U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 and 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported): April 15, 2004 (January 30,
2004)
U.S. ENERGY CORP.
-------------------
(Exact Name of Registrant as Specified in its Charter)
Wyoming 000-6814 83-205516
---------------------------- ------------------ -------------------
(State or othe jurisdiction (Commission (I.R.S. Employer
of incorporation) File No.) Identification No.)
Glen L. Larsen Building
877 North 8th West
Riverton, WY 82501
-------------------------------------------- --------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (307) 856-9271
Not Applicable
--------------
(Former Name, Former Address or Former Fiscal Year,
if Changed From Last Report)
1
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On January 30, 2004, U.S. Energy Corp., ("USE" or "the Company") through
its 88.5% owned subsidiary Rocky Mountain Gas, Inc. ("RMG") closed on the
acquisition of the assets of Hi-Pro, Production LLC ("Hi-Pro") for $6,800,000.
The purchase included an average working interest of 58% (average 46.4% net
revenue) in approximately 108 producing coalbed methane gas wells located in the
Powder River Basin of Wyoming and 40,120 undeveloped fee acres in the Powder
River Basin of Wyoming ("the Properties"). The purchase also included
miscellaneous equipment, inventory and office facilities.
The transaction was structured as an asset purchase, with a wholly owned
subsidiary of RMG, RMG I, LLC ("RMG I") as the purchaser, in connection with the
establishment of a mezzanine credit facility for up to $25,000,000 of secured
loans to acquire and develop more proven coalbed methane reserves. RMG replaced
Hi-Pro as the contract operator for 89% of the wells that were acquired.
For information about the terms of the transaction not summarized below,
see the Form 8-K/A filed on March 5, 2004. This Form 8-K/A files financial
information about the purchased assets and pro forma financial information. See
Item 7.
RMG negotiated the purchase based on the $7,113,000 present value,
discounted 10%, of gas reserves recoverable (and the estimated future net
revenues to be derived) from proved reserves in the Hi-Pro properties, as
estimated as of November 1, 2003.
The $6,800,000 purchase price reflects a deduction, negotiated by the
parties in January 2004, to account for the decrease in gas production from
October 2003 due to the impact on production from deferred maintenance on the
properties, and the expected cost of such maintenance work after closing.
- TERMS OF THE PURCHASE. The purchase price of $6,800,000 was paid:
* $ 776,700 cash by RMG, $75,000 of which was non refundable as of December
31, 2003.
* $ 588,300 net revenues from November 1, 2003 to December 31, 2003, which
were retained by Hi-Pro.(1)
* $ 500,000 by USE's 30 day promissory note (secured by 166,667 restricted
shares of USE common stock, valued at $3.00 per share).(2)
* $ 600,000 by 200,000 restricted shares of USE common stock (valued at
$3.00 per share).(3)
* $ 700,000 by 233,333 restricted shares of RMG common stock (valued at
$3.00 per share).(4)
* $3,635,000 cash, loaned to RMG I under the credit facility agreement
----------
$6,800,000
(1) RMG I paid all January operating costs at closing. Net revenues from
the purchased properties for January 2003 were credited to RMG I's
obligations under the credit facility agreement. These net revenues
were considered by the parties to be a reduction in the purchase price
which RMG I otherwise would have paid at the January 30, 2004 closing.
(2) Pursuant to the terms of the promissory note, USE issued 166,667
shares as payment in full of this obligation during the first quarter
of 2004.
(3) USE agreed to file a resale registration statement with the SEC to
cover public resale of these 200,000 shares.
2
(4) From November 1, 2004 to November 1, 2006, the RMG shares shall be
convertible at Hi-Pro's sole election into restricted shares of common
stock of USE. The number of USE shares to be issued to Hi-Pro shall
equal (A) the number of RMG shares to be converted, multiplied by
$3.00 per share, divided by (B) the average closing sale price of the
shares of USE for the 10 trading days prior to notice of conversion.
The conversion right is exercisable cumulatively, as to at least
16,666 RMG shares per conversion.
USE issued the participating lenders three year warrants to purchase a
total of 318,465 shares of common stock of USE (subject to vesting) at $3.30
cash per share. At closing of the Hi-Pro acquisition, warrants on 63,693 shares
vested. The remaining warrants will vest at the rate of the right to buy one USE
share for each $157 which RMG I subsequently borrows under the credit facility.
Regardless of when or if vested, all warrants will expire on the earlier of
January 30, 2007, or the 180th day after USE notifies the warrant holders that
USE's stock price has achieved or exceeded $6.60 per share for 15 consecutive
business days. USE has agreed to file a registration statement with the SEC to
cover public resale of the warrant shares.
RMG assumed a liability in the amount of $155,700 for royalty owner
payments that were in suspense. The assumption of this liability resulted in an
increase in the basis of proven properties.
RMG also signed a promissory note payable to Hi-Pro in the amount of
$115,000 for the purchase of miscellaneous inventory and office equipment and
field equipment. The purchase of these assets was in addition to the $6,800,000
purchase price of the Hi-Pro coalbed methane properties. The promissory note was
due on March 30, 2004 and bore no interest if it was timely paid. RMG retired
the note prior to its maturity date in March 2004.
In a separate transaction, RMG purchased 5 trucks from an affiliate of
Hi-Pro for $120,000. This transaction was completed by the payment of $4,500 in
cash and a promissory note to a commercial bank in the amount of $115,700.
As disclosed in the Company's Form 10-K for the year ended December 31,
2003, in June 2003, the Company and RMG contributed all their producing
properties into a newly formed entity for an equity position in that entity
(Pinnacle Gas Resources, Inc.). The Company and RMG therefore had no production
of coal bed methane gas as of December 31, 2003. The acquisition of Hi-Pro
therefore became 100% of the coal bed methane production for the Company and
RMG.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED. The following financial
statements for the Properties acquired in the Hi-Pro acquisition for the years
ended December 31, 2003, 2002 and 2001 are filed herewith:
INDEX PAGE
Report of Independent Certified Public Accountants 5
Statements of Revenue and Direct Operating Expenses of Acquired Hi - Pro
Properties 6
Notes to Financial Statements 7-9
(b) PRO FORMA FINANCIAL INFORMATION. The unaudited pro forma combined
balance sheet as of December 31, 2003, and the unaudited pro forma combined
statement of
3
operations for the year ended December 31, 2003, which give effect
to the acquisition of the Hi-Pro Properties are filed herein on pages 10-16.
4
Board of Directors
U.S. Energy Corp.
We have audited the accompanying Combined Statements of Revenue and Direct
Operating Expenses of Certain Acquired Property Interests (combined statements)
for the years ended December 31, 2003, 2002 and 2001. The combined statements
are the responsibility of the Acquired Properties management. Our responsibility
is to express an opinion on the combined statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the combined
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the combined
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the combined statements. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying combined statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for inclusion in the Form 8-K of U.S. Energy Corp.) as described in
Note A and are not intended to be a complete presentation of the Acquired
Properties revenue and expenses.
In our opinion, the combined statements referred to above present fairly,
in all material respects, the revenue and direct operating expenses as described
in Note A of the Acquired Property Interests for the years ended December 31,
2003, 2002 and 2001, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Grant Thornton LLP
Oklahoma City, Oklahoma
April 7, 2004
5
U.S. ENERGY CORP.
STATEMENTS OF REVENUE AND DIRECT OPERATING EXPENSES
OF ACQUIRED HI-PRO PROPERTIES
Year ended December 31,
2003 2002 2001
----------- ---------- ----------
Revenue- gas sales $ 4,381,100 $3,846,600 $6,922,500
Direct operating expenses
Lease operations 1,091,700 956,100 1,181,700
Production taxes 521,800 495,800 849,800
----------- ---------- ----------
1,613,500 1,451,900 2,031,500
----------- ---------- ----------
Excess of revenue over direct
operating expenses $ 2,767,600 $2,394,700 $4,891,000
=========== ========== ==========
The accompanying notes are an integral part of these statements.
6
U.S. ENERGY CORP.
NOTES TO STATEMENTS OF REVENUE AND
DIRECT OPERATING EXPENSES OF
ACQUIRED HI-PRO PROPERTIES
December 31, 2003, 2002 and 2001
NOTE A - BASIS OF PRESENTATION AND GENERAL INFORMATION
The accompanying combined statements present the ownership interests of the
Company in the revenue and direct operating expenses of certain coalbed methane
gas properties acquired in the acquisition of the Hi-Pro Properties on January
30, 2004. The combined statements include the revenue and direct operating
expenses of the Properties for the years ended December 31, 2003, 2002 and 2001.
The accompanying combined statements do not reflect provisions for
depletion, depreciation, and amortization, if any, which may have been recorded
in the financial records of the previous owner. The combined statements do not
reflect certain additional expenses that may have been incurred in connection
with the ownership of the Properties such as interest on indebtedness and
general and administrative expenses incurred individually by the prior interest
owners as such costs are not comparable to those which will result from the
future operation of the Properties.
Lease operations expense includes direct costs of operating the Properties.
The Properties are not taxpaying entities. Any taxable income arising from
the operation of the Properties accrues directly to the interest owners
Accordingly, no provision for income taxes has been made in the combined
statements of revenue and direct operating expenses.
NOTE B - GAS RESERVE DATA (UNAUDITED)
The following estimates of proved developed and proved undeveloped reserve
quantities and related standardized measure of discounted future net cash flows
are estimates only, and do not purport to reflect realizable values or fair
market values of the Properties' reserves. It is emphasized that reserve
estimates are inherently imprecise and that estimates of new discoveries are
more imprecise than those of producing oil and gas properties. Accordingly,
these estimates are expected to change as future information becomes available.
Proved reserves are estimated reserves of coalbed methane gas that
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those expected to be
recovered through existing wells, equipment, and operating methods.
7
U.S. ENERGY CORP.
NOTES TO STATEMENTS OF REVENUE AND
DIRECT OPERATING EXPENSES OF
ACQUIRED HI-PRO PROPERTIES
December 31, 2003, 2002 and 2001
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of gas (with consideration of price changes only to the
extent provided by contractual arrangements) to the estimated future production
of proved gas reserves, less estimated future expenditures (based on year-end
costs) to be incurred in developing and producing the proved reserves, and
assuming continuation of existing economic conditions. The estimated future net
cash flows are then discounted using a rate of 10% a year to reflect the
estimated timing of the future cash flows. The following summaries of changes in
reserves and standardized measure of discounted future net cash flows were
prepared from estimates of proved reserves developed by an independent petroleum
engineer and Company personnel. The acquired properties have no proved
undeveloped reserves.
CHANGE IN STANDARDIZED MEASURE OF QUANTITIES
December 31,
2003 2002 2001
MCF MCF MCF
---------- ---------- ----------
Beginning of Year 5,409,210 7,349,918 8,997,579
Revision of previous estimates (170,404) 628,246 (276,442)
Extensions & Discoveries - - 2,088,700
Production (1,834,113) (2,568,954) (3,459,919)
---------- ---------- -----------
End of Year 3,404,693 5,409,210 7,349,918
========== ========== ===========
8
U.S. ENERGY CORP.
NOTES TO STATEMENTS OF REVENUE AND
DIRECT OPERATING EXPENSES OF
ACQUIRED HI-PRO PROPERTIES
December 31, 2003, 2002 and 2001
NOTE B - OIL AND GAS RESERVE DATA (UNAUDITED) - CONTINUED
Changes in Standardized Measure of Discounted Future Net Cash Flows
Related to Proved Gas Reserves
December 31,
2003 2002 2001
------------ ------------ -------------
Standardized measure - beginning of year $11,000,591 $ 4,727,437 $ 45,547,500
Sale & Transfer, net of production cost (2,767,511) (2,394,703) (4,890,983)
Net change in sales & transfer price,
net of production cost 370,529 5,373,659 (30,173,881)
Extensions, discoveries and improved
recovery, net of future production and
development cost - - 1,343,452
Revision of Quantity Estimate (353,171) 1,277,650 (177,806)
Accretion of Discount 1,100,059 472,743 4,554,750
Change in Production Rate & Other (2,294,097) 1,543,805 (11,475,595)
----------- ----------- ------------
Standardized measure - end of year $ 7,056,400 $11,000,591 $ 4,727,437
=========== =========== ============
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U.S. ENERGY CORP.
PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
(UNAUDITED)
The unaudited pro forma combined condensed consolidated balance sheet as of
December 31, 2003 and the unaudited pro forma combined condensed consolidated
statement of operations for the year ended December 31, 2003 give effect to the
acquisition of certain property interests acquired in the acquisition of the
Hi-Pro Properties by U.S. Energy Corp. ("USE" or "the Company"), and its
subsidiary Rocky Mountain Gas, ("RMG") which has been accounted for using the
purchase method of accounting. The pro forma combined financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the operating results that would have occurred if the transactions given pro
forma effect herein had been consummated as of the time reflected herein, nor
are they necessarily indicative of the future operating results or financial
position of the Company. The pro forma adjustments are based upon available
information and certain assumptions that the Company believes are reasonable.
This information should be read in conjunction with the historical financial
statements and related notes of the Company and the Statements of Revenue and
Direct Operating Expenses of Hi-Pro Acquired Properties.
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U.S. ENERGY CORP. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
DECEMBER 31, 2003
(UNAUDITED)
ACQUISITION
ADJUSTMENTS
U.S. ENERGY FOR HI-PRO
HISTORICAL PROPERTIES COMBINED
------------ ------------ -----------
CURRENT ASSETS:
Cash and cash equivalents $ 4,084,800 $ (706,200) (1) $ 3,378,600
Accounts Receivable 397,700 551,100 (1) 948,800
Other Current Assets 708,900 88,300 (1) 797,200
------------ ------------ -----------
Total current assets 5,191,400 (66,800) 5,124,600
INVESTMENTS: 7,831,900 7,831,900
PROPERTIES AND EQUIPMENT:
Land, Buildings, Machinery and Oil Properties 12,884,100 146,700 (1) 13,030,800
Proven coal bed methane properties 3,285,300 (1) 3,285,300
Unproved coal bed methane properties
excluded from amortization 1,204,400 3,213,000 (1) 4,417,400
------------ ------------ -----------
Total property and equipment 14,088,500 6,645,000 20,733,500
Less accumulated depreciation,
depletion and amortization (6,901,400) (6,901,400)
------------ ----------- -----------
Net property and equipment 7,187,100 6,645,000 13,832,100
OTHER ASSETS: 3,719,300 145,000 (1) 3,864,300
------------ ------------ -----------
Total assets $23,929,700 $ 6,723,200 30,652,900
============ ============ ===========
The accompanying notes are an integral part of these statements.
11
U.S. ENERGY CORP. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS EQUITY
DECEMBER 31, 2003
(UNAUDITED)
ACQUISITION
ADJUSTMENTS
U.S. ENERGY FOR HI-PRO
HISTORICAL PROPERTIES COMBINED
------------- ------------- -----------
CURRENT LIABILITIES $ 1,909,700 $ 1,615,400 (1) $ 3,525,100
LONG-TERM DEBT 1,317,600 3,242,200 (1) 4,559,800
ASSET RETIREMENT OBLIGATIONS 7,264,700 372,100 (1) 7,636,800
OTHER ACCRUED LIABILITIES 2,158,600 2,158,600
DEFERRED GAIN ON SALE OF ASSET 1,295,700 1,295,700
MINORITY INTERESTS 496,000 700,000 (1) 1,196,000
COMMITMENTS AND CONTINGENCIES
FORFEITABLE COMMON STOCK, $.01 par value
465,880 and 500,788 shares issued,
forfeitable until earned 2,726,600 2,726,600
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value;
unlimited shares authorized; 12,824,698
and 13,024,698 shares issued respectively 49,833,800 793,500 (1) 50,627,300
Accumulated deficit (43,073,000) (43,073,000)
------------- ------------ -----------
Total shareholders' equity 6,760,800 793,500 7,554,300
------------- ------------- -----------
Total liabilities and shareholders' equity $ 23,929,700 $ 6,723,200 30,652,900
============= ============= ===========
The accompanying notes are an integral part of these statements
12
U.S. ENERGY CORP. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
Year Ended December 31, 2003
(Unaudited)
HI - PRO
U.S. ENERGY PROPERTIES ADJUSTMENTS COMBINED
------------- ------------ ------------- ------------
OPERATING REVENUES:
Gas sales $ 287,400 $ 4,381,100 $ - $ 4,668,500
Other 549,900 - - 549,900
------------- ------------ ------------- ------------
837,300 4,381,100 - 5,218,400
OPERATING COSTS AND EXPENSES:
Gas operations 313,100 1,613,600 1,601,600 (2) 3,528,300
Mineral holding costs 1,461,700 - - 1,461,700
General and administrative 6,300,400 - 485,900 (3) 6,786,300
------------- ------------ ------------- ------------
8,075,200 1,613,600 2,087,500 11,776,300
------------- ------------ ------------- ------------
OPERATING (LOSS) GAIN: (7,237,900) 2,767,500 (2,087,500) (6,557,900)
OTHER INCOME & EXPENSES:
Other Income 758,500 - - 758,500
Other Expenses (831,500) - - (831,500)
------------- ------------ ------------- ------------
(73,000) -- -- (73,000)
(LOSS) GAIN INCOME BEFORE
MINORITY INTEREST,
PROVISION FOR INCOME TAXES,
DISCONTINUED OPERATIONS
AND CUMULATIVE EFFECT ------------ ----------- ------------ ------------
OF ACCOUNTING CHANGE: $ (7,310,900) $ 2,767,500 $ (2,087,500) $ (6,630,900)
============ =========== ============ ============
NET (LOSS) INCOME PER SHARE
BASIC $ (0.65) $ (0.58)
NET (LOSS) INCOME PER SHARE $ (0.65) $ (0.58)
DILUTED
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 11,180,975 11,380,975
============ ============
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 11,180,975 11,380,975
============ ============
The accompanying notes are an integral part of these statements.
13
U.S. ENERGY CORP.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
NOTE A - BASIS OF PRESENTATION
On January 30, 2004, the Company acquired the Hi-Pro coalbed methane
Properties for $6,800,000 and other equipment, inventory and vehicles were also
purchased for approximately $235,000. The accompanying pro forma combined
condensed consolidated balance sheet has been presented as if the acquisition
occurred on December 31, 2003 and the accompanying pro forma combined condensed
consolidated statement of operations for the year ended December 31, 2003 has
been prepared as if the acquisition was consummated on January 1, 2003.
Basic earnings per share are based upon the weighted average number of
common shares outstanding. Diluted earnings per common share are based on the
assumption that all of the common stock options and purchase warrants are
converted into common shares using the treasury stock method. There are no
differences in net earnings for purposes of computing basic and diluted earnings
per share as conversion of the common stock options and purchase warrants would
have not effect on net earnings.
NOTE B - PRO FORMA ADJUSTMENTS
Pro forma adjustments are necessary to reflect the assumed effect of the
acquisition on the balance sheet as of December 31, 2003 and statement of
operations assuming the acquisition was consummated on January 1, 2003. The
accompanying pro forma balance sheet and statement of operations reflect the
following adjustments:
(1) To record the acquisition of the Hi-Pro properties as of December 31,
2003. The fair value of stock warrants to acquire USE stock and
overriding royalty interests on acquired properties conveyed to the
lender are reflected as discount on debt.
(2) To record pro forma overriding royalty to lender, depletion, fixed
operating expenses and asset retirement accretion related to the
Hi-Pro properties as though they had been purchased as of January 1,
2003.
(3) To record interest expense on the long term debt and the amortization
of warrants issued in relation to that debt and other debt issue cost
as though the Hi-Pro properties had been purchased as of January 1,
2003.
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U.S. ENERGY CORP.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
NOTE C - GAS RESERVE DATA (UNAUDITED)
The following tables contain certain gas disclosures reflecting the pro
forma combined gas activities as of and for the year ended December 31, 2003.
Summary of Changes in Proved Reserves
December 31,
2003
MCF
-------------
Beginning of Year 5,994,813
Revision of previous estimates (170,404)
Exchange of reserves in place (1) (504,087)
Production (1,915,629)
-------------
End of Year 3,404,693
=============
(1) During June 2003, RMG contributed proved and unproved properties in
exchange for a 37.5% interest in Pinnacle
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Gas Reserves
December 31,
2003
-------------
Future Cash Inflows $ 14,217,600
Future Cost $ (5,613,700)
-------------
Future Net Cash Flows $ 8,603,900
10% Discount Factor $ (1,547,500)
-------------
Standardized measure of discounted $ 7,056,400
=============
future net cash flows
15
U.S. ENERGY CORP.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
NOTE C - OIL AND GAS RESERVE DATA (UNAUDITED) - CONTINUED
Changes in Standardized Measure of Discounted Future Net Cash Flows
Related to Proved Gas Reserves
December 31,
2003
-------------
Standardized measure - beginning of year $ 11,889,019
Sale & Transfer, net of production cost (2,830,711)
Net change in sales & transfer price,
net of production cost 370,529
Revision of Quantity Estimate (353,171)
Accretion of Discount 1,188,902
Net Change in income tax (1) -
Exchange of reserves in place (2) (825,228)
Change in Production Rate & Other (2,382,940)
-------------
Standardized measure - end of year $ 7,056,400
=============
(1) Due to significant net operating loss carryforwards no income tax expense
is recognized
(2) During June 2003, RMG contributed proved and unproved properties in
exchange for a 37.5% interest in Pinnacle
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, hereunto duly authorized.
U.S. ENERGY CORP.
Dated: April 15, 2004 By: /s/ Robert Scott Lorimer
---------------------------
Robert Scott Lorimer
17