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, 1998 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 NORTH 8TH WEST, RIVERTON, WY 82501
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (307) 856-9271
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NOT APPLICABLE
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(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, 1998
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Common stock, $.01 par value 7,242,839 Shares
<PAGE>
U.S. ENERGY CORP.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Condensed Consolidated Balance Sheets
February 28, 1998 and May 31, 1997.............................3-4
Condensed Consolidated Statements of
Operations Three and Nine Months
Ended February 28, 1998 and
February 28, 1997..............................................5-6
Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 28, 1998
and February 28, 1997..........................................7-8
Notes to Condensed Consolidated
Financial Statements..........................................9-10
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................11-15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................16-17
ITEM 4. Submission of Matters to Security Holders for Vote...........17-18
ITEM 5. Other Information............................................18-19
ITEM 6. Exhibits and Reports on Form 8-K................................19
Signatures......................................................20
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
U.S. ENERGY CORP. AND AFFILIATES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
February 28, May 31,
1998 1997
<S> <C> <C>
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,224,500 $ 1,416,900
Accounts receivable
Trade, net of valuation allowance
of $15,700 and $27,800, respectively 235,600 368,200
Related parties 1,664,300 1,191,000
Current portion long-term
notes receivables 337,200 337,200
Inventory 63,700 96,000
Assets held for resale and other 905,900 991,600
----------- -------------
TOTAL CURRENT ASSETS 5,431,200 4,400,900
LONG-TERM NOTES RECEIVABLE 745,800 1,477,900
INVESTMENTS IN CONTINGENT
STOCK PURCHASE WARRANT 4,594,000 4,594,000
INVESTMENTS IN AFFILIATES
Affiliates 4,868,700 4,999,600
Restricted 8,921,900 8,506,300
----------- -------------
13,790,600 13,505,900
PROPERTY AND EQUIPMENT 16,159,200 14,843,000
Less accumulated depreciation,
depletion and amortization (9,275,000) (8,802,100)
----------- -------------
6,884,200 6,040,900
OTHER ASSETS: 394,900 367,500
----------- -------------
$31,840,700 $ 30,387,100
=========== =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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U.S. ENERGY CORP. AND AFFILIATES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
February 28, May 31,
1998 1997
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 501,900 1,312,600
Deferred revenue 4,000,000 --
Current portion of long-term debt 141,000 81,300
----------- -----------
TOTAL CURRENT LIABILITIES 4,642,900 1,393,900
LONG-TERM DEBT 186,400 183,100
RECLAMATION LIABILITY 8,751,800 8,751,800
OTHER ACCRUED LIABILITIES 4,676,500 5,259,000
DEFERRED TAX LIABILITY 183,300 183,300
MINORITY INTERESTS 90,300 --
COMMITMENTS AND CONTINGENCIES
FORFEITABLE COMMON STOCK
$.01 par value; issued 229,606 shares and 223,900,
respectively, forfeitable until earned 1,958,000 1,892,400
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; issued, 6,732,945 and 6,646,475
shares respectively 67,300 66,500
Additional paid-in capital 22,921,400 22,543,000
Accumulated deficit (8,528,200) (6,776,900)
Treasury stock at cost, 690,943 shares (2,182,000) (2,182,000)
Unallocated ESOP contribution (927,000) (927,000)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 11,351,500 12,723,600
----------- -----------
$31,840,700 $30,387,100
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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U.S. ENERGY CORP. AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY NINE MONTHS ENDED FEBRUARY
28, 1998 28, 1997 28, 1998 28, 1997
<S> <C> <C> <C> <C>
REVENUES:
Mineral sales $ -- $ -- $ 858,700 $ --
Construction contract revenues -- 157,600 -- 935,300
Commercial operations 697,800 389,500 3,107,300 1,458,300
Oil Sales 48,400 62,700 125,000 125,000
Gain (loss) on sale of assets -- -- (200) (19,900)
Mineral property transactions 46,200 26,900 156,600 75,300
Interest 211,100 236,100 573,900 522,700
Management fees and other 162,100 104,900 508,100 172,500
-------- ------- ---------- ---------
1,165,600 977,700 5,329,400 3,269,200
COSTS AND EXPENSES:
Costs of mineral sold -- -- -- --
Mineral operations 375,400 228,800 1,098,600 545,700
Construction costs 11,300 118,000 33,400 682,600
Commercial operations 641,300 739,400 2,278,800 2,190,200
Oil production 8,800 32,500 52,300 71,200
General and administrative 1,454,700 835,100 2,865,200 1,869,600
Interest 17,000 29,400 49,900 91,600
-------- ---------- ---------- ---------
2,508,500 1,983,200 6,378,200 5,450,900
--------- ---------- ----------- ---------
(Continued)
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY NINE MONTHS ENDED FEBRUARY
28, 1998 28, 1997 28, 1998 28, 1997
<S> <C> <C> <C> <C>
INCOME (LOSS) BEFORE MINORITY INTEREST
EQUITY OF AFFILIATES AND
PROVISION FOR INCOME TAXES (1,342,900) (1,005,500) (1,048,800) (2,181,700)
MINORITY INTEREST IN (GAIN)
LOSS OF CONSOLIDATED
SUBSIDIARIES (27,700) 231,100 (90,300) 575,000
EQUITY IN LOSS OF AFFILIATES (205,900) (106,000) (612,200) (338,500)
----------- ----------- ----------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES (1,576,500) (880,400) (1,751,300) (1,945,200)
PROVISION FOR INCOME TAXES -- -- -- --
---------- ---------- ---------- ----------
NET INCOME (LOSS) $(1,576,500) $ (880,400) $(1,751,300) $(1,945,200)
============ =========== ============ ===========
NET GAIN (LOSS) PER SHARE $ (0.23) $ (0.13) $ (0.26) $ (0.29)
=========== ========== ========== =========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 6,850,913 6,654,863 6,842,679 6,642,253
=========== ========== ========== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
FEBRUARY 28,
------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,751,300) $(1,945,200)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Minority interest in gain (loss)
of consolidated subsidiaries 90,300 (575,000)
Depreciation 475,800 475,500
Depletion and amortization 207,700 56,500
Equity in loss from affiliates 612,200 338,500
Loss on sale of assets 200 19,900
Non-cash compensation 31,300 119,600
Deferred revenue 4,000,000 4,207,700
Other accrued liabilities (582,500) (537,600)
Other assets (27,400) (8,600)
Net changes in components of working capital (1,175,500) (975,100)
----------- -----------
NET CASH FROM PROVIDED BY
OPERATING ACTIVITIES 1,880,800 1,176,200
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of mining properties (16,500) (455,400)
Development of gas properties -- (29,100)
Proceeds from sale of assets 4,000 193,500
Increase in restricted investments (415,600) (277,800)
Purchase of property and equipment (1,306,800) (100,200)
Changes in notes receivable 732,100 58,800
Investments in affiliates (481,300) (616,400)
Proceeds from sale of subsidiary stock -- 1,246,100
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (1,484,100) 19,500
(Continued)
</TABLE>
See Notes to Condensed Consolidated Financial Statements
7
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
FEBRUARY 28,
------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of options and warrants for common stock 347,900 1,239,300
Purchase of treasury stock -- (78,400)
Proceeds from long-term debt 307,700 412,300
Repayments of long-term debt (244,700) (1,004,000)
----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 410,900 569,200
----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 807,600 1,764,900
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,416,900 992,600
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,224,500 $ 2,757,500
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Income tax paid $ -- $ 37,200
=========== ===========
Interest paid $ 49,900 $ 91,600
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
8
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) The Condensed Consolidated Balance Sheet as of February 28, 1998, the
Condensed Consolidated Statements of Operations for the three and nine months
ended February 28, 1998 and February 28, 1997, and the Condensed Consolidated
Statements of Cash Flows for the nine months ended February 28, 1998 and
February 28, 1997, have been prepared by the Company ("USE") without audit. The
Condensed Consolidated Balance Sheet as of May 31, 1997, 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, 1998 and May 31, 1997, the results of operations for
the three and nine months ended February 28, 1998 and February 28, 1997 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, 1997 Form 10-K. The
results of operations for the periods ended February 28, 1998 and February 28,
1997 are not necessarily indicative of the operating results for the full year.
3) The consolidated financial statements of the Registrant 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 (51.9%), Plateau
Resources Limited ("Plateau") (100%) and Four Nines Gold, Inc. ("FNG") (50.9%)
All material intercompany profits and balances have been eliminated.
4) Deferred revenue consists of a $4,000,000 Signing Bonus received in the
quarter ended August 31, 1997 when the Company and its subsidiary, Crested
entered into an Acquisition Agreement with Kennecott Uranium Company
("Kennecott") to acquire Kennecott's interest in the Green Mountain Mining
Venture ("GMMV") which owns certain uranium properties and the Sweetwater Mill
in Wyoming.
5) Debt as of February 28, 1998 consists of various equipment and other
property loans totaling $215,100 and debt attributable to consolidated
affiliates of $112,300 on Four Nines Gold. Certain inter-affiliate loans were
eliminated during consolidation.
6) Accrued reclamation obligations of $8,751,800 represent the Company's
share of a reclamation liability at the Crooks Gap Mining District and the full
obligation at the Shootaring Uranium Mill. The reclamation work may be performed
over several years.
9
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Continued
7) Net (loss) per share is computed using the weighted average number of
common shares outstanding during each period. The dilutive effect of stock
options is not included in the computation, as it is not material.
8) Certain reclassifications have been made in the May 31, 1997 financial
statements to conform to the classifications used in February 28, 1998.
10
<PAGE>
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 Registrant's liquidity, capital resources and
results of operations during the period included in the accompanying financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended February 28, 1998, the Company's current
assets increased by $1,030,300 to a balance of $5,431,200. This increase is
primarily due to a net increase of cash $807,600 and an increase of $473,300 in
Accounts Receivable related parties. The increase in cash was a result of the
Acquisition Agreement entered into during the three months ended August 31, 1997
between the Company, its subsidiary Crested and Kennecott. As a result of the
Acquisition Agreement the Company and Crested received a $4,000,000 signing
bonus and a loan of $16,000,000 to continue to develop the Green Mountain Mining
Venture (GMMV) mining properties. The $4,000,000 signing bonus was forfeitable
through December 1, 1997, unless certain conditions were met by the Company and
Crested. Although the conditions were met and the signing bonus was no longer
forfeitable, under generally accepted accounting principals the $4,000,000
continues to be carried as a deferred revenue item until such time as the
Acquisition Agreement is closed or terminated. If the Acquisition Agreement is
terminated, the GMMV will continue to hold the properties and only Kennecott
will be responsible for paying back the amount loaned under the $16,000,000
development loan to a Kennecott affiliate and the 50% interest of USE and
Crested will not be impacted.
The Company also received cash in the amount of $858,700 on a consolidated
basis for the sale of uranium under a Sheep Mountain Partners (SMP) contract;
$156,600 as an advance royalty from Cyprus/AMAX; $292,600 as a net profits
interest royalty from the sale of The Brunton Company; $333,300 as a payment on
the note receivable from the sale of The Brunton Company, and $347,900 as a
result of various employees exercising stock options and warrants. As a result
of the GMMV operations, the Company and Crested invoiced the GMMV a total of
$5,438,500 for direct costs, management fees and equipment rental during the
nine months ended February 28, 1998. Of the total amount invoiced to GMMV,
$1,245,900 (an increase of $424,900) had not been paid as of February 28, 1998.
However, the quarter-end balance was paid in full in March of 1998. The Company
and Crested continued to fund SMP and the Plateau operations. SMP has not
reimbursed the Company and Crested for their direct costs for maintaining the
SMP properties on standby and is subject to the Arbitration Panel's Award and
pending litigation.
Other current assets increased by approximately $85,700 primarily as a
result of an increase in prepaid insurance.
The primary uses of cash by the Company and Crested were the reduction of
Accounts
11
<PAGE>
Payable of $810,700; purchases of Property Plant and Equipment of $1,306,800;
increases in the Investment in Affiliates of $481,300; the increase of
Restricted Investments of $415,600 as a result of the reinvestment of interest
earned on Plateau's cash investments to cover Reclamation Liabilities; the
repayment of Long Term Debt of $244,800; and the reduction of Other Accrued
Liabilities pertaining to Plateau of $582,700. In addition to the reduction of
Notes Receivable on the sale of The Brunton Company referred to above, the
Company and Crested's Chairman and CEO retired $432,000 in amounts owed to the
Company and Crested. This was done as a result of the decision of the Company's
board of director and compensation committee granting the Company's and
Crested's chairman and CEO John L. Larsen a bonus of $615,000 for his excellent
work in acquiring Kennecott as a joint venture partner in 1990 for $15,000,000
in cash plus a $50,000,000 commitment to USECC to develop the Green Mountain
properties; the negotiations of Mr. Larsen in acquiring Plateau Resources Ltd.
with the Shootaring Mill and the most recent negotiations for USECC to enter
into the Acquisition Agreement to acquire Kennecott's interest in the GMMV
resulting in the signing bonus of $4,000,000 to the Company and Crested.
Companies and Mr. Larsen agreed that the bonus is further in full settlement of
the $1,000,000 bonus to Mr. Larsen authorized by the board of directors in 1993
which was conditioned on the spot price of uranium concentrates and cash
distributions from the GMMV to the Company.
The primary requirements for the Company's working capital continue to be
funding of on-going administrative expenses; mine and mill holding and start up
costs of Plateau; the holding costs of the SMP mines; on-going litigation
expenses associated with the SMP dispute, and certain uranium delivery costs
associated with SMP utility contracts. Nukem and CRIC are currently making most
of the SMP uranium deliveries. No assurance can be given that this method of
delivery will continue. The capital requirements to fill the Company's and
Crested's portion of the remaining commitments in fiscal 1998 will depend on the
spot market price of uranium and may also be dependent on the outcome of the
Arbitration/ Litigation Award involving Nukem and CRIC, which Nukem and CRIC
have appealed to the 10th Circuit Court of Appeals.
The primary source of the Company's capital resources for the remainder of
fiscal 1998 will be reimbursement available through the GMMV (see discussion
below); cash on hand; the potential settlement of the Nukem/CRIC
Arbitration/Litigation; uranium deliveries pursuant to the SMP contracts;
borrowing from financial institutions (primarily the line of credit), and the
sale of equity or interests in investment properties. Commercial Operations at
the Ticaboo Townsite in Utah; fees from oil production; rentals of various real
estate holdings and equipment, and the sale of aviation fuel will also provide
cash.
The Company, Crested and Sutter Gold Mining Company ("SGMC") are currently
seeking additional financing for the construction of the gold processing mill
and mine development of SGMC. See discussion under SGMC below. An additional $8
million in financing is being sought. However, there is no assurance that the
funds will be raised.
The expenditures for the SMP care and maintenance costs may require
additional funding, depending on the outcome of the SMP arbitration. See Part
II, Item 1 "Legal Proceedings" below.
12
<PAGE>
GMMV
On June 23, 1997, the Company and Crested d/b/a USECC signed an
Acquisition Agreement with Kennecott for the right to acquire Kennecott's
interest in the GMMV for $15,000,000 and other considerations. This information
was previously reported in the Company's Form 10-Q (Item 2) for the fiscal
quarter ended August 31, 1997. As a result of this Agreement, it is believed
that no internal funding will be required by the Company and Crested for the
GMMV at either the Sweetwater Mill or the Jackpot Mine.
Pursuant to the Acquisition Agreement which includes the Mineral Lease,
and the Mill Contract, USECC is developing the proposed Jackpot Mine and working
with Kennecott in preparing the Sweetwater Mill for renewed operations. Such
work is being funded from the $16,000,000 provided to the GMMV by Kennecott.
Under the Fourth Amendment of the GMMV Agreement (which amendment was affected
pursuant to the Acquisition Agreement), Kennecott will be entitled to a credit
against its original $50,000,000 commitment to fund the GMMV, in the amount of
two dollars of credit for each one dollar of such funds out of the $16,000,000
provided by Kennecott to the GMMV, plus the $4,000,000 bonus paid to the Company
and Crested on signing of the Acquisition Agreement.
Closing of the Acquisition Agreement is subject to the Company and Crested
satisfying several conditions on or before the extended closing date of October
30, 1998. If the Acquisition Agreement is never closed, Kennecott and USECC,
shall own their respective 50% interest in the GMMV, and the obligation to repay
the $16,000,000 loan shall remain Kennecott's obligation, without any adverse
effect on the 50% interest in the GMMV held by the Company and Crested.
SUTTER GOLD MINING COMPANY
The preliminary prospectus to qualify a previous special warrant offering
prospectus of SGMC common stock has been filed with the Ontario Securities
Commission with a copy to the Toronto Stock Exchange. An additional $8 million
must be raised to fund the development costs to place the SGMC properties in
production. It is not anticipated that any of the Company's funds will be
required to fund these operations. Subsequent to the quarter ended February 28,
1998, the Company purchased certain Special Warrants of Sutter Gold. Please
refer to Item 5 below. It is unlikely SGMC will be listed on the Toronto Stock
Exchange until such time as gold prices recover further from the drop in prices
during 1997.
SHEEP MOUNTAIN PARTNERS
Nukem and CRIC filed their opening brief in their appeal to the 10th
Circuit Court of Appeals on December 12, 1997. The Company and Crested filed
their answer brief on January 12, 1998. Thereafter, Nukem and CRIC filed a reply
brief. On April 13, 1998, the Deputy Clerk of Court advised all counsel that a
three-judge panel had reviewed the briefs and record on appeal and oral
arguments are not needed. See Item 1, Part II below. No assurance can be given
as to the ultimate outcome.
13
<PAGE>
Until such time as these issues are resolved, the Company and Crested may
be required to fund the standby costs of the Sheep Mountain Partners' mines. The
Company and Crested have filed a lien on the SMP properties as a protection for
the payment of past and future standby costs for which they have not been
reimbursed by Nukem/CRIC and filed suit in Wyoming to foreclose the lien. The
case has been stayed and the issues will be heard in the Denver District court.
See Item 1, Part II below.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED FEBRUARY 28, 1998 COMPARED TO THREE AND NINE MONTHS
ENDED FEBRUARY 28, 1997
Revenues for the nine months ended February 28, 1998, increased by
$2,060,200 over the same period of the prior year. The increase in revenues
primarily is as a result of a delivery pursuant to one of the SMP delivery
contracts wherein a net profit of $858,700 was recognized by the Company and
Crested and an increase of $1,649,000 in commercial revenues which consist
primarily of the rental of equipment, real estate and the retail operations at
the Ticaboo Townsite in southern Utah. There were no uranium sales during the
nine months ended February 28 1998. The increase of equipment rentals is as a
result of increased equipment rentals to the GMMV under the June 23, 1997
Acquisition Agreement discussed above. Construction revenues decreased $935,300
during the nine months ended February 28, 1998, as a result of the Company's
subsidiary Four Nines Gold, Inc. concentrating all of its efforts and equipment
on the mine development at the Jackpot uranium mine and having no third party
contracts. Management fees and Other Revenues increased by $335,600 during the
nine month period ended February 28, 1998, over the same period ended February
28, 1997, due primarily to management fees charged on increased activities
provided to various subsidiary companies and partnerships by the Company and
Crested.
Other than a reduction of construction costs in the amount of $649,200 and
increases in Commercial Operations of $88,600; Mineral Operations of $552,900
and General and Administrative expenses of $995,500, costs and expenses remained
relatively constant with those experienced during the nine month period of the
prior year. Mineral Operations and General and Administrative expenses increased
due primarily to additional staff to administer the development of the GMMV and
Plateau mining properties and the bonus given to the Company and Crested's
chairman and CEO. Commercial expenses increased due to increased activity at the
commercial real estate operations in Southern Utah. Construction expenses
decreased due to limited activity in Four Nines Gold outside the Company owned
activities.
Equity in Loss of Affiliates increased by $273,700 over the prior year
during the nine months ended February 28, 1997; to a total of $612,200. This
increase consisted of losses of $19,100 and $254,600 from SMP and Yellow Stone
Fuels Corp., respectively.
14
<PAGE>
Operations for the nine month period ended February 28, 1998, resulted in
a loss of $1,751,300 or $0.26 per share as compared to a loss of $1,945,200 or
$0.29 per share for the same period from the previous year. The decrease in the
loss is primarily as a result of increased revenues for the sale of Uranium and
the rental of equipment which were offset by increases in mineral costs, and the
increased administrative costs associated with expanded operations. Operations
for the three months ended February 28, 1998, resulted in a loss of $1,576,500
or $0.23 per share as compared to a loss of $880,400 or $0.13 per share during
the quarter ended February 28, 1997. This increase in the loss for the quarter
is primarily associated with the bonus given the Company's chairman and CEO and
increased costs associated with mining operations and administrative costs.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
(a) SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION. The information called
for in this Item 1 has been previously reported in the Company's Form 10-K (Item
3) for the fiscal year ended May 31, 1997 and Item 1, Part II of the Company's
Form 10-Q for the quarters ended August 31, 1997 and November 30, 1997. This
report discloses the status of the consensual arbitration/litigation in the U.S.
District Court of Colorado and 10th Circuit Court of Appeals involving the
Company and Crested Corp. d/b/a USECC and Nukem, Inc. and its wholly-owned
subsidiary Cycle Resource Investment Corp. (CRIC) over disputes involving the
Sheep Mountain Partners (SMP) partnership concerning the marketing and sale of
uranium and mining operations in Wyoming. As was reported earlier, a Second
Amended Judgment was entered on June 30, 1997, by Judge Lewis T. Babcock of the
U.S. District Court of Colorado wherein the Court again confirmed the
Arbitration Award ordering Nukem to pay USECC a net of approximately $8,600,000
as monetary damages and imposing a constructive trust in favor of SMP on Nukem's
rights to purchase CIS uranium, the uranium acquired pursuant to those rights
and the profits therefrom (the "CIS contracts"). Nukem/CRIC filed a motion for
clarification and/or limited remand of the Second Amended Judgment. On August
13, 1997, the U.S. District Court denied the motion. Nukem and CRIC then filed
an amended notice of appeal of the District Court's Judgment, Amended Judgment
and Second Amended Judgment with the 10th Circuit Court of Appeals. USECC filed
a motion to increase the supersedeas bond Nukem posted for $8,613,600 to cover
the value of the CIS contracts, but the 10th Circuit Court denied the motion.
Nukem/CRIC filed their Appellants' opening brief with the 10th Circuit Court of
Appeals on December 12, 1997. USECC filed its Appellees' brief on January 12,
1998. Nukem/CRIC filed a reply brief on January 26, 1998. On April 13, 1998,
Company received a notice to all counsel in the appeal from the Deputy Clerk of
the 10th Circuit Court advising that the case was referred to a three-judge
panel and after examination of the briefs and record on appeal, the panel was of
the unanimous opinion that oral arguments were not needed. Nukem and CRIC have
the opportunity to file within ten days a statement to the Court of reasons for
oral argument. The Court also required Nukem and CRIC to initiate a mandatory
settlement conference and a report of the proposed conference shall be filed
with the Clerk.
(b). BGBI LITIGATION. The information called for in this Item 1 has been
previously reported in the Company's Form 10-K (Item 3) for the fiscal year
ended May 31, 1997 and Item 1 Part II of the Company's Form 10-Q for the quarter
ended November 30, 1997. This report discloses the status of the lawsuit filed
by Plaintiff Bond Gold Bullfrog Inc. in Nye County, NV against the Defendants
Company, Crested and Parador Mining Company, Inc. regarding Parador's lease to
Bond Gold of two patented mining claims. On December 18, 1997, at a hearing
before the District court on motions for summary judgment by all parties, the
Court granted various motions of the parties but denied plaintiff's motions for
summary judgment on the breach of Parador's lease and the issue of specific
performance by plaintiff. The Court denied defendants' motion for summary
judgment on plaintiff's claim for breach of contract. Thus, the issues of breach
of contract by both these defendants and BGBI for specific performance remained
and were tried before the Court commencing on January 26, 1998. After the trial,
the Court found against the parties on their respective claims and the plaintiff
and these defendants filed a Notice of Cross-Appeal and Notice of appeal,
respectively to the Nevada Supreme Court. The record on appeal has been filed
with the Nevada Supreme Court and the appeals process is now underway.
16
<PAGE>
(c) On September 16, 1991, Company and Crested d/b/a USECC as plaintiffs,
filed Civil Action No. 91CV7082 in the Denver District Court, wherein plaintiffs
were seeking reimbursement of $85,000 per month from the spring of 1991 for
maintaining the SMP uranium mines at Crooks Gap on a standby basis. On behalf of
SMP, CRIC filed an answer, affirmative defenses and a counterclaim against
plaintiffs denying that SMP owed plaintiffs any money. Plaintiffs filed a Motion
for Summary Judgment and the Denver District Court Judge denied the motion and
stayed all proceedings until the case involving plaintiffs and CRIC and Nukem
were resolved in the U.S. District Court for Colorado. This matter was submitted
to arbitration in February 1994, and on April 18, 1996, the Arbitration Panel
awarded USECC $2,512,823 plus per diem interest of $616 against Nukem and CRIC
jointly and severally, for standby costs through March 31, 1996. When Nukem and
CRIC appealed the confirmation of the Arbitration Award, they posted a
supersedeas bond to cover this portion of the Award. USECC continued to maintain
the SMP underground and open pit mines in Fremont County, Wyoming so USECC filed
a lien for such expenditures on the SMP mining properties from March 31, 1996.
In 1997 USECC filed a civil action to foreclose the lien in a Wyoming District
Court. Nukem and CRIC resisted the foreclosure case in Wyoming claiming the
Denver District Court had jurisdiction because of the forum selection clause
referred to Colorado as the jurisdiction for such claim in the Operating
Agreement between SMP and USECC. The Court enjoined USECC from proceeding with
the foreclosure action in the Wyoming Court and various pleadings have been
filed by both parties in the Denver District Court where the case is now
pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 5, 1997, an annual meeting of shareholders of the Company was
held and two proposals were presented to shareholders for a vote.
Proposal #1 was for election of one director to serve until the third
succeeding annual meeting. The votes cast were as follows.
NAME OF DIRECTOR FOR AGAINST ABSTAIN WITHHELD
John L. Larsen 5,759,948 11,382 16,243 -0-
Mr. Larsen was elected to the Board of Directors to serve until the third
Annual Meeting of Shareholders and until his successor is elected or appointed
and qualified.
The Company's Board of Directors consists of seven members and John L.
Larsen will continue to serve with Messrs. Don Anderson, Nick Bebout, Russell
Fraser, David W. Brenman, Harold F. Herron and Keith G. Larsen whose terms of
office as directors continued after the annual meeting of shareholders held on
December 5, 1997.
Proposal #2 was to consider amending the 1996 Stock Award Program to
extend the Program through 2007 and eliminate the requirement of annual
shareholder approval of the number of shares awarded each year. The vote was as
follows:
17
<PAGE>
FOR AGAINST ABSTAIN NO VOTES
PROPOSAL #2 3,128,146 321,959 37,446 2,300,022
-----------
ITEM 5. OTHER INFORMATION
Subsequent to February 28, 1998, USE entered into four separate Stock
Purchase Agreements with four Canadian investment funds, for the issuance of
658,895 shares of Common Stock of USE, in consideration of the funds' payment to
USE of US$1,190,000 in cash and the delivery to USE of 888,900 Special Warrants
of Sutter Gold Mining Company ("SGMC"), a subsidiary of USE. The funds had paid
SGMC a total of Cdn$4,888,950 in May 1997, pursuant to a private offering in
Canada, to purchase the Special Warrants from SGMC. Each Special Warrant
entitled the holder to acquire from SGMC, at no further cost, one share of
Common Stock of SGMC, and one Purchase Warrant; each Purchase Warrant would have
entitled the holder to purchase one share of Common Stock of SGMC, at a price of
Cdn $6.00 per whole share (the "Purchase Warrants"), during the 18 months
following the May 1997 closing of the offering of the SGMC Special Purchase
Warrants.
Pursuant to the terms and conditions of the Special Warrants, if SGMC were
to fail to obtain prospectus qualification before the October 10, 1997
qualification deadline (as such terms were defined in the Special Warrants) from
the securities commissions of the Canadian Provinces wherein purchasers of the
Special Warrants reside, the holders of the Special Warrants would be entitled
to receive a dilution penalty in the amount of 1.1 shares of Common Stock of
SGMC and 1.1 Purchase Warrants, for each Special Warrant exercised after the
qualification deadline if prospectus qualification were not obtained by the
qualification deadline. Such qualification required listing of the SGMC shares
and Purchase Warrants on a principal Canadian stock exchange.
The prospectus qualification has not been obtained by SGMC, due to the
drop in gold prices during the latter part of 1997 and the resulting lack of
interest in new listings of gold companies in the Canadian markets. However,
none of the four Canadian funds, nor any other investor in the Canadian
offering, has received additional shares of SGMC Common Stock or additional
Purchase Warrants in payment of the dilution penalty with respect to the Special
Warrants and their constituent securities.
Each of the four Canadian funds, in order to diversify and increase their
original investment, made offers to USE to purchase shares of Common Stock of
USE. Each of the four funds, and USE, negotiated the terms of acceptance of the
funds' offer by USE. As a result of the offer and subsequent negotiations with
each of the funds, USE entered into the four Stock Purchase Agreements with the
funds.
As of the date hereof, pursuant to the Stock Purchase Agreements, USE has
received consideration for its issued shares consisting of (i) net cash
proceeds, from all four funds, of US$1,102,464 (after deduction of US$87,536 in
legal fees and a fee paid to a Canadian investment banking firm); (ii) 684,300
Special Warrants of SGMC (from three of the four funds);
18
<PAGE>
and (iv) the relinquishment by each of the four funds of their rights to the
dilution penalty. USE has issued 546,365 shares of Common Stock as of the date
hereof in consideration of the cash, the Special Warrants received to date and
the relinquishments. The USE shares are restricted securities. Pursuant to the
terms of the Stock Purchase Agreements, USE will file a resale registration
statement with the Securities and Exchange Commission, to permit the resale of
the subject shares by the funds. When the registration statement is declared
effective, the balance of 112,530 shares of USE Common Stock will be issued to
the fourth fund, and that fund will deliver its 204,600 Special Warrants to USE
in payment for such 112,530 shares of USE Common Stock. Such 112,530 shares of
USE Common Stock issued to the fourth fund will be included in the resale
registration statement.
The dilution penalty, if paid, would have resulted in the issuance to the
funds of an additional 88,890 shares of Common Stock of SGMC and Purchase
Warrants to buy another 88,890 shares of Common Stock of SGMC. USE will retain
the SGMC Special Warrants acquired to date from three of the funds (and will
retain the fourth fund's Special Warrants when acquired). It is possible that
the dilution penalty may have to be paid with respect to Canadian investors in
the Special Warrants other than the four Canadian funds.
The Stock Purchase Agreements closed as of April 7, 1998, at which date the
closing bid price of USE shares was US$6.876. A price of US$7.00 was utilized by
the funds and by USE for purposes of determining the number of USE shares to be
issued under the Stock Purchase Agreements. There will not be any adjustment in
the terms of the fourth fund's Stock Purchase Agreement for any changes in USE
share market prices when the final portion of that Agreement is closed.
The USE Compensation Committee is to review the transaction with the above
four funds on a division of the SGMC Special Warrants acquired by USE, between
USE aqnd Crested and make its recommendation to the boards of directors of
Crested and USE.
The accounting treatment of the transaction with the funds will be set
forth in the full year financial statements for USE, which will be included in
the Form 10-K Report for fiscal year ending May 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. None.
(b) Reports on Form 8-K. There were no Reports filed by the Registrant on
Form 8-K during the quarter ended February 28, 1998.
19
<PAGE>
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
20
<PAGE>
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<PERIOD-END> Feb-28-1998
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