SEC File No. 333-6189
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
Registration Statement Under Securities Act of 1933
U.S. ENERGY CORP.
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(Exact name of registrant as specified in its chapter)
Wyoming
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(State or other jurisdiction of incorporation)
1090
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(Primary Standard Industrial Classification Code Number)
83-0205516
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(I.R.S. Employer Identification No.)
877 North 8th West, Riverton, Wyoming 82501
Tel. 307/856-9271
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(Address and telephone of registrant's principal executive offices)
Daniel P. Svilar
877 North 8th West, Riverton, Wyoming 82501
Tel. 307/856-9271
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(Name address and telephone of agent for service of process)
Approximate date of commencement of proposed sale to public: As
soon as practicable.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415
under the Securities Act of 1933 check the following box. X
Exhibit Index begins on page 168.
<PAGE>
Cross Reference Sheet
under Rule 501(1)e
Information Required in the Prospectus
Item 1. Forepart of Registration Facing page, outside front
Statement and Outside Front Cover cover of Prospectus
Item 2. Inside Front and Outside Inside front and outside
Back Cover Pages of Prospectus back Prospectus cover
Item 3. Summary Information, Summary of the Offering;
Risk Factors, and Ratio of Risk Factors
Earnings to Fixed Charges
Item 4. Use of Proceeds Not applicable
Item 5. Determination of Not applicable
Offering Price
Item 6. Dilution Not applicable
Item 7. Selling Security Holders Holders of the Warrants;
Selling Shareholders
Item 8. Plan of Distribution Plan of Distribution
Item 9. Description of Securities Description of Securities
to be Registered
Item 10. Interests of Named Not applicable
Experts and Counsel
Item 11. Information With Respect Business and Properties
to the Registrant
Item 12. Disclosure of Commission Not applicable
Position on Indemnification for
Securities Act Liabilities
<PAGE>
Prospectus Subject to Completion, Dated April ___, 1998
U.S. ENERGY CORP.
39,539 COMMON SHARES
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The securities offered by this Prospectus are 39,539 shares (the
"Common Shares") of common stock, par value $0.01 per share
("Common Stock"), of U.S. Energy Corp., a Wyoming corporation
("Registrant", "Company" or "USE"). Of the total Common Shares,
30,000 shares (the "Warrant Shares") were issued upon the
exercise of that certain Warrant To Purchase 20,000 Common Shares
of U.S. Energy Corp. dated as of January 9, 1996 (the "Warrant")
granted to Shamrock Partners Ltd., 111 Veterans Square, Media,
Pennsylvania ("Holder"), as compensation for services to the
Company as a financial consultant and advisor. The Warrant
entitled the Holder to purchase at any time or from time to time
until 12:00 O'clock Midnight, Mountain Time, on January 9, 1997,
200,000 shares of Common Stock of Registrant a price of $5.00
per share. The Warrant was originally registered solely to
accommodate the registration of the Warrant Shares for sale to
the public following their issuance upon exercise of the Warrant
or Warrants. The original Expiration Date for all the Warrants
was January 9, 1997, however, the Expiration Date was extended to
December 1, 1997. As provided by its terms, the Warrant was
divided or combined with up to 10 other warrants which carry the
same (proportional) rights ("Warrants"). 180,000 shares were
issued upon the exercise (in the months of July, September,
October and December, 1996); the remaining 20,000 shares were
issued upon exercise in November 1997. Holders of the other
Warrants, having exercised the Warrants, are referred to
collectively as the "Holders of the Warrant Shares." The
remaining 19,539 Common Shares offered by this Prospectus for
sale to the public are held by 18 employees of the Company, one
of whom is a director and officer of the Company (the "Selling
Shareholders").
These are Speculative Securities.
Such Securities Involve a High Degree of Risk.
See "Risk Factors" starting on page 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE COMMISSION, OR ANY STATE
SECURITIES COMMISSION, PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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The date of this Prospectus is April ___, 1998.
<PAGE>
The Warrant Shares will be offered from time to time by the
Holders of the Warrant Shares. The remaining 19,539 Common
Shares held by the Selling Shareholders will be offered from time
to time by the Selling Shareholders. It is expected that all of
the Common Shares will be offered at market prices from time to
time. Registrant's Common Stock is traded on the NASDAQ/NMS
quotation system. As of February 5, 1998, the closing bid price
for Registrant's Common Stock was $7.375 per share. See "Market
for USE Common Stock and Related Stockholder Matters." There are
no underwriting arrangements known to Registrant. Any selling
discounts or commissions will be paid by the sellers of the
Common Shares. See "Plan of Distribution". The Company will pay
the cost of the registration estimated at $10,000 for registering
the Warrant and Common Shares.
Except for the $5.00 per share exercise price for the
Warrant Shares, the Company has not (and will not) received any
proceeds from the sale of the Common Shares.
The Common Shares have been registered for sale to public,
by the filing of the Registration Statement (of which this
Prospectus is a part) with the Securities and Exchange Commission
("Commission") under the Securities Act of 1933, as amended
("1933 Act"). No one is authorized to give any information, or
make any representation on behalf of the Company, the Warrant
Holders or the Selling Shareholders if not contained in this
Prospectus. This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to purchase, the securities
offered hereby by any person in any jurisdiction in which such an
offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such an offer or
solicitation.
Neither delivery of this Prospectus nor sale of the
securities offered hereby, shall create an implication that there
has been no change in the information set forth herein since date
of this Prospectus. The Prospectus will be supplemented to
reflect any material changes in the Company or its business in
the course of the offering.
Information contained herein is subject to completion or
amendment. A registration statement relating to these securities
has been filed with the Securities and Exchange Commission.
These securities may not be sold nor may offers to buy be
accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any
sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
AVAILABLE INFORMATION
Registrant is subject to the information requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other
statements and information with the Commission. The reports and
other documents so filed can be inspected and copied at the
Commission's public reference room located at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and at the Commission's
public reference facilities at Commission regional offices
located at: 7 World Trade Center, 13th Floor, New York, New York
10048; and Suite 1400, Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such
documents can be obtained at prescribed rates by writing to the
Securities
<PAGE>
and Exchange Commission, Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549 or on the Internet at
www.sec.gov.
This Prospectus does not contain all of the information set
forth in the Registration Statement and its exhibits, covering
the Common Shares offered hereby, certain portions of which have
been omitted pursuant to Commission rules and regulations. Each
statement made in this Prospectus concerning a document filed as
an exhibit to the Registration Statement, is qualified in its
entirety by reference to such exhibit for a complete statement of
its provisions. Any interested party may inspect the
Registration Statement (and any amendments thereto) and its
exhibits, without charge, at the public reference facilities of
the Commission at its offices as stated above.
SUMMARY OF THE OFFERING
The following summary is not intended to be complete and is
qualified in all respects by the more detailed information
included in this Prospectus.
The Company
Registrant is in the general minerals business of acquiring,
exploring, developing and/or selling or leasing of mineral
properties and, from time to time, mining and marketing of
minerals. The Company is now engaged in two principal mineral
sectors: uranium and gold. Its minerals business with respect to
uranium and gold can be characterized as in the development stage
according to the Commission's definition of that term. Interests
are held in other mineral properties (principally molybdenum),
but are either non-operating interests or undeveloped claims.
The Company also carries on a small oil and gas operation. Other
USE business segments are commercial operations (real estate and
general aviation) and construction operations.
Most USE operations are conducted through a joint venture
with Crested Corp., a majority-owned Colorado corporation
("Crested"),and various joint subsidiaries of USE and Crested.
The joint venture with Crested is hereafter referred to as
"USECC."
Manufacturing and/or marketing of professional and
recreational outdoor products was conducted through The Brunton
Company ("Brunton"), a wholly-owned USE subsidiary. On February
16, 1996 Registrant sold all of the shares of Brunton to Silva
Production AB for $4,300,000 plus 45% of the net profits before
taxes derived from the sale of Brunton products for four years
and three months.
The sale eliminated Brunton's manufacturing and/or marketing
of professional and recreational outdoor products from the
commercial segment of Registrant's business as of January 31,
1996, except to the extent that there are net profit payments
from Silva over the next four years, of which there can be no
assurance. For the fiscal years ended May 31, 1995 and 1996,
Brunton's sales provided 49% and 19%, respectively, of revenues
of USE before reclassification to reflect Brunton as discontinued
operations with respect to the Company (see "Business and
Properties - Brunton" for details of this transaction, and Risk
Factor 2 for additional information on the impact of this
transaction).
<PAGE>
USE was incorporated in Wyoming in 1966. All operations are
in the United States. Principal executive offices are located at
877 North 8th West, Riverton, Wyoming 82501, telephone (307) 856-
9271.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Prospectus 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 than
statements of historical fact included in this Prospectus,
including without limitation the statements under Management's
Discussion and Analysis of Financial Condition and Results of
Operations, the disclosures about the registrant's option to buy
out Kennecott's interest in the Green Mountain Mining Venture,
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, the
plan of operations for Yellow Stone Fuels Corp. and Sutter Gold
Mining Company (subsidiaries of U.S. Energy Corp.), and future
uranium prices and possible utility contracts, 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
Prospectus. The forward-looking statements should be carefully
considered in the context of all the information set forth in
this Prospectus.
The Offering
Securities Offered (1).......................39,539 shares
of Common Stock(2)
USE Common Stock Outstanding
Before and After Offering .................7,242,839 shares
NASDAQ/NMS Symbol"USEG"
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(1) See "Description of Securities." (2) See "Plan of
Distribution."
Risk Factors
An investment in the Common Shares involves substantial
risks, including the risks of USE's failure to obtain necessary
capital to put its principal mineral properties into production,
a recurrence of low uranium prices, litigation and competition.
See "RISK FACTORS" beginning on the next page.
Issuance of the Warrant Shares
180,000 of the Warrant Shares were issued by Registrant from
July to December, 1996 upon exercise of the Warrant or those
Warrants that resulted from the division and/or recombination of
<PAGE>
the Warrant originally held by Shamrock Partners Ltd. See
"Description of Securities - Warrants" for information concerning
the terms of the Warrants. On the date of this Prospectus, the
Holders of the remaining 30,000 Warrant Shares are set forth
below. Except for Shamrock Partners, Ltd., all of the Holders
who previously purchased Warrant Shares have sold their
positions.
Shamrock Partners, Ltd. 10,000 Warrant Shares
Shamrock Partners International, Inc. 20,000 Warrant Shares
Issuance of Other Common Shares
The remaining 19,539 Common Shares are held by employees of
the Company, one of whom is a director and officer of the Company
(see "Selling Shareholders"). These shares were issued as bonus
compensation to Company employees pursuant to a resolution of the
Company's Board of Directors at a meeting held on December 22,
1995.
RISK FACTORS
Prospective investors should note that the Company's
business is subject to certain risks, including the following:
1. Working Capital Requirements. Registrant's cash
requirements for the balance of fiscal 1998 and fiscal 1999 are
the funding of on-going general and administrative expenses,
including legal costs incurred as a result of the Sheep Mountain
Partners ("SMP") arbitration/litigation proceedings described
below; mine and mill development and holding costs of the Sutter
gold property described below; holding (standby) costs for the
uranium mill owned by Plateau Resources Limited, a 100%
subsidiary of the Company ("Plateau"), in southeastern Utah; SMP
mine care and maintenance costs; mine development costs for the
Jackpot Mine; and costs to acquire uranium oxide which the
Company may be obligated to deliver under the SMP contracts. As
a result of the disputes between the SMP partners (see "Business
and Properties - Legal Proceedings - Sheep Mountain Partners
Arbitration/Litigation"), Registrant and Crested have been
delivering certain of the U3O8 concentrates required to fill
various delivery requirements on long-term U3O8 contracts with
domestic utilities. Recently, Nukem, Inc. ("Nukem") and its 100%
subsidiary Cycle Resource Investment Corporation ("CRIC") have
made most of the SMP deliveries of U3O8. It is not known how
long this arrangement will continue. The capital requirements to
fill Registrant's and Crested's portion of the remaining
commitments in fiscal 1998 and thereafter will depend on the
timing of payments to the Registrant and Crested by Nukem/CRIC
under the arbitration award, whether SMP will be wound up and
dissolved as a partnership and its assets distributed to partners
Registrant/Crested and Nukem/CRIC, and whether a receiver is
appointed by the court to oversee SMP contract delivery
obligations pending dissolution of SMP.
The primary source of Registrant's capital resources for the
last two quarters of fiscal 1998, will be (i) cash on hand at
November 30, 1997; (ii) possible sale of equity or interests in
investment properties or other affiliated companies; (iii) sale
of equipment; (iv) proceeds from the resolution of the SMP
arbitration/litigation; (v) sale of royalties or interests in
mineral properties; (vi) proceeds from the sale of uranium under
the SMP contracts, and (vii) borrowings from financial
institutions.
<PAGE>
Construction revenues from the Company's 50.9% subsidiary, Four
Nines Gold, Inc. ("FNG"), fees from oil production, rentals of
various real estate holdings and equipment and the sale of
aviation fuel are also expected to provide cash. Also, the mine
development expenses for the Jackpot Mine on Green Mountain
(Wyoming) are being funded by Kennecott Uranium Company ("KUC")
through the Green Mountain Mining Venture ("GMMV").
Registrant's working capital decreased during the three
months ended November 30, 1997 by $1,674,800 to working capital
of $1,744,200.
Monthly operating and development expenses to hold the
uranium properties, and fund general and administrative expense
is estimated at $1,500,000 for the last two quarters of fiscal
1998. Revenues from commercial operations are expected to
provide approximately $110,000 monthly. However, funds for work
on the Jackpot Mine are being provided by KUC through the GMMV.
Funds to develop the Sutter Gold property in California are
provided by the funds on hand at Sutter Gold Mining Company. The
Registrant and Crested are currently seeking additional financing
for the construction of the SGMC gold processing mill and to
complete the mine development, but there can be no assurance that
such financing can be arranged.
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional information
on working capital requirements and capital resources. See also
Risk Factors 2 and 3 below.
2. Sutter Gold - No Current Mining Operations or Gold
Production. USE and Crested have invested substantial funds in
capitalized costs and additional funds for operating expenses to
acquire, permit and develop a gold property in California, held
through a subsidiary, Sutter Gold Mining Company. This
investment represents a significant portion of USE's consolidated
assets. Although SGMC completed private financings for a total
of $7,115,100, additional financing may be required to put the
property into full production and build a mill on the property.
If third-party financing cannot be obtained and USE is unable to
fund development and production costs from internally generated
funds over the next two years, the Company may be adversely
affected. See "Business and Properties - Gold - Lincoln Project
(California)".
3. Additional Shares to Market; Possible Dilution. The
Registrant may issue additional common stock in a private
placement or a public offering pursuant to the 1933 Act if needed
for future working capital (see Risk Factor 1 above).
In addition, the Registrant and Crested intend to finance
the purchase of KUC's 50% interest in GMMV and proceed to develop
the GMMV properties through a public financing of a new entity.
The new entity will hold the principal uranium assets of the
Registrant and Crested, and Registrant and Crested will be the
principal shareholders of the new entity. The terms of such
restructuring of the uranium assets, and the impact of such
financing on the shareholders of the Registrant and Crested will
not be determinable until final terms of the transaction are
reached. See "Business and Properties - Green Mountain Mining
Venture." The issuance of such additional shares could result in
dilution to the equity of outstanding shareholders of Registrant,
depending on the price at which such shares are issued and sold.
<PAGE>
4. Project Delay. Registrant's minerals business is
subject to the risk of unanticipated delays in developing and
permitting its uranium and gold projects. Such delays may be
caused by fluctuations in commodity prices (see Risk Factor 5),
mining risks (see Risk Factor 8), difficulty in arranging needed
financing, unanticipated permitting requirements, or legal
obstruction in the permitting process by project opponents. In
addition to adding to project capital costs (and possibly
operating costs), such delays, if protracted, could result in a
write off of all or a portion of the carrying value of the
delayed project and/or could trigger certain reclamation
obligations sooner than planned.
5. Commodity Price Fluctuations. The ability of the
Company to develop and operate its uranium and gold projects
profitably can be significantly affected by changes in the market
price of uranium and gold, respectively. From 1988 until mid-
1996, the spot market price for uranium concentrates was
depressed and had been below $8.00 per pound as recently as 1992.
(See Business and Properties - Uranium - Uranium Market
Information" for additional information on the uranium markets
and pricing.) Uranium prices are subject to a number of factors
beyond Registrant's control including imports of uranium from
Russia and other countries in the Commonwealth of Independent
States ("CIS"), the amount of uranium produced and sold from the
blending of highly enriched uranium recovered from U. S. and
Russian nuclear weapons to produce lower enriched uranium for
nuclear fuel, the build up by utilities of uranium fuel
inventories and the sale of excess inventories into the market,
the rate of consumption of uranium inventories by utilities, the
rate of uranium production in the United States, Canada,
Australia and elsewhere by other producers and the rate of new
construction of nuclear generating facilities, versus the rate of
shutdown and decommissioning of older nuclear generating
facilities, particularly in the United States.
Market prices for uranium concentrates in the United States
recovered to between $16.25 and $16.50 per pound as of May 31,
1996, however, prices were between $10.30 and $14.80 per pound in
fiscal 1997. The market price at January 23, 1998 was $12.00 per
pound. The Company believes that if the price rebounds to or
surpasses $16.50 per pound, United States utilities will seek
long term price stabilizing uranium supply contracts. If the
Company is able to obtain long term uranium supply contracts with
assured prices exceeding $18.00 per pound, that should be
sufficient to operate Plateau's Utah uranium properties
profitably. It should also be sufficient to continue with
development of the Green Mountain Mining Venture ("GMMV") Jackpot
Mine and operation of the Sweetwater uranium mill. There also
can be no assurance that such a price rebound will occur. USE
would be adversely affected if the United States utilities with
nuclear power plants do not seek long term uranium supply
contracts during the balance of the 1990s. Although the extent
of such adverse impact cannot be predicted, if uranium prices
remained so depressed through the 1990s that USE's properties and
facilities were not put into operation, the book value of such
assets might decrease and USE could be required to reclaim or
restore such properties sooner than planned (see Risk Factor 10).
The market price of gold has fluctuated widely and is affected by
numerous factors beyond the Company's control, including
international economic trends, currency exchange fluctuations,
expectations for inflation, the extent of forward sales of gold
by other producers, consumption patterns (such as purchases of
gold jewelry and the development of gold coin programs),
purchases and sales of gold bullion holdings by central banks or
other large gold bullion holders or dealers and global or
regional political events, particularly in major gold-producing
countries such as South
<PAGE>
Africa and some of the CIS (Commonwealth of Independent States -
formerly the Soviet Union) countries. Gold market prices are
also affected by worldwide production levels, which have
increased in recent years, but currently appear to be decreasing
somewhat. The aggregate effect of these factors, all of which
are beyond the Company's control, is impossible for the Company
to predict. In addition, the market price of gold has on
occasion been subject to rapid short-term changes because of
market speculation. As of April 22, 1998, the Comex spot price
of gold was $311.50 per ounce, compared to $373 per ounce on
November 24, 1996.
6. 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.
7. Exploration Risks. Mineral exploration, particularly
for gold, is highly speculative in nature, involves many risks
and frequently is nonproductive. There can be no assurance that
the Company's efforts at the Sutter Gold Project to identify
additional gold ore reserves will be successful. Moreover,
substantial expenditures are required to establish additional ore
reserves through drilling, to determine metallurgical processes
to extract the metal from the ore and to construct mining and
processing facilities. During the time required to establish
additional ore reserves, determine suitable metallurgical
processes and construct such mining and processing facilities,
the economic feasibility of production may change because of
fluctuating gold prices (see Risk Factor 5).
8. Mining Risks and Insurance. The business of uranium
and gold mining generally is subject to a number of risks and
hazards, including environmental hazards, industrial accidents,
explosions and rock falls, earthquakes, flooding, interruptions
due to weather conditions and other acts of God. Such risks
could result in damage to or destruction of Registrant's mineral
properties and production facilities, as well as to properties of
others in the area, personal injury, environmental damage and
process and production delays, causing Registrant monetary losses
and possible legal liability. While the Company maintains, and
intends to continue to maintain, liability, property damage and
other insurance consistent with industry practice, no assurance
can be given that such insurance will continue to be available,
be available at economically acceptable premiums or be adequate
to cover any resulting liability.
9. 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 (see also Risk Factor 6).
<PAGE>
Requirements for the location of a valid mining claim on public
land depend on the type of claim being staked, but generally
include discovery of valuable minerals, erecting a discovery
monument and posting thereon a location notice, marking the
boundaries of the claim with monuments, and filing a certificate
of location with the county in which the claim is located and
with the U. S. Bureau of Land Management ("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 Risk Factor 15).
10. Reclamation and Environmental Liabilities.
Registrant's projects and 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 and the Comprehensive Environmental Response Compensation
Liability Act. 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 will impact USE. Similar laws in California affect
SGMC operations and in Utah will affect Plateau's operations. In
addition, Registrant's uranium mill in Utah and the GMMV mill in
Wyoming are subject to jurisdiction of the Nuclear Regulatory
Commission ("NRC").
To Registrant's knowledge, it is in compliance in all
material respects with current environmental regulations. To the
extent that production by SMP, GMMV or SGMC is delayed,
interrupted or discontinued due to need to satisfy present or
future laws or regulations which relate to environmental
protection, future USE earnings could be adversely affected. For
additional information concerning the effect such environmental
laws and regulations have on the Company's capital expenditures,
see "Business and Properties - Environmental" and Notes F and K
to the Company's Consolidated Financial Statements.
USE is a joint venturer in the GMMV, which entity is
responsible for mine reclamation, environmental restoration and
decommissioning associated with mineral properties on Green
Mountain, in south central Wyoming, and the nearby Sweetwater
Mill. Future costs to comply with these obligations are now
estimated at approximately $25,000,000. If actual costs are
higher, USE could be adversely impacted. There is no assurance
the properties will generate sufficient revenues to fund
reclamation, restoration and decommissioning costs in excess of
current estimates. See Note K to the Company's Consolidated
Financial Statements. Current bonds and funds in escrow are
<PAGE>
deemed adequate for reclamation and decommissioning liabilities
associated with the Shootaring Mill in Utah.
USE and Crested have assumed the reclamation obligations,
environmental liabilities and contingent liabilities for employee
injuries, from mining the SMP properties 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, which amount is shown on
USE's balance sheet as a long-term obligation.
To assure the reclamation work will be performed, regulatory
agencies require posting of a bond or other security. USE and
Crested satisfied this requirement with respect to SMP properties
by mortgaging their executive office building in Riverton,
Wyoming. 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 concentrates produced from its
properties to USE and Crested for reclamation work. The status
of this commitment could be impacted by the ultimate resolution
of the arbitration/litigation with Nukem/CRIC (see "Business and
Properties-Legal Proceedings-Sheep Mountain Partners Arbitration/
Litigation").
The GMMV and Sweetwater Mill reclamation liabilities are
self bonded by Kennecott pursuant to written agreements with the
NRC and the State of Wyoming, and accordingly these liabilities
are not recorded in the USE or Crested financial statements. The
SMP and Plateau reclamation liabilities are in the audited USE
Consolidated Financial Statements (see Note K). A cash bond of
approximately $40,000 is posted for miscellaneous reclamation
costs at the Sutter gold property (carried under "Other Assets-
Deposits and Other" on the USE financial statements).
Reclamation and environmental obligations for the oil and gas
properties held by USE are deemed insignificant and manageable in
the ordinary course of business.
11. Possible Losses on Uranium Contracts. As of May 31,
1997, SMP held contracts for delivery of U3O8 to domestic
utilities through 2000 (725,000 pounds in 1998, 725,000 pounds in
1999 and 105,000 pounds in 2000), exclusive of rights to increase
or decrease such amounts as provided for in the contracts. In
the proceedings before the American Arbitration Association
involving Nukem, Inc., the arbitration panel found that another
contract for U3O8 to be delivered through 2000 was to be assigned
to SMP by Nukem/CRIC. See "Business and Properties - Legal
Proceedings - Sheep Mountain Partners Litigation/ Arbitration".
Actual quantities of U3O8 purchased by utilities over that period
of time may vary by 10 to 30 percent, as provided in the
contracts (see "Business and Properties - Uranium - Sheep
Mountain Partners - SMP Marketing"), and profit or loss to SMP on
the deliveries will depend on the cost of inventory. Profits on
such future deliveries cannot be predicted, however, management
of the Company does not anticipate any material losses from the
sales of U3O8 pursuant to these contracts. As of the date of
this Prospectus, the prices under SMP's one remaining base
escalated contract exceed the current market price, however,
there can be no assurance this situation will not change in the
future.
Increases in the spot market price would increase USE's and
Crested's cost of delivering on certain of the SMP contracts
prior to the time that their uranium properties are in
production, thus reducing potential profits or possibly producing
losses, while spot market price decreases would be likely to
increase profits on such contracts. Due to the SMP dispute,
earlier arrangements between
<PAGE>
the partners to deliver their shares of the SMP contracts in
spite of the dispute were abandoned, and USE made no deliveries
(and therefore recorded no revenues or losses) on any SMP
contracts during fiscal 1997 or through August 31, 1997.
12. Competition. There is keen competition in the domestic
minerals industry and the oil and gas business for properties and
capital. USE's competitors include a number of major mining and
oil and gas companies, most of which are larger than USE in all
respects. In the production and marketing of uranium
concentrates there are more than 10 major international entities
(some of which are government controlled) that are significantly
larger and better capitalized than USE. Although the Registrant
presently is not engaged in the mining or milling of uranium, and
therefore should not be counted in the top ten uranium producers,
the Registrant's competitive stature may improve significantly at
such time as it commences uranium mining and production.
The location and composition of mineral ore bodies are of
great importance to the competitive position of a mining company.
Producers of high-grade ore with readily extractable minerals are
in an advantageous position. Producers of one mineral may be
able to efficiently recover other minerals as by-products, with
significant competitive impact on primary producers. Substantial
capital costs for equipment and mine-works are often needed. As
a result, owners of producing properties, particularly if
purchase contracts for the production are in place, generally
enjoy substantial competitive advantages over organizations that
propose to develop non-producing properties. Competition is also
keen in the search for mineral properties and prospects and in
the employment and retention of qualified personnel.
USE believes that with the recent improvements in market
prices for uranium concentrates, it will be able to compete with
other uranium producers, primarily because it holds significant
uranium resources in place, along with the necessary mining and
milling facilities, all of which it acquired for little or no
cost. Applications have been submitted to upgrade the mill
licenses to operating levels, however, delays in final permitting
may be encountered, as the uranium refining industry is closely
regulated by the NRC.
Nonetheless, USE expects competition from larger producers
in Canada, Australia and Africa, as well as from U.S. in situ
producers of uranium and other producers that recover uranium as
a byproduct of other mineral recovery processes, and from uranium
recovered from the de-enrichment of highly enriched uranium
obtained from the dismantlement of U.S. and Russian nuclear
weapons and sold in the market by the United States Enrichment
Corporation and/or the United States Department of Energy, as
well as from imports to the United States of uranium from the
Commonwealth of Independent States (formerly the Soviet Union).
See "Business and Properties - Uranium - Uranium Market
Information" and "NUEXCO Exchange Value".
In the past, USE's affiliate FNG has encountered strong
competition with a number of larger civil engineering
construction firms in the western United States. Presently, FNG
is working primarily on GMMV projects, however, at such time as
FNG finishes GMMV work and re-enters the general civil
engineering construction market, FNG again will encounter
competition from larger firms as has been the case in prior
years.
<PAGE>
13. Reserve Estimates. While the ore reserve estimates at
GMMV Round Park uranium ore deposit in Wyoming and SGMC's Lincoln
gold project in California have been reviewed by independent
consultants, such ore reserve estimates are necessarily imprecise
and depend to some extent on statistical inferences drawn from
limited drilling, which may, on occasion, prove unreliable.
Should the Company encounter mineralization or formations at any
of its mines or projects different from those predicted by
drilling, sampling and similar examinations, ore reserve
estimates may have to be adjusted and mining plans may have to be
altered in a way that could adversely affect the Company's
operations. Moreover, short-term operating factors relating to
the ore reserves, such as the need for sequential development of
ore bodies and the processing of new or different ore grades, may
adversely affect the Company's profitability in any particular
accounting period.
14. Variable Revenues and Recent Losses. Due to the nature
of USE's business, there are from time to time major increases in
gross revenues from sale of mineral properties. During fiscal
1991, $7,193,600 was recognized from sale of a partial interest
in a uranium property to Kennecott Uranium Company (a GMMV
partner). No such revenues were recognized from fiscal 1992
through fiscal 1995. Further, USE realized a net gain in fiscal
1992 of $613,000, but net losses were realized from fiscal 1993
through fiscal 1995 (in the respective amounts of $221,900,
$3,370,800 and $2,070,600). Revenues in fiscal 1997 were
$5,790,200, compared to $9,632,200 in 1996. The decrease was
primarily due to no revenues being recognized from mineral sales
in 1997. In 1996, the Company had a net profit of $270,700, but
realized a net loss in 1997 of $3,724,500.
15. Bullfrog Litigation. Registrant, Crested, Parador
Mining Company, Inc. ("Parador") and H. B. Layne Contractor, Inc.
("Layne") are defendants and counter- or cross-claimants in
certain litigation in the District Court of Nye County, Nevada,
brought by Bond Gold Bullfrog Inc. ("BGBI") in July 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 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 from Parador,
which is subject to the lease to BGBI's predecessor.
Parador, USE and Crested had previously advised BGBI that
they are entitled to royalty payments with respect to
extralateral rights of the subject claims on minerals produced at
the Bullfrog Mine, claiming that the lode or vein containing the
gold mineralization apexes on the Parador claims and dips under
the claims leased to BGBI by Layne.
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.
<PAGE>
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. Defendants
Registrant, Crested Corp. 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 Layne
presented a single witness who testified that there was no apex
within the Parador claims. The Court nevertheless found that
Parador had failed to meet its burden of proof and therefore
Parador, Registrant and Crested had 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.
Defendants filed an appeal of the Court's ruling as erroneous as
a matter of law, but the Supreme Court of Nevada dismissed the
appeal as premature.
The partial trial did not address any of the other issues
pending in the litigation other than those required to decide the
question of whether the doctrine of extralateral rights is
applicable to this case. On December 18, 1997, the Court ruled
on the parties' motion and cross motion for summary judgment, and
ruled that BGBI's claim for breach of contract and the claims of
defendants Registrant, Crested Corp. and Parador for breach of
the lease agreement with BGBI's predecessor and for specific
performance are the only claims remaining to be tried. The trial
was conducted on January 26, 1998, on those issues.
If USE's and Crested's position concerning extralateral
rights is ultimately sustained, substantial additional revenues
and income may be received by USE and Crested from royalties
payable with respect to gold produced from the Bullfrog Mine.
If, however, the final decision is adverse to USE and Crested
(which could occur only after a successful appeal by the other
parties to the Nevada Supreme Court and a subsequent retrial
which resulted in a judgement in favor of the other parties and
against USE and Crested), USE and Crested could be adversely
affected. The amount of damages which could be awarded against
USE and Crested is not presently known or ascertainable, and
would not be known until such time as an award of damages against
USE and Crested were entered following evidence presented by BGBI
on its damages in a retrial following a successful appeal.
16. Potential Issuance of Preferred Stock. Under the USE
Restated Articles of Incorporation, as amended ("Restated
Articles") and as permitted by the Wyoming Business Corporation
Act ("WBCA"), the Registrant's Board of Directors has authority
to create series of
<PAGE>
preferred stock and to issue shares thereof, without the approval
of any USE shareholders. The creation and issue of USE preferred
stock with dividend rights senior to the Company's Common Stock
could adversely affect common stockholder participation in future
earnings through dividends that otherwise would be available for
distribution to holders of the Common Stock, including those
purchasing the Common Shares.
Such preferred stock also could inhibit a takeover of the
Company. Under the WBCA, separate voting approval by classes of
stock is required for certain substantive corporate transactions.
If the interests of preferred stockholders is perceived to be
different from those of the common stockholders, the preferred
stockholders could withhold approval of the transactions needed
to effect the takeover.
17. Potential Anti-Takeover Effects of Staggered Board.
Registrant's Board of Directors is presently divided into three
classes of two directors each. Pursuant to the USE Restated
Articles and as permitted by the WBCA, the directors in each
class serve a three year term, and only those directors in one
class are reelected each year. This board classification could
stall a takeover of USE, even if a majority of the Common Stock
were to be held by persons desiring a change in control of the
Board. See "Description of Securities."
THE COMPANY
U.S. Energy Corp. ("USE", the "Company" or the "Registrant")
is in the general minerals business of acquiring, exploring,
developing and/or selling or leasing of mineral properties and,
mining and marketing of minerals. USE is now engaged in two
principal mineral sectors: uranium and gold, both of which are in
the development stage. Interests are held in other mineral
properties (principally molybdenum), but are either non-operating
interests or undeveloped claims. The Company also carries on
small oil and gas operations in Montana and Wyoming. Other USE
business segments are commercial operations (real estate and
general aviation) and construction operations. Most of USE
operations are conducted through a joint venture with Crested
Corp. ("Crested," a majority-owned subsidiary), and various joint
subsidiaries of USE and Crested. The joint venture with Crested
is hereafter referred to as "USECC."
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.
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 the payment of $15,000,000 by Registrant,
Crested Corp. or a third party to Kennecott and the assumption of
various reclamation and other liabilities. For the details of
this fiscal 1998 transaction, please see
<PAGE>
"Minerals-Uranium-The Green Mountain Mining Project-June 23, 1997
Acquisition Agreement with Kennecott Uranium Company" below.
Construction operations are carried on primarily through
USE's subsidiary Four Nines Gold, Inc. ("FNG"). Oil and gas
operations are carried on through Energx, Ltd., a subsidiary of
the Company and Crested.
USE and Crested originally were independent companies, with
two common affiliates (John L. Larsen and Max T. Evans). In
1980, USE and Crested formed the USECC 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 "Certain Relationships and Related
Transactions."
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 the
operation of mines and mills 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.
Except for approximately 1,400 ounces of gold recovered in
fiscal 1992 in a bulk sampling program at the Sutter gold
property in California, the Company has not received revenues
from the mining of either uranium or gold during its five fiscal
years ended May 31, 1997 or the nine months ended February 28,
1998. Mineral revenues have been received from sales of mineral
properties, advance royalties in respect of the Company's
interests in an undeveloped molybdenum property that was sold to
AMAX Inc. in 1980, and from sales of uranium under certain of the
utility supply
<PAGE>
contracts held by Sheep Mountain Partners ("SMP"), as a result of
USE and Crested delivering their one-half share or all of the
uranium and receiving sales proceeds therefrom. See "Business
and Properties - Legal Proceedings - Sheep Mountain Partners
Arbitration/Litigation." Commencement of uranium mining from the
Jackpot (Round Park) deposit in Wyoming may result in utility
supply contracts for Green Mountain Mining Venture ("GMMV"), of
which USE and Crested are joint venture partners with Kennecott
Uranium Company ("Kennecott"), and/or commencement of mining
operations from the properties held by Plateau Resources Limited
("Plateau"), a wholly-owned subsidiary of USE, in Utah may result
in utility supply contracts for Plateau. There can be no
assurance, however, that such mining operations will commence, or
that new utility supply contracts will result.
SELECTED FINANCIAL DATA
The following tables set forth certain selected historical
financial data with respect to the Company for the periods
indicated. It is derived from and should be read in conjunction
with the Company's Consolidated Financial Statements included
elsewhere in this Prospectus.
<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
_____
(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.
</TABLE>
February 28, 1998
-----------------
(unaudited)
Current assets $ 5,431,200
Current liabilities 4,642,900
Working capital 788,300
Total assets 31,840,700
Long-term
obligations(1) 13,798,000
Shareholders' equity 11,351,500
(1)Includes $8,751,800 of accrued reclamation costs on mining
properties at November 30, 1997.
<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
Loss before minority
interest in 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 (loss) income (3,724,500) 270,700 (2,070,600) (3,370,800) (221,900)
Loss per share before
extraordinary item and
gain on disposal of
subsidiary in
discontinued segment $ (.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>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
February 28,
------------------------------
1998 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 5,329,400 $ 3,269,200
Loss before equity
income of affiliate and
provision for income taxes (1,048,800) (2,181,700)
Minority interest in (gain) loss
of consolidated subsidiaries (90,300) 575,000
Equity in loss of affiliates - net (612,200) (338,500)
------------ ------------
Loss before provision
for income taxes (1,751,300) (1,945,200)
Provision for income taxes -- --
------------ ------------
Net loss $ (1,751,300) $ (1,945,200)
============ ============
Net loss per share $ (.26) $ (.29)
============ ============
</TABLE>
BUSINESS AND PROPERTIES
Minerals
Uranium
General
The Company 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 an agreement 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., an affiliate of the Company.
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
<PAGE>
Company and Kennecott Corporation of Salt Lake City, UT are
indirect subsidiaries of Rio Tinto plc, formerly RTZ PLC of
London. Rio Tinto plc is one of the world's leading natural
resource companies. 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 Prospectus as Kennecott.
All mining claims are accessible by county, private, 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 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 Resources Limited, a wholly owned subsidiary of USE,
is the owner of the Tony M mine and portions of the Frank M
properties and has posted a bond securing Plateau's obligations
<PAGE>
to reclaim these properties. The Tony M mine was originally
developed by Plateau at the time Plateau was owned by Consumers
Power Company ("CPC"), a Michigan public utility. Significant
areas of uranium mineralization have been accessed and delineated
by the prior owner's underground workings. When the Tony M Mine
was in production (while Plateau was owned by CPC) it produced
ore containing from three to eight pounds of uranium concentrates
per ton. Some of this ore was processed at the Shootaring Mill
into U3O8, the saleable product. In addition, low grade uranium
ore was stockpiled at the Tony M mine and at the Shootaring Mill,
and related mill support facilities, which are held by Plateau.
Plateau also owns the Velvet Mine and the nearby Wood Mine
complex in the Lisbon Valley area in southeastern Utah. The
Velvet uranium mine was fully developed and permitted by its
prior owner and is located approximately 178 miles by road from
the Shootaring Mill. The Wood Mine complex was formerly an
operating uranium mine with a remaining undeveloped resource.
Access to this resource would be by extending a drift
approximately 2,500 feet from the former Wood Mine. The Wood
Mine property is not permitted at this time, but the Company does
not expect difficulty in obtaining a new permit because the
surface facilities would occupy the site that has been disturbed
from previous operations.
The Green Mountain Mining Venture Project
GMMV. 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 the "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
<PAGE>
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 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 hereof, 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 the
Acquisition Agreement with Kennecott Uranium Company, a Delaware
corporation, 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 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.
<PAGE>
The work to develop the proposed Jackpot Mine and ready the
Sweetwater Mill for operations will be undertaken, prior to
closing of the Acquisition Agreement, 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.
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
<PAGE>
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 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 were not closed by December 1,
1997, then USE and USECC (or an entity formed by them to acquire
the GMMV interest owned by Kennecott) were 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
<PAGE>
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 have entitled 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.
In November 1997, the Registrant and its subsidiaries
Crested and Plateau Resources entered into a letter of intent
with an underwriter to raise sufficient funds to acquire
Kennecott Uranium Company's interest in the GMMV. This letter of
intent complies with the condition of the Acquisition Agreement
for the delivery of such letter of intent by December 1, 1997 so
that the $4,000,000 advanced to the Registrant and Crested by
Kennecott on June 23, 1997, would be nonrefundable. This letter
of intent in effect allows the Registrant, as contemplated and
permitted by the Acquisition Agreement, until October 30, 1998 to
close the Acquisition Agreement transactions.
Final terms of the financing, including the total funds to
be raised (which would close the Acquisition Agreement
transactions and provide working capital for mine and mill work),
the identification of the issuer (the Acquiring Entity) of the
securities to be sold to raise the financing, the percentage
ownership of such issuer by the Registrant and its affiliated
companies, and other terms, have not been agreed upon as of the
date of this Prospectus. Such final terms and the expected
timing of the financing will be set forth in a registration
statement which is anticipated to be filed in connection with the
financing in the first calendar quarter of 1998. This Prospectus
will be supplemented with the final information, at the same time
as the registration statement is filed for the financing of the
Acquiring Entity.
If the Acquisition Agreement is not closed, USE and USECC,
and Kennecott, will 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 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.
<PAGE>
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.
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.
<PAGE>
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 purchase of 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). The GMMV has agreed to be responsible for compliance
with mill decommissioning and land reclamation laws, for which
the environmental and reclamation bonding requirements are
approximately $24,330,000, which includes a $4,560,000 bond
required by the NRC. None of the GMMV future reclamation and
closure costs are reflected in Registrant's Consolidated
Financial Statements (see 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
<PAGE>
prior to the earlier of commercial production by GMMV or January
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, the 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 23, 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 January 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 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 Prospectus, 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, completed and are operational (catch basin for
sediment and runoff). The management of the GMMV believes it 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.
<PAGE>
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 and USECC have
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 EPA 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 further venting at the Jackpot mine site, and
must monitor radon emissions at the mines, as well as wind speed,
direction and other conditions. USE management 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 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:
<PAGE>
(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").
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.
<PAGE>
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. But 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 and USE own 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 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.
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
<PAGE>
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.
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.
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 Prospectus, 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.
<PAGE>
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.
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 "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 "Certain Relationships and Related
Transactions."
From mid-September 1997 to late March 1998, YSFC sold
1,215,000 shares of Common Stock in a private placement, at $2.00
per share; net proceeds to YSFC were $2,034,100 after payment of
$315,900 in commissions to the placement agent (RAF Financial
Corp., Denver, Colorado) and $80,000 in legal and accounting
expenses. The securities were sold pursuant to Rule 506 of
Regulation D under the Securities Act of 1933, and are restricted
from resale under Rule 144. In connection with the private
placement, in September, 1997, USE entered into an Exchange
Rights Agreement with YSFC and RAF, pursuant to which USE agreed
that the investors in the YSFC private offering would have the
opportunity to exchange all or a part of their YSFC shares for
shares of Common Stock of USE, if YSFC is not listed on and its
Common Stock is not available for quotation on, the Nasdaq
National Market System by March 16, 1999 (the "listing period").
The number of USE shares which a YSFC investor would be entitled
to receive by exchanging his or her YSFC shares, would equal the
amount invested in the original purchase of the YSFC shares (plus
10% annual interest), divided by the average market price of USE
shares for the five trading days
<PAGE>
before notice of exchange is given to the YSFC shareholders
(excluding USE and Crested). Warrants to purchase YSFC shares,
issued to RAF in partial compensation for placement services,
would be exchangeable for warrants to purchase shares of USE
Common Stock. The exchange transaction would be registered with
the SEC under the Securities Act of 1933, such that the
exchanging YSFC shareholders would receive unrestricted
(registered) shares of USE. The number of USE shares which may
be issued under the Exchange Rights Agreement is presently not
determinable. USE expects that even if all the YSFC shares were
exchange in May 1999 for shares of USE, pursuant to the Exchange
Rights Agreement, the resulting increase in the outstanding
shares of USE would constitute less than 5% of the total
outstanding shares of USE on a proforma basis.
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. Nukem
had acquired three long term uranium sales contracts for USE and
the parties thereafter contributed the sales contracts, mining
properties and Nukem's financial and marketing expertise 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 agreed to be responsible
for mining 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
its 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.;
<PAGE>
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 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 by
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 "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources at May 31, 1997".
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. However, USECC has not yet received any of
these amounts. See 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
<PAGE>
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 725,000 pounds of U3O8
annually from 1997 to 2000, which amounts may be increased or
decreased by specified percentages.
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, who 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 former Soviet Union now
known as 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.
<PAGE>
Uranium is primarily used in nuclear reactors to heat water
which drives turbines generating electricity. According to the
Uranium Institute (UI) 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 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, Kyrgyzstan and Tajikistan) in
1992 and 1993, 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.
<PAGE>
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 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. 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, the Registrant 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 declined to $10.30 per pound in September 1997 and
rebounded to almost $12.15 per pound in December 1997. And,
while the spot price has eroded to 1995 levels, the Registrant
<PAGE>
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, the Registrant 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, the Registrant 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, the Registrant believes the price may 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").
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
were reported by NUEXCO for spot sales in the restricted U.S.
market.
<PAGE>
NUEXCO EXCHANGE VALUE
---------------------
Years Ended US $/pound of U3O8
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. As of January 23, 1998 the
price per pound was $12.00.
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.
Impact of Global Warming. In December 1997, over 150
nations from around the world met in Kyoto, Japan for the purpose
of limiting greenhouse gas (CO2, SO2, NOX) emissions. At the
conclusion of the meeting, an agreement was reached which
proposes to reduce greenhouse gas emissions below 1990 levels by
the years 2008 - 2012. The U.S. reductions will be 7% below 1990
levels; the European Union 8% below 1990 levels, and Japan 6%
below 1990 levels.
The registrant believes that Nuclear power will be the only
significant logical choice for supplying electricity while
cutting greenhouse gases and expects a revival of the nuclear
industry over the next 10 years. With any new introduction of
Nuclear power plants, the supply/demand fundamentals discussed
previously will be impacted in favor of higher spot and long term
prices for U3O8.
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 totaling 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 of SGMC Special Warrants
conducted in Toronto, Ontario, Canada by C.M. Oliver & Company
Limited). The net proceeds of $6,509,700 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 to late calendar 1998 and
that by that time, construction of a 1,000
<PAGE>
ton per day gold mill will have been completed. Additional
financing will be sought in 1998 to complete mill construction
and start production mining.
Until the dramatic drop in gold prices in November 1997,
SGMC had been 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. The Toronto
listing application most likely will be delayed until gold prices
improve.
After completion of the two private financings in fiscal
1997, and taking into account a restructuring in that year of the
ownership of USE and Crested in SGMC (and the additional issue of
75,000 shares to settle a dispute with Amador United, see below),
USE and Crested each continued to own securities of SGMC. In
fiscal 1998 (April 7, 1998), USE reacquired some of the
securities of SGMC which were sold in Canada in 1997 (see "April
1998 Transaction for Cash and SGMC Warrants"). As of February
28, 1998, USE and Crested owned the following securities of SGMC:
(a) Together, approximately 28% of the outstanding shares
of SGMC Common Stock, which would be reduced in the event
outstanding warrants held by the remaining Canadian investors to
purchase 770,500 more shares of Common Stock are exercised at
Cdn$6.00 per share 18 months from the date of closing of the
private offerings (which were completed in May 1997) 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 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 a 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.
April 1998 Transaction for Cash and SGMC Special Warrants.
As of April 7, 1998, USE entered into four separate Stock
Purchase Agreements with four Canadian investment funds,
<PAGE>
for the issuance of 658,895 shares of Common Stock of USE, in
consideration of the funds' payment to USE of $1,190,000 in cash
and the delivery to USE of 888,900 Special Warrants of SGMC. The
funds had paid SGMC a total of Cdn$4,888,950 in May 1997,
pursuant to a private offering in Canada, to purchase the Special
Warrants from SGMC. Each Special Warrant entitled the holder to
acquire from SGMC, at no further cost, one share of Common Stock
of SGMC, and one Purchase Warrant; each Purchase Warrant would
have entitled the holder to purchase one share of Common Stock of
SGMC, at a price of Cdn$6.00 per whole share (the "Purchase
Warrants"), during the 18 months following the May 1997 closing
of the offering of the SGMC Special Purchase Warrants.
Pursuant to the terms and conditions of the Special
Warrants, if SGMC were to fail to obtain prospectus qualification
before the October 10, 1997 qualification deadline (as such terms
were defined in the Special Warrants) from the securities
commissions of the Canadian Provinces wherein purchasers of the
Special Warrants reside, the holders of the Special Warrants
would be entitled to receive a dilution penalty in the amount of
1.1 shares of Common Stock of SGMC and 1.1 Purchase Warrants, for
each Special Warrant exercised after the qualification deadline
if prospectus qualification were not obtained by the
qualification deadline. Such qualification required listing of
the SGMC shares and Purchase Warrants on a principal Canadian
stock exchange.
The prospectus qualification has not been obtained by SGMC,
due to the drop in gold prices in the latter part of 1997 and the
resulting lack of interest in new listings of gold companies in
the Canadian markets. However, none of the four Canadian funds,
nor any other investor in the Canadian offering, has received
additional shares of SGMC Common Stock or additional Purchase
Warrants in payment of the dilution penalty with respect to the
Special Warrants and their constituent securities. The dilution
penalty may have to be paid with respect to the other Canadian
investors in the Special Warrants.
Each of the four Canadian funds, in order to diversify and
increase their original investment, made offers to USE to
purchase shares of USE $.01 par value Common Stock. Each of the
four funds, and USE, negotiated the terms of acceptance of the
funds' offer by USE. As a result of the offer and subsequent
negotiations with each of the funds, USE entered into the four
Stock Purchase Agreements with the funds.
As of the date hereof, pursuant to the Stock Purchase
Agreements, USE has received consideration for its issued shares
consisting of (i) net cash proceeds, from all four funds, of
US$1,102,464 (after deduction of $87,536 in legal fees and a fee
paid to a Canadian investment banking firm); (ii) 684,300 Special
Warrants of SGMC (from three of the four funds); and (iv) the
relinquishment by each of the four funds of their rights to the
dilution penalty. USE has issued 546,365 shares of Common Stock
as of the date hereof in consideration of the cash, the Special
Warrants, and the relinquishments. The USE shares are restricted
securities. Pursuant to the terms of the Stock Purchase
Agreements, USE will file a resale registration statement with
the Securities and Exchange Commission, to permit the resale of
the subject shares by the funds. When the registration statement
is declared effective, the balance of 112,530 shares of USE
Common Stock will be issued to the fourth fund, and that fund
will deliver its 204,600 Special Warrants to USE in payment for
such 112,530 shares of USE Common Stock. Such 112,530 shares of
USE Common Stock issued to the fourth fund will be included in
the resale registration statement.
<PAGE>
As of the date hereof, USE and Crested together own
approximately 40% of the outstanding shares of Common Stock of
SGMC.
Cash proceeds will be used for general corporate purposes.
The dilution penalty, if paid, would have resulted in the
issuance to the funds of an additional 88,890 shares of Common
Stock of SGMC and Purchase Warrants to buy another 88,890 shares
of Common Stock of SGMC. USE will retain the SGMC Special
Warrants acquired to date from three of the funds (and will
retain the fourth fund's Special Warrants when acquired).
The Stock Purchase Agreements for three funds, and the Stock
Purchase Agreement for the fourth fund with respect to the cash
portion thereof, closed as of April 7, 1998, at which date the
closing bid price of USE shares was $6.876. A price of $7.00 per
USE share was utilized by the funds and USE for purposes of
determining the number of USE shares to be issued under the Stock
Purchase Agreements. The fourth fund will close on the second
part of its Stock Purchase Agreement (for its Special Warrants of
SGMC) when the USE resale registration statement is declared
effective (see above); there will not be any adjustment in the
terms of the fourth fund's Stock Purchase Agreement for changes
in USE share market prices.
Settlement with Amador United. 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.
USE Management Agreement with 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 in 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 of Sutter
Creek.
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
<PAGE>
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 executed with the 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 (CUP) 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 has been permitted.
SGMC is obligated to spend up to $15,000 to quiet the title to
both the surface and mineral rights. Upon successful quiet title
action, 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.
During September 1997, SGMC entered into a lease agreement
for the Eldorado Mining Claim and an additional forty acres of
mineralized property contiguous to the Keystone Mining claims.
The terms of the Agreement are that SGMC makes a monthly advance
royalty payment of $1,500.00, which is recoupable against earned
royalties and the production royalty which starts at 3% for the
first two years and then increases to 4% thereafter.
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
<PAGE>
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 was a prior owner of certain leases
which it conveyed to the Lincoln Project when the project was
owned by Meridian Minerals Company ("Meridian"). In return for
its conveyance of such leases, Amador United received a right of
first refusal to buy the Lincoln Project and a 20 percent net
profits interest in production from any of the Lincoln Project
properties. 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. If
current low gold prices ($300 per ounce at January 23, 1998)
persist or drop lower, the amounts of economically recoverable
gold in proven and probable reserves might be reduced.
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
<PAGE>
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.
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,(assuming gold prices rebound to the satisfaction of the
Board of Directors) 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
<PAGE>
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.
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 to the underground crushing station, then
either transported to the surface via conveyor 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 processed through a second gravity recovery circuit;
third, the tails from this gravity circuit are run 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 fourth, 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
<PAGE>
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 first floor of the central mill building (exclusive of
attached lab and other support facilities) will be approximately
20,000 square feet. Because of the availability and price
advantage of equipment for a 1,000 tpd mill over a 500 tpd mill,
the 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.
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
<PAGE>
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.
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.
<PAGE>
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
and Layne 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 of breach of contract and specific performance will be
tried before the trial court starting on January 26, 1998. See
Risk Factor 15 and "Legal Proceedings - BGBI Litigation".
Oil and Gas.
Fort Peck Lustre Field (Montana). USECC conducts oil
production operations at the Lustre Oil Field on the Ft. Peck
Indian Reservation in north-eastern Montana; four wells are
producing, and USE and Crested receive a fee based on oil
produced. USE is the operator of record. No further drilling is
expected in this field. This fee and certain real property of
USE and Crested, have been pledged or mortgaged as security for a
$1,000,000 line of credit from a bank.
Energx, Ltd. Fort Peck Gas Project. Energx, Ltd., a
Wyoming corporation owned 45% by USE, 45% by Crested, and 10% by
the Assiniboine and Sioux Tribes, signed in October 1993 an
"Agreement Between The Assiniboine and Sioux Tribes of the Fort
Peck Indian Reservation and Energx, Ltd. to Explore, Develop and
Produce Shallow Gas." This Agreement has been approved by the
Secretary of the Interior and the United States Bureau of Indian
Affairs. In the fourth quarter of calendar 1995 Energx drilled
and tested three exploratory wells, in conjunction with NuGas
Resources U.S. Inc. ("NuGas"). These three were all dry holes,
having been drilled under a farmout
<PAGE>
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
<PAGE>
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 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.
<PAGE>
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 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
"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 "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.
<PAGE>
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 the Chairman,
President and Chief Executive Officer of the Company and Chairman
and Chief Executive Officer of Crested. See "Certain
Relationships and Related Transactions - Transactions with
Arrowstar Investments, Inc."
USE and Crested also own 18 undeveloped lots on 26.8 acres
of the Wind River Airpark near the Riverton Municipal Airport,
and three mountain sites covering 16 acres in Fremont County,
Wyoming.
USECC owns various buildings, 290 city lots and/or tracts
and other properties at the Jeffrey City townsite in south-
central Wyoming. Nearly 4,000 people resided in Jeffrey City in
the early 1980s, when the nearby Crooks Gap and Big Eagle uranium
mining projects were active. The townsite may be utilized for
worker housing as the Jackpot Mine and Sweetwater Mill are put
into operation. In the interim, 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.
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.
<PAGE>
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
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). On December 26, 1997, registrant and
Crested received a payment of $164,739.71 from Contour as payment
to Crested on Note B. As of the date of this Prospectus, 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.
<PAGE>
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 "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.
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.
<PAGE>
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 December 19, 1997, USE had 109 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 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
<PAGE>
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 "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.
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
<PAGE>
various affiliates of CRIC and Nukem (together, the
"defendants"), alleging that CRIC and Nukem misrepresented
material facts to and concealed material information from the
plaintiffs to induce their entry into SMP Agreement and various
related agreements. Plaintiffs also 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,
<PAGE>
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.
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 belonged to SMP,
and ordered Nukem to assign such contract to SMP. The contract
expires in 2000.
The fraud and RICO claims of USE and Crested against Nukem
and CRIC and vice versa 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 and Award
(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
<PAGE>
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 Award
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 denying 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 $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
Order and Award which awarded one uranium supply contract to SMP
and Nukem's contracts with CIS republic in constructive trust 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 and Nukem and
CRIC filed an amended notice of appeal with the Tenth Circuit
Court of Appeals (10th CCA) of the June 30, 1997 Second Amended
Judgment and other earlier judgments.
<PAGE>
Colorado State Court Proceeding. On September 16, 1991,
Company and Crested d/b/a USECC as plaintiffs, filed Civil Action
No. 91CV7082 in the Denver District Court, wherein plaintiffs
were seeking reimbursement of $85,000 per month from the spring
of 1991 for maintaining the SMP uranium mines at Crooks Gap on a
standby basis. On behalf of SMP, CRIC filed an answer,
affirmative defenses and a counterclaim against plaintiffs
denying that SMP owed plaintiffs any money. Plaintiffs filed a
Motion for Summary Judgment and the Denver District Court Judge
denied the motion and stayed all proceedings until the case
involving plaintiffs and CRIC and Nukem were resolved in the U.S.
District Court for Colorado. This matter was submitted to
arbitration in February 1994, and on April 18, 1996, the
Arbitration Panel awarded USECC $2,512,823 plus per diem interest
of $616 against Nukem and CRIC jointly and severally, for standby
costs through March 31, 1996. When Nukem and CRIC appealed the
confirmation of the Arbitration Award, they posted a supersedeas
bond to cover this portion of the Award. USECC continued to
maintain the SMP underground and open pit mines in Fremont
County, Wyoming so USECC filed a lien for such expenditures on
the SMP mining properties from March 31, 1996. In 1997, USECC
filed a civil action to foreclose the lien in a Wyoming District
Court. Nukem and CRIC resisted the foreclosure case in Wyoming
claiming the Denver District Court had jurisdiction because of
the forum selection clause referred to Colorado as the
jurisdiction for such claim in the Operating Agreement between
SMP and USECC. The Court enjoined USECC from proceeding with the
foreclosure action in the Wyoming Court and various pleadings
have been filed by both parties in the Denver District Court
where the case is now pending.
Federal Appeal. In the pending appeal involving the
arbitration/litigation matter between Registrant and its
subsidiary Crested Corp. as plaintiffs and Nukem, Inc. and CRIC
as defendants, as was reported above Nukem/CRIC filed an amended
notice of appeal of the Second Amended Judgment entered on or
about June 27, 1997. In the Second Amended Judgment, the U. S.
District Court of Colorado ordered that in addition to the net
monetary award to plaintiffs, the rights Nukem has to purchase
uranium from the CIS republic, the uranium acquired pursuant to
those rights and the profits therefrom were impressed with a
constructive trust in favor of SMP. Nukem was required by the
District Court to post a supersedeas bond in the amount of
$8,613,600 to cover the monetary portion of the Court's judgment
in favor of Registrant and Crested against Nukem/CRIC. The
District Court refused to increase the supersedeas bond to cover
the value of the CIS contracts because the Arbitration Panel did
not value such equitable relief granted to plaintiffs Registrant
and Crested. Consequently, Registrant and Crested filed a motion
before the 10th CCA to increase the supersedeas bond to cover the
value of the CIS contracts. Defendants Nukem/CRIC filed response
and a motion to again remand the case to the Arbitration Panel.
Plaintiffs Registrant and Crested filed a response to that
request and a motion for sanctions against Nukem/CRIC. On
November 12, 1997, two judges of the 10th CCA entered an order
denying plaintiffs' motion to increase the supersedeas bond and
denied Nukem/CRIC's cross-motion for remand to the Panel of
certain issues on appeal. In plaintiffs' motion for sanctions,
the Court denied the motion without prejudice. Nukem/CRIC filed
their Appellants' opening brief with the 10th Circuit Court of
Appeals on December 12, 1997. USECC filed its Appellees' brief
on January 12, 1998. Nukem/CRIC filed a reply brief on January
26, 1998. On April 13, 1998, Company received a notice to all
counsel in the appeal from the Deputy Clerk of the 10th Circuit
Court advising that the case was referred to a three-judge panel
and after examination of the briefs and record on appeal, the
panel was of the unanimous opinion that oral arguments were not
needed. Nukem and CRIC have the opportunity to file within ten
days a statement to the Court of reasons for oral argument. The
Court also required Nukem and
<PAGE>
CRIC to initiate a mandatory settlement conference and a report
of the proposed conference shall be filed with the Clerk.
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 and initially
leased to a predecessor of BGBI, which claims are in and adjacent
to BGBI's Bullfrog open pit and underground mine. USE and
Crested assert certain interests in the claims under an April
1991 assignment and lease with Parador, which is subject to the
lease to BGBI's predecessor.
Parador, USE and Crested had previously advised BGBI that
they are entitled to royalty payments with respect to
extralateral rights of the subject claims on minerals produced at
the Bullfrog Mine, claiming that the lode or vein containing the
gold mineralization apexes on the Parador claims and dips under
the claims leased to BGBI by a third party.
BGBI seeks to quiet title to its leasehold interest in the
subject claims, alleging that Parador's lease thereof to USE and
Crested is adverse to the interest claimed by BGBI, and that the
assertions by USE and Crested of an interest in the claims have
no foundation. BGBI seeks a determination that USE and Crested
have no rights in the claims and an order enjoining USE and
Crested from asserting any interest in them. BGBI further
asserts that, in attempting to lease an interest in the subject
claims to USE and Crested, Parador breached the provisions of its
lease to BGBI, and that Parador is responsible for the legal fees
and costs incurred by BGBI in the quiet title action, which may
be offset against royalties. Under an arrangement to pay certain
legal expenses of Parador, USE and Crested may be responsible for
any such amounts.
BGBI alleges that by entering into the Assignment and Lease
of Mining Claims with Parador, USE and Crested disrupted the
contractual relationship between BGBI and Parador. In addition,
BGBI claims that the USECC-Parador agreement slanders BGBI's
title to the claims. BGBI seeks compensatory damages from
Parador, USE, and Crested; punitive damages from USE and Crested;
and costs and other appropriate relief from Parador, USE and
Crested, all in amounts to be determined. The amount of damages
which might be awarded against USE and Crested cannot presently
be ascertained.
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
<PAGE>
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 rights, or 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. The issues of breach of contract by the
defendants and BGBI for specific performance remained and were
tried before the Court commencing on January 26, 1998. After
the trial, the Court found against the parties on their
respective claims and the plaintiff and these defendants filed a
Notice of Cross-Appeal and Notice of appeal, respectively to the
Nevada Supreme Court. The record on appeal has been filed with
the Nevada Supreme Court and the appeals process is now underway
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 1997, and 1996, and the three
months ended August 31, 1997.
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
First Quarter ended August 31, 1997 $ 11.63 $ 7.13
Second Quarter ended November 30, 1997 $ 12.75 $ 7.45
At January 23, 1998, the closing bid price was $7.625 per share
and there were approximately 720 shareholders of record for
Common Stock.
<PAGE>
USE has not paid any cash dividends with respect to the 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year 2000 Disclosure
The Company has evaluated the operating systems on all
headquarter and field office computers and determined that all of
the operating systems are currently set up on software which will
transition all data (historical and incoming) through the year
2000 without compromise to the integrity of the systems and their
network, or other interruptions or loss of data.
Liquidity and Capital Resources at February 28, 1998 (unaudited)
During the nine months ended February 28, 1998, the
Company's current assets increased by $1,030,300 to a balance of
$5,431,200. This increase is primarily due to a net increase of
cash $807,600 and an increase of $473,300 in Accounts Receivable
related parties. The increase in cash was a result of the
Acquisition Agreement entered into during the three months ended
August 31, 1997 between the Company, its subsidiary Crested Corp.
("Crested") and Kennecott Uranium Company ("Kennecott"). As a
result of the Acquisition Agreement the Company and Crested
received a $4,000,000 signing bonus and a loan of $16,000,000 to
continue to develop the Green Mountain Mining Venture (GMMV)
mining properties. The $4,000,000 signing bonus was forfeitable
through December 1, 1997, unless certain conditions were met by
the Company and Crested. Although the conditions were met and
the signing bonus was no longer forfeitable, under generally
accepted accounting principals the $4,000,000 continues to be
carried as a deferred income item until such time as the
Acquisition Agreement is closed or terminated. If the
Acquisition Agreement is terminated, the GMMV will continue to
hold the properties and only Kennecott will be responsible for
paying back the amount loaned under the $16,000,000 development
loan to a Kennecott affiliate and the 50% interest of USE and
Crested will not be impacted.
The Company also received cash in the amount of $858,700 on
a consolidated basis for the sale of uranium under a Sheep
Mountain Partners (SMP) contract; $156,600 as an advance royalty
from Cyprus/AMAX; $292,600 as a net profits interest royalty from
the sale of the Brunton Company; $333,300 as a payment on the
note receivable from the sale of The Brunton Company, and
$347,900 as a result of various employees exercising stock
options and warrants. As a result of the GMMV operations, the
Company and Crested invoiced the GMMV a total of $5,438,500 for
direct costs, management fees and equipment rental during the
nine months ended February 28, 1998. Of the total amount
invoiced to GMMV, $1,245,900 (an increase of $424,900) had not
been paid as of February 28, 1998. However, the quarter-end
balance was paid in full in March of 1998. The Company and
Crested continued to fund SMP and the Plateau Resources (Plateau)
operations. SMP has not reimbursed the Company and Crested for
their direct costs for maintaining the SMP properties on standby
and is subject to the Arbitration Panel's Award and pending
litigation.
<PAGE>
Other current assets decreased by approximately $85,700
primarily as a result of an decrease in prepaid insurance.
The primary uses of cash by the Company and Crested were the
reduction of Accounts Payable of $810,700; purchases of Property
Plant and Equipment of $1,306,800; increases in the Investment in
Affiliates of $481,300; the increase of Restricted Investments of
$415,600 as a result of the reinvestment of interest earned on
Plateau's cash investments to cover Reclamation Liabilities; the
repayment of Long Term Debt of $244,700; and the reduction of
Other Accrued Liabilities pertaining to Plateau of $582,500. In
addition to the reduction of Notes Receivable on the sale of The
Brunton Company referred to above, the Company and Crested's
Chairman and CEO retired $432,000 in amounts owed to the Company
and Crested. This was done as a result of the decision of the
Company's board of director and compensation committee granting
the Company's and Crested's chairman and CEO John L. Larsen a
bonus of $615,000 for his excellent work in acquiring Kennecott
as a joint venture partner in 1990 for $15,000,000 in cash plus a
$50,000,000 commitment to USECC to develop the Green Mountain
properties; the negotiations of Mr. Larsen in acquiring Plateau
Resources Ltd. with the Shootaring Mill and the most recent
negotiations for USECC to enter into the Acquisition Agreement to
acquire Kennecott's interest in the GMMV resulting in the signing
bonus of $4,000,000 to the Company and Crested. The Companies
and Mr. Larsen agreed that the bonus is further in full
settlement of the $1,000,000 bonus to Mr. Larsen authorized by
the board of directors in 1993 which was conditioned on the spot
price of uranium concentrates and cash distributions from the
GMMV to the Company.
The primary requirements for the Company's working capital
continue to be funding of on-going administrative expenses; mine
and mill holding and start up costs of Plateau; the holding costs
of the SMP mines; on-going litigation expenses associated with
the SMP dispute, and certain uranium delivery costs associated
with SMP utility contracts. Nukem and CRIC are currently making
most of the SMP uranium deliveries. No assurance can be given
that this method of delivery will continue. The capital
requirements to fill the Company's and Crested's portion of the
remaining commitments in fiscal 1998 will depend on the spot
market price of uranium and may also be dependent on the outcome
of the Arbitration/ Litigation Award involving Nukem and CRIC,
which Nukem and CRIC have appealed to the 10th Circuit Court of
Appeals.
The primary source of the Company's capital resources for
the remainder of fiscal 1998 will be reimbursement available
through the GMMV (see discussion below); cash on hand; the
potential settlement of the Nukem/CRIC Arbitration/Litigation;
uranium deliveries pursuant to the SMP contracts; borrowing from
financial institutions (primarily the line of credit), and the
sale of equity or interests in investment properties. Commercial
Operations at the Ticaboo Townsite in Utah; fees from oil
production; rentals of various real estate holdings and
equipment, and the sale of aviation fuel will also provide cash.
The Company, Crested and Sutter Gold Mining Company ("SGMC")
are currently seeking additional financing for the construction
of the gold processing mill and mine development of SGMC. See
discussion under SGMC below. An additional $8 million in
financing is being sought. However, there is no assurance that
the funds will be raised.
<PAGE>
The expenditures for the SMP care and maintenance costs may
require additional funding, depending on the outcome of the SMP
arbitration.
GMMV
On June 23, 1997, the Company and Crested d/b/a USECC signed
an Acquisition Agreement with Kennecott for the right to acquire
Kennecott's interest in the GMMV for $15,000,000 and other
considerations. This information was previously reported in the
Company's Form 10-Q (Item 2) for the fiscal quarter ended August
31, 1997. As a result of this Agreement, it is believed that no
internal funding will be required by the Company and Crested for
the GMMV at either the Sweetwater Mill or the Jackpot Mine.
Pursuant to the Acquisition Agreement which includes the
Mineral Lease, and the Mill Contract, USECC is developing the
proposed Jackpot Mine and working with Kennecott in preparing the
Sweetwater Mill for renewed operations. Such work is being
funded from the $16,000,000 provided to the GMMV by Kennecott.
Under the Fourth Amendment of the GMMV Agreement, which amendment
was affected pursuant to the Acquisition Agreement), Kennecott
will be entitled to a credit against its 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 bonus paid
to the Company and Crested on signing of the Acquisition
Agreement.
Closing of the Acquisition Agreement is subject to the
Company and Crested satisfying several conditions on or before
the extended closing date of October 30, 1998. If the
Acquisition Agreement is never closed, Kennecott and USECC, shall
own their respective 50% interest in the GMMV, and the obligation
to repay the $16,000,000 loan shall remain Kennecott's
obligation, without any adverse effect on the 50% interest in the
GMMV held by the Company and Crested.
Sutter Gold Mining Company
The preliminary prospectus to qualify a previous special
warrant offering prospectus of Sutter Gold Mining common stock
has been filed with the Ontario Securities Commission with a copy
to the Toronto Stock Exchange. An additional $8 million must be
raised to fund the development costs to place the SGMC properties
in production. It is not anticipated that any of the Company's
funds will be required to fund these operations. Subsequent to
the quarter ended February 28, 1998, the Company purchased
certain Special Warrants of Sutter Gold. It is unlikely SGMC
will be listed on the Toronto Stock Exchange until such time as
gold prices recover further from the drop in prices during 1997.
Sheep Mountain Partners
Nukem and CRIC filed their opening brief in their appeal to
the 10th Circuit Court of Appeals on December 12, 1997. The
Company and Crested filed their answer brief on January 12, 1998.
Thereafter, Nukem and CRIC filed a reply brief. On April 13,
1998, the Deputy Clerk of Court advised all counsel that a three-
judge panel had reviewed the briefs and record on appeal and oral
arguments are not needed. No assurance can be given as to the
ultimate outcome.
<PAGE>
Until such time as these issues are resolved, the Company
and Crested may be required to fund the standby costs of the
Sheep Mountain Partners' mines. The Company and Crested have
filed a lien on the SMP properties as a protection for the
payment of past and future standby costs for which they have not
been reimbursed by Nukem/CRIC and filed suit in Wyoming to
foreclose the lien. The case has been stayed and the issues
will be heard in the Denver District court.
Results of Operations
Three and Nine months ended February 28, 1998 Compared to Three
and Nine Months Ended February 28, 1997
Revenues for the nine months ended February 28, 1998,
increased by $2,060,200 over the same period of the prior year.
The increase in revenues primarily is as a result of a delivery
pursuant to one of the SMP delivery contracts wherein a net
profit of $858,700 was recognized by the Company and Crested and
an increase of $1,649,000 in commercial revenues which consist
primarily of the rental of equipment, real estate and the retail
The increase of equipment rentals is as a result of increased
equipment rentals to the GMMV under the June 23, 1997 Acquisition
Agreement discussed above. Construction revenues decreased
$935,300 during the nine months ended February 28, 1998, as a
result of the Company's subsidiary Four Nines Gold, Inc.
concentrating all of its efforts and equipment on the mine
development at the Jackpot uranium mine and having no third party
contracts. Management fees and Other Revenues increased by
$335,600 during the nine month period ended February 28, 1998,
over the same period ended February 28, 1997, due primarily to
management fees charged on increased activities provided to
various subsidiary companies and partnerships by the Company and
Crested.
Other than a reduction of construction costs in the amount
of $649,200 and increases in Commercial Operations of $88,600;
Mineral Operations of $552,900 and General and Administrative
expenses of $995,600, costs and expenses remained relatively
constant with those experienced during the nine month period of
the prior year. Mineral Operations and General and Administrative
expenses increased due primarily to additional staff to
administer the development of the GMMV and Plateau mining
properties and the bonus given to the Company and Crested's
chairman and CEO. Commercial expenses increased due to increased
activity at the commercial real estate operations in Southern
Utah. Construction expenses decreased due to limited activity in
Four Nines Gold outside the Company owned activities.
Equity in Loss of Affiliates increased by $273,700 over the
prior year during the nine months ended February 28, 1997; to a
total of $612,200. This increase consisted of losses of $19,100
and $254,600 from SMP and Yellow Stone Fuels Corp., respectively.
<PAGE>
Operations for the nine month period ended February 28,
1998, resulted in a loss of $1,751,300 or $0.26 per share as
compared to a loss of $1,945,200 or $0.29 per share for the same
period from the previous year. The decrease in the loss is
primarily as a result of increased revenues for the sale of
Uranium and the rental of equipment which were offset by
increases in mineral costs, and the increased administrative
costs associated with expanded operations. Operations for the
three months ended February 28, 1998, resulted in a loss of
$1,576,500 or $0.23 per share as compared to a loss of $880,400
or $0.13 per share during the quarter ended February 28, 1997.
This increase in the loss for the quarter is primarily associated
with the bonus given the Company's chairman and CEO and increased
costs associated with mining operations and administrative costs.
Liquidity and Capital Resources at May 31, 1997
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 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.
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 an increase in accounts payable of $20,300.
Accounts receivable affiliates increased by $909,200
primarily as a result of increased amounts due to 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
<PAGE>
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.
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, may require up to $10,000,000 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
<PAGE>
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 seek to sell an additional
$10,000,000 in equity during fiscal 1998 through an initial
public offering ("IPO") only in Canada. There is no assurance
that this IPO will be successfully completed, unless gold prices
recover to at least $320 per ounce. 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 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
<PAGE>
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 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
<PAGE>
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.
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.
<PAGE>
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.
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
<PAGE>
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.
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.
<PAGE>
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.
<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 remained
relatively stable over the 1997 fiscal year between $320 and $390
per ounce. However, by February, 1998 the price had dropped to
approximately $296 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.
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
Business Experience and Other Directorships of Directors.
Keith G. Larsen has been principally employed by the Company
and Crested for more than the past five years as uranium fuels
marketing director. On November 25, 1997 he was appointed as a
director of the Company and elected President, replacing John L.
Larsen as President. John L. Larsen remains as Chairman of the
Board and Chief Executive Officer.
John L Larsen has been principally employed as the Chief
Executive Officer and Chairman of the Board of Directors of the
Company and Crested Corp. for more than the past five years. He
is also a director of the Company's subsidiary, Ruby Mining
Company ("Ruby"). Crested and Ruby have registered equity
securities under the Securities Exchange Act of 1934 (the
"Exchange Act"). Mr. Larsen is Chief Executive Officer and
Chairman of the board of directors of Plateau Resources, Limited
and of Sutter Gold Mining Company, and he is a director of Yellow
Stone Fuels Corp.
Harold F. Herron has been the Company's Vice-President
since January 1989. From 1976, Mr. Herron has been an employee
of Brunton, a manufacturer and/or marketer of compasses,
binoculars and knives. Brunton was a wholly owned Company
subsidiary until Brunton was sold in February 1996. Initially,
he was Brunton's sales manager, and since 1987 he has been its
President. Mr. Herron is a director of Ruby and Northwest Gold,
Inc. ("NWG"), which have registered equity securities under the
Exchange Act. He is also an officer and director of Plateau.
Mr. Herron received an M.B.A. degree from the University of
Wyoming after receiving a B.S. degree in Business Administration
from the University of Nebraska at Omaha.
David W. Brenman has been a director of the Company since
January 1989. Since September 1988, Mr. Brenman has been a self-
employed financial consultant. In that capacity, Mr. Brenman has
assisted the Company and Crested in negotiating certain financing
arrangements. From February 1987 through September 1988, Mr.
Brenman was a vice-president of project financing for Lloyd's
International Corp., a wholly-owned subsidiary of Lloyd's Bank,
PLC. From October 1984 through February 1987, Mr. Brenman was
President, and continues to be a director of Cogenco
International, Inc., a company engaged in the electric
cogeneration industry, which has registered equity securities
under the Exchange Act. Mr. Brenman has an L.L.M. degree in
taxation from New York University and a J.D. degree from the
University of Denver.
Don C. Anderson has been a Company director since May 1990.
From January 1990 until mid-fiscal 1993, Mr. Anderson was the
Manager of the Geology Department for the Company. Mr. Anderson
was Manager of Exploration and Development for Pathfinder Mines
Corporation, a major domestic uranium mining and milling
corporation, from 1976 until his retirement in 1988. Previously,
he was Mine Manager for Pathfinder's predecessor, Utah
International, Inc., from 1965 to 1976. He received a B. S.
degree in geology from Brigham Young University.
Nick Bebout has been director and President of NUCOR, Inc.
("NUCOR"), a privately-held corporation that provides exploration
and development drilling services to the mineral and oil and gas
industries, since 1987. Prior to that time, Mr. Bebout was Vice
President of NUCOR from 1984. Mr.
<PAGE>
Bebout is also an officer, director and owner of other privately-
held entities involved in the resources industry.
H. Russell Fraser has been chairman of the board and chief
executive officer of Fitch Investors Services, L.P. for more than
the past five years until he sold his interest in Fitch in
November 1997. Fitch Investors Services, L.P., New York, New
York, is a nationwide stock and bond rating and information
distribution company. From 1980-1989, Mr. Fraser served as
president and chief executive officer of AMBAC, the oldest
municipal bond issuer in the United States. Under his direction,
AMBAC's assets grew to more than $1 billion at year-end 1988 from
$35 million at the beginning of 1980, while statutory net income
after taxes increased to $57 million in 1988 from a loss in 1979.
Before joining AMBAC, Mr. Fraser was senior vice president
and director of fixed-income research at Paine Webber, Inc.
While a member of the board of directors at Paine Webber, Mr.
Fraser participated in both the corporate and public finance
departments and headed Paine Webber's trading and sales for all
corporate bond products. Previously, he managed corporate
ratings at Standard & Poor's, supervising research analysis of
corporate bonds, preferred stock, and commercial paper. During
his tenure at S&P he started commercial paper ratings 'A-1'
through 'A-3', initiating the plus and minus qualifiers and
rating the first two financial guaranty companies, AMBAC and
MBIA. Mr. Fraser holds a B.S. in finance and economics from the
University of Arizona. He is a member of the Municipal Analysts
Group of New York and founder of the Fixed Income Analysts
Society.
Advisory Board
In fiscal 1998, the Board of Directors established an
Advisory Board comprised of individuals with experience in the
areas of business, financial services, national elected office,
and other areas. The members of the Advisory Board meet
quarterly to review topics of interest or concern to the Board of
Directors, and report to the Board of Directors the findings and
recommendations of the Advisory Board. The Advisory Board does
not include any directors or officers of the Company, and none of
the findings or recommendations of the Advisory board will be
binding upon the Company. The first appointment to the Advisory
Board is the Honorable Alan K. Simpson, former U.S. Senator for
Wyoming.
Information Concerning Executive Officers Who Are Not Directors
The following information is provided pursuant to Item 401
of Reg. S-B, regarding the executive officers of the Company who
are not also directors.
Max T. Evans, age 73, 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 is also an officer and
director of Plateau. 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-B Item
401(d) 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, Assistant
Secretary of USE, and is
<PAGE>
an officer of Plateau and SGMC. 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-B Item 401(d) proceeding.
Robert Scott Lorimer, age 46, has been Treasurer, Chief
Financial Officer, Controller and Chief Accounting Officer for
USE and Crested for more than the past five years. Mr. Lorimer
is also an officer of Plateau, SGMC and Yellow Stone Fuels Corp.
Mr. Lorimer is also chief financial officer and a director of the
Brunton Company. 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 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-B Item 401(d)
listed proceeding.
Family Relationships.
Harold F. Herron, a director and Vice-President of USE, is
the son-in-law of John L. Larsen, a principal shareholder,
Chairman and CEO of USE. Keith G. Larsen, a director and
President of USE, is a son of John L. Larsen. Mark Larsen,
President of Yellow Stone Fuels Corp., is a son of John L.
Larsen. Nick Bebout, a director, is a nephew of Daniel P.
Svilar, a principal shareholder and General Counsel. There are
no other family relationships among the executive officers or
directors of the Company. See also "Certain Transactions - Other
Information."
Executive Compensation
Under a Management Agreement dated August 1, 1981, the
Company and Crested share certain general and administrative
expenses, including compensation of the officers and directors of
the companies (but excluding directors' fees) which have been
paid through the USECC Joint Venture ("USECC"). Substantially
all the work efforts of the officers of the Company and Crested
are devoted to the business of both the Company and Crested.
All USECC personnel are Company employees, in order to
utilize the Company's ESOP as an employee benefit mechanism. The
Company charges USECC for the direct and indirect costs of its
employees for time spent on USECC matters, and USECC charges one-
half of that amount to each of Crested and the Company.
The following table sets forth the compensation paid to the
USE Chief Executive Officer, and those of the four most highly
compensated USE executive officers who were paid more than
$100,000 cash in any of the three fiscal years ended May 31,
1997. The table includes compensation paid such persons by
Crested for 1995, 1996 and 1997, and Brunton for 1995 and 1996
for such persons' services to such subsidiaries.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
-------------------------------
Annual Compensation Awards Payouts
------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Name Annual Restricted All Other
and Compen- Stock LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) SARs(#) ($) ($)(4)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John L. Larsen 1997 $131,200 $4,000 -- $ 98,158(1) -0- -- $13,500
CEO and 1996 148,600 -0- -- -- -0- -- 15,566
President 1995 144,023 2,751 -- 9,000(2) -0- -- 13,361
Daniel P. Svilar 1997 $109,700 $3,400 -- $ 81,454(1) -0- -- $11,300
General Counsel 1996 124,153 -0- -- -- -0- -- 14,009
and Assistant 1995 112,615 2,076 -- 8,100(2) -0- -- 11,008
Secretary
Harold F. Herron 1997 $ 31,900 $ 990 -- $120,858(3) -0- -- $ 3,300
Vice President 1996 113,600 -0- -- -- -0- -- 4,037
1995 117,238 2,033 -- -- -0- -- 6,626
R. Scott Lorimer 1997 $100,300 $3,200 -- $ 54,299(1) -0- -- $10,300
Treasurer 1996 110,100 -0- -- -- -0- -- 13,749
and CFO 1995 112,403 2,098 -- 5,681(2) -0- -- 10,989
</TABLE>
(1) Includes bonus shares of USE common stock equal to 40%
of original bonus shares issued FY 1990, multiplied by $10.875,
the closing bid price on issue dates. Also includes shares
issued under 1996 Stock Award Program multiplied by $10.875, the
closing bid price on the issue dates. These shares are subject
to forfeiture on termination of employment, except for
retirement, death or disability.
(2) Includes bonus shares equal to 20% of original bonus
shares issued FY 1990, multiplied by $3.75 in 1995, the closing
bid price on issue dates. These shares are subject to forfeiture
on termination of employment, except for retirement, death or
disability.
(3) Includes bonus shares equal to 100% of original bonus
shares issued FY 1990, multiplied by $10.875, the closing bid
price on issue date. Also includes shares issued under the 1996
Stock Award Program multiplied by $10.875, the closing bid price
on the issue date. These shares are subject to forfeiture on
termination of employment, except for retirement, death or
disability.
(4) Dollar values for ESOP contributions and 401K matching
contributions.
<PAGE>
Executive Compensation Plans and Employment Agreements
To provide an incentive to Mr. Larsen to develop the GMMV
into a producing operation as soon as possible, in fiscal 1993
the USE Board adopted a long-term incentive arrangement under
which Mr. Larsen is to be paid a non-recurring $1,000,000 cash
bonus, provided that the Nuexco Exchange Value of uranium oxide
concentrates has been maintained at $25.00 per pound for six
consecutive months, and provided further that USE has received
cumulative cash distributions of at least $10,000,000 from GMMV
as a producing property. In December, 1997, Mr. Larsen agreed
to relinquish all of his rights under this bonus arrangement
related to GMMV..
In December, 1997 the Company paid Mr. Larsen a bonus of
$615,000 in recognition of his service to the Company and work in
acquiring Kennecott as a joint venture partner in 1990 for
$15,000,000 in cash plus a $50,000,000 commitment to USECC to
develop the Green Mountain properties; the negotiations of Mr.
Larsen in acquiring Plateau Resources Ltd. with the Shootaring
Mill and the most recent negotiations for USECC to enter into the
Acquisition Agreement to acquire Kennecott's interest in the GMMV
resulting in the signing bonus of $4,000,000 to the Company and
Crested. The Companies and Mr. Larsen agreed that the bonus is
further in full settlement of the $1,000,000 bonus to Mr. Larsen
authorized by the board of directors in 1993 which was
conditioned on the spot price of uranium concentrates and cash
distributions from the GMMV to the Company. The bonus was
recommended and approved by the Compensation Committee, taking
into account pay levels at comparable corporations in the mining
industry.
The Company has adopted a plan to pay the estates of Messrs.
Larsen, Evans and Svilar amounts equivalent to the salaries they
are receiving at the time of their death, for a period of one
year after death, and reduced amounts for up to five years
thereafter. The amounts to be paid in such subsequent years have
not yet been established, but would be established by the Boards
of the Company and Crested.
Mr. Svilar has an employment agreement with the Company and
Crested, which provides for an annual salary in excess of
$100,000, with the condition that Mr. Svilar pay an unspecified
amount of expenses incurred by him on behalf of the Company and
its affiliates. In the event Mr. Svilar's employment is
involuntarily terminated, he is to receive an amount equal to the
salary he was being paid at termination, for a two year period.
If he should voluntarily terminate his employment, the Company
and Crested will pay him that salary for nine months thereafter.
The foregoing is in addition to Mr. Svilar's Executive Severance
and Non-Compete Agreement with the Company (see below).
In fiscal 1992, the Company signed Executive Severance and
Non-Compete Agreements with Messrs. Larsen, Evans, Svilar and
Lorimer, providing for payment to such person upon termination of
his employment with the Company, occurring within three years
after a change in control of the Company, of an amount equal to
(i) severance pay in an amount equal to three times the average
annual compensation over the prior five taxable years ending
before change in control, (ii) legal fees and expenses incurred
by such persons as a result of termination, and (iii) the
difference between market value of securities issuable on
exercise of vested options to purchase securities in USE, and the
options' exercise price. These Agreements also provide that for
the three years following termination, the terminated individual
will not compete with USE in most of the western United States in
regards to exploration and development activities for uranium,
molybdenum, silver or gold. For such non-compete covenant, such
person will be paid monthly over a three year period an agreed
amount for the value of such covenants.
<PAGE>
These Agreements are intended to benefit the Company's
shareholders, by enabling such persons to negotiate with a
hostile takeover offeror and assist the Board concerning the
fairness of a takeover, without the distraction of possible
tenure insecurity following a change in control. As of this
Proxy Statement date, the Company is unaware of any proposed
hostile takeover.
The Company and Crested provide all of their employees with
certain forms of insurance coverage, including life and health
insurance. The health insurance plan does not discriminate in
favor of executive employees; life insurance of $50,000 is
provided to each member of upper management (which includes all
persons in the compensation table), $25,000 of such coverage is
provided to middle-management employees, and $15,000 of such
coverage is provided to other employees.
Employee Stock Ownership Plan ("ESOP"). An ESOP has been
adopted to encourage ownership of the Common Stock by employees,
and to provide a source of retirement income to them. The ESOP
is a combination stock bonus plan and money purchase pension
plan. It is expected that the ESOP will continue to invest
primarily in the Common Stock. Messrs. Larsen, Herron and Evans
are the trustees of the ESOP.
Contributions to the stock bonus plan portion of the ESOP
are discretionary and are limited to a maximum of 15% of the
covered employees' compensation for each year ended May 31.
Contributions to the money purchase portion of the ESOP are
mandatory (fixed at ten percent of the compensation of covered
employees for each year), are not dependent upon profits or the
presence of accumulated earnings, and may be made in cash or
shares of Company's Common Stock.
The Company made a contribution of 24,069 shares to the ESOP
for fiscal 1997, all of which were contributed under the money
purchase pension plan. At the time the shares were contributed,
the market price was approximately $8.87 per share, for a total
contribution with a market value of $213,492, (which has been
funded by the Company). Crested and the Company are each
responsible for one-half of that amount (i.e., $106,746) and
Crested currently owes its one-half to the Company.
Employees are eligible to participate in the ESOP on the
first day of the plan year (June 1) following completion of one
year of service in which at least 1,000 hours are credited. Each
employee's participation in the ESOP continues until the ESOP's
anniversary date coinciding with or next following termination of
service by reason of retirement, disability or death. In these
cases, the participant will share in the allocation of USE's
contributions for the ESOP year in which the retirement, death or
disability occurs, and will have a fully-vested interest in
allocations to the participant's account.
An employee's participation in the ESOP does not cease upon
termination of employment. If the employment of a participant in
the ESOP is terminated for reasons other than disability, death,
or retirement (unless the employee receives a lump sum
distribution upon the termination of employment), participation
continues following the termination, until five consecutive one-
year breaks in service have been incurred. An employee is deemed
to have incurred a one-year break in service during any year in
which 500 or fewer hours of service are completed.
Employee interests in the ESOP are earned pursuant to a
seven year vesting schedule. Upon completion of three years of
service for the Company, the employee is vested as to 20% of the
employee's account in the ESOP, and thereafter at the rate of 20%
per year. Any portion of an employee's ESOP
<PAGE>
account which is not vested is forfeited upon termination of
employment for any reason, other than retirement, disability, or
death.
The 24,069 shares issued to the ESOP for fiscal 1997
included 1,524 shares allocated to John L. Larsen's account, 886
shares allocated to Max T. Evans' account, 371 shares allocated
to Harold F. Herron's account, 1,274 shares allocated to Daniel
P. Svilar's account, and 1,166 shares allocated to R. Scott
Lorimer's account, for a total of 5,221 shares allocated to
accounts for all executive officers as a group (five persons).
Shares forfeited by terminated employees who were not fully
vested were reallocated to plan participants and included 323,
188, 78, 271 and 247 shares to the accounts of Messrs. Larsen,
Evans, Herron, Svilar and Lorimer, respectively. The accounts of
the executive officers are fully vested, as they have all been
employed by the Company and USECC for more than the past seven
years. Allocations of shares for fiscal 1998 have not been made
with respect to any participant in the ESOP.
The maximum loan outstanding during fiscal 1997 under a loan
arrangement between the Company and the ESOP, was $1,014,300 at
May 31, 1997 for loans made in fiscal 1992 and 1991. Interest
owed by the ESOP was not booked by the Company. Crested pays
one-half of the amounts contributed to the ESOP by USE. Because
the loans are expected to be repaid by contributions to the ESOP,
Crested may be considered to indirectly owe one-half of the loan
amounts to USE. The loan was reduced by $183,785 plus interest
of $168,574.84 through the contribution of shares by the ESOP to
the ESOP in 1996. There was no similar reduction, however, for
fiscal 1997.
Stock Option Plan. The Company has an incentive stock
option plan ("ISOP"), reserving an aggregate of 975,000 shares of
Common Stock for issuance upon exercise of options granted
thereunder. Awards under the plan are made by a committee of two
or more persons selected by the Board (presently Messrs. Herron,
Bebout, Brenman and Fraser). The committee establishes the
exercise periods and exercise prices for options granted under
the plan. The Board ultimately ratifies the actions of the
committee. Total grants to officers and directors as a group may
not exceed 275,000 shares.
Options expire no later than ten years from the date of
grant, and upon termination of employment for cause. Subject to
the ten year maximum period, upon termination, unless terminated
for cause, options are exercisable for three months or in the
case of retirement, disability or death, for one year. In fiscal
1994, conditions relating to periods of Company service before
vesting of stock purchased on exercise of the non-qualified
options were removed.
For fiscal 1996, options to purchase 360,000 shares of
Common Stock were granted to USE employees (none were granted to
officers or directors), at an exercise price of $4.00 per share
(the closing bid price on grant date in December 1996). In
fiscal 1997, options to purchase 106,100 shares (previously
issued to employees in 1992 and 1996) were exercised. None of
the exercised options had been held by officers or directors.
<PAGE>
The following table shows unexercised options, how much
thereof were exercisable, and the dollar values for in-the-money
options, at May 31, 1997.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal year and FY-End
Option/SAR Values
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
Shares FY-End (#) FY-End($)
Acquired Value Exercisable/ Exercisable
Name on Exercise (#) Realized($) Unexercisable Unexercisable
---- ---------------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
John L. Larsen, -0- -0- 100,000 $687,000(1)
CEO exercisable exercisable and
unexercised
Keith Larsen -0- -0- 100,100 $597,597(2)
President exercisable exercisable and
unexercised
Max T. Evans, -0- -0- 57,200 $341,484(2)
Secretary exercisable exercisable and
unexercised
Harold F. Herron, -0- -0- 11,000 $65,670(2)
Vice President exercisable exercisable and
unexercised
Daniel P. Svilar -0- -0- 66,000 $394,020(2)
Assistant Secretary exercisable exercisable and
unexercised
R. Scott Lorimer -0- -0- 29,700 $177,309(2)
Treasurer exercisable exercisable and
unexercised
</TABLE>
(1) Equal to $8.87 closing bid on last trading day in FY 1997,
less $2.00 per share option exercise price, multiplied by
all shares exercisable.
(2) Equal to $8.87 closing bid on last trading day in FY 1997,
less $2.90 per share option exercise price, multiplied by
all shares exercisable.
Restricted Stock Plans. The Company and Crested have
issued stock bonuses to various executive officers and directors
of the Company and others. These shares are subject to
forfeiture to the
<PAGE>
issuer by the grantee if employment terminates otherwise than for
death, retirement or disability. If the required service is
completed, the risk of forfeiture lapses and the shares become
the unrestricted property of the holder. Messrs. Larsen, Evans,
Herron, Svilar, Lorimer and all executive officers who are
participants of this restricted stock plan, as a group (five
persons), received 25,200, 12,750, 18,900, 18,360, 15,120, and
90,330 shares of Common Stock, respectively, through fiscal 1997.
Shares issued through fiscal 1997 also include 20,000 for Don C.
Anderson, director. The shares issued in 1997 represent a 40%
bonus (20% for 1996 and 20% for 1997, and 100% for Mr. Herron) on
this plan's original shares. The expenses relating to these
stock issuances are shared equally by the Company and Crested.
Additional shares were issued in calendar 1997 under the 1996
Stock Award Program. See below.
Subsidiary Plans. During the year ended May 31, 1991,
Brunton adopted a salary deduction plan intended to qualify as a
deferred compensation plan under Internal Revenue Code Section
401(k). Harold F. Herron, John L. Larsen, Daniel P. Svilar and
R. Scott Lorimer are the only Company officers who are able to
participate in this retirement plan. The fiscal 1994 acquisition
of Brunton by the Company, and the sale of Brunton in 1996, have
not affected the Brunton 401(k) plan.
Other than as set forth above, neither the Company nor any
of its subsidiaries have any pension, stock option, bonus, share
appreciation, rights or other plans pursuant to which they
compensate the executive officers and directors of the Company.
Other than as set forth above, no executive officer received
other compensation in any form which, with respect to any
individual named in the Cash Compensation Table, exceeded ten
percent of the compensation reported for that person, nor did all
executive officers as a group receive other compensation in any
form which exceeded ten percent of the compensation reported for
the group.
Directors' Fees and Other Compensation
The Company pays non-employee directors a fee of $150 per
meeting attended. All directors are reimbursed for expenses
incurred with attending meetings.
Prior to fiscal 1992, the Board authorized the Executive
Committee to make loans to members of the Board, or to guarantee
their obligations in amounts of up to $50,000, if such loans or
surety arrangements would benefit the Company. Any loans or
surety arrangements for directors which are in excess of $50,000
will require Board rather than Executive Committee approval. The
Company loaned $25,000 to David W. Brenman under this plan prior
to fiscal 1991. The loan to Mr. Brenman bears interest at the
prime rate of the Chase Manhattan Bank and was due September 1,
1994, but has been extended to December 31, 1997 by Board vote
(Mr. Brenman abstaining). The loan was provided as partial
consideration for Mr. Brenman's representation of the Company to
the financial community in New York City. The loan to Mr.
Brenman originally was approved by the executive committee.
1996 Stock Award Program. The Board of Directors and the
shareholders of the Company have approved an annual incentive
compensation arrangement for the issuance of up to 67,000 shares
of Common Stock each year (from 1997 through 2002) to the five
executive officers of the Company, in amounts to be determined
each year based on the earnings of the Company for the prior
fiscal year ended May 31.
<PAGE>
Shares will be issued annually, provided that each officer
to whom the shares are to be issued is employed by the Company as
of the issue date of the grant year, and provided further that
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, although if in
prior years, starting in 1997, fewer than 67,000 USE shares are
awarded in any one or more years, the unissued balance of the
67,000 share maximum will be available for issue in subsequent
years (through 2007). One-half of the compensation expense under
the Program is the responsibility of Crested. The Board of
Directors determines the date each year (starting in 1997) when
shares are to be issued.
To provide additional incentive for the officers to remain
with the Company over the years, each allocation of shares to an
officer under the Program each year will be issued in the name of
the officer, and will be earned out (vested) over 5 years, at the
rate of 20% as of May 31 of each year following the date of issue
of the shares. However, none of the vested shares shall become
available to or come under the control of the officer in whose
name the shares were issued, until termination of employment by
retirement, death or disability. Upon termination of employment,
the shares and certificates will be released to the officer.
Until termination, the share certificates will be held by the
Treasurer of the Company. Voting rights will be exercised over
the shares by the non-employee directors of the Company, in their
discretion. Dividends or other distributions on or with respect
to the shares will be held by the Treasurer for the benefit of
the officers.
The number of shares to be awarded each year out of such
67,000 shares aggregate limit is determined by the Compensation
Committee, and will be based on certain criteria including the
Company's earnings per share of Common Stock for the prior fiscal
year. The total shares issued shall be divided among the
officers based on the following percentages: John L. Larsen
29.85%, Daniel P. Svilar 22.39%, Max T. Evans 17.91%, Harold F.
Herron 14.93% and R. Scott Lorimer 14.93%. Other factors bearing
on the prior year's profitability may be taken into consideration
by the Compensation Committee. In addition, the actual issuance
of the number of shares recommended by the Compensation Committee
to be awarded to the officers presently is required to be
submitted for approval by shareholders of the Company at the
Annual Meeting held subsequent to the end of the fiscal year.
In fiscal 1996, the Compensation Committee determined the
Program award for fiscal 1996 to be 14,158 shares of Common
Stock, as follows: John L. Larsen (4,226 shares), Harold F.
Herron 2,113 shares), R. Scott Lorimer (2,113 shares), Daniel
P. Svilar (3,170 shares), and Max T. Evans (2,536 shares). This
award was approved by the shareholders at the 1996 Annual
Meeting. Such shares have been issued to the officers as of the
date of this Prospectus.
COMMITTEES AND MEETING ATTENDANCE
During the fiscal year ended May 31, 1997 there were six
Board meetings and three Executive Committee meetings. Each
current member of the Board attended at least 75% of the combined
Board meetings and meetings of committees on which the director
serves. From time to time, the Board and Executive Committee act
by unanimous written consent pursuant to Wyoming law. Such
actions are counted as meetings for purposes of disclosure under
this paragraph.
The Board has established an Executive Committee to act in
place of the Board between meetings of the Board. The Executive
Committee had three meetings in fiscal 1997.
<PAGE>
An Audit Committee has also been established by the Board.
The Audit Committee had one meeting in fiscal 1997. Members of
the Audit Committee have also met informally at various times
during the year. The Audit Committee reviews the Company's
financial statements and accounting controls, and contacts the
independent public accountants as necessary to ensure that
adequate accounting controls are in place and that proper records
are being kept. The Audit Committee also reviews the audit fees
of the independent public accountants.
The Compensation Committee reviews, approves and makes
recommendations on the Company's compensation policies, practices
and procedures. During the year ended May 31, 1997, the members
of the Compensation Committee discussed compensation matters on
an individual basis and had one formal meeting.
A Management Cost Apportionment Committee was established by
USE and Crested in 1982, for the purpose of reviewing the
apportionment of costs between USE and Crested. John L. Larsen,
Max T. Evans and Scott Lorimer are members of this Committee.
The Board of Directors has a Nominating Committee, which did
not meet during the most recently completed year.
CERTAIN OTHER TRANSACTIONS
Transactions with Sheep Mountain Partners ("SMP"). In
fiscal 1989, the Company and Crested through USECC sold a one-
half interest in the Sheep Mountain properties to Cycle Resource
Investment Corporation ("CRIC"), a wholly-owned subsidiary of
Nukem, Inc., and thereafter USECC and CRIC contributed their 50%
interests in the properties to a new Colorado partnership, SMP,
which was organized to further develop and mine uranium claims,
market uranium and acquire additional uranium sales contracts.
Due to disputes with CRIC and Nukem, (which had been in
arbitration proceedings, and the results of the arbitration
having been appealed by Nukem and CRIC to the United States Tenth
Circuit Court of Appeals), necessary mine maintenance has been
funded by USECC alone. During fiscal 1997, the Company and
Crested received $4,000,000 from the SMP escrow accounts as part
of their monetary damages awarded by the Arbitration Panel. This
$4,000,000 was first applied to the account receivable for mine
standby costs as required under recovery cost accounting rules.
At May 31, 1997 a $8,600,000 monetary award remains unpaid as
well as certain equity damages.
Transactions with Green Mountain Mining Venture ("GMMV").
On June 23, 1997, USE and USECC signed an Acquisition Agreement
with Kennecott Uranium Company ("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. For a more detailed explanation of this
transaction, see Note F to the Financial Statements contained in
the Company's 1997 Annual Report.
<PAGE>
Transactions with 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 YSFC 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 January 27, 1998, YSFC had 11,645,000 shares of Common
Stock issued and outstanding, including 3,000,000 shares (25.7%)
issued to USE and Crested. A portion 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 or
until the $400,000 loan facility is paid, with two principal
shareholders of YSFC, whereby USE and Crested will have voting
control of more than 50% of the outstanding shares of YSFC.
Additional equity investors have provided an additional
$2,200,000 of funds for YSFC. The majority of the remaining
outstanding YSFC shares are owned by family members of John L.
Larsen, Chairman of USE. At November 30, 1997 the entire
$400,000 loan facility had been drawn down by YSFC and remained
owed to USE.
YSFC has staked and/or leases or holds unpatented mining
claims, state leases, and patented mining claims covering
approximately 10,200 acres in Wyoming and New Mexico.
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. If YSFC obtains equity funding, the
current shareholders' ownership interest would be reduced,
however the $400,000 loan facility from USE and Crested is
convertible to YSFC common stock, so that USE's and Crested's
equity ownership levels could be maintained.
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
<PAGE>
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 but not
exceeding 10% of uranium concentrated produced) 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.
Transactions with 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 totaling a
net of $6,511,200 ($1,106,700 through a private placement
conducted in the United States by RAF Financial Corporation, and
$5,404,500 through a private placement conducted in Toronto,
Ontario, Canada by C.M. Oliver & Company Limited). The proceeds
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
costs. 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.
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:
(a) 30.7% and 3.2% of the outstanding shares of SGMC 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 SGMC Common Stock are exercised
at Cdn$6.00 per share 18 months from the date of closing of the
offering in Canada and the outstanding warrants held by C.M.
Oliver to purchase 145,480 more shares of SGMC Common Stock are
exercised at Cdn$5.50 per share, before May 13, 1999. The
preceding percentages of SGMC Common Stock do not reflect
warrants 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 certain of the voluntary reductions in the ownership of SGMC
shares by USE and Crested, in connection with the private
offering in Canada. 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.
<PAGE>
(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 SGMC 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. 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.
Transactions with Directors. Two of the Company's
directors, Messrs. Larsen and Herron, and one of Crested's
directors, Max T. Evans, are trustees of the ESOP. Mr. Larsen is
also a director of Crested. In that capacity they have an
obligation to act in the best interests of the ESOP participants.
This duty may conflict with their obligations as directors of the
Company in times of adverse market conditions for the Common
Stock, or in the event of a tender offer or other significant
transaction.
In general, the ESOP trustees exercise dispositive powers
over shares held by the ESOP, and exercise voting powers with
respect to ESOP shares that have not been allocated to a
participant's account. In addition, the Department of Labor has
taken the position that in certain circumstances ESOP trustees
may not rely solely upon voting or dispositive decisions
expressed by plan participants, and must investigate whether
those expressions represent the desires of the participants, and
are in their best interests.
Harold F. Herron, son-in-law of John L. Larsen, had been
living in and caring for a house owned by the Company until such
time as the property was sold. In fiscal 1995, Mr. Herron
purchased the house for $260,000, the appraised value of the
property, and was reimbursed by the Company for leasehold
improvements totaling $22,830. The Company accepted a promissory
note in the amount of $112,170 with interest compounded annually
at 7% due on September 6, 1999 as a result of this transaction.
This note is secured by 30,000 shares of USE common stock owned
by Mr. Herron.
<PAGE>
Other Information. The Company has adopted a stock
repurchase plan under which it may purchase up to 275,000 shares
of its Common Stock. These shares would be purchased in part to
provide a source of shares for issuance upon the exercise of
various outstanding options.
Three of John L. Larsen's sons and two sons-in-law are
employed by the Company or subsidiaries (as President, President
of YSFC, President of Brunton, chief pilot, and landman). Mr.
Larsen's son-in-law Harold F. Herron is an officer and director
of the Company, and President and a director of Brunton.
Collectively, the six individuals including John L. Larsen
received $424,300 in cash compensation (paid by the Company and
Crested) for those services during the fiscal year ended May 31,
1997. The foregoing compensation expense was shared by the
Company and Crested, in accordance with the compensation
arrangements for all employees. Mr. Herron continues as
president and a director of Brunton. Mr. Larsen's son-in-law
Peter Schoonmaker is a part time land man for USECC.
The Company and Crested provide management and
administrative services for affiliates under the terms of various
management agreements. Revenues from services by the Company and
Crested from unconsolidated affiliates were $397,700 in fiscal
1997 and $92,900 in fiscal 1996. 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.
CERTAIN INDEBTEDNESS
Transactions Involving USECC. The Company and Crested
conduct the bulk of their activities through their equally-owned
joint venture, USECC. From time to time the Company and Crested
advance funds to or make payments on behalf of USECC in
furtherance of their joint activities. These advances and
payments create intercompany debt between the Company and
Crested. The party extending funds is subsequently reimbursed by
the other venturer. The Company had a note receivable of
$6,023,400 from Crested at May 31, 1997 ($6,460,300 during fiscal
1996).
Debt Associated with USE's ESOP. During the year ended May
31, 1997, the Company made a contribution of 24,069 shares of
Common Stock to the ESOP. Because Crested engages the Company's
employees to discharge substantially all of its functions, these
contributions benefitted Crested. As a result, Crested owes the
Company $106,800 for one-half of the Company's contribution to
the ESOP. Regular and substantial contributions by the Company
to the ESOP are required to maintain the ESOP in effect. In
fiscal 1996 the Company contributed 10,089 shares of Common Stock
to the ESOP, for one-half of which Crested owes the Company
$43,650.
Loans to Four Directors. As of May 31, 1997 three of the
Company's and one of Crested's directors owed the Company
$487,000 as follows (each loan is secured with shares of Common
Stock of the Company owned by the individual): Harold F. Herron
$11,000 (1,000 shares); John L. Larsen $413,600 (124,000 shares),
David W. Brenman $25,000 (4,000 shares) and Max T. Evans $37,400
(7,500 shares). The outstanding loan amounts represent various
loans made to the individuals over a period of several years.
The loans mature December 31, 1997 and bear interest at 10% per
year. For information on an additional loan to Mr. Herron, see
below. At May 31, 1997, John L. Larsen and members of his
immediate family were indebted to the Company for $745,300
secured by 160,000 shares of the Company's Common Stock. As of
the date of this Prospectus, John L. Larsen has repaid his debt
to the Company (which was $431,871, including interest, at
December 31, 1997), which reduced down to $313,429 the amount
owed members of Mr. Larsen's family to the Company. The
preceding amounts do not include the loan to Mr. Herron, see
below.
In fiscal 1995, the Company made a five year non-recourse
loan in the amount of $112,170 to Harold F. Herron. The loan is
secured by 30,000 shares of the Company's Common Stock, bears
interest
<PAGE>
at a rate of 7% and is payable at maturity. The Board approved
the loan to obtain a higher interest rate of return on the funds
compared to commercial rates, and to avoid having the USE stock
prices depressed from Mr. Herron selling his shares to meet
personal obligations. See Transactions with Directors above.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of November 25, 1997, the
shares of Common Stock, and the $.001 par value common stock of
the Company's 52%-owned subsidiary, Crested, held by each
director and nominee, and by all officers and directors as a
group. Unless otherwise noted, the listed record holder
exercises sole voting and dispositive powers over the shares
reported as beneficially owned, excluding the shares subject to
forfeiture and those held in ESOP accounts established for the
employee's benefit. Dispositive powers over the forfeitable
shares held by employees and a non-employee director who are not
officers, is shared by the Company's Board of Directors. Voting
and dispositive powers are shared by the Company's non-employee
directors (Messrs. Anderson, Bebout, Brenman and Fraser) over
forfeitable shares held by the Company's five executive officers.
The ESOP Trustees exercise voting powers over unallocated ESOP
shares and dispositive powers over all ESOP shares. It should be
noted that voting and dispositive powers for certain shares are
shared by two or more of the listed holders. Such shares are
reported opposite each holder having a shared interest therein,
but are only included once in the shareholdings of the group
presented in the table.
<TABLE>
<CAPTION>
Company Common Stock Crested Common Stock
-------------------------------- -------------------------------
Amount and Percent Amount and Percent
Nature of of Nature of of
Beneficial Ownership Class(1) Beneficial Ownership Class(1)
-------------------- --------- -------------------- --------
<S> <C> <C> <C> <C>
John L. Larsen 1,982,888(2) 27.5% 5,879,182(13) 55.5%
Harold F. Herron 817,547(3) 11.8% 5,574,999(14) 53.3%
Don C. Anderson 222,813(4) 3.3% 5,300,297(15) 51.4%
Nick Bebout 229,764(5) 3.6% 5,300,297(15) 51.4%
David W. Brenman 218,658(6) 3.2% 5,300,297(15) 51.4%
H. Russell Fraser 217,658(7) 3.2% 5,300,297(15) 51.4%
Keith G. Larsen 130,321(8) * 5,300,297(15) 51.4%
Max T. Evans 1,242,111(9) 17.8% 414,236(14) 4.0%
Daniel P. Svilar 685,272(10) 9.9% 280,000(17) 2.7%
R. Scott Lorimer 64,379(11) 1.0% 15,000(18) *
All officers and
directors as a
group (eight persons) 2,444,772(12) 35.7% 6,244,235(19) 60.6%
</TABLE>
<PAGE>
* Less than one percent.
(1) Percent of class is computed by dividing the number of
shares beneficially owned plus any options held by the reporting
person or group, by the number of shares outstanding plus the
shares underlying the options held by that person or group.
(2) Mr. Jack Larsen exercises sole voting powers over
242,536 directly owned shares, (including 106,000 shares in
joint tenancy with his wife, 200,100 shares underlying options
and 26,641 shares held in the U.S. Energy Corp. Employee Stock
Ownership Plan account for his benefit). The directly owned
shares include 27,500 shares gifted to his wife, that have
remained in Mr. Larsen's name. Shares over which shared voting
rights are exercised consist of 155,811 shares held by the ESOP,
which have not been allocated to accounts established for
specific beneficiaries and shares held by corporations of which
Mr. Larsen is a director consisting of 512,359 shares held by
Crested Corp., 125,556 shares held directly by Plateau Resources
, 75,000 shares underlying options held by Plateau, 100,000
shares held by SGMC, 75,0000 shares underlying options held by
SGMC, and 12,612 shares held by Ruby Mining Company. Mr. Larsen
shares voting and dispositive rights over such shares with the
other directors of these corporations. Mr. Larsen shares voting
powers over the unallocated ESOP shares and dispositive powers
over all ESOP shares in his capacity as an ESOP Trustee with the
other ESOP Trustees. Shares over which sole dispositive rights
are exercised consist of directly owned shares, joint tenancy
shares and options, less the 27,500 shares gifted, but not
transferred, to his wife. Shares for which shared dispositive
powers are held consist of the 404,597 shares held by the ESOP,
101,850 shares held by employees who are not officers or
directors of the Company and a non-employee director (Forfeitable
Shares) which are subject to forfeiture, the shares held by
Crested, Plateau, SGMC and Ruby, and the Plateau and SGMC option
shares. The shares listed under Total Beneficial Ownership also
include 29,426 shares beneficially held by Mr. Larsen which are
subject to forfeiture. The Company's non-employee directors
exercise shared voting and dispositive powers over such shares.
The shares shown as beneficially owned by Mr. Larsen do not
include 42,350 shares owned directly by his wife, who exercises
the sole investment and voting powers over those shares.
(3) Mr. Herron exercises sole voting powers over 54,486
directly owned shares, 12,000 shares held for his minor children
under the Wyoming Uniform Transfers to Minors Act (the Minor's
shares), 11,000 shares underlying options, 5,607 shares held in
the ESOP account established for his benefit and 1,581 shares
held by Northwest Gold, Inc. (NWG). Sole dispositive powers are
exercised over the directly held shares, the Minor's shares, the
shares underlying options and the shares held by NWG. Mr. Herron
exercises shared voting rights over 125,556 shares held by
Plateau, 75,000 shares underlying options held by Plateau, 12,612
shares held by Ruby and the 155,811 unallocated ESOP shares.
Shared dispositive rights are exercised over the shares held by
the ESOP, Plateau, Ruby and the 101,850 Forfeitable Shares. Mr.
Herron exercises dispositive and voting powers over the shares
held by Plateau and Ruby as a director of those companies with
the other directors of those companies. He exercises powers over
the ESOP shares in his capacity as an ESOP Trustee with the other
ESOP Trustees. The shares listed under Total Beneficial
Ownership also include 21,013 shares beneficially held by Mr.
Herron which are subject to forfeiture. The Company's non-
employee directors exercise shared voting and dispositive powers
over such shares. The shares shown as beneficially owned by Mr.
Herron do not include 2,895 shares owned directly by his wife who
exercises the sole voting and dispositive powers over such
shares.
<PAGE>
(4) Includes 6,100 directly held shares, 3,055 shares held
in an IRA established for Mr. Anderson's benefit, and 213,658
shares subject to forfeiture. Mr. Anderson exercises sole voting
and dispositive power over the directly held shares and IRA
shares. He exercises sole voting power over 21,000 shares he
holds which are subject to forfeiture. Mr. Anderson exercises
shared dispositive powers over the 101,850 shares held by
individuals who are not officers of the Company which are subject
to forfeiture ("Forfeitable Shares"), with the other directors of
the Company. As a non-employee director, Mr. Anderson exercises
shared voting and dispositive rights over 111,808 shares held by
executive officers which are subject to forfeiture ("Officers
Forfeitable Shares"), with the other non-employee directors.
(5) Consists of 16,056 shares held directly, 50 shares held
in joint tenancy with his wife and 213,658 shares subject to
forfeiture. Mr. Bebout exercises sole voting and dispositive
powers over the directly held shares and joint tenancy shares.
He exercises shared dispositive powers over the 101,850
Forfeitable Shares with the other directors of the Company and as
a non-employee director, Mr. Bebout exercises shared voting and
dispositive rights over the 111,808 Officers Forfeitable Shares,
with the other non-employee directors.
(6) Consists of 5,000 shares held directly and 213,658
shares subject to forfeiture. Mr. Brenman exercises sole voting
and dispositive powers over the 5,000 directly held shares. Mr.
Brenman exercises shared dispositive powers over the 101,850
Forfeitable Shares with the other directors of the Company. As a
non-employee director, Mr. Brenman exercises shared voting and
dispositive rights over the 111,808 Officers Forfeitable Shares,
with the other non-employee directors.
(7) Consists of 1,000 directly held shares and 4,000 shares
held in an IRA for Mr. Fraser's benefit, and 213,658 shares
subject to forfeiture. Mr. Fraser exercises sole voting and
dispositive rights over the directly held shares and the IRA
shares. Mr. Fraser exercises shared dispositive powers over the
101,850 Forfeitable Shares with the other directors of the
Company. As a non-employee director, Mr. Fraser exercises shared
voting and dispositive rights over the 111,808 Officers
Forfeitable Shares, with the other non-employee directors.
(8) Consists of 1,774 directly held shares, 8,820 shares
subject to forfeiture, 9,877 shares held in the ESOP account
established for his benefit, 8,000 shares held for his minor
children under the Wyoming Uniform Transfers to Minors Act
("Minors Shares), 30,000 shares underlying options, and 101,850
shares subject to forfeiture held by employees who are not
officers or directors of the Company. Mr. Larsen exercises sole
voting and dispositive powers over the directly held, the Minors
Shares and the shares underlying his options. He exercises sole
voting over his ESOP shares and his forfeitable shares. Mr.
Larsen shares dispositive powers over the 101,850 Forfeitable
Shares with the other directors of the Company.
(9) Shares over which Mr. Evans exercises sole voting powers
consist of 2,901 directly owned shares, 36,389 shares held in
joint tenancy with his wife, 11,971 shares held in an Individual
Retirement Account for his benefit and 57,200 shares underlying
options. Shares for which Mr. Evans holds sole dispositive
powers are comprised of his directly held shares, joint tenancy
shares, IRA shares and the shares underlying his options. Shares
over which Mr. Evans exercises shared voting rights consist of
the shares held by Crested, Plateau, the unallocated ESOP shares
and the Plateau options. He exercises shared dispositive rights
over the shares held by Crested, Plateau, the ESOP, and the
Plateau options. Mr. Evans shares voting and dispositive powers
over the shared held by Crested and Plateau with the
<PAGE>
remaining directors of those companies. The shares listed under
Total Beneficial Ownership also include 18,286 shares
beneficially held by Mr. Evans which are subject to forfeiture.
The Company's non-employee directors exercise shared voting and
dispositive powers over such shares.
(10) Mr. Svilar exercises sole voting powers over 22,084
directly owned shares, 12,700 shares held in joint tenancy with
his wife, 11,000 shares held jointly with a deceased family
member, 1,000 shares held as custodian for his minor child under
the Wyoming Uniform Transfers to Minors Act (the Minor's shares),
66,000 shares underlying options and 22,200 shares held in the
ESOP account established for his benefit. He holds sole
dispositive power over his directly held shares, joint tenancy
shares, Minor's shares and the shares underlying his options.
The shares over which he exercises shared voting and dispositive
rights consist of the 512,359 shares held by Crested and the
100,000 shares and 75,000 shares underlying options held by SGMC.
Mr. Svilar exercises shared voting and dispositive powers as a
director of Crested and SGMC with the other directors of those
companies. He also exercises shared voting and investment powers
of 11,700 shares held by a nonaffiliated company of which Mr.
Svilar is a partner. The shares listed under Total Beneficial
Ownership also include 25,850 shares beneficially held by Mr.
Svilar which are subject to forfeiture. The Company's non-
employee directors exercise shared voting and dispositive powers
over such shares.
(11) Mr. Lorimer exercises sole voting powers over 2
directly held shares, 17,444 shares held in the ESOP account
established for his benefit, and 29,700 shares underlying
options. Mr. Lorimer exercises sole dispositive powers over his
directly held shares and the shares underlying his options. The
shares listed under "Total Beneficial Ownership" also include
17,233 shares beneficially held by Mr. Lorimer which are subject
to forfeiture. The Company's non-employee directors exercise
shared voting and dispositive powers over such shares.
(12) Consists of 1,006,182 shares over which the group
members exercise sole voting rights, including 364,000 shares
underlying options and 32,248 shares allocated to ESOP accounts
established for the benefit of group members. The listed shares
include 913,290 shares, including 364,000 shares underlying
options, over which group members exercise sole dispositive
rights. Shared voting and dispositive rights are exercised with
respect to 1,167,234 and 1,528,334 (including 213,658 shares
subject to forfeiture) shares, respectively.
(13) Consists of 5,300,297 Crested shares held by the
Company, 100,000 shares and 150,000 shares underlying options
held by SGMC, 60,000 shares and 150,000 shares underlying options
held by Plateau, 53,885 shares held by Ruby with respect to which
shared voting and dispositive powers are exercised as a director
with the other directors of those Companies and 65,000
forfeitable shares held by employees, over which Mr. Larsen
exercises shared dispositive powers with the remaining Crested
directors.
(14) Includes 6,932 directly held shares and 3,885 shares
held by NWG over which Mr. Herron exercises sole voting and
investment powers. Mr. Herron is the sole director of NWG. Also
includes the Crested shares held by the Company and Ruby, and the
shares and shares underlying options held by Plateau, with
respect to which shared voting and dispositive powers are
exercised as a USE, Plateau and Ruby director with the other
directors of those companies.
<PAGE>
(15)Consist of the Crested shares held by the Company with
respect to which shared voting and dispositive powers are
exercised as a director with the other directors of the Company.
(16) Includes 139,236 directly held shares, and 60,000
shares and 150,000 shares underlying options held by Plateau,
with respect to which shared voting and dispositive powers are
exercised as a director with the other directors of Plateau and
65,000 forfeitable shares held by employees, over which Mr. Evans
exercises shared dispositive powers with the remaining Crested
directors.
(17) Consists of 175,000 directly held shares and 40,000
shares which are held in joint tenancy with a deceased family
member, over which Mr. Svilar exercises sole voting and
dispositive powers and 65,000 forfeitable shares held by
employees, over which Mr. Svilar exercises shared dispositive
powers with the remaining Crested directors.
(18) Consists of 15,000 shares which are subject to
forfeiture. Mr. Lorimer exercises sole voting power of such
shares, while the Crested directors share the dispositive powers
over the shares.
(19) Consists of 380,053 shares over which the group members
exercise sole voting rights, including 15,000 shares subject to
forfeiture. The listed shares include 365,053 shares over which
group members exercise sole dispositive rights. Shared voting
and dispositive rights are exercised with respect to 5,814,182
and 5,79,182 (including 65,000 shares subject to forfeiture)
shares, respectively.
DESCRIPTION OF SECURITIES
The Company's Articles of Incorporation authorize issuance
of 20,000,000 shares of Common Stock, $.01 par value, and 100,000
shares of preferred stock, $.01 par value.
Common Stock. Holders of Common Stock are entitled to
receive dividends when and as declared by the Board of Directors
out of funds legally available therefor.
Holders of Common Stock are entitled to one vote per share
on all matters upon which such holders are entitled to vote, and
further have the right to cumulate their votes in elections of
directors to the Company's Board of Directors. Cumulation is
effected by multiplication of shares held by the number of
director nominees, and voting is by casting the product as
desired among the nominees; directors are elected by a plurality
of votes cast.
Pursuant to the Company's Articles and the Wyoming
Management Stability Act, shares of Common Stock held by Crested
(512,359) may be voted by Crested, shares of Common Stock held by
Plateau (125,556) may be voted by Plateau and shares of Common
Stock held by SGMC (100,000) may be voted by SGMC in elections of
USE directors, so long as USE conducts substantial business in
Wyoming and is "qualified" under such Act as having assets in
excess of $10,000,000, with a class of stock listed on NASDAQ or
on a principal exchange.
In the event of dissolution, liquidation or winding up of
USE, holders of Common Stock are entitled to share ratably in
assets remaining after creditors (including holders of any
preferred stock, as to liquidation preferences) have been paid.
<PAGE>
All outstanding shares of common stock (including the Common
Shares offered for sale by this Prospectus) have been fully paid
and are nonassessable.
Preferred Stock. The Company's Board of Directors is
authorized to issue shares of preferred stock in one or more
series, with such rights to redemption, liquidation preference,
dividends, voting and other matters as determined by the Board of
Directors, without authorization from the USE stockholders.
Accordingly, the USE Board of Directors could issue preferred
shares with dividend rights senior to the Common Shares. Under
the Wyoming Business Corporation Act, separate classes of stock
are entitled to vote separately on certain substantive
transactions (e.g., a merger or sale of most of the company
assets), with approval of the transaction subject to approval by
each class.
No shares of USE preferred stock have been issued, and no
series thereof has been established to date.
Warrants. Additional Warrant to Shamrock Partners, Ltd. On
January 20, 1998 the Company entered into a nonexclusive one year
Investment Banking Consulting Agreement with Shamrock Partners,
Ltd. ("SPL"), 111 Veterans Square, Media, Pennsylvania, under
which SPL is to provide financial consulting services and advice
concerning financing, merger and acquisition proposals, and to
assist the Company in arranging meetings between representatives
of the Company and financial institutions in the investment
community (including broker-dealer firms, security analysts, and
portfolio managers). For SPL's services, as of December 5, 1997
the Company authorized the issuance to SPL a Warrant to Purchase
200,000 shares of Common Stock of the Company at a price of $6.00
cash per share; the Warrant is exercisable through May 1, 1999.
The Warrant may be subdivided for substitute Warrants. The
Holder (or substitute Holders) of the Warrants are not entitled
to any rights of a shareholder in the Company by virtue of
holding the Warrants.
The Warrant carries certain rights of registration with the
Commission under the 1933 Act as more specifically described in
the Warrant, but if the Company so registers the Warrants solely
to accommodate the registration for public sale of the underlying
200,000 Warrant Shares, the Holder or Holders of the Warrants may
not sell or otherwise transfer the Warrants for a period of 24
months after the effective date of such Registration Statement,
which period prevents sale or transfer of the Warrants prior to
their Expiration Date. The Warrants are governed by and
construed in accordance with the laws of Wyoming.
The above-described Warrant is separate and is in addition
to the original Warrant (also for the purchase of 200,000 shares
of Common Stock) which was issued to SPL in January 1996; the
original Warrant has been exercised, and this Prospectus relates
to the public resale of the 30,000 Warrant Shares so purchased.
As of the date of this Prospectus, SPL has not exercised the new
Warrant issued to SPL, and the Company has not filed a
registration statement for SPL in connection with the new
Warrant. This Prospectus does not include such new Warrant or
any shares of Common Stock issuable on exercise of such Warrant.
Warrant to Sunrise Financial Group, Inc. As of December 1,
1997, the Company retained Sunrise Financial Group, Inc.
("Sunrise") to serve as a financial consultant and advisor on a
nonexclusive basis for a period of 12 months ending on December
1, 1998. Sunrise will provide such services and advice
pertaining to the Company's business and affairs as the Company
may from time to time
<PAGE>
reasonably request. As compensation for Sunrise's services, in
December 1997, the Company authorized the issuance to Sunrise a
Warrant to Purchase 225,000 shares of Common Stock of the
Company; the Warrant is exercisable for three years at an
exercise price of $10.50 per share. As will be provided in the
Warrant, Sunrise will have the right (during the 12 month term of
the consulting agreement) to demand that the Company include in
the next registration statement filed by the Company with the
Securities and Exchange Commission, on a piggy-back basis, the
resale to the public of the shares of Common Stock purchased on
exercise of the Warrant. If no such registration statement
filing occurs during the 12 month period, Sunrise will have the
right to demand that the Company register the purchased shares
for sale to the public. As of the date of this Prospectus,
Sunrise has not exercised the Warrant issued to Sunrise in
connection with such Warrant. This Prospectus does not include
such Warrant or any shares of Common Stock issuable on exercise
of such Warrant.
PLAN OF DISTRIBUTION
The Warrant Shares are offered from time to time by the
Holders of the Warrant Shares or their agents at market prices
from time to time. Selling commissions will be paid by the
sellers of the Warrant Shares. Except for the Warrant exercise
price of $5.00 per share paid to the Company upon exercise of the
Warrants, no sales proceeds will be paid to the Company or any
subsidiary of the Company from the sale of the Warrant Shares.
The remaining 19,539 Common Shares which are being registered for
sale to the public by the filing of this Registration Statement,
of which this Prospectus is a part, with the Commission in
accordance with the 1933 Act and the regulations pursuant
thereto, will be offered from time to time by the Selling
Shareholders or their agents at market prices from time to time.
Selling commissions will be paid by the Selling Shareholders. No
sales proceeds will be paid to the Company or any subsidiary of
the Company from the sale of these Common Shares. The Common
Shares may be offered from time to time by the Holders of the
Warrants or the Selling Shareholders (i) in transactions in the
over-the-counter market, automated inter-dealer system on which
the Company's Common Stock is then listed, in negotiated
transactions or a combination of such methods of sale, and (ii)
at market prices prevailing at the time of sale, at prices
related to such prevailing market prices, or at negotiated
prices. The Holders of the Warrants or the Selling Shareholders
may effect such transactions directly with the broker-dealers.
Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Holders of the
Warrants and/or the purchasers of the Common Shares for whom such
broker-dealers may act as agents or to whom they may sell as
principals, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions).
Sales of the Common Shares may be made pursuant to this
Prospectus or pursuant to Rule 144 adopted under the 1933 Act.
No underwriting arrangements exist as of the date of this
Prospectus. Upon being advised of any underwriting arrangements
that may be entered into by the Holders of the Warrants or the
Selling Shareholders after the date of this Prospectus, the
Company will prepare and file a post-effective amendment to this
Registration Statement including a supplement to this Prospectus
to disclose the name of such underwriters and such arrangements.
Expense of any sales pursuant to this Prospectus will be
borne by the Holders of the Warrants or the Selling Shareholders,
except that the Company is paying certain of the expenses, which
are estimated at $10,000, of registering the Warrant Shares under
the 1933 Act and under the laws of one state selected by the
Holder, consisting of all costs incurred in connection with the
preparation of the Registration
<PAGE>
Statement (except for any fees of counsel for the Holders of the
Warrants). The Holders of the Warrants or the Selling
Shareholders will pay or assume brokerage commissions, or
underwriting discounts, incurred in the sale of the Common
Shares, which commissions or discounts are not being paid or
assumed by the Company.
HOLDERS OF THE WARRANT SHARES
The names of the Holders of the Warrant Shares issued upon
exercise of the Warrants prior to and after the offering are set
forth below. It is anticipated that such Holders will own none
of the Warrant Shares after completion of the offering. Such
Holders own no other shares of Common Stock.
No. of Share of
Shares of Common Common
Common Stock Shares to be Stock to be
Owned Prior Offered by Owned After
Name to Offering this Prospectus Offering
---- ----------- --------------- -----------
Shamrock Partners, Ltd. 10,000 10,000 0
Shamrock Partners
International, Inc. 20,000 20,000 0
None of the Holders of the Warrants have held any position,
office or have had any material relationship with Registrant or
any of its affiliates within the past three years except for (i)
the initial investment banking consulting agreement that
Registrant entered into with Shamrock Partners, Ltd., on a
nonexclusive basis for a one year term, effective January 9,
1996,(and extended through December 1, 1997), and (ii) the one
year agreement recently entered into, see "Warrants - Additional
Warrant to Shamrock Partners."
SELLING SHAREHOLDERS
The following is a listing of the Selling Shareholders, the
amount of Common Shares to be offered for each such Selling
Shareholder's account and the amount of USE's Common Stock owned
by each Selling Shareholder prior to the offering and to be held
by such Selling Shareholder after completion of the offering.
Except as noted below, none of the Selling Shareholders (i) has
had any position, office or other material relationship with the
Registrant or any of its affiliates within the past three years,
or (ii) to the knowledge of the Company, will own one percent or
more of the Company's outstanding common stock after completion
of the offering. It is anticipated each Selling Shareholder will
own none of the Common Shares hereby offered, after completion of
the offering.
<PAGE>
No. of
No. of No. of Shares of
Common Shares Shares of USE USE Common
to be Offered Common Stock Stock to be
by Selling Owned Prior Owned After
Name Shareholder to Offering* Offering
---- ------------- ------------ ------------
Richard P. Larsen(1) 1,774 24,299 22,525
Kenneth J. Webber(1) 1,478 28,815 27,337
N. Hal Clyde(1) 806 7,494 6,388
Hershel R. Dike(1) 906 5,107 4,201
Jeff T. Harding(1) 1,066 5,336 4,270
Noel Holbert(1) 1,062 7,512 6,450
Mitch M. LeClair(1) 1,047 4,843 3,796
Sharon Miller(1) 723 4,697 3,974
Steven P. Morrill(1) 884 2,069 1,185
Bryon G. Mowry(1) 122 723 601
Steven D. Richmond(1) 986 3,056 2,671
Mark Smith(1) 1,049 7,396 6,347
John Turner(1) 87 27 184
Keith G. Larsen(2) 1,774 28,471 26,697
Mark J. Larsen(3) 1,577 83,462 81,885
George F. Smith(4) 2,135 45,955 43,820
Michael E. Sweeney(5) 1,949 74,892 72,943
Glenn Dooley(6) 113 972 859
* Includes shares held directly, shares held in the USE
Employee Stock Ownership Plan (the "ESOP") account
established for the benefit of employee shares held jointly
and shares held directly by immediate family members in the
same household.
(1) USE employee, (except Ms. Miller, a former employee).
(2) President and director of USE
(3) USE employee, president and director of Yellowstone Fuels Corp.
(4) USE employee and director of Ruby Mining Company, an
affiliate of USE.
(5) USE employee, director of Four Nines Gold, Inc.; President
and director of Sutter Gold Mining Company and Vice
President of USECC Gold Limited Liability Company, all
affiliates of the Company.
(6) USE employee; Vice President of Plateau Resources Limited, a
100% subsidiary of USE.
<PAGE>
EXPERTS
The consolidated financial statements of USE included in
this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.
The balance sheet of the Green Mountain Mining Venture 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
included in this Prospectus have been included herein in reliance
of Coopers & Lybrand L.L.P., independent accountants, given on
the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Stephen E. Rounds, Denver, Colorado, has acted as special
counsel to USE in connection with this offering.
<PAGE>
Consolidated Financial Statements (audited only for fiscal
periods ending May 31)
Registrant and Affiliates Page No.
Report of Independent Public Accountants 106
Consolidated Balance Sheets
May 31, 1997 and 1996 and 107-108
February 28, 1998 146-147
Consolidated Statements of Operations
for the Years Ended May 31, 1997 and 1996, 109-110
Nine Months Ended February 28, 1998 and 1997 148-149
Consolidated Statements of Shareholders'
Equity for the Years Ended
May 31, 1997, 1996 and 1995 111-113
Consolidated Statements of Cash Flows for
the Years Ended May 31, 1997, 1996 and 1995 114-115
Nine Months Ended February 28, 1998 and 1997 150-151
Notes to Consolidated Financial Statements
for the Years Ended May 31, 1997, 1996 and 1995 116-145
Nine Months Ended February 28, 1998 152
Green Mountain Mining Venture
Report of Independent Public Accountants 154
Balance Sheet - December 31, 1996 and 1995 155
Statement of Operations for the Years Ended
December 31, 1996, 1995 and 1994 and
for the Period from Inception (June 1, 1990)
to December 31, 1996 156
Statement of Changes in Partners'
Capital for the Years Ended
December 31, 1996, 1995 and 1994
and for the Period from Inception
(June 1, 1990) to December 31, 1996 157
<PAGE>
Statement of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 and
for the Period from Inception (June 1, 1990)
to December 31, 1996 158
Notes to Financial Statements 159-164
Sheep Mountain Partners
USE's partner in SMP, Nukem/CRIC, has 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 USE that they have been unable to complete
their audit of SMP, and are unable to render a report on
SMP's financial statements. USE and SMP's independent
public accountants are seeking to resolve these
uncertainties so that SMP's financial statements may be
finalized and filed. When and if these matters are
resolved, the following SMP financial statements will be
filed under cover of an amendment.
Balance Sheets - May 31, 1997 and 1996
Statements of Operations - Years Ended
May 31, 1997, 1996 and 1996
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
Schedules to SMP's Financial Statements
<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.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
August 15, 1997.
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
ASSETS
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 financial statement included
herein (including the accompanying
notes) have been prepared from the
books and records of the company after
making all necessary adjustments and
represent the final statements for the
period under examination.
By: /s/ R. Scott Lorimer
---------------------------------
R. Scott Lorimer, Chief Financial Officer
The accompanying notes to consolidated financial
statements are an integral part of these balance sheets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
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,
forfeitalbe 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>
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS
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>
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
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>
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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
--------- ------- ----------- ----------- ------- ----------- ----------- -----------
The accompanying notes to consolidated financial
statements are an integral part of these statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(continued)
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
--------- ------- ----------- ----------- ------- ----------- ----------- -----------
The accompanying notes to consolidated financial
statements are an integral part of these statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(continued)
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.
The accompanying notes to consolidated financial
statements are an integral part of these statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
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>
<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
nterests 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 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
<PAGE>
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.
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.
<PAGE>
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 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.
<PAGE>
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).
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
<PAGE>
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.
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.
<PAGE>
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:
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:
<PAGE>
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)
========= ========= =========
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
<PAGE>
$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.
CONDENSED COMBINED BALANCE SHEETS - EQUITY INVESTEES
May 31,
----------------------------
1997 1996
---- ----
Current assets $ 21,524,800 $ 19,525,200
Non-current assets 7 8,125,200 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.
<PAGE>
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 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
<PAGE>
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 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 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
<PAGE>
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 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
<PAGE>
the option; on option exercise and closing, Pangolin paid $36,090 in
cash for 22 acres and two nonrecourse promissory notes totaling
$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.
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
<PAGE>
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.
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
<PAGE>
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.
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.
<PAGE>
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 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.
<PAGE>
H. INCOME TAXES:
The components of deferred taxes as of May 31, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
May 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
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)
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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 $ -- $ -- $ --
</TABLE>
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
<PAGE>
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.
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>
<PAGE>
<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>
<PAGE>
<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 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
<PAGE>
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, $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
<PAGE>
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
----- --------- ------ ----- ------------
Mayy 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.
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
<PAGE>
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 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.
<PAGE>
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
-------- -------------- ------------- -------- -------------- --------
<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. 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.
<PAGE>
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 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.
<PAGE>
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 totaling 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 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.
PAGE>
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.
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:
<PAGE>
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 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.
<PAGE>
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 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.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
U.S. ENERGY CORP. AND AFFILIATES
<TABLE>
<CAPTION>
Condensed Consolidated Balance Sheets
ASSETS
February 28, May 31,
1998 1997
-------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,224,500 $ 1,416,900
Accounts receivable
Trade, net of valuation allowance
of $15,700 and $27,800, respectively 235,600 368,200
Related parties 1,664,300 1,191,000
Current portion long-term
notes receivables 337,200 337,200
Inventory 63,700 96,000
Assets held for resale and other 905,900 991,600
----------- ------------
TOTAL CURRENT ASSETS 5,431,200 4,400,900
LONG-TERM NOTES RECEIVABLE 745,800 1,477,900
INVESTMENTS IN CONTINGENT
STOCK PURCHASE WARRANT 4,594,000 4,594,000
INVESTMENTS IN AFFILIATES
Affiliates 4,868,700 4,999,600
Restricted 8,921,900 8,506,300
----------- ------------
13,790,600 13,505,900
PROPERTY AND EQUIPMENT 16,159,200 14,843,000
Less accumulated depreciation,
depletion and amortization (9,275,000) (8,802,100)
----------- ------------
6,884,200 6,040,900
OTHER ASSETS: 394,900 367,500
----------- ------------
$ 31,840,700 $ 30,387,100
============ ============
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
<TABLE>
<CAPTION>
Condensed Consolidated Balance Sheets
LIABILITIES AND SHAREHOLDERS' EQUITY
February 28, May 31,
1998 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 501,900 $ 1,312,600
Deferred revenue 4,000,000 --
Current portion of long-term debt 141,000 81,300
------------ ------------
TOTAL CURRENT LIABILITIES 4,642,900 1,393,900
LONG-TERM DEBT 186,400 183,100
RECLAMATION LIABILITY 8,751,800 8,751,800
OTHER ACCRUED LIABILITIES 4,676,500 5,259,000
DEFERRED TAX LIABILITY 183,300 183,300
MINORITY INTERESTS 90,300 --
COMMITMENTS AND CONTINGENCIES
FORFEITABLE COMMON STOCK
$.01 par value; issued 229,606
shares and 223,900, respectively,
forfeitable until earned 1,958,000 1,892,400
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value;
100,000 shares authorized none
issued or outstanding; -- --
Common stock, $.01 par value;
20,000,000 shares authorized;
issued, 6,732,945 and 6,646,475
shares respectively 67,300 66,500
Additional paid-in capital 22,921,400 22,543,000
Accumulated deficit (8,528,200) (6,776,900)
Treasury stock at cost, 690,943 shares (2,182,000) (2,182,000)
Unallocated ESOP contribution (927,000) (927,000)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 11,351,500 12,723,600
------------ ------------
$ 31,840,700 $ 30,387,100
============ ============
</TABLE>
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
<TABLE>
<CAPTION>
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended February Nine Months Ended February
--------------------------- --------------------------
28, 1998 28, 1997 28, 1998 28, 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Mineral sales $ -- $ -- $ 858,700 $ --
Construction contract revenues -- 157,600 -- 935,300
Commercial operations 697,800 389,500 3,107,300 1,458,300
Oil Sales 48,400 62,700 125,000 125,000
Gain (loss) on sale of assets -- -- (200) (19,900)
Mineral property transactions 46,200 26,900 156,600 75,300
Interest 211,100 236,100 573,900 522,700
Management fees and other 162,100 104,900 508,100 172,500
---------- ---------- ----------
1,165,600 977,700 5,329,400 3,269,200
COSTS AND EXPENSES:
Costs of mineral sold -- -- -- --
Mineral operations 375,400 228,800 1,098,600 545,700
Construction costs 11,300 118,000 33,400 682,600
Commercial operations 641,300 739,400 2,278,800 2,190,200
Oil production 8,800 32,500 52,300 71,200
General and administrative 1,454,700 835,100 2,865,200 1,869,600
Interest 17,000 29,400 49,900 91,600
---------- ---------- ----------
2,508,500 1,983,200 6,378,200 5,450,900
---------- ---------- ----------
(Continued)
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
<TABLE>
<CAPTION>
Condensed Consolidated Statements of Operations
(Unaudited)
(continued)
Three Months Ended February Nine Months Ended February
--------------------------- --------------------------
28, 1998 28, 1997 28, 1998 28, 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INCOME (LOSS) BEFORE
MINORITY INTEREST
EQUITY OF AFFILIATES
AND PROVISION FOR
INCOME TAXES (1,342,900) (1,005,500) (1,048,800) (2,181,700)
MINORITY INTEREST IN
(GAIN) LOSS OF
CONSOLIDATED
SUBSIDIARIES (27,700) 231,100 (90,300) 575,000
EQUITY IN LOSS OF
AFFILIATES (205,900) (106,000) (612,200) (338,500)
------------ ----------- ------------
INCOME (LOSS) BEFORE
INCOME TAXES (1,576,500) (880,400) (1,751,300) (1,945,200)
PROVISION FOR
INCOME TAXES -- -- -- --
------------ ----------- ------------
NET INCOME (LOSS) $ (1,576,500) $ (880,400) $ (1,751,300) $(1,945,200)
============ =========== ============ ===========
NET GAIN (LOSS)
PER SHARE $ (0.23) $ (0.13) $ (0.26) $ (0.29)
============ =========== ============ ===========
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING 6,850,913 6,654,863 6,842,679 6,642,253
============ =========== ============ ===========
See notes to condensed consolidated financial statements.
</TALBE>
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
</TABLE>
<TABLE>
<CAPTION>
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
February 28,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,751,300) $ (1,945,200)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Minority interest in gain (loss)
of consolidated subsidiaries 90,300 (575,000)
Depreciation 475,800 475,500
Depletion and amortization 207,700 56,500
Equity in loss from affiliates 612,200 338,500
Loss on sale of assets 200 19,900
Non-cash compensation 31,300 119,600
Deferred revenue 4,000,000 4,207,700
Other accrued liabilities (582,500) 537,600
Other assets 27,400 (8,600)
Net changes in components of
working capital (1,175,500) (975,101)
------------ ------------
NET CASH FROM PROVIDED BY
OPERATING ACTIVITIES 1,880,800 1,176,200
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of mining properties (16,500) (455,400)
Development of gas properties -- (29,100)
Proceeds from sale of assets 4,000 193,500
Increase in restricted investments (415,600) (277,800)
Purchase of property and equipment (1,306,800) (100,200)
Changes in notes receivable 732,100 58,800
Investments in affiliates (481,300) (616,400)
Proceeds from sale of subsidiary stock -- 1,246,100
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (1,484,100) 19,500
Continued)
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
<TABLE>
<CAPTION>
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
February 28,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of options and warrants
for common stock 347,900 1,239,300
Purchase of treasury stock -- (78,400)
Proceeds from long-term debt 307,700 412,300
Repayments of long-term debt (244,700) (1,004,000)
----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 410,900 569,200
----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 807,600 1,764,900
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,416,900 992,600
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,224,500 $ 2,757,500
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Income tax paid $ -- $ 37,200
=========== ===========
Interest paid $ 49,900 $ 91,600
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
Notes to Condensed Consolidated Financial Statements
1) The Condensed Consolidated Balance Sheet as of February 28,
1998, the Condensed Consolidated Statements of Operations for the three
and nine months ended February 28, 1998 and February 28, 1997, and the
Condensed Consolidated Statements of Cash Flows for the nine months
ended February 28, 1998 and February 28, 1997, have been prepared by
the Company ("USE") without audit. The Condensed Consolidated Balance
Sheet as of May 31, 1997, has been taken from the audited financial
statements included in the Company's Annual Report on Form 10-K for the
period then ended. In the opinion of the Company, the accompanying
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position
of the Company as of February 28, 1998 and May 31, 1997, the results of
operations for the three and nine months ended February 28, 1998 and
February 28, 1997 and the cash flows for the nine months then ended.
2) Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these financial statements be read in conjunction with the
Company's May 31, 1997 Form 10-K. The results of operations for the
periods ended February 28, 1998 and February 28, 1997 are not
necessarily indicative of the operating results for the full year.
3) The consolidated financial statements of the Registrant
include 100% of the accounts of USECB Joint Venture ("USECB" or
"USECC") which is owned 50% by the Company and 50% by the Company's
subsidiary, Crested Corp. ("Crested"). The consolidated financial
statements also reflect 100% of the accounts of its majority-owned
subsidiaries: Energx Ltd. (90%), Crested (51.9%), Plateau Resources
Limited ("Plateau") (100%) and Four Nines Gold, Inc. ("FNG") (50.9%)
All material intercompany profits and balances have been eliminated.
4) Deferred revenue consists of a $4,000,000 Signing Bonus
received in the quarter ended August 31, 1997 when the Company and its
subsidiary, Crested entered into an Acquisition Agreement with
Kennecott Uranium Company ("Kennecott") to acquire Kennecott's interest
in the Green Mountain Mining Venture ("GMMV") which owns certain
uranium properties and the Sweetwater Mill in Wyoming.
5) Debt as of February 28, 1998 consists of various equipment
and other property loans totaling $215,100 and debt attributable to
consolidated affiliates of $112,300 on Four Nines Gold. Certain
inter-affiliate loans were eliminated during consolidation.
6) Accrued reclamation obligations of $8,751,800 represent the
Company's share of a reclamation liability at the Crooks Gap Mining
District and the full obligation at the Shootaring Uranium Mill. The
reclamation work may be performed over several years.
7) Net income (loss) per share is computed using the weighted
average number of common shares outstanding during each period. The
dilutive effect of stock options is not included in the computation, as
it is not material.
8) Certain reclassifications have been made in the May 31, 1997
financial statements to conform to the classifications used in February
28, 1998.
<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
<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
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
<TABLE>
<CAPTION>
BALANCE SHEET
______
As of December 31,
---------------------------
1996 1995
------------ ------------
ASSETS
Assets:
<S> <C> <C>
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
============ ============
The accompanying notes are an integral
part of these financial statements.
</TABLE>
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
_______
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
=========== =========== =========== ===========
The accompanying notes are an integral
part of these financial statements.
</TABLE>
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN VENTURE PARTNERS CAPITAL
_____
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
The accompanying notes are an integral
part of these financial statements.
</TABLE>
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
_____
Period from
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) 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
The accompanying notes are an integral
part of these financial statements.
</TABLE>
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
1. Organization of the Joint Venture:
Green Mountain Mining Venture ("GMMV" or the "Venture") is a
joint venture with a 30 year life, formed by U.S. Energy
Corp. ("USE"), Crested Corp. ("Crested") and Kennecott
Uranium Company ("Kennecott"), the Venture partners, to
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.
<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.
<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.
<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:
Period from
inception
(June 1, 1990)
Year ended December 31, to December 31,
---------------------------------- ---------------
1996 1995 1994 1996
--------- --------- --------- -----------
Kennecott 31,597 43,626 137,482 2,732,181
--------- --------- --------- -----------
Total $ 771,772 $ 555,448 $ 283,194 $ 8,683,086
========= ========= ========= ===========
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.
<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,
<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.
6. Update of Certain Events (Unaudited):
On June 23, 1997, Kennecott and USECC signed an Acquisition
Agreement wherein USECC agreed to purchase Kennecott's
interest in the GMMV for $15,000,000 and the assumption of
various reclamation and other liabilities. Kennecott paid
$4,000,000 to USECC on signing and is required to provide a
line of credit to GMMV of up to $16,000,000 for payment of
costs related to the Jackpot mine development and Sweetwater
mill preparation work. Amounts advanced under this line-of-
credit bear interest at 10.5% with repayment amounts based
upon the cash flow and earnings of GMMV with any unpaid
balance payable in full no later than June 23, 2010 in the
event USECC or its affiliate purchases Kennecott's interest
in the GMMV. The line-of-credit is collateralized by a
first mortgage lien against Kennecott's 50% interest in
GMMV. Closing of the Acquisition Agreement is subject to
several conditions and governmental approvals. Kennecott is
entitled to a credit against their original $50,000,000
commitment of two dollars for each dollar provided under the
line-of-credit and the $4,000,000 paid on signing.
Concerning the litigation and arbitration proceedings
described in Footnote 4 between Kennecott and Nukem and
Cycle Resource Investment Corporation (Cycle), on August 22,
1997 the trial court granted Kennecott's motion for summary
judgement and dismissed the claims of Nukem and Cycle.
Following the motion, the parties agreed to settle the case,
and in February 1998 a settlement agreement was signed.
<PAGE>
U.S. ENERGY CORP.
39,539 COMMON SHARES
PROSPECTUS TABLE OF CONTENTS
Summary of the Offering 5
Risk Factors 7
The Company 16
Selected Financial Data 18
Business and Properties 20
Uranium 20
Gold 41
Molybdenum 49
Parador 51
Oil and Gas 51
Brunton 53
Real Estate and Other Commercial 54
Construction 57
Legal Proceedings 59
Market for USE Common Shares
and Related Stockholder Matters 65
Management's Discussion and Analysis of
Financial Condition and Results of Operations 66
Directors and Executive Officers 79
Certain Relationships and Related Transactions 89
Security Ownership of Certain
Beneficial Owners and Management 94
Description of Securities 98
Plan of Distribution 100
Holders of the Warrant Shares 101
Selling Shareholders 101
Experts 103
Legal Matters 103
Index to Financial Statements 104
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Legal $ 6,000*
Audit 2,000*
SEC and
state fees 2,000*
--------
$ 10,000*
* Estimate
Item 14. Indemnification of Directors and Officers.
The Wyoming Business Corporation Act ("WBCA"), W.S. 17-16-850 et
seq., provides for indemnification of the registrant's officers,
directors, employees, and agents against liabilities which they
may incur in such capacities. A summarization of circumstances
in which such indemnification may be available follows, but is
qualified by reference to registrant's Articles of Incorporation
and the text of the statute.
In general, any officer, director, employee, or agent may be
indemnified against expenses, fines, settlements, or judgments
arising in connection with a legal proceeding to which such
person is a party, as a result of such relationship, if that
person's actions were in good faith, were believed by him or her
to be in (or at least not opposed to) registrant's best
interests, and in the case of any criminal proceeding, he or she
had no reasonable cause to believe his or her conduct was
unlawful. Unless such person is successful upon the merits in
such an action, indemnification may be awarded only after a
determination by decision of the board of directors (by directors
not at the time parties to the proceeding) or by majority
shareholder vote (excluding shares held or controlled by
directors who are at the time parties to the proceeding), or by
opinion of special legal counsel.
The circumstances under which indemnification would be made in
connection with an action brought on behalf of the registrant are
generally the same as stated above, except that indemnification
is permitted only for reasonable expenses.
In addition, registrant has statutory authority to purchase
insurance to protect its officers, directors, employees, and
agents against any liabilities asserted against them, or incurred
in connection with their service in such capacities. Further,
registrant may advance or reimburse funds to a director who is a
party to a proceeding, for reasonable expenses incurred in
connection with a proceeding.
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
(a)(1) In August, 1993 Registrant sold a $300,000 convertible
promissory note to The Brunton Company, which note was
subsequently converted (on October 19, 1993) to 100,000 shares of
common stock of the Registrant at $3.00 per share.
(2) From November 28, 1995 to March 31, 1995 Registrant sold
400,000 restricted shares of its common stock, principally to its
officers and employees or members of their immediate families out
of a total 400,000 shares offered.
(3) From June 8, 1995 July 28, 1995, Registrant sold 812,432
restricted shares of its common stock to accredited investors at
$4.00 per share, out of 1,750,000 shares offered.
(4) On September 15, 1994, Registrant delivered 20,000 shares
of its Common Stock, that Registrant borrowed from Keith G.
Larsen, to Gladys L. May (13,334 shares), Kenneth E. May (3,333
shares) and Vicki Juhl Guier (3,333) shares in exchange for a
total of 9,000 common shares of Ticaboo Development, Inc.
("TDI"), a Utah Corporation, pursuant to an Agreement and Plan of
Reorganization dated September 2, 1994 (the "Agreement") among
Registrant, TDI and TDI's three shareholders named above. The
20,000 shares of Registrant's Common Stock was acquired by Keith
G. Larsen (who is not an affiliate of Registrant) in open market
transactions and was used by Registrant to acquire all of the
outstanding shares of TDI pursuant to the terms of the Agreement.
In December 21, 1994 Registrant issued to Keith G. Larsen 20,000
restricted shares of its Common Stock to replace the 20,000 free
trading shares borrowed from him to complete the transaction
described above.
(5) In March 1996 Registrant issued the Warrant to Shamrock
Partners, Ltd. as compensation for services as a financial
consultant and advisor under an agreement dated January 9, 1996.
(6) In January 1996 Registrant issued an aggregate of 32,901
shares of its common stock to 30 employees as a Christmas bonus
for services performed during the 1995 calendar year.
(7) In July 1996 Registrant issued 25,000 shares of its
common stock for exercise of Warrants under the Shamrock
Partners, Ltd Warrant.
(8) In September 1996 Registrant issued 100,000 shares of its
common stock for exercise of Warrants under the Shamrock
Partners, Ltd Warrant.
(9) In October 1996 Registrant issued 30,000 shares of its
common stock for exercise of Warrants under the Shamrock
Partners, Ltd Warrant.
(10) In December 1996 Registrant issued 25,000 shares of its
common stock for exercise of Warrants under the Shamrock
Partners, Ltd Warrant.
(11) In fiscal 1997, the Registrant issued 14,158 shares of
Common Stock to its officers under the Registrant's 1996 Stock
Award Program.
(12) In November 1997, the Registrant issued 20,000 shares
of its common stock for exercise of Warrants under the Shamrock
Partners, Ltd Warrant.
<PAGE>
(b)(1), (2), (4) through (12) No underwriters were involved in
transactions (a)(1), (2), (4), (5) and (6). RAF Financial
Corporation was placement agent for the (a)(3) private offering,
receiving a 10 percent sales commission and a 3 percent
nonaccountable expense allowance on shares sold, and warrants to
purchase 10 percent of total shares sold.
(c)(1) See above.
(2) Shares were offered at $3.00.
(3) Shares were offered at $4.00.
(4) See (a)(4) above.
(5) See (a)(5) above.
(6) See (a)(6) above.
(7) See (a) (7) through (10), and (a) (11), shares were
sold at $5.00.
(11) Shares were issued at market prices.
(d)(1), (4), (5), (6) and (11). The securities referenced in
(a)(1), (4) through (12), were offered and sold in reliance on
the section 4(2) exemption from section 5 registration.
(d)(2) and (3). The common stock issued and sold in the
private placements were offered and have been sold in reliance on
the section 4(2) exemption from registration, and Rule 506 of
Regulation D thereunder. Total nonaccredited purchasers in the
two private placements were 34; the balance of investors were
accredited persons. Further, Registrant believes the two
placements were different offerings, not subject to integration
under Commission criteria.
Item 16. Exhibits and Financial Statement Schedules.
Schedules have been omitted because the information is not
applicable or because the information is included in the
financial statements.
(b) Exhibits.
Exhibit No.
Reference
3.1 USE Restated Articles of Incorporation *
3.1(a) USE Articles of Amendment to
Restated Articles of Incorporation *
3.2 USE Bylaws, as amended through April 22, 1992 *
<PAGE>
4.1 Shamrock Partners, Ltd. 1/9/96 Warrant to
Purchase 200,000 Common Shares of USE *
4.2 USE 1989 Incentive Stock Option Plan,
as amended through 1/94 *
4.3 USE Restricted Stock Bonus Plan,
as amended through 2/94 *
4.4 Amendment to 1/9/96 Shamrock Warrant **
4.5 Agreement with Shamrock Partners, Ltd (1/20/98) **
4.6 Shamrock Partners, Ltd. 1/23/98 Warrant to
Purchase 200,000 Common Shares of USE **
4.7 1996 Stock Award Program *
4.8 Restated 1996 Stock Award Program *
4.9 Agreement with Sunrise Financial Group (12/1/97) **
4.10 Sunrise Financial Group 1/9/98 Warrant to
Purchase 225,000 Common Shares of USE **
5.1 Opinion of Stephen E. Rounds, Esq. *
10.1 USECC Joint Venture Agreement - Amended *
10.2 Management Agreement with USECC *
10.4 Contract for Sale of Stock of Brunton
to Silva A.B. *
10.5 Assignment and Lease - Parador *
10.6 Employment Agreement - Daniel P. Svilar *
10.7 Airport Ground Lease - City of Riverton *
10.8 Executive Officer Death Benefit Plan *
10.9 Big Eagle Acquisition Agreement with PMC *
<PAGE>
10.11 Sweetwater Mill Acquisition Agreement *
10.12 Ft. Peck Agreement - Drilling
and Production Services *
10.13 USE/Seine River Letter Agreement - SGV *
10.14 Agreement to Sell SGV Interest to Crested *
10.18 Master Agreement - Mt. Emmons/AMAX *
10.20 Promissory Notes - ESOP/USE *
10.21 Self Bond Agreement - Crooks Gap Properties *
10.22 Security Agreement - ESOP Loans *
10.27 Mineral Properties Agreement
Congo Area - PMC *
10.28 Memorandum of Joint Venture Agreement - GMMV *
10.29 Memorandum of Partnership Agreement - SMP *
10.32 Employee Stock Ownership Plan *
10.33 1989 Stock Option Plan *
10.34 Form of Stock Option and Schedule - 1989 Plan *
10.35 Severance Agreement (Form) *
10.36 1992 Stock Compensation Plan
Non-Employee Directors *
10.37 Executive Compensation (John L. Larsen) *
10.38 Executive Compensation
(Non-qualified Options) *
10.39 ESOP and Option Plan Amendments (1992) *
10.40 Plateau Acquisition -
Stock Purchase Agreement and Related Exhibits *
10.41 Option and Sales Agreements
Gunnison Property Parcel A *
<PAGE>
10.42 Option and Sales Agreements
Gunnison Property Parcel B *
10.43 Option Agreement - USE and Arrowstar
Aircraft Hanger *
10.44 Amendment to Contract with Arrowstar for Hangar *
10.45 Contract for Sale of Wind River Estates *
10.46 Contract for sale of Jeffrey City Six-Plex *
10.47 Development Agreement with First N-Last *
10.48 Operating Agreement with First-N-Last *
10.49 USE/Dominick & Dominick Securities, Inc. Stock
Purchase Agreement for 157,530 Common Shares of USE **
10.50 USE/BPI Canadian Resource Fund Stock Purchase
Agreement for 125,341 Common Shares of USE **
10.51 USE/BPI Canadian Opportunities II Fund Stock
Purchase Agreement for 125,341 Common Shares of USE **
10.52 USE/BPI Canadian Small Companies Fund Stock
Purchase Agreement for 250,683 Common Shares of USE **
10.53 USE/Yellow Stone Fuels Corp.
Exchange Rights Agreement **
22.1 Subsidiaries of Registrant *
23.1 Consent of Arthur Andersen LLP **
23.2 Consent of Coopers & Lybrand L.L.P. **
* Previously Filed.
** Filed herewith
Item 17. Undertakings.
The registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
<PAGE>
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registrations statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such information
in the registration statement.
(a)(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(a)(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of this offering.
(h) Insofar as indemnification for liabilities arising under
the Securities Act of 1933, as amended, may be permitted to
directors, officers, and controlling persons of the registrant,
the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act, and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense
of any action suit or proceeding) is asserted by such officer,
director, or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment No. 2 to
the Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Riverton,
Wyoming, on April 22, 1998.
U.S. ENERGY CORP.
(Registrant)
Date: April 22, 1998 By: s/ John L. Larsen
-----------------------------
JOHN L. LARSEN,
Chief Executive Officer
In accordance with the requirements of the Securities Act of
1933, this Registration Statement was signed by the following
persons in the capacities and on the dates stated.
Date: April 22, 1998 By: s/ John L. Larsen
-----------------------------
JOHN L. LARSEN, Director
Date: April 22, 1998 By: s/ Harold F. Herron
-----------------------------
HAROLD F. HERRON, Director
Date: April 22, 1998 By: s/ Nick Bebout
-----------------------------
NICK BEBOUT, Director
Date: April ____, 1998 By:
-----------------------------
DON C. ANDERSON, Director
Date: April ____, 1998 By:
-----------------------------
DAVID W. BRENMAN, Director
Date: April 22, 1998 By: s/ H. Russell Fraser
-----------------------------
H. RUSSELL FRASER, Director
Date: April 22, 1998 By: s/ Keith G. Larsen
-----------------------------
KEITH G. LARSEN, Director
Date: April 22, 1998 By: s/ Robert Scott Lorimer
-----------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer
and Chief Accounting Officer
AMENDMENT TO
WARRANT TO PURCHASE 200,000 COMMON SHARES
U.S. ENERGY CORP.
WHEREAS, SHAMROCK PARTNERS, LTD. of 111 Veterans Square
Media, PA 19063 ("Holder") was granted a warrant to purchase
200,000 common shares of U.S. Energy Corp. $.01 par value common
stock on January 9, 1996 (the "Warrant"), with an Expiration Date
of January 9, 1997.
NOW THEREFORE, U.S. Energy Corp. hereby extends the
Expiration Date of the Warrant to July 9, 1997.
DATED, nunc pro tunc January 8, 1997.
U.S. ENERGY CORP.
By: s/ John L. Larsen
--------------------------
JOHN L. LARSEN, President
Shamrock Partners, Ltd.
Investment Bankers
-----------------------------------------------------------------
111 Veterans Square
Media, PA 19063
January 20, 1998 (610) 566-4900
1-800-326-4200
Fax (610) 566-3893
Mr. John L. Larsen
U.S. ENERGY CORPORATION
877 North 8th West
Riverton, WY 82501
RE: Investment Banking Consulting Agreement
This will confirm the arrangements, terms and conditions
pursuant to which Shamrock Partners, Ltd. (the "Consultant") has
been retained to serve as a financial consultant and advisor to
U.S. Energy Corp. (the "Company"), on a nonexclusive basis for a
period of twelve (12) months commencing upon January 20, 1998 and
ending on January 20, 1999. The undersigned hereby agrees to the
following terms and conditions:
1. Duties of Consultant. Consultant shall, at the request
of the Company, upon reasonable notice, render the following
services to the Company from time to time:
(a) Consulting Services. Consultant will provide such
financial consulting services and advice pertaining to the
Company's business affairs as the Company may from time to time
reasonably request. Without limiting the generality of the
foregoing, Consultant will assist the Company in developing,
studying and evaluating financing, merger and acquisition
proposals, prepare reports and studies thereon when advisable,
and assist in negotiations and discussions pertaining thereto.
This Agreement is not a contract for listing services; however,
nothing in this agreement will prohibit Shamrock from listing or
making a market in the Company's securities in the OTC markets,
which markets might include the NASDAQ Small-Cap Market.
(b) Financing. Consultant will assist and represent the
Company in obtaining both short and long-term financing. The
Consultant will be entitled to additional compensation under such
terms as may be agreed to by the parties.
(c) Wall Street Liaison. Consultant will, when appro-
priate arrange meetings between representatives of the
Company and individuals and financial institutions in the
investment community, such as security analysts, portfolio
managers and market makers.
The services described in this Section 1 shall be rendered
by Consultant without any direct supervision by the Company and
at such time and place and in such manner (whether by conference,
telephone, letter or otherwise) as Consultant may determine.
<PAGE>
2. Term. This Agreement shall continue for a period of
twelve (12) months from the
date hereof (the "Full Term"). In the event the Company wishes
to terminate this Agreement at the completion of the Full Term,
it shall give no less than thirty (30) days notice thereof, in
writing, addressed to the Consultant.
3. Compensation. As a compensation for Consultant's
services hereunder, the Company shall grant to Consultant a two
(2) year Warrant to purchase 200,000 common shares at an exercise
price of $7.50 per share, such shares subject to a demand
registration right by the Consultant as part of the next
subsequent SEC filing by the Company. In the event that no
filing occurs within the term of this Agreement, the Consultant
shall have the right to demand that the Company register for sale
the shares underlying the Warrant.
4. Available Time. Consultant shall make available such
time as it, in its sole discretion, shall deem appropriate for
the performance of its obligations under this Agreement.
5. Relationship. Nothing herein shall constitute
Consultant as an employee or agent of the Company, except to such
extent as might hereinafter be agreed upon for a particular
purpose. Except as might hereinafter be expressly agreed,
Consultant shall not have the authority to obligate or commit the
Company in any manner whatsoever.
6. Confidentiality. Except in the course of the
performance of its duties hereunder, Consultant agrees that it
shall not disclose any trade secrets know-how, or other
proprietary information not in the public domain learned as a
result of this Agreement unless and until such information
becomes generally known.
7. Assignment and Termination. This Agreement shall not
be assignable by any party except Such Warrant and such
underlying shares may be reissued by the Consultant to related
parties without prior notification to the Company. These
reissued Warrants or shares will be subject to the same terms and
conditions as those granted to the Consultant.
Agreed upon this 20th day of January, 1998.
U.S. ENERGY CORP. SHAMROCK PARTNERS, LTD.
/s/ John L. Larsen /s/ James T. Kelly
------------------------------ ------------------------------
Mr. John L. Larsen, President James T. Kelly, President
Void After 12:00 O'clock Midnight., Mountain Time, on January 20, 2000
WARRANT TO PURCHASE 200,000 COMMON SHARES
U.S. ENERGY CORP.
This is to Certify That, FOR VALUE RECEIVED, SHAMROCK
PARTNERS, LTD. of 111 Veterans Square, Media, PA 19063
("Holder"), is entitled to purchase, subject to the provisions of
this Warrant, from U.S. ENERGY CORP. ("Company"), a Wyoming
corporation, at any time until 12:00 O'clock Midnight, Mountain
Time, on January 20, 2000 ("Expiration Date"), up to 200,000
Common Shares of the Company at a price of $7.50 per share, the
("Purchase Price") during the period this Warrant is exercisable.
(a) Exercise of Warrant. This Warrant may be exercised at
any time or from time to time until the Expiration Date or if the
Expiration Date is a day on which banking institutions are
authorized by law to close, then on the next succeeding day, by
presentation and surrender hereof to the Company with the
Purchase Form annexed hereto duly executed and accompanied by
payment of the Purchase Price for the number of shares specified
in such Form.
(b) Reservation of Shares. The Company hereby agrees that
at all times there shall be reserved for issuance and delivery
upon exercise of this Warrant such number of Common Shares as
shall be required for issuance or delivery upon exercise of this
Warrant.
(c) Substitution or Replacement of Warrant. This Warrant
may be divided or combined with up to ten other Warrants which
carry the same rights upon presentation hereof at the office of
the Company, together with a written notice specifying the names
and denominations in which new Warrants are to be issued and
signed by the Holder thereof. Notwithstanding the foregoing,
this Warrant shall not be divided in such manner that there are,
at any time that this Warrant is outstanding, more than ten
Holders of this Warrant and any other Warrants that carry the
same rights as this Warrant. The term "Warrant" as used herein
includes any warrants issued in substitution for or replacement
of this Warrant, or into which this Warrant may be divided or
exchanged. Upon receipt by the Company of evidence satisfactory
to it of the loss, theft, destruction or mutilation of this
Warrant, and (in the case of loss, theft or destruction) of
reasonably satisfactory indemnification, and upon surrender and
cancellation of this Warrant, if mutilated, the Company will
execute and deliver a new Warrant of like tenor and date.
Subject to such right of indemnification, any such new Warrant
executed and delivered shall constitute an additional contractual
obligation on the part of the Company, whether or not this
Warrant so lost, stolen, destroyed, or mutilated shall be at any
time enforceable by anyone.
(d) Rights of the Holder. The Holder shall not, by virtue
hereof, be entitled to any rights of a shareholder in the
Company, either at law or equity, and the rights of the Holder
are limited to
<PAGE>
those expressed in the Warrant and are not enforceable against
the Company except to the extent set forth herein.
(e) Reclassification or Reorganization. In case of any
reclassification, capital reorganization or other change of
outstanding Common Shares of the Company (other than a change in
par value, or from par value to no par value, or from no par
value to par value, or as a result of an issuance of Common
Shares by way of dividend or other distribution or of a
subdivision or combination), the Company shall cause effective
provision to be made so that the Holder shall have the right
thereafter, by exercising this Warrant, to purchase the kind and
amount of shares of stock and other securities and property which
the Holder would have received upon such reclassification,
capital reorganization or other change, had this Warrant been
exercised prior to the consummation of such transaction. Any
such provision shall include provision for adjustments which
shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Warrant. The foregoing
provisions of this Section (e) shall similarly apply to
successive reclassifications, capital reorganizations and changes
of Common Shares.
(f) Registration Under the Securities Act of 1933.
(1) Within 45 days after receipt of a written request
by the then Holder(s) of the Warrant, provided the request
is made after January 21, 1998 and before the expiration of
this Warrant, the Company will file, no more than once, a
registration statement under the Securities Act of 1933, as
amended, registering the Warrant Shares. The Company will
use its best efforts to cause such registration statement to
become effective. The Holder acknowledges that such a
filing may be delayed until such time as the audit of the
Company's financial statements for the year ending May 31
has been completed.
(2) If at any time during the period commencing January
21, 1998, and ending January 20, 2000, the Company should
file a registration statement (which term shall not include
any registration statement filed on Forms S-8 or S-4) under
the Securities Act of 1933, as amended (the "Act"), which
relates to a current offering of securities of the Company
(other than solely in exchange for properties, assets or
stock of other individuals or corporations), such
registration statement and the prospectus included therein
shall also, at the written request to the Company from the
Holder(s) of the Warrants, relate to, and meet the
requirements of the Act with respect to any public offering
of the Warrant Shares so as to permit the public sale
thereof in compliance with the Act. The Company shall give
notice to the Holder(s) of its intention to file a
registration statement under the Act relating to a current
offering of the aforesaid securities of the Company prior to
the filing of such registration statement, and the written
request provided for in the first sentence of this
subsection shall be made by the Holder(s) to file such
registration statement. Neither the delivery of such notice
by the Company nor of such request by the Holder(s) shall in
any way obligate the Company to file such registration
statement and notwithstanding the filing of such
registration statement, the Company may, at any time prior
to the effective date thereof, determine not to proceed to
effectiveness with such registration statement, without
<PAGE>
liability to the Holder(s). The Company shall pay all
expenses (with the exception of any selling commissions
relating to the sale of the Warrant Shares which shall be
paid by the sellers thereof) of any such registration
statement.
(3) The Company will cooperate with the then Holder(s)
of the Warrant Shares in preparing and signing any
registration statement under subsections (1) and (2) of the
Section (f), as are required in order to sell or transfer
the Warrant Shares and will sign and supply all information
required therefore, all at the Company's sole expense. The
then Holder(s) of the Warrant Shares agree to provide such
information to the Company as the Company reasonably may
request, in connection with any such registration statement.
(4) When, pursuant to subsection (1) or (2) of this
Section, the Company shall take any action to permit a
public offering or sale or other distribution of the Warrant
Shares, the Company shall:
(A) Supply to the selling Holder(s) two executed
copies of each registration statement and a reasonable
number of copies of the preliminary, final and other
prospectus.
(B) Take all actions necessary to register or
qualify for sale the Warrant Shares in up to five
states selected by the Holder. The Company shall bear
the complete cost and expense (other than any selling
commissions relating to the sale of the Warrant Shares,
which shall be paid by the seller thereof) of such
registrations or qualifications.
(C) Keep effective such registration statement
until the first of the following events occur: (i) 12
months have elapsed after the effective date of such
registration statement or (ii) all of the registered
Warrant Shares issued by the Company either before or
after the effective date of such registration statement
has been publicly sold under such registration
statement.
(5) The Holder(s) shall supply such information as the
Company may reasonably require from such Holder(s), or any
underwriter for any of them, for inclusion in such
registration statement or post effective amendment.
(6) The Company's agreements with respect to the
Warrant Shares in this Section will continue in effect
regardless of the exercise or surrender of this Warrant.
(7) If the Company registers the Warrants under (f)(2)
above, solely to accommodate the registration of the Warrant
Shares, the Holder(s) agree not to sell or otherwise
transfer the Warrants pursuant to the Registration Statement
for a period of 24 months after the effective date. Such
lock-up shall not extend to the Warrant Shares purchased on
exercise of the Warrants.
<PAGE>
(8) Any notices or certificates by the Company to the
Holder(s) and by the Holder(s) to the Company shall be
deemed delivered if in writing and delivered personally or
sent by certified mail, return receipt requested, to the
Holder, addressed to him at his address as set forth on the
Warrant or stockholder register of the Company, or, if the
Holder has designated, by notice in writing to the Company,
any other address, to such other address, and, if to the
Company, addressed to it at 877 North 8th West, Riverton,
Wyoming 82501. The Company may change its address by
written notice to Holders.
(g) Transfer to Comply with the Securities Act of 1933.
The Company may cause the following legend, or one similar
thereto, to be set forth on the Warrant and on each certificate
representing Warrant Shares or any other security issued or
issuable upon exercise of this Warrant not theretofore
distributed to the public or sold to underwriters for
distribution to the public pursuant to Section (f) hereof; unless
legal counsel for the Company is of the opinion as to any such
certificate that such legend, or one similar thereto, is
unnecessary:
"The securities represented by this certificate may not
be offered for sale, sold or otherwise transferred
except pursuant to a registration statement made
effective under the Securities Act of 1933 (the "Act")
and under any applicable state securities law, or
pursuant to an exemption from registration under the
Act and under any applicable state securities law, the
availability of which is to be established to the
satisfaction of the Company."
(h) Applicable Law. This Warrant shall be governed by, and
construed in accordance with, the laws of the state of Wyoming.
Dated as of January 23, 1998.
U.S. ENERGY CORP.
By: /s/ Keith G. Larsen
------------------------------
KEITH G. LARSEN, PRESIDENT
<PAGE>
ASSIGNMENT FORM
Dated: ____________, 19____
FOR VALUE RECEIVED, ______________________________________________
hereby sells, assigns and transfers unto _________________________
Name: ___________________________________________________________
(Please typewrite or print in block letters)
Address: _________________________________________________________
the right to purchase the $.01 par value Common Shares
represented by Assignor's Warrant to the extent of Common Shares
of U.S. Energy Corp. (the "Company") as to which such right is
exercisable.
When Assignee exercises his or her Warrant, please complete the
Purchase Form and return a copy of this Assignment to U.S. Energy
Corp. at 877 North 8th West, Riverton, WY 82501 with full power
to transfer the same on the books of the Company. The signature
on this Assignment Form and the Purchase Form are both to be
Medallion guaranteed.
ASSIGNOR
Signature: ________________________
Name: _____________________________
Title: ____________________________
(MEDALLION GUARANTY)
<PAGE>
PURCHASE FORM
To: U.S. Energy Corp.
877 North 8th West
Riverton, WY 82501
Dated: ________________, 19___
The undersigned hereby irrevocably elects to exercise the Warrant
originally issued to Shamrock Partners, Ltd. to the extent of
purchasing _____________ shares of the $.01 par value Common
Shares of U.S. Energy Corp. and hereby makes payment of $________
to U.S. Energy Corp. in payment of the actual Purchase Price
thereof.
INSTRUCTIONS FOR REGISTRATION OF SHARES
Please register the shares in the following name(s):
__________________________________________________________________
__________________________________________________________________
(Please typewrite or print in block letters)
____________________________________
Social Security Number or
Federal ID Number
____________________________________
____________________________________
Address
____________________________________
____________________________________
Signature(s)
(MEDALLION GUARANTY)
SUNRISE FINANCIAL GROUP, INC.
135 East 57th Street, 11th Floor
New York, New York 10022
(212) 421-1616
December 1, 1997
Mr. John L. Larsen
U. S. Energy Corp.
877 North 8th West
Riverton, WY 82501
Dear Mr. Larsen:
This will confirm the arrangements, terms and conditions pursuant
to which Sunrise Financial Group, Inc. (the "Consultant") has
been retained to serve as a financial consultant and advisor to
U.S. Energy Corp. (the "Company"), on a nonexclusive basis for a
period of twelve (12) months commencing upon December 1, 1997 and
ending on December 1, 1998. The undersigned hereby agrees to the
following terms and conditions:
1. Duties of Consultant. Consultant shall, at the request
of the Company, upon reasonable notice, render the following
services to the Company from time to time:
(a) Consulting Services. Consultant will provide such
financial consulting services and advice pertaining to the
Company's business affairs as the Company may from time to time
reasonably request. Without limiting the generality of the
foregoing, Consultant will assist the Company in developing,
studying and evaluating financing, merger and acquisition
proposals, prepare reports and studies thereon when advisable,
and assist in negotiation and discussions pertaining thereto.
This Agreement is not a contract for listing services; however,
nothing in this agreement will prohibit Consultant from listing
or making a market in the Company's securities in the OTC
markets, which markets might include the NASDAQ Small-Cap Market.
(b) Financing. Consultant will assist and represent
the Company in obtaining both short and long-term financing.
The Consultant will be entitled to additional compensation under
such terms as may be agreed to by the parties.
(c) Wall Street Liaison. consultant will, when
appropriate arrange meetings between representatives of the
Company and individuals and financial institutions in the
investment community, such as security analysts, portfolio
managers and market makers.
The services described in this Section 1 shall be rendered
by Consultant without any direct supervision by the Company and
at such time and place and in such manner (whether by conference,
telephone, letter or otherwise) as Consultant may determine.
<PAGE>
2. Term. This Agreement shall continue for a period of
twelve (12) months from the date hereof (the "Full Term"). In
the event the Company wishes to terminate this Agreement at the
completion of the Full Term, it shall give no less than thirty
(30) days notice thereof, in writing, addressed to the Consultant.
3. Compensation. As a compensation for Consultant's
services hereunder, the Company shall grant to Consultant a three
(3) year Warrant to purchase 225,000 common shares at an exercise
price of $10.50 per share, such purchased shares from the Company
shall be subject to a demand registration right by the Consultant
as part of the next subsequent SEC filing by the Company. In the
event that no filing occurs within the term of this Agreement,
the Consultant shall have the right to demand that the Company
register for sale the shares underlying the Warrant.
4. Available Time. Consultant shall make available such
time as it, in its sole discretion, shall deem appropriate for
the performance of its obligations under this Agreement.
5. Relationship. Nothing herein shall constitute
Consultant as an employee or agent of the Company, except to such
extent as might hereinafter be agreed upon for a particular
purpose. Except as might hereinafter be expressly agreed,
Consultant shall not have the authority to obligate or commit the
Company in any manner whatsoever.
6. Confidentiality. Except in the course of the
performance of its duties hereunder, Consultant agrees that it
shall not disclose any trade secrets know-how, or other
proprietary information not in the public domain learned as a
result of this Agreement unless and until such information
becomes generally known by the investing public.
7. Assignment and Termination. This Agreement shall not
be assignable by any party except such Warrant and such
underlying shares may be reissued by the Consultant to related
parties without prior notification to the Company. These
reissued Warrant or shares will be subject to the same terms and
conditions as those granted to the Consultant.
8. Jurisdiction and Venue. The validity and
interpretation of this agreement shall be governed by the laws of
the State of Wyoming as applied to agreements made and to be
fully performed therein. The parties agree that neither shall
commence any ligation against the other arising out of this
Agreement or its termination except in a court located in the
State of Wyoming. Each party consents to the in personam
jurisdiction over it by such court and consents to the service of
process of such a court on it by mail.
Agreed upon this 1st day of December, 1997.
<PAGE>
U.S. ENERGY CORP. SUNRISE FINANCIAL GROUP, INC.
/s/ John L. Larsen /s/ Nathan A. Low
----------------------------- -------------------------------
John L. Larsen, President Nathan A. Low, President
Void After 12:00 O'clock Midnight., Mountain Time, on December 2, 2000
WARRANT TO PURCHASE 225,000 COMMON SHARES
U.S. ENERGY CORP.
This is to Certify That, FOR VALUE RECEIVED, SUNRISE
FINANCIAL GROUP of 135 East 57th Street, 11th Floor, New York, NY
10022 ("Holder"), is entitled to purchase, subject to the
provisions of this Warrant, from U.S. ENERGY CORP. (the
"Company"), a Wyoming corporation, at any time until 12:00
O'clock Midnight, Mountain Time, on December 2, 2000 ("Expiration
Date"), 225,000 Common Shares of the Company at a price of $10.50
per share, the ("Purchase Price") during the period this Warrant
is exercisable.
(a) Exercise of Warrant. This Warrant may be exercised at
any time or from time to time until the Expiration Date or if the
Expiration Date is a day on which banking institutions are
authorized by law to close, then on the next succeeding day which
shall not be such a day, by presentation and surrender hereof to
the Company or at the office of its stock transfer agent, if any,
with the Purchase Form annexed hereto duly executed and
accompanied by payment of the Purchase price for the number of
shares specified in such Form. The Company agrees not to merge,
reorganize or take any action that would terminate this Warrant
unless provisions are made as part of such merger, reorganization
or other action which would provide the holders of this Warrant
with an equivalent of this Warrant as specified in Section (i)
hereof; provided, however, that if reasonably required by the
other party or parties to such merger, reorganization or other
action, the Company may accelerate the Expiration Date to a date
prior to such merger, reorganization or other action, provided
further, however, that the Company shall give the Holder written
notice of such acceleration at least 30 days prior to such
accelerated Expiration Date. The Company agrees to provide
notice to the Holder that any tender offer is being made for the
Company's Common Shares no later than three business days after
the day the Company becomes aware that any tender offer is being
made for outstanding Common Shares of the Company. Upon receipt
by the Company of this Warrant at the office of the Company or at
the office of the Company's stock transfer agent, in proper form
for exercise and accompanied by the Purchase Price, the Holder
shall be deemed to be the holder of record of the Common Shares
issuable upon such exercise, notwithstanding that the stock
transfer books of the Company shall then be closed or that
certificates representing such common Shares shall not then be
actually delivered to the Holder.
(b) Reservation of Shares. The Company agrees that at all
times there shall be reserved for issuance and delivery upon
exercise of this Warrant such number of Common Shares as shall be
required for issuance or delivery upon exercise of this Warrant.
(c) Substitution or Replacement of Warrant. This Warrant
may be divided or combined with up to ten other Warrants which
carry the same rights upon presentation hereof at the office of
the Company or at the office of its stock transfer agent, if any,
together with a written notice specifying the names and
denominations in which new Warrants are to be issued and signed
by the
<PAGE>
Holder hereof. Not withstanding the foregoing, this Warrant
shall not be divided in such manner that there are, at any time
that this Warrant is outstanding, more than ten Holders of this
Warrant and any other Warrants that carry the same rights
as this Warrant. The term "Warrant" as used herein includes any
warrants issued in substitution for or replacement of this
Warrant, or into which this Warrant may be divided or exchanged.
Upon receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and (in
the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation
of this Warrant, if mutilated, the Company will execute and
deliver a new Warrant of like tenor and date. Subject to such
right of indemnification, any such new Warrant executed and
delivered shall constitute an additional contractual obligation
on the part of the Company, whether or not this Warrant so lost,
stolen, destroyed, or mutilated shall be at any time enforceable
by anyone.
(d) Rights of the Holder. The Holder shall not, by virtue
hereof, be entitled to any rights of a shareholder in the
Company, either at law or equity, and the rights of the Holder
are limited to those expressed in the warrant and are not
enforceable against the Company except to the extent set forth
herein.
(e) Notices to Holder. So long as this Warrant shall be
outstanding and unexercised (i) if the Company shall pay any
dividend or make any distribution upon the Common Shares or (ii)
if the Company shall offer to the holders of Common Shares for
subscription or purchase by them any shares of stock of any class
or any other rights or (iii) if any capital reorganization of the
Company, reclassification of the capital stock of the Company,
consolidation or merger of the Company with or into another
corporation, sale, lease, or transfer of all or substantially all
of the property and assets of the Company to another corporation,
or voluntary or involuntary dissolution, liquidation or winding
up of the Company shall be effected, then, in any such case, the
Company shall cause to be delivered to the Holder, at least 10
days prior to the date specified in (x) or (y) below, as the case
may be, a notice containing a brief description of the proposed
action and stating the date on which (x) a record is to be taken
for the purpose of such dividend, distribution or rights, or (y)
such reclassification, reorganization, consolidation, merger
conveyance, lease, dissolution, liquidation or winding up is to
take place and the date, if any is to be fixed, as of which the
holders of Common Shares of record shall be entitled to exchange
their Common Shares for securities or other property deliverable
upon such reclassification, reorganization, consolidation,
merger, conveyance, dissolution, liquidation or winding up.
(f) Reclassification, Reorganization or Merger. Subject to
the last sentence of this subsection (f), in case of any
reclassification, capital reorganization or other change of
outstanding Common Shares of the Company (other than a change in
par value, or from par value to no par value, or from no par
value to par value, or as a result of an issuance of Common
Shares by way of dividend or other distribution or of a
subdivision or combination), or in case of any consolidation or
merger of the Company with or into another corporation (other
than a merger with a subsidiary in which merger the Company is
the continuing corporation and which does not result in any
reclassification, capital reorganization or other change of
outstanding Common Shares of the class issuable upon exercise of
this Warrant) or in case of any sale or conveyance to another
corporation
<PAGE>
of the property of the Company as an entirety or
substantially as an entirety, the Company shall cause effective
provision to be made so that the Holder shall have the right
thereafter, by exercising this Warrant, to purchase the kind and
amount of shares of stock and other securities and property which
the Holder would have received upon such reclassification,
capital reorganization or other change, consolidation, merger,
sale or conveyance had this Warrant been exercised prior to the
consummation of such transaction. Any such provision shall
include provision for adjustments which shall be nearly
equivalent as may be practicable to the adjustments provided for
in this Warrant. The foregoing provisions of this Section (f)
shall similarly apply to successive reclassifications, capital
reorganizations and changes of common Shares and to successive
consolidations, mergers, sales or conveyances. In the event the
Company spins off a subsidiary by distributing to the
shareholders of the Company as a dividend or otherwise the stock
of the subsidiary, the Company shall reserve for the life of this
Warrant, shares of the subsidiary to be delivered to the Holders
of the Warrants upon exercise to the same extent as if they were
owners of record of the Warrant Shares on the record date for
payment of the shares of the subsidiary. The Holder shall not
have the right to exercise this Warrant to purchase shares of any
entity into which the Company may convey all or some of its
uranium properties and/or uranium processing facilities, or any
interests or rights in such properties or facilities, regardless
of whether such properties, facilities, interest and right
constitute all or substantially all of the assets of the Company
and regardless of whether the shareholders of the Company were or
will be granted the right to vote upon the approval of the
conveyance thereof to any entity.
(g) Registration Under the Securities Act of 1933.
(1) Within 45 days after receipt of a written request
by the then Holder(s) of the Warrant, provided the request
is made after December 2, 1998 and before the expiration of
this warrant, the Company will file, no more than once, a
registration statement under the Securities Act of 1933, as
amended, registering the Warrant Shares. The Company will
use its best efforts to cause such registration statement to
become effective.
(2) If at any time during the period commencing
December 1, 1997, and ending December 1, 1998, the Company
should file a registration statement (which term shall not
include any registration statement filed on Forms S-8 or S-
4) under the Securities Act of 1933, as amended (the "Act"),
which relates to a current offering of securities of the
Company (other than solely in exchange for properties,
assets or stock of other individuals or corporations), such
registration statement and the prospectus included therein
shall also, at the written request to the Company from the
Holder(s) of the Warrants, relate to, and meet the
requirements of the Act with respect to any public offering
of the Warrant Shares so as to permit the public sale
thereof in compliance with the Act. The Company shall give
notice to the Holder(s) of its intention to file a
registration statement under the Act relating to a current
offering of the aforesaid securities of the Company prior to
the filing of such registration statement, and the written
request provided for in the first sentence of this
subsection shall be made by the Holder(s) to file such
registration statement. Neither the delivery of such notice
by the Company nor of such request by the Holder(s) shall in
any
<PAGE>
way obligate the Company to file such registration
statement and notwithstanding the filing of such
registration statement, the Company may, at any time prior
to the effective date thereof, determine not to proceed to
effectiveness with such registration statement, without
liability to the Holders(s). The Company shall pay all
expenses (with the exception of any selling commissions
relating to the sale of the Warrant Shares which shall be
paid by the sellers thereof) of any such registration
statement.
(3) In addition, the Company will cooperate with the
then Holder(s) of the Warrant Shares in preparing and
signing any registration statement, in addition to the
registration statements discussed above, required in order
to sell or transfer the Warrant Shares and will sign and
supply all information required therefor.
(4) When, pursuant to subsection (1), (2), or (3) of
this Section, the Company shall take any action to permit a
public offering or sale or other distribution of the Warrant
Shares, the Company shall:
(A) Supply to the selling Holder(s) two executed
copies of each registration statement and a reasonable
number of copies of the preliminary, final and other
prospectus in conformity with requirements of the Act
and the Rules and Regulations promulgated thereunder
and such other documents as the Holders shall
reasonably request.
(B) Take all actions necessary to register or
qualify for sale the Warrant Shares in up to one state
selected by the Holder. The Company shall bear the
complete cost and expense (other than any selling
commissions relating to the sale of the Warrant Shares,
which shall be paid by the seller thereof) of such
registrations or qualifications except those filed
under subsection (g)(3) which shall be at the Holder's
cost and expense.
(C) Keep effective such registration statement
until the first of the following events occur: (i) 12
months have elapsed after the effective date of such
registration statement or (ii) all of the registered
Warrant Shares issued by the Company either before or
after the effective date of such registration statement
has been publicly sold under such registration
statement.
(5) The Holder(s) shall supply such information as the
Company may reasonably require from such Holder(s), or any
underwriter for any of them, for inclusion in such
registration statement or post effective amendment.
(6) The Company's agreements with respect to the
Warrant Shares in this Section will continue in effect
regardless of the exercise or surrender of this Warrant.
<PAGE>
(7) If the Company registers the Warrants under (g)(2)
above, solely to accommodate the registration of the Warrant
Shares, the Holder(s) agree not to sell or otherwise
transfer the Warrants pursuant to the Registration Statement
for a period of 24 months after the effective date. Such
lock-up shall not extend to the Warrant Shares purchased on
exercise of the Warrants.
(8) Any notices or certificates by the Company to the
Holder(s) and by the Holders(s) to the Company shall be
deemed delivered if in writing and delivered personally or
sent by certified mail, return receipt requested, to the
Holder, addressed to him at his address as set forth on the
Warrant or stockholder register of the Company, or, if the
Holder has designated, by notice in writing to the company,
any other address, to such other address, and, if to the
Company, addressed to it at 877 North 8th West, Riverton,
Wyoming 82501. The Company may change its address by
written notice to the Holders.
(h) Transfer to Comply with the Securities Act of 1933.
The Company may cause the following legend, or one similar
thereto, to be set forth on the Warrant and on each certificate
representing Warrant Shares or any other security issued or
issuable upon exercise of this Warrant not theretofore
distributed to the public or sold to underwriters for
distribution to the public pursuant to Section (g) hereof; unless
legal counsel for the Company is of the opinion as to any such
certificate that such legend, or one similar thereto, is
unnecessary:
"The securities represented by this certificate may not
be offered for sales sold or otherwise transferred
except pursuant to an effective registration statement
made under the Securities Act of 1933 (the "Act") and
under any applicable state securities law, or pursuant
to an exemption from registration under the Act and
under any applicable state securities law, the
availability of which is to be established to the
satisfaction of the Company."
(i) Applicable Law. This Warrant shall be governed by, and
construed in accordance with, the laws of the state of Wyoming.
Dated as of January 9, 1998.
U.S. ENERGY CORP.
By: /s/ Keith G. Larsen
---------------------------
KEITH G. LARSEN, PRESIDENT
<PAGE>
ASSIGNMENT FORM
Dated: ____________, 19___
FOR VALUE RECEIVED,
hereby sells, assigns and transfers unto ___________________________
Name: _____________________________________________________________
(Please typewrite or print in block letters)
Address: __________________________________________________________
the right to purchase the $.01 par value Common Shares represented by
Assignor's Warrant to the extent of Common Shares of U.S. Energy Corp.
(the "Company") as to which such right is exercisable.
When Assignee exercises his or her Warrant, please complete the
Purchase Form and return a copy of this Assignment to U.S. Energy
Corp. at 877 North 8th West, Riverton, WY 82501 with full power
to transfer the same on the books of the Company. The signature
on this Assignment Form and the Purchase Form are both to be
Medallion guaranteed.
ASSIGNOR
Signature: ____________________
Name: __________________________
Title: ________________________
(MEDALLION GUARANTY)
<PAGE>
PURCHASE FORM
To: U.S. Energy Corp.
877 North 8th West
Riverton, WY 82501
Dated: ________________, 19___
The undersigned hereby irrevocably elects to exercise the Warrant
originally issued to Sunrise Financial Group to the exten of
purchasing ____________ shares of the $.01 par value Common Shares
of U.S. Energy Corp. and hereby makes payment of $_____________ to
U.S. Energy Corp. in payment of the actual Purchase Price thereof.
INSTRUCTIONS FOR REGISTRATION OF SHARES
Please register the shares in the following name(s):
__________________________________________________________________
__________________________________________________________________
(Please typewrite or print in block letters)
____________________________________
Social Security Number or
Federal ID Number
____________________________________
____________________________________
Address
____________________________________
____________________________________
Signature(s)
(MEDALLION GUARANTY)
EXHIBIT 10.49
Stock Purchase Agreement
This Stock Purchase Agreement ("Agreement") is entered into
on April __, 1998 at Riverton, Wyoming by (i) U.S. Energy Corp.,
877 North 8th West, Riverton, Wyoming 82501, a Wyoming
corporation (the "Company"); and (ii) Dominick & Dominick
Securities, Inc., Suite 1714, 150 York Street, Toronto, Ontario,
Canada M5H 3S5 (the "Purchaser").
Recitals
A. The Company owns, directly and through subsidiaries and
joint ventures, uranium, gold and other mineral properties and
uranium processing facilities in the United States. Certain of
these properties are being developed for future mining and
processing of gold and uranium.
B. In May 1997, Altamira Management Ltd. (with offices at
250 Bloor Street East, Suite 300, Toronto, Ontario, Canada M4W
1E6) purchased 204,600 Special Purchase Warrants (the "Special
Warrants") issued by Sutter Gold Mining Company, a Wyoming
corporation ("SGMC") which is a subsidiary of the Company, for a
cash investment of Cdn$1,125,300. Each Special Warrant entitled
the holder to acquire from SGMC, at no further cost, one share of
Common Stock of SGMC, and one Purchase Warrant; each Purchase
Warrant would have entitled the holder to purchase one share of
Common Stock of SGMC, at a price of Cdn$6.00 per whole share (the
"Purchase Warrants"), during the 18 months following closing of
the offering of the SGMC Special Purchase Warrants. The offering
was conducted pursuant to SGMC's Confidential Offering Memorandum
("Memorandum") dated May 5, 1997.
C. Pursuant to SGMC's Memorandum and the terms and
conditions of the Special Warrants, if SGMC were to fail to
obtain Prospectus Qualification before the Qualification Deadline
(as such terms were defined in the Memorandum) from the
securities commissions of the Canadian Provinces wherein
purchasers of the Special Warrants reside, the holders of the
Special Warrants would be entitled to receive a Dilution Penalty
in the amount of 1.1 shares of Common Stock of SGMC and 1.1
Purchase Warrants, for each Special Warrant exercised after the
Qualification Deadline if Prospectus Qualification were not
obtained by the Qualification Deadline.
D. The Qualification Deadline has passed as of the date of
this Agreement, and the Prospectus Qualification has not been
obtained by SGMC. Altamira Management Ltd. has not received a
Dilution Penalty with respect to the Special Warrants and their
constituent securities.
E. For the account of Altamira Management Ltd. the
Purchaser desires to diversify and increase the original
investment by the acquisition of shares of the Common Stock of
the Company, and the Purchaser has made an offer to the Company
to purchase shares of Common Stock of the Company. The Purchaser
and the Company have negotiated the terms of acceptance of the
offer by the Company. As a result of the offer and subsequent
negotiations with the Purchaser, the Company has determined to
sell shares of Common Stock of the Company to the Purchaser, for
the consideration and on the terms set forth in this Agreement.
<PAGE>
Agreement
Now Therefore, in consideration of the mutual promises and
covenants contained herein, and subject to the terms and
conditions of this Agreement, the parties agree as follows:
1. Purchase and Sale of Company Shares; Closing Times.
(a) At the closings of this Agreement, the Company
will sell to the Purchaser (in trust for the account of Altamira
Management Ltd.) and the Purchaser (in trust for the account of
Altamira Management Ltd.) will purchase from the Company 157,530
shares of Common Stock of the Company, for US$315,000 in cash and
all of the 204,600 Special Warrants held by the Purchaser. As
further consideration for the purchase of the shares from the
Company, at and as of the First Closing Time, the Purchaser (as
duly authorized by Altamira Management Ltd.) shall relinquish and
forever give up the Dilution Penalty, and no further document or
certificate concerning this relinquishment and give up shall be
necessary.
(b) The Company is represented in this transaction by
Dominick & Dominick Securities, Inc. (the "Placement Agent")
pursuant to the terms of the Agency Agreement between the Company
and the Placement Agent. The closings of the purchase and sale
of the shares of the Company will be completed at the offices of
the Placement Agent on or before April 1, 1998, or on such other
date to which the Company and the Placement Agent agree (the
"Closing Times").
(i) The closing at the First Closing Time will be
effected with the delivery of the $315,000 cash to the Company,
and the delivery to the Placement Agent for transmission to
Altamira Management Ltd. of certificates for 45,000 shares of
Common Stock of the Company. Certificates for the remaining
112,530 shares of Common Stock shall be delivered to the
Placement Agent to hold, in trust for Altamira Management Ltd.
until the Second Closing Time. If there is no closing at the
Second Closing Time, the certificates for the 112,530 shares of
Common Stock shall be returned to the Company by the Placement
Agent.
(ii) Upon notification to the Purchaser by the
Company that the Company's registration statement has been
declared effective by the United States Securities and Exchange
Commission pursuant to paragraph 3(d) of this Agreement (the date
of receipt by the Purchaser of such notice shall be the date of
the Second Closing Time), (x) the Purchaser shall deliver to the
Placement Agent the certificates for the Special Warrants (duly
endorsed to the Company by Altamira Management Ltd. or
accompanied by a stock power with signature guaranteed), for
delivery by the Placement Agent to the Company; and (y) the
Placement Agent shall deliver certificates for the remaining
112,530 shares of Common Stock of the Company to the Purchaser to
hold in trust for Altamira Management Ltd. At the election of
the Purchaser, the certificates for such 1112,530 shares may be
turned in to the Company's transfer agent for immediate reissue
without restriction.
<PAGE>
(iii) Certificates to the Placement Agent for
transmittal to the Purchaser, which certificates shall be signed
by two officers of the Company, dated as of the First and Second
Closing Times, certifying on behalf of the Company that as of
each such Closing Time, (x) all of the Company's representations
and warranties set forth in paragraph 2.1 of this Agreement are
true and correct in all material respects; and (y) with respect
to 2.1(i), except as disclosed in the public record of the
Company as filed with the United States Securities and Exchange
Commission, there has been no material adverse change in the
consolidated financial condition of the Company. Certificates
for the shares of the Company purchased by the Purchaser shall be
delivered in the name of Altamira Management Ltd., or in such
other name as instructed by the Purchaser prior to each of the
Closing Times.
2 Representations and Warranties. Each party represents
and warrants to the other party as follows:
2.1 By the Company. The Company represents and warrants to
the Purchaser as follows:
(a) (i) Except as disclosed in subparagraph
2.1(a)(i)(x) below, the documents comprising the Company's public
record as filed with the United States Securities and Exchange
Commission pursuant to the United States Securities Exchange Act
of 1934 contain an accurate and complete record of the business
of the Company. There has been no material adverse change in the
business, financial affairs or other condition of the Company
that has not been publicly disclosed. The public record does not
omit to disclose any facts relating to the Company which would be
material to a prospective purchaser of its Common Shares.
(x) The Company's Form 10-Q Report for the
fiscal quarter ended November 30, 1997 disclosed (in Item 2
"Management's Discussion and Analysis of Financial Condition and
Results of Operations") that the $4,000,000 line item on the
balance sheet was classified as deferred income, as such amount
was forfeitable back to Kennecott Uranium Company until certain
conditions were fulfilled. The Company further disclosed that
the forfeitable terms were satisfied in the third quarter, which
would allow such $4,000,000 to be recognized as income during the
Company's third fiscal quarter (ended February 28, 1998).
Pending further evaluation of the proper accounting treatment of
the Company's receipt of such $4,000,000, the Company has
determined that it may amend the Form 10-Q Report for the fiscal
quarter ended November 30, 1997 to delete reference to the
Company recognizing such $4,000,000 as income. If the Form 10-Q
Report is to be amended, such amendment may not be filed with the
United States Securities and Exchange Commission until after the
Closing Time. However, for purposes of this Agreement, the
disclosures in this subparagraph 2.1(a)(i)(x) shall be deemed to
be part of the public record of the Company as of the date
hereof.
(ii) The public record (with respect to
information therein which concerns SGMC) filed with the United
States Securities and Exchange Commission pursuant to the United
States Securities Exchange Act of 1934 does not omit to disclose
any non-adverse facts which could be material to a seller of
securities of SGMC.
<PAGE>
(b) Each of the Company and its material subsidiaries
is, and will be at the Closing Time, duly incorporated and
organized and validly subsists under the laws of its jurisdiction
of incorporation (or other form of organization), with full
corporate (or other entity power) and capacity to carry on its
business as presently conducted.
(c) Except as disclosed in the audited financial
statements for the year ended May 31, 1997 or disclosed in
writing to the Purchaser, there are no actions, suits, proceeding
or enquiries threatened or, to the best of its knowledge, pending
against or affecting the Company or any of its subsidiaries at
law or in equity or before or by any federal, provincial,
municipal or other governmental department, commission, board,
bureau or agency which may in any way materially adversely affect
the business, operations or condition (financial or otherwise) of
the Company or any of its subsidiaries, taken as a whole, or
which affects or may affect the sale of Common Stock, and the
Company is not aware of any existing grounds on which such
action, suit, proceeding or enquiry might be commenced with any
reasonable likelihood of success.
(d) The authorized capital of the Company consists of
(i) 20,000,000 shares of Common Stock, $.01 par value, of which,
as at the date hereof, there were issued and outstanding
6,696,474 shares of Common Stock as fully paid and nonassessable,
not including (a) 4,092 shares to be issued to employees for the
1997 Christmas bonus, (b) 2,500 shares to be issued to outside
director Simpson and 2,500 shares to be issued to Advisory Board
Member Fraser, and (c) 229,606 shares which are forfeitable; and
(ii) 100,000 preferred shares, none issued or outstanding.
(e) American Securities Transfer & Trust, Inc., 938
Quail Street, Suite 101, Lakewood, Colorado USA 80215-5513,
telephone 1-800-962-4284, is the duly appointed registrar and
transfer agent for the shares of Common Stock of the Company.
(f) No regulatory authority of any other jurisdiction
has issued any order preventing or suspending trading in any
securities of the Company which at the Closing Time will be
outstanding, and the Company is not in default of any requirement
of the securities laws of any province of Canada or any laws of
the United States which would reasonably be expected to affect
trading in the Company's securities.
(g) The issued and outstanding shares of Common Stock
of the Company are quoted on NASDAQ.
(h) The Common Stock class of the Company is
registered with the United States Securities and Exchange
Commission pursuant to Section 12(g) of the Securities Exchange
Act of 1934, the Company has timely filed all reports and other
documents required to be filed thereunder, and the public record
as filed with such Commission as of the date hereof is materially
complete and accurate.
<PAGE?
(i) The Company and its subsidiaries are the
beneficial owners of the properties, businesses and assets
described in the documents comprising the public record as filed
with the United States Securities and Exchange Commission and
referred to in the Financial Statements (as hereinafter defined)
and any and all agreements pursuant to which the Company or its
subsidiaries hold such properties are in good standing in all
material respects under the applicable statutes and regulations
of the jurisdictions in which they are situated. As used herein,
"Financial Statements" mean the consolidated audited financial
statements of the Company for the year ended May 31, 1997 and
the consolidated unaudited interim financial statements for the
periods ended August 31, 1997 and November 30, 1997, as contained
in the public record of the Company as filed with the
Commission. The Financial Statements are true and correct in all
material respects and have been prepared in accordance with
United States generally accepted accounting principles
consistently applied throughout the periods indicated and present
fairly the financial condition of the Company for the periods
then ended.
2.2 By the Purchaser. The Purchaser represents and
warrants to the Company that:
(a) The Purchaser knows of no commission or finder's
or similar fee which has been or will be incurred in connection
with this Agreement except pursuant to the Agency Agreement.
(b) To the knowledge of the Purchaser, Altamira
Management Ltd. is the sole beneficial owner of the Special
Warrants. The Purchaser has full and complete authority to
execute this Agreement, deliver the cash and the Special Warrants
to the Company at the Closing Times, and relinquish the Dilution
Penalty, and receive therefor, the certificates for the number of
shares of the Company stated in this Agreement, all for the
account of Altamira Management Ltd. To the knowledge of the
Purchaser, Altamira Management Ltd. for its own account owns the
Special Warrants free and clear of any encumbrance or lien.
(c) It understands that the shares of Common Stock of
the Company to be purchased by the Purchaser will be restricted
from transfer pursuant to United States securities laws, that
certificates for the shares will bear a restrictive legend, and
that the Company's transfer agent will be issued "stop transfer"
instructions with respect to the shares.
(d) It has received (and sent to Altamira Management
Ltd.) copies, as filed with the United States Securities and
Exchange Commission, of the Company's (i) Annual Report on Form
10-K for fiscal year ended May 31, 1997, (ii) Quarterly Reports
on Form 10-Q for the fiscal quarter periods ended August 31, 1997
and November 30, 1997, and (iii) Current Reports on Form 8-K
since May 31, 1997 (the Company has represented that the only
such Form 8-K Reports were those Reports dated June 23, 1997,
June 27, 1997, September 27, 1997 and November 25, 1997).
2.3 Survival of Representations and Warranties. The
representations and warranties of each party which are stated in
this Agreement shall be deemed to be restated and affirmed as of
the Closing Time, and paragraphs 3(a) and 3(d) shall survive the
Closing Time.
<PAGE>
3. Covenants of the Company. The Company covenants and
agrees to and with the Purchaser that the Company will
(a) Use its reasonable best efforts to maintain the
registration of its Common Stock with the United States
Securities and Exchange Commission under Section 12(g) of the
Securities Exchange Act of 1934.
(b) Use its reasonable best efforts to maintain its
quotation on NASDAQ.
(c) Use the net proceeds from the sale and issue of
the Common Shares for general corporate purposes, which may
include assisting SGMC from time to time as may be appropriate.
(d) The Company shall take all actions, at its sole
expense, as required (i) immediately after the Closing Time to
file a registration statement with the United States Securities
and Exchange Commission, and have such statement declared
effective as soon as is practicable, so as to permit the public
sale in the United States of the shares of the Company purchased
hereby; and (ii) to keep the registration statement effective for
a period of 24 months after the initial effective date.
4. Entire Agreement and Modification. This Agreement
supersedes all prior agreements between the parties with respect
to its subject matter and constitutes a complete and exclusive
statement of the terms of the agreement between the parties with
respect to its subject matter. This Agreement may not be amended
except by a written agreement executed by the party to be charged
with the amendment.
5. No Assignment. No party may assign any of its rights
under this Agreement without the prior consent of the other
party. Subject to the preceding sentence, this Agreement will
apply to, be binding in all respects upon, and inure to the
benefit of the successors and permitted assigns of the parties.
Nothing expressed or referred to in this Agreement will be
construed to give any person other than the parties to this
Agreement any legal or equitable right, remedy, or claim under or
with respect to this Agreement or any provision of this
Agreement.
6. Notice. Any notice or communication hereunder or in
any agreement entered into in connection with the transactions
contemplated hereby must be in writing and given by depositing
the same in the United States mail, addressed to the party to be
notified, postage prepaid. Such notice shall be deemed received
five days after it is postmarked, provided, that notice by fax
transmission shall be deemed made when sent, if subsequently
confirmed in writing sent U.S. Mail.
7. Expenses. The Company shall bear the fees and expenses
of the Company and of the Placement Agent (subject to a limit on
the Placement Agent's fees of counsel) which are
incurred in connection with the sale and purchase of the shares
of Common Stock of the Company pursuant to this Agreement.
<PAGE>
8. Prevailing Party Clause; Governing Law. In the event
of any arbitration, litigation or other proceeding arising as a
result of the breach of this Agreement, including without
limitation the material falsity of any representation or
warranty, the party or parties prevailing in such arbitration,
litigation or proceeding shall be entitled to collect the costs
and expenses of bringing or defending such arbitration,
litigation or proceeding, including reasonable attorney's fees,
from the party or parties not prevailing. The preceding shall be
interpreted so as to entitle
the party prevailing in any arbitration to collect the costs and
expenses of litigation or other proceeding incurred by such
party, which litigation or other proceeding occurred prior to the
dispute being heard in arbitration.
IN WITNESS WHEREOF the parties have executed this Agreement
to be effective as of the date first stated above.
U.S. Energy Corp.
_____________________________ _______________________________
By Keith G. Larsen, President By Max T. Evans, Secretary
Dominick & Dominick Securities, Inc.
_____________________________
Authorized Officer
EXHIBIT 10.50
Stock Purchase Agreement
This Stock Purchase Agreement ("Agreement") is entered into
on March __, 1998 at Riverton, Wyoming by (i) U.S. Energy Corp.,
877 North 8th West, Riverton, Wyoming 82501, a Wyoming
corporation (the "Company"); and (ii) BPI Canadian Resource Fund,
161 Bay Street, Suite 3900, Toronto, Ontario, Canada M5J, 2S1
(the "Purchaser").
Recitals
A. The Company owns, directly and through subsidiaries and
joint ventures, uranium, gold and other mineral properties and
uranium processing facilities in the United States. Certain of
these properties are being developed for future mining and
processing of gold and uranium.
B. In May 1997, the Purchaser purchased 171,075 Special
Purchase Warrants (the "Special Warrants") issued by Sutter Gold
Mining Company, a Wyoming corporation ("SGMC") which is a
subsidiary of the Company, for a cash investment of
Cdn$940,912.50. Each Special Warrant entitled the holder to
acquire from SGMC, at no further cost, one share of Common Stock
of SGMC, and one Purchase Warrant; each Purchase Warrant would
have entitled the holder to purchase one share of Common Stock of
SGMC, at a price of Cdn$6.00 per whole share (the "Purchase
Warrants"), during the 18 months following closing of the
offering of the SGMC Special Purchase Warrants. The offering was
conducted pursuant to SGMC's Confidential Offering Memorandum
("Memorandum") dated May 5, 1997.
C. Pursuant to SGMC's Memorandum and the terms and
conditions of the Special Warrants, if SGMC were to fail to
obtain Prospectus Qualification before the Qualification Deadline
(as such terms were defined in the Memorandum) from the
securities commissions of the Canadian Provinces wherein
purchasers of the Special Warrants reside, the holders of the
Special Warrants would be entitled to receive a Dilution Penalty
in the amount of 1.1 shares of Common Stock of SGMC and 1.1
Purchase Warrants, for each Special Warrant exercised after the
Qualification Deadline if Prospectus Qualification were not
obtained by the Qualification Deadline.
D. The Qualification Deadline has passed as of the date of
this Agreement, and the Prospectus Qualification has not been
obtained by SGMC. The Purchaser has not received a Dilution
Penalty with respect to the Special Warrants and their
constituent securities.
E. The Purchaser desires to diversify and increase its
original investment by the acquisition of shares of the Common
Stock of the Company, and the Purchaser has made an offer to the
Company to purchase shares of Common Stock of the Company. The
Purchaser and the Company have negotiated the terms of acceptance
of the offer by the Company. As a result of the offer and
subsequent negotiations with the Purchaser, the Company has
determined to sell shares of Common Stock of the Company to the
Purchaser, for the consideration and on the terms set forth in
this Agreement.
<PAGE>
Agreement
Now Therefore, in consideration of the mutual promises and
covenants contained herein, and subject to the terms and
conditions of this Agreement, the parties agree as follows:
1. Purchase and Sale of Company Shares; Closing Time.
(a) At the closing of this Agreement, the Company will
sell to the Purchaser and the Purchaser will purchase from the
Company 125,341 shares of Common Stock of the Company, for
US$218,750 in cash and delivery to the Company of all of the
171,075 Special Warrants held by the Purchaser. As further
consideration for the purchase of the shares from the Company, at
and as of the closing, the Purchaser shall relinquish and forever
give up the Dilution Penalty, and no further document or
certificate concerning this relinquishment and give up shall be
necessary.
(b) The Company is represented in this transaction by
Dominick & Dominick Securities, Inc. (the "Placement Agent")
pursuant to the terms of the Agency Agreement between the Company
and the Placement Agent. The closing of the purchase and sale of
the shares of the Company will be completed at the offices of the
Placement Agent on or before March 31, 1998, or on such other
date to which the Company and the Placement Agent agree (the
"Closing Time"), with the delivery of (i) the cash and Special
Warrants to the Company, duly endorsed to the Company or
accompanied by a stock power with signature guaranteed, (ii) the
certificates for the shares of the Company to the Placement Agent
for transmittal to the Purchaser, and (iii) a certificate to the
Placement Agent for transmittal to the Purchaser, which
certificate shall be signed by two officers of the Company, dated
as of the Closing Time, certifying on behalf of the Company that
as of the Closing Time, (x) all of the Company's representations
and warranties set forth in paragraph 2.1 of this Agreement are
true and correct in all material respects; and (y) with respect
to 2.1(i), except as disclosed in the public record of the
Company as filed with the United States Securities and Exchange
Commission, there has been no material adverse change in the
consolidated financial condition of the Company. Certificates
for the shares of the Company purchased by the Purchaser shall be
delivered in the name of the Purchaser, or in such other name as
instructed by the Purchaser prior to the Closing Time.
2 Representations and Warranties. Each party represents
and warrants to the other party as follows:
2.1 By the Company. The Company represents and warrants to
the Purchaser as follows:
(a) (i) Except as disclosed in subparagraph
2.1(a)(i)(x) below, the documents comprising the Company's public
record as filed with the United States Securities and Exchange
Commission pursuant to the United States Securities Exchange Act
of 1934 contain an accurate and complete record of the business
of the Company. There has been no material adverse change in the
business, financial affairs or other condition of the Company
that has not been
<PAGE>
publicly disclosed. The public record does not omit to disclose
any facts relating to the Company which would be material to a
prospective purchaser of its Common Shares.
(x) The Company's Form 10-Q Report for the
fiscal quarter ended November 30, 1997 disclosed (in Item 2
"Management's Discussion and Analysis of Financial Condition and
Results of Operations") that the $4,000,000 line item on the
balance sheet was classified as deferred income, as such amount
was forfeitable back to Kennecott Uranium Company until certain
conditions were fulfilled. The Company further disclosed that
the forfeitable terms were satisfied in the third quarter, which
would allow such $4,000,000 to be recognized as income during the
Company's third fiscal quarter (ended February 28, 1998).
Pending further evaluation of the proper accounting treatment of
the Company's receipt of such $4,000,000, the Company has
determined that it may amend the Form 10-Q Report for the fiscal
quarter ended November 30, 1997 to delete reference to the
Company recognizing such $4,000,000 as income. If the Form 10-Q
Report is to be amended, such amendment may not be filed with the
United States Securities and Exchange Commission until after the
Closing Time. However, for purposes of this Agreement, the
disclosures in this subparagraph 2.1(a)(i)(x) shall be deemed to
be part of the public record of the Company as of the date
hereof.
(ii) The public record (with respect to
information therein which concerns SGMC) filed with the United
States Securities and Exchange Commission pursuant to the United
States Securities Exchange Act of 1934 does not omit to disclose
any non-adverse facts which could be material to a seller of
securities of SGMC.
(b) Each of the Company and its material subsidiaries
is, and will be at the Closing Time, duly incorporated and
organized and validly subsists under the laws of its jurisdiction
of incorporation (or other form of organization), with full
corporate (or other entity power) and capacity to carry on its
business as presently conducted.
(c) Except as disclosed in the audited financial
statements for the year ended May 31, 1997 or disclosed in
writing to the Purchaser, there are no actions, suits, proceeding
or enquiries threatened or, to the best of its knowledge, pending
against or affecting the Company or any of its subsidiaries at
law or in equity or before or by any federal, provincial,
municipal or other governmental department, commission, board,
bureau or agency which may in any way materially adversely affect
the business, operations or condition (financial or otherwise) of
the Company or any of its subsidiaries, taken as a whole, or
which affects or may affect the sale of Common Stock, and the
Company is not aware of any existing grounds on which such
action, suit, proceeding or enquiry might be commenced with any
reasonable likelihood of success.
(d) The authorized capital of the Company consists of
(i) 20,000,000 shares of Common Stock, $.01 par value, of which,
as at the date hereof, there were issued and outstanding
6,696,474 shares of Common Stock as fully paid and nonassessable,
not including (a) 4,092 shares to be issued to employees for the
1997 Christmas bonus, (b) 2,500 shares to be issued to outside
director Simpson and 2,500 shares to be issued to Advisory Board
Member Fraser, and (c) 229,606 shares which are forfeitable; and
(ii) 100,000 preferred shares, none issued or outstanding.
<PAGE>
(e) American Securities Transfer & Trust, Inc., 938
Quail Street, Suite 101, Lakewood, Colorado USA 80215-5513,
telephone 1-800-962-4284, is the duly appointed registrar and
transfer agent for the shares of Common Stock of the Company.
(f) No regulatory authority of any other jurisdiction
has issued any order preventing or suspending trading in any
securities of the Company which at the Closing Time will be
outstanding, and the Company is not in default of any requirement
of the securities laws of any province of Canada or any laws of
the United States which would reasonably be expected to affect
trading in the Company's securities.
(g) The issued and outstanding shares of Common Stock
of the Company are quoted on NASDAQ.
(h) The Common Stock class of the Company is
registered with the United States Securities and Exchange
Commission pursuant to Section 12(g) of the Securities Exchange
Act of 1934, the Company has timely filed all reports and other
documents required to be filed thereunder, and the public record
as filed with such Commission as of the date hereof is materially
complete and accurate.
(i) The Company and its subsidiaries are the
beneficial owners of the properties, businesses and assets
described in the documents comprising the public record as filed
with the United States Securities and Exchange Commission and
referred to in the Financial Statements (as hereinafter defined)
and any and all agreements pursuant to which the Company or its
subsidiaries hold such properties are in good standing in all
material respects under the applicable statutes and regulations
of the jurisdictions in which they are situated. As used herein,
"Financial Statements" mean the consolidated audited financial
statements of the Company for the year ended May 31, 1997 and the
consolidated unaudited interim financial statements for the
periods ended August 31, 1997 and November 30, 1997, as contained
in the public record of the Company as filed with the Commission.
The Financial Statements are true and correct in all material
respects and have been prepared in accordance with United States
generally accepted accounting principles consistently applied
throughout the periods indicated and present fairly the financial
condition of the Company for the periods then ended.
2.2 By the Purchaser. The Purchaser represents and
warrants to the Company that:
(a) The Purchaser owes no commission or finder's or
similar fee which has been or will be incurred in connection with
this Agreement.
(b) The Purchaser or its client A/C 317 is the sole
beneficial owner of the Special Warrants. The Purchaser has full
and complete authority to execute this Agreement, deliver the
cash and the Special Warrants to the Company at the Closing Time,
and relinquish the Dilution Penalty, and receive therefor, the
certificates for the number of shares of the Company stated in
this Agreement, all for the account of the Purchaser or for the
account of its client. The
<PAGE>
Purchaser, for itself or for its client, owns the Special
Warrants free and clear of any encumbrance or lien.
(c) It understands that the shares of Common Stock of
the Company to be purchased by the Purchaser will be restricted
from transfer pursuant to United States securities laws, that
certificates for the shares will bear a restrictive legend, and
that the Company's transfer agent will be issued "stop transfer"
instructions with respect to the shares.
(d) It has received copies, as filed with the United
States Securities and Exchange Commission, of the Company's (i)
Annual Report on Form 10-K for fiscal year ended May 31, 1997,
(ii) Quarterly Reports on Form 10-Q for the fiscal quarter
periods ended August 31, 1997 and November 30, 1997, and (iii)
Current Reports on Form 8-K since May 31, 1997 (the Company has
represented that the only such Form 8-K Reports were those
Reports dated June 23, 1997, June 27, 1997, September 27, 1997
and November 25, 1997).
2.3 Survival of Representations and Warranties. The
representations and warranties of each party which are stated in
this Agreement shall be deemed to be restated and affirmed as of
the Closing Time, and paragraphs 3(a) and 3(d) shall survive the
Closing Time.
3. Covenants of the Company. The Company covenants and
agrees to and with the Purchaser that the Company will
(a) Use its reasonable best efforts to maintain the
registration of its Common Stock with the United States
Securities and Exchange Commission under Section 12(g) of the
Securities Exchange Act of 1934.
(b) Use its reasonable best efforts to maintain its
quotation on NASDAQ.
(c) Use the net proceeds from the sale and issue of
the Common Shares for general corporate purposes, which may
include assisting SGMC from time to time as may be appropriate.
(d) The Company shall take all actions, at its sole
expense, as required (i) immediately after the Closing Time to
file a registration statement with the United States Securities
and Exchange Commission, and have such statement declared
effective as soon as is practicable, so as to permit the public
sale in the United States of the shares of the Company purchased
hereby; and (ii) to keep the registration statement effective for
a period of 24 months after the initial effective date.
4. Entire Agreement and Modification. This Agreement
supersedes all prior agreements between the parties with respect
to its subject matter and constitutes a complete and exclusive
statement of the terms of the agreement between the parties with
respect to its subject matter. This Agreement may not be amended
except by a written agreement executed by the party to be charged
with the amendment.
<PAGE>
5. No Assignment. No party may assign any of its rights
under this Agreement without the prior consent of the other
party. Subject to the preceding sentence, this Agreement will
apply to, be binding in all respects upon, and inure to the
benefit of the successors and permitted assigns of the parties.
Nothing expressed or referred to in this Agreement will be
construed to give any person other than the parties to this
Agreement any legal or equitable right, remedy, or claim under or
with respect to this Agreement or any provision of this
Agreement.
6. Notice. Any notice or communication hereunder or in
any agreement entered into in connection with the transactions
contemplated hereby must be in writing and given by depositing
the same in the United States mail, addressed to the party to be
notified, postage prepaid. Such notice shall be deemed received
five days after it is postmarked, provided, that notice by fax
transmission shall be deemed made when sent, if subsequently
confirmed in writing sent U.S. Mail.
7. Expenses. The Company shall bear the fees and expenses
of the Company and of the Placement Agent (subject to a limit on
the Placement Agent's fees of counsel) which are
incurred in connection with the sale and purchase of the shares
of Common Stock of the Company pursuant to this Agreement.
8. Prevailing Party Clause; Governing Law. In the event
of any arbitration, litigation or other proceeding arising as a
result of the breach of this Agreement, including without
limitation the material falsity of any representation or
warranty, the party or parties prevailing in such arbitration,
litigation or proceeding shall be entitled to collect the costs
and expenses of bringing or defending such arbitration,
litigation or proceeding, including reasonable attorney's fees,
from the party or parties not prevailing. The preceding shall be
interpreted so as to entitle the party prevailing in any
arbitration to collect the costs and expenses of litigation or
other proceeding incurred by such party, which litigation or
other proceeding occurred prior to the dispute being heard in
arbitration.
IN WITNESS WHEREOF the parties have executed this Agreement
to be effective as of the date first stated above.
U.S. Energy Corp.
_____________________________ _______________________________
By Keith G. Larsen, President By Max T. Evans, Secretary
BPI Canadian Resource Fund
_____________________________
By __________________________
Print name of signatory
_____________________________
EXHIBIT 10.51
Stock Purchase Agreement
This Stock Purchase Agreement ("Agreement") is entered into
on March __, 1998 at Riverton, Wyoming by (i) U.S. Energy Corp.,
877 North 8th West, Riverton, Wyoming 82501, a Wyoming
corporation (the "Company"); and (ii) BPI Canadian Opportunities
II Fund, 161 Bay Street, Suite 3900, Toronto, Ontario, Canada
M5J, 2S1 (the "Purchaser").
Recitals
A. The Company owns, directly and through subsidiaries and
joint ventures, uranium, gold and other mineral properties and
uranium processing facilities in the United States. Certain of
these properties are being developed for future mining and
processing of gold and uranium.
B. In May 1997, the Purchaser purchased 171,075 Special
Purchase Warrants (the "Special Warrants") issued by Sutter Gold
Mining Company, a Wyoming corporation ("SGMC") which is a
subsidiary of the Company, for a cash investment of
Cdn$940,912.50. Each Special Warrant entitled the holder to
acquire from SGMC, at no further cost, one share of Common Stock
of SGMC, and one Purchase Warrant; each Purchase Warrant would
have entitled the holder to purchase one share of Common Stock of
SGMC, at a price of Cdn$6.00 per whole share (the "Purchase
Warrants"), during the 18 months following closing of the
offering of the SGMC Special Purchase Warrants. The offering was
conducted pursuant to SGMC's Confidential Offering Memorandum
("Memorandum") dated May 5, 1997.
C. Pursuant to SGMC's Memorandum and the terms and
conditions of the Special Warrants, if SGMC were to fail to
obtain Prospectus Qualification before the Qualification Deadline
(as such terms were defined in the Memorandum) from the
securities commissions of the Canadian Provinces wherein
purchasers of the Special Warrants reside, the holders of the
Special Warrants would be entitled to receive a Dilution Penalty
in the amount of 1.1 shares of Common Stock of SGMC and 1.1
Purchase Warrants, for each Special Warrant exercised after the
Qualification Deadline if Prospectus Qualification were not
obtained by the Qualification Deadline.
D. The Qualification Deadline has passed as of the date of
this Agreement, and the Prospectus Qualification has not been
obtained by SGMC. The Purchaser has not received a Dilution
Penalty with respect to the Special Warrants and their
constituent securities.
E. The Purchaser desires to diversify and increase its
original investment by the acquisition of shares of the Common
Stock of the Company, and the Purchaser has made an offer to the
Company to purchase shares of Common Stock of the Company. The
Purchaser and the Company have negotiated the terms of acceptance
of the offer by the Company. As a result of the offer and
subsequent negotiations with the Purchaser, the Company has
determined to sell shares of Common Stock of the Company to the
Purchaser, for the consideration and on the terms set forth in
this Agreement.
<PAGE>
Agreement
Now Therefore, in consideration of the mutual promises and
covenants contained herein, and subject to the terms and
conditions of this Agreement, the parties agree as follows:
1. Purchase and Sale of Company Shares; Closing Time.
(a) At the closing of this Agreement, the Company will
sell to the Purchaser and the Purchaser will purchase from the
Company 125,341 shares of Common Stock of the Company, for
US$218,750 in cash and delivery to the Company of all of the
171,075 Special Warrants held by the Purchaser. As further
consideration for the purchase of the shares from the Company, at
and as of the closing, the Purchaser shall relinquish and forever
give up the Dilution Penalty, and no further document or
certificate concerning this relinquishment and give up shall be
necessary.
(b) The Company is represented in this transaction by
Dominick & Dominick Securities, Inc. (the "Placement Agent")
pursuant to the terms of the Agency Agreement between the Company
and the Placement Agent. The closing of the purchase and sale of
the shares of the Company will be completed at the offices of the
Placement Agent on or before March 31, 1998, or on such other
date to which the Company and the Placement Agent agree (the
"Closing Time"), with the delivery of (i) the cash and Special
Warrants to the Company, duly endorsed to the Company or
accompanied by a stock power with signature guaranteed, (ii) the
certificates for the shares of the Company to the Placement Agent
for transmittal to the Purchaser, and (iii) a certificate to the
Placement Agent for transmittal to the Purchaser, which
certificate shall be signed by two officers of the Company, dated
as of the Closing Time, certifying on behalf of the Company that
as of the Closing Time, (x) all of the Company's representations
and warranties set forth in paragraph 2.1 of this Agreement are
true and correct in all material respects; and (y) with respect
to 2.1(i), except as disclosed in the public record of the
Company as filed with the United States Securities and Exchange
Commission, there has been no material adverse change in the
consolidated financial condition of the Company. Certificates
for the shares of the Company purchased by the Purchaser shall be
delivered in the name of the Purchaser, or in such other name as
instructed by the Purchaser prior to the Closing Time.
2 Representations and Warranties. Each party represents
and warrants to the other party as follows:
2.1 By the Company. The Company represents and warrants to
the Purchaser as follows:
(a) (i) Except as disclosed in subparagraph
2.1(a)(i)(x) below, the documents comprising the Company's public
record as filed with the United States Securities and Exchange
Commission pursuant to the United States Securities Exchange Act
of 1934 contain an accurate and complete record of the business
of the Company. There has been no material adverse change in the
business, financial affairs or other condition of the Company
that has not been
<PAGE>
publicly disclosed. The public record does not omit to disclose
any facts relating to the Company which would be material to a
prospective purchaser of its Common Shares.
(x) The Company's Form 10-Q Report for the
fiscal quarter ended November 30, 1997 disclosed (in Item 2
"Management's Discussion and Analysis of Financial Condition and
Results of Operations") that the $4,000,000 line item on the
balance sheet was classified as deferred income, as such amount
was forfeitable back to Kennecott Uranium Company until certain
conditions were fulfilled. The Company further disclosed that
the forfeitable terms were satisfied in the third quarter, which
would allow such $4,000,000 to be recognized as income during the
Company's third fiscal quarter (ended February 28, 1998).
Pending further evaluation of the proper accounting treatment of
the Company's receipt of such $4,000,000, the Company has
determined that it may amend the Form 10-Q Report for the fiscal
quarter ended November 30, 1997 to delete reference to the
Company recognizing such $4,000,000 as income. If the Form 10-Q
Report is to be amended, such amendment may not be filed with the
United States Securities and Exchange Commission until after the
Closing Time. However, for purposes of this Agreement, the
disclosures in this subparagraph 2.1(a)(i)(x) shall be deemed to
be part of the public record of the Company as of the date
hereof.
(ii) The public record (with respect to
information therein which concerns SGMC) filed with the United
States Securities and Exchange Commission pursuant to the United
States Securities Exchange Act of 1934 does not omit to disclose
any non-adverse facts which could be material to a seller of
securities of SGMC.
(b) Each of the Company and its material subsidiaries
is, and will be at the Closing Time, duly incorporated and
organized and validly subsists under the laws of its jurisdiction
of incorporation (or other form of organization), with full
corporate (or other entity power) and capacity to carry on its
business as presently conducted.
(c) Except as disclosed in the audited financial
statements for the year ended May 31, 1997 or disclosed in
writing to the Purchaser, there are no actions, suits, proceeding
or enquiries threatened or, to the best of its knowledge, pending
against or affecting the Company or any of its subsidiaries at
law or in equity or before or by any federal, provincial,
municipal or other governmental department, commission, board,
bureau or agency which may in any way materially adversely affect
the business, operations or condition (financial or otherwise) of
the Company or any of its subsidiaries, taken as a whole, or
which affects or may affect the sale of Common Stock, and the
Company is not aware of any existing grounds on which such
action, suit, proceeding or enquiry might be commenced with any
reasonable likelihood of success.
(d) The authorized capital of the Company consists of
(i) 20,000,000 shares of Common Stock, $.01 par value, of which,
as at the date hereof, there were issued and outstanding
6,696,474 shares of Common Stock as fully paid and nonassessable,
not including (a) 4,092 shares to be issued to employees for the
1997 Christmas bonus, (b) 2,500 shares to be issued to outside
director Simpson and 2,500 shares to be issued to Advisory Board
Member Fraser, and (c) 229,606 shares which are forfeitable; and
(ii) 100,000 preferred shares, none issued or outstanding.
<PAGE>
(e) American Securities Transfer & Trust, Inc., 938
Quail Street, Suite 101, Lakewood, Colorado USA 80215-5513,
telephone 1-800-962-4284, is the duly appointed registrar and
transfer agent for the shares of Common Stock of the Company.
(f) No regulatory authority of any other jurisdiction
has issued any order preventing or suspending trading in any
securities of the Company which at the Closing Time will be
outstanding, and the Company is not in default of any requirement
of the securities laws of any province of Canada or any laws of
the United States which would reasonably be expected to affect
trading in the Company's securities.
(g) The issued and outstanding shares of Common Stock
of the Company are quoted on NASDAQ.
(h) The Common Stock class of the Company is
registered with the United States Securities and Exchange
Commission pursuant to Section 12(g) of the Securities Exchange
Act of 1934, the Company has timely filed all reports and other
documents required to be filed thereunder, and the public record
as filed with such Commission as of the date hereof is materially
complete and accurate.
(i) The Company and its subsidiaries are the
beneficial owners of the properties, businesses and assets
described in the documents comprising the public record as filed
with the United States Securities and Exchange Commission and
referred to in the Financial Statements (as hereinafter defined)
and any and all agreements pursuant to which the Company or its
subsidiaries hold such properties are in good standing in all
material respects under the applicable statutes and regulations
of the jurisdictions in which they are situated. As used herein,
"Financial Statements" mean the consolidated audited financial
statements of the Company for the year ended May 31, 1997 and the
consolidated unaudited interim financial statements for the
periods ended August 31, 1997 and November 30, 1997, as contained
in the public record of the Company as filed with the Commission.
The Financial Statements are true and correct in all material
respects and have been prepared in accordance with United States
generally accepted accounting principles consistently applied
throughout the periods indicated and present fairly the financial
condition of the Company for the periods then ended.
2.2 By the Purchaser. The Purchaser represents and
warrants to the Company that:
(a) The Purchaser owes no commission or finder's or
similar fee which has been or will be incurred in connection with
this Agreement.
(b) The Purchaser or its client A/C 317 is the sole
beneficial owner of the Special Warrants. The Purchaser has full
and complete authority to execute this Agreement, deliver the
cash and the Special Warrants to the Company at the Closing Time,
and relinquish the Dilution Penalty, and receive therefor, the
certificates for the number of shares of the Company stated in
this Agreement, all for the account of the Purchaser or for the
account of its client. The Purchaser, for itself or for its
client, owns the Special Warrants free and clear of any
encumbrance or lien.
<PAGE>
(c) It understands that the shares of Common Stock of
the Company to be purchased by the Purchaser will be restricted
from transfer pursuant to United States securities laws, that
certificates for the shares will bear a restrictive legend, and
that the Company's transfer agent will be issued "stop transfer"
instructions with respect to the shares.
(d) It has received copies, as filed with the United
States Securities and Exchange Commission, of the Company's (i)
Annual Report on Form 10-K for fiscal year ended May 31, 1997,
(ii) Quarterly Reports on Form 10-Q for the fiscal quarter
periods ended August 31, 1997 and November 30, 1997, and (iii)
Current Reports on Form 8-K since May 31, 1997 (the Company has
represented that the only such Form 8-K Reports were those
Reports dated June 23, 1997, June 27, 1997, September 27, 1997
and November 25, 1997).
2.3 Survival of Representations and Warranties. The
representations and warranties of each party which are stated in
this Agreement shall be deemed to be restated and affirmed as of
the Closing Time, and paragraphs 3(a) and 3(d) shall survive the
Closing Time.
3. Covenants of the Company. The Company covenants and
agrees to and with the Purchaser that the Company will
(a) Use its reasonable best efforts to maintain the
registration of its Common Stock with the United States
Securities and Exchange Commission under Section 12(g) of the
Securities Exchange Act of 1934.
(b) Use its reasonable best efforts to maintain its
quotation on NASDAQ.
(c) Use the net proceeds from the sale and issue of
the Common Shares for general corporate purposes, which may
include assisting SGMC from time to time as may be appropriate.
(d) The Company shall take all actions, at its sole
expense, as required (i) immediately after the Closing Time to
file a registration statement with the United States Securities
and Exchange Commission, and have such statement declared
effective as soon as is practicable, so as to permit the public
sale in the United States of the shares of the Company purchased
hereby; and (ii) to keep the registration statement effective for
a period of 24 months after the initial effective date.
4. Entire Agreement and Modification. This Agreement
supersedes all prior agreements between the parties with respect
to its subject matter and constitutes a complete and exclusive
statement of the terms of the agreement between the parties with
respect to its subject matter. This Agreement may not be amended
except by a written agreement executed by the party to be charged
with the amendment.
5. No Assignment. No party may assign any of its rights
under this Agreement without the prior consent of the other
party. Subject to the preceding sentence, this Agreement will
apply to, be binding in all respects upon, and inure to the
benefit of the successors and
<PAGE>
permitted assigns of the parties. Nothing expressed or referred
to in this Agreement will be construed to give any person other
than the parties to this Agreement any legal or equitable right,
remedy, or claim under or with respect to this Agreement or any
provision of this Agreement.
6. Notice. Any notice or communication hereunder or in
any agreement entered into in connection with the transactions
contemplated hereby must be in writing and given by depositing
the same in the United States mail, addressed to the party to be
notified, postage prepaid. Such notice shall be deemed received
five days after it is postmarked, provided, that notice by fax
transmission shall be deemed made when sent, if subsequently
confirmed in writing sent U.S. Mail.
7. Expenses. The Company shall bear the fees and expenses
of the Company and of the Placement Agent (subject to a limit on
the Placement Agent's fees of counsel) which are
incurred in connection with the sale and purchase of the shares
of Common Stock of the Company pursuant to this Agreement.
8. Prevailing Party Clause; Governing Law. In the event
of any arbitration, litigation or other proceeding arising as a
result of the breach of this Agreement, including without
limitation the material falsity of any representation or
warranty, the party or parties prevailing in such arbitration,
litigation or proceeding shall be entitled to collect the costs
and expenses of bringing or defending such arbitration,
litigation or proceeding, including reasonable attorney's fees,
from the party or parties not prevailing. The preceding shall be
interpreted so as to entitle the party prevailing in any
arbitration to collect the costs and expenses of litigation or
other proceeding incurred by such party, which litigation or
other proceeding occurred prior to the dispute being heard in
arbitration.
IN WITNESS WHEREOF the parties have executed this Agreement
to be effective as of the date first stated above.
U.S. Energy Corp.
_____________________________ _______________________________
By Keith G. Larsen, President By Max T. Evans, Secretary
BPI Canadian Opportunities II Fund
_____________________________
By __________________________
Print name of signatory
_____________________________
EXHIBIT 10.52
Stock Purchase Agreement
This Stock Purchase Agreement ("Agreement") is entered into
on March __, 1998 at Riverton, Wyoming by (i) U.S. Energy Corp.,
877 North 8th West, Riverton, Wyoming 82501, a Wyoming
corporation (the "Company"); and (ii) BPI Canadian Small
Companies Fund, 161 Bay Street, Suite 3900, Toronto, Ontario,
Canada M5J, 2S1 (the "Purchaser").
Recitals
A. The Company owns, directly and through subsidiaries and
joint ventures, uranium, gold and other mineral properties and
uranium processing facilities in the United States. Certain of
these properties are being developed for future mining and
processing of gold and uranium.
B. In May 1997, the Purchaser purchased 342,150 Special
Purchase Warrants (the "Special Warrants") issued by Sutter Gold
Mining Company, a Wyoming corporation ("SGMC") which is a
subsidiary of the Company, for a cash investment of
Cdn$1,991,825. Each Special Warrant entitled the holder to
acquire from SGMC, at no further cost, one share of Common Stock
of SGMC, and one Purchase Warrant; each Purchase Warrant would
have entitled the holder to purchase one share of Common Stock of
SGMC, at a price of Cdn$6.00 per whole share (the "Purchase
Warrants"), during the 18 months following closing of the
offering of the SGMC Special Purchase Warrants. The offering was
conducted pursuant to SGMC's Confidential Offering Memorandum
("Memorandum") dated May 5, 1997.
C. Pursuant to SGMC's Memorandum and the terms and
conditions of the Special Warrants, if SGMC were to fail to
obtain Prospectus Qualification before the Qualification Deadline
(as such terms were defined in the Memorandum) from the
securities commissions of the Canadian Provinces wherein
purchasers of the Special Warrants reside, the holders of the
Special Warrants would be entitled to receive a Dilution Penalty
in the amount of 1.1 shares of Common Stock of SGMC and 1.1
Purchase Warrants, for each Special Warrant exercised after the
Qualification Deadline if Prospectus Qualification were not
obtained by the Qualification Deadline.
D. The Qualification Deadline has passed as of the date of
this Agreement, and the Prospectus Qualification has not been
obtained by SGMC. The Purchaser has not received a Dilution
Penalty with respect to the Special Warrants and their
constituent securities.
E. The Purchaser desires to diversify and increase its
original investment by the acquisition of shares of the Common
Stock of the Company, and the Purchaser has made an offer to the
Company to purchase shares of Common Stock of the Company. The
Purchaser and the Company have negotiated the terms of acceptance
of the offer by the Company. As a result of the offer and
subsequent negotiations with the Purchaser, the Company has
determined to sell shares of Common Stock of the Company to the
Purchaser, for the consideration and on the terms set forth in
this Agreement.
<PAGE>
Agreement
Now Therefore, in consideration of the mutual promises and
covenants contained herein, and subject to the terms and
conditions of this Agreement, the parties agree as follows:
1. Purchase and Sale of Company Shares; Closing Time.
(a) At the closing of this Agreement, the Company will
sell to the Purchaser and the Purchaser will purchase from the
Company 250,683 shares of Common Stock of the Company, for
US$437,500 in cash and delivery to the Company of all of the
342,150 Special Warrants held by the Purchaser. As further
consideration for the purchase of the shares from the Company, at
and as of the closing, the Purchaser shall relinquish and forever
give up the Dilution Penalty, and no further document or
certificate concerning this relinquishment and give up shall be
necessary.
(b) The Company is represented in this transaction by
Dominick & Dominick Securities, Inc. (the "Placement Agent")
pursuant to the terms of the Agency Agreement between the Company
and the Placement Agent. The closing of the purchase and sale of
the shares of the Company will be completed at the offices of the
Placement Agent on or before March 31, 1998, or on such other
date to which the Company and the Placement Agent agree (the
"Closing Time"), with the delivery of (i) the cash and Special
Warrants to the Company, duly endorsed to the Company or
accompanied by a stock power with signature guaranteed, (ii) the
certificates for the shares of the Company to the Placement Agent
for transmittal to the Purchaser, and (iii) a certificate to the
Placement Agent for transmittal to the Purchaser, which
certificate shall be signed by two officers of the Company, dated
as of the Closing Time, certifying on behalf of the Company that
as of the Closing Time, (x) all of the Company's representations
and warranties set forth in paragraph 2.1 of this Agreement are
true and correct in all material respects; and (y) with respect
to 2.1(i), except as disclosed in the public record of the
Company as filed with the United States Securities and Exchange
Commission, there has been no material adverse change in the
consolidated financial condition of the Company. Certificates
for the shares of the Company purchased by the Purchaser shall be
delivered in the name of the Purchaser, or in such other name as
instructed by the Purchaser prior to the Closing Time.
2 Representations and Warranties. Each party represents
and warrants to the other party as follows:
2.1 By the Company. The Company represents and warrants to
the Purchaser as follows:
(a) (i) Except as disclosed in subparagraph
2.1(a)(i)(x) below, the documents comprising the Company's public
record as filed with the United States Securities and Exchange
Commission pursuant to the United States Securities Exchange Act
of 1934 contain an accurate and complete record of the business
of the Company. There has been no material adverse change in the
business, financial affairs or other condition of the Company
that has not been
<PAGE>
publicly disclosed. The public record does not omit to disclose
any facts relating to the Company which would be material to a
prospective purchaser of its Common Shares.
(x) The Company's Form 10-Q Report for the
fiscal quarter ended November 30, 1997 disclosed (in Item 2
"Management's Discussion and Analysis of Financial Condition and
Results of Operations") that the $4,000,000 line item on the
balance sheet was classified as deferred income, as such amount
was forfeitable back to Kennecott Uranium Company until certain
conditions were fulfilled. The Company further disclosed that
the forfeitable terms were satisfied in the third quarter, which
would allow such $4,000,000 to be recognized as income during the
Company's third fiscal quarter (ended February 28, 1998).
Pending further evaluation of the proper accounting treatment of
the Company's receipt of such $4,000,000, the Company has
determined that it may amend the Form 10-Q Report for the fiscal
quarter ended November 30, 1997 to delete reference to the
Company recognizing such $4,000,000 as income. If the Form 10-Q
Report is to be amended, such amendment may not be filed with the
United States Securities and Exchange Commission until after the
Closing Time. However, for purposes of this Agreement, the
disclosures in this subparagraph 2.1(a)(i)(x) shall be deemed to
be part of the public record of the Company as of the date
hereof.
(ii) The public record (with respect to
information therein which concerns SGMC) filed with the United
States Securities and Exchange Commission pursuant to the United
States Securities Exchange Act of 1934 does not omit to disclose
any non-adverse facts which could be material to a seller of
securities of SGMC.
(b) Each of the Company and its material subsidiaries
is, and will be at the Closing Time, duly incorporated and
organized and validly subsists under the laws of its jurisdiction
of incorporation (or other form of organization), with full
corporate (or other entity power) and capacity to carry on its
business as presently conducted.
(c) Except as disclosed in the audited financial
statements for the year ended May 31, 1997 or disclosed in
writing to the Purchaser, there are no actions, suits, proceeding
or enquiries threatened or, to the best of its knowledge, pending
against or affecting the Company or any of its subsidiaries at
law or in equity or before or by any federal, provincial,
municipal or other governmental department, commission, board,
bureau or agency which may in any way materially adversely affect
the business, operations or condition (financial or otherwise) of
the Company or any of its subsidiaries, taken as a whole, or
which affects or may affect the sale of Common Stock, and the
Company is not aware of any existing grounds on which such
action, suit, proceeding or enquiry might be commenced with any
reasonable likelihood of success.
(d) The authorized capital of the Company consists of
(i) 20,000,000 shares of Common Stock, $.01 par value, of which,
as at the date hereof, there were issued and outstanding
6,696,474 shares of Common Stock as fully paid and nonassessable,
not including (a) 4,092 shares to be issued to employees for the
1997 Christmas bonus, (b) 2,500 shares to be issued to outside
director Simpson and 2,500 shares to be issued to Advisory Board
Member Fraser, and (c) 229,606 shares which are forfeitable; and
(ii) 100,000 preferred shares, none issued or outstanding.
<PAGE>
(e) American Securities Transfer & Trust, Inc., 938
Quail Street, Suite 101, Lakewood, Colorado USA 80215-5513,
telephone 1-800-962-4284, is the duly appointed registrar and
transfer agent for the shares of Common Stock of the Company.
(f) No regulatory authority of any other jurisdiction
has issued any order preventing or suspending trading in any
securities of the Company which at the Closing Time will be
outstanding, and the Company is not in default of any requirement
of the securities laws of any province of Canada or any laws of
the United States which would reasonably be expected to affect
trading in the Company's securities.
(g) The issued and outstanding shares of Common Stock
of the Company are quoted on NASDAQ.
(h) The Common Stock class of the Company is
registered with the United States Securities and Exchange
Commission pursuant to Section 12(g) of the Securities Exchange
Act of 1934, the Company has timely filed all reports and other
documents required to be filed thereunder, and the public record
as filed with such Commission as of the date hereof is materially
complete and accurate.
(i) The Company and its subsidiaries are the
beneficial owners of the properties, businesses and assets
described in the documents comprising the public record as filed
with the United States Securities and Exchange Commission and
referred to in the Financial Statements (as hereinafter defined)
and any and all agreements pursuant to which the Company or its
subsidiaries hold such properties are in good standing in all
material respects under the applicable statutes and regulations
of the jurisdictions in which they are situated. As used herein,
"Financial Statements" mean the consolidated audited financial
statements of the Company for the year ended May 31, 1997 and the
consolidated unaudited interim financial statements for the
periods ended August 31, 1997 and November 30, 1997, as contained
in the public record of the Company as filed with the Commission.
The Financial Statements are true and correct in all material
respects and have been prepared in accordance with United States
generally accepted accounting principles consistently applied
throughout the periods indicated and present fairly the financial
condition of the Company for the periods then ended.
2.2 By the Purchaser. The Purchaser represents and
warrants to the Company that:
(a) The Purchaser owes no commission or finder's or
similar fee which has been or will be incurred in connection with
this Agreement.
(b) The Purchaser or its client A/C 317 is the sole
beneficial owner of the Special Warrants. The Purchaser has full
and complete authority to execute this Agreement, deliver the
cash and the Special Warrants to the Company at the Closing Time,
and relinquish the Dilution Penalty, and receive therefor, the
certificates for the number of shares of the Company stated in
this Agreement, all for the account of the Purchaser or for the
account of its client. The
Purchaser, for itself or for its client, owns the Special
Warrants free and clear of any encumbrance or lien.
<PAGE>
(c) It understands that the shares of Common Stock of
the Company to be purchased by the Purchaser will be restricted
from transfer pursuant to United States securities laws, that
certificates for the shares will bear a restrictive legend, and
that the Company's transfer agent will be issued "stop transfer"
instructions with respect to the shares.
(d) It has received copies, as filed with the United
States Securities and Exchange Commission, of the Company's (i)
Annual Report on Form 10-K for fiscal year ended May 31, 1997,
(ii) Quarterly Reports on Form 10-Q for the fiscal quarter
periods ended August 31, 1997 and November 30, 1997, and (iii)
Current Reports on Form 8-K since May 31, 1997 (the Company has
represented that the only such Form 8-K Reports were those
Reports dated June 23, 1997, June 27, 1997, September 27, 1997
and November 25, 1997).
2.3 Survival of Representations and Warranties. The
representations and warranties of each party which are stated in
this Agreement shall be deemed to be restated and affirmed as of
the Closing Time, and paragraphs 3(a) and 3(d) shall survive the
Closing Time.
3. Covenants of the Company. The Company covenants and
agrees to and with the Purchaser that the Company will
(a) Use its reasonable best efforts to maintain the
registration of its Common Stock with the United States
Securities and Exchange Commission under Section 12(g) of the
Securities Exchange Act of 1934.
(b) Use its reasonable best efforts to maintain its
quotation on NASDAQ.
(c) Use the net proceeds from the sale and issue of
the Common Shares for general corporate purposes, which may
include assisting SGMC from time to time as may be appropriate.
(d) The Company shall take all actions, at its sole
expense, as required (i) immediately after the Closing Time to
file a registration statement with the United States Securities
and Exchange Commission, and have such statement declared
effective as soon as is practicable, so as to permit the public
sale in the United States of the shares of the Company purchased
hereby; and (ii) to keep the registration statement effective for
a period of 24 months after the initial effective date.
4. Entire Agreement and Modification. This Agreement
supersedes all prior agreements between the parties with respect
to its subject matter and constitutes a complete and exclusive
statement of the terms of the agreement between the parties with
respect to its subject matter. This Agreement may not be amended
except by a written agreement executed by the party to be charged
with the amendment.
5. No Assignment. No party may assign any of its rights
under this Agreement without the prior consent of the other
party. Subject to the preceding sentence, this Agreement will
apply to, be binding in all respects upon, and inure to the
benefit of the successors and
<PAGE>
permitted assigns of the parties. Nothing expressed or referred
to in this Agreement will be construed to give any person other
than the parties to this Agreement any legal or equitable right,
remedy, or claim under or with respect to this Agreement or any
provision of this Agreement.
6. Notice. Any notice or communication hereunder or in
any agreement entered into in connection with the transactions
contemplated hereby must be in writing and given by depositing
the same in the United States mail, addressed to the party to be
notified, postage prepaid. Such notice shall be deemed received
five days after it is postmarked, provided, that notice by fax
transmission shall be deemed made when sent, if subsequently
confirmed in writing sent U.S. Mail.
7. Expenses. The Company shall bear the fees and expenses
of the Company and of the Placement Agent (subject to a limit on
the Placement Agent's fees of counsel) which are
incurred in connection with the sale and purchase of the shares
of Common Stock of the Company pursuant to this Agreement.
8. Prevailing Party Clause; Governing Law. In the event
of any arbitration, litigation or other proceeding arising as a
result of the breach of this Agreement, including without
limitation the material falsity of any representation or
warranty, the party or parties prevailing in such arbitration,
litigation or proceeding shall be entitled to collect the costs
and expenses of bringing or defending such arbitration,
litigation or proceeding, including reasonable attorney's fees,
from the party or parties not prevailing. The preceding shall be
interpreted so as to entitle the party prevailing in any
arbitration to collect the costs and expenses of litigation or
other proceeding incurred by such party, which litigation or
other proceeding occurred prior to the dispute being heard in
arbitration.
IN WITNESS WHEREOF the parties have executed this Agreement
to be effective as of the date first stated above.
U.S. Energy Corp.
_____________________________ _______________________________
By Keith G. Larsen, President By Max T. Evans, Secretary
BPI Canadian Small Companies Fund
_____________________________
By __________________________
Print name of signatory
_____________________________
EXHIBIT 10.53
EXCHANGE RIGHTS AGREEMENT
This Exchange Rights Agreement (the "Agreement") is
entered into as of September 17, 1997 by and between Yellow
Stone Fuels Corporation ("YSFC"), an Ontario, Canada
corporation with offices at 877 North 8th West, Riverton,
Wyoming 82501, U.S. Energy Corp. ("USE"), a Wyoming corporation
with offices at 877 North 8th West, Riverton, Wyoming 82501,
and R A F Financial Corporation ("RAF"), a corporation with
offices at 1700 Lincoln Street, 32nd Floor, Denver, Colorado
80203.
RECITALS
Whereas, USE and its affiliated corporation, Crested Corp.
("Crested"), own shares of Common Stock of YSFC and have the
right to convert indebtedness to additional shares of Common
Stock of YSFC; and
Whereas, USE has taken the initiative in founding and
organizing YSFC and may be deemed to be a founder and promoter
of YSFC; and
Whereas, YSFC has or will enter into an Selling Agent
Agreement ("Agent Agreement") with RAF under which RAF has
agreed to or will agree to use its best efforts, as agent for
YSFC, to place (sell) shares of Common Stock of YSFC for YSFC
in a private offering (the "Private Offering") for up to US$3
million in gross proceeds; provided that, YSFC and RAF prior to
the end of the Private Offering may mutually agree to increase
the size of the Private Offering up to a maximum of US$5
million in gross proceeds. Hereafter, the shares of Common
Stock which will be sold in the Private Offering are referred
to as the "Private Offering Shares" and the information about
YSFC and the Private Offering to be delivered to the purchasers
("Investors") in the Private Offering is referred to as the
"Private Placement Memorandum"; and
Whereas, RAF will receive, as a part of its compensation
for sale of the Private Offering Shares, Warrants to Purchase
Common Shares of YSFC ("Agent's Warrants", and the future
holders of such Agent's Warrants are referred to as the
"Warrantholders"); and
Whereas, the offer and sale of the Private Offering Shares
will not be registered with the Securities and Exchange
Commission ("SEC") pursuant to Section 5 of the Securities Act
of 1933 ("1933 Act") or any state securities laws and,
therefore, the Private Offering Shares will constitute
"restricted securities" under SEC Rule 144 and state securities
laws; and
<PAGE>
Whereas, USE, YSFC and RAF have negotiated the terms and
conditions under which the Investors and their assignees will
have the opportunity to exchange all or a part of their Private
Offering Shares for USE Shares if YSFC is not listed on, and
the Common Stock of YSFC is not available for quotation on, the
Nasdaq National Market System ("NNM") by the eighteen month
anniversary of the date of the Private Placement Memorandum
(the "Listing Period"); and
Whereas, USE, YSFC and RAF have negotiated the terms and
conditions under which the Warrantholders and the holders of
Common Stock of YSFC acquired upon the exercise of the Agent's
Warrants ("Exercise Shares") will have the opportunity to
exchange all or a part of their Agent's Warrants or Exercise
Shares for USE Warrants or for USE Shares, respectively, if
YSFC is not listed on, and the Common Stock of YSFC is not
available for quotation on, NNM during the Listing Period; and
Whereas, the Common Stock of USE is listed on NNM.
AGREEMENT
Now, therefore, the parties agree as follows:
1. Definitions. In addition to the terms defined above,
the following terms shall have the following meanings:
"Exchange Date" shall mean the date when the
Investor's Exchange Shares, the Warrantholder's Agent's
Warrants or the Exercise Shares and a duly completed and
executed notice of election to exchange relating thereto
are received by USE.
"Exchange Offer Documents" shall mean (i) the
prospectus included in the Registration Statement on Form
S-1 or other appropriate SEC form, which prospectus is to
be delivered by USE ("USE Prospectus") as a part of the
Exchange Offer Documents pursuant to paragraph 2 of this
Agreement and which registration statement shall have
registered and/or qualified by the first day of the
Exchange Period the offers to sell (exchange) and the sale
(exchange) of the USE Shares and USE Warrants by USE and
the exercise of the USE Warrants to purchase the USE
Shares underlying the USE Warrants with the SEC and the
states in which the Investors, the Investors' assignees,
the Warrantholders and the holders of the Exercise Shares
reside and (ii) such accompanying documents, including the
form of notice of election to exchange, as are necessary
to effect the exchange pursuant to this Agreement.
<PAGE>
"Exchange Period" shall mean the period of time
beginning on the date when the Exchange Offer Documents
are first mailed pursuant to Paragraph 2 of this Agreement
to the Investors, to the Investors' assignees, to the
Warrantholders and to those persons who have Exercise
Shares, and ending on the six-month anniversary of the
date of such mailing, or the next business day if the six-
month anniversary falls on a bank holiday; provided, that
the Exchange Offer Documents must be mailed to the
Investors, to the Investors' assignees, to the
Warrantholders and to those persons who have Exercise
Shares not later than the first business day after the
expiration of the Listing Period.
"Investor's Exchange Shares" shall mean the Private
Offering Shares owned by an Investor or an Investor's
assignee at the beginning of the Exchange Period;
provided, that USE will only recognize and this Agreement
only shall be enforceable with respect to an Investor's
assignee of an Investor's Exchange Shares if (i) the
Investor's Exchange Shares have been assigned or otherwise
transferred in compliance with the 1933 Act and such
compliance is established to the reasonable satisfaction
of YSFC before such assignment or transfer is approved by
YSFC; and (ii) the assignee or transferee did not acquire
the Investor's Exchange Shares in a United States or
Canadian stock market or stock exchange transaction.
"Investor's Exchange Value" shall mean the total
original cash cost to the Investor of the Private Offering
Shares owned by the Investor or the Investor's assignee,
plus annual interest at the rate of 10% calculated on a
360 day year basis starting the day after the Investor's
Subscription Agreement was accepted and approved by YSFC
for the Investor's purchase of the Private Offering Shares
in the Private Offering and ending on the Exchange Date.
"USE Shares" shall mean shares of Common Stock of
USE, $0.01 par value and any other class of securities
ranking on a parity with such Common Stock.
"USE Share Value" shall mean the average of the
closing bid prices for a share of USE Common Stock on NNM
for the five trading days before the Exchange Date, as
reported by NNM. If USE is not listed on, or the USE
Shares are not available for quotation on, NNM on the
Exchange Date, the USE Share Value shall be based on the
average of the closing bid prices for such five day period
of the USE Shares on a national securities exchange if the
USE Shares are listed on a national securities exchange or
admitted to unlisted trading privileges on such an
exchange, or, if not, based upon the average of the
closing bid prices for such five day period if the USE
Shares are listed for trading on another trading system of
the National Association of Securities Dealers, Inc. If
the USE Shares are not so listed on such exchange or
system or admitted to unlisted trading privileges, the USE
Share Value shall be the average of the closing bid prices
reported by the National Quotation Bureau, Inc. for the
five
<PAGE>
trading days before the Exchange Date. If the USE Shares are
not so listed or admitted to unlisted trading privileges and if
bid prices are not so reported, the current value shall be an
amount, not less than book value, determined in such reasonable
manner as may be prescribed by the board of directors of the
Company.
"USE Warrants" shall mean warrants to purchase shares
of Common Stock of USE, with the same terms, including but
not limited to registration rights, as the Agent's
Warrants surrendered in exchange therefor, except that the
USE Warrants shall be (i) exercisable only for the
unexpired term of the Agent's Warrants and (ii)
exercisable to purchase that number of USE Shares equal to
(a) the product of (x) the number of shares of Common
Stock underlying the Agent's Warrants multiplied by (z)
the price per share of Common Stock of YSFC in the Private
Offering divided by (b) the USE Share Value and except
that the exercise price per share of the USE Warrants
shall be equal to the USE Share Value.
2. YSFC Notice to USE and RAF of No NNM Listing;
Exchange Offer Documents. At least 30 days before the
expiration of the Listing Period, YSFC shall give written
notice to RAF and USE as to whether or not YSFC will be listed
on, and the Common Stock of YSFC available for quotation on,
NNM at the end of the Listing Period. If not, not later than
the first business day after the end of the Listing Period, USE
shall mail the Exchange Offer Documents to Investors, to
Investors' assignees, to the Warrantholders and to those
persons who have Exercise Shares.
3. Exchange Offer Terms.
a. To Investors. During the Exchange Period, each
Investor and each Investor's assignee shall have the right
to exchange all of part of the Investor's Exchange Shares
for the number of fully paid and nonassessable USE Shares
which equals the Investor's Exchange Value divided by the
USE Share Value.
b. To Warrantholders and Holders of Exercise Shares.
During the Exchange Period, each Warrantholder and each
holder of Exercise Shares shall have the right to exchange
(i) all or part of the Agent's Warrants owned by the
Warrantholder for USE Warrants, and/or (ii) all or part of
the Exercise Shares for USE Shares on the same basis as
the Investor's Exchange Shares are exchangeable as
provided in paragraph 3.a above.
c. Receipt During Exchange Period; No Fractions;
Irrevocable Election. No notice of election to exchange
which is given after the expiration of the Exchange Period
will be accepted by USE. No fractional USE Shares or USE
Warrants shall be issued; any fractional USE Share or USE
Warrant which would otherwise result shall be rounded up
to the next whole USE Share or USE Warrant. Each
Investor, each Investor's assignee, each Warrantholder and
each holder of Exercise Shares shall have the right, one
time only, to exchange some or all of the Investor's
Exchange Shares, the Warrantholder's Agent's Warrants or
the Exercise Shares for USE Shares or USE Warrants, as
applicable. On the Exchange Date, the notices of election
to exchange shall be irrevocable and shall not be changed
to increase or decrease the number of Investor's Exchange
Shares, Agent's Warrants or Exercise Shares to be
exchanged.
d. Certificates for USE Shares and USE Warrants.
From time to time during the Exchange Period (i)
certificates for the USE Shares shall be issued by USE to
the persons exercising their right of exchange for USE
Shares, and (ii) USE Warrants shall be issued by USE to
the persons who have exchanged Agent's Warrants for USE
Warrants.
4. Current Registration Statement; Expenses of
Registration and Qualification. USE shall keep the
registration statement current until the day after the last day
of the Exchange Period. USE shall pay for all expenses
incurred in connection with such registration statement and, in
addition, for all expenses incurred in connection with
registering or qualifying the offer and sale of the USE Shares,
USE Warrants and underlying USE Shares under the securities
laws of the states wherein the Investors, Investors' assignees,
Warrantholders and each holder of Exercise Shares reside.
<PAGE>
USE shall not pay any commissions or other compensation to any
person in connection with such offers and sales.
5. Adjustments for Recapitalizations; No Termination.
In the event that between the date of the Private Placement
Memorandum and the day after the last day of the Exchange
Period, YSFC or USE declares any stock dividend or effectuates
any stock split or undergoes a capital reorganization or other
transaction which changes the kind or number of shares of
Common Stock of YSFC or USE, then full and equitable adjustment
in the number of USE Shares and USE Warrants shall be made with
the objective of maintaining after the transaction the relative
values of the Investor's Exchange Value and the USE Share Value
before such stock dividend or other capital reorganization or
other transaction as if such transaction had not occurred,
taking into account changes in USE Share Value which have
resulted otherwise than from such stock dividend or stock
split, etc.
USE and YSFC agree that from the date of this Agreement
until the day after the last day of the Exchange, neither USE
nor YSFC will take or permit any action, including, but not
limited to, a merger, reorganization or sale of assets, which
would terminate or diminish the rights of the Investors,
Investors' assignees, Warrantholders or holders of Exercise
Shares under this Agreement.
6. Injunctive Relief. USE irrevocably grants RAF and
its assignees, in addition to other legal remedies available,
the right to apply for an injunction, without bond exceeding
$500, to enforce USE's covenants herein and USE's sole remedy
in the event of the entry of such injunctive relief shall be
the dissolution of such injunctive relief, if warranted, upon
hearing duly held (all claims for damages by reason of the
wrongful issuance of such injunction being expressly waived
hereby).
7. Complete Agreement; Governing Law and Expenses of
Resolution; Notice. This Agreement represents the complete
agreement among the parties with respect to the subject matter
hereof, except for the Agent Agreement and the Agent's Warrants
the terms of which shall control in the event of any conflict
with this Agreement. This Agreement shall be construed and
interpreted under the laws of the State of Colorado; this
Agreement is entered into in Denver, Colorado. In the event of
litigation to enforce the rights of the parties hereto, the
party which prevails shall be entitled to recover from the
other parties the costs and expenses (including reasonable
attorney's fees) of such litigation. Notice to the parties
hereto shall be given by first class mail to the address of the
party stated in this Agreement; notice to the Investors,
Investor assignees, Warrantholders and holders of Exercise
Shares shall be by first class mail to the addresses of such
persons as reflected in the records of the Company. Unless
otherwise stated in this Agreement, all notices under this
Agreement shall be given when postmarked after having been
deposited in the U.S. Mail, postage prepaid.
<PAGE>
8. Binding Nature. This Agreement shall be binding upon
the parties hereto, and inure to the benefit of the parties,
their respective heirs, administrators, executors, successors
and assigns. Further, RAF shall have the right, in its sole
discretion, to enforce this Agreement on behalf of the
Investors, Investor assignees, Warrantholders and holders of
Exercise Shares or to assign the rights to enforcement hereof
to one or more of the Investors, Investor assignees,
Warrantholders and holders of Exercise Shares.
This Agreement is effective as of the date first stated
above.
YELLOW STONE FUELS CORP. U.S. ENERGY CORP.
By: /s/ Mark J. Larsen By: /s/ John L. Larsen
------------------------- --------------------------
Mark J. Larsen, President John L. Larsen, Chairman
RAF FINANCIAL CORPORATION
/s/ Robert L. Long
------------------------------
Robert L. Long,
Senior Vice President, Corporate Finance
EXHIBIT 23.1
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference of our Report dated August 15, 1997,
in this Form S-1 Registration Statement (No. 333-6189).
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
April 22, 1998
EXHIBIT 23.2
Consent of Independent Accountants
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We consent to the reference to our firm under the caption
"Experts" in the registration statement on Form S-1 (SEC File No.
333-6189) of U.S. Energy Corp.
/s/ Coopers & Lybrand L.L.P.
Salt Lake City, Utah
April 17, 1998
