FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal quarter ended November 30, 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
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U.S. ENERGY CORP.
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(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, address and 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
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State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 14, 1999
- ------------------------------------ ------------------------------------
Common stock, $.01 par value 7,718,253 Shares
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U.S. ENERGY CORP. and SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Condensed Consolidated Balance Sheets
November 30, 1998 and May 31, 1998.............................3-4
Condensed Consolidated Statements of
Operations Six Months Ended
November 30, 1998 and 1997.......................................5
Condensed Consolidated Statements of Cash Flows
Six Months Ended November 30, 1998 and 1997....................6-7
Notes to Condensed Consolidated
Financial Statements.............................................8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................9-13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................14-15
ITEM 4. Submission of Matters to be a Vote of Security Holders. . . . . 16
ITEM 5. Other Information...............................................16
ITEM 6. Exhibits and Reports on Form 8-K................................16
Signatures......................................................17
2
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
U.S. ENERGY CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
ASSETS
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<S> <C> <C>
November 30, May 31,
1998 1998
-------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and Cash Equivalents $5,900,800 $5,650,500
Accounts and notes receivable:
Trade 169,600 195,800
Affiliates 2,234,800 1,878,400
Current portion of long-term
notes receivables 335,800 335,800
Assets held for resale and other 1,256,600 1,100,800
SMP settlement receivable, net - - 5,026,000
Inventory 152,400 113,700
----------- -----------
TOTAL CURRENT ASSETS 10,050,000 14,301,000
INVESTMENTS
Affiliates 664,900 871,800
Restricted investments 9,075,900 8,889,100
----------- -----------
9,740,800 9,760,900
PROPERTIES AND EQUIPMENT 31,294,900 31,256,600
Less accumulated depreciation,
depletion and amortization (12,185,100) (11,806,300)
----------- -----------
19,109,800 19,450,300
OTHER ASSETS:
Accounts and notes receivable:
Real estate sales, net of valuation allowance 353,700 398,000
Employees 361,000 352,000
Other 1,000 1,800
Deposits and other 683,500 755,100
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1,399,200 1,506,900
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$40,299,800 $45,019,100
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
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U.S. ENERGY CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
LIABILITIES AND SHAREHOLDERS' EQUITY
November 30, May 31,
1998 1998
------------- -------------
(Unaudited)
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CURRENT LIABILITIES:
Accounts payable and accrued expenses $1,083,000 $1,836,400
Deferred GMMV purchase option 4,000,000 4,000,000
Current portion of long-term debt 340,500 225,700
------------ -------------
TOTAL CURRENT LIABILITIES 5,423,500 6,062,100
LONG-TERM DEBT 203,700 278,200
RECLAMATION LIABILITIES 8,860,900 8,778,800
OTHER ACCRUED LIABILITIES 3,983,300 4,266,800
DEFERRED TAX LIABILITY 1,144,800 1,144,800
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS IN SUBSIDIARIES 4,125,000 4,561,300
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;
authorized, 100,000 shares,
none issued or outstanding -- --
Common stock, $.01 par value;
20,000,000 shares authorized;
7,523,492 shares issued and outstanding 75,200 75,200
Additional paid-in capital 28,526,200 28,526,200
Accumulated deficit (11,004,800) (7,760,100)
Treasury stock, 911,643 shares, at cost (2,584,600) (2,460,800)
Unallocated ESOP contribution (927,000) (927,000)
----------- ------------
14,085,000 17,453,500
----------- ------------
$40,299,800 $45,019,100
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
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U.S. ENERGY CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
November 30, November 30,
------------------------ ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<TABLE>
<S> <C> <C> <C> <C>
REVENUES:
Mineral revenue $ 35,600 $ 52,900 $ 84,700 $ 969,100
Commercial revenues 451,800 850,200 1,994,900 2,409,500
Oil sales 34,700 28,100 53,700 76,600
Management and other fees 72,700 197,100 390,700 346,000
Interest 254,400 175,800 434,300 362,800
Gain on sales of assets -- (900) 54,300 (200)
----------- ----------- ---------- ------------
849,200 1,303,200 3,012,600 4,163,800
----------- ----------- ---------- ------------
COSTS AND EXPENSES:
Mineral operations $531,600 348,300 1,186,000 723,200
Commercial operations 865,400 799,700 1,823,300 1,637,500
General and administrative 1,413,000 798,000 3,423,500 1,409,700
Oil production 16,900 29,000 39,000 43,500
Interest 14,800 17,000 31,400 32,900
Construction costs 9,200 10,400 15,500 22,100
------------ ----------- ---------- ------------
2,850,900 2,002,400 6,518,700 3,868,900
------------ ----------- ---------- ------------
(LOSS) INCOME BEFORE
MINORITY INTEREST AND
EQUITY IN LOSS OF AFFILIATES (2,001,700) (699,200)(3,506,100) 294,900
MINORITY INTEREST IN LOSS
(INCOME) OF CONSOLIDATED
SUBSIDIARIES 44,300 83,900 305,000 (62,600)
EQUITY IN LOSS OF AFFILIATES-NET (30,100) (242,500) (43,600) (406,300)
------------ ----------- ----------- -----------
LOSS BEFORE FOR INCOME TAXES (1,987,500) (857,800) (3,244,700) (174,000)
PROVISION FOR INCOME TAXES -- -- -- --
------------ ----------- ----------- -----------
NET LOSS $(1,987,500) $ (857,800) $(3,244,700) $ (174,000)
============ =========== ============ ===========
NET LOSS
PER SHARE BASIC AND DILUTED $ ($.26) $ (0.13) $ (0.42) $ (0.03)
============ =========== =========== ===========
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 7,741,096 6,850,913 7,752,587 6,821,138
============ =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
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U.S. ENERGY CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
November 30,
---------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(3,244,700) $ (174,000)
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating activities:
Minority interest in (loss) income
of consolidated subsidiaries (305,000) 62,600
Increase in Reclamation Liabilities 82,100 --
Depreciation, depletion and amortization 384,500 481,800
Equity in loss of affiliates 43,600 406,300
Gain on sale of assets (54,300) 200
Other 71,600 (46,200)
Net changes in components
of working capital 3,464 500 (1,127,700)
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NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 442,300 (397,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of mining properties (5,000) (14,500)
Proceeds from sale of property and equipment 203,900 4,000
Increase in restricted investments (186,800) (259,400)
Purchase of property and equipment (188,600) (875,100)
Change in note receivable 36,100 23,000
Investments in affiliates 31,900 (345,700)
Deferred GMMV purchase option -- 4,000,000
- - ----------- -----------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (108,500) 2,532,300
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of options for common stock -- 220,000
Proceeds from long-term debt 201,000 160,900
Purchase of treasury stock (123,800) --
Payment on long-term debt (160,700) (211,100)
---------- -----------
NET CASH (USED IN)
FINANCING ACTIVITIES (83,500) 169,800
---------- -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 250,300 2,305,100
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 5,650,500 1,416,900
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $5,900,800 $3,722,000
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
6
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U.S. ENERGY CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
November 30,
----------------------------
1998 1997
---- ----
SUPPLEMENTAL DISCLOSURES:
Income tax paid $ 21,000 $ --
Interest paid $ 31,400 $ 15,900
========= =========
See notes to condensed consolidated financial statements.
7
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U.S. ENERGY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1) The Condensed Consolidated Balance Sheet as of November 30, 1998 and the
Condensed Consolidated Statements of Operations for the three and six months and
Cash Flows for the six months ended November 30, 1998 and 1997 have been
prepared by the Registrant without audit. The Condensed Consolidated Balance
Sheet as of May 31, 1998, has been taken from the audited financial statements
included in the Registrant's Annual Report on Form 10-K for the year then ended.
In the opinion of the Registrant, the accompanying financial statements contain
all adjustments (consisting of only normal recurring accruals) necessary to
fairly present the financial position of the Registrant and its subsidiaries as
of November 30, 1998 and May 31, 1998, the results of operations for the three
and six months ended November 30, 1998 and 1997, and the cash flows for the six
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 Registrant's May 31, 1998 Form 10-K.
The results of operations for the periods ended November 30, 1998 and 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 Registrant and 50% by the Registrant'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. (59%) and Four Nines Gold, Inc. (50.9%)
All material intercompany profits and balances have been eliminated.
4) Deferred income at November 30, 1998 and 1997 consists of the $4,000,000
Signing Bonus received when the Registrant and its subsidiary, Crested entered
into an Acquisition Agreement with Kennecott Uranium Company to acquire
properties. The amount was forfeitable until certain actions are taken by the
Registrant and Crested (See GMMV discussion in Item 2).
5) Accrued reclamation obligations and standby costs of $12,844,200 are the
Registrant'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.
6) 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 Registrant's
previously reported net income (loss) per common share.
7) Certain reclassifications have been made in the May 31, 1998 financial
statements to conform to the classifications used in November 30, 1998.
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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 periods included in the accompanying financial
statements.
Liquidity and Capital Resources
During the six months ended November 30, 1998, the Registrant and its
subsidiary Crested Corp. ("Crested") received $5,026,000 in cash as a result of
a partial settlement of Sheep Mountain Partners ("SMP") arbitration. Primarily
as a result of receiving these funds the cash position of the Registrant
increased to $5,900,800 at November 30, 1998 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 $155,800 and Accounts Receivable Affiliates of
$356,400. The components of the increase in assets held for resale and other
assets was an increase of $134,400 in prepaid insurance and $21,400 improvements
in assets held for sale by the Registrant's subsidiary Plateau Resources Ltd.
("Plateau"). Accounts Receivable Affiliates increased due to the Registrant and
Crested advancing funds for the Green Mountain Mining Venture ("GMMV")
operations. These advances had not yet been reimbursed by the GMMV at November
30, 1998, due to certain differences of opinion between the GMMV participants
relating to allowable charges under the temporary standby status of the GMMV
properties. As of December 31, 1998, the majority of these advances had been
repaid by the GMMV. The Registrant, Crested and Kennecott continue to work on
resolving the balance of the funds due the Registrant and Crested. Inventories
also increased by $38,700 as a result of operational needs of the Registrant's
subsidiaries Plateau and Western Executive Air, Inc.
The Current portion of long term debt increased by $114,800 during the six
months ended November 30, 1998. This increase in debt was as a result of
financing the Registrant and Crested"s annual insurance premium. Total long term
debt as a result of the financing of these insurance premiums along with other
minor financings resulted in an increase of $201,000 in long term debt. During
the six months ended November 30, 1998, there was also a reduction of long term
debt through cash payments of $160,700 for a net increase in long term debt of
$40,300.
During the six months ended November 30, 1998, the Registrant and its
consolidated subsidiaries purchased a various pieces of mining equipment for a
total of $188,600. In the normal course of evaluating equipment needs, the
Registrant and its subsidiary also received $203,900 in proceeds from the sale
of various pieces of equipment that were no longer needed to complete the
operations of the Registrant and its subsidiaries.
During the six months ended November 30, 1998, the Registrant 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
Registrant 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 is concluded or standby costs are offset
against the $4,000,000 deferred income until it is reduced to zero.
Capital Resources
General: The primary source of the Registrant's capital resources for the
remaining six months of Fiscal 1999 are the cash on hand at November 30, 1998;
the potential receipt of cash from the SMP Arbitration Award, possible equity
financing from affiliated companies, and proceeds under the line of
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credit after it is renewed. Additionally, the Registrant 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, aircraft
chartering and aviation fuel sales, also will provide cash.
Line of Credit: The Registrant and Crested have 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 Registrant and Crested. The
Registrant and Crested are currently negotiating with the commercial bank to
increase the line of credit. No assurance can be given that the line of credit
will be increased. The commercial bank however has given initial indications
that at a minimum the line of credit will be renewed in its initial amount of
$1,000,000 during the third quarter of 1999. It is anticipated that the line of
credit may 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 among other conditions. As of November 30, 1998, the prices for these
metals remained depressed and it is not known when they will recover. The
Registrant 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 Registrant 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 Registrant believes that cash on hand at November 30, 1998 and
the anticipated proceeds from the Nukem litigation 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 Registrant's mineral properties. For these
expansions the Registrant and Crested continue to seek joint venture partners.
Capital Requirements
General: The primary requirements for the Registrant'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 Registrant's portion
of the costs associated with the GMMV properties should the Registrant elect to
participate in the holding costs and corporate general and administrative
expenses.
SGMC: The Registrant 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 Registrant 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.
Due primarily to the sustained decline in gold prices during Fiscal 1998,
the Registrant 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 Registrant 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 Registrant acknowledges that it may 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. As of the six months ended November 30, 1998, the Registrant
was continuing its search for development capital and has several interested
parties, however no financing commitments has been obtained.
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SMP: As part of a settlement agreement reached during the fourth quarter of
1998, the SMP mines and associated properties were transferred to the Registrant
and Crested. The holding and reclamation costs associated with these mining
properties are the responsibility of the Registrant and Crested. The holding
costs historically have been approximately $85,000 per month. The Registrant 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 Registrant
and Crested's real estate assets. The dollar amount for the reclamation bond is
reviewed annually by State regulatory agencies. The Registrant 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 Registrant and Crested have determined that
the SMP mining properties should be maintained and prepared for production in
the future when the price of uranium increases into the $15 per pound range or
at such time as the Registrant 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
obligations during the balance of Fiscal 1999 that the Registrant 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 Registrant and Crested also
received one of the market related delivery contracts which had previously
belonged to SMP. There is one delivery under this contract during the third
quarter of Fiscal 1999. The delivery requirement was sold to a third party and
the Registrant and Crested will make a nominal amount of profit on the sale
during the third quarter of 1999. As of November 30, 1998, the Registrant has no
additional delivery or financing commitments for the sale or purchase of uranium
during Fiscal 1999.
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 have made the financing of the acquisition of
Kennecott's interest in the GMMV more difficult. The Registrant 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 will continue to be
maintained. Kennecott's obligation to fund the first $50 million in expenditures
is now satisfied and the Registrant and Crested will be obligated to fund their
50% of the ongoing costs. 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 Registrant,
Crested and Kennecott are desirous that the expenses be held to a minimum. The
Registrant and Crested will need to elect to either participate in the standby
costs or become diluted by not participating.
Certain disagreements as to how the holding costs from July 1998 forward
are to be funded have existed between Kennecott and the Registrant and Crested.
Until such time as the disagreements are resolved and a firm understanding is
arrived at, no estimate as to any potential financial commitment for the holding
costs of the properties to the Registrant and Crested can be made. If the GMMV
participants are not able to resolve the disagreements on holding cost
obligations, the GMMV contracts direct such disagreements to arbitration for
resolution.
Plateau: Plateau owns and operates the Ticaboo townsite, motel, convenience
store and restaurant. Additionally, Plateau owns and maintains the Tony M
uranium mine and Shootaring Uranium mill. The Registrant and Crested are
currently working to obtain the necessary permits from the State of Utah to
place the Shootaring mill into production. The Registrant 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
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as the financing is received and profitable contracts are obtained, the
Registrant 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 six months ended November 30, 1998 the reclamation liability on
the Plateau properties was increased by $82,100 to provide for estimates made by
regulatory agencies. The Registrant 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.
Yellow Stone Fuels Corp. ("YSFC"): In Management's opinion, YSFC has
sufficient cash to complete its projected 1999 exploration program on its
in-situ uranium properties. As of November 30, 1998, YSFC owed the Registrant
and Crested $400,000 in a convertible promissory note plus interest at 10% per
annum. The note was not paid on the due date of December 31, 1998. The directors
of YSFC and management of the Registrant and Crested are discussing how the note
will be retired. At the time of this filing, it is anticipated that the note
will be retired partially in cash and partially in stock of YSFC pursuant to the
terms of the note and will be completely retired during March of 1999.
Additional amounts of money totaling $157,800 have been advanced by the
Registrant and Crested for YSFC for a total indebtedness at November 30, 1998 of
$577,800 plus accrued interest. YSFC has sufficient cash on hand to retire this
indebtedness.
Term Debt: Debt to third parties at November 30, 1998 was $544,200 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 and
various purchases of equipment.
Reclamation Obligations: It is not anticipated that any of the Registrant'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 Registrant owns an
interest in will enter the reclamation phase prior to May 31, 1999.
Other: The Registrant and Crested currently are not in production on any
mineral properties, and development work continues on several of their major
investments. The Registrant 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
Registrant 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 Registrant and USE met with the Appeals Office of the IRS in
Denver, Colorado to discuss resolving issues raised for Fiscal 1993 and 1994.
The Registrant 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
Six Months Ended November 30,1998 Compared to Six Months Ended November 30, 1997
During the six months ended November 30, 1998, revenues decreased from
those revenues reported during the same period of the previous year by
$1,151,200 to total revenues of $3,012,600. The major reduction was as a result
of the Registrant not receiving any revenues from the delivery of uranium on one
of the SMP contracts. During the six months ended November 30, 1997, the
Registrant recognized $969,100 in revenue from the profits derived from a SMP
contract delivery. No such revenues were recognized during the six months ended
November 30, 1998. Revenues from Management Fees
12
<PAGE>
increased by $44,700 during the six months ended November 30, 1998 over the same
period of the previous year as a result increased expenditures at the GMMV on
which the Registrant recognized a management fee.
Costs and expenses for the six months ended November 30, 1998 increased by
$2,649,800 over the same period of the previous year. The increase in costs
primary came as a result of increased activity on mineral properties, associated
with decline development in June and July on the GMMV properties and subsequent
shut down expenses of the GMMV properties, Sutter Gold permitting and Plateau
permitting of mine and mill properties and real estate development. Commercial
operations and increased general and administrative overhead to supervise the
increased activity also contributed to increased general and administrative
costs. The Registrant and Crested also paid bonuses to four employees as
recognition of the extraordinary dedication they had given to their work in the
SMP arbitration/litigation. These bonuses, which included taxes due, were
$561,000. 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, it is not anticipated that the properties will be placed into
production in Fiscal 1999. A decision was however made in July 1998 to place the
GMMV mines on active standby. The Registrant is therefore anticipating
reductions in costs.
As a result of the reduced revenues and increased costs discussed above,
operations for the six months ended November 30, 1998 resulted in a loss of
$3,244,700 or $0.42 per share as compared to a loss of $174,000 or $0.03 per
share for the quarter ended November 30, 1997.
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 Registrant 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 Registrant and affiliates. The
vendors have confirmed to the Registrant that all of the Registrant's software
and information systems are Year 2000 compliant.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
Sheep Mountain Partners Arbitration/Litigation
In 1991, disputes arose between USE/Crested and Nukem, Inc. and its
subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation
and operation of the Sheep Mountain Partners ("SMP") 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 both the arbitration
proceedings and the State Court case. In February 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 73 hearing days before a three member panel of the AAA, the Panel
entered an Order and Award on April 18, 1996 and supplemented the Order on July
3, 1996. The Orders were ultimately confirmed by the U.S. District Court of
Colorado in its Second Amended Judgment on June 27, 1997. Please see "Item 3.
Legal Proceedings" in the Registrant's 1998 Form 10-K for more details of this
arbitration/litigation. Nukem/CRIC appealed the decision of the U.S. District
Court to the 10th Circuit Court of Appeals (CCA) and on September 24, 1998, oral
arguments were made to a three judge panel. On October 22, 1998, the 10th CCA
affirmed the Second Amended Judgment issued by the Federal Court which had
confirmed the AAA Orders and Award, and issued its Mandate on November 13, 1998.
Thereafter, Nukem and CRIC filed a motion in the U.S. District Court seeking to
stay the execution of the Judgment and offered to deposit in Court the net
amount of the monetary judgment due USECC of $5,971,596 in full satisfaction of
the Second Amended Judgment. USECC filed a response alleging that the equitable
portion of the Judgment granting USECC a one half interest in the contracts
Nukem had to purchase uranium from CIS republics, had not been satisfied and
requested the Court to deny the Motion of Nukem/CRIC. USECC also filed a motion
to compel the bonding company which posted the supersedeas bond for Nukem/CRIC,
to pay the monetary amount of the Second Amended Judgment. As of January 13,
1999, no ruling on the motions had been received from the U.S. District Court.
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, Canyon 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") The motions were
denied by the Court and USE posted a supersedeas bond for $275,000 to appeal the
judgment. The appeal is pending.
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 lode
mining claims owned by Parador Mining Company Inc. ("Parador") which were
initially leased to a predecessor of BGBI. The two mining 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
14
<PAGE>
assignment were made subject to the earlier lease to BGBI's predecessor. Please
see "Item 3, Legal Proceedings " of Registrant's 1998 Form 10-K for more details
of this litigation. The record on appeal has been filed with the Nevada Supreme
Court and USE, Crested and Parador have until January 26, 1999 to file their
opening brief and appendix.
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 in July 1998. Please see "Item 3. Legal Proceedings " of
Registrant's 1998 Form 10-K for more details of this litigation. The DOE filed a
motion to dismiss the complaint claiming that the U.S. Congress withdrew its
consent to be sued in connection with the adoption of the law privatizing USEC
Inc. and that USEC Inc. must be joined as an indispensable party. The State of
Wyoming moved to join in the litigation on behalf of the plaintiffs. A hearing
was held on the motions on January 8, 1999 before the U.S. District Court in
Cheyenne, WY and the Court took the motions 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. (all referred to as,
"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
subject to certain conditions precedent. If all conditions are met by January
15, 1999, the case will be resolved. Otherwise, the lawsuit will continue.
15
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders
On December 4, 1998 an annual meeting of shareholders was held and two
proposals were presented to shareholders for a vote.
Proposal one was for election of directors. Two directors, Harold F. Herron
and David W. Brenman were reelected for a term expiring on the third succeeding
annual meeting and until their successors are duly elected or appointed and
qualified. With respect to the election of the two directors, the votes cast
were as follows:
<TABLE>
<S> <C> <C> <C> <C>
Name of Director For Against Abstain Withheld
- ---------------- --- ------- ------- --------
Harold F. Herron 6,180,617 3,973 302,119 20
David W. Brenman 6,174,721 9,889 302,119 0
</TABLE>
With respect to Proposal Number 2: To amend the 1996 Stock Award Program, the
Amendment received the following number of votes:
<TABLE>
<S> <C> <C> <C>
For Against Abstain
--- ------- -------
3,087,236 669,897 28,095
</TABLE>
The Registrant's Board of Directors consists of seven members and Messrs.
Herron and Brenman will continue to serve with John L. Larsen, Max T. Evans, H.
Russell Fraser and Nick Bebout whose terms of office as directors continued
after the Annual Meeting of Shareholders held on December 4, 1998.
ITEM 5. Other Information
On September 28, 1998 the Registrant announced that it would begin
purchasing up to 500,000 shares of its common shares in the open market. The
purchase of shares will take place over time and will depend on the market price
of the Registrant's common shares. The purchases will be made from cash on hand
and future earnings. As of the date of the filing of this report the Registrant
had purchased a total of 45,700 common shares at a purchase price of $123,800.
On December 28, 1998, the Utah Department of Water Quality began a 30 day
public advertisement of a notice for public comments on the water discharge and
construction permit for the tailings facility at Shootaring Canyon uranium mill
in southeast Utah. If there are no substantial and significant comments from the
public by January 11, 1999, there will be no public hearing and Registrant's
affiliate Plateau Resources Ltd. should receive the discharge and construction
permit.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. None.
(b) Reports on Form 8-K. On October 22, 1998, the Registrant filed a Report
in Item 5 on Form 8-K during the second quarter ended November 30, 1998. The
Report was on the decision of the 10th CCA affirming the Second Amended Judgment
entered by the U.S. District Court of Colorado in favor of USE and Crested and
against Nukem/CRIC and the subsequent motions filed thereafter with the District
Court by the Parties.
16
<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, there unto duly authorized.
U.S. ENERGY CORP.
(Registrant)
Date: October 14, 1998 By: /s/ Keith G. Larsen
------------------------------------
KEITH G. LARSEN,
President
Date: October 14, 1998 By: /s/ Robert Scott Lorimer
------------------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer and
Chief Accounting Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000101594
<NAME> U.S. Energy Corp. 10Q
<MULTIPLIER> 1
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<EXCHANGE-RATE> 1
<CASH> 5,900,800
<SECURITIES> 0
<RECEIVABLES> 2,404,400
<ALLOWANCES> 0
<INVENTORY> 152,400
<CURRENT-ASSETS> 10,050,000
<PP&E> 31,294,900
<DEPRECIATION> (12,185,100)
<TOTAL-ASSETS> 40,299,800
<CURRENT-LIABILITIES> 5,423,500
<BONDS> 0
0
0
<COMMON> 75,200
<OTHER-SE> 14,009,800
<TOTAL-LIABILITY-AND-EQUITY> 40,299,800
<SALES> 2,048,600
<TOTAL-REVENUES> 964,000
<CGS> 1,862,300
<TOTAL-COSTS> 6,487,300
<OTHER-EXPENSES> (261,400)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,400
<INCOME-PRETAX> (3,244,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,244,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,244,700)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> 0
</TABLE>
