ITEM 1 AND ITEM 2.
ITEM 3. 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 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 (District of Colorado) in Civil No. 91B1153. 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 and various submissions by the parties, the AAA panel (the "Panel") entered an Order and Award (the "Order") in April 1996 and clarifying the Order on July 3, 1996, finding generally in favor of USE and Crested on certain of their claims (including the claims for reimbursement for standby maintenance expenses and profits denied SMP in Nukem's trading of uranium), and in favor of Nukem/CRIC and against USE and Crested on certain other claims. USECC filed a petition for confirmation on the Order and on June 30, 1997, the U.S. District Court confirmed the Order in its Second Amended Judgment (the "Judgment"). Thereafter, Nukem/CRIC appealed the Judgment to the 10th Circuit Court of Appeals ("10th CCA") in Nos. 96-1532 ss. 97-1332.
A three judge panel of the 10th CCA issued an Order and Judgment in the Nukem/CRIC arbitration/litigation matter on October 22, 1998, which unanimously affirmed the Federal District Court Second Amended Judgment without modification. The ruling of the 10th CCA affirmed (i) the imposition of 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; and (ii) the damage award against Nukem/CRIC. As a result of the ruling of the 10th CCA, USE and Crested received an additional $6,077,264 (including interest and court costs) from Nukem in February 1999 for a total net monetary award of $15,468,625 in the arbitration/litigation, and equitable relief in the form of USE's and Crested's interest in SMP, which holds the constructive trust over the CIS contracts. Nukem/CRIC filed motions for entry of final satisfaction of Judgment. The U.S. District Court denied both motions, the last one on July 16, 1999 and on August 16, 1999, Nukem filed a Notice of Appeal to the 10th CCA. USECC opposes the appeal and filed a brief in opposition to Nukem/CRIC brief in the 10th CAA. The appeal is pending. For more information see Note K to the financial statements.
GMMV 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. an USECC in the Sixth Judicial District Court, Campbell County, Wyoming, No. 22406. Kennecott is seeking to dissolve the GMMV joint venture with USECC and judicial approval of a plan to sell the GMMV or liquidate its assets plus attorney fees and costs. Defendants filed a motion to change venue to the District Court in Fremont County, Wyoming and the Sixth Judicial District court granted the motion. The case was then transferred to the Ninth Judicial District Court of Fremont county, Wyoming in civil Action No. 31322. The parties have initiated discovery proceedings each seeking production of documents from the other and certain documents of the parties have been received and reviewed.
On March 13, 2000, defendants U.S. Energy, Crested Corp. and USECC filed an answer denying the various allegations of Kennecott and counterclaims against plaintiff Kennecott and its parent Rio Tinto plc. Defendants also filed a separate third party complaint against Rio Tinto plc. Kennecott filed a motion to dismiss the complaint and Rio Tinto filed a motion for judgment on the pleadings. A hearing date on the respective motions was set for May 30, 2000 but was continued for a time in September or October, 2000 to be set by the Court, as the parties are attempting to negotiate a settlement. On July 14, 2000, Kennecott and USECC entered into a partial settlement wherein Kennecott paid USECC $250,000 to settle claims peripheral to the case concerning accounts receivables and other minor claims for work done and equipment used and mobilized by USECC for the GMMV.
On September 11, 2000, the parties executed a settlement agreement and related documentation and releases (the "Settlement"). Under the Settlement, USECC will sell all of its interests in the GMMV and the GMMV properties, including those within a described Area of Interest to an affiliate of Kennecott. The purchase consideration is $3,250,000 in cash and a 4% net profits royalty interest in certain of the mining claims at the Big Eagle and Jackpot Mines. USECC is allowed to retain certain mining equipment and supplies, and has the right to receive certain mining claims that may be abandoned by Kennecott. Until final bond release, USECC may not compete in the Area of Interest. Kennecott assumes the reclamation obligations (to the extent required by applicable regulatory authority) at the GMMV properties and USECC retains liabilities relating to its activities as a contractor to the GMMV. The Settlement provides that Kennecott is under no obligation to develop any of the properties or the underlying claims and may instead choose to sell the properties and claims or to abandon the claims as they are no longer required. USECC and Kennecott agree to dismiss the case and to release each other from further liability. The Settlement is effective upon approval by the trial judge.
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 Utah State Court 3rd Judicial District in Civil No. 960901865CV. The Plaintiff, Dejavue, Inc., recovered a judgment against USE and USE appealed to the Utah Court of Appeals which affirmed the judgment. After a denial by the Utah Supreme Court, USE petitioned for Writ of Certiorari, USE paid $294,787 being the full amount of the judgment plus interest. USE is seeking reimbursement from the insurance company. See footnote K.
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 in Civil No. 11877, brought by Bond Gold Bullfrog Inc. ("BGBI") on July 30, 1991. BGBI (now known as Barrick Bullfrog, Inc.) is an affiliate of Barrick Corp., a large international gold producer headquartered in Toronto, Canada. The litigation primarily concerns extra-lateral rights associated with two patented mining claims owned by Parador Mining Company Inc. ("Parador") and initially leased to a predecessor of BGBI, which claims are in and adjacent to BGBI's Bullfrog open pit and underground mine. USE and Crested assert certain interests in the claims under an April 1991 assignment and lease with Parador, which is subject to the lease to BGBI's predecessor.
A partial or bifurcated trial to the Court of the extra-lateral rights issues was held on December 11 and 12, 1995, to determine whether the Bullfrog orebody is a vein apexing on Parador's Claims. The Court found that Parador had failed to meet its burden of proof and therefore Parador, USE and Crested have no right, title and interest in the minerals lying beneath the claims of Layne pursuant to extralateral rights. The partial trial did not address the issues of breach of contract by the defendants and BGBI for specific performance and they were tried before the Court commencing on January 26, 1998. After the trial, the Court found against the
parties on their respective claims. BGBI, Parador and USE/Crested all appealed the decision to the Nevada Supreme Court. The appeal is pending.
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. The complaint seeks declaratory judgment and injunctive relief. The plaintiffs allege that the DOE violated the USEC Privatization Act of 1996, when the DOE transferred 45 metric tons of low enriched uranium and 3,800 metric tons of natural uranium to United States Enrichment Corp. ("USEC").
The plaintiffs have asked the Court to declare that (i) the DOE violated its statutory authority by transferring uranium to USEC in excess of statutory limits on volume; (ii) the excess amounts were not "sold" by the DOE to USEC for fair value, as required by the Act, and mandated findings by the DOE concerning possible adverse impacts were not supported in fact; and (iii) the DOE be enjoined from future transfers in violation of the Act. 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 USEC Inc. privatization 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, Wyoming. The Court took the motions under advisement and has not entered a decision.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the United States District Court, Denver, Colorado, Case No. 98WM1630, against Contour Development Company, L.L.C. and entities and persons associated with Contour Development Company, L.L.C. (together, "Contour") and the original developer Pangolin Corporation, seeking compensatory and consequential damages of more than $1.3 million from the defendants for dealings in real estate owned by USE and Crested in Gunnison, Colorado.
See "Business - Commercial Operations - Real Estate and Other Commercial Operations - Colorado Properties" above, and Note K to the Consolidated Financial Statements.
Three of the defendants also filed motions to dismiss seeking relief from USE's notice of lis pendens. That motion has not been decided pending settlement discussions that were terminated by USE on July 15, 1999. The defendants, Gunnison Center Properties, L.L.C. and Val Olson, petitioned for protection under Chapter 11 of the Bankruptcy Code. The remaining defendants own other property which USE believes has sufficient value to satisfy any judgment that USE may obtain.
SGMC LITIGATION
In 1993, Amador County issued a conditional use permit ("CUP") to allow SGMC to develop the SGM near the town of Sutter Creek, Amador County, California. A number of conditions were attached to the original CUP which accommodated local citizen and government agency concerns about noise, waste disposal, traffic and other aspects of the proposed mining operation.
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. The new design also would significantly reduce capital and operating costs for the mine/mill complex, but cover more
land for waste disposal and other purposes. The certification and approval by the Amador County Planning Commission of the Final Subsequent Environmental Impact Report ("FSEIR") and CUP amendments on July 14, 1998 was appealed (by another local citizens project opposition group) to the Amador County Board of Supervisors. In August and September 1998, the Board of Supervisors certified the FSEIR and 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 challenges the actions of Amador County and its Board of Supervisors in certifying the FSEIR and approving the amended CUP. A hearing was held on June 7, 1999 and the Court denied all claims by the Concerned Citizens Plaintiff. The matter is on appeal, see Note K to the financial statements.
DENNIS SELLEY ET AL VS U.S. ENERGY CORP., CRESTED CORP. ET AL. On May 14, 1999, Dennis Selley personally and as personal representative of the Estate of Hannah Selley and his wife Mary B. Selley, filed a Civil Action No. 30869 in the Ninth Judicial District Court of Fremont County, Wyoming against U.S. Energy Corp. and Crested Corp., Plateau Resources Limited and USECC the joint venture, alleging that the defendants were negligent as a landlord in renting a double wide trailer (converted to a bunkhouse) near Ticaboo, Utah to plaintiffs' daughter Hannah Selley and seek various unspecified damages. Hannah Selley was employed by U.S. Energy Corp. ("USE") at the Ticaboo Lodge in June 1998. Because no housing was available for employees, she and five other USE employees rented rooms in the bunkhouse provided by USE, located about 1/2 mile from the Ticaboo Lodge. In the late evening of June 5, 1998 and early the next morning, the occupants built a bonfire near the bunkhouse and had guests over for a party. At about 4:00 a.m. the morning of June 6, 1998, a fire started in the bunkhouse. All occupants were awakened and left the living quarters during the fire except Ms. Selley who perished in the fire. Plaintiffs allege inter alia that defendants were negligent in providing faulty living quarters and that defendants submitted a false filing with the Utah Workers Compensation Fund. Defendants deny negligence in providing the living facility and assert various defenses including plaintiffs' complaint is barred by the Workers Compensation statutory immunity as well as the defense of an intervening clause. The case is scheduled for a pre-trial conference on September 8, 2000 and if Defendants' various motions are denied, the trial may commence on September 25, 2000. See Note K to the financial statements.
DECLARATORY JUDGMENT ACTION. The Workers Compensation Fund of Utah has filed a complaint for declaratory relief on or about July 26, 1999 against U.S. Energy Corp., Crested Corp., Plateau Resources Limited, Dennis and Mary Selley and others in Civil Action No. 99090 7500 before the Utah Third Judicial Court of Salt Lake County, Utah. The suit is to determine its obligation to defend and indemnify U.S. Energy Corp. and its affiliates in the above Hannah Selley case. Defendants filed a motion for summary judgment in July 2000. See Note K to financial statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
INFORMATION CONCERNING EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS.
The following information is provided pursuant to Instruction 3, Item 401 of Reg. S-K, regarding certain of the executive officers of USE who are not also directors.
ROBERT SCOTT LORIMER, age 49, has been the Chief Accounting Officer for both USE and Crested for more than the past five years. Mr. Lorimer also has been Chief Financial Officer for both these companies since May 25, 1991, their Treasurer since December 14, 1990, and Vice President Finance since April 1998.
He serves at the will of each board of directors. There are no understandings between Mr. Lorimer and any other person, pursuant to which he was named as an officer, and he has no family relationship with any of the other executive officers or directors of USE or Crested. During the past five years, Mr. Lorimer has not been involved in any Reg. S-K Item 401(f) listed proceeding.
DANIEL P. SVILAR, age 71, has been General Counsel for USE and Crested for more than the past five years. He also has served as Secretary and a director of Crested, and Assistant Secretary of USE. His positions of General Counsel to, and as officers of the companies, are at the will of each board of directors. There are no understandings between Mr. Svilar and any other person pursuant to which he was named as officer or General Counsel. He has no family relationships with any of the other executive officers or directors of USE or Crested, except his nephew Nick Bebout is a USE director. During the past five years, Mr. Svilar has not been involved in any Reg. S-K Item 401(f) proceeding.
MAX T. EVANS, age 75, has been Secretary for USE and President of Crested for more than the past five years. Mr. Evans had been a director of USE for more than the past five years, prior to April 17, 1997. He serves at the will of each board of directors. There are no understandings between Mr. Evans and any other person pursuant to which he was named as an officer. He has no family relationships with any of the other executive officers or directors of USE or Crested. During the past five years, Mr. Evans has not been involved in any Reg. S-K Item 401(f) proceeding.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Shares of USE Common Stock are traded on the over-the-counter market, and prices are reported on a "last sale" basis by the National Market System ("NMS") of the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). The range by quarter of high and low sales prices for the Common Stock is set forth below for fiscal 1999 and 1998.
High Low ---- --- Fiscal year ended May 31, 2000
First quarter ended 8/31/99 $5.09 $3.25 Second quarter ended 11/30/99 4.50 3.19 Third quarter ended 2/29/00 3.88 3.13 Fourth quarter ended 5/31/00 3.63 2.06
Fiscal year to end May 31, 1999
First quarter ended 8/31/98 $7.25 $1.63 Second quarter ended 11/30/98 4.06 .81 Third quarter ended 2/28/99 3.63 1.56 Fourth quarter ended 5/31/99 6.75 3.25
(b) Holders
(1) At August 31, 2000, the closing bid price was $2.19 per share and there were approximately 731 shareholders of record for Common Stock.
(2) Not applicable.
(c) USE has not paid any cash dividends with respect to its common stock. There are no contractual restrictions on USE's present or future ability to pay cash dividends, however, USE intends to retain any earnings in the near future for operations.
(d) During the year ended May 31, 2000, USE issued 6,020 shares to outside directors; 15,357 shares of Common Stock to private investors for the exchange of securities of Sutter Gold Mining Company; and 57,752 shares in an exchange of YSFC common stock. No underwriter was involved in any of these transactions.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following tables show certain selected historical financial data for USE for the five years ended May 31, 2000. The selected financial data is derived from and should be read with the financial statements for USE included in this Report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is Management's Discussion and Analysis of significant factors which have affected the Company's liquidity, capital resources and results of operations during the periods included in the accompanying financial statements. The discussion contains forward-looking statements that involve risks and uncertainties. Due to uncertainties in the minerals business, the Company's actual results may differ materially from the results discussed in any such forward-looking statements.
OVERVIEW OF BUSINESS
The Company is in the business of acquiring, exploring, developing and or selling mineral properties, including coalbed methane gas, uranium and gold. As part of its mineral business, Company has been in the contract drilling and construction business for third party coalbed methane companies. The Company also owns commercial properties which are in the tourism and rental business.
The Company entered into a contract with Quantum Energy, L.L.C. ("Quantum") through its newly formed subsidiary Rocky Mountain Gas, Inc. (RMG), to acquire a 50% working interest and 40% net revenue interest in approximately 185,000 acres of leases on properties having potential for coalbed methane exploration and development in the Powder River Basin of southeastern Montana. The Company also holds additional properties in Northeastern Wyoming that are part of the Powder River Basin. These leases are outside the boundaries of the agreement that controls the 185,000 acres in Montana and consist of 880 acres in which the Company owns varying interests. In addition to the coalbed methane properties held in the Powder River Basin, the Company holds a 100% working interest and a net revenue interest of 81.5% to 83.5% in approximately 63,120 net mineral acres in the Ham's Fork Coal Fields in Southwestern Wyoming. It is anticipated that the business operations of the Company will be largely directed toward the development of its coalbed methane properties during fiscal 2001 and well into the future.
As in all mineral development operations, there are risks involved in the development of coalbed methane gas fields. Some of the known risks in the coalbed methane development and production business are; government regulations, delays in permitting, environmental restrictions, market price for methane gas, availability and capacity of pipe lines. The Company cannot accurately predict what if any of these risks will have on its business in the future. The Company will continue to seek financing through either the sale of equity in RMG or the Company's common stock or a joint venture with an industry partner to fund its obligations on the maintenance and development of these properties.
The Company owns, and during fiscal 2000 purchased additional, drilling and construction equipment that was used during fiscal 2000 on a contract basis for non-related companies in coalbed methane development. This work consisted of site preparation, drilling, casing, completion, dam construction, compressor and gathering pipeline construction and site reclamation. During August of 2000, the Company determined it would no longer perform such services on a contract basis for third parties and concentrate its efforts on developing properties in which it owns an interest. Part of the drilling and construction equipment will be sold and a portion will be retained for work that the Company will do on the properties that the Company owns an interest in.
The Company has interests in uranium properties in Central Wyoming and Southern Utah. Both properties in Central Wyoming have been or are part of partnership arrangements. In fiscal 1989 the Company entered into an agreement to sell a 50% interest in its Sheep Mountain properties to Cycle Resources, Inc., a wholly owned subsidiary of Nukem, Inc.("Nukem") This partnership, Sheep Mountain Partners ("SMP"), and the assets contained in it have been in litigation for the past nine years. During fiscal 1999, a partial settlement agreement was reached wherein the Company received all the mineral properties
and one uranium supply contract. Nukem has for a second time appealed the decision to the 10th Circuit Court of Appeals. The appeal is pending.
In fiscal 1990 the Company entered into an agreement to sell a 50% interest in its uranium properties to Kennecott. These properties were then placed into the Green Mountain Mining Venture ("GMMV"). The GMMV also acquired additional mining properties and a uranium mill. During fiscal 2000, Kennecott filed a civil action against the Company in Wyoming State Court. The Company responded by filing an answer denying the allegations of Kennecott and counterclaimed certain damages against Kennecott.
Settlement discussions to resolve the issues surrounding the GMMV have been successful in resolving the disputes. The Company and Kennecott have agreed that the Company will sell all of its remaining interest in the GMMV to Kennecott for cash compensation of $3.25 million, payable at the signing of the letter of intent, $.25 million, $1.375 million five days after the court approves the terms of the agreement and dismisses the case and $1.625 in January 2001. Kennecott assumed all reclamation liabilities of the mine and mill properties. The Company has the responsibility of removing certain assets from the mine properties including a GMIX plant which will likely be buried in the Sweetwater Mill tailings cell. The clean up of the GMIX plant is covered by a cash reclamation bond that management believes sufficient to cover cost of reclamation. The company also received certain equipment and a 4% net profits royalty on any uranium produced from the GMMV mine properties.
The Company's uranium property in Southern Utah consists of uranium mining claims and a state of the art uranium mill. Due to current depressed uranium prices, the Company has placed all of its uranium properties on care and maintenance status. The Company is currently evaluating the prospects of the uranium market and may determine to dispose of part or all of it's interests in uranium through the sale of such interests or the reclamation of the properties. The reclamation liabilities of clean up of all the Company's uranium properties are covered by cash bonds, bonds secured by certain real estate assets of the Company. The Company is evaluating the long term uranium market and may conclude to reclaim these assets.
The Company's gold properties in the Mother Lode Mining District of California are on a care and maintenance basis. Due to the lack of available funding, which is as a result of the depressed gold price, plans to construct a 1,000 ton-per-day gold mill complex and further development of the underground mine have been deferred. During Fiscal 1999, the Company recorded an impairment on these properties which did not affect the ownership of the properties but reflected only an economic realization evaluation of the properties at the then market price of gold and the known proven reserves of the property. The Company has evaluated the possibility of using the property as a tourism asset until the price of gold recovers. Such evaluations may result in the tourism business being sold, leased or discontinued.
The Company has commercial operations in Wyoming and Southern Utah. The Wyoming commercial operations at Ticaboo Utah near Lake Powell, consist of various real estate rental properties and the operation of an airport fixed base operation. The Utah commercial operations include a motel, restaurant, lounge, convenience store, boat storage, rental space for mobile homes and recreational vehicles and the sale of home lots and finished homes.
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 2000, the Company had a working capital deficit of $3,161,100 as compared to working capital of $7,363,300. Included in the working capital deficit is a $4,000,000 deferred purchase option from GMMV. This is as a result of a payment made to the Company from Kennecott. This payment is non refundable and is carried as deferred revenue at May 31, 2000. Pursuant to the settlement of the GMMV litigation this amount plus the cash purchase price will be offset against the Company's investment in certain GMMV equipment and the balance will be recorded as revenues.
The primary reason for the decrease in working capital of $10,524,400 was primarily as a result of decreases in cash, $9,256,600 and assets held for resale and other, $269,400 increased accounts payable of $454,200, current portion of long term debt, $158,100, and draw down of the line of credit of $650,000. These decreases in working capital were partially offset by an increase in accounts receivable of $277,400.
Cash of $6,621,200 was consumed by operations. The non-cash items that went into operations that resulted in a net loss from operations for the year of $10,662,600 were depreciation of $699,600, provision for doubtful accounts of $708,600, issuance of stock to the Company sponsored ESOP retirement plan for employees of $371,400, non-cash compensation of $3,191,000 and a change in other current assets of $283,400. The provision for doubtful accounts is a reserve that was established on receivables from employee notes and accounts receivable and the valuation of collateral on a loan made to the ESOP. In prior years the Company made a loan to the ESOP in the amount of $927,000. The ESOP purchased common shares of the Company with this loan which have been held as collateral for the loan. Due to the market price at the year end of Fiscal 2000 for the common stock of the Company, a reserve in the amount of $436,500 was taken on this receivable. Due to the issuance of stock to employees, directors and others of RMG stock at below market price, a non-cash compensation charge was taken to earnings. These shares are restricted and are forefeitable until retirement, total disability or death of the individuals who received them.
Cash was also consumed in investing activities in the amount of $7,478,700. Major components of investing activities were the purchase of coalbed methane properties in the amount of $4,727,200, the purchase of equipment of $2,542,700, and the decrease in restricted investments of $200,600. The coalbed methane gas properties were purchased by RMG in developing areas having potential of coalbed methane gas. It is believed that these properties will be developed into significant coalbed methane producing properties. Additionally equipment was purchased to expand the Company's fleet of construction, drilling and support equipment. This equipment was used throughout fiscal 2000 in contract construction and drilling activities and a portion of it will be used in future coalbed methane development work for the Company's properties. Restricted investments increased as these cash deposits earn interest until such time as they are used for reclamation associated with the Company's uranium mill in southern Utah.
Financing activities provided $4,843,300 in cash during Fiscal 2000. This cash came from the issuance of preferred stock of the Company, net $1,840,000, proceeds from the sale of stock by RMG of $2,160,000, proceeds from long term debt through the financing of equipment purchases of $1,392,400 and the draw down of the Company's line of credit with its bank of $650,000.
The 200 shares of preferred stock, were issued at $10,000 per share, are convertible at the holders option to either 666,667 shares of the common stock of RMG or into common stock of the Company based on the market price at the time of conversion. Such conversion rights exist for a two year period, beginning April 11, 2000. The preferred shares bear interest at 71/2% per annum which is payable quarterly.
During Fiscal 2000, RMG received a total of $2,160,000 for the sale of 719,666 shares of its common stock to third parties. 333,333 of these shares of RMG stock are subject to the payment of 10% per annum interest, payable annually on the anniversary of the initial investment. This interest payment is payable in the common stock of the Company at the market price of the common stock of the Company on the date the interest is due. This interest payment is due and payable until such time as an initial public offering for RMG becomes effective with the Securities and Exchange Commission. RMG also sold an additional 486,667 shares of common stock to the Company and its affiliates for $1,460,000.
Long term debt financing and the draw down of the line of credit were used to purchase additional drilling and construction equipment and fund on-going operations. Proceeds from long term debt financing were $1,392,400 while a total of $1,246,300 in cash was applied to long term debt. At May 31, 2000 the Company had total long term debt, including the current portion, of $1,184,200 and owed $650,000 on its
line of credit with a banking institution. The total limit on the line of credit is $1,000,000. All long term debt and the line of credit are secured by assets which have sufficient value, management believes, to retire the debt.
The Company has generated significant net losses during fiscal 1999 and 2000 resulting in an accumulated deficit of approximately $30,071,200 at May 31, 2000. The Company also has a working capital deficit of approximately $3,161,100 at May 31, 2000 that includes a $4,000,000 deferred purchase option. If the deferred purchase option is excluded, the company has positive working capital of $838,900. At year end, the Company did not have the working capital necessary to continue the level of capital development completed during fiscal 2000 or to fund a similar level of operations over the next year. In order to reduce its overhead costs, the Company has reduced its staff. The company also has certain assets that are unencumbered that could be sold to generate cash to ensure its survival during the next year. However, there can be no assurances that Company assets could be liquidated in excess of their carrying values.
CAPITAL RESOURCES
The primary source of the Company's capital resources are the cash on hand; collection of receivables from contract construction and drilling operations at May 31, 2000, $884,400; projected equity financing from RMG; sale of mine, construction and drilling equipment; sale of partial ownership interest in mineral properties; proceeds under the line of credit; the GMMV settlement proceeds; and possible settlement discussions with Phelps Dodge regarding a dispute on a molybdenum property and final determination of the SMP arbitration/litigation. The Company also will continue to receive revenues from its commercial operations in southern Utah along with the rental and fixed base airport operations in Wyoming. Additionally, the Company will continue to offer for sale various assets such as lots and homes at the Company's southern Utah commercial operations along with real estate holdings in Wyoming, Colorado and Utah.
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. At May 31, 2000 the line of credit had been drawn down by $650,000 and by the date of this Report $850,000. The line of credit is being used for short term working capital needs associated with operations.
The Company believes that cash resources on hand at May 31, 2000, cash received from Kennecott as part of the GMMV settlement and the collection of outstanding receivables will be sufficient to sustain operations during fiscal 2001. The cash resources plus cash from Kennecott for the GMMV settlement will not be sufficient, however, to provide funding for the Company's maintenance and development of its coalbed methane gas business. The Company and RMG are seeking additional equity or an industry partner financing arrangement to develop its coalbed methane leases.
CAPITAL REQUIREMENTS
The primary requirements for the Company's working capital during Fiscal 2000 are expected to be general and administrative costs, the cost of maintaining the SMP and southern Utah uranium properties and the SGMC gold properties and the costs associated with the expansion and development of the coalbed methane gas properties.
COALBED METHANE GAS
To acquire a 50% working interest in 185,000 acres of leaseholds, RMG paid $3,200,000 to Quantum Energy, ("Quantum") in January 2000 and an additional $1,000,000 in May 2000. RMG is committed to pay Quantum an additional $1,300,000 on or before December 31, 2000. If RMG does not make this final payment it must assign 12% of its undivided 50% WI in the properties back to Quantum. Quantum, at its sole option, may elect to have RMG drill and complete additional wells for the equivalent cost of $1,300,000. If Quantum exercises this option, RMG would own a 50% WI (40% NRI) in the wells drilled with those funds, but only after Quantum has received $1,300,000 in net revenues (payback) from those wells. If these payments are not made, the 50% working interest could be reduced.
Under the terms of the Quantum agreement, the Company through RMG has a $2,500,000 work commitment to drill and complete 25 coalbed methane wells. If RMG does not complete the work commitment and Quantum spends part or all of that amount of funds to drill and complete wells on the Quantum acreage, then RMG will have the right to buy back its 50% working interest by satisfying certain penalties. RMG also has the obligation to fund 50% of the delay rentals on the Quantum properties which amounts to $515,000 ($257,500) for RMG's share during fiscal 2001.
To fund all of the RMG commitments, financing will need to be obtained from equity funding or an industry partner through the sale of a portion or all of RMG's ownership in the Quantum properties.
MINERAL HOLDING COSTS
SMP URANIUM PROPERTIES
The care and maintenance costs associated with the Sheep Mountain uranium mineral properties are the responsibility of the Company. The holding costs during Fiscal 2000 were approximately $48,300 per month. The Company has initiated alternative methods of managing the properties in an effort to reduce these holding costs during Fiscal 2001. The Company has the obligation to deliver uranium to a utility under one of the SMP supply contracts. The Company believes that it can either continue to deliver these pounds at a small profit margin or sell the entire contract to a third party supplier.
GMMV URANIUM PROPERTIES
The Company and Kennecott filed various court actions against each other during fiscal 2000. On September 11, 2000, the Company and Kennecott entered into a settlement agreement which resolved these disputes. The Company sold its remaining interest in the GMMV properties to Kennecott for a total of $3.25 million. The Company received $.25 million upon signing the letter of agreement to settle all disputes, it will receive $1.375 five days after the court approves the settlement agreement and dismisses all claims and $1.625 in January 2001. The Company also received certain mining equipment and a 4% net profits royalty. Kennecott assumed all reclamation liabilities of the GMMV mine and mill properties. The Company is responsible to remove certain assets including the GMIX plant from the properties.
PLATEAU RESOURCES URANIUM PROPERTIES
Plateau owns and operates the Ticaboo townsite, motel, convenience store, boat storage, restaurant and lounge. Additionally, Plateau owns and maintains the Tony M uranium mine and Shootaring Canyon Uranium Mill. The Company is pursuing alternative uses for these properties including alternative feed or waste disposal of low level nuclear waste. The Company is seeking joint venture partners and equity financing to enter into the alternative feed and waste disposal business as the expansion into this business will require additional capital. It is not known what the outcome of these discussions will be. In the management of the
commercial operations of the Plateau properties, the Company has determined it will shut many of the operations down during the winter months which should improve the annual profits of the commercial operations.
SUTTER GOLD MINING COMPANY GOLD PROPERTIES
Due to the depressed market price of gold, the development of the gold properties has been deferred into the future. SGMC has explored the possibility of using the properties as a tourism business until such time as the price for gold recovers. The results of limited operations in the tourism business are being evaluated. The results of these evaluations may result in the tourism business being expanded or terminated. The core assets of the SGMC properties will continue to be maintained at as low a cost as possible.
DEBT PAYMENTS
Debt to non-related parties at May 31, 2000 was $1,184,200 as compared to $912,700 at May 31, 1999. The increase in debt to non-related parties consists primally of debt due on the financing of equipment and annual insurance premiums. The balance of the debt to non-related parties is for the purchase of land and buildings by SGMC and various pieces of heavy equipment and bears different interest rates with various maturity dates. All payments on the debt are current. If construction or drilling operations are permanently reduced or discontinued, the equipment will be sold and the debt retired.
At May 31, 2000, the Company had borrowed $650,000 of its line of credit and as of the date of this report $850,000. This debt is secured by the pledge of equipment and real estate assets of the Company. This debt will be retired through profits from operations, the settlement with Kennecott and possible settlement of the Nukem dispute or the sale of an interest in assets.
FEDERAL INCOME TAX ISSUES
The tax years through May 31, 1994 are closed after audit by the IRS. The Company has attended appeals hearings with the IRS in Denver Colorado to discuss resolving issues raised for fiscal 1995 and 1996.
The issues have been resolved with the IRS. A final settlement agreement has not yet been approved but it is not believed that the settlement will have a material affect on the Company.
RECLAMATION COSTS
It is not anticipated that any of the Company's working capital will be used in fiscal 2001 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.
As a result of the settlement agreement entered into on September 11, 2000, Kennecott assumed all reclamation liabilities of the GMMV mine and mill properties with the exception of the GMIX plant and the removal of certain equipment from the GMMV properties. The reclamation of the GMIX plant is bonded with a cash bond which management anticipates will fully satisfy the obligation of reclamation.
The reclamation liability on the Plateau uranium properties is $7,382,100 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.
The future reclamation costs on the Sheep Mountain properties are covered by a reclamation bond which is secured by a pledge of certain of the Company's real estate assets. The reclamation bond amount
is reviewed annually by the state regulatory agencies. The Company's reclamation liability on the Sheep Mountain properties is currently $1,496,800.
The reclamation of SGMC gold properties is approximately $27,900. This reclamation obligation is bonded with a cash bond.
FISCAL 2000 COMPARED TO FISCAL 1999
RESULTS OF OPERATIONS
REVENUES: --------
During fiscal 2000, the Company recognized revenues in three segments; minerals in the form of advance royalties on its molybdenum property, $132,600, contract drilling and construction work in the coalbed methane industry, $3,584,900, commercial operations in southern Utah and other rental properties in Wyoming, $2,786,800. The Company also recognized other revenues from oil sales of $159,200 from its interest in the Lustre Field on the Fort Peck Reservation, interest revenues of $813,600 on cash equivalents invested in interest bearing accounts and management fees of $277,300 for services provided to the GMMV.
Total revenues during fiscal 2000 were $7,773,800, a decrease of $3,079,800 from revenues of $10,853,600 in fiscal 1999. This decrease was as a result of decreased revenues in Mineral sales of $105,600, commercial operations of $191,000, revenues from the partial settlement of the SMP arbitration/litigation of $6,077,300, management fees and other revenues of $307,100, interest revenues of $34,000 and the gain on disposal of assets of $25,700. These decreases in revenues were offset by increased revenues from contract drilling/construction operations of $3,584,900 and oil sales of $76,000.
The decrease in mineral sales is as a result of the Company recognizing revenues of $87,600 from the sale of uranium under a SMP contract during fiscal 1999. No revenues were recognized from sales of uranium during fiscal 2000. This decrease in uranium sales plus the a decrease in the market price for molybdenum, which reduced the advance royalty from Cyprus Amax during fiscal 2000 by $18,000, accounted for the reduction in mineral sales revenues.
Commercial operations decreased by $191,000 as a result of reduced equipment rental revenues received by the Company for the rental of equipment to the GMMV during Fiscal 2000 as compared to fiscal 1999. Commercial operations at the Ticaboo operations in southern Utah increased by $405,200 during fiscal 2000. The reduced activity at GMMV during Fiscal 2000 also was the main contributor to the reduced management fee revenue when compared with fiscal 1999.
Revenues in contract drilling/construction operations were generated as a result of the Company entering into the drilling and earth construction contract work in the coalbed methane gas business during fiscal 2000. No revenues from contract drilling/construction work were recorded in fiscal 1999. The profit margin in the contract drilling and construction business is a function of the number of available contractors and is often very small. The Company has suspended operations in this area. It is not known if the Company will resume this type of work on a contract basis. The Company will maintain a certain amount of equipment in order to perform this type of work in for future for its own account.
Increased oil revenues were as a result of higher market prices for oil which allowed the Company to produce from more of its wells in the Lustre Field during fiscal 2000.
COSTS AND EXPENSES
Costs and expenses were reduced in fiscal 2000 by $7,989,400 to $18,922,000 from $26,911,400 during fiscal 1999. This reduction was primary as a decrease in the impairment of mineral properties of $13,224,400. No impairment of mineral properties was taken during fiscal 2000. During fiscal 1999 the Company determined that an impairment should be taken on the SGMC assets of $10,718,300 and the Yellow Stone Fuels Corp.("YSFC") assets of $2,506,100. The impairment of the SGMC and YSFC assets related to the recover ability of the Company's investment in the mineral properties and equipment based on the then market prices for gold and uranium. Other decreases in costs and expenses were a $51,600 reduction in commercial operations as a result of cost cutting efforts and $9,100 in oil production costs due to less repair expenditures being made on the wells during fiscal 2000.
Increases in costs and expenses during fiscal 2000 over fiscal 1999 are $341,400 in mineral operations, $4,164,400 in contract drilling/construction operations, provision for doubtful accounts of $343,600 and interest expense of $38,300.
Costs and expenses in mineral operations during fiscal 2000 increased as a result of increased activities for the Company's own account where mineral operations in previous years were associated primary with joint ventures that either reimbursed a portion or all of the costs. Contract drilling and construction costs recorded during fiscal 2000 have no comparative costs and expenses during fiscal 1999. These costs include all labor, equipment operating and repair expenses and other costs associated with contract drilling and construction. Prior to fiscal 2000 there were no contract drilling and construction operations.
General and Administrative costs and expenses increased by $408,000 during fiscal 2000. Included in this increase is non-cash compensation of $3,139,100 which was as a result of the issuance of common shares of RMG stock below market. The increase in General and Administrative costs and expenses was offset by reductions of General and Administrative costs and expenses at SGMC and other Company operations resulting in a net decrease in General and Administrative costs and expenses of $2,731,100.
The increase in provision for doubtful accounts of $343,600 during fiscal 2000 was primary as a result of the valuation to market of the collateral held for the loan to the Company's ESOP retirement plan. Interest expense increased by $38,300 during fiscal 2000 as a result of additional equipment financing activity.
Operations resulted in a loss of $10,662,600 or $1.33 per share fully diluted as compared to a loss of $11,648,500 or $1.63 per share fully diluted during fiscal 1999.
FISCAL 1999 COMPARED TO FISCAL 1998
Although the Company experienced positive cash flows during fiscal 1999, operations resulted in a net loss after taxes of $11,648,500 or $1.63 per share as compared to a loss of $983,200 or $0.15 per share in fiscal 1998. Decreased revenue and the impairment of mineral assets are the primary cause for the increase in the fiscal 1999 loss.
REVENUES: Mineral sales decreased by $831,500 during fiscal 1999. This decrease resulted from no revenues recognized during fiscal 1999 from a SMP base escalated uranium delivery contract, which generated revenues of $858,600 during fiscal 1998 from the final delivery under the contract. There were reduced revenues from the advance royalty from Cyprus Amax of $60,400, due to reduced market prices for molybdenum. These decreases in mineral sales revenue were slightly offset by net profits received from one of the SMP purchase contracts of $87,500 during fiscal 1999 while no such revenues were recorded in fiscal 1998.
Commercial operations revenues decreased by $545,700. This decrease occurred primarily as a result of reduced equipment rentals to the GMMV. The GMMV properties were on a standby basis during most of fiscal 1999 due to reduced uranium prices. This decrease of equipment rental of $751,300 was offset by increased fuel sales at the Company's southern Utah commercial operations of $141,700.
Oil sales decreased by $86,900 as a result of temporarily closing down oil production due to continued depressed market prices for crude oil and a continuing decline in the production of the oil wells. Subsequent to May 31, 1999 the Company began producing from two of the oil wells. The Company will continue to evaluate future production based on estimated production rates and market prices for crude oil.
Management fees and other revenues decreased by $784,900, primarily due to reduced contract work performed at the GMMV properties and management services at the SMP properties. The Company is paid a percentage of all costs at the GMMV properties for contract services provided. During fiscal 1999, operations were significantly reduced at the GMMV properties, which reduced the related management fees. Upon receiving the SMP mining properties in a partial settlement of the SMP arbitration issues, the Company was no longer entitled to management fees on the SMP properties.
COSTS AND EXPENSES: Mineral operations increased from $1,664,800 during fiscal 1998 to $2,309,800 during fiscal 1999. This increase of $645,000 primarily related to care and maintenance costs associated with the SMP properties. The Company became responsible for 100% of these costs at the beginning of fiscal 1999 due to a partial settlement of the SMP arbitration/litigation issues which conveyed ownership of the SMP mining properties to the Company.
General and Administrative expenses increased from $4,793,200 during fiscal 1998 by $2,656,200 to $7,449,400 during fiscal 1999. This increase was a result of (1) the consolidation of SGMC for the full year of fiscal 1999 of $1,928,900; (2) the consolidation of YSFC for the fourth quarter of 1999, $93,500; and (3) the amortization of warrants granted to consultants of $291,700 and deferred compensation of $81,900.
The largest increases in costs and expenses were impairments in mineral assets and provision for doubtful accounts. During fiscal 1999, the Company recorded a total impairment on mineral assets of $13,224,400 as compared to an impairment on mineral assets of $1,500,000 for fiscal 1998. The impairment in fiscal 1999, consisted of an impairment of the SGMC assets of $10,718,300 and the YSFC assets of $2,506,100. The impairment of the SGMC and YSFC assets related primarily to mineral properties and equipment.
The Company also recognized non-cash expenses in the form of a provision for doubtful accounts of $365,000 and the write-off of an investment made in a non affiliated company during fiscal 1999 of $100,000. The provision for doubtful accounts is a result of the continual inability of a third party to pay amounts due the Company on real estate sold in prior years. The Company will pursue collection of these amounts.
FUTURE OPERATIONS
The Company has generated losses in each of the last three years, as a result of holding costs and permitting activities in the mineral segment along with impairments of mineral assets. The Company is maintaining its investments in gold and uranium properties that are currently not generating any operating revenues. These properties require expenditures for items such as permitting, care and maintenance, holding fees, corporate overhead and administrative expenses. Success in the minerals industry is dependent on the price that a producer can receive for its minerals. The Company cannot predict what the long term price for gold and uranium will be and therefore cannot predict when, or if, the Company will generate net income from operations. The Company believes it has sufficient capital resources to maintain its mineral properties on a
stand by basis through fiscal 2001. Development activities of the mineral properties and expansion of commercial operations are dependant on the Company obtaining equity financing or commercial loans. It may also be necessary to generate cash through the sale of equipment or other assets.
At May 31, 2000 the Company was committed to be in the coalbed methane business well into the future. Uranium prices and market projections are being evaluated. Decisions to liquidate part or all of the Company's uranium holdings are being considered. The Company is also evaluating its commitment to the gold business and at what time the price for gold may recover.
EFFECTS OF CHANGES IN PRICES
Mining operations and the acquisition, development and sale of mineral properties are significantly affected by changes in commodity prices. As prices for a particular mineral increase, prices for prospects for that mineral also increase, making acquisitions of such properties costly, and sales advantageous. Conversely, a price decline facilitates acquisitions of properties containing that mineral, but makes sales of such properties more difficult. Operational impacts of changes in mineral commodity prices are common in the mining industry.
URANIUM AND GOLD. Changes in the prices of uranium and gold affect the Company to the greatest extent. Currently, both gold and uranium are at historical low prices. The Company is continually evaluating market trends and data. The Company does not plan to go forward with any additional development of its mineral properties until the market price for gold and uranium obtain and remain at higher levels which will make the operations profitable.
MOLYBDENUM AND OIL. Changes in prices of molybdenum and petroleum are not expected to materially affect the Company with respect to either its molybdenum advance royalties or its fees associated with oil production. A significant and sustained increase in demand for molybdenum would be required for the development of the Mt. Emmons properties by Phelps Dodge it has other producing mines.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
Financial statements for the Company follow immediately. Because of litigation between USE, Crested and USECC, and Kennecott Uranium Company, regarding disputes about the Green Mountain Mining Venture ("GMMV"), financial statements for the GMMV for the fiscal year ended December 31, 1999 have not been provided to USE and therefore are not filed with this report.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To U.S. Energy Corp.:
We have audited the accompanying consolidated balance sheets of U.S. ENERGY CORP. (a Wyoming corporation) AND SUBSIDIARIES as of May 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended May 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of U.S. Energy Corp. and subsidiaries as of May 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2000, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado, September 11, 2000
The accompanying notes to consolidated financial statements are an part of these statements.
The accompanying notes to consolidated financial statements are an part of these statements.
(Continued)
The accompanying notes to consolidated financial statements are an part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
Total Shareholders' Equity at May 31, 1998 does not include 312,378 shares currently issued but forfeitable if certain conditions are not met by the recipients. "Basic and Diluted Weighted Average Shares Outstanding" also includes the 865,943 shares of common stock held by majority-owned subsidiaries, which, in consolidation, are treated as treasury shares.
The accompanying notes to consolidated financial statements are an integral part of these statements.
Total Shareholders' Equity at May 31, 1999 does not include 339,208 shares currently issued but forfeitable if certain conditions are not met by the recipients. "Basic and Diluted Weighted Average Shares Outstanding" also includes the 812,915 shares of U.S. Energy common stock held by majority-owned subsidiaries, which, in consolidation, are treated as treasury shares.
The accompanying notes to consolidated financial statements are an integral part of these statements.
Total Shareholders' Equity at May 31, 2000 does not include 396,608 shares currently issued but forfeitable if certain conditions are not met by the recipients. "Basic and Diluted Weighted Average Shares Outstanding" also includes the 827,108 shares of U.S. Energy common stock held by majority-owned subsidiaries, which, in consolidation, are treated as treasury shares.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000
A. BUSINESS ORGANIZATION AND OPERATIONS:
U.S. Energy Corp. and subsidiaries (the "Company" or "USE") was incorporated in the State of Wyoming on January 26, 1966. The Company engages in the acquisition, exploration, holding, sale and/or development of mineral and coalbed methane gas properties, the production of petroleum properties and marketing of minerals and methane gas. Principal mineral interests are in uranium, gold, molybdenum and coalbed methane. None of the Company's mineral properties are currently in production. The Company also holds various real and personal properties used in commercial activities. The Company also performs contract drilling and construction work on third party properties. Most of these activities are conducted through the joint venture discussed below and in Note D.
The Company engages in the maintenance of two uranium properties, one a joint venture with Kennecott Uranium Company ("Kennecott") known as the Green Mountain Mining Venture ("GMMV"), and the second known as Sheep Mountain Partners ("SMP"). Both of these ventures have been involved in significant litigation (see Note K). All issues and disputes in the SMP litigation have been resolved with the exception of certain market rights and the profits therefrom on certain CIS related uranium sales contracts. The resolution of the other issues resulted in the payment of cash to the Company and the receipt of the SMP mineral properties and one uranium delivery contract. The remaining outstanding issue in the SMP litigation is on appeal before the U.S. 10th Circuit Court of Appeals. The litigation with Kennecott has been settled. Sutter Gold Mining Company ("SGMC"), a Wyoming corporation owned 66.3% by the Company at May 31, 2000, manages the Company's interest in gold properties. The Company also owns 100% of the outstanding stock of Plateau Resources Limited ("Plateau"), which owns a nonoperating uranium mill and support facilities in southeastern Utah. Currently, the mill is nonoperating but has been granted a license to operate pending certain conditions. Rocky Mountain Gas, Inc. ("RMG") was formed in fiscal 2000 to consolidate all methane gas operations of the Company. The Company owns and controls 84% of RMG as of May 31, 2000.
The Company has generated significant net losses during fiscal 1999 and 2000 resulting in an accumulated deficit of approximately $30,071,200 at May 31, 2000. The Company also has a working capital deficit of approximately $3,161,100 at May 31, 2000 that includes a $4,000,000 deferred purchase option. If the deferred purchase option is excluded, the company has positive working capital of $838,900. The Company's cash balance has decreased from $10,173,000 at the prior year end to $916,400 at May 31, 2000. At year end, the Company did not have the working capital necessary to continue the level of capital development completed during fiscal 2000 or to fund a similar level of operations over the next year. In order to reduce its overhead costs, the Company has reduced its staff. The Company also has certain assets that are unencumbered that could be sold to generate cash to ensure its survival during the next year. However, there can be no assurances that Company assets could be liquidated in excess of their carrying values. In addition, the Company continues to believe that it will ultimately receive more cash from the final settlement of the SMP litigation. Subsequent to year end, the Company settled a dispute with its GMMV partner that will result in the receipt of cash. (See Note M). Taken together, the Company believes it will be able to meet its obligations during the upcoming year.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of USE and subsidiaries include the accounts of the Company, the accounts of its majority-owned subsidiaries Plateau (100%), Energx, Ltd ("Energx") (90%), Four Nines Gold, Inc. ("FNG") (50.9%), SGMC (66.3%), Crested Corp. ("Crested") (52%), Yellowstone Fuels Corp. ("YSFC") (35.9%) Rocky Mountain Gas ("RMG") (82%), Ruby Mining Company ("Ruby") (91%), Northwest Gold, Inc. ("NWG") (96%) and the USECC Joint Venture ("USECC"), a consolidated joint venture which is equally owned by U.S. Energy Corp. and Crested, through which the bulk of their operations are conducted.
With the exception of YSFC, investments in joint ventures and all 20% to 50% owned companies are accounted for using the equity method (see Note E). YSFC was an equity investee through February 1999, at which time the Company purchased the majority of the shares of common stock of YSFC owned by outside shareholders by issuing 677,167 shares of Company's common stock. As a result of the common directors and control of YSFC by USE and its employees, YSFC was consolidated as of March 1, 1999. SGMC was an equity investee through March 1998 when the Company purchased special warrant units from certain investors and increased its ownership to 59%, requiring consolidation subsequent to April 1, 1998 (see Note F). Investments of less than 20% are accounted for by the cost method. All material intercompany profits, transactions and balances have been eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of three months or less to be restricted cash equivalents.
RESTRICTED INVESTMENTS
Based on the provisions of Statement of Financial Accounting Standards No. 115 ("SFAS 115"), the Company accounts for its restricted investment in certain securities as held-to-maturity. Held-to-maturity securities are measured at amortized cost and are carried at the lower of aggregate cost or fair market value.
INVENTORIES
Inventories consist primarily of aviation and automobile fuel, associated aircraft parts, mining supplies, gold ore stockpiles and retail inventory for commercial operations. Retail inventories are stated using the average cost method. Other inventory is stated at the lower of cost or market.
PROPERTIES AND EQUIPMENT
Land, buildings, improvements, machinery and equipment are carried at cost. Depreciation of buildings, improvements, machinery and equipment is provided principally by the straight-line method over estimated useful lives ranging from three to forty-five years.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
The Company capitalizes all costs incidental to the acquisition and development of mineral properties as incurred. Mineral exploration costs are expensed as incurred. The costs of mine development are deferred until production begins as these costs will be recovered through future mining operations. Once commercial production begins, mine development costs incurred to maintain production will be amortized using a units-of- production method over the estimated useful life of the ore-body. Costs are charged to operations if the Company determines that an ore body is no longer economical. Costs and expenses related to general corporate overhead are expensed as incurred.
The Company has acquired substantial mining property assets and associated facilities at minimal cash cost, primarily through the assumption of reclamation and environmental liabilities. Certain of these assets are owned by various ventures in which the Company is either a partner or venturer.
LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amount may not be recoverable. If the sum of estimated future cash flows on an undiscounted basis is less than the carrying amount of the related asset, an asset impairment is considered to exist. The related impairment loss is measured by comparing estimated future cash flows on a discounted basis to the carrying amount of the asset. Changes in significant assumptions underlying future cash flow estimates may have a material effect on the Company's financial position and results of operations. An uneconomic commodity market price, if sustained for an extended period of time, or an inability to obtain financing necessary to develop mineral interests, may result in asset impairment. During 1999, the Company recorded an impairment of $10,718,300 on its mineral assets in SGMC and $2,506,100 on its mineral assets in YSFC. During 1998, the Company recognized an impairment loss of $1,500,000 on its mineral assets in SGMC. As of May 31, 2000, management believes no further impairment is necessary. See Note F for further discussion.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, receivables, other current assets, accounts payable and accrued expenses approximates fair value because of the short-term nature of those instruments. The recorded amounts for short-term and long-term debt, approximate fair value due to the variable nature of the interest rates on the debt.
REVENUE RECOGNITION
Advance royalties which are non-refundable are recognized as revenue when received (see Note F). Non-refundable option deposits are recognized as revenue when the option expires.
Revenues from gold and uranium sales are recognized upon delivery. Revenues are recognized from the rental of certain assets ratably over the related lease terms. Revenues from commercial operations, which represent primarily real estate activity and an airport fixed base operation, are recognized as goods and services are delivered. Revenues from long-term construction contracts are recognized on the percentage-of-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
completion method. If estimated total costs on any contract indicate a loss, the Company provides currently for the total anticipated loss on the contract. Oil and gas revenue is recognized at the time of production.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". This statement requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets, liabilities and carryforwards.
SFAS 109 requires recognition of deferred tax assets for the expected future effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are reduced, if deemed necessary, by a valuation allowance for any tax benefits which, based on current circumstances, are not expected to be realized.
NET (LOSS) INCOME PER SHARE
The Company reports net (loss) income per share pursuant to Statement of Financial Accounting Standards No. 128 ("SFAS 128"). SFAS 128 specifies the computation, presentation and disclosure requirements for earnings per share. Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock, if dilutive.
COMPREHENSIVE INCOME
There are no components of comprehensive income which have been excluded from net income and, therefore, no separate statement of comprehensive income has been presented.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," establishes fair value accounting and reporting standards for derivative instruments and hedging activities. The Company will adopt SFAS No. 133 in the first quarter of fiscal 2001. The Company is currently assessing the effect of adoption, if any, on its financial position, results of operations and cash flows.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 1998 financial statements to conform with the 2000 presentation.
C. RELATED-PARTY TRANSACTIONS:
The Company provides management and administrative services for affiliates under the terms of various management agreements. Revenues from services by the Company to unconsolidated affiliates were $39,900, $584,400 and $849,000 in fiscal 2000, 1999 and 1998, respectively. The Company has $408,300 of receivables from unconsolidated subsidiaries and advances to employees totaling $100,600 as of May 31, 2000.
As of May 31, 2000, the Company had notes receivable due from certain directors and employees of the Company totaling $462,000 which bear interest at 10% per annum and are due December 31, 2001. This indebtedness is secured by 166,500 shares of the Company's common stock.
D. USECC JOINT VENTURE:
The Company operates the Glen L. Larsen office complex; an aircraft hangar with a fixed base operation, office space and certain aircraft; holds interests in various mineral operations; conducts oil and gas operations; and transacts all operating and payroll expenses through a joint venture with Crested, the USECC joint venture.
E. INVESTMENTS IN AND ADVANCES TO AFFILIATES:
The Company's restricted investments secure various decommissioning reclamation and holding costs. Investments are comprised of debt securities issued by the U.S. Treasury that mature at varying times from three months to one year from the original purchase date. As of May 31, 2000 and 1999, the cost of debt securities was a reasonable approximation of fair market value. These investments are classified as held-to- maturity under SFAS 115 and are measured at amortized cost.
The Company's investment in and advances to affiliates are as follows:
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
Equity loss from investments accounted for by the equity method are as follows:
Condensed combined balance sheets and statements of operations of the Company's equity investees for fiscal 1999 include the GMMV and Ruby Mining Company. For fiscal 2000, Ruby Mining Company has been consolidated and no balance sheet for the GMMV has been presented due to the litigation with Kennecott as discussed in Notes, F, K and M. Because of this dispute, the Company did not receive any financial or operating results of the GMMV from Kennecott, the operator of the GMMV, for fiscal 2000. Nevertheless, the Company's total investment in the GMMV is zero, except for the salvage value of certain equipment totaling $727,000 held by the GMMV which is included in property and equipment in the accompanying balance sheets. As discussed in Note M, subsequent to year end, the Company has settled its dispute with Kennecott and has been released from any and all GMMV obligations.
CONDENSED COMBINED BALANCE SHEETS - EQUITY INVESTEES
----
Current assets $ 37,100 Non-current assets 802,400 -------------- $ 839,500 ==============
Current liabilities $ 718,500 Reclamation and other liabilities 23,620,000 Assets over (under) liabilities (23,499,000) -------------- $ 839,500 ==============
See Note F for a discussion of the reduction in the carrying value of such investee assets.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
CONDENSED COMBINED STATEMENTS OF OPERATIONS - EQUITY INVESTEES
Year Ended May 31, ------------------------------------------- 1999 1998 ---- ---- Revenues $ 10,500 $ 54,900 Costs and expenses (62,307,800) (1,646,900) -------------- ------------- Net loss $ (62,297,300) $ (1,592,000) ============== =============
F. MINERAL CLAIMS TRANSACTIONS AND MINING PROPERTIES:
GMMV - ----
During fiscal 1990, the Company entered into an agreement with Kennecott, a wholly-owned, indirect subsidiary of The RTZ Corporation plc, for Kennecott to acquire a 50% interest in certain uranium mineral properties in Wyoming known as the Green Mountain Properties. The purchase price was $15 million and a commitment to fund the first $50 million of development and operating costs and additional amounts if certain future operating margins are achieved.
On June 23, 1997, the Company signed an Acquisition Agreement with Kennecott for the right to acquire Kennecott's interest in the GMMV. Kennecott paid the Company $4 million on signing and committed to loan the GMMV up to $16 million to be used in developing the proposed underground Jackpot Uranium Mine and change the status of the Sweetwater Mill from standby to operational. Under the Acquisition Agreement, Kennecott received a credit of two dollars for each dollar advanced against the original work commitment of $50 million.
During fiscal 1998 and 1999, the Company and Kennecott continued to own their respective 50% interests in the GMMV, and Kennecott advanced approximately $14.5 million of the $16 million loan obligation called for in the Acquisition Agreement. Due to the continued depressed market price for uranium concentrates, the Company was unable to purchase Kennecott's interest in the GMMV, and the GMMV stopped development activities at the Jackpot Mine and placed the facility on active standby on July 31, 1998.
As of May 31, 2000, the Company and Kennecott continue to own their respective 50% interests in the GMMV. The GMMV no longer has the obligation to repay the $14.5 million advanced under the $16 million loan from Kennecott. As a result of the funds advanced under the loan and the signing bonus discussed above, the original $50 million work commitment under the 1990 GMMV Agreement is fully satisfied. The Company has elected to have its interest diluted by becoming non-participating on the work plans and budgets. Kennecott is obligated to fund the annual plans and budgets. If the Company's participating interests drop below 10%, their interests will be automatically converted to a 1% to 3% gross proceeds interest. It is not anticipated that such dilution will occur in the near term.
As a result of sustained depressed uranium prices, GMMV determined the carrying value of its assets exceeded the future cash flows. Accordingly, in fiscal 1999, GMMV recorded an impairment in the amount of $59.5 million related to its mineral assets. This impairment had no effect on the Company's carrying value
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
of its investment in the GMMV. The Company's carrying value reflects management's estimates of its portion of the salvage value of the GMMV's machinery and equipment.
Subsequent to year end, as discussed in Note M, the Company settled its dispute with Kennecott and dissolved the GMMV for cash and release from all reclamation and environmental liabilities.
SMP - ---
During fiscal 1989, the Company, through USECC, entered into an agreement to sell a 50% interest in their Sheep Mountain properties to Nukem's subsidiary CRIC. USECC and CRIC immediately contributed their 50% interests in the properties to a newly-formed partnership, SMP. SMP was established to further develop and mine the uranium claims on Sheep Mountain, acquire uranium supply contracts and market uranium. Certain disputes arose among USECC, CRIC and its parent Nukem, Inc. over the operation of SMP. These disputes have been in litigation/arbitration for the past nine years. See Note K for a description of the investment and a discussion of the related litigation/arbitration.
The Company is responsible for one SMP market related delivery contract which requires approximately 942,644 pounds of uranium concentrates to be delivered. These deliveries are priced at an average of the three month market price preceding each delivery. The customer has the option of increasing or decreasing the quantity by plus or minus thirty percent. In 1999 and 1998, deliveries by the Company on SMP contracts resulted in revenues of $87,500 and $858,700, respectively (no such revenues were recognized in 2000). Revenues from these transaction have been included in the accompanying Consolidated Statements of Operations as Mineral Revenues, which would normally have been sales of SMP. Delivery requirements for fiscal 2000 are 206,407 pounds of uranium. Arrangements have been made to complete this delivery in the second quarter of 2001.
Due to the litigation and arbitration proceedings involving SMP for the past 9 years, the Company has expensed all of its costs related to SMP and has had no carrying value of its investment in SMP for either 2000 or 1999 as proceeds from litigation and arbitration proceedings were accounted for under the cost recovery method of accounting as discussed in Note K. The Company's direct loss generated from its investment in SMP, which represents mine standby costs incurred directly by the Company, was $711,300, $704,10, and $436,000 for the years ended May 31, 2000, 1999 and 1998, respectively.
As part of a partial settlement agreement dated June 1, 1998, the Company was awarded the return of its Sheep Mountain uranium mines and certain other properties. Accordingly, all mine standby costs and other holding costs were expensed solely by the Company during fiscal 2000 and 1999.
PHELPS DODGE - ------------
During prior years, the Company conveyed interests in mining claims to AMAX Inc. ("AMAX") in exchange for cash, royalties, and other consideration. AMAX merged with Cyprus Minerals ("Cyprus Amax") which was purchased by Phelps Dodge Mining Company ("Phelps Dodge") in December of 1999. The properties have not been placed into production as of May 31, 2000.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
Cyprus Amax paid the Company an annual advance in royalty of 50,000 pounds of molybdenum (or its cash equivalent). During fiscal 2000, Phelps Dodge has assumed this obligation and made its first advance royalty payment to the Company during the first quarter of 2001. Phelps Dodge is entitled to a partial credit against future royalties for any advance royalty payments made, but such royalties are not refundable if the properties are not placed into production. The Company recognized $132,600, $150,100 and $211,000 of revenue from the advance royalty payments in fiscal 2000, 1999 and 1998, respectively.
Phelps Dodge may elect to return the properties to the Company, which would cancel future obligations under the advance royalty obligation. If Phelps Dodge formally decides to place the properties into production, it is obligated to pay $2,000,000 to the Company.
The Company has recently entered into discussions with Phelps Dodge concerning the purchase of the properties from Cyprus Amax. Per the contract with Amax, the Company is to receive 15% of the first $25,000,000, or $3,750,000, if the properties are sold, which the Company believes has occurred.
SUTTER GOLD MINE COMPANY - ------------------------
SGMC was established in 1990 to conduct operations on mining leases and to produce gold from the Lincoln Project in California. SGMC is in the development stage and additional development is required prior to the commencement of commercial production. SGMC has not generated any significant revenue and has no assurance of future revenue. All acquisition and mine development costs since inception have been capitalized. Since test production in 1992, SGMC has focused its efforts on obtaining a reserve study, developing a mine plan and pursuing a partner to assist in the financing of its mineral development and ultimate production. Due to the decline in the spot price for gold and the lack of adequate financing, SGMC has put the development of the mine on hold. Until the time when development begins, SGMC will require capital contributions from affiliates or other sources to maintain its current activities. SGMC will continue to be considered in the development stage until the time it generates significant revenue from its principal operations.
Primarily as a result of the sustained decline in gold prices and the lack of significant financing necessary to further develop the Lincoln Project, the Company evaluated the carrying value of its SGMC assets for impairment. The Company determined the carrying value of its assets exceeded its fair value. Accordingly, in fiscal 1999 and 1998, the Company recorded an impairment in the amount of $10,718,300 and $1,500,000, which is classified as Impairment of Mineral Assets in the accompanying Consolidated Statements of Operations. The impairment related to mineral properties and mine development costs ($10,315,700 and $1,500,000 for 1999 and 1998, respectively) and equipment ($402,600 and $-0- for 1999 and 1998, respectively).
In connection with a private offering, on March 21, 1997, the Company and Crested accepted a Contingent Stock Purchase Warrant which provides the Company and Crested the right to acquire, for no additional consideration, common shares of SGMC's $.001 par value common stock having an aggregate value of $10,000,000 (US). The Stock Purchase Warrant has a term of ten years extending to March 21, 2007, and is exercisable partially or in total, semi-annually beginning on June 30, 1997. However, the Stock Purchase Warrant is only exercisable to the extent proven and probably ore reserves, as defined in the Stock
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
Purchase Warrant, in excess of 300,000 ounces are added to SGMC's reserves. In addition, SGMC has the right to satisfy the exercise of all or any portion of the Stock Purchase Warrant with the net cash flows, as defined, at $25.00 (US) for each new ounce of proven and probable ore in excess of 300,000 ounces up to a maximum of 700,000 ounces. Accordingly, the Company has allocated the carrying value of SGMC shares exchanged for the Contingent Stock Purchase Warrant to its investment in such contingent warrants. The Stock Purchase Warrant benefits the Company and Crested on a basis of 88.9% and 11.1%, respectively.
On March 31, 1998, the Company purchased 889,900 Special Warrant units from certain Canadian investors. The units were purchased with 488,895 shares of the Company's common stock. In addition, the Company sold 170,000 shares of common stock to the Canadian investors at the then market price ($7.00 per share). As a result of this purchase, the Company and Crested's combined ownership interest in SGMC reached 59%. Therefore, as of April 1, 1998 the Company began consolidating SGMC's results of operations. During 1999, the Company issued 89,059 shares of common stock to acquire an additional 207,500 SGMC Special Warrants. This purchase increased the Company's ownership of SGMC to 63%. During fiscal 2000, the Company issued an additional 15,357 shares of its common stock to acquire 5,500 additional SGMC Special Warrants. This purchase increased the Company's ownership of SGMC to 66%.
Additional financing will be required in order to develop SGMC.
YELLOW STONE FUELS CORP. - ------------------------
In fiscal 1998, the Company became contractually obligated to exchange its common stock for common stock of YSFC, plus interest, because certain conditions were not met (See Note J). As a result of depressed market prices for uranium, YSFC was not successful in the public offering of its common stock. As a result, the terms of the exchange agreement became effective between the Company and YSFC shareholders. The Company therefore issued 677,167 shares of its common stock. The exchange offer for YSFC remained effective until September 13, 1999.
Due to continued low uranium market prices and the inability to raise financing to place the YSFC properties into production, the Company recorded an impairment of $2,506,100 related to YSFC's Mineral Assets during fiscal 1999, which is classified as Impairment of Mineral Assets in the accompanying Consolidated Statements of Operations. The impairment was specifically related to the Company's investment in YSFC ($2,248,200) and the write-down of mineral properties ($257,900) in fiscal 1999.
PLATEAU RESOURCES LIMITED - -------------------------
During fiscal 1994, the Company entered into an agreement with Consumers Power Company to acquire all the issued and outstanding common stock of Plateau, a Utah corporation. Plateau owns a uranium processing mill and support facilities and certain other real estate assets through its wholly-owned subsidiary Canyon Homesteads, Inc. in southeastern Utah. The Company paid nominal cash consideration for the Plateau stock and agreed to assume all environmental liabilities and reclamation bonding obligations. At May 31, 2000, Plateau had a cash security in the amount of $7,952,600 to cover reclamation of the properties (see Note K).
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
The Company is currently evaluating the best utilization of Plateau's assets. Evaluations are ongoing to determine when, or if, the mine and mill properties should be placed into production. The primary factor in these evaluations relates to the current depressed uranium market. Commercial revenues are being generated from the townsite assets which include a motel, C-store, lounge/restaurant, boat storage facility and housing.
In fiscal 1998, the Company had an independent appraisal performed for its modular homes held for resale inventory. Based upon the analysis performed, the Company recorded a $100,000 write-down to more accurately reflect the fair value of these assets as of May 31, 1998. The write-down is included in Commercial Costs and Expenses in the accompanying Consolidated Statements of Operations. The Company will continue to monitor these assets to insure the carrying value does not exceed their fair value.
ENERGX, LTD. - ------------
Energx is engaged in the operation of oil wells in Montana. Energx is owned by 90% by the Company and 10% by the Assiniboine and Sioux Tribes. Revenues from the sale of oil during fiscal 2000, 1999 and 1998 was $159,200, $83,200 and $170,000, respectively.
During fiscal 1997, Energx abandoned certain of its leases and as a result wrote off $164,500 of related capitalized costs. During fiscal 1999, the oil production from oil wells on the Fort Peck Indian Reservation was stopped due to depressed oil prices and declining production. Production will resume once the market price for crude oil increases to the level where the wells are again profitable.
ROCKY MOUNTAIN GAS, INC. - ------------------------
During fiscal 2000, the Company organized RMG to enter into the coalbed methane gas business. RMG is engaged in the acquisition of coalbed methane gas properties and the future exploration, development and production of methane gas from those properties. The Company owns and controls 86% of RMG. RMG sold 1,206,333 shares of its common stock in a private placement during fiscal 2000 for total proceeds of approximately $3,619,000.
RMG entered into an agreement with Quantum Energy, L.L.C. ("Quantum") on January 3, 2000 to purchase a 50% working interest and 40% net revenue interest in approximately 185,000 acres of unproven leasehold interests in the Powder River Basin of Southeastern Montana.
The terms of the Quantum agreement were payments of $3,200,000 on closing, $1,000,000 on or before May 1, 2000 and $1,300,000 on or before December 31, 2000. All payments through May 31, 2000 were made to Quantum. If RMG does not pay the $1,300,000 payment by December 31, 2000, RMG will assign 12% of its undivided 50% working interest to Quantum.
RMG also has a $2,500,000 work commitment to drill 25 wells on the Quantum properties by November 30, 2000. As of May 31, 2000, no wells had been drilled on the Quantum properties due to delays in the permitting process. Funds to complete this work commitment will be raised through equity financing.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
RMG also acquired a 100% working interest (82% revenue interest) in 63,000 net mineral acres in southwest Wyoming. These coalbed methane gas leases are in the greater Green River Basin. RMG purchased these leases for cash and a commitment to drill two wells before December 31, 2000.
On February 2, 2000, RMG and Quantum organized Powder River Gas, L.L.C. ("Powder River") to operate the exploration, development and production of the jointly owned leases in the Powder River Basin. RMG and Quantum each own 50% of Powder River.
G. DEBT:
LINES OF CREDIT - ---------------
The Company has a $1,000,000 line of credit from a commercial bank. The line of credit bears interest at a variable rate (10.5% as of May 31, 2000). The weighted average interest rate for 2000 and 1999 was 9.8%. As of May 31, 2000, $650,000 was outstanding on this line of credit. The line of credit is secured by certain real property and a share of the net proceeds of fees from production from certain oil wells.
LONG-TERM DEBT - --------------
The components of long-term debt as of May 31, 2000 and 1999 are as follows:
Principal requirements on long-term debt are $284,100; $92,500; $132,600; $66,300; $19,100; $589,600 for the years 2001 through 2005 and thereafter, respectively.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
H. INCOME TAXES:
The components of deferred taxes as of May 31, 2000 and 1999 are as follows:
The Company has established a valuation allowance of $13,967,500 and $10,338,700 against deferred tax assets due to the losses incurred by the Company in past fiscal years. The Company's ability to generate future taxable income to utilize the NOL carryforwards is uncertain.
The income tax provision (benefit) is different from the amounts computed by applying the statutory federal income tax rate to income before taxes. The reasons for these differences are as follows:
There were no taxes currently payable as of May 31, 2000, 1999 or 1998 related to continuing operations.
At May 31, 2000, the Company and its subsidiaries had available, for federal income tax purposes, net operating loss carryforwards of approximately $28,000,000 which will expire from 2001 to 2020 and investment tax credit carryforwards of $17,900 which, if not used, will expire from 2000 to 2001. The Internal Revenue Code contains provisions which limit the NOL carryforwards available which can be used
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
in a given year when significant changes in company ownership interests occur. In addition, the NOL and credit amounts are subject to examination by the tax authorities.
The Internal Revenue Service has audited the Company's and subsidiaries tax returns through the year ended May 31, 1996. The Company's income tax liabilities are settled through fiscal 1994. The audit of fiscal 1996 is complete and the Company has attended appeals hearings. A tentative settlement has been reached, however, final tax liability has not been determined. The Company does not expect that the resolution of the audit will have a material effect on the Company's financial position or results of operations.
I. SEGMENTS AND MAJOR CUSTOMERS:
The Company's primary business activity is the sale of minerals and the acquisition, exploration, holding, development and sale of mineral bearing properties, although the Company has no producing mines. Other reportable industry segments include commercial operations, primarily real estate activities and, an airport fixed base operation, and construction activities. The following is information related to these industry segments:
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
During fiscal 1999 and 1998 approximately 100% of mineral revenues were from the sale of uranium. There were no uranium sales during fiscal 2000.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
J. SHAREHOLDERS' EQUITY:
The Board of Directors adopted the U.S. Energy Corp. 1989 Stock Option Plan (the "Option Plan") for the benefit of USE's key employees. The Option Plan, as amended, reserves 2,750,000 shares of the Company's $.01 par value common stock for issuance under the Option Plan. During fiscal 1992, the Company issued 371,200 non-qualified options to certain of its executive officers, Board members and others at prices ranging from $2.75 to $2.90 per share. These options will expire on April 14, 2002 and April 30, 2002. During fiscal 1996, the Company issued 360,000 non-qualified options to employees at an exercise price of $4.00 per share, expiring on December 31, 2000. In fiscal 1997, the shareholders of USE ratified an amendment to the Option Plan and on that same date all outstanding non-qualified options were converted to qualified options by the Board of Directors of USE. During fiscal 1998, options were exercised for the purchase of 62,000 shares. During fiscal 1999, the Company issued 837,500 options under the Option Plan, including 299,462 non-qualified and 538,038 qualified options. The non-qualified options were issued at a price below fair market value, resulting in the recognition of $262,000 in compensation expense at the time of issuance.
The Board of Directors of USE adopted the U.S. Energy Corp. 1989 Employee Stock Ownership Plan ("ESOP") in 1989, for the benefit of USE employees. During fiscal 2000, 1999 and 1998, the Board of Directors of USE contributed 123,802, 89,600 and 49,470 shares to the ESOP at prices of $3.00, $4.00 and $6.57 per share, respectively. The Company has recognized $371,400, $358,400 and $324,600 in fiscal 2000, 1999, and 1998, respectively related to these contributions. USE has loaned the ESOP $1,014,300 to purchase 125,000 shares from the Company and 38,550 shares on the open market. These loans, which are secured by pledges of the stock purchased, bear interest at the rate of 10% per annum. The loans are reflected as unallocated ESOP contribution in the equity section of the accompanying Consolidated Balance Sheets.
In May 1996, the Board of Directors of USE approved an annual incentive compensation arrangement ("1996 Stock Award Program") for its CEO and four other officers of the Company payable in shares of the Company's common stock. The 1996 Stock Award Program was subsequently modified to reflect the intent of the directors which was to provide incentive to the officers of the Company to remain with USE. The shares are to be issued annually pursuant to the recommendation of the Compensation Committee on or before January 15 of each year, beginning January 15, 1997, as long as each officer is employed by the Company. The officers will receive up to an aggregate total of 67,000 shares per year for the years 1997 through 2002. The shares under the plan are forfeitable until retirement, death or disability of the officer. The shares are held in trust by the Company's treasurer and are voted by the Company's non-employee directors. As of May 31, 2000, 215,158 total shares have been issued to the five officers of the Company and Crested under the 1996 Stock Award Plan.
In January 1996, the Company entered into a warrant purchase agreement with an investment advisory firm. Pursuant to the Agreement, this firm received a warrant to purchase 200,000 common shares of the Company's common stock at $5.00/share in exchange for consultation services to be provided through January 9, 1997. In connection with this warrant agreement, the Company recognized $148,300 of consulting expense in fiscal 1997 which the Company determined to be the fair value. During fiscal 1997, 180,000 of these warrants were exercised resulting in total proceeds to the Company of $900,000. The remaining 20,000 shares were exercised in 1998 resulting in $100,000 of proceeds to the Company.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
In December 1997, the Company entered into a warrant purchase agreement with an investment advisory firm to purchase 225,000 shares of the Company's common stock at an exercise price of $10.50/share expiring December 2, 2000. The warrants were issued in exchange for services to be provided during the period from December 1997 to December 1998. The Company determined the fair value associated with these warrants to be $186,000, which will be recognized ratably over the term of the related advisory agreement. Accordingly, $108,000 was recognized as expense in fiscal 1998 and $78,000 in fiscal 1999.
During fiscal 1998, the Company and YSFC entered into an Exchange Rights Agreement (the "Agreement"). Under the Agreement the YSFC private placement shareholders and related broker agent had the right, but not the obligation, to exchange their shares in YSFC for USE common stock if YSFC's common shares were not listed and available for quotation on the NASDAQ marketing system by March 1998. The Company exchanged 677,167 shares of its common stock during fiscal 1999, at a fair value of $2,591,500, for 1,131,500 shares of YSFC common stock or 9% of the outstanding shares of YSFC. During fiscal 2000, the Company issued an additional 57,752 shares of its common stock valued at $206,900 for an additional 96,250 shares of YSFC common stock or an additional 1% of the outstanding shares of YSFC common stock. The exchange rate for USE shares was the price paid for the YSFC's common shares plus 10% per annum return to the investor from the date of purchase. The number of USE shares exchanged was based on the exchange rate for a share of USE common stock for the five business days prior to the date of notice given by the YSFC shareholder to exchange their shares.
In January 1998, the Company entered into a warrant purchase agreement with another investment advisory firm to purchase 200,000 shares of the Company's common stock at an exercise price of $7.50/share expiring January 20, 2000. The warrants were issued in exchange for services to be provided during the period from January 1998 to January 1999. The Company determined the fair value associated with these warrants to be $264,000, which will be recognized ratably over the term of the related advisory agreement. Accordingly, $88,000 was recognized as expense in fiscal 1998 and $176,000 in fiscal 1999 and $27,000 in fiscal 2000.
In February of 1999, the Company entered into a warrant purchase agreement with a consulting firm to purchase 20,000 shares of the Company's common stock at an exercise price of $2.62 expiring January 31, 2002. The warrants were issued in exchange for services to be provided during the period from February 1999 to February 2000. The Company determined the fair value associated with these warrants to be $36,000, which will be recognized ratably over the term of the consulting agreement. Accordingly, $9,000 was recognized as expense in fiscal 1999 and $27,000 in fiscal 2000.
Also, during fiscal 1999, the Company issued warrants in exchange for outstanding YSFC warrants, which were originally issued for services provided by outside consultants in connection with the agreement discussed above. The Company issued 67,025 warrants at an exercise price of $3.64 expiring September 19, 2002. The Company determined the fair value associated with these warrants to be $167,000, which was recorded as an additional investment in YSFC during fiscal 1999.
In February 1999, the Company entered into a consulting agreement with an individual to provide consulting and other services for a period of 24 months, commencing on February 8, 1999 and ending on January 31, 2001. As consideration for services to be performed, the Company granted the individual 25,000
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
shares of the Company's common stock at a grant price of $2.75 per share and entered into a 5 year warrant purchase agreement to purchase up to 75,000 shares of the Company's common stock at an exercise price of $2.25, expiring February 8, 2004. The Company determined the fair value associated with the stock grant to be $68,750 and the warrants to be $140,000, which will be recognized ratably over the term of the consulting agreement. Accordingly, $28,950 was recognized as expense in fiscal 1999 and 2000 related to this agreement.
During fiscal 2000, the Company issued 200 shares of its $.01 par value mandatorily convertible preferred stock for $2,000,000. A commission of $160,000 was paid to an independent broker on this transaction. This preferred stock is mandatorily convertible into either 677,667 shares of common stock of RMG or into shares of common stock of the Company at the market price of the Company's common stock on the date of conversion. The preferred shares are convertible at the earlier of the date RMG completes an initial public offering of its common stock or April 11, 2002. The convertible preferred shares pay dividends at the rate of 7.5% per annum while they are outstanding. These preferred shares have been reflected outside of shareholders' equity in the accompanying consolidated balance sheets due to the convertible nature of the securities into common stock of RMG.
The Board of Directors of the Company issues shares of stock as bonuses to certain directors, employees and third parties. The stock bonus shares have been reflected outside of the Shareholders' Equity section in the accompanying Consolidated Balance Sheets as such shares are forfeitable to the Company until earned. During fiscal 1993, the Company's Board of Directors amended the stock bonus plan. As a result, the earn out dates of certain individuals were extended until retirement. For the years ended May 31, 2000, 1999 and 1998, the Company had compensation expense of $201,000, $173,300 and $119,700 respectively, resulting from these issuances. A schedule of total forfeitable shares for the Company is set forth in the following table:
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
During 2000 and 1999, 9,600 and 40,170 shares were earned, respectively. No shares were earned in fiscal 1998.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value based method of accounting for employee stock options or similar equity instruments. However, SFAS 123 allows the continued measurement of compensation cost for such plans using the intrinsic value based method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), provided that pro forma disclosures are made of net income or loss and net income or loss per share, assuming the fair value based method of SFAS 123 had been applied. The Company has elected to account for its stock-based compensation plans under APB 25; accordingly, for purposes of the pro forma disclosures presented below, the Company has computed the fair values of all options granted using the Black-Scholes pricing model and the following weighted average assumptions (no options were granted during 2000 and 1998):
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
----
Risk-free interest rate 4.65% Expected lives 10 years Expected volatility 102% Expected dividend yield 0%
To estimate expected lives of options for this valuation, it was assumed options will be exercised upon expiration at the end of the ten years. All options are initially assumed to vest. Cumulative compensation cost recognized in pro forma net income or loss with respect to options that are forfeited prior to vesting is adjusted as a reduction of pro forma compensation expense in the period of forfeiture. Pro forma stock-based compensation, net of the effect of forfeitures, was $0, $2,314,700 and $98,100 for 2000, 1999 and 1998, respectively.
If the Company had accounted for its stock-based compensation plans in accordance with SFAS 123, the Company's net loss and pro forma net loss per common share would have been reported as follows:
Weighted average shares used to calculate pro forma net loss per share were determined as described in Note B, except in applying the treasury stock method to outstanding options, net proceeds assumed received upon exercise were increased by the amount of compensation cost attributable to future service periods and not yet recognized as pro forma expense.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
A summary of the Stock Option Plan activity for the years ended May 31, 2000 and 1999 is as follows:
The following table summarized information about employee stock options outstanding and exercisable at May 31, 2000:
Weighted Weighted Number of Average Number Average Options Remaining of Options Exercise Outstanding at Contractual Exercisable at Price May 31, 2000 Life in years May 31, 2000 ----- ------------ ------------- ------------
$2.00 312,500 8.50 312,500 2.75 49,400 1.92 49,400 2.88 525,000 8.50 525,000 2.90 264,300 1.88 264,300 4.00 149,000 .50 149,000 --------- --------- 1,300,200 1,300,200 ========= =========
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
K. COMMITMENTS, CONTINGENCIES AND OTHER:
LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
In 1991, disputes arose between the Company through USECC and Nukem, Inc. and its subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation and operation of the 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 issues and entered an Order and Award in April 1996 and clarifying it in July 1996. The Order and Award were confirmed by the U.S. District Court of Colorado in its Second Amended Judgment (the "Judgment") in June 1997. 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. Nukem appealed the judgment 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).
On November 13, 1998, Nukem/CRIC filed a motion 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 motion and requested 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. This request was denied. USECC filed a motion to dismiss the appeal of Nukem/CRIC to the 10th CCA, which is also pending. On or about March 7, 2000, Nukem and CRIC filed their opening brief with the 10th CCA. USECC filed its answer brief on April 10, 2000 and Nukem and CRIC filed their reply brief and the appeal is pending.
TOWNSITE LITIGATION
In fiscal 1998, a prior contract operator of the restaurant and lounge at Ticaboo, UT, and two employees supervising the motel and convenience store (owned by Canyon Homesteads, Inc.) and their corporation Dejavue, Inc. sued USE, Crested and others in the Utah 3rd District State Court. One of the
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
plaintiffs received a judgment against USE. USE appealed the judgment to the Utah Court of Appeals and the appeal was denied. USE petitioned for a writ of certiorari and the Utah Supreme Court denied the petition. On April 26, 2000, USE paid $294,787 being the full amount of the judgment with interest. USE is seeking reimbursement of the payment from USE's insurance company.
BOND GOLD BULLFROG INC. LITIGATION
USECC is a defendant and counter- or cross-claimant in certain litigation in the district Court of the Fifth Judicial District of Nye County, Nevada, brought by Bond Gold Bullfrog Inc. ("BGBI") on July 30, 1991. BGBI (now known as Barrick Bullfrog, Inc.) is an affiliate of Barrick Corp., a large international gold producer headquartered in Toronto, Canada. The litigation primarily concerns extra-lateral rights associated with two patented mining claims owned by Parador Mining Company Inc. ("Parador") and initially leased to a predecessor of BGBI, which claims are in and adjacent to BGBI's Bullfrog open pit and underground gold mine. USECC asserted certain interests in the claims under an April 1991 assignment and lease from Parador, which is subject to the lease to BGBI's predecessor. After a trial, the Court found against certain of the parties including Parador and USECC on their claims for extra lateral rights and BGBI on its claims. Parador, USECC and BGBI all appealed the decision to the Nevada Supreme Court. The appeal is pending.
DEPARTMENT OF ENERGY LITIGATION
On July 20, 1998, eight uranium mining companies with operations in the United States, including U.S. Energy Corp., 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. The complaint seeks declaratory judgment and injunctive relief. 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 USEC Inc. privatization 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, Wyoming. The Court took the motions under advisement and to date, has not entered a decision.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the United States District Court, Denver, Colorado (Case No. 98 WM 1630) against Contour Development Company, L.L.C. and entities and persons associated with Contour Development Company, L.L.C. (collectively "Contour") seeking compensatory and consequential damages from the defendants for dealings in certain real estate.
Specifically, USE alleges that Contour has breached contracts for the sale of the Company's Gunnison properties, and is in default on the promissory notes delivered to pay for the Gunnison properties. USE also alleges a pattern of fraud, interference with contractual relation, breach of fiduciary duty, conversion of USE's security for payment of the promissory notes unjust enrichment in Contour's dealings with the Company regarding such real estate. Contour answered denying all allegations of wrongdoing, asserting certain counterclaims, which USE has denied, and claiming that the Company's refusal to consent to a requested transfer of one of the properties excused Contour from paying the balances due on the promissory notes.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
Three of the defendants also filed motions to dismiss seeking relief from USE's notice of lis pendens. That motion was not granted pending further discovery. Settlement discussions have not been fruitful and USE is expected to resume the litigation against all defendants other than Val Olsen who petitioned for protection under Chapter 7 of the Bankruptcy Code and Gunnison Center Properties, L.L.C. which petitioned for protection under Chapter 11 of the Bankruptcy Code and several of Gunnison Center properties have been sold. The remaining defendants own other property which USE believes has sufficient value to satisfy any judgment that USE may obtain.
SGMC LITIGATION
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 challenges the actions of Amador County and its Board of Supervisors in certifying the Final Subsequent Environmental Impact Report (FSEIR) and approving the amended Conditional Use Permit (CUP).
A hearing was held on June 7, 1999, and on August 30, 1999, the Honorable Susan C. Harlan, Judge of the Superior Court in Amador County, issued a detailed written Memorandum of Opinion, denying every cause of action of Appellants'/Petitioners' Petition for Writ of Mandate, and upholding the County's certification of the FSEIR and approval of the amended CUP. In September 1999, the Concerned Citizens appealed Amador County Superior Court's decision to the Court of Appeals of the State of California Third Appellate District. On appeal, Appellants presented a more targeted approach, alleging only two violations of the Planning and Zoning Law and two violations of California Environmental Quality Act (CEQA). SGMC and the County filed their respective Respondent Briefs in March 2000. The appeal before the Court of Appeals is pending.
DENNIS SELLEY ET AL VS U.S. ENERGY CORP., CRESTED CORP. ET AL. On May 14, 1999, Dennis Selley personally and as personal representative of the Estate of Hannah Selley and his wife Mary B. Selley, filed a Civil Action No. 30869 in the Ninth Judicial District Court of Fremont County, Wyoming against U.S. Energy Corp., Crested Corp., Plateau and USECC, alleging that the defendants were negligent as a landlord in renting a double wide trailer (converted to a bunkhouse) near Ticaboo, Utah to plaintiffs' daughter Hannah Selley and seek various unspecified damages. Discovery is underway and the defendants have filed motions to stay the trial scheduled for September 25, 2000 because of the declaratory judgment action filed in Utah which may be dispositive of all issues. The motions are pending.
DECLARATORY JUDGMENT ACTION. The Workers Compensation Fund of Utah (the "Fund") filed a complaint for declaratory relief on July 26, 1999 against U.S. Energy Corp., Crested, Plateau, Lexington Insurance Company, Dennis Selley, as personal representative for the estate of Hannah Selley and others in Civil Action No. 99090 7500 before the Utah Third Judicial Court of Salt Lake County, Utah. The suit is to determine if Hannah Selley died in the course of her employment and the Fund's and Lexington Insurance Company's obligation to defend and indemnify the Company in the above Hannah Selley case. Lexington Insurance Company and the Company filed a joint motion for summary judgment in the case on July 21, 2000 alleging among other allegations that Hannah Selley was in the course and scope of her employment at the
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
time of her death. The Selleys filed their opposition to the motion on or about July 31, 2000. The motion is pending.
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 and USECC in the Sixth Judicial District Court, Campbell County, Wyoming, No. 22406. Kennecott is seeking to dissolve the GMMV joint venture with USECC and judicial approval of a plan to sell the GMMV or liquidate its assets plus attorney fees and costs. Defendants filed a motion to change venue to the District Court in Fremont County, Wyoming and the Sixth Judicial District court granted the motion. The case was then transferred to the Ninth Judicial District Court of Fremont county, WY in Civil Action No. 31322.
On March 13, 2000, the Company filed an answer denying the various allegations of Kennecott and counterclaims against plaintiff Kennecott and its parent Rio Tinto plc. The Company also filed a separate third party complaint against Rio Tinto plc. Kennecott filed a motion to dismiss the complaint and Rio Tinto filed a motion for judgment on the pleadings. A hearing date on the respective motions was set for May 30, 2000 but was continued for a time in September or October, 2000 to be set by the Court, as the parties attempted to negotiate a settlement. On July 14, 2000, Kennecott and USECC entered into a partial settlement wherein Kennecott paid USECC $250,000 to settle claims peripheral to the case concerning accounts receivables and other minor claims for work done and equipment used and mobilized by USECC for the GMMV. The litigation was settled on September 11, 2000. See Note M.
RECLAMATION AND ENVIRONMENTAL LIABILITIES
Most of the Company's mine development, exploration and operating activities are subject to federal and state regulations that require the Company to protect the environment. The Company conducts its mining operations in accordance with these regulations. The Company's current estimates of its reclamation obligations and its current level of expenditures to perform ongoing reclamation may change in the future. At the present time, however, the Company cannot predict the outcome of future regulation or its impact on costs. Nonetheless, the Company has recorded its best estimate of future reclamation and closure costs based on currently available facts, technology and enacted laws and regulations. Certain regulatory agencies, such as the Nuclear Regulatory Commission ("NRC"), the Bureau of Land Management ("BLM") and the Wyoming Department of Environmental Quality ("WDEQ") review the Company's reclamation, environmental and decommissioning liabilities, and the Company believes its recorded amounts are consistent with those reviews and related bonding requirements. To the extent that planned production on its properties is delayed, interrupted or discontinued because of regulation or the economics of the properties, the future earnings of the Company would be adversely affected. The Company believes it has accrued all necessary reclamation costs and there are no additional contingent losses or unasserted claims to be disclosed or recorded. The Company has not disposed of any properties for which it has a commitment or is liable for any known environmental liabilities.
The majority of the Company's environmental obligations relate to former mining properties acquired by the Company. Since the Company currently does not have properties in production, the Company's policy
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
of providing for future reclamation and mine closure costs on a unit-of-production basis has not resulted in any significant annual expenditures or costs. For the obligations recorded on acquired properties, including site-restoration, closure and monitoring costs, actual expenditures for reclamation will occur over several years, and since these properties are all considered future production properties, those expenditures, particularly the closure costs, may not be incurred for many years. The Company also does not believe that any significant capital expenditures to monitor or reduce hazardous substances or other environmental impacts are currently required. As a result, the near term reclamation obligations are not expected to have a significant impact on the Company's liquidity.
As of May 31, 2000, the Company has recorded estimated reclamation obligations, including standby costs, of $8,906,800 which is included in Reclamation and Other Long-term Liabilities in the accompanying Consolidated Balance Sheets. None of these liabilities have been discounted, and the Company has not recorded any potential offsetting recoveries from other responsible parties or from any insurance companies.
The Company currently has four mineral properties or investments that account for most of its environmental obligations, SMP, GMMV, Plateau and SGMC. The environmental obligations and the nature and extent of cost sharing arrangements with other potentially responsible parties, as well as any uncertainties with respect to joint and several liability of each are discussed in the following paragraphs:
SMP - ---
The Company is responsible for the reclamation obligations, environmental liabilities and liabilities for injuries to employees in mining operations with respect to the Sheep Mountain properties. The reclamation obligations, which are established by regulatory authorities, were reviewed by the Company and the regulatory authorities during fiscal 2000 and the balance in the reclamation liability account at May 31, 2000 of $1,496,800 is believed by management to be adequate. The obligation will be satisfied over the life of the mining project which is estimated to be at least 20 years. The Company self bonded this obligation by mortgaging certain of its real estate assets, including the Glen L. Larsen building, and by posting cash bonds.
GMMV - ----
During fiscal 1991, the Company acquired developed mineral properties on Green Mountain known as the Big Eagle Property. In connection with that acquisition, the Company agreed to assume reclamation and other environmental liabilities associated with the property. Reclamation obligations imposed by regulatory authorities were established at $7,300,000 at the time of acquisition. Immediately after the acquisition, the Company transferred a one-half interest to Kennecott, with Kennecott and the Company contributing their ownership in the Big Eagle properties to GMMV, which assumed the reclamation and other environmental liabilities. Kennecott provides bonding for the reclamation obligations for the benefit of GMMV.
As part of the settlement of the GMMV litigation with Kennecott, the Company has been released from any and reclamation and environmental obligations related to the GMMV. See Note M.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2000 (CONTINUED)
SUTTER GOLD MINING COMPANY
SGMC is currently owned 62% by the Company, 4% by Crested and 34% by private investors. SGMC owns gold mineral properties in California. Currently, these properties are on standby and have never been in production. Reclamation obligations are covered by a $27,000 reclamation bond which SGMC has recorded as a reclamation liability as of May 31, 2000.
PLATEAU RESOURCES, LIMITED
The environmental and reclamation obligations acquired with the acquisition of Plateau include obligations relating to the Shootaring mill. Based on the bonding requirements, Plateau transferred $2,500,000 to a trust account as financial surety to pay future costs of mill decommissioning, site reclamation and long-term site surveillance. In fiscal 1997, Plateau increased the NRC surety to a cash bond of $6,784,000 in order to have its standby license changed by the NRC to operational. As of May 31, 2000, Plateau held a cash deposit for reclamation in the amount of $7,952,600 which management believes will satisfy the obligation of reclamation.
EXECUTIVE COMPENSATION
The Company and USE are committed to pay the estates of certain of their officers one years' salary and an amount to be determined by the Boards of Directors, for a period of up to five years thereafter. This commitment applies only in the event of the death or total disability of those officers who are full-time employees of the Company and USE at the time of total disability or death.
L. DISCONTINUED OPERATIONS.
In February 1996, the Company completed the sale of 100% of the 8,267,450 outstanding shares of common stock of Brunton to a third party for $4,300,000 in accordance with a Stock Purchase Agreement dated January 30, 1996 (the "Purchase Agreement"). The Company received $300,000 at execution of the Purchase Agreement and approximately $3,000,000 at closing. The Company has also since been paid in full on the $1,000,000 balance. In addition, the Company is entitled to receive 45% of the profits before taxes as defined in the Purchase Agreement related to Brunton products existing at the time the Purchase Agreement was executed for a period of 4 years and three months, beginning February 1, 1996. The Company received payments of $52,000, $94,900 and $292,600 for profits in 2000, 1999 and 1998, respectively.
M. SUBSEQUENT EVENT
On September 11, 2000, the Company entered into a Settlement agreement with Kennecott related to the pending legal dispute discussed in Note K. In connection with this Settlement agreement, the Company has transferred its ownership interests in the GMMV to Kennecott, including its ownership interest in the Sweetwater Mill, the Jackpot Mine, the Big Eagle Mine and shop, and all patented and unpatented mining claims. The Company will receive various machinery and equipment held by the GMMV at the Jackpot Mine and $3.25 million of cash payments from Kennecott. In addition, Kennecott has assumed all the liabilities of the GMMV, including all reclamation and bonding requirements, except the reclamation liability associated with the Green Mountain Ion Exchange.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
In the event a definitive proxy statement containing the information being incorporated by reference into this Part III is not filed within 120 days of May 31, 2000, the Registrant will file such information under cover of a Form 10-K/A.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 with respect to directors and certain executive officers in incorporated herein by reference to Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders. The information regarding the remaining executive officers is contained in Part I of this report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference to the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 11 is incorporated herein by reference to the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 11 is incorporated herein by reference to the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, REPORTS AND FORMS 8-K.
(a) The following financial statements are filed as a part of the Report in Item 8:
Consolidated Financial Statements Page No. --------
U.S. Energy Corp. and Subsidiaries
Report of Independent Public Accounts...............................43
Consolidated Balance Sheets - May 31, 1999 and 1998..............44-45
Consolidated Statements of Operations
for the Years Ended May 31, 1999, 1998, and 1997.................46-47
Consolidated Statements of Shareholders' Equity for the Years Ended May 31, 1999, 1998, and 1997..........50-49
Consolidated Statements of Cash Flows
for the Years Ended May 31, 1999, 1998, and 1997.................51-53
Notes to Consolidated Financial Statements.......................54-81
(2) Not applicable.
(3) Exhibits Required to be Filed. Each individual exhibit filed herewith is sequentially paginated corresponding to the pagination of the entire Form 10-K. As a result of this pagination, the page numbers of documents filed herewith containing a table of contents will not be the same as the page number contained in the original hard copy.
Exhibit Sequential No. Title of Exhibit Page No. -------- ------------------------------------------------ ---------
3.1 USE Restated Articles of Incorporation.....................[4]
3.1(a) USE Articles of Amendment to Restated Articles of Incorporation.........................[8]
3.1(b) USE Articles of Amendment to Restated Articles of Incorporation (June 27, 2000)..........89
3.2 USE Bylaws, as amended through April 22, 1992..............[8]
4.1 Shamrock Partners, Ltd. 1/9/96 Warrant to Purchase 200,000 Common Shares of USE..................[13]
4.2 USE 1998 Incentive Stock Option Plan and Form of Stock Option Agreement 1/99...................[26]
4.3 USE Restricted Stock Bonus Plan, as amended through 2/94...................................[13]
4.4 Form of Stock Option Agreement, and Schedule, Options Issued 1/96.........................[14]
4.5 1/8/97 Amendment to Shamrock Partners, Ltd. 1/9/96 Warrant to Purchase 200,000 Common Shares of USE......................................[15]
4.6 Amendment to USE 1989 Incentive Stock Option Plan (12/13/96)..............................[15]
4.7 USE 1996 Stock Award Program (Plan).......................[15]
4.8 USE Restated 1996 Stock Award Plan and Amendment to USE 1990 Restricted Stock Bonus Plan.........[15]
4.9 Agreement with Sunrise Financial Group (12/1/97)..........[22]
4.10 Sunrise Financial Group 1/9/98 Warrant to Purchase 225,000 Common Shares of USE.....................[22]
4.11 Agreement with Shamrock Partners, Ltd. (1/20/98)..........[23]
4.12 Shamrock Partners, Ltd Warrant to Purchase 200,000 Common Shares of USE (1/23/98)....................[24]
10.1 USECC Joint Venture Agreement - Amended as of 1/20/89....................................[2]
10.2 Management Agreement with USECC............................[7]
10.3-10.4 [intentionally left blank]
10.5 Assignment and Lease - Parador.............................[7]
10.6 Employment Agreement - Daniel P. Svilar....................[4]
10.7 Airport Ground Lease - City of Riverton....................[7]
10.8 Executive Officer Death Benefit Plan.......................[4]
10.9 - 10.10 [intentionally left blank]
10.11 Sweetwater Mill Acquisition Agreement......................[7]
10.12 - 10.17 [intentionally left blank]
10.18 Master Agreement - Mt. Emmons/AMAX.........................[1]
10.19 [intentionally left blank]
10.20 Promissory Notes - ESOP/USE................................[6]
10.21 Self Bond Agreement with WY DEQ - Crooks Gap Properties....................................[2]
10.22 Security Agreement - ESOP Loans............................[6]
10.23 - 10.27 [intentionally left blank]
10.28 Memorandum of Joint Venture Agreement - GMMV...............[4]
10.29 Memorandum of Partnership Agreement - SMP.................[2]
10.30 - 10.31 [intentionally left blank]
10.32 Employee Stock Ownership Plan..............................[2]
10.33 [intentionally left blank]
10.34 Form of Stock Option Agreement and Schedule - 1989 Plan................................................[4]
10.35 Severance Agreement (Form).................................[8]
10.36 1992 Stock Compensation Plan Non-Employee Directors........[8]
10.37 Executive Compensation (John L. Larsen)....................[8]
10.38 Executive Compensation (Non-qualified Options).............[8]
10.39 ESOP and Option Plan Amendments (1992).....................[8]
10.40 Plateau Acquisition - Stock Purchase Agreement and Related Exhibits.......................................[9]
10.41 - 10.42 [intentionally left blank]
10.43 Acquisition Agreement between Kennecott Uranium Company, USE and USECC regarding GMMV (6/23/97)....................[16]
10.44 - 10.47 [intentionally left blank]
10.48 Exhibit I to Acquisition Agreement (see 10.43) - Fourth Amendment of Mining Venture Agreement among Kennecott Uranium Company, USE and USECC..................[21]
10.49 USE/Dominick & Dominick Securities, Inc. Stock Purchase Agreement for 157,530 Common Shares of USE.......[22]
10.50 USE/BPI Canadian Resource Fund Stock Purchase Agreement for 125,341 Common Shares of USE................[22]
10.51 USE/BPI Canadian Opportunities II Fund Stock Purchase Agreement for 125,341 Common Shares of USE.......[22]
10.52 USE/BPI Canadian Small Companies Fund Stock Purchase Agreement for 250,683 Common Shares of USE.......[22]
10.53 USE/Yellow Stone Fuels Corp. Exchange Rights Agreement.................................[28]
10.54 - 10.57 [intentionally left blank]
10.58 Outsourcing and Lease Agreement between YSFC and USECC....................................[15]
10.59 Convertible Promissory Note from YSFC to USECC............[15]
10.60 [intentionally left blank]
10.61 [intentionally left blank]
10.62 Agreement for Purchase and Sale of Assets (Rocky Mountain Gas, Inc. and Quantum Energy L.L.C.........92
21.1 Subsidiaries of Registrant................................[15]
[1] Incorporated by reference from the like-numbered exhibit to a Schedule 13D filed by AMAX on or about August 3, 1987.
[2] Incorporated by reference from the like-numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended May 31, 1989.
[3] Incorporated by reference from exhibit 3 to Amendment No 4. of a Schedule 13D filed by John L. Larsen, reporting an event of January 2, 1990.
[4] Incorporated by reference from the like-numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended May 31, 1990.
[5] Incorporated by reference from the like-numbered exhibit to the Registrant's Form 10-Q for the period ended February 28, 1991.
[6] Incorporated by reference from exhibit 2 to Amendment No. 6 of a Schedule 13D filed by John L. Larsen, reporting an event of May 28, 1991.
[7] Incorporated by reference from the like-numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended May 31, 1991.
[8] Incorporated by reference from the like-numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended May 31, 1992.
[9] Incorporated by reference from exhibit A to the Registrant's Form 8-K reporting an event of August 11, 1993.
[10] - [11] [intentionally left blank]
[12] Incorporated by reference from an exhibit to the Registrant's Post-Effective Amendment No. 1 to Form S-3 (SEC File No. 333-1967, filed April 3, 1996).
[13] Incorporated by reference from the like-numbered exhibit to the Registrant's Form S-1 registration statement, initial filing (SEC File No. 333-1689, filed June 18, 1996).
[14] Incorporated by reference from the like-numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended May 31, 1996
[15] Incorporated by reference from the like-numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended May 31, 1997.
[16] Incorporated by reference from Exhibit 10.49 to the Registrant's Annual Report on Form 10-K for the year ended May 31, 1997.
[17] - [20] [intentionally left blank]
[21] Incorporated by reference from Exhibit 10.54 to the Registrant's Annual Report on Form 10-K for the year ended May 31, 1997.
[22] Incorporated by reference from the like-numbered exhibit to the Registrant's Form S-1 Post- Effective Amendment No. 2 (SEC File No. 333-6189, filed April 24, 1998).
[23] Incorporated by reference from Exhibit 4.5 to the Registrant's Form S-1 Post-Effective Amendment No. 2 (SEC File No. 333-6189, filed April 24, 1998).
[24] Incorporated by reference from Exhibit 4.6 to the Registrant's Form S-1 Post-Effective Amendment No. 2 (SEC File No. 333-6189, filed April 24, 1998).
[25] Incorporated by reference from the like-numbered exhibit to the Registrant's S-1 registration statement, initial filing (SEC File No. 333-57957, filed June 29, 1998).
[26] Incorporated by reference from the like-numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended May 31, 1998.
[27] Incorporated by reference from the like-numbered exhibit to the Registrant's S-1 registration statement, Amendment No. 1 (SEC File No. 333-57957, filed October 29, 1998).
[28] Incorporated by reference from the like-numbered exhibit to the Registrant's S-4 registration statement (SEC File No. 333-72703, filed February 22, 1999).
(b) Reports filed on Form 8-K.
During the fourth quarter of the fiscal year ended on May 31, 2000, the Registrant filed no Form 8-K Reports.
(c) Required exhibits are attached hereto and listed above under Item 14(a)(3).
(d) Required financial statement schedules are listed and attached hereto in Item 14(a)(2).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: September 11, 2000 By: /s/ John L. Larsen -------------------------------- JOHN L. LARSEN, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: September 11, 2000 By: /s/ John L. Larsen -------------------------------- JOHN L. LARSEN, Director
Date: September 11, 2000 By: /s/ Keith G. Larsen -------------------------------- KEITH G. LARSEN, Director
Date: September 11, 2000 By: /s/ Harold F. Herron -------------------------------- HAROLD F. HERRON, Director
Date: September __, 2000 By: -------------------------------- DON C. ANDERSON, Director
Date: September __, 2000 By: -------------------------------- DAVID W. BRENMAN, Director
Date: September 11, 2000 By: /s/ Nick Bebout -------------------------------- NICK BEBOUT, Director
Date: September 11, 2000 By: /s/ H. Russell Fraser -------------------------------- H. RUSSELL FRASER, Director
Date: September 11, 2000 By: /s/ Robert Scott Lorimer -------------------------------- ROBERT SCOTT LORIMER, Principal Financial Officer and Chief Accounting Officer