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, 1999 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____ to ____
Commission file number 0-6814
U.S. ENERGY CORP.
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(Exact Name of Company as Specified in its Charter)
Wyoming 83-0205516
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West, Riverton, WY 8250
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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 January 14, 2000
- ---------------------------- -------------------------------
Common stock, $.01 par value 8,895,110 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, 1999 and May 31, 1999.................................3-4
Condensed Consolidated Statements of
Operations for the Three and Six Months Ended
November 30, 1999 and 1998...........................................5
Condensed Consolidated Statements of Cash Flows
Six Months Ended November 30, 1999 and 1998........................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
November 30, May 31,
1999 1999
------------- -------------
(Unaudited)
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CURRENT ASSETS:
Cash and Cash Equivalents $ 5,619,500 $ 10,173,000
Accounts receivable:
Trade, net of allowance for
doubtful accounts of $27,800 730,100 223,100
Affiliates 674,900 1,063,400
Assets held for resale and other 1,228,300 1,116,200
Inventory 168,600 143,200
------------- -------------
TOTAL CURRENT ASSETS 8,421,400 12,718,900
INVESTMENTS
Affiliates 887,000 751,600
Restricted investments 9,240,400 9,160,400
------------- -------------
10,127,400 9,912,000
PROPERTIES AND EQUIPMENT 21,200,900 19,607,800
Less accumulated depreciation,
depletion and amortization (10,488,900) (10,171,300)
------------- -------------
10,712,000 9,436,500
OTHER ASSETS:
Accounts and notes receivable:
Real estate sales 24,900 20,400
Employees 369,500 366,600
Deposits and other 845,300 936,600
------------- -------------
1,239,700 1,323,600
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$ 30,500,500 $ 33,391,000
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
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U.S. ENERGY CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
LIABILITIES AND SHAREHOLDERS' EQUITY
November 30, May 31,
1999 1999
------------- -------------
(Unaudited)
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CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,103,400 $ 1,229,600
Deferred GMMV purchase option 4,000,000 4,000,000
Current portion of long-term debt 202,000 126,000
------------ ------------
TOTAL CURRENT LIABILITIES 5,305,400 5,355,600
LONG-TERM DEBT 749,700 786,700
RECLAMATION LIABILITIES 8,860,900 8,860,900
OTHER ACCRUED LIABILITIES 3,449,300 3,734,500
DEFERRED TAX LIABILITY 1,144,800 1,144,800
MINORITY INTERESTS 566,200 856,500
COMMITMENTS AND CONTINGENCIES
FORFEITABLE COMMON STOCK $.01 par value;
339,208 shares issued,
forfeitable until earned 2,471,700 2,471,700
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;
8,621,376 and 8,550,624 shares
issued respectively 86,300 85,600
Additional paid-in capital 33,266,800 33,014,900
Accumulated deficit (21,837,800) (19,408,600)
Treasury stock, at cost,
943,144 and 865,943
shares respectively (2,635,800) (2,584,600)
Unallocated ESOP contribution (927,000) (927,000)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 7,952,500 10,180,300
------------- -------------
$ 30,500,500 $ 33,391,000
============= =============
</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,
-------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
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REVENUES:
Mineral sales $ 32,800 $ 35,600 $ 67,100 $ 84,700
Coal bed methane gas
operations 763,100 -- 763,100 --
Commercial operations 619,100 451,800 1,702,400 1,994,900
Oil sales 35,200 34,700 46,100 53,700
Management fees and other 310,200 72,700 429,900 390,700
Interest 166,500 254,400 392,400 434,300
Gain on sales of assets -- -- -- 54,300
------------ ------------ ------------ ------------
1,926,900 849,200 3,401,000 3,012,600
COSTS AND EXPENSES:
Mineral operations 848,700 531,600 1,398,100 1,186,000
Construction costs 303,900 9,200 306,600 15,500
Commercial operations 922,000 865,400 1,847,600 1,823,300
General and
administrative 1,182,400 1,413,000 2,348,200 3,423,500
Oil production 15,000 16,900 16,900 39,000
Interest 9,500 14,800 14,400 31,400
------------ ------------ ------------ ------------
3,281,500 2,850,900 5,931,800 6,518,700
------------ ------------ ------------ ------------
LOSS BEFORE MINORITY
INTEREST AND EQUITY IN LOSS
OF AFFILIATES (1,354,600) (2,001,700) (2,530,800) (3,506,100)
MINORITY INTEREST IN LOSS
OF CONSOLIDATED
SUBSIDIARIES 39,500 44,300 104,500 305,000
EQUITY IN LOSS OF AFFILIATES
- NET (2,500) (30,100) (2,900) (43,600)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,317,600) (1,987,500) (2,429,200) (3,244,700)
PROVISION FOR INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET LOSS $(1,317,600) $(1,987,500) $(2,429,200) $(3,244,700)
============ ============ ============ ============
NET LOSS PER SHARE
BASIC AND DILUTED $ (0.16)$ $ (0.26) $ (0.30) $ (0.42)
============ ============ ============ ============
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 8,025,672 7,741,096 7,992,667 7,752,587
============= ============ ============ ============
</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
Six Months Ended
November 30,
------------------------------
1999 1998
---- ----
(Unaudited) (Unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,429,200) $(3,244,700)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest in loss
of consolidated subsidiaries (104,500) (305,000)
Increase in reclamation liabilities -- 82,100
Depreciation 285,900 384,500
Equity in loss from affiliates 2,900 43,600
Gain on sale of assets -- (54,300)
Other 91,300 71,600
Net changes in components of working capital (690,300) 3,464,500
------------ ------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (2,843,900) 442,300
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in cash from acquisition of subsidiary 37,600 --
Development of mining properties (38,900) (5,000)
Proceeds from sale of property and equipment -- 203,900
Increase in restricted investments (80,000) (186,800)
Purchase of property and equipment (1,514,600) (188,600)
Change in notes receivable, net (7,400) 36,100
Investments in affiliates (145,300) 31,900
------------ ------------
NET CASH USED IN
INVESTING ACTIVITIES (1,748,600) (108,500)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 186,600 201,000
Purchase of treasury stock -- (123,800)
Repayments of long-term debt (147,600) (160,700)
------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 39,000 (83,500)
------------ ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (4,553,500) 250,300
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 10,173,000 5,650,500
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 5,619,500 $ 5,900,800
============ ============
</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
Six Months Ended
November 30,
--------------------------------
1999 1998
----------- -----------
(Unaudited) (Unaudited)
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SUPPLEMENTAL DISCLOSURES:
Income tax paid $ -- $ --
======== ========
Interest paid $ 14,400 $ 31,400
======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 14,400 $ 31,400
======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Payment of receivable-affiliate
with stock from affiliate $ 70,400 $ --
======== ========
Issuance of stock for additional
interest in subsidiaries
$252,600 $ --
======== ========
Consolidation of subsidiary in the
second quarter of FY 2000
Other assets $ -- $ --
Investment in affiliates 27,700 --
Property, plant and equipment 7,900 --
Accounts payable and
accrued expenses 10,400 --
Minority Interest 18,400 --
Treasury stock 51,200 --
</TABLE>
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, 1999 and the
Condensed Consolidated Statements of Operations for the three and six months and
Cash Flows for the six months ended November 30, 1999 and 1998 have been
prepared by the Company without audit. The Condensed Consolidated Balance Sheet
as of May 31, 1999, has been taken from the audited financial statements
included in the Company's Annual Report on Form 10-K for the year then ended. In
the opinion of the Company, the accompanying financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to fairly
present the financial position of the Company and its subsidiaries as of
November 30, 1999 and May 31, 1999, the results of operations for the three and
six months ended November 30, 1999 and 1998, 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 Company's May 31, 1999 Form 10-K.
The results of operations for the periods ended November 30, 1999 and 1998 are
not necessarily indicative of the operating results for the full year.
3) The consolidated financial statements of the Company include 100% of the
accounts of USECB Joint Venture ("USECB" or "USECC") which is owned 50% by the
Company and 50% by the Company's subsidiary, Crested Corp. (Crested). The
consolidated financial statements also reflect 100% of the accounts of its
majority-owned subsidiaries: Energx Ltd. (90%), Crested (52%), Plateau Resources
Limited (100%) Sutter Gold Mining Co. (62.6%), Four Nines Gold, Inc. (50.9%),
Yellowstone Fuels (23.5%) and for the period ended November 30, 1999 Ruby Mining
Company (67%). All material intercompany profits and balances have been
eliminated.
4) Deferred GMMV Purchase Option at November 30, 1999 and May 31, 1999
consists of the $4,000,000 Signing Bonus received when the Company and its
subsidiary, Crested entered into an Acquisition Agreement with Kennecott Uranium
Company to acquire properties. (See GMMV discussion in Item 2).
5) Accrued reclamation obligations and standby costs of $12,310,200 are the
Company's share of a reclamation liability at the SMP mining properties and the
full obligation at the Shootaring Uranium Mill. The reclamation work may be
performed over several years.
6) Certain reclassifications have been made in the May 31, 1999 financial
statements to conform to the classifications used in November 30, 1999.
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ITEM 2. Management's Discussion and Analysis of Financial Conditio
and Results of Operations.
The following is Management's Discussion and Analysis of significant
factors which have affected the Company's liquidity, capital resources and
results of operations during the periods included in the accompanying financial
statements.
Liquidity and Capital Resources
During the six months ended November 30, 1999, the Company experienced a
decrease in working capital in the amount of $4.2 million. This decrease
resulted in working capital of $3.1 million at November 30, 1999 as compared to
working capital of $7.3 million at May 31, 1999. The primary components of this
decrease in working capital were reductions of $4.5 million in cash and cash
equivalents, a reduction of $388,500 in accounts receivable affiliates and an
increase of $39,000 in long term debt.
Cash was consumed by operations, $2.8 million, and investing activities,
$1.7 million, while financing activities provided $39,000 in cash and cash
equivalents. Accounts receivable affiliates decreased primarily as a result of
the Company receiving payments from its affiliates Green Mountain Mining Venture
("GMMV"), $432,400 and Ruby Mining Company ("RUBY"), $70,400. These reductions
in accounts receivable affiliates were offset by increases in accounts
receivable from other affiliates.
The Company determined during the six months ended November 30, 1999 to
enter into the coal bed methane gas business. As a result of this decision the
Company invested $160,000 in a newly formed subsidiary company, Rocky Mountain
Gas, Inc. ("RMG"). As a result of this decision, the Company refurbished various
drill rigs and support equipment and have purchased additional drill equipment.
These capital expenditures for drilling equipment consumed an additional $1.1
million in cash. Additionally the Company's affiliates Plateau Resources
("Plateau") and Sutter Gold Mining Company ("SGMC") purchased $328,100 and
$40,900 respectively in new equipment. With these funds Plateau developed its
boat storage and gravel crushing businesses and SGMC purchased assets to develop
its tourism business. The company also purchased additional interests in SGMC
and Yellow Stone Fuels Corp. ("YSFC") by issuing 70,753 shares of its common
stock in exchange for shares of SGMC and YSFC.
The increase in cash from financing activities is as a result of increased
debt third parties primarily for the financing of prepaid insurance premiums and
miscellaneous equipment in the amount of $186,600. During the six months ended
November 30, 1999, long term debt was reduced by $147,600. The Company also
entered into an agreement with RUBY to accept 11,000,000 shares of RUBY's common
stock in payment of $70,400 of debt due the Company. As a result of this
transaction, the Company became the owner of 67% of the common stock of RUBY
during the six months ended November 30, 1999. RUBY therefore was consolidated
as of November 30, 1999 which increased cash by $37,600.
Reductions of working capital were partially offset by increases in
accounts receivable trade, $507,000, other assets $112,100 and a reduction of
$126,200 in accounts payable and accrued liabilities. Accounts receivable trade
increased primarily as a result of contract drilling and construction work that
is being performed by the Company in the coal bed methane gas business. Other
assets increased as a result of the Company recording prepaid insurance amounts
which will be amortized over the entire fiscal year and work that Plateau
performed on its real estate assets which are being held for resale.
The Company reported a $4,000,000 deferred purchase option at November 30,
1999 and May 31, 1999. This option is as the result of Kennecott Energy paying
the Company a signing bonus upon the execution of the Acquisition Agreement on
June 23, 1997. The option is non-refundable and will be offset against any
future cash commitments the Company may incur on the GMMV properties.
9
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Capital Resources
General: The primary source of the Company's capital resources for the
remaining six months of fiscal 2000, are the cash on hand at November 30, 1999;
contract drilling and construction operations in coal bed methane gas; possible
equity financing from affiliated companies; proceeds under the line of credit;
and the potential receipt of cash from the SMP Arbitration Award. During the
quarter and six months ended November 30, 1999, the Company recognized $763,100
in revenues from drilling and construction contracts. The majority of this
amount was recorded during the month of November 1999.
The Company has successfully financed a portion of the new equipment
acquisitions as well as equipment that it and its affiliates had purchased
previously. To preserve cash, the Company continue to seek equipment financing.
Additionally, the Company will continue to offer for sale various assets such as
equipment, lots and homes in Ticaboo, Utah, real estate holdings in Wyoming,
Colorado and Utah and mineral interests. Interest, rentals of real estate
holdings and equipment, and aviation fuel sales, also will provide cash.
Financing: During the six months ended November 30, 1999, the Company
became involved in the exploration phase of coal bed methane gas as drilling and
construction contractors for third parties. The Company also entered into an
agreement to purchase 185,000 acres of coal bed methane gas leasehold interests
land. To secure the land, the Company formed RMG. To fund the purchase and
development of the coal bed methane gas lease hold interests RMG is seeking
equity funding.
To acquire a 50% working interest in the 185,000 acres of leaseholds, RMG
paid $3.2 million to Quantum Energy, ("Quantum") at closing on January 3, 2000.
RMG agreed to pay Quantum an additional $1.0 million on May 1, 2000 and $1.3
million on or before December 31, 2000. If these payments are not made, the 50%
working interest could be reduced. It is contemplated that the Company will
conduct the drilling and construction work on these and other properties which
will generate significant revenues. It is further projected that RMG will
receive significant revenues from the coal bed methane gas production. No
assurance can be given as to the actual amount of coal bed methane gas that will
be produced from the RMG properties. The Company and its subsidiary Crested
Corp. ("Crested") own a controlling interest in RMG.
Equity financing for Sutter Gold Mining Company ("SGMC") and Plateau are
dependent on the market price of gold and uranium among other conditions. As of
November 30, 1999, the prices for these metals remained depressed and it is not
known when they will recover. The Company continues to be optimistic concerning
the future markets for these metals but cannot 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, the working capital of the Company could be
impacted negatively due to holding costs of the properties. The Company
continues to pursue alternative uses for these properties including tourism at
the SGMC properties and alternate feed or waste disposal at the Plateau
properties.
Line of Credit: The Company has a $1,000,000 line of credit with a
commercial bank. The line of credit is secured by various real estate holdings
and equipment belonging to the Company. It is anticipated that this line of
credit may be used to finance short term working capital needs. The Company is
currently seeking an increase in their line of credit through financial
institutions to fund expanding operations.
Summary: The Company believes that cash on hand at November 30, 1999,
proceeds from drilling and construction contracts, and its line of credit will
be adequate to fund working capital requirements through fiscal 2000. However,
these capital resources will not be sufficient to provide funding for the
Company's mineral property acquisitions and development or projected business
expansions.
10
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Capital Requirements
General: The primary requirements for the Company's working capital during
the remainder of fiscal 2000 are expected to be the costs associated with the
development activities of Plateau, SGMC, care and maintenance costs of the
former SMP uranium properties, payments of holding fees for mining claims,
business expansion and development costs associated with the coal bed methane
gas and alternative feed/waste disposal businesses and corporate general and
administrative expenses.
SGMC: The Company owns a majority interest in SGMC and is therefore
responsible for the ongoing administrative and development costs of the
properties owned by SGMC. The Company continues its efforts to secure financing
to place the SGMC properties in California into production.
SGMC is developing alternate uses of its mineral properties until such time
as production of gold is profitable. SGMC is developing various facilities to
utilize its properties in the tourism business. SGMC is currently seeking either
debt or equity financing to fund these operations. Should these efforts be
unsuccessful, the development of the tourism business will be curtailed or the
cash reserves of the Company and USE will be needed to complete the development
of these assets.
Sheep Mountain Mines: The holding and reclamation costs associated with the
Sheep Mountain uranium mineral properties are the responsibility of the Company.
The holding costs during 1999 were approximately $57,000 per month. The Company
continues to search for improved techniques that will reduce these monthly
costs. The future reclamation costs on the Sheep Mountain properties are covered
by a reclamation bond which is secured by the pledge of certain of the Company's
real estate assets. The reclamation bond amount is reviewed annually by the
state regulatory agencies. The Company's portion of the reclamation liability on
the Sheep Mountain properties is $1,451,800 and is shown as "Reclamation
liability" within the condensed consolidated balance sheet.
It is not anticipated that the Sheep Mountain properties will be placed
into production during Fiscal 2000. The Company have determined that the Sheep
Mountain mining properties should be maintained and prepared for production in
the future when the price of uranium increases to the level where the Company is
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 expenditures expected during the
balance of Fiscal 2000 that the Company is aware of on the Sheep Mountain
properties.
GMMV: In 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.
The management committee of the GMMV is endeavoring to reduce the holding costs
of the GMMV mineral and mill properties. The Company has notified the GMMV
management committee that they have elected to be a non-participating partner in
funding current holding and reclamation costs. By making this election, the
Company will be diluted pursuant to the terms of the GMMV contract. It is not
believed that the dilution in the short term will be material to the Company
ownership interest in the GMMV.
On November 10, 1999, Kennecott Uranium Company, ("KUC") and Kennecott
Energy Company filed a court action in the Wyoming State Court against the
Company and Crested. In its action KUC expressed its opinion that the GMMV was
no longer economically viable and asked relief from the court to allow the
termination of GMMV and the dissolution of assets. The Company and Crested do
not agree with the allegation made by KUC and are in the process of filing their
responses. The ultimate outcome of these actions on the cash resources of the
Company cannot be predicted as of November 30, 1999.
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 Canyon Uranium mill. The Company owns Plateau but
shares in the cash flow streams of the properties with Crested on a 50-50 basis.
The Company is currently seeking joint venture partners and equity financing to
enter into the alternative feed and waste disposal businesses. Currently,
discussions are underway with third parties and investment
11
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banking firms regarding the expansion into these business opportunities. The
Company will continue to fund the costs of permitting and stand-by costs
associated with the properties. Expansion into the alternate feed and waste
disposal businesses will require additional capital. The commercial operations
of Plateau continue to improve.
The reclamation liability on the Plateau properties is $7.4 million which
is reflected on the Balance Sheet as a reclamation liability. This liability is
fully covered by cash investments which are recorded as long term restricted
assets. It is not anticipated that any reclamation of the Plateau properties
will occur in the balance of Fiscal 2000. At such time as reclamation is begun
the cash on deposit will be used.
Yellow Stone Fuels Corp. ("YSFC"): In Management's opinion, YSFC has
sufficient cash to fund its limited operations. YSFC continues to maintain its
mineral interests and look for additional business opportunities. It is not
anticipated that the Company will be obligated to advance funds on behalf of
YSFC.
Term Debt and Other Obligations: Debt to non-related parties at November
30, 1999, was $951,900 compared to $912,700 at May 31, 1999. The increase in
debt to non-related parties consists primarily of debt due on the financing of
annual insurance premiums. The balance of the debt to non-related parties is for
the purchase of land and buildings at SGMC and various pieces of heavy equipment
and bears different interest rates with various maturity dates. All payments on
the debt are current.
Reclamation Obligations: It is not anticipated that any of the Company's
working capital will be used in Fiscal 2000 for the reclamation of any of its
mineral property interests. The reclamation costs are long term and are either
bonded through the use of cash bonds or the pledge of assets. It is not
anticipated that any of the mining properties in which the Company owns an
interest will enter the reclamation phase prior to May 31, 2000. GMMV is in the
process of reclaiming of an open pit mine near the Sweetwater Mill which was
developed by a previous owner. It is believed that the cost of reclamation will
be covered by a commitment by the prior owner to provide the initial $8 million
in reclamation. These funds are to be recovered from a future production through
the Sweetwater Mill override until such time as they are repaid.
Other: The Company is currently not in production on any mineral
properties. The Company is not using hazardous substances or known pollutants to
any great degree in the maintenance of mineral properties or the development of
new businesses. Consequently, recurring costs for managing hazardous substances,
and capital expenditures for monitoring hazardous substances or pollutants have
not been significant. The Company is not aware of any claims for personal injury
or property damages that need to be accrued or funded. The Company maintains
both workers compensation and liability insurance coverage which they believe
cover any claims that may exist.
The tax years through May 31, 1994 are closed after audit by the IRS. The
Company is currently in hearings with the Appeals Office of the IRS in Denver,
Colorado to discuss resolving issues raised for Fiscal 1995 and 1996. Although
no definite outcome can be predicted, the Company believes that there will not
be a material cash impact from the ultimate outcome of these hearings.
Results of Operations
Six and Three Months Ended November 30, 1999 Compared to Six and Three
Months Ended November 30, 1998
During the six months ended November 30, 1999, revenues increased by
$388,400 to $3,401,000 as compared to revenues of $3,012,600 during the six
months ended November 30, 1998. During the quarter ended November 30, 1999
revenues increased by $1,077,700. This increase was primarily associated with
the contract drilling and construction work the Company has been doing in the
coal bed methane gas business. During the six months and quarter ended November
30, 1999, the Company recorded revenues of $763,100 from these contracts. No
similar revenues were recognized during the comparative periods of 1998. The
other increases in revenues during the six months ended November 30, 1999 were
commercial revenues, $90,400,
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as a result of increased fuel sales at the Company's airport operations and
increased revenues at the Plateau commercial operations of $225,300.
These increased revenues for the six months ended November 30, 1999, were
offset by decreased rental of equipment to the GMMV. The reduction of work on
the GMMV properties was as a result of low spot prices for uranium and the
inability of the Company to raise the funds to purchase Kennecott Energy's
interest in the GMMV. The GMMV management committee determined in late July 1998
to significantly reduce expenditures at its mineral properties. This curtailment
reduced the rental of equipment revenues and management fees previously received
by the Company from GMMV.
Costs and Expenses for the six months ended November 30, 1999, decreased by
$586,900 when compared with those expenses incurred during the six months ended
November 30, 1998 while expenses for the quarter ended November 30, 1999
increased by $430,600. During the quarter and six months ended November 30,
1999, the Company reported coal bed methane gas associated costs of $302,600.
General and Administrative expenses decreased for the six months ended November
30, 1999 by $1,075,300. This decrease is primarily as a result reduced activity
on the GMMV properties, reduced legal expenses related to the Sheep Mountain
Partners arbitration/litigation and a bonus which was paid during the six months
ended November 30, 1998 to two employees for their work on the SMP settlement.
The bonus was the award of common shares of the Company's common stock.
Operations for the six months ended November 30, 1999, resulted in a loss
of $2,429,200 or $0.30 per share as compared to a loss of $3,244,700 or $0.42
per share for the six months ended November 30, 1999. The improvement in the
profitability of the Company during the six months ended November 30, 1999, is
primarily attributable to the contract drilling and contract work in the coal
bed methane gas business and a reduction of General and Administrative expenses.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Sheep Mountain Partners Arbitration/Litigation
In 1991, disputes arose between USE/Crested (USECC), 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 against USECC by CRIC in June 1991 before
the American Arbitration Association ("AAA"). A three member panel of the AAA
held hearings on the SMP and entered an Order and Award in April 1996 and
supplemented it in July 1996, which were ultimately confirmed by the U.S.
District Court of Colorado in its Second Amended Judgment (the "Judgment").
Please see Item 3 of the Company's 1999 Form 10-K for more details of this
arbitration/litigation. Nukem appealed the Judgment of the U.S. District Court
to the 10th Circuit Court of Appeals (10th CCA). On October 22, 1998, the 10th
CCA issued its Order and Judgment affirming the District Court's Judgment
(without modification). The Judgment ordered Nukem/CRIC to pay USECC a monetary
award and ordered the uranium purchase contracts Nukem entered into with three
CIS republics including the purchase rights, the uranium acquired pursuant to
those rights and the profits therefrom be impressed with a constructive trust in
favor of SMP of which USECC owned one half.
On November 13, 1998, Nukem/CRIC filed motions for entry of full
satisfaction of the Judgment if Nukem/CRIC paid only the balance remaining due
on the monetary portion of the Judgment. USECC responded opposing the motions
and requesting payment of the balance of the monetary award. On February 8,
1999, the District Court denied the motion of Nukem/CRIC for entry of final
satisfaction of the Judgment and ordered Nukem/CRIC to forthwith pay USECC the
balance of $5,971,600 plus interest of $105,700. Nukem/CRIC made that payment to
USECC on February 9, 1999.
On April 28, 1999, USECC filed a petition in the U.S. District Court to
dissolve SMP and for an accounting. Nukem/CRIC responded that the District Court
did not have jurisdiction and again filed a motion seeking entry of final
satisfaction of the Judgment. On July 16, 1999, the District Court again denied
the motion of Nukem/CRIC for entry of final satisfaction of Judgment and denied
USECC's petition for dissolution because neither USECC nor Nukem/CRIC petitioned
the Court for dissolution of SMP before the Court entered its Second Amended
Judgment. On August 2, 1999, Nukem/CRIC filed a Notice of Appeal to the 10th CCA
of the District Court's July 16, 1999 Order. Thereafter, USECC filed a request
with the District Court for post judgment assistance to compel Nukem to account
for its profits on the CIS contracts. USECC also filed a motion to dismiss the
appeal of Nukem/CRIC to the 10th CCA. The post judgment request and the motion
to dismiss are pending before the Courts.
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.) and their corporation Dejavue, Inc. sued USE,
Crested and others in the Utah 3rd Judicial District State Court. See Item 3 of
the Company's 1999 Form 10K for more details. 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 against USE and awarded the
plaintiff Dejavue, Inc. $91,668 in attorney fees. USE posted a supersedeas bond
for $275,000 to appeal the judgment and plaintiffs also appealed the judgment to
the Utah Court of Appeals. The Utah Court of Appeals affirmed the judgment on
December 3, 1999 against USE and USE plans to petition the Supreme Court of Utah
for a writ of certiorari to appeal the decision of the Court of Appeals. The
petition is due to be filed on or before February 3, 2000.
14
<PAGE>
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. Please see
Item 3 of Company's 1999 Form 10K. The Trial Court ruled against both the
plaintiff and defendants on their respective claims. BGBI, Parador and
USE/Crested all appealed the decision to the Nevada Supreme Court. Briefing has
been substantially completed and oral arguments have not yet been scheduled.
Sutter Gold Mining Company (SGMC) Litigation
In 1993, Amador County issued a conditional use permit ("CUP") to allow
SGMC to develop the Sutter Gold Mine (SGM) near the town of Sutter Creek, Amador
County, California. A number of conditions were included in the original CUP
which accommodated local citizen and government agency concerns about noise,
waste disposal, traffic and other aspects of the proposed mining operation.
Please see Item 3 of the Company's 1999 Form 10K.
In 1997 and 1998, SGMC proposed amendments to the CUP for a new design of
the SGM which would lower its environmental impact by reducing traffic,
potentially eliminating the use of cyanide on-site, and removing two large
tailings dams which would have been built to hold mine and mill waste. In August
and September 1998, the Board of Supervisors approved the amendments to the CUP.
On September 28, 1998, a lawsuit was filed in Amador County Superior Court,
California (Case No. 98 CV 3298) by Concerned Citizens of Amador County as
plaintiffs, against the County of Amador and the Amador County Board of
Supervisors, and against SGMC as a real party in interest. The lawsuit
challenged the actions of Amador County and its Board of Supervisors in
approving the amended CUP. A hearing was held on June 7, 1999 and the Court
denied plaintiffs' lawsuit on August 30, 1999. Plaintiffs have appealed the
decision to the California appellate court.
Kennecott Uranium Litigation
On November 10, 1999, Kennecott Uranium Company and Kennecott Energy
Company ("Kennecott") filed a civil action against defendants U.S. Energy Corp.,
Crested Corp. and USECC in the Sixth Judicial District Court, Campbell County,
Wyoming, No. 22406. Kennecott is seeking among other relief, the judicial
approval of a plan to sell the GMMV or liquidate its assets plus attorney fees
and costs. Defendants have filed a motion to change venue to the District Court
in Fremont County, Wyoming. The motion is pending. The parties have initiated
discovery proceedings each seeking production of documents from the other.
USE and Crested are involved in other litigation as reported in their Form
10-Ks for the fiscal year ended May 31, 1999. There were no material changes in
the status of the various cases during the quarter ended November 30, 1999.
15
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders
On December 23, 1999 the reconvened annual meeting of shareholders
scheduled for December 10, 1999, was held and one proposal was presented to
shareholders for a vote.
Proposal one was for election of three directors. Directors, Don C.
Anderson, Nick Bebout and H. Russell Fraser 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 three
directors, the votes cast were as follows:
Name of Director For Against Abstain Withheld
----------------- --------- ------- ------- --------
Don C. Anderson 4,347,780 2,485 133,059 0
Nick Bebout 4,347,780 2,485 133,059 0
H. Russell Fraser 4,347,280 2,485 133,059 500
The Registrant's Board of Directors consists of seven members and Messrs.
Anderson, Bebout and Fraser will continue to serve with John L. Larsen, Max T.
Evans, David W. Brenman and Harold F. Herron whose terms of office as directors
continued after the Annual Meeting of Shareholders held on December23, 1999.
ITEM 5. Other Information
On January 5, 2000, USE and Crested announced in a public news release that
their newly formed subsidiary, Rocky Mountain Gas, Inc. ("RMG"), had closed on
an agreement to purchase a 50% working interest and 40% net revenue interest
from Quantum Energy, L.L.C. of Cleveland, OH on approximately 185,000 acres of
leaseholds prospective for coal bed methane gas in the Powder River Basin of
Montana. RMG paid Quantum $3,200,000 at closing on January 3, 2000, and agreed
to pay Quantum an additional $1,000,000 on or before May 1, 2000 and $1,300,000
on or before December 31, 2000.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. None.
(b) Reports on Form 8-K. On November 22, 1999, the Company filed a Report
in Item 5 on Form 8-K during the second quarter ended November 30, 1999. The
Report was reporting (1) the entry of the Company and Crested into a purchase
agreement for coal bed methane gas properties and (2) the litigation filed by
Kennecott Uranium Company et al.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, there unto duly authorized.
U.S. ENERGY CORP.
(Company)
Date: January 14, 2000. By: /s/ Keith G. Larsen
-------------------------------
KEITH G. LARSEN,
President
Date: January 14, 2000. By: /s/ Robert Scott Lorimer
-------------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer and
Chief Accounting Officer
17
<PAGE>
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<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-END> NOV-30-1999
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