SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required] for the fiscal
year ended May 31, 1996 or
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
[No Fee Required] for the transition period from ____ to ____
Commission file number 0-6814
U.S. ENERGY CORP.
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(Exact Name of Registrant as Specified in its Charter)
Wyoming 83-0205516
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West, Riverton, WY 82501
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (307) 856-9271
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
---------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES X NO
The aggregate market value of the shares of voting stock held
by non-affiliates of the Registrant as of September 6, 1996,
computed by reference to the average of the bid and asked prices of
the Registrant's common stock as reported by the National Market
System of NASDAQ on that date, was approximately $84,667,813.
Class Outstanding at September 9, 1996
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Common Stock, $0.01 par value 6,686,909 shares
<PAGE>
Documents incorporated by reference: Portions of the documents
listed below have been incorporated by reference into the indicated
parts of this report as specified in the responses to the
referenced sections of this filing.
Annual Meeting Proxy Statement for the fiscal year ended
May 31, 1996 into Part III of the filing.
Indicate by check mark if disclosure of delinquent filers, pursuant
to Item 405 of Regulation S-K is not contained herein and will not
be contained, to the best of the Registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
<PAGE>
PART I
Item 1 and Item 2. Business and Properties
(a) General.
U.S. Energy Corp. ("USE", the "Company" or the "Registrant") is in
the general minerals business of acquiring, exploring,developing
and/or selling or leasing of mineral properties and, mining and
marketing of minerals. USE is now engaged in two principal mineral
sectors: uranium and gold, both of which are in the development
stage. Interests are held in other mineral properties (principally
molybdenum), but are either non-operating interests or undeveloped
claims. The Company also carries on small oil and gas operations
in Montana and Wyoming. Other USE business segments are commercial
operations (real estate and general aviation) and construction
operations.
Most of USE operations are conducted through a joint venture with
Crested Corp. ("Crested", a majority-owned subsidiary), and various
joint subsidiaries of USE and Crested. The joint venture with
Crested is hereafter referred to as "USECC". Construction
operations are carried on primarily through USE's subsidiary Four
Nines Gold, Inc. ("FNG"). Oil and gas operations are carried on
through Energx, Ltd., a subsidiary of the Company and Crested. USE
and Crested originally were independent companies,with two common
affiliates (John L. Larsen and Max T. Evans). In 1980, USE and
Crested formed a joint venture to do business together (unless one
or the other elected not to pursue an individual project). As a
result of USE funding certain of Crested's obligations from time to
time (due to Crested's lack of cash on hand), and later payment of
the debts by Crested issuing common stock to USE, Crested became a
majority owned subsidiary of USE in fiscal 1993. See Part III of
this Report.
Until February 1996, the Company also conducted manufacturing
and/or marketing of professional and recreational outdoor products
through The Brunton Company ("Brunton"), a wholly-owned USE
subsidiary. As of February 1, 1996, Registrant sold all of the
shares of Brunton to Silva Production AB for $4,300,000 plus 45% of
the net profits before taxes derived from the sale of Brunton
products for four years and three months; the 45% interest in
income before taxes will begin being received in fiscal 1997. The
sale eliminated Brunton's manufacturing and/or marketing of
professional and recreational outdoor products from the commercial
segment of Registrant's business as of January 31, 1996, except to
the extent that there are net profit payments from Silva over the
next four years, of which there can be no assurance. For the
fiscal year ended May 31, 1996, Brunton's sales provided 25% of net
revenues of USE (before reclassification to reflect Brunton as
discontinued operations with respect to the Company) compared with
49% net revenues for the fiscal year ended May 31, 1995. The
purchase price of $4,300,000 was in the form of $3,300,000 in cash
and a $1,000,000 promissory note. The February 1996 receipt of
approximately $2,900,000 in net cash from the sale (and future
payments on Silva's $1,000,000 promissory note and any profits
payments) enhanced the Company's financial condition and medium
term liquidity as well as providing additional resources to develop
the Company's uranium and gold properties.
The Brunton sale was prompted in part by Registrant's desire to
focus on its core minerals sector. The Company plans to
consolidate all of its uranium assets into a single subsidiary and
finance the startup of its mines and mill operations with debt or
equity funding. Of course, there can be no assurance uranium
prices will remain at their current level, that USE will succeed in
its efforts to obtain long-term uranium supply contracts required
to operate its uranium properties profitably, or that the required
financing will be available to put such properties into operation.
USE was incorporated in Wyoming in 1966. All operations are in the
United States. Principal executive offices are located in the Glen
L. Larsen building at 877 North 8th Street West, Riverton, Wyoming
82501, telephone (307) 856-9271.
(b) Financial information about industry segments.
The Registrant operates in three business segments: (i) minerals,
(ii) commercial operations, and (iii) construction operations. See
Footnote I to the Consolidated Financial Statements. The
Registrant engages in other miscellaneous activities such as oil
and gas exploration, development and production. The principal
products of the operating units within each of the reportable
industry segments are:
INDUSTRY SEGMENTS PRINCIPAL PRODUCTS
Minerals Sales and leases of mineral-bearing
properties and, from time to time,
the production and/or marketing of
uranium, gold and molybdenum.
Commercial Operations Operation of a motel and rental of
real estate, operation of an
aircraft fixed base operation
(aircraft fuel sales, flight
instruction and aircraft
maintenance), and provision of
various contract services, including
managerial services for subsidiary
companies.
Construction Operations Construction of irrigation, flood
control, municipal sewer and similar
projects.
Percentage of Net Revenue contributions by the three USE segments
in the last three fiscal years were:
Percentage of Net Revenue During Year Ended
May 31, May 31, May 31,
1996 1995 1994
Minerals 32% 2% 50%
Commercial Operations 15% 26% 13%
Construction Operations 39% 28% 30%
USE did not receive revenues from the mining of either uranium or
gold in the three fiscal years ended May 31, 1996. During fiscal
1996 and 1994, however, mineral revenues were generated from sales
of uranium under certain of the utility supply contracts held by
Sheep Mountain Partners ("SMP", a Colorado general partnership),
USE and Crested delivering their one-half share or 100% of uranium
and receiving net sales proceeds therefrom with profits deposited
in SMP accounts. In addition, during fiscal 1994 mineral revenues
were received from the sale of mineral properties. For fiscal
1995, there were no revenues from mineral sales in part due to the
arbitration proceedings involving SMP (see Item 3 - "Legal
Proceedings - Sheep Mountain Partners Arbitration/Litigation"). In
addition, USE will attempt to commence production of uranium
concentrates production from the mill belonging to Plateau
Resources, Limited ("Plateau"), a 100% subsidiary of the Company,
at Ticaboo, Utah which is expected to result in the procurement of
utility supply contracts for Plateau in fiscal 1997. There can be
no assurance, however, such milling operations will commence, or
that new utility supply contracts will be procured. See
Description of "Business - Minerals - Uranium."
(c) Narrative description of business by industry segment
(including Item 2 - Properties disclosure).
Minerals
Uranium
General
USE has interests in several uranium-bearing properties in Wyoming
and Utah and in uranium processing mills in Sweetwater County,
Wyoming (the "Sweetwater Mill") and in southeastern Garfield
County, Utah (the "Shootaring Mill"). All the uranium-bearing
properties are located in areas which have produced significant
amounts of uranium in the 1970s and 1980s. The Company is planning
to develop and operate these property interests (directly or
through a joint venture in which another company may be the
operator) to produce uranium concentrates ("U3O8") for sale to
public utilities that operate nuclear powered electricity
generating plants.
The property interests in Wyoming are:
521 unpatented lode mining claims (the "Green Mountain Claims") on
Green Mountain in Fremont County, Wyoming, including 105 claims on
which the Round Park (Jackpot) uranium deposit is located, and the
Sweetwater Mill, (approximately 23 miles south of the proposed
Jackpot Mine). These assets are held by the Green Mountain Mining
Venture ("GMMV"), owned 50 percent by the Company and USECC (the
"USE Parties"), and 50 percent by Kennecott Uranium Company
("KUC"), a subsidiary of Kennecott Energy and Coal Company of
Gillette, WY. Kennecott Energy and Coal Company and Kennecott
Corporation of Salt Lake City, UT are subsidiaries of RTZ PLC of
London. KUC is also referred to in this report as Kennecott. All
claims are accessible by county and United States Bureau of Land
Management ("BLM") access roads. Substantial exploration and
delineation of the principal uranium resources in the proposed
Jackpot Mine have been completed. The BLM has signed a Record of
Decision approving the Jackpot Mine Plan of Operations following
preparation of a final Environmental Impact Statement ("EIS") for
the proposed mine, and on June 25, 1996, the Wyoming Department of
Environmental Quality ("WDEQ") issued Mine Permit No. 660 that is
required for GMMV to develop the underground Jackpot Mine and mine
the uranium deposits. The proposed mine has had no previous
operators, and will be a new mine when opened. The Big Eagle Mine
and related claim groups (which are near the proposed Jackpot Mine
and are part of the Green Mountain Claims held by the GMMV), are
accessible by county and private roads. The Big Eagle Mine was
first operated by Pathfinder Mines Corporation ("PMC") starting in
the late 1970s.
Unpatented lode mining claims, underground and open pit uranium
mines and mining equipment in the Crooks Gap area are located on
Sheep Mountain in Fremont County, Wyoming and are adjacent to and
west of the Big Eagle mining claims held by the GMMV. These assets
are held by the Sheep Mountain Partners partnership ("SMP"), the
partners of which are USE and Crested, doing business as USECC, and
Nukem, Inc. ("NUKEM"), through its wholly-owned subsidiary Cycle
Resource Investment Corporation ("CRIC"). The SMP Sheep Mountain
Mines 1 and 2 are accessible by county and private roads and were
first operated by Western Nuclear, Inc., a subsidiary of Phelps
Dodge Corporation, in the late 1970s. The SMP and GMMV properties
contain uranium mineralization in sandstones of Tertiary age, as is
typical of most Wyoming uranium deposits.
Electric power to all the above Wyoming properties is furnished by
either Pacific Power & Light or Hot Springs Rural Electric
Association.
The property interests in Utah are:
The Tony M Mine and the Frank M property are underground uranium
deposits in San Juan County, Utah located partially on Utah State
mining leases. These properties are accessible by county roads.
The Company has a contract with Nuclear Fuels Services calling for
transfer of the Tony M mine and the Frank M properties to the
Company upon approval by the State of Utah of a new bond securing
Plateau's obligations to reclaim these properties. The Tony M mine
was originally developed by Plateau at the time Plateau was owned
by Consumers Power Company ("CPC"), a Michigan public utility.
Significant areas of uranium mineralization have been accessed and
delineated by the prior owner's underground workings. When the
Tony M Mine was in production (while Plateau was owned by CPC) it
produced ore containing from three to eight pounds of uranium
concentrates per ton. Some of this ore was processed at the
Shootaring Mill into U3O8, the saleable product. In addition, low
grade uranium ore was stockpiled at the Tony M mine and at the
Shootaring Mill, and related mill support facilities, which are
held by Plateau.
Plateau also owns the Velvet Mine and the nearby Wood Mine complex
in the Lisbon Valley area in southeastern Utah. The Velvet uranium
mine was fully developed and permitted by its prior owner and is
located approximately 178 miles by road from the Shootaring Mill.
The Wood Mine complex was formerly an operating uranium mine with
a remaining undeveloped resource. Access to this resource would be
by extending a drift approximately 2,500 feet from the former Wood
Mine. The Wood Mine property is not permitted at this time, but
the Company does not expect difficulty in obtaining a new permit
because the surface facilities would occupy the site that has been
disturbed from previous operations.
The Green Mountain Mining Venture Project
GMMV. In fiscal 1991, USE and Crested entered into an agreement to
sell 50 percent of their interests in the Green Mountain uranium
claims, and certain other rights to Kennecott for $15,000,000 cash
(USE's share of the proceeds was $12,600,000, and the balance was
Crested's). In fiscal 1991, Registrant and USECC ("USE Parties")
and Kennecott formed the GMMV to develop, mine and mill uranium ore
from the Green Mountain Claims, and market U3O8 to utilities using
nuclear power to generate electricity.
Kennecott agreed to fund the first $50,000,000 of GMMV
expenditures, pursuant to Management Committee budgets.
Thereafter, GMMV expenses will be shared by the parties generally
in accordance with their participating interests (50 percent
Kennecott, 50 percent USE Parties). The agreement also provides
that Kennecott will pay a disproportionate share (up to an
additional $45,000,000) of GMMV operating expenses, but only out of
cash operating margins from sales of processed uranium at more than
$24.00/lb (for $30,000,000 of such operating expenses), and from
sales of processed uranium at more than $27.00/lb (for the next
$15,000,000 of such operating expenses).
Pursuant to the joint venture agreement, each party's participation
interest in the GMMV is subject to reduction for voluntary or
involuntary failure to pay its share of expenses as required in
approved budgets (including Kennecott's commitment to fund the
initial $50,000,000 of GMMV expenditures), so that in effect, the
interest held by each party collateralizes its performance.
However, a defaulting party would remain liable for third party
liabilities incurred during GMMV operations, proportionate to its
interest before reduction.
GMMV cash flows will be shared between Kennecott and the USE
Parties according to their participation interests. However, 105
of the Green Mountain Claims, which cover the Round Park (Jackpot)
uranium deposit, currently believed to be the most significant
mineralized resource on Green Mountain, were formerly owned solely
by USE. Pursuant to an agreement between USE and Crested, cash
flow from production of uranium out of these 105 Green Mountain
Claims will be distributed only to USE and Kennecott, and GMMV
expenditures on such properties will be shared 50 percent by USE
and 50 percent by Kennecott. Milling costs will be paid by GMMV as
operating costs and shared among the participants according to
their ownership interests in the ore being milled.
The USE Parties' share of GMMV cash flow resulting from the balance
of the properties (outside the 105 claims), previously owned by USE
and Crested together, will be shared equally by USE and Crested.
GMMV expenditures from such properties will be shared 25 percent
each by USE and Crested, and 50 percent by Kennecott. Such latter
properties are expected to be developed after the Round Park
(Jackpot) deposit is placed into production; uranium deposits on
these properties may be accessed through the proposed tunnels at
the Jackpot Mine.
The GMMV Management Committee has three Kennecott representatives
and two USECC representatives, acts by majority vote, and appoints
and supervises the project manager. In fiscal 1993, Kennecott
became the GMMV project manager and has continued as project
manager since then. USECC has continued work on a contract basis
at Kennecott's request.
Pre-development activities on the GMMV properties have included
environmental and mining equipment studies, mine permitting and
planning work, property maintenance, setting up a uranium marketing
program, acquisition and monitoring of the Sweetwater Mill and
preparation of an application to the U. S. Nuclear Regulatory
Commission ("NRC") to convert the Sweetwater Mill license from
standby to an operating license. During fiscal 1996, GMMV
completed a sediment dam, sediment basin and drainage diversion
ditch, built a fuel storage facility and other support facilities
and made improvements to existing facilities. As of the date this
10-K Report is filed, the GMMV has not established a schedule for
the commencement of mine development work necessary to put the GMMV
properties into production. Discussions are underway between
Kennecott and the USE Parties to consider combining all uranium
assets of the GMMV and USECC, to the extent possible, into a single
entity. The parties are also exploring various alternative plans.
Properties and Mine Plan. GMMV owns a total of 521 claims on Green
Mountain, including the 105 claims on which the Round Park
(Jackpot) uranium deposit is located. Surface rights are owned by
the United States Government under management by the BLM. In
addition, other uranium mineralization has been delineated in the
Phase 2 and Whiskey Peak deposits on these claims, which formerly
belonged to USE and Crested. These deposits are undeveloped.
Roads and utilities have been put in place, which are believed to
be satisfactory to support future mine development.
GMMV also owns the Big Eagle Properties on Green Mountain, which
appear to contain substantial remaining uranium mineralization, and
are adjacent to the other GMMV mining claims. The Big Eagle
Properties contain one underground and two open-pit mines, as well
as related roads, utilities, buildings, structures, equipment and
a stockpile of ore. The assets include 38,000 and 8,000 square
foot buildings formerly used by Pathfinder Mines Corporation
("PMC") in mining operations. Also included are three ore-hauling
vehicles, each having a 100-ton capacity. Permits transferred to
the GMMV for the properties include: a permit to mine, an air
quality permit, and water discharge and water quality permits. The
GMMV owns the mineral rights to the underlying unpatented lode
mining claims.
The Round Park (Jackpot) mining claims contain deposits of uranium
which have been estimated to contain 52 million pounds of U3O8
averaging .23% uranium oxide using a grade-thickness cut-off of .6
(i.e., deposit areas were excluded unless deposit bed thickness at
intercept, times intercept grade of uranium mineralization,
exceeded .6). The GMMV plans to mine this deposit from the Jackpot
Mine, which will be driven underground from the south side of Green
Mountain. The first of several mineralization horizons is about
2,300 feet vertically down from the top of Green Mountain.
The Jackpot Mine Plan of Operations provides for two declines to be
driven from the side of Green Mountain, extending about 10,400 feet
into the deposits; one decline will be used for ventilation and
transportation of personnel, and the other will convey ore, rock
and waste out of the mine. The mine plan estimates that the
Jackpot Mine will produce about 3,000 tons of uranium ore per day
and will have an expected mine life of 13 to 22 years. It will
utilize the existing Big Eagle Mine facilities located about two
miles west of the Jackpot Mine site. As many as 250 workers will
be required during mining operations.
USE Parties expect mine development costs will not exceed
$25,000,000 to begin production from the Round Park (Jackpot)
deposit. However, cost estimates may change as exploration and
initial development progress. Pursuant to the GMMV agreement,
Kennecott has agreed to fund the initial $50,000,000 in development
costs including reclamation costs. To May 31, 1996, such
expenditures total approximately $16,565,000. Additional costs
would be funded by operations and/or by cash assessments on the
venturers.
Sweetwater Mill. In fiscal 1993, GMMV acquired the Sweetwater
uranium processing mill and associated properties located in
Sweetwater County, Wyoming, approximately 23 miles south of the
proposed Jackpot Mine, from Union Oil Company of California
("UNOCAL"), primarily in consideration of Kennecott and the GMMV
assuming environmental liabilities, and decommissioning and
reclamation obligations.
Kennecott is manager of the Sweetwater Mill and, as such, will be
compensated by GMMV out of production. Payments for pre-operating
management will be based on a sliding scale percentage of mill cash
operating costs prior to mill operation; payments for operating
management will be based on 13 percent of mill cash operating costs
when processing ore. Mill holding costs are paid by GMMV and
funded by Kennecott as part of its $50,000,000 funding commitment.
The Sweetwater Mill includes buildings, milling and related
equipment, real estate improvements, mining and mill site claims
and other real property interests, personal property and intangible
property (including government permits relating to operation of
those properties). The major assets are the mill buildings and
equipment located on approximately 92 acres.
The mill was designed as a 3,000 ton per day ("tpd") facility.
UNOCAL's subsidiary Minerals Exploration Company reportedly
processed in excess of 4,200 tpd for sustained periods. The mill
is one of the newest uranium milling facilities in the United
States, and has been maintained in good condition. UNOCAL has
reported that the mill buildings and equipment have historical
costs of $10,500,000 and $26,900,000, respectively.
As consideration for the Sweetwater Mill, GMMV agreed to indemnify
UNOCAL against certain reclamation and environmental liabilities,
which indemnification obligations are guaranteed by Kennecott
Corporation (parent of Kennecott Uranium Company). GMMV has agreed
to be responsible for compliance with mill decommissioning and land
reclamation laws, for which the environmental and reclamation
bonding requirements are approximately $24,330,000, which includes
a $4,560,000 bond required by the NRC. None of the GMMV future
reclamation and closure costs are reflected in Registrant's
Consolidated Financial Statements (see Note K to USE Consolidated
Financial Statements for fiscal year ended May 31, 1996).
The reclamation and environmental liabilities assumed by GMMV
consist of two categories: (1) cleanup of the inactive open pit
mine site near the mill (the source of ore feedstock for the mill
when operating under UNOCAL), including water (heavy metals and
other contaminants) and tailings (heavy metals dust and other
contaminants requiring abatement and erosion control) associated
with the pit; and (2) decontamination and cleanup and disposal of
the mill building, equipment and tailings cells after mill
decommissioning. On June 18, 1996, Kennecott established an
irrevocable Letter of Credit through Morgan Guaranty Trust Company
of New York City in the amount of $19,767,079 in favor of the
Wyoming Department of Environmental Quality ("WDEQ") for
reclamation requirements of the GMMV. The Letter of Credit was
increased by $10,000 on August 26, 1996 to cover off-permit wetland
enhancement. The WDEQ exercises delegated jurisdiction from the
United States Environmental Protection Agency ("EPA") to administer
the Clean Water Act and the Clean Air Act, and directly administers
Wyoming statutes on mined land reclamation. The Sweetwater Mill is
also regulated by the NRC for tailings cells and mill
decontamination and cleanup. The EPA has continuing jurisdiction
under the Resource Conservation and Recovery Act, pertaining to any
hazardous materials which may be on site when cleanup work is
started.
Although the GMMV is liable for all reclamation and environmental
compliance costs associated with mill and site maintenance, as well
as mill decontamination and cleanup and site reclamation and
cleanup after the mill is decommissioned, USE believes it is
unlikely USE would have to pay for such costs directly. First,
based on current estimates of cleanup and reclamation costs
(reviewed annually by the oversight agencies), such costs for the
letters of credit or other surety appear to be within the
$50,000,000 development commitment of Kennecott for GMMV. These
costs are not expected to increase materially if the mill is not
put into operation. Second, UNOCAL has agreed that if GMMV incurs
expenditures for environmental liabilities prior to the earlier of
commercial production by GMMV or February 1, 2001, (which
liabilities are not due solely to the operations of GMMV), then
UNOCAL will reimburse GMMV the first $8,000,000 of such
expenditures. Any such reimbursement may be recovered by UNOCAL
from 20% of future cash flows from sale of uranium concentrates
processed through the mill. Third, payment of reclamation and
environmental liabilities related to the mill is guaranteed by
Kennecott. Last, the GMMV will set aside a portion of operating
revenues to fund reclamation and environmental liabilities when
mining and milling operations are finally shut down.
Kennecott will be entitled to contribution from the USE Parties in
proportion to their participation interests in GMMV, if Kennecott
is required to pay mill cleanup costs directly pursuant to its
guarantee. Such contributions would be required only if the
liabilities cannot be satisfied by Kennecott within the initial
$50,000,000 development commitment, and then only to the extent
there are insufficient funds from the accumulated reclamation
reserve. In addition, if and to the extent such liabilities
resulted from UNOCAL's mill operations, and payment of the
liabilities was required before February 1, 2001 and before mill
production resumes, then up to $8,000,000 of that amount would be
paid by UNOCAL, before Kennecott would be required to pay on its
guarantee. However, notwithstanding the preceding, the extent of
any ultimate USE liability for contribution to mill cleanup costs
cannot be predicted.
Permitting. In March 1993, GMMV applied to the WDEQ for a Permit
to Mine the Round Park deposit through the Jackpot Mine, for up to
22 years. Following preparation of a final EIS by the BLM,
including a series of public meetings and a period for receipt of
written comments on both the preliminary and final EIS, on April
24, 1996 the BLM signed the Record of Decision ("ROD") approving
the Jackpot Mine Plan of Operations. With the entry of the ROD,
the WDEQ issued the mine permit for the Jackpot Mine on June 26,
1996. This Permit allows GMMV to proceed with construction of mine
facilities, further underground mine development and eventual
mining of the Round Park (Jackpot) Deposit.
The Jackpot Mine Plan of Operations and a combination of the
alternatives analyzed in the EIS will allow for the disposal of
mine waste rock in the Big Eagle Mine pits and the upgrading of
existing roads and the construction of new haul road segments for
transport of ore to the Sweetwater Mill. These roads will be
subject to modification in alignment necessary to minimize or avoid
adverse impacts to riparian and cultural resources.
The maximum area of new disturbance required for the project will
be 289 acres. This disturbance will include 118 acres for mine
site development and 171 acres for transportation corridor
construction and/or improvement. When uranium reserves have been
depleted, the mine portals will be plugged and the ground surface
recontoured and reclaimed to blend with the natural landscape.
Also, surface structures will be removed, roads closed per
landowner or BLM request, and disturbed areas reclaimed.
Kennecott, as operator of the Sweetwater Mill, has initiated
discussions and made appropriate filings with the NRC regarding
amendments to the Source Material License to resume ore processing
at the Sweetwater Mill. Separately, Kennecott has applied to the
NRC for permission to use a mill tailings cell to hold low level
tailings waste from an ion exchange plant owned by USE and Crested
in the Crooks Gap area.
The United States Environmental Protection Agency ("EPA") has
advised Kennecott, as operator of the GMMV, that if Kennecott would
level the tailings within the existing tailings impoundment and
install a new liner with leak detection capability, the EPA would
allow the use of the existing 60 acre tailings cell for milling
operations. USE anticipates that this would result in substantial
cost savings to GMMV and reduce the time required for the
Sweetwater Mill to resume operations.
The Environmental Protection Agency has promulgated final rules for
radon emissions. These regulations affect the mining and milling
of uranium and may require substantial expenditures for compliance.
GMMV may need to install venting at mine sites, and must monitor
radon emissions at the mines, as well as wind speed, direction and
other conditions. USE believes all of the uranium operations in
which it owns an interest are in compliance with these rules.
There ultimately will be an effect on USE earnings from
environmental compliance expenditures by GMMV, since GMMV
operations will be accounted for by the equity method. GMMV's
expenses for compliance with environmental laws (as well as other
matters) are not expected to materially affect USE cash flow during
the next two years, as Kennecott will fund the first $50,000,000 of
costs of GMMV, of which approximately $16,565,000 had been expended
as of May 31, 1996.
Kennecott Corporation is a wholly-owned United States subsidiary of
The RTZ Corporation PLC ("RTZ"), a United Kingdom public company.
RTZ (now part of the RTZ-CRA Group) is one of the world's leading
international natural resource companies. Kennecott Corporation
owns and operates several mines through wholly-owned subsidiaries,
including the Bingham Canyon, Utah open pit copper mine which was
started in 1906.
Registrant is not aware of any guarantee by Kennecott Corporation,
RTZ or any subsidiary of Kennecott Corporation or RTZ of the
performance by Kennecott Uranium Company of Kennecott Uranium
Company's development commitment under the GMMV joint venture
agreement. Further, USE has no knowledge whether earnings of
Kennecott Uranium Company are retained by it, or remitted to its
parent. Accordingly, performance by Kennecott Uranium Company of
its development commitment under the GMMV joint venture agreement
can not be assured.
Plateau's Shootaring Canyon Mill
Acquisition of Plateau Resources, Limited ("Plateau"). In August
1993, Registrant purchased from Consumers Power Company ("CPC"),
all of the outstanding stock of Plateau, which owns the Shootaring
Canyon uranium processing mill and support facilities in
southeastern Utah (the "Shootaring Mill"). The Shootaring Mill
holds a source materials license from the NRC.
Registrant paid nominal cash consideration for the Plateau stock,
but as additional consideration, Registrant has agreed:
(a) to perform or cause Plateau to perform all studies, remedial or
other response actions or other activities necessary from time to
time for Plateau to comply with environmental monitoring and other
provisions of (i) federal and state environmental laws relating to
hazardous or toxic substances, and (ii) the Uranium Mill Tailings
Radiation Control Act, the Atomic Energy Act of 1954, and
administrative orders and licenses relating to nuclear or
radioactive substances or materials on the property of, or produced
or released by, Plateau; and
(b) to indemnify CPC from all liabilities and costs related to the
presence of hazardous substances or radioactive materials on
Plateau property, and to any future violation of laws and
administrative orders and licenses relating to the environment or
to nuclear or radioactive substances.
At closing, Plateau transferred $2,500,000 cash to fund the "NRC
Surety Trust Agreement" with a commercial bank as trustee. The
trustee is to pay future costs of Shootaring Mill decommissioning,
site reclamation, and long term site surveillance, as directed by
the NRC. The amount transferred to the trust is the minimum amount
now required by the NRC as financial assurance for clean up after
permanent shut down of the Shootaring Mill.
Also at closing, Plateau transferred $4,800,000 cash to fund the
"Agency Agreement" with a commercial bank. These funds will be
available to indemnify CPC against possible claims related to
environmental or nuclear matters as described above, and against
third-party claims related to an agreement between Plateau and the
third-party (see Note K to the USE Consolidated Financial
Statements for fiscal year ended May 31, 1996).
There are no present claims against funds held under either the
Trust Agreement or Agency Agreement. Funds (including accrued
interest) not disbursed under the Trust and Agency Agreements will
be paid over to Plateau upon termination of such Agreements with
NRC concurrence.
The consideration paid by USE was determined by negotiation with
CPC, taking into account estimated annual Shootaring Mill holding
costs, and estimated future Mill decommissioning and site
reclamation costs as required by the NRC and the Utah Department of
Natural Resources, Division of Oil, Gas and Mining ("DOGM").
The Plateau acquisition was done solely with USE, in light of
potential NRC objections to selling Plateau to the USECC joint
venture. Subsequent to closing, in September 1993, the Company and
Crested agreed that after Plateau's unencumbered cash has been
depleted, USE and Crested each will assume one-half of Plateau's
obligations, and share equally in Plateau operating cash flows,
pursuant to the USECC Joint Venture.
Shootaring Mill and Facilities. The Shootaring Mill is located in
south-eastern Utah, approximately 13 miles north of Lake Powell,
and 50 miles south of Hanksville, Utah via State Highway 276, then
four miles west on good gravel roads. The entire facility occupies
18.9 acres of a 264.52 acre plant site. The mill was designed to
process 750 tpd, but only operated on a trial basis for two months
in mid-summer 1982. In 1984, Plateau put the mill on standby
because of the depressed U3O8 market.
Included with mill assets are tailings cells, laboratory
facilities, equipment shop and inventory. The NRC issued a license
to Plateau authorizing production of uranium concentrates, however,
since the mill was shut down, only maintenance and required safety
and environmental inspection activities have been performed. The
current source materials license with the NRC is for a standby
operation only and expired on December 31, 1993. Prior to
expiration, USE applied for an extension of its expiration date.
On July 31, 1996, the NRC approved Plateau's application to
postpone initiation of the requirements of timeliness in
decommissioning of the Shootaring Mill for five years, which
postponement will enable Plateau to upgrade the source materials
license to operational status. USE has applied to the NRC to
convert the source materials license from standby to operational.
Plateau also owns approximately 90,000 tons of uranium mineralized
material stockpiled at the mill site and approximately 172,000 tons
of mineralized material stockpiled at the Tony M Mine.
USE intends to cause Plateau to continue maintenance activities
pending reassumption of mill operations to process uranium ores to
concentrates. Both NRC and DOGM approval will be required prior to
commencing such operations.
Ticaboo Townsite
Plateau also owns all of the outstanding stock of Canyon
Homesteads, Inc. ("Canyon"), a Utah corporation, which developed
the Ticaboo, Utah townsite 3.5 miles south of the Shootaring mill.
The Ticaboo site includes a 66 room motel, convenience store,
laundromat facility, 98 single family home sites, 151 mobile home
sites, and 26 recreational vehicle sites (all with utility access).
The townsite is located on a State of Utah lease near Lake Powell,
and is being operated as a commercial enterprise. USE and Crested
plan to further develop the townsite, and have been seeking
financial partners. Interim funding for limited improvements on
the commercial operations was provided by a private corporation
affiliated with a John L. Larsen, Chairman of the Board, President
and Chief Executive Officer of USE. See Part III, Item 12 "Certain
Relationships and Related Transactions - Transactions with
Arrowstar Investments, Inc.".
Sheep Mountain Partners ("SMP")
Partnership. SMP is a Colorado general partnership formed on
December 21, 1988, between USECC, and Nukem, Inc. of Stamford, CT
("Nukem") through its wholly-owned subsidiary Cycle Resource
Investment Corporation ("CRIC"). Nukem is a uranium brokerage and
trading concern. During fiscal 1991, certain disputes arose among
the partners of SMP. These disputes resulted in litigation and
subsequent arbitration from which an Order and Award was issued on
April 18, 1996. Registrant and Crested have filed a petition for
confirmation of the Order and Award with the U.S. District Court of
Colorado together with a petition for appointment of a receiver for
the SMP Partnership. See "Legal Proceedings - Sheep Mountain
Partners Arbitration/Litigation".
In February 1988, USE and Crested acquired uranium mines, mining
equipment and mineralized properties (Sheep Mountain Mines) at
Crooks Gap in south-central Fremont County, Wyoming, from Western
Nuclear, Inc. These Crooks Gap mining properties are adjacent to
the Green Mountain uranium properties. USECC mined and sold
uranium ore from two of the underground Sheep Mines during fiscal
1988 and 1989. Production ceased in fiscal 1989, because uranium
could be purchased from the spot market at prices below the mining
and milling costs of SMP.
The Company and Crested sold 50 percent of their interests in the
Crooks Gap properties to Nukem's subsidiary CRIC for cash. The
parties thereafter contributed the properties to SMP, in which USE
and Crested received an undivided 50 percent interest. Each group
provided one-half of $315,000 to purchase equipment from Western
Nuclear, Inc.; the Company and Crested also contributed their
interests in three uranium supply contracts to SMP and agreed to be
responsible for property reclamation obligations. The SMP
Partnership agreement provided that each partner generally had a 50
percent interest in SMP net profits, and an obligation to
contribute 50 percent of funds needed for partnership programs or
discharge of liabilities. Capital needs were to have been met by
loans, credit lines and contributions.
SMP was directed by a management committee, with three members
appointed by USECC, and three members appointed by Nukem/CRIC. The
committee has not met since 1991 during the SMP
arbitration/litigation.
Properties. SMP owns 80 (3 of which were conveyed by PMC to SMP in
August 1996, see below) unpatented lode mining claims on the Crooks
Gap properties, including two open-pit and five underground uranium
mines and an inventory of uranium ore. Production from the
properties is subject to sliding-scale royalties payable to Western
Nuclear, Inc.; the rates are from one to four percent on recovered
uranium concentrates.
Various structures and equipment are located on the properties
including three operating and three non-operating mine headframes
with hoists; maintenance shops; offices; and other buildings,
equipment and supplies. An ion-exchange plant is located near the
SMP properties, but is held by USECC and not SMP.
Until recently, SMP also had interests in 59 an additional
unpatented mining claims, one State mineral lease and one State
surface use lease, which had been conveyed to Pathfinder Mines
Corporation ("PMC"). In August 1996, PMC conveyed 38 of the 59
claims to SMP, retaining 21. SMP chose to retain only 3 of the 38
claims. These SMP properties contain a previously-mined open-pit
uranium mine and three underground mines. PMC has the right to
mine a portion of these properties (the Congo area), by open-pit or
in-situ techniques to certain depths, without royalty or other
obligations to SMP. PMC has the responsibility for reclamation
work needed thereon as a result of its activities. If PMC mines
any portion of the properties outside the Congo area, a 3% royalty
is owed to SMP. Conversely, SMP has the right to mine portions of
the claims and leases outside the Congo area (and specified
surrounding zones) by underground mining techniques, subject to a
3% royalty to PMC. PMC conducted an exploration program on a
portion of these properties, and has advised the Company that it
does not intend any further development. PMC has decommissioned
and dismantled its two uranium mills in the vicinity.
An ion exchange plant on the former PMC properties (and now held by
USECC) was used to remove natural soluble uranium from mine water.
The Company, on behalf of USECC, has submitted a plan to the NRC to
decommission this facility and obtained a three year extension for
timeliness of decommissioning. Management is reviewing the
economics of relicensing this facility as part of a potential in-
situ leach uranium mining operation. See "Environmental" below.
Property Maintenance. As operating manager for SMP, USECC is
responsible for exploration, mining, and care and maintenance of
SMP mineral properties. USECC was to have been reimbursed by SMP
for certain expenditures on the properties. During the SMP
arbitration/litigation, Nukem/CRIC refused to allow SMP to pay
USECC for care and maintenance and other work performed on the
properties since the spring of 1991. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources at May 31, 1996". As
part of the Order and Award made on April 18, 1996, the Arbitration
Panel awarded USECC $2,065,989 for Nukem/CRIC's 50% share of care
and maintenance expenses for the SMP properties plus interest of
$446,834 to March 31, 1996 and per diem cost of $616 thereafter,
which award is not yet finalized. See Item 3, Legal Proceedings -
Sheep Mountain Partners Arbitration/Litigation - Stipulated
Arbitration." Currently, USECC has a limited care and maintenance
staff on site to care for and maintain the mines and pump mine
water to prevent flooding of the mines.
SMP Marketing. Nukem, Inc. was engaged by SMP to provide SMP with
financial expertise and marketing services. SMP entered into a
marketing agreement with CRIC, which was concurrently assigned to
and assumed by Nukem, to provide marketing and trading services for
SMP, which included acquiring uranium for SMP by purchasing or
borrowing. Nukem was to be reimbursed at its direct costs for
acquiring such uranium for SMP. USECC, SMP and Nukem had seven
long-term contracts plus an additional long-term contract with
PSE&G that was awarded to SMP by the Arbitration Panel (four of
these contracts remain) for sales of uranium originally to nine
domestic utilities. SMP's uranium supply contracts are either
base-price escalated or market-related (referring to how price is
determined for uranium to be delivered). Base-price escalated
contracts set a floor price which is escalated over the term of the
contract to reflect changes in the GNP price deflator. The two
current base-price escalated contracts of SMP require delivery of
130,000 pounds of uranium concentrates through 1997 on one contract
and 750,000 lbs. U3O8 through 2001 on the other contract. Prices
of uranium for deliveries under the base-price escalated contract
currently exceed prices at which uranium can be purchased in the
spot market.
Under the market-related contracts, the purchaser's cost depends on
quoted market prices and the price at which a willing seller will
sell its U3O8 during specified periods before delivery. Some of
these contracts place a ceiling on the purchase price, substituting
a base-price escalated amount, if the market price exceeds a
certain level. Under the terms of the various market-price related
contracts, SMP is required to deliver from 250,000 to 900,000
pounds of U3O8 annually from 1997 to 2000, which amounts may be
increased or decreased by specified percentages.
Through fiscal 1996, USE and its affiliates have satisfied most of
these contracts with uranium concentrates previously produced by
SMP, borrowed from others, or purchased on the open market. The
future role of Nukem in making deliveries under these contracts on
behalf of SMP cannot be assured notwithstanding the April 18, 1996
Order and Award. See "Legal Proceedings - Sheep Mountain Partners
Arbitration/Litigation."
Permits. Permits to operate existing mines on SMP properties have
been issued by the State of Wyoming. Amendments are needed to open
new mines within the permit area. As a condition to issuance of
the permits, an NPDES permit under the Clean Water Act has been
obtained. Monitoring and treatment of water removed from the mines
and discharged in nearby Crooks Creek is generally required.
During the past two years, SMP did not discharge wastewater into
Crooks Creek, and the mine water is presently being discharged into
the McIntosh Pit.
Uranium Market Information. There are currently nine producers of
uranium in the United States, which collectively produced 5.8
million pounds of U3O8 during calendar 1995 and are expected to
produce approximately 7.2 million pounds in calendar 1996. In
addition, there currently several major producers in Canada
(Cameco, Cogema Canada, Ltd., Rio Algom and Uranerz); Australia
(Energy Resources of Australia and Pancontinental Mining, Ltd.);
Africa (Cogema and RTZ's Rossing unit), and Europe, which
collectively produced about 60 million pounds of U3O8 during
calendar year 1995 and are expected to produce approximately 65
million pounds in calendar 1996. Several members of the
Commonwealth of Independent States ("CIS"), also export uranium to
the western markets although the amount of such exports to the
United States and European markets is currently limited.
Uranium is primarily used in nuclear reactors that heat water to
drive turbines that generate electricity. There are presently some
542 commercial nuclear power plants worldwide either operating,
under construction or planned. Of them, 45 are under construction
and 53 are planned. Current worldwide consumption is about 150
million pounds of U3O8 per year, but worldwide production is only
about 72 million pounds per year. Published reports indicate that
approximately 31 percent of the worldwide nuclear-powered
electrical generating capacity is in the U.S., 49 percent is in
western Europe, and 14 percent is in the Far East. Although the
reactors in western Europe have a greater aggregate generating
capacity and fuel usage, the supply of uranium for those reactors
has been obtained for relatively long periods, and the market
requiring the greatest supply of uranium for the next few years is
believed to be the United States. The Asia Pacific region is also
developing into a significant uranium consumer, due to announced
plans for rapid expansion of nuclear power programs in Japan,
Korea, Taiwan and the Russian Federation. This region accounts for
most of the 98 power plants which are ordered or under
construction.
Pursuant to Suspension Agreements signed in October 1992 between
the United States Department of Commerce ("DOC") and certain of the
Republics of the CIS, to rectify prior damage to domestic United
States uranium producers from dumping sales of U3O8 by certain CIS
republics, all spot sales of U3O8 delivered into the U.S. now
reflect quota restrictions on U3O8 imports from the CIS. However,
there are provisions which allow CIS uranium to be imported for
certain long-term uranium sales contracts entered into with
domestic utilities prior to March 5, 1992 ("grandfathered
contracts").
NUEXCO Exchange Value. The market related contracts of SMP are
based on an average of the Nuexco Exchange Value ("NEV") for 2, 3
or more months before uranium delivery. The high and low NEV
reported on U3O8 sales during USE's past five fiscal years are shown
below. NUEXCO Exchange Values are reported monthly and represent
NUEXCO's judgment of the price at which spot and near term
transactions for significant quantities could be concluded. NEVs
for fiscal 1993 are higher for U.S. transactions, due to the impact
of CIS import restrictions since late 1992. These prices ("US
NEV") were reported by NUEXCO for spot sales in the restricted U.S.
market.
NUEXCO EXCHANGE VALUE
----------------------
US $/pound of U3O8
Years Ended -------------------
May 31, High Low
------------- -------- --------
1992 $ 9.05 $ 7.75
1993 10.05 7.75
1994 10.20 9.25
1995 11.00 9.50
1996 16.50 11.85
US NEV was $16.30/lb. as of August 31, 1996.
NUEXCO's restricted market values ("U.S. NEV") apply to all
products and services delivered in the U.S. as well as non-CIS
origin products and services delivered outside the U.S.
In the U.S., uranium is generally supplied to electric utilities
under medium to long-term supply agreements, which require
deliveries more than one year after entry into the contract. These
agreements are designed to provide both the producer-supplier and
the customer with reasonable assurance as to the amount of uranium
desired and the availability of supply at a predictable price.
Utilities generally seek supply contracts at least two to three
years before their needs occur. It is expected that a large
portion of U.S. demand will be secured by electric utilities
entering into contracts in the next one to three years. There also
is an active spot market, through which approximately 5 to 10
percent of uranium concentrate needs are satisfied.
While total demand in 1995 exceeded domestic production, there
remains a near-term supply of U3O8 equivalent from domestic
producers' inventory, and from unrestricted (i.e., not under
quotas) foreign producers current production and inventory. The
Company expects these and other factors (e.g., weapons grade
uranium conversions) will moderate price increases, which otherwise
might be expected from the shortfall of United States production
meeting demand, in spite of increasing interest from U.S. utilities
in renewing long-term contracts at higher than spot market prices.
During fiscal 1996, spot market prices increased approximately 40%
from May 31, 1995.
Gold
Lincoln Project (California)
Sutter Gold Mining Company. In fiscal 1991, USE acquired an
interest in the Lincoln Project (including the underground Lincoln
Mine) in the Mother Lode Mining District of Amador County,
California in a mining joint venture known as the Sutter Gold
Venture ("SGV"). The entire interest of SGV is now owned by USECC
Gold L.L.C., a Wyoming limited liability company ("USECC Gold).
Until the end of fiscal 1994, Seine River Resources Inc., a
Vancouver Stock Exchange listed company ("SRRI"), which is not
affiliated with USE or its subsidiaries, was a joint venture party
in SGV. USECC Gold is a subsidiary of Sutter Gold Mining Company,
a Wyoming corporation ("SGMC").
SGMC expects to commence additional exploration and mine
development as soon as it raises sufficient funding. There can be
no assurance that funding proposals will be successful in raising
sufficient capital to commence mining and milling operations at the
Lincoln Project. See "Permits and Future Plans."
USECC Gold and SRRI had intended to operate SGV as equal 50 percent
venturers. However, because of SRRI defaults on its obligations,
USE and Crested acquired (through USECC Gold) a 90 percent
aggregate equity interest in the Lincoln Project by the end of
fiscal 1993 (and the interests in USECC Gold were owned 88.89
percent by USE, and 11.11 percent by Crested). By the end of
fiscal 1994, SRRI owed USE and Crested $1,970,507 for SGV property
holding costs, permitting costs and mine maintenance expense
incurred and paid for by USE and Crested since March 1992,
including interest and management fees charged by USE and Crested.
As of May 23, 1994, SRRI agreed to assign its remaining 10 percent
interest in SGV to USE as payment for the $1,970,507 owed USE and
Crested. However, only the $1,389,272 of costs and expenses paid
for by USE and Crested was recorded; $581,235 for interest and
management fees was written off as uncollectible. SRRI also issued
400,000 common shares of stock and delivered them to USE as final
payment of any deficiencies for pre-fiscal 1994 indebtedness (owed
by SRRI to SGV) which had been secured with SRRI's interest in SGV
and which USE and Crested acquired in lieu of foreclosure (see Note
F to the USE Consolidated Financial Statements for fiscal year May
31, 1996). SRRI's 10% interest was delivered to USE and Crested in
fiscal 1994.
Subsequent to the end of fiscal 1994, the Sutter Gold Venture was
terminated, USE and Crested formed SGMC and agreed to exchange
their interests in USECC Gold for common stock of SGMC. As of May
31, 1996 a private placement of 896,364 shares was made to a small
group of investors. SGMC currently is owned 74 percent by USE, 9
percent by Crested and 17 percent by private investors.
During fiscal years 1992 through 1995, SGV conducted environmental
studies, drafted initial mine and mill designs, mined bulk samples
from the Lincoln Mine for assay and mill design purposes, installed
an underground water treatment plant to treat mine water seepage,
and performed other work to support application for operating
permits.
Properties. SGMC (through its subsidiary USECC Gold) holds
approximately 14 acres of surface and mineral rights (owned), 436
acres of surface rights (leased), 158 acres of mineral rights
(leased), and 380 acres of mineral rights (owned), all on patented
mining claims near Sutter Creek, Amador County, California. The
majority of these properties were acquired from Meridian Minerals
Company and the balance were acquired by SGV in 1995 and 1994. The
properties are located in the western Sierra Nevada Mountains at
from 1,000 to 1,500 feet elevation; year round climate is
temperate. Access is by California State Highway 16 from
Sacramento to California State Highway 49, then by paved county
road approximately .4 miles outside Sutter Creek.
Surface and mineral rights total holding costs will be
approximately $430,000 through May 31, 1997 (including $39,000 for
payments on two parcels (14 acres) bought in 1994; an estimated
$30,000 for one-time costs to acquire a surface easement and lease
to access the mill site from California State Highway 49; and
property taxes of approximately $30,000 for the year ending May 31,
1997). Annual property taxes are estimated to increase to more
than $100,000 when the Lincoln Project is built and put into
operation.
The leases are for varying terms (the earliest expires in February
1998), and require rental fees, advance production royalties, real
property taxes and insurance. Leases expiring before 2010 will
generally be extended, so long as minerals are continuously
produced from the property that is subject to the lease or minimum
payments are made . Other leases may be extended for various
periods on terms similar to those contained in the original leases.
Production royalties are from 2.5% to 6% (most are 4%). The
various leases have different methods of calculating royalty
payments (net smelter return and gross proceeds).
Amador United Gold Mines ("Amador United") was a prior owner of
certain leases which it conveyed to the Lincoln Project when the
project was owned by Meridian Minerals Company ("Meridian"). In
return for its conveyance of such leases Amador United received a
right of first refusal to buy the Lincoln Project and a 20 percent
net profits interest in production from any of the Lincoln Project
properties. Although all of the properties which Amador United
conveyed to the Lincoln Project were relinquished by Meridian as
uneconomic or of marginal utility to the Project, Amador United
remains entitled to its net profits interest. "Net profits" will
be determined by deducting from gross revenues from sale of
minerals produced by the Lincoln Project, an amount equal to 105
percent of all costs and expenses in excess of $6,000,000 which are
directly or indirectly attributable and necessary or incidental to
the acquisition, exploration, development, mining and marketing of
minerals produced from all of the properties comprising the Lincoln
Project. Costs and expenses are defined to include (but not be
limited to): ad valorem real property and personal property taxes;
reasonably anticipated reclamation costs; salaries and wages of
employees assigned to property acquisition, exploration,
development, mining and marketing activities; travel expenses and
transportation of employees, material, equipment and supplies; all
payments to contractors; assay, metallurgical testing and other
analyses to determine the quality and quantity of minerals on all
of the properties; costs to obtain environmental permits and other
permits, rights-of-way and similar rights, as incurred in
connection with acquisition, exploration, development, mining and
marketing activities; property acquisition and holding expenses;
costs for feasibility studies; costs for title curative work; and
1.25 percent monthly interest on such costs and expenses which are
not paid.
A separate holder of four of the properties that were assembled by
Meridian into the Lincoln Project holds a 5 percent net profits
interest on production from such properties, which was granted by
Meridian when it acquired the properties. The "net profits"
generally will be determined in the same manner as the Amador
United net profits interest (i.e., gross mineral revenues less an
amount equal to 105 percent of numerous categories of costs and
expenses). An additional 0.5 percent net smelter return royalty is
held by a consultant to a lessee prior to Meridian's acquisition of
the properties, which 0.5 percent interest covers the same four
properties in the Lincoln Project.
There has been an estimated $16,858,900 of spending to date in the
Lincoln Project by Meridian, USECC Gold and their predecessors.
Since fiscal 1991, USE and Crested have expended approximately
$12,858,900 to acquire the Lincoln Project and for mine
development, mining and processing bulk samples of mineralization,
exploration, feasibility studies, project permitting costs, holding
costs, and related general and administrative costs, which amount
includes advances by USE and Crested to cover SRRI's share of such
costs. The amount of such expenditures during the 1996 fiscal year
was approximately $637,300. Certain of the expenditures included
in the $12,858,900 have been expenses and the rest have been
capitalized as assets.
Current estimates call for up to $15 million of additional
investment to put the properties into production. Payment of any
amount to Amador United and the other holders of net profits
interests will only occur after the Lincoln Project has generated
gross revenues in excess of the amount invested by the Company and
Meridian (estimated at $69 million, including interest, assuming
production begins in 1997). Lease royalties burdening the Lincoln
Project properties are in addition to Amador United's net profits
interest.
In connection with SRRI and USE receiving their interests in the
Lincoln Project at formation of the SGV, and thereafter upon USE's
and Crested's acquisition of SRRI's remaining interests in SGV due
to default by SRRI, Amador United was provided notices of its right
of first refusal to acquire such interests for amounts equal to the
consideration paid and USE's and Crested's advances to SRRI. Amador
United has objected to the notices given, however, USE and Crested
believe these objections are without merit.
Geology and Reserves. The minerals consulting firm Pincock, Allen
& Holt of Lakewood, CO ("PAH") prepared a prefeasibility study of
the Lincoln Project in fiscal 1994. PAH reviewed core drilling
data on the Lincoln Zone on 100-foot centers from the surface, and
drilling on the Comet Zone from both surface and underground. PAH
also reviewed data from drilling on the Keystone Zone from surface
on 200-foot centers. Total data is from 162 exploration core holes
(surface and underground), with total footage of 64,700 feet. PAH
based its estimate of proven reserves on mineralized material
within 25 feet of sample information; probable reserves were based
on material located between 25 and 50 feet of sample information.
Using a cutoff grade of 0.25 ounces of gold per ton in place, PAH
estimates the Lincoln Project contains 194,740 tons of proven and
probable reserves grading 0.57 ounces of gold per ton. If
operating economics indicate a lower cutoff grade is feasible, the
tonnages for the stated reserves would be increased.
In fiscal 1992, SGV mined 8,000 tons of material (including waste
rock and low grade mineralization) out of drifts and raises off the
Stringbean Alley decline (see "Permits and Future Plans", below) in
a bulk sampling program to test mining techniques and milling
recoveries. Milling results indicated at least 94 percent of the
gold in the ore should be recoverable with gravity, flotation and
cyanidation milling circuits (1,400 ounces of gold were recovered
in this program). Subsequent metallurgical tests by the
engineering firm Brown & Root, Inc. (using test data from the
Lincoln Project developed by Hazen Research, Inc.) indicate mill
recovery could be in excess of 96 percent. PAH has estimated the
recovery rate as between 93 and 95 percent.
The geology within the Lincoln Project is typical of the historic
Mother Lode region of California, with a steeply dipping to
vertical sequence of metavolcanic and metasedimentary rocks hosting
the gold-bearing veins. Depending on location along the strike
length on the vein systems, the gold-bearing veins are slate,
metavolcanic greenstone, or an interbedded unit of slates and
volcanics. The Lincoln Project covers over 11,000 feet of strike
length along the Mother Lode vein systems.
Permits and Future Plans. In August 1993, the Amador County Board
of Supervisors issued a Conditional Use Permit ("CUP") allowing
mining of the Lincoln Mine and milling of production, subject to
conditions relating to land use, environmental and public safety
issues, road construction and improvement, and site reclamation.
The permit will allow construction of the mine and mill facilities
in stages as the project gets underway, thereby reducing initial
capital outlays. Additional permits (for road work, dust control
and construction of mill and other surface improvements) need to be
applied for in due course.
Initial mining using standard cut-and-fill overhead stoping
techniques is planned for the Lincoln and Comet Zones, by an
existing 15 feet by 12 feet by 2,800 feet decline (the Stringbean
Alley decline), which runs from the surface down through the Comet
and into the Lincoln Zone. Screened tailings from the mill
flotation circuit will be used to back-fill the stopes and
stabilize the wall rocks; this recycling will also greatly reduce
the volume of tailings going into the tailings ponds. In the pre-
production stage, the Stringbean Alley decline will be extended
down to 750 feet, then a drift driven back horizontally along the
750 foot level (above sea level).
The CUP requires that within 18 months after operations start up,
a new decline (to be named the Lincoln Decline) will have to be
completed running for 1,850 feet from the surface at the mill site
(1,340 feet above sea level) down to a new drift to be driven at
the 1,000 foot (above sea) level; the new decline will be used for
access of mining personnel and supplies to the underground
workings, as well as to permit ore haulage up the decline by
conveyor, thus eliminating ore haulage on the surface from mine
portal to the mill.
Concurrently with production mining, SGMC intends to maintain an
aggressive underground development program to delineate (on an on-
going basis) two to three years of developed ore in sight.
Preliminary estimates are that SGMC will require up to $15 million
financing to construct the mill and prepare the mine for full scale
production, and for interim holding costs. The mill design is
being finalized and will be reviewed by PAH or another engineering
firm, and SGMC expects to follow PAH's or such other firm's
recommendations in building the recovery circuits. The mill will
be constructed to allow a 500 ton per day operations, but initially
will be equipped so as to handle 300 tons per day throughput.
Exclusive of attached lab and other support facilities, the central
mill building is expected to cover less than 15,000 square feet,
and will be constructed with interior mezzanine levels to hold
different banks of equipment. Adequate power is available at the
boundaries of the Lincoln Project from the local utility; water
also is available from a utility if needed, although the Lincoln
Mine is expected to produce adequate water for mining and milling
operations.
Molybdenum
As holders of royalty, reversionary and certain other interests in
properties located at Mt. Emmons near Crested Butte, Colorado, USE
and Crested are entitled to receive annual advance royalties of
50,000 pounds of molybdenum, or cash equivalent (one-half to each).
AMAX Inc. (which was acquired and merged with Cyprus Minerals
Company and was renamed Cyprus Amax Minerals Company in November
1993) delineated a deposit of molybdenum containing approximately
146 million tons of mineralization averaging 0.43% molybdenum
disulfide on the properties.
Advance royalties are paid in equal quarterly installments, until:
(i) commencement of production; (ii) failure to obtain certain
licenses, permits, etc., that are required for production; or (iii)
AMAX's return of the properties to the USE and Crested. USE did
not receive any advance royalties during fiscal 1996 because of an
arrangement with Cyprus Amax described below. During fiscal 1995,
USE recognized $85,500 of advance royalty revenue under this
arrangement. These royalties are shown in the Consolidated
Statements of Operations as a component of gains from restructuring
mineral properties agreements. See Note F to the USE Consolidated
Financial Statements for fiscal year ended May 31, 1996. The
advance royalty payments reduce the operating royalties (six
percent of gross production proceeds) which would otherwise be due
from Cyprus Amax from production. There is no obligation to repay
the advance royalties if the property is not placed in production.
The Agreement with AMAX also provides that USE and Crested are to
receive $2,000,000 (one-half to each), at such time as the Mt.
Emmons properties are put into production and, in the event AMAX
sells its interest in the properties, USE and Crested would receive
15 percent of the first $25,000,000 received by AMAX. The Company
has asserted that the reported merger of AMAX into Cyprus Minerals
Company was a sale of AMAX's interest in the properties which would
entitle USE and Crested to such payment. Cyprus Amax has rejected
such assertion and the Company is considering its remedies.
Subsequent to May 31, 1994, USE and Crested reached agreement with
Cyprus Amax to forego six quarters of advance royalties (starting
fourth quarter calendar 1994) as payment for the option exercise
price for certain real estate in Gunnison, Colorado owned by Cyprus
Amax and the subject of a purchase option held by USE and Crested.
The option exercise price is valued at $266,250. USE and Crested
exercised their option in August 1994 and subsequently sold that
property for $970,300 in cash and notes receivable. The advance
royalties resumed in the second quarter of calendar 1996, however,
the payment was not received until June 1996, being the first
quarter of fiscal 1997.
Molybdenum Market Information
Molybdenum is a metallic element with applications in both
metallurgy and chemistry. Principal consumers include the steel
industry, which uses molybdenum alloying agents to enhance strength
and other characteristics of its products, and the chemical, super-
alloy and electronics industries, which purchase molybdenum in
upgraded product forms.
The molybdenum market is cyclical with prices influenced by
production costs and the rate of production of foreign and domestic
primary and by-product producers, world-wide economic conditions
particularly in the steel industry, the U.S. dollar exchange rate,
and other factors such as the rate of consumption of molybdenum in
end-use products. When molybdenum prices rose dramatically in the
late 1970s, for example, steel alloys were modified to reduce
reliance on molybdenum. AMAX and Cyprus Minerals Company were the
two major primary producers of molybdenum in the United States
until November 1993, when the companies merged.
Worldwide demand for molybdenum in calendar 1995 was reportedly 232
million pounds, its highest level ever. Production for that period
was about 230 million pounds. There is however, excess capacity
from the primary molybdenum mines which are currently not
producing. In addition, by-product molybdenum (primarily from
Chilean copper mining companies) has a major impact on available
supplies. It is unlikely that any major new primary deposits will
be developed during fiscal 1997.
Molybdenum prices on the open spot market increased substantially,
from $3.35 per pound of technical molybdic oxide (the principal
product) in September 1994, to $15.50 - $17.50 per pound in
February 1995. However, by May 31, 1996 prices had declined to
$3.00 - $3.35 per pound.
Parador Mining (Nevada)
The Company and Crested are sublessees and assignees from Parador
Mining Co., Inc. ("Parador"), on certain rights under two patented
mining claims located in the Bullfrog Mining District of Nye
County, Nevada. The claims are immediately adjacent to and part of
a gold mine operated by Bond Gold Bullfrog, Inc. ("BGBI"), a non-
affiliated third party (now known as Barrick Bullfrog, Inc.). The
Company and Crested have also been assigned certain extralateral
rights associated with the claims and certain royalty rights
relating to a prior lease on those properties. The lease to USE
and Crested is for a ten year primary term, is subject to a prior
lease to BGBI on the properties, and allows USE and Crested to
explore for, develop and mine minerals from the claims. If USE and
Crested conduct activities on the claims, they are entitled to
recover costs out of revenues from extracted minerals. After
recovering any such costs, USE and Crested will pay Parador a
production royalty of 50 percent of the net value of production
sold from the claims.
USE, Crested and Parador informed BGBI that payments are owed to
them pursuant to extralateral rights on the claims. BGBI in turn
initiated legal proceedings to establish the rights of the various
parties in the claims. Thereafter, Parador notified BGBI that BGBI
had defaulted in its lease and that Parador had terminated the
lease. BGBI denies that it has defaulted. A trial on the
bifurcated issue of extralateral rights only to the court in
December 1995 resulted in a decision that Parador had failed to
meet its burden of proof to establish that its claims are entitled
to assert extralateral rights and that Registrant, Parador and
Crested have no right, title or interest in the adjacent BGBI
claims. Registrant has filed an appeal of this ruling as erroneous
as a matter of law. The remaining issues have not been set for
trial. See Item 3, "Legal Proceedings - BBGI Litigation".
Oil and Gas.
Fort Peck Lustre Field (Montana). USECC conducts oil production
operations at the Lustre Oil Field on the Ft. Peck Indian
Reservation in north-eastern Montana; four wells are producing, and
USE and Crested receive a fee based on oil produced. USE is the
operator of record. No further drilling is expected in this field.
This fee and certain real property of USE and Crested, have been
pledged or mortgaged as security for a $1,000,000 line of credit
from a bank.
Energx, Ltd. Fort Peck Gas Project. Energx, Ltd., a Wyoming
corporation owned 45% by USE, 45% by Crested, and 10% by the
Assiniboine and Sioux Tribes, signed in October 1993 an "Agreement
Between The Assiniboine and Sioux Tribes of the Fort Peck Indian
Reservation and Energx, Ltd. to Explore, Develop and Produce
Shallow Gas." This Agreement has been approved by the Secretary of
the Interior and the United States Bureau of Indian Affairs. In
the fourth quarter of calendar 1995 Energx drilled and tested three
exploratory wells, in conjunction with NuGas Resources U.S. Inc.
("NuGas"). These three were all dry holes, having been drilled
under a farmout agreement with Placid (see below); these three
wells counted against the eight well commitment under this
Agreement. Energx (and NuGas) had planned to drill and test five
more exploratory wells in July 1996, however, this has been
extended to September 1996. If Energx determines there is
potential for a natural gas field, Energx (and NuGas) will have
exclusive exploration rights for shallow gas (down to the top of
the Muddy formation, approximately 4,000 feet) on approximately
325,000 acres of tribal mineral lands on the Reservation for a
period of five years. The Agreement is renewable for successive
five year terms, provided Energx drills another five exploration
wells during each term. The first three dry holes were funded by
NuGas in accordance with the provisions of the Agreement.
With additional fee and Tribal allotted acreage assembled by Energx
and NuGas, Energx and NuGas now have positions in approximately
330,000 contiguous acres within the Fort Peck Indian Reservation.
The Tribes will not participate in the fee acreage.
During the initial exploration program, proceeds from production
will be allocated to NuGas to recoup the initial eight wells'
drilling and completion expense (except for up to three dry holes,
see "NuGas Resources (U.S.) Inc. Agreement"), Thereafter, net
revenues will be allocated 40 percent to the Tribes and 60 percent
to Energx and NuGas. Pursuant to United States Law, only the
Tribes may own beneficial interests in reservation minerals;
Energx' and NuGas' share of net revenues is compensation for
operating services.
The Fort Peck tribal lands are believed to contain significant
shallow gas deposits, analogous to the Bowdoin Gas Field (eastern
Montana) and other Cretaceous age gas producing reservoirs in the
Northern Great Plains Gas Province. Numerous wells drilled for
deep oil on the Fort Peck tribal lands have documented shallow gas
shows. However, no reserves have been established for the acreage
subject to the Agreement with Energx. Two major gas transmission
systems cross the Fort Peck Reservation (Northern Border and
Williston Basin).
NuGas Resources (U.S.) Inc. Agreement. By the Joint Venture
Agreement ("JVA") with Energx dated July 18, 1994, NuGas is
obligated to Energx to drill and complete (or abandon) at NuGas'
sole expense, eight exploratory shallow gas wells on the Fort Peck
Reservation by July 1, 1996, which has been extended to July 1,
1997, to earn a one-half interest in Energx' rights under the Fort
Peck Shallow Gas Agreement. Well gathering, gas dehydration and
related equipment costs will be shared equally by NuGas and Energx.
Energx will not be required to contribute to the costs of drilling
the first eight exploratory wells.
NuGas has contributed $100,000 to pay for costs of acquiring leases
and easements on non-Tribal lands contiguous to Tribal lands, to
assemble adequate sized drilling units for the first eight
exploratory wells. In fiscal 1995 Energx received $200,000 under
the JVA as a prospect generation fee. Energx is operator of
record, while NuGas is field operator.
NuGas and Energx each will receive 50 percent of proceeds from gas
produced and sold from the initial eight wells, until NuGas
receives 50 percent of such wells' drilling, completion, geological
and equipping costs; thereafter, distributions will be shared 30
percent each to NuGas and Energx, and 40 percent to the tribes
pursuant to the Fort Peck Shallow Gas Agreement. NuGas will not be
entitled to recoup any drilling and geological costs related to up
to three dry holes drilled in the initial eight well drilling
program. All activities after the initial exploration drilling
program will be funded equally by NuGas and Energx.
NuGas is a subsidiary of a Toronto Stock Exchange company with
substantial experience in shallow gas exploration and production,
principally in the northern plains states and Canada, where the
company currently operates more than 500 shallow gas wells and
produces 30,000,000 cubic feet of gas per day.
Farmout Agreement. In October 1995, Placid Oil Company, a
subsidiary of Occidental Petroleum and other parties (hereafter
together referred to as "Placid"), signed a Farmout Agreement with
Energx and NuGas. Under the agreement, Energx and NuGas as
operator had the right to drill and complete shallow gas wells on
approximately 170,000 acres of non-Tribal lands within the Fort
Peck Indian Reservation, at the sole expense of the operator. The
Farmout Agreement contemplated three phases: (i) drilling and
completion (or abandonment) of three test wells on widely dispersed
drilling locations; (ii) subject to performance of (i), continuous
drilling and completion (or abandonment) of option wells, also on
widely dispersed drilling locations; and (iii) subject to
performance of (i), continuous drilling and completion (or
abandonment) of additional wells on blocks not covered by (i) and
(ii). The first three wells were drilled on specific sections
within the 170,000 acres.
Drilling of the first test well commenced in October 1995; the last
of the three wells was to be drilled and completed (or abandoned)
within 45 days of the commencement of drilling the first well.
All three wells were dry holes. Contemplating the significant
holding cost for the delay rentals, Energx and NuGas jointly
decided to terminate the Placid Farmout Agreement on January 1,
1996 and relinquished their rights to the 170,000 acres referred to
above as Energx and NuGas determined they would focus their efforts
and resources towards the Tribal acreage.
Wind River Basin, Wyoming - Monument Butte Prospect. During the
1996 fiscal year, Energx terminated BLM leases covering
approximately 13,000 acres in Fremont County, WY, which were
believed to be prospective of shallow coalbed methane and
conventional stratigraphic natural gas and oil deposits. Energx
wrote off $328,700, the cost of acquiring and holding these leases.
Funding Energx: Energx operations to date have been funded with
USECC equity investments and advances, and transaction revenue (the
NuGas prospect generation fee). Energx expects to fund future
operations by a combination of private equity financing and by
seeking industry and private investor participation on prospects.
However, due to depressed gas prices in calendar 1996, equity
financing as well as joint venture industry participation of
natural and coalbed methane gas projects was difficult to obtain.
Accordingly, in fiscal 1997 Energx is monitoring its acreage
positions (other than Fort Peck) to evaluate whether to continue
paying the acreage holding costs and/or drill to earn acreage
rights (as applicable), or to turn operations over to another
company in the industry in exchange for an overriding royalty from
future production payable to Energx or to abandon such position.
COMMERCIAL OPERATIONS
Brunton.
On February 16, 1996 Registrant completed the sale of 8,267,450
shares of common stock, $0.01 par value, (the "Stock") of Brunton
to Silva Production AB, a closely held Swedish corporation
("Silva"), pursuant to the terms of a Stock Purchase Agreement
dated January 30, 1996 (the "Agreement") by and between Registrant
and Silva. Brunton is engaged in the manufacture and marketing of
professional and recreational outdoor products and at the time of
its sale Brunton was 100% owned by USE. The sale was prompted in
part by Registrant's desire to focus on its core business of
acquiring and developing mineral properties and mining and
marketing minerals, particularly uranium and gold. The Stock
constitutes all of the issued and outstanding shares of Brunton
owned by Registrant as of the date of the sale including 90,750
shares held in Brunton's treasury.
The purchase price for the Stock was $4,300,000, which was a
negotiated price based on an Adjusted Shareholder's Equity in
Brunton (as defined in the Agreement) as of January 31, 1996 of
$2,399,103. USE received $300,000 upon execution and delivery of
the Agreement, approximately $3,000,000 by wire transfer from Silva
at closing and an agreement by Silva to pay USE $1,000,000 in three
annual installments of $333,333 together with interest at the rate
of 7% per annum, such installments to be paid on February 15, 1997,
February 15, 1998 and February 15, 1999.
In addition, Silva agreed that, in the operation of Brunton, Silva
will cause the existing Brunton products and operations (including
lasers and other new products being developed by Brunton at the
time of the sale) to be a separate profit center and to pay USE 45%
of the net profits before taxes derived from that profit center for
a period of four years and three months commencing February 1,
1996. The first such net profits payment will be made on or before
July 15, 1997 for the period from February 1, 1996 through April
30, 1997, if net profits are earned for such period. Additional
net profits payments will be made, on July 15, 1998, July 15, 1999
and July 15, 2000, if net profits are earned for the corresponding
twelve month period. There can be no assurance that Brunton will
earn net profits for any such period and therefore there can be no
assurance that any such net profits payment will be received by
USE.
The assets of Brunton that were acquired by Silva through the
purchase of the Stock consist of certain real estate housing
Brunton's headquarters and manufacturing operations in Riverton,
Wyoming; Brunton's working capital; equipment, inventory,
machinery, personal property and all of Brunton's intellectual
property rights. Certain items of equipment and personal property
were withheld by USE from the Agreement and transferred from
Brunton to Registrant, by mutual agreement with Silva, for USE's
assumption of the indebtedness thereon. Such items include
depreciated mining equipment, real estate not used in Brunton
operations, and miscellaneous other equipment, as well as 225,556
shares of USE's common stock, par value $0.01 per share, and
options to purchase 150,000 shares of USE's common stock for $3.50
per share; 160,000 shares of Crested common stock, par value
$0.001, and options to purchase (from Crested) 300,000 shares of
Crested common stock for $0.40 per share, all of which were
previously owned by Brunton. USE subsequently transferred to
Plateau 125,556 shares of USE (and options to purchase 75,000
shares of USE), plus 60,000 shares of Crested (and options to
purchase 150,000 shares of Crested) in partial payment of debt owed
to Plateau by USECC. The remaining 100,000 USE shares (and options
to purchase 75,000 USE shares), plus 100,000 Crested shares (and
options to purchase 150,000 shares of Crested) were transferred to
SGMC.
Also at closing, the Registrant paid Brunton $171,685 for product
purchases and accrued rentals on mining equipment owned by Brunton.
The equipment was transferred to Registrant at closing and the
Registrant paid off $273,000 in bank debt previously incurred by
Brunton in connection with a loan purchase the equipment from the
Registrant.
The sale will eliminate Brunton's manufacturing and/or marketing of
professional and recreational outdoor products from the commercial
segment of Registrant's business, except to the extent that there
are net profit payments from Silva over the next four years. For
the fiscal year ended May 31, 1996, Brunton's sales provided 19% of
net revenues of USE, compared with 49% of net revenues for fiscal
year ended May 31, 1995 (before reclassification to reflect Brunton
as discontinued operations with respect to the Company). The
inability to include Brunton's operations with Registrant's other
operating revenues in the future could result in continued
operating losses for Registrant, unless Registrant is able to
develop other profitable businesses, such as Plateau's uranium
business or FNG's construction business, to replace profits from
Brunton. See Part III, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" at May 31, 1996.
Real Estate and Other Commercial Operations
Registrant owns varying interests, alone and with Crested, in
affiliated companies engaged in real estate, transportation, and
commercial businesses. The affiliated organizations include
Western Executive Air, Inc. ("WEA") and Canyon Homesteads, Inc.
(through Plateau). Activities of these subsidiaries in these
business sectors include ownership and management of a commercial
office building, the townsite of Jeffrey City, Wyoming and the
townsite, motel, convenience store and other commercial facilities
in Ticaboo, Utah. Until it was sold in April 1996, USECC also
owned and managed a mobile home park in Riverton, Wyoming. See
Part III, Item 12, "Certain Relationships and Related Transactions
- - Transactions with Arrowstar Investments, Inc.". WEA owns and
operates an aircraft fixed base operation with fuel sales, flight
instruction and aircraft maintenance in Riverton, Wyoming.
Wyoming Properties. USECC owns a 14-acre tract in Riverton,
Wyoming, with a two-story 30,400 square foot office building
(including underground parking). The first floor is rented to
affiliates, nonaffiliates and government agencies; the second floor
is occupied by USE and Crested and is adequate for their executive
offices. The property is mortgaged to the WDEQ as security for
future reclamation work on the SMP properties.
USECC (through WEA) also owns a fixed base aircraft operation at
the Riverton Municipal Airport, including a 10,000 square foot
aircraft hangar and 7,000 square feet of associated offices and
facilities. This operation is located on land leased from the City
of Riverton for a term ending December 16, 2005, with an option to
renew on mutually agreeable terms for five years. The annual rent
is presently $1,180 (adjusted annually to reflect changes in the
Consumer Price Index), plus a $0.02 fee per gallon of fuel sold.
In November 1995, USECC exercised an option to acquire a 7,200
square foot hangar at the Riverton airport, for $75,000, from a
private Wyoming corporation affiliated with John L. Larsen,
Chairman, President and Chief Executive Officer of the Company and
Chairman and Chief Executive Officer of Crested. See Part III,
Item 12, "Certain Relationships and Related Transactions -
Transactions with Arrowstar Investments, Inc."
USE and Crested also own 18 undeveloped lots on 26.8 acres of the
Wind River Airpark near the Riverton Municipal Airport, and three
mountain sites covering 16 acres in Fremont County, Wyoming.
USECC owns various buildings, 290 city lots and/or tracts and other
properties at the Jeffrey City townsite in south-central Wyoming.
Nearly 4,000 people resided in Jeffrey City in the early 1980s,
when the nearby Crooks Gap and Big Eagle uranium mining projects
were active. The townsite may be utilized for worker housing as
the Jackpot Mine and Sweetwater Mill are put into operation. In
the interim Registrant and Crested have sold 19 lots for an
aggregate of $46,000 during fiscal 1996. In addition, in April 25,
1996, the Registrant and Crested entered into an agreement with a
non-related party to sell 10 six-plex townhouses located in Jeffrey
City for $500,000, conditioned upon purchaser obtaining financing
for the full amount within 60 days. The purchaser did not obtain
financing within the 60 days and the agreement was extended until
September 15, 1996. Full real estate title will be transferred to
the purchaser upon closing, however, if purchaser removes the
townhouses, purchaser must reclaim the land and the real property
where the townhouses were located will be assigned and conveyed
back to USE and Crested by quitclaim deed for full consideration of
$10.00.
USE owns five city lots and a 20-acre tract with improvements
including two smaller office buildings and three other buildings
with 19,000 square feet of office facilities, 5,000 square feet of
laboratory space and repair and maintenance shops containing 8,000
square feet, all in Riverton, Wyoming.
Colorado Properties. In connection with the AMAX transaction for
the Mt. Emmons molybdenum properties near Crested Butte, Colorado,
USECC acquired an option from AMAX (now Cyprus Amax) to purchase
approximately 57 acres for $200,000 in Mountain Meadows Business
Park, Gunnison, Colorado. See "Minerals - Molybdenum" above. The
property is zoned commercial and industrial, and is adjacent to
Western State College. In fiscal 1995, USECC and Cyprus Amax
agreed to exercise the option by USE and Crested agreeing to forego
six quarters of advance royalties from Cyprus Amax (the option
purchase price was $200,000), plus payment of certain expenses i.e.
real property taxes from 1987 and other expenses amounting to
$19,358. Thereafter, USE (together with Crested) signed option
agreements with Pangolin Corporation, a Park City, Utah developer,
for sale of the 57 acres, and a separate parcel owned in Gunnison
County, Colorado.
The first option (exercised in February, 1995) was for the 57
commercial and noncommercial zoned acres in the City of Gunnison,
Colorado; the purchase price was $970,300. Pangolin paid $345,000
cash and $625,300 in three year nonrecourse promissory notes, of
which $137,900 was paid during fiscal 1995 and $35,600 was paid
during fiscal 1996. The remaining note bears interest at 7.5% per
annum.
The second option covers 472.5 acres of ranch land northwest of the
City of Gunnison, Colorado (purchase price $822,460). Pangolin
paid $10,000 for the option; on option exercise and closing,
Pangolin paid $46,090 in cash and $776,370 by two nonrecourse
promissory notes (each with principal and unpaid interest due on
the third anniversary of closing except for $35,000 on the first
anniversary). The Registrant did not receive the $35,000 as
scheduled but is negotiating the receipt of it and expects to
collect it in the near future. At closing, 22.19 acres were deeded
to Pangolin; different parcels of the remaining acreage secure the
notes, and will be released for principal payments in the course of
development. The sale was accounted for as an installment sale and
thus the gain on sale was deferred, to be recorded as the notes are
paid.
Both notes ($145,500 and $630,870) will require annual payments of
accrued interest: the larger note accrues interest at 7.5 percent;
the initial interest rate on the smaller note was 7.5 percent
through August 28, 1995 and 12 percent thereafter (with a $35,000
principal payment on the first anniversary).
The Company and USE are discussing with an affiliate of
Pangolin an arrangement that is intended to result in realization
of the principal balance of the two notes, or a substantial part
thereof, prior to maturity in return for the release of several of
the parcels of land originally securing the notes.
Utah Properties. Canyon Homesteads, Inc. (a Plateau subsidiary)
owns a majority interest in a joint venture which holds the Ticaboo
Townsite in Ticaboo, Utah (see "Minerals - Uranium-Shootaring
Canyon Mill - Ticaboo Townsite, above). In fiscal 1995, USE
acquired the minority interest in the joint venture from a
nonaffiliate. Further recreational improvements to the townsite
were planned for fiscal 1996, to develop a commercial operation
directed to Lake Powell tourists. However, as the anticipated
joint venture partners did not fund development plans, (and the
proposed joint ventures for such purpose were not formed), and USE
and Crested have not been successful in finding other sources of
development funding, limited interim funding was provided by
Arrowstar Investments, Inc. through First-N-Last LLC, a limited
liability company with Canyon Homesteads, Inc. In April 1996,
USECC acquired the entire interest of Arrowstar in First-N-Last LLC
as partial consideration for the sale to Arrowstar of USECC's Wind
River Estates mobile home park in Riverton, WY. See Part III, Item
12, "Certain Relationships and Related Transactions - Transactions
with Arrowstar Investments, Inc."
CONSTRUCTION
Four Nines Gold, Inc. On May 5, 1995 FNG was awarded a 14 month
$2,584,434 contract by the City of Lead, South Dakota for municipal
road and drainage construction, and rock slide area stabilization.
As of May 31, 1996, change orders by the City of Lead had increased
the contract to $3,544,099 and FNG had performed 89% percent of the
contract, billing $3,212,006 (after $75,000 retainage by the City
of Lead against completion of the project), of which $3,064,941 had
been paid. FNG continues to expect the contract to be profitable
On September 13, 1995 FNG was awarded a separate construction
contract for $618,270 by the United States Department of the
Interior, Bureau of Reclamation, for the Minor Laterals, North
Canal, Stage 5, Belle Fourche Unit, South Dakota. The work
consists of constructing 3.81 miles of pipeline, approximately 1.4
miles of gravel-surfaced road, removing existing reinforced
concrete hydraulic structures and constructing miscellaneous
concrete structures which include four inlets. As of May 31, 1996
FNG had completed 100% of the contract, billing $601,935 and having
received payment for $535,515. The contract as of May 31, 1996,
had resulted in a loss of approximately $50,000 to FNG, however, a
claim for approximately $173,000 has been submitted, and if
approved would result in a gross profit of approximately $123,000
to FNG. The outcome of the claim cannot be predicted at this time.
Neither commercial nor construction operations are dependent upon
a single customer, or a few customers, the loss of which would have
a materially adverse effect on USE.
RESEARCH AND DEVELOPMENT
Registrant has incurred no research and development expenditures,
either on its own account or sponsored by customers, during the
past three fiscal years.
ENVIRONMENTAL
General. Registrant's operations are subject to various federal,
state and local laws and regulations regarding the discharge of
materials into the environment or otherwise relating to the
protection of the environment, including the Clean Air Act, the
Clean Water Act, the Resource Conservation and Recovery Act
("RCRA"), and the Comprehensive Environmental Response Compensation
Liability Act ("CERCLA"). With respect to mining operations
conducted in Wyoming, Wyoming's mine permitting statutes, Abandoned
Mine Reclamation Act and industrial development and siting laws and
regulations also impact the Company. Similar laws and regulations
in California affect SGMC operations and in Utah, will effect
Plateau's operations.
To the Company's knowledge, currently it is in compliance in all
material respects with existing environmental regulations. To the
extent that production by SMP, GMMV or SGMC is delayed, interrupted
or discontinued due to need to satisfy existing or new provisions
which relate to environmental protection, future USE earnings could
be adversely affected.
Crooks Gap. An inoperative ion exchange facility at Crooks Gap
currently holds a NRC license for possession of uranium operations
byproducts. USE has applied to the NRC for permission to
decommission and decontaminate the plant, dispose low level waste
into the Sweetwater Mill tailings cell, and keep intact such of the
facility as does not require dismantling. Costs for this two year
effort (once approved by the NRC) are not expected to exceed
$150,000. However, management of USE and Crested are reviewing the
economics of relicensing this facility as part of a potential in-
situ leach uranium mining operation.
Other Environmental Costs. Actual costs for compliance with
environmental laws may vary considerably from estimates, depending
upon such factors as changes in environmental laws and regulation
(e.g., the new Clean Air Act), and conditions encountered in
minerals exploration and mining. Registrant does not anticipate
that expenditures to comply with laws regulating the discharge of
materials into the environment, or which are otherwise designed to
protect the environment, will have any substantial adverse impact
on the Registrant's competitive position.
EMPLOYEES
USE has 78 full-time employees. Crested uses approximately 50
percent of the time of USE employees, and reimburses USE
accordingly. Payroll expense has been shared by USE and Crested
since 1981.
<PAGE>
MINING CLAIM HOLDINGS
Title to Properties. Nearly all the uranium mining properties held
by GMMV, SMP, and Plateau are on federal unpatented claims.
Unpatented claims are located upon federal public land pursuant to
procedure established by the General Mining Law. Requirements for
the location of a valid mining claim on public land depend on the
type of claim being staked, but generally include discovery of
valuable minerals, erecting a discovery monument and posting
thereon a location notice, marking the boundaries of the claim with
monuments, and filing a certificate of location with the county in
which the claim is located and with the BLM. If the statutes and
regulations for the location of a mining claim are complied with,
the locator obtains a valid possessory right to the contained
minerals. To preserve an otherwise valid claim, a claimant must
also annually pay certain rental fees to the federal government
(currently $100 per claim) and make certain additional filings with
the county and the BLM. Failure to pay such fees or make the
required filings may render the mining claim void or voidable.
Because mining claims are self-initiated and self-maintained, they
possess some unique vulnerabilities not associated with other types
of property interests. It is impossible to ascertain the validity
of unpatented mining claims solely from public real estate records
and it can be difficult or impossible to confirm that all of the
requisite steps have been followed for location and maintenance of
a claim. If the validity of an unpatented mining claim is
challenged by the government, the claimant has the burden of
proving the present economic feasibility of mining minerals located
thereon. Thus, it is conceivable that during times of falling
metal prices, claims which were valid when located could become
invalid if challenged. Disputes can also arise with adjoining
property owners for encroachment or under the doctrine of
extralateral rights (see Item 3, "Legal Proceedings - BGBI
Litigation").
Proposed Federal Legislation. The U.S. Congress has, in
legislative sessions in recent years, actively considered several
proposals for major revision of the General Mining Law, which
governs mining claims and related activities on federal public
lands. If any of the recent proposals become law, it could result
in the imposition of a royalty upon production of minerals from
federal lands and new requirements for mined land reclamation and
other environmental control measures. It remains unclear whether
the current Congress will pass such legislation and, if passed, the
extent such new legislation will affect existing mining claims and
operations. The effect of any revision of the General Mining Law
on the Company's operations cannot be determined conclusively until
such revision is enacted; however, such legislation could
materially increase the carrying costs of the Green Mountain
mineral properties, the SMP properties and some of Plateau's
mineral properties which are located on federal unpatented mining
claims, and could increase both the capital and operating costs for
such projects and impair the Company's ability to hold or develop
such properties, as well as other mineral prospects on federal
unpatented mining claims.
<PAGE>
ITEM 3. Legal Proceedings
Sheep Mountain Partners Arbitration/Litigation
Arbitration. On June 26, 1991, CRIC submitted certain disputed
matters concerning SMP to arbitration before the American
Arbitration Association in Denver, Colorado, to which USE and
Crested filed a responsive pleading and counterclaim alleging
violations of contracts and duties by CRIC related to SMP. CRIC
asserted that USE and Crested, d/b/a/ USECC, were in default under
the SMP partnership agreement ("SMP Agreement"). Prior to
initiation of arbitration proceedings, USE and Crested had notified
CRIC it was in default under the SMP Agreement. The issues raised
in the arbitration proceedings were generally incorporated in the
Federal proceedings (see below), wherein the U.S. District Court of
Colorado stayed further proceedings in arbitration. See also
"Stipulated Arbitration", below.
Federal Proceedings. On July 3, 1991, USE and Crested
("plaintiffs") filed Civil Action No. 91-B-1153 in the United
States District Court for the District of Colorado against CRIC,
Nukem and various affiliates of CRIC and Nukem (together, the
"defendants"), alleging that CRIC and Nukem misrepresented material
facts to and concealed material information from the plaintiffs to
induce their entry into SMP Agreement and various related
agreements. Plaintiffs also claim CRIC and Nukem wrongfully
pursued a plan to obtain ownership of the USE-Crested interests in
SMP through various means, including overcharging SMP for uranium
"sold" to SMP by defendants. Plaintiffs further allege that
defendants refused to provide a complete accounting with respect to
dealings in uranium with and on behalf of SMP, and that certain
defendants misappropriated SMP property and engaged in other
wrongful acts relating to the acquisition of uranium by SMP.
Plaintiffs requested that the court order rescission of the SMP
Agreement and related contracts, and asked the court to determine
the amounts payable to CRIC by USECC as a result of any such
rescission order to place the parties in status quo. USE and
Crested also requested that the court order defendants to make a
complete accounting to them concerning the matters alleged in the
Amended Complaint. They requested an award of damages (including
punitive, exemplary and treble damages, interest, costs and
attorneys' fees) in an amount to be determined at trial.
Plaintiffs further requested imposition of a constructive trust on
all property of SMP held by defendants, and on profits wrongfully
realized by defendants on transactions with SMP.
The defendants filed various motions, including an application to
stay judicial process and compel arbitration and to dismiss certain
of plaintiff's claims. The defendants also filed answers and
counterclaims against plaintiffs, claiming plaintiffs breached the
SMP Agreement and misappropriated a partnership opportunity by
providing certain information about SMP to Kennecott and entering
into the GMMV with Kennecott involving the Green Mountain uranium
properties. The defendants also claim that plaintiffs wrongfully
sold an interest in SMP to Kennecott through the GMMV without
CRIC's consent and without providing CRIC a right of first refusal
to purchase such interests; that Registrant breached the uranium
marketing agreement between CRIC and SMP, which had been assigned
by CRIC to Nukem, by agreeing with Kennecott in the GMMV that
Kennecott could market all the uranium from Green Mountain, thereby
depriving Nukem of commissions to be earned under such marketing
agreement; that Registrant and Crested interfered with certain SMP
supply contracts, costing CRIC legal fees and costs; that CRIC and
Nukem are entitled to be indemnified for purchases of uranium made
on behalf of SMP; that Registrant and Crested failed to perform
their obligations under an Operating Agreement with SMP in a proper
manner, resulting in additional costs to SMP; that Registrant and
Crested overcharged SMP for certain services under the SMP
Partnership Agreement and refused to allow SMP to pay certain
marketing fees to Nukem under the Uranium Marketing Agreement; that
Registrant and Crested breached the SMP Partnership Agreement by
failing to maintain a toll milling agreement with Pathfinder Mines
Corporation, thereby rendering SMP's uranium resources worthless;
and that Registrant and Crested have engaged in vexatious
litigation against CRIC and Nukem. Defendants also requested
damages (including punitive, exemplary and treble damages under
RICO, interest costs and attorney fees).
Stipulated Arbitration. In fiscal 1994, the plaintiffs and
defendants agreed to proceed with exclusive, binding arbitration
before a panel of three arbitrators (the "Panel") with respect to
any and all post-December 21, 1988 disputes, claims and
controversies (including those brought in the 1991 arbitration
proceedings, the U.S. District Court proceeding and separate
Colorado State Court proceeding initiated by USE and Crested to
obtain reimbursement for maintaining the SMP mines on a standby
basis that any party may assert against the other. All pre-
December 21, 1988 claims, disputes and controversies were stayed by
stipulation between the parties, until the Panel entered an order
and award in the arbitration proceeding.
In connection with agreeing to proceed to arbitration as stated
above, the Registrant and Crested affirmed the Sheep Mountain
Partners partnership, and proceeded on common law damages and other
claims in the arbitration. Approximately $19.3 million is held in
escrow as of May 31, 1996 by agreement of the parties pending
resolution of the disputes.
The arbitration evidentiary proceedings were completed on May 31,
1995, following which the parties filed with the arbitrators
proposed findings of fact and conclusions of law and proposed
order, award, briefs of law and responses to the other party's
submittals. Nukem and CRIC sought damages against USECC in the
amount of $47,122,535. For their claims, USE and Crested sought
damages of approximately $258 million from Nukem and CRIC, which
amount USE and Crested requested be trebled under the Racketeer
Influenced and Corrupt Organizations Act ("RICO") and similar state
law provisions.
On April 18, 1996, the Panel entered an Arbitration Order and Award
(the "Award"). The Panel found in favor of the Registrant and
Crested on certain claims made by the Registrant and Crested
(including the claims for reimbursement of standby maintenance
expense and other expenses on the SMP mines), and in favor of
Nukem/CRIC and against the Registrant and Crested on certain other
claims.
The Registrant and Crested were awarded monetary damages of
approximately $7.4 million, which amount is after deduction of
monetary damages which the panel awarded in favor of Nukem/CRIC and
against the Registrant and Crested. An additional amount of
approximately $4.8 million was awarded by the Panel to the
Registrant and Crested, to be paid out of cash funds held in SMP
bank accounts, which accounts have been accruing operating funds
from SMP since the arbitration/litigation proceedings were
commenced. It is anticipated that such payment out of the SMP bank
accounts will be made in fiscal 1997.
The Panel ordered that one utility supply contract with PSE&G for
980,000 pounds of uranium oxide held by Nukem belonged to SMP, and
ordered such contract assigned to SMP. The contract expires in
2000. The Panel further awarded SMP the uranium purchase contracts
Nukem entered into with three CIS Republics in constructive trust.
The RICO claims of both parties against the other were either
withdrawn (Nukem) or dismissed by the Panel. In its Award the
Panel did not order SMP dissolved. The timing and ultimate
resolution of the question of SMP dissolution presently is
uncertain. Pending such resolution, the Registrant and Crested are
hopeful that delivery obligations under the various SMP utility
supply contracts can be met through the cooperation of Nukem.
Registrant and Crested petitioned the U.S. District Court for the
District of Colorado (the "Court") for confirmation of the Award.
Nukem filed two motions to vacate or modify portions of the Award,
alleging that significant portions of the Award were erroneous. On
May 24, 1996, the Court remanded the Award to the Panel for
consideration of these motions. On July 3, 1996, the Panel entered
a new Order essentially affirming its earlier Award. With respect
to the principal claim of error alleged in the Nukem motions,
concerning the award of more than $15 million of damages and
interest to Registrant and Crested attributable to Nukem's
unauthorized use of SMP uranium supply contracts to obtain rights
to purchase U3O8 from the Commonwealth of Independent States
("CIS"), the Panel affirmed the amount of its award to Registrant
and Crested. In so doing the Panel stated that, "There was
wrongdoing on the part of Nukem when it used what were clearly
partnership contracts to obtain financial benefits for itself
alone.... Our Award . . . is premised upon wrongdoing by Nukem
and a judgment by us that Nukem ought not to be permitted to profit
from that wrongful conduct." The Panel affirmed the Award granting
SMP the rights to purchase CIS uranium, the uranium acquired
pursuant to those rights and the profits therefrom, which are
impressed with a constructive trust in favor of SMP. The Panel
further stated, "We thus conclude that there is no inconsistency
and no double recovery and no subtraction that ought to be made
from profits already realized...."
The Panel did correct a portion of the award, to reimburse $137,700
to CRIC for U3O8 it purchased, out of a bank account in Riverton,
WY. The Panel also made a correction to have the $136,500
previously awarded to Registrant and Crested paid out of the First
Interstate Bank of Riverton account rather than the Norwest Bank
account in Denver, CO. Registrant and Crested called a
mathematical error to the Panel's attention which was made by Nukem
after the close of evidence in the amount of $265,313.83. The
Panel did not consider that error because it was not directed by
the Court to do so and it remains for the Court to resolve that
issue.
In addition to the Petition for Confirmation of the Award (which
was later amended), Registrant and Crested also filed with the
Court a petition for appointment of a receiver for the SMP
Partnership and for an order directing distribution of the escrowed
proceeds in the SMP bank accounts. Nukem/CRIC filed a petition
with the Court to vacate part of the Panel's Award and modify other
portions. The U. S. District Court ordered the parties to respond
to each others pleadings by August 22 and replies by September 6,
1996. The Court set a hearing for September 25, 1996 with respect
to these matters.
BGBI Litigation
The Company and Crested are defendants and counter- or cross-
claimants in certain litigation in the District Court of the Fifth
Judicial District of Nye County, Nevada, brought by Bond Gold
Bullfrog Inc. ("BGBI") on July 30, 1991. BGBI (now known as
Barrick Bullfrog, Inc.) is an affiliate of Barrick Corp., a large
international gold producer headquartered in Toronto, Canada. The
litigation primarily concerns extralateral 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.
Parador, USE and Crested had previously advised BGBI that they are
entitled to royalty payments with respect to extralateral rights of
the subject claims on minerals produced at the Bullfrog Mine,
claiming that the lode or vein containing the gold mineralization
apexes on the Parador claims and dips under the claims leased to
BGBI by a third party.
BGBI seeks to quiet title to its leasehold interest in the subject
claims, alleging that Parador's lease thereof to USE and Crested is
adverse to the interest claimed by BGBI, and that the assertions by
USE and Crested of an interest in the claims have no foundation.
BGBI seeks a determination that USE and Crested have no rights in
the claims and an order enjoining USE and Crested from asserting
any interest in them. BGBI further asserts that, in attempting to
lease an interest in the subject claims to USE and Crested, Parador
breached the provisions of its lease to BGBI, and that Parador is
responsible for the legal fees and costs incurred by BGBI in the
quiet title action, which may be offset against royalties. Under
an arrangement to pay certain legal expenses of Parador, USE and
Crested may be responsible for any such amounts.
BGBI alleges that by entering into the Assignment and Lease of
Mining Claims with Parador, USE and Crested disrupted the
contractual relationship between BGBI and Parador. In addition,
BGBI claims that the USECC-Parador agreement slanders BGBI's title
to the claims. BGBI seeks compensatory damages from Parador, USE,
and Crested; punitive damages from USE and Crested; and costs and
other appropriate relief from Parador, USE and Crested, all in
amounts to be determined.
A partial or bifurcated trial to the court of the extralateral
rights issues was held on December 11 and 12, 1995. The purpose of
the hearing was to determine whether the Bullfrog orebody is a
"vein, lode or ledge" as described in the General Mining Law and,
if so, whether the facts of the case warrant the application of the
doctrine of extralateral rights as set forth in such statute.
Although the Court sat as both the finder of fact and law with
respect to such issues, the Court concluded that the questions are
ultimately one of law which must be decided based on the testimony
and exhibits introduced at the trial concerning the description of
the orebody. Registrant, Crested and Parador presented five
experts in the field of geology, including the person who was
responsible for the discovery of the gold deposit at the mine. All
five experts opined that the deposit was a lode and it apexed on a
portion of Parador's two mining claims. The defendant H.B. Layne
Contractor, Inc. ("Layne") presented a single witness who testified
that there was no apex within the Parador claims. The Court
nevertheless found that Parador had failed to meet its burden of
proof and therefore Parador, Registrant and Crested have no right,
title and interest in the minerals lying beneath the claims of
Layne pursuant to extralateral rights. The Court entered a partial
judgment in favor of Layne and ordered that Parador pay Court costs
to Layne. Registrant and Crested have filed an appeal of the
Court's ruling as erroneous as a matter of law, which is pending.
The partial trial did not address any of the other issues pending
in the litigation other than those required to decide the question
of whether the doctrine of extralateral rights is applicable to
this case. All other claims and counterclaims remain pending
before the Court and no hearing date has been set for those issues.
If USE's and Crested's position concerning extralateral rights is
ultimately sustained, substantial additional revenues and income
may be received by USE and Crested from royalties payable with
respect to gold produced from the Bullfrog Mine. If, however, the
final decision of the appellate court is adverse to USE and
Crested, an award of damages against USE and Crested in a
substantial amount could have a significant negative impact on USE
and Crested.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE>
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 45, has been Controller and Chief
Accounting Officer for 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, and their Treasurer since
December 14, 1990. He serves at the will of the Boards 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, he has
not been involved in any Reg. S-K Item 401(f) listed proceeding.
Daniel P. Svilar, age 67, 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.
<PAGE>
PART II
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 1996, and 1995.
High Low
Fiscal year ended May 31, 1996 ---- ----
------------------------------
First quarter ended 8/31/95 $5.38 $4.13
Second quarter ended 11/30/95 5.38 3.38
Third quarter ended 2/29/96 19.75 3.50
Fourth quarter ended 5/31/96 27.00 13.00
Fiscal year ended May 31, 1995
------------------------------
First quarter ended 8/31/94 5.13 3.88
Second quarter ended 11/30/94 4.75 3.50
Third quarter ended 2/28/95 4.63 3.38
Fourth quarter ended 5/31/95 7.55 4.63
(b) Holders
(1) At September 9, 1996, the closing bid price was $15.50 per
share and there were approximately 707 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.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
May 31,
-------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current assets $ 2,912,400 $ 3,390,100 $ 3,866,600 $ 1,650,300 $ 3,260,500
Current liabilities 2,031,200 3,368,200 1,291,700 1,592,100 681,900
Working capital 881,200 21,900 2,574,900 58,200 2,578,600
Total assets 34,793,300 33,384,500 33,090,300 24,037,200 24,583,000
Long-term
obligations(1) 15,020,700 15,769,600 16,612,500 2,900,000 4,540,400
Shareholders' equity 14,617,000 12,168,400 12,559,100 15,063,200 14,982,900
</TABLE>
(1)Includes $3,978,800, $3,951,800, $3,951,800, $1,695,600 and
$1,695,600 of accrued reclamation costs on mining properties at May
31, 1996, 1995, 1994, 1993 and 1992, respectively. See Note K of
Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
For Years Ended May 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 9,632,200 $ 4,600,600 $ 8,776,300 $ 9,045,500 $ 6,353,600
Income (loss) before
equity in income
(loss) of affiliates,
provision for
income taxes and
extraordinary item (2,524,100) (2,577,700) (3,587,900) (103,100) 819,200
Equity in (loss) of
affiliates (418,500) (442,300) (531,200) (444,700) (324,900)
Net income (loss) 270,700 (2,070,600) (3,370,800) (221,900) 613,200
Income (loss) per
share before
extraordinary item $(.38) $(.48) $(.73) $(.05) $ .09
Extraordinary item -- -- -- -- .06
----- ----- ----- ----- -----
Income (loss) per share
before cumulative effect
of accounting change (.38) (.48) (.73) (.05) .15
Income from discontinued
operations .05 .06 .03 -- --
Gain on disposal of
subsidiary operations in
discontinued segment .37 -- -- -- --
Cumulative effect at
June 1, 1993 of income
tax accounting change -- -- (.06) -- --
----- ----- ----- ----- ----
Net income (loss)
per share $ .04 $(.42) $(.76) $(.05) $.15
----- ----- ----- ----- ----
----- ----- ----- ----- ----
Cash dividends per share $ -0- $-0- $-0- $-0- $-0-
----- ----- ----- ----- ----
----- ----- ----- ----- ----
</TABLE>
<PAGE>
ITEM 7. USE Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following is Managements's Discussion and Analysis of
those significant factors which have affected USE's liquidity,
capital resources and results of operations during the periods
covered in the USE Consolidated Financial Statements filed with
this Report.
Although operations during the year ended May 31, 1996 were
profitable, the Company generated significant losses in fiscal 1995
and 1994, as a result of holding costs and permitting activities in
the mineral segment and gas operations and from certain commercial
operations. The Company is in the process of developing and/or
holding investments in gold, uranium, and gas properties that are
currently not generating any operating revenues, but for which the
Company has high expectations. These properties require
expenditures for permitting, development, care and maintenance,
holding fees, corporate overhead and administrative expenses, etc.
In addition, legal expenses associated with the litigation and
arbitration surrounding the SMP Partnership and the inability of
the Company to utilize funds generated by that Partnership have
compounded the Company's operating and cash flow situation.
Nevertheless, the Company believes that it will meet its
obligations in the coming year, as further discussed below.
Liquidity and Capital Resources at May 31, 1996
Working Capital Components. Cash used in operating activities
was $2,787,300 for the year ended May 31, 1996. Cash provided by
investing and financing activities during fiscal 1996 was $541,200
and $2,878,100, respectively. For the year ended May 31, 1996,
these activities resulted in a net increase of $632,000 in cash.
Working capital increased during the fiscal year ended May 31, 1996
by $859,300 to working capital of $881,200 (from working capital
of $21,900 at May 31, 1995).
Cash provided by financing activities resulted from private
placements of USE's common stock of $3,273,600 and proceeds from
long-term debt of $4,212,800. These increases in cash from
financing activities were offset by reductions in cash as it was
used to retire long-term debt of $3,967,300. Additionally cash was
used to repay USE's line of credit, resulting in a net reduction of
the line of credit of $641,000 during the year ended May 31, 1996.
During the year ended May 31, 1996, the Company completed a
private placement of 812,432 shares of restricted common stock
which resulted in net proceeds to the Company of $2,842,200. In
connection with this private placement, warrants to purchase 81,243
USE common shares at $4.80 per share were issued to the selling
agent. These warrants were exercisable through July 25, 2000. All
of the warrants were exercised in fiscal 1996 resulting in $389,900
of proceeds to the Company. The Company also received $41,500 as
a result of a non-affiliated individuals exercising options for
6,600 shares of common stock.
The increase in long-term debt was primarily a result of USE
subsidiaries, Crested and Four Nines Gold, Inc. increasing their
amount of debt. Four Nines Gold increased its debt by $751,700
during the year and repaid $377,700 of this debt for an ending
balance of debt of $431,300. This debt is from operating loans and
the financing of equipment. The remaining debt is covered by
equity in equipment owned by Four Nines Gold. Crested acquired
additional long-term debt of $2,350,900 to $6,460,300 due USE.
This increase is due to USE funding operations jointly owned with
Crested due to Crested's lack of liquid assets. It is anticipated
that the debt to USE at May 31, 1996 of $6,460,300 will be repaid
at least in part from funds awarded by the Arbitration Panel in the
SMP litigation/arbitration as 50% of the Award is the property of
Crested. The debt for Crested is eliminated in consolidation of
the financial statements of Crested into USE.
Cash generated from investing activities were principally from
proceeds from the sale of property and equipment of $1,212,900 and
proceeds from the sale of a subsidiary, The Brunton Company of
$3,300,000.
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. USE will also receive
$1,000,000 in three annual installments of $333,333 plus interest
at a rate of 7% per year beginning February 15, 1997. The current
portion of this note receivable is included in current assets and
the long-term portion is included in notes receivable-real estate
and other in the accompanying balance sheet. 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 first payment will cover profits from February 1, 1996 through
april 30, 1997 and is due no later than July 15, 1997. Each
subsequent payment, due July 15 of subsequent years, will cover
profits for the most recent year ended April 30.
Certain items of property owned by Brunton were not subject to
the Agreement. These items included various inventory items,
mining equipment, real estate not used in operations, 225,556
shares of USE common stock, options to purchase 150,000 shares of
USE common stock for $3.50 per share, 160,000 shares of Crested
common stock and options to purchase 300,000 shares of Crested
common stock for $.40 per share. 100,000 shares of USE common
stock and 100,000 shares of Crested common stock were transferred
for no consideration to SGMC and the remainder of the USE and
Crested stock was transferred to Plateau. One-half of the USE and
Crested options were transferred to each SGMC and Plateau,
respectively.
In connection with the Purchase Agreement, the Company paid
Brunton $171,700 for accrued rental on mining equipment and retired
$273,000 related to bank debt incurred by Brunton on behalf of USE.
Proceeds from the sale of assets of $1,212,900 were primarily
from assets sold by USECB joint venture, $905,700, and Four Nines
Gold, $287,800. Four Nines Gold sold miscellaneous equipment that
was no longer needed in its operations. The majority of the
proceeds from the sale of assets recognized by USECB, are as a
result of the sale of Wind River Estates, a mobile home park, to
Arrowstar, a corporation owned by USE's president and chief
executive officer and his sons.
These increases in cash from investing activities during
fiscal 1996 are offset by cash used in mining property development,
$763,000; development of gas properties, $42,100; purchase of
property and equipment, $1,387,300; changes in notes receivable,
$1,102,800, and investments in affiliates of $676,500.
Due to disputes among the SMP partners, USE and Crested have
not been reimbursed for care and maintenance costs for the SMP
properties since the spring of 1991. As of May 31, 1996 the total
amount that SMP owed USECC for standby and maintenance costs was
$5,354,000. On April 18, 1996 the Arbitration Panel ordered
Nukem/CRIC to pay USECC $2,065,989 in standby costs for the SMP
mines plus $446,834 in interest and per diem interest of $616 until
paid for their 50% share of SMP expenses. At August 31, 1996, the
total amount due USECC from Nukem/CRIC was $2,607,100.
Capital Requirements - General: The primary requirements for
USE's working capital during fiscal 1997 are expected to be the
costs associated with development activities of Plateau (see
"Capital Requirements - Plateau"), care and maintenance costs of
SMP, payments of holding fees for mining claims, purchase of
uranium for delivery to utility customers of SMP, drilling and
overhead expenses of Energx and corporate general and
administrative expenses, including costs associated with continuing
litigation and arbitration.
Capital Requirements - SGMC: SGMC's properties contain
reserves of gold. Preliminary estimates are that a 500 ton per day
("tpd") mine/mill operation using a cyanide-flotation process, will
require up to $15,000,000 to place the proposed mine and mill into
full operation.
Although pre-production mine development and underground
exploration is substantially complete, capital resources in
addition to those currently on hand, will be needed to complete
mine development and construct a mill facility. The timing of
these expenditures will depend upon internal cash flow or
additional financing.
Subsequent to May 31, 1996, and as of September 6, 1996, SGMC
received a net of approximately $840,000 in equity financing which
is to be used by SGMC for property holding costs and to further
develop the properties.
On May 14, 1996, SGMC entered into a Letter of Intent with RAF
Financial Corporation ("RAF") whereby RAF is to assist SGMC in
obtaining additional equity financing through an initial public
offering ("IPO"). Under the terms of the IPO Letter of Intent,
SGMC and RAF are proposing a public offering of 3 million shares of
SGMC common stock at an expected price of between $4.00 and $6.00
per common share and up to 3 million Class A warrants at a price of
$0.25 per warrant. The Class A warrants are expected to have an
exercise price of approximately $7.00 per share and will be
exercisable for 3 years following the IPO.
There can be no assurance that the IPO will be successfully
completed.
Capital Requirements - SMP: There are no current plans to
mine the SMP Crooks Gap properties during fiscal 1997, however, USE
and Crested will continue to preserve the ore bodies and develop
concepts to reduce care and maintenance costs, including driving a
decline to reduce pumping costs (which also would reduce future
mining costs by reducing hoisting costs). Although funds are
available in SMP's bank account of approximately $19.3 million as
of May 31, 1996, these funds are restricted and since early 1991,
SMP has not paid USE and Crested the operating costs and fees
associated with their services as operating manager of the Crooks
Gap properties. As part of the Order and Award on April 18, 1996,
the Arbitration Panel awarded USECC $2,065,989 for standby costs
through March 1996, plus interest of $446,834 and per diem interest
of $616 until paid. The Award was based on $71,241 per month for
holding costs. USE and Crested maintain that at least the Award
amount of $71,241 per month is due USECC until SMP resolves the
ultimate disposition of its mining properties. Nukem disputes the
amount of $71,241 per month. It is hoped that this issue will be
resolved by the Federal Court.
Notwithstanding disputes between the SMP partners, USE and
Crested have delivered an agreed-upon portion of the uranium
concentrates required to fill contract delivery requirements on
certain long-term U3O8 contracts since July 1, 1991. During 1996,
USECC made certain deliveries while during 1995 all of the
deliveries to fill the SMP contracts were made by Nukem. It is
uncertain what protocol with Nukem will be in place for 1997 and
thereafter. If the SMP partners are unable to agree on how to
separately effect contract performance for the various SMP
customers, resulting delivery delays and/or incomplete deliveries
could adversely affect the contracts, and therefore USE. Further,
the SMP partners are awaiting the decision to either confirm the
Arbitration Panel's Award or to, as Nukem has requested, vacate a
portion of the Award. No assurance can be given on the outcome of
the hearing which is scheduled for September 25, 1996 or any
further appeal attempts by Nukem/CRIC.
Capital Requirements - GMMV: Operations of GMMV are not
requiring USE's capital resources, as the initial $50,000,000 of
expenses on the GMMV properties is being paid by Kennecott. USE
and Crested continue to project that the proposed Jackpot Mine can
be put into production for less than $25,000,000. However,
depending on results of exploration and development projects on the
properties, additional expenditures may be required. GMMV
expenditures for fiscal 1997 will depend on whether one or both
declines for the proposed mine are started. A decision by the
Management Committee of GMMV regarding the declines is currently
being considered. Nonetheless, GMMV should not require any funding
from USE during fiscal 1997. The Management Committee of GMMV is
also considering various financing options which could result in
Kennecott being able to monetize all or a portion of its interest
in GMMV. This could be accomplished by either acquiring new
investors or formation of a new public company to finance the
development of the properties.
Capital Requirements - Plateau: On August 11, 1993, USE
purchased all the outstanding shares of Plateau Resources, Limited
("Plateau"). Plateau owns various real estate developments in and
around Ticaboo, Utah and the Shootaring Uranium Mill. Although
Crested has no ownership in Plateau, the Directors of USE and
Crested have agreed to divide equally one-half of the obligations
incurred in excess of the total $14.2 million which was held by
Plateau at the time of the USE acquisition. Management of USE and
Crested are currently in the process of having the Shootaring Mill
license changed to operational. At such time as the mill is
licensed to operate, significant amounts of capital will be
required to place the mill and mines into operation. It is
expected that these funds will either be provided by cash received
as a result of the SMP litigation, equity financing on the Plateau
U3O8 assets or a joint venture partner. For a more detailed
discussion of the Plateau transaction please refer to Note F. of
the financial statements.
Capital Requirements - Energx: Another requirement of
Crested's and USE's working capital is the continued funding of
Energx overhead expenses and drilling operations. Energx held
several gas leases and participates in one gas venture (on the Fort
Peck Indian reservation in Montana) with NuGas, a Canadian firm;
the gas venture requires NuGas to fund the drilling of the first
eight wells. Therefore, capital expenditures for Energx by USE on
this venture are not anticipated to be significant in 1997.
Without access to equity capital no additional expansion of Energx'
operations is anticipated. If the discovery wells on the Fort Peck
Reservation are successful additional capital requirements will be
satisfied by either equity or commercial debt.
Long-Term Debt and Other Obligations: Debt at May 31, 1996 was
$1,183,200, including $499,000 on the Company's line of credit of
which $738,900 is current, (see Note G to the USE Consolidated
Financial Statements).
Reclamation Costs. Prior to fiscal 1996, USE and Crested
assumed the reclamation obligations, environmental liabilities and
contingent liabilities for employee injuries, from mining the
Crooks Gap and other properties in the Sheep and Green Mountain
Mining Districts. The reclamation obligations, which are
established by governmental regulators, were most recently set at
$1,451,800 for SMP, $2,500,000 for Plateau and $27,000 for SGMC,
for a total of $3,978,800 which amount is shown on USE's balance
sheet as a long-term obligation.
To assure the reclamation work will be performed, regulatory
agencies require posting of a bond or other security. USE and
Crested satisfied this requirement with respect to SMP properties
by mortgaging their executive office building in Riverton, Wyoming.
USE and Crested have also posted a cash bond in the amount of
$176,000 for this reclamation bond. USE and Crested are
negotiating with government agencies to decrease the $176,000 cash
bond and either forego the additional collateral or take other real
estate and improvements with equal value. A portion of the funds
for the reclamation of SMP's properties was to have been provided
by SMP, which agreed to pay up to $.50 per pound of uranium
produced from its properties to USE and Crested for reclamation
work. The status of this commitment could be impacted by the
ultimate resolution of the litigation with SMP.
Reclamation obligations on the contiguous Big Eagle properties
and the Sweetwater Mill, estimated at approximately $23,620,000,
have been assumed by the GMMV venturers, and secured by a bank
letter of credit provided by Kennecott. The reclamation and
environmental costs associated with the Sweetwater Mill will not
commence prior to conclusion of mining activities on Green
Mountain. As uranium is processed through the Mill, a reclamation
reserve will be funded on a per unit of production basis. Up to
$8,000,000 (in 1990 dollars) in any reclamation costs which may be
incurred prior to commencement of production or 2001 will be paid
for by UNOCAL.
Reclamation obligations of Plateau are covered by a $2,500,000
cash bond with accrued interest of $385,000 at August 31, 1996 to
the U.S. Nuclear Regulatory Commission and a $4,800,000 cash
deposit plus accrued interest of $559,400 as of August 31, 1996 for
the resolution of any environmental or nuclear claims. See Item 1-
Business-Uranium.
Reclamation work on any of the above properties need not be
fully completed until a decision is made to abandon the properties,
or as otherwise required by regulatory agencies. Reclamation and
environmental costs associated with any of these properties are not
expected to require Crested funding in fiscal 1996, because such
costs are not anticipated to be incurred for many years.
See Note K to the USE consolidated financial statements
regarding reclamation and environmental costs, and the funding
thereof.
Capital Resources: The primary source of USE capital
resources for fiscal 1997 will be derived from equity financing for
affiliated companies, the resolution of the arbitration/litigation
with Nukem and commercial debt. Additionally, USE and Crested will
continue to offer for sale various non-core assets such as lots and
homes in Ticaboo, real estate holdings in Wyoming, Colorado and
Utah and mineral interests. Fees from oil production (Ft. Peck
Lustre Field, Montana), rentals of real estate holdings and
equipment, aircraft chartering and aviation fuel sales, also will
provide cash.
Additional sources of capital will be needed to develop and
build the mine and mill complex for the Lincoln Project, for which
capital costs SGMC presently is seeking equity financing. There is
no certainty as to the outcome of these efforts. Continued funding
of such costs could cause USE and Crested to incur short term
working capital deficits.
To fund any Energx drilling beyond the eight wells on the Fort
Peck Reservation as well as any other locations, USE and Crested
plan to seek a joint venture partner or obtain financing through
banking institutions or the equity market.
Funding of SMP care and maintenance costs may require
additional capital, depending on the outcome of the SMP
arbitration/litigation. Although management is of the opinion that
the SMP arbitration/litigation will be resolved in favor of USE and
Crested during fiscal 1997, which will result in funds being
available to repay USE and Crested for advances to SMP, this
outcome is not assured. In any event, further delays in resolution
of the arbitration/litigation are expected, and may cause short
term liquidity requirements.
USE believes available working capital, operating revenues and
anticipated financing operations will continue to be adequate to
fund working capital requirements. However, with the exceptions of
GMMV and Plateau, Crested will require continued support from USE
and additional sources of funding to continue the development of
and investment in its various mineral ventures, as stated above.
Although USE and Crested currently are not in production on
any mineral properties, development work continues on several of
their major investments. USE and Crested are not using hazardous
substances and known pollutants to any great degree in these
activities. Consequently, recurring costs for managing hazardous
substances, and capital expenditures for monitoring hazardous
substances or pollutants have not been significant. Likewise, USE
and Crested do not have properties which require current
remediation. USE and Crested are not aware of any claims for
personal injury or property damages that need to be accrued or
funded.
USE received a notification of tax deficiency from the
Internal Revenue Service for fiscal years ended May 31, 1989, 1990
and 1991. USE filed a response to the proposed deficiency, and has
requested an administrative appeal of the initial examiner's
deficiency finding. After several appeals hearings, USE received
a preliminary indication that a major portion of the findings has
been resolved in favor of USE. No written confirmation has been
received as of the date of filing. USE is confident the matters
will be resolved favorably at the administrative appeals level.
Results of Operations
Fiscal 1996 Compared to Fiscal 1995
Revenues increased by $5,031,600 to $9,632,200 for the year
ended May 31, 1996. This increase was primarily due to increases
of $3,116,700 in mineral sales and option (primarily as a result of
U3O8 deliveries made to two of the utilities who have contracts with
SMP) and $2,491,100 in construction contract revenues. Due to the
litigation/arbitration between USE, Crested and Nukem/CRIC,
virtually all SMP deliveries have been in dispute. Certain
deliveries are made 100% by either partner, while others are
delivered on agreed to percentages. USE and Crested have turned
over all profits they have made during fiscal 1996 on these
deliveries to SMP. Due to the difficulties between USE, Crested
and Nukem/CRIC, no deliveries were made by Crested or USE during
the year ended May 31, 1995. Increased revenues from construction
contracts is as a result of Four Nines gold securing larger
contracts than it had been able to obtain in prior years.
The gain in mineral sales and construction contract revenues
during fiscal 1996 was offset by a reduction of $930,200 in gain on
sale of assets revenue. This decrease was a result of large gains
recognized on the sale of real estate in Colorado in fiscal 1995.
No comparable sales took place during fiscal 1996. The only sale
of real estate during fiscal 1996 was the sale of USE's and
Crested's mobile home park on which a gain of $252,600 was
recognized.
Expenses from mineral operations and minerals sold increased
by $1,918,000 to $3,572,300. This increase is directly as a result
of the cost of U3O8 sold during fiscal 1996 as no U3O8 was sold
during fiscal 1995 due to disputes between the SMP partners
relating to contract deliveries. This increase was offset by a
reduction of mineral operation expense associated with mining
properties.
General and administrative costs and expenses increased by
$664,100 to $2,524,700 primarily as a result of costs associated
with the SMP arbitration/litigation and increased mineral and
construction activities. The increased costs are related to
amounts paid to lawyers, expert witnesses and the Arbitrators.
Construction costs and expenses increased $2,039,500 to $3,077,800
during fiscal 1996. This increase is as a result of increased
construction operations and the size of contracts performed.
Commercial operations expenses increased $304,700 during fiscal
1996 over fiscal 1995. This increase is related to increased
commercial operations, primarily Ticaboo. During fiscal 1996,
Energx abandoned $328,700 in shallow natural gas leases, due to
continued depressed prices for natural gas.
As a result of selling 100% of the common stock of Brunton,
the Company has reflected the operations of Brunton as discontinued
in the accompanying financial statements. Revenues for the
discontinued operations for the years ended May 31, 1996, 1995 and
1994 were $2,870,800, $4,553,500 and $4,118,800, respectively. The
Company recognized a gain on the disposal of Brunton of $2,295,700
net of income taxes approximately $50,000.
Equity losses in affiliates have been recorded using the
equity method. Please refer to Notes A and E to the consolidated
financial statements. After accounting for equity losses of
$418,500 and $442,300 for fiscal 1996 and 1995, respectively,
operations resulted in a gain of $270,700, $0.04 per share; and a
loss of $2,070,600, $0.42 per share, for the fiscal years ended May
31, 1996 and 1995, respectively.
Fiscal 1995 Compared To Fiscal 1994
The revenues decreased in fiscal 1995 to $4,600,600 (compared
to $8,776,300 in fiscal 1994), and total costs and expenses
declined in fiscal 1995 to $7,178,300 (compared to $12,364,200 in
fiscal 1994). This resulted in a reduction in the net loss by
$1,300,200 to a loss of $2,070,600 in fiscal 1995 from a loss of
$3,370,800 in fiscal 1994. The improvement in operations can be
attributed to two major events, the sale of property and the
consolidation of Brunton's statement of operations, which has been
restated as discontinued operations. Brunton was acquired in May
of 1994 and sold in February 1996.
Gain on sales of assets increased by $1,229,600 during fiscal
1995 compared to the corresponding period of the prior year. The
increase is due to the sale of certain real estate in Colorado for
$951,600; receipt by Plateau of an option payment of $100,000 for
certain properties in Utah, and sale by Energx of an interest in a
gas property for $195,900. During fiscal 1994, there were only
sales of miscellaneous equipment for $52,800.
There were no mineral sales in fiscal 1995, as a result of the
SMP arbitration, to compare with the $3,732,500 in revenues from
the sale of U3O8 in fiscal 1994. However, this had no significant
effect on the net operating losses because of the corresponding
reduction in the cost of sales. During fiscal 1994, USE and
Crested made all or a portion (50 percent) of certain of the
uranium deliveries required under the SMP contracts. However,
during fiscal 1995, USE and Crested have not been allowed to make
such deliveries, due to disputes with the other SMP partners; under
agreements reached on an interim basis pending resolution of the
SMP dispute, all deliveries have been made by Nukem. Once the
arbitration proceedings are concluded, deliveries will be made in
accordance with the decision of the arbitration panel.
The reduction in mineral property transactions is related to
the Mt. Emmons molybdenum property, in which USE and Crested have
a six percent gross royalty. In addition to the gross royalty,
there were promissory notes of $7,500,000 each issued to USE and
Crested in 1980, with provision for advance royalties. In 1985,
AMAX, USE and Crested agreed to amortize the notes at an annual
rate of $1,000,000 each to USE and Crested ($250,000 each, per
quarter), in lieu of most of the advance royalties. Advance
royalties of 50,000 pounds of molybdic oxide (or its cash
equivalent) remains payable. During fiscal 1994, the final
$500,000 was amortized on the long term note, so there was
consequently no amortization of such debt in fiscal 1995. The
remaining component of the decrease in gain from restructuring
mining properties agreements, is as a result of the fluctuation of
the market price of molybdenum, which is paid in kind by AMAX in
lieu of the advance royalty.
Construction operation revenues for the year ended May 31,
1995 decreased by $1,303,000 from the previous year due to
decreased contract work performed by USE's subsidiary Four Nines
Gold, Inc. ("FNG"). The reason for this decrease can be attributed
to FNG not being successful in the bidding process for new
construction work. During fiscal 1995, FNG spent the majority of
its time bidding on a large ($3,500,000) contract for structure
work. Late in fiscal 1995, FNG was awarded this contract which is
projected to be profitable. Long term growth and profits for the
construction segment is based on FNG's ability to competitively bid
for work and at the same time remain profitable. It is anticipated
that FNG will grow, however, there will be periods of time that
show declines in revenue, as was experienced during fiscal 1995.
On June 1, 1993, USE implemented SFAS No. 109. See Footnote
2 to the USE Consolidated Financial Statements. The cumulative
effect for the year ended May 31, 1994, of this tax accounting
change was a decrease of net income of $267,000. No provision for
income taxes was necessary in fiscal 1995.
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 USE to the greatest extent. When uranium prices were
relatively high in fiscal 1988, USE and Crested acquired the Crooks
Gap properties, and thereafter put the properties into production.
When uranium prices fell sharply during fiscal 1989-1991, USECC
suspended mining operations for SMP, because uranium could be
purchased at prices less than the costs of producing uranium.
Uranium production in the United States reportedly fell by 25
percent to 33 percent in 1990, due to the lowest prices for uranium
since the market developed in the 1960s. However, these low prices
created opportunities for the acquisition of the Sweetwater Mill
and the Shootaring Mill.
Changes in uranium prices directly affect the profitability of
SMP's uranium supply agreements with utilities. Certain of those
agreements become advantageous to USE when the spot market price
for uranium falls significantly below the price which a utility has
agreed to pay. Some of the supply agreements of SMP were acquired
before the fall of spot market prices during fiscal 1989-1991.
Those fixed-price contracts, which have contract prices exceeding
current spot market rates, are currently advantageous, as the
uranium to fill them can be readily obtained at favorable prices.
Although such contracts benefit SMP and USE in a falling market, a
corresponding adverse impact would not be anticipated in the event
of substantially increased prices. SMP would produce uranium from
its Crooks Gap properties to fill those contracts, in the event of
a sustained increase in the spot market price above the contract
prices.
USE believes SGMC's Lincoln Mine will be profitable with gold
prices over $290 per ounce. The price of gold has remained
relatively stable over the past year between $340 and $390 per
ounce.
Molybdenum and Oil. Changes in prices of molybdenum and
petroleum are not expected to materially affect USE with respect to
either its molybdenum advance royalties or its fees associated with
oil production. A significant and sustained increase in the price
of molybdenum would be required for the development Mt. Emmons
properties by Cyprus Amax.
ITEM 8. Financial Statements.
Financial statements meeting the requirements of Regulation S-
X for the Registrant and its affiliate USECC, follow immediately.
Financial statements of GMMV are included as schedules and
immediately follow the index at Item 14(a)(2).
<PAGE>
Report of Independent Public Accountants
To the Board of Directors and Shareholders of
U.S. Energy Corp.:
We have audited the accompanying consolidated balance sheets of
U.S. Energy Corp. (the "Company") (a Wyoming corporation) and
affiliates as of May 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended May 31,
1996. 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 generally accepted
auditing standards. 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 affiliates as of May 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the
three years in the period ended May 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
August 16, 1996.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
May 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 992,600 $ 360,600
Accounts and notes receivable (Note C):
Trade, net of allowance of $27,800
and $51,000 for doubtful accounts 570,900 709,700
Related parties 281,800 231,600
Inventory 118,700 86,100
Current portion of long-term
notes receivable (Notes C, F and L ) 438,700 74,400
Assets held for resale and other 509,700 86,100
Net current assets of discontinued
operations (Note L) -- 1,841,600
----------- -----------
TOTAL CURRENT ASSETS 2,912,400 3,390,100
INVESTMENTS AND ADVANCES (Notes E and F):
Affiliates 3,658,500 3,244,600
Restricted investments 8,200,800 7,757,400
----------- -----------
11,859,300 11,002,000
PROPERTIES AND EQUIPMENT
(Notes B, C, D and F):
Land and mobile home park 939,000 2,771,900
Buildings and improvements 6,243,100 5,889,800
Aircraft and other equipment 6,650,100 6,104,000
Developed oil properties,
full cost method 1,769,800 1,769,800
Undeveloped gas properties 135,400 422,000
Mineral properties and mine
development costs 10,956,900 10,121,700
----------- -----------
26,694,300 27,079,200
Less accumulated depreciation,
depletion and amortization (9,047,900) (9,659,400)
----------- -----------
17,646,400 17,419,800
----------- -----------
</TABLE>
(Continued)
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Continued)
<TABLE>
<CAPTION>
May 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
OTHER ASSETS:
Accounts and notes receivable:
Real estate sales and other
(Notes F and L) 1,648,900 937,700
Employees (Note C) 532,400 505,100
Deposits and other 193,900 129,800
----------- -----------
2,375,200 1,572,600
----------- -----------
$34,793,300 $33,384,500
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
May 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,292,300 $ 2,067,000
Lines of credit (Note G) 499,000 1,140,000
Current portion of long-term
debt (Note G) 239,900 161,200
----------- -----------
TOTAL CURRENT LIABILITIES 2,031,200 3,368,200
LONG-TERM DEBT (Note G) 444,300 277,500
RECLAMATION LIABILITY (Notes F and K) 3,978,800 3,951,800
OTHER ACCRUED LIABILITIES (Note F) 10,414,300 10,818,700
DEFERRED TAX LIABILITY (Note H) 183,300 183,300
NET NONCURRENT LIABILITIES OF
DISCONTINUED OPERATIONS (Note L) -- 538,300
(Continued)
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
May 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
COMMITMENTS AND CONTINGENCIES (Note K)
MINORITY INTERESTS 1,637,900 708,200
FORFEITABLE COMMON STOCK,
$.01 par value; issued 195,520
and 187,820, shares, respectively,
forfeitable until earned (Note J) 1,486,500 1,370,100
SHAREHOLDERS' EQUITY (Note J):
Preferred stock, $.01 par value;
authorized, 100,000 shares;
none issued or outstanding -- --
Common stock, $.01 par value;
authorized, 20,000,000 shares;
issued 6,324,306 and 5,262,794
shares, respectively 63,100 52,500
Additional paid-in capital 20,775,700 18,629,000
Accumulated deficit (3,052,400) (3,256,400)
Treasury stock at cost,
769,943 shares (2,242,400) (2,242,400)
Unallocated ESOP contribution (927,000) (1,014,300)
----------- -----------
14,617,000 12,168,400
----------- -----------
$34,793,300 $33,384,500
----------- -----------
----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Mineral sales and option
(Note E) $ 3,116,700 $ -- $ 3,732,500
Construction contract revenues 3,794,500 1,303,400 2,606,400
Commercial operations 1,439,100 1,177,600 1,165,100
Oil sales 210,100 194,500 183,700
Gain on sales of assets
(Notes D and F) 352,200 1,282,400 52,800
Gain from restructuring mineral
properties agreements (Note F) -- 85,500 626,800
Interest 619,400 469,900 328,700
Management fees and other
(Note C) 100,200 87,300 80,300
------------ ------------ -----------
9,632,200 4,600,600 8,776,300
------------ ------------ -----------
COSTS AND EXPENSES:
Cost of minerals sold 2,766,700 -- 3,895,400
Mineral operations 805,600 1,654,300 1,129,000
Construction costs 3,077,800 1,038,300 2,288,900
Commercial operations 2,374,800 2,070,100 1,989,400
Oil production 73,000 78,100 89,800
General and administrative 2,524,700 1,860,600 2,696,800
Gas operations -- 206,600 157,800
Abandonment of mining claims 328,700 -- --
Loss on sale of investments -- 90,000 --
Interest 205,000 180,300 117,100
------------ ------------ -----------
12,156,300 7,178,300 12,364,200
------------ ------------ -----------
LOSS BEFORE MINORITY INTEREST
IN LOSS, EQUITY IN LOSS OF
AFFILIATES AND INCOME TAXES (2,524,100) (2,577,700) (3,587,900)
MINORITY INTEREST IN LOSS OF
CONSOLIDATED SUBSIDIARIES 608,700 653,200 874,800
EQUITY IN LOSS OF AFFILIATES (418,500) (442,300) (531,200)
------------ ------------ -----------
(Continued)
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
LOSS BEFORE INCOME TAXES (2,333,900) (2,366,800) (3,244,300)
INCOME TAXES (Note H) -- -- --
----------- ----------- -----------
LOSS BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE
AND DISCONTINUED OPERATIONS (2,333,900) (2,366,800) (3,244,300)
CUMULATIVE EFFECT AT JUNE 1, 1993
OF INCOME TAX ACCOUNTING CHANGE
(Notes B and H) -- -- (267,000)
DISCONTINUED OPERATIONS:
Income from discontinued
operations, net of income
taxes of $0 308,900 296,200 140,500
Gain on disposal of
subsidiary operations in
discontinued segment, net
of income taxes of $50,000 2,295,700 -- --
----------- ------------ -----------
NET INCOME (LOSS) $ 270,700 $ (2,070,600) $(3,370,800)
----------- ------------ -----------
----------- ------------ -----------
INCOME (LOSS) PER SHARE AMOUNTS:
Loss before cumulative
effect of accounting change
and discontinued operations $ (.38) $ (.48) $ (.73)
Cumulative effect at
June 1, 1993 of income tax
accounting change -- -- (.06)
Income from discontinued
operations .05 .06 .03
Gain on disposal of
subsidiary operating
in discontinued segment .37 -- --
----------- ------------ -----------
NET INCOME (LOSS) PER SHARE $ .04 $ (.42) $ (.76)
----------- ------------ -----------
----------- ------------ -----------
WEIGHTED AVERAGE
SHARES OUTSTANDING 6,218,184 4,977,050 4,431,469
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Accumulated)
Additional Deficit) Unallocated Total
Common Stock Paid-In Retained Treasury Stock ESOP Shareholders'
Shares Amount Capital Earnings Shares Amount Contribution Equity
------ ------ --------- ------------ ------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1993 4,257,288 $ 42,500 $ 15,050,900 $ 2,185,000 435,301 $(1,200,900) $ (1,014,300) $ 15,063,200
Funding of ESOP 46,332 400 184,900 -- -- -- -- 185,300
Issuance of common
stock to affiliate
in lieu of payment
of loan 100,000 1,000 299,000 -- -- -- -- 300,000
Issuance of common
stock to purchase
an affiliate 276,470 2,800 1,197,100 -- -- -- -- 1,199,900
Issuance of common
stock to third
party for services
rendered 7,000 100 26,900 -- -- -- -- 27,000
Issuance of common
stock to an employee
for services
rendered 1,000 -- 4,300 -- -- -- -- 4,300
Issuance of common
stock 5,000 -- 21,700 -- -- -- -- 21,700
Common stock owned by
Brunton -- -- -- -- 150,000 (437,500) -- (437,500)
Common stock owned by
Crested Corp. -- -- -- -- 127,975 (434,000) -- (434,000)
Net loss -- -- -- (3,370,800) -- -- -- (3,370,800)
--------- -------- ------------ ----------- ------- ----------- ------------ ------------
Balance, May 31, 1994 4,693,090 $ 46,800 $ 16,784,800 $(1,185,800) 713,276 $(2,072,400) $ (1,014,300) $ 12,559,100
--------- -------- ------------ ----------- ------- ----------- ------------ ------------
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(continued)
(Accumulated)
Additional Deficit) Unallocated Total
Common Stock Paid-In Retained Treasury Stock ESOP Shareholders'
Shares Amount Capital Earnings Shares Amount Contribution Equity
------ ------ --------- ------------ ------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance May 31, 1994 4,693,090 $ 46,800 $16,784,800 $(1,185,800) 713,276 $(2,072,400) $ (1,014,300) $ 12,559,100
Funding of ESOP 37,204 400 199,600 -- -- -- -- 200,000
Issuance of common
stock through private
placement (Note J) 400,000 4,000 1,196,000 -- 56,667 (170,000) -- 1,030,000
Issuance of common stock
to third party for
services rendered 5,000 -- 23,100 -- -- -- -- 23,100
Issuance of common stock
for exercised option 107,500 1,100 345,700 -- -- -- -- 346,800
Issuance of common stock
to buyout third party
in property venture 20,000 200 79,800 -- -- -- -- 80,000
Net loss -- -- -- (2,070,600) -- -- -- (2,070,600)
--------- -------- ------------ ----------- ------- ----------- ------------ ------------
Balance May 31, 1995 5,262,794 $ 52,500 $18,629,000 $(3,256,400) 769,943 $(2,242,400) $ (1,014,300) $ 12,168,400
--------- -------- ------------ ----------- ------- ----------- ------------ ------------
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(continued)
(Accumulated)
Additional Deficit) Unallocated Total
Common Stock Paid-In Retained Treasury Stock ESOP Shareholders'
Shares Amount Capital Earnings Shares Amount Contribution Equity
------ ------ --------- ------------ ------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance May 31, 1995 5,262,794 $ 52,500 $18,629,000 $(3,256,400) 769,943 $(2,242,400) $ (1,014,300) $ 12,168,400
Funding of ESOP -- -- -- -- -- -- 87,300 87,300
Issuance of common
stock through private
placement 812,432 8,100 2,834,100 -- -- -- -- 2,842,200
Issuance of additional
common shares in
connection
with prior year
private placement 133,336 1,300 65,400 (66,700) -- -- -- --
Cancellation of common
stock issued for
services rendered (5,000) -- (23,100) -- -- -- -- (23,100)
Issuance of common
stock to employees
for a bonus 32,901 300 180,600 -- -- -- -- 180,900
Issuance of common stock
for exercised warrants 81,243 800 389,100 -- -- -- -- 389,900
Fair value of warrants
issued above exercise
price -- -- 41,700 -- -- -- -- 41,700
Issuance of common stock
for exercised option 6,600 100 41,400 -- -- -- -- 41,500
Dilution of investment
in subsidiary -- -- (1,382,500) -- -- -- -- (1,382,500)
Net income (loss) -- -- -- 270,700 -- -- -- 270,700
--------- -------- ----------- ----------- ------- ----------- ------------ ------------
Balance, May 31, 1996 6,324,306 $ 63,100 $20,775,700 $(3,052,400) 769,943 $(2,242,400) $ (927,000) $ 14,617,000
--------- -------- ----------- ----------- ------- ----------- ------------ ------------
Shareholders' Equity at May 31, 1996 does not include 195,520 shares
currently issued but forfeitable if certain conditions are not met
by the recipients. However, both the "Outstanding Shares at September 9,
1996" on the cover page and the "Weighted Average Shares Outstanding"
on the Consolidated Statement of Operations include the forfeitable shares.
These two line items also include the 717,026 shares of common stock held
by a majority-owned subsidiary, which, in consolidation, are treated as
treasury shares.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended May 31,
------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 270,700 $ (2,070,600) $(3,370,800)
Adjustments to reconcile
net income (loss) to net cash
used in operating activities:
Minority interest in loss of
consolidated subsidiaries (608,700) (653,200) (874,800)
Income from discontinued
operations (308,900) (296,200) (140,500)
Depreciation, depletion
and amortization 788,500 724,700 720,200
Abandoned mining claims 328,700 -- --
Gain from restructuring
mineral property agreements -- -- (500,000)
Equity in loss from affiliates 418,500 442,300 531,200
Gain on sale of assets (352,200) (1,282,400) (52,800)
Loss on sale of marketable
equity securities -- 90,000 --
Gain on sale of subsidiary (2,295,700) -- --
Non-cash proceeds from sale
of subsidiary 607,900 -- --
Common stock issued
to fund ESOP 87,300 200,000 185,300
Non-cash compensation 339,100 69,500 75,900
Common stock exchanged
for services (23,100) 23,100 34,300
Other (455,600) (219,000) (149,900)
Net changes in:
Accounts receivable 88,600 (415,700) 468,700
Inventory (32,600) (35,700) (9,100)
Other assets (487,700) (60,300) (4,000)
Accounts payable and
accrued expenses (774,700) 1,557,700 (573,700)
Reclamation and other
liabilities (377,400) (412,600) (415,400)
Deferred tax liability (117,500) 267,000
----------- ------------ -----------
NET CASH USED IN OPERATING
ACTIVITIES (2,787,300) (2,455,900) (3,808,400)
----------- ------------ -----------
</TABLE>
(Continued)
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
Year Ended May 31,
------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in purchase
of subsidiaries -- -- 6,900,000
Development of mining properties (763,000) (455,100) (796,300)
Development of gas properties (42,100) (218,200) (207,900)
Proceeds from sale of subsidiary 3,300,000 -- --
Proceeds from sale of
property and equipment 1,212,900 854,300 149,700
Proceeds from sale of investments -- 199,300 --
Purchases of property
and equipment (1,387,300) (124,200) (855,800)
Changes in notes receivable (1,102,800) 91,800 73,700
Investments in affiliates (676,500) (627,500) (760,500)
----------- ------------ -----------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES 541,200 (279,600) 4,502,900
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance
of common stock 3,273,600 1,376,800 --
Proceeds from long-term debt 4,212,800 626,400 368,400
Net proceeds from lines of credit (641,000) 1,140,000 --
Repayments of long-term debt (3,967,300) (935,300) (654,300)
----------- ------------ -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 2,878,100 2,207,900 (285,900)
----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 632,000 $ (527,600) $ 408,600
CASH AND CASH EQUIVALENTS,
Beginning of year 360,600 888,200 479,600
----------- ------------ -----------
CASH AND CASH EQUIVALENTS,
End of year $ 992,600 $ 360,600 $ 888,200
----------- ------------ -----------
----------- ------------ -----------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 205,000 $ 160,200 $ 114,200
----------- ------------ -----------
----------- ------------ -----------
Income taxes paid $ -- $ -- $ --
----------- ------------ -----------
----------- ------------ -----------
(Continued)
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
Year Ended May 31,
------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Non-cash investing and financing activities:
Notes received for sale of assets $ 1,000,000 $ 1,550,000 $ --
----------- ------------ -----------
----------- ------------ -----------
Issuance of common stock to
acquire affiliate $ -- $ 80,000 $ 1,199,900
----------- ------------ -----------
----------- ------------ -----------
Release of forfeitable
common stock bonus
to third party $ -- $ -- $ 18,000
----------- ------------ -----------
----------- ------------ -----------
Change in valuation of
reclamation liability $ -- $ -- $ (243,800)
----------- ------------ -----------
----------- ------------ -----------
Conversion of SRRI receivable
to investment upon SRRI
loan default $ -- $ -- $ 1,857,800
----------- ------------ -----------
----------- ------------ -----------
Undeveloped mining properties
contributed to the Green
Mountain Mining Venture $ -- $ -- $ 243,800
----------- ------------ -----------
----------- ------------ -----------
Acquisition of USE common
stock in exchange
for shareholder notes
receivable $ -- $ -- $ 445,300
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
Significant assets acquired and liabilities assumed in 1994 acquisition of
subsidiaries:
<TABLE>
<S> <C>
Reclamation liability $ 2,500,000
Other accrued liabilities 11,700,000
Restricted investments (7,300,000)
Other 293,500
-----------
Net cash acquired in
purchase of subsidiaries $ 7,193,500
-----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
A. BUSINESS ORGANIZATION AND OPERATIONS:
U.S. Energy Corp. (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 properties, mining and marketing of minerals. Principal
mineral interests are in uranium, gold, and molybdenum. The
Company also holds various real and personal properties used in
commercial operations and engages in the exploration, development
and production of petroleum and methane gas. Most of these
activities are conducted through the joint venture discussed below
and in Note D. The Company, through its previously wholly-owned
subsidiary, The Brunton Company ("Brunton"), which was sold during
February 1996 and treated as a discontinued operation (see Notes C
and L), also engaged in the manufacturing and/or marketing of
compasses and the distribution of outdoor recreational products,
including knives and binoculars. In addition, through its majority
owned subsidiary, Four Nines Gold, Inc. ("FNG"), the Company
engages in projects such as the construction of municipal sewage
systems, irrigation projects and other civil engineering matters.
The Company and its 52%-owned subsidiary, Crested Corp.
("Crested") (see Note F) are engaged in two ventures to develop
certain uranium properties, one with Kennecott Uranium Company
("Kennecott") known as Green Mountain Mining Venture ("GMMV"),
formed on June 1, 1990, and the second, a partnership with Nukem,
Inc. ("Nukem") through its wholly-owned subsidiary Cycle Resource
Investment Corporation ("CRIC"), known as Sheep Mountain Partners
("SMP"). During fiscal 1991, the Company and Crested also formed
USECC Gold Limited Liability Company ("USECC Gold"), and with Seine
River Resources Inc. ("SRRI") established the Sutter Gold Venture
("SGV") to develop certain gold properties located in California.
The remaining interest of SRRI was acquired by the Company and
Crested during fiscal 1994 (see Note F). During fiscal 1995, the
SGV was terminated, USE and Crested formed a new Wyoming
corporation, Sutter Gold Mining Company, and agreed to exchange
their interests in USECC Gold for common stock of Sutter Gold
Mining Company (hereafter, "SGMC").
During fiscal 1994, the Company acquired 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 being
maintained. See a further discussion of the acquisition details in
Note F.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
Liquidity and Operating Losses
As a result of the SMP litigation/arbitration (see Note K) and
the significant amount of standby/maintenance, permitting and
development costs being incurred on the Company's mineral
properties, none of which are in production, the Company has
incurred significant losses from continuing operations during each
of the last three years. During the past few years the Company has
relied primarily on the sale of its common stock through private
placements and the exercise of common stock warrants/options,
borrowings on its lines of credit and term loans and the sale of
its subsidiary, Brunton, to funds its losses and cash needs. The
Company has working capital of $881,200 as of May 31, 1996, but
will require substantial additional cash to continue to fund the
development of its mineral properties until they can be put into
production. The Company anticipates obtaining the necessary funds
primarily from the Arbitration Panel's award in connection with the
settlement of the SMP litigation (see Note K). However, if the
Arbitration Panel's award is delayed or reduced additional sources
of funding will be required which may not be available to the
Company. The Company also believes it can slow its development
activities such that available cash, operating revenues, bank
borrowings and equity financing will be adequate to fund working
capital requirements for fiscal 1997.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements of USE and affiliates
include the accounts of the Company, the accounts of its majority-
owned subsidiaries: Plateau Resources Ltd ("Plateau") (100%),
Energx, Ltd ("Energx") (90%), FNG (50.9%), SGMC (74%), Crested
(52%) and the USECC Joint Venture ("USECC"), a joint venture
through which USE and Crested conduct the bulk of their operations.
USECC is owned equally by the Company and Crested. USECC owns the
buildings and other equipment (see Note D) used by the Company and
has invested in SMP (see Notes E and F). The accounts of Brunton
have been reflected as discontinued operations for all periods
presented since Brunton was sold in February 1996.
Investments in other joint ventures and 20% to 50% owned
companies are accounted for by the equity method (Note E).
Investments of less than 20% in companies are accounted for by the
cost method. All material intercompany profits, transactions and
balances have been eliminated.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
Cash Equivalents
The Company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents.
The carrying amount of cash equivalents approximates fair value
because of the short maturity of these instruments.
Investments
The Company adopted Statement of Financial Accounting
Standards No. 115 ("SFAS No. 115"), "Accounting for Certain
Investments in Debt and Equity Securities" in fiscal 1995. Based
on the provisions of SFAS No. 115, the Company accounts for
investments 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 fuel, associated
aircraft parts, mining supplies, purchased uranium, gold ore
stockpile and modular homes held for resale. Retail inventories
are stated using the average cost method of accounting for
inventories. Other inventory is stated at the lower of cost or
market.
Properties and Equipment
Land, buildings, improvements, aircraft and other equipment
are carried at cost.
Depreciation of buildings and improvements, aircraft and other
equipment is provided principally by the straight-line method over
estimated useful lives ranging from three to forty-five years.
The Company capitalizes all costs incidental to the
acquisition, exploration, holding and development of mineral
properties as incurred. The costs of mine development are deferred
until production begins on the basis that they will be recovered
through future mining operations. Once commercial production
begins, mine development costs incurred to maintain production will
be expensed. Capitalized costs are charged to operations at the
time the Company determines that no economic ore bodies exist on
such properties. An impairment allowance is charged to operations
at such time when, in the opinion of management, the carrying value
of the property exceeds its expected future economic benefit.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
Costs and expenses related to general corporate overhead are
expensed as incurred.
The Company and Crested have 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. The market
value of these assets and the reclamation and environmental
liabilities associated with them are not reflected in the
accompanying balance sheets (see Note K).
Proceeds from the sale of undeveloped mineral properties are
treated as a recovery of cost with any excess of proceeds over cost
recognized as gain.
The Company follows the full-cost method of accounting for oil
and gas properties whereby all costs incurred in the acquisition,
exploration and development of the properties, including
unproductive wells, are capitalized, limited to the present value
of the estimated proved reserves and the lower of cost or estimated
fair value of unproved properties.
Depreciation, depletion and amortization of oil properties is
provided by the unit of production method based on the estimated
reserves to be recovered.
Statement of Financial Accounting Standards No. 121 ("SFAS No.
121") "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" was issued in March 1995. The
provisions of SFAS No. 121 require the Company to evaluate the
carrying value of its long-lived assets whenever events or changes
in circumstance indicate that the carrying amount of an asset may
not be recoverable. SFAS No. 121 is required to be adopted by the
Company in fiscal 1997. The Company has not yet determined the
impact the adoption of SFAS No. 121 will have on the financial
position or results of operations of the Company.
Revenue Recognition
Advance royalties which are payable only from future
production or 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.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
Sales of gold and uranium are recognized upon delivery.
Revenues are recognized from the rental of certain assets as they
are rented. Revenue from commercial operations are recognized as
goods and services are delivered. Oil sales revenue is recognized
as the oil is produced (see Notes D and F.)
Revenue from long-term construction contracts is recognized on
the percentage-of-completion method determined by the ratio of
costs incurred to management's estimate of total anticipated costs.
If estimated total costs on any contract indicate a loss, the
Company provides currently for the total anticipated loss on the
contract. Billings on uncompleted long-term contracts may be
greater than or less than incurred costs and estimated earnings,
and are shown as current liabilities or current assets in the
accompanying balance sheets.
Income Taxes
Effective June 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 ("SFAS No. 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 basis
of assets, liabilities and carryforwards.
SFAS No. 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 then reduced, if deemed necessary, by a
valuation allowance for any tax benefits which, based on current
circumstances, are not assured of realization.
As a result of adopting SFAS No. 109, the Company recognized
a cumulative provision for change in accounting principle of
$267,000 or $(0.06) per common share as of the beginning of fiscal
year 1994. The provision is included under the caption "cumulative
effect at June 1, 1993 of income tax accounting change" in the
accompanying Consolidated Statements of Operations.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted
average number of common shares outstanding during each period.
Management's 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.
Reclassifications
Certain reclassifications have been made in the 1995 and 1994
financial statements to conform to the classifications used in
1996.
C. RELATED-PARTY TRANSACTIONS:
The Company and Crested provide management and administrative
services for affiliates under the terms of various management
agreements. The Company provides all employee services required by
Crested. In exchange, Crested is obligated to the Company for its
share of the costs for providing such employees. Revenues from
services by the Company to unconsolidated affiliates were $92,900,
$87,300 and $80,300 in fiscal 1996, 1995 and 1994, respectively.
At May 31, 1996, the Company's President and immediate family
were indebted to the Company in the amount of $673,000 of which
$650,400 is represented by notes secured by 170,500 shares of the
Company's common stock. As of May 31, 1995, the President and his
immediate family were indebted to the Company in the amount of
$609,000.
On August 19, 1994, the Company sold a house in Riverton,
Wyoming, to Harold F. Herron, Vice President of the Company for an
amount equal to a current independent appraisal. At the same time
the Company loaned to Mr. Herron the sum of $112,170 secured by
30,000 shares of the Company's common stock for a period of five
years. This amount is included in the $673,000 and $609,000
discussed above.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
In November 1992, the Company entered into a sale/leaseback
agreement as the lessee, and sold certain machinery and equipment
to Brunton. This machinery and equipment was being leased from
Brunton on a month to month basis for $6,800. The Company had
deferred a gain of $249,800 on this sale as of May 31, 1995. In
1996, the affiliate was sold (see Note L) and USE repurchased the
same equipment from Brunton. The deferred gain offset the purchase
price of the assets.
On June 14, 1995, USECC signed a six year option to acquire a
7,200 square foot hangar at the Riverton Regional Airport, for
$110,000, from Arrowstar Investments, Inc. ("Arrowstar"), an entity
which is owned by the Company's President and his family. In 1996,
the option was amended and the Company purchased the hangar for
$75,000.
D. USECC JOINT VENTURE:
USECC 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 properties and
ventures including SMP and GMMV; conducts oil and gas operations;
and transacts all operating and payroll expenses, except for
specific expenses allocated directly to each venturer. The joint
venture agreement also provides for the allocation of certain
operating expenses to other affiliates. In addition, through April
1996 USECC operated Wind River Estates ("Wind River"), a 100 unit
mobile home park. During 1996, USECC sold Wind River (which had a
net book value of approximately $512,700) to Arrowstar. USECC
recognized a gain of $252,600 on the sale of Wind River, which is
reflected as a gain on sale of assets in the accompanying
statements of operations. USECC received consideration of $765,300
for Wind River. The $765,300 was comprised of the following:
Cash $ 500,000
Note receivable 56,000
Debt forgiven 47,900
50% interest in First-N-Last LLC 161,400
$ 765,300
The debt forgiven was an amount due to Arrowstar from USECC
for the hangar at the Riverton Regional Airport discussed above.
First-N-Last LLC owns and operates a convenience store near Lake
Powell in Utah. Subsequently, USECC then transferred its acquired
50% ownership in First-N-Last LLC to Plateau, which reduced USE's
payable to Plateau.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
E. INVESTMENTS AND ADVANCES:
The Company's restricted investments secure various
decommissioning costs, 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, 1996, the cost of debt
securities was a reasonable approximation of fair market value.
The Company's investment in and advances to affiliates are as
follows:
Carrying Value at May 31,
Consolidated -------------------------
Ownership 1996 1995
------------ ----- -----
Equity Method:
GMMV 50.0% $ 724,800 $ 724,800
Ruby Mining Company 26.7% 35,900 38,200
SMP (Note F) 50.0% 2,897,800 2,481,600
---------- ----------
$3,658,500 $3,244,600
---------- ----------
---------- ----------
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
Equity income (loss) from investments accounted for by the
equity method are as follows:
Year Ended May 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
SMP (Note F) $ (416,200) $ (439,200) $ (514,800)
Ruby Mining Company (2,300) (3,100) (16,400)
GMMV (Note F) -- -- --
---------- ---------- ----------
$ (418,500) $ (442,300) $ (531,200)
---------- ---------- ----------
---------- ---------- ----------
There are currently litigation and arbitration proceedings
with the Company's partner in the SMP partnership, as discussed
further in Note K. Because of the litigation and arbitration, the
Company and Crested have provided funding to SMP in the amount of
$5,354,000 for standby mine care and maintenance, the rental of
certain mining equipment and administrative costs as of May 31,
1996, including $832,400 in fiscal 1996. These advances are
included in the above investment account net of the Company's
equity share of SMP's expenses. The Company and Crested consider
the $5,354,000 to be a receivable from SMP. Whether or not the
$5,354,000 of advances are recovered will depend on the outcome of
the litigation and arbitration with Nukem and its wholly-owned
subsidiary CRIC as further discussed in Note K.
SMP has entered into various market related and base price
escalated uranium sales contracts with certain utilities which
require delivery of an estimated 250,000 to 970,000 pounds of
uranium annually from 1997 through 2000. These contracts also
allow for the quantities to be substantially increased by the
utilities. Until the disputes between the SMP partners are
resolved, the Company and Crested are arranging for the purchase
and delivery of their portion of the contracts or are allowing
Nukem and CRIC to make the entire delivery. The deliveries will be
satisfied by purchases in the spot market, existing purchase
contracts, uranium inventories or by producing from SMP properties.
Production will not be commenced, however, until uranium prices
rise substantially. Most market related sales contracts can be
settled through spot market purchases. All base price sales
contracts exceed the spot market price as of May 31, 1996.
Revenues from such uranium sales of $2,766,700 and $3,732,500 have
been included in the accompanying consolidated statements of
operations for the years ended May 31, 1996 and 1994, respectively,
which would normally have been sales of SMP. The sales in fiscal
1996 were all to the same customer. The sales in 1994 were to two
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
customers. All sales contracts were filled by Nukem in 1995, and
as a result, no revenues from uranium sales were recognized during
1995. The cash from uranium sales is accumulating in SMP's bank
accounts which as of May 31, 1996 amounted to $19,336,300.
GMMV expenses certain general and administrative, maintenance
and holding costs. However, the Company has not recognized equity
losses in GMMV because Kennecott is committed to fund 100% of the
first $50,000,000 of development and operating costs of the Joint
Venture. The Company's investment in GMMV of $724,800 in the
accompanying balance sheets is substantially lower than its
underlying equity in GMMV.
Condensed combined statements of operations of the Company's
equity investees include GMMV, SMP and Ruby Mining Company.
CONDENSED COMBINED BALANCE SHEETS - EQUITY INVESTEES
May 31,
------------------------------------
1996 1995
---- ----
Current assets $ 19,525,200 $ 8,408,500
Non-current assets 49,901,000 49,211,100
$ 69,426,200 $ 57,619,600
Current liabilities $ 8,160,800 $ 7,312,700
Other long-term debt 41,270,800 30,782,900
Excess in assets 19,994,600 19,524,000
------------ ------------
$ 69,426,200 $ 57,619,600
------------ ------------
------------ ------------
CONDENSED COMBINED STATEMENTS OF OPERATIONS - EQUITY INVESTEES
Year Ended May 31,
---------------------------------------------
1996 1995 1994
---- ---- ----
Revenues $ 1,143,500 $ 368,300 $ 451,700
Less costs and
expenses (1,825,400) (1,402,400) (3,473,600)
----------- ------------ -----------
Net loss $ (681,900) $ (1,034,100) $(3,021,900)
----------- ------------ -----------
----------- ------------ -----------
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
F. MINERAL CLAIMS TRANSACTIONS AND MINING PROPERTIES:
GMMV
During fiscal 1990, the Company and Crested 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 $15,000,000 and a
commitment to fund the first $50 million of development and
operating costs. Before they were contributed to GMMV, the Green
Mountain Properties were owned by the Company, with a portion owned
by USECC.
The Boards of Directors of the Company and Crested adopted a
method of apportioning the initial consideration of $15,000,000, on
a ratio of 84% to the Company and 16% to Crested. This division
was based on analyses of the projected cash flows of the properties
contributed by USE and USECC.
Kennecott committed to fund 100% of the first $50 million of
capital contributions to the joint venture. Kennecott will also
pay additional amounts if certain future operating margins are
achieved. Because the Company held 100% of the claims containing
the Round Park Deposit portion of the Green Mountain properties, it
has the right to receive 50% of the cash flows from the operations
relating to that portion of GMMV properties. With respect to
portions of GMMV properties previously held by USECC, the Company
and Crested share in cash flows attributable to their combined 50%
interest in GMMV.
GMMV has incurred $16,435,800 in the development and
operations of the above uranium mineral properties through May 31,
1996. This was funded by Kennecott out of the $50 million funding
commitment. As previously mentioned, the Company's carrying value
of its investment in GMMV is $724,800 at May 31, 1996, which is
substantially lower than its equity basis in GMMV. Reclamation
obligations of GMMV are discussed in Note K. Development of the
properties continues in anticipation of future uranium price
increases.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
SMP
During fiscal 1989, USE and Crested, 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. SMP agreed to deposit up to $.50 per
pound of U3O8 as it is produced from the properties for reclamation
obligations. Certain disputes have arisen among USECC, CRIC and
its parent Nukem, Inc. over the formation and operation of SMP.
These disputes have been in litigation/arbitration for the past
five years. Certain preliminary decisions were reached during 1996
which have gone to the court for approval. See Notes E and K for
a description of the investment and a discussion of the related
arbitration/litigation.
AMAX Transactions
During prior years, the Company and Crested conveyed interests
in mining claims to AMAX Inc. ("AMAX") in exchange for cash,
royalties, and other consideration including interest-free loans,
due in 2010. In connection with a renegotiation of various rights
and duties of the parties, AMAX agreed to amortize the principal
amount of those loans to the Company and Crested by $250,000 each
quarter, subject to certain conditions and until AMAX put the
properties into production, which has not occurred. The last
quarterly amortization of $250,000 for a non-interest bearing loan
from AMAX in lieu of advance royalties, was recognized in the first
quarter of fiscal 1994.
AMAX may elect to return the properties to the Company and
Crested, which would cancel the advance royalty obligation. If
AMAX formally decides to place the properties into production, it
will pay $2,000,000 to the Company and Crested. If AMAX sells the
properties, the Company and Crested will receive 15% of the first
$25 million received by AMAX.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
In addition, AMAX pays the Company and Crested an annual
advance royalty of 50,000 pounds of molybdenum (or its cash
equivalent). AMAX is entitled to a 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 $-0-, $85,500 and $126,800 of revenue from the
advance royalty payments in fiscal 1996, 1995 and 1994,
respectively.
Effective November 1993, AMAX, Inc. was acquired by Cyprus
Minerals Corporation, hereafter Cyprus Amax. USE and Crested held
an option to purchase certain real estate located in Gunnison owned
by Cyprus Amax. During fiscal 1995 USE and Crested reached an
agreement with Cyprus Amax whereby USE and Crested would forego six
quarters of advance royalties as payment of the option's exercise
price. USE and Crested received no advance royalties during 1996
as a result of this agreement. Thereafter, USE (together with
Crested) signed two option agreements with Pangolin Corporation, a
Park City, Utah developer, for sale of the 57 acres, and a separate
parcel owned in Gunnison County, Colorado.
The first option (exercised by Pangolin in February, 1995) was
for the 57 commercial and noncommercial zoned acres in the City of
Gunnison, Colorado; the purchase price was $970,300. Pangolin paid
$345,000 cash and $625,300 in a three year nonrecourse promissory
note, of which $35,600 and $137,900 was paid during fiscal 1996 and
1995, respectively. As of May 31, 1996, this note had an
outstanding principal balance of $451,800. 19.25 acres have been
deeded to Pangolin; the remaining acreage secures the note, and
will be released to the buyer against principal payments on the
note as development (mixed commercial and residential) advances.
The remaining note bears interest at 7.5% per annum and matures in
January 1998.
The second option covers 472.5 acres of ranch land northwest
of the City of Gunnison, Colorado (purchase price $822,460).
Pangolin paid $10,000 for the option; on option exercise and
closing, Pangolin paid $46,090 in cash and $776,370 by two
nonrecourse promissory notes (each with principal and unpaid
interest due on the third anniversary of closing except for $35,000
on the first anniversary). The Company did not receive the $35,000
payment as schedule but is negotiating receipt of it and expects to
collect it in the near future. These notes bear interest at rates
of 7.5% and 12% and mature in May and June 1998. At closing, 22.19
acres were deeded to Pangolin; different parcels of the remaining
acreage secure the notes, and will be released for principal
payments in the course of development. The sale was accounted for
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
as an installment sale and thus the gain on sale was deferred to be
recorded as payments on the notes are received by the Company. The
carrying amount of the notes receivable discussed above
approximates market value due to the conditions and terms of the
receivables.
Sutter Gold Mining Company
Sutter Gold Mining Company ("SGMC") was formerly a joint
venture between USE and SRRI formed to acquire, hold and develop
mineral leases and mining claims in Amador County, California (the
"Lincoln Project"). On December 14, 1990, Crested purchased one-
ninth of USE's beneficial interest in the SGV Properties
hereinafter fully described, for $500,000 and the commitment to
fund one-ninth of the future costs and liabilities. USE and
Crested formed USECC Gold Limited Liability Company ("USECC Gold")
which became the joint venturer with SRRI on the Lincoln Project.
USECC Gold was owned 88.89% by USE and 11.11% by Crested. SGMC was
established to conduct operations on mining leases and to produce
gold from the Lincoln Project.
USE (i) funded $4,500,000 of the $5,000,000 purchase price of
SGMC's properties; (ii) agreed to initially fund SRRI's share of
holding and development costs totaling $500,000; and (iii) agreed
to provide its share of the holding costs and assessments of SGMC.
SRRI, the second venture partner, through a subsidiary, funded
$500,000 of the property purchase price, and agreed to pay
$2,000,000 to USE to equalize the investments so that USE and SRRI
would each initially hold 50% interests in SGMC. USE was to
recover the $500,000 of predecessor holding costs and SGMC's
initial development costs paid by them, out of SGMC's initial cash
flows.
SRRI issued a $2,000,000 note to USE, bearing interest at 10%
per annum. The note provided that $500,000 of principal and
accrued interest was due April 12, 1991, and the balance of
$1,500,000 with interest was due October 12, 1991. In February
1991, USE and Crested formed USECC Gold and transferred their
respective interests in the Lincoln Project to USECC Gold. When
the installments on the $2,000,000 note to USE were not paid when
due, the interests of USECC Gold and SRRI in SGMC were adjusted to
equal the percentage of the $5,000,000 purchase price of SGMC's
properties that each of them provided. On July 16, 1991, the 50%
interest of SRRI in SGMC was reduced to 40%, with a corresponding
increase in the USECC Gold interest to 60%. On October 12, 1991,
SRRI's interest was further reduced to 10% and USECC Gold's
interest increased to 90%. On May 23, 1994, SRRI released its
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
remaining 10% interest and issued 400,000 shares of SRRI common
stock to USE in exchange for the release of all SRRI's liabilities
relating to SGMC and USECC Gold. Accordingly, SRRI's capital
investment of $257,900 and all liabilities of SGMC to USE and its
affiliates on behalf of SRRI totaling $1,550,600 were transferred
to USECC Gold's capital investment. In addition, SGMC released
SRRI of its obligation to SGMC totaling $1,970,500, which includes
accrued but unrecorded interest of approximately $579,800.
On August 5, 1994, USE, Crested and SGMC entered into an
agreement whereby USE and Crested each conveyed their eight-ninths
and one-ninth interest, respectively, in USECC Gold in exchange for
common shares of SGMC. USE and Crested ultimately received
6,964,531 and 870,469 shares of SGMC's common stock, respectively,
for their eight-ninth and one-ninth interest, respectively in USECC
Gold.
SGMC is in the development stage and additional development is
required prior to the commencement of commercial production. SGMC
has yet to generate any significant revenue and has no assurance of
future revenue. During fiscal 1992, SGMC shipped a bulk sample of
gold ore mined during development operations to an independent mill
to determine mill availability and assay information.
Approximately 1,400 ounces of gold was recovered and sold. The
related mining costs were recognized. All acquisition and other
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. In the interim SGMC will continue to require capital
contributions from USE, Crested or other sources of financing to
maintain its current activities. SGMC will continue to be
considered in the development stage until such time as it generates
significant revenue from its principal operations.
Since inception, the Company and Crested have funded
$7,858,900 in development and holding costs. These costs were
funded by the Company and Crested on a eight-ninth/one-ninths
basis, respectively.
During May 1996, SGMC issued 896,364 shares of its common
stock at $0.11 per share to certain individuals, including a
related party for total proceeds of $98,000. Such shares were
authorized to be sold by SGMC in October 1995 to raise funds to pay
for the legal and other costs of possible equity financing in the
future.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
Subsequent to the above issuance of shares, USE and Crested
own 74% and 9%, respectively, of the SGMC. Subsequent to May 31,
1996 and as of August 16, 1996, SGMC has received approximately
$291,600 in equity financing which is to be used by SGMC for
property holding costs and to further develop the properties.
On May 14, 1996, SGMC entered into a Letter of Intent with RAF
Financial Corporation ("RAF") whereby RAF is to assist SGMC in
obtaining additional equity financing through an initial public
offering ("IPO"). Under the terms of the IPO Letter of Intent,
SGMC and RAF are proposing a public offering of 3 million shares of
SGMC common stock at an expected price of between $4.00 and $6.00
per common share and up to 3 million Class A warrants at a price of
$0.25 per warrant. The Class A warrants are expected to have an
exercise price of approximately $7.00 per share and will be
exercisable for 3 years following the IPO. Each purchaser would
generally be required to purchase one Class A warrant for every two
common shares purchased.
There can be no assurance that the IPO will be successfully
completed.
Plateau Resources Limited
On August 11, 1993, the Company concluded the June 30, 1993
Stock Purchase Agreement ("SPA") with Consumers Power Company
("CPC"), by which the Company purchased from CPC all of the
outstanding stock of Plateau Resources Limited ("Plateau").
Plateau, a Utah corporation, owns the Shootaring Canyon Uranium
Mill and support facilities in southeastern Utah. At the present
time, Plateau has applied to renew its materials license with the
United States Nuclear Regulatory Commission ("NRC"). See paragraph
(b) below.
In 1984, because of a severely depressed market for uranium
concentrates, Plateau indefinitely extended the suspension of
operations of its uranium processing facility and ceased
development of the Ticaboo Townsite project. Therefore, the
acquisition consisted of non-operating assets with no reportable
continuing operations. The Company paid nominal cash consideration
for the Plateau stock. As additional consideration, the Company
agreed:
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
(a) to perform or cause the performance by Plateau of all
studies, remedial or other response actions or other activities
necessary from time to time for Plateau to comply with
environmental monitoring, site exit and other provisions of (i)
federal and state environmental laws relating to hazardous or toxic
substances, and (ii) the Uranium Mill Tailings Radiation Control
Act, the Atomic Energy Act of 1954, and administrative orders and
licenses relating to nuclear or radioactive substances or materials
on the property of or produced or released by Plateau; and
(b) to indemnify CPC from all liabilities and costs related to
the presence of hazardous substances or radioactive materials on
Plateau property, and of any future violation of laws and
administrative orders and licenses relating to the environment or
to nuclear or radioactive substances.
At closing of the SPA, Plateau's assets included $14,200,000
in cash and cash equivalents. Of this amount, $2,500,000 was
transferred at closing by Plateau to fund the "NRC Surety Trust
Agreement" with a commercial bank as trustee. The trustee is to
pay future costs of mill decommissioning, site reclamation, and
long term site surveillance, as directed by the NRC. The amount
transferred to the trust is the minimum amount now required by the
NRC as financial assurance for clean up after permanent shut down
of the mill.
Also at closing, $4,800,000 was transferred by Plateau to
fund the "Agency Agreement" with a commercial bank. These funds
will be available to indemnify CPC against possible claims related
to environmental or nuclear matters, as disclosed above, and
against third-party claims related to a tax benefit transfer
agreement between Plateau and the third-party, in the event of a
"disqualification event" as provided in such agreement. The
$4,800,000 and $2,500,000 are reflected as Restricted Investments.
No value has been recorded by the Company for the mill and related
operating assets received in the transaction because of their
current nonoperating nature and the lack of cash flow from any
operations in the foreseeable future. The Company recorded the
specified $2,500,000 reclamation liability, an additional liability
for $4,800,000 related to an indemnification of other possible
claims against Plateau and recorded a liability of $6,900,000 for
estimated care and maintenance costs on the mill. Certain care and
maintenance costs incurred during the year reduced this liability
to $5,614,300 at year end. Together with the $4,800,000
indemnification reserve, these estimated obligations are recorded
as Other Accrued Liabilities of $10,414,300 in the accompanying
consolidated financial statements as of May 31, 1996.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
On August 25, 1994, Plateau signed a letter of intent with an
unrelated third party to sell part interest in Canyon Homesteads,
Inc. ("CHI"), a wholly owned subsidiary of Plateau, and to develop
the Ticaboo Townsite, in south central Utah and other resort
properties near Lake Powell. In fiscal 1995 the purchaser
defaulted, and the $100,000 ernest money deposit was recognized as
income in fiscal 1995.
CHI entered into a joint venture, First-N-Last LLC, with
Arrowstar to develop on a 50/50 basis, certain properties at the
Ticaboo Townsite. As of May 31, 1995, the Company had recorded
$112,400 related to Arrowstar's initial funding commitment to the
joint venture which is included in accounts receivable trade on the
accompanying balance sheet as of May 31, 1995. During 1996,
Arrowstar gave its 50% interest in First-N-Last LLC to USECC as
part of the consideration for Wind River. USECC then transferred
its 50% ownership in First-N-Last LLC to Plateau (see Note D). As
of May 31, 1996, Plateau/CHI owns 100% of First-N-Last LLC.
Energx
During fiscal 1994, USE and Crested formed Energx to engage in
the exploration, development and operation of natural gas
properties. Energx currently has leased properties in Wyoming and
on the Fort Peck Indian Reservation, Montana. Energx is owned by
USE (45%), Crested (45%) and the Assiniboine and Sioux Tribes
(10%).
During fiscal 1995, Energx sold a 50% interest in the leases
on the Fort Peck Indian Reservation for the sum of $200,000 plus
$100,000 to be used only for the acquisition and consolidation of
additional leases, and for a commitment to drill 8 exploratory
wells. Three exploratory wells have been drilled to date and the
others are planned for the fall of 1996.
During 1996, Energx abandoned certain of its leases and as a
result wroteoff $328,700 of costs capitalized associated with
theses leases. The writeoff is reflected as abandonment of mining
claims in the accompanying 1996 statement of operations.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
G. DEBT:
Lines of Credit
USE and Crested have a $1,000,000 line of credit from a
commercial bank. The line of credit bears interest at the bank's
prime rate plus .5% (10.5% as of May 31, 1996). The weighted
average interest rate for 1996 and 1995 for the line of credit was
10.25% and 9.82%, respectively. 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 and matures October 9, 1996. As
of May 31, 1996 and 1995, $176,000 and $960,000, respectively, was
outstanding on this line of credit.
FNG holds a $400,000 line of credit with a commercial bank.
This line of credit accrues interest at 2.0% over the bank's prime
rate and expires on February 28, 1997. At May 31, 1996 and 1995,
$323,000 and $180,000 were outstanding, respectively. The weighted
average rate for 1996 and 1995 for this line of credit was 10.79%
and 10.29%, respectively.
Notes Payable
The components of notes payable as of May 31, 1996 and 1995
are as follows:
May 31,
-------------------------
1996 1995
---- -----
Installment note - secured by
equipment, interest at 8%,
paid in February 1996 $ -- $ 84,600
Installment notes - secured by
real estate, interest at
7.9% - 8%, mature 1998 - 2004 252,900 270,500
FNG installment notes - secured
by FNG equipment, interest
at 7.5% to 12%
mature 1997 - 2002 431,300 57,200
Notes payable - other -- 26,400
--------- ---------
684,200 438,700
Less current portion (239,900) (161,200)
--------- ---------
$ 444,300 $ 277,500
--------- ---------
--------- ---------
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
Principal requirements on notes payable for the five years
after May 31, 1996 are as follows: 1997 - $239,900; 1998 - $86,100;
1999 - $155,200; 2000 - $68,200; 2001 - $54,800 and thereafter
$80,000.
H. INCOME TAXES:
The components of deferred taxes as of May 31, 1996 and 1995
are as follows:
May 31,
--------------------------------
1996 1995
---- ----
Deferred tax assets:
Deferred compensation $ 40,100 $ 50,400
Deferred gain on sale of assets -- 143,900
Net operating loss carryforwards 7,260,400 6,535,200
Capital loss carryforwards 297,100 182,100
Tax Credits 325,100 325,000
Other 106,100 33,000
------------- ------------
Total deferred tax assets 8,028,800 7,269,600
------------- ------------
Deferred tax liabilities:
Accelerated depreciation for tax (597,900) (1,073,400)
Development and exploration costs (2,332,100) (2,095,700)
------------- ------------
Total deferred tax liabilities (2,930,000) (3,169,100)
------------- ------------
5,098,800 4,100,500
Valuation allowance (5,282,100) (4,283,800)
------------- ------------
Net deferred tax liability $ (183,300) $ (183,300)
------------- ------------
------------- ------------
The Company has established a valuation allowance of $5,282,100
against deferred tax assets due to the losses incurred by the
Company in fiscal 1996, 1995 and 1994. The Company's ability to
generate future taxable income to utilize the NOL and capital loss
carryforwards is uncertain.
The income tax provision (benefit) is different from the
amounts computed by applying the federal income tax rate to income
before taxes. The reasons for these differences are as follows:
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
Year Ended May 31,
------------------------------------------
1996 1995 1994
---- ---- ----
Expected federal income tax $(793,500) $ (804,700) $(1,103,100)
Utilization of capital
loss carryforward -- (269,900) --
Net operating losses not
previously benefitted
and other (204,800) (569,600) --
Valuation allowance 998,300 1,644,200 1,103,100
--------- ---------- -----------
Income tax provision $ -- $ -- $ --
--------- ---------- -----------
--------- ---------- -----------
There were no taxes currently payable as of May 31, 1996, 1995
or 1994 related to continuing operations.
At May 31, 1996, the Company and its subsidiaries had
available, for federal income tax purposes, net operating loss
carryforwards of approximately $21,354,000 which will expire from
1997 to 2011 and investment tax credit carryforwards of $325,000
which, if not used, will expire from 1997 to 2002. The Internal
Revenue Code contains provisions which limit the NOL carryforwards
available which can be used 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
affiliates' tax returns through fiscal 1986, and their income tax
liabilities are settled through that year. The IRS has recently
audited the Company's and affiliates', which includes USECC, fiscal
years 1989, 1990 and 1991 tax returns. The Company has received a
deficiency letter for the years 1989 through 1991. The Company has
submitted a written appeal to protest the findings of the examining
agent. Hearings have been held with the appeals officer assigned
to the case and all major issues have been verbally resolved in
favor of the Company. Management believes the Company will prevail
on the significant issues in dispute, and therefore, that
significant liabilities will not result from the findings.
The years ended May 31, 1993 and 1994 are currently being
audited by the IRS. No significant issues have come up during the
1993 and 1994 audits. The audit is not completed so issues may
arise.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
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 included
commercial operations, primarily real estate activities and
operation of an airport fixed base operation, and construction
operations. The following is information related to these industry
segments:
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
<TABLE>
<CAPTION>
Year Ended May 31, 1996
-----------------------------------------------------
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 3,116,700 $1,439,100 $3,794,500 $ 8,350,300
----------- --------- ----------
----------- --------- ----------
Interest and
other revenues 1,281,900
-----------
Total Revenues $ 9,632,200
-----------
-----------
Operating profit (loss) $ (455,600) $ (935,700) $ 716,700 $ (674,600)
----------- --------- ----------
----------- --------- ----------
Interest and other
revenues 1,281,900
General corporate and
other expenses (2,522,700)
Equity in loss of
affiliates (418,500)
Loss before income -----------
taxes discontinued
operations and
extraordinary item $(2,333,900)
-----------
-----------
Identifiable assets
at May 31, 1996 $19,724,700 $6,196,800 $ 705,500 $26,627,000
----------- --------- ----------
----------- --------- ----------
Investments in affiliates 3,658,500
Corporate assets 4,507,800
Total assets -----------
at May 31, 1996 $34,793,300
-----------
Capital expenditures $ 835,200 $ 372,000 $ 903,100
----------- --------- ----------
----------- --------- ----------
Depreciation, depletion
and amortization $ -- $ 569,000 $ 219,500
----------- --------- ----------
----------- --------- ----------
</TABLE>
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
<TABLE>
<CAPTION>
Year Ended May 31, 1995
------------------------------------------------------
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 85,500 $1,177,600 $1,303,400 $ 2,566,500
----------- --------- ----------
----------- --------- ----------
Interest and other
revenues 2,034,100
-----------
Total Revenues $ 4,600,600
-----------
-----------
Operating (loss) profit $(1,568,800) $ (892,500) $ 265,100 $(2,196,200)
----------- --------- ----------
----------- --------- ----------
Interest and other
revenues 2,034,100
General corporate
and other expenses (1,762,400)
Equity in loss of
affiliates (442,300)
Loss before income -----------
taxes and discontinued
operations $(2,366,800)
-----------
-----------
Identifiable assets
at May 31, 1995 $ 18,518,300 $9,074,300 $ 292,700 $27,885,300
----------- --------- ----------
----------- --------- ----------
Investments in affiliates 3,244,600
Corporate assets 2,254,600
-----------
-----------
Total assets
at May 31, 1995 $33,384,500
-----------
-----------
Capital expenditures $ 455,100 $ 186,400 $ 28,100
----------- --------- ----------
----------- --------- ----------
Depreciation, depletion
and amortization $ -- $ 608,200 $ 116,500
----------- --------- ----------
----------- --------- ----------
</TABLE>
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
<TABLE>
<CAPTION>
Year Ended May 31, 1994
-----------------------------------------------------
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $4,359,300 $1,165,100 $2,606,400 $ 8,130,800
----------- --------- ----------
----------- --------- ----------
Interest and
other revenues 645,500
-----------
Total Revenues $ 8,776,300
-----------
-----------
Operating profit (loss) $ (665,100) $ (824,300) $ 317,500 $(1,171,900)
----------- --------- ----------
----------- --------- ----------
Interest and
other revenues 645,500
General corporate
and other expenses (2,186,700)
Equity in loss of
affiliates (531,200)
Loss before income taxes -----------
and cumulative effect $(3,244,300)
-----------
-----------
Identifiable assets
at May 31, 1994 $ 17,745,200 $ 8,898,400 $ 371,200 $27,014,800
----------- --------- ----------
----------- --------- ----------
Investments in affiliates 2,807,900
Corporate assets 3,267,600
-----------
Total assets
at May 31, 1994 $33,090,300
-----------
-----------
Capital expenditures $ 1,190,700 $ 441,600 $ 19,800
----------- --------- ----------
----------- --------- ----------
Depreciation, depletion
and amortization $ -- $ 505,600 $ 160,200
----------- --------- ----------
----------- --------- ----------
</TABLE>
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
During fiscal 1994, approximately 14% of mineral revenues were
from amortization of principal on the AMAX notes and annual advance
royalties of molybdenum from AMAX. During fiscal 1996,
approximately 89% of mineral revenues were from the sale of
uranium. During fiscal 1994, 86% of mineral revenues were from
sales of uranium. There were no uranium sales during fiscal 1995.
The Company subleases excess office space, contracts aircraft
for charter flights and sells aviation fuel. Commercial revenues
in the statements of operations consist of mining equipment
rentals, office and other real property rentals, charter flights
and fuel sales.
J. SHAREHOLDERS' EQUITY:
In May 1996 the Board of Directors of U.S. Energy approved an
annual incentive compensation arrangement for its CEO and four
other officers of U.S. Energy payable in shares of U.S. Energy
common stock. The arrangement is subject to approval of the formal
1996 Stock Award Program by the Company's shareholders in late
calendar 1996. The shares will be issued annually on or before
January 15 of each year, starting January 15, 1997, as long as each
officer is employed by USE, provided the Company has been
profitable in the preceding fiscal year. The officers will receive
up to an aggregate total of 67,000 shares per year for the years
1997 through 2002. One-half of the compensation under the 1996
Stock Award Program is the responsibility of Crested. The number
of shares awarded each year out of such 67,000 shares aggregate
annual limit will be based on earning per share of Common Stock to
be determined in the formal plan to be adopted, and in addition
will be subject to approval by the shareholders of the Company for
each award each year.
Effective January 9, 1996, the Company entered into a Warrant
Purchase Agreement with Shamrock Partners, Ltd. ("Shamrock").
Pursuant to the Agreement, Shamrock received a warrant to purchase
200,000 common shares of the Company's common stock at $5.00 per
share in exchange for consultation services to be provided through
January 9, 1997. This warrant is exercisable through January 9,
1997. The Company determined the fair value of the warrant to be
$100,000 and has recorded expense of approximately $41,700 related
to the granting of the warrant through May 31, 1996.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
In March 1995, the Company completed a private placement of
400,000 shares of stock at $3.00 per share. The majority of the
proceeds were from employees of the Company. This offering carried
terms by which the Company, at its option, would either redeem the
common shares sold from each investor, at a cash redemption price
of $3.50 per share or issue one additional common share for each
three shares originally purchased. Management of the Company
issued the additional common shares (133,336 shares) in fiscal
1996. The Company registered all shares issued in connection with
this private placement in April 1996.
In June and July 1995, the Company sold common stock at $4.00
per share (812,432 shares, net proceeds to the Company of
$2,842,200). In connection with this private placement, warrants
to purchase 81,243 USE common shares at $4.80 per share were issued
to the selling agent. These warrants were exercisable through July
25, 2000. All of the warrants were exercised during fiscal 1996
resulting in approximately $390,000 of proceeds to the Company.
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, amended in December 1995, reserves
925,000 shares of the Company's $.01 par value common stock for
issuance under the Option Plan. During fiscal 1992, the Company
issued options to certain of its executive officers, Board members
and others. 371,200 non-qualified options were issued at purchase
prices ranging from $2.75 per share to $2.90 per share. The
options will expire on April 14, 2002 and April 30, 2002. During
fiscal 1995, options were exercised for the purchase of 7,500
shares. An additional 20,000 of these options were exercised
subsequent to May 31, 1996. In fiscal 1996, the Company issued
360,000 options at $4.00 per share to employees who are not
officers or directors.
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's employees. During fiscal 1996, 1995 and 1994, the
Board of Directors of USE contributed 10,089, 37,204 and 46,332,
shares to the ESOP at prices of $8.65, $5.38 and $4.00 per share,
respectively. The Company is responsible for one-half of these
contributions amounting to $43,600, $100,000 and $92,500 in fiscal
1996, 1995 and 1994, respectively. Crested is responsible for the
remainder. 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
with the loan proceeds, bear interest at the rate of 10% per annum.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
The loans are reflected as unallocated ESOP contribution in the
equity section of the accompanying balance sheets. During fiscal
1996, the Company released 10,089 of the shares to fund the 1996
ESOP contribution by $87,300 as reflected in the statement of
stockholders' equity.
The Board of Directors of both the Company and Crested issue
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 balance
sheets because such shares are forfeitable to the Company and
Crested 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, which
is the earn out date of the amended stock bonus plan. The amended
plan grants a stock-bonus of 20% of the previous plan per year for
five years. Crested is responsible for one half of the
compensation expense related to these issuances. For the years
ended May 31, 1996, 1995 and 1994, the Company had compensation
expense of $116,500, $200,000 and 116,700, respectively, resulting
from these issuances. A schedule of forfeitable shares for both
USE and Crested is set forth in the following table:
Issue Number Issue Total
Date of Shares Issuer Price Compensation
------- ---------- ------- ------ ------------
May 1990 40,300 USE $ 9.75 $392,925
June 1990 66,300 USE 11.00 729,300
November 1990
(stock dividend) 10,660 USE N.A. N.A.
June 1990 25,000 Crested 1.06 26,562
December 1990 7,500 Crested .50 3,750
January 1993 18,520 USE 3.00 55,560
January 1993 6,500 Crested .22 1,430
January 1994 18,520 USE 4.00 74,080
January 1994 6,500 Crested .28 1,828
January 1995 18,520 USE 3.75 69,450
January 1995 6,500 Crested .19 1,219
January 1996 7,700 USE 15.125 116,462
January 1996 5,000 Crested .3125 1,562
No shares were earned out in fiscal 1996 or 1995; however,
5,000 shares of USE stock were earned out and released to a third
party in fiscal 1994. Also included in forfeitable common stock
are 15,000 shares to directors which are vesting at 20% a year
beginning in November 1992, of which 12,000 shares are earned out
but not released as of May 31, 1996.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
K. COMMITMENTS, CONTINGENCIES AND OTHER:
Legal Proceedings
Sheep Mountain Partners (SMP)
Arbitration Proceeding Concerning SMP. In June 1991, Nukem's
wholly-owned subsidiary Cycle Resource Investment Corporation
("CRIC") instituted arbitration proceedings against the Company and
Crested. CRIC claimed that the Company and Crested violated the
Sheep Mountain Partners ("SMP") partnership agreement by assigning
to the Green Mountain Mining Venture (GMMV) the amounts equal to
any SMP cash distributions to USECC derived from sales of uranium
under SMP supply contracts. CRIC also asserted that by entering
into the GMMV agreement, the Company and Crested misappropriated a
business opportunity of SMP. CRIC seeks damages and certain
equitable remedies from the Company and Crested and seeks to expel
the Company and Crested from the SMP Partnership.
Federal Court Action Concerning SMP. On July 3, 1991, the
Company and Crested d/b/a USECC filed a civil action in the U. S.
District Court of Colorado against Nukem, CRIC and their
affiliates, alleging that Nukem, CRIC and their affiliates
fraudulently misrepresented facts and concealed information from
the Company and Crested to induce their entry into the agreements
forming SMP and seek rescission, damages and other relief. The
Company and Crested further alleged that Nukem and CRIC have
refused to provide information about transactions by CRIC and its
affiliates with SMP, and that the defendants had engaged in various
wrongful acts relating to financing and acquisition of uranium for
SMP. Nukem and CRIC filed an answer and a variety of counterclaims
against the Company and Crested. Certain of Nukem's affiliates
(excluding CRIC) were thereafter dismissed from the lawsuit. The
U. S. District Court granted the motion of the Company and Crested
to stay the above arbitration initiated by CRIC and also ordered
the Company and Crested to amend their complaint. On April 6,
1992, the Company and Crested filed an amended complaint against
Nukem and CRIC setting out the alleged fraud with particularity,
and Nukem and CRIC filed answers and counterclaims to the amended
complaint.
State Court Action Concerning SMP. On September 16, 1991,
USECC filed a civil action in the Denver District Court against SMP
seeking reimbursement of $85,000 per month since the spring of 1991
for the care and maintenance of the SMP underground uranium mines
and properties in south-central Wyoming. On May 11, 1993, the
Denver District Court stayed all proceedings until the U.S.
District Court for Colorado case is resolved.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
Summary. The discovery stage in the case filed by the Company
and Crested on July 3, 1991 in the U. S. District Court of Colorado
against Nukem, CRIC et al has been protracted and vigorously
contested by all parties. On November 6, 1993, the remaining
parties in that suit, Nukem and CRIC, agreed with the Company and
Crested that the majority of the litigation post the formation of
SMP on December 21, 1988, would be handled through consensual
arbitration with the American Arbitration Association ("AAA"). The
agreement to arbitrate was reduced to writing and executed on
February 7, 1994. The arbitration hearing commenced on June 27,
1994 before a three member AAA arbitration panel. After 73 hearing
days and approximately 15,000 pages of testimony, the parties
rested their cases on May 31, 1995. Per order of the Panel, the
parties filed their proposed Findings of Fact and Conclusions of
Law, Award and a brief of the law on August 7, 1995. Each side
submitted responsive proposed findings of fact and conclusions of
law, responsive proposed order and award and reply briefs by
September 21, 1995.
The Panel entered its Order and Award on April 18, 1996 but
did not dissolve the Partnership. Nukem appealed the Award by
filing two motions indicating there was a material miscalculation
and a double recovery. The U.S. District Court of Colorado
remanded the matter to the Arbitration Panel to consider Nukem's
motions. On July 3, 1996, the Panel found there was not double
recovery and confirmed the Order and Award, which awarded the
Company and Crested $12.2 million and Nukem/CRIC $7.1 million
through July 31, 1996. At the filing date of this report, the
Federal Court has before it petitions to confirm the Panel's Order
and Award filed by the Company and Crested and motions to vacate
portions of the Award filed by Nukem/CRIC. The Court has set a
hearing on the petitions and objections for September 25, 1996 in
Denver, CO. As of May 31, 1996 no accounting treatment has been
given to the settlement because of the continued uncertainty of the
ultimate resolution of the arbitration/ litigation.
Illinois Power. Illinois Power Company ("IPC"), one of the
utilities with whom SMP has a long-term uranium supply contract,
unilaterally sought to terminate the contract on October 28, 1993
and filed suit contemporaneously in the Federal District Court,
Danville, Illinois, against the Company, Crested, CRIC, SMP, Nukem
Luxembourg GmbH ("NULUX") and the Dresdner Bank, seeking a
declaratory judgment that the contract with USECC, which was
assigned to SMP and thereafter to NULUX, had been breached by USECC
filing a Motion for Appointment of Receiver in the SMP litigation.
The Dresdner Bank was dismissed from the case, and the remaining
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
defendants filed answers denying IPC's allegations and filed
counterclaims for damages due under the IPC contract. These
defendants also filed Motions for Summary Judgment and a hearing
was held on the motions on May 27, 1994. On September 1, 1994, the
U. S. District Court for the Central District of Illinois granted
the defendants' motions for summary judgment against IPC dismissing
IPC's complaint, and further granted those defendant's
counterclaims against IPC for breach of contract by IPC. After
various negotiating sessions the parties reached agreement in June
1995 to settle the case by entering into an amendment to the
original agreement to increase the price per pound of U3O8 delivered
to IPC and provide for 3 deliveries totalling 486,443 lbs. U3O8 in
1995, 1996 and 1997. The first delivery of 226,443 lbs. U3O8 was
made on June 30, 1995 by Nukem on behalf of SMP. A delivery of
130,000 lbs. U3O8 was made during fiscal 1996 and another delivery
of 130,000 lbs. U3O8 is scheduled for 1997. This amendment to the
IPC contract and the sharing of the revenues from such deliveries
is subject to the Federal Court confirming the decision of the
Arbitration Panel.
Parador Mining Company, Inc. ("Parador")
On July 30, 1991, Bond Gold Bullfrog, Inc. ("BGBI") filed
Civil Action No. 11877 in the District Court of the Fifth Judicial
District, Nye County, Nevada naming USE, Crested, Parador and H.B.
Layne Contractor, Inc. (Layne) as defendants. The complaint
primarily concerns extralateral rights associated with two patented
mining claims (the "Claims") owned by Parador which were initially
leased to a predecessor of BGBI and subsequently, the residuals of
that lease were assigned and leased by Parador to USE and Crested.
Parador, USE and Crested answered the complaint, filed a
counterclaim against the Plaintiff and a cross claim against Layne.
A bifurcated trial was held on December 11-12, 1995 before the
District Court for the Fifth Judicial District for the State of
Nevada, County of Nye, at which time the parties presented evidence
relative to the issue of extralateral rights. Other claims between
the parties were bifurcated by the Court and were not at issue at
the trial. Parador, USE and Crested submitted expert testimony
by five renowned geologists opining that a gold lode apexed on
Parador's Sunset No. 1 patented lode mining claim, from which apex
the lode extended in a continuous downward direction outside the
surface boundaries of that claim and under the surface boundaries
of a claim owned by an adjacent property owner. No contrary
testimony was submitted by the other parties.
The Trial Court took the matter under advisement at the
conclusion of the evidentiary proceedings, and on December 26,
1995, issued a written ruling denying apex rights and extralateral
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
royalties to Parador, USE and Crested. It is the belief of
Parador, USE and Crested that the trial court's ruling is erroneous
as a matter of law and, consequentially, on February 2, 1996, an
appeal was lodged with the Appellate Court asking that Court to
reverse the trial court's ruling. No ruling has been issued by
that court. Management intends to vigorously pursue the appeal and
seek to recover the extralateral rights and royalties allegedly due
Parador, USE and Crested. If, however, the final decision of the
appellate court is adverse to USE and Crested, an award in a
substantial amount could have a significant negative impact on USE
and Crested. Management further intends to pursue the remaining
claims, which involve breaches of the lease between Parador and the
operator, and to defend related claims brought by the operator
against Parador, U.S. Energy and Crested before the Trial Court.
The Company is expensing all costs related to the Parador
litigation.
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
attempts to conduct its mining operations so as to comply with
these regulations, but they are continually changing and generally
becoming more restrictive. Consequently, 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
and technology and enacted laws and regulations. Certain
regulatory agencies, such as the Nuclear Regulatory Commission, the
Bureau of Land Management and the Wyoming Department of
Environmental Quality 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 on
unasserted claims to be disclosed or recorded in the reclamation
liability. The Company has not disposed of any properties for
which it has a commitment or is liable for any known environmental
liabilities.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
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 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 a number of 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, 1996, the Company has recorded estimated
reclamation obligations, including standby costs, of $14,393,100 as
reflected in reclamation and other long-term liabilities in the
accompanying financial statements. In addition, the GMMV, in which
the Company is a 50% equity investor, has recorded a $23,620,000
liability for future reclamation and closure costs. 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.
The Company is a partner in SMP, a joint venturer of GMMV and an
owner of SGMC and Plateau. 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:
Sheep Mountain Partners ("SMP")
The Company and Crested agreed to assume the reclamation
obligations, environmental liabilities and liabilities for injuries
to employees in mining operations with respect to the Crooks Gap
properties, which are part of the SMP venture. The reclamation
obligations, which are established by regulatory authorities, were
reviewed by the Company and the regulatory authorities during
fiscal 1995 and the balance in the reclamation liability account at
May 31, 1996 of $1,451,800 was determined by the Company to be
adequate. The obligation will be satisfied over the life of the
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
mining project which is estimated to be at least 20 years. The
Company and Crested self bonded this obligation by mortgaging
certain of their real estate holdings. A portion of the funds for
the reclamation of SMP's properties is expected to be provided by
SMP which has agreed to pay up to $.50 per pound of uranium to the
Company and Crested for reclamation work, as the uranium is
produced from the properties. The final outcome of the arbitration
proceedings with Nukem and CRIC could result in changes to these
agreements between the parties.
Green Mountain Mining Venture ("GMMV")
During fiscal 1991, the Company and Crested acquired developed
minerals properties on Green Mountain known as the Big Eagle
Property. In connection with that acquisition, the Company and
Crested 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 and Crested transferred a one-half interest in them to
Kennecott, and Kennecott, the Company and Crested contributed the
Big Eagle properties to GMMV, which assumed the reclamation and
other environmental liabilities. Kennecott holds a commercial bank
letter of credit as security for the performance of the reclamation
obligations for the benefit of GMMV.
During fiscal 1993, GMMV entered into an agreement to acquire
the Sweetwater uranium mill and related properties from UNOCAL.
GMMV's consideration for the acquisition of the Sweetwater Mill
Property was the assumption of all environmental liabilities and
reclamation bonding obligations. The environmental obligations of
GMMV are guaranteed by Kennecott. However, UNOCAL also agreed that
if GMMV incurs expenditures for environmental liabilities prior to
the earlier of commercial production by GMMV or February 1, 2001
(which liabilities are not due solely to the operations of GMMV),
UNOCAL will reimburse GMMV the first $8,000,000 of such
expenditures. Any such reimbursement may be recovered by UNOCAL
from 20% of future cash flows from sale of uranium concentrates
processed through the Mill. In any event, until such time as
environmental and reclamation undertakings are liquidated against
Kennecott Corporation, such costs are not deemed expenditures under
Kennecott's $50,000,000 development commitment (although bond costs
may be charged against this development commitment).
The reclamation and environmental liabilities assumed by GMMV
concern two categories: (1) cleanup of an inactive open pit mine
site near the Mill, including water (heavy metals and other
contaminants) and tailings (heavy metals and other dust contaminant
abatement and erosion control) associated with the pit, and (2)
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
decontamination and cleanup and disposal of the Mill building and
equipment and tailings cells after Mill decommissioning. On June
18, 1996, Kennecott had a letter of credit in the amount of
approximately $19,767,000 issued to the Wyoming Department of
Environmental Quality for mine pit site matters (exercising EPA-
delegated jurisdiction to administer the Clean Water Act and the
Clean Air Act, and directly administering Wyoming statutes on mined
land reclamation), and by the NRC for decontamination and cleanup
of the Mill and Mill tailings cells. An irrevocable letter of
credit has been provided by the Morgan Guaranty Trust Company of
New York i lieu of a surety bond to cover the reclamation costs for
the open pit mine site and the mill. The letter of credit was
obtained by Kennecott Uranium Company to cover all reclamation
costs related to mining and drilling operations in the State of
Wyoming. The EPA has continuing jurisdiction under the Resource
Conservation and Recovery Act, pertaining to any hazardous
materials which may be on site when cleanup work is started.
Although USE and the other GMMV parties are liable for all
reclamation and environmental compliance costs associated with Mill
and site maintenance, as well as Mill decontamination and cleanup
and site reclamation and cleanup after the Mill is decommissioned,
USE believes it is unlikely USE will have to pay for such costs
directly. First, based on current estimates of cleanup and
reclamation costs (reviewed annually by the oversight agencies),
such costs may be within the $50,000,000 development commitment of
Kennecott Uranium Company for GMMV. These costs are not expected
to increase materially, if the Mill is not put into full operation.
Second, to the extent GMMV is required to spend money on
reclamation and environmental liabilities related to previous Mill
and site operations during ownership by Minerals Exploration
Company (a UNOCAL subsidiary), UNOCAL has agreed to fund up to
$8,000,000 of such costs (provided such costs are incurred before
February 1, 2001 and before Mill production resumes), which would
be recoverable only out of future Mill production (see above).
Third, payment of the GMMV reclamation and environmental
liabilities related to the mill is guaranteed by Kennecott
Corporation, parent of Kennecott Uranium Company. Last, GMMV will
set aside a portion of operating revenues to fund reclamation and
environmental liabilities once mining and milling commences. To
date, ongoing Mill maintenance expense is funded by Kennecott as
part of its development commitment.
Kennecott will be entitled to contribution from the USE
Parties in proportion to their participation interests in GMMV, if
Kennecott is required to pay Mill cleanup costs directly pursuant
to its guarantee. Such payments by Kennecott only would be
reimbursed if the liabilities cannot be satisfied within the
initial $50,000,000 expenditure commitment, and then only to the
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
extent there are insufficient funds from the reclamation reserve
(to be built up out of GMMV operating revenues). In addition, if
and to the extent such liabilities resulted from UNOCAL's Mill
operations, and payment of the liabilities was required before
February 1, 2001 and before Mill production resumes, then up to
$8,000,000 of that amount would be paid by UNOCAL, before Kennecott
Corporation would be required to pay on its guarantee. Accordingly,
although the extent of any ultimate USE liability for contribution
to Mill cleanup costs cannot be predicted, USE and Crested will
only be required to pay its proportional share of Mill cleanup if
a) the liabilities cannot be satisfied with the initial $50,000,000
expenditure commitment from Kennecott, b) there are insufficient
funds from the reclamation reserve to be built up out of GMMV
operating revenues and c) payments are not available from UNOCAL.
Sutter Gold Mining Company ("SGMC")
SGMC is currently owned 74% by the Company, 9% by Crested and
17% by private investors. SGMC owns gold mineral properties in
California. Currently, these properties are in development and
costs consist of drilling, permitting, holding costs and
administrative costs. No substantial mining has been completed,
although a 2,800 foot decline through the identified ore zones for
an underground mine was acquired in the purchase. The Company's
policy is to provide reclamation on a unit-of-production basis.
Currently, reclamation obligations are covered by a $27,000
reclamation bond which SGMC has recorded as a reclamation liability
as of May 31, 1996.
Plateau Resources, Limited ("Plateau")
The environmental obligations acquired with the acquisition of
Plateau include all environmental and reclamation obligations
relating to the Shootaring Mill. Based on the bonding
requirements, Plateau transferred $2,500,000 to a trust account
with the U.S. Nuclear Regulatory Commission ("NRC") to pay future
costs of mill decommissioning, site reclamation and long-term site
surveillance. In addition, Plateau has recorded additional
obligations of $10,414,300 as of May 31, 1996, for the estimated
holding and maintenance costs needed until the mill is placed in
service or decommissioning begins. The estimated future Shootaring
Mill decommissioning and site reclamation costs noted above ,as
required by the NRC and the Utah Department of Natural Resources,
were determining factors in the consideration paid by the Company.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
Executive Compensation
The Company and Crested are committed to pay the estates of
certain of their officers an amount equal to one year's salary for
one year after their death and reduced amounts, to be set by the
Board of Directors, for a period up to five years thereafter.
L. DISCONTINUED OPERATIONS.
In November 1993, USE and Brunton executed an Agreement and
Plan of Share Exchange ("Agreement") which closed in late May 1994.
The Agreement provided for the Exchange of 276,470 shares of USE
common stock for all 5,529,200 outstanding shares of Brunton's
common stock, which were not owned by USE. Brunton was therefore
owned 100% by USE as of May 31, 1994. The transaction was
accounted for as a purchase.
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. USE will also receive
$1,000,000 in three annual installments of $333,333 plus interest
at a rate of 7% per year beginning February 15, 1997. The current
portion of this note receivable is included in current assets and
the long-term portion is included in notes receivable-real estate
and other in the accompanying balance sheet. 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 first payment will cover profits from February 1, 1996 through
April 30, 1997 and is due no later than July 15, 1997. Each
subsequent payment, due July 15 of subsequent years, will cover
profits for the most recent year ended April 30.
Certain items of property owned by Brunton were not subject to
the Agreement. These items included various inventory items,
mining equipment, real estate not used in operations, 225,556
shares of USE common stock, options to purchase 150,000 shares of
USE common stock for $3.50 per share, 160,000 shares of Crested
common stock and options to purchase 300,000 shares of Crested
common stock for $.40 per share. 100,000 shares of USE common
stock and 100,000 shares of Crested common stock were transferred
for no consideration to SGMC and the remainder of the USE and
Crested stock was transferred to Plateau. One-half of the USE and
Crested options were transferred each SGMC and Plateau,
respectively.
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
In connection with the Purchase Agreement, the Company paid
Brunton $171,700 for accrued rental on mining equipment and retired
$273,000 related to bank debt incurred by Brunton on behalf of USE.
As a result of selling 100% of the common stock of Brunton,
the Company has reflected the operations of Brunton as discontinued
in the accompanying financial statements. The net current assets
and the net non-current liabilities of the discontinued operations
have been presented in one line in the accompanying consolidated
balance sheet as of May 31, 1995. Revenues for the discontinued
operations for the years ended May 31, 1996, 1995 and 1994 were
$2,870,800, $4,553,500 and $4,118,800, respectively. The Company
recognized a gain on the disposal of Brunton of $2,295,700 net of
income taxes of approximately $50,000.
<PAGE>
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, 1996, the Registrant will file
such information under cover of a Form 10-K/A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 with respect to directors
and certain executive officers is incorporated herein by reference
to Registrant's Proxy Statement for the 1996 Annual Meeting of
Shareholders. The information regarding the remaining executive
officers is contained in Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by
reference to the Registrant's Proxy Statement for the 1996 Annual
Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by Item 12 is incorporated herein by
reference to the Registrant's Proxy Statement for the 1996 Annual
Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by
reference to the Registrant's Proxy Statement for the 1996 Annual
Meeting of Shareholders.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, REPORTS AND
FORM 8-K
Page No.
--------
(a) The following financial statements are filed as a part of this
Report in Item 8:
(1) Consolidated Financial Statements
Registrant and Affiliates
Report of Independent Public Accountants . . . . . . . . . . . .55
Consolidated Balance Sheets - May 31, 1996 and 1995. . . . . 56-58
Consolidated Statements of Operations
for the Years Ended May 31, 1996, 1995 and 1994 . . . . . . 59-60
Consolidated Statements of Shareholders'
Equity for the Years Ended May 31, 1996, 1995 and 1994 . . . 61-63
Consolidated Statements of Cash Flows
for the Years Ended May 31, 1996, 1995 and 1994. . . . . . . 64-66
Notes to Consolidated Financial Statements . . . . . . . . 67-103
(ii) Financials and Schedules of Affiliates
(a) Green Mountain Mining Venture
Report of Independent Public Accountants. . . . . . . . . 112
Balance Sheet - December 31, 1995 and 1994. . . . . . . . 113
Statement of Operations for the Period from June 1, 1990
(Date of Inception) through December 31, 1995 . . . . . . . 114
Statement of Changes in Partners' Capital
for the Period from June 1, 1990 (Date of Inception)
through December 31, 1995 . . . . . . . . . . . . . . . . 115
Statement of Cash Flows for the Period from June 1, 1990
(Date of Inception) through December 31, 1995 . . . . . . . 116
Notes to Financial Statements . . . . . . . . . . . . . 118-123
(b) Sheep Mountain Partners
The Registrant's partner in SMP, Nukem/CRIC, have refused
to provide certain information concerning SMP to SMP's
independent public accountants. The information requested
concerns partnership costs for uranium purchases. USECC
and Nukem/CRIC disagree as to whether uranium costs of the
partnership means: (i) the price which Nukem/CRIC pays for
purchases of uranium for SMP; or (ii) the price which CRIC
charges SMP for uranium.
As a result, the independent public accountants have
informed the Registrant and Crested that they have been
unable to complete their audit of SMP, and are unable to
render a report on SMP's financial statements. The
Registrant and SMP's independent public accountants are
seeking to resolve these uncertainties so that SMP's
financial statements may be finalized and filed. When
these matters are resolved, the SMP financial statements
will be filed under cover of a Form 10-K/A.
Balance Sheets - May 31, 1996 and 1995. . . . . . . .*
Statements of Operations - Years Ended
May 31, 1996, 1995 and 1994 . . . . . . . . . . . . .*
Statements of Changes in Partners' Capital -
Years Ended May 31, 1996, 1995 and 1994 . . . . . . .*
Statements of Cash Flows - Years Ended
May 31, 1996, 1995 and 1994 . . . . . . . . . . . . .*
Notes to the Financial Statements . . . . . . . . . .*
*To be filed under cover of a Form 10-K/A.
All other schedules have been omitted because the
information is not applicable or because the information
is included in the financial statements.
<PAGE>
(3) Exhibits Required to be Filed.
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 [2]
3.2 USE Bylaws, as amended through April 22, 1992 [2]
4.1 Warrant to Purchase 200,000 Common Shares of USE [13]
4.2 USE 1989 Incentive Stock Option Plan,
as amended through 12/95 124
4.3 USE Restricted Stock Bonus Plan,
as amended through 2/94 [13]
4.4 Form of Stock Option Agreement
and Schdule, Options Issued 1/96 134
10.1 USECC Joint Venture Agreement - Amended [5]
10.2 Management Agreement with USECC [3]
10.4 Contract for Sale of Stock of Brunton to Silva A.B. [12]
10.5 Assignment and Lease - Parador [3]
10.6 Employment Agreement - Daniel P. Svilar [4]
10.7 Airport Ground Lease - City of Riverton [3]
10.8 Executive Officer Death Benefit Plan [4]
10.9 Big Eagle Acquisition Agreement with PMC [6]
10.11 Sweetwater Mill Acquisition Agreement [3]
10.12 Ft. Peck Agreement - Drilling and Production Services [3]
10.18 Master Agreement - Mt. Emmons/AMAX [8]
10.20 Promissory Notes - ESOP/USE [9]
10.21 Self Bond Agreement - Crooks Gap Properties [5]
10.22 Security Agreement - ESOP Loans [10]
10.27 Mineral Properties Agreement Congo Area - PMC [4]
10.28 Memorandum of Joint Venture Agreement - GMMV [4]
10.29 Memorandum of Partnership Agreement - SMP [5]
10.32 Employee Stock Ownership Plan [5]
10.34 Form of Stock Option Agreement
and Schedule - 1989 Plan [4]
10.35 Severance Agreement (Form) [2]
10.36 1992 Stock Compensation Plan Non
Employee Directors [2]
10.37 Executive Compensation (John L. Larsen) [2]
10.38 Executive Compensation (Non-qualified Options) [2]
10.39 ESOP and Option Plan Amendments (1992) [2]
10.40 Plateau Acquisition - Stock Purchase Agreement
and Related Exhibits [7]
10.41 Option and Sales Agreements -
Gunnison Property Parcel A [1]
10.42 Option and Sales Agreements -
Gunnison Property Parcel B [1]
10.43 Option Agreement - USE and Arrowstar -
Aircraft Hanger [1]
10.44 Amendment to Contract with Arrowstar or Hangar [13]
10.45 Contract for Sale of Wind River Estates [11]
10.46 Contract for sale of Jeffrey City Six-Plex [11]
10.47 Development Agreement with First N-Last [13]
10.48 Operating Agreement with First-N-Last [13]
21.1 Subsidiaries of Registrant 139
[1] Incorporated by reference from the like-numbered exhibit
to the Registrant's Annual Report on Form 10-K for the
year ended May 31, 1995.
[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, 1992.
[3] 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.
[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 Annual Report on Form 10-K for the
year ended May 31, 1989.
[6] Incorporated by reference from the like-numbered exhibit
to the Registrant's Form 10-Q for the period ended
February 28, 1991.
[7] Incorporated by reference from exhibit A to the
Registrant's Form 8-K reporting an event of August 11,
1993.
[8] Incorporated by reference from the like-numbered exhibit
to a Schedule 13D filed by AMAX on or about August 3,
1987.
[9] 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.
[10] 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.
[11] Incorporated by reference from an exhibit to the
Registrant's Post-Effective Amendment No. 1 to Form S-3,
SEC File No. 333-1967.
[12] Incorporated by reference from the like-numbered exhibit
to the Registrant's Form 8-K, reporting an event of
February 26, 1996.
[13] Incorporated by reference from the like-numbered exhibit to
Registrant's Form S-1 (SEC File No. 333-6189).
(b) Reports filed on Form 8-K.
During the fourth quarter of the fiscal year ended on May
31, 1996, the Registrant filed one Form 8-K, reporting an event
of April 18, 1996.
(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).
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Form 10-K report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Form 10-K report to be signed on its behalf by the
undersigned, thereunto duly authorized.
U.S. ENERGY CORP. (Registrant)
Date: September 12, 1996 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 12, 1996 By: s/ John L. Larsen
------------------------------
JOHN L. LARSEN, Director
Date: September 12, 1996 By: s/ Max T. Evans
------------------------------
MAX T. EVANS, Director
Date: September 12, 1996 By: s/ Harold F. Herron
------------------------------
HAROLD F. HERRON, Director
Date: September 12, 1996 By:
------------------------------
DON C. ANDERSON, Director
Date: September 12, 1996 By:
------------------------------
DAVID W. BRENMAN, Director
Date: September 12, 1996 By: s/ Nick Bebout
------------------------------
NICK BEBOUT, Director
Date: September 12, 1996 By: s/ Robert Scott Lorimer
------------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer
and Chief Accounting Officer
<PAGE>
Report of Independent Accountants
To the Members of the Management Committee of
Green Mountain Mining Venture
Riverton, Wyoming
We have audited the accompanying balance sheet of Green Mountain
Mining Venture (A Joint Venture in the Development Stage) as of
December 31, 1995 and 1994, and the related statements of
operations, changes in Venture partners' capital, and cash flows
for the years ended December 31, 1995, 1994 and 1993, and the
period from inception (June 1, 1990) to December 31, 1995. These
financial statements are the responsibility of the Venture's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. 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 Green
Mountain Mining Venture as of December 31, 1995 and 1994, and the
results of its operations and its cash flows for the years ended
December 31, 1995, 1994 and 1993, and the period from inception
(June 1, 1990) to December 31, 1995, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Salt Lake City, Utah
April 29, 1996
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
BALANCE SHEET
--------
As of December 31,
-------------------------
1995 1994
---- ----
Assets:
Due from USECC $ 1,212 $ -
----------- -----------
Property and equipment (Note 3):
Mineral properties and mine
development costs 22,443,305 21,887,857
Buildings 24,815,009 24,815,009
----------- -----------
47,258,314 46,702,866
----------- -----------
Total assets $47,259,526 $46,702,866
----------- -----------
----------- -----------
Liabilities and Partners' Capital:
Due to USECC $ - $ 62,386
Reclamation liabilities (Note 3) 23,620,000 23,620,000
----------- -----------
Total liabilities 23,620,000 23,682,386
----------- -----------
Commitments and contingencies
(Notes 3 and 5)
Partners' capital:
Kennecott Uranium Company 11,819,763 11,510,240
USECC 11,819,763 11,510,240
----------- -----------
23,639,526 23,020,480
----------- -----------
Total liabilities
and partners' capital $47,259,526 $46,702,866
----------- -----------
----------- -----------
The accompanying notes are an integral
part of these financial statements
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Period from
inception
Year ended December 31, (June 1, 1990)
-------------------------------------------- to December 31,
1995 1994 1993 1995
----------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Costs and expenses:
Maintenance and
holding costs $ 1,697,234 $ 1,877,528 $ 1,982,005 $ 7,619,016
Marketing costs - 85,676 83,977 247,598
----------- ----------- ----------- -----------
Net loss $ 1,697,234 $ 1,963,204 $ 2,065,982 $ 7,866,614
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The accompanying notes are an integral
part of these financial statements
</TABLE>
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF CHANGES IN VENTURE PARTNERS' CAPITAL
---------
<TABLE>
<CAPTION>
Period from
inception
Year ended December 31, (June 1, 1990)
---------------------------------------------- to December 31,
1995 1994 1993 1995
------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balance at beginning of period:
Kennecott Uranium Company $ 11,510,240 $ 11,348,745 $ 11,049,433 $ -
USECC 11,510,240 11,348,745 11,049,433 -
Capital contributions (Note 1):
Kennecott Uranium Company 1,158,140 1,143,097 1,332,303 15,753,070
USECC 1,158,140 1,143,097 1,332,303 15,753,070
Net loss:
Kennecott Uranium Company (848,617) (981,602) (1,032,991) (3,933,307)
USECC (848,617) (981,602) (1,032,991) (3,933,307)
Balance at end of period:
Kennecott Uranium Company 11,819,763 11,510,240 11,348,745 11,819,763
USECC 11,819,763 11,510,240 11,348,745 11,819,763
</TABLE>
The accompanying notes are an integral
part of these financial statements
<PAGE>
<TABLE>
<CAPTION>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF CASH FLOWS
---------
Period from
inception
Year ended December 31, (June 1, 1990)
----------------------------------------------------- to December 31,
1995 1994 1993 1995
------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,697,234) $ (1,963,204) $ (2,065,982) $ (7,866,614)
Increase (decrease) in due to and
due from USECC (47,889) (34,782) 51,947 (30,724)
------------- ------------- ------------- ------------
Net cash used in operating
activities (1,745,123) (1,997,986) (2,014,035) (7,897,338)
------------- ------------- ------------- ------------
Cash flows from investing activities:
Cost of buildings, mineral properties
and mine development (555,448) (283,194) (666,975) (7,911,314)
Increase (decrease) in due to and
due from USECC (15,709) (5,014) 16,404 29,512
------------- ------------- ------------- ------------
Net cash used in investing
activities (571,157) (288,208) (650,571) (7,881,802)
------------- ------------- ------------- ------------
Cash flows from financing activities:
Capital contributions 2,316,280 2,286,194 2,664,606 15,779,140
------------- ------------- ------------- ------------
Net change in cash and cash
equivalents $ - $ - $ - $ -
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Cash and cash equivalents:
At beginning of period $ - $ - $ - $ -
At end of period - - - -
The accompanying notes are an integral
part of these financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF CASH FLOWS
--------
Period from
inception
Year ended December 31, (June 1, 1990)
----------------------------------------------------- to December 31,
1995 1994 1993 1995
------------- ------------ ----------- --------------
<S> <C>
Supplemental schedule of non-cash
activities:
During 1990 and 1992 the Venture
acquired mineral properties and an
established uranium processing mill
in exchange for the assumption of
reclamation liabilities associated
with the properties. $ 23,620,000
In 1990 the Venture partners con-
tributed mineral properties and
buildings which were recorded at the
contributing partners' historical cost. $ 15,727,000
The accompanying notes are an integral
part of these financial statements
</TABLE>
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
--------
1. Organization of the Joint Venture:
Green Mountain Mining Venture ("GMMV" or the "Venture") is
a joint venture with a 30 year life, formed by U.S. Energy
Corp. ("USE"), Crested Corp. ("Crested") and Kennecott
Uranium Company ("Kennecott"), the Venture partners, to
develop mining claims and produce uranium from the Green
Mountain properties located in south-central Wyoming.
Kennecott has a 50% interest in GMMV, and USE and Crested
("USECC") collectively have a 50% interest. GMMV was formed
June 1, 1990, with each partner contributing its portion of
the Green Mountain properties. Kennecott acquired its
portion of the Green Mountain properties from USECC in 1990
for a cash payment of $15.0 million. Thereafter, the
partners are required to contribute funds based upon their
respective participating interests, subject to certain
provisions as provided for in the joint venture agreement.
Kennecott has agreed to contribute the first $50 million of
operating and development expenses pursuant to Management
Committee budgets. As of April 29, 1996, the Management
Committee has not approved a budget for the year ending
December 31, 1996. Kennecott has also agreed to pay a
disproportionate share (up to an additional $45,000,000) of
GMMV operating expenses, but only out of cash operating
margins from sales of processed uranium at more than
$24.00/lb (for $30,000,000 of such operating expenses), and
from sales of processed uranium at more than $27.00/lb (for
the next $15,000,000 of such operating expenses).
Through December 31, 1995, Kennecott has contributed
$15,779,140 to the Venture for operating and development
expenses. During this period, 50% of the capital
contributions made by Kennecott have been allocated to USECC.
Income or loss and the cash flows from the Venture will be
allocated 50% to Kennecott and 50% to USECC. The allocation
of the USECC portion of cash flows will be determined by the
ownership interests of USE and Crested in the various GMMV
properties.
Effective October 29, 1992, Kennecott replaced USECC as
manager of the Venture. Kennecott contracts with USECC to
perform work on behalf of the Venture.
Through December 31, 1995, the activities of the Venture have
consisted primarily of the development and maintenance of the
Green Mountain properties. Additional development is
required prior to the commencement of commercial production.
Such commencement is not expected to occur until the
Venture partners have reached agreement that all economic
and other conditions justify such commencement.
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
1. Organization of the Joint Venture, Continued:
Therefore, the Venture is considered to be in the development
stage as defined in Statement of Financial Accounting
Standards No. 7.
2. Summary of Significant Accounting Policies:
Mineral properties contributed to the Venture were recorded
at the partners' historical cost at the date of
contribution. Costs incurred in the acquisition of mineral
properties are capitalized and either charged to operations
on the units-of-production method over the estimated reserves
to be recovered or charged to operations at the time the
property is sold or abandoned. Mine development costs
incurred either to expand the capacity of operating mines,
develop new ore bodies or develop mine areas substantially
in advance of production are capitalized and charged to
operations on the units-of-production method over the
estimated reserves to be recovered. Mine development costs
incurred to maintain production are included in operating
costs and expenses. Maintenance and holding costs are
expensed as incurred.
The cost of mining equipment, less estimated salvage value,
will be depreciated on the units-of-production method over
the estimated reserves to be recovered or on the straight-
line method over the estimated life of the equipment,
whichever is shorter. The cost of buildings will be
depreciated on the straight-line method. Depreciation of
mining equipment and buildings will commence when mining
operations start. Costs of repairs and maintenance are
expensed as incurred. Expenditures that substantially extend
the useful lives of assets are capitalized. When assets are
retired or otherwise disposed of, all applicable costs and
accumulated depreciation are removed from the accounts and
any resulting gain or loss is recognized currently.
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
2. Summary of Significant Accounting Policies, Continued:
The Venture evaluates the recoverability of capitalized
acquisition and development costs based on the expected
undiscounted future net revenues from the related mining
properties. An impairment loss will be recorded if the
unamortized costs exceed the expected undiscounted future net
revenues. The recorded loss will be based on the difference
between the unamortized costs and the expected discounted
future net revenues from the related mining properties. The
Venture believes that uranium prices will reach levels
sufficient to justify commencement of commercial production
in the future. The Venture also believes the expected
undiscounted future net revenues from the Green Mountain
properties will be sufficient to allow recoverability of
these costs assuming commencement of commercial production.
The estimated net future costs of dismantling, restoring and
reclaiming operating mines which result from future mining
operations will be accrued during such operations. The
provision will be made using the units of production sold
method on the basis proven and probable ore reserves and
estimated costs at the balance sheet date. The effect of
changes in estimated costs and production will be recognized
on a prospective basis.
No provision has been made for federal, state and local
income taxes, credits, or benefits since tax liabilities are
the responsibility of the individual partners.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that 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.
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
3. Buildings, Mineral Properties and Mine Development Costs:
USECC conducts operations at the mine site on behalf of the
Venture. All accounts payable are due to USECC for costs
incurred by USECC in the normal course of business on behalf
of GMMV. Through December 31, 1995 Kennecott had reimbursed
USECC for substantially all development costs incurred.
Building, mineral property and mine development costs
incurred on behalf of each of the Venture partners are as
follows:
Period from
inception
Year ended December 31, (June 1, 1990)
----------------------------------- to December 31,
1995 1994 1993 1995
----------- ---------- ---------- ---------------
USECC $ 511,822 $ 145,712 $ 296,869 $ 5,210,730
Kennecott 43,626 137,482 370,106 2,700,584
---------- ---------- ---------- --------------
Total $ 555,448 $ 283,194 $ 666,975 $ 7,911,314
---------- ---------- ---------- --------------
---------- ---------- ---------- --------------
In December 1990, GMMV acquired additional mineral properties in
exchange for the assumption of reclamation liabilities associated
with those properties of $7.3 million. In 1992, GMMV acquired an
established uranium processing mill (the Sweetwater Mill) in
exchange for the assumption of reclamation liabilities associated
with this property of $16.3 million. Such amounts represent the
estimated costs at the acquisition date to reclaim these
properties. Kennecott, on behalf of GMMV, is self-bonded in the
amount of $24.3 million, which is payable to the Wyoming
Department of Environmental Quality ("WDEQ") and the U.S. Nuclear
Regulatory Commission in the event GMMV does not properly reclaim
the above properties or violates the Wyoming Environmental Quality
Act. Provided such costs are incurred before February 1, 2001 and
before mill production resumes, the seller is liable for the first
$8 million of the reclamation costs at the Sweetwater Mill.
The Venture properties include state leases which will expire in
August 1996 and May 2001. The Venture intends to renew the state
leases expiring in August 1996. All fees required to hold the
unpatented mining claims have been paid to the state of Wyoming
as of December 31, 1995.
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
At December 31, 1995 and 1994, costs capitalized as property
and equipment are composed of the following:
1995 1994
----------- -----------
Acquisition costs $39,347,000 $39,347,000
Development costs 7,911,314 7,355,866
----------- -----------
$47,258,314 $46,702,866
----------- -----------
----------- -----------
Acquisition costs include the partners' initial contribution
of mineral properties and buildings recorded at the
contributing partners' historical cost of $15,727,000 and
mineral properties and buildings acquired in exchange for the
assumption of reclamation liabilities totalling $23,620,000.
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
4. Subsequent Event:
On April 24, 1996, the Bureau of Land Management signed the
Record of Decision approving the Jackpot Mine Plan of
Operations. As of April 29, 1996, the Venture had applied
for but not yet received the necessary operating permit for
the Jackpot Mine from the WDEQ. Until this permit is granted
by the WDEQ, no further construction of mine facilities is
allowed, no further underground mine development can occur,
and the Jackpot deposit cannot be mined.
5. Contingencies:
In June 1994, Kennecott was served with a complaint filed by
Nukem Inc. (Nukem) and Cycle Resource Investment Corporation
(Cycle). The complaint alleges that when Kennecott entered
into the Green Mountain Mining Venture with USE on June 1,
1990, that Kennecott interfered with a Uranium Marketing
Agreement between Nukem and USE and the Sheep Mountain Mining
Venture (between USE and Cycle). Nukem and Cycle are each
seeking damages in excess of $14 million and punitive
damages. The proceeding has been stayed pending the
conclusion of an arbitration proceeding between Cycle, Nukem
and USE addressing issues pertinent to the outcome of the
proceeding against Kennecott. The arbitration proceeding was
concluded on April 19, 1996; however, the stay has yet to be
lifted. Once the stay is lifted, Kennecott intends to
vigorously defend this litigation.
Although the Venture is not a party to the complaint filed
by Nukem and Cycle, the ultimate resolution of this
contingency could have an impact on the properties held by
the Venture.
EXHIBIT 4.2
U.S. ENERGY CORP.
1989 STOCK OPTION PLAN
As Amended September 1, 1992, September 3, 1993,
Janaury 6, 1994 and December 22, 1995
1. Purpose. Restrictions on Amount Available Under the
Plan. This 1989 Stock Option Plan (the "Plan") is intended to
encourage stock ownership by employees, consultants and directors
of U.S. Energy Corp. (the "Corporation"), its divisions and
Subsidiary Corporations, so that they may acquire or increase their
proprietary interest in the Corporation, and to encourage such
employees and directors to remain in the employ of the Corporation
and to put forth maximum efforts for the success of the business.
It is further intended that options granted by the Committee
pursuant to Section 6 of this Plan shall constitute "incentive
stock options" ("Incentive Stock Options") within the meaning of
Section 422A of the Internal Revenue Code of 1986 and the
regulations issued thereunder (the "Code"), and options granted by
the Committee pursuant to Section 7 of this Plan shall constitute
"nonqualified stock options" ("Nonqualified Stock Options").
2. Definitions. As used in this Plan, the following words
and phrases shall have the meanings indicated:
(a) "Disability" shall mean an Optionee's inability to
engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment that can be
expected to result in death or that has lasted or can be expected
to last for a continuous period of not less than 12 months.
(b) "Fair Market Value" per share as of a particular
date shall mean the last sale price of the Corporation's Common
Stock as reported on a national securities exchange or on the
NASDAQ National Market System or, if last sale reporting quotation
is not available for the Corporation's Common Stock, the average of
the bid and asked prices of the Corporation's Common Stock as
reported by NASDAQ or in the National Quotation Bureau, Inc.'s
"Pink Sheets" or, if such quotations are unavailable, the value
determined by the Committee (as hereinafter defined) in accordance
with their discretion in making a bona fide, good faith
determination of fair market value.
(c) "Parent Corporation" shall mean any corporation
(other than the employer corporation) in an unbroken chain of
corporations ending with the employer corporation if, at the time
of granting an Option, each of the corporations other than the
employer corporation owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the other
corporations in such chain.
(d) "Subsidiary Corporation" shall mean any corporation
(other than the employer corporation) in an unbroken chain of
corporations beginning with the employer corporation if, at the
time of granting an Option, each of the corporations other than the
last corporation in the unbroken chain owns stock possessing 50% or
more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
3. Administration. The Plan shall be administered by a
committee (the "Committee"), consisting of not less than two
members of the Board of Directors of the Corporation (the "Board").
The members of the Committee, who shall be selected at a duly
convened meeting of the Board of Directors, shall be persons who
have not been granted or awarded equity securities of the
Corporation under the Plan or any other plan of the Employer or its
affiliates, during the year prior to awards of securities under the
Plan by the Committee. It is the intent of this Plan that the
Committee members shall be "disinterested administrators" as that
term is used in Rule 16b-3(c)(2)(i) promulgated by the Securities
and Exchange Commission. The members of the Committee shall have
all powers, subject to compliance with the Plan, to select officers
and directors for participation in the Plan, and to make all
decisions concerning the timing, pricing and amount of a grant or
award under the Plan.
The Committee shall have the authority in its discretion,
subject to and not inconsistent with the express provisions of the
Plan, to administer the Plan and to exercise all the powers and
authorities either specifically granted to it under the Plan or
necessary or advisable in the administration of the Plan,
including, without limitation, the authority to grant Options; to
determine which Options shall constitute Incentive Stock Options
and which Options shall constitute Nonqualified Stock Options; to
determine the purchase price of the shares of Common Stock covered
by each Option (the "Option Price"); to determine the persons to
whom, and the time or times at which, Options shall be granted; to
determine the number of shares to be covered by each Option; to
interpret the Plan; to prescribe, amend and rescind rules and
regulations relating to the Plan; to determine the terms and
provisions of the Option Agreements (which need not be identical)
entered into in connection with Options granted under the Plan; and
to make all other determinations deemed necessary or advisable for
the administration of the Plan. The Committee may delegate to one
or more of its members or to one or more agents such administrative
duties as it may deem advisable, and the Committee or any person to
whom it has delegated duties as aforesaid may employ one or more
persons to render advice with respect to any responsibility the
Committee or such person may have under the Plan.
The Board shall fill all vacancies, however caused, in the
Committee. The Board may from time to time appoint additional
members to the Committee, and may at any time remove one or more
Committee members and substitute others. One member of the
Committee shall be selected by the Board as chairman. The
Committee shall hold its meetings at such times and places as it
shall deem advisable. All determinations of the Committee shall be
made by a majority of its members either present in person or
participating by conference telephone at a meeting or by written
consent. The Committee may appoint a secretary and make such rules
and regulations for the conduct of its business as it shall deem
advisable, and shall keep minutes of its meetings.
No member of the Board or Committee shall be liable for any
action taken or determination made in good faith with respect to
the Plan or any Option granted hereunder.
4. Eligibility. Subject to certain limitations hereinafter
set forth, Options may be granted to employees of (including
officers) and consultants to and directors of (whether or not they
are employees) the Corporation or its present or future divisions
and Subsidiary Corporations. In determining the persons to whom
Options shall be granted and the number of shares to be covered by
each Option, the Committee shall take into account the duties of
the respective persons, their present and potential contributions
to the success of the Corporation and such other factors as the
Committee shall deem relevant in connection with accomplishing the
purpose of the Plan. A person to whom an Option has been granted
hereunder is sometimes referred to herein as an "Optionee." An
Optionee shall be eligible to receive more than one grant of an
Option during the term of the Plan, but only on the terms and
subject to the restrictions hereinafter set forth.
5. Stock. The stock subject to Options hereunder shall be
shares of the Corporation's Common Stock, $.01 par value per share
("Common Stock"). Such shares may, in whole or in part, be
authorized but unissued shares or shares that shall have been or
that may be reacquired by the Corporation. The aggregate number of
shares of Common Stock as to which Options may be granted from time
to time under the Plan shall not exceed 925,000. The maximum
number of shares which may be subject to options granted under the
Plan to the officers and directors as a group shall not exceed
275,000 shares of Common Stock. The limitations established by the
preceding sentences shall be subject to adjustment as provided in
Section 8(i) hereof.
In the event that any outstanding Option under the Plan for
any reason expires or is terminated without having been exercised
in full the shares of Common Stock allocable to the unexercised
portion of such Option (unless the Plan shall have been terminated)
shall become available for subsequent grants of options under the
Plan.
6. Incentive Stock Options. Options granted pursuant to
this Section 6 are intended to constitute Incentive Stock Options
and shall be subject to the following special terms and conditions,
in addition to the general terms and conditions specified in
Section 8 hereof. Consultants and directors who are not employees
of the Corporation shall not be entitled to receive Options
pursuant to this Section 6.
The aggregate Fair Market Value (determined as of the date the
Incentive Stock Option is granted) of the shares of Common Stock
with respect to which Options are exercisable for the first time by
an Optionee during any calendar year may not exceed $100,000.00
Incentive Stock Options granted under this Plan are intended
to satisfy all requirements for incentive stock options under the
Code and, notwithstanding any other provision of this Plan, the
Plan and all Incentive Stock Options granted under it shall be so
construed, and all contrary provisions shall be so limited in scope
and effect and, to the extent they cannot be so limited, they shall
be void.
7. Nonqualified Stock Options. Options granted pursuant to
this Section 7 are intended to constitute Nonqualified Stock
Options and shall be subject only to the general terms and
conditions specified in Section 8 hereof.
8. Terms and Conditions of Options. Each Option granted
pursuant to the Plan shall be evidenced by a written Option
Agreement between the Corporation and the Optionee, which agreement
shall comply with and be subject to the following terms and
conditions:
(a) Number of Shares. Each Option Agreement shall state
the number of shares of Common Stock to which the Option relates.
(b) Type of Option. Each Option Agreement shall
specifically identify the portion, if any, of the Option which
constitutes an Incentive Stock Option and the portion, if any,
which constitutes a Nonqualified Stock Option.
(c) Option Price. Each Option Agreement shall state the
Option Price, which shall be not less than 100% of the Fair Market
Value of the shares of Common Stock of the Corporation on the date
of grant of the Option except that any option granted under the
Plan to a person owning more than ten percent of the total combined
voting power of the Common Stock shall be at a price of 110% of
such fair market value and shall be for a term of no more than five
years, in the case of Incentive Stock Options, and not less than
80% of the Fair Market Value of the shares of Common Stock of the
Corporation on the date of grant of the Option in the case of Non-
Qualified Stock Options. The Option Price shall be subject to
adjustment as provided in Section 8(i) hereof. The date on which
the Committee adopts a resolution expressly granting an Option
shall be considered the day on which such Option is granted.
(d) Method of Exercise and Medium and Time of Payment.
Each exercise of an Option granted hereunder, whether in whole or
in part, shall be by written notice to the Secretary of the
Corporation designating the number of shares as to which the Option
is exercised, and shall be accompanied by payment in full of the
Option Price (in cash, shares or property) for the number of shares
so designated, together with any written statements required by any
applicable securities laws. The Option Price shall be paid in
cash, in shares of Common Stock having a Fair Market Value equal to
such Option Price or in property or in a combination of cash,
shares and property, and may be effected in whole or in part (i)
with monies received from the Corporation at the time of exercise
as a compensatory cash payment, or (ii) with monies borrowed from
the Corporation pursuant to repayment terms and conditions as shall
be determined from time to time by the Committee, in its
discretion, separately with respect to each exercise of Options and
each Optionee; provided, however, that each such method and time
for payment and each such borrowing and terms and conditions of
repayment shall be permitted by and be in compliance with
applicable law. The Board of Directors shall have the sole and
absolute discretion to determine whether or not property other than
cash or Common Stock may be used to purchase the shares of Common
Stock hereunder and, if so, to determine the value of the property
received.
(e) Term and Exercise of Options. Options shall be
exercisable over the exercise period as and at the times the
Committee may determine, as reflected in the Option Agreement;
provided, however, that the Committee shall have the authority to
accelerate the exercisability of any outstanding Option at such
time and under such circumstances as it, in its sole discretion,
deems appropriate. The exercise period shall be determined by the
Committee; provided, however, that such exercise period shall not
exceed ten years from the date of grant of the Option. The
exercise period shall be subject to earlier termination as provided
in Sections 8(f) and 8(g) hereof. An Option may be exercised, as
to any or all full shares of Common Stock as to which the Option
has become exercisable; provided, however, that an Option may not
be exercised at any one time as to fewer than 100 shares (or such
number of shares as to which the Option is then exercisable if such
number of shares is less than 100).
(f) Termination. Except as provided in this Section
8(f) and in Section 8(g) hereof, an Option may not be exercised
unless the Optionee is then an employee or director of or
consultant to the Corporation or a division or Subsidiary
Corporation thereof (or a corporation or a Parent or Subsidiary
Corporation of such corporation issuing or assuming the option in
a transaction to which Section 425(a) of the Code applies), and
unless the Optionee has remained continuously as an employee or
director of or consultant to the Corporation since the date of
grant of the Option. In the event that the Optionee ceases to be
an employee or director of or consultant to the Corporation (other
than by reason of death, Disability or retirement), all Options of
such Optionee that are exercisable at the time of such cessation
may, unless earlier terminated in accordance with their terms, be
exercised within three months after such cessation; provided,
however, that if the employment or consulting relationship of an
Optionee shall terminate, or if a director shall be removed, for
cause, all Options theretofore granted to such Optionee shall, to
the extent not theretofore exercised, terminate forthwith. Nothing
in the Plan or in any Option granted pursuant hereto shall confer
upon an individual any right to continue in the employ of the
Corporation or any of its divisions or Subsidiary Corporations or
interfere in any way with the right of the Corporation or its
shareholders or any such division or Subsidiary Corporation to
terminate such employment or other relationship between the
individual and the Corporation or any of its divisions and
subsidiary corporations.
(g) Death Disability or Retirement of Optionee. If an
Optionee shall die while a director of, or employed by, or a
consultant to, the Corporation or a Subsidiary Corporation thereof,
or within three months after the termination of such Optionee's
employment or directorship or consulting relationship, other than
termination for cause, or if the Optionee's employment or
directorship or consulting relationship, shall terminate by reason
of disability or retirement, all Options theretofore granted to
such Optionee (whether or not otherwise exercisable) may, unless
earlier terminated in accordance with their terms, be exercised by
the Optionee or by the Optionee's estate or by a person who
acquired the right to exercise such Option by bequest or
inheritance or otherwise by reason of the death or Disability of
the Optionee, at any time within one year after the date of death,
Disability or retirement of the Optionee.
(h) Nontransferability. Options granted under the Plan
shall not be transferable other than by will or by the laws of
descent and distribution, and Options may be exercised, during the
lifetime of the Optionee, only by the Optionee or by his guardian
or legal representative.
Any attempted sale, pledge, assignment, hypothecation or
other transfer of an option contrary to the provisions hereof and
the levy of any execution, attachment or similar process upon an
option shall be null and void and without force or effect.
As a condition to the transfer of any shares of Common
Stock issued under this Plan, the Corporation may require an
opinion of counsel, satisfactory to the Corporation, to the effect
that such transfer will not be in violation of the Securities Act
of 1933 or any other applicable securities laws or that such
transfer has been registered under federal and all applicable state
securities laws. Further, the Corporation shall be authorized to
refrain from delivering or transferring shares of Common Stock
issued under this Plan until the Board of Directors determines that
such delivery or transfer will not violate applicable securities
laws and the Optionee has tendered to the Corporation any federal,
state or local tax owed by the Optionee as a result of exercising
the Option, or disposing of any Common Stock, when the Corporation
has a legal liability to satisfy such tax. The Corporation shall
not be liable for damages due to delay in the delivery or issuance
of any stock certificate for any reason whatsoever, including, but
not limited to, a delay caused by listing requirements of any
securities exchange or any registration requirements under the
Securities Act of 1933, the Securities Exchange Act of 1934, or
under any other state or federal law, rule or regulation. The
Corporation is under no obligation to take any action or incur any
expense in order to register or qualify the delivery or transfer of
shares of Common Stock under applicable securities laws or to
perfect any exemption from such registration or qualification.
Furthermore, the Corporation will have no liability to any Optionee
for refusing to deliver or transfer shares of Common Stock if such
refusal is based upon the foregoing provisions of this Paragraph.
(i) Effect of Certain Changes.
(1) If there is any change in the number of shares
of Common Stock through the declaration of stock dividends, or
through recapitalization resulting in stock splits, or combinations
or exchanges of such shares, the number of shares of Common Stock
available for Options, the number of such shares covered by
outstanding Options, and the price per share of such Options, shall
be proportionately adjusted by the Committee to reflect any
increase or decrease in the number of issued shares of Common
Stock; provided, however, that any fractional shares resulting from
such adjustment shall be eliminated.
(2) In the event of the proposed dissolution or
liquidation of the Corporation, in the event of any corporate
separation or division, including, but not limited to, split-up,
split-off or spin-off, or in the event of a merger or consolidation
of the Corporation with another corporation, the Committee may
provide that the holder of each Option then exercisable shall have
the right to exercise such Option (at its then Option Price) solely
for the kind and amount of shares of stock and other securities,
property, cash or any combination thereof receivable upon such
dissolution, liquidation, or corporate separation or division, or
merger or consolidation by a holder of the number of shares of
Common Stock for which such Option might have been exercised
immediately prior to such dissolution, liquidation, or corporate
separation or division, merger or consolidation; or the Committee
may provide, in the alternative, that each Option granted under the
Plan shall terminate as of a date to be fixed by the Committee;
provided, however, that not less than 30 days' written notice of
the date so fixed shall be given to each Optionee, who shall have
the right, during the period of 30 days preceding such termination,
to exercise the Options as to all or any part of the shares of
Common Stock covered thereby, including shares as to which such
Options would not otherwise be exercisable.
(3) Paragraph (2) of this Section 8(i) shall not
apply to a merger or consolidation in which the Corporation is the
surviving corporation and shares of Common Stock are not converted
into or exchanged for stock, securities of any other corporation,
cash or any other thing of value. Notwithstanding the preceding
sentence, in case of any consolidation or merger of another
corporation into the Corporation in which the Corporation is the
surviving corporation and in which there is a reclassification or
change (including a change to the right to receive cash or other
property) of the shares of Common Stock (other than a change in par
value, or from par value to no par value, or as a result of a
subdivision or combination, but including any change in such shares
into two or more classes or series of shares), the Committee may
provide that the holder of each Option then exercisable shall have
the right to exercise such Option solely for the kind and amount of
shares of stock and other securities (including those of any new
direct or indirect parent of the Corporation), property, cash or
any combination thereof receivable upon such reclassification,
change, consolidation or merger by the holder of the number of
shares of Common Stock for which such Option might have been
exercised.
(4) In the event of a change in the Common Stock of
the Corporation as presently constituted, which is limited to a
change of all of its authorized shares with par value into the same
number of shares with a different par value or without par value,
the shares resulting from any such change shall be deemed to be the
Common Stock within the meaning of the Plan.
(5) To the extent that the foregoing adjustments
relate to stock or securities of the Corporation, such adjustments
shall be made by the Committee, whose determination in that respect
shall be final, binding and conclusive, provided that each
Incentive Stock Option granted pursuant to this Plan shall not be
adjusted in a manner that causes such option to fail to continue to
qualify as an Incentive Stock Option within the meaning of Section
422A of the Code.
(6) Except as hereinbefore expressly provided in
this Section 8(i), this Optionee shall have no rights by reason of
any subdivision or consolidation of shares of stock of any class or
the payment of any stock dividend or any other increase or decrease
in the number of shares of stock of any class or by reason of any
dissolution, liquidation, merger, or consolidation or spin- off of
assets or stock of another corporation; and any issue by the
Corporation of shares of stock of any class, or securities
convertible into shares of stock of any class, shall not affect,
and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to the
Option. The grant of an Option pursuant to the Plan shall not
affect in any way the right or power of the Corporation to make
adjustments, reclassifications, reorganizations or changes of its
capital or business structures or to merge or to consolidate or to
dissolve, liquidate or sell, or transfer all or part of its
business or assets.
(j) Rights as Shareholder - Non-Distributive Intent.
Neither a person to whom an Option is granted, nor such person's
legal representative, heir, legatee or distributee, shall be deemed
to be the holder of, or to have any rights of a holder with respect
to, any shares subject to such Option, until after the Option is
exercised and the shares are issued to the person exercising such
Options. Upon exercise of an Option at a time when there is no
registration statement in effect under the Securities Act of 1933
relating to the shares issuable upon exercise and available for
delivery of a prospectus meeting the requirements of Section
10(a)(3) of said Act, shares may be issued to the Optionee only if
the Optionee represents and warrants in writing to the Corporation
that the shares purchased are being acquired for investment and not
with a view to the distribution thereof. No shares shall be issued
upon the exercise of an Option unless and until there shall have
been compliance with any then applicable requirements of the
Securities and Exchange Commission, or any other regulatory
agencies having jurisdiction over the Corporation. No adjustment
shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distribution or other rights
for which the record date is prior to the date such stock
certificate is issued, except as provided in Section 8(i) hereof.
(k) Other Provisions. The Option Agreements authorized
under the Plan shall contain such other provisions, including,
without limitation, (i) the imposition of restrictions upon the
exercise of an Option, and (ii) in the case of an Incentive Stock
Option, the inclusion of any condition not inconsistent with such
Option qualifying as an Incentive Stock Option, as the Committee
shall deem advisable.
(l) Forfeiture Provisions: All shares of Common Stock
purchased on exercise of all Nonqualified Options granted after the
date of this Plan Amendment (and all shares of Common Stock
purchased on exercise of all Nonqualified Options granted prior to
such date provided that the holder consents), shall be subject to
forfeiture back to the Corporation in the event of termination of
employee, director or consultant status with the Corporation on or
before January 5 of the second calendar year after exercise. For
example, Common Stock purchased on September 1, 1993 by exercise of
a Nonqualified Option, will be subject to forfeiture through
January 5, 1995. Provided, that upon exercise of a Nonqualified
Option at a time when there is a registration statement in effect
under the Securities Act of 1933 relating to the shares issuable
upon exercise, the preceding forfeiture provisions of this
paragraph shall immediately terminate.
9. Agreement by Optionee Regarding Withholding Taxes. If
the Committee shall so require, as a condition of exercise, each
Optionee shall agree that:
(a) No later than the date of exercise of any Option
granted hereunder, the Optionee will pay to the Corporation or make
arrangements satisfactory to the Committee regarding payment of any
federal, state or local taxes of any kind required by law to be
withheld upon the exercise of such Option; and
(b) The Corporation shall, to the extent permitted or
required by law, have the right to deduct federal, state and local
taxes of any kind required by law to be withheld upon the exercise
of such Option from any payment of any kind otherwise due to the
Optionee.
The Corporation shall not be obligated to advise any
Optionee of the existence of any such tax or the amount which the
Corporation will be so required to withhold.
10. Term of Plan. Options may be granted pursuant to the
Plan from time to time within a period of ten years from the date
the Plan is adopted by the Board, or the date the Plan is approved
by the shareholders of the Corporation, whichever is earlier.
11. Amendment and Termination of the Plan. The Board at any
time and from time to time may suspend, terminate, modify or amend
the Plan; provided, however, that any amendment that would
materially increase the aggregate number of shares of Common Stock
as to which Options may be granted under the Plan or materially
increase the benefits accruing to participants under the Plan or
materially modify the requirements as to eligibility for
participation in the Plan shall be subject to the approval of the
holders of a majority of the Common Stock issued and outstanding,
except that any such increase or modification that may result from
adjustments authorized by Section 8(i) hereof shall not require
such approval. Except as provided in Section 8 hereof, no
suspension, termination, modification or amendment of the Plan may
adversely affect any Option previously granted, unless the written
consent of the Optionee is obtained.
12. Approval of Shareholders. The Plan shall take effect
upon its adoption by the Board but shall be subject to the approval
of the holders of a majority of the issued and outstanding shares
of Common Stock of the Corporation, which approval must occur
within 12 months after the date the Plan is adopted by the Board.
13. Assumption. The terms and conditions of any outstanding
Options granted pursuant to this Plan shall be assumed by, be
binding upon and inure to the benefit of any successor corporation
to the Corporation and shall continue to be governed by, to the
extent applicable, the terms and conditions of this Plan. Such
successor corporation shall not otherwise be obligated to assume
this Plan.
14. Termination of Right of Action. Every right of action
arising out of or in connection with the Plan by or on behalf of
the Corporation or of any Subsidiary, or by any shareholder of the
Corporation or of any Subsidiary against any past, present or
future member of the Board, or against any employee, or by an
employee (past, present or future) against the Corporation or any
Subsidiary, will, irrespective of the place where an action may be
brought and irrespective of the place of residence of any such
shareholder, director or employee, cease and be barred by the
expiration of three years from the date of the act or omission in
respect of which such right of action is alleged to have risen.
15. Tax Litigation. The Corporation shall have the right,
but not the obligation, to contest, at its expense, any tax ruling
or decision, administrative or judicial, on any issue which is
related to the Plan and which the Board believes to be important to
holders of Options issued under the Plan and to conduct any such
contest or any litigation arising therefrom to a final decision.
IN WITNESS WHEREOF, the foregoing is the 1989 Stock Option
Plan of U.S. Energy Corp., as amended at September 1, 1992,
September 3, 1993, January 6, 1994 and December 22, 1995.
U.S. ENERGY CORP.
By: s/ Max T. Evans
----------------------------
MAX T. EVANS, Secretary
EXHIBIT 4.4
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT effective as of the 1st day of January,
1996 between U.S. Energy Corp., a Wyoming corporation (the
"Corporation"), and KEY NAME~ (the "Optionee").
In accordance with its 1989 Stock Option Plan (the "Plan") as
amended, a copy of which is attached hereto and incorporated herein
by reference, the Corporation desires, in connection with the
services of the Optionee, to provide the Optionee with an
opportunity to acquire $.01 par value common stock (the "Common
Stock") of the Corporation on favorable terms and thereby increase
the Optionee's proprietary interest in the continued progress and
success of the business of the Corporation.
NOW, THEREFORE, in consideration of the premises, the mutual
covenants herein set forth and other good and valuable
consideration, the Corporation and the Optionee agree as follows:
1. Confirmation of Grant of Option. Pursuant to a
recommendation of the Compensation Committee of the Board of
Directors of the Corporation (the "Board") made on December 22,
1995 and confirmed by the Board of Directors on that date, the
Corporation, subject to the terms of the Plan and of this
Agreement, confirms that the Optionee has been irrevocably granted
on January 1, 1996 (the "Date of Grant"), as a matter of separate
inducement and agreement, and in addition to and not in lieu of
salary or other compensation for services, a Non-Qualified Stock
Option pursuant to Section 7 of the Plan (the "Option") to purchase
an aggregate of KEY # OF SHARES~ Non-Qualified shares of Common
Stock on the terms and conditions herein set forth subject to
adjustment as provided in Section 8 hereof.
2. Purchase Price. The purchase price of shares of Common
Stock covered by the Option will be $4.00 per share based on the
bid price of such shares remaining above $8.00 for 20 consecutive
business days (the "Option Price"). The Option Price shall be
subject to adjustment as provided in Section 8 hereof.
<PAGE>
Key Name~
Stock Option Agreement
January 1, 1996
Page
3. Exercise of Option. Except as otherwise provided in
Section 8 of the Plan, the Option may be exercised in amounts not
to exceed 20% of the number of option shares during each calendar
year for the term of the Option, provided, however, no Option shall
be exercisable after the expiration of the term thereof, and no
Option shall be exercisable unless the holder is an employee of the
Corporation or of any subsidiary of the Corporation on the date of
exercise, except as provided in Sections 6 and 7 hereof and Section
8(f) of the Plan. The Option may be exercised only as to whole
shares in increments of 100 shares. The 20% annual limitation
shall not be increased because of failure to exercise the full 20%
which may have been available in prior years.
The Option may be exercised, as provided in this Section 3, by
notice and payment to the Corporation as provided in Section 10
hereof and Section 8(d) of the Plan.
4. Term of Option. The term of the Option will be through
January 1, 1996 through December 31, 2000, subject to earlier
termination or cancellation as provided in this Agreement. Except
as otherwise provided in Sections 6 and 7 hereof, the Option will
not be exercisable unless the Optionee shall, at the time of
exercise, be an employee of the Corporation or of a subsidiary. As
used in this Agreement, the term "subsidiary" refers to and
includes each "subsidiary corporation" as defined in the Plan.
The holder of the Option will not have any rights to dividends
or any other rights of a shareholder with respect to any shares of
Common Stock subject to the Option until such shares shall have
been issued to him (as evidenced by the appropriate transfer agent
of the Corporation) upon purchase of such shares through exercise
of the Option.
5. Nontransferability of Option. The Option may not be
assigned, transferred (except as provided in the next preceding
sentence) or otherwise disposed of, or pledged or hypothecated in
any way (whether by operation of law or otherwise) otherwise than
by will or the laws of descent and distribution, and shall not be
subject to execution, attachment, or other process. Any
assignment, transfer, pledge, hypothecation or other disposition of
the Option or any attempt to make any such levy of execution,
attachment or other process will cause the Option to terminate
immediately upon the happening of any such event, provided,
however, that any such termination of the Option under the
foregoing provisions of this Section 5 will not prejudice any
rights or remedies which the corporation or any subsidiary may have
under this Agreement or otherwise.
6. Exercise Upon Termination. The Optionee's rights to
exercise this Option upon termination of employment shall be as set
forth in Section 8(f) of the Plan.
<PAGE>
Key Name~
Stock Option Agreement
January 1, 1996
Page
7. Death, Disability or Retirement of Optionee. The
Optionee's rights to exercise this Option upon the death,
disability or retirement of the Optionee shall be as set forth in
Section 8(g) of the Plan.
8. Adjustments. The Option shall be subject to adjustment
upon the occurrence of certain events as set forth in Section 8(i)
of the Plan.
9. Registration. The Optionee understands that the Option
and the shares of Common Stock subject thereto and issuable upon
the exercise thereof are registered under Form S-8 (SEC File No.
33-74154) under the Securities Act of 1933, as amended. The
Optionee understands that it is his responsibility to confirm that
the registration is current and effective at the time of exercise
of his Options and sale of shares acquired thereunder.
10. Notices. Each notice relating to this Agreement will
be in writing and delivered in person or by certified mail to the
proper address. All notices to the Corporation shall be addressed
to it at its office at Glen L. Larsen Building, 877 North 8th West,
Riverton, Wyoming 82501. All notices to the Optionee or other
person or persons then entitled to exercise the Option shall be
addressed to the Optionee nor such other person or Persons at the
Optionee's address below specified. Anyone to whom a notice maybe
given under this Agreement may designate a new address by notice to
that effect.
11. Approval of Counsel. The exercise of the Option and
the issuance and delivery of shares of Common Stock pursuant
thereto shall be subject to approval by the Corporation's counsel
of all legal matters in connection therewith, including compliance
with the requirements of the Securities Act of 1933, as amended,
the Securities Exchange Act of 1934, as amended, applicable state
securities laws, the rules and regulations thereunder, and the
requirements of any stock exchange upon which the Common Stock may
then be listed.
12. Benefits of Agreement. This Agreement will inure to
the benefit of and be binding upon each successor and assign of the
Company. All obligations imposed upon the Optionee and all rights
granted to the Corporation under this Agreement will be binding
upon the Optionee's heirs, legal representatives and successors.
13. Governmental and Other Regulations. The exercise of
the Option and the Corporation's obligation to sell and deliver
shares upon the exercise of rights to purchase shares is subject to
all applicable federal and state laws, rules and regulations, and
to such approvals by any regulatory or governmental agency which
may, in the opinion of counsel for the Corporation, be required.
14. Incorporation of the Plan. The Plan, as amended, is
attached hereto and incorporated herein by reference. In the event
that any provision in this Agreement conflicts with a provision in
the Plan, the Plan shall govern.
<PAGE>
Key Name~
Stock Option Agreement
January 1, 1996
Page
IN WITNESS WHEREOF, the Corporation has caused this Agreement
to be executed in its name by its President or a Vice President and
its corporate seal to be hereunto affixed and attested by its
Secretary or its Assistant Secretary and the Optionee has hereunto
set his hand and seal all as of the date first above written.
U.S. ENERGY CORP.
(Seal)
By: s/ John L. Larsen
----------------------------
JOHN L. LARSEN, President
ATTEST:
s/ Max T. Evans
- --------------------------
MAX T. EVANS, Secretary
The undersigned Optionee understands the terms of this Option
Agreement and the attached Plan and hereby agrees to comply
therewith.
Date , 19
(Address of Optionee)
<PAGE>
Schedule of Employees Receiving Stock Options pursuant to the above
Stock Option Agreement
Michael E. Sweeney 70,000
Richard P. Larsen 50,000
Mark J. Larsen 50,000
Keith G. Larsen 50,000
M. Shane Larsen 50,000
George F. Smith 60,000
Kenneth Webber 30,000
Thomas M. Evans 25,000
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
State or Other
Jurisdiction
of Incorporation or
Name of Subsidiary Organization
- ---------------------------------------- ---------------------
Canyon Homesteads, Inc. Utah
Colorado Mineral Belt Joint Venture Colorado
Crested Corp. Colorado
Energx, Ltd. Wyoming
First-N-Last LLC Utah
Four Nines Gold Inc. Colorado
Green Mountain Mining Venture Wyoming
Jeffrey City Homeowners Association, Inc. Wyoming
Plateau Resources Limited Utah
Ruby Mining Company Colorado
Sheep Mountain Partners Colorado
Sutter Gold Mining Company Wyoming
Ticaboo Development Inc. Utah
U.S. Energy 1977 Minerals Program, Ltd. Colorado
U.S. Energy 1978 Minerals Program, Ltd. Colorado
USECC Gold Limited Liability Company Wyoming
USECC Joint Venture Wyoming
Western Executive Air, Inc. Wyoming
ZX, Ltd. Colorado
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
MAY 31, 1996 AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000101594
<NAME> U.S. ENERGY CORP.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 992,600
<SECURITIES> 8,200,800
<RECEIVABLES> 880,500
<ALLOWANCES> 27,800
<INVENTORY> 118,700
<CURRENT-ASSETS> 2,912,400
<PP&E> 26,694,300
<DEPRECIATION> 9,047,900
<TOTAL-ASSETS> 34,793,300
<CURRENT-LIABILITIES> 2,031,200
<BONDS> 0
0
0
<COMMON> 63,100
<OTHER-SE> 14,533,900
<TOTAL-LIABILITY-AND-EQUITY> 34,793,300
<SALES> 3,326,800
<TOTAL-REVENUES> 9,632,200
<CGS> 2,839,700
<TOTAL-COSTS> 9,097,900
<OTHER-EXPENSES> 3,058,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 205,000
<INCOME-PRETAX> (2,333,900)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 2,604,600
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 270,700
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
