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, 1997 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.
(Exact Name of Registrant as Specified in its Charter)
WYOMING 83-0205516
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West
RIVERTON, WY 82501
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (307) 856-9271
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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 12, 1997, 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
$52,375,989.
CLASS OUTSTANDING AT SEPTEMBER 12, 1997
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Common Stock, $0.01 par value 6,826,025 shares
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, 1997
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. [ ]
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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K/A includes "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other that statements of historical
fact included in this Report, including without limitation the statements under
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the disclosures about the Green Mountain Mining Venture development
schedule for the Wyoming properties, the projected operating status of Plateau
Resources Limited's Shootaring Canyon uranium mill in Utah, and the plan of
operations for Yellow Stone Fuels Corp. and Sutter Gold Mining Company
(subsidiaries of U.S. Energy Corp.), are forward-looking statements.
Although U. S. Energy Corp. believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from such expectations are disclosed
in this Annual Report. The forward-looking statements should be carefully
considered in the context of all the information set forth in this Annual
Report.
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.
Subsequent to May 31, 1997, USE and USECC (see below) signed an
Acquisition Agreement with Kennecott Uranium Company ("Kennecott"), for the
purchase of Kennecott's interest in the Green Mountain Mining Venture ("GMMV").
In general terms, as a consequence of the Acquisition Agreement and the various
transactions associated therewith, USE and USECC received $4,000,000 as a bonus
for signing the Acquisition Agreement. In addition, pending closing of the
Acquisition Agreement, USECC has been provided the opportunity to move the GMMV
project forward, as follows: USECC has leased the mineral properties from GMMV
in order to develop the Jackpot Mine for production mining, and has been
appointed an independent contractor to ready the Sweetwater uranium mill (owned
by the GMMV) for changeover to operational processing status. Kennecott is to
provide a line of Credit to the GMMV of up to $16,000,000 for the mine
development and mill work being conducted by USECC. Closing of the Acquisition
Agreement will require payment to Kennecott of $15,000,000 cash and the
assumption of various reclamation and other liabilities. For the details of this
fiscal 1998 transaction, please see "Minerals-Uranium-The Green Mountain Mining
Project-June 23, 1997 Acquisition Agreement with Kennecott Uranium Company"
below.
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,
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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 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 ($3,300,000 in cash and a $1,000,000 promissory note) plus 45% of the
net profits before taxes derived from the sale of Brunton products for four
years and three months. The Registrant began receiving the net profits payments
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 through 2000. 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 Brunton sale was prompted in part by Registrant's desire to focus on
its core minerals sector. In fiscal 1998, the Company intends to implement plans
to consolidate 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 of its 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.
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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,
1997 1996 1995
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Minerals 4% 32% 2%
Commercial Operations 56% 15% 26%
Construction Operations 18% 39% 28%
USE did not receive revenues from the mining of either uranium or gold
in the last three fiscal years ended May 31, 1997. During fiscal 1996, 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. During fiscal 1997 and 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"). USE plans to
commence production of uranium concentrates 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 1998. 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. In addition, in fiscal 1997, additional
properties were acquired in New Mexico and Wyoming by Yellow Stone Fuels Corp.
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 USE 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 Rio Tinto plc, formerly RTZ PLC of London. RTZ (now part of the
RTZ-CRA Group) is one of the world's leading natural resource companies.
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Kennecott Corporation owns and operates several mines including the Bingham
Canyon, Utah open pit copper mine which started in 1906.
KUC is also referred to in this report as Kennecott. All mining 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.
Approximately 10,825 acres of properties are held by 437 unpatented
mining claims which have been staked by, plus four leases (including three state
leases) held by Yellow Stone Fuels Corp. (an Ontario, Canada corporation, or by
its wholly-owned subsidiary Yellow Stone Fuels, Inc., a Wyoming corporation,
hereafter "YSFC" including the subsidiary). The properties are located in
Wyoming and New Mexico, and are believed to be prospective of uranium and
suitable for in-situ leaching. USE and Crested each own 14.3% of YSFC.
Electric power to all the above Wyoming properties is furnished by
either Pacific Power & Light or the 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.
Plateau is the owner of the Tony M mine and portions of the Frank M
properties and has posted a 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.
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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. Subsequent to May 31, 1997, USE and USECC signed an Acquisition
Agreement for the acquisition from Kennecott Uranium Company of its interest in
the GMMV. The following is a description of the formation of GMMV and certain of
its terms, which terms have been modified as a result of the Acquisition
Agreement and related transactions, as set forth under "June 23, 1997
Acquisition Agreement with Kennecott Uranium Company" below.
In fiscal 1991, USE and USECC 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) and a commitment by Kennecott to
fund the first $50,000,000 of GMMV expenditures. In fiscal 1991, USE 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 the 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 the GMMV operations, proportionate to its interest
before reduction.
The 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 the 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
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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 through May 31, 1997. USECC has continued
work on a contract basis at Kennecott's request through May 31, 1997.
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 commenced
mine pre-development work necessary to put the GMMV properties into production,
see "June 23, 1997 Acquisition Agreement with Kennecott Uranium Company" and
"Permitting Activities" below.
JUNE 23, 1997 ACQUISITION AGREEMENT WITH KENNECOTT URANIUM COMPANY
Subsequent to May 31, 1997, USE and USECC signed an Acquisition
Agreement with Kennecott Uranium Company, a Delaware corporation ("Kennecott"),
for the right to acquire Kennecott's interest in the Green Mountain Mining
Venture ("GMMV") for $15,000,000 and other consideration. Kennecott paid USE and
USECC $4,000,000 on signing, and committed to provide the GMMV up to $16,000,000
for payment of reimbursable costs incurred by USECC in developing the proposed
underground Jackpot Uranium Mine for production and in changing the status of
the Sweetwater Mill from standby to operational. The work to develop the
proposed Jackpot Mine and ready the Sweetwater Mill for operations will be
undertaken, prior to closing of the terms of the Acquisition Agreement scheduled
for July 31, 1998, by USECC, as lessee of all the GMMV mineral properties under
a Mineral Lease Agreement between the GMMV and USECC (the "Mineral Lease"), and
as an independent contractor under a Contract Services Agreement (the "Mill
Contract") between Kennecott (as manager of the GMMV) and USECC. Both the
Mineral Lease and the Mill Contract, as well as a Fourth Amendment to the GMMV
Mining Venture Agreement among Kennecott, USE and USECC (the "Fourth Amendment
to the GMMV Agreement"), were executed simultaneously with the Acquisition
Agreement.
The $16,000,000 being provided by Kennecott to the GMMV was advanced to
Kennecott by an affiliate, Kennecott Energy Company ("KEC") under a secured
recourse Promissory Note (the "Note") bearing interest at 10.5% per annum
starting April 1999 until paid in full. The Note is payable quarterly out of 20%
of cash flow from the GMMV properties, but not more than 50% of the earnings for
such quarter from the GMMV operations, before interest, income tax, depreciation
and amortization. However, the Note is payable (i) in full on June 23, 2010
regardless of cash flow and earnings of the GMMV, or (ii) sooner (on December
31, 2005) if an economically viable uranium mine has not been placed into
production by such date. The Note is secured by a first mortgage lien against
Kennecott's 50% interest in the GMMV pursuant to a Mortgage, Security Agreement,
Financing Statement and Assignment of Proceeds, Rents and Leases granted by
Kennecott to KEC (the "Mortgage"). USE and USECC will assume the Note, and the
assets of the GMMV will be subject to the Mortgage, at closing of the
Acquisition Agreement.
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Pursuant to the Mineral Lease and the Mill Contract of the Acquisition
Agreement, USECC is to expend funds to develop the proposed Jackpot Mine and
nearby Big Eagle Mine, and work with Kennecott in preparing the Sweetwater Mill
for renewed operations. Such work will be funded from the $16,000,000 being
provided to the GMMV by Kennecott. Under the Fourth Amendment to the GMMV
Agreement, Kennecott will be entitled to a credit against Kennecott's original
$50,000,000 commitment to fund the GMMV, in the amount of two dollars of credit
for each one dollar of such funds out of the $16,000,000 provided by Kennecott
to the GMMV, plus the $4,000,000 paid to USE and USECC on signing of the
Acquisition Agreement. It is anticipated that such credits will satisfy the
balance of Kennecott's initial funding commitment to acquire a 50% interest in
the GMMV.
Pursuant to the Fourth Amendment to the GMMV Agreement, Kennecott
initially advanced $1,000,000 to the GMMV, which the GMMV has advanced to USECC
pursuant to the Mineral Lease and the Mill Contract, to allow USECC to establish
a working capital account. On a monthly basis, USECC is to submit detailed
invoices for reimbursable costs, defined in the Mineral Lease and Mill Contract
to include USECC's labor and equipment costs (maintenance and rental),
environmental compliance costs, direct office costs of USECC staff incurred in
monitoring and invoicing project costs and expenditures and associated
engineering costs and expenditures, and an additional amount equal to 10% of all
the preceding costs and expenditures as an administrative charge (the same 10%
as previously allowed in the GMMV Agreement). USECC is permitted to charge the
GMMV rental expense for equipment owned by USECC. The reimbursable cost
allocations for each phase of the development of the Jackpot Mine and upgrade of
the Sweetwater Mill to operating status are set forth in budgets of the Mineral
Lease and Mill Contract. Also included in reimbursable costs will be the amounts
required to cover all reclamation activities that will result from operations
conducted on the mining properties pursuant to the Mill Contract and the Mineral
Lease (USE and USECC will be required to put such reclamation cost amounts aside
in a sinking fund to pay for the reclamation work when production commences).
Kennecott has agreed to provide funds to the GMMV each month in an
amount adequate to reimburse USECC for invoiced costs and restore the USECC
working account balance to $1,000,000. Payment by GMMV of the monthly invoiced
costs is subject to Kennecott's confirmation that such costs conform to the
Mineral Lease and Mill Contract budgets. Subject to and at the closing of the
Acquisition Agreement, Kennecott will advance to the GMMV cash equal to any
difference between (i) the $16,000,000 commitment and (ii) amounts advanced to
pay reimbursable costs and maintain the working capital account.
Also pursuant to the Mineral Lease, USECC is to pay the GMMV a monthly
lease fee of $3,363, starting July 1, 1997. Separately and pursuant to the
Mineral Lease, USE and USECC are required to pay all rental, leasehold, property
and other payments relating to the mining properties, and all utility and other
payments, taxes and assessments that may be assessed against such properties
during the term of the Mineral Lease.
Closing of the Acquisition Agreement is subject to USE and USECC
satisfying several conditions, including: (i) the acquiring entity (which may be
USE, USECC, or an entity formed by USE and USECC to acquire Kennecott's interest
in the GMMV) must have a market capitalization of at least $200,000,000; (ii)
the parties to the Acquisition Agreement must have received all authorizations,
consents, permits and approvals of government agencies required to transfer
Kennecott's interest in the GMMV to the acquiring entity; (iii) USE and USECC
shall have replaced, or caused the replacement of, approximately $25,000,000 of
reclamation bonds, in addition to other guarantees, indemnification and
suretyship agreements posted by Kennecott on behalf of the GMMV; and (iv) USE
and USECC, or the acquiring entity, must pay $15,000,000 in cash to Kennecott at
closing and assume all obligations and liabilities of
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Kennecott with respect to the GMMV (including repayment of the $16,000,000 Note
and the Mortgage) from and after the closing. Under very limited circumstances,
the scheduled closing date may be postponed to another date no later than
October 30, 1998. The parties to the Acquisition Agreement also executed a
mutual General Release with respect to any and all claims that they may have
with respect to any prior disputes concerning the GMMV, which General Release
would be delivered to all such parties at closing of the Acquisition Agreement.
Upon closing of the Acquisition Agreement, the Mineral Lease and the Mill
Contract will be terminated and USE, USECC or the acquiring entity will own
Kennecott's 50% of the GMMV, although its properties will remain subject to the
Mortgage until the Note is paid in full. The current 50% interest in GMMV held
by USE and USECC will not change when the Acquisition Agreement is closed.
If the Acquisition Agreement is not closed by December 1, 1997, then USE
and USECC (or an entity formed by them to acquire the GMMV interest owned by
Kennecott) are to provide to Kennecott a commitment letter from a recognized
national investment banking firm to complete an underwritten public offering of
the securities of USE (or an entity formed or introduced to acquire Kennecott's
GMMV interest (the "Acquiring Entity")), in amount sufficient to close the
Acquisition Agreement transactions. Such amount is estimated by USE to be
approximately $40,000,000, (for the $15,000,000 closing cash purchase price to
Kennecott, plus $25,000,000 to assume or cause the replacement of reclamation
bonds, guarantees, indemnification agreements and suretyship agreements related
to the GMMV properties and the Sweetwater Mill. Alternatively, USE, USECC or the
Acquiring Entity must provide evidence to Kennecott of a commitment letter from
a bank, other financial institution or industry entity to provide private or
joint venture financing in such approximate amount. Failure to provide evidence
of such financial commitment by December 1, 1997 would entitle Kennecott to
terminate the Acquisition Agreement, the Mineral Lease and the Mill Contract.
Subject to providing evidence of adequate financial resources to close
the Acquisition Agreement with funds from a public financing or otherwise, the
$4,000,000 signing bonus paid by Kennecott is nonrefundable.
If the Acquisition Agreement is not closed, USE and USECC, and
Kennecott, shall own their respective 50% interest in the GMMV, and Kennecott's
obligation to repay the $16,000,000 loaned by KEC shall remain Kennecott's
obligation, without any adverse effect on the 50% interest in the GMMV held by
USE and USECC. However, the Jackpot Mine development work and Sweetwater Mill
upgrade work funded by the $16,000,000 advance, will have benefitted all parties
to the GMMV.
PROPERTIES AND MINE PLAN. The 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.
The 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 a
38,000 and an 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.
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The Round Park (Jackpot) mining claims contain deposits of uranium which
have been estimated to contain 52,000,000 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 two
tunnels in 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 three miles
west of the Jackpot Mine site. As many as 250 workers will be required during
mining full 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 had agreed to fund the initial $50,000,000 in development
costs including reclamation costs. To May 31, 1997, such expenditures totaled
approximately $20,416,400. Additional costs would be funded by the $16,000,000
loan, operations and/or by cash advance by 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 have been
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
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required by the NRC. None of the GMMV future reclamation and closure costs are
reflected in Registrant's Consolidated Financial Statements (see Notes F and K
to USE Consolidated Financial Statements for fiscal year ended May 31, 1997).
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, USECC believes it is unlikely USECC 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 covered by the
letters of credit or other surety appear to be within the $24,330,000
reclamation bonds posted by 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 the 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 loan
the GMMV the first $8,000,000 of such expenditures. Any reimbursement for the
loan may only be recovered by UNOCAL from 20% of future cash flows from sale of
uranium concentrates processed through the Sweetwater 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 participating interests in the 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 balance of any development commitment as provided by the
Acquisition Agreement, after the credits provided by the Fourth Amendment to the
GMMV (see the "June 32, 1997 Acquisition Agreement with Kennecott above). 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 USECC
liability for contribution to mill cleanup costs cannot be predicted.
PERMITTING AND ACTIVITIES. In March 1993, the GMMV applied to the WDEQ
for a Permit to Mine the Round Park deposit through the Jackpot Mine. 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
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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 the GMMV to proceed with construction of mine surface
facilities, further underground mine development and eventual mining of the
Round Park (Jackpot) Deposit.
General activity increased at the Jackpot mine site during fiscal 1997
and to the date of this Report, in anticipation of increased uranium prices.
Some of the principle activities were: a major portion of the access/haulroad
from the Jackpot Mine to the Big Eagle Mine was widened to a 40 foot running
surface eliminating various curves to accommodate the GMMV's 100 ton haul
trucks; permits and approvals were obtained for construction of Jackpot
Reservoirs No. 2 and 3 and construction was started and completed except for
installing liners, and Jackpot Reservoir No. 1 was completed and is operational
(catch basin for sediment and runoff). The GMMV is in compliance with all permit
conditions. Significant progress is being made in preparing for and running the
double declines into the Round Park (Jackpot) deposit, pursuant to the
pre-development operations plan agreed to between USECC and Kennecott. Two
shifts are currently working underground with a third shift being assembled.
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 some three miles from the Jackpot declines, the
upgrading of existing roads, and the construction of new haul road segments to
transport 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 approximately 118 acres for mine site
development and approximately 171 acres for transportation corridor construction
and/or improvement. When uranium reserves have been depleted, the mine portals
will be plugged; the ground surface recontoured and reclaimed to blend with the
natural landscape; 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 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. Although this could result in a cost
savings to the GMMV, a new 40 acre tailings cell has been designed by an outside
engineering firm and is scheduled to be constructed.
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. The GMMV may need to
install venting at the mine site, 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 the earnings of USE and Crested
from environmental compliance expenditures by the GMMV, since the GMMV
operations will be accounted for by the equity method if the acquisition of
Kennecott's interest in the GMMV pursuant to the Acquisition Agreement
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does not close. GMMV's expenses for compliance with environmental laws (as well
as other matters) are not expected to materially affect the cash flow of USE and
Crested during the next two years. Out of Kennecott's initial $50,000,000
commitment, Kennecott has funded about $20,416,400 through May 31,
1997.Nevertheless, advances to the GMMV made pursuant to the Acquisition
Agreement will reduce Kennecott's development commitment by two dollars for each
dollar advanced pursuant to the Fourth Amendment to the GMMV Agreement.
PLATEAU'S SHOOTARING CANYON MILL
ACQUISITION OF PLATEAU RESOURCES, LIMITED ("PLATEAU"). In August 1993,
USE 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.
USE paid nominal cash consideration for the Plateau stock, but as
additional consideration, USE 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, 1997).
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 further 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").
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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, USE 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's 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.
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. 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 were performed and the source materials
license with the NRC was for standby operations only. 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 enabled Plateau to upgrade the source materials license to
operational status. Plateau applied to the NRC to convert the source materials
license from standby to operational and upon increasing the reclamation bond to
$6,700,000, the NRC issued the new license on May 2, 1997. Plateau has an
additional $1,600,000 of government securities available for further bonding
needs.
In fiscal 1997 and into fiscal 1998, in anticipation of resuming milling
operations, Plateau commenced a complete reactivation and rehabilitation program
at the Mill (updating the control systems and testing gauges, relining wooden
acid leach tanks, etc.)
TICABOO TOWNSITE
Plateau 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, 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. An amendment was entered into on April 1, 1997 on the Utah State
lease covering the Ticaboo townsite whereby the State deeded portions of the
Townsite to Canyon Homesteads, Inc. on a sliding scale basis. USE and Crested
plan to further develop the townsite, and have been seeking financial partners
for this purpose. Interim funding for limited improvements on the commercial
operations were provided by a private corporation controlled by family members
of the 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.". USE now operates all commercial facilities
including the motel, restaurant, convenience store, mobile home/RV park and boat
storage as the renovation of the nearby Shootaring Canyon uranium mill is
underway.
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YELLOW STONE FUELS CORP.
Yellow Stone Fuels Corp., hereafter ("YSFC") was organized on February
17, 1997 in Ontario, Canada. As of February 17, 1997, YSFC acquired all the
outstanding shares of Common Stock of Yellow Stone Fuels, Inc. (a Wyoming
corporation which was organized on June 3,1996), in exchange for YSFC issuing
the same number of shares of YSFC Stock to the former shareholders of Yellow
Stone Fuels, Inc. ("YFI"). YSFC and its wholly-owned subsidiary Yellow Stone
Fuels, Inc. will hereafter be referred to collectively as YSFC.
In order to concentrate the efforts of USECC on conventional uranium
mining using the Shootaring and Sweetwater Mills, USECC decided to take a
minority position in Yellow Stone Fuels, Inc. and not be directly involved in
properties believed suitable for the production of uranium through the in- situ
leach ("ISL") mining process. USECC will have first call on any uranium ore
bodies YSFC discovers which are amenable to conventional mining and milling and
YSFC will have a call on ore bodies discovered by USECC amenable to the ISL
process. In the ISL process, groundwater fortified with oxidizing agents is
pumped into the ore body, causing the uranium contained into the ore to
dissolve. The resulting solution is pumped to the surface where it is further
processed to a dried form of uranium which is shipped to conversion facilities
for eventual sale. Generally, the ISL process is more cost effective and
environmentally benign compared to conventional underground mining techniques.
In addition, less time may be required to bring an ISL mine into operation than
to permit and build a conventional mine.
As of May 31, 1997, YSFC had 10,495,000 shares of Common Stock issued
and outstanding, including 3,000,000 shares (28.5%) issued to USE and Crested.
Most of the funds used by YSFC have been provided by USECC under a $400,000 loan
facility. As part consideration for the loan, USE and Crested entered into a
Voting Trust Agreement having an initial term of 24 months with two principal
shareholders of YSFC, whereby USE and Crested will have voting control of more
than 50% of the outstanding shares of YSFC. See Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
majority of the remaining outstanding YSFC shares are owned by affiliates of USE
and Crested. See Part III, Item 13, "Certain Relationships and Related
Transactions."
In Wyoming, YSFC has staked and/or holds 304 unpatented mining claims
and has entered into three State leases covering a total of 9,280 acres located
in the Powder River Basin uranium district. The State leases have a 10 year term
expiring October 1, 2006; require annual rental of $1.00 per acre for five
years, then $2.00 for the second five years, or sooner upon the discovery of
commercial quantities of minerals; and a 5% gross royalty of the value of
uranium bearing ore mined from the leased properties is payable to the State of
Wyoming.
Also in Wyoming, the Peterson claim group includes 50 unpatented mining
claims covering approximately 1,000 acres in the southern part of the power
River Basin uranium district. In addition to owning the Peterson claim group,
YSFC has leased the surface rights to the mineral properties for five years, at
$4.00 per acre annual rent per year plus a production royalty of $0.50 per pound
of uranium concentrates (U3O8) sold at or for less than $22.00 per pound (the
royalty increases to $0.75 per pound for uranium sold at more than $30.00 per
pound). The Low claim group, covering 63 unpatented lode mining claims covering
approximately 1,260 acres, is also located in the southern part of the Powder
River Basin uranium district, approximately 20 miles northwest of the producing
Rio Algom's Smith Ranch Mine. The Low claims may be similar in geology and
hydrology to the Smith Ranch and Cameco's Highland ISL operations.
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In New Mexico, YSFC has staked and holds 39 unpatented mining claims and
has leased 8 patented mining claims. These properties in the aggregate cover
approximately 945 acres located in the Grants uranium region of New Mexico. The
8 unpatented mining claims (covering 165.44 acres) are held by a 5 year
renewable lease from Parador Mining Company, requiring $500 monthly rental
payments to Parador Mining Company, which has retained a 5% gross royalty on
revenues from uranium sold from the property. The Parador area was mined for up
to 600,000 pounds U3O8 at a grade of 0.24% by other companies in the 1970s. The
extent of further mineral resources on the properties is presently unknown.
The geological and geophysical data acquired with the Pioneer Nuclear,
Inc. ("PNI") library may assist YSFC in evaluating the viability of the various
uranium claims to in-situ processing. This library of information was assembled
in the 1970s by PNI in its uranium exploration program, and the library was
acquired from a person in exchange for shares of YSFC common stock.
As of the date of this Annual Report on Form 10-K, YSFC is negotiating
to acquire additional properties in Converse, Fremont and Sweetwater Counties,
Wyoming which in some instances will include certain tangible assets. However,
there are no contracts or agreements in principle for such acquisitions at this
report date.
YSFC will require additional funding to maintain its property
acquisition program, conduct the geological and engineering studies on
properties to evaluate their suitability to in-situ recovery methods, and to
build and operate in-situ recovery facilities on suitable properties. YSFC is
currently seeking additional funding, but there is no assurance that such
funding will be obtained.
In fiscal 1997, USE and USECC entered into several agreements with YSFC,
including a Milling Agreement through Plateau Resources. The Shootaring Canyon
mill facilities will be available to YSFC to transport uranium concentrate
slurry and loaded resin to the mill and process it into uranium concentrate
("yellowcake"), for which Plateau will be paid its direct costs plus 10%. Other
agreements include a Drill Rig Lease Agreement for YSFC to have access to USE
drilling rigs at the prevailing market rates; an Outsourcing and Lease Agreement
for assistance from USECC accounting and technical personnel on a cost plus 10%
basis and a sublease for 1,000 square feet of office space for $1,000 per month;
and a Ratification of Understanding by which USECC will offer to YSFC (with a
reserved royalty in amounts to be agreed on later) any uranium properties
amenable to in-situ production which USECC acquires or has the right to acquire.
In return, YSFC will offer to USECC ( with a reserve royalty in amounts to be
agreed on later) uranium properties amenable to conventional mining methods
which YSFC acquires or has the right to acquire. USECC also will make its
library of geological information and related materials available to YSFC . YSFC
also has a Storage Agreement with GMMV by which YSFC stores used low-level
contaminated mining equipment purchased from a third party at GMMV's Sweetwater
Mill; YSFC is responsible for any bonding and handling obligations for the
stored equipment, and pays GMMV nominal rent for the storage.
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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 between the partners of SMP. These disputes resulted in
arbitration/litigation and subsequent consensual arbitration from which an Order
and Award was issued on April 18, 1996. USE and Crested filed petitions for
confirmation of the Order and Award with the U.S. District Court of Colorado and
the Court has entered a Second Amended Judgment confirming the monetary and
equitable provisions of the Order and Award. 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.
USE 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 USECC received an undivided 50
percent interest. Each group provided one-half of $315,000 to purchase equipment
from Western Nuclear, Inc.; USE 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 as a result of the SMP arbitration/litigation.
PROPERTIES. SMP owns 80 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. Thirty-eight claims were
conveyed by PMC to SMP in August 1996, see below.
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
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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 had 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 SMP properties is owned USECC and was used
to remove natural soluble uranium from mine water. USE, 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. See Item 3,
Legal Proceedings Sheep Mountain Partners Arbitration/Litigation - Stipulated
Arbitration." Currently, USECC has a maintenance staff on site to care for and
maintain the mines and pump mine water to prevent flooding of the mines, which
could destroy equipment and the concrete lined vertical shafts accessing the
various levels of uranium mineralization.
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.
Nukem was 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 eight 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 at a future date). 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. Two of the base priced
contracts have been fulfilled and the third base-price escalated contract of
SMP, required delivery of 130,000 pounds of uranium concentrates in 1997 which
was made, completing that contract. The fourth contract calls for delivery of
750,000 lbs. U3O8 through 2001. 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 based on estimated prices at which a willing seller would
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.
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Through fiscal 1997, USECC 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 of the Arbitration Panel. 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 5,800,000 pounds of
U3O8 during calendar 1995 and produced approximately 6,300,000 pounds in
calendar 1996. Production in the U.S. for 1997 is estimated at 7,000,000 pounds.
In addition, there are 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 66,000,000 pounds of U3O8 during
calendar year 1996 and are expected to produce approximately 73,000,000 pounds
in calendar 1997. Several members of the Commonwealth of Independent States
("CIS"), also export uranium into the western markets although the amount of
such exports to the United States and European markets are currently limited.
Uranium is primarily used in nuclear reactors to heat water which drive
turbines and generators generating electricity. According to the Uranium
Institute based in London, England ("UI"), nuclear plants generated
approximately 17% of the world's electricity in 1996, up from less than 2% in
1970. According to the UI, through the year 2000, nuclear generating capacity is
expected to grow at 1 % per annum primarily as a result of new reactor
construction outside the United States and increased efficiencies of existing
reactors.
In 1996, 442 nuclear power plants were operating and 36 were under
construction worldwide, according to the International Atomic Energy Agency. The
plants combined to generate more than 23 trillion kilowatt hours of electricity
last year. Five plants totaling 5,717 megawatts - including Tennessee Valley
Authority's Watts Bar 1 - began commercial operation in 1996. Uranium
consumption by Western World commercial reactors has increased from about
60,000,000 pounds in 1981 to approximately 142,000,000 pounds in 1996.
SUPPLY AND DEMAND
From the early 1970s through 1980, the Western World uranium industry
was characterized by increasing uranium production fueled by overly optimistic
projections of nuclear power growth. From 1970 to 1985, production exceeded
consumption by approximately 500,000,000 pounds. By the end of 1985 enough
inventory had been amassed to fuel Western World reactor needs for over five
years. In response, sales of excess inventory followed and prices plummeted from
highs above $40 per pound in 1979 to below $8 per pound in 1992. As prices fell,
Western World production declined dramatically from a high of 115,000,000 pounds
in 1980 to a low of 57,000,000 pounds by 1994. Since 1985, consumption of
uranium in the Western World has exceeded Western World production by over
400,000,000 pounds. In 1995, consumption of uranium in the Western World was
129,000,000 pounds, nearly double the production of 66,000,000 pounds by Western
World producers. In 1996, Western World
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consumption rose to an estimated 142,000,000 pounds, while production increased
only to an estimated 74,000,000 pounds. Accordingly, by the end of 1995, excess
inventory levels in the Western World (inventory in excess of preferred levels)
had been reduced to less than two years of forward reactor requirements, and
excess inventories in the U.S. had been reduced to less than one year of
projected forward requirements. This trend continued in 1996 and 1997.
Countering the drawdown of Western World inventories and contributing
directly to the downturn of market prices was the importation, starting in 1989,
of uranium from the CIS republics, and to a lesser extent, from Eastern Europe
and mainland China. As the result of an anti-dumping suit in 1991 filed in the
U.S. ("CIS Anti-dumping Suit") against republics of the CIS, suspension
agreements were signed by six CIS republics (Russia, Ukraine, Kazakhstan,
Uzbekistan, Kyrgstan and Tajikistan) in October 1992, which applied price
related volume quotas to CIS uranium permitted to be imported into the U.S.
The Russian Suspension Agreement was amended in March 1994 allowing for
up to 43,000,000 pounds of Russian uranium to be imported into the U.S. over the
10 years beginning March 1994, but only if it is matched with an equal volume of
new U.S. production. Based on U.S. consumption for the 1994-2003 period (as
reported or projected by the Department of Energy), the matched volumes could
account for up to 18% of the supply to the U.S. market during this period.
In 1995, the Republics of Kazakhstan and Uzbekistan concluded
negotiations with the U.S. Department of Commerce to amend their respective
suspension agreements. Both amendments lowered initial prices relating to their
respective import quotas allowing imports to occur. Additionally, the amendments
require that uranium mined in those Republics and enriched in another country
for importation in the U.S. will count against their respective quotas. The
Uzbekistan amendment replaces the price-tied quota system with one based upon
U.S. production rates after October 1997. As U.S. rates increase, additional
imports from Uzbekistan are allowed.
Although these amendments to the suspension agreements may increase the
supply of uranium to the U.S. market, they provide increased predictability
concerning CIS imports into the U.S. Due to declining production levels in the
CIS republics, uranium from these sources has recently been difficult to obtain.
Consequently, the market impact of CIS primary production may be diminishing.
In January 1994, the U.S. and Russia entered into an agreement (the
Russian HEU Agreement") to convert highly enriched uranium ("HEU"), derived from
dismantling nuclear weapons to low enriched uranium ("LEU") suitable for use in
nuclear power plants. At a projected maximum conversion rate for HEU and LEU,
approximately 18,000,000 pounds of U3O8 will be available to Western World
markets.
In 1996, the U.S. Congress passed legislation in compliance with the
suspension agreements which allows the converted HEU material to be sold in the
U.S. marketplace at an annual rate not to exceed 2,000,000 pounds in 1998,
increasing gradually to 20,000,000 pounds in 2009. At this maximum rate, HEU
material could supply approximately 40% of annual U.S. reactor requirements
projected for 2009. However, the Russians may require much of the material for
its own internal use and the amounts which may be imported into the U.S. cannot
be predicted. In addition, an uncertain amount of HEU material is allowed to be
used in the U.S. for overfeeding of enrichment facilities and as a source of
Russian uranium for matching sales.
Industry analysts expect annual Western World consumption to be at
levels between 135,000,000 and 150,000,000 pounds U3O8 through 2001. The Company
estimates that between 30,000,000 and 40,000,000 pounds of this demand could be
filled by a combination of government stockpiles (including converted Russian
and U.S. HEU) and imports from CIS republics and former Eastern Bloc countries.
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<PAGE>
To achieve market equilibrium by 2001 primary production in the Western World
will need to supply between 95,000,000 and 120,000,000 pounds U3O8 on an annual
basis subject to some adjustment for any remaining inventory drawdown and
limited uranium reprocessing. Production from existing facilities in the Western
World, however, is projected to decline from current levels to approximately
57,000,000 pounds U3O8 by 2001 as reserves are depleted. New production
therefore will have to be brought on line to fill a potential annual gap of
between 38,000,000 and 63,000,000 pounds U3O8. While current price levels may
sustain 1996 production levels, USECC believes that higher prices will be needed
to support the required investment in new higher cost production as lower cost
production reserves are depleted.
1996 was also a transition year in the industry as the spot price for
U3O8 concentrates rose to a high of $16.60 per pound in July 1996 following a
surge in spot buying activity. Since then the spot price has declined to $10.30
per pound. And, while the spot price has eroded to 1995 levels, USECC believes
that it is only a reflection of a near term equilibrium of supply and demand
that was fueled by utilities exercising option flexibilities of up to an
additional 50% of contracted volumes of material as the spot price climbed
during 1996. On the contrary, utilities have also likely exercised downward
flexibilities of up to 50% of contracted volumes as the spot price has declined
to levels below contracted prices and are planning to buy materials at a lower
price.
Overall, USECC believes that adequate supply of U3O8 material to meet
firm demand cannot be sustained at spot price levels below $15.00 per pound.
And, while production remains at levels just above 50% of consumption in the
Western World, existing and planned production will not sufficiently meet supply
either, even if new production comes on stream as planned.
In the near term, USECC believes that the spot price for U3O8 will rise
to mid teen levels and remain there for a period before trending upwards to the
low $20s for a sustained period of time. If there is any disruption in HEU
supply or new planned capacity, USE believes the price will increase to much
higher levels.
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").
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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 16.60 13.00
1997* 14.80 10.30
* Through September 1, 1997.
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.
GOLD
LINCOLN PROJECT (CALIFORNIA)
SUTTER GOLD MINING COMPANY. In fiscal 1991, USE acquired an interest in
the Lincoln Project (including the underground Lincoln Mine and the 2,800 foot
Stringbean Alley decline) in the Mother Lode Mining District of Amador County,
California, held by 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, which is a subsidiary of Sutter Gold Mining Company,
a Wyoming corporation ("SGMC").
In fiscal 1997, SGMC completed private financings totalling a net of
$7,115,100 ($1,271,600 through a private placement conducted in the United
States by RAF Financial Corporation, and $5,843,500 through a private placement
conducted in Toronto, Ontario, Canada by C.M. Oliver & Company Limited). The net
proceeds of $6,411,816 from these financings (after deduction of commissions and
offering costs) are being applied to pre-production mine development, mill
design, and property holding and acquisition cost. SGMC anticipates production
mining will commence in mid- calendar 1998 and that by that time, construction
of a 500 ton per day gold mill will have been completed. Additional financing
will be sought in 1998 to complete mill construction and start production
mining.
As of the date of this Annual Report on Form 10-K, SGMC is preparing to
apply for listing on the Toronto Stock Exchange. SGMC does not have any class of
its securities registered with the Securities and Exchange Commission, and none
of its securities are traded in the United States.
After completion of the two private financings, and taking into account
a restructuring of the ownership of USE and Crested in SGMC (and additional
issue of 75,000 shares to settle a dispute with Amador United, see below), USE
and Crested each own the following securities of SGMC:
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(a) 30.7% and 3.2% of the outstanding shares of Common Stock which would
be reduced to 23.5% and 2.5%, respectively, in the event outstanding warrants
held by the Canadian investors to purchase 1,454,800 more shares of Common Stock
are exercised at Cdn$6.00 per share 18 months from the date of closing of the
Offering and the outstanding warrants held by C.M. Oliver to purchase 145,480
more shares of Common Stock are exercised at Cdn$5.50 per share, before May 13,
1999. The preceding percentages of SGMC Common Stock do not reflect 345,200
warrants that may be sold in the Offering or shares that may be acquired by USE
and Crested pursuant to the USECC $10,000,000 Contingent Stock Purchase Warrant
(described below) issued as consideration for the voluntary reductions in the
ownership of SGMC shares by USE and Crested. One reorganization of the capital
structure was required by RAF Financial Corporation in connection with its
private placement of SGMC shares, and the other was required by C.M. Oliver &
Company Limited in the Canadian private placement.
(b) A $10,000,000 Contingent Stock Purchase Warrant (the "USECC
Warrant") was issued to USE and Crested in connection with the restructuring of
SGMC. The USECC Warrant is owned 88.9% by USE and 11.1% by Crested. The USECC
Warrant provides that for each ounce of gold over 300,000 ounces added to the
proven and probable category of SGMC's reserves (up to a maximum of 400,000
additional ounces), using a cut-off grade of 0.10 ounces of gold per ton (at
minimum vein thickness of 4 feet), USE and Crested will be entitled to acquire
additional shares of Common Stock from SGMC (without paying additional
consideration). The number of additional shares issuable for each new ounce of
gold reserves will be determined by dividing US$25 by the greater of $5.00 or
the weighted average closing price of the Common Stock for the 20 trading days
before exercise of the USECC Warrant. The USECC Warrant is to be exercised
semi-annually. However, as an alternative to exercise of the USECC Warrant, SGMC
has the right to pay USE and Crested US$25 in cash for each new ounce of gold
(payable out of a maximum of 60% of net cash-flow from SGMC's mining
operations). Additions to reserves will be determined by an independent
geologist agreed upon by the parties.
In fiscal 1997, SGMC issued 75,000 shares of Common Stock to Amador
United Gold Mines to settle certain disputes between such company and SGMC, USE
and Crested (see "Properties" below). In addition, SGMC bought about one-third
of the outstanding shares of Keystone Mining Company owned by The Salvation
Army. The Keystone Mining Company owns property in the Lincoln Project leased to
SGMC.
Effective June 1, 1996, SGMC entered into a Management Agreement (dated
as of May 22, 1996) with USE under which USECC provides administrative staff and
services to SGMC. USECC is reimbursed for actual costs incurred, plus an extra
10% during the exploration and development phases; 2% during the construction
phase; and 2.5% during the mining phase (such 2.5% charge to be replaced with a
fixed sum which with parties will negotiate at the end of two years starting
when the mining phase begins). The Management Agreement replaces a prior
agreement by which USE provided administrative services to SGMC.
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 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.
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On October 1, 1996, SGMC entered into three letter agreements (the
"Lincoln Letter Agreements") with the property owners of 185 acres ("185 Acre
Property") on the west side of California State Highway 49 ("Hwy 49") and 32.58
acres ("32 Acre Property") of minerals which include 20.5 acres of surface on
the east side of Hwy 49 adjacent to the Stringbean Decline. The 185 Acre
Property is the proposed new location for the Surface Fill Unit and the 32 Acre
Property provides the land necessary for access and utility easements to Hwy 49.
Formal agreements have been submitted for execution but are awaiting approval of
the probate court of an estate of a deceased who owned an interest in the
properties.
The 185 Acre Property, which includes the surface and mineral rights, is
being purchased for $2,000 per acre (or $370,000) plus a 2% net smelter royalty
on any precious metals produced from this property. SGMC also agreed to purchase
for $185,000 the rights to the certified Environmental Impact Report ("EIR") on
the 185 Acre Property. The EIR saves SGMC approximately six to nine months of
permitting time. Payments for the 185 Acre Property and the EIR are monthly with
the final payments to be made before the construction of a surface fill unit for
the property (the "Surface Fill Unit"). The purchase of the 185 Acre Property
and EIR is contingent on SGMC obtaining an amendment to the Conditional USE
Permit to allow the placement of processed ore in to the Surface Fill Unit on
this property.
The transaction contemplated with respect to the 32 Acre property
contains two separate components. The first is the purchase of the road access
and utility easements and the second is a lease of the mineral rights on this
property. The purchase price of the easements is $15,000 which is to be made in
three equal payments. SGMC is obligated to spend up to $15,000 to quiet title
both the surface and mineral rights. Upon successful quiet title, SGMC is
obligated to complete a two year exploration program of mapping and core
drilling of at least 1,000 feet or in lieu of drilling make a $5,000 payment. If
an ore reserve can be developed on the 32 Acre property (in SGMC's sole
judgment) then SGMC will enter into a lease with the owners and pay up to a 4%
net smelter royalty on minerals extracted from the 32 Acre Property with a
minimum annual payment of $2,500 tied to the Gross Domestic Product Implicit
Price Index ("GDPIP") (base year shall be the year the quiet title on the 32
Acre property is obtained). Lease payments will be offset by the earned
royalties in excess of $15,000 escalated by the GDPIP.
Surface and mineral rights total holding costs will be approximately
$225,000 from April 1, 1997 through May 31, 1998, including $45,000 for payments
on two parcels (9.1 acres) bought in 1994; an estimated $30,000 for one-time
costs to acquire surface easements on the 32 Acre property to access the mill
site from California State Highway 49; and property taxes of approximately
$35,000 for the year ended 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. Estimated acquisition costs for the 185 Acre Property and the EIR on
the 185 Acre Property will be approximately $600,000.
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
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Project properties. In fiscal 1997, Amador United sold all of its rights in the
Lincoln Project to SGMC, in consideration of SGMC issuing 75,000 shares of
Common Stock to Amador United.
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 equal to 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.
Through May 31, 1997, there has been an estimated $20,000,000 of
spending in the Lincoln Project by Meridian, USECC Gold and their predecessors
to acquire the Lincoln Project and for mine development, mining and processing
bulk samples of mineralization, exploration, feasibility studies, permitting
costs, holding costs, and related general and administrative costs. The amount
of such expenditures during the 1997 fiscal year was approximately $572,700
($637,300 in 1996). Certain of the expenditures have been expensed and the rest
have been capitalized as assets.
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. Historical data (underground maps and production records) from
historic (now closed) mines within the Lincoln Project boundaries indicate
certain areas of those mines were not "mined out", such that additional
mineralized resources may exist on the property.
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.
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PROPOSED MINE PLAN
General. SGMC is evaluating different mine plans for properties within
the Lincoln Project. The mine plan summarized below is allowed by the CUP.
Different plans will require an amendment to the CUP, which may add several
months to the time required to obtain final approvals to commence operations on
the properties affected. It should be noted that the mine workings actually
developed may vary substantially from the plan adopted, depending on the
different conditions and grades of mineralization that are encountered.
SGMC proposes to mine the Lincoln and Comet Zones initially by access
through the existing Stringbean Alley decline. Production will be by overhand
cut-and-fill and open sub-level stoping techniques. Screened tailings from the
mill's flotation circuit (support fill) will be used to back fill the stopes,
which will stabilize the hanging and foot wall vein rocks, and greatly reduce
the volume of processed ore going into the Surface Fill Unit.
Mining (ore extraction) is anticipated to start by mid-1998, at a rate
increasing up to 500 tons per day ("tpd") during the first six months of mining
operations. Ore initially will be taken to surface with ore trucks through the
existing Stringbean Alley decline. A new underground level is planned to be
driven at 1,000 feet above sea level, (approximately 120 feet below surface)
during the next six months. Mining will coincide with development of additional
stopes and may allow an increase in mine production up to 1,00 tpd in
approximately the third year of operation. After the first 18 months of
operations, which is a condition in the Conditional Use Permit, it is
anticipated that the Lincoln decline connecting the Stringbean Alley decline and
the surface of the approved mill site will have been completed, running
underground from near underneath the location of the mill site to the mine's
1,000-foot level. The Lincoln decline would run for 1,850 feet at an inclination
of minus 19% (cross section 12 feet by 12 feet), and will be used for access of
personnel and supplies to the underground workings as well as for ore haulage up
the decline by conveyor thus eliminating ore haulage on the surface from the
portal of the mine to the mill.
SGMC has applied to amend the CUP to relocate the mill to eliminate the
need to drive the Lincoln decline and to minimize haulage to the mill and other
operating costs. It is anticipated that the land acquisition costs for such
relocation would be significantly less than the added capital costs and
operating costs to drive and operate the Lincoln decline. However, such
application has not yet been approved.
Pre-Production Development. Current access to the mine is through the
Stringbean Alley decline, the portal of which is 1,183 feet above sea level
leading to the bottom of the decline at 835 feet above sea level. This decline
was driven to access the Lincoln and Comet Zones, both of which were originally
core drilled from the surface, with the Comet Zone thereafter core drilled from
underground. Raises have been started in the "M" vein of the Comet Zone section
on 200-foot centers to establish stoping areas to access ore. The raises will
provide access, ventilation, fill access and escape ways for initial stopes.
Further crosscuts will be driven for more stopes as the Stringbean Alley decline
is extended and levels driven out horizontally.
Underground mine water seepage into the Stringbean Alley decline is
approximately 5 to 15 gallons per minute, depending on the season. Accumulated
water in the decline is now being pumped through a treatment plant located
underground in the Stringbean Alley decline. The plant removes arsenic and other
naturally occurring minerals, and the treated water is discharged by spray
evaporation at the surface. This plant will continue treating mine seepage water
as the mine goes into production. The treated water not used underground in
operations will be pumped to the surface for mill operations as needed.
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Production. All veins will be drifted on the first floor above the
crosscuts, which will serve as the bottom floor of the stopes. Raises will be
driven to the level above for ventilation and access for fill. Initially, in the
Comet Zone, these raises will be driven on 200-foot centers and, assuming
continuity of ore, will be two steps, one on either side of the raise. Ore will
be mined out of stopes with the overhand cut and fill open sub-level stoping
methods, with each layer of stope filled back in with mill tailings which have
been recycled from the surface mill facility. Broken ore will be loaded onto
15-ton underground trucks and hauled over to the underground crushing station,
then either transported to the surface via truck up the Stringbean Alley decline
or, if the Lincoln decline is driven, via the ore conveyor belt.
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.
MILL PLAN
General. The proposed mill process essentially involves three stages:
first, wet grinding of the ore into fine particles in a semi-autogenous grinder
("SAG") mill, with the resulting finely-milled ore run through a gravity process
to remove free particles of gold through gravity; second, ore containing gold
which was not captured in the first gravity process will be fed to a ball mill
for more grinding. The resulting finely-ground material is run through a second
gravity recovery circuit into flotation cells for mixing with non-toxic
chemicals and water to further remove gold from the ore (referred to as the
flotation stage); and third, processing the flotation concentrate with dilute
sodium cyanide to chemically remove most of the remaining gold. The mill is
designed to produce three gold-bearing products: free gold, a high-grade gravity
concentrate, and a Merrill-Crowe precipitate. All three will be smelted to a
dore bullion for shipment to a precious metal refinery. SGMC is also considering
selling the flotation concentrate rather than installing a Merrill-Crowe circuit
to precipitate gold. An economic analysis of this alternative is being completed
by SGMC.
In fiscal 1992, SGMC's predecessors mined 8,000 tons of material,
including waste rock and low grade mineralization, out of drifts and raises off
the Stringbean Alley decline, which were processed through a nearby mill in a
bulk sampling program to test mining techniques and mill recoveries. Milling
results indicated at least 94% of the gold in the ore should be recoverable with
a combination of gravity, flotation and cyanidation milling circuits.
Approximately 1,400 ounces of gold were recovered in this program. PAH believes
the mill recovery rate should be between 93% and 95% using the proposed gravity,
flotation and cyanidation milling circuits. In its prefeasibility study, PAH
used a 90% mill recovery rate because in its study, the mill was designed to
recover gold in only a single stage gravity circuit. Since the PAH
prefeasibility study, Lookewood Greene Engineers, Inc. of Dallas, Texas has
designed a new mill circuit to recover 95% of the gold.
The central mill building (exclusive of attached lab and other support
facilities) will cover up to approximately 20,000 square feet. If warranted,
mill capacity may be increased beyond 500 tpd in the second year of operations,
since the CUP allows for up to 1,000 tpd mining and milling operations.
Possible Alternative Mill and Waste Management Sites. SGMC presently is
evaluating a possible relocation of the waste management unit (or Surface Fill
Unit) site and the mill site. Although this relocation would require the
purchase of additional properties, and an amendment to the CUP, management of
SGMC believes the cost will be more than offset and would be recovered in
approximately five years by dropping the land surface leases for which the waste
management sit is currently approved. Net capital savings could be significant
if the new approach is adopted. The proposed new mill site also is anticipated
to significantly reduce operating costs through reductions in hauling distance;
elimination of the need for constructing the Lincoln decline; and the need to
build large dams, and the hauling costs of importing clay for pond liners.
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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 by Cyprus
Minerals Company and was renamed Cyprus Amax Minerals Company in November 1993)
delineated a deposit of molybdenum containing approximately 146,000,000 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. 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. USE and Crested have asserted that the acquisition of AMAX by
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 USE and Crested are considering their 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. In fiscal
1997, $207,300 was received by USECC from advance royalty payments.
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 AMAX was
acquired by Cyprus.
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Worldwide demand for molybdic oxide in calendar 1996 was reported at
approximately 230,000,000 pounds, its highest level ever. Production for that
period was about 225,000,000 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 1998.
Molybdenum prices on the open spot market increased substantially, from
$3.35 per pound of technical grade molybdic oxide (the principal product) in
September 1994, to $15.50 - $17.50 per pound in February 1995. However, by May
31, 1996, prices declined to $3.00 - $3.35 per pound but are in the $4.00 to
$4.40 per pound range in September 1997.
PARADOR MINING (NEVADA)
USE 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.).
USE 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
Parador, USE and Crested have no right, title or interest in the adjacent BGBI
claims. Parador, USE and Crested filed an appeal of this ruling as erroneous as
a matter of law but the appellate court dismissed the appeal as being premature.
The remaining issues have not been considered or 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
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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 (see below).
Energx (and NuGas) drilled five more exploratory wells during the fall of 1996.
All five of these wells were dry holes. All eight dry holes were funded by NuGas
in accordance with the provisions of the Agreement. Due to the fact that all
eight holes were dry, NuGas has no further obligations to drill under the
Agreement. Since the fall of 1996 there has been no other exploration or
drilling activities performed by Energx or NuGas under this Agreement.
Reclamation of the dry hole bores began in 1997. Energx may terminate or farmout
the Fort Peck Gas Project if further exploration work does not appear to be
warranted.
NUGAS RESOURCES (U.S.) INC. AGREEMENT. By the Joint Venture Agreement
("JVA") with Energx dated July 18, 1994, NuGas was 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 was extended to July
1, 1997, to earn a one-half interest in Energx' rights under the Fort Peck
Shallow Gas Agreement.
NuGas 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 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.
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 in fiscal
1996.
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
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future operations by private financing and industry participation. However,
equity financing as well as industry participation of natural and coalbed
methane gas projects may be difficult to obtain. Accordingly, in fiscal 1998
Energx will continue to monitor its Fort Peck positions to evaluate whether to
continue to seek to find gas on the tribal lands.
COMMERCIAL OPERATIONS
BRUNTON.
On February 16, 1996, USE 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 USE
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 USE'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 USE 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 (promissory note) by Silva to
pay USE $1,000,000 in three annual installments of $333,333 each, 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. The profits payment for the
period February 1, 1996 through April 30, 1997 of $292,600 was received after
May 31, 1997. 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 USE, 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
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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, USE paid Brunton $171,685 for product purchases and
accrued rentals on mining equipment owned by Brunton. The equipment was
transferred to USE at closing and the USE paid off $273,000 in bank debt
previously incurred by Brunton in connection with a loan purchase the equipment
from USE.
The sale eliminated Brunton's manufacturing and/or marketing of
professional and recreational outdoor products from the commercial segment of
USE's business for fiscal 1997 and thereafter, 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). For fiscal 1997, the inability to include Brunton's operations
with USE's other operating revenues has increased the operating losses for USE.
However, USE hopes to develop other profitable businesses, such as Plateau's
uranium business or FNG's construction business, to replace the profits of
Brunton. See Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" at May
31, 1997.
REAL ESTATE AND OTHER COMMERCIAL OPERATIONS
USE 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 services 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."
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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, USE and Crested sold 9 and 19 lots at Jeffrey City
for an aggregate of $21,150 and $46,000 during fiscal 1997 and 1996,
respectively.
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 carried interest at 7.5%
per annum.
The second option covered 472.5 acres of ranch land, owned by Crested,
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. At closing, 22.19 acres were deeded to Pangolin; different parcels of
the remaining acreage secured the notes, and were to 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) required annual payments of accrued
interest: the larger note accrued 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).
In fiscal 1997, USE and Crested agreed with Pangolin, and entities
affiliated with Pangolin, to restructure the remaining obligations of Pangolin
and entities affiliated with Pangolin, with respect to the land parcels in and
near Gunnison, Colorado (which had been covered by the original two purchase
options). Under the restructuring, Contour Development Company LLC (a Colorado
limited liability company, hereafter "Contour") gave USE and Crested two
recourse, secured promissory notes: the first
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note is for $454,894 of principal, due January 26, 1998, the second note is for
$872,508 of principal. The notes are secured by Contour's 73% interest in
Tenderfoot Properties LLC ( a Colorado limited liability company affiliated with
Contour, hereafter "Tenderfoot"). USE and Crested conveyed a key lot in the
Gunnison parcel to Tenderfoot, upon which Contour and Tenderfoot were to
construct an apartment building with HUD construction loan financing to be
obtained by Contour and Tenderfoot. USE and Crested had intended the
restructuring to result in a faster recovery by USE and Crested of their
investments in the land, than would have been realized under the terms of the
original Pangolin obligations.
Although the initial payments on the two new notes were paid when due in
January 1997, thereafter, on May 30, 1997, Contour defaulted in making a payment
to Crested of $164,439 (principal of $128,138 plus accrued interest of $36,301
at 8.39% per year from December 1, 1996). As of the filing date of this Annual
Report on Form 10-K, USE and Crested are re-evaluating all of the circumstances
of the negotiations which led to the restructuring in late calendar 1996,
including representations made to USE and Crested by affiliates of Pangolin and
Contour regarding the value of the Tenderfoot interests owned by Contour which
secure the new notes, Contour's intentions of paying the new notes when due
according to their terms, and other matters. As of the date of this Report, USE
and Crested have not determined what types of legal remedies will be pursued to
enforce their rights and recover the value of their investments in the land and
the original transaction with Pangolin.
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 land slide area stabilization. As of May 31, 1997,
change orders by the City of Lead and others had increased the contract to
$3,864,694. This contract was completed in fiscal 1997 for a profit of
$1,125,331.
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 consisted 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 included four inlets. As of May 31, 1997 FNG had completed 100% of the
contract, billing $618,270 and having received payment for $618,270. The
contract as of May 31, 1997, had resulted in a loss of $48,426 to FNG, however,
a claim for 172,977 was submitted and is still in process. If approved in fiscal
1998, the claim would result in a gross profit of $124,551 to FNG.
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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.
The Company's management believes it is currently 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
As of September 5, 1997, USE had 110 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.
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
35
<PAGE>
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.
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
counterclaims 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
36
<PAGE>
Agreement and various related agreements. Plaintiffs also claimed CRIC and Nukem
have 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 alleged 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 an answer 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 USE
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 USE 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
USE 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 USE 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 the Colorado
State Court proceeding described below), that any party may assert against the
other. All pre-December 21, 1988 claims, disputes and controversies pending
before the U.S. District Court have been stayed by stipulation between the
parties, until the Panel enters an order and award in the arbitration
proceeding.
In connection with agreeing to proceed to arbitration as stated above,
USE and Crested affirmed the Sheep Mountain Partners partnership, and proceeded
on common law damages and other claims in the arbitration. Approximately
$18,000,000 cash, comprising part of the damages claimed by plaintiffs, was
placed in escrow by agreement of the parties pending resolution of the disputes.
37
<PAGE>
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 its claims, USECC sought damages of approximately
$258,000,000 from Nukem and CRIC, which amount USECC requested be trebled under
the Racketeer Influenced and Corrupt Organizations Act ("RICO") and similar
state law provisions.
On April 18, 1996, the Arbitration Panel entered an Order and Award (the
"Order"). The Panel found generally in favor of USE and Crested on certain
claims made by USE 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 USE and Crested on certain other claims.
USE and Crested were awarded monetary damages of approximately
$7,800,000 with interest, which amount is after deduction of monetary damages
which the Panel awarded in favor of Nukem/CRIC and against USE and Crested. An
additional amount of approximately $4,300,000 was awarded by the Panel to USE
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.
The Panel ordered that one utility supply contract for 980,000 pounds of
uranium oxide held by Nukem/CRIC belonged to SMP, and ordered such contract
assigned to SMP. The contract expires in 2000.
The fraud and RICO claims of USE and Crested against Nukem and CRIC were
dismissed.
The timing and assurance of payment by Nukem/CRIC to USE and Crested of
the $7,400,000 monetary damages with interest is presently uncertain. On April
30, 1996 Nukem/CRIC filed with the Panel two motions (the "Nukem Motions")
requesting correction of the Order, claiming to have discovered errors and
inconsistencies in two of the 36 claims addressed in the Order that they allege
improperly increased the damages awarded to USE and Crested by an aggregate
amount exceeding $16,000,000.
On May 15, 1996, USE and Crested filed the Order (under seal with
respect to certain portions containing commercially sensitive information) with
the United States District Court for the District of Colorado (the "Court") and
a petition for confirmation of the Order. At a hearing on May 24, 1996 the Court
remanded the Order to the Panel for limited review of the Nukem Motions, without
taking further evidence. The petition for confirmation of the Order and motions
filed by USE and Crested for dissolution of SMP, for the appointment of a
receiver to oversee the obligations of SMP to make delivery of uranium
concentrates to utilities and supervise the formal dissolution of SMP, and for
an order directing distribution of the escrowed proceeds, were stayed by the
Court pending a ruling by the Panel on the Nukem Motions.
USE and Crested filed their opposition to the Nukem Motions with the
Panel on June 14, 1996. On July 3, 1996, the Panel entered an Order in
response to the Nukem motions and reaffirmed its April
18, 1996 Order and Award.
After a series of motions by the parties, the District Court entered
orders and a judgment on November 5, 1996 confirming the Panel's Order and
Award. In November 1996, USECC received the additional $4,367,000 awarded by the
Arbitration Panel out of SMP escrowed funds and its bank account per the Court's
November 5, 1996 Judgment. Thereafter, Nukem filed a motion to modify and/or
vacate portions of the Judgment and USECC filed a motion to modify one paragraph
of the Judgment deducting
38
<PAGE>
$265,213 from the amounts Nukem and CRIC claimed to have advanced to purchase
uranium for SMP. In December 1996, Nukem and CRIC filed a notice with the 10th
Circuit Court of Appeals ("CCA") appealing the Court's November 5, 1996
Judgment. However, the 10th CCA held that appeal in abeyance pending the
issuance of the U. S. District Court's final judgment.
Following the hearing on USECC's motion to correct the Court's November
5, 1996 Order and Judgment and motions to enter a final judgment, on March 7,
1997, Judge Lewis T. Babcock of the U. S. District Court of Colorado entered an
"Order for Entry of Amended Judgment as Final," and an Amended Judgment as of
March 7, 1997. The Amended Judgment further confirmed the Order and Award of the
Panel but did not include equitable portion of the Award in favor of SMP.
In the March 7, 1997 Amended Judgment, which included rulings on some 12
monetary claims of the parties, Judge Babcock ordered Nukem to pay USECC a net
of approximately $8,465,000 as monetary damages. The Amended Judgment did not
contain the equitable relief granted in the Panel's Order and Award, so USE and
Crested filed another motion with the U.S. District Court to correct clerical
omissions. Nukem/CRIC opposed the motion but on June 30, 1997, the Court entered
its Second Amended Judgment ordering Nukem to assign the PSE&G contract to SMP
and impressing a constructive trust in favor of SMP on Nukem's rights to
purchase CIS uranium, the uranium acquired pursuant to those rights and the
profits therefrom. The District court also stayed USECC's right to execute on
the judgment against Nukem/CRIC when Nukem/CRIC posted a supersedeas bond in the
amount of $8,613,600. Thereafter, Nukem/CRIC filed a motion for clarification
and/or limited remand of the Second Amended Judgment. On August 13, 1997, the
U.S. District Court denied the motion so Nukem and CRIC now have until September
12, 1997 to file a notice of appeal with the Tenth Circuit Court of Appeals of
the June 30, 1997 Second Amended Judgment.
COLORADO STATE COURT PROCEEDING. On September 16, 1991, USE and Crested
filed Civil Action No. 91CV7082 in Denver District Court against SMP, seeking
reimbursement of $85,000 per month from the spring of 1991 for maintaining the
SMP underground uranium mines at Crooks Gap on a standby basis. On behalf of
SMP, CRIC filed an answer, affirmative defenses and a counterclaim against
plaintiffs. Plaintiffs filed a motion for summary judgment; the court denied the
motion and stayed all proceedings pending resolution of the Federal proceeding,
which in turn have been stayed through arbitration (see "Stipulated Arbitration"
above).
On July 17, 1997, USECC filed a lien on Nukem/CRIC's interest in the
mining claims subject of the SMP partnership for $523,553 being the standby
costs from March 31, 1996 to June 1, 1997 and $35,620 per month thereafter.
These are the amounts of Nukem/CRIC's share of the monies SMP owes USECC for the
expenses of care and maintenances of SMP's properties in Wyoming. USECC have six
months within which to foreclose the lien through a civil lawsuit.
BGBI LITIGATION
USE and Crested are defendants and counter- or cross-claimants in
certain litigation in the District Court of the Fifth Judicial District of Nye
County, Nevada, brought by Bond Gold Bullfrog Inc. ("BGBI") on July 30, 1991.
BGBI (now known as Barrick Bullfrog, Inc.) is an affiliate of Barrick Corp., a
large international gold producer headquartered in Toronto, Canada. The
litigation primarily concerns 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.
39
<PAGE>
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. USE, 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, USE 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. Parador, USE and Crested filed an appeal of the Court's
ruling as erroneous as a matter of law and the Supreme Court of Nevada dismissed
the appeal as premature. The partial trial did not address any of the 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. The parties
intend to seek permission of the trial court to again appeal and/or try the
remaining issues in the case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
40
<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 46, has been Controller and Chief Accounting
Officer for both USE and Crested for more than the past five years. Mr. Lorimer
also has been Chief Financial Officer for both these companies since May 25,
1991, 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 68, has been General Counsel for USE and Crested
for more than the past five years. He also has served as Secretary and a
director of Crested, and Assistant Secretary of USE. His positions of General
Counsel to, and as officers of the companies, are at the will of each board of
directors. There are no understandings between Mr. Svilar and any other person
pursuant to which he was named as officer or General Counsel. He has no family
relationships with any of the other executive officers or directors of USE or
Crested, except his nephew Nick Bebout is a USE director. During the past five
years, Mr. Svilar has not been involved in any Reg. S-K Item 401(f) proceeding.
MAX T. EVANS, age 72, has been Secretary for USE and President of
Crested for more than the past five years. Mr. Evans had been a director of USE
for more than the past five years, prior to April 17, 1997. He serves at the
will of each board of directors. There are no understandings between Mr. Evans
and any other person pursuant to which he was named as an officer. He has no
family relationships with any of the other executive officers or directors of
USE or Crested. During the past five years, Mr. Evans has not been involved in
any Reg. S-K Item 401(f) proceeding.
PART II
ITEM 5. 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, 1997
First quarter ended 8/31/96 $22.00 $14.50
Second quarter ended 11/30/96 19.00 11.94
Third quarter ended 2/28/97 11.25 9.38
Fourth quarter ended 5/31/97 13.00 5.75
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
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<PAGE>
(b) Holders
(1) At September 4, 1997, the closing bid price was $8.38 per share and there
were approximately 710 shareholders of record for Common Stock.
(2) Not applicable.
(c) USE has not paid any cash dividends with respect to its common stock. There
are no contractual restrictions on USE's present or future ability to pay cash
dividends, however, USE intends to retain any earnings in the near future for
operations.
(d) During the year ended May 31, 1997, USE issued an aggregate of 8,452 shares
of Common Stock to three executive officers, as compensation for services. No
underwriter was involved in the transaction. All shares were issued as
restricted securities, in reliance on Sec. 4(2) exemption from registration
under the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
MAY 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current assets $ 4,400,900 $ 2,912,400 $ 3,390,100 $ 3,866,600 $ 1,650,300
Current liabilities 1,393,900 2,031,200 3,368,200 1,291,700 1,592,100
Working capital 3,007,000 881,200 21,900 2,574,900 58,200
Total assets 30,387,100 34,793,300 33,384,500 33,090,300 24,037,200
Long-term obligations(1) 14,377,200 15,020,700 15,769,600 16,612,500 2,900,000
Shareholders' equity 12,723,600 14,617,000 12,168,400 12,559,100 15,063,200
</TABLE>
(1)Includes $8,751,800, $3,978,800, $3,951,800, $3,951,800 and $1,695,600 of
accrued reclamation costs on mining properties at May 31, 1997, 1996, 1995, 1994
and 1993, respectively. See Note K of Notes to Consolidated Financial
Statements.
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<PAGE>
<TABLE>
<CAPTION>
FOR YEARS ENDED MAY 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $5,790,200 $ 9,632,200 $ 4,600,600 $8,776,300 $ 9,045,500
Income (loss) before
equity in income
(loss) of affiliates,
provision for
income taxes and
extraordinary item (3,706,000) (2,524,100) (2,577,700) (3,587,900) (103,100)
Equity in (loss) of
affiliates (690,800) (418,500) (442,300) (531,200) (444,700)
Net income (loss) (3,724,500) 270,700 (2,070,600) (3,370,800) (221,900)
Income (loss) per share before
extraordinary item $(.55) $(.38) $(.48) $(.73) $ (.05)
Extraordinary item -- -- -- -- --
----- ----- ----- ----- ------
Income (loss) per share
before cumulative effect
of accounting change (.55) (.38) (.48) (.73) (.05)
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 $(.55) $ .04 $(.42) $(.76) $ (.05)
===== ===== ===== ===== ======
Cash dividends per share $ -0- $ -0- $-0- $-0- $ -0-
===== ===== ===== ===== =====
</TABLE>
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 losses in fiscal 1997, 1995, 1994 and 1993, 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 and uranium 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
43
<PAGE>
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, 1997
WORKING CAPITAL COMPONENTS. Cash used in operating activities was
$2,647,600 for the year ended May 31, 1997. Cash provided by investing and
financing activities during fiscal 1997 was $1,664,300 and $1,407,600
respectively. For the year, these activities resulted in a net increase of
$424,300 in cash. Working capital increased during the fiscal year ended May 31,
1997 by $2,125,800 to working capital of $3,007,000 (from working capital of
$881,200 at May 31, 1996).
The increase in working capital of $2,125,800 is as a result of
increases in accounts receivable and assets held for resale, and a reduction of
the line of credit of $706,500, $481,900 and $499,000, respectively. These
increases in working capital were offset by reductions in long-term receivables
of $101,500 and an increase in accounts payable of $20,300.
Accounts receivable affiliates increased by $909,200 primarily as a
result of increased amounts to due USECC from GMMV, $812,200 and SGMC of
$112,000. These amounts were paid after May 31, 1997. At May 31, 1996, the
Company owed $176,000 on the line of credit of $1,000,000 that the Company and
Crested have. During fiscal 1997, this amount was paid off and at May 31, 1997 a
total of $1,000,000 remained available to the Company and Crested on the line of
credit. At May 31, 1996, the Company's subsidiary Four Nines Gold, Inc. also
owed $323,000 on its line of credit. This amount was paid off in fiscal 1997 and
was not renewed. The decrease in current portion of long-term receivables during
fiscal 1997 of $101,500 was as a result of long-term notes being signed by
certain employees and the impairment of a note receivable on certain real estate
in Gunnison, Colorado.
Cash from financing activities, exercise of 180,000 stock warrants for
$900,000 and the exercise of 106,100 stock options for $370,300, the proceeds of
long-term debt of $554,400 and sale of SGMC stock of $1,106,700 resulted in
total cash provided from investing activities of $2,931,400. These funds were
used to purchase treasury shares, $235,600; retire lines of credit, $499,000;
and repay long-term debt, $789,200.
Cash generated from investing activities were principally from proceeds
of a distribution of SMP and a reduction in the Company's ownership of Sutter
Gold Mining Company. In November 1996, the Company and Crested received
$4,367,000 from the SMP escrow accounts as partial satisfaction of the monetary
damages awarded by the Arbitration Panel. These funds were applied first to the
amounts due the Company and Crested for standby costs. This reduced the
Company's investment in SMP by $2,768,000. The balance was recorded as income of
which the Company recognized $1,003,800 on a consolidated basis. The other major
reduction in investments was as a result of the Company and Crested accepting a
$10,000,000 Contingent Stock Purchase Warrant (the "USECC Warrant") from Sutter
Gold Mining Company. The acceptance of the USECC Warrant reduced the investment
in SGMC by $4,755,300 of which $4,594,000 was recorded as an investment in a
contingent warrant.
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, overhead expenses
of Energx and corporate general and administrative expenses, including costs
associated with continuing litigation and arbitration.
44
<PAGE>
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.
During the first and second quarters of fiscal 1997, SGMC sold 424,000
shares of its common stock in a private placement. These shares were sold for
$3.00 per share. SGMC received $1,106,600 in net proceeds after deducting
commissions and offering costs.
During the fourth quarter of fiscal 1997, as a result of a planned
equity offering, the initial investors of SGMC agreed to a 1 for 2 reverse stock
split, exclusive of the 424,000 private placement shares discussed above. In
addition to the reduction of the shares owned by founders and insiders, the
Company and Crested agreed to have their holdings reduced from 870,469 common
shares and 6,964,531 common shares to 172,258 common shares and 1,503,060 common
shares, respectively.
In consideration of this reduction in their common shares owned, the
Company and Crested accepted the USECC Warrant dated March 21, 1997, which
provides the Company and Crested the right to acquire for no additional
consideration common shares of SGMC's $.001 par value common stock having an
aggregate value of $10,000,000. The USECC Warrant is only exercisable to the
extent proven and probable ore reserves, as defined in the USECC Warrant, in
excess of 300,000 ounces of gold are added to SGMC's reserves based on $25 per
ounce of proven reserves added to SGMC's reserves between 300,000 and 700,000
ounces. The number of shares issuable are based on the greater of $4.07 per
share for the fair market value of SGMC's common stock (as defined). The USECC
Warrant has a term of ten years extending to March 21, 2007, and is exercisable
partially or in total, semi-annually beginning on June 30, 1997. SGMC has the
right to satisfy the exercise of all or any portion of the USECC Warrant with
net cash flows, as defined, at $25 for each new ounce of proven and probable ore
in excess of 300,000 ounces. The USECC Warrant is divided between the Company
and Crested on a basis of 88.9% and 11.1%, respectively.
It is anticipated that SGMC will sell an additional $10,000,000 in
equity during fiscal 1998 through an initial public offering ("IPO"). There is
no assurance that this IPO will be successfully completed. If the offering is
successful, no additional financing will be needed to place the SGMC properties
into production. If SGMC is not successful in its offering of equity, other
sources of capital will be required to complete the mine and mill design and
construction.
CAPITAL REQUIREMENTS - SMP: There are no current plans to mine the SMP
Crooks Gap properties during fiscal 1998, 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 $15,600,000 as of May 31, 1997,
these funds are restricted and have not been made available to pay standby
costs.
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 1997 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 1998 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 Company and Crested are awaiting Nukem's response to the
Federal Courts confirmation of the Arbitration panel's Award. Nukem has until
September 12, 1997 to
45
<PAGE>
file a notice of appeal of the Second Amended Judgment with the Tenth Circuit
Court of Appeals. No assurance can be given on the outcome of a potential
appeal.
CAPITAL REQUIREMENTS - GMMV: Operations of GMMV are not requiring USE's
capital resources. On June 23, 1997, USE and USECC signed an Acquisition
Agreement with Kennecott for the right to acquire Kennecott's interest in the
Green Mountain Mining Venture ("GMMV") for $15,000,000 and other consideration.
Kennecott paid USE and USECC a $4,000,000 bonus on signing, and committed to
provide the GMMV up to $16,000,000 for payment of reimbursable costs incurred by
USECC in developing the proposed underground Jackpot Uranium Mine for production
and in changing the status of the Sweetwater Mill from standby to operational.
The $16,000,000 loan being provided by Kennecott to the GMMV was
advanced to Kennecott by an affiliate, Kennecott Energy Company ("KEC") under a
secured recourse Promissory Note (the "Note") bearing interest at 10.5% per
annum starting April 1999 until paid in full. The Note is payable quarterly out
of 20% of cash flow from the GMMV properties, but not more than 50% of the
earnings for such quarter from the GMMV operations, before interest, income tax,
depreciation and amortization. However, the Note is payable (i) in full on June
23, 2010 regardless of cash flow and earnings of the GMMV, or (ii) sooner (on
December 31, 2005) if an economically viable uranium mine has not been placed
into production by such date. The Note is secured by a first mortgage lien
against Kennecott's 50% interest in the GMMV pursuant to a Mortgage, Security
Agreement, Financing Statement and Assignment of Proceeds, Rents and Leases
granted by Kennecott to KEC (the "Mortgage"). USE and USECC will assume the
Note, and the assets of the GMMV will be subject to the Mortgage, at closing of
the acquisition.
Pursuant to the Mineral Lease and the Mill Contract of the Acquisition
Agreement, USECC is to develop the proposed Jackpot Mine and nearby Big Eagle
Mine, and work with Kennecott in preparing the Sweetwater Mill for renewed
operations. Such work will be funded from the $16,000,000 loan being provided to
the GMMV by Kennecott. Kennecott will be entitled to a credit against
Kennecott's original $50,000,000 commitment to fund the GMMV, in the amount of
two dollars of credit for each one dollar of such funds advanced under the
$16,000,000 loan to be provided by Kennecott to the GMMV, plus the $4,000,000
paid to USE and USECC on signing of the Acquisition Agreement. It is anticipated
that such credits will satisfy the balance of Kennecott's initial funding
commitment to the GMMV.
Closing of the Acquisition Agreement is subject to USE and USECC
satisfying several conditions, including: (i) the acquiring entity (which may be
USE, USECC, or an entity formed by USE and USECC to acquire Kennecott's interest
in the GMMV) must have a market capitalization of at least $200,000,000; (ii)
the parties to the Acquisition Agreement must have received all authorizations,
consents, permits and approvals of government agencies required to transfer
Kennecott's interest in the GMMV to the acquiring entity; (iii) USE and USECC
shall have replaced, or caused the replacement of, approximately $25,000,000 of
reclamation bonds, in addition to other guarantees, indemnification and
suretyship agreements posted by Kennecott on behalf of the GMMV; and (iv) USE
and USECC, or the acquiring entity, must pay $15,000,000 cash to Kennecott at
closing and assume all obligations and liabilities of Kennecott with respect to
the GMMV (including repayment of the $16,000,000 loan and the Mortgage) from and
after the closing. Under very limited circumstances, the scheduled closing date
may be postponed to another date not later than October 30, 1998.
If the Acquisition Agreement is not closed by December 1, 1997, then USE
and USECC (or an entity formed by them to acquire the GMMV interest owned by
Kennecott) are to provide to Kennecott a commitment letter from a recognized
national investment banking firm to complete an underwritten public offering of
the securities of USE (or the entity formed to acquire Kennecott's interest), in
amount
46
<PAGE>
sufficient to close the Acquisition Agreement transactions. Such amount is
estimated by USE to be approximately $40,000,000 (for the $15,000,000 closing
cash purchase price to Kennecott, plus $25,000,000 to assume or cause the
replacement of reclamation bonds, guarantees, indemnification agreements and
suretyship agreements related to the GMMV properties and the Sweetwater Mill.
Alternatively, USE and USECC (or the acquiring entity) must provide evidence to
Kennecott of a commitment letter from a bank, other financial institution or
industry entity to provide private or joint venture financing in such
approximate amount. Failure to provide evidence of such financial commitment by
December 1, 1997 would entitle Kennecott to terminate the Acquisition Agreement,
the Mineral Lease and the Mill Contract.
Subject to providing evidence of adequate financial resources to close
the Acquisition Agreement with funds from a public financing or otherwise, the
$4,000,000 signing bonus paid by Kennecott is nonrefundable.
If the Acquisition Agreement is not closed, USE and USECC, and
Kennecott, shall continue to own their respective 50% interests in the GMMV, and
Kennecott's obligation to repay the $16,000,000 loaned by KEC shall remain
Kennecott's obligation, without any adverse effect on the 50% interest in GMMV
held by USE and USECC. However, the Jackpot Mine development work and Sweetwater
Mill upgrade work funded by the $16,000,000 advance, will have benefitted all
parties to the GMMV.
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 arbitration, equity
financing on the Plateau U3O8 assets or a joint venture partner.
CAPITAL REQUIREMENTS - ENERGX: Another requirement of USE's and
Crested's working capital is the continued funding of Energx overhead expenses.
Energx held several gas leases and participated in one gas venture (on the Fort
Peck Indian reservation in Montana) with NuGas, a Canadian firm; the gas venture
required NuGas to fund the drilling of the first eight wells. The eight gas
wells were drilled and no economic production of gas was found. Energx does not
currently have any plans for future exploration or development drilling.
CAPITAL REQUIREMENTS - YELLOW STONE FUELS CORP. ("YSFC"): In June 1996,
the Company and Crested assisted YSFC in organizing and funded certain
administrative costs. The Company and USE each own 14% of YSFC. The president
and vice president of YSFC are the son and son-in-law, respectively, of
Company's Chairman. On May 15, 1997, the Company and Crested signed a $400,000
convertible promissory note with YSFC which bears interest at 10% and is due
December 31, 1998. The debt is repayable at YSFC's option in cash or its common
stock.
LONG-TERM DEBT AND OTHER OBLIGATIONS: Debt at May 31, 1997 was $264,400.
This debt consists of minor financings of equipment and prepaids.
47
<PAGE>
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.
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 Crested and USE 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 $6,883,500 cash bond
at May 31, 1997 to the U.S. Nuclear Regulatory Commission and a $1,622,800 cash
deposit as of May 31, 1997 for the resolution of any environmental or nuclear
claims.
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.
CAPITAL RESOURCES: The primary source of USE capital resources for
fiscal 1998 will be cash on hand, 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 deficiencies and increase the Company's working
capital deficit.
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 1998, providing funds for
various projects, this outcome is not assured. In any event, further delays in
resolution of the arbitration/litigation are expected, and may exacerbate short
term liquidity requirements.
48
<PAGE>
USE Crested believes available working capital excluding the debt to
affiliates, operating revenues and anticipated financing will continue to be
adequate to fund working capital requirements. However, USE may require
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 also
not aware of any claims for personal injury or property damages that need to be
accrued or funded.
The tax years through May 31, 1991 are closed after audit by the IRS.
USE has filed a request for an appeal hearing on an IRS agent's findings for the
years ended May 31, 1993 and 1994. Although the findings of the IRS audit for
1993 and 1994 will not cause any additional tax to become due to the Government,
the findings of the audit could affect the tax net operating loss of the
Company. Management of USE feels confident that they will prevail on a majority
of the issues, but no assurance of the outcome of the appeal can be given.
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues for the twelve months ended May 31, 1997 totaled $5,790,200 as
compared to revenues at May 31, 1996 of $9,632,200. This decrease in revenues of
$3,842,000 is primarily as a result of no revenues being recognized from mineral
sales in fiscal 1997 (decrease of $3,116,700). During the prior year, USE and
Crested made certain deliveries of U3O8 for SMP. Other decreases in revenues
were oil sales, $45,500; sales of assets, $312,800; and construction revenues
from USE's subsidiary FNG, $2,755,900. These decreases in revenues were offset
by increased commercial sales, $780,300; advance royalties from Climax,
$207,300; partial distribution of SMP funds, $1,003,800; and increased
management fees and other revenues, $323,600.
With the exception of cost of minerals sold, construction costs and
commercial operations, costs and expenses remained the same as they had been in
1996. Cost of minerals sold declined by $2,766,700 as a result of Crested and
USE not delivering any U3O8 under the SMP contracts during fiscal 1997.
Construction costs declined by $2,325,200 as a result of USE's subsidiary FNG
not being able to secure construction contracts. Currently, FNG is using its
equipment and employees on the construction of earth structures and roads for
the GMMV. It is not known if FNG will be able to obtain contracts in the future.
During fiscal 1997, USE also recognized a provision for doubtful accounts of
$614,200. This is as a result of a third party defaulting on land that USE and
Crested sold during a prior period. USE also recognized an increase in the
abandonment of mineral leases of $897,100. The total expense of $1,225,800 for
mineral property abandonment was as a result of Crested abandoning a mineral
property having a book value of $71,500 and SGMC abandoning properties it no
longer needed with a book value of $1,154,300.
General and administrative expenses increased only slightly $238,600 due
to expansion of operations. Increases in general and administrative expenses
were reduced by overhead and direct charges to GMMV, SMP and SGMC.
49
<PAGE>
Equity losses recognized by USE increased by $272,300. Operations
resulted in a net loss of $3,724,500 or $0.55 per share in 1997 as compared to a
net profit of $270,700 or $0.04 per share in 1996.
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.
50
<PAGE>
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 $320 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 demand for molybdenum would be required for the
development Mt. Emmons properties by Cyprus Amax since Cyprus Amax has other
producing mines.
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).
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1997
and 1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended May 31,
1997. 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, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended May 31, 1997,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
August 15, 1997.
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<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
<TABLE>
ASSETS
<CAPTION>
MAY 31,
---------------------------------
1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,416,900 $ 992,600
Accounts and notes receivable (Note C):
Trade, net of allowance for doubtful
accounts of $30,900 and $27,800, respectively 368,200 570,900
Related parties (Note C) 1,191,000 281,800
Current portion of long-term
notes receivable (Notes F and L ) 337,200 438,700
Assets held for resale and other 991,600 509,700
Inventory 96,000 118,700
------------- -------------
TOTAL CURRENT ASSETS 4,400,900 2,912,400
INVESTMENTS AND ADVANCES (Notes E and F):
Affiliates 4,999,600 3,658,500
Restricted investments 8,506,300 8,200,800
------------- -------------
13,505,900 11,859,300
INVESTMENT IN CONTINGENT STOCK
PURCHASE WARRANT (Note F) 4,594,000 --
PROPERTIES AND EQUIPMENT (Notes B, C, D and F):
Land and mobile home park 939,000 939,000
Buildings and improvements 5,986,800 6,243,100
Aircraft and related equipment 5,627,900 6,650,100
Developed oil and gas properties, full cost method 1,769,900 1,769,800
Undeveloped gas properties -- 135,400
Mineral properties and mine development costs 519,400 10,956,900
------------- -------------
14,843,000 26,694,300
Less accumulated depreciation, depletion
and amortization (8,802,100) (9,047,900)
------------- -------------
6,040,900 17,646,400
OTHER ASSETS:
Accounts and notes receivable:
Real estate sales, net of valuation
allowance of $926,300 at
May 31, 1997 (Notes F and L) 394,000 974,200
Employees (Note C) 745,300 532,400
Other 338,600 674,700
Deposits and other 367,500 193,900
------------- -------------
1,845,400 2,375,200
------------- -------------
$ 30,387,100 $ 34,793,300
============= =============
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
</TABLE>
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U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
MAY 31,
---------------------------------
1997 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,312,600 $ 1,292,300
Lines of credit (Note G) -- 499,000
Current portion of long-term debt (Note G) 81,300 239,900
------------- ------------
TOTAL CURRENT LIABILITIES 1,393,900 2,031,200
LONG-TERM DEBT (Note G) 183,100 444,300
RECLAMATION LIABILITY (Notes F and K) 8,751,800 3,978,800
OTHER ACCRUED LIABILITIES (Note F) 5,259,000 10,414,300
DEFERRED TAX LIABILITY (Note H) 183,300 183,300
COMMITMENTS AND CONTINGENCIES (Note K)
MINORITY INTERESTS -- 1,637,900
FORFEITABLE COMMON STOCK,
$.01 par value; issued 223,900 and
195,520 shares, respectively, forfeitable
until earned (Note J) 1,892,400 1,486,500
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 6,646,475 and
6,324,306 shares, respectively 66,500 63,100
Additional paid-in capital 22,543,000 20,775,700
Accumulated deficit (6,776,900) (3,052,400)
Treasury stock at cost, 690,943 and
769,943 shares, respectively (2,182,000) (2,242,400)
Unallocated ESOP contribution (927,000) (927,000)
------------- ------------
12,723,600 14,617,000
------------- ------------
$ 30,387,100 $ 34,793,300
============= ============
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
</TABLE>
54
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Mineral sales and option (Note E) $ -- $ 3,116,700 $ --
Construction contract revenues 1,038,600 3,794,500 1,303,400
Commercial operations 2,219,400 1,439,100 1,177,600
Distribution from affiliate in
excess of cost basis 1,003,800 -- --
Oil sales 164,600 210,100 194,500
Gain on sales of assets (Notes D and F) 39,400 352,200 1,282,400
Royalties from mineral
properties agreements (Note F) 207,300 -- 85,500
Interest 693,300 619,400 469,900
Management fees and other (Note C) 423,800 100,200 87,300
------------ ------------ ------------
5,790,200 9,632,200 4,600,600
------------ ----------- ------------
COSTS AND EXPENSES:
Cost of minerals sold -- 2,766,700 --
Mineral operations 843,100 805,600 1,654,300
Construction costs 752,600 3,077,800 1,038,300
Commercial operations 3,059,600 2,374,800 2,070,100
Oil production 96,800 73,000 78,100
Provision for doubtful accounts 614,200 -- --
General and administrative 2,763,300 2,524,700 1,860,600
Gas operations -- -- 206,600
Abandonment of mineral interests 1,225,800 328,700 --
Loss on sale of investments -- -- 90,000
Interest 140,800 205,000 180,300
------------ ----------- ------------
9,496,200 12,156,300 7,178,300
LOSS BEFORE MINORITY INTEREST
IN LOSS, EQUITY IN LOSS OF
AFFILIATES AND INCOME TAXES (3,706,000) (2,524,100) (2,577,700)
MINORITY INTEREST IN LOSS OF
CONSOLIDATED SUBSIDIARIES 672,300 608,700 653,200
EQUITY IN LOSS OF AFFILIATES (690,800) (418,500) (442,300)
------------ ------------- ------------
(Continued)
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
55
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
LOSS BEFORE INCOME TAXES $ (3,724,500) $ (2,333,900) $ (2,366,800)
INCOME TAXES (Note H) -- -- --
------------- -------------- ------------
LOSS BEFORE
DISCONTINUED OPERATIONS (3,724,500) (2,333,900) (2,366,800)
DISCONTINUED OPERATIONS:
Income from discontinued operations,
net of income taxes of $0 -- 308,900 296,200
Gain on disposal of subsidiary operations
in discontinued segment, net of
income taxes of $50,000 -- 2,295,700 --
------------- ------------- ------------
NET INCOME (LOSS) $ (3,724,500) $ 270,700 $ (2,070,600)
============= ============= ============
INCOME (LOSS) PER SHARE AMOUNTS:
Loss before discontinued operations $ (.55) $ (.38) $ (.48)
Income from discontinued operations -- .05 .06
Gain on disposal of subsidiary
operating in discontinued segment -- .37 --
------------- ------------- ------------
NET INCOME (LOSS) PER SHARE $ (.55) $ .04 $ (.42)
============= ============= ============
WEIGHTED AVERAGE
SHARES OUTSTANDING 6,798,458 6,218,184 4,977,050
============= ============= ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
56
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
ADDITIONAL (ACCUMULATED UNALLOCATED TOTAL
COMMON STOCK PAID-IN DEFICIT) 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
---------- ------- ----------- ----------- ------- ----------- ----------- -----------
</TABLE>
57
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(CONTINUED)
<CAPTION>
ADDITIONAL (ACCUMULATED UNALLOCATED TOTAL
COMMON STOCK PAID-IN DEFICIT) 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
--------- ------- ----------- ----------- ------- ----------- ----------- -----------
</TABLE>
58
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(CONTINUED)
<CAPTION>
ADDITIONAL (ACCUMULATED UNALLOCATED TOTAL
COMMON STOCK PAID-IN DEFICIT) TREASURY STOCK ESOP SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT CONTRIBUTION EQUITY
------ ------ ------- -------- ------ ------ ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Funding of ESOP 24,069 200 213,400 -- -- -- -- 213,600
Issuance of common
stock for
exercised warrants 180,000 1,800 898,200 -- -- -- -- 900,000
Fair value of warrants
issued above exercise
price -- -- 148,300 -- -- -- -- 148,300
Issuance of common stock
for services rendered 12,000 200 138,300 -- -- -- -- 138,500
Issuance of common stock
for exercised option 106,100 1,200 369,100 -- -- -- -- 370,300
Purchase of treasury stock -- -- -- -- 21,000 (235,600) -- (235,600)
Shares of USE stock
held by subsidiary
no longer consolidated -- -- -- -- (100,000) 296,000 -- 296,000
Net loss -- -- -- (3,724,500) -- -- -- (3,724,500)
--------- ------- ----------- ----------- -------- ----------- --------- -----------
Balance, May 31, 1997 6,646,475 $66,500 $22,543,000 $(6,776,900) 690,943 $(2,182,000) $(927,000) $12,723,600
========= ======= =========== =========== ======= =========== ========= ===========
Shareholders' Equity at May 31, 1997 does not include 223,900 shares currently
issued but forfeitable if certain conditions are not met by the recipients.
However, both the "Outstanding Shares at September 12, 1997" 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
616,026 shares of common stock held by a majority-owned subsidiary, which, in
consolidation, are treated as treasury shares.
</TABLE>
59
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED MAY 31,
------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(3,724,500) $ 270,700 $(2,070,600)
Adjustments to reconcile net income
(loss) to net cash
used in operating activities:
Minority interest in loss of
consolidated subsidiaries (672,300) (608,700) (653,200)
Income from discontinued operations -- (308,900) (296,200)
Depreciation, depletion and amortization 658,900 788,500 724,700
Abandoned mineral claims 1,225,800 328,700 --
Equity in loss from affiliates 690,800 418,500 442,300
Distribution from affiliate in excess
of cost basis (1,003,800) -- --
Gain on sale of assets (39,400) (352,200) (1,282,400)
Provision for doubtful accounts 614,200 -- --
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 213,600 87,300 200,000
Non-cash compensation 405,900 339,100 69,500
Common stock and warrants issued for services 286,800 (23,100) 23,100
Other 150,600 (455,600) (219,000)
Net changes in:
Accounts receivable (706,500) 88,600 415,700)
Other assets (724,100) (520,300) (96,000)
Accounts payable and accrued expenses 331,700 (774,700) 1,557,700
Reclamation and other liabilities (355,300) (377,400) (412,600)
Deferred tax liability -- (117,500)
----------- ------------- ------------
NET CASH USED IN OPERATING ACTIVITIES (2,647,600) (2,787,300) (2,455,900)
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of mining properties (719,300) (763,000) (455,100)
Development of gas properties (29,100) (42,100) (218,200)
Proceeds from sale of subsidiary -- 3,300,000 --
Proceeds from sale of property and equipment 273,500 1,212,900 854,300
Proceeds from sale of investments -- -- 199,300
Purchases of property and equipment (208,600) (1,387,300) (124,200)
Changes in notes receivable, net (121,400) (1,102,800) 91,800
Distribution from affiliate 4,367,000 -- --
Investments in affiliates (1,413,700) (676,500) (627,500)
Reduction in cash due to
deconsolidation of subsidiary (484,100) -- --
----------- ------------ -----------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES 1,664,300 541,200 (279,600)
----------- ------------ -----------
(Continued)
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
60
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock $ 1,270,300 $ 3,273,600 $1,376,800
Proceeds from subsidiary stock sale 1,106,700 -- --
Proceeds from long-term debt 554,400 4,212,800 626,400
Net (repayments on) proceeds from lines of credit (499,000) (641,000) 1,140,000
Purchase of treasury stock (235,600) -- --
Repayments of long-term debt (789,200) (3,967,300) (935,300)
----------- ------------ ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,407,600 2,878,100 2,207,900
----------- ------------ ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 424,300 632,000 (527,600)
CASH AND CASH EQUIVALENTS, Beginning of year 992,600 360,600 888,200
----------- ------------ ----------
CASH AND CASH EQUIVALENTS, End of year $ 1,416,900 $ 992,600 $ 360,600
=========== ============ ==========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 118,900 $ 205,000 $ 160,200
=========== ============ ==========
Income taxes paid $ -- $ -- $ --
=========== ============ ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Notes received for sale of assets $ -- $ 1,000,000 $1,550,000
=========== ============ ==========
Exchange of common shares
investment in affiliate in exchange
for investment in Contingent Stock
Purchase Warrant $ 4,594,000 $ -- $ --
=========== ============ ==========
Issuance of common stock to acquire affiliate $ -- $ -- $ 80,000
============ ============= ==========
Deconsolidation of subsidiary in 1997:
Other assets $ 77,600 $ -- $ --
Investment in affiliates 355,000 $ -- $ --
Restricted investment 27,000 $ -- $ --
Property, plant and equipment 11,560,600 $ -- $ --
Notes payable 185,000 $ -- $ --
Accounts payable and accrued expenses 433,900 $ -- $ --
Minority interest 2,069,900 $ -- $ --
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
61
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
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 and 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. 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 in the 1996 financial statements (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 historically engaged in projects such as the
construction of municipal sewage systems, irrigation projects and other civil
engineering matters. At May 31, 1997, FNG was primarily engaged in activities
for the Company at its uranium property on Green Mountain in the construction of
a haul road.
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").
Subsequent to May 31, 1997, the Company and USE entered into an agreement with
Kennecott whereby they may purchase Kennecott's interest in the GMMV if certain
conditions are met (see Note F). 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 ("SGMC)", and agreed to exchange their
interests in USECC Gold for common stock of SGMC. During fiscal 1997, SGMC sold
shares of its common stock in two private placements and the Company and Crested
accepted contingent stock purchase warrants in exchange for certain shares
previously held in SGMC. These activities combined reduced the Company's share
ownership interest in SGMC to 33.9%.
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 has been granted a license to operate pending certain conditions.
See a further discussion of the acquisition details in Note F.
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
62
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
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, borrowing on its
lines of credit and term loans and the sale of its subsidiary, Brunton, to fund
its losses and cash needs. During fiscal 1997, the Company received $136,500
plus interest of $23,292 from SMP for a delivery it made to one of the SMP
contracts in 1991. Additionally, the Company and Crested received $4,367,000 as
partial payment of the monetary resolution of the American Arbitration
Association's Order and Award in the SMP arbitration/litigation (see Note K).
The Company and Crested first applied the proceeds to their investment balance
in SMP. The balance of $1,003,800 after cost recovery was recorded as income.
The Company has net working capital of $3,007,00 as of May 31, 1997, but will
require substantial additional cash to continue to fund the development of its
mineral properties until they can be put into production.
On June 23, 1997, the Company and USECC entered into an Acquisition
Agreement with Kennecott whereby the Company received a signing bonus of
$4,000,000 and a loan of $16,000,000 to be spent on the GMMV mine and mill
properties. This Agreement also allows the Company and Crested the opportunity
of buying Kennecott's interest in the GMMV (see Note F).
During fiscal 1997, SGMC raised net cash proceeds of $6,509,300 through
the private placement of 1,878,800 shares of its common stock. This sale of
equity reduced the Company's ownership of SGMC which at the same time reduced
the Company's cash commitment to the development of the SGMC properties.
In addition to these capital sources, the Company anticipates obtaining
additional funds from the Arbitration Panel's award in connection with the
settlement of the SMP litigation (see Note K). If the Arbitration Panel's award
is delayed, reduced or overturned, additional sources of funding will be
required to place Plateau into production as well as to purchase the Kennecott
interest in GMMV. Equity funding will be the primary source of these funds 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
borrowing and affiliate equity financings will be adequate to fund working
capital requirements for fiscal 1998.
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 (100%), Energx, Ltd ("Energx") (90%), FNG (50.9%), SGMC (74% through
March 1997 and 33.9% at May 1997), 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 in the 1996 and 1995 financial statements since
Brunton was sold in February 1996.
63
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
Investments in other joint ventures and 20% to 50% owned companies are
accounted for by the equity method (see Note E). SGMC was consolidated through
May 1997 until the Company relinquished majority ownership in SGMC at which time
SGMC was accounted for using the equity method as of May 31, 1997. Investments
of less than 20% in companies are accounted for by the cost method. All material
intercompany profits, transactions and balances have been eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The carrying amount
of cash equivalents approximates fair value because of the short maturity of
these instruments.
INVESTMENTS
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 stockpiles 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, 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. 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
64
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
or venturer. The market value of these assets and most of the reclamation and
environmental liabilities associated with them are not reflected in the
accompanying consolidated 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 and gas properties is
provided by the units of production method based on the estimated reserves to be
recovered. All oil and gas properties were fully amortized at May 31, 1997.
Long-lived Assets - The Company evaluates potential impairment of
long-lived assets and long-lived assets to be disposed of in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121"). SFAS No. 121 establishes procedures for review of
recoverability, and measurement of impairment if necessary, of long-lived assets
and certain identifiable intangibles held and used by the entity. SFAS No. 121
requires that those assets be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be fully
recoverable. SFAS No. 121 also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less estimated selling costs. As of May 31, 1997,
management believes that there has not been any impairment of the Company's
long-lived assets or other identifiable intangibles.
Fair Value of Financial Instruments - The recorded amounts for cash and
cash equivalents, receivables, other current assets, and accounts payable and
accrued expenses approximate fair value due to the short-term nature of these
financial instruments.
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.
Revenues from gold and uranium sales 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 and gas sales revenue is recognized at the time of production
(see Notes D and F).
65
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
Revenues 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 or less than incurred costs and estimated earnings, and are shown
as current liabilities or current assets in the accompanying consolidated
balance sheets.
INCOME TAXES
The Company accounts for income taxes in accordance with 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 bases
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 expected to be realized.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average
number of common shares outstanding during each period. Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), which establishes standards for
computing and presenting earnings per share, is effective for years ending after
December 15, 1997. Management does not believe the adoption of SFAS 128 will
materially affect reported earnings per share.
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 to the 1996 and 1995 financial
statements to conform with the 1997 presentation.
66
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U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
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 $397,700, $92,900 and $87,300 in fiscal 1997, 1996 and 1995, respectively.
The Company has 1,037,800 of receivables from unconsolidated subsidiaries and
short-term advances to employees totaling 153,200 as of May 31, 1997.
At May 31, 1997, the Company's President and his immediate family were
indebted to the Company in the amount of $745,300 which is represented by notes
secured by 160,000 shares of the Company's common stock.
During fiscal 1995, 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 $745,300 and discussed above.
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.
On May 15, 1997 Yellow Stone Fuels Corp. ("YSFC"), a 14% owned affiliate
of USE and a 14% owned affiliate of Crested signed a promissory note in favor of
USECC in the amount of $400,000 ($392,200 outstanding at May 31, 1997). This
note bears interest at 10% and is due on December 31, 1998. In lieu of paying
the note in cash on or before its maturity date, Yellow Stone Fuels Corp. may
convert this debt, at its option, into YSFC shares of common stock at $1.00 per
share of debt and interest. However, if YSFC defaults in paying the note on
December 31, 1998, the note is convertible into a number of shares which will
give USE and Crested a combined 51% ownership interest in YSFC.
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 consolidated
statements of operations. USECC received consideration of $765,300 for Wind
River. The $765,300 was comprised of the following:
67
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U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
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
purchase of 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.
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, 1997, 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:
CONSOLIDATED CARRYING VALUE AT MAY 31,
OWNERSHIP 1997 1996
------------ ---- ----
Equity Method:
SGMC 33.9%* $ 4,034,800 $ --
GMMV 50.0% 724,800 $ 724,800
Ruby Mining Company 26.7% 32,600 35,900
YSFC 28.0%** 207,400 --
SMP (Note F) 50.0% -- 2,897,800
----------- -----------
$ 4,999,600 $ 3,658,500
=========== ===========
*Consolidated until May, 1997.
**Includes notes receivable of $392,200 from YSFC (see Note C).
Equity loss from investments accounted for by the equity method are as
follows:
YEAR ENDED MAY 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
SMP (Note F) $ (442,700) $ (416,200) $ (439,200)
Ruby Mining Company (3,300) (2,300) (3,100)
YSFC (244,800) -- --
GMMV (Note F) -- -- --
------------ ----------- ----------
$ (690,800) $ (418,500) $ (442,300)
=========== ========== ==========
68
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U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
There are currently litigation and arbitration proceedings with the
Company's partner in the SMP partnership, as discussed further in Note K.
SMP has entered into various market related and base price escalated
uranium sales contracts with certain utilities which require approximately
1,500,000 pounds of uranium concentrates to be delivered from 1997 through 2000
depending on utility requirements. 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. The last delivery under the remaining
base price sales contract was made in May 1996 and exceeded the spot market
price as of May 31, 1996. Revenues from such uranium sales of $1,383,400 have
been included in the accompanying consolidated statements of operations for the
year ended May 31, 1996, which would normally have been sales of SMP. All sales
contracts were filled by Nukem in 1997 and 1995, and as a result, no revenues
from uranium sales were recognized during 1997 and 1995. The cash from uranium
sales is accumulating in SMP's bank accounts and is subject to the Order and
Award of the arbitration proceedings with Nukem/CRIC discussed in Note F.
GMMV expenses certain general and administrative, maintenance and
holding costs. However, the Company has not recognized equity losses in GMMV
because Kennecott was committed to fund 100% of the first $50,000,000 of
development and operating costs of the Joint Venture. Subsequent to May 31,
1997, the Company and USECC entered into an Acquisition Agreement with Kennecott
whereby the Company may be able to purchase Kennecott's interest in the GMMV
(see Note F). The Company's carrying value of its investment in GMMV of $744,800
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, SGMC (as of May 31, 1997), YSFC and Ruby Mining
Company. SGMC is included in the condensed combined balance sheet disclosure
only due to its deconsolidation effective May 1997.
69
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
CONDENSED COMBINED BALANCE SHEETS - EQUITY INVESTEES
MAY 31,
--------------------------------
1997 1996
---- ----
Current assets $ 21,524,800 $ 19,525,200
Non-current assets 78,125,200 49,901,000
------------ ------------
$ 99,650,000 $ 69,426,200
============ ============
Current liabilities $ 23,772,200 $ 8,160,800
Reclamation and other liabilities 30,116,300 41,270,800
Excess in assets 45,761,500 19,994,600
------------ ------------
$ 99,650,000 $ 69,426,200
============ ============
CONDENSED COMBINED STATEMENTS OF OPERATIONS - EQUITY INVESTEES
YEAR ENDED MAY 31,
-------------------------------------------------
1997 1996 1995
---- ---- ----
Revenues $ 883,300 $ 1,143,500 $ 368,300
Costs and expenses (4,091,500) (1,825,400) (1,402,400)
------------ ------------ -----------
Net loss $ (3,208,200) $ (681,900) $(1,034,100)
============ ============ ===========
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 also committed to pay additional
amounts if certain future operating margins are achieved. USE and USECC
participate in cash flows of the GMMV in accordance with their ownership of the
mining claims prior to the formation of GMMV. Because USE owned all the claims
on that portion of the Green Mountain Properties where the Round Park (Jackpot)
uranium deposit was delineated, Crested has no interest in GMMV's cash flow from
the ore produced in mining operations on
70
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
the Round Park properties, which have been scheduled for initial development.
USE and Crested will share their portion of the cash flows from the other GMMV
properties on a 50-50 basis.
GMMV has incurred $20,416,400 in the development and operations of the
above uranium mineral properties through May 31, 1997. 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,
1997, 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.
On June 23, 1997, USE and USECC signed an Acquisition Agreement with
Kennecott for the right to acquire Kennecott's interest in the GMMV for
$15,000,000 and other consideration. Kennecott paid USE and USECC $4,000,000 on
signing, and committed to loan the GMMV up to $16,000,000 for payment of
reimbursable costs incurred by USECC in developing the proposed underground
Jackpot Uranium Mine for production and in changing the status of the Sweetwater
Mill from standby to operational.
The $16,000,000 loan being provided by Kennecott to the GMMV was
advanced to Kennecott by an affiliate, Kennecott Energy Company ("KEC") under a
secured recourse Promissory Note (the "Note") bearing interest at 10.5% per
annum starting April 1999 until paid in full. The Note is payable quarterly out
of 20% of cash flow from the GMMV properties, but not more than 50% of the
earnings for such quarter from the GMMV operations, before interest, income tax,
depreciation and amortization; however, the Note is payable (i) in full on June
23, 2010 regardless of cash flow and earnings of the GMMV, or (ii) sooner (on
December 31, 2005) if an economically viable uranium mine has not been placed
into production by such date. The Note is secured by a first mortgage lien
against Kennecott's 50% interest in the GMMV pursuant to a Mortgage, Security
Agreement, Financing Statement and Assignment of Proceeds, Rents and Leases
granted by Kennecott to KEC (the "Mortgage"). USE and USECC will assume the
Note, and the assets of the GMMV will be subject to the Mortgage, at closing of
the acquisition.
Pursuant to the Acquisition Agreement, the Mineral Lease, and the Mill
Contract, USECC is to develop the proposed Jackpot Mine and nearby Big Eagle
Mine, and work with Kennecott in preparing the Sweetwater Mill for renewed
operations. Such work will be funded from the $16,000,000 being loaned to the
GMMV by Kennecott. Kennecott will be entitled to a credit against Kennecott's
original $50,000,000 commitment to fund the GMMV, in the amount of two dollars
of credit for each one dollar of such funds out of the $16,000,000 loaned by
Kennecott to the GMMV, plus the $4,000,000 paid to USE and USECC on signing of
the Acquisition Agreement. It is anticipated that such credits will fully
satisfy the balance of Kennecott's initial funding commitment to the GMMV.
Closing of the Acquisition Agreement is subject to USE and USECC
satisfying several conditions, including: (i) the acquiring entity (which may be
USE, USECC, or an entity formed by USE and USECC to acquire Kennecott's interest
in the GMMV) must have a market capitalization of at least $200,000,000 (ii) the
parties to the Acquisition Agreement must have received all authorizations,
consents, permits and approvals of government agencies required to transfer
Kennecott's interest in the GMMV to the acquiring
71
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
entity; (iii) USE and USECC shall have replaced, or caused the replacement of,
approximately $25,000,000 of reclamation bonds, in addition to other guarantees,
indemnification and suretyship agreements posted by Kennecott on behalf of the
GMMV; and (iv) USE and USECC, or the acquiring entity, must pay $15,000,000 cash
to Kennecott at closing and assume all obligations and liabilities of Kennecott
with respect to the GMMV (including repayment of the $16,000,000 Note and the
Mortgage) from and after the closing. Under very limited circumstances, the
scheduled closing date may be postponed to another date not later than October
30, 1998.
If the Acquisition Agreement is not closed by December 1, 1997, then USE
and USECC (or an entity formed by them to acquire the GMMV interest owned by
Kennecott) are to provide to Kennecott a commitment letter from a recognized
national investment banking firm to complete an underwritten public offering of
the securities of USE (or the entity formed to acquire Kennecott's interest) in
amount sufficient to close the Acquisition Agreement transactions. Such amount
is estimated by USE to be approximately $40,000,000 (for the $15,000,000 closing
cash purchase price to Kennecott, plus $25,000,000 to assume or cause the
replacement of reclamation bonds, guarantees, indemnification agreements and
suretyship agreements related to the GMMV properties and the Sweetwater Mill)
Alternatively, USE and USECC (or the acquiring entity) may provide evidence to
Kennecott of a commitment letter from a bank or other institutional or industry
entity to provide private or joint venture financing in such approximate amount.
Failure to provide evidence of such financial commitment by December 1, 1997
will terminate the Acquisition Agreement, the Mineral Lease and the Mill
Contract.
Subject to providing evidence of adequate financial resources to close
the Acquisition Agreement with funds from a public financing or otherwise, the
$4,000,000 signing bonus paid by Kennecott is nonrefundable and will serve to
reduce USE's and Crested's ultimate $15,000,000 purchase obligation.
If the Acquisition Agreement is not closed, USE, USECC and Kennecott
shall continue to own their respective 50% interests in the GMMV, and
Kennecott's obligation to repay the $16,000,000 loaned by KEC shall remain
Kennecott's obligation, without any adverse effect on the 50% interest in GMMV
held by USE and USECC. However, the Jackpot Mine development work and Sweetwater
Mill upgrade work funded by the $16,000,000 advance will have benefitted all
parties to the GMMV and will fully satisfy Kennecott's original $50,000,000
funding obligation to GMMV.
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 six years. In the arbitration, the American
Arbitration Association Panel issued its Order and Award during fiscal 1996. On
June 27, 1997, the United States District Court entered its Second Amended
Judgment confirming the Order and Award and including the equitable
72
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
portion of the Order and Award. Nukem/CRIC filed a motion for clarification
and/or limited remand. The Court denied the motion and Nukem has until September
12, 1997 to determine if it will appeal the Second Amended Judgment to the Tenth
Circuit Court of Appeals. See Notes E and K for a description of the investment
and a discussion of the related litigation/arbitration.
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. The loans were completely
amortized in fiscal 1994. AMAX was acquired by Cyprus Minerals Corporation in
November 1993 and is now doing business as "Cyprus Amax." AMAX and its successor
Cyprus Amax have not placed the properties into production as of May 31, 1997.
Cyprus Amax may elect to return the properties to the Company and
Crested, which would cancel the advance royalty obligation. If Cyprus Amax
formally decides to place the properties into production, it will pay $2,000,000
to the Company and Crested. If Cyprus Amax sells the properties, the Company and
Crested will receive 15% of the first $25 million received by Cyprus Amax.
In addition, Cyprus Amax now pays the Company and Crested an annual
advance royalty of 50,000 pounds of molybdenum (or its cash equivalent). Cyprus
Amax is entitled to a partial credit against future royalties for any advance
royalty payments made, but such royalties are not refundable if the properties
are not placed into production. The Company recognized $207,300, $-0- and
$85,500 of revenue from the advance royalty payments in fiscal 1997, 1996 and
1995, respectively.
The Company 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 this option 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 Gunnison Center Properties LLC in January
1995) was for 57 commercial and noncommercial zoned acres in the City of
Gunnison, Colorado; the net purchase price was $970,300. This resulted in a gain
for the Company of $491,100. Pangolin paid $345,000 cash and $625,300 in
nonrecourse promissory notes. The first note for $137,900 was paid in fiscal
1995. The second note for $487,366 was a three year promissory note, bearing
interest at 7.5% per year and calling for interest only payments in January 1996
and 1997 with the balance due in January 1998, of which $0 and $35,600 was
received during fiscal 1997 and 1996, respectively. Effective December 1, 1996 a
replacement promissory note was given to USE and Crested by Contour Development
Company LLC in the principal amount of $454,900 payable January 1998, bearing
interest at the rate of 7.5% per annum, and secured by Contour's 73% interest in
a limited liability company owning a 2.93 acre subdivided lot
73
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U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
in the City of Gunnison currently approved for development with an 87 unit
apartment project. As of May 31, 1997 the second note had an outstanding
principal balance of $451,865, of which USE's 50% portion, or $225,932, is
reflected in the accompanying consolidated balance sheet, before a valuation
allowance of $86,800.
The second option covered 472.5 acres of ranch land northwest of the
City of Gunnison, Colorado and was exercised by Castle Mountain Ranches LLC in
May 1995 (purchase price $822,460). Pangolin paid $10,000 for the option; on
option exercise and closing, Pangolin paid $36,090 in cash for 22 acres and two
nonrecourse promissory notes totalling $776,370, each due May 30, 1998, and
secured by the remaining acreage. One note for $145,500 bore interest at the
rate of 7.5% per annum until August 28, 1995 and thereafter at the rate of 12%
per annum until paid. A principal payment in the amount of $35,000 was due on
May 30, 1996 but was not paid. The second note for $630,873 bore interest at the
rate of 7.5% per annum with interest only payments due May 30, 1996 and May 30,
1997 and principal and interest due at maturity. Effective December 1, 1996 a
replacement note from Contour Development Company LLC was given to Crested in
the principal amount of $872,508 bearing interest at the rate of 8.39% per annum
until May 30, 1997, at which time a principal payment of $128,138, together with
accrued interest, was due, but was not paid. As a result of Contour's default in
the payment due May 30, 1997, The Company and Crested have declared the entire
principal balance of this note to be due and payable and have declared a default
in the pledge of Contour's 73% interest in the limited liability company
building the apartment project in the City of Gunnison. The Company recognized a
consolidated bad debt expense of $614,200 and the reversal of a deferred gain of
$312,100 as a result of Contour's default, and has established a corresponding
valuation allowance against the receivable in the amount of $(839,500). The
Company and Crested are currently evaluating their potential remedies against
Contour (which may include litigation).
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.
74
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U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
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 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 included 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 approximately 100% of the outstanding 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-ninths/one-ninths basis, respectively. As of May 31, 1997,
the Company's total investment in SGMC had a carrying value of $8,628,800.
During May 1996, SGMC issued shares of its common stock 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 legal and other costs of a possible future equity financing.
75
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
During the first and second quarters of fiscal 1997, SGMC sold
additional shares of its common stock in a private placement. These shares were
sold for $3.00 per share. SGMC received $1,106,600 in net proceeds from this
equity placement.
During the fourth quarter of fiscal 1997, management of SGMC entered
into an Engagement Letter with a different underwriter in Toronto to complete an
offering of additional shares of SGMC's common stock which closed in May, 1997
and raised approximately $5,400,000 in net cash proceeds. At the underwriter's
request, the initial investors (including USE and Crested) agreed to have the
amount of their common shares owned reduced by 50 percent. The investors in the
$3.00 per share private placement discussed above were not affected as those
shares were sold in contemplation of the 1 for 2 reverse split.
In connection with this Offering, the Company and Crested accepted a
Stock Purchase Warrant dated March 21, 1997 which provides the Company and
Crested the right to acquire for no additional consideration common shares of
SGMC's $.001 par value common stock having an aggregate value of $10,000,000
(US). The Stock Purchase Warrant has a term of ten years extending to March 21,
2007, and is exercisable partially or in total, semi-annually beginning on June
30, 1997. However, the Stock Purchase Warrant is only exercisable to the extent
proven and probable ore reserves, as defined in the Stock Purchase Warrant, in
excess of 300,000 ounces are added to SGMC's reserves. In addition, SGMC shall
have the right to satisfy the exercise of all or any portion of the Stock
Purchase Warrant with the net cash flows, as defined, at $25.00 (US) for each
new ounce of proven and probable ore in excess of 300,000 ounces to a maximum of
700,000 ounces. Accordingly, the Company has allocated the carrying value of
SGMC shares exchanged for the Contingent Stock Purchase Warrant to its
investment in such contingent warrants. The Stock Purchase Warrant benefits the
Company and Crested on a basis of 88.9% and 11.1%, respectively.
PLATEAU RESOURCES LIMITED
Effective August 11, 1993, USE entered into an agreement with Consumers
Power Company to acquire all the issued and outstanding common stock of Plateau
Resources Limited ("Plateau"), a Utah corporation. Plateau owns a uranium
processing mill and support facilities and certain other real estate assets
through its wholly-owned subsidiary Canyon Homesteads, Inc. ("CHI") in
southeastern Utah. USE paid nominal cash consideration for the Plateau stock and
agreed to assume all environmental liabilities and reclamation bonding
obligations. Prior to closing the agreement, Plateau transferred $2,500,000 cash
to fund the NRC Surety Trust Agreement to pay future costs of mill
decommissioning, site reclamation and long-term site surveillance. Plateau also
transferred $4,800,000 cash to an Agency Agreement to indemnify the seller
against possible environmental or nuclear claims. At the date of acquisition,
Plateau held an additional $6,900,000 of unencumbered cash to be used for care
and maintenance costs on the mill and other assets acquired. As of May 31, 1997,
most of the unencumbered cash has been used for care and maintenance costs or
was loaned to USE for development of certain properties held by the Company and
Crested. Directors of the Company and Crested have agreed to divide equally
one-half of the obligations incurred in excess of the total $14,200,000
described above and will share in one-half of all cash flows derived from
operations of these assets.
76
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
On August 25, 1995, Plateau signed a letter of intent with an unrelated
third party to sell part interest in 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 earnest money deposit was recognized as income in fiscal 1995.
CHI entered into a joint venture, First-N-Last LLC, with Arrowstar
Investments, Inc. ("Arrowstar") to develop on a 50/50 basis, certain properties
at the Ticaboo Townsite. Arrowstar is owned by certain shareholders of the
Company. During 1996, Arrowstar gave its 50% interest in First- N-Last LLC to
USECC as part of the consideration for Wind River (see Note D). USECC then
transferred its 50% ownership in First-N-Last LLC to Plateau. As of May 31,
1997, Plateau/CHI owns 100% of First-N-Last, LLC.
ENERGX, LTD.
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 eight exploratory wells. Eight exploratory wells were drilled and were
found to be non-commercial. No further activity is planned for this project.
During 1997 and 1996, Energx abandoned certain of its leases and as a
result wrote off $164,500 and $328,700, respectively, of costs capitalized
associated with theses leases. The write off is reflected as abandonment of
mineral interests in the accompanying 1997 and 1996 consolidated statements of
operations.
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% (10.25% as
of May 31, 1997). The weighted average interest rate for 1997 and 1996 for the
line of credit was 10.25%. 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. As of May 31, 1996, $176,000 was outstanding on this line of credit.
No amounts were outstanding as of May 31, 1997.
FNG held a $400,000 line of credit with a commercial bank. This line of
credit accrued interest at 2.0% over the bank's prime rate and expired on
February 28, 1997. At May 31, 1996, $323,000 was outstanding. No amounts were
outstanding as of May 31, 1997. The weighted average rate for 1997 and
77
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
1996 for this line of credit was 10.79%. The line of credit was not renewed when
it expired on February 28, 1997.
NOTES PAYABLE
The components of notes payable as of May 31, 1997 and 1996 are as
follows:
MAY 31,
-----------------------------
1997 1996
---- ----
Installment notes - secured by equipment;
interest at 8.75% - 9.5%, mature 2000 $ 69,100 252,900
FNG installment notes - secured by FNG
equipment, interest at 7.5% to 11.25%
matures in 1997 - 2002 195,300 431,300
----------- ----------
264,400 684,200
Less current portion (81,300) (239,900)
----------- ----------
$ 183,100 $ 444,300
=========== ==========
Principal requirements on notes payable for the five years after May 31,
1997 are as follows: 1998 - $81,300; 1999 - $85,800; 2000 - $55,700; 2001 -
$34,200; 2002 - $6,000 and thereafter $1,400.
H. INCOME TAXES:
The components of deferred taxes as of May 31, 1997 and 1996 are as
follows:
MAY 31,
------------------------------
1997 1996
---- ----
Deferred tax assets:
Deferred compensation $ 129,800 $ 40,100
Net operating loss carryforwards 6,731,500 7,260,400
Capital loss carryforwards -- 297,100
Tax Credits 325,100 325,100
Other 655,400 106,100
Tax basis in excess of book basis 573,400 --
----------- ----------
Total deferred tax assets 8,415,200 8,028,800
----------- ----------
Deferred tax liabilities:
Book basis in excess of tax basis -- (597,900)
Development and exploration costs (1,963,400) (2,332,100)
----------- ----------
Total deferred tax liabilities (1,963,400) (2,930,000)
----------- ----------
6,451,800 5,098,800
Valuation allowance (6,635,100) (5,282,100)
----------- ----------
Net deferred tax liability $ (183,300) $ (183,300)
=========== ==========
78
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
The Company has established a valuation allowance of $6,635,100 against
deferred tax assets due to the losses incurred by the Company in fiscal 1997,
1996 and 1995. 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 statutory federal income tax rate to income before
taxes. The reasons for these differences are as follows:
YEAR ENDED MAY 31,
-----------------------------------------
1997 1996 1995
---- ---- ----
Expected federal income tax $(1,266,330) $(793,500) $ (804,700)
Utilization of capital loss
carryforward -- -- (269,900)
Net operating losses not
previously
benefitted and other (86,670) (204,800) (569,600)
Valuation allowance 1,353,000 998,300 1,644,200
----------- --------- -----------
Income tax provision $ -- $ -- $ --
=========== ========= ===========
There were no taxes currently payable as of May 31, 1997, 1996 or 1995
related to continuing operations.
At May 31, 1997, the Company and its subsidiaries had available, for
federal income tax purposes, net operating loss carryforwards of approximately
$21,300,000 which will expire from 1998 to 2012 and investment tax credit
carryforwards of $325,000 which, if not used, will expire from 1998 to 2003. 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 1991, 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 1993 and 1994 returns. The Company has
received a 30 day letter for the year 1993 and 1994. The Company has submitted a
written appeal to protest the findings of the examining agent to preserve its
NOL. Management believes the Company will prevail on the significant issues in
dispute, and therefore, that no significant changes will result from the
findings.
79
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(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:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1997
--------------------------------------------------------
COMMERCIAL CONSTRUCTION
MINERALS OPERATIONS OPERATIONS CONSOLIDATED
-------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues $ -- $ 3,223,200 $1,038,600 $ 4,261,800
========== =========== ==========
Interest and other revenues 1,528,400
------------
Total revenues $ 5,790,200
============
Operating profit (loss) $ (843,100) $ 163,600 $ 286,000 $ (393,500)
========== ============ ===========
Interest and other revenues 1,528,400
General corporate and other expenses (4,168,600)
Equity in loss of affiliates (690,800)
------------
Loss before income taxes
and cumulative effect $ (3,724,500)
============
Identifiable net assets at May 31, 1997 $ 9,025,700 $ 6,103,700 $ 301,500 $ 15,430,900
=========== ============ ===========
Investments in affiliates 4,999,600
Corporate assets 9,956,600
------------
Total assets at May 31, 1997 $ 30,387,100
============
Capital expenditures $ 159,500 $ 296,300 $ --
=========== ============ ===========
Depreciation, depletion and
amortization $ -- $ 460,100 $ 172,000
========== ============ ===========
</TABLE>
80
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(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 net 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>
81
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(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 net 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>
During fiscal 1996, approximately 89% of mineral revenues were from the
sale of uranium. There were no uranium sales during fiscal 1997 and 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 USE approved an annual incentive
compensation arrangement ("1996 Stock Award Program") for its CEO and four other
officers of USE payable in shares of the Company's common stock. The 1996 Stock
Award Program was approved by the Company's shareholders in the second quarter
of fiscal 1997. The shares are to 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 earnings 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
82
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
shareholders of the Company for each award each year. In fiscal 1997, 14,158
shares were authorized for issuance by shareholder approval to these five
officers of the Company and Crested. The 1996 Stock Award Program was
subsequently modified to reflect the intent of the directors of the Company
which was to provide incentive to the officers of the Company and Crested to
remain with the Companies. The shares under the plan therefore became
forfeitable until retirement, death or disability of the officer. The shares are
held in trust by the Company's treasurer and are voted by the Company's
non-employee directors.
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. During fiscal 1997, Shamrock exercised 180,000
of these warrants for a total of $900,000. In connection with this warrant
agreement, the Company recognized $148,300 of consulting expense in 1997.
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. Under this Plan, 371,200 non-qualified options were issued at
purchase prices ranging from $2.75 per share to $2.90 per share. These options
will expire on April 14, 2002 and April 30, 2002. During fiscal 1996, the
Company issued 360,000 non-qualified options to employees who are not officers
or directors at a purchase price of $4.00 per share, expiring on December 31,
2000. During fiscal 1997, options were exercised for the purchase of 106,100
shares. On December 13, 1996, the shareholders of USE ratified an amendment to
the Option Plan and on that same date all outstanding non-qualified options were
converted to qualified options by the Board of Directors of USE.
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 1997, 1996 and 1995, the Board of Directors of USE
contributed 24,069, 10,089 and 37,204, shares to the ESOP at prices of $8.87,
83
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
$8.65 and $5.38 per share, respectively. The Company is responsible for one-half
of these contributions amounting to $106,700, $43,600 and $100,000 in fiscal
1997, 1996 and 1995, 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. The loans are reflected as unallocated ESOP contribution in the equity
section of the accompanying consolidated 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. In exchange for this amendment, 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, 1997, 1996 and 1995, the Company had
compensation expense of $152,600, $116,500 and $200,000, 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
January 1997 36,832 USE 11.02 405,830
January 1997 8,000 Crested .9375 7,500
No shares were earned out in fiscal 1997 or 1996. Also included in the
forfeitable common stock are 15,000 shares to directors which are vesting at 20%
a year beginning in November 1992, of which 9,000 are earned out but not
released as of May 31, 1997.
84
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair
value based method of accounting for employee stock options or similar equity
instruments. However, SFAS 123 allows the continued measurement of compensation
cost for such plans using the intrinsic value based method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), provided
that pro forma disclosures are made of net income or loss and net income or loss
per share, assuming the fair value based method of SFAS 123 had been applied.
The Company has elected to account for its stock-based compensation plans under
APB 25; accordingly, for purposes of the pro forma disclosures presented below,
the Company has computed the fair values of all options granted during fiscal
year 1997 using the Black-Scholes pricing model and the following weighted
average assumptions (no options were granted during 1997):
1997
----
Risk-free interest rate 5.45%
Expected lives 5 years
Expected volatility 135.2%
Expected dividend yield 0%
To estimate expected lives of options for this valuation, it was assumed
options will be exercised upon becoming fully vested at the end of the five
years. All options are initially assumed to vest. Cumulative compensation cost
recognized in pro forma net income or loss with respect to options that are
forfeited prior to vesting is adjusted as a reduction of pro forma compensation
expense in the period of forfeiture.
The total fair value of options granted was computed to be approximately
$1,274,900 during the year ended May 31, 1996. This amount is amortized ratably
over the vesting periods of the options. Pro forma stock-based compensation, net
of the effect of forfeitures, was $255,000 and $106,200 for 1997 and 1996,
respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss and pro forma net loss per
common share would have been reported as follows:
YEAR ENDED MAY 31,
----------------------------
1997 1996
---- ----
Net income (loss)
As reported $(3,724,500) $ 270,700
Pro forma $(3,979,500) $ 164,500
Net income (loss) per common share
As reported $ (.55) $ .04
Pro forma $ (.59) $ .03
Weighted average shares used to calculate pro forma net loss per share
were determined as described in Note 2, except in applying the treasury stock
method to outstanding options, net proceeds
85
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
assumed received upon exercise were increased by the amount of compensation cost
attributable to future service periods and not yet recognized as pro forma
expense.
A summary of the Stock Option Plan activity for the years ended May 31,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- ----- ------- -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 724,800 3.44 371,400 2.95
Granted -- 360,000 4.00
Canceled (22,000) 4.00 --
Exercised (106,100) 3.49 (6,600) 6.27
--------- --------
Outstanding at end of year 596,700 3.41 724,800 3.44
========= =======
Exercisable at end of year 380,700 436,800
========== =======
</TABLE>
The following table summarized information about employee stock options
outstanding and exercisable at May 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -----------------------------
WEIGHTED
NUMBER OF AVERAGE WEIGHTED WEIGHTED
OPTIONS REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
PRICES MAY 31, 1997 LIFE IN YEARS PRICE MAY 31, 1997 PRICE
------ ------------ ------------- ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
$2.75 49,400 4.92 $2.75 49,400 $2.75
2.90 264,300 4.88 2.90 264,300 2.90
4.00 283,000 3.50 4.00 67,000 4.00
</TABLE>
K. COMMITMENTS, CONTINGENCIES AND OTHER:
LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS (SMP)
ARBITRATION PROCEEDINGS 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.
86
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
CRIC also asserted that by entering into the GMMV agreement, the Company and
Crested misappropriated a business opportunity of SMP. CRIC sought damages and
certain equitable remedies from the Company and Crested and sought 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 USE 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.
SUMMARY. The discovery stage in the case filed by the Company and USE 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
finally 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 some 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 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 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 Crested and USE $12,500,000 and
Nukem/CRIC $7,100,000 through July 31, 1996. On November 4, 1996 the United
States District Court issued a Judgment and Order confirming the Arbitration
Panel's Order and Award during fiscal 1997. The Company and Crested
87
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
received $4,300,000 from the SMP escrow accounts as partial payment of the
monetary award of the Arbitration Panel. This $4,300,000 was accounted for under
cost recovery method of accounting, wherein it was applied to outstanding
amounts due USECC and the Company and the balance of $1,003,800 was recognized
as income. Nukem/CRIC filed a motion asking for limited remand and on June 27,
1997 the Federal Court issued a Second Amended Judgment which confirmed the
monetary award of the Arbitration Panel and clarified the equitable damages due
USECC from Nukem/CRIC. Nukem has until September 12, 1997 to file a notice of
appeal with the Tenth Circuit Court of Appeals. Nukem has posted a $8,600,000
supersedeas bond on the monetary portion of the Award. If Nukem seeks to appeal
the equitable portion of the Award, the Company and Crested will ask that the
supersedeas bond be raised to $111,000,000.
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, USE, 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 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 the last delivery of 130,000 lbs. U3O8
under the contract was made in May 1997. On June 13, 1997, the Company and
Crested received $838,500 as a distribution of profits from the last delivery
under this SMP contract.
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 lode 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, the
Company 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, the Company and Crested submitted expert testimony by five renowned
geologists opining that a gold lode apexed on
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<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
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 District 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 royalties to Parador, the Company and
Crested. It is the belief of Parador, the Company and Crested that the trial
court's ruling is erroneous as a matter of law and, consequently on February 2,
1996, an appeal was lodged with the appellate court asking that Court to reverse
the trial court's ruling. The Appellate Court dismissed the appeal pending a
resolution of all claims before the District Court. Parador, the Company and
Crested intend to proceed wit the 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 are 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.
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.
89
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
As of May 31, 1997 and 1996, the Company has recorded estimated
reclamation obligations, including standby costs, of $13,674,700 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 venturer of GMMV, the owner of Plateau and an investor in SGMC. The
environmental obligations and the nature and extent of cost sharing arrangements
with other potentially responsible parties, as well as any uncertainties with
respect to joint and several liability of each are discussed in the following
paragraphs:
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, 1997
of $1,451,800 was determined by the Company to be adequate. The obligation will
be satisfied over the life of the mining project which is estimated to be at
least 20 years. The Company 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
90
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
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) decontamination, 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 in 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
91
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
initial $50,000,000 expenditure commitment, and then only to the extent there
are insufficient funds from the reclamation reserve (to be established 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 established out of GMMV operating
revenues and c) payments are not available from UNOCAL.
SUTTER GOLD MINING COMPANY ("SGMC")
SGMC is currently owned 30.7% by the Company, 3.2% by Crested and 66.1%
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, 1997.
PLATEAU RESOURCES, LIMITED ("PLATEAU")
The environmental and reclamation obligations acquired with the
acquisition of Plateau include obligations relating to the Shootaring Mill.
Based on the bonding requirements, Plateau transferred $2,500,000 to a trust
account as financial surety to pay future costs of mill decommissioning, site
reclamation and long-term site surveillance. In fiscal 1997, Plateau increased
the NRC surety to a cash bond of $6,784,000 in order to have its standby license
changed by the NRC to operational.
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, the Company 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
the Company. Brunton was therefore owned 100% by USE as of May 31, 1994. The
transaction was accounted for as a purchase.
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<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(CONTINUED)
In February 1996, the Company completed the sale of 100% of the
8,267,450 outstanding shares of common stock of Brunton to a third party for
$4,300,000 in accordance with a Stock Purchase Agreement dated January 30, 1996
(the "Purchase Agreement"). The Company received $300,000 at execution of the
Purchase Agreement and approximately $3,000,000 at closing. The Company received
the first of three annual installments of $333,333 on a $1,000,000 note, plus
interest at a rate of 7% per year during February 1997. Two additional payments
are due the Company in the amount of $333,333 plus interest in February 1998 and
1999. 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 consolidated 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 which covered profits from February 1, 1996
through April 30, 1997 was received in August 1997 in the amount of $292,600.
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.
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. Revenues for the discontinued operations for the years
ended May 31, 1996 and 1995 were $2,870,800 and $4,553,500, respectively. The
Company recognized a gain on the disposal of Brunton of $2,295,700 net of income
taxes of approximately $50,000.
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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, 1997, 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 1997 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 1997 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 1997 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 1997 Annual Meeting of Shareholders.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, REPORTS AND FORMS 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.........................52
Consolidated Balance Sheets - May 31, 1997 and 1996...........53-54
Consolidated Statements of Operations
for the Years Ended May 31, 1997, 1996 and 1995 ..............55-56
Consolidated Statements of Shareholders'
Equity for the Years Ended May 31, 1997, 1996 and 1995........57-59
Consolidated Statements of Cash Flows
for the Years Ended May 31, 1997, 1996 and 1995...............60-61
Notes to Consolidated Financial Statements ...................62-92
(ii) Financials and Schedules of Affiliates
(a) Green Mountain Mining Venture
Report of Independent Public Accountants....................103
Balance Sheet - December 31, 1996 and 1995..................104
Statement of Operations for the Period
from June 1, 1990 (Date of Inception)
through December 31, 1996...................................105
Statement of Changes in Partners' Capital
for the Period from June 1, 1990
(Date of Inception) through December 31, 1996...............106
Statement of Cash Flows for the Period
from June 1, 1990 (Date of Inception)
through December 31, 1996...................................107
Notes to Financial Statements...........................108-113
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<PAGE>
(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, 1997 and 1996........................*
Statements of Operations - Years Ended
May 31, 1997, 1996 and 1995...................................*
Statements of Changes in Partners' Capital -
Years Ended May 31, 1997, 1996 and 1995.......................*
Statements of Cash Flows - Years Ended
May 31, 1997, 1996 and 1995...................................*
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.
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(3) Exhibits Required to be Filed. Each individual exhibit filed herewith is
sequentially paginated corresponding to the pagination of the entire
Form 10-K. As a result of this pagination, the page numbers of documents
filed herewith containing a table of contents will not be the same as
the page number contained in the original hard copy.
EXHIBIT SEQUENTIAL
NO. TITLE OF EXHIBIT PAGE NO.
--- ---------------- --------
3.1 USE Restated Articles of Incorporation........................[5]
3.1(a) USE Articles of Amendment to Restated
Articles of Incorporation.....................................[3]
3.2 USE Bylaws, as amended through April 22, 1992.................[3]
4.1 Warrant to Purchase 200,000 Common Shares of USE.............[14]
4.2 USE 1989 Incentive Stock Option Plan,
as amended through 12/95......................................[1]
4.3 USE Restricted Stock Bonus Plan,
as amended through 2/94......................................[14]
4.4 Form of Stock Option Agreement,
and Schedule, Options Issued 1/96.............................[1]
4.5 Amendment to Warrant to Purchase
200,000 Common Shares of USE..................................114
4.6 Amendment to USE 1989 Incentive Stock
Option Plan (12/13/96)........................................115
4.7 USE 1996 Stock Award Program (Plan).......................116-117
4.8 USE Restated 1996 Stock Award Plan
and Amendment to USE 1990 Restricted
Stock Bonus Plan..........................................118-121
10.1 USECC Joint Venture Agreement - Amended.......................[6]
10.2 Management Agreement with USECC...............................[4]
10.3 Promissory Note from Crested to USE (5/31/97).............122-123
10.4 Contract for Sale of Stock of Brunton to Silva A.B...........[13]
10.5 Assignment and Lease - Parador................................[4]
10.6 Employment Agreement - Daniel P. Svilar.......................[5]
10.7 Airport Ground Lease - City of Riverton.......................[4]
10.8 Executive Officer Death Benefit Plan..........................[5]
10.9 Big Eagle Acquisition Agreement with PMC......................[7]
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10.11 Sweetwater Mill Acquisition Agreement......................[4]
10.12 Ft. Peck Agreement - Drilling and Production Services......[4]
10.18 Master Agreement - Mt. Emmons/AMAX.........................[9]
10.20 Promissory Notes - ESOP/USE...............................[10]
10.21 Self Bond Agreement - Crooks Gap Properties................[6]
10.22 Security Agreement - ESOP Loans...........................[11]
10.27 Mineral Properties Agreement Congo Area - PMC..............[5]
10.28 Memorandum of Joint Venture Agreement - GMMV...............[5]
10.29 Memorandum of Partnership Agreement - SMP.................[6]
10.32 Employee Stock Ownership Plan..............................[6]
10.34 Form of Stock Option Agreement and Schedule - 1989 Plan....[5]
10.35 Severance Agreement (Form).................................[3]
10.36 1992 Stock Compensation Plan Non-Employee Directors........[3]
10.37 Executive Compensation (John L. Larsen)....................[3]
10.38 Executive Compensation (Non-qualified Options).............[3]
10.39 ESOP and Option Plan Amendments (1992).....................[3]
10.40 Plateau Acquisition - Stock Purchase
Agreement and Related Exhibits.............................[8]
10.41 Option and Sales Agreements -
Gunnison Property Parcel A.................................[2]
10.42 Option and Sales Agreements -
Gunnison Property Parcel B.................................[2]
10.43 Option Agreement - USE and Arrowstar -
Aircraft Hanger............................................[2]
10.44 Amendment to Contract with Arrowstar on Hangar............[14]
10.45 Contract for Sale of Wind River Estates...................[12]
10.46 Contract for sale of Jeffrey City Six-Plex................[12]
10.47 Development Agreement with First N-Last...................[14]
10.48 Operating Agreement with First-N-Last.....................[14]
98
<PAGE>
10.49 Acquisition Agreement between
Kennecott Uranium Company,
USE and USECC regarding GMMV (6/23/97).................124-158
10.50 Exhibit A to Acquisition Agreement (see 10.49)
Promissory Note from Kennecott Uranium Company
to Kennecott Energy Company regarding GMMV.............159-163
10.51 Exhibit B to Acquisition Agreement (see 10.49)
Mortgage, Security Agreement, Financing Statement
and Assignment of Proceeds, Rents and Leases...........164-193
10.52 Exhibit G to Acquisition Agreement
(see 10.49) - Contract Services Agreement
for the Sweetwater Uranium Mill Facility...............194-227
10.53 Exhibit H to Acquisition Agreement
(see 10.49) - Mineral Lease Agreement..................228-255
10.54 Exhibit I to Acquisition Agreement
(see 10.49) - Fourth Amendment of
Mining Venture Agreement among
Kennecott Uranium Company, USE and USECC...............256-267
10.55 Master Resolution Agreement
regarding Gunnison Properties..........................268-272
10.56 Membership Pledge Agreement
regarding Gunnison Properties..........................273-279
10.57 Management Agreement between SGMC and USECC............280-296
10.58 Outsourcing and Lease Agreement
between YSFC and USECC.................................297-300
10.59 Convertible Promissory Note from YSFC to USECC.........301-302
21.1 Subsidiaries of Registrant.................................303
[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, 1996
[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, 1995.
[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, 1992.
[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, 1991.
[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, 1990.
99
<PAGE>
[6] 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.
[7] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form 10-Q for the period ended February 28, 1991.
[8] Incorporated by reference from exhibit A to the Registrant's
Form 8-K reporting an event of August 11, 1993.
[9] Incorporated by reference from the like-numbered exhibit to a
Schedule 13D filed by AMAX on or about August 3, 1987.
[10] 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.
[11] 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.
[12] Incorporated by reference from an exhibit to the Registrant's
Post-Effective Amendment No. 1 to Form S-3, SEC File No. 333-1967.
[13] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form 8-K, reporting an event of February 26, 1996.
[14] Incorporated by reference from the like-numbered exhibit to the
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, 1997, the
Registrant filed one Form 8-K, under Item 5, Other Events, reporting an event of
March 6, 1997.
(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).
100
<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 report to be signed on
its behalf by the undersigned, thereunto duly authorized.
U.S. ENERGY CORP. (Registrant)
Date: October 14, 1997 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: October 14, 1997 By: /s/ John L. Larsen
----------------------------------
JOHN L. LARSEN, Director
Date: October 13, 1997 By: /s/ Harold F. Herron
----------------------------------
HAROLD F. HERRON, Director
Date: October __, 1997 By:
----------------------------------
DON C. ANDERSON, Director
Date: October __, 1997 By:
----------------------------------
DAVID W. BRENMAN, Director
Date: October 14, 1997 By: /s/ Nick Bebout
----------------------------------
NICK BEBOUT, Director
Date: October 14, 1997 By: /s/ H. Russell Fraser
----------------------------------
H. RUSSELL FRASER, Director
Date: October 13, 1997 By: /s/ Robert S. Lorimer
----------------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer and
Chief Accounting Officer
101
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
Report on Audits of Financial Statements
as of December 31, 1996 and 1995 and for the
years ended December 31, 1996, 1995 and 1994,
and the period from inception
(June 1, 1990) to December 31, 1996
102
<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, 1996 and 1995, and
the related statements of operations, changes in Venture partners' capital, and
cash flows for the years ended December 31, 1996, 1995 and 1994, and the period
from inception (June 1, 1990) to December 31, 1996. 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, 1996 and 1995, and the results of its operations and its cash
flows for the years ended December 31, 1996, 1995 and 1994, and the period from
inception (June 1, 1990) to December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Salt Lake City, Utah May 6, 1997, except for Note 5, as to which the date is
June 17, 1997
103
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
BALANCE SHEET
------
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------
1996 1995
---- ----
ASSETS
<S> <C> <C>
Assets:
Due from USECC $ - $ 1,212
Property and equipment (Note 3):
Mineral properties and mine development costs 22,812,077 22,443,305
Buildings 24,815,009 24,815,009
Machinery and equipment 403,000 -
-------------- --------------
48,030,086 47,258,314
-------------- --------------
Total assets $ 48,030,086 $ 47,259,526
============== ==============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Due to USECC $ 469,032 $ -
Reclamation liabilities (Note 3) 23,620,000 23,620,000
-------------- --------------
Total liabilities 24,089,032 23,620,000
-------------- --------------
Commitments and contingencies (Notes 3 and 4)
Partners' capital:
Kennecott Uranium Company 11,970,527 11,819,763
USECC 11,970,527 11,819,763
-------------- --------------
23,941,054 23,639,526
-------------- --------------
Total liabilities and partners' capital $ 48,030,086 $ 47,259,526
============== ==============
<FN>
The accompanying notes are an integral
part of these financial statements
</FN>
</TABLE>
104
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
<TABLE>
STATEMENT OF OPERATIONS
-------
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 1, 1990)
YEAR ENDED DECEMBER 31, TO DECEMBER 31,
------------------------------------------- ---------------
1996 1995 1994 1996
------------ ------------ -------------- ---------------
<S> <C> <C> <C> <C>
Cost and expenses:
Maintenance and holding costs $ 1,838,820 $ 1,697,234 $ 1,877,528 $ 9,457,836
Marketing costs - - 85,676 247,598
------------ ------------ -------------- --------------
Net loss $ 1,838,820 $ 1,697,234 $ 1,963,204 $ 9,705,434
============ ============ ============== ==============
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
105
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF CHANGES IN VENTURE PARTNERS CAPITAL
-----
<TABLE>
<CAPTION>
Period from
inception
(June 1, 1990)
YEAR ENDED DECEMBER 31, TO DECEMBER 31,
---------------------------------------------- ---------------
1996 1995 1994 1996
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 11,819,763 $ 11,510,240 $ 11,348,745 $ -
Kennecott Uranium Company 11,819,763 11,510,240 11,348,745
Capital Contributions (Note 1):
Kennecott Uranium Company 1,070,174 1,158,140 1,143,097 16,823,244
USECC 1,070,174 1,158,140 1,143,097 16,823,244
Net loss:
Kennecott Uranium Company (919,410) (848,617) (981,602) (4,852,717)
USECC (919,410) (848,617) (981,602) (4,852,717)
Balance at end of period:
Kennecott Uranium Company $ 11,970,527 $ 11,819,763 $ 11,510,240 $ 11,970,527
USECC $ 11,970,527 $ 11,819,763 $ 11,510,240 $ 11,970,527
<FN>
The accompanying notes are an integral
part of these financial statements
</FN>
</TABLE>
106
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
<TABLE>
STATEMENT OF CASH FLOWS
-----
PERIOD FROM
<CAPTION>
INCEPTION
(JUNE 1, 1990)
YEAR ENDED DECEMBER 31, TO DECEMBER 31,
--------------------------------------------- ---------------
1996 1995 1994 1996
------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,838,820) $(1,697,234) $(1,963,204) $ (9,705,434)
Increase (decrease) in due to and due from
USECC 329,171 (47,889) (34,782) 298,447
------------ ----------- ----------- -------------
Net cash used in operating activities (1,509,649) (1,745,123) (1,997,986) (9,406,987)
------------ ----------- ----------- -------------
Cash flows from investing activities:
Cost of buildings, mineral properties mine
development, and machinery and equipment (771,772) (555,448) (283,194) (8,683,086)
Increase (decrease i due to and due from
USECC 141,073 (15,709) (5,014) 170,585
------------ ----------- ----------- -------------
Net cash used in investing activities (630,699) (571,157) (288,208) (8,512,501)
------------ ----------- ----------- -------------
Cash flows from financing activities:
Capital contributions 2,140,348 2,316,280 2,286,194 17,919,488
------------ ----------- ----------- -------------
Net change in cash and cash equivalents $ - $ - $ - $ -
=========== =========== =========== =============
Cash and cash equivalents:
At beginning of period $ - $ - $ - $ -
At end of period - - - -
Supplemental schedule of non-cash activities:
During 1990 and 1992 the Venture acquired
mineral properties an an established
uranium processing milling exchange
for the assumption of reclamation
liabilities associated with the
properties. $ 23,620,000
In 1990 the Venture partners contributed mineral
properties and buildings which were recorded
at the contributing partners' historical cost. $ 15,727,000
<FN>
The accompanying notes are an integral
part of these financial statements
</FN>
</TABLE>
107
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 explore for, evaluate, develop, mine and market
the mineral resources 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
May 6, 1997, the Management Committee has not approved a budget for the
year ending December 31, 1997. 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, 1996, Kennecott has contributed $17,919,488 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.
Continued
108
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
1. ORGANIZATION OF THE JOINT VENTURE, Continued:
Through December 31, 1996, the activities of the Venture have consisted
primarily of the development and maintenance of the Green Mountain
properties. While these activities are expected to continue in the
future, additional development at substantially higher annual levels is
required prior to the commencement of commercial production. Such
commencement is not expected to occur until the venture partners have
agreed that all economic and other conditions justify such commencement.
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. Amortization of mine
properties and development costs will commence when mining operations
start. 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.
Continued
109
<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.
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, 1996
Kennecott had reimbursed USECC for substantially all development costs
incurred.
Continued
110
<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, Continued:
Building, mineral property and mine development costs incurred by each
of the Venture partners are as follows:
<TABLE>
<CAPTION>
Period from
inception
(June 1, 1990)
YEAR ENDED DECEMBER 31, TO DECEMBER 31,
--------------------------------------------- ---------------
1996 1995 1994 1996
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Kennecott 31,597 43,626 137,482 2,732,181
------------ ------------ ------------ --------------
Total $ 771,772 $ 555,448 $ 283,194 $ 8,683,086
============ ============ ============ ==============
</TABLE>
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. Before the earlier of January 1, 2001, and resumption of
production, if the GMMV is required to incur reclamation or
environmental costs, the seller of the mill will be liable for the first
$8 million of these costs at the Sweetwater Mill.
The Venture properties include state leases which will expire in May
2001 and October 2006. All fees required to hold the unpatented mining
claims have been paid to the state of Wyoming as of December 31, 1996.
Continued
111
<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, Continued:
At December 31, 1996 and 1995, costs capitalized as property and
equipment are composed of the following:
1996 1995
---------------- ----------------
Acquisition costs $ 39,347,000 $ 39,347,000
Development costs 8,683,086 7,911,314
---------------- ----------------
$ 48,030,086 $ 47,258,314
================ ================
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
totaling $23,620,000.
4. 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 (UMA) between Nukem and USE and the Sheep
Mountain Partners Partnership Agreement (SMPA) between USE and Cycle.
Nukem and Cycle are each seeking damages in excess of $14 million and
punitive damages.
The case was stayed pending the conclusion of an arbitration proceeding
between Cycle, Nukem and USE. The arbitration panel entered its order in
April 1996, and the stay in this case was lifted. The arbitration panel
held against Nukem in material respects stating that, even if the UMA
had been breached, Nukem suffered no damages thereby. The panel denied
the relief that Cycle sought for alleged breach of the SMPA.
Accordingly, on January 6, 1997, Kennecott filed a motion for summary
judgment contending, among other things, that the arbitration findings
collaterally estop all claims asserted by Nukem and Cycle. The motion is
currently pending. If the motion is denied,
Continued
112
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
4. CONTINGENCIES, Continued:
the case will proceed to trial scheduled in 1997. Kennecott intends to
vigorously prosecute the summary judgment motion, and to vigorously
defend the litigation in the event the motion is denied.
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.
5. SUBSEQUENT EVENT:
Subsequent to year end, Kennecott and USECC continued negotiations
whereby the parties are attempting to extract Kennecott from the GMMV.
These negotiations contemplate USECC buying out the Kennecott interest
in GMMV. No assurance can be given that the negotiations will be
successfully concluded.
Continued
113
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
U.S. ENERGY CORP. FORM 10-K FOR THE YEAR ENDED MAY 31, 1997 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-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 1,416,900
<SECURITIES> 0
<RECEIVABLES> 1,590,100
<ALLOWANCES> 30,900
<INVENTORY> 96,000
<CURRENT-ASSETS> 4,400,900
<PP&E> 14,843,000
<DEPRECIATION> 8,802,100
<TOTAL-ASSETS> 30,387,100
<CURRENT-LIABILITIES> 1,393,900
<BONDS> 0
0
0
<COMMON> 66,500
<OTHER-SE> 12,657,100
<TOTAL-LIABILITY-AND-EQUITY> 30,387,100
<SALES> 3,258,000
<TOTAL-REVENUES> 5,790,200
<CGS> 4,655,300
<TOTAL-COSTS> 4,655,300
<OTHER-EXPENSES> 4,718,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140,800
<INCOME-PRETAX> (3,724,500)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,724,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,724,500)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> (.55)
</TABLE>
