SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] for the fiscal year ended May 31, 1998 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from to
Commission file number 0-6814
U.S. ENERGY CORP.
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(Exact Name of Registrant as Specified in its Charter)
Wyoming 83-0205516
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West
Riverton, WY 82501
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (307) 856-9271
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO _____
The aggregate market value of the shares of voting stock held by
non-affiliates of the Registrant as of August 17, 1998, computed by reference to
the average of the bid and asked prices of the Registrant's common stock as
reported by the National Market System of NASDAQ on that date, was approximately
$14,128,200.
Class Outstanding at August 17, 1998
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Common Stock, $0.01 par value 7,696,068 shares
Documents incorporated by reference: Portions of the documents listed below have
been incorporated by reference into the indicated parts of this report as
specified in the responses to the referenced sections of this filing.
Annual Meeting Proxy Statement for the fiscal year ended May 31, 1998 into
Part III of the filing.
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K 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 Report, including without limitation the statements under
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the disclosures about the Green Mountain Mining Venture development
schedule for the Wyoming properties, the projected operating status of Plateau
Resources Limited's Shootaring Canyon uranium mill in Utah, future market prices
for uranium oxide, possible utility contracts for uranium oxide, and the plan of
operations for Yellow Stone Fuels Corp. and Sutter Gold Mining Company
(subsidiaries of U.S. Energy Corp.), are forward-looking statements. In
addition, when words like "expect," "anticipate" or "believe" are used, U.S.
Energy Corp. is making forward-looking statements.
Although U. S. Energy Corp. believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from such expectations are disclosed
in this Annual Report. The forward-looking statements should be carefully
considered in the context of all the information set forth in this Annual
Report.
PART I
ITEM 1 AND ITEM 2. BUSINESS AND PROPERTIES
(A) GENERAL.
U.S. Energy Corp. ("USE" or the "Registrant") is in the business of
acquiring, exploring, developing and/or selling or leasing mineral properties,
and the 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.
The most significant uranium properties are located on Green Mountain and Sheep
Mountain in Wyoming, and in southeast Utah. USE's gold operations are conducted
through Sutter Gold Mining Company, a 59% owned subsidiary. Interests are held
in other mineral properties (principally molybdenum), but are either
non-operating interests or undeveloped claims. USE 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. USE has a May 31 fiscal year.
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.
Most of USE operations are conducted through a joint venture with Crested
Corp. ("Crested"), a majority-owned subsidiary, and various jointly owned
subsidiaries of USE and Crested. The joint venture with Crested is referred to
in this Report as "USECC". Construction operations are carried on primarily
through USE's subsidiary Four Nines Gold, Inc. ("FNG"). Oil and gas operations
are carried out through Energx, Ltd., a subsidiary of USE and Crested. USE and
Crested originally were independent companies, with two common affiliates (John
L. Larsen and Max T. Evans). In 1980, USE and Crested formed a joint venture to
do business together (unless one or the other elected not to pursue an
individual project). As a result of USE funding certain of Crested's obligations
from time to time (due to Crested's lack of cash on hand), and later payment of
the debts by Crested issuing common stock to USE, Crested became a majority
owned subsidiary of USE in fiscal 1993. See Part III of this Report.
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In fiscal 1998, USE and USECC signed an agreement with Kennecott Uranium
Company ("Kennecott"), for the purchase of Kennecott's interest in the Green
Mountain Mining Venture ("GMMV") (the "Acquisition Agreement"). Please see
"Minerals-Uranium-The Green Mountain Mining Project-June 23, 1997 Acquisition
Agreement with Kennecott Uranium Company" below.
In fiscal 1998, USE and Crested continued the development of the GMMV
uranium mines and the upgrade of the GMMV's Sweetwater uranium mill and the
Shootaring Canyon uranium mill in southeast Utah (owned by Plateau Resources
Ltd., a wholly-owned USE subsidiary) In addition, USE intends to implement plans
for it and Crested to consolidate their uranium assets into a single subsidiary
and finance the startup of its mines and mill operations, subject to obtaining
the necessary debt or equity funding. There is no assurance such financing can
be obtained.
For fiscal 1999, USE intends to seek the financing necessary to continue
development work at the Jackpot Mine. In late July 1998, USE, Crested and
Kennecott made a business decision to temporarily cease development work at the
jackpot Mine because of the expected negative impact on uranium prices due to
the amount of uranium inventory which USEC Inc. announced was held in its
inventory and could be sold into the uranium market. However, other factors are
affecting the uranium market (reductions in current and planned production),
such that the resumption of development work and putting the Utah uranium
properties into production in the near-term may be warranted. See "Uranium
Market Information." USE is in discussions with various sources of capital for
this purpose, however, no funding agreements have been reached as of the date of
this Report and there is no assurance any such funding would be received. Such
funding would also finance USE's and Crested's purchase of Kennecott's interest
in the GMMV. See "June 23, 1997 Acquisition Agreement with Kennecott Uranium
Company" below.
USE also will be refining the mine and mill plan for the Lincoln Project
in California (held by Sutter Gold Mining Company), with the objective of
continuing mine development, building a gold mill and producing gold in late
fiscal 1999 or early fiscal 2000. Capital and operating costs for the Lincoln
Project may be funded internally by Sutter Gold Mining Company, as supplemented
by additional funding from USE and/or third parties. However, there are no
outside funding agreements as of the date of this Report and there is no
assurance needed funding will be received. See "Gold" below.
Until February 1996, USE conducted manufacturing and/or marketing of
professional and recreational outdoor products through The Brunton Company
("Brunton"), a wholly-owned subsidiary. As of February 1, 1996, USE sold Brunton
to Silva Production AB. The sale eliminated Brunton's manufacturing and/or
marketing of professional and recreational outdoor products from the commercial
segment of USE's business as of January 31, 1996, except to the extent that
there are net profits 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
USE). See "Commercial Operations" below.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Registrant operates in three business segments: (i) minerals, (ii)
commercial operations, and (iii) construction operations. The Registrant engages
in other miscellaneous activities such as oil and gas exploration, development
and production. The principal products of the operating units within each of the
reportable industry segments are:
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INDUSTRY SEGMENTS PRINCIPAL PRODUCTS
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Minerals Sales and leases of mineral-bearing properties
and, from time to time, the production and/or
marketing of uranium, gold and molybdenum.
Commercial Operations Operation of a motel and rental of
real estate, operation of an aircraft fixed
base operation (aircraft fuel sales, flight
instruction and aircraft maintenance), and
provision of various contract services,
including managerial services for subsidiary
companies.
Construction Operations Construction of irrigation, flood
control, municipal sewer, roads, ponds, site
work, culverts, erosion and similar projects.
Percentage of Net Revenue contributions by the three segments in the last three
fiscal years were:
Percentage of Net Revenues During the Year Ended
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May 31, May 31, May 31,
1998 1997 1996
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Minerals 9% 4% 32%
Commercial Operations 23% 56% 15%
Construction Operations 0% 18% 39%
USE received $858,000 in revenues from the sale of uranium in fiscal 1998.
During fiscal 1996, mineral revenues were generated from sales of uranium under
certain of the utility supply contracts held by Sheep Mountain Partners ("SMP"),
a Colorado general partnership. During fiscal 1997, there were no revenues from
mineral sales (except for molybdenum royalty interest) in part due to the
arbitration proceedings involving SMP (see Item 3, "Legal Proceedings - Sheep
Mountain Partners Arbitration/Litigation"). Additional mineral revenue was
generated by USE's molybdenum interest. In Construction Operations, all of FNG's
revenues were derived from renting FNG construction equipment for the
development work at the Jackpot Mine for fiscal 1998.
(C) NARRATIVE DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT (INCLUDING ITEM 2 -
PROPERTIES DISCLOSURE).
MINERALS
URANIUM
GENERAL
USE has interests in several uranium-bearing properties in Wyoming and
Utah and in uranium processing mills in Sweetwater County, Wyoming (the
"Sweetwater Mill") and in southeastern Garfield County, Utah (the "Shootaring
Mill"). All the uranium-bearing properties are in areas which produced
significant amounts of uranium in the 1970s and 1980s. USE plans to develop and
operate these properties (directly or through a subsidiary company or a joint
venture) to produce uranium concentrates ("U3O8") for sale to public utilities
that operate nuclear powered electricity generating plants. In addition, other
uranium- bearing properties in New Mexico and Wyoming are held by Yellow Stone
Fuels Corp. (a minority joint subsidiary of USE and Crested).
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The property interests of USE in Wyoming are:
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Green Mountain
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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" or
"Kennecott"), a subsidiary of Kennecott Energy and Coal Company of Gillette, WY.
Kennecott Energy and Coal Company and Kennecott Corporation of Salt Lake City,
UT are subsidiaries of Rio Tinto plc, formerly RTZ PLC of London. Rio Tinto plc
is one of the world's leading natural resource companies and owns 69% of Rossing
Uranium Corp.'s operations in Namibia in southwest Africa. Rossing currently
produces about 6,000,000 lbs. of U3O8 out of its 10,000,000 lb. annual capacity.
Rio Tinto has delayed indefinitely the construction of its 4,000,000 lb. U3O8
per year Kintyre uranium project in Western Australia. Kennecott Corporation
owns and operates several mines including the Bingham Canyon, Utah open pit
copper mine which opened in 1906.
All of the GMMV mining claims are accessible by county, private and/or
United States Bureau of Land Management ("BLM") access roads. Exploration and
delineation of the principal uranium resources in the proposed Jackpot Mine have
been substantially 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.
Sheep Mountain
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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 GMMV mining claims. From
1988 to June 1, 1998, these assets were held by SMP. On June 1, 1998, USECC
received back from SMP all of the Sheep Mountain mineral properties and
equipment, in partial settlement of disputes with Nukem and CRIC. The
disposition of SMP cash and the CIS uranium supply contracts, remain in dispute.
See Item 3, "Legal Proceedings." The 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.
Yellow Stone Fuels Corp.
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Approximately 10,825 acres of properties are held by 437 unpatented lode
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 collectively or individually referred to as "YSFC"). 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 12.7% of
YSFC.
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The property interests of USE in Utah through Plateau Resources Ltd. are:
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The Tony M Mine and the Frank M properties, underground uranium deposits
in San Juan County, Utah located partially on Utah State mining leases. These
properties are accessible by county roads.
Plateau is the lessee of the Tony M Mine and portions of the Frank M
properties and has posted a bond securing Plateau's obligations to reclaim these
properties. The Tony M mine was originally developed by Plateau at the time
Plateau was owned by Consumers Power Company ("CPC"), a Michigan public utility.
Significant areas of uranium mineralization have been accessed and delineated by
the prior owner's underground workings. When the Tony M Mine was in production
(while Plateau was owned by CPC), it produced ore containing from three to eight
pounds of uranium concentrates per ton. Some of this ore was processed at the
Shootaring Mill. In addition, low grade uranium ore was stockpiled at the Tony M
Mine and at the Shootaring Mill.
Plateau also acquired the Velvet Mine and the nearby Woods Complex in the
Lisbon Valley area in southeastern Utah. The Velvet Mine was fully developed and
permitted by its prior owner and is located approximately 178 miles by road from
the Shootaring Mill. The Woods 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, but USE does not expect difficulty in obtaining
a new permit because the surface facilities would occupy the site that has been
disturbed from previous operations.
Plateau Resources Ltd. is a wholly-owned subsidiary of USE, however,
Crested will have an interest in Plateau. See "Plateau Shootaring Canyon Mill"
below.
THE GREEN MOUNTAIN MINING VENTURE ("GMMV") PROJECT
GMMV. In fiscal 1998, USE and USECC signed the Acquisition Agreement to
acquire Kennecott Uranium Company's interest in the GMMV. The following is a
description of the formation of GMMV and certain of its terms, which 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 (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 pursuant to Management Committee
budgets. At the same time, 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.
After the first $50,000,000 of GMMV expenditures advanced by Kennecott is
spent (which has been completed as of the date of this 10-K Report (see
"Properties and Mine Plan" below)), the GMMV expenses are to 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 GMMV joint venture agreement, each party's participation
interest in the GMMV is subject to reduction for voluntary or involuntary
failure to pay its share of expenses as required in approved budgets (including
Kennecott's commitment to fund the initial $50,000,000 of the GMMV
expenditures), so
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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.
Assuming Kennecott's interest is not acquired by the USE Parties (see
below), 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. This sharing ratio
will change if Kennecott's interest is acquired by USE and Crested. See "June
23, 1997 Acquisition Agreement with Kennecott Uranium Company." 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), which were 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 and the uranium
deposits on these properties may be accessed through the proposed tunnels at the
Jackpot Mine. Development work at the Jackpot Mine was temporarily halted in
late July 1998, see "USEC Inc." below.
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, 1998. USECC has continued work
on a contract basis at Kennecott's request through May 31, 1998.
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. USE has completed the construction of
additional mining support facilities at the Jackpot Mine in fiscal 1998,
including; the installation of natural gas lines and phone services;
construction of a new shop building containing offices, a dry-change room,
emergency generators, air compressors and mechanical repair base; upgrading the
ore haul road; and installation of a conveyor and stacker and other incidental
mine activities, while maintaining all permits and licenses at the Jackpot Mine
and Sweetwater Mill. For underground mine development work, as of the date of
this 10-K Report, the GMMV has driven twin decline tunnels 18 feet wide and 12
feet high on a -17 percent grade approximately 2,000 feet each into Green
Mountain with 1,000 feet of cross cuts between the declines. All of these
development costs in fiscal 1998 and to date in fiscal 1999 have been funded
through the $16,000,000 loan in connection with Kennecott's $50,000,000 work
commitment (for its 50 percent interest).
JUNE 23, 1997 ACQUISITION AGREEMENT WITH KENNECOTT URANIUM COMPANY
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 as
a signing payment, and committed to provide the GMMV up to $16,000,000 for
payment of reimbursable costs incurred by USECC in developing the proposed
underground Jackpot Uranium Mine for production and in changing the status of
the Sweetwater Mill from standby to operational. The work to develop the
proposed Jackpot Mine and ready the Sweetwater Mill for operations was performed
by
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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 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 in April 1999 until paid in full. As of the date of this Report
approximately $14,000,000 of the $16,000,000 loan has been spent. If the
Acquisition Agreement closes, the Note converts to become a debt of the GMMV or
its successors, and would be 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 by GMMV or its successors (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"). At closing of the Acquisition
Agreement, USE, USECC and their assignee (if such is assigned) will assume the
Note, and the assets of the GMMV will be subject to the Mortgage.
Pursuant to the Mineral Lease and the Mill Contract included in 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 was funded from the
$16,000,000 loan provided to the GMMV by Kennecott. Under the Fourth Amendment
to the GMMV Agreement, Kennecott is 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. These credits satisfied 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, USECC submits
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 general and administrative 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 also charges the
GMMV rental expense for equipment owned or leased 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 made by the GMMV against
budgets under the Mineral Lease and Mill Contract. Also included in reimbursable
costs will be the amounts required to cover all reclamation activities that will
result from operations conducted on the mining properties pursuant to the Mill
Contract and the Mineral Lease (USE and USECC will be required to put such
reclamation cost amounts aside in a sinking fund to pay for the reclamation work
when production commences).
Kennecott provided 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
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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 up until the closing date.
Also pursuant to the Mineral Lease, USECC pays the GMMV a monthly lease
fee of $3,363. 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 (this
condition has not yet been met and may not be met by the deadline); (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 closing date for the
Acquisition Agreement may be postponed not later than October 30, 1998 (see
"USEC Inc. " below). 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. If the Acquisition Agreement is closed,
USE and Crested would each own 50% of the GMMV, and Crested will thereby own the
right to 25% of the revenues from the Round Park (Jackpot Mine) deposit, because
Crested will have acquired one-half of Kennecott's 50% interest in the GMMV
(which includes the Round Park deposit).
USE estimates that at least $40,000,000 will be needed to close the
Acquisition Agreement transactions ($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). USE presently is negotiating
with investment banking firms to raise up to $100 million in debt or a
combination of debt and equity financing to close the Acquisition Agreement and
put the uranium assets into production. Such negotiations have not been
finalized as of the date of this Report. There is no assurance this financing
can be obtained by October 30, 1998 in light of current prices in the uranium
oxide market.
If the Acquisition Agreement is not closed, USE, USECC and Kennecott,
shall retain 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 loan will have benefitted all parties to
the GMMV. Further, if the Acquisition Agreement is not closed, the GMMV parties
will remain in the GMMV, and the development, mining and milling costs will be
paid for by such parties. If one of the parties does not pay its share, its
percentage in the GMMV is reduced if the other party pays instead. In the event
the Acquisition Agreement is not closed, Kennecott may not wish to participate
further in the project. If USE has the funding to pay for all costs to continue
the development of the Jackpot Mine and the upgrade work at the Sweetwater Mill
(but no the funds to purchase Kennecott's interest directly), and USE makes the
decision to continue the project, then Kennecott's interest would be
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reduced. Thus, it is possible that USE could indirectly purchase Kennecott's
interest through funding the project through the GMMV.
USEC INC. In 1992, Congress enacted the "Energy Policy Act of 1992"
creating the U.S. Enrichment Corporation ("USEC") to operate the U.S. Department
of Energy's ("DOE") uranium enrichment program. Congress later enacted the "USEC
Privatization Act of 1996" to privatize USEC and allowed the DOE to transfer
various forms of uranium to USEC. The DOE has transferred approximately 75
million pounds of uranium and uranium equivalents to USEC. On July 22, 1998,
USEC Inc. became a publicly traded company. Because of the anticipated negative
impact of USEC Inc.'s sales of new uranium inventory in the market (see
"Marketing - U.S. Enrichment Corporation," below) on uranium oxide prices, on
July 31, 1998, Kennecott and USE and Crested made a business decision to
temporarily place the Jackpot Mine on standby, which resulted in the lay off of
approximately 45 employees. Resumption of development work with funding from
GMMV provided by Kennecott will depend on resolution of the USEC Inc. uranium
inventory sales issue (see "U.S. Enrichment Corporation" below and Item 13,
"Legal Proceedings") and improved uranium prices. However, it is possible that
third party financing will be obtained, in which event the development work
would resume and the Acquisition Agreement would be closed. The anticipated
negative impact of the USEC Inc. inventory on the uranium market may be
mitigated by other factors. USE believes the GMMV's decision to place the
development of the Jackpot Mine on standby, should be viewed as an interim
event, because anticipated improved uranium prices based on supply and demand
projections, or even continued level prices, could lead to a decision to resume
development work on the Jackpot Mine. See "Uranium Market Information" below.
As a result of the current uncertainty surrounding the uranium market, and
the July 31, 1998 suspension of development work on the Jackpot Mine, USE and
Crested anticipate that certain provisions of the Acquisition Agreement will be
modified after discussions with Kennecott. Such changes may include an extension
of the deadline for purchase of Kennecott's interest in the GMMV; the $200
million market capitalization requirement; provisions for funding GMMV's standby
maintenance costs; and other items. However, as of the date of this Report, no
such modifications had been finalized with Kennecott.
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 satisfactory to support mine development.
The GMMV also owns the Big Eagle Properties on Green Mountain, which
contain substantial uranium mineralization, and are adjacent to the other GMMV
mining claims. The Big Eagle Properties contain two open-pit mines, as well as
related roads, utilities, buildings, structures, equipment and a stockpile of
500,000 tons of uranium material with a grade of approximately .05% U3O8. The
assets include two buildings (38,000 square feet and 8,000 square feet) 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; the grade averages 4.6
pounds of U3O8 per ton of mineralized material. The GMMV plans to mine this
mineralize material from two decline tunnels (-17 percent slope) in the Jackpot
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Mine, which are being driven underground from the south side of Green Mountain.
The first of several mineralized horizons is about 2,300 feet vertically down
from the top of Green Mountain.
The declines will ultimately extend up to 12,300 feet in length to access
the different zones of the deposit; 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. The Big Eagle Mine facilities located about three miles west of the
Jackpot Mine site will be utilized. As many as 250 workers will be required
during mining full operations. To the date of this Report, USE has run
approximately 2,000 feet of tunnel in each decline.
The USE Parties expect the Jackpot Mine development costs will not exceed
an additional $10,000,000 to reach the "B" zone to continue the development in
the ore at the Round Park deposit. However, cost estimates may change as the
development progresses. Pursuant to the GMMV agreement, Kennecott agreed to fund
the initial $50,000,000 in development costs including reclamation costs. To
April 30, 1997, such expenditures totaled approximately $20,355,142. In fiscal
1998, approximately $10,160,896 of additional GMMV costs had been funded by the
$16,000,000 loan. With the 2 for 1 credit provision in the Acquisition Agreement
which also applied to the $4,000,000 signing bonus, Kennecott had completed its
$50,000,000 commitment. Since June 1997, Kennecott has advanced approximately
$14,000,000 of the $16,000,000 to the GMMV, leaving a balance of $2,000,000.
Whether this $2,000,000 will be made available by Kennecott for the GMMV to keep
the Jackpot Mine on standby status has not been determined as of the date of
this Report.
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 a subsidiary of
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 and operator 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 the GMMV and funded by Kennecott as part of its
$50,000,000 funding commitment.
The Sweetwater Mill includes buildings, milling and related equipment,
real estate improvements, mining and mill site claims and other real property
interests, personal property and intangible property (including government
permits relating to operation of those properties). The major assets are the
mill buildings and equipment located on approximately 92 acres.
The mill was designed as a 3,000 ton per day ("tpd") facility. UNOCAL's
subsidiary, Minerals Exploration Company, reportedly processed in excess of
4,200 tpd for sustained periods. The mill is one of the newest uranium milling
facilities in the United States, and has been maintained in good condition.
UNOCAL has reported that the mill buildings and equipment have historical costs
of $10,500,000 and $26,900,000, respectively.
As consideration for the Sweetwater Mill, GMMV agreed to indemnify UNOCAL
against certain reclamation and environmental liabilities, which indemnification
obligations are guaranteed by Kennecott Corporation (parent of Kennecott Uranium
Company). GMMV has agreed to be responsible for compliance with mill
decommissioning and land reclamation laws, for which the environmental and
reclamation bonding requirements are approximately $24,330,000, which includes a
$4,560,000 bond required by the NRC. None
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of the GMMV future reclamation and closure costs are reflected in the
Consolidated Financial Statements (see "Notes F and K to USE Consolidated
Financial Statements for fiscal year ended May 31, 1998").
The reclamation and environmental liabilities assumed by the 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 of
reclamation bonds posted by Kennecott for GMMV. These costs are not expected to
increase materially if the mill is not put into operation. Second, UNOCAL has
agreed that if the GMMV incurs expenditures for environmental liabilities prior
to the earlier of commercial production by GMMV or February 1, 2001, (which
liabilities are not due solely to the operations of GMMV), then UNOCAL will loan
the GMMV the first $8,000,000 (escalated according to the Consumer Price Index
to current dollars, from 1993) of such expenditures. Any reimbursement for the
loan may only be recovered by UNOCAL from 20% of future cash flows from sale of
uranium concentrates processed through the Sweetwater Mill. Third, payment of
reclamation and environmental liabilities related to the Mill is guaranteed by
Kennecott. Last, the GMMV will set aside a portion of operating revenues to fund
reclamation and environmental liabilities when mining and milling operations are
finally shut down.
Kennecott will be entitled to contribution from the USE Parties in
proportion to their participating interests in the GMMV, if Kennecott is
required to pay mill cleanup costs directly pursuant to its guarantee. Such
contributions would be required only if the liabilities cannot be satisfied by
Kennecott within the balance of any development commitment as provided by the
Acquisition Agreement, after the credits provided by the Fourth Amendment to the
GMMV (see the "June 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 February 1, 2001
and before mill production resumes, then up to $8,000,000 (escalated) 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. The WDEQ issued a 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.
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
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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.
Kennecott has initiated discussions and made filings with the NRC
regarding amendments to the Source Material License to resume ore processing at
the Sweetwater Mill. The NRC has advised that the Operating Permit should be
issued in September 1998.
USE believes all of the uranium operations in which it owns an interest
are in compliance with these rules. There ultimately will be an effect on the
earnings of USE and Crested from environmental compliance expenditures by the
GMMV, since the GMMV operations will be accounted for by the equity method if
the acquisition of Kennecott's interest in the GMMV pursuant to the Acquisition
Agreement 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.
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") for a nominal cash
consideration. The Shootaring Mill holds a source materials license from the
NRC. USE agreed:
(a) 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.
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
decommissioning costs of Shootaring Mill as directed by the NRC. The amount
transferred to the trust is the minimum amount now required by the NRC as
financial assurance reclamation of the Shootaring Mill.
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, 1998).
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.
Subsequent to closing, 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.
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SHOOTARING MILL AND FACILITIES. The Shootaring Mill is located in
south-eastern Utah and occupies 19 acres of a 265 acre plant site. The mill was
designed to process 750 tpd, but only operated on a trial basis for two months
in mid-summer 1982. In 1984, Plateau put the mill on standby because of the
depressed U3O8 market.
Plateau also owns approximately 90,000 tons of uranium mineralized
material stockpiled at the mill site and approximately 172,000 tons of
mineralized material stockpiled at the Tony M Mine. Included with mill assets
are tailings cells, laboratory facilities, equipment shop and inventory. The NRC
issued a license to Plateau authorizing production of uranium concentrates,
however, since the mill was shut down, only maintenance and required safety and
environmental inspection activities were performed and the source materials
license with the NRC was for standby operations only. 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 1998, in anticipation of resuming milling operations, Plateau
has significantly performed a reactivation and rehabilitation program at the
Mill. Plateau is awaiting approval of the water control permit for the tailings
facility from the State of Utah Water Control Division.
TICABOO TOWNSITE
Plateau owns all of the outstanding stock of Canyon Homesteads, Inc.
("Canyon"), a Utah corporation, which developed the Ticaboo, Utah townsite 3.5
miles south of the Shootaring Mill. The Ticaboo site includes a motel,
restaurant, lounge, convenience store and single family, mobile home and
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 on a sliding scale basis. USE and Crested may develop the
townsite to sell home and mobile home sites as the nearby Shootaring Canyon
uranium mill commences operations.
YELLOW STONE FUELS CORP.
Yellow Stone Fuels Corp., 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. are
herein collectively referred to as YSFC.
In order to concentrate the efforts of USECC on conventional uranium
mining using the Shootaring and Sweetwater Mills, USECC decided to take a
minority position in Yellow Stone Fuels, Inc. and not be directly involved in
properties believed suitable for the production of uranium through the in-situ
leach ("ISL") mining process. USECC will have the right of first refusal with
respect to any uranium ore bodies YSFC discovers which are amenable to
conventional mining and milling and YSFC will have the right of first refusal
with respect to ore bodies discovered by USECC amenable to the ISL process. In
the ISL process, groundwater fortified with oxidizing agents is pumped in 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.
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In Wyoming, YSFC has staked and/or holds 356 unpatented mining claims and
has entered into four State leases covering a total of 9,040 acres located in
the Powder River Basin and Red Desert uranium districts. Three State leases have
a 10 year term expiring October 1, 2006; one State lease has a 10 year term
expiring October 1, 2008; each 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; plus 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, YSFC owns or leases a total of 113 unpatented mining
claims in the Powder River Uranium District. One group of 63 claims is located
approximately 20 miles northwest of the producing Rio Algom's Smith Ranch Mine.
These 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 (approximately 945 acres) in the Grants
uranium region of New Mexico. The 8 unpatented mining claims (covering 165
acres) are held by a 5 year renewable lease ($500 monthly rental, and a 5% gross
royalty on revenues from uranium sold from the property). Other claims in the
immediate area were 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.
In fiscal 1997, USE, USECC and the GMMV have 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
access 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 and
use of various office equipment for $3,000 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 at the Sweetwater Mill.
YSFC has 11,764,000 shares of Common Stock issued and outstanding,
including 3,000,000 shares 25.4%) issued to USE and Crested. Most of the funds
used by YSFC have been provided by USECC under a $400,000 loan facility. As part
consideration for the loan, USE and Crested entered into a Voting Trust
Agreement having an initial term of 24 months with two principal shareholders of
YSFC, whereby USE and Crested will have voting control of more than 50% of the
outstanding shares of YSFC. See Part III of this Report.
In fiscal 1998, YSFC sold 1,219,000 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 number of USE shares which a YSFC investor would
be entitled to receive by exchanging YSFC shares, would equal the amount
invested in the original
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purchase of the YSFC shares (plus 10% annual interest), divided by the average
market price of USE shares for the five trading days 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 Warrants are exercisable to purchase 121,900 shares of YSFC Common
Stock, at $2.00 per share. These Warrants would be exchanged for new Warrants to
purchase shares of USE Common Stock, equal to $243,800 divided by the same
market prices for USE shares. The exercise price for the new Warrants would
equal the same USE share market prices used to issue the exchange shares of USE
to the YSFC shareholders. The original Warrants expire (and any new Warrants
will expire) in 2002. The new Warrants will be exercisable for unrestricted
(registered) shares. 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 exchanged 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, assuming USE share prices
move back to the $8-$9 range of early fiscal 1998. However, if share prices
remain at current low levels ($1.38 at September 11, 1998), such new shares
issued could constitute more than 5% of the outstanding shares on a proforma
basis.
To date, YSFC is not listed on the Nasdaq National Market System ("NMS"),
but YSFC is pursuing a possible listing on a Canadian stock exchange in fiscal
1999.
SHEEP MOUNTAIN PARTNERS ("SMP")
PARTNERSHIP. 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. SMP mined and sold uranium ore from one 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. In December 1988, USE and Crested sold 50 percent of their
interests in the Crooks Gap properties to Nukem's subsidiary CRIC for cash. The
parties thereafter contributed the properties to and formed Sheep Mountain
Partners ("SMP"), in which USECC received an undivided 50 percent interest. 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"). Each group provided one-half of
$315,000 to purchase equipment from Western Nuclear, Inc.; USE and Crested also
contributed their interests in three uranium supply contracts to SMP and agreed
to be responsible for property reclamation obligations. The SMP Partnership
agreement provided that each partner generally had a 50 percent interest in SMP
net profits, and an obligation to contribute 50 percent of funds needed for
partnership programs or discharge of liabilities. Capital needs were to have
been met by loans, credit lines and contributions. Nukem is a uranium brokerage
and trading concern.
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. 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. Some of the claims have been
resolved and the rest are to be determined by the 10th Circuit Court of Appeals
("CCA"), which is expected to occur in fiscal 1999 (see "Legal Proceedings -
Sheep Mountain Partners Arbitration/Litigation").
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PROPERTIES. Until June 1, 1998, SMP owned 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. In connection with a partial
settlement of litigation/arbitration between USE/Crested and Nukem/CRIC, SMP
conveyed these mineral properties and equipment to USECC. See "Item 3."
Production from the properties is subject to sliding-scale royalties payable to
Western Nuclear, with rates ranging from one to four percent on recovered
uranium concentrates.
Various structures and equipment are located on the properties including
three operating and three non-operating mine headframes with hoists, maintenance
shops, offices, and other buildings, equipment and supplies. An ion-exchange
plant is located on the properties.
Of the claims, which contain a previously-mined open-pit uranium mine and
three underground mines, Pathfinder Mines Corporation ("PMC") has the right to
mine a portion (the Congo area), by open-pit or in-situ techniques to certain
depths, without royalty or other obligations to USECC. 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 USECC. Conversely, USECC 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.
The ion exchange plant on the properties 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.
PROPERTY MAINTENANCE. As operating manager for SMP, USECC was responsible
for exploration, mining, and care and maintenance of the 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. As part of the Order and Award made on
April 18, 1996, the Arbitration Panel awarded USECC $2,065,989 for Nukem/CRIC's
50% share of care and maintenance expenses for the SMP properties plus interest
of $446,834 to March 31, 1996 and per diem cost of $616 thereafter. See Item 3,
"Legal Proceedings - Sheep Mountain Partners Arbitration/Litigation - Stipulated
Arbitration." Currently, USECC has a maintenance staff on site to care for and
maintain the mines and pump mine water to prevent flooding of the mines, which
could destroy equipment and the concrete lined vertical shafts accessing the
various levels of uranium mineralization.
SMP MARKETING. Nukem, Inc. was engaged by SMP to provide SMP with
financial expertise and marketing services. SMP entered into a marketing
agreement with CRIC, which was concurrently assigned to and assumed by Nukem.
Nukem was to provide marketing and trading services for SMP, which included
acquiring uranium for SMP by purchasing or borrowing. Nukem was to be reimbursed
at its direct costs for acquiring such uranium for SMP. USECC, SMP and Nukem had
seven long-term contracts plus an additional long-term contract with a domestic
utility that was awarded to SMP by the Arbitration Panel (three of these
contracts remained in SMP until the partial settlement on June 1, 1998). The
contracts all were for sales of uranium originally to eight domestic utilities.
SMP's uranium supply contracts were 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 a delivery of 130,000 pounds of
uranium concentrates on May 15, 1997
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which was made, completing that contract. The fourth contract of SMP (which has
been transferred to USECC) is a market-related contract, and calls for delivery
of unspecified quantities of U3O8 totaling approximately 1,000,000 lbs. U3O8
(depending on the number of reactors this utility is operating and their
consumption levels). This contract may be completed in calendar 2000.
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.
Through fiscal 1997 and for prior years, 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. In fiscal 1998
$858,000 in revenues was received representing USE's portion of revenues for a
delivery made (apparently in late fiscal 1997) by Nukem. See "Legal Proceedings
- - Sheep Mountain Partners Arbitration/Litigation."
PERMITS. Permits to operate existing mines on the Crooks Gap 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, a NPDES
water discharge permit under the Clean Water Act has been obtained. Monitoring
and treatment of water removed from the mines and discharged in nearby Crooks
Creek is generally required. During the past two years, SMP did not discharge
wastewater into Crooks Creek, and the mine water is presently being discharged
into the McIntosh Pit.
URANIUM MARKET INFORMATION.
There are currently nine producers of uranium in the United States, which
collectively produced 5,800,000 pounds of U3O8 during calendar 1997 and produced
approximately 6,300,000 pounds in calendar 1996. Production in the U.S. for 1998
is estimated at 5,000,000 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 Rio Tinto's Rossing unit), and Europe, which collectively produced about
78,000,000 pounds of U3O8 during calendar year 1997 and are expected to produce
approximately the same amount in calendar 1998. Several members of the
Commonwealth of Independent States ("CIS") also export uranium into the western
markets although the amount of such exports to the United States and European
markets are currently limited.
Uranium is primarily used in nuclear reactors to heat water which drive
turbines to generate electricity. According to the Uranium Institute based in
London, England, nuclear plants generated approximately 17% of the world's
electricity in 1996, up from less than 2% in 1970. According to the Uranium
Institute, 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 1997, 437 nuclear power plants were operating and 28 were under
construction worldwide, according to the Uranium Institute. Uranium consumption
by world commercial reactors has increased from about 60,000,000 pounds in 1981
to approximately 165,000,000 pounds in 1997.
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<PAGE>
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 U3O8. 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 U3O8 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, uranium demand
in the Western World has exceeded Western World production by over 400,000,000
pounds. In 1995, uranium demand in the Western World was 129,000,000 pounds,
nearly double the production of 66,000,000 pounds by Western World producers. In
1997, total world demand rose to an estimated 165,000,000 pounds, while world
mine supply increased only to an estimated 93,000,000 pounds (including the
78,000,000 pounds produced in North America, Australia, Africa and Europe, see
above). Accordingly, by the end of 1997, excess inventory levels in the Western
World (inventory in excess of preferred levels) had been reduced to less than
1.5 years of forward reactor requirements, and the excess inventories in the
U.S. had been reduced to less than one year of projected forward requirements.
This trend is expected to continue in calendar 1998.
Countering the drawdown of Western World inventories and contributing
directly to the downturn of market prices was the importation of uranium from
the CIS republics, and to a lesser extent, from Eastern Europe and mainland
China starting in 1989. As the result of an anti-dumping suit filed in the U.S.
("CIS Anti-dumping Suit") in 1991 against republics of the CIS, suspension
agreements were signed by six CIS republics (Russia, Ukraine, Kazakhstan,
Uzbekistan, Kyrgyzstan and Tajikistan) in October 1992. These Suspension
Agreements applied price related volume quotas to CIS uranium permitted to be
imported into the U.S., so that to rectify prior damage to domestic United
States uranium producers from dumping sales of U3O8, all spot sales of U3O8
delivered into the U.S. now reflect quota restrictions on U3O8 imports from the
CIS. Exceptions are allowed by 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").
The Suspension Agreement with Russia was amended in March 1994 allowing
for up to 43,000,000 pounds of Russian uranium to be imported into the U.S. over
the 10 years beginning March 1994, but only if it is matched with an equal
volume of new U.S. production. Based on U.S. consumption for the 1994-2003
period (as reported or projected by the Department of Energy), the matched
volumes could account for up to 18% of the supply to the U.S. market during this
period.
In 1995, the Republics of Kazakhstan and Uzbekistan concluded negotiations
with the U.S. DOC 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. production rates increase, additional imports from
Uzbekistan are allowed.
Although these amendments to three of the Suspension Agreements may
increase the supply of uranium to the U.S. market, they also provide increased
predictability concerning CIS imports into the U.S. Due to declining production
levels in the CIS republics, uranium from these sources has recently been
difficult to obtain. Consequently, the market impact of CIS primary production
may be diminishing.
In January 1994, the U.S. and Russia entered into an agreement (the
"Russian HEU Agreement") to convert highly enriched uranium ("HEU"), derived
from dismantling nuclear weapons, to low enriched
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<PAGE>
uranium ("LEU") suitable for use in nuclear power plants. At a projected maximum
conversion rate for HEU to LEU, approximately 24,000,000 pounds of U3O8 per year
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 Russian HEU material to be
sold in the U.S. market 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 165,000,000 pounds U3O8 through 2001. USE management
estimates that between 30,000,000 and 40,000,000 pounds U3O8 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
(78,000,000 pounds in 1998) 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 1998 production levels, USE believes that
higher prices will be needed to support the required investment by other uranium
producers in new higher cost production facilities as lower cost production
reserves are depleted.
Overall, USE believes that adequate supply of U3O8 material to meet firm
demand (i.e. to supply future long term contracts with utilities) 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 new production combine will not equal consumption even if the new
production comes on stream as planned.
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 secured for relatively long
periods. 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.
U.S. ENRICHMENT CORPORATION. The United States Enrichment Corporation
("USEC") was created by the United States Congress as part of the Energy Policy
Act of 1992. USEC began operations in July 1993 when the United States
Department of Energy ("DOE") transferred the DOE's uranium enrichment facilities
to USEC. USEC enriches uranium at two gaseous diffusion process plants (at
Paducah, Kentucky and near Portsmouth, Ohio) as part of the process to transform
natural uranium into fuel for commercial power plants. USEC has a substantial
share of the world market for enrichment services, and dominates the North
American market for enrichment services. In 1996, Congress enacted the "USEC
Privatization Act of 1996" to privatize USEC and allowed the DOE to transfer
certain amounts of various forms of uranium to USEC.
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<PAGE>
In July 1998, USEC became a wholly-owned subsidiary of USEC Inc. (herein
"USEC") when it completed its privatization through a $1.4 billion public
offering. USEC represented in filings with the Securities and Exchange
Commission that it now holds or intends to acquire 95 metric tons enriched
uranium (50 tons highly enriched, 45 tons low enriched) and 10,800 tons of
natural uranium (uranium oxide as produced from uranium milling, prior to
concentration). USEC has represented its intention to supplement uranium
enrichment services revenues through sales of natural uranium.
Based upon the amounts of uranium USEC purportedly has, or will be
acquiring in shipments from DOE, USEC may be seeking to sell up to 75 million
pounds of uranium or uranium equivalents through the year 2005. On an annual
basis, such sales would adversely impact the domestic uranium market for
producers such as USE and Crested, because USEC's sales would amount to more on
an annual basis than all domestic producers (including USE and Crested) will
produce and plan to sell combined.
USE and Crested believe that a substantial portion of the uranium (45
metric tons of low enriched uranium and 7,000 tons of natural uranium) which
USEC has acquired and will acquire from the DOE, in fact was transferred and
will be transferred by DOE in violation of the USEC Privatization Act of 1996.
USE and Crested have joined with other uranium producers and the Uranium
Producers of America ("UPA") in the filing of a lawsuit for declaratory judgment
and injunctive relief against the Department of Energy, with respect to the
excess transfers, in an attempt to prevent USEC from enjoying a market advantage
over the domestic uranium producers which is prohibited by law. See "Legal
Proceedings" below.
MARKET SUMMARY - IMPLICATIONS FOR FUTURE URANIUM PRICES. With the
privatization of USEC and the prospect of natural uranium coming to the market
from USEC inventories, uranium prices may not rise significantly over the next
12 months, as previously had been anticipated in reports by industry analysts
and by USE management. Nevertheless, USE believes that uranium prices eventually
will be determined and moved up significantly by the fundamentals of the market,
because all excess inventories built up in the 1980s will eventually be
consumed. In addition, USEC has stated that USEC would sell its uranium in a
rational and responsible manner indicating (in the opinion of USE management)
that USEC may keep its market sales at levels which would not drive down uranium
prices.
As detailed below, many projects have been delayed or postponed since
mid-1997 for various reasons, which will have a significant impact on future
supply/demand fundamentals. If, as it appears to be the case, the possible
introduction of the new USEC inventories currently has a depressing effect on
the price of uranium concentrates, then new planned uranium production will be
curtailed more than indicated below.
Delay/Loss of Annual
Production Potential
Date The Events Reported lbs. of U3O8
---- ------------------- ------------
July 1997 Former Soviet Union production declines 27% 5 million
(1992-1996)
July 28, 1997 Russia announces it may require 30-50% of 6-10 million
the HEU feed for internal use
August 11, 1997 Kazakhs annul World Wide Contract at 1-2 million
Tselinney Project, Kazakhstan
September 1, 1997 Rio Tinto suspends development at Kintyre 3-4 million
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<PAGE>
September 1, 1997 McClean Lake, Can., schedule slips 6 million
from 1997 to 1998
November 3, 1997 Rio Algom begins production at Smith Ranch, 1-2 million
Wyo. behind schedule
November 10, 1997 Midwest and Cigar Lake, timing delayed 18 million
from 1999 to 2001
November 24, 1997 Aborigines veto ERA's plan to truck ore 6 million
to Ranger Mill, Aust.
July 1998 U.S. Energy/Crested Corp. suspend operations 2-4 million
at Green Mountain, Wyoming
August 1998 World Wide Minerals puts the Dornod project in 1-2 million
Mongolia on standby citing market conditions
August 1998 Cogema will put Cluff Lake, Can., Mine on 2-3 million
standby on Dec. 31, 2000. -----------
Total 51-62 million
With these delays, postponements, and possible further delays or
cancellations of planned uranium production projects, USE believes that it is
possible that the market price for uranium may increase substantially in mid -
to late 1999, in spite of possible sales from the USEC inventory. The
fundamentals for higher uranium prices are ascertainable. Currently, all nuclear
reactors worldwide consume approximately 160 million lbs. of natural uranium per
year and by most estimates, will continue at that rate for at least the next 20
years. Total world production for 1997 was approximately 90 million lbs. Over
the next four years, three mines located in Canada (Key Lake, Cluff Lake and
Rabbit Lake) will have exhausted their reserves and will be shut down. Three new
Canadian mines (McArthur River, McClean Lake/Midwest and Cigar Lake) are
scheduled to produce approximately 40 million lbs. of U3O8 annually when they
are in full production.
USE management believes that other delays and cancellations of projects
may be imminent and that eventually all inventories (government and public) will
be consumed. New significant production will be needed to fuel existing and
planned reactors into the 21st century. USE management believes that prices must
rise significantly from current levels of $10.50/lb., and possibly up to the
$18.00/lb. range over the next 2-3 years, to motivate existing and new mines to
move forward as planned. In addition, no new mine/mill construction would be
justifiable for selling into only the spot market. At least 80 percent of a
uranium producer's production has to be sold to long term contracts, because
only with long term contracts can the mine/ mill process over the life of the
mine be planned and financed.
In contrast to finding, developing and mining new properties and building
new mills, USE's uranium properties are believed to contain well defined uranium
deposits delineated by others which do not require further exploration work
prior to beginning production. Development work is significantly advanced at
both the principal Wyoming site (the Jackpot Mine) and the Utah mines. The
uranium mills in Wyoming and Utah were acquired fully built at no cost to USE
and Crested, and the remaining work required to put the mills into operating
status will not consume significant amounts of capital. For these reasons, USE
believes that its uranium properties will be low cost uranium producers compared
to some of the other uranium mines now in operation, and also compared to the
costs to develop new properties and build new uranium mills.
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<PAGE>
Nonetheless the decision by USE to put any mine into production, and the
commitment of funds necessary to implement that commitment, must be made well in
advance of the time when revenues from the mined resource are received. Price
fluctuations between the time the production commitment is made, and the time
when production and sales occur, can significantly impact the economics of the
mine. If the sales revenues fall below production costs for a substantial period
of time, it is possible that USE could determine that it is not then
economically feasible to continue production operations. Taking into account all
of the relevant factors discussed above, USE intends throughout fiscal 1999 to
seek the financing to put the uranium properties into production, and in the
meantime to seek long term utility contracts to take the uranium production,
with the ultimate goal of being in full production in Wyoming in April 2000, and
milling the stockpiled uranium in Utah in late fiscal 1999 or early fiscal 2000.
There is no assurance such financing will be obtained, nor is there assurance
prices will not decrease, which would make obtaining such financing more
expensive or impossible.
NUEXCO EXCHANGE VALUE. The market related contracts to sell uranium oxide
to utilities usually are based on an average of the Nuexco Exchange Value
("NEV") or some other market quotes for 2, 3 or more months before the uranium
delivery. The high and low NEV reported on U3O8 sales during USE's past seven
fiscal years are shown below. NUEXCO Exchange Values are now reported weekly by
TradeTech and represents its judgment of the price at which spot and near term
transactions for significant quantities could be concluded. NEVs for fiscal 1993
are higher for U.S. transactions, due to the impact of CIS import restrictions
since late 1992. These prices ("US NEV") were reported by NUEXCO for spot sales
in the restricted U.S. market.
NUEXCO EXCHANGE VALUE
US $/pound of U3O8
Years Ended ------------------
May 31, High Low
------------- ---- ---
1992 $ 9.05 $ 7.75
1993 10.05 7.75
1994 9.60 9.05
1995 12.20 9.65
1996 16.50 13.00
1997 14.25 10.20
1998* 12.05 10.50
* Through August 10, 1998 when it was $10.50/lb.
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.
The foregoing prices represent the "spot" market only, and indicate
transactions primarily by utilities purchasing to cover short positions.
Long-term supply contracts, which cover up to 10 to 15 percent of the uranium
sold from year to year, carry prices which are in excess of the spot market.
This price premium is paid by the utilities to assure long term price stability;
the producer demands the premium to compensate for future price increases which
could (but may not) exceed the premium. Utilities keep their long term contract
provisions confidential, so it is difficult to assess any one utility company's
long term contract plans or needs. The amount of the price premium will vary
from time to time.
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<PAGE>
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
US$7,115,400 ($1,272,000 through a private placement conducted in the United
States by RAF Financial Corporation ("RAF"), and $5,843,400 through a private
placement conducted in Toronto, Ontario, Canada by C.M. Oliver & Company
Limited). The net proceeds of $6,511,200 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. Additional
financing of up to $15,000,000 will be sought to fund the development and
construction of the mine/mill. SGMC's properties contain an estimated amount of
proven reserves (see below). Because the properties are not yet in production
and the needed funding is not yet available to do so (gold is at $290 per ounce,
which has hampered efforts to raise capital), the recorded value of SGMC's
mineral properties has been reduced as of May 31, 1998. See "Item 7,
Management's Discussion and Analysis Financial Condition and Results of
Operations." If such financing is not available by the end of fiscal 1999, or if
gold prices do not improve, the value of USE's investment in SGMC could be
deemed further impaired and more of such investment written off during fiscal
1999. SGMC intends to fund the development and construction of the project
through private or public debt and/or equity financing. At Report date SGMC is
in discussions with certain investment banks, however, no agreements for
financing have been reached, and there is no assurance any agreements will be
reached.
In fiscal 1998, due to the depressed gold price and gold equity market,
SGMC suspended the start of construction of the 1,000 ton-per-day gold mill
complex and development of the underground mine. SGMC initially anticipated
production mining would commence in mid-calendar 1998 and by that time,
construction of a 1,000 ton per day gold mill would have been completed. Once a
decision to commence production is made, from that date, it is estimated it will
take approximately 18 months to complete the mill complex construction and pour
the first bar of gold. During fiscal 1998, SGMC pursued amendments to its
approved 1993 Conditional Use Permit (see "Permits and Future Plans"), finalized
the process flow of the mill, entered into the final design engineering contract
with the engineering firm of Lockwood Greene of Dallas, Texas and started to
build the entrance road to the mine.
SGMC does not have any class of its securities registered with the
Securities and Exchange Commission, and none of its securities are traded in the
United States.
After completion of the two private financings, and taking into account a
restructuring of the ownership of USE and Crested in SGMC, USE and Crested each
own the following securities of SGMC:
(a) Together, a majority (after the April 1998 transaction, discussed
below) 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 564,900 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 does not reflect SGMC 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
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<PAGE>
USE and Crested. One reorganization of the capital structure was made in
contemplation of its private placement of SGMC shares, and a second
reorganization was made in contemplation of 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 for
the Canadian private placement. 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 cash or additional shares of Common Stock from SGMC (without paying
additional consideration) at SGMC's election. 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 exercisable semi-annually. If SGMC decides against the exercise
of the USECC Warrant, it can 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, 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 entitles the
holder to acquire from SGMC, at no further cost, one share of Common Stock of
SGMC, and one Purchase Warrant; each Purchase Warrant entitles the holder to
purchase one share of Common Stock of SGMC, at a price of Cdn$6.00 per whole
share (the "Purchase Warrants"), through November 13, 1998.
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 SGMC Common Stock
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 was not obtained by SGMC, due primarily 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, as
discussed below, none of the four Canadian Funds, 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 separate 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
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<PAGE>
of $87,536 in legal fees and a fee paid to a Canadian investment banking firm);
(ii) 888,900 Special Warrants of SGMC from the four funds; and (iii) the
relinquishment by each of the four funds of their rights to the dilution
penalty. USE issued 658,895 shares of Common Stock 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 has
filed a resale registration statement with the SEC to permit the resale of the
funds' shares. The 658,895 Common Shares include the balance of 112,530 shares
of USE Common Stock to be issued to the fourth fund when the resale registration
statement is declared effective, for its delivery of the 204,600 Special
Warrants to USE in payment for such 112,530 shares of USE Common Stock. Such
112,530 shares are counted as issued and outstanding as of the date of this
Report. Cash proceeds from the transaction with the Canadian Funds are being
used for general corporate purposes by USE.
The Stock Purchase Agreements for three Canadian 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. There will be no adjustment in the terms of the Stock
Purchase Agreements for changes in USE share market prices.
The dilution penalty, if paid, would have resulted in the issuance to the
Canadian 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 from the Canadian Funds.
In fiscal 1999, USE may issue additional shares of its Common Stock to the
shareholders of SGMC who invested through RAF, in exchange for such investors'
SGMC shares. The amount of USE shares which might be issued in such an exchange
is not currently known, and therefore the extent of any dilution to current
shareholders cannot be predicted. However, it is not expected that any material
dilution would result. It is expected that USE will register (with the SEC) all
such USE shares for resale under the Securities Act of 1933, at such time as
another registration statement is filed by USE.
USECC 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 the parties will
negotiate at the end of two years starting when the mining phase begins). The
Management Agreement replaces a prior agreement by which USECC provided
administrative services to SGMC.
PROPERTIES. SGMC (through its subsidiary USECC Gold) holds approximately
14 acres of surface and mineral rights (owned), 55 acres of surface 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 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 Acre
Property is the proposed new location
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for the Surface Fill Unit and the 32 Acre Property provides the land necessary
for access and utility easements to Hwy 49.
Surface and mineral rights holding costs will aggregate approximately
$225,000 from June 1, 1998 through May 31, 1999. Property taxes for fiscal 1998
are estimated to be $30,000.
The leases are for varying terms, and require rental fees, advance
production royalties, real property taxes and insurance. The lease that was to
expire in February 1998 has been extended through its force majeure clause due
to the low price of gold. Leases expiring before 2010 will generally be extended
automatically, so long as minerals are continuously produced from the property
that is subject to the lease or minimum payments are made . Other leases may be
extended for various periods on terms similar to those contained in the original
leases. Production royalties are from 2.5% to 6% (most are 4%). The various
leases have different methods of calculating royalty payments (net smelter
return and gross proceeds).
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, 1998, an estimated $21,000,000 was spent on the Lincoln
Project by Meridian, USECC Gold and other of 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 1998 fiscal year was approximately $1,410,800 ($572,700
in 1997).
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 (and updated the study in 1997). 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 0.15 ounces of gold per ton in place, PAH
estimates the Lincoln Project contains approximately 350,000 tons of proven and
probable reserves grading approximately 0.4 ounces of gold per ton. If operating
economics indicate a lower cutoff grade is feasible, the tonnages for the stated
reserves would be increased. Historical data (underground maps and production
records) from historic (now closed) mines within the Lincoln Project boundaries
indicate certain areas of those mines were not "mined out," such that additional
mineralized resources may exist on the property.
The geology within the Lincoln Project is typical of the historic Mother
Lode region of California, with a steeply dipping to vertical sequence of
metavolcanic and metasedimentary rocks hosting the gold- bearing veins.
Depending on location along the strike length on the vein systems, the
gold-bearing veins are slate, metavolcanic greenstone, or an interbedded unit of
slates and volcanics. The Lincoln Project covers over 11,000 feet of strike
length along the Mother Lode vein systems.
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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. On July 14, 1998 the Amador County Planning Commission certified the
Final Subsequent Environmental Impact Report ("FSEIR:) and approved all of the
amendments requested by SGMC. The decision by the Planning Commission has been
appealed to the Amador County Board of Supervisors by a local citizens' group
and will be heard by the Board of Supervisors in August 1998; further appeal
would be available to the Amador County Superior Court if the opposition lost at
the Board of Supervisors level. The appeal deals only with the adequacy of the
FSEIR; since SGMC already has a valid CUP, SGMC could continue to move forward
on certain parts of the development of the mine/mill. In any event, SGMC does
not expect the appeal process to materially impact the development plan or
schedule. Amendments to the CUP will remove two tailings dams, eliminate the
need to use cyanide on-site, and eliminate mine related traffic on two county
roads.
PROPOSED MINE PLAN
In 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 (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 at startup is expected to increase up to 500 tons per day ("tpd")
during the first six months of mining operations. Ore will be conveyed to the
surface through an off shoot portal from the 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 1,000 tpd in approximately the third year of operation.
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
There are three stages of milling and processing the ore. The first stage
involves wet grinding of the ore to the size of fine sand in a semi-autogenous
grinding ("SAG") mill. The resulting finely-milled ore is treated in a gravity
separator which employs centrifugal force to separate the heavier free gold
particles from the lighter rock particles. Next, the gold concentrate is run
across a set of cleaning tables to upgrade the gold concentrate. The second
stage takes the middlings and tails from the first and again involves wet
grinding in a ball mill to a finer size particle. This ground ore is again
treated in a similar gravity separator which is tuned for this finer size
particle and the gold concentrate is run across a different set of cleaning
tables. The third stage separates the remaining gold by flotation wherein minute
quantities of non-toxic chemicals are added to the ground ore which makes the
gold bearing particles attach to air bubbles. The gold bearing particles are
then separated from the ground ore into a flotation concentrate. At this stage,
the flotation concentrate is either reground and processed with a dilute
solution of sodium cyanide or shipped offsite. SGMC is planning on shipping the
flotation concentrate offsite, even though its CUP allows processing with sodium
cyanide. The mill is designed to produce several gold-bearing products: a
high-grade gravity concentrate; a flotation concentrate or a gold precipitate if
the cyanide process is used. These gold-bearing products will be smelted to dore
bullion for shipment to a precious metal refinery. During processing, 95 to 97%
of the processed ore
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will be removed. Of this material, approximately 65% will be placed underground
as structural fill and 35% will be placed into the Surface Fill Unit.
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 of USE and
Crested.
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 USE and Crested. USECC did not receive any advance royalties during fiscal
1996 because of an arrangement with Cyprus Amax described below. These royalties
are shown in the Consolidated Statements of Operations as a component of gains
from restructuring mineral properties agreements. See "Note F to the USE
Consolidated Financial Statements." The advance royalty payments reduce the
operating royalties (six percent of gross production proceeds) which would
otherwise be due from Cyprus Amax from production. There is no obligation to
repay the advance royalties if the property is not placed in production.
The Agreement with AMAX also provides that USE and Crested are to receive
$2,000,000 (one-half to each), at such time as the Mt. Emmons properties are put
into production and, in the event AMAX sells its interest in the properties, USE
and Crested would receive 15 percent of the first $25,000,000 received by AMAX.
USE and Crested have asserted that the acquisition of AMAX by Cyprus Minerals
Company was a sale of AMAX's interest in the properties which would entitle USE
and Crested to such payment. Cyprus Amax has rejected such assertion and USE and
Crested are considering their remedies.
In fiscal 1995, 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. USE recognized $211,000 and
$207,300 of revenues in fiscal 1998 and 1997, respectively related to this
royalty interest.
MOLYBDENUM MARKET INFORMATION
Molybdenum is a metallic element with applications in both metallurgy and
chemistry. Principal consumers include the steel industry, which uses molybdenum
alloying agents to enhance strength and other characteristics of its products,
and the chemical, super-alloy and electronics industries, which purchase
molybdenum in upgraded product forms.
The molybdenum market is cyclical with prices influenced by production
costs and the rate of production of foreign and domestic primary and by-product
producers, world-wide economic conditions particularly in the steel industry,
the U.S. dollar exchange rate, and other factors such as the rate of consumption
of molybdenum in end-use products. When molybdenum prices rose dramatically in
the late 1970s, for example, steel alloys were modified to reduce reliance on
molybdenum. AMAX and Cyprus Minerals Company were the two major primary
producers of molybdenum in the United States until November 1993, when AMAX was
acquired by Cyprus.
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Worldwide demand for molybdic oxide in calendar 1996 was reported at
approximately 230,000,000 pounds, its highest level ever. Production for that
period was about 225,000,000 pounds. There is, however, excess capacity from the
primary molybdenum mines which are currently not producing. In addition, by-
product molybdenum (primarily from Chilean copper mining companies) has a major
impact on available supplies. It is unlikely that any major new primary deposits
will be developed during fiscal 1999.
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 were in the $4.00 to
$4.40 per pound range in September 1997 and $3.75 in July 1998.
PARADOR MINING (NEVADA)
USE and Crested are sublessees and assignees from Parador Mining Co., Inc.
("Parador"), of 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 presently are in litigation concerning this
property. See Item 3, "Legal Proceedings - BGBI Litigation."
OIL AND GAS.
FORT PECK LUSTRE FIELD (MONTANA). USECC conducts a small 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 Fort Peck (Montana) Assiniboine
and Sioux Tribes, had certain rights to explore Montana properties for shallow
natural gas. Exploration efforts were unsuccessful prior to 1998, and Energx was
released from the property agreements in 1998. Other Energx projects have also
been unsuccessful. Accordingly, in fiscal 1998 Energx decided to cease all
operations pending evaluation of future options.
COMMERCIAL OPERATIONS
BRUNTON.
In fiscal 1996, USE sold The Brunton Company to Silva Production AB, a
closely held Swedish corporation ("Silva") for $4,300,000. 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.
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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 The installments for 1997 and 1998 have been received.
In addition, Silva agreed to pay USE 45% of the net profits before taxes
derived from Brunton products and operations (including new products then being
developed by Brunton) for a period of four years and three months commencing
February 1, 1996. The profits payment for the period February 1, 1996 through
April 30, 1997 of $292,600 was received after May 31, 1997; the profits payment
for fiscal 1998 has not yet been received.
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, including 225,556
shares of USE's common stock, and options to purchase 150,000 shares of USE's
common stock for $3.50 per share; and 160,000 shares of Crested common stock,
and options to purchase (from Crested) 300,000 shares of Crested common stock
for $0.40 per share. 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. In fiscal 1998,
SGMC exercised its USE options. Plateau did not exercise its USE, and neither
SGMC or Plateau exercised their Crested options, which have expired.
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 of future
net profit payments from Silva.
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 and other subsidiaries
in the 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.
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 Crooks Gap uranium 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. WEA owns and
operates an aircraft fixed base operation with fuel sales, flight instruction
services and aircraft maintenance in Riverton, Wyoming.
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USE and Crested also own 18 undeveloped lots on 26.8 acres of the Wind
River Airpark near the Riverton Municipal Airport, and three mountain sites
covering 16 acres in Fremont County, Wyoming.
USECC owns various buildings, 290 city lots and/or tracts and other
properties at the Jeffrey City townsite in south-central Wyoming. Nearly 4,000
people resided in Jeffrey City in the early 1980s, when the nearby Crooks Gap
and Big Eagle uranium mining projects were active. The townsite may be utilized
for worker housing as the Jackpot Mine and Sweetwater Mill are put into
operation. In the interim, USE and Crested are selling lots at Jeffrey City and
made sales aggregating $38,400 and $21,150 during fiscal 1998 and 1997,
respectively.
USE owns five city lots and a 20-acre tract with improvements including
two smaller office buildings and three other buildings with 19,000 square feet
of office facilities, 5,000 square feet of laboratory space and repair and
maintenance shops containing 8,000 square feet, all in Riverton, Wyoming.
COLORADO PROPERTIES. In connection with the AMAX transaction for the Mt.
Emmons molybdenum properties near Crested Butte, Colorado, USECC acquired an
option from AMAX (now Cyprus Amax) to purchase approximately 57 acres for
$200,000 in Mountain Meadows Business Park, Gunnison, Colorado. See "Minerals -
Molybdenum" above. The property is zoned commercial and industrial, and is
adjacent to Western State College. In fiscal 1995, USECC and Cyprus Amax agreed
to exercise the option by USE and Crested agreeing to forego six quarters of
advance royalties from Cyprus Amax (the option purchase price was $200,000),
plus payment of certain expenses i.e. real property taxes from 1987 and other
expenses amounting to $19,358. Thereafter, USE (together with Crested) signed
option agreements with Pangolin Corporation, a Park City, Utah developer, for
sale of the 57 acres, and a separate parcel owned in Gunnison County, Colorado.
The first option (exercised in February, 1995) was for the 57 commercial
and noncommercial zoned acres in the City of Gunnison, Colorado; the purchase
price was $970,300. Pangolin paid $345,000 cash and $625,300 in three year
nonrecourse promissory notes, of which $137,900 was paid during fiscal 1995 and
$35,600 was paid during fiscal 1996. The remaining note carried interest at 7.5%
per annum.
The second option covered 472.5 acres of ranch land, owned by Crested,
northwest of the City of Gunnison, Colorado (purchase price $822,460). Pangolin
paid $10,000 for the option; on option exercise and closing, Pangolin paid
$46,090 in cash and $776,370 by two nonrecourse promissory notes. USE 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 were paid. Both notes required annual interest
payments.
In fiscal 1997, USE and Crested agreed with Pangolin to restructure the
remaining obligations of Pangolin. Under the restructuring, Contour Development
Company LLC gave USE and Crested two recourse, secured promissory notes: the
first note for $454,894 due January 26, 1998, the second note for $872,508. The
notes are secured by Contour's 73% interest in Tenderfoot Properties LLC ( a
Colorado limited liability company affiliated with Contour). 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 plus interest). Also, the first note
($454,894) was not paid in January 1998. In July 1998, USE and Crested filed a
lawsuit
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against Contour and associated parties to seek recovery of the balance owing on
the promissory notes and contracts. See Item 3, "Legal Proceedings."
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. Revenues from sale of homesites and operation
of the motel were nominal in 1998.
CONSTRUCTION
FOUR NINES GOLD, INC. On September 13, 1995, FNG was awarded a
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. As of May 31, 1997 FNG had completed 100% of
the contract, billing and receiving $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. On July 2, 1998 the claim was denied by the Bureau of Reclamation and
FNG has 12 months to appeal.
For fiscal 1998, FNG has had no contracts for construction work, but has
rented its equipment to USECC for use by the GMMV at the Jackpot Mine. Rental
revenues totaled $478,338 for fiscal 1998 at a profit of $263,409, and the
rentals are continuing into fiscal 1999.
Neither commercial nor construction operations are dependent upon a single
customer, or a few customers, the loss of which would have a materially adverse
effect on USE.
RESEARCH AND DEVELOPMENT
Registrant has incurred no research and development expenditures, either
on its own account or sponsored by customers, during the past three fiscal
years.
ENVIRONMENTAL
GENERAL. Registrant's operations are subject to various federal, state and
local laws and regulations regarding the discharge of materials into the
environment or otherwise relating to the protection of the environment,
including the Clean Air Act, the Clean Water Act, the Resource Conservation and
Recovery Act ("RCRA"), and the Comprehensive Environmental Response Compensation
Liability Act ("CERCLA"). With respect to mining operations conducted in
Wyoming, Wyoming's mine permitting statutes, Abandoned Mine Reclamation Act and
industrial development and siting laws and regulations also impact the Company.
Similar laws and regulations in California affect SGMC operations and in Utah,
will effect Plateau's operations.
The Company's management believes it is currently in compliance in all
material respects with existing environmental regulations. To the extent that
production by SMP, GMMV or SGMC is delayed, interrupted or discontinued due to
need to satisfy existing or new provisions which relate to environmental
protection, future USE earnings could be adversely affected.
CROOKS GAP. An inoperative ion exchange facility at Crooks Gap currently
holds a NRC license for possession of uranium operations byproducts. USE has
applied to the NRC for permission to decommission and decontaminate the plant,
dispose low level waste into the Sweetwater Mill tailings cell, and keep intact
such of the facility as does not require dismantling.
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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 the date of this Report, USE had approximately 120 full-time
employees (including mine and mill employees in Wyoming and Utah). Crested uses
approximately 50 percent of the time of USE employees, and reimburses USE on a
cost reimbursement basis.
MINING CLAIM HOLDINGS
TITLE TO PROPERTIES. Nearly all the uranium mining properties held by
GMMV, USE and Plateau are on federal unpatented claims. Unpatented claims are
located upon federal public land pursuant to procedure established by the
General Mining Law. Requirements for the location of a valid mining claim on
public land depend on the type of claim being staked, but generally include
discovery of valuable minerals, erecting a discovery monument and posting
thereon a location notice, marking the boundaries of the claim with monuments,
and filing a certificate of location with the county in which the claim is
located and with the BLM. If the statutes and regulations for the location of a
mining claim are complied with, the locator obtains a valid possessory right to
the contained minerals. To preserve an otherwise valid claim, a claimant must
also annually pay certain rental fees to the federal government (currently $100
per claim) and make certain additional filings with the county and the BLM.
Failure to pay such fees or make the required filings may render the mining
claim void or voidable. Because mining claims are self-initiated and
self-maintained, they possess some unique vulnerabilities not associated with
other types of property interests. It is impossible to ascertain the validity of
unpatented mining claims solely from public real estate records and it can be
difficult or impossible to confirm that all of the requisite steps have been
followed for location and maintenance of a claim. If the validity of an
unpatented mining claim is challenged by the government, the claimant has the
burden of proving the present economic feasibility of mining minerals located
thereon. Thus, it is conceivable that during times of falling metal prices,
claims which were valid when located could become invalid if challenged.
Disputes can also arise with adjoining property owners for encroachment or under
the doctrine of extralateral rights (see Item 3, "Legal Proceedings - BGBI
Litigation").
PROPOSED FEDERAL LEGISLATION. The U.S. Congress has, in legislative
sessions in recent years, actively considered several proposals for major
revision of the General Mining Law, which governs mining claims and related
activities on federal public lands. If any of the recent proposals become law,
it could result in the imposition of a royalty upon production of minerals from
federal lands and new requirements for mined land reclamation and other
environmental control measures. It remains unclear whether the current Congress
will pass such legislation and, if passed, the extent such new legislation will
affect existing mining claims and operations. The effect of any revision of the
General Mining Law on the Company's operations cannot be determined conclusively
until such revision is enacted; however, such legislation could materially
increase the carrying costs of the Green Mountain mineral properties, the SMP
properties and some of Plateau's mineral properties which are located on federal
unpatented mining claims, and could increase both the capital and operating
costs for such projects and impair the Company's ability to hold or develop such
properties, as well as other mineral prospects on federal unpatented mining
claims.
34
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
In 1991, disputes arose between USE/Crested, and Nukem, Inc. and its
subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation
and operation of the Sheep Mountain Partners partnership for uranium mining and
marketing, and activities of the parties outside SMP. Arbitration proceedings
were initiated by CRIC in June 1991 and in July 1991, USECC filed a lawsuit
against Nukem, CRIC and others in the U.S. District Court (District of
Colorado). Later, USECC filed another suit for the standby costs at the SMP
mines against SMP in the Colorado State Court. The Federal Court stayed the
arbitration proceedings and the State Court case was also stayed. In fiscal
1994, all of the parties agreed to exclusive and binding arbitration of the
disputes before the American Arbitration Association, for which the legal claims
made by both sides included fraud and misrepresentation, breach of contract,
breach of duties owed to the SMP partnership, and other claims.
Following 73 hearing days and various submissions by the parties, the
arbitration panel (the "Panel") entered an Order and Award (the "Order") in
April 1996 finding generally in favor of USE and Crested on certain of their
claims (including the claims for reimbursement for standby maintenance expenses
and profits denied SMP in Nukem's trading of uranium), and in favor of
Nukem/CRIC and against USE and Crested on certain other claims.
Approximately $18 million of SMP cash had been placed in escrow and a bank
account by agreement of the parties pending resolution of the disputes.
The April 1996 Order awarded USE and Crested monetary damages of
approximately $7,800,000 with interest (after deduction of monetary damages
which the Arbitration 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 the escrowed $18 million and SMP
cash. This $4,300,000 was USE and Crested's share of SMP profits from selling
uranium to utilities and advances to purchase uranium for SMP. The Panel also
ordered that one utility supply contract which had been in dispute belonged to
SMP, not Nukem, and that Nukem was to assign that contract to SMP. The Panel
further ordered that certain contracts which Nukem had obtained for the purchase
of uranium from countries in the CIS (former Soviet republics) belonged to SMP.
After motions and further proceedings in the Federal District Court, and a
reaffirmation Order by the Panel in July 1996, the U.S. District Court confirmed
the Panel's Order and Award. In November 1996, USECC received the $4,367,000 of
the damage award out of the SMP escrowed funds and a separate SMP bank account.
In confirming the Panel's Order, the Court ordered Nukem to assign a utility
contract to SMP; to pay USECC a net amount of approximately $8,465,000 in
monetary damages; and impressed a constructive trust in favor of SMP on Nukem's
rights to purchase CIS uranium, the uranium acquired pursuant to those rights,
and profits therefrom. Nukem/CRIC posted a supersedeas bond for $8,613,600 and
the Court stayed execution on the judgment. The bond did not cover the value of
the CIS contracts at issue because the Panel's Order did not value such
contracts.
Nukem/CRIC appealed the District Court's Judgment to the 10th Circuit
Court of Appeals, and the matter is set for oral argument on September 24, 1998
in Oklahoma City, Oklahoma. The issues to be decided are: whether the U.S.
District Court, in confirming the Panel's Order, provided for a double recovery
to USE and Crested (i.e., awarding both $8,465,000 in monetary damages and
one-half of the profits SMP has made on uranium contracts); and whether the
constructive trust on the CIS contracts covers only an amount of profits
necessary to secure Nukem/CRIC's payment of the $8,645,000 monetary award in
favor of USE and Crested. USE's positions on these issues are that there is no
double recovery; and that the constructive trust of SMP on
35
<PAGE>
the CIS contracts extends to all such contracts and profits therefrom, because
Nukem obtained the contracts for its own account outside of and hence in
violation of Nukem's fiduciary obligations to SMP as a general partner.
During the fourth quarter of fiscal 1998, USE and Crested entered into a
partial settlement with Nukem and CRIC on certain of the claims not on appeal.
Under the partial settlement, USECC received (i) from SMP an assignment of all
of the mining claims and equipment which had been held by SMP (USECC remains
responsible for the reclamation liabilities associated with the claims as had
always been the case when the properties were in SMP); (ii) from Nukem and CRIC,
$484,361 which settled USE and Crested's claim to their share of the past and
future profits on a utility contract which Nukem had wrongfully kept outside of
SMP (and Nukem was allowed to keep this contract as part of the settlement);
(iii) from Nukem and CRIC, $4,540,000 to settle all claims by USE against Nukem,
CRIC and SMP (including Nukem/CRIC's one-half share of the SMP mine maintenance
costs); (iv) from SMP, a contract to sell 1,076,842 pounds of uranium oxide to a
utility; and (v) from SMP, a contract to purchase 600,000 pounds of uranium
oxide from another producer in North America (200,000 pounds annually through
2000). In connection with the partial settlement, the parties agreed to the
dismissal with prejudice of the Colorado and Wyoming State Court proceedings
(for reimbursement of SMP mine maintenance costs), and all claims in the Federal
District Court and the arbitration, except for the issues pending before the
10th Circuit Court of Appeals. The cash settlement portion under (iii) above is
in addition to the $4,367,000 received by USECC in November 1996 out of the SMP
escrowed funds. USECC is negotiating to sell the purchase contract under (v) to
Nukem.
TICABOO TOWNSITE LITIGATION. In fiscal 1998, a prior contract operator of the
Ticaboo restaurant and lounge, and two employees supervising the motel and
convenience store in Utah (owned by Canyon Homesteads, Inc.) sued USE, Crested
and others in Utah State Court. After a five day trial, a jury denied the claims
of two of three plaintiffs but awarded the third plaintiff $156,000 in damages
against USE. USE is appealing the award.
BGBI LITIGATION
USE and Crested are defendants and counter- or cross-claimants in certain
litigation in the District Court of the Fifth Judicial District of Nye County,
Nevada, brought by Bond Gold Bullfrog Inc. ("BGBI") on July 30, 1991. BGBI (now
known as Barrick Bullfrog, Inc.) is an affiliate of Barrick Corp., a large
international gold producer headquartered in Toronto, Canada. The litigation
primarily concerns extralateral rights associated with two patented mining
claims owned by Parador Mining Company Inc. ("Parador") and initially leased to
a predecessor of BGBI, which claims are in and adjacent to BGBI's Bullfrog open
pit and underground mine. USE and Crested assert certain interests in the claims
under an April 1991 assignment and lease with Parador, which is subject to the
lease to BGBI's predecessor.
BGBI seeks to quiet title to its leasehold interest in the subject claims,
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 other claims and 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.
A partial or bifurcated trial to the Court of the extralateral rights
issues was held on December 11 and 12, 1995, 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 warrant application of the doctrine of extralateral
rights as set forth in such statute. The Court found that Parador had failed to
meet its burden of proof and therefore Parador, USE and Crested have no right,
title and interest in the minerals lying beneath the claims of Layne pursuant to
extralateral rights. The partial trial did not address the issues of breach of
contract by the defendants and BGBI for specific performance and they were tried
before the Court commencing on January 26, 1998. After
36
<PAGE>
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 underway.
DEPARTMENT OF ENERGY LITIGATION
On July 20, 1998, eight uranium mining companies with operations in the
United States (including USE, Crested, YSFC) and the Uranium Producers of
America (a trade organization) filed a complaint against the United States
Department of Energy (the "DOE") in a lawsuit (file no. 98 CV 1775) in the
United States District Court, Cheyenne, Wyoming. The complaint seeks declaratory
judgment and injunctive relief. The plaintiffs allege that the DOE violated the
USEC Privatization Act of 1996, when the DOE transferred 45 metric tons of low
enriched uranium and 3,800 metric tons of natural uranium to United States
Enrichment Corp. ("USEC"). See Item 1, "Business, Uranium Marketing - U.S.
Enrichment Corporation" above.
Specifically, the plaintiffs allege that the USEC Privatization Act
authorizes the DOE to transfer to USEC "without charge" an initial 50 metric
tons of highly enriched uranium and 7,000 metric tons of natural uranium. The
Act authorizes the DOE to sell (not merely transfer) additional quantities of
uranium out of the DOE stockpile, but only upon payment of fair market value for
the uranium and then only upon specific finding by the DOE that such a sale
would not have an adverse material impact on the domestic uranium, mining,
conversion or enrichment industry, taking into account sales under the Russian
HEU Agreement and the Suspension Agreement.
The plaintiffs have asked the Court to declare that (i) the DOE violated
its statutory authority by transferring uranium to USEC in excess of statutory
limits on volume; (ii) the excess amounts were not "sold" by the DOE to USEC for
fair value, as required by the Act, and mandated findings by the DOE concerning
possible adverse impacts were not supported in fact; and (iii) the DOE be
enjoined from future transfers in violation of the Act.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the United States District Court,
Denver, Colorado against Contour Development Company, L.L.C. and entities and
persons associated with Contour Development Company, L.L.C. (together,
"Contour") seeking compensatory and consequential damages of more than $1.3
million from the defendants for dealings in certain real estate.
Specifically, USE (which is the assignee of Crested's rights and interests
in certain of the promissory notes, contracts and agreements) alleges that
Contour has breached contracts for the sale of USE's and Crested's Gunnison
properties, and is in default on the promissory notes delivered to pay for the
Gunnison properties. USE has further alleged that Contour fraudulently induced
USE and Crested to enter into restructuring agreements for the original
transactions between the parties in such properties; and further, that Contour
has breached the duties of good faith, honesty, full disclosure and fair dealing
which were owed to USE and Crested by Contour in the course of the transactions.
USE has made additional claims against Contour for unjust enrichment and
conversion of the real estate assets. See Item 1, "Business - Commercial
Operations - Real Estate and Other Commercial Operations - Colorado Properties"
above.
As of the date of this Report, Contour has not filed an answer to the
complaint.
37
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
INFORMATION CONCERNING EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS.
The following information is provided pursuant to Instruction 3, Item 401
of Reg. S-K, regarding certain of the executive officers of USE who are not also
directors.
ROBERT SCOTT LORIMER, age 47, has been Controller and Chief Accounting
Officer for both USE and Crested for more than the past five years. Mr. Lorimer
also has been Chief Financial Officer for both these companies since May 25,
1991, their Treasurer since December 14, 1990, and Vice President Finance since
April 1998. He serves at the will of each board of directors. There are no
understandings between Mr. Lorimer and any other person, pursuant to which he
was named as an officer, and he has no family relationship with any of the other
executive officers or directors of USE or Crested. During the past five years,
he has not been involved in any Reg. S-K Item 401(f) listed proceeding.
DANIEL P. SVILAR, age 69, has been General Counsel for USE and Crested for
more than the past five years. He also has served as Secretary and a director of
Crested, and Assistant Secretary of USE. His positions of General Counsel to,
and as officers of the companies, are at the will of each board of directors.
There are no understandings between Mr. Svilar and any other person pursuant to
which he was named as officer or General Counsel. He has no family relationships
with any of the other executive officers or directors of USE or Crested, except
his nephew Nick Bebout is a USE director. During the past five years, Mr. Svilar
has not been involved in any Reg. S-K Item 401(f) proceeding.
MAX T. EVANS, age 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 serves at the will of each
board of directors. There are no understandings between Mr. Evans and any other
person pursuant to which he was named as an officer. He has no family
relationships with any of the other executive officers or directors of USE or
Crested. During the past five years, Mr. Evans has not been involved in any Reg.
S-K Item 401(f) proceeding.
PART II
ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Shares of USE Common Stock are traded on the over-the-counter market, and prices
are reported on a "last sale" basis by the National Market System ("NMS") of the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"). The range by quarter of high and low sales prices for the Common
Stock is set forth below for fiscal 1998 and 1997.
38
<PAGE>
High Low
---- ---
Fiscal year ended May 31, 1998
------------------------------
First quarter ended 8/31/97 $11.63 $7.13
Second quarter ended 11/30/97 11.75 7.45
Third quarter ended 2/29/98 10.13 6.75
Fourth quarter ended 5/31/98 8.63 5.75
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
(b) Holders
(1) At August 17, 1998, the closing bid price was $2.31 per share and there were
approximately 696 shareholders of record for Common Stock.
(2) Not applicable.
(c) USE has not paid any cash dividends with respect to its common stock. There
are no contractual restrictions on USE's present or future ability to pay cash
dividends, however, USE intends to retain any earnings in the near future for
operations.
(d) During the year ended May 31, 1998, USE issued (i) an aggregate of 4,092
shares of Common Stock to employees as compensation for services., and (ii)
546,365 shares of Common Stock to three Canadian Funds for cash and the exchange
of securities of Sutter Gold Mining Company. Another 112,530 shares will be
issued to a fourth fund when USE's resale prospectus for the Funds is effective
with the SEC. No underwriter was involved in any of these transactions. All
shares were issued as restricted securities, in reliance on the Sec. 4(2)
exemption from registration under the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
May 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current assets $14,301,000 $ 4,400,900 $ 2,912,400 $ 3,390,100 $ 3,866,600
Current liabilities 6,062,100 1,393,900 2,031,200 3,368,200 1,291,700
Working capital 8,238,900 3,007,000 881,200 21,900 2,574,900
Total assets 45,019,100 30,387,100 34,793,300 33,384,500 33,090,300
Long-term obligations(1) 14,468,600 14,377,200 15,020,700 15,769,600 16,612,500
Shareholders' equity 17,453,500 12,723,600 14,617,000 12,168,400 12,559,100
- -----
<FN>
(1)Includes $8,778,800, $8,751,800, $3,978,800, $3,951,800 and $3,951,800 of
accrued reclamation costs on mining properties at May 31, 1998, 1997, 1996, 1995
and 1994, respectively. See Note K of Notes to Consolidated Financial
Statements.
</FN>
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
For Years Ended May 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $11,558,500 $ 5,790,200 $ 9,632,200 $ 4,600,600 $ 8,776,300
Income (loss) before
equity in income
(loss) of affiliates,
provision for
income taxes and
extraordinary item 365,000 (3,706,000) (2,524,100) (2,577,700) (3,587,900)
Equity in (loss) of
affiliates (575,700) (690,800) (418,500) (442,300) (531,200)
Net income (loss) (983,200) (3,724,500) 270,700 (2,070,600) (3,370,800)
Income (loss) per share before
extraordinary item $(.15) $(.58) $(.39) $(.48) $(.73)
Extraordinary item -- -- -- -- --
----- ----- ----- ----- -----
Income (loss) per share
before cumulative effect
of accounting change (.15) (.58) (.39) (.48) (.73)
Income from discontinued
operations -- -- .05 .06 .03
Gain on disposal of
subsidiary operations in
discontinued segment -- -- .38 -- --
Cumulative effect at
June 1, 1993 of income
tax accounting change -- -- -- -- (.06)
----- ----- ----- ----- -----
Net income (loss)
per share, basic
and diluted $(.15) $(.58) $.04 $(.42) $(.76)
===== ===== ==== ===== =====
Cash dividends per share $ -0- $ -0- $-0- $ -0- $ -0-
===== ===== ==== ===== =====
</TABLE>
40
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is Management's Discussion and Analysis of those significant
factors which have affected the Company's liquidity, capital resources and
results of operations during the periods covered in the Company's Consolidated
Financial Statements filed with this Report.
Some of the statements in this Management's Discussion and Analysis
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward- looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES AT MAY 31, 1998
Working capital increased by $5,231,900 during fiscal 1998 to $8,238,900
at May 31, 1998 from $3,007,000 as of May 31, 1997. The primary components of
the increase are increases in cash and cash equivalents, litigation settlement
receivable, and accounts receivable from affiliates of $4,233,600, $5,026,000,
and $687,400, respectively. These increases in working capital were offset by
increases in accounts payable, the deferred GMMV purchase option and the current
portion of long term debt of $523,800, $4,000,000 and $144,400, respectively.
Cash increased due to the reconsolidation of Sutter Gold Mining Company
("SGMC") which resulted in increased cash of $3,124,000 and $1,800,500 from the
sale of the Company's common stock. These receipts of cash were used primarily
in mine development of $1,125,000, purchases of equipment of $1,947,200,
increased investment in affiliates of $102,300, and cash used in operations.
During the fourth quarter of 1998 the Company and Crested were able to negotiate
a settlement of certain of the issues in the Sheep Mountain Partners ("SMP")
arbitration with Nukem and CRIC which resulted in settlement proceeds to the
Company and Crested of $5,026,000. The increase in accounts receivable
affiliates is primarily the result of the Company advancing funds for Crested in
the various ventures in which the companies participate and advances that the
Company and Crested made on behalf of Yellow Stone Fuels Corp.
Accounts payable increased due to the increased activity of the Green
Mountain Mining Venture ("GMMV") where the Company and Crested acted as the
operator for the development of the two decline tunnels to access the uranium
mineralized material on Green Mountain. The current portion of long term debt
increased as a result of a balloon payment coming due on one of the Company's
long term notes payable.
During the first quarter of fiscal 1998, the Company and Crested entered
into an Acquisition Agreement with Kennecott to acquire Kennecott's interest in
the GMMV. As part of that Agreement Kennecott paid the Company and Crested
$4,000,000 upon execution which is recorded as a deferred purchase option. If
the Company and Crested are successful in closing the Acquisition Agreement and
purchasing Kennecott's interest in GMMV, the $4,000,000 will be considered a
component (i.e., a reduction) of the acquisition/purchase price of $15,000,000
(please see Note F to the Consolidated Financial Statements). If the Company and
Crested are not able to close the Acquisition Agreement, the $4,000,000 will be
applied against any future reimbursable costs/contributions due the GMMV. After
these costs and any remaining obligations are satisfied, the remainder, if any,
will be recognized as income.
Investments in affiliates decreased by $4,127,800 primarily as a result of
reconsolidating SGMC and equity losses from affiliates of $3,179,600 and
$575,700, respectively. Restricted investments increased as a result of an
investment by SGMC in a non affiliated company for $53,400 and the increase of
the certificates
41
<PAGE>
of deposit held by Plateau Resources Ltd. ("Plateau") of $326,500 for future
reclamation expenses as a result of earned interest.
During the year ended May 31, 1998, property plant and equipment increased
by $13,409,400. This increase was primarily as a result of reconsolidating SGMC
of $12,499,000, development of mining properties of $1,125,000 and the
acquisition of equipment of $1,947,200. The majority of these development and
equipment purchase expenses benefitted the GMMV and SGMC properties. There were
also capital expenditures made to keep the mill facility owned by Plateau in
standby status.
Notes receivable from employees decreased by $393,300 as the Company's
chairman retired $431,900 of obligations to the Company and Crested. Notes
receivable other decreased by $336,800 primarily as a result of Silva Production
A.B. paying its second installment of $333,333 plus interest on the note due the
Company for the purchase of The Brunton Company in fiscal 1996. Deposits and
other increased by $387,600 primarily as a result of 67,000 shares of Company
common stock being issued to executive officers of the Company under the 1996
Stock Award Program. Such shares are retained by the Company until the executive
retires and are forfeitable under certain conditions.
CAPITAL RESOURCES
GENERAL: The primary source of the Company's capital resources for fiscal
1999 will be cash on hand at May 31, 1998, equity financing for affiliated
companies, and the expected final resolution of the SMP arbitration.
Additionally, the Company 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. Interest, rentals of real
estate holdings and equipment, aircraft chartering and aviation fuel sales also
will provide cash.
LINE OF CREDIT: The Company and Crested have a $1,000,000 line of credit
with a commercial bank. The line of credit is secured by various real estate
holdings and equipment belonging to the Company and Crested. This facility is
currently available to the Company. It is anticipated that this line of credit
may be used to finance working capital needs as well as the purchase of uranium
to deliver against a SMP delivery contract that the Company and Crested recently
received as a partial settlement of certain SMP arbitration matters.
FINANCING: Equity financing for SGMC and Plateau are dependant on the
market price of gold and uranium, among other things. At May 31, 1998, the
prices for these metals were depressed and it is not known when they will
recover, if at all. Management of the Company and Crested believe, based on
independent projections, that the market prices for these metals will improve in
the short term. No assurance can be given that the prices will improve during
fiscal 1999. If the prices do not improve, the ability of the Company and
Crested to raise equity financing for these subsidiaries will be impaired.
The Company believes that cash on hand, in addition to its line of credit
and cash projected to be received from operations will be adequate to fund
working capital requirements through fiscal 1999. However, these capital
resources may not be sufficient to provide the funding for major capital
expansions of the Company's mineral properties and,accordingly, the Company's
development plans may be either temporarily or permanently impacted. Net cash
provided by financing activities for the year ended May 31, 1998 of $4,922,300
was primarily the result of issuances of the Company's common stock.
42
<PAGE>
CAPITAL REQUIREMENTS
GENERAL: The primary requirements for the Company's working capital during
fiscal 1999 are expected to be the costs associated with development activities
of Plateau, care and maintenance costs of the former SMP properties, payments of
holding fees for mining claims, purchase of uranium for delivery to the utility
contract that was distributed to the Company and Crested as a result of the
settlement agreement reached regarding the SMP arbitration, the Company's
portion of the costs associated with the GMMV properties and corporate general
and administrative expenses.
SGMC: Effective April 7, 1998, the Company purchased 889,900 Special
Warrant Units from certain Canadian investors in an arm's length, bargained
transaction between unrelated entities. As consideration, the Units were
purchased with 488,895 shares of the Company's common stock. The transaction
resulted in the Company increasing its ownership to 59% of the outstanding
common stock of SGMC as of May 31, 1998 from 39% at May 31, 1997.
Due primarily to the sustained decline in gold prices, the Company
recorded a $1,500,000 impairment on its investment in SGMC. If financing is not
obtained in fiscal 1999 and/or gold prices further decline from present levels,
the Company will reevaluate the need for an additional impairment on its
investment in SGMC, which includes the Stock Purchase Warrant that is contingent
on SGMC identifying ounces of gold in excess of 300,000 ounces. The Company
acknowledges that it may be required to record a significant impairment under
Generally Accepted Accounting Principles should financing not be obtained by
SGMC to develop the project or if gold prices decline further.
SGMC's properties contain reserves of gold. Preliminary estimates are that
a 500 ton per day ("tpd") mine/mill operation using a cyanide-flotation process,
will require up to $15,000,000 to place the proposed mine and mill into full
operation. It is the Company's intent to complete the necessary financing to
develop the reserves of SGMC. Management believes that if adequate funding is
obtained, production will begin in fiscal 2000. SGMC is currently attempting to
negotiate financing with an investment firm with a proposed plan for the
necessary financing intended to be completed in fiscal 1999. Sufficient capital
resources are available to SGMC to continue its permitting and capital raising
activities.
SMP: As part of a settlement agreement reached during the fourth quarter
of fiscal 1998 regarding the SMP Arbitration, the SMP mines and associated
properties were transferred to the Company and Crested. All past holding costs
of the SMP mines were resolved and the future costs of standby as well as
reclamation are the obligation of the Company and Crested. These costs are
estimated at approximately $85,000 per month. There are no current plans to mine
the SMP Crooks Gap properties during fiscal 1999. However, the Company and
Crested will continue to preserve the mineral properties and develop concepts to
reduce care and maintenance costs.
All matters in the SMP arbitration have been settled with the exception of
two issues that are currently before the 10th Circuit Court of Appeals. Oral
arguments are scheduled on these issues for September 24, 1998. Management of
the Company cannot predict the timing or ultimate outcome of this hearing but
believes that the issues will be resolved during fiscal 1999 unless Nukem and
CRIC elect to appeal the decision further to the U.S. Supreme Court and that
court decides to hear the appeal.
GMMV: 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. As discussed in Note F to the financial
statements, Kennecott paid the Company $4 million upon execution of the
Agreement, which became nonrefundable upon the satisfaction of certain terms.
The $4 million is classified
43
<PAGE>
as a deferred purchase option since it will be recorded as a reduction of the
Company's purchase price if the Acquisition Agreement closes.
During July 1998, the GMMV Management Committee unanimously agreed to
place the Jackpot Mine and Sweetwater Mill on active standby status. This
decision was made as a result of uncertainties in the short term uranium market.
These same uncertainties have made the financing of the acquisition of
Kennecott's interest in GMMV more difficult. The Company continues in its
financing activities in an effort to raise sufficient capital to acquire the
Kennecott interest in the GMMV. Currently, it is believed that such financing
efforts may not be concluded by the terms of the Acquisition Agreement with
Kennecott. Kennecott continues to work with the Company in its efforts to
successfully close the purchase of Kennecott's interest.
The standby costs of the GMMV mine, associated property and mill will
eventually become the responsibility of the individual partners on a percentage
ownership basis. The partners in the GMMV are currently discussing how to
operate and fund the operations of the properties. Budgets have not been
finalized, but it is projected the annual holding costs of the mine and mill
will be approximately $2,000,000. The Company and Crested will be obligated to
pay their share (50%) of these costs once the obligations of Kennecott are
completely satisfied. Due to the unpredictability of the uranium market, the
Company is unable to predict when the GMMV properties will again be put on an
active basis or when or if it will be able to purchase Kennecott's interest in
the GMMV.
PLATEAU: Plateau owns and operates the Ticaboo townsite, motel,
convenience store and restaurant. The operations resulted in fiscal 1998 losses
of $800,000, which were absorbed by the Company. The Company continues to work
on methods of increasing revenues and reducing costs. There has been an annual
growth in sales since the Company has owned Plateau. The Company has constructed
a total of seven homes which are held for sale. During fiscal 1998, the homes
were written down by $100,000 to the appraised value.
The Company is currently working to obtain the necessary permits from the
NRC and State of Utah to place the Shootaring mill which is owned by Plateau and
located in southern Utah into production. The Company is seeking debt or equity
financing of between $6,000,000 to $9,000,000 to put the mill and Tony M. Mine
into production. Until such time as the financing is obtained and profitable
contracts are obtained, the Company will not put the properties into production.
YELLOW STONE FUELS CORP. ("YSFC"): In Management's opinion, YSFC has
sufficient cash to complete its projected 1999 exploration program on its
in-situ uranium properties. At May 31, 1998, YSFC owed the Company and Crested
$400,000 on a convertible promissory note plus $40,000 in interest for a total
of $440,000. The note bears interest at 10% per annum and is due in December
1998. YSFC also owed the Company and Crested $161,700 for miscellaneous payroll
and operating expenses. YSFC has indicated its desire to pay the total
indebtedness in cash but it is not certain that a cash payment will occur as
YSFC may elect at its option to pay the promissory note with shares of its
common stock.
TERM DEBT AND OTHER OBLIGATIONS: Debt at May 31, 1998 of $503,900
constitutes a relatively low percentage of capitalization given the value of
assets owned by the Company and the various activities it participates in. The
debt is primarily for property and equipment purchased by USECC, Sutter and FNG.
The debt bears different interest rates and is due under various payment terms.
It is anticipated that all debt payments will be able to be made in the normal
course of the Company's business.
RECLAMATION OBLIGATIONS: It is not anticipated that any of the Company's
working capital will be used in fiscal 1999 for the reclamation of any of its
mineral properties. The reclamation costs are long term and are either bonded
through the use of cash bonds or the pledge of assets. It is not anticipated
that any of the Company's mining properties will enter the reclamation phase
prior to May 31, 1999.
44
<PAGE>
Prior to fiscal 1996, the Company 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 as well as the SGMC properties. The reclamation
obligations, which are established by government agencies, were most recently
set at $1,451,800 for the SMP properties and $27,000 on the SGMC properties. The
amount of accruals for environmental liabilities for each site are determined by
estimating costs associated with current or expected reclamation and remediation
plans. These plans include detailed descriptions of the work to be performed,
and in many cases involve the work of third party consultants. The plans are
submitted annually to government agencies who review them and set the bond
amounts.
To assure the reclamation work will be performed, regulatory agencies
require posting of a bond or other security. The Company and Crested satisfied
this requirement with respect to SMP properties by mortgaging their executive
office building in Riverton, Wyoming.
Reclamation obligations on the GMMV 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 except for the open pit mine near the Mill. As uranium is
processed through the Mill, a reclamation reserve will be funded on the unit of
production basis. Up to $8,000,000 (in 1990 dollars) in any reclamation costs on
the Sweetwater mill and associated properties which may be incurred prior to
commencement of production or 2001 will be loaned by UNOCAL to the GMMV to be
repaid only out of production.
Reclamation obligations of Plateau are covered by a $7,270,400 cash bond
at May 31, 1998 to the U.S. Nuclear Regulatory Commission and a $1,561,600 cash
deposit as of May 31, 1998 for the resolution of any environmental or nuclear
claims.
OTHER: Although the Company and Crested currently are not in production on
any mineral properties, development work continues on several of their major
investments. The Company and Crested are not using hazardous substances or 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, the
Company and Crested do not have properties which require current remediation.
The Company 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, 1992 are closed after audit by the IRS. The
Company currently has filed a request for an appeal hearing on an IRS agent's
findings for the years ended May 31, 1993 and 1994. Although all indicators are
that the findings of the IRS audit for 1993 and 1994 will not result in
additional tax, the findings of the audit could affect the tax net operating
loss of the Company. Management of the Company feels confident that it will
prevail on a majority of the issues. No assurance of the outcome of the appeal
can be given. The tax years ended May 31, 1995 and 1996 are also currently being
audited by the IRS. No determination on these audits can be made as they are not
yet completed.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Operations resulted in a net after tax loss of $983,200 or $0.15 per share
as compared to a net after tax loss of $3,724,500 or $0.58 per share. The
primary cause of this reduction in the Company's loss during fiscal 1998 were
increased revenues of $5,768,300 while costs and expenses only increased by
$1,697,300.
45
<PAGE>
Net cash used in operating activities decreased to $2,245,000 in 1998 from
$2,647,600 in 1997 primarily due to the decrease in loss from operations offset
by other working capital changes.
REVENUES: Mineral revenues increased by $862,400 as the result of the
Company receiving its proportionate share of the net proceeds from the delivery
of pounds of uranium under an SMP contract. This was the last delivery under
this contract and no similar delivery proceeds were received during fiscal 1997.
Commercial operations revenue increased by $1,304,100 as a result of an
increase of $1,019,100 pertaining to increased equipment rentals to the GMMV and
the development of mining properties. Additionally, revenues generated at the
Company's Ticaboo townsite increased by $285,000 in fiscal 1998. SMP litigation
settlements are recorded net of any accounts receivable from SMP for holding
costs of the mining properties. During fiscal 1998, such revenues increased by a
net of $3,586,200 to $4,590,000.
Construction contract revenues decreased by $1,038,600 as a result of the
Company's subsidiary Four Nines Gold, Inc.("FNG") not obtaining any commercial
construction contracts. FNG's equipment and employees were used exclusively
during fiscal 1998 on the construction of various roads, ponds and other
excavation projects for the GMMV. Revenues from Management fees increased
significantly due to the work that was done under the GMMV agreements that allow
the Company to receive a 10% management fee on all billable charges under the
1990 GMMV agreement.
COSTS AND EXPENSES: Mineral operation expenses and General and
administrative expenses increased by $821,700 and $2,029,900, respectively due
to increased operations at the Company's GMMV and Plateau mineral and commercial
operations, and increased salary expense. The Company recognized a mineral
interest impairment of $1,500,000 pertaining to SGMC as discussed above. There
was no impairment of mineral properties taken during fiscal 1997. There was
however an abandonment of mining claims in 1997 pertaining to certain mining
claims in the amount of $1,225,800. No abandonments of mining claims occurred in
fiscal 1998.
Construction costs decreased by $716,200 due to FNG not performing any
commercial construction work, and provision for doubtful accounts decreased by
$614,200 as no additional provision was required.
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 the 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 Cyprus Amax,
$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
46
<PAGE>
defaulting on a sale of 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
the result of Crested abandoning a mineral property having a book value of
$71,500 and SGMC abandoning properties with a book value of $1,154,300.
General and administrative expenses increased only slightly by $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 $0.58 per share in 1997 as compared to a net
profit of $270,700 or $0.04 per share in 1996.
FUTURE OPERATIONS:
The Company has generated losses in two of the last three years, as a
result of holding costs and permitting activities in the mineral segment along
with impairments of mining claims and investments in subsidiaries that are
involved in the minerals business 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.
These properties require expenditures for items such as permitting, development,
care and maintenance, holding fees, corporate overhead and administrative
expenses. Success in the minerals industry is dependant on the price that a
company can receive for the minerals produced. The Company cannot predict what
the long term price for gold and uranium will be and therefore cannot predict
when, or if, the Company will generate net income from operations..
In addition, legal expenses associated with the litigation and arbitration
surrounding the SMP Partnership and the inability of the Company to utilize all
the funds that have been awarded to the Company and Crested by the Arbitration
Panel and confirmed by the Federal Court have compounded the Company's operating
and cash flow position in the past. The Company believes that the SMP
arbitration will be resolved during fiscal 1999. The Company believes that it
will meet its obligations in fiscal 1999 as well as be able to secure financing
to further the development of its mineral properties and place them into
production.
YEAR 2000 ISSUE
Computer programs written in the past utilize a two digit format to
identify the applicable year. Any date sensitive software beyond December 31,
1999 could fail, if not modified. The result could be, among other
possibilities, disruptions to operations and the inability to process financial
transactions. The Company has evaluated the operating systems on all headquarter
and field office computers and operating systems and has consulted with various
vendors of the computer software which is being used by the Company and
affiliates. The vendors have confirmed to the Company that all of the Company's
software and information systems are Year 2000 compliant. The Company therefore
does not believe that significant expenditures will be required for the Year
2000 event.
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.
47
<PAGE>
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 the mining operations of 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 uranium
supply agreements with utilities. Fixed-price agreements become advantageous
when the spot market price for uranium falls significantly below the price which
a utility has agreed to pay.
Several of the original SMP utility contracts have been completed, and the
rest assigned out to the partners in connection with the partial settlement of
litigation with Nukem/CRIC. For fiscal 1998, USE and Crested have one utility
supply contract, which is market related, and one purchase contract, which is
market related. However, the purchase contract requires six months notice to the
supplier before delivery, which notice fixes the price. a price decline between
notice and delivery could adversely impact USE and Crested. Additional contracts
with utilities will be sought as the uranium properties of USE and Crested go
into production.
USE believes SGMC's Lincoln Mine will be profitable with gold prices over
$290 per ounce. The price of gold was adversely impacted in October and November
1997 and prices in late July 1998 were approximately $295 per ounce.
MOLYBDENUM AND OIL. Changes in prices of molybdenum and petroleum are not
expected to materially affect USE with respect to either its molybdenum advance
royalties or its fees associated with oil production. a significant and
sustained increase in demand for molybdenum would be required for the
development Mt. Emmons properties by Cyprus Amax since Cyprus Amax has other
producing mines.
ITEM 8. FINANCIAL STATEMENTS.
Financial statements for the Company follow immediately. Financial
statements of GMMV are included as schedules and immediately follow the index at
Item 14(a)(2).
48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To U.S. Energy Corp.:
We have audited the accompanying consolidated balance sheets of U.S. ENERGY
CORP. (a Wyoming corporation) AND SUBSIDIARIES as of May 31, 1998 and 1997, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended May 31, 1998. 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
subsidiaries as of May 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
September 11, 1998.
49
<PAGE>
Page 1 of 2
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
May 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,650,500 $ 1,416,900
Accounts and notes receivable:
Trade, net of allowance for doubtful
accounts of $30,900 195,800 368,200
Affiliates 1,878,400 1,191,000
Current portion of long-term
notes receivable 335,800 337,200
Assets held for resale and other 1,100,800 991,600
SMP settlement receivable, net 5,026,000 --
Inventory 113,700 96,000
----------- -----------
Total current assets 14,301,000 4,400,900
INVESTMENTS AND ADVANCES:
Affiliates 871,800 4,999,600
Restricted investments 8,889,100 8,506,300
----------- -----------
9,760,900 13,505,900
INVESTMENT IN SGMC CONTINGENT
STOCK PURCHASE WARRANT -- 4,594,000
PROPERTIES AND EQUIPMENT:
Mineral properties and mine
development costs 13,346,600 519,400
Buildings and improvements 6,424,000 5,986,800
Aircraft and other equipment 8,761,400 5,627,900
Developed oil and gas properties,
full cost method 1,773,600 1,769,900
Land and mobile home park 951,000 939,000
----------- -----------
31,256,600 14,843,000
Less accumulated depreciation, depletion
and amortization (11,806,300) (8,802,100)
----------- -----------
19,450,300 6,040,900
OTHER ASSETS:
Accounts and notes receivable:
Real estate sales, net of valuation
allowance of $926,300 398,000 394,000
Employees 352,000 745,300
Other 1,800 338,600
Deposits and other 755,100 367,500
----------- -----------
1,506,900 1,845,400
----------- -----------
Total assets $45,019,100 $30,387,100
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
</TABLE>
50
<PAGE>
Page 2 of 2
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
May 31,
----------------------------
1998 1997
---- ----
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable and accrued expenses $ 1,836,400 $ 1,312,600
Deferred GMMV purchase option 4,000,000 --
Current portion of long-term debt 225,700 81,300
------------ ------------
Total current liabilities 6,062,100 1,393,900
LONG-TERM DEBT 278,200 183,100
RECLAMATION LIABILITIES 8,778,800 8,751,800
OTHER ACCRUED LIABILITIES 4,266,800 5,259,000
DEFERRED TAX LIABILITY 1,144,800 183,300
COMMITMENTS AND CONTINGENCIES (Note K)
MINORITY INTERESTS IN SUBSIDIARIES 4,561,300 --
FORFEITABLE COMMON STOCK,
$.01 par value; 312,378 and
232,352 shares issued, respectively,
forfeitable until earned 2,473,600 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; 7,523,492 and
6,646,475 shares issued, respectively 75,200 66,500
Additional paid-in capital 28,526,200 22,543,000
Accumulated deficit (7,760,100) (6,776,900)
Treasury stock, at cost, 865,943
and 690,943 shares, respectively (2,460,800) (2,182,000)
Unallocated ESOP contribution (927,000) (927,000)
------------ ------------
17,453,500 12,723,600
------------ ------------
Total liabilities and shareholders' equity $ 45,019,100 $ 30,387,100
============ ============
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
</FN>
</TABLE>
51
<PAGE>
Page 1 of 2
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
REVENUES:
<S> <C> <C> <C>
Mineral revenues $ 1,069,700 $ 207,300 $ 3,116,700
Construction contract revenues -- 1,038,600 3,794,500
Commercial operations 3,523,500 2,219,400 1,439,100
SMP settlements, net 4,590,000 1,003,800 --
Oil sales 170,100 164,600 210,100
Management fees from
affiliates and other 1,369,300 423,800 100,200
Interest 836,100 693,300 619,400
(Loss) gain on asset sales (200) 39,400 352,200
----------- ----------- -----------
11,558,500 5,790,200 9,632,200
----------- ----------- -----------
COSTS AND EXPENSES:
Mineral operations 1,664,800 843,100 3,572,300
Construction costs 36,400 752,600 3,077,800
Commercial operations 3,055,100 3,059,600 2,374,800
General and administrative 4,793,200 2,763,300 2,524,700
Abandonment of mineral interests -- 1,225,800 328,700
Impairment of mineral interests 1,500,000 -- --
Oil production 68,000 96,800 73,000
Interest 76,000 140,800 205,000
Provision for doubtful accounts -- 614,200 --
----------- ----------- -----------
11,193,500 9,496,200 12,156,300
----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND EQUITY IN LOSS OF
AFFILIATES AND INCOME TAXES 365,000 (3,706,000) (2,524,100)
MINORITY INTEREST IN (INCOME) LOSS
OF CONSOLIDATED SUBSIDIARIES (772,500) 672,300 608,700
EQUITY IN LOSS OF AFFILIATES (575,700) (690,800) (418,500)
----------- ----------- -----------
(Continued)
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
52
<PAGE>
Page 2 of 2
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
LOSS BEFORE INCOME TAXES $ (983,200) $(3,724,500) $(2,333,900)
INCOME TAXES (Note H) -- -- --
---------- ----------- -----------
LOSS BEFORE
DISCONTINUED OPERATIONS (983,200) (3,724,500) (2,333,900)
DISCONTINUED OPERATIONS:
Income from discontinued operations,
net of income taxes of $0 -- -- 308,900
Gain on sale of subsidiary, net
of income taxes of $50,000 -- -- 2,295,700
---------- ----------- -----------
NET (LOSS) INCOME $ (983,200) $(3,724,500) $ 270,700
========== =========== ===========
INCOME (LOSS) PER SHARE AMOUNTS:
Loss before discontinued operations $ (.15) $ (.58) $ (.39)
Income from discontinued operations -- -- .05
Gain on disposal of subsidiary
operating in discontinued segment -- -- .38
---------- ----------- -----------
NET INCOME (LOSS) PER SHARE,
BASIC AND DILUTED $ (.15) $ (.58) $ .04
========== =========== ===========
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 6,657,549 6,466,855 6,028,255
========== =========== ===========
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Page 1 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional Unallocated Total
Common Stock Paid-In Accumulated Treasury Stock ESOP Shareholders'
Shares Amount Capital Deficit 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 as 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 -- -- -- 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
--------- ------- ----------- ----------- ------- ----------- ----------- -----------
<FN>
The accompanying notes to consolidated financial statements are an integral part of these statements.
</FN>
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Page 2 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(CONTINUED)
Additional Unallocated Total
Common Stock Paid-In Accumulated Treasury Stock ESOP Shareholders'
Shares Amount Capital Deficit 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
========= ======= =========== =========== ======== =========== ========= ===========
<FN>
The accompanying notes to consolidated financial statements are an integral part of these statements.
</FN>
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Page 3 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(CONTINUED)
Additional Unallocated Total
Common Stock Paid-In Accumulated Treasury Stock ESOP Shareholders'
Shares Amount Capital Deficit Shares Amount Contribution Equity
------ ------ ------- ------- ------ ------ ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Funding of ESOP 49,470 500 324,100 -- -- -- -- 324,600
Issuance of common stock
for exercised warrant 20,000 200 99,800 -- -- -- -- 100,000
Issuance of common stock
for services rendered 11,647 100 82,600 -- -- -- -- 82,700
Issuance of common stock
for exercised options 62,000 600 247,400 -- -- -- -- 248,000
Fair value of warrants issued
for services rendered -- -- 450,000 -- -- -- -- 450,000
Issuance of common
stock to acquire SGMC
special warrants, net of
offering costs 488,900 4,900 3,329,200 -- -- -- -- 3,334,100
Issuance of common stock 170,000 1,700 1,188,300 -- -- -- -- 1,190,000
Reconsolidation of SGMC -- -- -- -- 75,000 (16,300) -- (16,300)
Issuance of stock for SGMC
exercised option 75,000 700 261,800 -- 100,000 (262,500) -- --
Net loss -- -- -- (983,200) -- -- -- (983,200)
--------- ------- ----------- ----------- ------- ----------- --------- -----------
Balance May 31, 1998 7,523,492 $75,200 $28,526,200 $(7,760,100) 865,943 $(2,460,800) $(927,000) $17,453,500
========= ======= =========== =========== ======= =========== ========= ===========
<FN>
Total Shareholders' Equity at May 31, 1998 does not include 312,378 shares
currently issued but forfeitable if certain conditions are not met by the
recipients. However, Outstanding Shares at May 31, 1998 include the forfeitable
shares. Also, "Basic and Diluted Weighted Average Shares Outstanding" also
includes the 865,943 shares of U.S. Energy common stock held by majority-owned
subsidiaries, which, in consolidation, are treated as treasury shares.
The accompanying notes to consolidated financial statements are an integral part of these statements.
</FN>
</TABLE>
56
<PAGE>
Page 1 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ (983,200) $(3,724,500) $ 270,700
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Minority interest in income (loss) of
consolidated subsidiaries 772,500 (672,300) (608,700)
Income from discontinued operations -- -- (308,900)
Depreciation, depletion and amortization 657,600 658,900 788,500
Impairment of assets held for sale 100,000 -- --
Abandoned mineral claims -- 1,225,800 328,700
Impairment of mineral interests 1,500,000 -- --
Equity in loss of affiliates 575,700 690,800 418,500
SMP settlement (received after year end) (4,590,000) (1,003,800) --
Loss (gain) on sale of assets 200 (39,400) (352,200)
Provision for doubtful accounts -- 614,200 --
Gain on sale of subsidiary -- -- (2,295,700)
Proceeds from sale of subsidiary -- -- 607,900
Common stock issued to fund ESOP 324,600 213,600 87,300
Non-cash compensation 82,700 -- 222,600
Common stock and warrants
issued for services 196,000 286,800 (23,100)
Other 287,800 177,600 (455,600)
Net changes in:
Accounts receivable 172,400 (706,500) 88,600
Other assets (226,900) 318,200 (403,800)
Accounts payable and accrued expenses (176,200) (331,700) (774,700)
Reclamation and other liabilities (938,200) (355,300) (377,400)
----------- ----------- -----------
NET CASH USED IN
OPERATING ACTIVITIES (2,245,000) (2,647,600) (2,787,300)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of mining properties (1,125,000) (719,300) (763,000)
Development of gas properties -- (29,100) (42,100)
Proceeds from sale of subsidiary -- -- 3,300,000
Proceeds from sale of property and equipment 4,000 273,500 1,212,900
Proceeds from sale of investments -- -- --
Purchases of property and equipment (1,947,200) (208,600) (1,387,300)
Changes in notes receivable, net 726,800 (121,400) (1,102,800)
Distribution from affiliate -- 4,367,000 --
Investments in affiliates (102,300) (1,413,700) (676,500)
Deferred GMMV purchase option 4,000,000 -- --
----------- ----------- -----------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 1,556,300 2,148,400 541,200
----------- ----------- -----------
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
57
<PAGE>
Page 2 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Proceeds from issuance of common stock $ 1,800,500 $ 1,270,300 $ 3,273,600
Proceeds from subsidiary stock sale -- 1,106,700 --
Proceeds from long-term debt 307,700 554,400 4,212,800
Payments on lines of credit -- (499,000) (641,000)
Purchase of treasury stock -- (235,600) --
Repayments of long-term debt (309,900) (789,200) (3,967,300)
Increase (decrease) in cash related to SGMC 3,124,000 (484,100) --
----------- ----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 4,922,300 923,500 2,878,100
----------- ----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 4,233,600 424,300 632,000
CASH AND CASH EQUIVALENTS, Beginning of year 1,416,900 992,600 360,600
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, End of year $ 5,650,500 $ 1,416,900 $ 992,600
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 76,000 $ 118,900 $ 205,000
=========== =========== ===========
Income taxes paid $ -- $ -- $ --
=========== =========== ===========
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
58
<PAGE>
Page 3 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------------
1998 1997 1996
---- ---- ----
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
<S> <C> <C> <C>
Notes received for sale of assets $ -- $ -- $ 1,000,000
=========== =========== ===========
Exchange of common stock
investment in affiliate for
Contingent Stock
Purchase Warrant $ -- $ 4,594,000 $ --
=========== =========== ============
Consolidation/Deconsolidation of subsidiary
in 1998 and 1997, respectively:
Other assets $ 49,200 $ 77,600 $ --
Investment in affiliates 358,375 355,000 --
Investment in Contingent Stock Purchase Warrant (4,594,000) -- --
Restricted investment -- 27,000 --
Property, plant and equipment 12,499,000 11,560,600 --
Notes payable (241,700) 185,000 --
Accounts payable and accrued expenses (700,000) 433,900 --
Reclamation (27,000) -- --
Minority interest (3,788,700) 2,069,900 --
Issuance of common stock to acquire
SGMC special warrants, net of
of offering costs
Common stock 4,900 -- --
Additional paid-in capital 3,329,200 -- --
Warrants issued for professional services 254,000 -- --
Forfeitable stock issued for services 581,200 405,800 116,500
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
59
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
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's primary business is the
acquisition, exploration, holding, sale and/or development of mineral properties
and mining and marketing of minerals. Principal mineral interests are in
uranium, gold, and molybdenum. The Company also holds various real and personal
properties used in commercial activities and operates an airport fixed base
facility in Riverton, Wyoming. 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 in February 1996, engaged in the manufacturing and marketing of compasses
and the distribution of outdoor recreational products. 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 and other civil engineering projects. At May 31, 1998, FNG
was primarily engaged in activities for the Company at its Green Mountain
uranium property.
The Company and its 52%-owned subsidiary, Crested Corp. ("Crested") are
engaged in a venture to develop certain uranium properties with Kennecott
Uranium Company ("Kennecott") known as the Green Mountain Mining Venture
("GMMV"), formed in 1990, and is also involved in a partnership with Nukem, Inc.
("Nukem") through its wholly-owned subsidiary, Cycle Resource Investment
Corporation ("CRIC"), known as Sheep Mountain Partners ("SMP"). As discussed in
Note K, SMP is currently involved in significant legal proceedings between its
partners. During fiscal 1995, USE and Crested formed a new Wyoming corporation,
Sutter Gold Mining Company ("SGMC"), which was the successor of USECC Gold
Limited Liability Company ("USECC Gold") and Sutter Gold Venture ("SGV"). These
companies were formed to develop and mine gold reserves in California. The
Company also owns 100% of the outstanding stock of Plateau Resources Limited
("Plateau"), which owns a nonoperating uranium mill and support facilities in
southeastern Utah. Currently, the mill is nonoperating but has been granted a
license to operate, pending certain conditions. See further discussion of these
entities in Note F. As used, hereafter, "Company" refers to USE and its
consolidated entities unless otherwise specified.
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, term loans and the sale of its subsidiary, Brunton, to fund its
losses and cash needs. During fiscal 1998, the Company received $858,700 for a
delivery made on an SMP contract. Subsequent to year end, the Company and
Crested received $5,026,000 as partial payment of the monetary resolution of the
American Arbitration Association's Order and Award for the portion of the SMP
arbitration/litigation ("SMP litigation") that was finalized in fiscal 1998. For
accounting purposes, the Company and Crested first applied the proceeds against
their recorded investment balance in SMP of $436,000, with the remaining balance
of $4,590,000, after cost recovery, being recognized as income. These
transactions have resulted in the Company having net working capital of
$8,238,900 as of May 31, 1998.
60
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
The Company anticipates obtaining additional funds from those issues
presently on appeal before the 10th Circuit Court of Appeals in connection with
the SMP litigation, as further discussed in Note K. If the anticipated 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 (see Note F). Equity and/or debt financing will be the primary source of
these funds. There is no assurance such financing sources will be available to
the Company. If the additional financings do not occur as planned, the Company
believes it can delay its development activities so that available cash,
operating cash flow and bank borrowings will be adequate to fund its working
capital requirements and commitments for fiscal 1999.
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 (59%), Crested (52%) and
the USECC Joint Venture ("USECC"), a proportionately consolidated joint venture
which is equally owned by the Company and Crested through which the bulk of
their operations are conducted. USECC owns the buildings and other equipment
used by the Company and holds an interest in SMP (see Notes E and F). The
accounts of Brunton have been reflected as discontinued operations in the 1996
financial statements as Brunton was sold in February 1996.
With the exception of SMP, investments in other joint ventures and 20% to
50% owned companies are accounted for by the equity method (see Note E). SGMC
was an equity investee through March 1998 when the Company purchased special
warrant units from certain investors and increased its ownership to 59%,
requiring consolidation of April and May 1998 operations (see Note F).
Investments of less than 20% in companies are accounted for by the cost method.
All material intercompany profits, transactions and balances have been
eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The carrying amount
of cash equivalents approximates fair value because of the short maturity of
these instruments.
INVESTMENTS
Based on the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, the Company accounts for its investment in certain securities
as held-to-maturity. Held-to-maturity securities are measured at amortized cost
and are carried at the lower of aggregate cost or fair market value.
61
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
INVENTORIES
Inventories consist primarily of aviation fuel, associated aircraft parts,
mining supplies, stockpiled uranium and gold ore. Retail inventories are stated
using the average cost method. Other inventory is stated at the lower of cost or
market.
PROPERTIES AND EQUIPMENT
Land, buildings, improvements, 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 45 years.
The Company capitalizes all costs incidental to the acquisition and
development of mineral properties as incurred. Mineral exploration costs are
expensed as incurred. The costs of mine development are deferred until
production begins as these costs will be recovered through future mining
operations. Once commercial production begins, mine development costs incurred
to maintain production will be amortized using a units-of- production method
over the estimated useful life of the ore-body. Costs are charged to operations
if the Company determines that an ore body is no longer economical. Costs and
expenses related to general corporate overhead are expensed as incurred.
The Company 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 are not reflected in the accompanying consolidated
balance sheets (see Note K).
LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment when events or
changes in circumstances indicate that the related carrying amount may not be
recoverable based upon an assessment of estimated future cash flows or fair
market value, whichever is more objectively ascertainable. If the sum of
estimated future cash flows on an undiscounted basis or the fair value is less
than the carrying amount of the related asset, an asset impairment is considered
to exist. The related impairment loss is measured by comparing estimated future
cash flows on a discounted basis or the fair value of the asset less any selling
costs to the carrying amount of the asset. Changes in significant assumptions
underlying future cash flow estimates or fair values of assets may have a
material effect on the Company's financial position and results of operations. A
low commodity price market, if sustained for an extended period of time or an
inability to obtain financing necessary to develop mineral interests may result
in asset impairment. During 1998, the Company recorded an impairment of
$1,500,000 on its investment in SGMC (see Note F).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts for short-term and long-term debt, receivables, other
current assets, and accounts payable and accrued expenses approximate fair
value.
62
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
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).
Revenues from gold and uranium sales are recognized upon delivery.
Revenues are recognized from the rental of certain assets ratably over the
related lease terms. Revenues from commercial operations, which represent
primarily real estate activity, and an airport fixed base operation, are
recognized as goods and services are delivered. Revenues from long-term
construction contracts are recognized on the percentage-of-completion method.
If estimated total costs on any contract indicate a loss, the Company provides
currently for the total anticipated loss on the contract.
INCOME TAXES
The Company accounts for income taxes in accordance with 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 109 requires recognition of deferred tax assets for the expected
future effects of all deductible temporary differences, loss carryforwards and
tax credit carryforwards. Deferred tax assets are reduced, if deemed necessary,
by a valuation allowance for any tax benefits which, based on current
circumstances, are not expected to be realized.
NET INCOME (LOSS) PER SHARE
In February 1997, SFAS No. 128 "Earnings per Share" was issued and specifies the
computation, presentation and disclosure requirements for earnings per share.
SFAS 128 is effective for periods ended after December 15, 1997 and requires
retroactive restatement of prior period earnings per share. The statement
replaces "primary earnings per share" with "basic earnings per share" and
replaces "fully diluted earnings per share" with "diluted earnings per share."
Adoption of SFAS 128 required restatement of 1997 earnings per share as
forfeitable shares were included in the calculations of primary earnings per
share for the year ended May 31, 1997, the loss per share was (.55) prior to
restatement. The following table presents a reconciliation of basic and diluted
earnings per share calculations:
63
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
<TABLE>
<CAPTION>
For Years Ended May 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- ----------------------------------- ------------------------------
Per Share Per Share Per Share
Income Shares Amount Loss Shares Amount Income Shares Amount
BASIC EPS
Net (loss) income
applicable
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
to common shares $(983,200) 6,657,549 $(.15) $(3,724,500) 6,466,855 $(0.58) $270,700 6,028,255 $ .04
EFFECT OF DILUTIVE SECURITIES
Equivalent common
shares from stock options
and warrants -- -- -- -- -- -- -- 400,814 --
--------- --------- ----- ------------ --------- ------ -------- --------- -----
DILUTED EARNINGS PER SHARE
Net (loss) income applicable
to common shares $(983,200) 6,657,749 $(.15) $(3,724,500) 6,466,855 $(0.58) $ 270,700 6,429,069 $ .04
========= ========= ===== =========== ========= ====== ========= ========= =====
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130 "Reporting Comprehensive Income" ("SFAS 130")
was issued and establishes standards for reporting and displaying comprehensive
income and its components in the financial statements. In addition to net
income, comprehensive income includes all changes in equity during a period,
except those resulting from investments by and distributions to owners. The
Company will adopt SFAS 130, which is effective for fiscal years beginning after
December 15, 1997, in the first quarter of fiscal 1999. Management does not
expect the adoption of this pronouncement to have a material impact on its
consolidated financial statements.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131") was issued and establishes standards for
reporting information about operating segments in annual and interim financial
statements. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 is
effective for fiscal years beginning after December 15, 1997, and will be
adopted in fiscal 1999. Reporting and disclosures under SFAS 131 are not
expected to be materially different than those disclosures in Note I.
In February 1998, SFAS No. 132 "Employers' Disclosures about Pensions and
Other Post Retirement Benefits" ("SFAS 132") was issued and standardizes
disclosure requirements for pension and other post retirement benefit plans.
Adoption of this standard is required for fiscal years beginning after December
15, 1997, and restatement of prior period comparative disclosures is required.
The Company will adopt SFAS 132 in fiscal 1999. The adoption of SFAS 132 is not
expected to materially affect the Company's disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
establishes accounting and reporting standards for derivative instruments and
for hedging activity. SFAS 133 is effective for all periods in fiscal years
beginning after June 15, 1999. SFAS No. 133 requires all derivatives to be
recorded on the balance sheet as either an asset or liability and measured at
fair value. Changes in the derivative's fair value will be recognized currently
in earnings unless specific hedge accounting criteria are met. The Company does
not expect the adoption of SFAS 133 to have a material effect on its financial
position or results of operations.
64
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform with the 1998 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 also
provides all employee services required by Crested. In exchange, Crested is
obligated to the Company for its share of these costs. Revenues from services by
the Company to unconsolidated affiliates were $849,000, $397,000 and $92,900 in
fiscal 1998, 1997 and 1996, respectively. The Company has $1,604,400 of
receivables from unconsolidated subsidiaries and short-term advances to
employees totaling $101,300 as of May 31, 1998.
At May 31, 1998, the Company's principal shareholder and his immediate
family were indebted to the Company in the amount of $338,000 which is
represented by notes secured by 104,000 shares of the Company's common stock.
On May 15, 1997, Yellow Stone Fuels Corp. ("YSFC"), a 12.7% owned
affiliate of USE and a 12.7% owned affiliate of Crested, entered into a line of
credit arrangement with USECC. As of May 31, 1998, YSFC owed USECC $440,000
which included $40,000 of accrued interest. 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, YSFC 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 by 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. The Company has classified the $440,000 note as an investment in YSFC
based upon YSFC's current financial condition.
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) and recognized
a gain of $252,600, which is reflected as a Gain on Sale of Assets in the
accompanying Consolidated Statements of Operations.
65
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
E. INVESTMENTS AND ADVANCES:
The Company's restricted investments secure various decommissioning costs,
reclamation and holding costs. Investments are comprised of debt securities
issued by the U.S. Treasury that mature at varying times from three months to
one year from the original purchase date. As of May 31, 1998, the cost of debt
securities was a reasonable approximation of fair market value. These
investments are classified as held-to-maturity under SFAS 115 and are measured
at amortized cost.
The Company's investment in and advances to affiliates are as follows:
<TABLE>
<CAPTION>
Consolidated Carrying Value at May 31,
Ownership 1998 1997
------------- ---- ----
Equity Method:
<S> <C> <C> <C>
SGMC 59.0%* $ -- * $4,034,800
GMMV 50.0% 724,800 724,800
Ruby Mining Company 26.7% 32,100 32,600
YSFC 25.4%** 114,900 207,400
---------- ----------
$ 871,800 $4,999,600
========== ==========
</TABLE>
* Approximately 39% until March, 1998; consolidated at May 31, 1998.
**Includes notes receivable from YSFC of $440,000 and $392,200,
respectively (see Note C), reduced by equity in losses.
Equity loss from investments accounted for by the equity method are as
follows:
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Ruby Mining Company $ (500) $ (3,300) $ (2,300)
YSFC (140,300) (224,800) --
GMMV (Note F) -- -- --
---------- --------- ---------
$ (140,800) $(228,100) $ (2,300)
========== ========= =========
</TABLE>
GMMV expenses certain general and administrative, maintenance and holding
costs. However, the Company has not recognized equity losses in GMMV because
Kennecott was committed to fund 100% of the first $50,000,000 of development and
operating costs of the Joint Venture. In 1998, 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 $724,800 in the accompanying balance sheets
is substantially lower than its underlying equity in GMMV.
Condensed combined statements of operations of the Company's equity
investees include GMMV, YSFC and Ruby Mining Company.
66
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
CONDENSED COMBINED BALANCE SHEETS - EQUITY INVESTEES
<TABLE>
<CAPTION>
May 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Current assets $ 1,762,300 $ 5,776,300
Non-current assets 71,583,100 75,947,500
----------- -----------
$73,345,400 $81,723,800
=========== ===========
Current liabilities $ 1,952,000 $ 1,402,500
Reclamation and other liabilities 33,770,300 30,114,700
Excess in assets 37,623,100 50,206,600
----------- -----------
$73,345,400 $81,723,800
=========== ===========
</TABLE>
CONDENSED COMBINED STATEMENTS OF OPERATIONS - EQUITY INVESTEES
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $ 54,900 $ 1,100 $ 1,200
Costs and expenses (1,646,900) (3,116,900) (609,900)
---------- ---------- ---------
Net loss $(1,592,000) $(3,115,800) $(608,700)
=========== =========== =========
</TABLE>
SMP 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. As discussed in Note K, SMP has been
the subject of significant litigation and arbitration proceedings between the
SMP partners since 1991, portions of which are currently still in progress.
Pending the resolution of the remaining proceedings, the partners in SMP agreed
to fulfill certain of the SMP's uranium sales contracts outside of the
partnership with each partner delivering a mutually- agreed portion of the
delivery commitments on an individual basis. In 1998 and 1996, the Company
recognized revenues of $858,700 and $1,383,400, respectively (no related
revenues were recognized in 1997) from these deliveries. Revenues from these
transactions have been included in the accompanying Consolidated Statements of
Operations as Mineral Sales, which would normally have been sales of SMP.
Due to the litigation and arbitration proceedings, audited financial
statements for SMP are not obtainable. Accordingly, the Company has recorded
only its direct investment in, and results of operations from the partnership.
The Company had no carrying value of its investment in SMP for either 1998 or
1997 as proceeds from litigation and arbitration proceedings were accounted for
under the cost recovery method of accounting as discussed in Note K. The
Company's direct loss generated from its investment in SMP, which represent mine
standby costs incurred by the Company, was $436,000, $442,700 and $416,200 for
the years ended May 31, 1998, 1997 and 1996, respectively. No amounts
attributable to SMP are included in the Condensed Combined Balance Sheets or
Condensed Combined Statements of Operations of the Company's equity investees
presented above.
67
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
F. MINERAL CLAIMS TRANSACTIONS AND MINING PROPERTIES:
GMMV
During fiscal 1990, the Company and Crested entered into an agreement with
Kennecott, a wholly-owned, indirect subsidiary of The RTZ Corporation PLC, for
Kennecott to acquire a 50% interest in certain uranium mineral properties in
Wyoming known as the Green Mountain Properties. The purchase price was
$15,000,000 and a commitment to fund the first $50 million of development and
operating costs. Kennecott committed to fund 100% of the first $50 million of
capital contributions to the GMMV. 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 the GMMV.
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.
Pursuant to the Acquisition Agreement, the Mineral Lease, and the Mill
Contract, USECC is to develop the proposed Jackpot Mine and nearby Big Eagle
Mine, and work with Kennecott in preparing the Sweetwater Mill for renewed
operations. Such work will be funded from the $16,000,000 being loaned to the
GMMV by Kennecott. Kennecott will be entitled to a credit against Kennecott's
original $50,000,000 commitment to fund the GMMV, in the amount of two dollars
of credit for each one dollar of such funds out of the $16,000,000 loaned by
Kennecott to the GMMV, plus the $4,000,000 paid to USE and USECC on signing of
the Acquisition Agreement. It is anticipated that such credits will fully
satisfy the balance of Kennecott's initial funding commitment to the GMMV.
Closing of the Acquisition Agreement is subject to USE and USECC
satisfying several conditions, including: (i) the acquiring entity (which may be
USE, USECC, or an entity formed by USE and USECC to acquire Kennecott's interest
in the GMMV) must have a market capitalization of at least $200,000,000; (ii)
the parties to the Acquisition Agreement must have received all authorizations,
consents, permits and approvals of government agencies required to transfer
Kennecott's interest in the GMMV to the acquiring 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 not later than October 30, 1998.
USECC satisfied the terms of the Acquisition Agreement to the point that
the $4,000,000 deferred GMMV purchase option benefit paid by Kennecott is
nonrefundable and will serve to reduce USE's and Crested's ultimate $15,000,000
purchase price. If the acquisition is unsuccessful, the signing payment will be
applied against any future reimbursable costs and contributions due the GMMV.
After such costs and remaining obligations are satisfied, the remainder, if any,
will be recognized as income.
68
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
In 1996, the U.S. Government adopted the "USEC Privatization Act of 1996"
to privatize the U.S. Enrichment Corp. ("USEC"). In July 1998, in filings with
the U.S. Securities and Exchange Commission, USEC disclosed its planned sale of
significant quantities of uranium in the U.S. marketplace. Accordingly,
forecasted demand for uranium and forecasted uranium sales prices have decreased
in the short-term. As a result, on July 31, 1998, GMMV halted development
activities at the Jackpot Mine and has placed the facility on active standby.
This action required the layoff of mine workers. Due to the uncertainty of the
uranium market, it is not known when the mine will operate again or if USECC
will be able to conclude the financing necessary to buy Kennecott's interest.
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. Certain disputes arose among USECC, CRIC
and its parent Nukem, Inc. over the operation of SMP. These disputes have been
in litigation/arbitration for the past seven years. See Notes E and K for a
description of the investment and a discussion of the related
litigation/arbitration.
CYPRUS AMAX
During prior years, the Company and Crested conveyed interests in mining
claims to AMAX Inc. ("AMAX") in exchange for cash, royalties, and other
consideration. AMAX and its successor Cyprus Amax Minerals, Inc. ("Cyprus Amax")
have not placed the properties into production as of May 31, 1998.
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 $211,000, $207,300 and $-0- of revenue from
the advance royalty payments in fiscal 1998, 1997, and 1996, respectively.
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.
The Company and Crested also held an option to purchase certain real
estate located in Gunnison, Colorado owned by Cyprus Amax. During fiscal 1995,
USE and Crested reached an agreement with Cyprus
69
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
Amax whereby USE and Crested would forego six quarters of advance royalties as
payment of this option exercise price. Accordingly, 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
("Pangolin"), a Park City, Utah developer, for sale of the land owned in
Gunnison. Pangolin made a cash payment and signed promissory notes for the
purchase of the properties. As of May 31, 1998, the promissory notes were in
default and are adequately reserved for. USECC is endeavoring to resolve the
default and filed a legal action to protect its interest (see Note K).
SGMC
Sutter Gold Mining Company ("SGMC") was established in 1990 to conduct
operations on mining leases and to produce gold from the Lincoln Project.
SGMC is in the development stage and additional development is required
prior to the commencement of commercial production. SGMC has not generated any
significant revenue and has no assurance of future revenue. All acquisition and
mine development costs since inception have been capitalized. Since test
production in 1992, SGMC has focused its efforts on obtaining a reserve study,
developing a mine plan and pursuing a partner to assist in the financing of its
mineral development and ultimate production. As of May 31, 1998, due to the
decline in the spot price for gold, SGMC has put the development of the mine on
hold. Until the time when development begins, SGMC does not expect 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 the time it generates significant revenue from its
principal operations.
During the first and second quarters of fiscal 1997, SGMC sold shares of
its common stock in a private placement. These shares were sold for $3.00 per
share. SGMC received approximately $1,100,000 in net proceeds from this equity
placement. During the fourth quarter of fiscal 1997, an additional offering of
shares of SGMC's special warrant units was completed and raised approximately
$5,400,000 in net cash proceeds. Each special warrant unit is convertible into
one share of SGMC common stock for no additional consideration and one stock
purchase warrant. The warrant allows the holder to purchase an additional share
of SGMC common stock for a CAN$6.00. The warrant expires in November 1998. 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 the second offering, the Company and Crested accepted a
Contingent 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 has the right to satisfy the exercise of all or any
portion of the Stock Purchase Warrant with the net cash flows, as defined, at
$25.00 (US) for each new ounce of proven and probable ore in excess of 300,000
ounces up to a maximum of 700,000 ounces. Accordingly, the Company has allocated
the carrying value of SGMC shares
70
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
exchanged for the Contingent Stock Purchase Warrant to its investment in such
contingent warrants. The Stock Purchase Warrant benefits the Company and Crested
on a basis of 88.9% and 11.1%, respectively.
On March 31, 1998, the Company purchased 889,900 Special Warrant units
from certain Canadian investors. The units were purchased with 488,895 of the
Company's common stock. In addition, the Company sold 170,000 shares of common
stock to the Canadian investors at the then market price ($7.00 per share). As a
result of this purchase, the Company and Crested's combined ownership interest
in SGMC was 59%. Therefore, as of April 1, 1998 the Company began consolidating
SGMC's results of operations. Had the Company consolidated SGMC for the entire
12-month period ended May 31, 1998, the 1998 consolidated net loss would have
been approximately $190,000 greater.
Primarily as a result of the sustained decline in gold prices and the
April 1998 issuance of shares for additional equity interest in SGMC, the
Company evaluated the May 31, 1998 carrying value of its investment in SGMC for
impairment. The Company determined its aggregate investment in SGMC, which
includes the Stock Purchase Warrant discussed previously, exceeded the fair
value of the investment by approximately $1,500,000. Accordingly, in fiscal
1998, the Company recorded an impairment in the amount of $1,500,000 which is
classified as Impairment of Mineral Interests in the accompanying Consolidated
Statements of Operations.
Additional financing will be required in order to develop the reserves of
SGMC. Management of SGMC is currently attempting to negotiate a proposed
financing plan to be executed in fiscal 1999. However, if financing is not
obtained in fiscal 1999, or should other events occur such as a sustained or
further decline in gold prices, the Company will reevaluate the need for an
additional impairment of its carrying value in SGMC. If a determination is made
that an impairment has occurred, it is likely the amount of such impairment will
be material to the Company's financial position and results of operations.
PLATEAU RESOURCES LIMITED
During fiscal 1994, 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. in southeastern
Utah. USE paid nominal cash consideration for the Plateau stock and agreed to
assume all environmental liabilities and reclamation bonding obligations. At May
31, 1998, Plateau had a cash security in the amount of $7,270,408 to cover
reclamation of the properties (see Note K).
USECC is currently evaluating the best utilization of Plateau's assets.
Evaluations are ongoing to determine when, or if, the mine and mill properties
should be placed into production. The primary factor in these evaluations
relates to the current depressed uranium market. Alternative uses of the
properties are also being evaluated.
In fiscal 1998, the Company had an independent appraisal performed on its
modular homes held for resale. Based upon the analysis performed, the Company
recorded a $100,000 write-down to more accurately reflect the fair value of
these assets as of May 31, 1998. The write-down is included in Commercial Costs
71
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
and Expenses in the accompanying Consolidated Statements of Operations. The
Company continues to review its investment in these assets for impairment.
ENERGX, LTD.
Energx is engaged 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 1997 and 1996, Energx abandoned certain of its leases and as
a result wrote off $164,500 and $328,700, respectively, of related capitalized
costs. The write off is reflected as Abandonment of Mineral Interests in the
accompanying 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, 1998). The weighted average interest rate for both 1998 and 1997 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. No amounts were
outstanding as of May 31, 1998 and 1997.
NOTES PAYABLE
The components of notes payable as of May 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
May 31,
-----------------------
1998 1997
---- ----
Installment notes - secured by equipment;
<S> <C> <C>
interest at 8.75% - 9.5%, matures in 2000 $ 167,100 $ 69,100
SGMC installment notes - secured by
certain mining properties, interest at
7.5% to 8.0%, maturity from 1999 - 2004 235,000 --
FNG installment notes - secured by FNG
equipment, interest at 8.75% to 8.9%
maturity from 1997 - 2002 101,800 195,300
--------- ---------
503,900 264,400
Less current portion (225,700) (81,300)
--------- ---------
$ 278,200 $ 183,100
========= =========
</TABLE>
Principal requirements on notes payable are $225,700; $117,000; $84,300;
$24,700; $22,600; and $29,600 for the years 1999 through 2003 and thereafter,
respectively.
72
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
H. INCOME TAXES:
The components of deferred taxes as of May 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
May 31,
--------------------------
1998 1997
---- ----
Deferred tax assets:
<S> <C> <C>
Deferred compensation $ 87,300 $ 129,800
Net operating loss carryforwards 6,703,900 6,731,500
Tax credits 213,800 325,100
Other 541,900 655,400
Tax basis in excess of book basis 2,087,900 573,400
----------- -----------
Total deferred tax assets 9,634,800 8,415,200
----------- -----------
Deferred tax liabilities:
Development and exploration costs (3,979,300) (1,963,400)
----------- -----------
Total deferred tax liabilities (3,979,300) (1,963,400)
----------- -----------
5,655,500 6,451,800
Valuation allowance (6,800,300) (6,635,100)
----------- -----------
Net deferred tax liability $(1,144,800) $ (183,300)
=========== ===========
</TABLE>
The Company has established a valuation allowance of $6,800,300 against
deferred tax assets due to the losses incurred by the Company in past fiscal
years. The Company's ability to generate future taxable income to utilize the
NOL 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,
----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected federal income tax $ (320,300) $(1,266,330) $(793,500)
Net operating losses not previously
benefitted and other 155,100 ( 86,670) (204,800)
Valuation allowance 165,200 1,353,000 998,300
---------- ----------- ---------
Income tax provision $ -- $ -- $ --
========== =========== =========
</TABLE>
There were no taxes currently payable as of May 31, 1998, 1997 or 1996
related to continuing operations.
At May 31, 1998, the Company and its subsidiaries had available, for
federal income tax purposes, net operating loss carryforwards of approximately
$19,700,000 which will expire from 2004 to 2013 and investment tax credit
carryforwards of $213,800 which, if not used, will expire from 1999 to 2001. The
Internal Revenue Code contains provisions which limit the NOL carryforwards
available which can be used in a given year when significant changes in company
ownership interests occur. In addition, the NOL and credit amounts are subject
to examination by the tax authorities.
73
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
The Internal Revenue Service has audited the Company's and affiliates' tax
returns through fiscal 1994, and is currently auditing the fiscal years ended
May 31, 1996 and May 31, 1995. The Company's income tax liabilities are settled
through fiscal 1992. The Company has received 30 day letters for the years ended
May 31, 1994 and 1993. 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, 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 include commercial operations, primarily real estate
activities, an airport fixed base operation, and construction activities. The
following is information related to these industry segments:
<TABLE>
<CAPTION>
Year Ended May 31, 1998
-------------------------------------------------------
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues $ 1,069,700 $3,523,500 $ -- $ 4,593,200
=========== ========== ==========
Interest and other revenues 6,965,300
-----------
Total revenues $11,558,500
Operating loss $ (595,100) $ 468,400 $ (36,400) $ (163,100)
=========== ========== ==========
Interest and other revenues 6,965,300
General corporate and other expenses (7,209,900)
Equity in loss of affiliates (575,500)
-----------
Loss before income taxes
and discontinued operations $ (983,200)
===========
Identifiable net assets at May 31, 1998 $22,235,700 $7,717,400 $ 208,200 $30,161,300
=========== ========== ==========
Investments in affiliates 912,900
Corporate assets 15,486,000
-----------
Total assets at May 31, 1998 $46,560,200
===========
Capital expenditures $ 1,175,000 $ 239,400 $ --
=========== ========== ==========
Depreciation, depletion and
amortization $ 243,900 $ 298,600 $ 115,100
=========== ========== ==========
</TABLE>
74
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended May 31, 1997
--------------------------------------------------------
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues $ 207,300 $ 2,219,400 $ 1,038,600 $ 3,465,300
=========== =========== ===========
Interest and other revenues 2,324,900
------------
Total revenues $ 5,790,200
============
Operating (loss) profit $ (843,100) $ (840,200) $ 286,000 $ (1,397,300)
=========== ============ ===========
Interest and other revenues 2,324,900
General corporate and other expenses (3,961,300)
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 $ 198,800
=========== ============ ===========
</TABLE>
75
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended May 31, 1996
---------------------------------------------------------
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues $ 3,116,700 $ 1,439,100 $ 3,794,500 $ 8,350,300
============ =========== ===========
Interest and other revenues 1,281,900
------------
Total revenues $ 9,632,200
============
Operating (loss) profit $ (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>
During fiscal 1998 and 1996 approximately 100% and 89% of mineral revenues
were from the sale of uranium. There were no uranium sales during fiscal 1997.
The Company subleases excess office space, contracts aircraft for charter
flights and sells aviation fuel. Commercial Revenues in the accompanying
Consolidated 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 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 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 shares under the plan are forfeitable until retirement, death or
disability of the officer. The shares are held in trust by the Company's
treasurer and are voted by the Company's non-
76
<PAGE>
employee directors. As of May 31, 1998, 245,378 total shares have been issued to
the five officers of the Company and Crested.
In December 1997, the Company entered into a warrant purchase agreement
with an investment advisory firm to purchase 225,000 shares at an exercise price
of $10.50 expiring December 2, 2000. The warrants were issued in exchange for
services to be provided during the period December 1997 to December 1998. The
Company determined the fair value associated with these warrants to be $186,000,
which will be recognized ratably over the term of the related advisory
agreement. Accordingly, $108,000 was recognized as expense in fiscal 1998, with
the remaining amount to be recognized in fiscal 1999.
In January 1998, the Company entered into a warrant purchase agreement
with another investment advisory firm to purchase 200,000 shares at an exercise
price of $7.50 expiring January 20, 2000. The warrants were issued in exchange
for services to be provided during the period from January 1998 to January 1999.
The Company determined the fair value associated with these warrants to be
$264,000, which will be recognized ratably over the term of the related advisory
agreement. Accordingly, $88,000 was recognized as expense in fiscal 1998, with
the remaining amount to be recognized in fiscal 1999.
In January 1996, the Company entered into a warrant purchase agreement
with an investment advisory firm. Pursuant to the Agreement, this firm received
a warrant to purchase 200,000 common shares of the Company's common stock at
$5.00 per share in exchange for consultation services to be provided through
January 9, 1997. In connection with this warrant agreement, the Company
recognized $148,300 of consulting expense in fiscal 1997 which the Company
determined to be the fair value. During fiscal 1997, 180,000 of these warrants
were exercised resulting in total proceeds to the Company of $900,000. The
remaining 20,000 shares were exercised in 1998 resulting in $100,000 of proceeds
to the Company.
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 prices
ranging from $2.75 to $2.90 per share. These options will expire on April 14,
2002 and April 30, 2002. During fiscal 1996, the Company issued 360,000
non-qualified options to employees who are not officers or directors at a
purchase price of $4.00 per share, expiring on December 31, 2000. During fiscal
1998, options were exercised for the purchase of 62,000 shares. In fiscal 1997,
the shareholders of USE ratified an amendment to the Option Plan and on that
same date all outstanding non-qualified options were converted to qualified
options by the Board of Directors of USE.
The Board of Directors of USE adopted the U.S. Energy Corp. 1989 Employee
Stock Ownership Plan ("ESOP") in 1989, for the benefit of USE employees. During
fiscal 1998, 1997 and 1996, the Board of Directors of USE contributed 49,470,
24,069 and 10,089 shares to the ESOP at prices of $6.57, $8.87 and $8.65 per
share, respectively. The Company is responsible for one-half of these
contributions amounting to $162,300, $106,700 and $43,600 in fiscal 1998, 1997
and 1996, 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
77
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
contribution in the equity section of the accompanying Consolidated Balance
Sheets. During fiscal 1996, the Company released 10,089 of the shares to fund
the 1996 ESOP contribution by $87,300 as reflected in the Consolidated 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 Consolidated 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, 1998, 1997 and 1996, the Company had
compensation expense of $54,600, $152,600 and $116,500 respectively, resulting
from these issuances. A schedule of forfeitable shares for both USE and Crested
is set forth in the following table:
<TABLE>
<CAPTION>
Issue Number Issue Total
Date of Shares Price Compensation
---- --------- ----- ------------
<S> <C> <C> <C>
May 1990 40,300 $ 9.75 $392,900
June 1990 66,300 11.00 729,300
November 1992 10,660 N/A N/A
May 1993 20,000 3.375 67,500
November 1993 18,520 3.00 55,600
January 1994 18,520 4.00 74,100
January 1995 13,520 3.75 50,700
February 1996 7,700 15.125 116,500
December 1996 36,832 10.875 405,800
------- ----------
Balance at
May 31, 1997 232,352 $1,892,400
August 1997 13,026 10.875 141,700
May 1998 67,000 6.56 439,500
------- ----------
Balance at
May 31, 1998 312,378 $2,473,600
======= ==========
</TABLE>
No shares were earned in fiscal 1998 or 1997. 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 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
78
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
disclosures are made of net income or loss and net income or loss per share,
assuming the fair value based method of SFAS 123 had been applied. The Company
has elected to account for its stock-based compensation plans under APB 25;
accordingly, for purposes of the pro forma disclosures presented below, the
Company has computed the fair values of all options granted during fiscal year
1996 using the Black- Scholes pricing model and the following weighted average
assumptions (no options were granted during 1998 and 1997):
1996
----
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 $98,100, $255,000 and $106,200 for 1998, 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:
<TABLE>
<CAPTION>
Year Ended May 31,
------------------------------------------
1998 1997 1996
---- ---- ----
Net (loss) income
<S> <C> <C> <C>
As reported $(983,200) $(3,724,500) $270,700
Pro forma $(1,081,300) $(3,979,500) $164,500
Net (loss) income per common
share, basic and diluted
As reported $ (.15) $ (.58) $ .04
Pro forma, Basic $ (.16) $ (.62) $ .03
Pro forma, Diluted $ (.16) $ (.62) $ .03
</TABLE>
Weighted average shares used to calculate pro forma net loss per share
were determined as described in Note B, except in applying the treasury stock
method to outstanding options, net proceeds assumed received upon exercise were
increased by the amount of compensation cost attributable to future service
periods and not yet recognized as pro forma expense.
79
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
A summary of the Stock Option Plan activity for the years ended May 31,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 596,700 $3.41 724,800 $3.44
Granted -- -- -- --
Canceled -- -- (22,000) $4.00
Exercised (62,000) $4.00 (106,100) $3.49
------- --------
Outstanding at end of year 534,700 $3.34 596,700 $3.41
======= ========
Exercisable at end of year 394,700 $3.11 380,700 $3.07
======= ========
</TABLE>
The following table summarizes information about employee stock options
outstanding and exercisable at May 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- --------------------------
Weighted
Number of Average Weighted Number Weighted
Options Remaining Average of Options Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Prices May 31, 1998 Life in years Price May 31, 1998 Price
------ ------------ ------------- ----- ------------ -----
<S> <C> <C> <C> <C> <C>
$2.75 49,400 3.92 $2.75 49,400 $2.75
2.90 264,300 3.88 2.90 264,300 2.90
4.00 221,000 2.50 4.00 81,000 4.00
</TABLE>
K. COMMITMENTS, CONTINGENCIES AND OTHER:
LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS (SMP)
ARBITRATION/LITIGATION 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. On July 3, 1991, the Company and Crested, through USECC,
filed a civil action in the U. S. District Court of Colorado against Nukem, CRIC
and their affiliates, alleging Nukem/CRIC fraudulently misrepresented facts and
concealed information from the Company and Crested to induce their entry into
the agreements forming the SMP partnership and sought rescission, damages and
other relief. 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.
80
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
On September 16, 1991, USECC filed another 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. On May 11, 1993, the Denver District Court stayed all
proceedings in state court until the case in the U.S. District Court for
Colorado case was resolved. Thereafter in February 1994, USECC, Nukem and CRIC,
agreed that the majority of the litigation subsequent to the formation of SMP on
December 21, 1988, would be handled through consensual arbitration before a
three member panel of the American Arbitration Association (the "Panel"). The
arbitration hearing consumed 73 hearing days commencing on June 27, 1994 and
concluded on May 31, 1995. The Panel entered its Order and Award on April 18,
1996. Nukem filed two motions with the district court indicating there was a
material miscalculation and a double recovery. The District Court remanded the
matter to the Arbitration Panel to consider Nukem's motions. On July 3, 1996,
the Panel found there was no double recovery and approved the Order and Award,
which awarded Crested and USE $12,500,000 and Nukem/CRIC $7,100,000 through
March 31, 1996. On November 4, 1996 the United States District Court issued a
Judgment and Order confirming the Arbitration Panel's Order and Award.
In November 1996, USE and Crested received $4,300,000 from the SMP escrow
bank accounts as partial payment of the monetary award of the Arbitration Panel.
This $4,300,000 was accounted for under the cost recovery method of accounting,
wherein it was applied to outstanding amounts due USECC and USE 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 reviewed the motion and
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 filed a notice of appeal with the Tenth Circuit Court of Appeals and
posted a $8,613,600 supersedeas bond on the monetary portion of the Award.
Nukem's appeal is based on two issues, the District Court erred in confirming
the double recovery finding in the AAA Panel's Order and Award and that the
Order placing Nukem's uranium purchase contracts with the CIS republics in
constructive trust with SMP. During the fourth quarter of fiscal 1998, a
settlement agreement was reached whereby U.S. Energy and Crested received
$5,026,000 as a partial settlement and, in addition, USECC received the Sheep
Mountain Uranium Mines and certain other properties from SMP and one uranium
delivery contract along with a 50% interest in a uranium supply contract. This
settlement does not in any way affect issues presently on appeal and pending
before the 10th Circuit Court of Appeal ("CCA"). A hearing is currently
scheduled before a three judge panel court of the 10th CCA on September 24, 1998
in Oklahoma City, Oklahoma.
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 in the U.S. Federal
District Court, Danville, Illinois, against the Company, Crested, et al. seeking
a declaratory judgment that IPC's contract with SMP was void. After various
negotiating sessions the parties reached agreement in June 1995 to settle the
case by entering into an amendment to the original supply contract to provide
for 3 deliveries totaling 486,443 lbs. U3O8. The final delivery was made in May
1997. On June 13, 1997, USE and Crested received $838,500 as a distribution of
profits from the final delivery under this SMP contract.
81
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
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. as defendants. The
complaint primarily concerns extra lateral 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. 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 extra lateral rights. Other claims
between the parties were bifurcated by the Court and were not at issue at the
trial. On December 26, 1995, the district court issued a ruling denying apex
rights and extra lateral royalties to Parador, the Company and Crested. The
partial trial did not address the other issues pending in the litigation but
limited the trial to those issues required to decide the question of extra
lateral rights. All other remaining claims and counterclaims were considered by
the Court on January 26-28, 1998 in a bench trial and the Court entered judgment
against the plaintiff and the defendants on their claims. BGBI, USECC and
Parador appealed this judgment to the Nevada Supreme Court. On June 23, 1998, a
mandatory Settlement Conference was held in Reno, NV but no settlement was
achieved. The Settlement Mediator referred the case to the Nevada Supreme Court
for an expedited hearing and the appeal is currently pending.
TICABOO TOWNSITE LITIGATION. In fiscal 1998, the prior contract operator
of the restaurant and lounge and two of its employees who operated the motel and
convenience store at Ticaboo (owned by Canyon Homesteads, Inc.) sued USE,
Crested and Plateau Resources Ltd., et al in Utah State Court. After a five day
trial, the jury found against the two plaintiff employees but found for the
third plaintiff and a judgment was entered for $153,371 in damages against USE,
which was recorded in fiscal 1998. USE intends to vigorously appeal the award.
DEPARTMENT OF ENERGY LITIGATION. On July 20, 1998, eight uranium mining
companies with operations in the United States (including USE, Crested, YSFC)
and the Uranium Producers of America, a trade organization, filed a complaint
against the United States Department of Energy (the "DOE") and the acting
secretary in a lawsuit (file no. 98 CV 1775) in the U.S. District Court,
Cheyenne, Wyoming. The complaint seeks declaratory judgment and injunctive
relief. The plaintiffs allege that the DOE violated the USEC Privatization Act
of 1996, when the DOE transferred 45 metric tons of low enriched uranium and
3,800 metric tons of natural uranium to the United States Enrichment Corp.
("USEC") in May 1998.
The plaintiffs have asked the Court among other claims to declare that (i)
the DOE violated its statutory authority by transferring uranium to USEC in
excess of statutory limits on volume; (ii) the excess amounts were not sold by
the DOE to USEC for fair value, as required by the Act, and mandated findings by
the DOE concerning possible adverse impacts were not supported in fact; and
(iii) the DOE be enjoined from future transfers in violation of the Act. The
defendants have not yet responded to the complaint.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the U.S. District Court, Denver,
Colorado against Contour Development Company, L.L.C. and entities and persons
associated with Contour Development Company,
82
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
L.L.C. (collectively, "Contour") seeking compensatory and consequential damages
from the defendants for dealings in certain real estate.
Specifically, USE alleges that Contour has breached contracts for the sale
of the Gunnison properties of USE and Crested, and is in default on the
contracts and promissory notes delivered to pay for the Gunnison properties.
As of the filing date of this Report, Contour and the other defendants
have not filed an answer to the complaint but negotiations are underway to
settle the issues.
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 in accordance with these regulations, but the rules are continually
changing and generally becoming more restrictive. Consequently, the Company's
current estimates of its reclamation obligations and its current level of
expenditures to perform ongoing reclamation may change in the future. At the
present time, however, the Company cannot predict the outcome of future
regulation or its impact on costs. Nonetheless, the Company has recorded its
best estimate of future reclamation and closure costs based on currently
available facts, technology and enacted laws and regulations. Certain regulatory
agencies, such as the Nuclear Regulatory Commission ("NRC"), the Bureau of Land
Management ("BLM") and the Wyoming Department of Environmental Quality ("WDEQ")
review the Company's reclamation, environmental and decommissioning liabilities,
and the Company believes its recorded amounts are consistent with those reviews
and related bonding requirements. To the extent that planned production on its
properties is delayed, interrupted or discontinued because of regulation or the
economics of the properties, the future earnings of the Company would be
adversely affected. The Company believes it has accrued all necessary
reclamation costs and there are no additional contingent losses or unasserted
claims to be disclosed or recorded. The Company has not disposed of any
properties for which it has a commitment or is liable for any known
environmental liabilities.
The majority of the Company's environmental obligations relate to former
mining properties acquired by the Company. Since the Company currently does not
have properties in production, the Company's policy of providing for future
reclamation and mine closure costs on a unit-of-production basis has not
resulted in any significant annual expenditures or costs. For the obligations
recorded on acquired properties, including site-restoration, closure and
monitoring costs, actual expenditures for reclamation will occur over several
years, and since these properties are all considered future production
properties, those expenditures, particularly the closure costs, may not be
incurred for many years. The Company also does not believe that any significant
capital expenditures to monitor or reduce hazardous substances or other
environmental impacts are currently required. As a result, the near term
reclamation obligations are not expected to have a significant impact on the
Company's liquidity.
As of May 31, 1998, the Company has recorded estimated reclamation
obligations, including standby costs, of $13,055,600 which is included in
Reclamation and Other Long-term Liabilities in the accompanying Consolidated
Balance Sheets. In addition, the GMMV, in which the Company is a 50% owner, has
recorded a $23,620,000 liability for future reclamation and closure costs. None
of these liabilities have been
83
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
discounted, and the Company has not recorded any potential offsetting recoveries
from other responsible parties or from any insurance companies.
The Company currently has four mineral properties or investments that
account for most of its environmental obligations, SMP, GMMV, Plateau and SGMC.
The environmental obligations and the nature and extent of cost sharing
arrangements with other potentially responsible parties, as well as any
uncertainties with respect to joint and several liability of each are discussed
in the following paragraphs:
SMP
- ---
The Company and Crested are responsible for the reclamation obligations,
environmental liabilities and liabilities for injuries to employees in mining
operations with respect to the Crooks Gap properties. The reclamation
obligations, which are established by regulatory authorities, were reviewed by
the Company and the regulatory authorities during fiscal 1998 and the balance in
the reclamation liability account at May 31, 1998 of $1,451,800 is believed by
management to be adequate. The obligation will be satisfied over the life of the
mining project which is estimated to be at least 20 years. The Company and
Crested self bonded this obligation by mortgaging certain of its real estate
assets and by holding certificates of deposits. A portion of the funds for the
reclamation of SMP's properties will be provided by a sinking fund of up to $.50
per pound of uranium for reclamation work as the uranium is produced from the
properties.
GMMV
- ----
During fiscal 1991, the Company and Crested acquired developed mineral
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 to Kennecott, with Kennecott, the Company and
Crested contributing 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 for
the first $8,000,000 of such expenditures. Any reimbursement may be recovered by
UNOCAL from 20% of future cash flows from the sale of uranium concentrates
processed through the Mill.
On June 18, 1996, Kennecott had a letter of credit in the amount of
approximately $19,767,000 issued to the WDEQ for minesite matters (executing
EPA-delegated jurisdiction to administer the Clean Water Act and the Clean Air
Act, and directly administering Wyoming statutes on mined land reclamation), and
$5,400,000 issued to the NRC for decontamination and cleanup of the Mill and
related tailings cells. An irrevocable letter of credit has been provided by the
Morgan Guaranty Trust Company of New York in lieu
84
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
of a surety bond to cover the reclamation costs for the minesite and a
performance bond by St. Paul Insurance Company was obtained for 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 commences.
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 it will have to pay for
such costs directly. First, based on current estimates of cleanup and
reclamation costs (reviewed annually by the oversight agencies), these costs may
be within the $50,000,000 development commitment and related $16,000,000 loan of
Kennecott Uranium Company for the 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 UNOCAL's ownership, UNOCAL
has agreed to fund up to $8,000,000 of costs (provided these 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 should mining and milling commence.
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
from GMMV operating revenues). In addition, if and to the extent these
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 is currently owned 55% by the Company, 4% by Crested and 41% by
private investors. SGMC owns gold mineral properties in California. Currently,
these properties are in development and costs consist of drilling, permitting,
holding 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, 1998.
85
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
Plateau Resources, Limited
- --------------------------
The environmental and reclamation obligations acquired with the
acquisition of Plateau include obligations relating to the Shootaring mill.
Based on the bonding requirements, Plateau transferred $2,500,000 to a trust
account as financial surety to pay future costs of mill decommissioning, site
reclamation and long-term site surveillance. In fiscal 1997, Plateau increased
the NRC surety to a cash bond of $6,784,000 in order to have its standby license
changed by the NRC to operational.
YSFC Exchange Rights Agreement
- ------------------------------
The Company and YSFC have entered into an Exchange Rights Agreement (the
"Agreement"). Under the Agreement the YSFC private placement shareholders and
related broker agent have the right, but not the obligation, to exchange their
shares in YSFC for USE common stock if YSFC's common shares are not listed and
available for quotation on the NASDAQ marketing system by March 1999. The
exchange rate for USE shares will be the price paid for the YSFC's common shares
plus 10% per annum of total cost from the date of purchase. The number of USE
shares exchanged will be based on the exchange rate for a share of USE common
stock for the five business days prior to the date of notice given by the YSFC
shareholder to exchange their shares.
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 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 two of
the three annual installments of $333,333 on a $1,000,000 note, plus interest at
a rate of 7% per year during February 1997 and 1998. One additional payment is
due the Company in the amount of $333,333 plus interest in February 1999. In
addition, the Company is entitled to receive 45% of the profits before taxes as
defined in the Purchase Agreement related to Brunton products existing at the
time the Purchase Agreement was executed for a period of 4 years and three
months, beginning February 1, 1996. The Company received payments of $292,600
for profits in 1997.
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 year
ended May 31, 1996 was $2,870,800. The Company recognized a gain on the disposal
of Brunton of $2,295,700 net of income taxes of approximately $50,000.
86
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
In the event a definitive proxy statement containing the information being
incorporated by reference into this Part III is not filed within 120 days of May
31, 1998, the Registrant will file such information under cover of a Form
10-K/A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 with respect to directors and certain
executive officers is incorporated herein by reference to Registrant's Proxy
Statement for the 1998 Annual Meeting of Shareholders. The information regarding
the remaining executive officers is contained in Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference to
the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by Item 12 is incorporated herein by reference to
the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by reference to
the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, REPORTS AND
FORMS 8-K
Page No.
(a) The following financial statements are filed as a part
of this Report in Item 8:
(1) Consolidated Financial Statements
Registrant and Affiliates
Report of Independent Public Accountants........................49
Consolidated Balance Sheets - May 31, 1998 and 1997..........50-51
Consolidated Statements of Operations
for the Years Ended May 31, 1998, 1997 and 1996 .............52-53
87
<PAGE>
Consolidated Statements of Shareholders'
Equity for the Years Ended May 31, 1998, 1997 and 1996.......54-56
Consolidated Statements of Cash Flows
for the Years Ended May 31, 1998, 1997 and 1996..............57-59
Notes to Consolidated Financial Statements ..................60-86
(ii) Financial and Schedules of Affiliates
(a) Green Mountain Mining Venture
Report of Independent Public Accountants..................95
Balance Sheet - December 31, 1997 and 1996................96
Statement of Operations for the Period
from June 1, 1990 (Date of Inception)
through December 31, 1997.................................97
Statement of Changes in Partners'
Capital for the Period from
June 1, 1990 (Date of Inception)
through December 31, 1997.................................98
Statement of Cash Flows for the
Period from June 1, 1990
(Date of Inception) through
December 31, 1997.........................................99
Notes to Financial Statements........................100-105
(b) Sheep Mountain Partners
Due to the litigation and arbitration proceedings, audited financial
statements for SMP are not obtainable. They are therefore not
included as an Exhibit to the Registrant's Form 10-K.
All other schedules have been omitted because the information is not
applicable or because the information is included in the financial
statements.
(3) Exhibits Required to be Filed. Each individual exhibit filed herewith is
sequentially paginated corresponding to the pagination of the entire Form
10-K. As a result of this pagination, the page numbers of documents filed
herewith containing a table of contents will not be the same as the page
number contained in the original hard copy.
Exhibit Sequential
No. Title of Exhibit Page No.
------ -------------------------------- ----------
3.1 USE Restated Articles of Incorporation....................[5]
3.1(a) USE Articles of Amendment to Restated Articles
of Incorporation..........................................[3]
3.2 USE Bylaws, as amended through April 22, 1992.............[3]
4.1 Warrant to Purchase 200,000 Common Shares of USE.........[14]
88
<PAGE>
4.2 USE 1998 Incentive Stock Option Plan
and Form of Stock Option Agreement....................106-116
4.3 USE Restricted Stock Bonus Plan,
as amended through 2/94..................................[14]
4.4 Form of Stock Option Agreement,
and Schedule, Options Issued 1/96.........................[1]
4.5 Amendment to Warrant to Purchase
200,000 Common Shares of USE.............................[15]
4.6 Amendment to USE 1989 Incentive
Stock Option Plan (12/13/96).............................[15]
4.7 USE 1996 Stock Award Program (Plan)......................[15]
4.8 USE Restated 1996 Stock Award Plan and Amendment to
USE 1990 Restricted Stock Bonus Plan.....................[15]
4.9 Agreement with Sunrise Financial Group (12/1/97).........[16]
4.10 Sunrise Financial Group 1/9/98 Warrant to
Purchase 225,000 Common Shares of USE....................[16]
10.1 USECC Joint Venture Agreement - Amended...................[6]
10.2 Management Agreement with USECC...........................[4]
10.3 Promissory Note from Crested to USE (5/31/97)............[15]
10.4 Contract for Sale of Stock of Brunton to Silva A.B.......[13]
10.5 Assignment and Lease - Parador............................[4]
10.6 Employment Agreement - Daniel P. Svilar...................[5]
10.7 Airport Ground Lease - City of Riverton...................[4]
10.8 Executive Officer Death Benefit Plan......................[5]
10.9 Big Eagle Acquisition Agreement with PMC..................[7]
10.10 [intentionally left blank]
10.11 Sweetwater Mill Acquisition Agreement.....................[4]
10.12 Ft. Peck Agreement - Drilling and Production Services ....[4]
10.13 [intentionally left blank]
10.18 Master Agreement - Mt. Emmons/AMAX........................[9]
10.19 [intentionally left blank]
89
<PAGE>
10.20 Promissory Notes - ESOP/USE..............................[10]
10.21 Self Bond Agreement - Crooks Gap Properties...............[6]
10.22 Security Agreement - ESOP Loans..........................[11]
10.23 - 10.26 [intentionally left blank]
10.27 Mineral Properties Agreement Congo Area - PMC.............[5]
10.28 Memorandum of Joint Venture Agreement - GMMV..............[5]
10.29 Memorandum of Partnership Agreement - SMP................[6]
10.30 [intentionally left blank]
10.31 [intentionally left blank]
10.32 Employee Stock Ownership Plan.............................[6]
10.33 [intentionally left blank]
10.34 Form of Stock Option Agreement and Schedule - 1989 Plan...[5]
10.35 Severance Agreement (Form)................................[3]
10.36 1992 Stock Compensation Plan Non-Employee Directors.......[3]
10.37 Executive Compensation (John L. Larsen)...................[3]
10.38 Executive Compensation (Non-qualified Options)............[3]
10.39 ESOP and Option Plan Amendments (1992)....................[3]
10.40 Plateau Acquisition - Stock Purchase
Agreement and Related Exhibits............................[8]
10.41 Option and Sales Agreements -
Gunnison Property Parcel A................................[2]
10.42 Option and Sales Agreements -
Gunnison Property Parcel B................................[2]
10.43 - 10.48 [intentionally left blank]
10.49 Acquisition Agreement between
Kennecott Uranium Company,
USE and USECC regarding GMMV (6/23/97)...................[15]
10.50 Exhibit A to Acquisition Agreement (see 10.49)
Promissory Note from Kennecott Uranium Company to
Kennecott Energy Company regarding GMMV .................[15]
90
<PAGE>
10.51 Exhibit B to Acquisition Agreement
(see 10.49) Mortgage, Security Agreement,
Financing Statement and Assignment of
Proceeds, Rents and Leases...............................[15]
10.52 Exhibit G to Acquisition Agreement
(see 10.49) - Contract Services Agreement
for the Sweetwater Uranium Mill Facility.................[15]
10.53 Exhibit H to Acquisition Agreement
(see 10.49) - Mineral Lease Agreement ...................[15]
10.54 Exhibit I to Acquisition Agreement
(see 10.49) - Fourth Amendment of
Mining Venture Agreement among
Kennecott Uranium Company, USE and USECC.................[15]
10.49 USE/Dominick & Dominick Securities, Inc. Stock
Purchase Agreement for 157,530 Common Shares of USE......[16]
10.50 USE/BPI Canadian Resource Fund Stock Purchase
Agreement for 125,341 Common Shares of USE...............[16]
10.51 USE/BPI Canadian Opportunities II Fund Stock
Purchase Agreement for 125,341 Common Shares of USE......[16]
10.52 USE/BPI Canadian Small Companies Fund Stock
Purchase Agreement for 250,683 Common Shares of USE......[16]
10.53 USE/Yellow Stone Fuels Corp.
Exchange Rights Agreement................................[16]
10.55 Master Resolution Agreement
regarding Gunnison Properties............................[15]
10.56 Membership Pledge Agreement
regarding Gunnison Properties............................[15]
10.57 Management Agreement between SGMC and USECC..............[15]
10.58 Outsourcing and Lease Agreement
between YSFC and USECC ..........................[15]
10.59 Convertible Promissory Note from YSFC to USECC...........[15]
21.1 Subsidiaries of Registrant...............................[15]
[1] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31,
1996
[2] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31,
1995.
[3] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31,
1992.
91
<PAGE>
[4] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31,
1991.
[5] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31,
1990.
[6] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31,
1989.
[7] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form 10-Q for the period ended February 28, 1991.
[8] Incorporated by reference from exhibit A to the Registrant's Form
8-K reporting an event of August 11, 1993.
[9] Incorporated by reference from the like-numbered exhibit to a
Schedule 13D filed by AMAX on or about August 3, 1987.
[10] Incorporated by reference from exhibit 2 to Amendment No. 6 of a
Schedule 13D filed by John L. Larsen, reporting an event of May
28, 1991.
[11] Incorporated by reference from exhibit 3 to Amendment No 4. of a
Schedule 13D filed by John L. Larsen, reporting an event of
January 2, 1990.
[12] Incorporated by reference from an exhibit to the Registrant's
Post-Effective Amendment No. 1 to Form S-3, SEC File No. 333-1967.
[13] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form 8-K, reporting an event of February 26, 1996.
[14] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form S-1 (SEC File No. 333-6189).
[15] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31,
1997.
[16] Incorporated by reference from the like numbered exhibit to
Registrant's S-1 registration statement (333-5797).
(b) Reports filed on Form 8-K.
During the fourth quarter of the fiscal year ended on May 31, 1998, the
Registrant filed no Form 8-K Reports.
(c) Required exhibits are attached hereto and listed above under Item 14 (a)(3).
(d) Required financial statement schedules are listed and attached hereto in
Item 14(a)(2).
92
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
U.S. ENERGY CORP. (Registrant)
Date: September 11, 1998 By: /s/ John L. Larsen
-------------------------------------
JOHN L. LARSEN,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: September 11, 1998 By: /s/ John L. Larsen
-------------------------------------
JOHN L. LARSEN, Director
Date: September 11, 1998 By: /s/ Keith G. Larsen
-------------------------------------
KEITH G. LARSEN, Director
Date: September 11, 1998 By: /s/ Harold F. Herron
-------------------------------------
HAROLD F. HERRON, Director
Date: September ______, 1998 By:
-------------------------------------
DON C. ANDERSON, Director
Date: September ______, 1998 By:
-------------------------------------
DAVID W. BRENMAN, Director
Date: September 11, 1998 By: /s/ Nick Bebout
-------------------------------------
NICK BEBOUT, Director
Date: September 11, 1998 By: /s H. Russell Fraser
-------------------------------------
H. RUSSELL FRASER, Director
Date: September 11, 1998 By: /s/ Robert Scott Lorimer
-------------------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer and
Chief Accounting Officer
93
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
Report on Audits of Financial Statements
as of December 31, 1997 and 1996 and for the
years ended December 31, 1997, 1996 and 1995,
and the period from inception
(June 1, 1990) to December 31, 1997
94
<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, 1997 and 1996, and
the related statements of operations, changes in Venture partners' capital, and
cash flows for the years ended December 31, 1997, 1996 and 1995, and the period
from inception (June 1, 1990) to December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for the years ended December 31, 1997, 1996 and 1995, and the period from
inception (June 1, 1990) to December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Salt Lake City, Utah
April 3, 1998
95
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
BALANCE SHEET
------
<TABLE>
<CAPTION>
As of December 31,
-----------------------------
1997 1996
---- ----
ASSETS
Assets:
<S> <C> <C>
Cash and cash equivalents $ 95,778 $ -
Property and equipment (Note 3):
Mineral properties and mine
development costs 27,725,252 22,812,077
Buildings 24,815,009 24,815,009
Mining equipment 403,000 403,000
52,943,261 48,030,086
Total assets $53,039,039 $48,030,086
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accounts payable - related parties $ 924,019 $ 469,032
Reclamation liabilities (Note 3) 23,620,000 23,620,000
----------- -----------
Total liabilities 24,544,019 24,089,032
----------- ----------
Commitments and contingencies (Notes 3 and 4)
Partners' capital:
Kennecott Uranium Company 14,247,510 11,970,527
USECC 14,247,510 11,970,527
----------- ----------
28,495,020 23,941,054
Total liabilities and partners' capital $53,039,039 $48,030,086
The accompanying notes are an integral
part of these financial statements
</TABLE>
96
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF OPERATIONS
------
<TABLE>
<CAPTION>
Period from
inception
(June 1, 1990)
Year ended December 31, to December 31,
------------------------------------------- ---------------
1997 1996 1995 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cost and expenses:
Maintenance and holding costs $ 3,065,432 $ 1,838,820 $ 1,697,234 $ 12,523,268
Marketing costs -- -- -- 247,598
------------ ------------ ------------ ------------
Total costs and expenses 3,065,432 1,838,820 1,697,234 12,770,866
Other income 14,618 -- -- 14,618
------------ ------------ ------------ ------------
Net loss $ 3,050,814 $ 1,838,820 $ 1,697,234 $ 12,756,248
============ ============ ============ ============
The accompanying notes are an integral
part of these financial statements
</TABLE>
97
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF CHANGES IN VENTURE PARTNERS CAPITAL
------
<TABLE>
<CAPTION>
Period from
inception
(June 1, 1990)
Year ended December 31, to December 31,
----------------------------------------- ---------------
1997 1996 1995 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period
Kennecott Uranium Company $ 11,970,527 $ 11,819,763 $ 11,510,240 $ --
USECC 11,970,527 11,819,763 11,510,240 --
------------ ------------ ------------ ------------
23,941,054 23,639,526 23,020,480 --
------------ ------------ ------------ ------------
Capital Contributions (Note 1):
Kennecott Uranium Company 3,802,390 1,070,174 1,158,140 20,625,634
USECC 3,802,390 1,070,174 1,158,140 20,625,634
------------ ------------ ------------ ------------
7,604,780 2,140,348 2,316,280 41,251,268
------------ ------------ ------------ ------------
Net loss:
Kennecott Uranium Company (1,525,407) (919,410) (848,617) (6,378,124)
USECC (1,525,407) (919,410) (848,617) (6,378,124)
------------ ------------ ------------ ------------
(3,050,814) (1,838,820) (1,697,234) (12,756,248)
------------ ------------ ------------ ------------
Balance at end of period:
Kennecott Uranium Company $ 14,247,510 $ 11,970,527 $ 11,819,763 $ 14,247,510
USECC 14,247,510 11,970,527 11,819,763 14,247,510
------------ ------------ ------------ ------------
$ 28,495,020 $ 23,941,054 $ 23,639,526 $ 28,495,020
============ ============ ============ ============
The accompanying notes are an integral
part of these financial statements
</TABLE>
98
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF CASH FLOWS
------
<TABLE>
<CAPTION>
Period from
inception
Year ended December 31, (June 1, 1990)
--------------------------------------------- to December 31,
1997 1996 1995 1997
------------ ------------ ------------ ------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net loss $(3,050,814) $(1,838,820) $(1,697,234) $(12,756,248)
Increase (decrease) in accounts payable -
related parties 318,491 329,171 (47,889) 616,938
----------- ----------- ----------- ------------
Net cash used in operating activities (2,732,323) (1,509,649) (1,745,123) (12,139,310)
----------- ----------- ----------- ------------
Cash flows from investing activities:
Additions to buildings, mineral properties mine
development and mining equipment (4,913,175) (771,772) (555,448) (13,596,261)
Increase (decrease) in accounts payable -
related parties 136,496 141,073 (15,709) 307,081
----------- ----------- ----------- -----------
Net cash used in investing activities (4,776,679) (630,699) (571,157) (13,289,180)
----------- ----------- ----------- ------------
Cash flows from financing activities:
Capital contributions 7,604,780 2,140,348 2,316,280 25,524,268
----------- ----------- ----------- ------------
Net cash provided by financing activities 7,604,780 2,140,348 2,316,280 25,524,268
----------- ----------- ----------- ------------
Net increase in cash and cash equivalents 95,778 - - 5,778
Cash and cash equivalents:
At beginning of period - - - -
----------- ----------- ----------- ------------
At end of period $ 95,778 $ - $ - $ 95,778
=========== =========== =========== ============
Supplemental schedule of non-cash investing and financing activities:
During 1990 and 1992 the Venture acquired mineral properties and 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
</TABLE>
The accompanying notes are an integral
part of these financial statements
99
<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 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. Kennecott
also agreed to pay a disproportionate share (up to an additional $45
million) of GMMV operating expenses, but only out of cash operating
margins from sales of processed uranium at more than $24.00/lb (for $30
million of such operating expenses), and from sales of processed uranium
at more than $27.00/lb (for the next $15 million of such operating
expenses).
Effective October 29, 1992, Kennecott replaced USECC as manager of the
Venture. Kennecott contracts with USECC to perform work on behalf of the
Venture.
On June 23, 1997, Kennecott and USECC signed an Acquisition Agreement
wherein USECC agreed to purchase Kennecott's interest in GMMV for $15
million plus the assumption of Kennecott's share of various reclamation
and other liabilities. Kennecott paid $4 million to USECC on signing the
Acquisition Agreement and under the terms of the Acquisition Agreement is
required to provide a line of credit to GMMV of up to $16 million 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 based upon the cash flow and earnings of
GMMV. Any unpaid balance is payable in full no later than June 23, 2010 as
long as 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 and must occur by
October 1998. Kennecott is entitled to a credit against their original $50
million commitment of two dollars for each dollar provided under the line
of credit and the $4 million paid on signing. As of December 31, 1997,
Kennecott has approximately $10.8 million remaining to contribute to the
Venture for operating and development expenses.
Continued
100
<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, 1997, 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 agree 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:
All highly liquid securities with a maturity of three months or less are
considered to be cash equivalents.
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 will be 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 will be charged
to operations on the units-of-production method over the estimated
reserves to be recovered. Amortization of mineral properties and
development costs will commence when mining operations start. Mine
development costs incurred to maintain production are included in
operating costs and expenses.
Maintenance and holding costs are expensed as incurred.
The cost of mining equipment, less estimated salvage value, will be
depreciated on the units-of- production method over the estimated reserves
to be recovered or on the straight-line method over the estimated life of
the equipment, whichever is shorter. The cost of buildings will be
depreciated on the straight-line method. Depreciation of mining equipment
and buildings will commence when mining operations start. Costs of repairs
and maintenance are expensed as incurred. Expenditures that substantially
extend the useful lives of assets are capitalized. When assets are retired
or otherwise disposed of, all applicable costs and accumulated
depreciation are removed from the accounts and any resulting gain or loss
is recognized currently.
Continued
101
<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 capitalized 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 method over the estimated reserves to be recovered 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.
Certain amounts in 1996 have been reclassified for comparability to 1997
amounts.
Continued
102
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
------
3. Property and Equipment:
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, 1997
Kennecott had reimbursed USECC for substantially all development costs
incurred.
The cost of building, mineral properties and mine development and mining
equipment incurred by each of the Venture partners are as follows:
<TABLE>
<CAPTION>
Period from
inception
(June 1, 1990)
Year ended December 31, to December 31,
-------------------------------------- ---------------
1997 1996 1995 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
USECC $4,913,175 $ 740,175 $ 511,822 $ 10,864,080
Kennecott - 31,597 43,626 2,732,181
--------- ---------- ---------- ------------
Total $4,913,175 $ 771,772 $ 555,448 $ 13,596,261
========== ========== ========== ============
</TABLE>
In December 1990, GMMV acquired additional mineral properties in exchange
for the assumption of reclamation liabilities associated with those
properties of $7.3 million. In 1992, GMMV acquired an established uranium
processing mill (the Sweetwater Mill) in exchange for the assumption of
reclamation liabilities associated with this property of $16.3 million.
Such amounts represent the estimated costs at the acquisition date to
reclaim these properties. Kennecott, on behalf of GMMV, is self-bonded in
the amount of $24.3 million, which is payable to the Wyoming Department of
Environmental Quality ("WDEQ") and the U.S. Nuclear Regulatory Commission
in the event GMMV does not properly reclaim the above properties or
violates the Wyoming Environmental Quality Act. Before the earlier of
January 1, 2001, or 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 these unpatented mining claims
have been paid to the state of Wyoming as of December 31, 1997.
Continued
103
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
------
3. Property and Equipment, Continued:
At December 31, 1997 and 1996, costs capitalized as property and equipment
are composed of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Acquisition costs $39,347,000 $39,347,000
Development costs 13,596,261 8,683,086
----------- -----------
$52,943,261 $48,030,086
=========== ===========
</TABLE>
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
alleged that when Kennecott entered into the Green Mountain Mining Venture
with USE on June 1, 1990, 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 were
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. 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 which
resulted in both parties agreeing to suspend all litigation and claims
against each other.
Continued
104
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
------
5. Subsequent Events:
In 1996, the U.S. government adopted the "USEC Privatization Act of 1996"
to privatize the U.S. Enrichment Corp. In July 1998, in a S-1 Registration
Statement filed with U.S. Securities and Exchange Commission, USEC Inc.
disclosed its planned sale of significant quantities of uranium in the
U.S. marketplace. Accordingly, forecasted demand for uranium and
forecasted uranium sales prices have decreased in the short-term. As a
result, GMMV has halted development activities at the Jackpot Mine, and
has placed the facility on active standby.
105
<PAGE>
EXHIBIT 4.2
U.S. ENERGY CORP.
1998 STOCK OPTION PLAN
As adopted by the Board of Directors on June 15, 1998 and
constituting a restatement of the 1989 Stock Option Plan,
which was Amended September 1, 1992, September 3,
1993, January 6, 1994, December 22, 1995, and
December 13, 1996.
1. Purpose. Restrictions on Amount Available Under the Plan. This 1998
Stock Option Plan (the "Plan") is intended to encourage stock ownership by
employees, consultants and directors of U.S. Energy Corp. (the "Corporation"),
its divisions and Subsidiary Corporations, so that they may acquire or increase
their proprietary interest in the Corporation, and to encourage such employees
and directors to remain in the employ of the Corporation and to put forth
maximum efforts for the success of the business. It is further intended that
options granted by the Committee pursuant to Section 6 of this Plan shall
constitute "incentive stock options" ("Incentive Stock Options") within the
meaning of Section 422A of the Internal Revenue Code of 1986 and the regulations
issued thereunder (the "Code"), and options granted by the Committee pursuant to
Section 7 of this Plan shall constitute "nonqualified stock options"
("Nonqualified Stock Options").
2. Definitions. As used in this Plan, the following words and phrases
shall have the meanings indicated:
(a) "Disability" shall mean an Optionee's inability to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment that can be expected to result in death or that
has lasted or can be expected to last for a continuous period of not less than
12 months.
(b) "Fair Market Value" per share as of a particular date
shall mean the last sale price of the Corporation's Common Stock as reported on
a national securities exchange or on the NASDAQ National Market System or, if
last sale reporting quotation is not available for the Corporation's Common
Stock, the average of the bid and asked prices of the Corporation's Common Stock
as reported by NASDAQ or in the National Quotation Bureau, Inc.'s "Pink Sheets"
or, if such quotations are unavailable, the value determined by the Committee
(as hereinafter defined) in accordance with their discretion in making a bona
fide, good faith determination of fair market value.
(c) "Parent Corporation" shall mean any corporation (other
than the employer corporation) in an unbroken chain of corporations ending with
the employer corporation if, at the time of granting an Option, each of the
corporations other than the employer corporation owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
(d) "Subsidiary Corporation" shall mean any corporation (other
than the employer corporation) in an unbroken chain of corporations beginning
with the employer corporation if, at the time of granting an Option, each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
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<PAGE>
3. Administration. The Plan shall be administered by a committee (the
"Committee"), consisting of not less than two members of the Board of Directors
of the Corporation (the "Board"). The members of the Committee, who shall be
selected at a duly convened meeting of the Board of Directors, shall be persons
who have not been granted or awarded equity securities of the Corporation under
the Plan or any other plan of the Employer or its affiliates, during the year
prior to awards of securities under the Plan by the Committee. It is the intent
of this Plan that the Committee members shall be "disinterested administrators"
as that term is used in Rule 16b-3(c)(2)(i) promulgated by the Securities and
Exchange Commission. The members of the Committee shall have all powers, subject
to compliance with the Plan, to select officers and directors for participation
in the Plan, and to make all decisions concerning the timing, pricing and amount
of a grant or award under the Plan.
The Committee shall have the authority in its discretion, subject to
and not inconsistent with the express provisions of the Plan, to administer the
Plan and to exercise all the powers and authorities either specifically granted
to it under the Plan or necessary or advisable in the administration of the
Plan, including, without limitation, the authority to grant Options; to
determine which Options shall constitute Incentive Stock Options and which
Options shall constitute Nonqualified Stock Options; to determine the purchase
price of the shares of Common Stock covered by each Option (the "Option Price");
to determine the persons to whom, and the time or times at which, Options shall
be granted; to determine the number of shares to be covered by each Option; to
interpret the Plan; to prescribe, amend and rescind rules and regulations
relating to the Plan; to determine the terms and provisions of the Option
Agreements (which need not be identical) entered into in connection with Options
granted under the Plan; and to make all other determinations deemed necessary or
advisable for the administration of the Plan. The Committee may delegate to one
or more of its members or to one or more agents such administrative duties as it
may deem advisable, and the Committee or any person to whom it has delegated
duties as aforesaid may employ one or more persons to render advice with respect
to any responsibility the Committee or such person may have under the Plan.
The Board shall fill all vacancies, however caused, in the Committee.
The Board may from time to time appoint additional members to the Committee, and
may at any time remove one or more Committee members and substitute others. One
member of the Committee shall be selected by the Board as chairman. The
Committee shall hold its meetings at such times and places as it shall deem
advisable. All determinations of the Committee shall be made by a majority of
its members either present in person or participating by conference telephone at
a meeting or by written consent. The Committee may appoint a secretary and make
such rules and regulations for the conduct of its business as it shall deem
advisable, and shall keep minutes of its meetings.
No member of the Board or Committee shall be liable for any action
taken or determination made in good faith with respect to the Plan or any Option
granted hereunder.
4. Eligibility. Subject to certain limitations hereinafter set forth,
Options may be granted to employees of (including officers) and consultants to
and directors of (whether or not they are employees) the Corporation or its
present or future divisions and Subsidiary Corporations. In determining the
persons to whom Options shall be granted and the number of shares to be covered
by each Option, the Committee shall take into account the duties of the
respective persons, their present and potential contributions to the success of
the Corporation and such other factors as the Committee shall deem relevant in
connection with accomplishing the purpose of the Plan. A person to whom an
Option has been granted hereunder is sometimes referred to herein as an
"Optionee." An Optionee shall be eligible to receive more than one grant of an
Option during the term of the Plan, but only on the terms and subject to the
restrictions hereinafter set forth.
5. Stock. The stock subject to Options hereunder shall be shares of the
Corporation's Common Stock, $.01 par value per share ("Common Stock"). Such
shares may, in whole or in part, be authorized but unissued shares or shares
that shall have been or that may be reacquired by the Corporation. The aggregate
107
<PAGE>
number of shares of Common Stock as to which Options may be granted from time to
time under the Plan shall not exceed 2,750,000. The limitations established by
the preceding sentences shall be subject to adjustment as provided in Section
8(i) hereof.
In the event that any outstanding Option under the Plan for any reason
expires or is terminated without having been exercised in full the shares of
Common Stock allocable to the unexercised portion of such Option (unless the
Plan shall have been terminated) shall become available for subsequent grants of
options under the Plan.
6. Incentive Stock Options. Options granted pursuant to this Section 6
are intended to constitute Incentive Stock Options and shall be subject to the
following special terms and conditions, in addition to the general terms and
conditions specified in Section 8 hereof. Consultants and directors who are not
employees of the Corporation shall not be entitled to receive Options pursuant
to this Section 6.
The aggregate Fair Market Value (determined as of the date the
Incentive Stock Option is granted) of the shares of Common Stock with respect to
which Options are exercisable for the first time by an Optionee during any
calendar year may not exceed $100,000.00. If more than $100,000 of shares is
subject to Options held by an Optionee, the Corporation shall cause (A)the
maximum number of Options to be designated ISOs and the balance to be designated
nonqualified stock options; or (B) different share certificates to be issued on
first exercise, such that one certificate shall be issued for the shares which
are issued under the ISOs, and another certificate shall be issued for the
nonqualified stock options.
Incentive Stock Options granted under this Plan are intended to satisfy
all requirements for incentive stock options under the Code and, notwithstanding
any other provision of this Plan, the Plan and all Incentive Stock Options
granted under it shall be so construed, and all contrary provisions shall be so
limited in scope and effect and, to the extent they cannot be so limited, they
shall be void.
7. Nonqualified Stock Options. Options granted pursuant to this Section
7 are intended to constitute Nonqualified Stock Options and shall be subject
only to the general terms and conditions specified in Section 8 hereof.
8. Terms and Conditions of Options. Each Option granted pursuant to the
Plan shall be evidenced by a written Option Agreement between the Corporation
and the Optionee, which agreement shall comply with and be subject to the
following terms and conditions:
(a) Number of Shares. Each Option Agreement shall state the
number of shares of Common Stock to which the Option relates.
(b) Type of Option. Each Option Agreement shall specifically
identify the portion, if any, of the Option which constitutes an Incentive Stock
Option and the portion, if any, which constitutes a Nonqualified Stock Option.
(c) Option Price. Each Option Agreement shall state the Option
Price, which shall be not less than 100% of the Fair Market Value of the shares
of Common Stock of the Corporation on the date of grant of the Option except
that any option granted under the Plan to a person owning more than ten percent
of the total combined voting power of the Common Stock shall be at a price of
110% of such fair market value and shall be for a term of no more than five
years, in the case of Incentive Stock Options, and not less than 80% of the Fair
Market Value of the shares of Common Stock of the Corporation on the date of
grant of the Option in the case of Non- Qualified Stock Options. The Option
Price shall be subject to adjustment as provided in Section 8(i) hereof. The
date on which the Committee adopts a resolution expressly granting an Option
shall be considered the day on which such Option is granted.
108
<PAGE>
(d) Method of Exercise and Medium and Time of Payment. Each
exercise of an Option granted hereunder, whether in whole or in part, shall be
by written notice to the Secretary of the Corporation designating the number of
shares as to which the Option is exercised, and shall be accompanied by payment
in full of the Option Price (in cash, shares or property) for the number of
shares so designated, together with any written statements required by any
applicable securities laws. The Option Price shall be paid in cash, in shares of
Common Stock having a Fair Market Value equal to such Option Price or in
property or in a combination of cash, shares and property, and may be effected
in whole or in part (i) with monies received from the Corporation at the time of
exercise as a compensatory cash payment, or (ii) with monies borrowed from the
Corporation pursuant to repayment terms and conditions as shall be determined
from time to time by the Committee, in its discretion, separately with respect
to each exercise of Options and each Optionee; provided, however, that each such
method and time for payment and each such borrowing and terms and conditions of
repayment shall be permitted by and be in compliance with applicable law. The
Board of Directors shall have the sole and absolute discretion to determine
whether or not property other than cash or Common Stock may be used to purchase
the shares of Common Stock hereunder and, if so, to determine the value of the
property received.
(e) Term and Exercise of Options. Options shall be exercisable
over the exercise period as and at the times the Committee may determine, as
reflected in the Option Agreement; provided, however, that the Committee shall
have the authority to accelerate the exercisability of any outstanding Option at
such time and under such circumstances as it, in its sole discretion, deems
appropriate. The exercise period shall be determined by the Committee; provided,
however, that such exercise period shall not exceed ten years from the date of
grant of the Option. The exercise period shall be subject to earlier termination
as provided in Sections 8(f) and 8(g) hereof. An Option may be exercised, as to
any or all full shares of Common Stock as to which the Option has become
exercisable; provided, however, that an Option may not be exercised at any one
time as to fewer than 100 shares (or such number of shares as to which the
Option is then exercisable if such number of shares is less than 100).
(f) Termination. Except as provided in this Section 8(f) and
in Section 8(g) hereof, an Option may not be exercised unless the Optionee is
then an employee or director of or consultant to the Corporation or a division
or Subsidiary Corporation thereof (or a corporation or a Parent or Subsidiary
Corporation of such corporation issuing or assuming the option in a transaction
to which Section 425(a) of the Code applies), and unless the Optionee has
remained continuously as an employee or director of or consultant to the
Corporation since the date of grant of the Option. In the event that the
Optionee ceases to be an employee or director of or consultant to the
Corporation (other than by reason of death, Disability or retirement), all
Options of such Optionee that are exercisable at the time of such cessation may,
unless earlier terminated in accordance with their terms, be exercised within
three months after such cessation; provided, however, that if the employment or
consulting relationship of an Optionee shall terminate, or if a director shall
be removed, for cause, all Options theretofore granted to such Optionee shall,
to the extent not theretofore exercised, terminate forthwith. Nothing in the
Plan or in any Option granted pursuant hereto shall confer upon an individual
any right to continue in the employ of the Corporation or any of its divisions
or Subsidiary Corporations or interfere in any way with the right of the
Corporation or its shareholders or any such division or Subsidiary Corporation
to terminate such employment or other relationship between the individual and
the Corporation or any of its divisions and subsidiary corporations.
(g) Death Disability or Retirement of Optionee. If an Optionee
shall die while a director of, or employed by, or a consultant to, the
Corporation or a Subsidiary Corporation thereof, or within three months after
the termination of such Optionee's employment or directorship or consulting
relationship, other than termination for cause, or if the Optionee's employment
or directorship or consulting relationship, shall terminate by reason of
disability or retirement, all Options theretofore granted to such Optionee
(whether or not otherwise exercisable) may, unless earlier terminated in
accordance with their terms, be exercised by the Optionee or by the Optionee's
estate or by a person who acquired the right to exercise such Option by bequest
109
<PAGE>
or inheritance or otherwise by reason of the death or Disability of the
Optionee, at any time within one year after the date of death, Disability or
retirement of the Optionee.
(h) Nontransferability. Options granted under the Plan shall
not be transferable other than by will or by the laws of descent and
distribution, and Options may be exercised, during the lifetime of the Optionee,
only by the Optionee or by his guardian or legal representative.
Any attempted sale, pledge, assignment, hypothecation or other
transfer of an option contrary to the provisions hereof and the levy of any
execution, attachment or similar process upon an option shall be null and void
and without force or effect.
As a condition to the transfer of any shares of Common Stock
issued under this Plan, the Corporation may require an opinion of counsel,
satisfactory to the Corporation, to the effect that such transfer will not be in
violation of the Securities Act of 1933 or any other applicable securities laws
or that such transfer has been registered under federal and all applicable state
securities laws. Further, the Corporation shall be authorized to refrain from
delivering or transferring shares of Common Stock issued under this Plan until
the Board of Directors determines that such delivery or transfer will not
violate applicable securities laws and the Optionee has tendered to the
Corporation any federal, state or local tax owed by the Optionee as a result of
exercising the Option, or disposing of any Common Stock, when the Corporation
has a legal liability to satisfy such tax. The Corporation shall not be liable
for damages due to delay in the delivery or issuance of any stock certificate
for any reason whatsoever, including, but not limited to, a delay caused by
listing requirements of any securities exchange or any registration requirements
under the Securities Act of 1933, the Securities Exchange Act of 1934, or under
any other state or federal law, rule or regulation. The Corporation is under no
obligation to take any action or incur any expense in order to register or
qualify the delivery or transfer of shares of Common Stock under applicable
securities laws or to perfect any exemption from such registration or
qualification. Furthermore, the Corporation will have no liability to any
Optionee for refusing to deliver or transfer shares of Common Stock if such
refusal is based upon the foregoing provisions of this Paragraph.
(i) Effect of Certain Changes.
(1) If there is any change in the number of shares
of Common Stock through the declaration of stock dividends, or through
recapitalization resulting in stock splits, or combinations or exchanges
of such shares, the number of shares of Common Stock available for
Options, the number of such shares covered by outstanding Options, and the
price per share of such Options, shall be proportionately adjusted by the
Committee to reflect any increase or decrease in the number of issued
shares of Common Stock; provided, however, that any fractional shares
resulting from such adjustment shall be eliminated.
(2) In the event of the proposed dissolution or
liquidation of the Corporation, in the event of any corporate separation
or division, including, but not limited to, split-up, split-off or
spin-off, or in the event of a merger or consolidation of the Corporation
with another corporation, the Committee may provide that the holder of
each Option then exercisable shall have the right to exercise such Option
(at its then Option Price) solely for the kind and amount of shares of
stock and other securities, property, cash or any combination thereof
receivable upon such dissolution, liquidation, or corporate separation or
division, or merger or consolidation by a holder of the number of shares
of Common Stock for which such Option might have been exercised
immediately prior to such dissolution, liquidation, or corporate
separation or division, merger or consolidation; or the Committee may
provide, in the alternative, that each Option granted under the Plan shall
terminate as of a date to be fixed by the Committee; provided, however,
that not less than 30 days' written notice of the date so fixed shall be
given to each Optionee, who shall have the right, during the period of 30
days preceding such termination, to exercise the Options as to all or any
part of the shares of Common Stock covered thereby, including shares as to
which such Options would not otherwise be exercisable.
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<PAGE>
(3) Paragraph (2) of this Section 8(i) shall not
apply to a merger or consolidation in which the Corporation is the
surviving corporation and shares of Common Stock are not converted into or
exchanged for stock, securities of any other corporation, cash or any
other thing of value. Notwithstanding the preceding sentence, in case of
any consolidation or merger of another corporation into the Corporation in
which the Corporation is the surviving corporation and in which there is a
reclassification or change (including a change to the right to receive
cash or other property) of the shares of Common Stock (other than a change
in par value, or from par value to no par value, or as a result of a
subdivision or combination, but including any change in such shares into
two or more classes or series of shares), the Committee may provide that
the holder of each Option then exercisable shall have the right to
exercise such Option solely for the kind and amount of shares of stock and
other securities (including those of any new direct or indirect parent of
the Corporation), property, cash or any combination thereof receivable
upon such reclassification, change, consolidation or merger by the holder
of the number of shares of Common Stock for which such Option might have
been exercised.
(4) In the event of a change in the Common Stock of
the Corporation as presently constituted, which is limited to a change of
all of its authorized shares with par value into the same number of shares
with a different par value or without par value, the shares resulting from
any such change shall be deemed to be the Common Stock within the meaning
of the Plan.
(5) To the extent that the foregoing adjustments
relate to stock or securities of the Corporation, such adjustments shall
be made by the Committee, whose determination in that respect shall be
final, binding and conclusive, provided that each Incentive Stock Option
granted pursuant to this Plan shall not be adjusted in a manner that
causes such option to fail to continue to qualify as an Incentive Stock
Option within the meaning of Section 422A of the Code.
(6) Except as hereinbefore expressly provided in
this Section 8(i), this Optionee shall have no rights by reason of any
subdivision or consolidation of shares of stock of any class or the
payment of any stock dividend or any other increase or decrease in the
number of shares of stock of any class or by reason of any dissolution,
liquidation, merger, or consolidation or spin- off of assets or stock of
another corporation; and any issue by the Corporation of shares of stock
of any class, or securities convertible into shares of stock of any class,
shall not affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to the
Option. The grant of an Option pursuant to the Plan shall not affect in
any way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structures or to merge or to consolidate or to dissolve, liquidate or
sell, or transfer all or part of its business or assets.
(j) Rights as Shareholder - Non-Distributive Intent. Neither a
person to whom an Option is granted, nor such person's legal representative,
heir, legatee or distributee, shall be deemed to be the holder of, or to have
any rights of a holder with respect to, any shares subject to such Option, until
after the Option is exercised and the shares are issued to the person exercising
such Options. Upon exercise of an Option at a time when there is no registration
statement in effect under the Securities Act of 1933 relating to the shares
issuable upon exercise and available for delivery of a prospectus meeting the
requirements of Section 10(a)(3) of said Act, shares may be issued to the
Optionee only if the Optionee represents and warrants in writing to the
Corporation that the shares purchased are being acquired for investment and not
with a view to the distribution thereof. No shares shall be issued upon the
exercise of an Option unless and until there shall have been compliance with any
then applicable requirements of the Securities and Exchange Commission, or any
other regulatory agencies having jurisdiction over the Corporation. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distribution or other rights for which
the record date is prior to the date such stock certificate is issued, except as
provided in Section 8(i) hereof.
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<PAGE>
(k) Other Provisions. The Option Agreements authorized under
the Plan shall contain such other provisions, including, without limitation, (i)
the imposition of restrictions upon the exercise of an Option, and (ii) in the
case of an Incentive Stock Option, the inclusion of any condition not
inconsistent with such Option qualifying as an Incentive Stock Option, as the
Committee shall deem advisable.
(l) Forfeiture Provisions: All shares of Common Stock
purchased on exercise of all Nonqualified Options granted after the date of this
Plan Amendment (and all shares of Common Stock purchased on exercise of all
Nonqualified Options granted prior to such date provided that the holder
consents), shall be subject to forfeiture back to the Corporation in the event
of termination of employee, director or consultant status with the Corporation
on or before January 5 of the second calendar year after exercise. For example,
Common Stock purchased on September 1, 1993 by exercise of a Nonqualified
Option, will be subject to forfeiture through January 5, 1995. Provided, that
upon exercise of a Nonqualified Option at a time when there is a registration
statement in effect under the Securities Act of 1933 relating to the shares
issuable upon exercise, the preceding forfeiture provisions of this paragraph
shall immediately terminate.
9. Agreement by Optionee Regarding Withholding Taxes. If the Committee
shall so require, as a condition of exercise, each Optionee shall agree that:
(a) No later than the date of exercise of any Option granted
hereunder, the Optionee will pay to the Corporation or make arrangements
satisfactory to the Committee regarding payment of any federal, state or local
taxes of any kind required by law to be withheld upon the exercise of such
Option; and
(b) The Corporation shall, to the extent permitted or required
by law, have the right to deduct federal, state and local taxes of any kind
required by law to be withheld upon the exercise of such Option from any payment
of any kind otherwise due to the Optionee.
The Corporation shall not be obligated to advise any Optionee
of the existence of any such tax or the amount which the Corporation will be so
required to withhold.
10. Term of Plan. Options may be granted pursuant to the Plan from time
to time within a period of ten years from the date the Plan is adopted by the
Board, or the date the Plan is approved by the shareholders of the Corporation,
whichever is earlier.
11. Amendment and Termination of the Plan. The Board at any time and
from time to time may suspend, terminate, modify or amend the Plan; provided,
however, that any amendment that would materially increase the aggregate number
of shares of Common Stock as to which Options may be granted under the Plan or
materially increase the benefits accruing to participants under the Plan or
materially modify the requirements as to eligibility for participation in the
Plan shall be subject to the approval of the holders of a majority of the Common
Stock issued and outstanding, except that any such increase or modification that
may result from adjustments authorized by Section 8(i) hereof shall not require
such approval. Except as provided in Section 8 hereof, no suspension,
termination, modification or amendment of the Plan may adversely affect any
Option previously granted, unless the written consent of the Optionee is
obtained.
12. Approval of Shareholders. The Plan shall take effect upon its
adoption by the Board but shall be subject to the approval of the holders of a
majority of the issued and outstanding shares of Common Stock of the
Corporation, which approval must occur within 12 months after the date the Plan
is adopted by the Board.
13. Assumption. The terms and conditions of any outstanding Options
granted pursuant to this Plan shall be assumed by, be binding upon and inure to
the benefit of any successor corporation to the
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Corporation and shall continue to be governed by, to the extent applicable, the
terms and conditions of this Plan. Such successor corporation shall not
otherwise be obligated to assume this Plan.
14. Termination of Right of Action. Every right of action arising out
of or in connection with the Plan by or on behalf of the Corporation or of any
Subsidiary, or by any shareholder of the Corporation or of any Subsidiary
against any past, present or future member of the Board, or against any
employee, or by an employee (past, present or future) against the Corporation or
any Subsidiary, will, irrespective of the place where an action may be brought
and irrespective of the place of residence of any such shareholder, director or
employee, cease and be barred by the expiration of three years from the date of
the act or omission in respect of which such right of action is alleged to have
risen.
15. Tax Litigation. The Corporation shall have the right, but not the
obligation, to contest, at its expense, any tax ruling or decision,
administrative or judicial, on any issue which is related to the Plan and which
the Board believes to be important to holders of Options issued under the Plan
and to conduct any such contest or any litigation arising therefrom to a final
decision.
IN WITNESS WHEREOF, the foregoing is the 1998 Stock Option Plan of U.S.
Energy Corp., as amended at September 1, 1992, September 3, 1993, January 6,
1994, December 22, 1995, December 13, 1996 and June 15, 1998, and as such, this
1998 Stock Option Plan constitutes a restatement of the 1989 Stock Option Plan.
This 1998 Stock Option Plan is to be submitted to the shareholders of the
Corporation for approval at the 1998 Annual Meeting of Shareholders.
U.S. ENERGY CORP.
By: /s/ Max T. Evans
----------------------------------
MAX T. EVANS, Secretary
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<PAGE>
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT made as of this ______ day of ____________,
______ between U.S. Energy Corp., a Wyoming corporation (the "Corporation").
In accordance with its 1998 Stock Option Plan (the "Plan") as now or
hereafter amended, a copy of which is attached hereto and incorporated herein by
reference, the Corporation desires, in connection with the services of the
Optionee, to provide the Optionee with an opportunity to acquire $.01 pare value
common stock (the "Common Stock") of the Corporation on favorable terms and
thereby increase the Optionee's proprietary interest in the continue progress
and success of the business of the Corporation.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
herein set forth and other good and valuable consideration, the Corporation and
the Optionee agree as follows:
1. Confirmation of Grant of Option. Pursuant to a determination of the
Directors of the Corporation (the "Board") on __________, ______, _______ the
Corporation, subject to the terms of the Plan and of this Agreement, confirms
that the Optionee has been irrevocably granted on ____________, ______ (the
"Date of Grant"), as a matter of separate inducement and agreement, and in
addition to and not in lieu of salary or other compensation for services, a
(Qualified) (Non-Qualified) Stock Option pursuant to Section _______ of the Plan
(the "Option") to purchase an aggregate of ___________ shares of Common Stock on
the terms and conditions herein set forth subject to adjustment as provided in
Section 8 hereof.
2. Purchase Price. The purchase price of shares of Common Stock covered
by the Option will be $________ per share (the "Option Price") subject to
adjustment as provided in Section 8 hereof.
3. Exercise of Option. Except as otherwise provided in Section 8 of the
Plan, the Option may be exercised in whole or part at any time during the term
of the Option, provided, however, no Option shall be exercisable after the
expiration of the term thereof, and no Option shall be exercisable unless the
holder shall at the time of exercise have been an employee or director of or a
consultant to the corporation or of any subsidiary of the Corporation for a
period of at least three months. The Option may be exercised only as to whole
shares in increments of 100 shares.
The Option may be exercised, as provided in this Section 3, by notice
and payment to the Corporation as provided in Section 10 hereof and Section 8(d)
of the Plan.
4. Term of Option. The term of the Option will be through
______________, _____, subject to earlier termination or cancellation as
provided in this Agreement. Except as otherwise provided in Section 7 hereof,
the Option will not be exercisable unless the Optionee shall, at the time of
exercise, be an employee or director of or consultant to the Corporation or of a
subsidiary. As used in this Agreement, the term "subsidiary" refers to and
includes each "subsidiary corporation" as defined in the Plan.
The holder of the Option will not have any rights to dividends or any
other rights of a shareholder with respect to any shares of Common Stock subject
to the Option until such shares shall have been issued to him
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<PAGE>
(as evidenced by the appropriate transfer agent of the Corporation) upon
purchase of such shares through exercise of the Option.
5. Nontransferability of Option. The Option may not be assigned,
transferred (except as provided in the next preceding sentence) or otherwise
disposed of, or pledged or hypothecated in any way (whether by operation of law
or otherwise) otherwise than by will or the laws of descent and distribution,
and shall not be subject to execution, attachment, or other process. Any
assignment, transfer, pledge, hypothecation or other disposition of the Option
or any attempt to make any such levy of execution, attachment or other process
will cause the Option to terminate immediately upon the happening of any such
event, provided, however, that any such termination of the Option under the
foregoing provisions of this Section 5 will not prejudice any rights or remedies
with the Corporation or any subsidiary may have under this Agreement or
otherwise.
6. Exercise Upon Termination. The Optionee's rights to exercise this
Option upon termination of employment or cessation as a director or consultant
shall be as set forth in Section 8(f) of the Plan.
7. Death, Disability or Retirement of Optionee. The Optionee's rights
to exercise this Option upon the death, disability or retirement of the Optionee
shall be as set forth in Section 8(g) of the Plan.
8. Adjustments. The Option shall be subject to adjustment upon the
occurrence of certain events as set forth in Section 8(i) of the Plan.
9. No Registration. The Optionee understands that neither the Option
nor the shares of Common Stock subject thereto and issuable upon the exercise
thereof are registered under the Securities Act of 1933, as amended. The
Optionee represents that the Option is being acquired by him and that such
shares of Common Stock will be acquired by him for investment and all
certificates for the shares issued upon exercise of the Option will bear the
following legend:
The shares represented by this Certificate have not been registered
under the Securities Act of 1933 (the "Act"), and are "restricted
securities" as that term is defined in Rule 144 under the Act. The
shares may not be offered for sale, sold or otherwise transferred
except pursuant to an effective registration statement under the Act,
the availability of which is to be established to the satisfaction of
the Company.
10. Notices. Each notice relating to this Agreement will be in writing
and delivered in person or by certified mail to the proper address. All notices
to the Corporation shall be addressed to it at its office at Glen L. Larsen
Building, 877 North 8th West, Riverton, WY 82501. All notices to the Optionee or
other person or persons then entitled to exercise the Option shall be addressed
to the Optionee or such other person or persons at the Optionee's address below
specified. Anyone to whom a notice may be given under this Agreement may
designate a new address by notice to that effect.
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<PAGE>
11. Approval of Counsel. The exercise of the Option and the issuance
and delivery of shares of Common Stock pursuant thereto shall be subject to
approval by the Corporations' counsel of all legal matters in connection
therewith, including compliance with the requirements of the Securities Act of
1933, as amended, the Securities Exchange Act of 1934, as amended, applicable
state securities laws, the rules and regulations thereunder, and the
requirements of any stock exchange upon which the Common Stock may then be
listed.
12. Benefits of Agreement. This Agreement will inure to the benefit of
and be binding upon each successor and assign of the Company. All obligations
imposed upon the Optionee and all rights granted to the Corporation under this
Agreement will be binding upon the Optionee's heirs, legal representatives and
successors.
13. Governmental and Other Regulations. The exercise of the Option and
the Corporation's obligation to sell and deliver shares upon the exercise of
rights to purchase shares is subject to all applicable federal and state laws,
rules and regulations, and to such approvals by any regulatory or governmental
agency which may, in the opinion of counsel for the Corporation, be required.
14. Incorporation of the Plan. The Plan is attached hereto and
incorporated herein by reference. In the event that any provision in this
Agreement conflicts with a provision in the Plan, the Plan shall govern.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed in its name by its President or a Vice President and it corporate seal
to be hereunto affixed and attested by its Secretary or its Assistant Secretary
and the Optionee has hereunto set his hand and seal all as of the date first
above written.
U.S. ENERGY CORP.
(Seal)
By:
-----------------------------
JOHN L. LARSEN, President
ATTEST:
- ----------------------------------
MAX T. EVANS, Secretary
The undersigned Optionee understands the terms of this Option Agreement
and the attached Plan and hereby agrees to comply therewith.
Date , 19
-------------------------------
-------------------------------
(Address of Optionee)
116
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE U.S. ENERGY
CORP. FORM 10-K FOR THE YEAR ENDED MAY 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000101594
<NAME> U.S. ENERGY CORP.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 5,650,500
<SECURITIES> 0
<RECEIVABLES> 7,466,900
<ALLOWANCES> (30,900)
<INVENTORY> 113,700
<CURRENT-ASSETS> 14,301,000
<PP&E> 31,256,600
<DEPRECIATION> 11,806,300
<TOTAL-ASSETS> 45,019,100
<CURRENT-LIABILITIES> 6,062,100
<BONDS> 0
0
0
<COMMON> 75,200
<OTHER-SE> 17,378,300
<TOTAL-LIABILITY-AND-EQUITY> 45,019,100
<SALES> 4,763,300
<TOTAL-REVENUES> 11,558,500
<CGS> 3,123,100
<TOTAL-COSTS> 6,494,400
<OTHER-EXPENSES> 1,500,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,000
<INCOME-PRETAX> (983,200)
<INCOME-TAX> 0
<INCOME-CONTINUING> (983,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (983,200)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
