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, 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.
- --------------------------------------------------------------------------------
(Exact Name of Company as Specified in its Charter)
Wyoming 83-0205516
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West, Riverton, WY 82501
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (307) 856-9271
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Not Applicable
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(Former name, address and fiscal year, if changed since last report)
Check whether the Company: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Company was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
----- -----
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 12, 2002
- ------------------------------------ ------------------------------------
Common stock, $.01 par value 11,910,545 Shares
U.S. ENERGY CORP. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Condensed Consolidated Balance Sheets
February 28, 2002 and May 31, 2001..............................3-4
Condensed Consolidated Statements of
Operations for the Three and Nine Months Ended
February 28, 2002 and 2001........................................5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 28, 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.................11-14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................15
ITEM 2. Changes in Securities.........................................15-16
ITEM 4. Submission of Matters to be a Vote of Security Holders...........16
ITEM 6. Exhibits and Reports on Form 8-K.................................16
Signatures.......................................................16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
February 28, May 31,
2002 2001
------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,964,100 $ 685,500
Accounts receivable
Trade, net of allowance for doubtful accounts 400,500 1,319,300
Affiliates 118,300 74,200
Current portion of long-term notes receivable, net 225,000 225,000
Assets held for resale & other 1,107,900 983,800
Inventory 84,300 42,200
------------ ------------
Total current assets 3,900,100 3,330,000
INVESTMENTS AND ADVANCES
Affiliates 6,400 16,200
Restricted investments 9,908,900 9,778,700
------------ ------------
Total investments and advances 9,915,300 9,794,900
PROPERTIES AND EQUIPMENT 22,635,300 23,389,400
Less accumulated depreciation,
depletion and amortization (7,545,600) (7,285,100)
------------ ------------
Total properties and equipment 15,089,700 16,104,300
OTHER ASSETS:
Accounts and notes receivable:
Real estate and equipment sales 312,600 42,400
Employees 72,000 180,300
Deposits and other 1,004,800 1,013,300
------------ ------------
Total other assets 1,389,400 1,236,000
------------ ------------
$ 30,294,500 $ 30,465,200
============ ============
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,
2002 2001
------------- -------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,190,700 $ 1,404,300
Prepaid drilling costs 295,000 --
Current portion of long-term debt 235,200 142,400
Line of credit 200,000 850,000
------------ ------------
Total current liabilities 1,920,900 2,396,700
LONG-TERM DEBT 2,049,800 2,152,100
RECLAMATION LIABILITY (Note 4) 8,906,800 8,906,800
OTHER ACCRUED LIABILITIES (Note 4) 2,598,600 2,777,800
DEFERRED TAX LIABILITY 1,144,800 1,144,800
MINORITY INTERESTS 525,700 1,177,800
COMMITMENTS AND CONTINGENCIES
FORFEITABLE COMMON STOCK,
$.01 par value; 500,788 and 433,788
shares issued, forfeitable until earned 3,009,900 2,748,600
PREFERRED STOCK,
$.01 par value; 100,000 shares authorized
zero and 200 shares issued respectively; -- 1,840,000
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; unlimited
shares authorized; 11,376,549 and 8,989,047
shares issued, respectively 113,800 90,000
Additional paid-in capital 46,690,800 38,681,600
Accumulated deficit (33,435,700) (28,300,000)
Treasury stock at cost, 959,725
and 949,725 shares respectively (2,740,400) (2,660,500)
Unallocated ESOP contribution (490,500) (490,500)
------------ ------------
Total shareholders' equity 10,138,000 7,320,600
------------ ------------
$ 30,294,500 $ 30,465,200
============ ============
See notes to condensed consolidated financial statements.
4
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended February 28, Nine Months Ended February 28,
------------------------------- ------------------------------
2002 2001 2002 2001
---- ---- ---- ----
CONTINUING OPERATIONS
OPERATING REVENUES:
Commercial operations $ 209,500 $ 204,500 $ 1,417,500 $ 2,139,000
Mineral sales and royalties -- 264,700 -- 430,600
Management fees 29,200 187,700 177,800 621,400
----------- ----------- ----------- -----------
238,700 656,900 1,595,300 3,191,000
COSTS AND EXPENSES:
Commercial operations 383,500 624,400 1,402,300 2,424,300
Mine holding costs 302,100 622,900 1,418,200 2,289,600
General and administrative 977,200 1,071,900 2,969,400 3,186,200
Impairment of goodwill 1,622,700 -- 1,622,700 --
Other 19,900 17,500 48,600 48,200
----------- ----------- ----------- -----------
3,305,400 2,336,700 7,461,200 7,948,300
----------- ----------- ----------- -----------
OPERATING (LOSS) INCOME (3,066,700) (1,679,800) (5,865,900) (4,757,300)
OTHER INCOME & EXPENSES
Gain on sales of assets 86,400 126,300 629,100 710,400
Litigation settlements, net -- -- -- 7,132,800
Interest income 128,000 96,200 634,100 446,300
Interest expense (313,300) (81,800) (409,900) (195,900)
----------- ----------- ----------- -----------
(98,900) 140,700 853,300 8,093,600
----------- ----------- ----------- -----------
(LOSS) INCOME BEFORE
MINORITY INTEREST: (3,165,600) (1,539,100) (5,012,600) 3,336,300
MINORITY INTEREST IN GAIN OF
CONSOLIDATED SUBSIDIARIES 5,100 63,100 27,100 222,700
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (3,160,500) (1,476,000) (4,985,500) 3,559,000
PROVISION FOR INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
NET (LOSS) INCOME FROM
CONTINUING OPERATIONS (3,160,500) (1,476,000) (4,985,500) 3,559,000
DISCONTINUED OPERATIONS,
NET OF TAX (9,600) (344,300) (63,700) (333,500)
----------- ----------- ----------- -----------
NET (LOSS) INCOME (3,170,100) (1,820,300) (5,049,200) 3,225,500
PREFERRED STOCK DIVIDENDS (11,500) (37,500) (86,500) (112,500)
----------- ----------- ----------- -----------
NET (LOSS) INCOME AVAILABLE
TO COMMON SHAREHOLDERS $(3,181,600) $(1,857,800) $(5,135,700) $ 3,113,000
=========== =========== =========== ===========
NET LOSS PER SHARE BASIC
FROM CONTINUED OPERATIONS $ (0.32) $ (0.19) $ (0.57) $ 0.45
FROM DISCONTINUED OPERATIONS -- (0.04) (0.01) (0.04)
----------- ----------- ----------- -----------
$ (0.32) $ (0.23) $ (0.58) $ 0.41
=========== =========== =========== ===========
NET LOSS PER SHARE DILUTED
FROM CONTINUED OPERATIONS $ (0.32) $ (0.19) $ (0.57) $ 0.43
FROM DISCONTINUED OPERATIONS -- (0.04) (0.01) (0.04)
----------- ----------- ----------- -----------
$ (0.32) $ (0.23) $ (0.58) $ 0.39
=========== =========== =========== ===========
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 9,837,494 7,819,446 8,866,858 7,665,360
=========== =========== =========== ===========
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 9,837,494 7,819,446 8,866,858 8,002,494
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
5
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended February 28,
------------------------------
2002 2001
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(5,135,700) $ 3,113,000
Adjustments to reconcile net income (loss) to net cash
Provided by (used in) operating activities:
Minority interest in loss
of consolidated subsidiaries (27,100) (222,700)
Depreciation 422,500 632,600
Impairment of goodwill 1,622,700 --
Noncash services 55,600 19,200
Noncash dividend 11,500 --
Deferred purchase option -- (2,721,200)
Gain on sale of assets (619,600) (710,500)
Noncash compensation 409,000 --
Prepaid Drilling 295,000 --
Other -- 203,300
Net changes in assets and liabilities 477,000 1,270,200
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,489,100) 1,583,900
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase and Development of gas properties (530,100) (2,000,900)
Proceeds from the sale of gas interests 1,025,000 --
Proceeds from sale of property and equipment 542,700 1,507,700
Increase in restricted investments (130,200) (181,300)
Purchase of property and equipment (106,800) (274,200)
Net change in investments in affiliates 330,500 (8,400)
----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES 1,131,100 (957,100)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,466,300 --
Proceeds from issuance of stock by subsidiary 1,000,000 --
Proceeds from long-term debt 250,500 726,400
Net repayments on lines of credit (650,000) (450,000)
Acquisition of treasury stock (79,900) --
Repayments of long-term debt (350,300) (830,200)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,636,600 (553,800)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,278,600 73,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 685,500 916,400
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,964,100 $ 989,400
=========== ===========
See notes to condensed consolidated financial statements.
6
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended February 28,
------------------------------
2002 2001
---- ----
(Unaudited) (Unaudited)
SUPPLEMENTAL DISCLOSURES:
Income tax paid $ -- $ --
==========
Interest paid $ 409,900 $ 195,100
========== ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Sale of equipment by issuing of note receivable $ 468,000 $ --
========== ==========
Acquisition of assets through issuance of debt $ 90,300 $ 162,400
========== ==========
Acquisition of assets through issuance of stock $ 96,800 $ --
========== ==========
Issuance of stock warrants for services $ 35,600 $ --
========== ==========
Issuance of forfeitable stock as compensation $ 261,300 $ --
========== ==========
Issuance of stock to invest in subsidiary $3,568,500 $ --
========== ==========
Issuance of stock to retire preferred stock $ 1,840,000 $ --
========== ==========
Issuance of stock for services $ 14,400 $ 19,200
========== ==========
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 February 28, 2002 and the
Condensed Consolidated Statements of Operations and Cash Flows for the three and
nine months ended February 28, 2002 and 2001, have been prepared by the Company
without audit. The Condensed Consolidated Balance Sheet as of May 31, 2001 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 February 28, 2002 and May 31, 2001 and
the results of operations and cash flows for the three and nine months ended
February 28, 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, 2001 Form 10-K. The results of operations for the periods
ended February 28, 2002 and 2001 are not necessarily indicative of the operating
results for the full year.
3) The consolidated financial statements of the Company include 100% of the
accounts of USECB Joint Venture ("USECB" or "USECC") which is owned 50% by the
Company and 50% by the Company's subsidiary, Crested Corp. (Crested). The
consolidated financial statements also reflect 100% of the accounts of its
majority-owned and controlled subsidiaries: Energx Ltd. (90%), Crested (70.5%),
Plateau Resources Limited (100%), Sutter Gold Mining Co. (66.3%), Yellow Stone
Fuels Corp. ("YSFC") (35.9%), Four Nines Gold, Inc. (50.9%), Northwest Gold,
Inc. (89%) and Rocky Mountain Gas, Inc.("RMG") (91.8%). All material
intercompany profits and balances have been eliminated.
4) Accrued reclamation obligations and standby costs of $11,505,400 at
February 28, 2002 and $11,684,600 at May 31, 2001 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
commenced until such time as all the uranium mineralization contained in the
properties is produced or the properties are abandoned. It is anticipated that
neither of these events will occur for sometime into the future. The reclamation
work may be performed over several years and is bonded with either cash or
certain of the Company's real estate assets. The Company is exploring certain
options to free up a significant portion of the cash bonds held for the
reclamation of the Shootaring Mill by a possible sale of that facility.
5) Components of Properties and Equipment at February 28, 2002 consist of
natural gas properties, mining properties, and buildings and equipment.
Accumulated
Amortization
Cost and Depreciation Net Value
------------ ---------------- ------------
Natural gas properties $ 7,261,600 $ (1,773,600) $ 5,488,000
Mining properties 1,520,600 -- 1,520,600
Buildings and other equipment 13,853,100 (5,772,000) 8,081,100
------------ ------------ ------------
$ 22,635,300 $ (7,545,600) $ 15,089,700
============ ============ ============
The Company has updated prior economic evaluations on its mineral
properties and has impaired a portion of historical costs associated with these
properties in prior periods. The Company will continue to evaluate the mineral
properties and provide additional impairments if necessary.
8
U.S. ENERGY CORP. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6) On February 8, 2001, the Company through its affiliate Rocky Mountain
Gas, ("RMG") entered into an option and farmin agreement with Suncor Energy
America, Inc., ("SUNCOR"). The agreement granted SUNCOR an option to purchase
37.5% of RMG's interest in 111,634 acres of its coalbed methane properties.
SUNCOR drilled 19 wells and completed 8 wells in total. During February 2002,
SUNCOR notified the Company that is was not going to exercise its February 2002
option to continue as a partner in the development of the properties. The
properties and 8 completed wells will be returned to the Company and its
co-venture participants.
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.
The 50% undivided interest purchased by CCBM is pledged back to RMG to
secure the purchase price, and will be released 25% when 33.3% of the principal
amount of the purchase price is paid, another 25% when the total principal
payments reach 66% of the principal amount of the purchase price and the balance
when the total principal amount is paid. Collateral for the Promissory Note of
$7,500,000 is the property on an "as earned" basis based on the above
percentages. The Promissory Note is therefore accounted for on a cash basis.
7) The Company presents basic and diluted earnings per share in accordance
with the provisions of Statement of Financial Accounting Standards No. 128,
"Earnings per Share". Basic earnings per common share is based on the weighted
average number of common shares outstanding during the period. Diluted earnings
per share does not include the dilutive effect of common stock equivalents for
the three months ended February 28, 2002 and 2001 or the nine months ended
February 28, 2002 because stock options and warrants which comprised common
stock equivalents would have been anti-dilutive. Those options and warrants are
convertible into 496,271, 396,608 and 454,233 shares of common stock,
respectively.
8) During the quarter ending February 28, 2002, the Company made the
decision to permanently discontinue its contract drilling and construction
operations. The assets the Company owns that were used in the operations have
either been sold or converted for use in the Company's other operations.
9) The Internal Revenue Service (IRS) began a routine audit of the
Company's fiscal years ended May 31, 1999 and 2000 during the quarter ended
February 28, 2002. All fiscal years prior to the fiscal year ended May 31, 1999
have been closed by the IRS, after audit, with no material changes. It is not
known when the IRS audit of fiscal 1999 and 2000 will be completed nor what, if
any, impact will result from the audit.
10) Certain reclassifications have been made in the May 31, 2001 financial
statements to conform to the classifications used in February 28, 2002.
9
U.S. ENERGY CORP. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11) The accompanying condensed consolidated 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 February 28, 2002. In addition, we
have used, rather than provided, cash in our operations. We, however, have been
unable to secure adequate financing to meet our future cash needs.
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 the Company's liquidity, capital resources and
results of operations during the periods included in the accompanying financial
statements. For a detailed explanation of the Company's Business Overview, it is
suggested that Management's Discussion and Analysis of Financial Condition and
Results of Operations for the three and nine months ended February 28, 2002 be
read in conjunction with the Company's Form 10-K for the year ended May 31,
2001.
OVERVIEW OF BUSINESS
The Company is engaged in the mineral development and extraction business.
The Company has interests in an uranium mine and mill in southern Utah; uranium
mines in central Wyoming; a gold property in California; coalbed methane
properties in the Powder River Basin in Wyoming and Montana, and various real
estate operations including a commercial townsite operation near Lake Powell,
Utah.
All these businesses are operated in conjunction with the Company's
subsidiary Crested Corp. . ("Crested") through a joint venture between the two
companies, USECB Joint Venture ("USECB").
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended February 28, 2002, the Company experienced an
increase in working capital of $1,045,900. At February 28, 2002, the Company had
a working capital of $1,979,200 as compared to a working capital of $933,300 at
May 31, 2001.
Components of the increase of working capital were increases in cash of
$1,278,600, accounts receivable affiliates of $44,100, assets held for resale
and other of $124,100, and inventory of $42,100; along with a decrease in the
line of credit of $650,000 and accounts payable of $213,600. These working
capital increases were offset by reduced accounts receivable trade of $918,800,
increased current long-term debt of $92,800, and prepaid drilling costs of
$295,000.
During the nine months ended February 28, 2002, operations consumed cash of
$2,489,100, while investing and financing activities generated cash of
$1,131,100 and $2,636,600, respectively. The increase in cash from investing
activities came from the sale of property and equipment of $542,700, proceeds
from sales of natural gas interests of $1,025,000, and the net decrease in
investments in affiliates of $330,500. These increases were offset by the
purchase of new equipment in the amount of $106,800, purchase and development of
gas properties of $530,100 and an increase of restricted investments held for
reclamation of $130,200 through the reinvesting of interest earned on those
restricted investments.
Cash provided by financing activities was a result of the issuance of stock
by the Company from the exercising of stock options by employees of $505,400;
the issuance of stock in a private placement of $1,961,000; the issuance of
stock by the Company's subsidiary, RMG, of $1,000,000, and proceeds from new
debt of $250,500 primarily from the financing of the Company's annual insurance
premium. These cash inflows were offset by the pay down of the line of credit of
$650,000; payments on long term debt of $350,300, and receipt of treasury stock
of $79,900.
11
CAPITAL RESOURCES
The primary source of the Company's capital resources are cash on hand;
collection of receivables; projected equity financing of its coalbed methane
affiliate, Rocky Mountain Gas, Inc., ("RMG"); sale of partial ownership interest
in mineral properties; proceeds under the line of credit; potential settlement
discussions with Phelps Dodge regarding a dispute on a molybdenum property and
final determination of the SMP arbitration/litigation. The Company also will
continue to receive revenues from its motel operations in southern Utah, along
with revenues from rental properties and the airport fixed base operations in
Wyoming.
The Company has a $750,000 line of credit with a commercial bank. The line
of credit is secured by various real estate holdings and equipment belonging to
the Company. At February 28, 2002, the line of credit had been drawn down by
$200,000. The line of credit is being used for short term working capital needs
associated with operations. The Company also has a $500,000 line of credit
through its affiliate Plateau Resources. This line of credit is for the
development of the Ticaboo town site in southern Utah. Plateau has drawn down
$300,000 under this financing facility. The line of credit is a revolving credit
facility.
Pursuant to the terms of an agreement with CCBM, Inc. to sell a 50%
interest in its coalbed methane properties. The Company receives monthly
principal payments or $125,000 plus interest on a $7.5 million note. These
payments continue through November 2004 at which time there is a balloon payment
of $2.4 million.
During the nine months ended February 28, 2002, the Company received
$505,400 as proceeds from employees exercising stock options under one of the
Company's Stock Option Plans. The Company also received $1,960,900 net of
commissions from investors through a private placement of its common stock and
$1,000,000 as the result of a private placement of RMG common stock. The Company
may continue to raise capital from Private Placements of stock. During the nine
months ended February 28, 2002, the investment in RMG was converted to common
stock of the Company. See Part II, Item 2.
In addition to the above referenced cash resources, the Company through its
subsidiary RMG continues to seek either an equity or industry partner in the
financing of its coalbed methane operations.
The Company believes that these cash resources will be sufficient to
sustain operations during the balance of fiscal 2002. However, the capital
resources at February 28, 2002, will not be sufficient to provide funding for
the Company's maintenance and development of its coalbed methane gas business.
CAPITAL REQUIREMENTS
The Company has the obligation to fund the holding costs of the Sheep
Mountain uranium mines, the Plateau uranium mine and mill, and the Sutter Gold
properties. Additional funds are needed to support the Company's real estate and
commercial operations, and the development of the RMG coalbed methane gas
properties. Due to the holding costs of the non coalbed methane properties and
the uncertainty of when these properties will become economically viable, the
Company determined that it will either sell the properties or seek joint venture
partners or equity financing on the properties.
On December 31, 2001, RMG and Quantum Energy LLC ("Quantum") entered into
an Option and Farmin Agreement with Suncor Energy America Inc. ("Suncor"). The
agreement granted an option to Suncor to purchase 37.5% of RMG's and 12.5% of
Quantum's interest in 111,634 acres of their coalbed methane properties. For
this option, Suncor paid $1,706,800 at closing on February 8, 2001.
The option period was for 12 months from closing on 105,175 acres and 24
months on 6,461 acres. During this option period, Suncor committed to conduct a
$2,250,000 drilling program on the properties.
12
RMG was obligated to fund $250,000 of that drilling program. This commitment of
$250,000 was assumed and paid by CCBM. In February 2002, Suncor notified RMG
that it was not going to exercise its option to purchase the interest in the
properties resulting in those interests reverting back to the Company and its
co- venture participants. RMG will continue to seek an equity partner for this
property.
On July 10, 2001, RMG closed a Purchase and Sale Agreement with CCBM, a
wholly-owned subsidiary of Carrizo Oil & Gas, Inc. of Houston, Texas. CCBM
purchased an option to acquire an undivided 50% interest in all of RMG's
existing coalbed properties. In accordance with the purchase and sale agreement
CCBM signed a $7,500,000 Promissory Note payable in principal amounts of
$125,000 per month plus interest at annual rate of 8% over 41 months (starting
July 31, 2001) with a balloon payment due on the forty- second month. All
payments on the promissory note are current through February 28, 2002.
The 50% undivided interest is pledged back to RMG to secure the purchase
price, and will be released 25% when 33.3% of the principal amount of the
purchase price is paid, another 25% when the total principal payments reach 66%
of the principal amount of the purchase price and the balance when the total
principal amount is paid. As the only collateral for the promissory note is the
property, the Company accounts for the note on a cash basis.
CCBM has also agreed to fund $5,000,000 for an initial drilling program. If
CCBM fails to expend $5,000,000 in the drilling program or $2,500,000 for RMG's
benefit, CCBM will be obligated to pay any remaining unspent portions of the
$2,500,000 directly to RMG. If CCBM defaults on its purchase obligation, CCBM
will still earn a 50% working interest in each well location (80 acres) and
production therefrom. CCBM's ownership will be earned on these wells regardless
of the status of the payments on the promissory note. Through March 31, 2002,
the Company and CCBM had drilled 30 wells at an cost of $1,618,800.
CCBM will be entitled to a credit (applied as a prepayment of the purchase
price for the production of the undivided 50% interest in RMG's acreage), equal
to 20% of RMG's net revenue interest from wells drilled with the $5,000,000
until CCBM equals $1,250,000 from production proceeds.
During the nine months ended February 28, 2002, the Company completed the
reclamation of the Ion Exchange Plant at the SMP properties at a cost of
$360,000. It is not anticipated that any additional major reclamation projects
will occur on the Company's mineral property interests during the balance of
fiscal 2002. The future reclamation costs on the Sheep Mountain properties are
covered by a reclamation bond which is secured by a pledge of certain of the
Company's real estate assets. The reclamation bond amount is reviewed annually
by State regulatory agencies. Reclamation costs of the Plateau properties are
bonded by restricted cash investments that are only available for Plateau
reclamation projects.
RESULTS OF OPERATIONS
Operating revenues for the nine months ended February 28, 2002, decreased
$1,595,700 from the same period of the previous year to $1,595,300. The decrease
was primarily as a result of a decrease in commercial operations in southern
Utah of $721,500, suspension of royalty payments from Phelps Dodge of $96,300,
and no sales of uranium to delivery contracts of $334,300.
The subcontracting of retail commercial operations in southern Utah reduced
commercial operating costs and expenses by $1,022,000 during the nine months
ended February 28, 2002. Other reductions in costs and expenses during the nine
months ended February 28, 2002, were the reduced mine holding costs of $871,400
and general and administration of $216,800. These reductions in costs and
expenses are a direct result of the Company's reduction of overhead and costs
associated with mining properties.
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During the three and nine months ended February 28, 2002, the Company
increased its investment in RMG by purchasing RMG common shares previously sold
to third parties in private placements. This increase in ownership of RMG was
accomplished by the Company issuing shares of its common stock in exchange for
RMG common stock. As RMG does not currently have production, an impairment of
$1,622,700 related to goodwill from these transactions was taken against this
investment.
Other income at February 28, 2002 decreased for the nine months ended
February 28, 2001, primarily as a result of the Company recognizing $7,132,800,
net in litigation settlements during the nine months ended February 28, 2001.
These revenues were recognized as a result of a portion of the SMP litigation
issues being resolved. No similar revenues were recognized during the current
period.
During the quarter ending February 28, 2002, the Company made the decision
to permanently discontinue its contract drilling and construction operations.
These operations had operated at a loss for the three and nine months ended
February 28, 2002 of $9,600 and 63,700 respectively. This compares to losses of
$344,300 and $333,500 for the three and nine months ended February 28, 2001.
Operations for the nine months ended February 28, 2002 resulted in a loss
of $5,135,700 or $(0.58) per share both basic and fully diluted as compared to a
gain of $3,113,000 or $0.41 per share basic for the same period of the prior
year. The most significant factor in this reduction of profitability is the
litigation settlement revenue recognized during the nine months ended February
28, 2001.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about March 13, 2002, the Company's subsidiary, Sutter Gold Mining
Company, was served with a complaint filed in the Superior Court of Amador
County, California, case number 02CU2051. The plaintiff is Edward A. Swift
individually and as a trustee and the other defendant is Meridian Minerals
Company (Meridian). The litigation involves a mining lease entered into in 1989
between Plaintiffs and Defendant Meridian on the rental of Plaintiffs' land.
Plaintiffs contend Defendants owe them $136,186 for past due rent and some
$12,000 in unpaid taxes and for fence repair. Defendant Sutter Gold, has filed
an answer generally denying the complaint and the case is pending..
On or about April 1, 2002, the Company's subsidiary, Rocky Mountain Gas,
Inc. (RMG) was served with a Second Amended Complaint wherein the Northern
Plains Resource Council had filed suit in the U.S. District Court of Montana,
Billings Division in Case No. CV-01-96-BLG-RWA, against the U.S. BLM, RMG
certain of its affiliates and joined some 20 other defendants. The plaintiff is
seeking to cancel oil and gas leases issued to RMG et al by the BLM in the
Powder River Basin of Montana and for other relief. RMG and its affiliates have
not yet answered or otherwise pled to the complaint.
ITEM 2. CHANGES IN SECURITIES
(a)(1) From June 29 through October 18, 2001, we sold 389,667 shares of
restricted common stock to 18 accredited investors for $1,169,000
($3.00 per share). As part of the offering, warrants to purchase
77,933 shares were issued to the investors, expiring October 2003,
with an exercise price of $3.75 per share.
(a)(2) In October, 2001, we sold 200,000 shares of restricted commons stock
to an accredited investor and an accredited limited liability
company controlled by the accredited investor, for $500,000 ($2.50
per share). Warrants to purchase 50,000 shares, at $3.00 per share,
also were issued to these investors. These warrants expire in
October, 2003.
(a)(3) In December, 2001, we issued 910,320 shares of restricted common
stock to nine accredited investors in RMG, in exchange for their
earlier restricted common stock investments in RMG totaling
$3,568,500 plus interest owed to two of the investors. The offering
was priced at market ($3.92 per share on December 5, 2001). As a
result of the exchange, the Company's consolidated ownership of RMG
now is 91.8%.
(a)(4) In December, 2001, we issued 513,140 shares of restricted common
stock to the holder of 200 shares of preferred stock in the Company,
an accredited investor, in conversion of the $2,000,000 investment
in the preferred stock plus accrued interest, according to the terms
of the preferred stock (shares issued equal to principal plus
accrued interest divided by market price, $3.92 per share on
December 5, 2001).
(a)(5) In February, 2002, we sold 133,848 shares of restricted common stock
to 10 accredited investors for $435,000 ($3.25 per share), and also
issued to those investors warrants to purchase 26,768 shares, at
$4.00 per share. The warrants will expire two years after issuance.
(a)(6) In November, 2001, we paid VentureRound Group, LLC (VRG) for
financial consulting services by issuing to VRG warrants to purchase
11,034 shares of common stock, at $3.75 per share. The warrants
expire November 2, 2006.
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(b)(1) For the (a)(1) transactions, we paid our financial advisor VRG a
cash fee of $116,900 non accountable fees of $25,000 and also issued
warrants to VRG to purchase 38,966 shares of common stock at $3.75
per share. The warrants expire October 18, 2006
(b)(6) For the (a)(5) transactions, we paid (after February 28, 2002) our
financial advisor VRG a cash fee of $43,500 and issued warrants to
VRG to purchase 13,384 shares of stock at $4.00 per share. The
warrants will expire two years after issuance.
(c) See (a) subparagraphs above.
(d) All of the transactions described in the (a) subparagraphs were with
accredited persons, and the offer and sale of securities to all
investors (except VRG) were made under rule 506 of Regulation D. The
financial consulting services warrants issued to VRG were issued to
VRG in a section 4(2) transaction not involving a public offering by
the Company.
(e) Not applicable.
(f) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) Exhibits. None.
(b) REPORTS ON FORM 8-K. There were no reports filed by the Company on Form
8-K for the quarter ended February 28, 2002.
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: April 12, 2002 By: /s/ Keith G. Larsen
---------------------------------------
KEITH G. LARSEN,
President
Date: April 12, 2002 By: /s/ Robert Scott Lorimer
---------------------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer and
Chief Accounting Officer
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