance.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. None.
(b) Reports on Form 8-K. No reports were filed on Form 8K during
the quarter ended February 28, 1999.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
U.S. ENERGY CORP.
(Registrant)
Date: April 13, 1998 By: s/ John L. Larsen
-----------------------------------------
JOHN L. LARSEN
Chief Executive Officer
Date: April 13, 1998 By: s/ R. Scott Lorimer
-----------------------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer
and Chief Accounting Officer
16