SEC File No. ____________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
Registration Statement Under Securities Act of 1933
U.S. ENERGY CORP.
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(Exact Name of registrant as specified in its charter)
Wyoming
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(State or other jurisdiction of incorporation)
1090
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(Primary Standard Industrial Classification Code Number)
83-0205516
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(I.R.S. Employer Identification No.)
877 North 8th West, Riverton, Wyoming 82501
Tel. 307/856-9271
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(Address and telephone of registrant's principal executive offices)
Daniel P. Svilar
877 North 8th West, Riverton, Wyoming 82501
Tel. 307/856-9271
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(Name address and telephone of agent for service of process)
Approximate date of commencement of proposed sale to public: As soon as
practicable.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. X
Exhibit Index begins on page 174.
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<TABLE>
<CAPTION>
Calculation of Registration Fee
Title of Amount to be Proposed Proposed Amount of
each class registered maximum maximum registration fee
of securities offering offering
to be registered price per unit price
- ---------------- -------------- -----
<S> <C> <C> <C> <C> <C>
Common 662,987 $7.00 (1) $4,640,909 $1,370.00
stock, $.01 shares
par value
- --------- ------- --------- ---------- ---------
Total 662,987 $7.00 (1) $4,640,909 $1,370.00
</TABLE>
(1) Pursuant to rule 457(c), the securities being registered will be offered for
sale to the market from time to time by the current holders. Therefore, the fee
is based on the closing price per share on the NASDAQ/NMS market as of the date
withing 5 trading days of the initial filing of this registration statement.
<PAGE>
Cross Reference Sheet
under Rule 501(1)e
Information Required in the Prospectus
Item 1. Forepart of Registration Facing page, outside front
Statement and Outside Front Cover cover of Prospectus
Item 2. Inside Front and Outside Inside front and outside
Back Cover Pages of Prospectus back Prospectus cover
Item 3. Summary Information, Summary of the Offering;
Risk Factors, and Ratio of Risk Factors
Earnings to Fixed Charges
Item 4. Use of Proceeds Not applicable
Item 5. Determination of Not applicable
Offering Price
Item 6. Dilution Not applicable
Item 7. Selling Security Holders Holders of the Warrants;
Selling Shareholders
Item 8. Plan of Distribution Plan of Distribution
Item 9. Description of Securities Description of Securities
to be Registered
Item 10. Interests of Named Not applicable
Experts and Counsel
Item 11. Information With Respect Business and Properties
to the Registrant
Item 12. Disclosure of Commission Not applicable
Position on Indemnification for
Securities Act Liabilities
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Prospectus Subject to Completion, Dated June ____, 1998
U.S. ENERGY CORP.
662,987 COMMON SHARES
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The securities offered by this Prospectus are 662,987 shares (the "Common
Shares") of common stock, par value $0.01 per share ("Common Stock"), of U.S.
Energy Corp., a Wyoming corporation ("Registrant", "Company" or "USE"). Of the
total Common Shares, (i) 546,365 shares were issued to four Canadian investment
funds ("Canadian Funds") in April, 1998 for cash and securities of a subsidiary
of the Company (Sutter Gold Mining Company); (ii) another 112,530 Common Shares
will be issued to one of the funds as of the date of this Prospectus; and (iii)
4,092 Common Shares are held by 23 employees of the Company, three of whom are
officers of the Company (the "Selling Shareholders"). See "Business and
Properties - Gold - Sutter Gold Mining Company April 1998 Transaction for Cash
and SGMC Special Warrants."
These are Speculative Securities.
Such Securities Involve a High Degree of Risk.
See "Risk Factors" starting on page 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE COMMISSION, OR ANY STATE
SECURITIES COMMISSION, PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is June ____, 1998.
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The Common Shares will be offered for sale from time to time by the
Canadian Funds and the Selling Shareholders. It is expected that all of the
Common Shares will be offered at market prices from time to time. Registrant's
Common Stock is traded on the NASDAQ/NMS quotation system. As of June 24, 1998,
the closing bid price for Registrant's Common Stock was $5.50 per share. See
"Market for USE Common Stock and Related Stockholder Matters." There are no
underwriting arrangements known to Registrant. Any selling discounts or
commissions will be paid by the sellers of the Common Shares. See "Plan of
Distribution". The Company will pay the cost of the registration estimated at
$10,000 for registering the Common Shares.
The Company has not (and will not) received any proceeds from the sale of
the Common Shares pursuant to this Prospectus by the Canadian Funds or by the
Selling Shareholders.
The Common Shares have been registered for sale to public, by the filing of
the Registration Statement (of which this Prospectus is a part) with the
Securities and Exchange Commission ("Commission") under the Securities Act of
1933, as amended ("1933 Act"). No one is authorized to give any information, or
make any representation on behalf of the Company, the Canadian Funds or the
Selling Shareholders if not contained in this Prospectus. This Prospectus does
not constitute an offer to sell, or a solicitation of an offer to purchase, the
securities offered hereby by any person in any jurisdiction in which such an
offer or solicitation is not authorized or in which the person making such offer
or solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such an offer or solicitation.
Neither delivery of this Prospectus nor sale of the securities offered
hereby, shall create an implication that there has been no change in the
information set forth herein since date of this Prospectus. The Prospectus will
be supplemented to reflect any material changes in the Company or its business
in the course of the offering.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
AVAILABLE INFORMATION
Registrant is subject to the information requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other statements and information with the
Commission. The reports and other documents so filed can be inspected and copied
at the Commission's public reference room located at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the Commission's public reference
facilities at Commission regional offices located at: 7 World Trade Center, 13th
Floor, New York, New York 10048; and Suite 1400, Northwestern Atrium Center, 500
West Madison Street, Chicago, Illinois 60661. Copies of such documents can be
obtained at prescribed rates by writing to the Securities
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and Exchange Commission, Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or on the Internet at www.sec.gov.
This Prospectus does not contain all of the information set forth in the
Registration Statement and its exhibits, covering the Common Shares offered
hereby, certain portions of which have been omitted pursuant to Commission rules
and regulations. Each statement made in this Prospectus concerning a document
filed as an exhibit to the Registration Statement, is qualified in its entirety
by reference to such exhibit for a complete statement of its provisions. Any
interested party may inspect the Registration Statement (and any amendments
thereto) and its exhibits, without charge, at the public reference facilities of
the Commission at its offices as stated above.
SUMMARY OF THE OFFERING
The following summary is not intended to be complete and is qualified in
all respects by the more detailed information included in this Prospectus.
The Company
Registrant is in the general minerals business of acquiring, exploring,
developing and/or selling or leasing of mineral properties and, from time to
time, mining and marketing of minerals. The Company is now engaged in two
principal mineral sectors: uranium and gold. Its minerals business with respect
to uranium and gold can be characterized as in the development stage according
to the Commission's definition of that term. Interests are held in other mineral
properties (principally molybdenum), but are either non-operating interests or
undeveloped claims. The Company also carries on a small oil and gas operation.
Other USE business segments are commercial operations (real estate and general
aviation) and construction operations.
Most USE operations are conducted through a joint venture with Crested
Corp., a majority-owned Colorado corporation ("Crested"),and various joint
subsidiaries of USE and Crested. The joint venture with Crested is hereafter
referred to as "USECC."
Manufacturing and/or marketing of professional and recreational outdoor
products was conducted through The Brunton Company ("Brunton"), a wholly-owned
USE subsidiary. On February 16, 1996 Registrant sold all of the shares of
Brunton to Silva Production AB for $4,300,000 plus 45% of the net profits before
taxes derived from the sale of Brunton products for four years and three months.
The sale eliminated Brunton's manufacturing and/or marketing of
professional and recreational outdoor products from the commercial segment of
Registrant's business as of January 31, 1996, except to the extent that there
are net profit payments from Silva over the next four years, of which there can
be no assurance. For the fiscal years ended May 31, 1995 and 1996, Brunton's
sales provided 49% and 19%, respectively, of revenues of USE before
reclassification to reflect Brunton as discontinued operations with respect to
the Company (see "Business and Properties - Brunton" for details of this
transaction, and Risk Factor 2 for additional information on the impact of this
transaction).
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USE was incorporated in Wyoming in 1966. All operations are in the United
States. Principal executive offices are located at 877 North 8th West, Riverton,
Wyoming 82501, telephone (307) 856-9271.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements other than statements of historical fact included in this
Prospectus, including without limitation the statements under Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
disclosures about the registrant's option to buy out Kennecott's interest in the
Green Mountain Mining Venture, the Green Mountain Mining Venture development
schedule for the Wyoming properties, the projected operating status of Plateau
Resources Limited's Shootaring Canyon uranium mill in Utah, the plan of
operations for Yellow Stone Fuels Corp. and Sutter Gold Mining Company
(subsidiaries of U.S. Energy Corp.), and future uranium prices and possible
utility contracts, are forward-looking statements.
Although U. S. Energy Corp. believes that the expectations reflected in
such forward looking statements are reasonable, it can give no assurance
that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from such expectations are disclosed
in this Prospectus. The forward-looking statements should be carefully
considered in the context of all the information set forth in this Prospectus.
The Offering
Securities Offered (1)......................................662,987 shares
of Common Stock(2)
USE Common Stock Outstanding
Before and After Offering ................................7,369,462 shares(3)
NASDAQ/NMS Symbol"USEG"
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(1) See "Description of Securities." (2) See "Plan of Distribution."
(3) Includes 112,530 shares issued to Altamira Management Ltd. (one of the four
Canadian Funds) as of the date of this Prospectus (see "Business and Properties
- - Gold - Sutter Gold Mining Company - April 1998 Transaction for Cash and SGMC
Special Warrants").
Risk Factors
An investment in the Common Shares involves substantial risks,
including the risks of USE's failure to obtain necessary capital to put its
principal mineral properties into production, a recurrence of low uranium
prices, litigation and competition. See "RISK FACTORS" beginning on the next
page.
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Issuance of Common Shares to Canadian Funds
In April, 1998, USE issued 546,365 Common Shares to the Canadian Funds, and
agreed to issue another 112,530 Common Shares to one of such Funds as of the
date the registration statement (including this Prospectus) is declared
effective by the Commission. See "Selling Shareholders."
Common Shares
Canadian Fund Registered for Sale
BPI Canadian Small Companies Fund
161 Bay Street, Suite 3900
Toronto, Ontario M5J 2S1 250,683
Altamira Management Ltd.
250 Bloor Street East, Suite 300
Toronto, Ontario M4W 1E6 157,530
BPI Canadian Opportunities II Fund
161 Bay Street, Suite 3900
Toronto, Ontario M5J 2S1 125,341
CPI Canadian Resource Funds
161 Bay Street, Suite 3900
Toronto, Ontario M5J 2S1 125,341
Issuance of Common Shares to Employees
The remaining 4,092 Common Shares are held by employees of the Company,
three of whom are officers of the Company (see "Selling Shareholders"). These
shares were issued as bonus 1997 Christmas bonus compensation to Company
employees, pursuant to a resolution of the Company's Board of Directors at a
special meeting held on March 5, 1998.
RISK FACTORS
Prospective investors should note that the Company's business is subject to
certain risks, including the following:
1. Working Capital Requirements. Registrant's expected cash requirements
for the balance of fiscal 1998 and fiscal 1999 are the funding of on-going
general and administrative expenses, including legal costs incurred as a result
of the Sheep Mountain Partners ("SMP") arbitration/litigation proceedings
described below; mine and mill development and holding costs of the Sutter gold
property described below; holding (standby) costs for the uranium mill owned by
Plateau Resources Limited, a 100% subsidiary of the Company ("Plateau"), in
southeastern Utah; SMP mine care and maintenance costs; mine development costs
for the Jackpot Mine; and costs to acquire uranium oxide which the Company may
be obligated to deliver under the SMP contracts. As a result of the disputes
between the SMP partners (see "Business and Properties - Legal
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Proceedings - Sheep Mountain Partners Arbitration/Litigation"), Registrant and
Crested have been delivering certain of the U3O8 concentrates required to fill
various delivery requirements on long-term U3O8 contracts with domestic
utilities. Recently, Nukem, Inc. ("Nukem") and its 100% subsidiary Cycle
Resource Investment Corporation ("CRIC") had made most of the SMP deliveries of
U3O8. As a result of the June 1998 partial settlement of the dispute with Nukem
and CRIC, SMP assigned out to its partners its remaining contracts. The capital
requirements to fill Registrant's and Crested's portion of the remaining
commitments in fiscal 1999 and thereafter will depend on market prices for the
contracts received from SMP.
The primary source of Registrant's capital resources for the last quarter
of fiscal 1998, will be (i) cash on hand at February 28, 1998; and proceeds from
the partial settlement with Nukem/CRIC; (ii) possible sale of equity or
interests in investment properties or other affiliated companies; (iii) sale of
equipment; (iv) proceeds from the resolution of the SMP arbitration/litigation;
(v) sale of royalties or interests in mineral properties; (vi) proceeds from the
sale of uranium under the SMP contracts, and (vii) borrowings from financial
institutions. Construction revenues from the Company's 50.9% subsidiary, Four
Nines Gold, Inc. ("FNG"), fees from oil production, rentals of various real
estate holdings and equipment and the sale of aviation fuel are also expected to
provide cash. Also, the mine development expenses for the Jackpot Mine on Green
Mountain (Wyoming) are being funded by Kennecott Uranium Company ("KUC") through
the Green Mountain Mining Venture ("GMMV").
Registrant's working capital decreased during the nine months ended
February 28, 1998 by $2,308,700 to working capital of $698,300; however,
included in current liabilities at February 28, 1998 was $4,000,000 of deferred
income. See "Management's Discussion and Analysis of Financial condition and
Results of Operations," at February 28, 1998.
Monthly operating and development expenses to hold the uranium properties,
and fund general and administrative expense is estimated at $800,000 for the
last quarter of fiscal 1998. Revenues from commercial operations are expected to
provide approximately $110,000 monthly. However, funds for work on the Jackpot
Mine are being provided by KUC through the GMMV. Funds to develop the Sutter
Gold property in California are provided by the funds on hand at Sutter Gold
Mining Company. The Registrant and Crested are currently seeking additional
financing for the construction of the SGMC gold processing mill and to complete
the mine development, but there can be no assurance that such financing can be
arranged.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for additional information on working capital
requirements and capital resources. See also Risk Factors 2 and 3 below.
2. Sutter Gold - No Current Mining Operations or Gold Production. USE and
Crested have invested substantial funds in capitalized costs and additional
funds for operating expenses to acquire, permit and develop a gold property in
California, held through a subsidiary, Sutter Gold Mining Company. This
investment represents a significant portion of USE's consolidated assets.
Although SGMC completed private financings for a total of $7,115,100, additional
financing may be required to put the property into full production and build a
mill on the
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property. If third-party financing cannot be obtained and USE is unable to fund
development and production costs from internally generated funds over the next
two years, the Company may be adversely affected. See "Business and Properties -
Gold - Lincoln Project (California)".
3. Additional Shares to Market; Possible Dilution. The Registrant may issue
additional common stock in a private placement or a public offering pursuant to
the 1933 Act if needed for future working capital (see Risk Factor 1 above).
In addition, the Registrant and Crested intend to finance the purchase of
KUC's 50% interest in GMMV and proceed to develop the GMMV properties through a
financing of a new entity. The new entity will hold the principal uranium assets
of the Registrant and Crested, and Registrant and Crested will be the principal
shareholders of the new entity. The terms of such restructuring of the uranium
assets, and the impact of such financing on the shareholders of the Registrant
and Crested will not be determinable until final terms of the transaction are
reached. See "Business and Properties - Green Mountain Mining Venture."
4. Project Delay. Registrant's minerals business is subject to the risk of
unanticipated delays in developing and permitting its uranium and gold projects.
Such delays may be caused by fluctuations in commodity prices (see Risk Factor
5), mining risks (see Risk Factor 8), difficulty in arranging needed financing,
unanticipated permitting requirements, or legal obstruction in the permitting
process by project opponents. In addition to adding to project capital costs
(and possibly operating costs), such delays, if protracted, could result in a
write off of all or a portion of the carrying value of the delayed project
and/or could trigger certain reclamation obligations sooner than planned.
5. Commodity Price Fluctuations. The ability of the Company to develop and
operate its uranium and gold projects profitably can be significantly affected
by changes in the market price of uranium and gold, respectively. From 1988
until mid-1996, the spot market price for uranium concentrates was depressed and
had been below $8.00 per pound as recently as 1992. (See Business and Properties
- - Uranium - Uranium Market Information" for additional information on the
uranium markets and pricing.) Uranium prices are subject to a number of factors
beyond Registrant's control including imports of uranium from Russia and other
countries in the Commonwealth of Independent States ("CIS"), the amount of
uranium produced and sold from the blending of highly enriched uranium recovered
from U. S. and Russian nuclear weapons to produce lower enriched uranium for
nuclear fuel, the build up by utilities of uranium fuel inventories and the sale
of excess inventories into the market, the rate of consumption of uranium
inventories by utilities, the rate of uranium production in the United States,
Canada, Australia and elsewhere by other producers and the rate of new
construction of nuclear generating facilities, versus the rate of shutdown and
decommissioning of older nuclear generating facilities, particularly in the
United States.
Market prices for uranium concentrates in the United States recovered to
between $16.25 and $16.50 per pound as of May 31, 1996, however, prices were
between $10.30 and $14.80 per pound in fiscal 1997. The market price at June 15,
1998 was $10.90 per pound. The Company believes that if the price rebounds to or
surpasses $16.50 per pound, United States utilities will seek long term price
stabilizing uranium supply contracts. If the Company is able to obtain long term
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uranium supply contracts with assured prices exceeding $18.00 per pound, that
should be sufficient to operate Plateau's Utah uranium properties profitably. It
should also be sufficient to continue with development of the Green Mountain
Mining Venture ("GMMV") Jackpot Mine and operation of the Sweetwater uranium
mill. There also can be no assurance that such a price rebound will occur. USE
would be adversely affected if the United States utilities with nuclear power
plants do not seek long term uranium supply contracts during the balance of the
1990s. Although the extent of such adverse impact cannot be predicted, if
uranium prices remained so depressed through the 1990s that USE's properties and
facilities were not put into operation, the book value of such assets might
decrease and USE could be required to reclaim or restore such properties sooner
than planned (see Risk Factor 10).
The market price of gold has fluctuated widely and is affected by numerous
factors beyond the Company's control, including international economic trends,
currency exchange fluctuations, expectations for inflation, the extent of
forward sales of gold by other producers, consumption patterns (such as
purchases of gold jewelry and the development of gold coin programs), purchases
and sales of gold bullion holdings by central banks or other large gold bullion
holders or dealers and global or regional political events, particularly in
major gold-producing countries such as South Africa and some of the CIS
(Commonwealth of Independent States - formerly the Soviet Union) countries. Gold
market prices are also affected by worldwide production levels, which have
increased in recent years, but currently appear to be decreasing somewhat. The
aggregate effect of these factors, all of which are beyond the Company's
control, is impossible for the Company to predict. In addition, the market price
of gold has on occasion been subject to rapid short-term changes because of
market speculation. As of June 17, 1998, the Comex spot price of gold was
$293.00 per ounce, compared to $373 per ounce on November 24, 1996.
6. Proposed Federal Legislation. The U.S. Congress has, in legislative
sessions in recent years, actively considered several proposals for major
revision of the General Mining Law, which governs mining claims and related
activities on federal public lands. If any of the recent proposals become law,
it could result in the imposition of a royalty upon production of minerals from
federal lands and new requirements for mined land reclamation and other
environmental control measures. It remains unclear whether the current Congress
will pass such legislation and, if passed, the extent such new legislation will
affect existing mining claims and operations. The effect of any revision of the
General Mining Law on the Company's operations cannot be determined conclusively
until such revision is enacted; however, such legislation could materially
increase the carrying costs of the Green Mountain mineral properties, the SMP
properties and some of Plateau's mineral properties which are located on federal
unpatented mining claims, and could increase both the capital and operating
costs for such projects and impair the Company's ability to hold or develop such
properties, as well as other mineral prospects on federal unpatented mining
claims.
7. Exploration Risks. Mineral exploration, particularly for gold, is highly
speculative in nature, involves many risks and frequently is nonproductive.
There can be no assurance that the Company's efforts at the Sutter Gold Project
to identify additional gold ore reserves will be successful. Moreover,
substantial expenditures are required to establish additional ore reserves
through drilling, to determine metallurgical processes to extract the metal from
the ore and to construct mining and processing facilities. During the time
required to establish additional ore
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reserves, determine suitable metallurgical processes and construct such mining
and processing facilities, the economic feasibility of production may change
because of fluctuating gold prices (see Risk Factor 5).
8. Mining Risks and Insurance. The business of uranium and gold mining
generally is subject to a number of risks and hazards, including environmental
hazards, industrial accidents, explosions and rock falls, earthquakes, flooding,
interruptions due to weather conditions and other acts of God. Such risks could
result in damage to or destruction of Registrant's mineral properties and
production facilities, as well as to properties of others in the area, personal
injury, environmental damage and process and production delays, causing
Registrant monetary losses and possible legal liability. While the Company
maintains, and intends to continue to maintain, liability, property damage and
other insurance consistent with industry practice, no assurance can be given
that such insurance will continue to be available, be available at economically
acceptable premiums or be adequate to cover any resulting liability.
9. Title to Properties. Nearly all the uranium mining properties held by
GMMV, SMP, and Plateau are on federal unpatented claims. Unpatented claims are
located upon federal public land pursuant to procedure established by the
General Mining Law (see also Risk Factor 6). Requirements for the location of a
valid mining claim on public land depend on the type of claim being staked, but
generally include discovery of valuable minerals, erecting a discovery monument
and posting thereon a location notice, marking the boundaries of the claim with
monuments, and filing a certificate of location with the county in which the
claim is located and with the U. S. Bureau of Land Management ("BLM"). If the
statutes and regulations for the location of a mining claim are complied with,
the locator obtains a valid possessory right to the contained minerals. To
preserve an otherwise valid claim, a claimant must also annually pay certain
rental fees to the federal government (currently $100 per claim) and make
certain additional filings with the county and the BLM. Failure to pay such fees
or make the required filings may render the mining claim void or voidable.
Because mining claims are self-initiated and self-maintained, they possess some
unique vulnerabilities not associated with other types of property interests. It
is impossible to ascertain the validity of unpatented mining claims solely from
public real estate records and it can be difficult or impossible to confirm that
all of the requisite steps have been followed for location and maintenance of a
claim. If the validity of an unpatented mining claim is challenged by the
government, the claimant has the burden of proving the present economic
feasibility of mining minerals located thereon. Thus, it is conceivable that
during times of falling metal prices, claims which were valid when located could
become invalid if challenged. Disputes can also arise with adjoining property
owners for encroachment or under the doctrine of extralateral rights (see Risk
Factor 15).
10. Reclamation and Environmental Liabilities. Registrant's projects and
operations are subject to various federal, state and local laws and regulations
regarding the discharge of materials into the environment or otherwise relating
to the protection of the environment, including the Clean Air Act, the Clean
Water Act, the Resource Conservation and Recovery Act and the Comprehensive
Environmental Response Compensation Liability Act. With respect to mining
operations conducted in Wyoming, Wyoming's mine permitting statutes, Abandoned
Mine Reclamation Act and industrial development and siting laws and regulations
will impact USE.
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Similar laws in California affect SGMC operations and in Utah will affect
Plateau's operations. In addition, Registrant's uranium mill in Utah and the
GMMV mill in Wyoming are subject to jurisdiction of the Nuclear Regulatory
Commission ("NRC").
To Registrant's knowledge, it is in compliance in all material respects
with current environmental regulations. To the extent that production by SMP,
GMMV or SGMC is delayed, interrupted or discontinued due to need to satisfy
present or future laws or regulations which relate to environmental protection,
future USE earnings could be adversely affected. For additional information
concerning the effect such environmental laws and regulations have on the
Company's capital expenditures, see "Business and Properties - Environmental"
and Notes F and K to the Company's Consolidated Financial Statements.
USE is a joint venturer in the GMMV, which entity is responsible for mine
reclamation, environmental restoration and decommissioning associated with
mineral properties on Green Mountain, in south central Wyoming, and the nearby
Sweetwater Mill. Future costs to comply with these obligations are now estimated
at approximately $25,000,000. If actual costs are higher, USE could be adversely
impacted. There is no assurance the properties will generate sufficient revenues
to fund reclamation, restoration and decommissioning costs in excess of current
estimates. See Note K to the Company's Consolidated Financial Statements.
Current bonds and funds in escrow are deemed adequate for reclamation and
decommissioning liabilities associated with the Shootaring Mill in Utah.
USE and Crested have assumed the reclamation obligations, environmental
liabilities and contingent liabilities for employee injuries, from mining the
SMP properties and other properties in the Sheep and Green Mountain Mining
Districts. The reclamation obligations, which are established by governmental
regulators, were most recently set at $1,451,800, which amount is shown on USE's
balance sheet as a long-term obligation.
To assure the reclamation work will be performed, regulatory agencies
require posting of a bond or other security. USE and Crested satisfied this
requirement with respect to SMP properties by mortgaging their executive office
building in Riverton, Wyoming. A portion of the funds for the reclamation of
SMP's properties was to have been provided by SMP, which agreed to pay up to
$.50 per pound of uranium concentrates produced from its properties to USE and
Crested for reclamation work. The status of this commitment could be impacted by
the ultimate resolution of the arbitration/litigation with Nukem/CRIC (see
"Business and Properties-Legal Proceedings-Sheep Mountain Partners Arbitration/
Litigation").
The GMMV and Sweetwater Mill reclamation liabilities are self bonded by
Kennecott pursuant to written agreements with the NRC and the State of Wyoming,
and accordingly these liabilities are not recorded in the USE or Crested
financial statements. The SMP and Plateau reclamation liabilities are in the
audited USE Consolidated Financial Statements (see Note K). A cash bond of
approximately $40,000 is posted for miscellaneous reclamation costs at the
Sutter gold property (carried under "Other Assets-Deposits and Other" on the USE
financial statements). Reclamation and environmental obligations for the oil and
gas properties held by USE are deemed insignificant and manageable in the
ordinary course of business.
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11. Possible Losses on Uranium Contracts. As of May 31, 1997, SMP held
contracts for delivery of U3O8 to domestic utilities through 2000 (725,000
pounds in 1998, 725,000 pounds in 1999 and 105,000 pounds in 2000), exclusive of
rights to increase or decrease such amounts as provided for in the contracts. In
the proceedings before the American Arbitration Association involving Nukem,
Inc., the arbitration panel found that another contract for U3O8 to be delivered
through 2000 was to be assigned to SMP by Nukem/CRIC. As a result of the partial
settlement with Nukem, Inc. in June 1998, SMP assigned out the remaining
contracts to USECC and Nukem. See "Business and Properties - Legal Proceedings -
Sheep Mountain Partners Litigation/ Arbitration". Actual quantities of U3O8
purchased by utilities over that period of time may vary by 10 to 30 percent, as
provided in the contracts (see "Business and Properties - Uranium - Sheep
Mountain Partners - SMP Marketing"), and profit or loss to SMP on the deliveries
will depend on the cost of inventory. Profits on such future deliveries cannot
be predicted, however, management of the Company does not anticipate any
material losses from the sales of U3O8 pursuant to these contracts. As of the
date of this Prospectus, the prices under SMP's one remaining base escalated
contract exceed the current market price, however, there can be no assurance
this situation will not change in the future.
Increases in the spot market price would increase USE's and Crested's cost
of delivering on certain of the SMP contracts prior to the time that their
uranium properties are in production, thus reducing potential profits or
possibly producing losses, while spot market price decreases would be likely to
increase profits on such contracts. Due to the SMP dispute, earlier arrangements
between the partners to deliver their shares of the SMP contracts in spite of
the dispute were abandoned, and USE made no deliveries (and therefore recorded
no revenues or losses) on any SMP contracts during fiscal 1997 or through
February 28, 1998.
12. Competition. There is keen competition in the domestic minerals
industry and the oil and gas business for properties and capital. USE's
competitors include a number of major mining and oil and gas companies, most of
which are larger than USE in all respects. In the production and marketing of
uranium concentrates there are more than 10 major international entities (some
of which are government controlled) that are significantly larger and better
capitalized than USE. Although the Registrant presently is not engaged in the
mining or milling of uranium, and therefore should not be counted in the top ten
uranium producers, the Registrant's competitive stature may improve
significantly at such time as it commences uranium mining and production.
The location and composition of mineral ore bodies are of great importance
to the competitive position of a mining company. Producers of high-grade ore
with readily extractable minerals are in an advantageous position. Producers of
one mineral may be able to efficiently recover other minerals as by-products,
with significant competitive impact on primary producers. Substantial capital
costs for equipment and mine-works are often needed. As a result, owners of
producing properties, particularly if purchase contracts for the production are
in place, generally enjoy substantial competitive advantages over organizations
that propose to develop non-producing properties. Competition is also keen in
the search for mineral properties and prospects and in the employment and
retention of qualified personnel.
14
<PAGE>
USE believes that with the recent improvements in market prices for uranium
concentrates, it will be able to compete with other uranium producers, primarily
because it holds significant uranium resources in place, along with the
necessary mining and milling facilities, all of which it acquired for little or
no cost. Applications have been submitted to upgrade the mill licenses to
operating levels, however, delays in final permitting may be encountered, as the
uranium refining industry is closely regulated by the NRC.
Nonetheless, USE expects competition from larger producers in Canada,
Australia and Africa, as well as from U.S. in situ producers of uranium and
other producers that recover uranium as a byproduct of other mineral recovery
processes, and from uranium recovered from the de- enrichment of highly enriched
uranium obtained from the dismantlement of U.S. and Russian nuclear weapons and
sold in the market by the United States Enrichment Corporation and/or the United
States Department of Energy, as well as from imports to the United States of
uranium from the Commonwealth of Independent States (formerly the Soviet Union).
See "Business and Properties - Uranium - Uranium Market Information" and "NUEXCO
Exchange Value".
In the past, USE's affiliate FNG has encountered strong competition with a
number of larger civil engineering construction firms in the western United
States. Presently, FNG is working primarily on GMMV projects, however, at such
time as FNG finishes GMMV work and re-enters the general civil engineering
construction market, FNG again will encounter competition from larger firms as
has been the case in prior years.
13. Reserve Estimates. While the ore reserve estimates at GMMV Round Park
uranium ore deposit in Wyoming and SGMC's Lincoln gold project in California
have been reviewed by independent consultants, such ore reserve estimates are
necessarily imprecise and depend to some extent on statistical inferences drawn
from limited drilling, which may, on occasion, prove unreliable. Should the
Company encounter mineralization or formations at any of its mines or projects
different from those predicted by drilling, sampling and similar examinations,
ore reserve estimates may have to be adjusted and mining plans may have to be
altered in a way that could adversely affect the Company's operations. Moreover,
short-term operating factors relating to the ore reserves, such as the need for
sequential development of ore bodies and the processing of new or different ore
grades, may adversely affect the Company's profitability in any particular
accounting period.
14. Variable Revenues and Recent Losses. Due to the nature of USE's
business, there are from time to time major increases in gross revenues from
sale of mineral properties. During fiscal 1991, $7,193,600 was recognized from
sale of a partial interest in a uranium property to Kennecott Uranium Company (a
GMMV partner). No such revenues were recognized from fiscal 1992 through fiscal
1995. Further, USE realized a net gain in fiscal 1992 of $613,000, but net
losses were realized from fiscal 1993 through fiscal 1995 (in the respective
amounts of $221,900, $3,370,800 and $2,070,600). Revenues in fiscal 1997 were
$5,790,200, compared to $9,632,200 in 1996. The decrease was primarily due to no
revenues being recognized from mineral sales in 1997. In 1996, the Company had a
net profit of $270,700, but realized a net loss in 1997 of $3,724,500.
15
<PAGE>
15. Bullfrog Litigation. Registrant, Crested, Parador Mining Company, Inc.
("Parador") and H. B. Layne Contractor, Inc. ("Layne") are defendants and
counter- or cross-claimants in certain litigation in the District Court of Nye
County, Nevada, brought by Bond Gold Bullfrog Inc. ("BGBI") in July 1991. BGBI
(now known as Barrick Bullfrog, Inc.) is an affiliate of Barrick Corp., a large
international gold producer headquartered in Toronto, Canada. The litigation
primarily concerns extralateral rights associated with two patented mining
claims owned by Parador and initially leased to a predecessor of BGBI, which
claims are in and adjacent to BGBI's Bullfrog open pit and underground mine. USE
and Crested assert certain interests in the claims under an April 1991
assignment and lease from Parador, which is subject to the lease to BGBI's
predecessor.
Parador, USE and Crested had previously advised BGBI that they are entitled
to royalty payments with respect to extralateral rights of the subject claims on
minerals produced at the Bullfrog Mine, claiming that the lode or vein
containing the gold mineralization apexes on the Parador claims and dips under
the claims leased to BGBI by Layne.
BGBI seeks to quiet title to its leasehold interest in the subject claims,
alleging that Parador's lease thereof to USE and Crested is adverse to the
interest claimed by BGBI, and that the assertions by USE and Crested of an
interest in the claims have no foundation. BGBI seeks a determination that USE
and Crested have no rights in the claims and an order enjoining USE and Crested
from asserting any interest in them. BGBI further asserts that, in attempting to
lease an interest in the subject claims to USE and Crested, Parador breached the
provisions of its lease to BGBI, and that Parador is responsible for the legal
fees and costs incurred by BGBI in the quiet title action, which may be offset
against royalties. Under an arrangement to pay certain legal expenses of
Parador, USE and Crested may be responsible for any such amounts.
BGBI alleges that by entering into the Assignment and Lease of Mining
Claims with Parador, USE and Crested disrupted the contractual relationship
between BGBI and Parador. In addition, BGBI claims that the USECC-Parador
agreement slanders BGBI's title to the claims. BGBI seeks compensatory damages
from Parador, USE, and Crested; punitive damages from USE and Crested; and costs
and other appropriate relief from Parador, USE and Crested, all in amounts to be
determined.
A partial or bifurcated trial to the court of the extralateral rights
issues was held on December 11 and 12, 1995. The purpose of the hearing was to
determine whether the Bullfrog orebody is a "vein, lode or ledge" as described
in the General Mining Law and, if so, whether the facts of the case warrant the
application of the doctrine of extralateral rights as set forth in such statute.
Although the Court sat as both the finder of fact and law with respect to such
issues, the Court concluded that the questions are ultimately one of law which
must be decided based on the testimony and exhibits introduced at the trial
concerning the description of the orebody. Defendants Registrant, Crested Corp.
and Parador presented five experts in the field of geology, including the person
who was responsible for the discovery of the gold deposit at the mine. All five
experts opined that the deposit was a lode and it apexed on a portion of
Parador's two mining claims. The defendant Layne presented a single witness who
testified that there was no apex within the Parador claims. The Court
nevertheless found that Parador had failed to meet its burden of proof and
therefore Parador, Registrant and Crested had no right, title and interest in
the minerals lying
16
<PAGE>
beneath the claims of Layne pursuant to extralateral rights. The Court entered a
partial judgment in favor of Layne and ordered that Parador pay Court costs to
Layne. Defendants filed an appeal of the Court's ruling as erroneous as a matter
of law, but the Supreme Court of Nevada dismissed the appeal as premature.
The partial trial did not address any of the other issues pending in the
litigation other than those required to decide the question of whether the
doctrine of extralateral rights is applicable to this case. On December 18,
1997, the Court ruled on the parties' motion and cross motion for summary
judgment, and ruled that BGBI's claim for breach of contract and the claims of
defendants Registrant, Crested Corp. and Parador for breach of the lease
agreement with BGBI's predecessor and for specific performance are the only
claims remaining to be tried. The trial was conducted on January 26, 1998, on
those issues.
If USE's and Crested's position concerning extralateral rights is
ultimately sustained, substantial additional revenues and income may be received
by USE and Crested from royalties payable with respect to gold produced from the
Bullfrog Mine. If, however, the final decision is adverse to USE and Crested
(which could occur only after a successful appeal by the other parties to the
Nevada Supreme Court and a subsequent retrial which resulted in a judgement in
favor of the other parties and against USE and Crested), USE and Crested could
be adversely affected. The amount of damages which could be awarded against USE
and Crested is not presently known or ascertainable, and would not be known
until such time as an award of damages against USE and Crested were entered
following evidence presented by BGBI on its damages in a retrial following a
successful appeal.
16. Potential Issuance of Preferred Stock. Under the USE Restated Articles
of Incorporation, as amended ("Restated Articles") and as permitted by the
Wyoming Business Corporation Act ("WBCA"), the Registrant's Board of Directors
has authority to create series of preferred stock and to issue shares thereof,
without the approval of any USE shareholders. The creation and issue of USE
preferred stock with dividend rights senior to the Company's Common Stock could
adversely affect common stockholder participation in future earnings through
dividends that otherwise would be available for distribution to holders of the
Common Stock, including those purchasing the Common Shares.
Such preferred stock also could inhibit a takeover of the Company. Under
the WBCA, separate voting approval by classes of stock is required for certain
substantive corporate transactions. If the interests of preferred stockholders
is perceived to be different from those of the common stockholders, the
preferred stockholders could withhold approval of the transactions needed to
effect the takeover.
17. Potential Anti-Takeover Effects of Staggered Board. Registrant's Board
of Directors is presently divided into three classes of two directors each.
Pursuant to the USE Restated Articles and as permitted by the WBCA, the
directors in each class serve a three year term, and only those directors in one
class are reelected each year. This board classification could stall a takeover
of USE, even if a majority of the Common Stock were to be held by persons
desiring a change in control of the Board. See "Description of Securities."
17
<PAGE>
THE COMPANY
U.S. Energy Corp. ("USE", the "Company" or the "Registrant") is in the
general minerals business of acquiring, exploring, developing and/or selling or
leasing of mineral properties and, mining and marketing of minerals. USE is now
engaged in two principal mineral sectors: uranium and gold, both of which are in
the development stage. Interests are held in other mineral properties
(principally molybdenum), but are either non-operating interests or undeveloped
claims. The Company also carries on small oil and gas operations in Montana and
Wyoming. Other USE business segments are commercial operations (real estate and
general aviation) and construction operations. Most of USE operations are
conducted through a joint venture with Crested Corp. ("Crested," a
majority-owned subsidiary), and various joint subsidiaries of USE and Crested.
The joint venture with Crested is hereafter referred to as "USECC."
Subsequent to May 31, 1997, USE and USECC (see below) signed an Acquisition
Agreement with Kennecott Uranium Company ("Kennecott"), for the purchase of
Kennecott's interest in the Green Mountain Mining Venture ("GMMV"). In general
terms, as a consequence of the Acquisition Agreement and the various
transactions associated therewith, USE and USECC received $4,000,000 as a bonus
for signing the Acquisition Agreement. Pending closing of the Acquisition
Agreement, USECC has been provided the opportunity to move the GMMV project
forward, as follows: USECC has leased the mineral properties from GMMV in order
to develop the Jackpot Mine for production mining, and has been appointed an
independent contractor to ready the Sweetwater uranium mill (owned by the GMMV)
for changeover to operational processing status. Kennecott is to provide a line
of credit to the GMMV of up to $16,000,000 for the mine development and mill
work being conducted by USECC. Closing of the Acquisition Agreement will require
the payment of $15,000,000 by Registrant, Crested Corp. or a third party to
Kennecott and the assumption of various reclamation and other liabilities. For
the details of this fiscal 1998 transaction, please see "Minerals-Uranium-The
Green Mountain Mining Project-June 23, 1997 Acquisition Agreement with Kennecott
Uranium Company" below.
Construction operations are carried on primarily through USE's subsidiary
Four Nines Gold, Inc. ("FNG"). Oil and gas operations are carried on through
Energx, Ltd., a subsidiary of the Company and Crested.
USE and Crested originally were independent companies, with two common
affiliates (John L. Larsen and Max T. Evans). In 1980, USE and Crested formed
the USECC a joint venture to do business together (unless one or the other
elected not to pursue an individual project). As a result of USE funding certain
of Crested's obligations from time to time (due to Crested's lack of cash on
hand), and later payment of the debts by Crested issuing common stock to USE,
Crested became a majority owned subsidiary of USE in fiscal 1993. See "Certain
Relationships and Related Transactions."
Until February 1996, the Company conducted manufacturing and/or marketing
of professional and recreational outdoor products through The Brunton Company
("Brunton"), a wholly-owned USE subsidiary. As of February 1, 1996, Registrant
sold all of the shares of Brunton to Silva Production AB for $4,300,000
($3,300,000 in cash and a $1,000,000 promissory note) plus 45% of the net
profits before taxes derived from the sale of Brunton products for four years
and
18
<PAGE>
three months. The Registrant began receiving the net profits payments in fiscal
1997. The sale eliminated Brunton's manufacturing and/or marketing of
professional and recreational outdoor products from the commercial segment of
Registrant's business as of January 31, 1996, except to the extent that there
are net profit payments from Silva through 2000. For the fiscal year ended May
31, 1996, Brunton's sales provided 25% of net revenues of USE (before
reclassification to reflect Brunton as discontinued operations with respect to
the Company) compared with 49% net revenues for the fiscal year ended May 31,
1995.
The Brunton sale was prompted in part by Registrant's desire to focus on
its core minerals sector. In fiscal 1998, the Company intends to implement plans
to consolidate its uranium assets into a single subsidiary and finance the
startup of the operation of mines and mills with debt or equity funding. Of
course, there can be no assurance uranium prices will remain at their current
level; that USE will succeed in its efforts to obtain long-term uranium supply
contracts required to operate its uranium properties profitably, or that the
required financing will be available to put such properties into operation.
USE was incorporated in Wyoming in 1966. All of its operations are in the
United States. Principal executive offices are located in the Glen L. Larsen
building at 877 North 8th Street West, Riverton, Wyoming 82501, telephone (307)
856-9271.
Except for approximately 1,400 ounces of gold recovered in fiscal 1992 in a
bulk sampling program at the Sutter gold property in California, the Company has
not received revenues from the mining of either uranium or gold during its five
fiscal years ended May 31, 1997 or the nine months ended February 28, 1998.
Mineral revenues have been received from sales of mineral properties, advance
royalties in respect of the Company's interests in an undeveloped molybdenum
property that was sold to AMAX Inc. in 1980, and from sales of uranium under
certain of the utility supply contracts held by Sheep Mountain Partners ("SMP"),
as a result of USE and Crested delivering their one-half share or all of the
uranium and receiving sales proceeds therefrom. See "Business and Properties -
Legal Proceedings - Sheep Mountain Partners Arbitration/Litigation."
Commencement of uranium mining from the Jackpot (Round Park) deposit in Wyoming
may result in utility supply contracts for Green Mountain Mining Venture
("GMMV"), of which USE and Crested are joint venture partners with Kennecott
Uranium Company ("Kennecott"), and/or commencement of mining operations from the
properties held by Plateau Resources Limited ("Plateau"), a wholly-owned
subsidiary of USE, in Utah may result in utility supply contracts for Plateau.
There can be no assurance, however, that such mining operations will commence,
or that new utility supply contracts will result.
19
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth certain selected historical financial data
with respect to the Company for the periods indicated. It is derived from and
should be read in conjunction with the Company's Consolidated Financial
Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
May 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current assets $ 4,400,900 $ 2,912,400 $ 3,390,100 $ 3,866,600 $ 1,650,300
Current liabilities 1,393,900 2,031,200 3,368,200 1,291,700 1,592,100
Working capital 3,007,000 881,200 21,900 2,574,900 58,200
Total assets 30,387,100 34,793,300 33,384,500 33,090,300 24,037,200
Long-term
obligations(1) 14,377,200 15,020,700 15,769,600 16,612,500 2,900,000
Shareholders' equity 12,723,600 14,617,000 12,168,400 12,559,100 15,063,200
(1)Includes $8,751,800, $3,978,800, $3,951,800, $3,951,800 and $1,695,600 of accrued reclamation
costs on mining properties at May 31, 1997, 1996, 1995, 1994 and 1993, respectively. See Note K
of Notes to Consolidated Financial Statements.
</TABLE>
February 28, 1998
-----------------
Current assets $ 5,431,200
Current liabilities 4,642,900
Working capital 788,300
Total assets 31,840,700
Long-term
obligations(1) 13,798,000
Shareholders' equity 11,351,500
(1)Includes $8,751,800 of accrued reclamation costs on mining properties at
February 28, 1998.
20
<PAGE>
<TABLE>
<CAPTION>
For Years Ended May 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 5,790,200 $ 9,632,200 $ 4,600,600 $ 8,776,300 $ 9,045,500
Loss before minority
interest in loss
of affiliates,
provision for
income taxes and
extraordinary item (3,706,000) (2,524,100) (2,577,700) (3,587,900) (103,100)
Equity in loss of
affiliates (690,800) (418,500) (442,300) (531,200) (444,700)
Net (loss) income (3,724,500) 270,700 (2,070,600) (3,370,800) (221,900)
Loss per share basic
and diluted before
extraordinary item and
gain on disposal of
subsidiary in
discontinued segment $ (.55) $ (.38) $ (.48) $ (.73) $ (.05)
Income from
discontinued
operations -- .05 .06 .03 --
Gain on disposal of
subsidiary operations in
discontinued segment -- .37 -- -- --
Cumulative effect at
June 1, 1993 of income
tax accounting change -- -- -- (.06) --
----------- ---------- ----------- ----------- -----------
Net income (loss)
per share basic
and diluted $ (.55) $ .04 $ (.42) $ (.76) $ (.05)
=========== ========== =========== =========== ===========
Cash dividends
per share $ -0- $ -0- $ -0- $ -0- $ -0-
=========== =========== =========== =========== ===========
</TABLE>
21
<PAGE>
<TABLE>
Nine Months Ended
February 28,
--------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues $ 5,329,400 $ 3,269,200
Loss before equity
income of affiliate and
provision for income taxes (1,048,800) (2,181,700)
Minority interest in (gain) loss
of consolidated subsidiaries (90,300) 575,000
Equity in loss of affiliates - net (612,200) (338,500)
-------------- ---------------
Loss before provision
for income taxes (1,751,300) (1,945,200)
Provision for income taxes -- --
-------------- ---------------
Net loss $ (1,751,300) $ (1,945,200)
============== ===============
Net loss per share
basic and diluted $ (.26) $ (.29)
============== ===============
</TABLE>
BUSINESS AND PROPERTIES
Minerals
Uranium
General
The Company has interests in several uranium-bearing properties in Wyoming
and Utah and in uranium processing mills in Sweetwater County, Wyoming (the
"Sweetwater Mill") and in southeastern Garfield County, Utah (the "Shootaring
Mill"). All the uranium-bearing properties are located in areas which have
produced significant amounts of uranium in the 1970s and 1980s. The Company is
planning to develop and operate these property interests (directly or through an
agreement in which another company may be the operator) to produce uranium
concentrates ("U3O8") for sale to public utilities that operate nuclear powered
electricity generating plants. In addition, in fiscal 1997, additional
properties were acquired in New Mexico and Wyoming by Yellow Stone Fuels Corp.,
an affiliate of the Company.
The property interests in Wyoming are:
521 unpatented lode mining claims (the "Green Mountain Claims") on Green
Mountain in Fremont County, Wyoming, including 105 claims on which the Round
Park (Jackpot) uranium deposit is located, and the Sweetwater Mill,
(approximately 23 miles south of the proposed Jackpot Mine). These assets are
held by the Green Mountain Mining Venture ("GMMV"), owned 50 percent by USE and
USECC (the "USE Parties"), and 50 percent by Kennecott Uranium Company ("KUC"),
a subsidiary of Kennecott Energy and Coal Company of Gillette, WY. Kennecott
Energy and Coal
22
<PAGE>
Company and Kennecott Corporation of Salt Lake City, UT are indirect
subsidiaries of Rio Tinto plc, formerly RTZ PLC of London. Rio Tinto plc is one
of the world's leading natural resource companies. Kennecott Corporation owns
and operates several mines including the Bingham Canyon, Utah open pit copper
mine which started in 1906.
KUC is also referred to in this Prospectus as Kennecott. All mining claims
are accessible by county, private, and United States Bureau of Land Management
("BLM") access roads. Substantial exploration and delineation of the principal
uranium resources in the proposed Jackpot Mine have been completed. The BLM has
signed a Record of Decision approving the Jackpot Mine Plan of Operations
following preparation of a final Environmental Impact Statement ("EIS") for the
proposed mine, and on June 25, 1996, the Wyoming Department of Environmental
Quality ("WDEQ") issued Mine Permit No. 660 that is required for GMMV to develop
the underground Jackpot Mine and mine the uranium deposits. The proposed mine
has had no previous operators, and will be a new mine when opened. The Big Eagle
Mine and related claim groups (which are near the proposed Jackpot Mine and are
part of the Green Mountain Claims held by the GMMV), are accessible by county
and private roads. The Big Eagle Mine was first operated by Pathfinder Mines
Corporation ("PMC") starting in the late 1970s.
Unpatented lode mining claims, underground and open pit uranium mines and
mining equipment in the Crooks Gap area are located on Sheep Mountain in Fremont
County, Wyoming and are adjacent to and west of the Big Eagle mining claims held
by the GMMV. Until June 1, 1998 these assets were held by the Sheep Mountain
Partners partnership ("SMP"). The partners are USE and Crested, doing business
as USECC, and Nukem, Inc. ("Nukem"), through its wholly-owned subsidiary Cycle
Resource Investment Corporation ("CRIC"). As of June 1, 1998, SMP assigned all
of its mining claims (including the underground and open pit mines) and
equipment to USECC in partial settlement of disputes (see "Legal Proceedings").
The SMP Sheep Mountain Mines 1 and 2 are accessible by county and private roads
and were first operated by Western Nuclear, Inc., a subsidiary of Phelps Dodge
Corporation, in the late 1970s. The SMP and GMMV properties contain uranium
mineralization in sandstones of Tertiary age, as is typical of most Wyoming
uranium deposits.
Approximately 10,825 acres of properties are held by 437 unpatented mining
claims which have been staked by, plus four leases (including three state
leases) held by, Yellow Stone Fuels Corp. (an Ontario, Canada corporation, or by
its wholly-owned subsidiary Yellow Stone Fuels, Inc., a Wyoming corporation,
hereafter "YSFC" including the subsidiary). The properties are located in
Wyoming and New Mexico, and are believed to be prospective of uranium and
suitable for in-situ leaching. USE and Crested each own 14.3% of YSFC.
Electric power to all the above Wyoming properties is furnished by either
Pacific Power & Light or the Hot Springs Rural Electric Association.
The property interests in Utah are:
The Tony M Mine and the Frank M property are underground uranium deposits
in San Juan County, Utah located partially on Utah State mining leases. The
other two properties are the Velvet Mine and Wood Complex, located on private
leases. Royalties on these properties range from 4%
23
<PAGE>
on the Wood Complex, 6% on the Tony M and 8.25% on the Velvet Mine. All
royalties are paid from production. USE owns the approximate 34 claims in the
Velvet property. These properties are accessible by county roads.
Plateau Resources Limited, a wholly owned subsidiary of USE, is the owner
of the Tony M mine and portions of the Frank M properties and has posted a bond
securing Plateau's obligations to reclaim these properties. The Tony M mine was
originally developed by Plateau at the time Plateau was owned by Consumers Power
Company ("CPC"), a Michigan public utility. Significant areas of uranium
mineralization have been accessed and delineated by the prior owner's
underground workings. When the Tony M Mine was in production (while Plateau was
owned by CPC) it produced ore containing from three to eight pounds of uranium
concentrates per ton. Some of this ore was processed at the Shootaring Mill into
U3O8, the saleable product. In addition, low grade uranium ore was stockpiled at
the Tony M mine and at the Shootaring Mill, and related mill support facilities,
which are held by Plateau.
Plateau also owns the Velvet Mine and the nearby Wood Mine complex in the
Lisbon Valley area in southeastern Utah. The Velvet uranium mine was fully
developed and permitted by its prior owner and is located approximately 178
miles by road from the Shootaring Mill. The Wood Mine complex was formerly an
operating uranium mine with a remaining undeveloped resource. Access to this
resource would be by extending a drift approximately 2,500 feet from the former
Wood Mine. The Wood Mine property is not permitted at this time, but the Company
does not expect difficulty in obtaining a new permit because the surface
facilities would occupy the site that has been disturbed from previous
operations.
The Green Mountain Mining Venture Project
GMMV. Subsequent to May 31, 1997, USE and USECC signed an Acquisition
Agreement for the acquisition from Kennecott Uranium Company of its interest in
the GMMV. The following is a description of the formation of GMMV and certain of
its terms, which terms have been modified as a result of the Acquisition
Agreement and related transactions, as set forth under the "June 23, 1997
Acquisition Agreement with Kennecott Uranium Company" below.
In fiscal 1991, USE and USECC entered into an agreement to sell 50 percent
of their interests in the Green Mountain uranium claims, and certain other
rights to Kennecott for $15,000,000 cash (USE's share of the proceeds was
$12,600,000, and the balance was Crested's) and a commitment by Kennecott to
fund the first $50,000,000 of GMMV expenditures. In fiscal 1991, USE and USECC
("USE Parties") and Kennecott formed the GMMV to develop, mine and mill uranium
ore from the Green Mountain Claims, and market U3O8 to utilities using nuclear
power to generate electricity.
Kennecott agreed to fund the first $50,000,000 of GMMV expenditures,
pursuant to Management Committee budgets. Thereafter, GMMV expenses will be
shared by the parties generally in accordance with their participating interests
(50 percent Kennecott, 50 percent USE Parties). The agreement also provides that
Kennecott will pay a disproportionate share (up to an additional $45,000,000) of
GMMV operating expenses, but only out of cash operating margins from sales of
processed uranium at more than $24.00/lb (for $30,000,000 of such operating
expenses),
24
<PAGE>
and from sales of processed uranium at more than $27.00/lb (for the next
$15,000,000 of such operating expenses).
Pursuant to the joint venture agreement, each party's participation
interest in the GMMV is subject to reduction for voluntary or involuntary
failure to pay its share of expenses as required in approved budgets (including
Kennecott's commitment to fund the initial $50,000,000 of the GMMV
expenditures), so that in effect, the interest held by each party collateralizes
its performance. However, a defaulting party would remain liable for third party
liabilities incurred during the GMMV operations, proportionate to its interest
before reduction.
The GMMV cash flows will be shared between Kennecott and the USE Parties
according to their participation interests. However, 105 of the Green Mountain
Claims, which cover the Round Park (Jackpot) uranium deposit, currently believed
to be the most significant mineralized resource on Green Mountain, were formerly
owned solely by USE. Pursuant to an agreement between USE and Crested, cash flow
from production of uranium out of these 105 Green Mountain Claims will be
distributed only to USE and Kennecott, and GMMV expenditures on such properties
will be shared 50 percent by USE and 50 percent by Kennecott. Milling costs will
be paid by the GMMV as operating costs and shared among the participants
according to their ownership interests in the ore being milled.
The USE Parties' share of GMMV cash flow resulting from the balance of the
properties (outside the 105 claims), previously owned by USE and Crested
together, will be shared equally by USE and Crested. GMMV expenditures from such
properties will be shared 25 percent each by USE and Crested, and 50 percent by
Kennecott. Such latter properties are expected to be developed after the Round
Park (Jackpot) deposit is placed into production; uranium deposits on these
properties may be accessed through the proposed tunnels at the Jackpot Mine.
The GMMV Management Committee has three Kennecott representatives and two
USECC representatives, acts by majority vote, and appoints and supervises the
project manager. In fiscal 1993, Kennecott became the GMMV project manager and
has continued as project manager through May 31, 1997. USECC has continued work
on a contract basis at Kennecott's request through May 31, 1997.
Pre-development activities on the GMMV properties have included
environmental and mining equipment studies, mine permitting and planning work,
property maintenance, setting up a uranium marketing program, acquisition and
monitoring of the Sweetwater Mill and preparation of an application to the U. S.
Nuclear Regulatory Commission ("NRC") to convert the Sweetwater Mill license
from standby to an operating license. During fiscal 1996, GMMV completed a
sediment dam, sediment basin and drainage diversion ditch, built a fuel storage
facility and other support facilities and made improvements to existing
facilities. As of the date hereof, the GMMV has commenced mine pre-development
work necessary to put the GMMV properties into production, see "June 23, 1997
Acquisition Agreement with Kennecott Uranium Company" and "Permitting
Activities" below.
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June 23, 1997 Acquisition Agreement with Kennecott Uranium Company
Subsequent to May 31, 1997, USE and USECC signed the Acquisition Agreement
with Kennecott Uranium Company, a Delaware corporation, for the right to acquire
Kennecott's interest in the GMMV for $15,000,000 and other consideration.
Kennecott paid USE and USECC $4,000,000 on signing, and committed to provide the
GMMV up to $16,000,000 for payment of reimbursable costs incurred by USECC in
developing the proposed underground Jackpot Uranium Mine for production and in
changing the status of the Sweetwater Mill from standby to operational. The work
to develop the proposed Jackpot Mine and ready the Sweetwater Mill for
operations will be undertaken, prior to closing of the Acquisition Agreement, by
USECC, as lessee of all the GMMV mineral properties under a Mineral Lease
Agreement between the GMMV and USECC (the "Mineral Lease"), and as an
independent contractor under a Contract Services Agreement (the "Mill Contract")
between Kennecott (as manager of the GMMV) and USECC. Both the Mineral Lease and
the Mill Contract, as well as a Fourth Amendment to the GMMV Mining Venture
Agreement among Kennecott, USE and USECC (the "Fourth Amendment to the GMMV
Agreement"), were executed simultaneously with the Acquisition Agreement.
The $16,000,000 being provided by Kennecott to the GMMV was advanced to
Kennecott by an affiliate, Kennecott Energy Company ("KEC") under a secured
recourse Promissory Note (the "Note") bearing interest at 10.5% per annum
starting April 1999 until paid in full. The Note is payable quarterly out of 20%
of cash flow from the GMMV properties, but not more than 50% of the earnings for
such quarter from the GMMV operations, before interest, income tax, depreciation
and amortization. However, the Note is payable (i) in full on June 23, 2010
regardless of cash flow and earnings of the GMMV, or (ii) sooner (on December
31, 2005) if an economically viable uranium mine has not been placed into
production by such date. The Note is secured by a first mortgage lien against
Kennecott's 50% interest in the GMMV pursuant to a Mortgage, Security Agreement,
Financing Statement and Assignment of Proceeds, Rents and Leases granted by
Kennecott to KEC (the "Mortgage"). USE and USECC will assume the Note, and the
assets of the GMMV will be subject to the Mortgage, at closing of the
Acquisition Agreement.
Pursuant to the Mineral Lease and the Mill Contract of the Acquisition
Agreement, USECC is to expend funds to develop the proposed Jackpot Mine and
nearby Big Eagle Mine, and work with Kennecott in preparing the Sweetwater Mill
for renewed operations. Such work will be funded from the $16,000,000 being
provided to the GMMV by Kennecott. Under the Fourth Amendment to the GMMV
Agreement, Kennecott will be entitled to a credit against Kennecott's original
$50,000,000 commitment to fund the GMMV, in the amount of two dollars of credit
for each one dollar of such funds out of the $16,000,000 provided by Kennecott
to the GMMV, plus the $4,000,000 paid to USE and USECC on signing of the
Acquisition Agreement. It is anticipated that such credits will satisfy the
balance of Kennecott's initial funding commitment to acquire a 50% interest in
the GMMV.
Pursuant to the Fourth Amendment to the GMMV Agreement, Kennecott initially
advanced $1,000,000 to the GMMV, which the GMMV has advanced to USECC pursuant
to the Mineral Lease and the Mill Contract, to allow USECC to establish a
working capital account. On a monthly basis, USECC is to submit detailed
invoices for reimbursable costs, defined in the Mineral Lease and Mill Contract
to include USECC's labor and equipment costs (maintenance and rental),
environmental compliance costs, direct office costs of USECC staff incurred in
monitoring and
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invoicing project costs and expenditures and associated engineering costs and
expenditures, and an additional amount equal to 10% of all the preceding costs
and expenditures as an administrative charge (the same 10% as previously allowed
in the GMMV Agreement). USECC is permitted to charge the GMMV rental expense for
equipment owned by USECC. The reimbursable cost allocations for each phase of
the development of the Jackpot Mine and upgrade of the Sweetwater Mill to
operating status are set forth in budgets of the Mineral Lease and Mill
Contract. Also included in reimbursable costs will be the amounts required to
cover all reclamation activities that will result from operations conducted on
the mining properties pursuant to the Mill Contract and the Mineral Lease (USE
and USECC will be required to put such reclamation cost amounts aside in a
sinking fund to pay for the reclamation work when production commences).
Kennecott has agreed to provide funds to the GMMV each month in an amount
adequate to reimburse USECC for invoiced costs and restore the USECC working
account balance to $1,000,000. Payment by GMMV of the monthly invoiced costs is
subject to Kennecott's confirmation that such costs conform to the Mineral Lease
and Mill Contract budgets. Subject to and at the closing of the Acquisition
Agreement, Kennecott will advance to the GMMV cash equal to any difference
between (i) the $16,000,000 commitment and (ii) amounts advanced to pay
reimbursable costs and maintain the working capital account.
Also pursuant to the Mineral Lease, USECC is to pay the GMMV a monthly
lease fee of $3,363, starting July 1, 1997. Separately and pursuant to the
Mineral Lease, USE and USECC are required to pay all rental, leasehold, property
and other payments relating to the mining properties, and all utility and other
payments, taxes and assessments that may be assessed against such properties
during the term of the Mineral Lease.
Closing of the Acquisition Agreement is subject to USE and USECC satisfying
several conditions, including: (i) the acquiring entity (which may be USE,
USECC, or an entity formed by USE and USECC to acquire Kennecott's interest in
the GMMV) must have a market capitalization of at least $200,000,000; (ii) the
parties to the Acquisition Agreement must have received all authorizations,
consents, permits and approvals of government agencies required to transfer
Kennecott's interest in the GMMV to the acquiring entity; (iii) USE and USECC
shall have replaced, or caused the replacement of, approximately $25,000,000 of
reclamation bonds, in addition to other guarantees, indemnification and
suretyship agreements posted by Kennecott on behalf of the GMMV; and (iv) USE
and USECC, or the acquiring entity, must pay $15,000,000 in cash to Kennecott at
closing and assume all obligations and liabilities of Kennecott with respect to
the GMMV (including repayment of the $16,000,000 Note and the Mortgage) from and
after the closing. Under very limited circumstances, the scheduled closing date
may be postponed to another date no later than October 30, 1998. The parties to
the Acquisition Agreement also executed a mutual General Release with respect to
any and all claims that they may have with respect to any prior disputes
concerning the GMMV, which General Release would be delivered to all such
parties at closing of the Acquisition Agreement. Upon closing of the Acquisition
Agreement, the Mineral Lease and the Mill Contract will be terminated and USE,
USECC or the acquiring entity will own Kennecott's 50% of the GMMV, although its
properties will remain subject to the Mortgage until the Note is paid in full.
The current 50% interest in GMMV held by USE and USECC will not change when the
Acquisition Agreement is closed.
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If the Acquisition Agreement were not closed by December 1, 1997, then USE
and USECC (or an entity formed by them to acquire the GMMV interest owned by
Kennecott) were to provide to Kennecott a commitment letter from a recognized
national investment banking firm to complete an underwritten public offering of
the securities of USE (or an entity formed or introduced to acquire Kennecott's
GMMV interest (the "Acquiring Entity")), in amount sufficient to close the
Acquisition Agreement transactions. Such amount is estimated by USE to be
approximately $40,000,000, (for the $15,000,000 closing cash purchase price to
Kennecott, plus $25,000,000 to assume or cause the replacement of reclamation
bonds, guarantees, indemnification agreements and suretyship agreements related
to the GMMV properties and the Sweetwater Mill. Alternatively, USE, USECC or the
Acquiring Entity must provide evidence to Kennecott of a commitment letter from
a bank, other financial institution or industry entity to provide private or
joint venture financing in such approximate amount. Failure to provide evidence
of such financial commitment by December 1, 1997 would have entitled Kennecott
to terminate the Acquisition Agreement, the Mineral Lease and the Mill Contract.
Subject to providing evidence of adequate financial resources to close the
Acquisition Agreement with funds from a public financing or otherwise, the
$4,000,000 signing bonus paid by Kennecott is nonrefundable.
In November 1997, the Registrant and its subsidiaries Crested and Plateau
Resources entered into a letter of intent with an underwriter to raise
sufficient funds to acquire Kennecott Uranium Company's interest in the GMMV.
This letter of intent complies with the condition of the Acquisition Agreement
for the delivery of such letter of intent by December 1, 1997 so that the
$4,000,000 advanced to the Registrant and Crested by Kennecott on June 23, 1997,
would be nonrefundable. This letter of intent in effect allows the Registrant,
as contemplated and permitted by the Acquisition Agreement, until October 30,
1998 to close the Acquisition Agreement transactions.
Final terms of the financing, including the total funds to be raised (which
would close the Acquisition Agreement transactions and provide working capital
for mine and mill work), the identification of the issuer (the Acquiring Entity)
of the securities to be sold to raise the financing, the percentage ownership of
such issuer by the Registrant and its affiliated companies, and other terms,
have not been agreed upon as of the date of this Prospectus. Such final terms
and the expected timing of the financing will be set forth in a registration
statement which is anticipated to be filed in connection with the financing in
the first calendar quarter of 1998. This Prospectus will be supplemented with
the final information, at the same time as the registration statement is filed
for the financing of the Acquiring Entity.
If the Acquisition Agreement is not closed, USE and USECC, and Kennecott,
will continue to own their respective 50% interests in the GMMV, and Kennecott's
obligation to repay the $16,000,000 loaned by KEC shall remain Kennecott's
obligation, without any adverse effect on the 50% interest in the GMMV held by
USE and USECC. However, the Jackpot Mine development work and Sweetwater Mill
upgrade work funded by the $16,000,000 advance, will have benefitted all parties
to the GMMV.
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Properties and Mine Plan. The GMMV owns a total of 521 claims on Green
Mountain, including the 105 claims on which the Round Park (Jackpot) uranium
deposit is located. Surface rights are owned by the United States Government
under management by the BLM. In addition, other uranium mineralization has been
delineated in the Phase 2 and Whiskey Peak deposits on these claims, which
formerly belonged to USE and Crested. These deposits are undeveloped. Roads and
utilities have been put in place, which are believed to be satisfactory to
support future mine development.
The GMMV also owns the Big Eagle Properties on Green Mountain, which appear
to contain substantial remaining uranium mineralization, and are adjacent to the
other GMMV mining claims. The Big Eagle Properties contain one underground and
two open-pit mines, as well as related roads, utilities, buildings, structures,
equipment and a stockpile of ore. The assets include a 38,000 and an 8,000
square foot buildings formerly used by Pathfinder Mines Corporation (PMC) in
mining operations. Also included are three ore-hauling vehicles, each having a
100-ton capacity. Permits transferred to the GMMV for the properties include: a
permit to mine, an air quality permit, and water discharge and water quality
permits. The GMMV owns the mineral rights to the underlying unpatented lode
mining claims.
The Round Park (Jackpot) mining claims contain deposits of uranium which
have been estimated to contain 52,000,000 pounds of U3O8 averaging .23% uranium
oxide using a grade- thickness cut-off of .6 (i.e., deposit areas were excluded
unless deposit bed thickness at intercept, times intercept grade of uranium
mineralization, exceeded .6). The GMMV plans to mine this deposit from two
tunnels in the Jackpot Mine, which will be driven underground from the south
side of Green Mountain. The first of several mineralization horizons is about
2,300 feet vertically down from the top of Green Mountain.
The Jackpot Mine Plan of Operations provides for two declines to be driven
from the side of Green Mountain, extending about 10,400 feet into the deposits;
one decline will be used for ventilation and transportation of personnel, and
the other will convey ore, rock and waste out of the mine. The mine plan
estimates that the Jackpot Mine will produce about 3,000 tons of uranium ore per
day and will have an expected mine life of 13 to 22 years. It will utilize the
existing Big Eagle Mine facilities located about three miles west of the Jackpot
Mine site. As many as 250 workers will be required during mining full
operations.
USE Parties expect mine development costs will not exceed $25,000,000 to
begin production from the Round Park (Jackpot) deposit. However, cost estimates
may change as exploration and initial development progress. Pursuant to the GMMV
agreement, Kennecott had agreed to fund the initial $50,000,000 in development
costs including reclamation costs. To May 31, 1997, such expenditures totaled
approximately $20,416,400. Additional costs would be funded by the $16,000,000
loan, operations and/or by cash advance by the venturers. Approximately
$7,600,00 of the $16,000,000 loan amount has been spent on the GMMV through May
15, 1998.
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Sweetwater Mill. In fiscal 1993, GMMV acquired the Sweetwater uranium
processing mill and associated properties located in Sweetwater County, Wyoming,
approximately 23 miles south of the proposed Jackpot Mine, from Union Oil
Company of California ("UNOCAL"), primarily in consideration of Kennecott and
the GMMV assuming environmental liabilities, and decommissioning and reclamation
obligations.
Kennecott is manager of the Sweetwater Mill and, as such, will be
compensated by GMMV out of production. Payments for pre-operating management
will be based on a sliding scale percentage of mill cash operating costs prior
to mill operation; payments for operating management will be based on 13 percent
of mill cash operating costs when processing ore. Mill holding costs have been
paid by GMMV and funded by Kennecott as part of its $50,000,000 funding
commitment.
The Sweetwater Mill includes buildings, milling and related equipment, real
estate improvements, mining and mill site claims and other real property
interests, personal property and intangible property (including government
permits relating to operation of those properties). The major assets are the
mill buildings and equipment located on approximately 92 acres.
The mill was designed as a 3,000 ton per day ("tpd") facility. UNOCAL's
subsidiary Minerals Exploration Company reportedly processed in excess of 4,200
tpd for sustained periods. The mill is one of the newest uranium milling
facilities in the United States, and has been maintained in good condition.
UNOCAL has reported that the mill buildings and equipment have historical costs
of $10,500,000 and $26,900,000, respectively.
As consideration for the purchase of the Sweetwater Mill, GMMV agreed to
indemnify UNOCAL against certain reclamation and environmental liabilities,
which indemnification obligations are guaranteed by Kennecott Corporation
(parent of Kennecott Uranium Company). The GMMV has agreed to be responsible for
compliance with mill decommissioning and land reclamation laws, for which the
environmental and reclamation bonding requirements are approximately
$24,330,000, which includes a $4,560,000 bond required by the NRC. None of the
GMMV future reclamation and closure costs are reflected in Registrant's
Consolidated Financial Statements (see Notes F and K to USE Consolidated
Financial Statements for fiscal year ended May 31, 1997).
The reclamation and environmental liabilities assumed by GMMV consist of
two categories: (1) cleanup of the inactive open pit mine site near the mill
(the source of ore feedstock for the mill when operating under UNOCAL),
including water (heavy metals and other contaminants) and tailings (heavy metals
dust and other contaminants requiring abatement and erosion control) associated
with the pit; and (2) decontamination and cleanup and disposal of the mill
building, equipment and tailings cells after mill decommissioning. On June 18,
1996, Kennecott established an irrevocable Letter of Credit through Morgan
Guaranty Trust Company of New York City in the amount of $19,767,079 in favor of
the Wyoming Department of Environmental Quality ("WDEQ") for reclamation
requirements of the GMMV. The Letter of Credit was increased by $10,000 on
August 26, 1996 to cover off-permit wetland enhancement. The WDEQ exercises
delegated jurisdiction from the United States Environmental Protection Agency
("EPA") to administer the Clean Water Act and the Clean Air Act, and directly
administers Wyoming statutes on mined land
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reclamation. The Sweetwater Mill is also regulated by the NRC for tailings cells
and mill decontamination and cleanup. The EPA has continuing jurisdiction under
the Resource Conservation and Recovery Act, pertaining to any hazardous
materials which may be on site when cleanup work is started.
Although the GMMV is liable for all reclamation and environmental
compliance costs associated with mill and site maintenance, as well as mill
decontamination and cleanup and site reclamation and cleanup after the mill is
decommissioned, USECC believes it is unlikely USECC would have to pay for such
costs directly. First, based on current estimates of cleanup and reclamation
costs (reviewed annually by the oversight agencies), such costs covered by the
letters of credit or other surety appear to be within the $24,330,000
reclamation bonds posted by Kennecott for GMMV. These costs are not expected to
increase materially if the mill is not put into operation. Second, UNOCAL has
agreed that if the GMMV incurs expenditures for environmental liabilities prior
to the earlier of commercial production by GMMV or January 1, 2001, (which
liabilities are not due solely to the operations of GMMV), then UNOCAL will loan
the GMMV the first $8,000,000 of such expenditures. Any reimbursement for the
loan may only be recovered by UNOCAL from 20% of future cash flows from sale of
uranium concentrates processed through the Sweetwater Mill. Third, the payment
of reclamation and environmental liabilities related to the Mill is guaranteed
by Kennecott. Last, the GMMV will set aside a portion of operating revenues to
fund reclamation and environmental liabilities when mining and milling
operations are finally shut down.
Kennecott will be entitled to contribution from the USE Parties in
proportion to their participating interests in the GMMV, if Kennecott is
required to pay mill cleanup costs directly pursuant to its guarantee. Such
contributions would be required only if the liabilities cannot be satisfied by
Kennecott within the balance of any development commitment as provided by the
Acquisition Agreement, after the credits provided by the Fourth Amendment to the
GMMV (see the "June 23, 1997 Acquisition Agreement with Kennecott above). In
addition, if and to the extent such liabilities resulted from UNOCAL's mill
operations, and payment of the liabilities was required before January 1, 2001
and before mill production resumes, then up to $8,000,000 of that amount would
be paid by UNOCAL, before Kennecott would be required to pay on its guarantee.
However, notwithstanding the preceding, the extent of any ultimate USECC
liability for contribution to mill cleanup costs cannot be predicted.
Permitting and Activities. In March 1993, the GMMV applied to the WDEQ for
a Permit to Mine the Round Park deposit through the Jackpot Mine. Following
preparation of a final EIS by the BLM, including a series of public meetings and
a period for receipt of written comments on both the preliminary and final EIS,
on April 24, 1996, the BLM signed the Record of Decision ("ROD") approving the
Jackpot Mine Plan of Operations. With the entry of the ROD, the WDEQ issued the
mine permit for the Jackpot Mine on June 26, 1996. This Permit allows the GMMV
to proceed with construction of mine surface facilities, further underground
mine development and eventual mining of the Round Park (Jackpot) Deposit.
General activity increased at the Jackpot mine site during fiscal 1997 and
to the date of this Prospectus, in anticipation of increased uranium prices.
Some of the principle activities were: a major portion of the access/haulroad
from the Jackpot Mine to the Big Eagle Mine was widened to
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a 40 foot running surface eliminating various curves to accommodate the GMMV's
100 ton haul trucks; permits and approvals were obtained for construction of
Jackpot Reservoirs No. 2 and 3 and construction was started, completed and are
operational (catch basin for sediment and runoff). The management of the GMMV
believes it is in compliance with all permit conditions. Significant progress is
being made in preparing for and running the double declines into the Round Park
(Jackpot) deposit, pursuant to the pre-development operations plan agreed to
between USECC and Kennecott. Two shifts are currently working underground with a
third shift being assembled.
The Jackpot Mine Plan of Operations and a combination of the alternatives
analyzed in the EIS will allow for the disposal of mine waste rock in the Big
Eagle Mine pits some three miles from the Jackpot declines, the upgrading of
existing roads, and the construction of new haul road segments to transport ore
to the Sweetwater Mill. These roads will be subject to modification in alignment
necessary to minimize or avoid adverse impacts to riparian and cultural
resources.
The maximum area of new disturbance required for the project will be 289
acres. This disturbance will include approximately 118 acres for mine site
development and approximately 171 acres for transportation corridor construction
and/or improvement. When uranium reserves have been depleted, the mine portals
will be plugged; the ground surface recontoured and reclaimed to blend with the
natural landscape; surface structures will be removed; roads closed per
landowner or BLM request, and disturbed areas reclaimed.
Kennecott, as operator of the Sweetwater Mill and USECC have initiated
discussions and made filings with the NRC regarding amendments to the Source
Material License to resume ore processing at the Sweetwater Mill. Separately,
Kennecott has applied to the NRC for permission to use a mill tailings cell to
hold low level tailings waste from an ion exchange plant owned by USE and
Crested in the Crooks Gap area.
The United States Environmental Protection Agency ("EPA") has advised
Kennecott, as operator of the GMMV, that if Kennecott would level the tailings
within the existing tailings impoundment and install a new liner with leak
detection capability, the EPA would allow the use of the existing 60 acre
tailings cell for milling operations. Although this could result in a cost
savings to the GMMV, a new 40 acre tailings cell has been designed by an outside
engineering firm and is scheduled to be constructed.
The EPA has promulgated final rules for radon emissions. These regulations
affect the mining and milling of uranium and may require substantial
expenditures for compliance. The GMMV may need to install further venting at the
Jackpot mine site, and must monitor radon emissions at the mines, as well as
wind speed, direction and other conditions. USE management believes all of the
uranium operations in which it owns an interest are in compliance with these
rules.
There ultimately will be an effect on the earnings of USE and Crested from
environmental compliance expenditures by the GMMV, since the GMMV operations
will be accounted for by the equity method if the acquisition of Kennecott's
interest in the GMMV pursuant to the Acquisition Agreement does not close.
GMMV's expenses for compliance with environmental laws (as well as other
matters) are not expected to materially affect the cash flow of USE and Crested
during the
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next two years. Out of Kennecott's initial $50,000,000 commitment, Kennecott has
funded about $20,416,400 through May 31, 1997. Nevertheless, advances to the
GMMV made pursuant to the Acquisition Agreement will reduce Kennecott's
development commitment by two dollars for each dollar advanced pursuant to the
Fourth Amendment to the GMMV Agreement.
Plateau's Shootaring Canyon Mill
Acquisition of Plateau Resources, Limited ("Plateau"). In August 1993, USE
purchased from Consumers Power Company ("CPC"), all of the outstanding stock of
Plateau, which owns the Shootaring Canyon uranium processing mill and support
facilities in southeastern Utah (the "Shootaring Mill"). The Shootaring Mill
holds a source materials license from the NRC.
USE paid nominal cash consideration for the Plateau stock, but as
additional consideration, USE has agreed:
(a) to perform or cause Plateau to perform all studies, remedial or other
response actions or other activities necessary from time to time for Plateau to
comply with environmental monitoring and other provisions of (i) federal and
state environmental laws relating to hazardous or toxic substances, and (ii) the
Uranium Mill Tailings Radiation Control Act, the Atomic Energy Act of 1954, and
administrative orders and licenses relating to nuclear or radioactive substances
or materials on the property of, or produced or released by, Plateau; and
(b) to indemnify CPC from all liabilities and costs related to the presence
of hazardous substances or radioactive materials on Plateau property, and to any
future violation of laws and administrative orders and licenses relating to the
environment or to nuclear or radioactive substances.
At closing, Plateau transferred $2,500,000 cash to fund the "NRC Surety
Trust Agreement" with a commercial bank as trustee. The trustee is to pay future
costs of Shootaring Mill decommissioning, site reclamation, and long term site
surveillance, as directed by the NRC. The amount transferred to the trust is the
minimum amount now required by the NRC as financial assurance for clean up after
permanent shut down of the Shootaring Mill.
Also at closing, Plateau transferred $4,800,000 cash to fund the "Agency
Agreement" with a commercial bank. These funds will be available to indemnify
CPC against possible claims related to environmental or nuclear matters as
described above, and against third-party claims related to an agreement between
Plateau and the third-party (see Note K to the USE Consolidated Financial
Statements for fiscal year ended May 31, 1997).
There are no present claims against funds held under either the Trust
Agreement or Agency Agreement. Funds (including accrued interest) not disbursed
under the Trust and Agency Agreements will be paid over to Plateau upon
termination of such Agreements with NRC concurrence.
The consideration paid by USE was determined by negotiation with CPC,
taking into account further estimated annual Shootaring Mill holding costs, and
estimated future Mill
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decommissioning and site reclamation costs as required by the NRC and the Utah
Department of Natural Resources, Division of Oil, Gas and Mining ("DOGM").
The Plateau acquisition was done solely with USE, in light of potential NRC
objections to selling Plateau to the USECC joint venture. Subsequent to closing,
in September 1993, USE and Crested agreed that after Plateau's unencumbered cash
has been depleted, USE and Crested each will assume one-half of Plateau's
obligations, and share equally in Plateau's operating cash flows, pursuant to
the USECC Joint Venture.
Shootaring Mill and Facilities. The Shootaring Mill is located in
south-eastern Utah, approximately 13 miles north of Lake Powell, and 50 miles
south of Hanksville, Utah via State Highway 276, then four miles west on good
gravel roads. The entire facility occupies 18.9 acres of a 264.52 acre plant
site. The mill was designed to process 750 tpd, but only operated on a trial
basis for two months in mid-summer 1982. In 1984, Plateau put the mill on
standby because of the depressed U3O8 market.
Plateau also owns approximately 90,000 tons of uranium mineralized material
stockpiled at the mill site and approximately 172,000 tons of mineralized
material stockpiled at the Tony M Mine. Included with mill assets are tailings
cells, laboratory facilities, equipment shop and inventory. The NRC issued a
license to Plateau authorizing production of uranium concentrates. But since the
mill was shut down, only maintenance and required safety and environmental
inspection activities were performed and the source materials license with the
NRC was for standby operations only. On July 31, 1996, the NRC approved
Plateau's application to postpone initiation of the requirements of timeliness
in decommissioning of the Shootaring Mill for five years, which postponement
enabled Plateau to upgrade the source materials license to operational status.
Plateau applied to the NRC to convert the source materials license from standby
to operational and upon increasing the reclamation bond to $6,700,000, the NRC
issued the new license on May 2, 1997. Plateau has an additional $1,600,000 of
government securities available for further bonding needs.
In fiscal 1997 and into fiscal 1998, in anticipation of resuming milling
operations, Plateau commenced a complete reactivation and rehabilitation program
at the Mill (updating the control systems and testing gauges, relining wooden
acid leach tanks, etc.).
Ticaboo Townsite
Plateau and USE own all of the outstanding stock of Canyon Homesteads, Inc.
("Canyon"), a Utah corporation, which developed the Ticaboo, Utah townsite 3.5
miles south of the Shootaring Mill. The Ticaboo site includes a 66 room motel;
convenience store; 98 single family home sites; 151 mobile home sites, and 26
recreational vehicle sites (all with utility access). The townsite is located on
a State of Utah lease near Lake Powell and is being operated as a commercial
enterprise. An amendment was entered into on April 1, 1997 on the Utah State
lease covering the Ticaboo townsite whereby the State deeded portions of the
Townsite to Canyon Homesteads, Inc. on a sliding scale basis. USE and Crested
plan to further develop the townsite, and have been seeking financial partners
for this purpose. Interim funding for limited improvements on the commercial
operations were provided by a private corporation controlled by family members
of the Chairman of the Board
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and Chief Executive Officer of USE. See Part III, Item 12 "Certain Relationships
and Related Transactions - Transactions with Arrowstar Investments, Inc.". USE
now operates all commercial facilities including the motel, restaurant,
convenience store, mobile home/RV park and boat storage as the renovation of the
nearby Shootaring Canyon uranium mill is underway.
Yellow Stone Fuels Corp.
Yellow Stone Fuels Corp., hereafter ("YSFC") was organized on February 17,
1997 in Ontario, Canada. As of February 17, 1997, YSFC acquired all the
outstanding shares of Common Stock of Yellow Stone Fuels, Inc. (a Wyoming
corporation which was organized on June 3,1996), in exchange for YSFC issuing
the same number of shares of YSFC Stock to the former shareholders of Yellow
Stone Fuels, Inc. ("YFI"). YSFC and its wholly-owned subsidiary Yellow Stone
Fuels, Inc. will hereafter be referred to collectively as YSFC.
In order to concentrate the efforts of USECC on conventional uranium mining
using the Shootaring and Sweetwater Mills, USECC decided to take a minority
position in Yellow Stone Fuels, Inc. and not be directly involved in properties
believed suitable for the production of uranium through the in-situ leach
("ISL") mining process. USECC will have first call on any uranium ore bodies
YSFC discovers which are amenable to conventional mining and milling and YSFC
will have a call on ore bodies discovered by USECC amenable to the ISL process.
In the ISL process, groundwater fortified with oxidizing agents is pumped into
the ore body, causing the uranium contained into the ore to dissolve. The
resulting solution is pumped to the surface where it is further processed to a
dried form of uranium which is shipped to conversion facilities for eventual
sale. Generally, the ISL process is more cost effective and environmentally
benign compared to conventional underground mining techniques. In addition, less
time may be required to bring an ISL mine into operation than to permit and
build a conventional mine.
In Wyoming, YSFC has staked and/or holds 304 unpatented mining claims and
has entered into three State leases covering a total of 9,280 acres located in
the Powder River Basin uranium district. The State leases have a 10 year term
expiring October 1, 2006; require annual rental of $1.00 per acre for five
years, then $2.00 for the second five years, or sooner upon the discovery of
commercial quantities of minerals; and a 5% gross royalty of the value of
uranium bearing ore mined from the leased properties is payable to the State of
Wyoming.
Also in Wyoming, the Peterson claim group includes 50 unpatented mining
claims covering approximately 1,000 acres in the southern part of the power
River Basin uranium district. In addition to owning the Peterson claim group,
YSFC has leased the surface rights to the mineral properties for five years, at
$4.00 per acre annual rent per year plus a production royalty of $0.50 per pound
of uranium concentrates (U3O8) sold at or for less than $22.00 per pound (the
royalty increases to $0.75 per pound for uranium sold at more than $30.00 per
pound). The Low claim group, covering 63 unpatented lode mining claims covering
approximately 1,260 acres, is also located in the southern part of the Powder
River Basin uranium district, approximately 20 miles northwest of the producing
Rio Algom's Smith Ranch Mine. The Low claims may be similar in geology and
hydrology to the Smith Ranch and Cameco's Highland ISL operations.
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In New Mexico, YSFC has staked and holds 39 unpatented mining claims and
has leased 8 patented mining claims. These properties in the aggregate cover
approximately 945 acres located in the Grants uranium region of New Mexico. The
8 unpatented mining claims (covering 165.44 acres) are held by a 5 year
renewable lease from Parador Mining Company, requiring $500 monthly rental
payments to Parador Mining Company, which has retained a 5% gross royalty on
revenues from uranium sold from the property. The Parador area was mined for up
to 600,000 pounds U3O8 at a grade of 0.24% by other companies in the 1970s. The
extent of further mineral resources on the properties is presently unknown.
The geological and geophysical data acquired with the Pioneer Nuclear, Inc.
("PNI") library may assist YSFC in evaluating the viability of the various
uranium claims to in-situ processing. This library of information was assembled
in the 1970s by PNI in its uranium exploration program, and the library was
acquired from a person in exchange for shares of YSFC common stock.
As of the date of this Prospectus, YSFC is negotiating to acquire
additional properties in Converse, Fremont and Sweetwater Counties, Wyoming
which in some instances will include certain tangible assets. However, there are
no contracts or agreements in principle for such acquisitions at this report
date.
YSFC will require additional funding to maintain its property acquisition
program, conduct the geological and engineering studies on properties to
evaluate their suitability to in-situ recovery methods, and to build and operate
in-situ recovery facilities on suitable properties. YSFC is currently seeking
additional funding, but there is no assurance that such funding will be
obtained.
In fiscal 1997, USE and USECC entered into several agreements with YSFC,
including a Milling Agreement through Plateau Resources. The Shootaring Canyon
mill facilities will be available to YSFC to transport uranium concentrate
slurry and loaded resin to the mill and process it into uranium concentrate
("yellowcake"), for which Plateau will be paid its direct costs plus 10%. Other
agreements include a Drill Rig Lease Agreement for YSFC to have access to USE
drilling rigs at the prevailing market rates; an Outsourcing and Lease Agreement
for assistance from USECC accounting and technical personnel on a cost plus 10%
basis and a sublease for 1,000 square feet of office space for $1,000 per month;
and a Ratification of Understanding by which USECC will offer to YSFC (with a
reserved royalty in amounts to be agreed on later) any uranium properties
amenable to in-situ production which USECC acquires or has the right to acquire.
In return, YSFC will offer to USECC ( with a reserve royalty in amounts to be
agreed on later) uranium properties amenable to conventional mining methods
which YSFC acquires or has the right to acquire. USECC also will make its
library of geological information and related materials available to YSFC . YSFC
also has a Storage Agreement with GMMV by which YSFC stores used low-level
contaminated mining equipment purchased from a third party at GMMV's Sweetwater
Mill; YSFC is responsible for any bonding and handling obligations for the
stored equipment, and pays GMMV nominal rent for the storage.
As of May 31, 1997, YSFC had 10,495,000 shares of Common Stock issued and
outstanding, including 3,000,000 shares (28.5%) issued to USE and Crested. Most
of the funds used by YSFC have been provided by USECC under a $400,000 loan
facility. As part consideration for the loan, USE and Crested entered into a
Voting Trust Agreement having an initial term of 24 months with
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two principal shareholders of YSFC, whereby USE and Crested will have voting
control of more than 50% of the outstanding shares of YSFC. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
majority of the remaining outstanding YSFC shares are owned by affiliates of USE
and Crested. See "Certain Relationships and Related Transactions."
From mid-September 1997 to late March 1998, YSFC sold 1,215,000 shares of
Common Stock in a private placement, at $2.00 per share; net proceeds to YSFC
were $2,034,100 after payment of $315,900 in commissions to the placement agent
(RAF Financial Corp., Denver, Colorado) and $80,000 in legal and accounting
expenses. The securities were sold pursuant to Rule 506 of Regulation D under
the Securities Act of 1933, and are restricted from resale under Rule 144. In
connection with the private placement, in September, 1997, USE entered into an
Exchange Rights Agreement with YSFC and RAF, pursuant to which USE agreed that
the investors in the YSFC private offering would have the opportunity to
exchange all or a part of their YSFC shares for shares of Common Stock of USE,
if YSFC is not listed on and its Common Stock is not available for quotation on,
the Nasdaq National Market System by March 16, 1999 (the "listing period"). The
number of USE shares which a YSFC investor would be entitled to receive by
exchanging his or her YSFC shares, would equal the amount invested in the
original purchase of the YSFC shares (plus 10% annual interest), divided by the
average market price of USE shares for the five trading days before notice of
exchange is given to the YSFC shareholders (excluding USE and Crested). Warrants
to purchase YSFC shares, issued to RAF in partial compensation for placement
services, would be exchangeable for warrants to purchase shares of USE Common
Stock. The exchange transaction would be registered with the SEC under the
Securities Act of 1933, such that the exchanging YSFC shareholders would receive
unrestricted (registered) shares of USE. The number of USE shares which may be
issued under the Exchange Rights Agreement is presently not determinable. USE
expects that even if all the YSFC shares were 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.
Sheep Mountain Partners ("SMP")
Partnership. SMP is a Colorado general partnership formed on December 21,
1988, between USECC and Nukem, Inc. of Stamford, CT ("Nukem") through its
wholly-owned subsidiary Cycle Resource Investment Corporation ("CRIC"). Nukem is
a uranium brokerage and trading concern. During fiscal 1991, certain disputes
arose between the partners of SMP. These disputes resulted in
arbitration/litigation and subsequent consensual arbitration from which an Order
and Award was issued on April 18, 1996. USE and Crested filed petitions for
confirmation of the Order and Award with the U.S. District Court of Colorado and
the Court has entered a Second Amended Judgment confirming the monetary and
equitable provisions of the Order and Award. See "Legal Proceedings - Sheep
Mountain Partners Arbitration/Litigation".
In February 1988, USE and Crested acquired uranium mines, mining equipment
and mineralized properties (Sheep Mountain Mines) at Crooks Gap in south-central
Fremont County, Wyoming, from Western Nuclear, Inc. These Crooks Gap mining
properties are adjacent to the Green Mountain uranium properties. USECC mined
and sold uranium ore from two of the underground Sheep Mines during fiscal 1988
and 1989. Production ceased in fiscal 1989, because
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uranium could be purchased from the spot market at prices below the mining and
milling costs of SMP.
USE and Crested sold 50 percent of their interests in the Crooks Gap
properties to Nukem's subsidiary CRIC for cash. Nukem had acquired three long
term uranium sales contracts for USE and the parties thereafter contributed the
sales contracts, mining properties and Nukem's financial and marketing expertise
to SMP, in which USECC received an undivided 50 percent interest. Each group
provided one-half of $315,000 to purchase equipment from Western Nuclear, Inc.
USE and Crested agreed to be responsible for mining property reclamation
obligations. The SMP Partnership agreement provided that each partner generally
had a 50 percent interest in SMP net profits, and an obligation to contribute 50
percent of funds needed for partnership programs or discharge of its
liabilities. Capital needs were to have been met by loans, credit lines and
contributions.
SMP was directed by a management committee, with three members appointed by
USECC, and three members appointed by Nukem/CRIC. The committee has not met
since 1991 as a result of the SMP arbitration/litigation. However, as of June 1,
1998 USECC reacquired the Crooks Gap properties and equipment out of a partial
settlement with Nukem/CRIC.
Properties. USECC now owns 80 unpatented lode mining claims (including
three claims originally acquired from Pathfinder Mines Corporation), see below
on the Crooks Gap properties, including two open-pit and seven underground
uranium mines and an inventory of uranium ore. Production from the properties is
subject to sliding-scale royalties payable to Western Nuclear, Inc.; the rates
are from one to four percent on recovered uranium concentrates. Thirty-eight
claims were conveyed by PMC to SMP in August 1996, see below.
Various structures and equipment are located on the properties including
three operating and three non-operating mine headframes with hoists; maintenance
shops; offices; and other buildings, equipment and supplies. An ion-exchange
plant is located near the properties, which is held by USECC.
SMP also had interests in 59 an additional unpatented mining claims, one
State mineral lease and one State surface use lease, which had been conveyed to
Pathfinder Mines Corporation (PMC). In August 1996, PMC conveyed 38 of the 59
claims to SMP, retaining 21. SMP chose to retain only 3 of the 38 claims. These
3 claims are included in the 80 claims acquired back from SMP in June 1998.
These properties contain a previously-mined open-pit uranium mine and three
underground mines. PMC has the right to mine a portion of these properties (the
Congo area), by open-pit or in- situ techniques to certain depths, without
royalty or other obligations to 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 that it does not
intend any further development. PMC has decommissioned and dismantled its two
uranium mills in the vicinity.
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An ion exchange plant on the Crooks Gap properties is owned by USECC and
was used to remove natural soluble uranium from mine water. USE, on behalf of
USECC, has submitted a plan to the NRC to decommission this facility and
obtained a three year extension for timeliness of decommissioning. Management is
reviewing the economics of relicensing this facility as part of a potential
in-situ leach uranium mining operation. See "Environmental" below.
Property Maintenance. As operating manager for SMP, USECC was responsible
for exploration, mining, and care and maintenance of SMP mineral properties.
USECC was to have been reimbursed by SMP for certain expenditures on the
properties. During the SMP arbitration/litigation, Nukem/CRIC refused to allow
SMP to pay USECC for care and maintenance and other work performed on the
properties since the spring of 1991. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources at May 31, 1997". As part of the Order and Award made on April 18,
1996, the Arbitration Panel awarded USECC $2,065,989 for Nukem/CRIC's 50% share
of care and maintenance expenses for the SMP properties plus interest of
$446,834 to March 31, 1996 and per diem cost of $616 thereafter. However, until
June 1998 USECC had not received any of these amounts. See Legal Proceedings -
Sheep Mountain Partners Arbitration/Litigation - Stipulated Arbitration." These
amounts were received in June 1998. Currently, USECC has a maintenance staff on
site to care for and maintain the mines and pump mine water to prevent flooding
of the mines, which could destroy equipment and the concrete lined vertical
shafts accessing the various levels of uranium mineralization.
SMP Marketing. Nukem, Inc. was engaged by SMP to provide SMP with financial
expertise and marketing services. SMP entered into a marketing agreement with
CRIC, which was concurrently assigned to and assumed by Nukem. Nukem was to
provide marketing and trading services for SMP, which included acquiring uranium
for SMP by purchasing or borrowing. Nukem was to be reimbursed at its direct
costs for acquiring such uranium for SMP. USECC, SMP and Nukem had seven
long-term contracts plus an additional long-term contract with PSE&G that was
awarded to SMP by the Arbitration Panel for sales of uranium originally to eight
domestic utilities. The uranium supply contracts are either base-price escalated
or market-related (referring to how price is determined for uranium to be
delivered at a future date). Base-price escalated contracts set a floor price
which is escalated over the term of the contract to reflect changes in the GNP
price deflator. Two of the base priced contracts have been fulfilled and the
third base-price escalated contract of SMP required delivery of 130,000 pounds
of uranium concentrates in 1997 which was made, completing that contract. The
fourth contract (market delivery) calls for delivery of 1.2 million lbs. U3O8
through 2001. A 50% interest in the fourth contract was acquired by USECC under
the partial settlement and gives USECC the right to purchase 200,000 pounds each
in 1998, 1999 and 2000 (as to the 50% interest).
Pursuant to the partial settlement with Nukem and CRIC, USECC has been
assigned the 300,000 lbs./year contract (through 2001) the 50% interest in the
fourth contract.
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
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before delivery. The delivery contract acquired from SMP places a ceiling on the
purchase price, substituting a base-price escalated amount, if the market price
exceeds a certain level.
Through fiscal 1997, USECC and its affiliates have satisfied most of these
contracts with uranium concentrates previously produced by SMP, borrowed from
others, or purchased on the open market. The future role of Nukem in making
deliveries under these contracts on behalf of SMP cannot be assured
notwithstanding the April 18, 1996 Order and Award of the Arbitration Panel. See
"Legal Proceedings - Sheep Mountain Partners Arbitration/Litigation."
Permits. Permits to operate existing mines on SMP properties have been
issued by the State of Wyoming. Amendments are needed to open new mines within
the permit area. As a condition to issuance of the permits, an NPDES permit
under the Clean Water Act has been obtained. Monitoring and treatment of water
removed from the mines and discharged in nearby Crooks Creek is generally
required. During the past two years, SMP did not discharge wastewater into
Crooks Creek, and the mine water is presently being discharged into the McIntosh
Pit.
Uranium Market Information. There are currently nine producers of uranium
in the United States, who collectively produced 5,800,000 pounds of U3O8 during
calendar 1995 and produced approximately 6,300,000 pounds in calendar 1996.
Production in the U.S. for 1997 is estimated at 7,000,000 pounds. In addition,
there are several major producers in Canada (Cameco, Cogema Canada, Ltd., Rio
Algom and Uranerz); Australia (Energy Resources of Australia and Pancontinental
Mining, Ltd.); Africa (Cogema and RTZ's Rossing unit), and Europe, which
collectively produced about 66,000,000 pounds of U3O8 during calendar year 1996
and are expected to produce approximately 73,000,000 pounds in calendar 1997.
Several members of the former Soviet Union now known as the Commonwealth of
Independent States ("CIS"), also export uranium into the western markets
although the amount of such exports to the United States and European markets
are currently limited.
Uranium is primarily used in nuclear reactors to heat water which drives
turbines generating electricity. According to the Uranium Institute (UI) based
in London, England ("UI"), nuclear plants generated approximately 17% of the
world's electricity in 1996, up from less than 2% in 1970. According to the UI,
through the year 2000, nuclear generating capacity is expected to grow at 1 %
per annum primarily as a result of new reactor construction outside the United
States and increased efficiencies of existing reactors.
In 1996, 442 nuclear power plants were operating and 36 were under
construction worldwide, according to the International Atomic Energy Agency. The
plants combined to generate more than 23 trillion kilowatt hours of electricity
last year. Five plants totaling 5,717 megawatts including Tennessee Valley
Authority's Watts Bar 1 - began commercial operation in 1996. Uranium
consumption by Western World commercial reactors has increased from about
60,000,000 pounds in 1981 to approximately 142,000,000 pounds in 1996.
Supply and Demand. From the early 1970s through 1980, the Western World
uranium industry was characterized by increasing uranium production fueled by
overly optimistic projections of nuclear power growth. From 1970 to 1985,
production exceeded consumption by approximately
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500,000,000 pounds. By the end of 1985 enough inventory had been amassed to fuel
Western World reactor needs for over five years. In response, sales of excess
inventory followed and prices plummeted from highs above $40 per pound in 1979
to below $8 per pound in 1992. As prices fell, Western World production declined
dramatically from a high of 115,000,000 pounds in 1980 to a low of 57,000,000
pounds by 1994. Since 1985, consumption of uranium in the Western World has
exceeded Western World production by over 400,000,000 pounds. In 1995,
consumption of uranium in the Western World was 129,000,000 pounds, nearly
double the production of 66,000,000 pounds by Western World producers. In 1996,
Western World consumption rose to an estimated 142,000,000 pounds, while
production increased only to an estimated 74,000,000 pounds. Accordingly, by the
end of 1995, excess inventory levels in the Western World (inventory in excess
of preferred levels) had been reduced to less than two years of forward reactor
requirements, and excess inventories in the U.S. had been reduced to less than
one year of projected forward requirements. This trend continued in 1996 and
1997.
Countering the drawdown of Western World inventories and contributing
directly to the downturn of market prices was the importation, starting in 1989,
of uranium from the CIS republics, and to a lesser extent, from Eastern Europe
and mainland China. As the result of an anti-dumping suit in 1991 filed in the
U.S. ("CIS Anti-dumping Suit") against republics of the CIS, suspension
agreements were signed by six CIS republics (Russia, Ukraine, Kazakhstan,
Uzbekistan, Kyrgyzstan and Tajikistan) in 1992 and 1993, which applied price
related volume quotas to CIS uranium permitted to be imported into the U.S.
The Russian Suspension Agreement was amended in March 1994 allowing for up
to 43,000,000 pounds of Russian uranium to be imported into the U.S. over the 10
years beginning March 1994, but only if it is matched with an equal volume of
new U.S. production. Based on U.S. consumption for the 1994-2003 period (as
reported or projected by the Department of Energy), the matched volumes could
account for up to 18% of the supply to the U.S. market during this period.
In 1995, the Republics of Kazakhstan and Uzbekistan concluded negotiations
with the U.S. Department of Commerce to amend their respective suspension
agreements. Both amendments lowered initial prices relating to their respective
import quotas allowing imports to occur. Additionally, the amendments require
that uranium mined in those Republics and enriched in another country for
importation in the U.S. will count against their respective quotas. The
Uzbekistan amendment replaces the price-tied quota system with one based upon
U.S. production rates after October 1997. As U.S. rates increase, additional
imports from Uzbekistan are allowed.
Although these amendments to the suspension agreements may increase the
supply of uranium to the U.S. market, they provide increased predictability
concerning CIS imports into the U.S. Due to declining production levels in the
CIS republics, uranium from these sources has recently been difficult to obtain.
Consequently, the market impact of CIS primary production may be diminishing.
In January 1994, the U.S. and Russia entered into an agreement to convert
highly enriched uranium ("HEU"), derived from dismantling nuclear weapons to low
enriched uranium ("LEU")
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suitable for use in nuclear power plants. At a projected maximum conversion rate
for HEU and LEU, approximately 18,000,000 pounds of U3O8 will be available to
Western World markets.
In 1996, the U.S. Congress passed legislation in compliance with the
suspension agreements which allows the converted HEU material to be sold in the
U.S. marketplace at an annual rate not to exceed 2,000,000 pounds in 1998,
increasing gradually to 20,000,000 pounds in 2009. At this maximum rate, HEU
material could supply approximately 40% of annual U.S. reactor requirements
projected for 2009. However, the Russians may require much of the material for
its own internal use and the amounts which may be imported into the U.S. cannot
be predicted. In addition, an uncertain amount of HEU material is allowed to be
used in the U.S. for overfeeding of enrichment facilities and as a source of
Russian uranium for matching sales.
Industry analysts expect annual Western World consumption to be at levels
between 135,000,000 and 150,000,000 pounds U3O8 through 2001. The Company
estimates that between 30,000,000 and 40,000,000 pounds of this demand could be
filled by a combination of government stockpiles (including converted Russian
and U.S. HEU) and imports from CIS republics and former Eastern Bloc countries.
To achieve market equilibrium by 2001 primary production in the Western World
will need to supply between 95,000,000 and 120,000,000 pounds U3O8 on an annual
basis subject to some adjustment for any remaining inventory drawdown and
limited uranium reprocessing. Production from existing facilities in the Western
World, however, is projected to decline from current levels to approximately
57,000,000 pounds U3O8 by 2001 as reserves are depleted. New production
therefore will have to be brought on line to fill a potential annual gap of
between 38,000,000 and 63,000,000 pounds U3O8. While current price levels may
sustain 1996 production levels, the Registrant believes that higher prices will
be needed to support the required investment in new higher cost production as
lower cost production reserves are depleted.
1996 was also a transition year in the industry as the spot price for U3O8
concentrates rose to a high of $16.60 per pound in July 1996 following a surge
in spot buying activity. Since then the spot price declined to $10.30 per pound
in September 1997 and rebounded to almost $12.15 per pound in December 1997.
And, while the spot price has eroded to 1995 levels, the Registrant believes
that it is only a reflection of a near term equilibrium of supply and demand
that was fueled by utilities exercising option flexibilities of up to an
additional 50% of contracted volumes of material as the spot price climbed
during 1996. On the contrary, utilities have also likely exercised downward
flexibilities of up to 50% of contracted volumes as the spot price has declined
to levels below contracted prices and are planning to buy materials at a lower
price.
Overall, the Registrant believes that adequate supply of U3O8 material to
meet firm demand cannot be sustained at spot price levels below $15.00 per
pound. And, while production remains at levels just above 50% of consumption in
the Western World, existing and planned production will not sufficiently meet
supply either, even if new production comes on stream as planned.
In the near term, the Registrant believes that the spot price for U3O8 will
rise to mid-teen levels and remain there for a period before trending upwards to
the low $20s for a sustained period of time. If there is any disruption in HEU
supply or new planned capacity, the Registrant believes the price may increase
to much higher levels.
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Published reports indicate that approximately 31 percent of the worldwide
nuclear-powered electrical generating capacity is in the U.S., 49 percent is in
western Europe, and 14 percent is in the Far East. Although the reactors in
western Europe have a greater aggregate generating capacity and fuel usage, the
supply of uranium for those reactors has been obtained for relatively long
periods, and the market requiring the greatest supply of uranium for the next
few years is believed to be the United States. The Asia Pacific region is also
developing into a significant uranium consumer, due to announced plans for rapid
expansion of nuclear power programs in Japan, Korea, Taiwan and the Russian
Federation. This region accounts for most of the 98 power plants which are
ordered or under construction.
Pursuant to Suspension Agreements signed in October 1992 between the United
States Department of Commerce ("DOC") and certain of the Republics of the CIS,
to rectify prior damage to domestic United States uranium producers from dumping
sales of U3O8 by certain CIS republics, all spot sales of U3O8 delivered into
the U.S. now reflect quota restrictions on U3O8 imports from the CIS. However,
there are provisions which allow CIS uranium to be imported for certain
long-term uranium sales contracts entered into with domestic utilities prior to
March 5, 1992 ("grandfathered contracts").
NUEXCO Exchange Value. The market related contracts of SMP are based on an
average of the Nuexco Exchange Value ("NEV") for 2, 3 or more months before
uranium delivery. The high and low NEV reported on U3O8 sales during USE's past
five fiscal years are shown below. NUEXCO Exchange Values are reported monthly
and represent NUEXCO's judgment of the price at which spot and near term
transactions for significant quantities could be concluded. NEVs for fiscal 1993
are higher for U.S. transactions, due to the impact of CIS import restrictions
since late 1992. These prices were reported by NUEXCO for spot sales in the
restricted U.S. market.
NUEXCO EXCHANGE VALUE
US $/pound of U3O8
Years Ended ---------------------
May 31, High Low
------------- ---- ---
1992 $ 9.05 $ 7.75
1993 10.05 7.75
1994 10.20 9.25
1995 11.00 9.50
1996 16.60 13.00
1997* 14.80 10.30
* Through September 1, 1997. 998 the price per pound was $10.90.
NUEXCO's restricted market values ("U.S. NEV") apply to all products and
services delivered in the U.S. as well as non-CIS origin products and services
delivered outside the U.S.
Impact of Global Warming. In December 1997, over 150 nations from around
the world met in Kyoto, Japan for the purpose of limiting greenhouse gas (CO2,
SO2, NOX) emissions. At the conclusion of the meeting, an agreement was reached
which proposes to reduce greenhouse gas
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emissions below 1990 levels by the years 2008 - 2012. The U.S. reductions will
be 7% below 1990 levels; the European Union 8% below 1990 levels, and Japan 6%
below 1990 levels.
The Registrant believes that Nuclear power will be the only significant
logical choice for supplying electricity while cutting greenhouse gases and
expects a revival of the nuclear industry over the next 10 years. With any new
introduction of Nuclear power plants, the supply/demand fundamentals discussed
previously will be impacted in favor of higher spot and long term prices for
U3O8.
Gold
Lincoln Project (California)
Sutter Gold Mining Company. In fiscal 1991, USE acquired an interest in the
Lincoln Project (including the underground Lincoln Mine and the 2,800 foot
Stringbean Alley decline) in the Mother Lode Mining District of Amador County,
California, held by a mining joint venture known as the Sutter Gold Venture
("SGV"). The entire interest of SGV is now owned by USECC Gold L.L.C., a Wyoming
limited liability company, which is a subsidiary of Sutter Gold Mining Company,
a Wyoming corporation ("SGMC").
In fiscal 1997, SGMC completed private financings totaling a net of
$7,115,100 ($1,271,600 through a private placement conducted in the United
States by RAF Financial Corporation, and $5,843,500 through a private placement
of SGMC Special Warrants conducted in Toronto, Ontario, Canada by C.M. Oliver &
Company Limited). The net proceeds of $6,509,700 from these financings (after
deduction of commissions and offering costs) are being applied to pre-production
mine development, mill design, and property holding and acquisition cost. The
net proceeds of $6,509,700 from these financings (after deduction of commissions
and offering costs) are being applied to pre-production mine development,
permitting, mill design, and property holding and acquisition costs. Due to the
soft price of gold, since last year, SGMC has put on hold the pre-production
mine development. However, some infrastructure work for site preparation and
building of a short road to connect to Highway 49 was performed. In addition the
final engineering and plans for the 1,000 ton per day mill were contracted to be
completed by mid year 1998 and construction of the mill delayed until additional
financing is in place. SGMC purchased certain used mining and mill equipment to
take advantage of low equipment prices. SGMC' strategy is to continue to
minimize costs at the project site, while completing the necessary activities to
ensure smooth development, construction and startup of operations. Additional
financing will be sought to fund the development and construction of the
mine/mill when gold prices improve.
Until the dramatic drop in gold prices in November 1997, SGMC had been
preparing to apply for listing on the Toronto Stock Exchange. SGMC does not have
any class of its securities registered with the Securities and Exchange
Commission, and none of its securities are traded in the United States. The
Toronto listing application will be delayed until gold prices improve.
After completion of the two private financings in fiscal 1997, and taking
into account a restructuring in that year of the ownership of USE and Crested in
SGMC (and the additional issue of 75,000 shares to settle a dispute with Amador
United, see below), USE and Crested each
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continued to own securities of SGMC. In fiscal 1998 (April 7, 1998), USE
reacquired some of the securities of SGMC which were sold in Canada in 1997 (see
"April 1998 Transaction for Cash and SGMC Warrants"). As of February 28, 1998,
USE and Crested owned the following securities of SGMC:
(a) Together, a majority (after the April 1998 transaction, see 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 do 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 USE and Crested. One reorganization of the
capital structure was required by RAF Financial Corporation in connection with
its private placement of SGMC shares, and the other was required by C.M. Oliver
& Company Limited in the Canadian private placement.
(b) A $10,000,000 Contingent Stock Purchase Warrant (the "USECC Warrant")
was issued to USE and Crested in connection with the restructuring of SGMC. The
USECC Warrant is owned 88.9% by USE and 11.1% by Crested. The USECC Warrant
provides that for each ounce of gold over 300,000 ounces added to the proven and
probable category of SGMC's reserves (up to a maximum of 400,000 additional
ounces), using a cut-off grade of 0.10 ounces of gold per ton (at a minimum vein
thickness of 4 feet), USE and Crested will be entitled to acquire additional
shares of Common Stock from SGMC (without paying additional consideration). The
number of additional shares issuable for each new ounce of gold reserves will be
determined by dividing US$25 by the greater of $5.00 or the weighted average
closing price of the Common Stock for the 20 trading days before exercise of the
USECC Warrant. The USECC Warrant is to be exercised semi-annually. However, as
an alternative to exercise of the USECC Warrant, SGMC has the right to pay USE
and Crested US$25 in cash for each new ounce of gold (payable out of a maximum
of 60% of net cash-flow from SGMC's mining operations). Additions to reserves
will be determined by an independent geologist agreed upon by the parties.
April 1998 Transaction for Cash and SGMC Special Warrants. As of April 7,
1998, USE entered into four separate Stock Purchase Agreements with four
Canadian investment funds, for the issuance of 658,895 shares of Common Stock of
USE, in consideration of the funds' payment to USE of $1,190,000 in cash and the
delivery to USE of 888,900 Special Warrants of SGMC. The funds had paid SGMC a
total of Cdn$4,888,950 in May 1997, pursuant to a private offering in Canada, to
purchase the Special Warrants from SGMC. Each Special Warrant entitled the
holder to acquire from SGMC, at no further cost, one share of Common Stock of
SGMC, and one Purchase Warrant; each Purchase Warrant would have entitled the
holder to purchase one share of Common Stock of SGMC, at a price of Cdn$6.00 per
whole share (the "Purchase Warrants"), during the 18 months following the May
1997 closing of the offering of the SGMC Special Purchase Warrants.
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Pursuant to the terms and conditions of the Special Warrants, if SGMC were
to fail to obtain prospectus qualification before the October 10, 1997
qualification deadline (as such terms were defined in the Special Warrants) from
the securities commissions of the Canadian Provinces wherein purchasers of the
Special Warrants reside, the holders of the Special Warrants would be entitled
to receive a dilution penalty in the amount of 1.1 shares of Common Stock of
SGMC and 1.1 Purchase Warrants, for each Special Warrant exercised after the
qualification deadline if prospectus qualification were not obtained by the
qualification deadline. Such qualification required listing of the SGMC shares
and Purchase Warrants on a principal Canadian stock exchange.
The prospectus qualification has not been obtained by SGMC, due to the drop
in gold prices in the latter part of 1997 and the resulting lack of interest in
new listings of gold companies in the Canadian markets. However, none of the
four Canadian Funds, nor any other investor in the Canadian offering, has
received additional shares of SGMC Common Stock or additional Purchase Warrants
in payment of the dilution penalty with respect to the Special Warrants and
their constituent securities. The dilution penalty may have to be paid with
respect to the other Canadian investors in the Special Warrants.
Each of the four Canadian Funds, in order to diversify and increase their
original investment, made offers to USE to purchase shares of USE $.01 par value
Common Stock. Each of the four funds, and USE, negotiated the terms of
acceptance of the funds' offer by USE. As a result of the offer and s ubsequent
negotiations with each of the funds, USE entered into the four Stock Purchase
Agreements with the funds.
As of the date hereof, pursuant to the Stock Purchase Agreements, USE has
received consideration for its issued shares consisting of (i) net cash
proceeds, from all four funds, of US$1,102,464 (after deduction of $87,536 in
legal fees and a fee paid to a Canadian investment banking firm); (ii) 888,900
Special Warrants of SGMC (from the four funds, including the 204,600 Special
Warrants transferred by Altamira Management Ltd. (the fourth Canadian Fund) for
Common Shares as of the date hereof); and (iii) the relinquishment by each of
the four funds of their rights to the dilution penalty. USE has issued 658,895
shares of Common Stock as of the date hereof in consideration of the cash, the
Special Warrants, and the relinquishments. The USE shares are restricted
securities. Pursuant to the terms of the Stock Purchase Agreements, USE has
filed a resale registration statement (of which this Prospectus is a part) with
the Commission, to permit the resale of the subject shares by the funds. The
658,895 Common Shares include the balance of 112,530 shares of USE Common Stock
issued to the fourth fund as of the date of this Prospectus, for its delivery of
the 204,600 Special Warrants to USE in payment for such 112,530 shares of USE
Common Stock.
As of the date hereof, USE and Crested together own approximately 40% of
the outstanding shares of Common Stock of SGMC.
Cash proceeds from the transaction with the Canadian Funds will be used for
general corporate purposes.
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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.
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. The fourth fund (Altamira Management Ltd.) closed on the
second part of its Stock Purchase Agreement (for its Special Warrants of SGMC)
when the USE registration statement (including this Prospectus) was declared
effective (see above); there was no adjustment in the terms of the fourth fund's
Stock Purchase Agreement for changes in USE share market prices.
Settlement with Amador United. In fiscal 1997, SGMC issued 75,000 shares of
Common Stock to Amador United Gold Mines to settle certain disputes between such
company and SGMC, USE and Crested (see "Properties" below). In addition, SGMC
bought about one-third of the outstanding shares of Keystone Mining Company
owned by The Salvation Army. The Keystone Mining Company owns property in the
Lincoln Project leased to SGMC.
USE Management Agreement with SGMC. Effective June 1, 1996, SGMC entered
into a Management Agreement (dated as of May 22, 1996) with USE under which
USECC provides administrative staff and services to SGMC. USECC is reimbursed
for actual costs incurred, plus an extra 10% during the exploration and
development phases; 2% during the construction phase; and 2.5% during the mining
phase (such 2.5% charge to be replaced with a fixed sum which with parties will
negotiate at the end of two years starting when the mining phase begins). The
Management Agreement replaces a prior agreement by which USE provided
administrative services to SGMC.
Properties. SGMC (through its subsidiary USECC Gold) holds approximately 14
acres of surface and mineral rights (owned), 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 majority of these properties were acquired
from Meridian Minerals Company and the balance were acquired in 1997, 1995 and
1994. The properties are located in the western Sierra Nevada Mountains at from
1,000 to 1,500 feet in elevation; year round climate is temperate. Access is by
California State Highway 16 from Sacramento to California State Highway 49, then
by paved county road approximately .4 miles outside of Sutter Creek.
On October 1, 1996, SGMC entered into three letter agreements (the "Lincoln
Letter Agreements") with the property owners of 185 acres ("185 Acre Property")
on the west side of California State Highway 49 ("Hwy 49") and 32.58 acres ("32
Acre Property") of minerals which include 20.5 acres of surface on the east side
of Hwy 49 adjacent to the Stringbean Decline. The 185 Acre Property is the
proposed new location for the Surface Fill Unit and the 32 Acre Property
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provides the land necessary for access and utility easements to Hwy 49. Formal
agreements have been executed with the approval of the probate court of an
estate of a deceased who owned an interest in the properties.
The 185 Acre Property, which includes the surface and mineral rights, is
being purchased for $2,000 per acre (or $370,000) plus a 2% net smelter royalty
on any precious metals produced from this property. SGMC also agreed to purchase
for $185,000 the rights to the certified Environmental Impact Report ("EIR") on
the 185 Acre Property. The EIR saves SGMC approximately six to nine months of
permitting time. Payments for the 185 Acre Property and the EIR are monthly with
the final payments to be made before the construction of a surface fill unit for
the property (the "Surface Fill Unit"). The purchase of the 185 Acre Property
and EIR is contingent on SGMC obtaining an amendment to the Conditional Use
Permit (CUP) to allow the placement of processed ore in to the Surface Fill Unit
on this property.
The transaction contemplated with respect to the 32 Acre property contains
two separate components. The first is the purchase of the road access and
utility easements and the second is a lease of the mineral rights on this
property. The easements were purchased for $15,000. SGMC is obligated to spend
up to $15,000 to quiet the title to both the surface and mineral rights. Upon
successful quiet title action, SGMC is obligated to complete a two year
exploration program of mapping and core drilling of at least 1,000 feet or in
lieu of drilling make a $5,000 payment. If an ore reserve can be developed on
the 32 Acre property (in SGMC's sole judgment) then SGMC will enter into a lease
with the owners and pay up to a 4% net smelter royalty on minerals extracted
from the 32 Acre Property with a minimum annual payment of $2,500 tied to the
Gross Domestic Product Implicit Price Index ("GDPIP") (base year shall be the
year the quiet title on the 32 Acre property is obtained). Lease payments will
be offset by the earned royalties in excess of $15,000 escalated by the GDPIP.
During September 1997, SGMC entered into a lease agreement for the Eldorado
Mining Claim and an additional forty acres of mineralized property contiguous to
the Keystone Mining claims. The terms of the Agreement are that SGMC makes a
monthly advance royalty payment of $1,500.00, which is recoupable against earned
royalties and the production royalty which starts at 3% for the first two years
and then increases to 4% thereafter.
Surface and mineral rights total holding costs will be approximately
$165,000 from June 1, 1998 through May 31, 1999, including $45,000 for payments
on two parcels (9.1 acres) bought in 1994; and property taxes of approximately
$35,000 for the year ended May 31, 1999. Such holding costs reflect reductions
effected through force majeure provisions of certain of the leases, which permit
SGMC to stop paying annual rent until gold prices recover to various levels.
Annual property taxes are estimated to increase to more than $100,000 when the
Lincoln Project is built and put into operation. Estimated acquisition costs for
the 185 Acre Property and the EIR on the 185 Acre Property will be approximately
$600,000.
The leases are for varying terms; and require rental fees, advance
production royalties, real property taxes and insurance. Leases expiring before
2010 will generally be extended, so long as minerals are continuously produced
from the property that is subject to the lease or minimum payments are made .
Other leases may be extended for various periods on terms similar to those
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contained in the original leases. Production royalties are from 2.5% to 6% (most
are 4%). The various leases have different methods of calculating royalty
payments (net smelter return and gross proceeds).
Amador United Gold Mines was a prior owner of certain leases which it
conveyed to the Lincoln Project when the project was owned by Meridian Minerals
Company ("Meridian"). In return for its conveyance of such leases, Amador United
received a right of first refusal to buy the Lincoln Project and a 20 percent
net profits interest in production from any of the Lincoln Project properties.
In fiscal 1997, Amador United sold all of its rights in the Lincoln Project to
SGMC, in consideration of SGMC issuing 75,000 shares of Common Stock to Amador
United.
A separate holder of four of the properties that were assembled by Meridian
into the Lincoln Project holds a 5 percent net profits interest on production
from such properties, which was granted by Meridian when it acquired the
properties. The "net profits" generally will be equal to gross mineral revenues
less an amount equal to 105 percent of numerous categories of costs and
expenses. An additional 0.5 percent net smelter return royalty is held by a
consultant to a lessee prior to Meridian's acquisition of the properties, which
0.5 percent interest covers the same four properties in the Lincoln Project.
Through May 31, 1998, there has been an estimated $21,000,000 of spending
in the Lincoln Project by Meridian, USECC Gold and their predecessors to acquire
the Lincoln Project and for mine development, mining and processing bulk samples
of mineralization, exploration, feasibility studies, permitting costs, holding
costs, and related general and administrative costs. The amount of such
expenditures during the 1997 fiscal year was approximately $572,700 ($637,300 in
1996). Certain of the expenditures have been expensed and the rest have been
capitalized as assets.
Geology and Reserves. The minerals consulting firm Pincock, Allen & Holt of
Lakewood, CO ("PAH") prepared a prefeasibility study of the Lincoln Project in
fiscal 1994. PAH reviewed core drilling data on the Lincoln Zone on 100-foot
centers from the surface, and drilling on the Comet Zone from both surface and
underground. PAH also reviewed data from drilling on the Keystone Zone from
surface on 200-foot centers. Total data is from 162 exploration core holes
(surface and underground), with total footage of 64,700 feet. PAH based its
estimate of proven reserves on mineralized material within 25 feet of sample
information; probable reserves were based on material located between 25 and 50
feet of sample information.
Using a cutoff grade of 0.25 ounces of gold per ton in place, PAH estimates
the Lincoln Project contains 194,740 tons of proven and probable reserves
grading 0.57 ounces of gold per ton. If operating economics indicate a lower
cutoff grade is feasible, the tonnages for the stated reserves would be
increased. If current low gold prices ($300 per ounce at January 23, 1998)
persist or drop lower, the amounts of economically recoverable gold in proven
and probable reserves might be reduced. Historical data (underground maps and
production records) from historic (now closed) mines within the Lincoln Project
boundaries indicate certain areas of those mines were not "mined out", such that
additional mineralized resources may exist on the property.
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The geology within the Lincoln Project is typical of the historic Mother
Lode region of California, with a steeply dipping to vertical sequence of
metavolcanic and metasedimentary rocks hosting the gold-bearing veins. Depending
on location along the strike length on the vein systems, the gold-bearing veins
are slate, metavolcanic greenstone, or an interbedded unit of slates and
volcanics. The Lincoln Project covers over 11,000 feet of strike length along
the Mother Lode vein systems.
Permits and Future Plans. In August 1993, the Amador County Board of
Supervisors issued a Conditional Use Permit ("CUP") allowing mining of the
Lincoln Mine and milling of production, subject to conditions relating to land
use, environmental and public safety issues, road construction and improvement,
and site reclamation. The permit will allow construction of the mine and mill
facilities in stages as the project gets underway, thereby reducing initial
capital outlays. Additional permits (for road work, dust control and
construction of mill and other surface improvements) need to be applied for in
due course.
Proposed Mine Plan
General. SGMC has evaluated different mine plans for properties within the
Lincoln Project. The mine plan summarized below. It should be noted that the
mine workings actually developed may vary substantially from the plan adopted,
depending on the different conditions and grades of mineralization that are
encountered.
SGMC proposes to mine the Lincoln and Comet Zones initially by access
through the existing Stringbean Alley decline. Production will be by overhand
cut-and-fill and open sub-level stoping techniques. Screened tailings from the
mill's flotation circuit (support fill) will be used to back fill the stopes,
which will stabilize the hanging and foot wall vein rocks, and greatly reduce
the volume of processed ore going into the Surface Fill Unit.
Mining (ore extraction) is anticipated to start by mid-1998, (assuming gold
prices rebound to the satisfaction of the Board of Directors) at a rate
increasing up to 500 tons per day ("tpd") during the first six months of mining
operations. Ore will be crushed underground and conveyed to the surface through
the existing Stringbean Alley decline. A new underground level is planned to be
driven at 1,000 feet above sea level, (approximately 120 feet below surface)
during the first 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.
SGMC has applied to amend the CUP to relocate the mill to eliminate the
need to drive the Lincoln decline and to minimize haulage to the mill and other
operating costs. The land acquisition costs for such relocation was
significantly less than the added capital costs and operating costs to drive and
operate the Lincoln decline. The application is before the Amador County
Planning Commission and approval is expected in August 1998.
Pre-Production Development. Current access to the mine is through the
Stringbean Alley decline, the portal of which is 1,183 feet above sea level
leading to the bottom of the decline at 835 feet above sea level. This decline
was driven to access the Lincoln and Comet Zones, both of which
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were originally core drilled from the surface, with the Comet Zone thereafter
core drilled from underground. Raises have been started in the "M" vein of the
Comet Zone section on 200-foot centers to establish stoping areas to access ore.
The raises will provide access, ventilation, fill access and escape ways for
initial stopes. Further crosscuts will be driven for more stopes as the
Stringbean Alley decline is extended and levels driven out horizontally.
Underground mine water seepage into the Stringbean Alley decline is
approximately 5 to 15 gallons per minute, depending on the season. Accumulated
water in the decline is now being pumped through a treatment plant located
underground in the Stringbean Alley decline. The plant removes arsenic and other
naturally occurring minerals, and the treated water is discharged by spray
evaporation at the surface. This plant will continue treating mine seepage water
as the mine goes into production. The treated water not used underground in
operations will be pumped to the surface for mill operations as needed.
Production. All veins will be drifted on the first floor above the
crosscuts, which will serve as the bottom floor of the stopes. Raises will be
driven to the level above for ventilation and access for fill. Initially, in the
Comet Zone, these raises will be driven on 200-foot centers and, assuming
continuity of ore, will be two steps, one on either side of the raise. Ore will
be mined out of stopes with the overhand cut and fill open sub-level stoping
methods, with each layer of stope filled back in with mill tailings which have
been recycled from the surface mill facility. Broken ore will be loaded onto
15-ton underground trucks and hauled to the underground crushing station, then
either transported to the surface via conveyor up the Stringbean Alley decline
or, if the Lincoln decline is driven, via the ore conveyor belt.
Concurrently with production mining, SGMC intends to maintain an aggressive
underground development program to delineate (on an on-going basis) two to three
years of developed ore in sight.
Mill Plan
General. The proposed mill process essentially involves three stages:
first, wet grinding of the ore into fine particles in a semi-autogenous grinding
("SAG") mill, with the resulting finely- milled ore run through a gravity
process to remove free particles of gold through gravity; second, ore containing
gold which was not captured in the first gravity process will be fed to a ball
mill for more grinding. The resulting finely-ground material is processed
through a second gravity recovery circuit; third, the tails from this gravity
circuit are run into flotation cells for mixing with non-toxic chemicals and
water to further remove gold from the ore (referred to as the flotation stage);
and the resulting gold concentrates will be sold.The mill is designed to produce
two gold-bearing products: free gold, and a low grade flotation concentrate. The
free gold will be smelted to a dore bullion for shipment to a precious metal
refinery.
In fiscal 1992, SGMC's predecessors mined 8,000 tons of material, including
waste rock and low grade mineralization, out of drifts and raises off the
Stringbean Alley decline, which were processed through a nearby mill in a bulk
sampling program to test mining techniques and mill recoveries. Milling results
indicated at least 94% of the gold in the ore should be recoverable with a
combination of gravity and flotation milling circuits. Approximately 1,400
ounces of gold were
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recovered in this program. PAH believes the mill recovery rate should be between
93% and 95% using the proposed gravity and flotation milling circuits. In its
prefeasibility study, PAH used a 90% mill recovery rate because in its study,
the mill was designed to recover gold in only a single stage gravity circuit.
Since the PAH prefeasibility study, Lockwood Greene Engineers, Inc. of Dallas,
Texas has designed a new mill circuit to recover 95% to 96% of the gold.
The first floor of the central mill building (exclusive of attached lab and
other support facilities) will be approximately 20,000 square feet. Because of
the availability and price advantage of equipment for a 1,000 tpd mill over a
500 tpd mill, the mill will be constructed to 1,000 tpd.
Permitting of Alternative Mill and Tailings Sites. SGMC has submitted an
application to Amador County to relocate the tailings site and the mill site.
Although this relocation will require purchase of additional properties (mill
site already purchased; tailings site under option) and an amendment to the CUP,
management of SGMC believes the cost will be more than offset and would be
recovered in approximately five years by dropping the land surface leases for
which the tailings site is currently approved. Projected net capital savings are
significant. The proposed new mill site also is anticipated to significantly
reduce operating costs through reductions in hauling distance; elimination of
the need for constructing the Lincoln decline; and the need to build large dams,
and the hauling costs of importing clay for pond liners.
Molybdenum
As holders of royalty, reversionary and certain other interests in
properties located at Mt. Emmons near Crested Butte, Colorado, USE and Crested
are entitled to receive annual advance royalties of 50,000 pounds of molybdenum,
or cash equivalent (one-half to each). AMAX Inc. (which was acquired by Cyprus
Minerals Company and was renamed Cyprus Amax Minerals Company in November 1993)
delineated a deposit of molybdenum containing approximately 146,000,000 tons of
mineralization averaging 0.43% molybdenum disulfide on the properties.
Advance royalties are paid in equal quarterly installments, until: (i)
commencement of production; (ii) failure to obtain certain licenses, permits,
etc., that are required for production; or (iii) AMAX's return of the properties
to the USE and Crested. USE did not receive any advance royalties during fiscal
1996 because of an arrangement with Cyprus Amax described below. During fiscal
1995, USE recognized $85,500 of advance royalty revenue under this arrangement.
These royalties are shown in the Consolidated Statements of Operations as a
component of gains from 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.
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The Agreement with AMAX also provides that USE and Crested are to receive
$2,000,000 (one-half to each), at such time as the Mt. Emmons properties are put
into production and, in the event AMAX sells its interest in the properties, USE
and Crested would receive 15 percent of the first $25,000,000 received by AMAX.
USE and Crested have asserted that the acquisition of AMAX by Cyprus Minerals
Company was a sale of AMAX's interest in the properties which would entitle USE
and Crested to such payment. Cyprus Amax has rejected such assertion and USE and
Crested are considering their remedies.
Subsequent to May 31, 1994, USE and Crested reached agreement with Cyprus
Amax to forego six quarters of advance royalties (starting fourth quarter
calendar 1994) as payment for the option exercise price for certain real estate
in Gunnison, Colorado owned by Cyprus Amax and the subject of a purchase option
held by USE and Crested. The option exercise price is valued at $266,250. USE
and Crested exercised their option in August 1994 and subsequently sold that
property for $970,300 in cash and notes receivable. The advance royalties
resumed in the second quarter of calendar 1996, however, the payment was not
received until June 1996, being the first quarter of fiscal 1997. In fiscal
1997, $207,300 was received by USECC from advance royalty payments.
Molybdenum Market Information
Molybdenum is a metallic element with applications in both metallurgy and
chemistry. Principal consumers include the steel industry, which uses molybdenum
alloying agents to enhance strength and other characteristics of its products,
and the chemical, super-alloy and electronics industries, which purchase
molybdenum in upgraded product forms.
The molybdenum market is cyclical with prices influenced by production
costs and the rate of production of foreign and domestic primary and by-product
producers, world-wide economic conditions particularly in the steel industry,
the U.S. dollar exchange rate, and other factors such as the rate of consumption
of molybdenum in end-use products. When molybdenum prices rose dramatically in
the late 1970s, for example, steel alloys were modified to reduce reliance on
molybdenum. AMAX and Cyprus Minerals Company were the two major primary
producers of molybdenum in the United States until November 1993, when AMAX was
acquired by Cyprus.
Worldwide demand for molybdic oxide in calendar 1996 was reported at
approximately 230,000,000 pounds, its highest level ever. Production for that
period was about 225,000,000 pounds. There is however, excess capacity from the
primary molybdenum mines which are currently not producing. In addition,
by-product molybdenum (primarily from Chilean copper mining companies) has a
major impact on available supplies. It is unlikely that any major new primary
deposits will be developed during fiscal 1998.
Molybdenum prices on the open spot market increased substantially, from
$3.35 per pound of technical grade molybdic oxide (the principal product) in
September 1994, to $15.50 - $17.50 per pound in February 1995. However, by May
31, 1996, prices declined to $3.00 - $3.35 per pound but are in the $4.00 to
$4.40 per pound range in September 1997.
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Parador Mining (Nevada)
USE and Crested are sublessees and assignees from Parador Mining Co., Inc.
("Parador"), on certain rights under two patented mining claims located in the
Bullfrog Mining District of Nye County, Nevada. The claims are immediately
adjacent to and part of a gold mine operated by Bond Gold Bullfrog, Inc.
("BGBI"), a non-affiliated third party (now known as Barrick Bullfrog, Inc.).
USE and Crested have also been assigned certain extralateral rights associated
with the claims and certain royalty rights relating to a prior lease on those
properties. The lease to USE and Crested is for a ten year primary term, is
subject to a prior lease to BGBI on the properties, and allows USE and Crested
to explore for, develop and mine minerals from the claims. If USE and Crested
conduct activities on the claims, they are entitled to recover costs out of
revenues from extracted minerals. After recovering any such costs, USE and
Crested will pay Parador a production royalty of 50 percent of the net value of
production sold from the claims.
USE, Crested and Parador informed BGBI that payments are owed to them
pursuant to extralateral rights on the claims. BGBI in turn initiated legal
proceedings to establish the rights of the various parties in the claims.
Thereafter, Parador notified BGBI that BGBI had defaulted in its lease and that
Parador had terminated the lease. BGBI denies that it has defaulted. A trial on
the bifurcated issue of extralateral rights only to the court in December 1995
resulted in a decision that Parador had failed to meet its burden of proof to
establish that its claims are entitled to assert extralateral rights and that
Parador, USE and Crested have no right, title or interest in the adjacent BGBI
and Layne claims. Parador, USE and Crested filed an appeal of this ruling as
erroneous as a matter of law but the appellate court dismissed the appeal as
being premature. The remaining issues of breach of contract and specific
performance will be tried before the trial court starting on January 26, 1998.
See Risk Factor 15 and "Legal Proceedings - BGBI Litigation".
Oil and Gas.
Fort Peck Lustre Field (Montana). USECC conducts oil production operations
at the Lustre Oil Field on the Ft. Peck Indian Reservation in north-eastern
Montana; four wells are producing, and USE and Crested receive a fee based on
oil produced. USE is the operator of record. No further drilling is expected in
this field. This fee and certain real property of USE and Crested, have been
pledged or mortgaged as security for a $1,000,000 line of credit from a bank.
Energx, Ltd. Fort Peck Gas Project. Energx, Ltd., a Wyoming corporation
owned 45% by USE, 45% by Crested, and 10% by the Assiniboine and Sioux Tribes,
signed in October 1993 an "Agreement Between The Assiniboine and Sioux Tribes of
the Fort Peck Indian Reservation and Energx, Ltd. to Explore, Develop and
Produce Shallow Gas." This Agreement has been approved by the Secretary of the
Interior and the United States Bureau of Indian Affairs. In the fourth quarter
of calendar 1995 Energx drilled and tested three exploratory wells, in
conjunction with NuGas Resources U.S. Inc. ("NuGas"). These three were all dry
holes, having been drilled under a farmout agreement with Placid (see below);
these three wells counted against the eight well commitment under this Agreement
(see below). Energx (and NuGas) drilled five more exploratory wells during the
fall of 1996. All five of these wells were dry holes. All eight dry holes were
funded by NuGas
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in accordance with the provisions of the Agreement. Due to the fact that all
eight holes were dry, NuGas has no further obligations to drill under the
Agreement. Since the fall of 1996, there has been no other exploration or
drilling activities performed by Energx or NuGas under this Agreement.
Reclamation of the dry hole bores began in 1997. Energx may terminate or farmout
the Fort Peck Gas Project if further exploration work does not appear to be
warranted.
NuGas Resources (U.S.) Inc. Agreement. By the Joint Venture Agreement
("JVA") with Energx dated July 18, 1994, NuGas was obligated to Energx to drill
and complete (or abandon) at NuGas' sole expense, eight exploratory shallow gas
wells on the Fort Peck Reservation by July 1, 1996, which was extended to July
1, 1997, to earn a one-half interest in Energx' rights under the Fort Peck
Shallow Gas Agreement.
NuGas contributed $100,000 to pay for costs of acquiring leases and
easements on non- Tribal lands contiguous to Tribal lands, to assemble adequate
sized drilling units for the first eight exploratory wells. In fiscal 1995,
Energx received $200,000 under the JVA as a prospect generation fee. Energx is
operator of record, while NuGas is field operator.
NuGas is a subsidiary of a Toronto Stock Exchange company with substantial
experience in shallow gas exploration and production, principally in the
northern plains states and Canada.
Farmout Agreement. In October 1995, Placid Oil Company, a subsidiary of
Occidental Petroleum and other parties (hereafter together referred to as
"Placid"), signed a Farmout Agreement with Energx and NuGas. Under the
agreement, Energx and NuGas as operator had the right to drill and complete
shallow gas wells on approximately 170,000 acres of non-Tribal lands within the
Fort Peck Indian Reservation, at the sole expense of the operator. The Farmout
Agreement contemplated three phases: (i) drilling and completion (or
abandonment) of three test wells on widely dispersed drilling locations; (ii)
subject to performance of (i), continuous drilling and completion (or
abandonment) of option wells, also on widely dispersed drilling locations; and
(iii) subject to performance of (i), continuous drilling and completion (or
abandonment) of additional wells on blocks not covered by (i) and (ii). The
first three wells were drilled on specific sections within the 170,000 acres.
Drilling of the first test well commenced in October 1995; the last of the
three wells was to be drilled and completed (or abandoned) within 45 days of the
commencement of drilling the first well. All three wells were dry holes.
Contemplating the significant holding cost for the delay rentals, Energx and
NuGas jointly decided to terminate the Placid Farmout Agreement on January 1,
1996 and relinquished their rights to the 170,000 acres referred to above as
Energx and NuGas determined they would focus their efforts and resources towards
the Tribal acreage.
Wind River Basin, Wyoming - Monument Butte Prospect. During the 1996 fiscal
year, Energx terminated BLM leases covering approximately 13,000 acres in
Fremont County, WY, which were believed to be prospective of shallow coalbed
methane and conventional stratigraphic natural gas and oil deposits. Energx
wrote off $328,700, the cost of acquiring and holding these leases in fiscal
1996.
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Funding Energx: Energx operations to date have been funded with USECC
equity investments and advances, and transaction revenue (the NuGas prospect
generation fee). Energx expects to fund future operations by private financing
and industry participation. However, equity financing as well as industry
participation of natural and coalbed methane gas projects may be difficult to
obtain. Accordingly, in fiscal 1998 Energx will continue to monitor its Fort
Peck positions to evaluate whether to continue to seek to find gas on the tribal
lands.
COMMERCIAL OPERATIONS
Brunton.
On February 16, 1996, USE completed the sale of 8,267,450 shares of common
stock, $0.01 par value (the "Stock") of Brunton to Silva Production AB, a
closely held Swedish corporation ("Silva"), pursuant to the terms of a Stock
Purchase Agreement dated January 30, 1996 (the "Agreement") by and between USE
and Silva. Brunton is engaged in the manufacture and marketing of professional
and recreational outdoor products and at the time of its sale Brunton was 100%
owned by USE. The sale was prompted in part by USE's desire to focus on its core
business of acquiring and developing mineral properties and mining and marketing
minerals, particularly uranium and gold. The Stock constitutes all of the issued
and outstanding shares of Brunton owned by USE as of the date of the sale
including 90,750 shares held in Brunton's treasury.
The purchase price for the Stock was $4,300,000, which was a negotiated
price based on an Adjusted Shareholder's Equity in Brunton (as defined in the
Agreement) as of January 31, 1996 of $2,399,103. USE received $300,000 upon
execution and delivery of the Agreement, approximately $3,000,000 by wire
transfer from Silva at closing and an agreement (promissory note) by Silva to
pay USE $1,000,000 in three annual installments of $333,333 each, together with
interest at the rate of 7% per annum, such installments to be paid on February
15, 1997, February 15, 1998 and February 15, 1999.
In addition, Silva agreed that, in the operation of Brunton, Silva will
cause the existing Brunton products and operations (including lasers and other
new products being developed by Brunton at the time of the sale) to be a
separate profit center and to pay USE 45% of the net profits before taxes
derived from that profit center for a period of four years and three months
commencing February 1, 1996. The first such net profits payment will be made on
or before July 15, 1997 for the period from February 1, 1996 through April 30,
1997, if net profits are earned for such period. The profits payment for the
period February 1, 1996 through April 30, 1997 of $292,600 was received after
May 31, 1997. Additional net profits payments will be made, on July 15, 1998,
July 15, 1999 and July 15, 2000, if net profits are earned for the corresponding
twelve month period. There can be no assurance that Brunton will earn net
profits for any such period and therefore there can be no assurance that any
such net profits payment will be received by USE.
The assets of Brunton that were acquired by Silva through the purchase of
the Stock consist of certain real estate housing Brunton's headquarters and
manufacturing operations in Riverton, Wyoming; Brunton's working capital;
equipment, inventory, machinery, personal property and all of Brunton's
intellectual property rights. Certain items of equipment and personal property
were
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withheld by USE from the Agreement and transferred from Brunton to USE, by
mutual agreement with Silva, for USE's assumption of the indebtedness thereon.
Such items include depreciated mining equipment, real estate not used in Brunton
operations, and miscellaneous other equipment, as well as 225,556 shares of
USE's common stock, par value $0.01 per share, and options to purchase 150,000
shares of USE's common stock for $3.50 per share; 160,000 shares of Crested
common stock, par value $0.001, and options to purchase (from Crested) 300,000
shares of Crested common stock for $0.40 per share, all of which were previously
owned by Brunton. USE subsequently transferred to Plateau 125,556 shares of USE
(and options to purchase 75,000 shares of USE), plus 60,000 shares of Crested
(and options to purchase 150,000 shares of Crested) in partial payment of debt
owed to Plateau by USECC. The remaining 100,000 USE shares (and options to
purchase 75,000 USE shares), plus 100,000 Crested shares (and options to
purchase 150,000 shares of Crested) were transferred to SGMC.
Also at closing, USE paid Brunton $171,685 for product purchases and
accrued rentals on mining equipment owned by Brunton. The equipment was
transferred to USE at closing and the USE paid off $273,000 in bank debt
previously incurred by Brunton in connection with a loan purchase the equipment
from USE.
The sale eliminated Brunton's manufacturing and/or marketing of
professional and recreational outdoor products from the commercial segment of
USE's business for fiscal 1997 and thereafter, except to the extent that there
are net profit payments from Silva over the next four years. For the fiscal year
ended May 31, 1996, Brunton's sales provided 19% of net revenues of USE,
compared with 49% of net revenues for fiscal year ended May 31, 1995 (before
reclassification to reflect Brunton as discontinued operations with respect to
the Company). For fiscal 1997, the inability to include Brunton's operations
with USE's other operating revenues has increased the operating losses for USE.
However, USE hopes to develop other profitable businesses, such as Plateau's
uranium business or FNG's construction business, to replace the profits of
Brunton. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations Liquidity and Capital Resources" at May 31, 1997.
Real Estate and Other Commercial Operations
USE owns varying interests, alone and with Crested, in affiliated companies
engaged in real estate, transportation, and commercial businesses. The
affiliated organizations include Western Executive Air, Inc. ("WEA") and Canyon
Homesteads, Inc. (through Plateau). Activities of these subsidiaries in these
business sectors include ownership and management of a commercial office
building, the townsite of Jeffrey City, Wyoming and the townsite, motel,
convenience store and other commercial facilities in Ticaboo, Utah. Until it was
sold in April 1996, USECC also owned and managed a mobile home park in Riverton,
Wyoming. See "Certain Relationships and Related Transactions - Transactions with
Arrowstar Investments, Inc.". WEA owns and operates an aircraft fixed base
operation with fuel sales, flight instruction services and aircraft maintenance
in Riverton, Wyoming.
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
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affiliates, nonaffiliates and government agencies; the second floor is occupied
by USE and Crested and is adequate for their executive offices. The property is
mortgaged to the WDEQ as security for future reclamation work on the SMP
properties.
USECC (through WEA) also owns a fixed base aircraft operation at the
Riverton Municipal Airport, including a 10,000 square foot aircraft hangar and
7,000 square feet of associated offices and facilities. This operation is
located on land leased from the City of Riverton for a term ending December 16,
2005, with an option to renew on mutually agreeable terms for five years. The
annual rent is presently $1,180 (adjusted annually to reflect changes in the
Consumer Price Index), plus a $0.02 fee per gallon of fuel sold.
In November 1995, USECC exercised an option to acquire a 7,200 square foot
hangar at the Riverton airport, for $75,000, from a private Wyoming corporation
affiliated with the Chairman, President and Chief Executive Officer of the
Company and Chairman and Chief Executive Officer of Crested. See "Certain
Relationships and Related Transactions - Transactions with Arrowstar
Investments, Inc."
USE and Crested also own 18 undeveloped lots on 26.8 acres of the Wind
River Airpark near the Riverton Municipal Airport, and three mountain sites
covering 16 acres in Fremont County, Wyoming.
USECC owns various buildings, 290 city lots and/or tracts and other
properties at the Jeffrey City townsite in south-central Wyoming. Nearly 4,000
people resided in Jeffrey City in the early 1980s, when the nearby Crooks Gap
and Big Eagle uranium mining projects were active. The townsite may be utilized
for worker housing as the Jackpot Mine and Sweetwater Mill are put into
operation. In the interim, USE and Crested sold 9 and 19 lots at Jeffrey City
for an aggregate of $21,150 and $46,000 during fiscal 1997 and 1996,
respectively.
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.
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The first option (exercised in February, 1995) was for the 57 commercial
and noncommercial zoned acres in the City of Gunnison, Colorado; the purchase
price was $970,300. Pangolin paid $345,000 cash and $625,300 in three year
nonrecourse promissory notes, of which $137,900 was paid during fiscal 1995 and
$35,600 was paid during fiscal 1996. The remaining note carried interest at 7.5%
per annum.
The second option covered 472.5 acres of ranch land, owned by Crested,
northwest of the City of Gunnison, Colorado (purchase price $822,460). Pangolin
paid $10,000 for the option; on option exercise and closing, Pangolin paid
$46,090 in cash and $776,370 by two nonrecourse promissory notes (each with
principal and unpaid interest due on the third anniversary of closing except for
$35,000 on the first anniversary). The Registrant did not receive the $35,000 as
scheduled. At closing, 22.19 acres were deeded to Pangolin; different parcels of
the remaining acreage secured the notes, and were to be released for principal
payments in the course of development. The sale was accounted for as an
installment sale and thus the gain on sale was deferred, to be recorded as the
notes are paid.
Both notes ($145,500 and $630,870) required annual payments of accrued
interest: the larger note accrued interest at 7.5 percent; the initial interest
rate on the smaller note was 7.5 percent through August 28, 1995 and 12 percent
thereafter (with a $35,000 principal payment on the first anniversary).
In fiscal 1997, USE and Crested agreed with Pangolin, and entities
affiliated with Pangolin, to restructure the remaining obligations of Pangolin
and entities affiliated with Pangolin, with respect to the land parcels in and
near Gunnison, Colorado (which had been covered by the original two purchase
options). Under the restructuring, Contour Development Company LLC (a Colorado
limited liability company, hereafter "Contour") gave USE and Crested two
recourse, secured promissory notes: the first note is for $454,894 of principal,
due January 26, 1998, the second note is for $872,508 of principal. The notes
are secured by Contour's 73% interest in Tenderfoot Properties LLC ( a Colorado
limited liability company affiliated with Contour, hereafter "Tenderfoot"). USE
and Crested conveyed a key lot in the Gunnison parcel to Tenderfoot, upon which
Contour and Tenderfoot were to construct an apartment building with HUD
construction loan financing to be obtained by Contour and Tenderfoot. USE and
Crested had intended the restructuring to result in a faster recovery by USE and
Crested of their investments in the land, than would have been realized under
the terms of the original Pangolin obligations.
Although the initial payments on the two new notes were paid when due in
January 1997, thereafter, on May 30, 1997, Contour defaulted in making a payment
to Crested of $164,439 (principal of $128,138 plus accrued interest of $36,301
at 8.39% per year from December 1, 1996). On December 26, 1997, registrant and
Crested received a payment of $164,739.71 from Contour as payment to Crested on
Note B. As of the date of this Prospectus, USE and Crested are reevaluating all
of the circumstances of the negotiations which led to the restructuring in late
calendar 1996, including representations made to USE and Crested by affiliates
of Pangolin and Contour regarding the value of the Tenderfoot interests owned by
Contour which secure the new notes, Contour's intentions of paying the new notes
when due according to their terms, and other matters.
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Utah Properties. Canyon Homesteads, Inc. (a Plateau subsidiary) owns a
majority interest in a joint venture which holds the Ticaboo Townsite in
Ticaboo, Utah (see "Minerals - Uranium- Shootaring Canyon Mill - Ticaboo
Townsite, above). In fiscal 1995, USE acquired the minority interest in the
joint venture from a nonaffiliate. Further recreational improvements to the
townsite were planned for fiscal 1996, to develop a commercial operation
directed to Lake Powell tourists. However, as the anticipated joint venture
partners did not fund development plans, (and the proposed joint ventures for
such purpose were not formed), and USE and Crested have not been successful in
finding other sources of development funding, limited interim funding was
provided by Arrowstar Investments, Inc. through First-N-Last LLC, a limited
liability company with Canyon Homesteads, Inc. In April 1996, USECC acquired the
entire interest of Arrowstar in First-N-Last LLC as partial consideration for
the sale to Arrowstar of USECC's Wind River Estates mobile home park in
Riverton, WY. See "Certain Relationships and Related Transactions - Transactions
with Arrowstar Investments, Inc."
CONSTRUCTION
Four Nines Gold, Inc. On May 5, 1995, FNG was awarded a 14 month $2,584,434
contract by the City of Lead, South Dakota for municipal road and drainage
construction, and land slide area stabilization. As of May 31, 1997, change
orders by the City of Lead and others had increased the contract to $3,864,694.
This contract was completed in fiscal 1997 for a profit of $1,125,331.
On September 13, 1995, FNG was awarded a separate construction contract for
$618,270 by the United States Department of the Interior, Bureau of Reclamation,
for the Minor Laterals, North Canal, Stage 5, Belle Fourche Unit, South Dakota.
The work consisted of constructing 3.81 miles of pipeline, approximately 1.4
miles of gravel-surfaced road, removing existing reinforced concrete hydraulic
structures and constructing miscellaneous concrete structures which included
four inlets. As of May 31, 1997 FNG had completed 100% of the contract, billing
$618,270 and having received payment for $618,270. The contract as of May 31,
1997, had resulted in a loss of $48,426 to FNG, however, a claim for 172,977 was
submitted and is still in process. If approved in fiscal 1998, the claim would
result in a gross profit of $124,551 to FNG.
Neither commercial nor construction operations are dependent upon a single
customer, or a few customers, the loss of which would have a materially adverse
effect on USE.
RESEARCH AND DEVELOPMENT
Registrant has incurred no research and development expenditures, either on
its own account or sponsored by customers, during the past three fiscal years.
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ENVIRONMENTAL
General. Registrant's operations are subject to various federal, state and
local laws and regulations regarding the discharge of materials into the
environment or otherwise relating to the protection of the environment,
including the Clean Air Act, the Clean Water Act, the Resource Conservation and
Recovery Act ("RCRA"), and the Comprehensive Environmental Response Compensation
Liability Act ("CERCLA"). With respect to mining operations conducted in
Wyoming, Wyoming's mine permitting statutes, Abandoned Mine Reclamation Act and
industrial development and siting laws and regulations also impact the Company.
Similar laws and regulations in California affect SGMC operations and in Utah,
will effect Plateau's operations.
The Company's management believes it is currently in compliance in all
material respects with existing environmental regulations. To the extent that
production by SMP, GMMV or SGMC is delayed, interrupted or discontinued due to
need to satisfy existing or new provisions which relate to environmental
protection, future USE earnings could be adversely affected.
Crooks Gap. An inoperative ion exchange facility at Crooks Gap currently
holds a NRC license for possession of uranium operations byproducts. USE has
applied to the NRC for permission to decommission and decontaminate the plant,
dispose low level waste into the Sweetwater Mill tailings cell, and keep intact
such of the facility as does not require dismantling. Costs for this two year
effort (once approved by the NRC) are not expected to exceed $150,000. However,
management of USE and Crested are reviewing the economics of relicensing this
facility as part of a potential in-situ leach uranium mining operation.
Other Environmental Costs. Actual costs for compliance with environmental
laws may vary considerably from estimates, depending upon such factors as
changes in environmental laws and regulation (e.g., the new Clean Air Act), and
conditions encountered in minerals exploration and mining. Registrant does not
anticipate that expenditures to comply with laws regulating the discharge of
materials into the environment, or which are otherwise designed to protect the
environment, will have any substantial adverse impact on the Registrant's
competitive position.
EMPLOYEES
As of December 19, 1997, USE had 109 full-time employees. Crested uses
approximately 50 percent of the time of USE employees, and reimburses USE
accordingly. Payroll expense has been shared by USE and Crested since 1981.
MINING CLAIM HOLDINGS
Title to Properties. Nearly all the uranium mining properties held by GMMV,
SMP, and Plateau are on federal unpatented claims. Unpatented claims are located
upon federal public land pursuant to procedure established by the General Mining
Law. Requirements for the location of a valid mining claim on public land depend
on the type of claim being staked, but generally include discovery of valuable
minerals, erecting a discovery monument and posting thereon a location
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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 "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.
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LEGAL PROCEEDINGS
Sheep Mountain Partners Arbitration/Litigation
As of June 1, 1998 USE, Crested and SMP entered into a partial settlement
with Nukem, Inc. and CRIC of some of the claims involved in the Sheep Mountain
Partners Arbitration/Litigation which is discussed below. For more complete
information about the nature of the settlement, reference is made to the
detailed discussion below. 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 a bank escrow account, $484,361 which represented USECC's share of
profits earned on certain prior deliveries of uranium under SMP's uranium supply
contracts with utilities; (iii) from Nukem and CRIC $4,540,000 to settle all
claims by USECC against Nukem, CRIC and SMP, except certain claims which remain
on appeal with the 10th Circuit Federal Court of Appeals; (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 American (200,000 pounds annually through 2000). In connection
with the partial settlement, the parties agreed to the dismissal with prejudice
of the Colorado State Court Proceeding (and a Wyoming State Court proceeding),
and all claims in the Federal Proceeding, except for the issues pending before
the Federal 10th Circuit Court of Appeals. The 10th CCA will decide the limited
issues which have not been settled, including the right of SMP to all of the CIS
uranium contracts. 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 (see "Stipulated Arbitration" below).
Arbitration. On June 26, 1991, CRIC submitted certain disputed matters
concerning SMP to arbitration before the American Arbitration Association in
Denver, Colorado, to which USE and Crested filed a responsive pleading and
counterclaims alleging violations of contracts and duties by CRIC related to
SMP. CRIC asserted that USE and Crested, d/b/a/ USECC, were in default under the
SMP partnership agreement ("SMP Agreement"). Prior to initiation of arbitration
proceedings, USE and Crested had notified CRIC it was in default under the SMP
Agreement. The issues raised in the arbitration proceedings were generally
incorporated in the Federal proceedings (see below), wherein the U.S. District
Court of Colorado stayed further proceedings in arbitration. See also
"Stipulated Arbitration", below.
Federal Proceedings. On July 3, 1991, USE and Crested ("plaintiffs") filed
Civil Action No. 91-B-1153 in the United States District Court for the District
of Colorado against CRIC, Nukem and various affiliates of CRIC and Nukem
(together, the "defendants"), alleging that CRIC and Nukem misrepresented
material facts to and concealed material information from the plaintiffs to
induce their entry into SMP Agreement and various related agreements. Plaintiffs
also claimed CRIC and Nukem have wrongfully pursued a plan to obtain ownership
of the USE-Crested interests in SMP through various means, including
overcharging SMP for uranium "sold" to SMP by defendants. Plaintiffs further
alleged that defendants refused to provide a complete accounting with respect to
dealings in uranium with and on behalf of SMP, and that certain defendants
misappropriated SMP property and engaged in other wrongful acts relating to the
acquisition of uranium by SMP.
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Plaintiffs requested that the court order rescission of the SMP Agreement
and related contracts, and asked the court to determine the amounts payable to
CRIC by USECC as a result of any such rescission order to place the parties in
status quo. USE and Crested also requested that the court order defendants to
make a complete accounting to them concerning the matters alleged in the Amended
Complaint. They requested an award of damages (including punitive, exemplary and
treble damages, interest, costs and attorneys' fees) in an amount to be
determined at trial. Plaintiffs further requested imposition of a constructive
trust on all property of SMP held by defendants, and on profits wrongfully
realized by defendants on transactions with SMP.
The defendants filed various motions, including an application to stay
judicial process and compel arbitration and to dismiss certain of plaintiff's
claims. The defendants also filed an answer and counterclaims against
plaintiffs, claiming plaintiffs breached the SMP Agreement and misappropriated a
partnership opportunity by providing certain information about SMP to Kennecott
and entering into the GMMV with Kennecott involving the Green Mountain uranium
properties. The defendants also claim that plaintiffs wrongfully sold an
interest in SMP to Kennecott through the GMMV without CRIC's consent and without
providing CRIC a right of first refusal to purchase such interests; that USE
breached the uranium marketing agreement between CRIC and SMP, which had been
assigned by CRIC to Nukem, by agreeing with Kennecott in the GMMV that Kennecott
could market all the uranium from Green Mountain, thereby depriving Nukem of
commissions to be earned under such marketing agreement; that Registrant and
Crested interfered with certain SMP supply contracts, costing CRIC legal fees
and costs; that CRIC and Nukem are entitled to be indemnified for purchases of
uranium made on behalf of SMP; that USE and Crested failed to perform their
obligations under an Operating Agreement with SMP in a proper manner, resulting
in additional costs to SMP; that Registrant and Crested overcharged SMP for
certain services under the SMP Partnership Agreement and refused to allow SMP to
pay certain marketing fees to Nukem under the Uranium Marketing Agreement; that
USE and Crested breached the SMP Partnership Agreement by failing to maintain a
toll milling agreement with Pathfinder Mines Corporation, thereby rendering
SMP's uranium resources worthless; and that USE and Crested have engaged in
vexatious litigation against CRIC and Nukem. Defendants also requested damages
(including punitive, exemplary and treble damages under RICO, interest costs and
attorney fees).
Stipulated Arbitration. In fiscal 1994, the plaintiffs and defendants
agreed to proceed with exclusive, binding arbitration before a panel of three
arbitrators (the "Panel") with respect to any and all post-December 21, 1988
disputes, claims and controversies (including those brought in the 1991
arbitration proceedings, the U.S. District Court proceeding and the Colorado
State Court proceeding described below), that any party may assert against the
other. All pre-December 21, 1988 claims, disputes and controversies pending
before the U.S. District Court have been stayed by stipulation between the
parties, until the Panel enters an order and award in the arbitration
proceeding.
In connection with agreeing to proceed to arbitration as stated above, USE
and Crested affirmed the Sheep Mountain Partners partnership, and proceeded on
common law damages and other claims in the arbitration. Approximately
$18,000,000 cash, comprising part of the damages
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claimed by plaintiffs, was placed in escrow by agreement of the parties pending
resolution of the disputes.
The arbitration evidentiary proceedings were completed on May 31, 1995,
following which the parties filed with the arbitrators proposed findings of fact
and conclusions of law and proposed order, award, briefs of law and responses to
the other party's submittals. NUKEM and CRIC sought damages against USECC in the
amount of $47,122,535. For its claims, USECC sought damages of approximately
$258,000,000 from Nukem and CRIC, which amount USECC requested be trebled under
the Racketeer Influenced and Corrupt Organizations Act ("RICO") and similar
state law provisions.
On April 18, 1996, the Arbitration Panel entered an Order and Award (the
"Order"). The Panel found generally in favor of USE and Crested on certain
claims made by USE and Crested (including the claims for reimbursement of
standby maintenance expense and other expenses on the SMP mines), and in favor
of Nukem/CRIC and against USE and Crested on certain other claims.
USE and Crested were awarded monetary damages of approximately $7,800,000
with interest, which amount is after deduction of monetary damages which the
Panel awarded in favor of Nukem/CRIC and against USE and Crested. An additional
amount of approximately $4,300,000 was awarded by the Panel to USE and Crested,
to be paid out of cash funds held in SMP bank accounts, which accounts have been
accruing operating funds from SMP since the arbitration/litigation proceedings
were commenced.
The Panel ordered that one utility supply contract for 980,000 pounds of
uranium oxide held by Nukem belonged to SMP, and ordered Nukem to assign such
contract to SMP. The contract expires in 2000.
The fraud and RICO claims of USE and Crested against Nukem and CRIC and
vice versa were dismissed.
The timing and assurance of payment by Nukem/CRIC to USE and Crested of the
$7,400,000 monetary damages with interest is presently uncertain. On April 30,
1996, Nukem/CRIC filed with the Panel two motions (the "Nukem Motions")
requesting correction of the Order, claiming to have discovered errors and
inconsistencies in two of the 36 claims addressed in the Order that they allege
improperly increased the damages awarded to USE and Crested by an aggregate
amount exceeding $16,000,000.
On May 15, 1996, USE and Crested filed the Order and Award (under seal with
respect to certain portions containing commercially sensitive information) with
the United States District Court for the District of Colorado (the Court) and a
petition for confirmation of the Order. At a hearing on May 24, 1996, the Court
remanded the Order to the Panel for limited review of the Nukem motions, without
taking further evidence. The petition for confirmation of the Order and Award
and motions filed by USE and Crested for dissolution of SMP; for the appointment
of a receiver to oversee the obligations of SMP to make delivery of uranium
concentrates to utilities and supervise the formal dissolution of SMP, and for
an order directing distribution of the escrowed proceeds, were stayed by the
Court pending a ruling by the Panel on the Nukem motions.
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USE and Crested filed their opposition to the Nukem motions with the Panel
on June 14, 1996. On July 3, 1996, the Panel entered an Order denying Nukem
motions and reaffirmed its April 18, 1996 Order and Award.
After a series of motions by the parties, the District Court entered orders
and a judgment on November 5, 1996 confirming the Panel's Order and Award. In
November 1996, USECC received the additional $4,367,000 awarded by the
Arbitration Panel out of SMP escrowed funds and its bank account per the Court's
November 5, 1996 Judgment. Thereafter, Nukem filed a motion to modify and/or
vacate portions of the Judgment and USECC filed a motion to modify one paragraph
of the Judgment deducting $265,213 from the amounts Nukem and CRIC claimed to
have advanced to purchase uranium for SMP. In December 1996, Nukem and CRIC
filed a notice with the 10th Circuit Court of Appeals ("CCA") appealing the
Court's November 5, 1996 Judgment. However, the 10th CCA held that appeal in
abeyance pending the issuance of the U. S. District Court's final judgment.
Following the hearing on USECC's motion to correct the Court's November 5,
1996 Order and Judgment and motions to enter a final judgment, on March 7, 1997,
Judge Lewis T. Babcock of the U. S. District Court of Colorado entered an "Order
for Entry of Amended Judgment as Final," and an Amended Judgment as of March 7,
1997. The Amended Judgment further confirmed the Order and Award of the Panel
but did not include equitable portion of the Order and Award which awarded one
uranium supply contract to SMP and Nukem's contracts with CIS republic in
constructive trust in favor of SMP.
In the March 7, 1997 Amended Judgment, which included rulings on some 12
monetary claims of the parties, Judge Babcock ordered Nukem to pay USECC a net
of approximately $8,465,000 as monetary damages. The Amended Judgment did not
contain the equitable relief granted in the Panel's Order and Award, so USE and
Crested filed another motion with the U.S. District Court to correct clerical
omissions. Nukem/CRIC opposed the motion but on June 30, 1997, the Court entered
its Second Amended Judgment ordering Nukem to assign the PSE&G contract to SMP
and impressing a constructive trust in favor of SMP on Nukem's rights to
purchase CIS uranium, the uranium acquired pursuant to those rights and the
profits therefrom. The District court also stayed USECC's right to execute on
the judgment against Nukem/CRIC when Nukem/CRIC posted a supersedeas bond in the
amount of $8,613,600. Thereafter, Nukem/CRIC filed a motion for clarification
and/or limited remand of the Second Amended Judgment. On August 13, 1997, the
U.S. District Court denied the motion and Nukem and CRIC filed an amended notice
of appeal with the Tenth Circuit Court of Appeals (10th CCA) of the June 30,
1997 Second Amended Judgment and other earlier judgments.
Colorado State Court Proceeding. On September 16, 1991, Company and Crested
d/b/a USECC as plaintiffs, filed Civil Action No. 91CV7082 in the Denver
District Court, wherein plaintiffs were seeking reimbursement of $85,000 per
month from the spring of 1991 for maintaining the SMP uranium mines at Crooks
Gap on a standby basis. On behalf of SMP, CRIC filed an answer, affirmative
defenses and a counterclaim against plaintiffs denying that SMP owed plaintiffs
any money. Plaintiffs filed a Motion for Summary Judgment and the Denver
District Court Judge denied the motion and stayed all proceedings until the case
involving plaintiffs and
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CRIC and Nukem were resolved in the U.S. District Court for Colorado. This
matter was submitted to arbitration in February 1994, and on April 18, 1996, the
Arbitration Panel awarded USECC $2,512,823 plus per diem interest of $616
against Nukem and CRIC jointly and severally, for standby costs through March
31, 1996. When Nukem and CRIC appealed the confirmation of the Arbitration
Award, they posted a supersedeas bond to cover this portion of the Award. USECC
continued to maintain the SMP underground and open pit mines in Fremont County,
Wyoming so USECC filed a lien for such expenditures on the SMP mining properties
from March 31, 1996. In 1997, USECC filed a civil action to foreclose the lien
in a Wyoming District Court. Nukem and CRIC resisted the foreclosure case in
Wyoming claiming the Denver District Court had jurisdiction because of the forum
selection clause referred to Colorado as the jurisdiction for such claim in the
Operating Agreement between SMP and USECC. The Court enjoined USECC from
proceeding with the foreclosure action in the Wyoming Court and various
pleadings have been filed by both parties in the Denver District Court where the
case is now pending.
Federal Appeal. In the pending appeal involving the arbitration/litigation
matter between Registrant and its subsidiary Crested Corp. as plaintiffs and
Nukem, Inc. and CRIC as defendants, as was reported above Nukem/CRIC filed an
amended notice of appeal of the Second Amended Judgment entered on or about June
27, 1997. In the Second Amended Judgment, the U. S. District Court of Colorado
ordered that in addition to the net monetary award to plaintiffs, the rights
Nukem has to purchase uranium from the CIS republic, the uranium acquired
pursuant to those rights and the profits therefrom were impressed with a
constructive trust in favor of SMP. Nukem was required by the District Court to
post a supersedeas bond in the amount of $8,613,600 to cover the monetary
portion of the Court's judgment in favor of Registrant and Crested against
Nukem/CRIC. The District Court refused to increase the supersedeas bond to cover
the value of the CIS contracts because the Arbitration Panel did not value such
equitable relief granted to plaintiffs Registrant and Crested. Consequently,
Registrant and Crested filed a motion before the 10th CCA to increase the
supersedeas bond to cover the value of the CIS contracts. Defendants Nukem/CRIC
filed response and a motion to again remand the case to the Arbitration Panel.
Plaintiffs Registrant and Crested filed a response to that request and a motion
for sanctions against Nukem/CRIC. On November 12, 1997, two judges of the 10th
CCA entered an order denying plaintiffs' motion to increase the supersedeas bond
and denied Nukem/CRIC's cross-motion for remand to the Panel of certain issues
on appeal. In plaintiffs' motion for sanctions, the Court denied the motion
without prejudice. Nukem/CRIC filed their Appellants' opening brief with the
10th Circuit Court of Appeals on December 12, 1997. USECC filed its Appellees'
brief on January 12, 1998. Nukem/CRIC filed a reply brief on January 26, 1998.
On April 13, 1998, Company received a notice to all counsel in the appeal from
the Deputy Clerk of the 10th Circuit Court advising that the case was referred
to a three-judge panel and after examination of the briefs and record on appeal,
the panel was of the unanimous opinion that oral arguments were not needed.
However, on June 22, 1998 the Court of Appeals on its own motion vacated its
prior Order and has set the matter for oral argument during the week of
September 22, 1998 in Oklahoma City, Oklahoma. Nukem and CRIC have the
opportunity to file within ten days a statement to the Court of reasons for oral
argument. The Court also required Nukem and CRIC to initiate a mandatory
settlement conference and a report of the proposed conference shall be filed
with the Clerk.
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BGBI Litigation
USE and Crested are defendants and counter- or cross-claimants in certain
litigation in the District Court of the Fifth Judicial District of Nye County,
Nevada, brought by Bond Gold Bullfrog Inc. ("BGBI") on July 30, 1991. BGBI (now
known as Barrick Bullfrog, Inc.) is an affiliate of Barrick Corp., a large
international gold producer headquartered in Toronto, Canada. The litigation
primarily concerns extralateral rights associated with two patented mining
claims owned by Parador and initially leased to a predecessor of BGBI, which
claims are in and adjacent to BGBI's Bullfrog open pit and underground mine. USE
and Crested assert certain interests in the claims under an April 1991
assignment and lease with Parador, which is subject to the lease to BGBI's
predecessor.
Parador, USE and Crested had previously advised BGBI that they are entitled
to royalty payments with respect to extralateral rights of the subject claims on
minerals produced at the Bullfrog Mine, claiming that the lode or vein
containing the gold mineralization apexes on the Parador claims and dips under
the claims leased to BGBI by a third party.
BGBI seeks to quiet title to its leasehold interest in the subject claims,
alleging that Parador's lease thereof to USE and Crested is adverse to the
interest claimed by BGBI, and that the assertions by USE and Crested of an
interest in the claims have no foundation. BGBI seeks a determination that USE
and Crested have no rights in the claims and an order enjoining USE and Crested
from asserting any interest in them. BGBI further asserts that, in attempting to
lease an interest in the subject claims to USE and Crested, Parador breached the
provisions of its lease to BGBI, and that Parador is responsible for the legal
fees and costs incurred by BGBI in the quiet title action, which may be offset
against royalties. Under an arrangement to pay certain legal expenses of
Parador, USE and Crested may be responsible for any such amounts.
BGBI alleges that by entering into the Assignment and Lease of Mining
Claims with Parador, USE and Crested disrupted the contractual relationship
between BGBI and Parador. In addition, BGBI claims that the USECC-Parador
agreement slanders BGBI's title to the claims. BGBI seeks compensatory damages
from Parador, USE, and Crested; punitive damages from USE and Crested; and costs
and other appropriate relief from Parador, USE and Crested, all in amounts to be
determined. The amount of damages which might be awarded against USE and Crested
cannot presently be ascertained.
A partial or bifurcated trial to the court of the extralateral rights
issues was held on December 11 and 12, 1995. The purpose of the hearing was to
determine whether the Bullfrog orebody is a "vein, lode or ledge" as described
in the General Mining Law and, if so, whether the facts of the case warrant the
application of the doctrine of extralateral rights as set forth in such statute.
Although the Court sat as both the finder of fact and law with respect to such
issues, the Court concluded that the questions are ultimately one of law which
must be decided based on the testimony and exhibits introduced at the trial
concerning the description of the orebody. USE, Crested and Parador presented
five experts in the field of geology, including the person who was responsible
for the discovery of the gold deposit at the mine. All five experts opined that
the deposit was a lode and it apexed on a portion of Parador's two mining
claims. The defendant H.B. Layne Contractor, Inc. ("Layne") presented a single
witness who testified that there was no apex within the
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Parador claims. The Court nevertheless found that Parador had failed to meet its
burden of proof and therefore, Parador, USE and Crested have no rights, or
interest in the minerals lying beneath the claims of Layne pursuant to
extralateral rights. The Court entered a partial judgment in favor of Layne and
ordered that Parador pay Court costs to Layne. Parador, USE and Crested filed an
appeal of the Court's ruling as erroneous as a matter of law and the Supreme
Court of Nevada dismissed the appeal as premature. The partial trial did not
address any of the issues pending in the litigation other than those required to
decide the question of whether the doctrine of extralateral rights is applicable
to this case. The issues of breach of contract by the defendants and BGBI for
specific performance remained and were tried before the Court commencing on
January 26, 1998. After the trial, the Court found against the parties on their
respective claims and the plaintiff and these defendants filed a Notice of
Cross-Appeal and Notice of appeal, respectively to the Nevada Supreme Court. The
record on appeal has been filed with the Nevada Supreme Court and the appeals
process is now underway
MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Shares of USE Common Stock are traded on the over-the-counter market, and prices
are reported on a "last sale" basis by the National Market System ("NMS") of the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"). The range by quarter of high and low sales prices for the Common
Stock is set forth below for fiscal 1997, and 1996, and the nine months ended
February 28, 1998.
High Low
---- ---
Fiscal year ended May 31, 1997
------------------------------
First quarter ended 8/31/96 $22.00 $14.50
Second quarter ended 11/30/96 19.00 11.94
Third quarter ended 2/28/97 11.25 9.38
Fourth quarter ended 5/31/97 13.00 5.75
Fiscal year ended May 31, 1996
------------------------------
First quarter ended 8/31/95 $ 5.38 $ 4.13
Second quarter ended 11/30/95 5.38 3.38
Third quarter ended 2/29/96 19.75 3.50
Fourth quarter ended 5/31/96 27.00 13.00
First Quarter ended August 31, 1997 $11.63 $ 7.13
-----------------------------------
Second Quarter ended November 30, 1997 $12.75 $ 7.45
--------------------------------------
Third Quarter ended February 28, 1998 $10.13 $ 6.75
-------------------------------------
At June 22, 1998, the closing bid price was $5.75 per share and there were
approximately 720 shareholders of record for Common Stock.
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USE has not paid any cash dividends with respect to the Common Stock. There are
no contractual restrictions on USE's present or future ability to pay cash
dividends, however, USE intends to retain any earnings in the near future for
operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year 2000 Disclosure
The Company has evaluated the operating systems on all headquarter and field
office computers and determined that all of the operating systems are currently
set up on software which will transition all data (historical and incoming)
through the year 2000 without compromise to the integrity of the systems and
their network, or other interruptions or loss of data.
Subsequent to February 28, 1998, USECC entered into a partial settlement of
litigation with Nukem, Inc. and CRIC, pursuant to which USECC received
$5,024,361 in cash. See "Business - Litigation - Sheep Mountain Partners."
Liquidity and Capital Resources at February 28, 1998
During the nine months ended February 28, 1998, the Company's current
assets increased by $1,030,300 to a balance of $5,431,200. This increase is
primarily due to a net increase of cash $807,600 and an increase of $473,300 in
Accounts Receivable related parties. The increase in cash was a result of the
Acquisition Agreement entered into during the three months ended August 31, 1997
between the Company, its subsidiary Crested Corp. ("Crested") and Kennecott
Uranium Company ("Kennecott"). As a result of the Acquisition Agreement the
Company and Crested received a $4,000,000 signing bonus and a loan of
$16,000,000 to continue to develop the Green Mountain Mining Venture (GMMV)
mining properties. The $4,000,000 signing bonus was forfeitable through December
1, 1997, unless certain conditions were met by the Company and Crested. Although
the conditions were met and the signing bonus was no longer forfeitable, under
generally accepted accounting principles the $4,000,000 continues to be carried
as a deferred income item until such time as the Acquisition Agreement is closed
or terminated. If the Acquisition Agreement is terminated, the GMMV will
continue to hold the properties and only Kennecott will be responsible for
paying back the amount loaned under the $16,000,000 development loan to a
Kennecott affiliate and the 50% interest of USE and Crested will not be
impacted, provided USE and Crested are able to fund their share of GMMV costs
going forward.
The Company also received cash in the amount of $858,700 on a consolidated
basis for the sale of uranium under a Sheep Mountain Partners (SMP) contract;
$156,600 as an advance royalty from Cyprus/AMAX; $292,600 as a net profits
interest royalty from the sale of the Brunton Company; $333,300 as a payment on
the note receivable from the sale of The Brunton Company, and $347,900 as a
result of various employees exercising stock options and warrants. As a result
of the GMMV operations, the Company and Crested invoiced the GMMV a total of
$5,438,500 for direct costs, management fees and equipment rental during the
nine months ended February 28, 1998. Of the total amount invoiced to GMMV,
$1,245,900 (an increase of $424,900) had not been paid as of February 28, 1998.
However, the quarter-end balance was paid in full in March of 1998.
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The Company and Crested continued to fund SMP and the Plateau Resources
(Plateau) operations. SMP has not reimbursed the Company and Crested for their
direct costs for maintaining the SMP properties on standby and is subject to the
Arbitration Panel's Award and pending litigation.
Other current assets decreased by approximately $85,700 primarily as a
result of an decrease in prepaid insurance.
The primary uses of cash by the Company and Crested were the reduction of
Accounts Payable of $810,700; purchases of Property Plant and Equipment of
$1,306,800; increases in the Investment in Affiliates of $481,300; the increase
of Restricted Investments of $415,600 as a result of the reinvestment of
interest earned on Plateau's cash investments to cover Reclamation Liabilities;
the repayment of Long Term Debt of $244,700; and the reduction of Other Accrued
Liabilities pertaining to Plateau of $582,500. In addition to the reduction of
Notes Receivable on the sale of The Brunton Company referred to above, the
Company and Crested's Chairman and CEO retired $432,000 in amounts owed to the
Company and Crested. This was done as a result of the decision of the Company's
board of director and compensation committee granting the Company's and
Crested's chairman and CEO John L. Larsen a bonus of $615,000 for his excellent
work in acquiring Kennecott as a joint venture partner in 1990 for $15,000,000
in cash plus a $50,000,000 commitment to USECC to develop the Green Mountain
properties; the negotiations of Mr. Larsen in acquiring Plateau Resources Ltd.
with the Shootaring Mill and the most recent negotiations for USECC to enter
into the Acquisition Agreement to acquire Kennecott's interest in the GMMV
resulting in the signing bonus of $4,000,000 to the Company and Crested. The
Companies and Mr. Larsen agreed that the bonus is further in full settlement of
the $1,000,000 bonus to Mr. Larsen authorized by the board of directors in 1993
which was conditioned on the spot price of uranium concentrates and cash
distributions from the GMMV to the Company.
The primary requirements for the Company's working capital continue to be
funding of on-going administrative expenses; mine and mill holding and start up
costs of Plateau; the holding costs of the SMP mines; on-going litigation
expenses associated with the SMP dispute, and certain uranium delivery costs
associated with SMP utility contracts. Nukem and CRIC are currently making most
of the SMP uranium deliveries. No assurance can be given that this method of
delivery will continue. The capital requirements to fill the Company's and
Crested's portion of the remaining commitments in fiscal 1998 will depend on the
spot market price of uranium and may also be dependent on the outcome of the
Arbitration/ Litigation Award involving Nukem and CRIC, which Nukem and CRIC
have appealed to the 10th Circuit Court of Appeals.
The primary source of the Company's capital resources for the remainder of
fiscal 1998 will be reimbursement available through the GMMV (see discussion
below); cash on hand; the potential settlement of the Nukem/CRIC
Arbitration/Litigation; uranium deliveries pursuant to the SMP contracts;
borrowing from financial institutions (primarily the line of credit), and the
sale of equity or interests in investment properties. Commercial Operations at
the Ticaboo Townsite in Utah; fees from oil production; rentals of various real
estate holdings and equipment, and the sale of aviation fuel will also provide
cash.
The Company, Crested and Sutter Gold Mining Company ("SGMC") are currently
seeking additional financing for the construction of the gold processing mill
and mine development of SGMC.
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See discussion under SGMC below. An additional $8 million in financing is being
sought. However, there is no assurance that the funds will be raised.
The expenditures for the SMP care and maintenance costs may require
additional funding, depending on the outcome of the SMP arbitration.
GMMV
On June 23, 1997, the Company and Crested d/b/a USECC signed an Acquisition
Agreement with Kennecott for the right to acquire Kennecott's interest in the
GMMV for $15,000,000 and other considerations. This information was previously
reported in the Company's Form 10-Q (Item 2) for the fiscal quarter ended August
31, 1997. As a result of this Agreement, it is believed that no internal funding
will be required by the Company and Crested for the GMMV at either the
Sweetwater Mill or the Jackpot Mine.
Pursuant to the Acquisition Agreement which includes the Mineral Lease, and
the Mill Contract, USECC is developing the proposed Jackpot Mine and working
with Kennecott in preparing the Sweetwater Mill for renewed operations. Such
work is being funded from the $16,000,000 provided to the GMMV by Kennecott.
Under the Fourth Amendment of the GMMV Agreement, which amendment was affected
pursuant to the Acquisition Agreement), Kennecott will be entitled to a credit
against its original $50,000,000 commitment to fund the GMMV, in the amount of
two dollars of credit for each one dollar of such funds out of the $16,000,000
provided by Kennecott to the GMMV, plus the $4,000,000 bonus paid to the Company
and Crested on signing of the Acquisition Agreement.
Closing of the Acquisition Agreement is subject to the Company and Crested
satisfying several conditions on or before the extended closing date of October
30, 1998. If the Acquisition Agreement is never closed, Kennecott and USECC,
shall own their respective 50% interest in the GMMV, and the obligation to repay
the $16,000,000 loan shall remain Kennecott's obligation, without any adverse
effect on the 50% interest in the GMMV held by the Company and Crested.
Sutter Gold Mining Company
The preliminary prospectus to qualify a previous special warrant offering
prospectus of Sutter Gold Mining common stock has been filed with the Ontario
Securities Commission with a copy to the Toronto Stock Exchange. An additional
$8 million must be raised to fund the development costs to place the SGMC
properties in production. It is not anticipated that any of the Company's funds
will be required to fund these operations. Subsequent to the quarter ended
February 28, 1998, the Company purchased certain Special Warrants of Sutter
Gold. It is unlikely SGMC will be listed on the Toronto Stock Exchange until
such time as gold prices recover further from the drop in prices during 1997.
Sheep Mountain Partners
Nukem and CRIC filed their opening brief in their appeal to the 10th
Circuit Court of Appeals on December 12, 1997. The Company and Crested filed
their answer brief on January 12, 1998. Thereafter, Nukem and CRIC filed a reply
brief. On April 13, 1998, the Deputy Clerk of Court advised
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all counsel that a three-judge panel had reviewed the briefs and record on
appeal and oral arguments are not needed. No assurance can be given as to the
ultimate outcome.
The Company and Crested filed a lien on the SMP properties as a protection
for the payment of past and future standby costs for which they have not been
reimbursed by Nukem/CRIC and filed suit in Wyoming to foreclose the lien.
Through June 1, 1998 the Company and Crested funded al standby costs of the
Sheep Mountain mines. As a result of the partial settlement with Nukem and CRIC,
SMP has assigned all of the SMP mines back to USECC, such that from June 1, 1998
USECC is responsible for the standby costs of these mines. See Business -
Litigation - Sheep Mountain Partners."
Results of Operations
Three and Nine months ended February 28, 1998 Compared to Three and Nine Months
Ended February 28, 1997
Revenues for the nine months ended February 28, 1998, increased by
$2,060,200 over the same period of the prior year. The increase in revenues
primarily is as a result of a delivery pursuant to one of the SMP delivery
contracts wherein a net profit of $858,700 was recognized by the Company and
Crested and an increase of $1,649,000 in commercial revenues which consist
primarily of the rental of equipment, real estate and the retail operations at
the Ticaboo Townsite in southern Utah. The increase of equipment rentals is as a
result of increased equipment rentals to the GMMV under the June 23, 1997
Acquisition Agreement discussed above. Construction revenues decreased $935,300
during the nine months ended February 28, 1998, as a result of the Company's
subsidiary Four Nines Gold, Inc. concentrating all of its efforts and equipment
on the mine development at the Jackpot uranium mine and having no third party
contracts. Management fees and Other Revenues increased by $335,600 during the
nine month period ended February 28, 1998, over the same period ended February
28, 1997, due primarily to management fees charged on increased activities
provided to various subsidiary companies and partnerships by the Company and
Crested.
Other than a reduction of construction costs in the amount of $649,200 and
increases in Commercial Operations of $88,600; Mineral Operations of $552,900
and General and Administrative expenses of $995,600, costs and expenses remained
relatively constant with those experienced during the nine month period of the
prior year. Mineral Operations and General and Administrative expenses increased
due primarily to additional staff to administer the development of the GMMV and
Plateau mining properties and the bonus given to the Company and Crested's
chairman and CEO. Commercial expenses increased du e to increased activity at
the commercial real estate operations in Southern Utah. Construction expenses
decreased due to limited activity in Four Nines Gold outside the Company owned
activities.
Equity in Loss of Affiliates increased by $273,700 over the prior year
during the nine months ended February 28, 1997; to a total of $612,200. This
increase consisted of losses of $19,100 and $254,600 from SMP and Yellow Stone
Fuels Corp., respectively.
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Operations for the nine month period ended February 28, 1998, resulted in a
loss of $1,751,300 or $0.26 per share as compared to a loss of $1,945,200 or
$0.29 per share for the same period from the previous year. The decrease in the
loss is primarily as a result of increased revenues for the sale of Uranium and
the rental of equipment which were offset by increases in mineral costs, and the
increased administrative costs associated with expanded ope rations. Operations
for the three months ended February 28, 1998, resulted in a loss of $1,576,500
or $0.23 per share as compared to a loss of $880,400 or $0.13 per share during
the quarter ended February 28, 1997. This increase in the loss for the quarter
is primarily associated with the bonus given the Company's chairman and CEO and
increased costs associated with mining operations and administrative costs.
Liquidity and Capital Resources at May 31, 1997
Although operations during the year ended May 31, 1996 were profitable, the
Company generated losses in fiscal 1997, 1995, 1994 and 1993, as a result of
holding costs and permitting activities in the mineral segment and gas
operations and from certain commercial operations. The Company is in the process
of developing and/or holding investments in gold and uranium properties that are
currently not generating any operating revenues, but for which the Company has
high expectations. These properties require expenditures for permitting,
development, care and maintenance, holding fees, corporate overhead and
administrative expenses, etc. In addition, legal expenses associated with the
litigation and arbitration surrounding the SMP Partnership and the inability of
the Company to utilize funds generated by that Partnership have compounded the
Company's operating and cash flow situation. Nevertheless, the Company believes
that it will meet its obligations in the coming year, as further discussed
below.
Working Capital Components. Cash used in operating activities was
$2,647,600 for the year ended May 31, 1997. Cash provided by investing and
financing activities during fiscal 1997 was $1,664,300 and $1,407,600,
respectively. For the year, these activities resulted in a net increase of
$424,300 in cash. Working capital increased during the fiscal year ended May 31,
1997 by $2,125,800 to working capital of $3,007,000 (from working capital of
$881,200 at May 31, 1996).
The increase in working capital of $2,125,800 is as a result of increases
in accounts receivable and assets held for resale, and a reduction of the line
of credit of $706,500, $481,900 and $499,000, respectively. These increases in
working capital were offset by an increase in accounts payable of $20,300.
Accounts receivable affiliates increased by $909,200 primarily as a
result of increased amounts due to USECC from GMMV, $812,200 and SGMC of
$112,000. These amounts were paid after May 31, 1997. At May 31, 1996, the
Company owed $176,000 on the line of credit of $1,000,000 that the Company and
Crested have. During fiscal 1997, this amount was paid off and at May 31,
1997 a
total of $1,000,000 remained available to the Company and Crested on the line of
credit. At May 31, 1996, the Company's subsidiary Four Nines Gold, Inc. also
owed $323,000 on its line of credit. This amount was paid off in fiscal 1997 and
was not renewed. The decrease in current portion of long-term receivables during
fiscal 1997 of $101,500 was as a result of long-term notes being signed by
certain employees and the impairment of a note receivable on certain real estate
in Gunnison, Colorado.
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Cash from financing activities, exercise of 180,000 stock warrants for
$900,000 and the exercise of 106,100 stock options for $370,300, the proceeds of
long-term debt of $554,400 and sale of SGMC stock of $1,106,700 resulted in
total cash provided from investing activities of $2,931,400. These funds were
used to purchase treasury shares, $235,600; retire lines of credit, $499,000;
and repay long-term debt, $789,200.
Cash generated from investing activities were principally from proceeds of
a distribution of SMP and a reduction in the Company's ownership of Sutter Gold
Mining Company. In November 1996, the Company and Crested received $4,367,000
from the SMP escrow accounts as partial satisfaction of the monetary damages
awarded by the Arbitration Panel. These funds were applied first to the amounts
due the Company and Crested for standby costs. This reduced the Company's
investment in SMP by $2,768,000. The balance was recorded as income of which the
Company recognized $1,003,800 on a consolidated basis. The other major reduction
in investments was as a result of the Company and Crested accepting a
$10,000,000 Contingent Stock Purchase Warrant (the "USECC Warrant") from Sutter
Gold Mining Company. The acceptance of the USECC Warrant reduced the investment
in SGMC by $4,755,300 of which $4,594,000 was recorded as an investment in a
contingent warrant.
Capital Requirements - General: The primary requirements for USE's working
capital during fiscal 1997 are expected to be the costs associated with
development activities of Plateau (see "Capital Requirements - Plateau"), care
and maintenance costs of SMP, payments of holding fees for mining claims,
purchase of uranium for delivery to utility customers of SMP, overhead expenses
of Energx and corporate general and administrative expenses, including costs
associated with continuing litigation and arbitration.
Capital Requirements - SGMC: SGMC's properties contain reserves of gold.
Preliminary estimates are that a 500 ton per day ("tpd") mine/mill operation
using a cyanide-flotation process, may require up to $10,000,000 to place the
proposed mine and mill into full operation.
During the first and second quarters of fiscal 1997, SGMC sold 424,000
shares of its common stock in a private placement. These shares were sold for
$3.00 per share. SGMC received $1,106,600 in net proceeds after deducting
commissions and offering costs.
During the fourth quarter of fiscal 1997, as a result of a planned equity
offering, the initial investors of SGMC agreed to a 1 for 2 reverse stock split,
exclusive of the 424,000 private placement shares discussed above. In addition
to the reduction of the shares owned by founders and insiders, the Company and
Crested agreed to have their holdings reduced from 870,469 common shares and
6,964,531 common shares to 172,258 common shares and 1,503,060 common shares,
respectively.
In consideration of this reduction in their common shares owned, the
Company and Crested accepted the USECC Warrant dated March 21, 1997, which
provides the Company and Crested the right to acquire for no additional
consideration common shares of SGMC's $.001 par value common stock having an
aggregate value of $10,000,000. The USECC Warrant is only exercisable to
the
extent proven and probable ore reserves, as defined in the USECC Warrant, in
excess of 300,000 ounces of gold are added to SGMC's reserves based on $25 per
ounce of proven reserves added to SGMC's
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reserves between 300,000 and 700,000 ounces. The number of shares issuable are
based on the greater of $4.07 per share for the fair market value of SGMC's
common stock (as defined). The USECC Warrant has a term of ten years extending
to March 21, 2007, and is exercisable partially or in total, semi-annually
beginning on June 30, 1997. SGMC has the right to satisfy the exercise of all or
any portion of the USECC Warrant with net cash flows, as defined, at $25 for
each new ounce of proven and probable ore in excess of 300,000 ounces. The USECC
Warrant is divided between the Company and Crested on a basis of 88.9% and
11.1%, respectively.
Pending a recovery in gold prices, SGMC has postponed seeking additional
equity financing to put its properties into production.
Capital Requirements - SMP: There are no current plans to mine the SMP
Crooks Gap properties during fiscal 1998, however, USE and Crested will continue
to preserve the ore bodies and develop concepts to reduce care and maintenance
costs, including driving a decline to reduce pumping costs (which also would
reduce future mining costs by reducing hoisting costs). Although funds are
available in SMP's bank account of approximately $15,600,000 as of May 31, 1997,
these funds are restricted and have not been made available to pay standby
costs.
Notwithstanding disputes between the SMP partners, USE and Crested have
delivered an agreed-upon portion of the uranium concentrates required to fill
contract delivery requirements on certain long-term U3O8 contracts since July 1,
1991. During 1997 all of the deliveries to fill the SMP contracts were made by
Nukem. It is uncertain what protocol with Nukem will be in place for 1998 and
thereafter. If the SMP partners are unable to agree on how to separately effect
contract performance for the various SMP customers, resulting delivery delays
and/or incomplete deliveries could adversely affect the contracts, and therefore
USE. Further, the Company and Crested are awaiting Nukem's response to the
Federal Courts confirmation of the Arbitration panel's Award. Nukem has until
September 12, 1997 to file a notice of appeal of the Second Amended Judgment
with the Tenth Circuit Court of Appeals. No assurance can be given on the
outcome of a potential appeal.
Capital Requirements - GMMV: Operations of GMMV are not requiring USE's
capital resources. On June 23, 1997, USE and USECC signed an Acquisition
Agreement with Kennecott for the right to acquire Kennecott's interest in the
Green Mountain Mining Venture ("GMMV") for $15,000,000 and other consideration.
Kennecott paid USE and USECC a $4,000,000 bonus on signing, and committed to
provide the GMMV up to $16,000,000 for payment of reimbursable costs incurred by
USECC in developing the proposed underground Jackpot Uranium Mine for production
and in changing the status of the Sweetwater Mill from standby to operational.
The $16,000,000 loan being provided by Kennecott to the GMMV was advanced
to Kennecott by an affiliate, Kennecott Energy Company ("KEC") under a secured
recourse Promissory Note (the "Note") bearing interest at 10.5% per annum
starting April 1999 until paid in full. The Note is payable quarterly out of 20%
of cash flow from the GMMV properties, but not more than 50% of the earnings for
such quarter from the GMMV operations, before interest, income tax, depreciation
and amortization. However, the Note is payable (i) in full on June 23, 2010
regardless of cash flow and earnings of the GMMV, or (ii) sooner (on December
31, 2005) if an economically viable uranium mine has not been placed into
production by such date. The Note is secured by a first mortgage lien against
Kennecott's
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50% interest in the GMMV pursuant to a Mortgage, Security Agreement, Financing
Statement and Assignment of Proceeds, Rents and Leases granted by Kennecott to
KEC (the "Mortgage"). USE and USECC will assume the Note, and the assets of the
GMMV will be subject to the Mortgage, at closing of the acquisition.
Pursuant to the Mineral Lease and the Mill Contract of the Acquisition
Agreement, USECC is to develop the proposed Jackpot Mine and nearby Big Eagle
Mine, and work with Kennecott in preparing the Sweetwater Mill for renewed
operations. Such work will be funded from the $16,000,000 loan being provided to
the GMMV by Kennecott. Kennecott will be entitled to a credit against
Kennecott's original $50,000,000 commitment to fund the GMMV, in the amount of
two dollars of credit for each one dollar of such funds advanced under the
$16,000,000 loan to be provided by Kennecott to the GMMV, plus the $4,000,000
paid to USE and USECC on signing of the Acquisition Agreement. It is anticipated
that such credits will satisfy the balance of Kennecott's initial funding
commitment to the GMMV.
Closing of the Acquisition Agreement is subject to USE and USECC satisfying
several conditions, including: (i) the acquiring entity (which may be USE,
USECC, or an entity formed by USE and USECC to acquire Kennecott's interest in
the GMMV) must have a market capitalization of at least $200,000,000; (ii) the
parties to the Acquisition Agreement must have received all authorizations,
consents, permits and approvals of government agencies required to transfer
Kennecott's interest in the GMMV to the acquiring entity; (iii) USE and USECC
shall have replaced, or caused the replacement of, approximately $25,000,000 of
reclamation bonds, in addition to other guarantees, indemnification and
suretyship agreements posted by Kennecott on behalf of the GMMV; and (iv) USE
and USECC, or the acquiring entity, must pay $15,000,000 cash to Kennecott at
closing and assume all obligations and liabilities of Kennecott with respect to
the GMMV (including repayment of the $16,000,000 loan and the Mortgage) from and
after the closing. Under very limited circumstances, the scheduled closing date
may be postponed to another date not later than October 30, 1998.
If the Acquisition Agreement is not closed by December 1, 1997, then USE
and USECC (or an entity formed by them to acquire the GMMV interest owned by
Kennecott) are to provide to Kennecott a commitment letter from a recognized
national investment banking firm to complete an underwritten public offering of
the securities of USE (or the entity formed to acquire Kennecott's interest), in
amount sufficient to close the Acquisition Agreement transactions. Such amount
is estimated by USE to be approximately $40,000,000 (for the $15,000,000 closing
cash purchase price to Kennecott, plus $25,000,000 to assume or cause the
replacement of reclamation bonds, guarantees, indemnification agreements and
suretyship agreements related to the GMMV properties and the Sweetwater Mill).
Alternatively, USE and USECC (or the acquiring entity) must provide evidence to
Kennecott of a commitment letter from a bank, other financial institution or
industry entity to provide private or joint venture financing in such
approximate amount. Failure to provide evidence of such financial commitment by
December 1, 1997 would have entitled Kennecott to terminate the Acquisition
Agreement, the Mineral Lease and the Mill Contract.
Subject to providing evidence of adequate financial resources to close the
Acquisition Agreement with funds from a public financing or otherwise, the
$4,000,000 signing bonus paid by Kennecott is nonrefundable.
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If the Acquisition Agreement is not closed, USE and USECC, and Kennecott,
shall continue to own their respective 50% interests in the GMMV, and
Kennecott's obligation to repay the $16,000,000 loaned by KEC shall remain
Kennecott's obligation, without any adverse effect on the 50% interest in GMMV
held by USE and USECC. However, the Jackpot Mine development work and Sweetwater
Mill upgrade work funded by the $16,000,000 advance, will have benefitted all
parties to the GMMV.
Capital Requirements - Plateau: On August 11, 1993, USE purchased all the
outstanding shares of Plateau Resources Limited ("Plateau"). Plateau owns
various real estate developments in and around Ticaboo, Utah and the Shootaring
Uranium Mill. Although Crested has no ownership in Plateau, the Directors of USE
and Crested have agreed to divide equally one-half of the obligations incurred
in excess of the total $14.2 million which was held by Plateau at the time of
the USE acquisition. Management of USE and Crested are currently in the process
of having the Shootaring Mill license changed to operational. At such time as
the mill is licensed to operate, significant amounts of capital will be required
to place the mill and mines into operation. It is expected that these funds will
either be provided by cash received as a result of the SMP arbitration, equity
financing on the Plateau U3O8 assets or a joint venture partner.
Capital Requirements - Energx: Another requirement of USE's and Crested's
working capital is the continued funding of Energx overhead expenses. Energx
held several gas leases and participated in one gas venture (on the Fort Peck
Indian reservation in Montana) with NuGas, a Canadian firm; the gas venture
required NuGas to fund the drilling of the first eight wells. The eight gas
wells were drilled and no economic production of gas was found. Energx does not
currently have any plans for future exploration or development drilling.
Capital Requirements - Yellow Stone Fuels Corp. ("YSFC"): In June 1996, the
Company and Crested assisted YSFC in organizing and funding certain
administrative costs. The Company and USE each own 14% of YSFC. The president
and vice president of YSFC are the son and son-in-law, respectively, of
Company's Chairman. On May 15, 1997, the Company and Crested signed a $400,000
convertible promissory note with YSFC which bears interest at 10% and is due
December 31, 1998. The debt is repayable at YSFC's option in cash or its common
stock.
Long-Term Debt and Other Obligations: Debt at May 31, 1997 was $264,400.
This debt consists of minor financings of equipment and prepaids.
Reclamation Costs. Prior to fiscal 1996, USE and Crested assumed the
reclamation obligations, environmental liabilities and contingent liabilities
for employee injuries, from mining the Crooks Gap and other properties in the
Sheep and Green Mountain Mining Districts. The reclamation obligations, which
are established by governmental regulators, were most recently set at
$1,451,800.
To assure the reclamation work will be performed, regulatory agencies
require posting of a bond or other security. USE and Crested satisfied this
requirement with respect to SMP properties by mortgaging their executive office
building in Riverton, Wyoming. USE and Crested have also posted a cash bond in
the amount of $176,000 for this reclamation bond. USE and Crested are
negotiating with government agencies to decrease the $176,000 cash bond and
either forego the additional collateral or take other real estate and
improvements with equal value. A portion of the funds for the reclamation
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of SMP's properties was to have been provided by SMP, which agreed to pay up to
$.50 per pound of uranium produced from its properties to Crested and USE for
reclamation work. The status of this commitment could be impacted by the
ultimate resolution of the litigation with SMP.
Reclamation obligations on the contiguous Big Eagle properties and the
Sweetwater Mill, estimated at approximately $23,620,000, have been assumed by
the GMMV venturers, and secured by a bank letter of credit provided by
Kennecott. The reclamation and environmental costs associated with the
Sweetwater Mill will not commence prior to conclusion of mining activities on
Green Mountain. As uranium is processed through the Mill, a reclamation reserve
will be funded on a per unit of production basis. Up to $8,000,000 (in 1990
dollars) in any reclamation costs which may be incurred prior to commencement of
production or 2001 will be paid for by UNOCAL.
Reclamation obligations of Plateau are covered by a $6,883,500 cash bond at
May 31, 1997 to the U.S. Nuclear Regulatory Commission and a $1,622,800 cash
deposit as of May 31, 1997 for the resolution of any environmental or nuclear
claims.
Reclamation work on any of the above properties need not be fully completed
until a decision is made to abandon the properties, or as otherwise required by
regulatory agencies. Reclamation and environmental costs associated with any of
these properties are not expected to require Crested funding in fiscal 1996,
because such costs are not anticipated to be incurred for many years.
Capital Resources: The primary source of USE capital resources for fiscal
1998 will be cash on hand, equity financing for affiliated companies, the
resolution of the arbitration/litigation with Nukem and commercial debt.
Additionally, USE and Crested will continue to offer for sale various non-core
assets such as lots and homes in Ticaboo, real estate holdings in Wyoming,
Colorado and Utah and mineral interests. Fees from oil production (Ft. Peck
Lustre Field, Montana), rentals of real estate holdings and equipment, aircraft
chartering and aviation fuel sales, also will provide cash.
Additional sources of capital will be needed to develop and build the mine
and mill complex for the Lincoln Project, for which capital costs SGMC presently
is seeking equity financing. There is no certainty as to the outcome of these
efforts. Continued funding of such costs could cause USE and Crested to incur
short term working capital deficiencies and increase the Company's working
capital deficit.
Funding of SMP care and maintenance costs may require additional capital,
depending on the outcome of the SMP arbitration/litigation. Although management
is of the opinion that the SMP arbitration/litigation will be resolved in favor
of USE and Crested during fiscal 1998, providing funds for various projects,
this outcome is not assured. In any event, further delays in resolution of the
arbitration/litigation are expected, and may exacerbate short term liquidity
requirements.
USE Crested believes available working capital excluding the debt to
affiliates, operating revenues and anticipated financing will continue to be
adequate to fund working capital requirements. However, USE may require
additional sources of funding to continue the development of and investment in
its various mineral ventures, as stated above.
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Although USE and Crested currently are not in production on any mineral
properties, development work continues on several of their major investments.
USE and Crested are not using hazardous substances and known pollutants to any
great degree in these activities. Consequently, recurring costs for managing
hazardous substances, and capital expenditures for monitoring hazardous
substances or pollutants have not been significant. Likewise, USE and Crested do
not have properties which require current remediation. USE and Crested are also
not aware of any claims for personal injury or property damages that need to be
accrued or funded.
The tax years through May 31, 1991 are closed after audit by the IRS. USE
has filed a request for an appeal hearing on an IRS agent's findings for the
years ended May 31, 1993 and 1994. Although the findings of the IRS audit for
1993 and 1994 will not cause any additional tax to become due to the Government,
the findings of the audit could affect the tax net operating loss of the
Company. Management of USE feels confident that they will prevail on a majority
of the issues, but no assurance of the outcome of the appeal can be given.
Results of Operations
Fiscal 1997 Compared to Fiscal 1996
Revenues for the twelve months ended May 31, 1997 totaled $5,790,200 as
compared to revenues at May 31, 1996 of $9,632,200. This decrease in revenues of
$3,842,000 is primarily as a result of no revenues being recognized from mineral
sales in fiscal 1997 (decrease of $3,116,700). During the prior year, USE and
Crested made certain deliveries of U3O8 for SMP. Other decreases in revenues
were oil sales, $45,500; sales of assets, $312,800; and construction revenues
from USE's subsidiary FNG, $2,755,900. These decreases in revenues were offset
by increased commercial sales, $780,300; advance royalties from Climax,
$207,300; partial distribution of SMP funds, $1,003,800; and increased
management fees and other revenues, $323,600.
With the exception of cost of minerals sold, construction costs and
commercial operations, costs and expenses remained the same as they had been in
1996. Cost of minerals sold declined by $2,766,700 as a result of Crested and
USE not delivering any U3O8 under the SMP contracts during fiscal 1997.
Construction costs declined by $2,325,200 as a result of USE's subsidiary FNG
not being able to secure construction contracts. Currently, FNG is using its
equipment and employees on the construction of earth structures and roads for
the GMMV. It is not known if FNG will be able to obtain contracts in the future.
During fiscal 1997, USE also recognized a provision for doubtful accounts of
$614,200. This is as a result of a third party defaulting on land that USE and
Crested sold during a prior period. USE also recognized an increase in the
abandonment of mineral leases of $897,100. The total expense of $1,225,800 for
mineral property abandonment was as a result of Crested abandoning a mineral
property having a book value of $71,500 and SGMC abandoning properties it no
longer needed with a book value of $1,154,300.
General and administrative expenses increased only slightly $238,600 due to
expansion of operations. Increases in general and administrative expenses were
reduced by overhead and direct charges to GMMV, SMP and SGMC.
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Equity losses recognized by USE increased by $272,300. Operations resulted
in a net loss of $3,724,500 or $0.55 per share in 1997 as compared to a net
profit of $270,700 or $0.04 per share in 1996.
Fiscal 1996 Compared to Fiscal 1995
Revenues increased by $5,031,600 to $9,632,200 for the year ended May 31,
1996. This increase was primarily due to increases of $3,116,700 in mineral
sales and option (primarily as a result of U3O8 deliveries made to two of the
utilities who have contracts with SMP) and $2,491,100 in construction contract
revenues. Due to the litigation/arbitration between USE, Crested and Nukem/CRIC,
virtually all SMP deliveries have been in dispute. Certain deliveries are made
100% by either partner, while others are delivered on agreed to percentages. USE
and Crested have turned over all profits they have made during fiscal 1996 on
these deliveries to SMP. Due to the difficulties between USE, Crested and
Nukem/CRIC, no deliveries were made by Crested or USE during the year ended May
31, 1995. Increased revenues from construction contracts is as a result of Four
Nines gold securing larger contracts than it had been able to obtain in prior
years.
The gain in mineral sales and construction contract revenues during fiscal
1996 was offset by a reduction of $930,200 in gain on sale of assets revenue.
This decrease was a result of large gains recognized on the sale of real estate
in Colorado in fiscal 1995. No comparable sales took place during fiscal 1996.
The only sale of real estate during fiscal 1996 was the sale of USE's and
Crested's mobile home park on which a gain of $252,600 was recognized.
Expenses from mineral operations and minerals sold increased by $1,918,000
to $3,572,300. This increase is directly as a result of the cost of U3O8 sold
during fiscal 1996 as no U3O8 was sold during fiscal 1995 due to disputes
between the SMP partners relating to contract deliveries. This increase was
offset by a reduction of mineral operation expense associated with mining
properties.
General and administrative costs and expenses increased by $664,100 to
$2,524,700 primarily as a result of costs associated with the SMP
arbitration/litigation and increased mineral and construction activities. The
increased costs are related to amounts paid to lawyers, expert witnesses and the
Arbitrators. Construction costs and expenses increased $2,039,500 to $3,077,800
during fiscal 1996. This increase is as a result of increased construction
operations and the size of contracts performed. Commercial operations expenses
increased $304,700 during fiscal 1996 over fiscal 1995. This increase is related
to increased commercial operations, primarily Ticaboo. During fiscal 1996,
Energx abandoned $328,700 in shallow natural gas leases, due to continued
depressed prices for natural gas.
As a result of selling 100% of the common stock of Brunton, the Company has
reflected the operations of Brunton as discontinued in the accompanying
financial statements. Revenues for the discontinued operations for the years
ended May 31, 1996, 1995 and 1994 were $2,870,800, $4,553,500 and $4,118,800,
respectively. The Company recognized a gain on the disposal of Brunton of
$2,295,700 net of income taxes approximately $50,000.
Equity losses in affiliates have been recorded using the equity method.
Please refer to Notes A and E to the consolidated financial statements. After
accounting for equity losses of $418,500 and $442,300 for fiscal 1996 and 1995,
respectively, operations resulted in a gain of $270,700, $0.04 per
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share; and a loss of $2,070,600, $0.42 per share, for the fiscal years ended May
31, 1996 and 1995, respectively.
Effects of Changes in Prices
Mining operations and the acquisition, development and sale of mineral
properties are significantly affected by changes in commodity prices. As prices
for a particular mineral increase, prices for prospects for that mineral also
increase, making acquisitions of such properties costly, and sales advantageous.
Conversely, a price decline facilitates acquisitions of properties containing
that mineral, but makes sales of such properties more difficult. Operational
impacts of changes in mineral commodity prices are common in the mining
industry.
Uranium and Gold. Changes in the prices of uranium and gold affect USE to
the greatest extent. When uranium prices were relatively high in fiscal 1988,
USE and Crested acquired the Crooks Gap properties, and thereafter put the
properties into production. When uranium prices fell sharply during fiscal
1989-1991, USECC suspended mining operations for SMP, because uranium could be
purchased at prices less than the costs of producing uranium. Uranium production
in the United States reportedly fell by 25 percent to 33 percent in 1990, due to
the lowest prices for uranium since the market developed in the 1960s. However,
these low prices created opportunities for the acquisition of the Sweetwater
Mill and the Shootaring Mill.
Changes in uranium prices directly affect the profitability of SMP's
uranium supply agreements with utilities. Certain of those agreements become
advantageous to USE when the spot market price for uranium falls significantly
below the price which a utility has agreed to pay. Some of the supply agreements
of SMP were acquired before the fall of spot market prices during fiscal
1989-1991. Those fixed-price contracts, which have contract prices exceeding
current spot market rates, are currently advantageous, as the uranium to fill
them can be readily obtained at favorable prices. Although such contracts
benefit SMP and USE in a falling market, a corresponding adverse impact would
not be anticipated in the event of substantially increased prices. SMP would
produce uranium from its Crooks Gap properties to fill those contracts, in the
event of a sustained increase in the spot market price above the contract
prices.
USE believes SGMC's Lincoln Mine will be profitable with gold prices over
$290 per ounce. The price of gold remained relatively stable over the 1997
fiscal year between $320 and $390 per ounce. However, by February, 1998 the
price had dropped to approximately $296 per ounce.
Molybdenum and Oil. Changes in prices of molybdenum and petroleum are not
expected to materially affect USE with respect to either its molybdenum advance
royalties or its fees associated with oil production. A significant and
sustained increase in demand for molybdenum would be required for the
development Mt. Emmons properties by Cyprus Amax since Cyprus Amax has other
producing mines.
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DIRECTORS AND EXECUTIVE OFFICERS
Business Experience and Other Directorships of Directors.
Keith G. Larsen has been principally employed by the Company and Crested
for more than the past five years as uranium fuels marketing director. On
November 25, 1997 he was appointed as a director of the Company and elected
President, replacing John L. Larsen as President. John L. Larsen remains as
Chairman of the Board and Chief Executive Officer.
John L Larsen has been principally employed as the Chief Executive Officer
and Chairman of the Board of Directors of the Company and Crested Corp. for more
than the past five years. He is also a director of the Company's subsidiary,
Ruby Mining Company ("Ruby"). Crested and Ruby have registered equity securities
under the Securities Exchange Act of 1934 (the "Exchange Act"). Mr. Larsen is
Chief Executive Officer and Chairman of the board of directors of Plateau
Resources, Limited and of Sutter Gold Mining Company, and he is a director of
Yellow Stone Fuels Corp.
Harold F. Herron has been the Company's Vice-President since January 1989.
From 1976, Mr. Herron has been an employee of Brunton, a manufacturer and/or
marketer of compasses, binoculars and knives. Brunton was a wholly owned Company
subsidiary until Brunton was sold in February 1996. Initially, he was Brunton's
sales manager, and since 1987 he has been its President. Mr. Herron is a
director of Ruby and Northwest Gold, Inc. ("NWG"), which have registered equity
securities under the Exchange Act. He is also an officer and director of
Plateau. Mr. Herron received an M.B.A. degree from the University of Wyoming
after receiving a B.S. degree in Business Administration from the University of
Nebraska at Omaha.
David W. Brenman has been a director of the Company since January 1989.
Since September 1988, Mr. Brenman has been a self-employed financial consultant.
In that capacity, Mr. Brenman has assisted the Company and Crested in
negotiating certain financing arrangements. From February 1987 through September
1988, Mr. Brenman was a vice-president of project financing for Lloyd's
International Corp., a wholly-owned subsidiary of Lloyd's Bank, PLC. From
October 1984 through February 1987, Mr. Brenman was President, and continues to
be a director of Cogenco International, Inc., a company engaged in the electric
cogeneration industry, which has registered equity securities under the Exchange
Act. Mr. Brenman has an L.L.M. degree in taxation from New York University and a
J.D. degree from the University of Denver.
Don C. Anderson has been a Company director since May 1990. From January
1990 until mid- fiscal 1993, Mr. Anderson was the Manager of the Geology
Department for the Company. Mr. Anderson was Manager of Exploration and
Development for Pathfinder Mines Corporation, a major domestic uranium mining
and milling corporation, from 1976 until his retirement in 1988. Previously, he
was Mine Manager for Pathfinder's predecessor, Utah International, Inc., from
1965 to 1976. He received a B. S. degree in geology from Brigham Young
University.
Nick Bebout has been director and President of NUCOR, Inc. ("NUCOR"), a
privately-held corporation that provides exploration and development drilling
services to the mineral and oil and gas industries, since 1987. Prior to that
time, Mr. Bebout was Vice President of NUCOR from 1984. Mr.
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<PAGE>
Bebout is also an officer, director and owner of other privately-held entities
involved in the resources industry.
H. Russell Fraser has been chairman of the board and chief executive
officer of Fitch Investors Services, L.P. for more than the past five years
until he sold his interest in Fitch in November 1997. Fitch Investors Services,
L.P., New York, New York, is a nationwide stock and bond rating and information
distribution company. From 1980-1989, Mr. Fraser served as president and chief
executive officer of AMBAC, the oldest municipal bond issuer in the United
States. Under his direction, AMBAC's assets grew to more than $1 billion at
year-end 1988 from $35 million at the beginning of 1980, while statutory net
income after taxes increased to $57 million in 1988 from a loss in 1979.
Before joining AMBAC, Mr. Fraser was senior vice president and director of
fixed-income research at Paine Webber, Inc. While a member of the board of
directors at Paine Webber, Mr. Fraser participated in both the corporate and
public finance departments and headed Paine Webber's trading and sales for all
corporate bond products. Previously, he managed corporate ratings at Standard &
Poor's, supervising research analysis of corporate bonds, preferred stock, and
commercial paper. During his tenure at S&P he started commercial paper ratings
'A-1' through 'A-3', initiating the plus and minus qualifiers and rating the
first two financial guaranty companies, AMBAC and MBIA. Mr. Fraser holds a B.S.
in finance and economics from the University of Arizona. He is a member of the
Municipal Analysts Group of New York and founder of the Fixed Income Analysts
Society.
Advisory Board
In fiscal 1998, the Board of Directors established an Advisory Board
comprised of individuals with experience in the areas of business, financial
services, national elected office, and other areas. The members of the Advisory
Board meet quarterly to review topics of interest or concern to the Board of
Directors, and report to the Board of Directors the findings and recommendations
of the Advisory Board. The Advisory Board does not include any directors or
officers of the Company, and none of the findings or recommendations of the
Advisory board will be binding upon the Company. The first appointment to the
Advisory Board is the Honorable Alan K. Simpson, former U.S. Senator for
Wyoming.
Information Concerning Executive Officers Who Are Not Directors
The following information is provided pursuant to Item 401 of Reg. S-B,
regarding the executive officers of the Company who are not also directors.
Max T. Evans, age 73, has been Secretary for USE and President of
Crested for more than the past five years. Mr. Evans had been a director of USE
for more than the past five years, prior to April 17, 1997. He is also an
officer and director of Plateau. He serves at the will of each board of
directors. There are no understandings between Mr. Evans and any other person
pursuant to which he was named as an officer. He has no family relationships
with any of the other executive officers or directors of USE or Crested. During
the past five years, Mr. Evans has not been involved in any Reg.
S-B Item 401(d) proceeding.
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<PAGE>
Daniel P. Svilar, age 68 has been General Counsel for USE and Crested for
more than the past five years. He also has served as Secretary and a director of
Crested, Assistant Secretary of USE, and is an officer of Plateau and SGMC. His
positions of General Counsel to, and as officers of the companies, are at the
will of each board of directors. There are no understandings between Mr. Svilar
and any other person pursuant to which he was named as officer or General
Counsel. He has no family relationships with any of the other executive officers
or directors of USE or Crested, except his nephew Nick Bebout is a USE director.
During the past five years, Mr. Svilar has not been involved in any Reg. S-B
Item 401(d) proceeding.
Robert Scott Lorimer, age 46, has been Treasurer, Chief Financial Officer,
Controller and Chief Accounting Officer for USE and Crested for more than the
past five years. Mr. Lorimer is also an officer of Plateau, SGMC and Yellow
Stone Fuels Corp. Mr. Lorimer is also chief financial officer and a director of
the Brunton Company. He serves at the will of the Boards of Directors. There are
no understandings between Mr. Lorimer and any other person, pursuant to which he
was named an officer, and he has no family relationship with any of the other
executive officers or directors of USE or Crested. During the past five years,
he has not been involved in any Reg. S-B Item 401(d) listed proceeding.
Family Relationships.
Harold F. Herron, a director and Vice-President of USE, is the son-in-law
of John L. Larsen, a principal shareholder, Chairman and CEO of USE. Keith G.
Larsen, a director and President of USE, is a son of John L. Larsen. Mark
Larsen, President of Yellow Stone Fuels Corp., is a son of John L. Larsen. Nick
Bebout, a director, is a nephew of Daniel P. Svilar, a principal shareholder and
General Counsel. There are no other family relationships among the executive
officers or directors of the Company. See also "Certain Transactions - Other
Information."
Executive Compensation
Under a Management Agreement dated August 1, 1981, the Company and Crested
share certain general and administrative expenses, including compensation of the
officers and directors of the companies (but excluding directors' fees) which
have been paid through the USECC Joint Venture ("USECC"). Substantially all the
work efforts of the officers of the Company and Crested are devoted to the
business of both the Company and Crested.
All USECC personnel are Company employees, in order to utilize the
Company's ESOP as an employee benefit mechanism. The Company charges USECC for
the direct and indirect costs of its employees for time spent on USECC matters,
and USECC charges one-half of that amount to each of Crested and the Company.
The following table sets forth the compensation paid to the USE Chief
Executive Officer, and those of the four most highly compensated USE executive
officers who were paid more than $100,000 cash in any of the three fiscal years
ended May 31, 1997. The table includes compensation paid such persons by Crested
for 1995, 1996 and 1997, and Brunton for 1995 and 1996 for such persons'
services to such subsidiaries.
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<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
--------------------------------------
Annual Compensation Awards Payouts
-----------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Name Annual Restricted All Other
and Compen- Stock LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) SARs(#) ($) ($)(4)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John L. Larsen 1997 $131,200 $4,000 -- $ 98,158(1) -0- -- $13,500
CEO and 1996 148,600 -0- -- -- -0- -- 15,566
President 1995 144,023 2,751 -- 9,000(2) -0- -- 13,361
Daniel P. Svilar 1997 $109,700 $3,400 -- $81,454(1) -0- -- $11,300
General Counsel 1996 124,153 -0- -- -- -0- -- 14,009
and Assistant 1995 112,615 2,076 -- 8,100(2) -0- -- 11,008
Secretary
Harold F. Herron 1997 $31,900 $ 990 -- $120,858(3) -0- -- $ 3,300
Vice President 1996 113,600 -0- -- -- -0- -- 4,037
1995 117,238 2,033 -- -- -0- -- 6,626
R. Scott Lorimer 1997 $100,300 $3,200 -- $ 54,299(1) -0- -- $10,300
Treasurer 1996 110,100 -0- -- -- -0- -- 13,749
and CFO 1995 112,403 2,098 -- 5,681(2) -0- -- 10,989
</TABLE>
(1) Includes bonus shares of USE common stock equal to 40% of original
bonus shares issued FY 1990, multiplied by $10.875, the closing bid price on
issue dates. Also includes shares issued under 1996 Stock Award Program
multiplied by $10.875, the closing bid price on the issue dates. These shares
are subject to forfeiture on termination of employment, except for retirement,
death or disability.
(2) Includes bonus shares equal to 20% of original bonus shares issued FY
1990, multiplied by $3.75 in 1995, the closing bid price on issue dates. These
shares are subject to forfeiture on termination of employment, except for
retirement, death or disability.
(3) Includes bonus shares equal to 100% of original bonus shares issued FY
1990, multiplied by $10.875, the closing bid price on issue date. Also includes
shares issued under the 1996 Stock Award Program multiplied by $10.875, the
closing bid price on the issue date. These shares are subject to forfeiture on
termination of employment, except for retirement, death or disability.
(4) Dollar values for ESOP contributions and 401K matching contributions.
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Executive Compensation Plans and Employment Agreements
To provide an incentive to Mr. Larsen to develop the GMMV into a producing
operation as soon as possible, in fiscal 1993 the USE Board adopted a long-term
incentive arrangement under which Mr. Larsen is to be paid a non-recurring
$1,000,000 cash bonus, provided that the Nuexco Exchange Value of uranium oxide
concentrates has been maintained at $25.00 per pound for six consecutive months,
and provided further that USE has received cumulative cash distributions of at
least $10,000,000 from GMMV as a producing property. In December, 1997, Mr.
Larsen agreed to relinquish all of his rights under this bonus arrangement
related to GMMV..
In December, 1997 the Company paid Mr. Larsen a bonus of $615,000 in
recognition of his service to the Company and work in acquiring Kennecott as a
joint venture partner in 1990 for $15,000,000 in cash plus a $50,000,000
commitment to USECC to develop the Green Mountain properties; the negotiations
of Mr. Larsen in acquiring Plateau Resources Ltd. with the Shootaring Mill and
the most recent negotiations for USECC to enter into the Acquisition Agreement
to acquire Kennecott's interest in the GMMV resulting in the signing bonus of
$4,000,000 to the Company and Crested. The Companies and Mr. Larsen agreed that
the bonus is further in full settlement of the $1,000,000 bonus to Mr. Larsen
authorized by the board of directors in 1993 which was conditioned on the spot
price of uranium concentrates and cash distributions from the GMMV to the
Company. The bonus was recommended and approved by the Compensation Committee,
taking into account pay levels at comparable corporations in the mining
industry.
The Company has adopted a plan to pay the estates of Messrs. Larsen, Evans
and Svilar amounts equivalent to the salaries they are receiving at the time of
their death, for a period of one year after death, and reduced amounts for up to
five years thereafter. The amounts to be paid in such subsequent years have not
yet been established, but would be established by the Boards of the Company and
Crested.
Mr. Svilar has an employment agreement with the Company and Crested, which
provides for an annual salary in excess of $100,000, with the condition that Mr.
Svilar pay an unspecified amount of expenses incurred by him on behalf of the
Company and its affiliates. In the event Mr. Svilar's employment is
involuntarily terminated, he is to receive an amount equal to the salary he was
being paid at termination, for a two year period. If he should voluntarily
terminate his employment, the Company and Crested will pay him that salary for
nine months thereafter. The foregoing is in addition to Mr. Svilar's Executive
Severance and Non-Compete Agreement with the Company (see below).
In fiscal 1992, the Company signed Executive Severance and Non-Compete
Agreements with Messrs. Larsen, Evans, Svilar and Lorimer, providing for payment
to such person upon termination of his employment with the Company, occurring
within three years after a change in control of the Company, of an amount equal
to (i) severance pay in an amount equal to three times the average annual
compensation over the prior five taxable years ending before change in control,
(ii) legal fees and expenses incurred by such persons as a result of
termination, and (iii) the difference between market value of securities
issuable on exercise of vested options to purchase securities in USE, and the
options' exercise price. These Agreements also provide that for the three years
following termination, the terminated individual will not compete with USE in
most of the western United States in regards to exploration and development
activities for uranium, molybdenum, silver or gold. For such non-compete
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<PAGE>
covenant, such person will be paid monthly over a three year period an agreed
amount for the value of such covenants. These Agreements are intended to benefit
the Company's shareholders, by enabling such persons to negotiate with a hostile
takeover offeror and assist the Board concerning the fairness of a takeover,
without the distraction of possible tenure insecurity following a change in
control. As of this Proxy Statement date, the Company is unaware of any proposed
hostile takeover.
The Company and Crested provide all of their employees with certain forms
of insurance coverage, including life and health insurance. The health insurance
plan does not discriminate in favor of executive employees; life insurance of
$50,000 is provided to each member of upper management (which includes all
persons in the compensation table), $25,000 of such coverage is provided to
middle- management employees, and $15,000 of such coverage is provided to other
employees.
Employee Stock Ownership Plan ("ESOP"). An ESOP has been adopted to
encourage ownership of the Common Stock by employees, and to provide a source of
retirement income to them. The ESOP is a combination stock bonus plan and money
purchase pension plan. It is expected that the ESOP will continue to invest
primarily in the Common Stock. Messrs. Larsen, Herron and Evans are the trustees
of the ESOP.
Contributions to the stock bonus plan portion of the ESOP are discretionary
and are limited to a maximum of 15% of the covered employees' compensation for
each year ended May 31. Contributions to the money purchase portion of the ESOP
are mandatory (fixed at ten percent of the compensation of covered employees for
each year), are not dependent upon profits or the presence of accumulated
earnings, and may be made in cash or shares of Company's Common Stock.
The Company made a contribution of 24,069 shares to the ESOP for fiscal
1997, all of which were contributed under the money purchase pension plan. At
the time the shares were contributed, the market price was approximately $8.87
per share, for a total contribution with a market value of $213,492, (which has
been funded by the Company). Crested and the Company are each responsible for
one-half of that amount (i.e., $106,746) and Crested currently owes its one-half
to the Company.
Employees are eligible to participate in the ESOP on the first day of the
plan year (June 1) following completion of one year of service in which at least
1,000 hours are credited. Each employee's participation in the ESOP continues
until the ESOP's anniversary date coinciding with or next following termination
of service by reason of retirement, disability or death. In these cases, the
participant will share in the allocation of USE's contributions for the ESOP
year in which the retirement, death or disability occurs, and will have a
fully-vested interest in allocations to the participant's account.
An employee's participation in the ESOP does not cease upon termination of
employment. If the employment of a participant in the ESOP is terminated for
reasons other than disability, death, or retirement (unless the employee
receives a lump sum distribution upon the termination of employment),
participation continues following the termination, until five consecutive
one-year breaks in service have been incurred. An employee is deemed to have
incurred a one-year break in service during any year in which 500 or fewer hours
of service are completed.
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Employee interests in the ESOP are earned pursuant to a seven year vesting
schedule. Upon completion of three years of service for the Company, the
employee is vested as to 20% of the employee's account in the ESOP, and
thereafter at the rate of 20% per year. Any portion of an employee's ESOP
account which is not vested is forfeited upon termination of employment for any
reason, other than retirement, disability, or death.
The 24,069 shares issued to the ESOP for fiscal 1997 included 1,524 shares
allocated to John L. Larsen's account, 886 shares allocated to Max T. Evans'
account, 371 shares allocated to Harold F. Herron's account, 1,274 shares
allocated to Daniel P. Svilar's account, and 1,166 shares allocated to R. Scott
Lorimer's account, for a total of 5,221 shares allocated to accounts for all
executive officers as a group (five persons). Shares forfeited by terminated
employees who were not fully vested were reallocated to plan participants and
included 323, 188, 78, 271 and 247 shares to the accounts of Messrs. Larsen,
Evans, Herron, Svilar and Lorimer, respectively. The accounts of the executive
officers are fully vested, as they have all been employed by the Company and
USECC for more than the past seven years. Allocations of shares for fiscal 1998
have not been made with respect to any participant in the ESOP.
The maximum loan outstanding during fiscal 1997 under a loan arrangement
between the Company and the ESOP, was $1,014,300 at May 31, 1997 for loans made
in fiscal 1992 and 1991. Interest owed by the ESOP was not booked by the
Company. Crested pays one-half of the amounts contributed to the ESOP by USE.
Because the loans are expected to be repaid by contributions to the ESOP,
Crested may be considered to indirectly owe one-half of the loan amounts to USE.
The loan was reduced by $183,785 plus interest of $168,574.84 through the
contribution of shares by the ESOP to the ESOP in 1996. There was no similar
reduction, however, for fiscal 1997.
Stock Option Plan. The Company has an incentive stock option plan ("ISOP"),
reserving an aggregate of 975,000 shares of Common Stock for issuance upon
exercise of options granted thereunder. Awards under the plan are made by a
committee of two or more persons selected by the Board (presently Messrs.
Herron, Bebout, Brenman and Fraser). The committee establishes the exercise
periods and exercise prices for options granted under the plan. The Board
ultimately ratifies the actions of the committee. Total grants to officers and
directors as a group may not exceed 275,000 shares.
Options expire no later than ten years from the date of grant, and upon
termination of employment for cause. Subject to the ten year maximum period,
upon termination, unless terminated for cause, options are exercisable for three
months or in the case of retirement, disability or death, for one year. In
fiscal 1994, conditions relating to periods of Company service before vesting of
stock purchased on exercise of the non-qualified options were removed.
For fiscal 1996, options to purchase 360,000 shares of Common Stock were
granted to USE employees (none were granted to officers or directors), at an
exercise price of $4.00 per share (the closing bid price on grant date in
December 1996). In fiscal 1997, options to purchase 106,100 shares (previously
issued to employees in 1992 and 1996) were exercised. Options for 20,000 shares
were exercised by Keith G. Larsen, in fiscal 1997 prior to him becoming
President of the Company. No other exercise options had been held by officers or
directors.
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The following table shows unexercised options, how much thereof were
exercisable, and the dollar values for in-the-money options, at May 31, 1997.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal year and FY-End Option/SAR Values
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
Shares FY-End (#) FY-End($)
Acquired Value Exercisable/ Exercisable
Name on Exercise (#) Realized($) Unexercisable Unexercisable
- ---- --------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
John L. Larsen, -0- -0- 100,000 $687,000(1)
CEO exercisable exercisable and
unexercised
-0- -0- 100,100 $597,597(2)
exercisable exercisable and
unexercised
Keith G. Larsen, 30,000(4) $525.650 40,000 $194,800(3)
President exercisable and
unexercised
Max T. Evans, -0- -0- 57,200 $341,484(2)
Secretary exercisable exercisable and
unexercised
Harold F. Herron, -0- -0- 11,000 $65,670(2)
Vice President exercisable exercisable and
unexercised
Daniel P. Svilar -0- -0- 66,000 $394,020(2)
Assistant Secretary exercisable exercisable and
unexercised
R. Scott Lorimer -0- -0- 29,700 $177,309(2)
Treasurer exercisable exercisable and
unexercised
(1) Equal to $8.87 closing bid on last trading day in FY 1997, less $2.00 per
share option exercise price, multiplied by all shares exercisable.
</TABLE>
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(2) Equal to $8.87 closing bid on last trading day in FY 1997, less $2.90 per
share option exercise price, multiplied by all shares exercisable.
(3) Equal to $8.87 closing bid on last trading day in FY 1997, less $4.00 per
share option exercise price, multiplied by all shares exercisable.
(4) Subsequent to FY 1997 year end Keith G. Larsen exercised options for an
additional 10,000 shares at $4.00 per share, realizing a value of $57,500 as of
June 22, 1998.
Restricted Stock Plans. The Company and Crested have issued stock bonuses
to various executive officers and directors of the Company and others. These
shares are subject to forfeiture to the issuer by the grantee if employment
terminates otherwise than for death, retirement or disability. If the required
service is completed, the risk of forfeiture lapses and the shares become the
unrestricted property of the holder. Messrs. Larsen, Evans, Herron, Svilar,
Lorimer and all executive officers who are participants of this restricted stock
plan, as a group (five persons), received 25,200, 12,750, 18,900, 18,360,
15,120, and 90,330 shares of Common Stock, respectively, through fiscal 1997.
Shares issued through fiscal 1997 also include 20,000 for Don C. Anderson,
director. The shares issued in 1997 represent a 40% bonus (20% for 1996 and 20%
for 1997, and 100% for Mr. Herron) on this plan's original shares. The expenses
relating to these stock issuances are shared equally by the Company and Crested.
Additional shares were issued in calendar 1997 under the 1996 Stock Award
Program. See below.
Subsidiary Plans. During the year ended May 31, 1991, Brunton adopted a
salary deduction plan intended to qualify as a deferred compensation plan under
Internal Revenue Code Section 401(k). Harold F. Herron, John L. Larsen, Daniel
P. Svilar and R. Scott Lorimer are the only Company officers who are able to
participate in this retirement plan. The fiscal 1994 acquisition of Brunton by
the Company, and the sale of Brunton in 1996, have not affected the Brunton
401(k) plan.
Other than as set forth above, neither the Company nor any of its
subsidiaries have any pension, stock option, bonus, share appreciation, rights
or other plans pursuant to which they compensate the executive officers and
directors of the Company. Other than as set forth above, no executive officer
received other compensation in any form which, with respect to any individual
named in the Cash Compensation Table, exceeded ten percent of the compensation
reported for that person, nor did all executive officers as a group receive
other compensation in any form which exceeded ten percent of the compensation
reported for the group.
Directors' Fees and Other Compensation
The Company pays non-employee directors a fee of $150 per meeting
attended. All directors are reimbursed for expenses incurred with attending
meetings.
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Prior to fiscal 1992, the Board authorized the Executive Committee to make
loans to members of the Board, or to guarantee their obligations in amounts of
up to $50,000, if such loans or surety arrangements would benefit the Company.
Any loans or surety arrangements for directors which are in excess of $50,000
will require Board rather than Executive Committee approval. The Company loaned
$25,000 to David W. Brenman under this plan prior to fiscal 1991. The loan to
Mr. Brenman bears interest at the prime rate of the Chase Manhattan Bank and was
due September 1, 1994, but has been extended to December 31, 1997 by Board vote
(Mr. Brenman abstaining). The loan was provided as partial consideration for Mr.
Brenman's representation of the Company to the financial community in New York
City. The loan to Mr. Brenman originally was approved by the executive
committee.
1996 Stock Award Program. The Board of Directors and the shareholders of
the Company have approved an annual incentive compensation arrangement for the
issuance of up to 67,000 shares of Common Stock each year (from 1997 through
2002) to the five executive officers of the Company, in amounts to be determined
each year based on the earnings of the Company for the prior fiscal year ended
May 31.
Shares will be issued annually, provided that each officer to whom the
shares are to be issued is employed by the Company as of the issue date of the
grant year, and provided further that the Company has been profitable in the
preceding fiscal year. The officers will receive up to an aggregate total of
67,000 shares per year for the years 1997 through 2002, although if in prior
years, starting in 1997, fewer than 67,000 USE shares are awarded in any one or
more years, the unissued balance of the 67,000 share maximum will be available
for issue in subsequent years (through 2007). One-half of the compensation
expense under the Program is the responsibility of Crested. The Board of
Directors determines the date each year (starting in 1997) when shares are to be
issued.
To provide additional incentive for the officers to remain with the Company
over the years, each allocation of shares to an officer under the Program each
year will be issued in the name of the officer, and will be earned out (vested)
over 5 years, at the rate of 20% as of May 31 of each year following the date of
issue of the shares. However, none of the vested shares shall become available
to or come under the control of the officer in whose name the shares were
issued, until termination of employment by retirement, death or disability. Upon
termination of employment, the shares and certificates will be released to the
officer. Until termination, the share certificates will be held by the Treasurer
of the Company. Voting rights will be exercised over the shares by the
non-employee directors of the Company, in their discretion. Dividends or other
distributions on or with respect to the shares will be held by the Treasurer for
the benefit of the officers.
The number of shares to be awarded each year out of such 67,000 shares
aggregate limit is determined by the Compensation Committee, and will be based
on certain criteria including the Company's earnings per share of Common Stock
for the prior fiscal year. The total shares issued shall be divided among the
officers based on the following percentages: John L. Larsen 29.85%, Daniel P.
Svilar 22.39%, Max T. Evans 17.91%, Harold F. Herron 14.93% and R. Scott Lorimer
14.93%. Other factors bearing on the prior year's profitability may be taken
into consideration by the Compensation Committee. In addition, the actual
issuance of the number of shares recommended by the Compensation Committee to be
awarded to the officers presently is required to be submitted for approval by
shareholders of the Company at the Annual Meeting held subsequent to the end of
the fiscal year.
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In fiscal 1996, the Compensation Committee determined the Program award for
fiscal 1996 to be 14,158 shares of Common Stock, as follows: John L. Larsen
(4,226 shares), Harold F. Herron 2,113 shares), R. Scott Lorimer (2,113 shares),
Daniel P. Svilar (3,170 shares), and Max T. Evans (2,536 shares). This award was
approved by the shareholders at the 1996 Annual Meeting. Such shares have been
issued to the officers as of the date of this Prospectus.
Outside Directors' Compensation Plan. In March 1998 the Board of Directors
established the Outside Directors' Compensation Plan, pursuant to which the
nonexecutive directors of USE will be paid $400 per month in shares of Common
Stock of USE, with the number of shares determined on January 15 of each year
(starting in 1998 for calendar 1997) by dividing the compensation (number of
months served in the prior year, multiplied by $400) by the closing price on
January 15.
In addition, the Board of Directors has approved the issuance of 2,500
restricted shares of Common Stock each to Alan K. Simpson and H. Russell Fraser,
as a bonus for their agreeing to serve on the Advisory Board, and as a USE
director, respectively.
COMMITTEES AND MEETING ATTENDANCE
During the fiscal year ended May 31, 1997 there were six Board meetings and
three Executive Committee meetings. Each current member of the Board attended at
least 75% of the combined Board meetings and meetings of committees on which the
director serves. From time to time, the Board and Executive Committee act by
unanimous written consent pursuant to Wyoming law. Such actions are counted as
meetings for purposes of disclosure under this paragraph.
The Board has established an Executive Committee to act in place of the
Board between meetings of the Board. The Executive Committee had three meetings
in fiscal 1997.
An Audit Committee has also been established by the Board. The Audit
Committee had one meeting in fiscal 1997. Members of the Audit Committee have
also met informally at various times during the year. The Audit Committee
reviews the Company's financial statements and accounting controls, and contacts
the independent public accountants as necessary to ensure that adequate
accounting controls are in place and that proper records are being kept. The
Audit Committee also reviews the audit fees of the independent public
accountants.
The Compensation Committee reviews, approves and makes recommendations on
the Company's compensation policies, practices and procedures. During the year
ended May 31, 1997, the members of the Compensation Committee discussed
compensation matters on an individual basis and had one formal meeting.
A Management Cost Apportionment Committee was established by USE and
Crested in 1982, for the purpose of reviewing the apportionment of costs between
USE and Crested. John L. Larsen, Max T. Evans and Scott Lorimer are members of
this Committee.
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The Board of Directors has a Nominating Committee, which did not meet
during the most recently completed year.
CERTAIN OTHER TRANSACTIONS
Transactions with Sheep Mountain Partners ("SMP"). In fiscal 1989, the
Company and Crested through USECC sold a one-half interest in the Sheep Mountain
properties to Cycle Resource Investment Corporation ("CRIC"), a wholly-owned
subsidiary of Nukem, Inc., and thereafter USECC and CRIC contributed their 50%
interests in the properties to a new Colorado partnership, SMP, which was
organized to further develop and mine uranium claims, market uranium and acquire
additional uranium sales contracts. Due to disputes with CRIC and Nukem, (which
had been in arbitration proceedings, and the results of the arbitration having
been appealed by Nukem and CRIC to the United States Tenth Circuit Court of
Appeals), necessary mine maintenance has been funded by USECC alone. During
fiscal 1997, the Company and Crested received $4,000,000 from the SMP escrow
accounts as part of their monetary damages awarded by the Arbitration Panel.
This $4,000,000 was first applied to the account receivable for mine standby
costs as required under recovery cost accounting rules. At May 31, 1997 a
$8,600,000 monetary award remains unpaid as well as certain equity damages.
Transactions with Green Mountain Mining Venture ("GMMV"). On June 23, 1997,
USE and USECC signed an Acquisition Agreement with Kennecott Uranium Company
("Kennecott") for the right to acquire Kennecott's interest in the GMMV for
$15,000,000 and other consideration. Kennecott paid USE and USECC $4,000,000 on
signing, and committed to loan the GMMV up to $16,000,000 for payment of
reimbursable costs incurred by USECC in developing the proposed underground
Jackpot Uranium Mine for production and in changing the status of the Sweetwater
Mill from standby to operational. For a more detailed explanation of this
transaction, see Note F to the Financial Statements contained in the Company's
1997 Annual Report.
Transactions with Yellow Stone Fuels Corp. Yellow Stone Fuels Corp.,
hereafter ("YSFC") was organized on February 17, 1997 in Ontario, Canada. As of
February 17, 1997, YSFC acquired all the outstanding shares of Common Stock of
Yellow Stone Fuels, Inc. (a Wyoming corporation which was organized on June 3,
1996), in exchange for YSFC issuing the same number of shares of YSFC Stock to
the former shareholders of Yellow Stone Fuels, Inc. ("YFI"). YSFC and its
wholly-owned subsidiary Yellow Stone Fuels, Inc. will hereafter be referred to
collectively as YSFC.
In order to concentrate the efforts of USECC on conventional uranium mining
using the Shootaring and Sweetwater Mills, USECC decided to take a minority
position in YSFC and not be directly involved in properties believed suitable
for the production of uranium through the in-situ leach ("ISL") mining process.
USECC will have first call on any uranium ore bodies YSFC discovers which are
amenable to conventional mining and milling and YSFC will have a call on ore
bodies discovered by USECC amenable to the ISL process. In the ISL process,
groundwater fortified with oxidizing agents is pumped into the ore body, causing
the uranium contained into the ore to dissolve. The resulting solution is pumped
to the surface where it is further processed to a dried form of uranium which is
shipped to conversion facilities for eventual sale. Generally, the ISL process
is more cost effective and environmentally benign compared to conventional
underground mining techniques. In addition, less time may be required to bring
an ISL mine into operation than to permit and build a conventional mine.
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As of January 27, 1998, YSFC had 11,645,000 shares of Common Stock issued
and outstanding, including 3,000,000 shares (25.7%) issued to USE and Crested. A
portion of the funds used by YSFC have been provided by USECC under a $400,000
loan facility. As part consideration for the loan, USE and Crested entered into
a Voting Trust Agreement having an initial term of 24 months or until the
$400,000 loan facility is paid, with two principal shareholders of YSFC, whereby
USE and Crested will have voting control of more than 50% of the outstanding
shares of YSFC. Additional equity investors have provided an additional
$2,200,000 of funds for YSFC. The majority of the remaining outstanding YSFC
shares are owned by family members of John L. Larsen, Chairman of USE. At
November 30, 1997 the entire $400,000 loan facility had been drawn down by YSFC
and remained owed to USE.
YSFC has staked and/or leases or holds unpatented mining claims, state
leases, and patented mining claims covering approximately 10,200 acres in
Wyoming and New Mexico.
YSFC will require additional funding to maintain its property acquisition
program, conduct the geological and engineering studies on properties to
evaluate their suitability to in-situ recovery methods, and to build and operate
in-situ recovery facilities on suitable properties. YSFC is currently seeking
additional funding, but there is no assurance that such funding will be
obtained. If YSFC obtains equity funding, the current shareholders' ownership
interest would be reduced, however the $400,000 loan facility from USE and
Crested is convertible to YSFC common stock, so that USE's and Crested's equity
ownership levels could be maintained.
In fiscal 1997, USE and USECC entered into several agreements with YSFC,
including a Milling Agreement through Plateau Resources. The Shootaring Canyon
mill facilities will be available to YSFC to transport uranium concentrate
slurry and loaded resin to the mill and process it into uranium concentrate
("yellowcake"), for which Plateau will be paid its direct costs plus 10%. Other
agreements include a Drill Rig Lease Agreement for YSFC to have access to USE
drilling rigs at the prevailing market rates; an Outsourcing and Lease Agreement
for assistance from USECC accounting and technical personnel on a cost plus 10%
basis and a sublease for 1,000 square feet of office space for $1,000 per month;
and a Ratification of Understanding by which USECC will offer to YSFC (with a
reserved royalty in amounts to be agreed on later but not exceeding 10% of
uranium concentrated produced) any uranium properties amenable to in-situ
production which USECC acquires or has the right to acquire. In return, YSFC
will offer to USECC ( with a reserve royalty in amounts to be agreed on later)
uranium properties amenable to conventional mining methods which YSFC acquires
or has the right to acquire. USECC also will make its library of geological
information and related materials available to YSFC. YSFC also has a Storage
Agreement with GMMV by which YSFC stores used low-level contaminated mining
equipment purchased from a third party at GMMV's Sweetwater Mill. YSFC is
responsible for any bonding and handling obligations for the stored equipment,
and pays GMMV nominal rent for the storage.
Transactions with Sutter Gold Mining Company. In fiscal 1991, USE acquired
an interest in the Lincoln Project (including the underground Lincoln Mine and
the 2,800 foot Stringbean Alley decline) in the Mother Lode Mining District of
Amador County, California, held by a mining joint venture known as the Sutter
Gold Venture ("SGV"). The entire interest of SGV is now owned by USECC Gold
L.L.C., a Wyoming limited liability company, which is a subsidiary of Sutter
Gold Mining Company, a Wyoming corporation ("SGMC").
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In fiscal 1997, SGMC completed private financings totaling a net of
$6,511,200 ($1,106,700 through a private placement conducted in the United
States by RAF Financial Corporation, and $5,404,500 through a private placement
conducted in Toronto, Ontario, Canada by C.M. Oliver & Company Limited). The
proceeds from these financings (after deduction of commissions and offering
costs) are being applied to pre-production mine development, mill design, and
property holding and acquisition costs. SGMC anticipates production mining will
commence in mid-calendar 1998 and that by that time, construction of a 500 ton
per day gold mill will have been completed. Additional financing will be sought
in 1998 to complete mill construction and start production mining.
After completion of the two private financings, and taking into account a
restructuring of the ownership of USE and Crested in SGMC (and additional issue
of 75,000 shares to settle a dispute with Amador United, see below), USE and
Crested each own the following securities of SGMC:
(a) 30.7% and 3.2% of the outstanding shares of SGMC Common Stock which
would be reduced to 23.5% and 2.5%, respectively, in the event outstanding
warrants held by the Canadian investors to purchase 1,454,800 more shares of
SGMC Common Stock are exercised at Cdn$6.00 per share 18 months from the date of
closing of the offering in Canada and the outstanding warrants held by C.M.
Oliver to purchase 145,480 more shares of SGMC Common Stock are exercised at
Cdn$5.50 per share, before May 13, 1999. The preceding percentages of SGMC
Common Stock do not reflect warrants sold in the offering or shares that may be
acquired by USE and Crested pursuant to the USECC $10,000,000 Contingent Stock
Purchase Warrant (described below) issued as consideration for certain of the
voluntary reductions in the ownership of SGMC shares by USE and Crested, in
connection with the private offering in Canada. One reorganization of the
capital structure was required by RAF Financial Corporation in connection with
its private placement of SGMC shares, and the other was required by C.M. Oliver
& Company Limited in the Canadian private placement.
(b) A $10,000,000 Contingent Stock Purchase Warrant (the "USECC Warrant")
was issued to USE and Crested in connection with the restructuring of SGMC. The
USECC Warrant is owned 88.9% by USE and 11.1% by Crested. The USECC Warrant
provides that for each ounce of gold over 300,000 ounces added to the proven and
probable category of SGMC's reserves (up to a maximum of 400,000 additional
ounces), using a cut-off grade of 0.10 ounces of gold per ton (at minimum vein
thickness of 4 feet), USE and Crested will be entitled to acquire additional
shares of Common Stock from SGMC (without paying additional consideration). The
number of additional shares issuable for each new ounce of gold reserves will be
determined by dividing US$25 by the greater of $5.00 or the weighted average
closing price of the SGMC Common Stock for the 20 trading days before exercise
of the USECC Warrant. The USECC Warrant is to be exercised semi-annually.
However, as an alternative to exercise of the USECC Warrant, SGMC has the right
to pay USE and Crested US$25 in cash for each new ounce of gold (payable out of
a maximum of 60% of net cash-flow from SGMC's mining operations). Additions to
reserves will be determined by an independent geologist agreed upon by the
parties.
In fiscal 1997, SGMC issued 75,000 shares of Common Stock to Amador United
Gold Mines to settle certain disputes between such company and SGMC, USE and
Crested. In addition, SGMC bought about one-third of the outstanding shares of
Keystone Mining Company owned by The Salvation Army. The Keystone Mining Company
owns property in the Lincoln Project leased to SGMC.
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Effective June 1, 1996, SGMC entered into a Management Agreement (dated as
of May 22, 1996) with USE under which USECC provides administrative staff and
services to SGMC. USECC is reimbursed for actual costs incurred, plus an extra
10% during the exploration and development phases; 2% during the construction
phase; and 2.5% during the mining phase (such 2.5% charge to be replaced with a
fixed sum which with parties will negotiate at the end of two years starting
when the mining phase begins). The Management Agreement replaces a prior
agreement by which USE provided administrative services to SGMC.
In fiscal 1996 in conjunction with the sale of The Brunton Company by USE
to Silva AB, options to purchase 150,000 shares of USE's Common Stock for $3.50
per share with an expiration date of April 30, 1998, previously owned by
Brunton, were transferred to Plateau and SGMC (75,000 shares each). On April 28,
1998 the Company extended the option exercise period to May 31, 1998. On May 26,
1998 SGMC exercised its option to purchase 75,000 shares of the Company's Common
Stock at the exercise price of $3.50 per share. Plateau's option expired without
exercise.
Transactions with Directors. Two of the Company's directors, Messrs. Larsen
and Herron, and one of Crested's directors, Max T. Evans, are trustees of the
ESOP. Mr. Larsen is also a director of Crested. In that capacity they have an
obligation to act in the best interests of the ESOP participants. This duty may
conflict with their obligations as directors of the Company in times of adverse
market conditions for the Common Stock, or in the event of a tender offer or
other significant transaction.
In general, the ESOP trustees exercise dispositive powers over shares held
by the ESOP, and exercise voting powers with respect to ESOP shares that have
not been allocated to a participant's account. In addition, the Department of
Labor has taken the position that in certain circumstances ESOP trustees may not
rely solely upon voting or dispositive decisions expressed by plan participants,
and must investigate whether those expressions represent the desires of the
participants, and are in their best interests.
Harold F. Herron, son-in-law of John L. Larsen, had been living in and
caring for a house owned by the Company until such time as the property was
sold. In fiscal 1995, Mr. Herron purchased the house for $260,000, the appraised
value of the property, and was reimbursed by the Company for leasehold
improvements totaling $22,830. The Company accepted a promissory note in the
amount of $112,170 with interest compounded annually at 7% due on September 6,
1999 as a result of this transaction. This note is secured by 30,000 shares of
USE common stock owned by Mr. Herron.
Other Information. The Company has adopted a stock repurchase plan under
which it may purchase up to 275,000 shares of its Common Stock. These shares
would be purchased in part to provide a source of shares for issuance upon the
exercise of various outstanding options.
Three of John L. Larsen's sons and two sons-in-law are employed by the
Company or subsidiaries (as President, President of YSFC, President of Brunton,
chief pilot, and landman). Mr. Larsen's son-in-law Harold F. Herron is an
officer and director of the Company, and President and a director of Brunton.
Collectively, the six individuals including John L. Larsen received $424,300 in
cash compensation (paid by the Company and Crested) for those services during
the fiscal year ended May 31, 1997. The foregoing compensation expense was
shared by the Company and Crested, in accordance with the compensation
arrangements for all employees. Mr. Herron continues as president
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and a director of Brunton. Mr. Larsen's son-in-law Peter Schoonmaker is a part
time land man for
USECC.
The Company and Crested provide management and administrative services for
affiliates under the terms of various management agreements. Revenues from
services by the Company and Crested from unconsolidated affiliates were $397,700
in fiscal 1997 and $92,900 in fiscal 1996. The Company provides all employee
services required by Crested. In exchange Crested is obligated to the Company
for its share of the costs for providing such employees.
CERTAIN INDEBTEDNESS
Transactions Involving USECC. The Company and Crested conduct the bulk of
their activities through their equally-owned joint venture, USECC. From time to
time the Company and Crested advance funds to or make payments on behalf of
USECC in furtherance of their joint activities. These advances and payments
create intercompany debt between the Company and Crested. The party extending
funds is subsequently reimbursed by the other venturer. The Company had a note
receivable of $6,023,400 from Crested at May 31, 1997 ($6,460,300 during fiscal
1996).
Debt Associated with USE's ESOP. During the year ended May 31, 1997, the
Company made a contribution of 24,069 shares of Common Stock to the ESOP.
Because Crested engages the Company's employees to discharge substantially all
of its functions, these contributions benefitted Crested. As a result, Crested
owes the Company $106,800 for one-half of the Company's contribution to the
ESOP. Regular and substantial contributions by the Company to the ESOP are
required to maintain the ESOP in effect. In fiscal 1996 the Company contributed
10,089 shares of Common Stock to the ESOP, for one-half of which Crested owes
the Company $43,650.
Loans to Four Directors. As of May 31, 1997 three of the Company's and one
of Crested's directors owed the Company $487,000 as follows (each loan is
secured with shares of Common Stock of the Company owned by the individual):
Harold F. Herron $11,000 (1,000 shares); John L. Larsen $413,600 (124,000
shares), David W. Brenman $25,000 (4,000 shares) and Max T. Evans $37,400 (7,500
shares). The outstanding loan amounts represent various loans made to the
individuals over a period of several years. The loans mature December 31, 1997
and bear interest at 10% per year. For information on an additional loan to Mr.
Herron, see below. At May 31, 1997, John L. Larsen and members of his immediate
family were indebted to the Company for $745,300 secured by 160,000 shares of
the Company's Common Stock. As of the date of this Prospectus, John L. Larsen
has repaid his debt to the Company (which was $431,871, including interest, at
December 31, 1997), which reduced down to $313,429 the amount owed members of
Mr. Larsen's family to the Company. The preceding amounts do not include the
loan to Mr. Herron, see below.
In fiscal 1995, the Company made a five year non-recourse loan in the
amount of $112,170 to Harold F. Herron. The loan is secured by 30,000 shares of
the Company's Common Stock, bears interest at a rate of 7% and is payable at
maturity. The Board approved the loan to obtain a higher interest rate of return
on the funds compared to commercial rates, and to avoid having the USE stock
prices depressed from Mr. Herron selling his shares to meet personal
obligations. See Transactions with Directors above.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of November 25, 1997, the shares of
Common Stock, and the $.001 par value common stock of the Company's 52%-owned
subsidiary, Crested, held by each director and nominee, and by all officers and
directors as a group. Unless otherwise noted, the listed record holder exercises
sole voting and dispositive powers over the shares reported as beneficially
owned, excluding the shares subject to forfeiture and those held in ESOP
accounts established for the employee's benefit. Dispositive powers over the
forfeitable shares held by employees and a non-employee director who are not
officers, is shared by the Company's Board of Directors. Voting and dispositive
powers are shared by the Company's non-employee directors (Messrs. Anderson,
Bebout, Brenman and Fraser) over forfeitable shares held by the Company's five
executive officers. The ESOP Trustees exercise voting powers over unallocated
ESOP shares and dispositive powers over all ESOP shares. It should be noted that
voting and dispositive powers for certain shares are shared by two or more of
the listed holders. Such shares are reported opposite each holder having a
shared interest therein, but are only included once in the shareholdings of the
group presented in the table.
<TABLE>
<CAPTION>
Company Common Stock Crested Common Stock
------------------------------------ ---------------------------------------
Amount and Percent Amount and Percent
Nature of of Nature of of
Beneficial Ownership Class(1) Beneficial Ownership Class(1)
-------------------- -------- -------------------- --------
<S> <C> <C> <C> <C>
John L. Larsen 1,982,888(2) 27.5% 5,879,182(13) 55.5%
Harold F. Herron 817,547(3) 11.8% 5,574,999(14) 53.3%
Don C. Anderson 222,813(4) 3.3% 5,300,297(15) 51.4%
Nick Bebout 229,764(5) 3.6% 5,300,297(15) 51.4%
David W. Brenman 218,658(6) 3.2% 5,300,297(15) 51.4%
H. Russell Fraser 217,658(7) 3.2% 5,300,297(15) 51.4%
Keith G. Larsen 130,321(8) * 5,300,297(15) 51.4%
Max T. Evans 1,242,111(9) 17.8% 414,236(14) 4.0%
Daniel P. Svilar 685,272(10) 9.9% 280,000(17) 2.7%
R. Scott Lorimer 64,379(11) 1.0% 15,000(18) *
All officers and
directors as a
group (eight persons) 2,444,772(12) 35.7% 6,244,235(19) 60.6%
</TABLE>
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* Less than one percent.
(1) Percent of class is computed by dividing the number of shares
beneficially owned plus any options held by the reporting person or group, by
the number of shares outstanding plus the shares underlying the options held by
that person or group.
(2) Mr. Jack Larsen exercises sole voting powers over 242,536 directly
owned shares, (including 106,000 shares in joint tenancy with his wife, 200,100
shares underlying options and 26,641 shares held in the U.S. Energy Corp.
Employee Stock Ownership Plan account for his benefit). The directly owned
shares include 27,500 shares gifted to his wife, that have remained in Mr.
Larsen's name. Shares over which shared voting rights are exercised consist of
155,811 shares held by the ESOP, which have not been allocated to accounts
established for specific beneficiaries and shares held by corporations of which
Mr. Larsen is a director consisting of 512,359 shares held by Crested Corp.,
125,556 shares held directly by Plateau Resources , 75,000 shares underlying
options held by Plateau, 100,000 shares held by SGMC, 75,0000 shares underlying
options held by SGMC, and 12,612 shares held by Ruby Mining Company. Mr. Larsen
shares voting and dispositive rights over such shares with the other directors
of these corporations. Mr. Larsen shares voting powers over the unallocated ESOP
shares and dispositive powers over all ESOP shares in his capacity as an ESOP
Trustee with the other ESOP Trustees. Shares over which sole dispositive rights
are exercised consist of directly owned shares, joint tenancy shares and
options, less the 27,500 shares gifted, but not transferred, to his wife. Shares
for which shared dispositive powers are held consist of the 404,597 shares held
by the ESOP, 101,850 shares held by employees who are not officers or directors
of the Company and a non-employee director (Forfeitable Shares) which are
subject to forfeiture, the shares held by Crested, Plateau, SGMC and Ruby, and
the Plateau and SGMC option shares. The shares listed under Total Beneficial
Ownership also include 29,426 shares beneficially held by Mr. Larsen which are
subject to forfeiture. The Company's non-employee directors exercise shared
voting and dispositive powers over such shares. The shares shown as beneficially
owned by Mr. Larsen do not include 42,350 shares owned directly by his wife, who
exercises the sole investment and voting powers over those shares.
(3) Mr. Herron exercises sole voting powers over 54,486 directly owned
shares, 12,000 shares held for his minor children under the Wyoming Uniform
Transfers to Minors Act (the Minor's shares), 11,000 shares underlying options,
5,607 shares held in the ESOP account established for his benefit and 1,581
shares held by Northwest Gold, Inc. (NWG). Sole dispositive powers are exercised
over the directly held shares, the Minor's shares, the shares underlying options
and the shares held by NWG. Mr. Herron exercises shared voting rights over
125,556 shares held by Plateau, 75,000 shares underlying options held by
Plateau, 12,612 shares held by Ruby and the 155,811 unallocated ESOP shares.
Shared dispositive rights are exercised over the shares held by the ESOP,
Plateau, Ruby and the 101,850 Forfeitable Shares. Mr. Herron exercises
dispositive and voting powers over the shares held by Plateau and Ruby as a
director of those companies with the other directors of those companies. He
exercises powers over the ESOP shares in his capacity as an ESOP Trustee with
the other ESOP Trustees. The shares listed under Total Beneficial Ownership also
include 21,013 shares beneficially held by Mr. Herron which are subject to
forfeiture. The Company's non-employee directors exercise shared voting and
dispositive powers over such shares. The shares shown as beneficially owned by
Mr. Herron do not include 2,895 shares owned directly by his wife who exercises
the sole voting and dispositive powers over such shares.
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(4) Includes 6,100 directly held shares, 3,055 shares held in an IRA
established for Mr. Anderson's benefit, and 213,658 shares subject to
forfeiture. Mr. Anderson exercises sole voting and dispositive power over the
directly held shares and IRA shares. He exercises sole voting power over 21,000
shares he holds which are subject to forfeiture. Mr. Anderson exercises shared
dispositive powers over the 101,850 shares held by individuals who are not
officers of the Company which are subject to forfeiture ("Forfeitable Shares"),
with the other directors of the Company. As a non-employee director, Mr.
Anderson exercises shared voting and dispositive rights over 111,808 shares held
by executive officers which are subject to forfeiture ("Officers Forfeitable
Shares"), with the other non-employee directors.
(5) Consists of 16,056 shares held directly, 50 shares held in joint
tenancy with his wife and 213,658 shares subject to forfeiture. Mr. Bebout
exercises sole voting and dispositive powers over the directly held shares and
joint tenancy shares. He exercises shared dispositive powers over the 101,850
Forfeitable Shares with the other directors of the Company and as a non-employee
director, Mr. Bebout exercises shared voting and dispositive rights over the
111,808 Officers Forfeitable Shares, with the other non-employee directors.
(6) Consists of 5,000 shares held directly and 213,658 shares subject to
forfeiture. Mr. Brenman exercises sole voting and dispositive powers over the
5,000 directly held shares. Mr. Brenman exercises shared dispositive powers over
the 101,850 Forfeitable Shares with the other directors of the Company. As a
non-employee director, Mr. Brenman exercises shared voting and dispositive
rights over the 111,808 Officers Forfeitable Shares, with the other non-employee
directors.
(7) Consists of 1,000 directly held shares and 4,000 shares held in an IRA
for Mr. Fraser's benefit, and 213,658 shares subject to forfeiture. Mr. Fraser
exercises sole voting and dispositive rights over the directly held shares and
the IRA shares. Mr. Fraser exercises shared dispositive powers over the 101,850
Forfeitable Shares with the other directors of the Company. As a non-employee
director, Mr. Fraser exercises shared voting and dispositive rights over the
111,808 Officers Forfeitable Shares, with the other non-employee directors.
(8) Consists of 1,774 directly held shares, 8,820 shares subject to
forfeiture, 9,877 shares held in the ESOP account established for his benefit,
8,000 shares held for his minor children under the Wyoming Uniform Transfers to
Minors Act ("Minors Shares), 30,000 shares underlying options, and 101,850
shares subject to forfeiture held by employees who are not officers or directors
of the Company. Mr. Larsen exercises sole voting and dispositive powers over the
directly held, the Minors Shares and the shares underlying his options. He
exercises sole voting over his ESOP shares and his forfeitable shares. Mr.
Larsen shares dispositive powers over the 101,850 Forfeitable Shares with the
other directors of the Company.
(9) Shares over which Mr. Evans exercises sole voting powers consist of
2,901 directly owned shares, 36,389 shares held in joint tenancy with his wife,
11,971 shares held in an Individual Retirement Account for his benefit and
57,200 shares underlying options. Shares for which Mr. Evans holds sole
dispositive powers are comprised of his directly held shares, joint tenancy
shares, IRA shares and the shares underlying his options. Shares over which Mr.
Evans exercises shared voting rights consist of the shares held by Crested,
Plateau, the unallocated ESOP shares and the Plateau options. He exercises
shared dispositive rights over the shares held by Crested, Plateau, the ESOP,
and the Plateau options.
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Mr. Evans shares voting and dispositive powers over the shared held by Crested
and Plateau with the remaining directors of those companies. The shares listed
under Total Beneficial Ownership also include 18,286 shares beneficially held by
Mr. Evans which are subject to forfeiture. The Company's non-employee directors
exercise shared voting and dispositive powers over such shares.
(10) Mr. Svilar exercises sole voting powers over 22,084 directly owned
shares, 12,700 shares held in joint tenancy with his wife, 11,000 shares held
jointly with a deceased family member, 1,000 shares held as custodian for his
minor child under the Wyoming Uniform Transfers to Minors Act (the Minor's
shares), 66,000 shares underlying options and 22,200 shares held in the ESOP
account established for his benefit. He holds sole dispositive power over his
directly held shares, joint tenancy shares, Minor's shares and the shares
underlying his options. The shares over which he exercises shared voting and
dispositive rights consist of the 512,359 shares held by Crested and the 100,000
shares and 75,000 shares underlying options held by SGMC. Mr. Svilar exercises
shared voting and dispositive powers as a director of Crested and SGMC with the
other directors of those companies. He also exercises shared voting and
investment powers of 11,700 shares held by a nonaffiliated company of which Mr.
Svilar is a partner. The shares listed under Total Beneficial Ownership also
include 25,850 shares beneficially held by Mr. Svilar which are subject to
forfeiture. The Company's non-employee directors exercise shared voting and
dispositive powers over such shares.
(11) Mr. Lorimer exercises sole voting powers over 2 directly held shares,
17,444 shares held in the ESOP account established for his benefit, and 29,700
shares underlying options. Mr. Lorimer exercises sole dispositive powers over
his directly held shares and the shares underlying his options. The shares
listed under "Total Beneficial Ownership" also include 17,233 shares
beneficially held by Mr. Lorimer which are subject to forfeiture. The Company's
non-employee directors exercise shared voting and dispositive powers over such
shares.
(12) Consists of 1,006,182 shares over which the group members exercise
sole voting rights, including 364,000 shares underlying options and 32,248
shares allocated to ESOP accounts established for the benefit of group members.
The listed shares include 913,290 shares, including 364,000 shares underlying
options, over which group members exercise sole dispositive rights. Shared
voting and dispositive rights are exercised with respect to 1,167,234 and
1,528,334 (including 213,658 shares subject to forfeiture) shares, respectively.
(13) Consists of 5,300,297 Crested shares held by the Company, 100,000
shares and 150,000 shares underlying options held by SGMC, 60,000 shares and
150,000 shares underlying options held by Plateau, 53,885 shares held by Ruby
with respect to which shared voting and dispositive powers are exercised as a
director with the other directors of those Companies and 65,000 forfeitable
shares held by employees, over which Mr. Larsen exercises shared dispositive
powers with the remaining Crested directors.
(14) Includes 6,932 directly held shares and 3,885 shares held by NWG over
which Mr. Herron exercises sole voting and investment powers. Mr. Herron is the
sole director of NWG. Also includes the Crested shares held by the Company and
Ruby, and the shares and shares underlying options held by Plateau, with respect
to which shared voting and dispositive powers are exercised as a USE, Plateau
and Ruby director with the other directors of those companies.
102
<PAGE>
(15)Consist of the Crested shares held by the Company with respect to which
shared voting and dispositive powers are exercised as a director with the other
directors of the Company.
(16) Includes 139,236 directly held shares, and 60,000 shares and 150,000
shares underlying options held by Plateau, with respect to which shared voting
and dispositive powers are exercised as a director with the other directors of
Plateau and 65,000 forfeitable shares held by employees, over which Mr. Evans
exercises shared dispositive powers with the remaining Crested directors.
(17) Consists of 175,000 directly held shares and 40,000 shares which are
held in joint tenancy with a deceased family member, over which Mr. Svilar
exercises sole voting and dispositive powers and 65,000 forfeitable shares held
by employees, over which Mr. Svilar exercises shared dispositive powers with the
remaining Crested directors.
(18) Consists of 15,000 shares which are subject to forfeiture. Mr. Lorimer
exercises sole voting power of such shares, while the Crested directors share
the dispositive powers over the shares.
(19) Consists of 380,053 shares over which the group members exercise sole
voting rights, including 15,000 shares subject to forfeiture. The listed shares
include 365,053 shares over which group members exercise sole dispositive
rights. Shared voting and dispositive rights are exercised with respect to
5,814,182 and 5,79,182 (including 65,000 shares subject to forfeiture) shares,
respectively.
DESCRIPTION OF SECURITIES
The Company's Articles of Incorporation authorize issuance of 20,000,000
shares of Common Stock, $.01 par value, and 100,000 shares of preferred stock,
$.01 par value.
Common Stock. Holders of Common Stock are entitled to receive dividends
when and as declared by the Board of Directors out of funds legally available
therefor.
Holders of Common Stock are entitled to one vote per share on all matters
upon which such holders are entitled to vote, and further have the right to
cumulate their votes in elections of directors to the Company's Board of
Directors. Cumulation is effected by multiplication of shares held by the number
of director nominees, and voting is by casting the product as desired among the
nominees; directors are elected by a plurality of votes cast.
Pursuant to the Company's Articles and the Wyoming Management Stability
Act, shares of Common Stock held by Crested (512,359) may be voted by Crested,
shares of Common Stock held by Plateau (125,556) may be voted by Plateau and
shares of Common Stock held by SGMC (100,000) may be voted by SGMC in elections
of USE directors, so long as USE conducts substantial business in Wyoming and is
"qualified" under such Act as having assets in excess of $10,000,000, with a
class of stock listed on NASDAQ or on a principal exchange.
In the event of dissolution, liquidation or winding up of USE, holders of
Common Stock are entitled to share ratably in assets remaining after creditors
(including holders of any preferred stock, as to liquidation preferences) have
been paid.
103
<PAGE>
All outstanding shares of common stock (including the Common Shares offered
for sale by this Prospectus) have been fully paid and are nonassessable.
Preferred Stock. The Company's Board of Directors is authorized to issue
shares of preferred stock in one or more series, with such rights to redemption,
liquidation preference, dividends, voting and other matters as determined by the
Board of Directors, without authorization from the USE stockholders.
Accordingly, the USE Board of Directors could issue preferred shares with
dividend rights senior to the Common Shares. Under the Wyoming Business
Corporation Act, separate classes of stock are entitled to vote separately on
certain substantive transactions (e.g., a merger or sale of most of the company
assets), with approval of the transaction subject to approval by each class.
No shares of USE preferred stock have been issued, and no series thereof
has been established to date.
Warrants. Additional Warrant to Shamrock Partners, Ltd. On January 20, 1998
the Company entered into a nonexclusive one year Investment Banking Consulting
Agreement with Shamrock Partners, Ltd. ("SPL"), 111 Veterans Square, Media,
Pennsylvania, under which SPL is to provide financial consulting services and
advice concerning financing, merger and acquisition proposals, and to assist the
Company in arranging meetings between representatives of the Company and
financial institutions in the investment community (including broker-dealer
firms, security analysts, and portfolio managers). For SPL's services, as of
December 5, 1997 the Company authorized the issuance to SPL a Warrant to
Purchase 200,000 shares of Common Stock of the Company at a price of $6.00 cash
per share; the Warrant is exercisable through May 1, 1999. The Warrant may be
subdivided for substitute Warrants. The Holder (or substitute Holders) of the
Warrants are not entitled to any rights of a shareholder in the Company by
virtue of holding the Warrants.
The Warrant carries certain rights of registration with the Commission
under the 1933 Act as more specifically described in the Warrant, but if the
Company so registers the Warrants solely to accommodate the registration for
public sale of the underlying 200,000 Warrant Shares, the Holder or Holders of
the Warrants may not sell or otherwise transfer the Warrants for a period of 24
months after the effective date of such Registration Statement, which period
prevents sale or transfer of the Warrants prior to their Expiration Date. The
Warrants are governed by and construed in accordance with the laws of Wyoming.
The above-described Warrant is separate and is in addition to the original
Warrant (also for the purchase of 200,000 shares of Common Stock) which was
issued to SPL in January 1996; the original Warrant has been exercised, and this
Prospectus relates to the public resale of the 30,000 Warrant Shares so
purchased. As of the date of this Prospectus, SPL has not exercised the new
Warrant issued to SPL, and the Company has not filed a registration statement
for SPL in connection with the new Warrant. This Prospectus does not include
such new Warrant or any shares of Common Stock issuable on exercise of such
Warrant.
Warrant to Sunrise Financial Group, Inc. As of December 1, 1997, the
Company retained Sunrise Financial Group, Inc. ("Sunrise") to serve as a
financial consultant and advisor on a nonexclusive basis for a period of 12
months ending on December 1, 1998. Sunrise will provide such
104
<PAGE>
services and advice pertaining to the Company's business and affairs as the
Company may from time to time reasonably request. As compensation for Sunrise's
services, in December 1997, the Company authorized the issuance to Sunrise a
Warrant to Purchase 225,000 shares of Common Stock of the Company; the Warrant
is exercisable for three years at an exercise price of $10.50 per share. As will
be provided in the Warrant, Sunrise will have the right (during the 12 month
term of the consulting agreement) to demand that the Company include in the next
registration statement filed by the Company with the Securities and Exchange
Commission, on a piggy-back basis, the resale to the public of the shares of
Common Stock purchased on exercise of the Warrant. If no such registration
statement filing occurs during the 12 month period, Sunrise will have the right
to demand that the Company register the purchased shares for sale to the public.
As of the date of this Prospectus, Sunrise has not exercised the Warrant issued
to Sunrise in connection with such Warrant. This Prospectus does not include
such Warrant or any shares of Common Stock issuable on exercise of such Warrant.
PLAN OF DISTRIBUTION
The Common Shares are offered from time to time by the Canadian Funds or
USE employees, or their agents, at market prices from time to time. Selling
commissions will be paid by such persons. No sales proceeds will be paid to the
Company or any subsidiary of the Company from the sale of the Common Shares.
The Common Shares may be offered from time to time by the Canadian Funds
and USE employees (i) in transactions in the over-the-counter market, automated
inter-dealer system on which the Company's Common Stock is then listed, in
negotiated transactions or a combination of such methods of sale, and (ii) at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices, or at negotiated prices. Such persons may effect such
transactions directly with the broker-dealers. Such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from such
persons for whom such broker-dealers may act as agents or to whom they may sell
as principals, or both (which compensation as to a particular broker-dealer
might be in excess of customary commissions). Sales of the Common Shares may be
made pursuant to this Prospectus or pursuant to Rule 144 adopted under the 1933
Act.
No underwriting arrangements exist as of the date of this Prospectus. Upon
being advised of any underwriting arrangements that may be entered into by the
Canadian Funds or the USE employees after the date of this Prospectus, the
Company will prepare and file a post-effective amendment to this Registration
Statement including a supplement to this Prospectus to disclose the name of such
underwriters and such arrangements.
The Company is paying certain of the expenses, which are estimated at
$10,000, of registering the Common Shares under the 1933 Act and under the laws
of Wyoming, consisting of all costs incurred in connection with the preparation
of the Registration Statement.
105
<PAGE>
HOLDERS OF THE COMMON SHARES
The names of the Canadian Funds holding the Common Shares are set forth
below. It is anticipated that such holders will own none of the Common Shares
after completion of the offering. Such holders own no other shares of Common
Stock.
<TABLE>
<CAPTION>
No. of Share of
Shares of Common Common
Common Stock Shares to be Stock to be
Owned Prior Offered by Owned After
Name to Offering his Prospectus Offering
- ---- ----------- -------------- --------
<S> <C> <C> <C>
BPI Canadian
Small Companies Fund 250,683 250,683 -0-
Altamira Management Ltd. 157,530 157,530 -0-
BPI Canadian
Opportunities II Fund 125,341 125,341 -0-
CPI Canadian Resource Funds 125,341 125,341 -0-
</TABLE>
None of the Funds, and no affiliate of the Funds, have held any position, office
or have had any material relationship with Registrant or any of its affiliates
within the past three years.
SELLING SHAREHOLDERS
The following is a listing of the Selling Shareholders, the amount of Common
Shares to be offered for each such Selling Shareholder's account and the amount
of USE's Common Stock owned by each Selling Shareholder prior to the offering
and to be held by such Selling Shareholder after completion of the offering.
Except as noted below, none of the Selling Shareholders (i) has had any
position, office or other material relationship with the Registrant or any of
its affiliates within the past three years, or (ii) to the knowledge of the
Company, will own one percent or more of the Company's outstanding common stock
after completion of the offering. It is anticipated that except as noted, each
Selling Shareholder will own none of the Common Shares hereby offered, after
completion of the offering.
106
<PAGE>
<TABLE>
<CAPTION>
No. of
No. of No. of Shares of
Common Shares Shares of USE USE Common
to be Offered Common Stock Stock to be
by Selling Owned Prior Owned After
Name Shareholder to Offering* Offering
---- ----------- ------------ --------
<S> <C> <C> <C>
Jimmie Dale Bates(1) 140 140 -0-
Roger T. Berg(1) 331 331 -0-
Allen R. Blisset 30 30 -0-
Larry W. Bridger(1) 70 70 -0-
Connie Brinkerhoff(1) 49 49 -0-
Ricky L. Brinkerhoff(1) 21 466 445
Frederick R. Craft(1) 4 4 -0-
Glenn Dooley(2) 523 1495 972
Donald A. Fresen(1) 31 31 -0-
Michele Herrick(1) 14 181 167
John L. Larsen(3) 1,127 448,080 446,953
Robert Scott Lorimer(4) 383 35,062 34,679
Debbie R. Metzger(1) 27 27 -0-
Michael G. Morlang(1) 86 86 -0-
Steve P. Morrill(1) 56 1,241 1,185
Garth F. Noyes(1) 109 266 157
Christopher L. Shepardson(1) 4 4 -0-
Joshua Shepardson(1) 4 4 -0-
Daniel P. Svilar(5) 483 99,446 98,963
John M. Tuner(1) 83 267 184
Allen R. Williams(1) 24 24 -0-
Debbie L. Williams(1) 27 27 -0-
Daryl P. Winters(1) 313 1,886 1,573
</TABLE>
* Includes shares held directly, shares held in the USE Employee Stock
Ownership Plan (the "ESOP") account established for the benefit of
employee, shares held jointly and shares held directly by immediate
family members in the same household.
(1) USE employee.
(2) USE employee; Vice President of Plateau Resources Limited, a 100%
subsidiary of USE.
(3) USE employee; Chairman of the Board, Chief Executive Officer and
director of USE, Crested Corp., Sutter Gold Mining Company, Plateau
Resources Limited, all affiliates of USE.
(4) USE employee; Treasurer and Chief Financial Officer of USE, Crested
Corp., Sutter Gold Mining Company, Plateau Resources Limited, Ruby
Mining Company and Northwest Gold, Inc., all affiliates of USE.
107
<PAGE>
(5) USE employee; General Counsel of USE, Crested Corp., Sutter Gold Mining
Company and Plateau Resources Limited; director and Secretary of
Crested Corp.; Assistant Secretary of USE, and Secretary of Sutter Gold
Mining Company, all affiliates of USE.
EXPERTS
The consolidated financial statements of USE included in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The balance sheet of the Green Mountain Mining Venture as of December 31,
1996 and 1995, and the related statements of operations, changes in venture
partners' capital and cash flows for the years ended December 31, 1996, 1995 and
1994 and the period from inception (June 1, 1990) to December 31, 1996 included
in this Prospectus have been included herein in reliance of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of such firm as experts
in accounting and auditing.
LEGAL MATTERS
Stephen E. Rounds, Denver, Colorado, has acted as special counsel to USE in
connection with this offering.
108
<PAGE>
<TABLE>
<CAPTION>
Consolidated Financial Statements
(audited only for fiscal periods ending May 31)
Registrant and Affiliates Page No.
- ------------------------- --------
<S> <C>
Report of Independent Public Accountants 111
Consolidated Balance Sheets
May 31, 1997 and 1996 and 112-113
February 28, 1998 151-152
Consolidated Statements of Operations
for the Years Ended May 31, 1997 and 1996, 114-115
Nine Months Ended February 28, 1998 and 1997 153-154
Consolidated Statements of Shareholders'
Equity for the Years Ended
May 31, 1997, 1996 and 1995 116-118
Consolidated Statements of Cash Flows for
the Years Ended May 31, 1997, 1996 and 1995 119-120
Nine Months Ended February 28, 1998 and 1997 155-156
Notes to Consolidated Financial Statements
for the Years Ended May 31, 1997, 1996 and 1995 121-150
Nine Months Ended February 28, 1998 157
Green Mountain Mining Venture
- -----------------------------
Report of Independent Public Accountants 159
Balance Sheet - December 31, 1996 and 1995 160
Statement of Operations for the Years Ended December 31, 1996,
1995 and 1994 and for the Period from Inception (June 1, 1990)
to December 31, 1996 161
Statement of Changes in Partners' Capital for the Years Ended
December 31, 1996, 1995 and 1994 and for the Period from
Inception
(June 1, 1990) to December 31, 1996 162
109
<PAGE>
Statement of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994 and for the Period from Inception (June 1, 1990)
to December 31, 1996 163
Notes to Financial Statements 164-169
</TABLE>
Sheep Mountain Partners
- -----------------------
USE's partner in SMP, Nukem/CRIC, has refused to provide certain
information concerning SMP to SMP's independent public
accountants. The information requested concerns partnership
costs for uranium purchases. USECC and Nukem/CRIC disagree as to
whether uranium costs of the partnership means: (i) the price
which Nukem/CRIC pays for purchases of uranium for SMP; or (ii)
the price which CRIC charges SMP for uranium.
As a result, the independent public accountants have informed
USE that they have been unable to complete their audit of SMP,
and are unable to render a report on SMP's financial statements.
USE and SMP's independent public accountants are seeking to
resolve these uncertainties so that SMP's financial statements
may be finalized and filed. When and if these matters are
resolved, the following SMP financial statements will be filed
under cover of an amendment.
Balance Sheets - May 31, 1997 and 1996
Statements of Operations - Years Ended
May 31, 1997, 1996 and 1996
Statements of Changes in Partners' Capital
Years Ended May 31, 1997, 1996 and 1995
Statements of Cash Flows - Years Ended
May 31, 1997, 1996 and 1995
Notes to the Financial Statements
Schedules to SMP's Financial Statements
110
<PAGE>
Report of Independent Public Accountants
To U.S. Energy Corp.:
We have audited the accompanying consolidated balance sheets of U.S. ENERGY
CORP. (the "Company") (a Wyoming corporation) AND AFFILIATES as of May 31, 1997
and 1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended May 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of U.S. Energy Corp. and
affiliates as of May 31, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended May 31, 1997,
in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
August 15, 1997.
111
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
ASSETS
May 31,
----------------------------------
1997 1996
---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,416,900 $ 992,600
Accounts and notes receivable (Note C):
Trade, net of allowance for doubtful
accounts of $30,900 and $27,800, respectively 368,200 570,900
Related parties (Note C) 1,191,000 281,800
Current portion of long-term
notes receivable (Notes F and L ) 337,200 438,700
Assets held for resale and other 991,600 509,700
Inventory 96,000 118,700
------------ ------------
TOTAL CURRENT ASSETS 4,400,900 2,912,400
INVESTMENTS AND ADVANCES (Notes E and F):
Affiliates 4,999,600 3,658,500
Restricted investments 8,506,300 8,200,800
------------ ------------
13,505,900 11,859,300
INVESTMENT IN CONTINGENT STOCK
PURCHASE WARRANT (Note F) 4,594,000 --
PROPERTIES AND EQUIPMENT (Notes B, C, D and F):
Land and mobile home park 939,000 939,000
Buildings and improvements 5,986,800 6,243,100
Aircraft and related equipment 5,627,900 6,650,100
Developed oil and gas properties, full cost method 1,769,900 1,769,800
Undeveloped gas properties -- 135,400
Mineral properties and mine development costs 519,400 10,956,900
------------ ------------
14,843,000 26,694,300
Less accumulated depreciation, depletion
and amortization (8,802,100) (9,047,900)
------------ ------------
6,040,900 17,646,400
OTHER ASSETS:
Accounts and notes receivable:
Real estate sales, net of valuation
allowance of $926,300 at
May 31, 1997 (Notes F and L) 394,000 974,200
Employees (Note C) 745,300 532,400
Other 338,600 674,700
Deposits and other 367,500 193,900
------------ ------------
1,845,400 2,375,200
------------ ------------
$ 30,387,100 $ 34,793,300
============ ============
The financial statement included herein (including the accompanying notes) have
been prepared from the books and records of the company after making all
necessary adjustments and represent the final statements for the period under
examination.
By: /s/ R. Scott Lorimer
R. Scott Lorimer, Chief Financial Officer
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
</TABLE>
112
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
May 31,
----------------------------------
1997 1996
---- ----
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable and accrued expenses $ 1,312,600 $ 1,292,300
Lines of credit (Note G) -- 499,000
Current portion of long-term debt (Note G) 81,300 239,900
------------ ------------
TOTAL CURRENT LIABILITIES 1,393,900 2,031,200
LONG-TERM DEBT (Note G) 183,100 444,300
RECLAMATION LIABILITY (Notes F and K) 8,751,800 3,978,800
OTHER ACCRUED LIABILITIES (Note F) 5,259,000 10,414,300
DEFERRED TAX LIABILITY (Note H) 183,300 183,300
COMMITMENTS AND CONTINGENCIES (Note K)
MINORITY INTERESTS -- 1,637,900
FORFEITABLE COMMON STOCK,
$.01 par value; issued 223,900 and
195,520 shares, respectively, forfeitable
until earned (Note J) 1,892,400 1,486,500
SHAREHOLDERS' EQUITY (Note J):
Preferred stock, $.01 par value; authorized,
100,000 shares; none issued or outstanding -- --
Common stock, $.01 par value; authorized,
20,000,000 shares; issued 6,646,475 and
6,324,306 shares, respectively 66,500 63,100
Additional paid-in capital 22,543,000 20,775,700
Accumulated deficit (6,776,900) (3,052,400)
Treasury stock at cost, 690,943 and
769,943 shares, respectively (2,182,000) (2,242,400)
Unallocated ESOP contribution (927,000) (927,000)
------------ ------------
12,723,600 14,617,000
------------ ------------
$ 30,387,100 $ 34,793,300
============ ============
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
</TABLE>
113
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended May 31,
----------------------------------------------------------
1997 1996 1995
---- ---- ----
REVENUES:
<S> <C> <C> <C>
Mineral sales and option (Note E) $ -- $ 3,116,700 $ --
Construction contract revenues 1,038,600 3,794,500 1,303,400
Commercial operations 2,219,400 1,439,100 1,177,600
Distribution from affiliate in
excess of cost basis 1,003,800 -- --
Oil sales 164,600 210,100 194,500
Gain on sales of assets (Notes D and F) 39,400 352,200 1,282,400
Royalties from mineral
properties agreements (Note F) 207,300 -- 85,500
Interest 693,300 619,400 469,900
Management fees and other (Note C) 423,800 100,200 87,300
------------ ------------ ------------
5,790,200 9,632,200 4,600,600
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of minerals sold -- 2,766,700 --
Mineral operations 843,100 805,600 1,654,300
Construction costs 752,600 3,077,800 1,038,300
Commercial operations 3,059,600 2,374,800 2,070,100
Oil production 96,800 73,000 78,100
Provision for doubtful accounts 614,200 -- --
General and administrative 2,763,300 2,524,700 1,860,600
Gas operations -- -- 206,600
Abandonment of mineral interests 1,225,800 328,700 --
Loss on sale of investments -- -- 90,000
Interest 140,800 205,000 180,300
------------ ------------ ------------
9,496,200 12,156,300 7,178,300
------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST
IN LOSS, EQUITY IN LOSS OF
AFFILIATES AND INCOME TAXES (3,706,000) (2,524,100) (2,577,700)
MINORITY INTEREST IN LOSS OF
CONSOLIDATED SUBSIDIARIES 672,300 608,700 653,200
EQUITY IN LOSS OF AFFILIATES (690,800) (418,500) (442,300)
------------ ------------ ------------
(Continued)
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
114
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
Year Ended May 31,
------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
LOSS BEFORE INCOME TAXES $(3,724,500) $(2,333,900) $(2,366,800)
INCOME TAXES (Note H) -- -- --
----------- ----------- -----------
LOSS BEFORE
DISCONTINUED OPERATIONS (3,724,500) (2,333,900) (2,366,800)
DISCONTINUED OPERATIONS:
Income from discontinued operations,
net of income taxes of $0 -- 308,900 296,200
Gain on disposal of subsidiary operations
in discontinued segment, net of
income taxes of $50,000 -- 2,295,700 --
----------- ----------- -----------
NET INCOME (LOSS) $(3,724,500) $ 270,700 $(2,070,600)
=========== =========== ===========
INCOME (LOSS) PER SHARE AMOUNTS:
Loss before discontinued operations $ (.55) $ (.38) $ (.48)
Income from discontinued operations -- .05 .06
Gain on disposal of subsidiary
operating in discontinued segment -- .37 --
----------- ----------- -----------
NET INCOME (LOSS) PER SHARE $ (.55) $ .04 $ (.42)
=========== =========== ===========
WEIGHTED AVERAGE
SHARES OUTSTANDING 6,798,458 6,218,184 4,977,050
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
115
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional (Accumulated Unallocated Total
Common Stock Paid-In (Deficit) Treasury Stock ESOP Shareholders'
Shares Amount Capital Earnings Shares Amount Contribution Equity
------ ------ --------- ------------ ------ ------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance May 31, 1994 4,693,090 $46,800 $16,784,800 $(1,185,800) 713,276 $(2,072,400) $(1,014,300) $12,559,100
Funding of ESOP 37,204 400 199,600 -- -- -- -- 200,000
Issuance of common stock
through private placement
(Note J) 400,000 4,000 1,196,000 -- 56,667 (170,000) -- 1,030,000
Issuance of common stock
to third party for
services rendered 5,000 -- 23,100 -- -- -- -- 23,100
Issuance of common stock
for exercised option 107,500 1,100 345,700 -- -- -- -- 346,800
Issuance of common stock
to buyout third party
in property venture 20,000 200 79,800 -- -- -- -- 80,000
Net loss -- -- -- (2,070,600) -- -- -- (2,070,600)
---------- ------- ----------- ----------- ------- ----------- ----------- -----------
Balance May 31, 1995 5,262,794 $52,500 $18,629,000 $(3,256,400) 769,943 $(2,242,400) $(1,014,300) $12,168,400
---------- ------- ----------- ----------- ------- ----------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
116
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(continued)
Additional (Accumulated Unallocated Total
Common Stock Paid-In Deficit) Treasury Stock ESOP Shareholders'
Shares Amount Capital Earnings Shares Amount Contribution Equity
------ ------ --------- ------------ ------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance May 31, 1995 5,262,794 $52,500 $18,629,000 $(3,256,400) 769,943 $(2,242,400) $(1,014,300) $12,168,400
Funding of ESOP -- -- -- -- -- -- 87,300 87,300
Issuance of common stock
through private placement 812,432 8,100 2,834,100 -- -- -- -- 2,842,200
Issuance of additional common
shares in connection
with prior year
private placement 133,336 1,300 65,400 (66,700) -- -- -- --
Cancellation of common stock
issued for services rendered (5,000) -- (23,100) -- -- -- -- (23,100)
Issuance of common stock to
employees for a bonus 32,901 300 180,600 -- -- -- -- 180,900
Issuance of common stock for
exercised warrants 81,243 800 389,100 -- -- -- -- 389,900
Fair value of warrants issued
above exercise price -- -- 41,700 -- -- -- -- 41,700
Issuance of common stock for
exercised option 6,600 100 41,400 -- -- -- -- 41,500
Dilution of investment
in subsidiary -- -- (1,382,500) -- -- -- -- (1,382,500)
Net income (loss) -- -- -- 270,700 -- -- -- 270,700
---------- ------- ----------- ----------- ------- ----------- ----------- -----------
Balance, May 31, 1996 6,324,306 $63,100 $20,775,700 $(3,052,400) 769,943 $(2,242,400) $ (927,000) $14,617,000
---------- ------- ----------- ----------- ------- ----------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
117
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(continued)
Additional (Accumulated Unallocated Total
Common Stock Paid-In Deficit) Treasury Stock ESOP Shareholders'
Shares Amount Capital Earnings Shares Amount Contribution Equity
------ ------ --------- ------------ ------- ------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance May 31, 1996 6,324,306 $63,100 $20,775,700 $(3,052,400) 769,943 $(2,242,400) $(927,000) $14,617,000
Funding of ESOP 24,069 200 213,400 -- -- -- -- 213,600
Issuance of common stock for
exercised warrants 180,000 1,800 898,200 -- -- -- -- 900,000
Fair value of warrants issued
above exercise price -- -- 148,300 -- -- -- -- 148,300
Issuance of common stock
for services rendered 12,000 200 138,300 -- -- -- -- 138,500
Issuance of common stock for
exercised option 106,100 1,200 369,100 -- -- -- -- 370,300
Purchase of treasury stock -- -- -- -- 21,000 (235,600) -- (235,600)
Shares of USE stock
held by subsidiary
no longer consolidated -- -- -- -- (100,000) 296,000 -- 296,000
Net loss -- -- -- (3,724,500) -- -- -- (3,724,500)
--------- ------- ----------- ----------- -------- ----------- --------- ----------
Balance, May 31, 1997 6,646,475 $66,500 $22,543,000 $(6,776,900) 690,943 $(2,182,000) $(927,000) $12,723,600
========= ======= =========== =========== ======== =========== ========= ===========
Shareholders' Equity at May 31, 1997 does not include 223,900 shares currently
issued but forfeitable if certain conditions are not met by the recipients.
However, both the "Outstanding Shares at September 12, 1997" on the cover page
and the "Weighted Average Shares Outstanding" on the Consolidated Statement of
Operations include the forfeitable shares. These two line items also include the
616,026 shares of common stock held by a majority-owned subsidiary, which, in
consolidation, are treated as treasury shares.
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
118
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended May 31,
------------------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $(3,724,500) $ 270,700 $(2,070,600)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Minority interest in loss of
consolidated subsidiaries (672,300) (608,700) (653,200)
Income from discontinued operations -- (308,900) (296,200)
Depreciation, depletion and amortization 658,900 788,500 724,700
Abandoned mineral claims 1,225,800 328,700 --
Equity in loss from affiliates 690,800 418,500 442,300
Distribution from affiliate in excess of cost basis (1,003,800) -- --
Gain on sale of assets (39,400) (352,200) (1,282,400)
Provision for doubtful accounts 614,200 -- --
Loss on sale of marketable
equity securities -- -- 90,000
Gain on sale of subsidiary -- (2,295,700) --
Non-cash proceeds from sale of subsidiary -- 607,900 --
Common stock issued to fund ESOP 213,600 87,300 200,000
Non-cash compensation 405,900 339,100 69,500
Common stock and warrants issued for services 286,800 (23,100) 23,100
Other 150,600 (455,600) (219,000)
Net changes in:
Accounts receivable (706,500) 88,600 (415,700)
Other assets (724,100) (520,300) (96,000)
Accounts payable and accrued expenses 331,700 (774,700) 1,557,700
Reclamation and other liabilities (355,300) (377,400) (412,600)
Deferred tax liability -- (117,500)
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (2,647,600) (2,787,300) (2,455,900)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of mining properties (719,300) (763,000) (455,100)
Development of gas properties (29,100) (42,100) (218,200)
Proceeds from sale of subsidiary -- 3,300,000 --
Proceeds from sale of property and equipment 273,500 1,212,900 854,300
Proceeds from sale of investments -- -- 199,300
Purchases of property and equipment (208,600) (1,387,300) (124,200)
Changes in notes receivable, net (121,400) (1,102,800) 91,800
Distribution from affiliate 4,367,000 -- --
Investments in affiliates (1,413,700) (676,500) (627,500)
Reduction in cash due to deconsolidation of subsidiary (484,100) -- --
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES 1,664,300 541,200 (279,600)
----------- ----------- -----------
(Continued)
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
119
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Year Ended May 31,
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock $ 1,270,300 $ 3,273,600 $ 1,376,800
Proceeds from subsidiary stock sale 1,106,700 -- --
Proceeds from long-term debt 554,400 4,212,800 626,400
Net (repayments on) proceeds from lines of credit (499,000) (641,000) 1,140,000
Purchase of treasury stock (235,600) -- --
Repayments of long-term debt (789,200) (3,967,300) (935,300)
------------ ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,407,600 2,878,100 2,207,900
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 424,300 632,000 (527,600)
CASH AND CASH EQUIVALENTS, Beginning of year 992,600 360,600 888,200
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, End of year $ 1,416,900 $ 992,600 $ 360,600
============ =========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 118,900 $ 205,000 $ 160,200
============ =========== ===========
Income taxes paid $ -- $ -- $ --
============ =========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Notes received for sale of assets $ -- $ 1,000,000 $ 1,550,000
============ =========== ===========
Exchange of common shares
investment in affiliate in exchange
for investment in Contingent Stock
Purchase Warrant $ 4,594,000 $ -- $ --
============ =========== ===========
Issuance of common stock to acquire affiliate $ -- $ -- $ 80,000
============ =========== ===========
Deconsolidation of subsidiary in 1997:
Other assets $ 77,600 $ -- $ --
Investment in affiliates 355,000 -- --
Restricted investment 27,000 -- --
Property, plant and equipment 11,560,600 -- --
Notes payable 185,000 -- --
Accounts payable and accrued expenses 433,900 -- --
Minority Interest 2,069,900 -- --
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
120
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
A. BUSINESS ORGANIZATION AND OPERATIONS:
U.S. Energy Corp. (the "Company" or "USE") was incorporated in the State of
Wyoming on January 26, 1966. The Company engages in the acquisition,
exploration, holding, sale and/or development of mineral properties and mining
and marketing of minerals. Principal mineral interests are in uranium, gold, and
molybdenum. The Company also holds various real and personal properties used in
commercial operations and engages in the exploration, development and production
of petroleum. Most of these activities are conducted through the joint venture
discussed below and in Note D. The Company, through its previously wholly-owned
subsidiary, The Brunton Company ("Brunton"), which was sold during February 1996
and treated as a discontinued operation in the 1996 financial statements (see
Notes C and L), also engaged in the manufacturing and/or marketing of compasses
and the distribution of outdoor recreational products, including knives and
binoculars. In addition, through its majority owned subsidiary, Four Nines Gold,
Inc. ("FNG"), the Company historically engaged in projects such as the
construction of municipal sewage systems, irrigation projects and other civil
engineering matters. At May 31, 1997, FNG was primarily engaged in activities
for the Company at its uranium property on Green Mountain in the construction of
a haul road.
The Company and its 52%-owned subsidiary, Crested Corp. ("Crested") (see
Note F) are engaged in two ventures to develop certain uranium properties, one
with Kennecott Uranium Company ("Kennecott") known as Green Mountain Mining
Venture ("GMMV"), formed on June 1, 1990, and the second, a partnership with
Nukem, Inc. ("Nukem") through its wholly-owned subsidiary Cycle Resource
Investment Corporation ("CRIC"), known as Sheep Mountain Partners ("SMP").
Subsequent to May 31, 1997, the Company and USE entered into an agreement with
Kennecott whereby they may purchase Kennecott's interest in the GMMV if certain
conditions are met (see Note F). During fiscal 1991, the Company and Crested
also formed USECC Gold Limited Liability Company ("USECC Gold"), and with Seine
River Resources Inc. ("SRRI") established the Sutter Gold Venture ("SGV") to
develop certain gold properties located in California. The remaining interest of
SRRI was acquired by the Company and Crested during fiscal 1994 (see Note F).
During fiscal 1995, the SGV was terminated, USE and Crested formed a new Wyoming
corporation, Sutter Gold Mining Company ("SGMC)", and agreed to exchange their
interests in USECC Gold for common stock of SGMC. During fiscal 1997, SGMC sold
shares of its common stock in two private placements and the Company and Crested
accepted contingent stock purchase warrants in exchange for certain shares
previously held in SGMC. These activities combined reduced the Company's share
ownership interest in SGMC to 33.9%.
During fiscal 1994, the Company acquired 100% of the outstanding stock of
Plateau Resources Limited ("Plateau"), which owns a nonoperating uranium mill
and support facilities in southeastern Utah. Currently, the mill is nonoperating
but has been granted a license to operate pending certain conditions. See a
further discussion of the acquisition details in Note F.
Liquidity and Operating Losses
As a result of the SMP litigation/arbitration (see Note K) and the
significant amount of standby/maintenance, permitting and development costs
being incurred on the Company's mineral properties, none of which are in
production, the Company has incurred significant losses from continuing
operations during each of the last three years. During the past few years the
Company has relied primarily on the sale of its common stock through private
placements and the exercise of common stock warrants/options, borrowing on its
lines of credit and term loans and the sale of its subsidiary, Brunton, to fund
its losses and cash needs. During fiscal 1997, the
121
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
Company received $136,500 plus interest of $23,292 from SMP for a delivery it
made to one of the SMP contracts in 1991. Additionally, the Company and Crested
received $4,367,000 as partial payment of the monetary resolution of the
American Arbitration Association's Order and Award in the SMP
arbitration/litigation (see Note K). The Company and Crested first applied the
proceeds to their investment balance in SMP. The balance of $1,003,800 after
cost recovery was recorded as income. The Company has net working capital of
$3,007,000 as of May 31, 1997, but will require substantial additional cash to
continue to fund the development of its mineral properties until they can be put
into production.
On June 23, 1997, the Company and USECC entered into an Acquisition
Agreement with Kennecott whereby the Company received a signing bonus of
$4,000,000 and a loan of $16,000,000 to be spent on the GMMV mine and mill
properties. This Agreement also allows the Company and Crested the opportunity
of buying Kennecott's interest in the GMMV (see Note F).
During fiscal 1997, SGMC raised net cash proceeds of $6,509,300 through the
private placement of 1,878,800 shares of its common stock. This sale of equity
reduced the Company's ownership of SGMC which at the same time reduced the
Company's cash commitment to the development of the SGMC properties.
In addition to these capital sources, the Company anticipates obtaining
additional funds from the Arbitration Panel's award in connection with the
settlement of the SMP litigation (see Note K). If the Arbitration Panel's award
is delayed, reduced or overturned, additional sources of funding will be
required to place Plateau into production as well as to purchase the Kennecott
interest in GMMV. Equity funding will be the primary source of these funds which
may not be available to the Company. The Company also believes it can slow its
development activities such that available cash, operating revenues, bank
borrowing and affiliate equity financings will be adequate to fund working
capital requirements for fiscal 1998.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements of USE and affiliates include the
accounts of the Company, the accounts of its majority-owned subsidiaries:
Plateau (100%), Energx, Ltd ("Energx") (90%), FNG (50.9%), SGMC (74% through
March 1997 and 33.9% at May 1997), Crested (52%) and the USECC Joint Venture
("USECC"), a joint venture through which USE and Crested conduct the bulk of
their operations. USECC is owned equally by the Company and Crested. USECC owns
the buildings and other equipment (see Note D) used by the Company and has
invested in SMP (see Notes E and F). The accounts of Brunton have been reflected
as discontinued operations in the 1996 and 1995 financial statements since
Brunton was sold in February 1996.
Investments in other joint ventures and 20% to 50% owned companies are
accounted for by the equity method (see Note E). SGMC was consolidated through
May 1997 until the Company relinquished majority ownership in SGMC at which time
SGMC was accounted for using the equity method as of May 31, 1997. Investments
of less than 20% in companies are accounted for by the cost method. All material
intercompany profits, transactions and balances have been eliminated.
122
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The carrying amount
of cash equivalents approximates fair value because of the short maturity of
these instruments.
Investments
Based on the provisions of SFAS No. 115, the Company accounts for
investments as held-to-maturity. Held-to-maturity securities are measured at
amortized cost and are carried at the lower of aggregate cost or fair market
value.
Inventories
Inventories consist primarily of aviation fuel, associated aircraft parts,
mining supplies, purchased uranium, gold ore stockpiles and modular homes held
for resale. Retail inventories are stated using the average cost method of
accounting for inventories. Other inventory is stated at the lower of cost or
market.
Properties and Equipment
Land, buildings, improvements, aircraft and other equipment are carried at
cost.
Depreciation of buildings, improvements, aircraft and other equipment is
provided principally by the straight-line method over estimated useful lives
ranging from three to forty-five years.
The Company capitalizes all costs incidental to the acquisition,
exploration, holding and development of mineral properties as incurred. The
costs of mine development are deferred until production begins on the basis that
they will be recovered through future mining operations. Once commercial
production begins, mine development costs incurred to maintain production will
be expensed. Capitalized costs are charged to operations at the time the Company
determines that no economic ore bodies exist on such properties. Costs and
expenses related to general corporate overhead are expensed as incurred.
The Company and Crested have acquired substantial mining property assets
and associated facilities at minimal cash cost, primarily through the assumption
of reclamation and environmental liabilities. Certain of these assets are owned
by various ventures in which the Company is either a partner or venturer. The
market value of these assets and most of the reclamation and environmental
liabilities associated with them are not reflected in the accompanying
consolidated balance sheets (see Note K).
Proceeds from the sale of undeveloped mineral properties are treated as a
recovery of cost with any excess of proceeds over cost recognized as gain.
The Company follows the full-cost method of accounting for oil and gas
properties whereby all costs incurred in the acquisition, exploration and
development of the properties, including unproductive wells, are capitalized,
limited to the present value of the estimated proved reserves and the lower of
cost or estimated fair value of unproved properties.
123
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
Depreciation, depletion and amortization of oil and gas properties is
provided by the units of production method based on the estimated reserves to be
recovered. All oil and gas properties were fully amortized at May 31, 1997.
Long-lived Assets - The Company evaluates potential impairment of
long-lived assets and long-lived assets to be disposed of in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121"). SFAS No. 121 establishes procedures for review of
recoverability, and measurement of impairment if necessary, of long-lived assets
and certain identifiable intangibles held and used by the entity. SFAS No. 121
requires that those assets be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be fully
recoverable. SFAS No. 121 also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less estimated selling costs. As of May 31, 1997,
management believes that there has not been any impairment of the Company's
long-lived assets or other identifiable intangibles.
Fair Value of Financial Instruments - The recorded amounts for cash and
cash equivalents, receivables, other current assets, and accounts payable and
accrued expenses approximate fair value due to the short-term nature of these
financial instruments.
Revenue Recognition
Advance royalties which are payable only from future production or which
are non-refundable are recognized as revenue when received (see Note F).
Non-refundable option deposits are recognized as revenue when the option
expires.
Revenues from gold and uranium sales are recognized upon delivery. Revenues
are recognized from the rental of certain assets as they are rented. Revenue
from commercial operations are recognized as goods and services are delivered.
Oil and gas sales revenue is recognized at the time of production (see Notes D
and F).
Revenues from long-term construction contracts is recognized on the
percentage-of-completion method determined by the ratio of costs incurred to
management's estimate of total anticipated costs. If estimated total costs on
any contract indicate a loss, the Company provides currently for the total
anticipated loss on the contract. Billings on uncompleted long-term contracts
may be greater or less than incurred costs and estimated earnings, and are shown
as current liabilities or current assets in the accompanying consolidated
balance sheets.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income
Taxes". This statement requires recognition of deferred income tax assets and
liabilities for the expected future income tax consequences, based on enacted
tax laws, of temporary differences between the financial reporting and tax bases
of assets, liabilities and carryforwards.
SFAS No. 109 requires recognition of deferred tax assets for the expected
future effects of all deductible temporary differences, loss carryforwards and
tax credit carryforwards. Deferred tax assets are then reduced, if
124
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
deemed necessary, by a valuation allowance for any tax benefits which, based on
current circumstances, are not expected to be realized.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number
of common shares outstanding during each period. Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), which establishes standards for
computing and presenting earnings per share, is effective for years ending after
December 15, 1997. Management does not believe the adoption of SFAS 128 will
materially affect reported earnings per share.
Management's Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform with the 1997 presentation.
C. RELATED-PARTY TRANSACTIONS:
The Company and Crested provide management and administrative services for
affiliates under the terms of various management agreements. The Company
provides all employee services required by Crested. In exchange, Crested is
obligated to the Company for its share of the costs for providing such
employees. Revenues from services by the Company to unconsolidated affiliates
were $397,700, $92,900 and $87,300 in fiscal 1997, 1996 and 1995, respectively.
The Company has 1,037,800 of receivables from unconsolidated subsidiaries and
short-term advances to employees totaling 153,200 as of May 31, 1997.
At May 31, 1997, the Company's President and his immediate family were
indebted to the Company in the amount of $745,300 which is represented by notes
secured by 160,000 shares of the Company's common stock.
During fiscal 1995, the Company sold a house in Riverton, Wyoming, to
Harold F. Herron, Vice President of the Company for an amount equal to a current
independent appraisal. At the same time the Company loaned to Mr. Herron the sum
of $112,170 secured by 30,000 shares of the Company's common stock for a period
of five years. This amount is included in the $745,300 and discussed above.
On June 14, 1995, USECC signed a six year option to acquire a 7,200 square
foot hangar at the Riverton Regional Airport, for $110,000, from Arrowstar
Investments, Inc. ("Arrowstar"), an entity which is owned by the
125
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
Company's President and his family. In 1996, the option was amended and the
Company purchased the hangar for $75,000.
On May 15, 1997 Yellow Stone Fuels Corp. ("YSFC"), a 14% owned affiliate of
USE and a 14% owned affiliate of Crested signed a promissory note in favor of
USECC in the amount of $400,000 ($392,200 outstanding at May 31, 1997). This
note bears interest at 10% and is due on December 31, 1998. In lieu of paying
the note in cash on or before its maturity date, Yellow Stone Fuels Corp. may
convert this debt, at its option, into YSFC shares of common stock at $1.00 per
share of debt and interest. However, if YSFC defaults in paying the note on
December 31, 1998, the note is convertible into a number of shares which will
give USE and Crested a combined 51% ownership interest in YSFC.
D. USECC JOINT VENTURE:
USECC operates the Glen L. Larsen office complex; an aircraft hangar with a
fixed base operation, office space and certain aircraft; holds interests in
various mineral properties and ventures including SMP and GMMV; conducts oil and
gas operations; and transacts all operating and payroll expenses, except for
specific expenses allocated directly to each venturer. The joint venture
agreement also provides for the allocation of certain operating expenses to
other affiliates. In addition, through April 1996, USECC operated Wind River
Estates ("Wind River"), a 100 unit mobile home park. During 1996, USECC sold
Wind River (which had a net book value of approximately $512,700) to Arrowstar.
USECC recognized a gain of $252,600 on the sale of Wind River, which is
reflected as a gain on sale of assets in the accompanying consolidated
statements of operations. USECC received consideration of $765,300 for Wind
River. The $765,300 was comprised of the following:
Cash $ 500,000
Note receivable 56,000
Debt forgiven 47,900
50% interest in First-N-Last LLC 161,400
----------
$ 765,300
The debt forgiven was an amount due to Arrowstar from USECC for the
purchase of the hangar at the Riverton Regional Airport discussed above.
First-N-Last LLC owns and operates a convenience store near Lake Powell in Utah.
Subsequently, USECC then transferred its acquired 50% ownership in First-N-Last
LLC to Plateau, which reduced USE's payable to Plateau.
E. INVESTMENTS AND ADVANCES:
The Company's restricted investments secure various decommissioning costs,
reclamation and holding costs. Investments are comprised of debt securities
issued by the U.S. Treasury that mature at varying times from three months to
one year from the original purchase date. As of May 31, 1997, the cost of debt
securities was a reasonable approximation of fair market value.
The Company's investment in and advances to affiliates are as follows:
126
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
<TABLE>
<CAPTION>
Consolidated Carrying Value at May 31,
Ownership 1997 1996
------------- ---- ----
<S> <C> <C> <C>
Equity Method:
SGMC 33.9%* $4,034,800 $ --
GMMV 50.0% 724,800 724,800
Ruby Mining Company 26.7% 32,600 35,900
YSFC 28.0%** 207,400 --
SMP (Note F) 50.0% -- 2,897,800
---------- ----------
$4,999,600 $3,658,500
========== ==========
*Consolidated until May, 1997.
**Includes notes receivable of $392,200 from YSFC (see Note C).
</TABLE>
Equity loss from investments accounted for by the equity method are as
follows:
<TABLE>
<CAPTION>
Year Ended May 31,
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SMP (Note F) $(442,700) $(416,200) $(439,200)
Ruby Mining Company (3,300) (2,300) (3,100)
YSFC (244,800) -- --
GMMV (Note F) -- -- --
--------- --------- ---------
$(690,800) $(418,500) $(442,300)
========= ========= =========
</TABLE>
There are currently litigation and arbitration proceedings with the
Company's partner in the SMP partnership, as discussed further in Note K.
SMP has entered into various market related and base price escalated
uranium sales contracts with certain utilities which require approximately
1,500,000 pounds of uranium concentrates to be delivered from 1997 through 2000
depending on utility requirements. These contracts also allow for the quantities
to be substantially increased by the utilities. Until the disputes between the
SMP partners are resolved, the Company and Crested are arranging for the
purchase and delivery of their portion of the contracts or are allowing Nukem
and CRIC to make the entire delivery. The deliveries will be satisfied by
purchases in the spot market, existing purchase contracts, uranium inventories
or by producing from SMP properties. Production will not be commenced, however,
until uranium prices rise substantially. Most market related sales contracts can
be settled through spot market purchases. The last delivery under the remaining
base price sales contract was made in May 1996 and exceeded the spot market
price as of May 31, 1996. Revenues from such uranium sales of $1,383,400 have
been included in the accompanying consolidated statements of operations for the
year ended May 31, 1996, which would normally have been sales of SMP. All sales
contracts were filled by Nukem in 1997 and 1995, and as a result, no revenues
from uranium sales were recognized during 1997 and 1995. The cash from uranium
sales is accumulating in SMP's bank accounts and is subject to the Order and
Award of the arbitration proceedings with Nukem/CRIC discussed in Note F.
127
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
GMMV expenses certain general and administrative, maintenance and holding
costs. However, the Company has not recognized equity losses in GMMV because
Kennecott was committed to fund 100% of the first $50,000,000 of development and
operating costs of the Joint Venture. Subsequent to May 31, 1997, the Company
and USECC entered into an Acquisition Agreement with Kennecott whereby the
Company may be able to purchase Kennecott's interest in the GMMV (see Note F).
The Company's carrying value of its investment in GMMV of $744,800 in the
accompanying balance sheets is substantially lower than its underlying equity in
GMMV.
Condensed combined statements of operations of the Company's equity
investees include GMMV, SMP, SGMC (as of May 31, 1997), YSFC and Ruby Mining
Company. SGMC is included in the condensed combined balance sheet disclosure
only due to its deconsolidation effective May 1997.
<TABLE>
CONDENSED COMBINED BALANCE SHEETS - EQUITY INVESTEES
<CAPTION>
May 31,
----------------------------------
1997 1996
---- ----
<S> <C> <C>
Current assets $ 21,524,800 $ 19,525,200
Non-current assets 78,125,200 49,901,000
------------ ------------
$ 99,650,000 $ 69,426,200
============ ============
Current liabilities $ 23,772,200 $ 8,160,800
Reclamation and other liabilities 30,116,300 41,270,800
Excess in assets 45,761,500 19,994,600
------------ ------------
$ 99,650,000 $ 69,426,200
============ ============
</TABLE>
<TABLE>
CONDENSED COMBINED STATEMENTS OF OPERATIONS - EQUITY INVESTEES
<CAPTION>
Year Ended May 31,
--------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues $ 883,300 $ 1,143,500 $ 368,300
Costs and expenses (4,091,500) (1,825,400) (1,402,400)
------------ ------------ ------------
Net loss $ (3,208,200) $ (681,900) $ (1,034,100)
============ ============ ============
</TABLE>
F. MINERAL CLAIMS TRANSACTIONS AND MINING PROPERTIES:
GMMV
During fiscal 1990, the Company and Crested entered into an agreement with
Kennecott, a wholly-owned, indirect subsidiary of The RTZ Corporation PLC, for
Kennecott to acquire a 50% interest in certain uranium mineral properties in
Wyoming known as the Green Mountain Properties. The purchase price was
$15,000,000 and a commitment to fund the first $50 million of development and
operating costs. Before they were contributed to GMMV, the Green Mountain
Properties were owned by the Company, with a portion owned by USECC.
128
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
The Boards of Directors of the Company and Crested adopted a method of
apportioning the initial consideration of $15,000,000, on a ratio of 84% to the
Company and 16% to Crested. This division was based on analyses of the projected
cash flows of the properties contributed by USE and USECC.
Kennecott committed to fund 100% of the first $50 million of capital
contributions to the joint venture. Kennecott also committed to pay additional
amounts if certain future operating margins are achieved. USE and USECC
participate in cash flows of the GMMV in accordance with their ownership of
the
mining claims prior to the formation of GMMV. Because USE owned all the claims
on that portion of the Green Mountain Properties where the Round Park (Jackpot)
uranium deposit was delineated, Crested has no interest in GMMV's cash flow from
the ore produced in mining operations on the Round Park properties, which have
been scheduled for initial development. USE and Crested will share their portion
of the cash flows from the other GMMV properties on a 50-50 basis.
GMMV has incurred $20,416,400 in the development and operations of the
above uranium mineral properties through May 31, 1997. This was funded by
Kennecott out of the $50 million funding commitment. As previously mentioned,
the Company's carrying value of its investment in GMMV is $724,800 at May 31,
1997, which is substantially lower than its equity basis in GMMV. Reclamation
obligations of GMMV are discussed in Note K. Development of the properties
continues in anticipation of future uranium price increases.
On June 23, 1997, USE and USECC signed an Acquisition Agreement with
Kennecott for the right to acquire Kennecott's interest in the GMMV for
$15,000,000 and other consideration. Kennecott paid USE and USECC $4,000,000 on
signing, and committed to loan the GMMV up to $16,000,000 for payment of
reimbursable costs incurred by USECC in developing the proposed underground
Jackpot Uranium Mine for production and in changing the status of the Sweetwater
Mill from standby to operational.
The $16,000,000 loan being provided by Kennecott to the GMMV was advanced
to Kennecott by an affiliate, Kennecott Energy Company ("KEC") under a secured
recourse Promissory Note (the "Note") bearing interest at 10.5% per annum
starting April 1999 until paid in full. The Note is payable quarterly out of 20%
of cash flow from the GMMV properties, but not more than 50% of the earnings for
such quarter from the GMMV operations, before interest, income tax, depreciation
and amortization; however, the Note is payable (i) in full on June 23, 2010
regardless of cash flow and earnings of the GMMV, or (ii) sooner (on December
31, 2005) if an economically viable uranium mine has not been placed into
production by such date. The Note is secured by a first mortgage lien against
Kennecott's 50% interest in the GMMV pursuant to a Mortgage, Security Agreement,
Financing Statement and Assignment of Proceeds, Rents and Leases granted by
Kennecott to KEC (the "Mortgage"). USE and USECC will assume the Note, and the
assets of the GMMV will be subject to the Mortgage, at closing of the
acquisition.
Pursuant to the Acquisition Agreement, the Mineral Lease, and the Mill
Contract, USECC is to develop the proposed Jackpot Mine and nearby Big Eagle
Mine, and work with Kennecott in preparing the Sweetwater Mill for renewed
operations. Such work will be funded from the $16,000,000 being loaned to the
GMMV by Kennecott. Kennecott will be entitled to a credit against Kennecott's
original $50,000,000 commitment to fund the GMMV, in the amount of two dollars
of credit for each one dollar of such funds out of the $16,000,000 loaned by
Kennecott to the GMMV, plus the $4,000,000 paid to USE and USECC on signing of
the Acquisition Agreement. It is anticipated that such credits will fully
satisfy the balance of Kennecott's initial funding commitment to the GMMV.
129
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
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 another date not later than October 30, 1998.
If the Acquisition Agreement is not closed by December 1, 1997, then USE
and USECC (or an entity formed by them to acquire the GMMV interest owned by
Kennecott) are to provide to Kennecott a commitment letter from a recognized
national investment banking firm to complete an underwritten public offering of
the securities of USE (or the entity formed to acquire Kennecott's interest) in
amount sufficient to close the Acquisition Agreement transactions. Such amount
is estimated by USE to be approximately $40,000,000 (for the $15,000,000 closing
cash purchase price to Kennecott, plus $25,000,000 to assume or cause the
replacement of reclamation bonds, guarantees, indemnification agreements and
suretyship agreements related to the GMMV properties and the Sweetwater Mill)
Alternatively, USE and USECC (or the acquiring entity) may provide evidence to
Kennecott of a commitment letter from a bank or other institutional or industry
entity to provide private or joint venture financing in such approximate amount.
Failure to provide evidence of such financial commitment by December 1, 1997
will terminate the Acquisition Agreement, the Mineral Lease and the Mill
Contract.
Subject to providing evidence of adequate financial resources to close the
Acquisition Agreement with funds from a public financing or otherwise, the
$4,000,000 signing bonus paid by Kennecott is nonrefundable and will serve to
reduce USE's and Crested's ultimate $15,000,000 purchase obligation.
If the Acquisition Agreement is not closed, USE, USECC and Kennecott shall
continue to own their respective 50% interests in the GMMV, and Kennecott's
obligation to repay the $16,000,000 loaned by KEC shall remain Kennecott's
obligation, without any adverse effect on the 50% interest in GMMV held by USE
and USECC. However, the Jackpot Mine development work and Sweetwater Mill
upgrade work funded by the $16,000,000 advance will have benefitted all parties
to the GMMV and will fully satisfy Kennecott's original $50,000,000 funding
obligation to GMMV.
SMP
During fiscal 1989, USE and Crested, through USECC, entered into an
agreement to sell a 50% interest in their Sheep Mountain properties to Nukem's
subsidiary CRIC. USECC and CRIC immediately contributed their 50% interests in
the properties to a newly-formed partnership, SMP. SMP was established to
further develop and mine the uranium claims on Sheep Mountain, acquire uranium
supply contracts and market uranium. SMP agreed to deposit up to $.50 per pound
of U3O8 as it is produced from the properties for reclamation obligations.
Certain disputes have arisen among USECC, CRIC and its parent Nukem, Inc. over
the formation and operation of SMP. These disputes have been in
litigation/arbitration for the past six years. In the arbitration, the American
Arbitration Association Panel issued its Order and Award during fiscal 1996. On
June 27, 1997, the United States
130
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
District Court entered its Second Amended Judgment confirming the Order and
Award and including the equitable portion of the Order and Award. Nukem/CRIC
filed a motion for clarification and/or limited remand. The Court denied the
motion and Nukem has until September 12, 1997 to determine if it will appeal the
Second Amended Judgment to the Tenth Circuit Court of Appeals. See Notes E and K
for a description of the investment and a discussion of the related
litigation/arbitration.
AMAX Transactions
During prior years, the Company and Crested conveyed interests in mining
claims to AMAX Inc. ("AMAX") in exchange for cash, royalties, and other
consideration including interest-free loans, due in 2010. In connection with a
renegotiation of various rights and duties of the parties, AMAX agreed to
amortize the principal amount of those loans. The loans were completely
amortized in fiscal 1994. AMAX was acquired by Cyprus Minerals Corporation in
November 1993 and is now doing business as "Cyprus Amax." AMAX and its successor
Cyprus Amax have not placed the properties into production as of May 31, 1997.
Cyprus Amax may elect to return the properties to the Company and Crested,
which would cancel the advance royalty obligation. If Cyprus Amax formally
decides to place the properties into production, it will pay $2,000,000 to the
Company and Crested. If Cyprus Amax sells the properties, the Company and
Crested will receive 15% of the first $25 million received by Cyprus Amax.
In addition, Cyprus Amax now pays the Company and Crested an annual advance
royalty of 50,000 pounds of molybdenum (or its cash equivalent). Cyprus Amax is
entitled to a partial credit against future royalties for any advance royalty
payments made, but such royalties are not refundable if the properties are not
placed into production. The Company recognized $207,300, $-0- and $85,500 of
revenue from the advance royalty payments in fiscal 1997, 1996 and 1995,
respectively.
The Company and Crested held an option to purchase certain real estate
located in Gunnison owned by Cyprus Amax. During fiscal 1995, USE and Crested
reached an agreement with Cyprus Amax whereby USE and Crested would forego six
quarters of advance royalties as payment of this option exercise price. USE and
Crested received no advance royalties during 1996 as a result of this agreement.
Thereafter, USE (together with Crested) signed two option agreements with
Pangolin Corporation, a Park City, Utah developer, for sale of the 57 acres, and
a separate parcel owned in Gunnison County, Colorado.
The first option (exercised by Gunnison Center Properties LLC in January
1995) was for 57 commercial and noncommercial zoned acres in the City of
Gunnison, Colorado; the net purchase price was $970,300. This resulted in a gain
for the Company of $491,100. Pangolin paid $345,000 cash and $625,300 in
nonrecourse promissory notes. The first note for $137,900 was paid in fiscal
1995. The second note for $487,366 was a three year promissory note, bearing
interest at 7.5% per year and calling for interest only payments in January 1996
and 1997 with the balance due in January 1998, of which $0 and $35,600 was
received during fiscal 1997 and 1996, respectively. Effective December 1, 1996 a
replacement promissory note was given to USE and Crested by Contour Development
Company LLC in the principal amount of $454,900 payable January 1998, bearing
interest at the rate of 7.5% per annum, and secured by Contour's 73% interest in
a limited liability company owning a 2.93 acre subdivided lot in the City of
Gunnison currently approved for development with an 87 unit apartment project.
As of May 31, 1997 the second note had an outstanding principal balance of
$451,865, of which USE's 50%
131
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
portion, or $225,932, is reflected in the accompanying consolidated balance
sheet, before a valuation allowance of $86,800.
The second option covered 472.5 acres of ranch land northwest of the City
of Gunnison, Colorado and was exercised by Castle Mountain Ranches LLC in May
1995 (purchase price $822,460). Pangolin paid $10,000 for the option; on option
exercise and closing, Pangolin paid $36,090 in cash for 22 acres and two
nonrecourse promissory notes totaling $776,370, each due May 30, 1998, and
secured by the remaining acreage. One note for $145,500 bore interest at the
rate of 7.5% per annum until August 28, 1995 and thereafter at the rate of 12%
per annum until paid. A principal payment in the amount of $35,000 was due on
May 30, 1996 but was not paid. The second note for $630,873 bore interest at the
rate of 7.5% per annum with interest only payments due May 30, 1996 and May 30,
1997 and principal and interest due at maturity. Effective December 1, 1996 a
replacement note from Contour Development Company LLC was given to Crested in
the principal amount of $872,508 bearing interest at the rate of 8.39% per annum
until May 30, 1997, at which time a principal payment of $128,138, together with
accrued interest, was due, but was not paid. As a result of Contour's default in
the payment due May 30, 1997, The Company and Crested have declared the entire
principal balance of this note to be due and payable and have declared a default
in the pledge of Contour's 73% interest in the limited liability company
building the apartment project in the City of Gunnison. The Company recognized a
consolidated bad debt expense of $614,200 and the reversal of a deferred gain of
$312,100 as a result of Contour's default, and has established a corresponding
valuation allowance against the receivable in the amount of $(839,500). The
Company and Crested are currently evaluating their potential remedies against
Contour (which may include litigation).
Sutter Gold Mining Company
Sutter Gold Mining Company ("SGMC") was formerly a joint venture between
USE and SRRI formed to acquire, hold and develop mineral leases and mining
claims in Amador County, California (the "Lincoln Project"). On December 14,
1990, Crested purchased one-ninth of USE's beneficial interest in the SGV
Properties hereinafter fully described, for $500,000 and the commitment to fund
one-ninth of the future costs and liabilities. USE and Crested formed USECC Gold
Limited Liability Company ("USECC Gold") which became the joint venturer with
SRRI on the Lincoln Project. USECC Gold was owned 88.89% by USE and 11.11% by
Crested. SGMC was established to conduct operations on mining leases and to
produce gold from the Lincoln Project.
USE (i) funded $4,500,000 of the $5,000,000 purchase price of SGMC's
properties; (ii) agreed to initially fund SRRI's share of holding and
development costs totaling $500,000; and (iii) agreed to provide its share of
the holding costs and assessments of SGMC. SRRI, the second venture partner,
through a subsidiary, funded $500,000 of the property purchase price, and agreed
to pay $2,000,000 to USE to equalize the investments so that USE and SRRI would
each initially hold 50% interests in SGMC. USE was to recover the $500,000 of
predecessor holding costs and SGMC's initial development costs paid by them, out
of SGMC's initial cash flows.
SRRI issued a $2,000,000 note to USE, bearing interest at 10% per annum.
The note provided that $500,000 of principal and accrued interest was due April
12, 1991, and the balance of $1,500,000 with interest was due October 12, 1991.
In February 1991, USE and Crested formed USECC Gold and transferred their
respective interests in the Lincoln Project to USECC Gold. When the installments
on the $2,000,000 note to USE were not paid when due, the interests of USECC
Gold and SRRI in SGMC were adjusted to equal the percentage of the $5,000,000
purchase price of SGMC's properties that each of them provided. On July 16,
1991, the 50% interest of SRRI in SGMC was reduced to 40%, with a corresponding
increase in the USECC Gold interest to
132
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
60%. On October 12, 1991, SRRI's interest was further reduced to 10% and USECC
Gold's interest increased to 90%. On May 23, 1994, SRRI released its remaining
10% interest and issued 400,000 shares of SRRI common stock to USE in exchange
for the release of all SRRI's liabilities relating to SGMC and USECC Gold.
Accordingly, SRRI's capital investment of $257,900 and all liabilities of SGMC
to USE and its affiliates on behalf of SRRI totaling $1,550,600 were transferred
to USECC Gold's capital investment. In addition, SGMC released SRRI of its
obligation to SGMC totaling $1,970,500, which included accrued but unrecorded
interest of approximately $579,800.
On August 5, 1994, USE, Crested and SGMC entered into an agreement whereby
USE and Crested each conveyed their eight-ninths and one-ninth interest,
respectively, in USECC Gold in exchange for common shares of SGMC. USE and
Crested ultimately received approximately 100% of the outstanding shares of
SGMC's common stock, respectively, for their eight-ninth and one-ninth interest,
respectively in USECC Gold.
SGMC is in the development stage and additional development is required
prior to the commencement of commercial production. SGMC has yet to generate any
significant revenue and has no assurance of future revenue. During fiscal 1992,
SGMC shipped a bulk sample of gold ore mined during development operations to an
independent mill to determine mill availability and assay information.
Approximately 1,400 ounces of gold was recovered and sold. The related mining
costs were recognized. All acquisition and other mine development costs since
inception have been capitalized. Since test production in 1992, SGMC has focused
its efforts on obtaining a reserve study, developing a mine plan and pursuing a
partner to assist in the financing of its mineral development and ultimate
production. In the interim, SGMC will continue to require capital contributions
from USE, Crested or other sources of financing to maintain its current
activities. SGMC will continue to be considered in the development stage until
such time as it generates significant revenue from its principal operations.
Since inception, the Company and Crested have funded $7,858,900 in
development and holding costs. These costs were funded by the Company and
Crested on a eight-ninths/one-ninths basis, respectively. As of May 31, 1997,
the Company's total investment in SGMC had a carrying value of $8,628,800.
During May 1996, SGMC issued shares of its common stock to certain
individuals, including a related party for total proceeds of $98,000. Such
shares were authorized to be sold by SGMC in October 1995 to raise funds to pay
for legal and other costs of a possible future equity financing.
During the first and second quarters of fiscal 1997, SGMC sold additional
shares of its common stock in a private placement. These shares were sold for
$3.00 per share. SGMC received $1,106,600 in net proceeds from this equity
placement.
During the fourth quarter of fiscal 1997, management of SGMC entered into
an Engagement Letter with a different underwriter in Toronto to complete an
offering of additional shares of SGMC's common stock which closed in May, 1997
and raised approximately $5,400,000 in net cash proceeds. At the underwriter's
request, the initial investors (including USE and Crested) agreed to have the
amount of their common shares owned reduced by 50 percent. The investors in the
$3.00 per share private placement discussed above were not affected as those
shares were sold in contemplation of the 1 for 2 reverse split.
In connection with this Offering, the Company and Crested accepted a Stock
Purchase Warrant dated March 21, 1997 which provides the Company and Crested the
right to acquire for no additional consideration
133
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
common shares of SGMC's $.001 par value common stock having an aggregate value
of $10,000,000 (US). The Stock Purchase Warrant has a term of ten years
extending to March 21, 2007, and is exercisable partially or in total,
semi-annually beginning on June 30, 1997. However, the Stock Purchase Warrant is
only exercisable to the extent proven and probable ore reserves, as defined in
the Stock Purchase Warrant, in excess of 300,000 ounces are added to SGMC's
reserves. In addition, SGMC shall have the right to satisfy the exercise of all
or any portion of the Stock Purchase Warrant with the net cash flows, as
defined, at $25.00 (US) for each new ounce of proven and probable ore in excess
of 300,000 ounces to a maximum of 700,000 ounces. Accordingly, the Company has
allocated the carrying value of SGMC shares exchanged for the Contingent Stock
Purchase Warrant to its investment in such contingent warrants. The Stock
Purchase Warrant benefits the Company and Crested on a basis of 88.9% and 11.1%,
respectively.
Plateau Resources Limited
Effective August 11, 1993, USE entered into an agreement with Consumers
Power Company to acquire all the issued and outstanding common stock of Plateau
Resources Limited ("Plateau"), a Utah corporation. Plateau owns a uranium
processing mill and support facilities and certain other real estate assets
through its wholly-owned subsidiary Canyon Homesteads, Inc. ("CHI") in
southeastern Utah. USE paid nominal cash consideration for the Plateau stock and
agreed to assume all environmental liabilities and reclamation bonding
obligations. Prior to closing the agreement, Plateau transferred $2,500,000 cash
to fund the NRC Surety Trust Agreement to pay future costs of mill
decommissioning, site reclamation and long-term site surveillance. Plateau also
transferred $4,800,000 cash to an Agency Agreement to indemnify the seller
against possible environmental or nuclear claims. At the date of acquisition,
Plateau held an additional $6,900,000 of unencumbered cash to be used for care
and maintenance costs on the mill and other assets acquired. As of May 31, 1997,
most of the unencumbered cash has been used for care and maintenance costs or
was loaned to USE for development of certain properties held by the Company and
Crested. Directors of the Company and Crested have agreed to divide equally
one-half of the obligations incurred in excess of the total $14,200,000
described above and will share in one-half of all cash flows derived from
operations of these assets.
On August 25, 1995, Plateau signed a letter of intent with an unrelated
third party to sell part interest in CHI, a wholly-owned subsidiary of Plateau,
and to develop the Ticaboo Townsite, in south central Utah and other resort
properties near Lake Powell. In fiscal 1995 the purchaser defaulted, and the
$100,000 earnest money deposit was recognized as income in fiscal 1995.
CHI entered into a joint venture, First-N-Last LLC, with Arrowstar
Investments, Inc. ("Arrowstar") to develop on a 50/50 basis, certain properties
at the Ticaboo Townsite. Arrowstar is owned by certain shareholders of the
Company. During 1996, Arrowstar gave its 50% interest in First-N-Last LLC to
USECC as part of the consideration for Wind River (see Note D). USECC then
transferred its 50% ownership in First-N-Last LLC to Plateau. As of May 31,
1997, Plateau/CHI owns 100% of First-N-Last, LLC.
Energx, Ltd.
During fiscal 1994, USE and Crested formed Energx to engage in the
exploration, development and operation of natural gas properties. Energx
currently has leased properties in Wyoming and on the Fort Peck Indian
Reservation, Montana. Energx is owned by USE (45%), Crested (45%) and the
Assiniboine and Sioux Tribes (10%).
134
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
During fiscal 1995, Energx sold a 50% interest in the leases on the Fort
Peck Indian Reservation for the sum of $200,000 plus $100,000 to be used only
for the acquisition and consolidation of additional leases, and for a commitment
to drill eight exploratory wells. Eight exploratory wells were drilled and were
found to be non- commercial. No further activity is planned for this project.
During 1997 and 1996, Energx abandoned certain of its leases and as a
result wrote off $164,500 and $328,700, respectively, of costs capitalized
associated with theses leases. The write off is reflected as abandonment of
mineral interests in the accompanying 1997 and 1996 consolidated statements of
operations.
G. DEBT:
Lines of Credit
USE and Crested have a $1,000,000 line of credit from a commercial bank.
The line of credit bears interest at the bank's prime rate plus .5% (10.25% as
of May 31, 1997). The weighted average interest rate for 1997 and 1996 for the
line of credit was 10.25%. The line of credit is secured by certain real
property and a share of the net proceeds of fees from production from certain
oil wells. As of May 31, 1996, $176,000 was outstanding on this line of credit.
No amounts were outstanding as of May 31, 1997.
FNG held a $400,000 line of credit with a commercial bank. This line of
credit accrued interest at 2.0% over the bank's prime rate and expired on
February 28, 1997. At May 31, 1996, $323,000 was outstanding. No amounts were
outstanding as of May 31, 1997. The weighted average rate for 1997 and 1996 for
this line of credit was 10.79%. The line of credit was not renewed when it
expired on February 28, 1997.
Notes Payable
The components of notes payable as of May 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
May 31,
------------------------
1997 1996
---- ----
<S> <C> <C>
Installment notes - secured by equipment;
interest at 8.75% - 9.5%, mature 2000 $ 69,100 $ 252,900
FNG installment notes - secured by FNG
equipment, interest at 7.5% to 11.25%
matures in 1997 - 2002 195,300 431,300
--------- ----------
264,400 684,200
Less current portion (81,300) (239,900)
--------- ----------
$ 183,100 $ 444,300
========= ==========
</TABLE>
Principal requirements on notes payable for the five years after May 31,
1997 are as follows: 1998 - $81,300; 1999 - $85,800; 2000 - $55,700; 2001 -
$34,200; 2002 - $6,000 and thereafter $1,400.
135
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
H. INCOME TAXES:
The components of deferred taxes as of May 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
May 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 129,800 $ 40,100
Net operating loss carryforwards 6,731,500 7,260,400
Capital loss carryforwards -- 297,100
Tax Credits 325,100 325,100
Other 655,400 106,100
Tax basis in excess of book basis 573,400 --
------------ ------------
Total deferred tax assets 8,415,200 8,028,800
------------ ------------
Deferred tax liabilities:
Book basis in excess of tax basis -- (597,900)
Development and exploration costs (1,963,400) (2,332,100)
------------ ------------
Total deferred tax liabilities (1,963,400) (2,930,000)
------------ ------------
6,451,800 5,098,800
Valuation allowance (6,635,100) (5,282,100)
------------ ------------
Net deferred tax liability $ (183,300) $ (183,300)
============ ============
</TABLE>
The Company has established a valuation allowance of $6,635,100 against
deferred tax assets due to the losses incurred by the Company in fiscal 1997,
1996 and 1995. The Company's ability to generate future taxable income to
utilize the NOL and capital loss carryforwards is uncertain.
The income tax provision (benefit) is different from the amounts computed
by applying the statutory federal income tax rate to income before taxes. The
reasons for these differences are as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected federal income tax $(1,266,330) $(793,500) $ (804,700)
Utilization of capital loss carryforward -- -- (269,900)
Net operating losses not previously
benefitted and other (86,670) (204,800) (569,600)
Valuation allowance 1,353,000 998,300 1,644,200
----------- --------- -----------
Income tax provision $ -- $ -- $ --
=========== ========= ===========
</TABLE>
There were no taxes currently payable as of May 31, 1997, 1996 or 1995
related to continuing operations.
At May 31, 1997, the Company and its subsidiaries had available, for
federal income tax purposes, net operating loss carryforwards of approximately
$21,300,000 which will expire from 1998 to 2012 and investment tax credit
carryforwards of $325,000 which, if not used, will expire from 1998 to 2003. The
Internal Revenue Code contains provisions which limit the NOL carryforwards
available which can be used in a given year when
136
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
significant changes in company ownership interests occur. In addition, the NOL
and credit amounts are subject to examination by the tax authorities.
The Internal Revenue Service has audited the Company's and affiliates' tax
returns through fiscal 1991, and their income tax liabilities are settled
through that year. The IRS has recently audited the Company's and affiliates',
which includes USECC, fiscal years 1993 and 1994 returns. The Company has
received a 30 day letter for the year 1993 and 1994. The Company has submitted a
written appeal to protest the findings of the examining agent to preserve its
NOL. Management believes the Company will prevail on the significant issues in
dispute, and therefore, that no significant changes will result from the
findings.
I. SEGMENTS AND MAJOR CUSTOMERS:
The Company's primary business activity is the sale of minerals and the
acquisition, exploration, holding, development and sale of mineral bearing
properties although the Company has no producing mines. Other reportable
industry segments included commercial operations, primarily real estate
activities and operation of an airport fixed base operation, and construction
operations. The following is information related to these industry segments:
<TABLE>
<CAPTION>
Year Ended May 31, 1997
------------------------------------------------------------
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues $ -- $ 3,223,200 $ 1,038,600 $ 4,261,800
========== =========== ===========
Interest and other revenues 1,528,400
------------
Total revenues $ 5,790,200
============
Operating profit (loss) $ (843,100) $ 163,600 $ 286,000 $ (393,500)
========== ============ ============
Interest and other revenues 1,528,400
General corporate and other expenses (4,168,600)
Equity in loss of affiliates (690,800)
------------
Loss before income taxes
and cumulative effect $ (3,724,500)
============
Identifiable net assets at May 31, 1997 $ 9,025,700 $ 6,103,700 $ 301,500 $ 15,430,900
=========== ============ ============
Investments in affiliates 4,999,600
Corporate assets 9,956,600
------------
Total assets at May 31, 1997 $ 30,387,100
============
Capital expenditures $ 159,500 $ 296,300 $ --
=========== ============ ============
Depreciation, depletion and
amortization $ -- $ 460,100 $ 172,000
========== ============ ============
</TABLE>
137
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
<TABLE>
<CAPTION>
Year Ended May 31, 1996
------------------------------------------------------------
Commercial Construction
Minerals Operations Operations Consolidated
<S> <C> <C> <C> <C>
Revenues $ 3,116,700 $ 1,439,100 $ 3,794,500 $ 8,350,300
============ =========== ===========
Interest and other revenues 1,281,900
------------
Total revenues $ 9,632,200
============
Operating profit (loss) $ (455,600) $ (935,700) $ 716,700 $ (674,600)
============ =========== ===========
Interest and other revenues 1,281,900
General corporate and other expenses (2,522,700)
Equity in loss of affiliates (418,500)
------------
Loss before income taxes,
discontinued operations
and extraordinary item $ (2,333,900)
============
Identifiable net assets at May 31, 1996 $ 19,724,700 $ 6,196,800 $ 705,500 $ 26,627,000
============ =========== ===========
Investments in affiliates 3,658,500
Corporate assets 4,507,800
------------
Total assets at May 31, 1996 $ 34,793,300
============
Capital expenditures $ 835,200 $ 372,000 $ 903,100
============ =========== ===========
Depreciation, depletion and
amortization $ -- $ 569,000 $ 219,500
============= =========== ===========
</TABLE>
138
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
<TABLE>
<CAPTION>
Year Ended May 31, 1995
-------------------------------------------------------------
Commercial Construction
Minerals Operations Operations Consolidated
<S> <C> <C> <C> <C>
Revenues $ 85,500 $ 1,177,600 $ 1,303,400 $ 2,566,500
============ =========== ===========
Interest and other revenues 2,034,100
------------
Total revenues $ 4,600,600
============
Operating (loss) profit $ (1,568,800) $ (892,500) $ 265,100 $ (2,196,200)
============ =========== ===========
Interest and other revenues 2,034,100
General corporate and other expenses (1,762,400)
Equity in loss of affiliates (442,300)
------------
Loss before income taxes
and discontinued operations $ (2,366,800)
============
Identifiable net assets at May 31, 1995 $ 18,518,300 $ 9,074,300 $ 292,700 $ 27,885,300
============= =========== ===========
Investments in affiliates 3,244,600
Corporate assets 2,254,600
------------
Total assets at May 31, 1995 $ 33,384,500
============
Capital expenditures $ 455,100 $ 186,400 $ 28,100
============= ============ ===========
Depreciation, depletion and
amortization $ -- $ 608,200 $ 116,500
============= ============ ===========
</TABLE>
During fiscal 1996, approximately 89% of mineral revenues were from the
sale of uranium. There were no uranium sales during fiscal 1997 and 1995.
The Company subleases excess office space, contracts aircraft for charter
flights and sells aviation fuel. Commercial revenues in the statements of
operations consist of mining equipment rentals, office and other real property
rentals, charter flights and fuel sales.
J. SHAREHOLDERS' EQUITY:
In May 1996, the Board of Directors of USE approved an annual incentive
compensation arrangement ("1996 Stock Award Program") for its CEO and four other
officers of USE payable in shares of the Company's common stock. The 1996 Stock
Award Program was approved by the Company's shareholders in the second quarter
of fiscal 1997. The shares are to be issued annually on or before January 15 of
each year, starting January 15, 1997, as long as each officer is employed by
USE, provided the Company has been profitable in the preceding fiscal year. The
officers will receive up to an aggregate total of 67,000 shares per year for the
years 1997 through 2002. One-half of the compensation under the 1996 Stock Award
Program is the responsibility of Crested. The number of shares awarded each year
out of such 67,000 shares aggregate annual limit will be based on earnings per
share of Common Stock to be determined in the formal plan to be adopted, and in
addition will be subject to approval by the shareholders of the Company for each
award each year. In fiscal 1997, 14,158 shares were authorized for issuance by
shareholder approval to these five officers of the Company and Crested. The 1996
139
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
Stock Award Program was subsequently modified to reflect the intent of the
directors of the Company which was to provide incentive to the officers of the
Company and Crested to remain with the Companies. The shares under the plan
therefore became forfeitable until retirement, death or disability of the
officer. The shares are held in trust by the Company's treasurer and are voted
by the Company's non-employee directors.
Effective January 9, 1996, the Company entered into a Warrant Purchase
Agreement with Shamrock Partners, Ltd. ("Shamrock"). Pursuant to the Agreement,
Shamrock received a warrant to purchase 200,000 common shares of the Company's
common stock at $5.00 per share in exchange for consultation services to be
provided through January 9, 1997. During fiscal 1997, Shamrock exercised 180,000
of these warrants for a total of $900,000. In connection with this warrant
agreement, the Company recognized $148,300 of consulting expense in 1997.
In March 1995, the Company completed a private placement of 400,000 shares
of stock at $3.00 per share. The majority of the proceeds were from employees of
the Company. This offering carried terms by which the Company, at its option,
would either redeem the common shares sold from each investor, at a cash
redemption price of $3.50 per share or issue one additional common share for
each three shares originally purchased. Management of the Company issued the
additional common shares (133,336 shares) in fiscal 1996. The Company registered
all shares issued in connection with this private placement in April 1996.
In June and July 1995, the Company sold common stock at $4.00 per share
(812,432 shares, net proceeds to the company of $2,842,200). In connection with
this private placement, warrants to purchase 81,243 USE common shares at $4.80
per share were issued to the selling agent. These warrants were exercisable
through July 25, 2000. All of the warrants were exercised during fiscal 1996
resulting in approximately $390,000 of proceeds to the Company.
The Board of Directors adopted the U.S. Energy Corp. 1989 Stock Option Plan
(the "Option Plan") for the benefit of USE's key employees. The Option Plan,
amended in December 1995, reserves 925,000 shares of the Company's $.01 par
value common stock for issuance under the Option Plan. During fiscal 1992, the
Company issued options to certain of its executive officers, Board members and
others. Under this Plan, 371,200 non-qualified options were issued at purchase
prices ranging from $2.75 per share to $2.90 per share. These options will
expire on April 14, 2002 and April 30, 2002. During fiscal 1996, the Company
issued 360,000 non-qualified options to employees who are not officers or
directors at a purchase price of $4.00 per share, expiring on December 31, 2000.
During fiscal 1997, options were exercised for the purchase of 106,100 shares.
On December 13, 1996, the shareholders of USE ratified an amendment to the
Option Plan and on that same date all outstanding non-qualified options were
converted to qualified options by the Board of Directors of USE.
The Board of Directors of USE adopted the U.S. Energy Corp. 1989 Employee
Stock Ownership Plan ("ESOP") in 1989, for the benefit of USE's employees.
During fiscal 1997, 1996 and 1995, the Board of Directors of USE contributed
24,069, 10,089 and 37,204, shares to the ESOP at prices of $8.87, $8.65 and
$5.38 per share, respectively. The Company is responsible for one-half of these
contributions amounting to $106,700, $43,600 and $100,000 in fiscal 1997, 1996
and 1995, respectively. Crested is responsible for the remainder. USE has loaned
the ESOP $1,014,300 to purchase 125,000 shares from the Company and 38,550
shares on the open market. These loans, which are secured by pledges of the
stock purchased with the loan proceeds, bear interest at the rate of 10% per
annum. The loans are reflected as unallocated ESOP contribution in the equity
section of
140
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
the accompanying consolidated balance sheets. During fiscal 1996, the Company
released 10,089 of the shares to fund the 1996 ESOP contribution by $87,300 as
reflected in the statement of stockholders' equity.
The Board of Directors of both the Company and Crested issue shares of
stock as bonuses to certain directors, employees and third parties. The stock
bonus shares have been reflected outside of the Shareholders' Equity section in
the accompanying balance sheets because such shares are forfeitable to the
Company and Crested until earned. During fiscal 1993, the Company's Board of
Directors amended the stock bonus plan. As a result, the earn out dates of
certain individuals were extended until retirement, which is the earn out date
of the amended stock bonus plan. In exchange for this amendment, the amended
plan grants a stock-bonus of 20% of the previous plan per year for five years.
Crested is responsible for one half of the compensation expense related to these
issuances. For the years ended May 31, 1997, 1996 and 1995, the Company had
compensation expense of $152,600, $116,500 and $200,000, respectively, resulting
from these issuances. A schedule of forfeitable shares for both USE and Crested
is set forth in the following table:
Issue Number Issue Total
Date of Shares Issuer Price Compensation
---- --------- ------ ----- ------------
May 1990 40,300 USE $ 9.75 $392,925
June 1990 66,300 USE 11.00 729,300
November 1990
(stock dividend) 10,660 USE N.A. N.A.
June 1990 25,000 Crested 1.06 26,562
December 1990 7,500 Crested .50 3,750
January 1993 18,520 USE 3.00 55,560
January 1993 6,500 Crested .22 1,430
January 1994 18,520 USE 4.00 74,080
January 1994 6,500 Crested .28 1,828
January 1995 18,520 USE 3.75 69,450
January 1995 6,500 Crested .19 1,219
January 1996 7,700 USE 15.125 116,462
January 1996 5,000 Crested .3125 1,562
January 1997 36,832 USE 11.02 405,830
January 1997 8,000 Crested .9375 7,500
No shares were earned out in fiscal 1997 or 1996. Also included in the
forfeitable common stock are 15,000 shares to directors which are vesting at 20%
a year beginning in November 1992, of which 9,000 are earned out but not
released as of May 31, 1997.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for employee stock options or similar equity
instruments. However, SFAS 123 allows the continued measurement of compensation
cost for such plans using the intrinsic value based method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), provided
that pro forma disclosures are made of net income or loss and net income or loss
per share, assuming the fair value based method of SFAS 123 had been
141
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
applied. The Company has elected to account for its stock-based compensation
plans under APB 25; accordingly, for purposes of the pro forma disclosures
presented below, the Company has computed the fair values of all options granted
during fiscal year 1997 using the Black-Scholes pricing model and the following
weighted average assumptions (no options were granted during 1997):
1997
----
Risk-free interest rate 5.45%
Expected lives 5 years
Expected volatility 135.2%
Expected dividend yield 0%
To estimate expected lives of options for this valuation, it was assumed
options will be exercised upon becoming fully vested at the end of the five
years. All options are initially assumed to vest. Cumulative compensation cost
recognized in pro forma net income or loss with respect to options that are
forfeited prior to vesting is adjusted as a reduction of pro forma compensation
expense in the period of forfeiture.
The total fair value of options granted was computed to be approximately
$1,274,900 during the year ended May 31, 1996. This amount is amortized ratably
over the vesting periods of the options. Pro forma stock-based compensation, net
of the effect of forfeitures, was $255,000 and $106,200 for 1997 and 1996,
respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss and pro forma net loss per
common share would have been reported as follows:
Year Ended May 31,
---------------------------
1997 1996
---- ----
Net income (loss)
As reported $ (3,724,500) $ 270,700
Pro forma $ (3,979,500) $ 164,500
Net income (loss) per common share
As reported $ (.55) $ .04
Pro forma $ (.59) $ .03
Weighted average shares used to calculate pro forma net loss per share were
determined as described in Note 2, except in applying the treasury stock method
to outstanding options, net proceeds assumed received upon exercise were
increased by the amount of compensation cost attributable to future service
periods and not yet recognized as pro forma expense.
142
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
A summary of the Stock Option Plan activity for the years ended May 31,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 724,800 3.44 371,400 2.95
Granted -- 360,000 4.00
Canceled (22,000) 4.00 --
Exercised (106,100) 3.49 (6,600) 6.27
--------- -------
Outstanding at end of year 596,700 3.41 724,800 3.44
========= =======
Exercisable at end of year 380,700 436,800
========== =======
</TABLE>
The following table summarized information about employee stock options
outstanding and exercisable at May 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------------
Weighted
Number of Average Weighted Weighted
Options Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Prices May 31, 1997 Life in years Price May 31, 1997 Price
------ ------------ ------------- ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
$2.75 49,400 4.92 $2.75 49,400 $2.75
2.90 264,300 4.88 2.90 264,300 2.90
4.00 283,000 3.50 4.00 67,000 4.00
</TABLE>
K. COMMITMENTS, CONTINGENCIES AND OTHER:
Legal Proceedings
Sheep Mountain Partners (SMP)
Arbitration Proceedings Concerning SMP. In June 1991, Nukem's wholly-owned
subsidiary Cycle Resource Investment Corporation ("CRIC") instituted arbitration
proceedings against the Company and Crested. CRIC claimed that the Company and
Crested violated the Sheep Mountain Partners ("SMP") partnership agreement by
assigning to the Green Mountain Mining Venture (GMMV) the amounts equal to any
SMP cash distributions to USECC derived from sales of uranium under SMP supply
contracts. CRIC also asserted that by entering into the GMMV agreement, the
Company and Crested misappropriated a business opportunity of SMP. CRIC sought
damages and certain equitable remedies from the Company and Crested and sought
to expel the Company and Crested from the SMP Partnership.
143
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
Federal Court Action Concerning SMP. On July 3, 1991, the Company and
Crested d/b/a USECC filed a civil action in the U. S. District Court of Colorado
against Nukem, CRIC and their affiliates, alleging that Nukem, CRIC and their
affiliates fraudulently misrepresented facts and concealed information from the
Company and Crested to induce their entry into the agreements forming SMP and
seek rescission, damages and other relief. The Company and Crested further
alleged that Nukem and CRIC have refused to provide information about
transactions by CRIC and its affiliates with SMP, and that the defendants had
engaged in various wrongful acts relating to financing and acquisition of
uranium for SMP. Nukem and CRIC filed an answer and a variety of counterclaims
against the Company and Crested. Certain of Nukem's affiliates (excluding CRIC)
were thereafter dismissed from the lawsuit. The U. S. District Court granted the
motion of the Company and Crested to stay the above arbitration initiated by
CRIC and also ordered the Company and Crested to amend their complaint. On April
6, 1992, the Company and USE filed an amended complaint against Nukem and CRIC
setting out the alleged fraud with particularity, and Nukem and CRIC filed
answers and counterclaims to the amended complaint.
State Court Action Concerning SMP. On September 16, 1991, USECC filed a
civil action in the Denver District Court against SMP seeking reimbursement of
$85,000 per month since the spring of 1991 for the care and maintenance of the
SMP underground uranium mines and properties in south-central Wyoming. On May
11, 1993, the Denver District Court stayed all proceedings until the U.S.
District Court for Colorado case is resolved.
Summary. The discovery stage in the case filed by the Company and USE on
July 3, 1991 in the U. S. District Court of Colorado against Nukem, CRIC et al
has been protracted and vigorously contested by all parties. On November 6,
1993, the remaining parties in that suit, Nukem and CRIC, agreed with the
Company and Crested that the majority of the litigation post the formation of
SMP on December 21, 1988, would be handled through consensual arbitration with
the American Arbitration Association ("AAA"). The agreement to arbitrate was
finally reduced to writing and executed on February 7, 1994. The arbitration
hearing commenced on June 27, 1994 before a three member AAA arbitration panel.
After 73 hearing days and some 15,000 pages of testimony, the parties rested
their cases on May 31, 1995. Per order of the Panel, the parties filed their
proposed Findings of Fact and Conclusions of Law, Award and a brief of the law
on August 7, 1995. Each side submitted responsive proposed findings of fact and
conclusions of law, responsive proposed award and reply briefs by September 21,
1995.
The Panel entered its Order and Award on April 18, 1996 but did not
dissolve the Partnership. Nukem appealed the Award by filing two motions
indicating there was a material miscalculation and a double recovery. The U.S.
District Court remanded the matter to the Arbitration Panel to consider Nukem's
motions. On July 3, 1996, the Panel found there was not double recovery and
confirmed the Order and Award, which awarded Crested and USE $12,500,000 and
Nukem/CRIC $7,100,000 through July 31, 1996. On November 4, 1996 the United
States District Court issued a Judgment and Order confirming the Arbitration
Panel's Order and Award during fiscal 1997. The Company and Crested received
$4,300,000 from the SMP escrow accounts as partial payment of the monetary award
of the Arbitration Panel. This $4,300,000 was accounted for under cost recovery
method of accounting, wherein it was applied to outstanding amounts due USECC
and the Company and the balance of $1,003,800 was recognized as income.
Nukem/CRIC filed a motion asking for limited remand and on June 27, 1997 the
Federal Court issued a Second Amended Judgment which confirmed the monetary
award of the Arbitration Panel and clarified the equitable damages due USECC
from Nukem/CRIC. Nukem has until September 12, 1997 to file a notice of appeal
with the Tenth Circuit Court of Appeals. Nukem has posted a $8,600,000
supersedeas bond on the monetary portion of the Award. If Nukem seeks to appeal
the equitable portion of the Award, the Company and Crested will ask that the
supersedeas bond be raised to $111,000,000.
144
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
Illinois Power. Illinois Power Company ("IPC"), one of the utilities with
whom SMP has a long-term uranium supply contract, unilaterally sought to
terminate the contract on October 28, 1993 and filed suit contemporaneously in
the Federal District Court, Danville, Illinois, against the Company, USE, CRIC,
SMP, Nukem Luxembourg GmbH ("NULUX") and the Dresdner Bank, seeking a
declaratory judgment that the contract with USECC, which was assigned to SMP and
thereafter to NULUX, had been breached by USECC filing a Motion for Appointment
of Receiver in the SMP litigation. The Dresdner Bank was dismissed from the
case, and the remaining defendants filed answers denying IPC's allegations and
filed counterclaims for damages due under the IPC contract. These defendants
also filed Motions for Summary Judgment and a hearing was held on the motions on
May 27, 1994. On September 1, 1994, the U. S. District Court for the Central
District of Illinois granted the defendants' motions for summary judgment
against IPC dismissing IPC's complaint, and further granted those defendant's
counterclaims against IPC for breach of contract by IPC. After various
negotiating sessions the parties reached agreement in June 1995 to settle the
case by entering into an amendment to the original agreement to increase the
price per pound of U3O8 delivered to IPC and provide for 3 deliveries totaling
486,443 lbs. U3O8 in 1995, 1996 and 1997. The first delivery of 226,443 lbs.
U3O8 was made on June 30, 1995 by Nukem on behalf of SMP. A delivery of 130,000
lbs. U3O8 was made during fiscal 1996 and the last delivery of 130,000 lbs. U3O8
under the contract was made in May 1997. On June 13, 1997, the Company and
Crested received $838,500 as a distribution of profits from the last delivery
under this SMP contract.
Parador Mining Company, Inc. ("Parador")
On July 30, 1991, Bond Gold Bullfrog, Inc. ("BGBI") filed Civil Action No.
11877 in the District Court of the Fifth Judicial District, Nye County, Nevada
naming USE, Crested, Parador and H.B. Layne Contractor, Inc. (Layne) as
defendants. The complaint primarily concerns extralateral rights associated with
two patented lode mining claims (the "Claims") owned by Parador which were
initially leased to a predecessor of BGBI and subsequently, the residuals of
that lease were assigned and leased by Parador to USE and Crested. Parador, the
Company and Crested answered the complaint, filed a counterclaim against the
Plaintiff and a cross claim against Layne. A bifurcated trial was held on
December 11-12, 1995 before the District Court for the Fifth Judicial District
for the State of Nevada, County of Nye, at which time the parties presented
evidence relative to the issue of extralateral rights. Other claims between the
parties were bifurcated by the Court and were not at issue at the trial.
Parador, the Company and Crested submitted expert testimony by five renowned
geologists opining that a gold lode apexed on Parador's Sunset No. 1 patented
lode mining claim, from which apex the lode extended in a continuous downward
direction outside the surface boundaries of that claim and under the surface
boundaries of a claim owned by an adjacent property owner. No contrary testimony
was submitted by the other parties.
The District Court took the matter under advisement at the conclusion of
the evidentiary proceedings, and on December 26, 1995, issued a written ruling
denying apex rights and extralateral royalties to Parador, the Company and
Crested. It is the belief of Parador, the Company and Crested that the trial
court's ruling is erroneous as a matter of law and, consequently on February 2,
1996, an appeal was lodged with the appellate court asking that Court to reverse
the trial court's ruling. The Appellate Court dismissed the appeal pending a
resolution of all claims before the District Court. Parador, the Company and
Crested intend to proceed wit the litigation.
145
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
Reclamation and Environmental Liabilities
Most of the Company's mine development, exploration and operating
activities are subject to federal and state regulations that require the Company
to protect the environment. The Company attempts to conduct its mining
operations so as to comply with these regulations, but they are continually
changing and are generally becoming more restrictive. Consequently, the
Company's current estimates of its reclamation obligations and its current level
of expenditures to perform ongoing reclamation may change in the future. At the
present time, however, the Company cannot predict the outcome of future
regulation or its impact on costs. Nonetheless, the Company has recorded its
best estimate of future reclamation and closure costs based on currently
available facts and technology and enacted laws and regulations. Certain
regulatory agencies, such as the Nuclear Regulatory Commission, the Bureau of
Land Management and the Wyoming Department of Environmental Quality review the
Company's reclamation, environmental and decommissioning liabilities, and the
Company believes its recorded amounts are consistent with those reviews and
related bonding requirements. To the extent that planned production on its
properties is delayed, interrupted or discontinued because of regulation or the
economics of the properties, the future earnings of the Company would be
adversely affected. The Company believes it has accrued all necessary
reclamation costs and there are no additional contingent losses on unasserted
claims to be disclosed or recorded in the reclamation liability. The Company has
not disposed of any properties for which it has a commitment or is liable for
any known environmental liabilities.
The majority of the Company's environmental obligations relate to former
mining properties acquired by the Company. Since the Company currently does not
have properties in production, the Company's policy of providing for future
reclamation and mine closure costs on a unit-of-production basis has not
resulted in any significant annual expenditures or costs. For the obligations
recorded on acquired properties, including site- restoration, closure and
monitoring costs, actual expenditures for reclamation will occur over a number
of years, and since these properties are all considered future production
properties, those expenditures, particularly the closure costs, may not be
incurred for many years. The Company also does not believe that any significant
capital expenditures to monitor or reduce hazardous substances or other
environmental impacts are currently required. As a result, the near term
reclamation obligations are not expected to have a significant impact on the
Company's liquidity.
As of May 31, 1997 and 1996, the Company has recorded estimated reclamation
obligations, including standby costs, of $13,674,700 as reflected in reclamation
and other long-term liabilities in the accompanying financial statements. In
addition, the GMMV, in which the Company is a 50% equity investor, has recorded
a $23,620,000 liability for future reclamation and closure costs. None of these
liabilities have been discounted, and the Company has not recorded any potential
offsetting recoveries from other responsible parties or from any insurance
companies.
The Company currently has four mineral properties or investments that
account for most of its environmental obligations. The Company is a partner in
SMP, a venturer of GMMV, the owner of Plateau and an investor in SGMC. The
environmental obligations and the nature and extent of cost sharing arrangements
with other potentially responsible parties, as well as any uncertainties with
respect to joint and several liability of each are discussed in the following
paragraphs:
146
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
Sheep Mountain Partners ("SMP")
The Company and Crested agreed to assume the reclamation obligations,
environmental liabilities and liabilities for injuries to employees in mining
operations with respect to the Crooks Gap properties, which are part of the SMP
venture. The reclamation obligations, which are established by regulatory
authorities, were reviewed by the Company and the regulatory authorities during
fiscal 1995 and the balance in the reclamation liability account at May 31, 1997
of $1,451,800 was determined by the Company to be adequate. The obligation will
be satisfied over the life of the mining project which is estimated to be at
least 20 years. The Company and Crested self bonded this obligation by
mortgaging certain of their real estate holdings. A portion of the funds for the
reclamation of SMP's properties is expected to be provided by SMP which has
agreed to pay up to $.50 per pound of uranium to the Company and Crested for
reclamation work as the uranium is produced from the properties. The final
outcome of the arbitration proceedings with Nukem and CRIC could result in
changes to these agreements between the parties.
Green Mountain Mining Venture ("GMMV")
During fiscal 1991, the Company and Crested acquired developed minerals
properties on Green Mountain known as the Big Eagle Property. In connection with
that acquisition, the Company and Crested agreed to assume reclamation and other
environmental liabilities associated with the property. Reclamation obligations
imposed by regulatory authorities were established at $7,300,000 at the time of
acquisition. Immediately after the acquisition, the Company and Crested
transferred a one-half interest in them to Kennecott, and Kennecott, the Company
and Crested contributed the Big Eagle properties to GMMV, which assumed the
reclamation and other environmental liabilities. Kennecott holds a commercial
bank letter of credit as security for the performance of the reclamation
obligations for the benefit of GMMV.
During fiscal 1993, GMMV entered into an agreement to acquire the
Sweetwater uranium mill and related properties from UNOCAL. GMMV's consideration
for the acquisition of the Sweetwater Mill Property was the assumption of all
environmental liabilities and reclamation bonding obligations. The environmental
obligations of GMMV are guaranteed by Kennecott. However, UNOCAL also agreed
that if GMMV incurs expenditures for environmental liabilities prior to the
earlier of commercial production by GMMV or February 1, 2001 (which liabilities
are not due solely to the operations of GMMV), UNOCAL will reimburse GMMV the
first $8,000,000 of such expenditures. Any such reimbursement may be recovered
by UNOCAL from 20% of future cash flows from sale of uranium concentrates
processed through the Mill. In any event, until such time as environmental and
reclamation undertakings are liquidated against Kennecott Corporation, such
costs are not deemed expenditures under Kennecott's $50,000,000 development
commitment (although bond costs may be charged against this development
commitment).
The reclamation and environmental liabilities assumed by GMMV concern two
categories: (1) cleanup of an inactive open pit mine site near the Mill,
including water (heavy metals and other contaminants) and tailings (heavy metals
and other dust contaminant abatement and erosion control) associated with the
pit, and (2) decontamination, cleanup and disposal of the Mill building and
equipment and tailings cells after Mill decommissioning. On June 18, 1996,
Kennecott had a letter of credit in the amount of approximately $19,767,000
issued to the Wyoming Department of Environmental Quality for mine pit site
matters (exercising EPA-delegated jurisdiction to administer the Clean Water Act
and the Clean Air Act, and directly administering Wyoming statutes on mined land
reclamation), and by the NRC for decontamination and cleanup of the Mill and
Mill tailings cells.
147
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
An irrevocable letter of credit has been provided by the Morgan Guaranty Trust
Company of New York in lieu of a surety bond to cover the reclamation costs for
the open pit mine site and the mill. The letter of credit was obtained by
Kennecott Uranium Company to cover all reclamation costs related to mining and
drilling operations in the State of Wyoming. The EPA has continuing jurisdiction
under the Resource Conservation and Recovery Act pertaining to any hazardous
materials which may be on site when cleanup work is started.
Although USE and the other GMMV parties are liable for all reclamation and
environmental compliance costs associated with Mill and site maintenance, as
well as Mill decontamination and cleanup and site reclamation and cleanup after
the Mill is decommissioned, USE believes it is unlikely USE will have to pay for
such costs directly. First, based on current estimates of cleanup and
reclamation costs (reviewed annually by the oversight agencies), such costs may
be within the $50,000,000 development commitment of Kennecott Uranium Company
for GMMV. These costs are not expected to increase materially if the Mill is not
put into full operation. Second, to the extent GMMV is required to spend money
on reclamation and environmental liabilities related to previous Mill and site
operations during ownership by Minerals Exploration Company (a UNOCAL
subsidiary), UNOCAL has agreed to fund up to $8,000,000 of such costs (provided
such costs are incurred before February 1, 2001 and before Mill production
resumes), which would be recoverable only out of future Mill production (see
above). Third, payment of the GMMV reclamation and environmental liabilities
related to the mill is guaranteed by Kennecott Corporation, parent of Kennecott
Uranium Company. Last, GMMV will set aside a portion of operating revenues to
fund reclamation and environmental liabilities once mining and milling
commences. To date, ongoing Mill maintenance expense is funded by Kennecott as
part of its development commitment.
Kennecott will be entitled to contribution from the USE Parties in
proportion to their participation interests in GMMV, if Kennecott is required to
pay Mill cleanup costs directly pursuant to its guarantee. Such payments by
Kennecott only would be reimbursed if the liabilities cannot be satisfied within
the initial $50,000,000 expenditure commitment, and then only to the extent
there are insufficient funds from the reclamation reserve (to be established up
out of GMMV operating revenues). In addition, if and to the extent such
liabilities resulted from UNOCAL's Mill operations, and payment of the
liabilities was required before February 1, 2001 and before Mill production
resumes, then up to $8,000,000 of that amount would be paid by UNOCAL before
Kennecott Corporation would be required to pay on its guarantee. Accordingly,
although the extent of any ultimate USE liability for contribution to Mill
cleanup costs cannot be predicted, USE and Crested will only be required to pay
its proportional share of Mill cleanup if a) the liabilities cannot be satisfied
with the initial $50,000,000 expenditure commitment from Kennecott, b) there are
insufficient funds from the reclamation reserve to be established out of GMMV
operating revenues and c) payments are not available from UNOCAL.
Sutter Gold Mining Company ("SGMC")
SGMC is currently owned 30.7% by the Company, 3.2% by Crested and 66.1% by
private investors. SGMC owns gold mineral properties in California. Currently,
these properties are in development and costs consist of drilling, permitting,
holding costs and administrative costs. No substantial mining has been
completed, although a 2,800 foot decline through the identified ore zones for an
underground mine was acquired in the purchase. The Company's policy is to
provide reclamation on a unit-of-production basis. Currently, reclamation
obligations are covered by a $27,000 reclamation bond which SGMC has recorded as
a reclamation liability as of May 31, 1997.
148
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
Plateau Resources, Limited ("Plateau")
The environmental and reclamation obligations acquired with the acquisition
of Plateau include obligations relating to the Shootaring Mill. Based on the
bonding requirements, Plateau transferred $2,500,000 to a trust account as
financial surety to pay future costs of mill decommissioning, site reclamation
and long-term site surveillance. In fiscal 1997, Plateau increased the NRC
surety to a cash bond of $6,784,000 in order to have its standby license changed
by the NRC to operational.
Executive Compensation
The Company and Crested are committed to pay the estates of certain of
their officers an amount equal to one year's salary for one year after their
death and reduced amounts, to be set by the Board of Directors, for a period up
to five years thereafter.
L. DISCONTINUED OPERATIONS.
In November 1993, the Company and Brunton executed an Agreement and Plan of
Share Exchange ("Agreement") which closed in late May 1994. The Agreement
provided for the Exchange of 276,470 shares of USE common stock for all
5,529,200 outstanding shares of Brunton's common stock, which were not owned by
the Company. Brunton was therefore owned 100% by USE as of May 31, 1994. The
transaction was accounted for as a purchase.
In February 1996, the Company completed the sale of 100% of the 8,267,450
outstanding shares of common stock of Brunton to a third party for $4,300,000 in
accordance with a Stock Purchase Agreement dated January 30, 1996 (the "Purchase
Agreement"). The Company received $300,000 at execution of the Purchase
Agreement and approximately $3,000,000 at closing. The Company received the
first of three annual installments of $333,333 on a $1,000,000 note, plus
interest at a rate of 7% per year during February 1997. Two additional payments
are due the Company in the amount of $333,333 plus interest in February 1998 and
1999. The current portion of this note receivable is included in current assets
and the long-term portion is included in notes receivable- real estate and other
in the accompanying consolidated balance sheet. In addition, the Company is
entitled to receive 45% of the profits before taxes as defined in the Purchase
Agreement related to Brunton products existing at the time the Purchase
Agreement was executed for a period of 4 years and three months, beginning
February 1, 1996. The first payment which covered profits from February 1, 1996
through April 30, 1997 was received in August 1997 in the amount of $292,600.
Each subsequent payment, due July 15 of subsequent years, will cover profits for
the most recent year ended April 30.
Certain items of property owned by Brunton were not subject to the
Agreement. These items included various inventory items, mining equipment, real
estate not used in operations, 225,556 shares of USE common stock, options to
purchase 150,000 shares of USE common stock for $3.50 per share, 160,000 shares
of Crested common stock and options to purchase 300,000 shares of Crested common
stock for $.40 per share. 100,000 shares of USE common stock and 100,000 shares
of Crested common stock were transferred for no consideration to SGMC and the
remainder of the USE and Crested stock was transferred to Plateau. One-half of
the USE and Crested options were transferred each SGMC and Plateau,
respectively.
149
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 AND 1995
(Continued)
In connection with the Purchase Agreement, the Company paid Brunton
$171,700 for accrued rental on mining equipment and retired $273,000 related to
bank debt incurred by Brunton on behalf of USE.
As a result of selling 100% of the common stock of Brunton, the Company has
reflected the operations of Brunton as discontinued in the accompanying
financial statements. Revenues for the discontinued operations for the years
ended May 31, 1996 and 1995 were $2,870,800 and $4,553,500, respectively. The
Company recognized a gain on the disposal of Brunton of $2,295,700 net of income
taxes of approximately $50,000.
150
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
U.S. ENERGY CORP. AND AFFILIATES
Condensed Consolidated Balance Sheets
<TABLE>
ASSETS
<CAPTION>
February 28, May 31,
1998 1997
---- ----
(Unaudited) (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 2,224,500 $ 1,416,900
Accounts receivable
Trade, net of valuation allowance
of $15,700 and $27,800, respectively 235,600 368,200
Related parties 1,664,300 1,191,000
Current portion long-term
notes receivables 337,200 337,200
Inventory 63,700 96,000
Assets held for resale and other 905,900 991,600
------------ ------------
TOTAL CURRENT ASSETS 5,431,200 4,400,900
LONG-TERM NOTES RECEIVABLE 745,800 1,477,900
INVESTMENTS IN CONTINGENT
STOCK PURCHASE WARRANT 4,594,000 4,594,000
INVESTMENTS IN AFFILIATES
Affiliates 4,868,700 4,999,600
Restricted 8,921,900 8,506,300
------------ ------------
13,790,600 13,505,900
PROPERTY AND EQUIPMENT 16,159,200 14,843,000
Less accumulated depreciation,
depletion and amortization (9,275,000) (8,802,100)
------------ ------------
6,884,200 6,040,900
OTHER ASSETS: 394,900 367,500
------------ ------------
$ 31,840,700 $ 30,387,100
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
151
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
Condensed Consolidated Balance Sheets
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
February 28, May 31,
1998 1997
---- ----
(Unaudited) (Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable and accrued expenses $ 501,900 $ 1,312,600
Deferred revenue 4,000,000 --
Current portion of long-term debt 141,000 81,300
------------ ------------
TOTAL CURRENT LIABILITIES 4,642,900 1,393,900
LONG-TERM DEBT 186,400 183,100
RECLAMATION LIABILITY 8,751,800 8,751,800
OTHER ACCRUED LIABILITIES 4,676,500 5,259,000
DEFERRED TAX LIABILITY 183,300 183,300
MINORITY INTERESTS 90,300 --
COMMITMENTS AND CONTINGENCIES
FORFEITABLE COMMON STOCK
$.01 par value; issued 229,606 shares and 223,900,
respectively, forfeitable until earned 1,958,000 1,892,400
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 100,000 shares
authorized none issued or outstanding; -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; issued, 6,732,945 and 6,646,475
shares respectively 67,300 66,500
Additional paid-in capital 22,921,400 22,543,000
Accumulated deficit (8,528,200) (6,776,900)
Treasury stock at cost, 690,943 shares (2,182,000) (2,182,000)
Unallocated ESOP contribution (927,000) (927,000)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 11,351,500 12,723,600
------------ ------------
$ 31,840,700 $ 30,387,100
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
152
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended February Nine Months Ended February
--------------------------- --------------------------
28, 1998 28, 1997 28, 1998 28, 1997
-------- -------- -------- --------
REVENUES:
<S> <C> <C> <C> <C>
Mineral sales $ -- $ -- $ 858,700 $ --
Construction contract revenues -- 157,600 -- 935,300
Commercial operations 697,800 389,500 3,107,300 1,458,300
Oil Sales 48,400 62,700 125,000 125,000
Gain (loss) on sale of assets -- -- (200) (19,900)
Mineral property transactions 46,200 26,900 156,600 75,300
Interest 211,100 236,100 573,900 522,700
Management fees and other 162,100 104,900 508,100 172,500
---------- ---------- ----------- -----------
1,165,600 977,700 5,329,400 3,269,200
COSTS AND EXPENSES:
Costs of mineral sold -- -- -- --
Mineral operations 375,400 228,800 1,098,600 545,700
Construction costs 11,300 118,000 33,400 682,600
Commercial operations 641,300 739,400 2,278,800 2,190,200
Oil production 8,800 32,500 52,300 71,200
General and administrative 1,454,700 835,100 2,865,200 1,869,600
Interest 17,000 29,400 49,900 91,600
---------- ---------- ----------- -----------
2,508,500 1,983,200 6,378,200 5,450,900
---------- ---------- ----------- -----------
(Continued)
See notes to condensed consolidated financial statements.
</TABLE>
153
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
Condensed Consolidated Statements of Operations
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Three Months Ended February Nine Months Ended February
--------------------------- --------------------------
28, 1998 28, 1997 28, 1998 28, 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INCOME (LOSS) BEFORE
MINORITY INTEREST
EQUITY OF AFFILIATES
AND PROVISION FOR
INCOME TAXES (1,342,900) (1,005,500) (1,048,800) (2,181,700)
MINORITY INTEREST IN
(GAIN) LOSS OF
CONSOLIDATED
SUBSIDIARIES (27,700) 231,100 (90,300) 575,000
EQUITY IN LOSS OF
AFFILIATES (205,900) (106,000) (612,200) (338,500)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES (1,576,500) (880,400) (1,751,300) (1,945,200)
PROVISION FOR
INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(1,576,500) $ (880,400) $(1,751,300) $(1,945,200)
=========== =========== =========== ===========
NET GAIN (LOSS)
PER SHARE $ (0.23) $ (0.13) $ (0.26) $ (0.29)
=========== =========== =========== ===========
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING 6,850,913 6,654,863 6,842,679 6,642,253
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
154
<PAGE>
<TABLE>
<CAPTION>
U.S. ENERGY CORP. AND AFFILIATES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
February 28,
---------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $(1,751,300) $(1,945,200)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Minority interest in gain (loss)
of consolidated subsidiaries 90,300 (575,000)
Depreciation 475,800 475,500
Depletion and amortization 207,700 56,500
Equity in loss from affiliates 612,200 338,500
Loss on sale of assets 200 19,900
Non-cash compensation 31,300 119,600
Deferred revenue 4,000,000 4,207,700
Other accrued liabilities (582,500) 537,600
Other assets 27,400 (8,600)
Net changes in components of working capital (1,175,500) (975,101)
----------- -----------
NET CASH FROM PROVIDED BY
OPERATING ACTIVITIES 1,880,800 1,176,200
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of mining properties (16,500) (455,400)
Development of gas properties -- (29,100)
Proceeds from sale of assets 4,000 193,500
Increase in restricted investments (415,600) (277,800)
Purchase of property and equipment (1,306,800) (100,200)
Changes in notes receivable 732,100 58,800
Investments in affiliates (481,300) (616,400)
Proceeds from sale of subsidiary stock -- 1,246,100
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,484,100) 19,500
(Continued)
See notes to condensed consolidated financial statements.
</TABLE>
155
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
<TABLE>
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended
February 28,
--------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of options and warrants for common stock 347,900 1,239,300
Purchase of treasury stock -- (78,400)
Proceeds from long-term debt 307,700 412,300
Repayments of long-term debt (244,700) (1,004,000)
----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 410,900 569,200
----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 807,600 1,764,900
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,416,900 992,600
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,224,500 $ 2,757,500
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Income tax paid $ -- $ 37,200
=========== ===========
Interest paid $ 49,900 $ 91,600
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
156
<PAGE>
U.S. ENERGY CORP. AND AFFILIATES
Notes to Condensed Consolidated Financial Statements
1) The Condensed Consolidated Balance Sheet as of February 28, 1998, the
Condensed Consolidated Statements of Operations for the three and nine months
ended February 28, 1998 and February 28, 1997, and the Condensed Consolidated
Statements of Cash Flows for the nine months ended February 28, 1998 and
February 28, 1997, have been prepared by the Company ("USE") without audit. The
Condensed Consolidated Balance Sheet as of May 31, 1997, has been taken from the
audited financial statements included in the Company's Annual Report on Form
10-K for the period then ended. In the opinion of the Company, the accompanying
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position of the
Company as of February 28, 1998 and May 31, 1997, the results of operations for
the three and nine months ended February 28, 1998 and February 28, 1997 and the
cash flows for the nine months then ended.
2) Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these financial
statements be read in conjunction with the Company's May 31, 1997 Form 10-K. The
results of operations for the periods ended February 28, 1998 and February 28,
1997 are not necessarily indicative of the operating results for the full year.
3) The consolidated financial statements of the Registrant include 100% of
the accounts of USECB Joint Venture ("USECB" or "USECC") which is owned 50% by
the Company and 50% by the Company's subsidiary, Crested Corp. ("Crested"). The
consolidated financial statements also reflect 100% of the accounts of its
majority-owned subsidiaries: Energx Ltd. (90%), Crested (51.9%), Plateau
Resources Limited ("Plateau") (100%) and Four Nines Gold, Inc. ("FNG") (50.9%)
All material intercompany profits and balances have been eliminated.
4) Deferred revenue consists of a $4,000,000 Signing Bonus received in the
quarter ended August 31, 1997 when the Company and its subsidiary, Crested
entered into an Acquisition Agreement with Kennecott Uranium Company
("Kennecott") to acquire Kennecott's interest in the Green Mountain Mining
Venture ("GMMV") which owns certain uranium properties and the Sweetwater Mill
in Wyoming.
5) Debt as of February 28, 1998 consists of various equipment and other
property loans totaling $215,100 and debt attributable to consolidated
affiliates of $112,300 on Four Nines Gold. Certain inter-affiliate loans were
eliminated during consolidation.
6) Accrued reclamation obligations of $8,751,800 represent the Company's
share of a reclamation liability at the Crooks Gap Mining District and the full
obligation at the Shootaring Uranium Mill. The reclamation work may be performed
over several years.
7) Net income (loss) per share is computed using the weighted average
number of common shares outstanding during each period. The dilutive effect of
stock options is not included in the computation, as it is not material.
8) Certain reclassifications have been made in the May 31, 1997 financial
statements to conform to the classifications used in February 28, 1998.
157
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
Report on Audits of Financial Statements as
of December 31, 1996 and 1995 and for the
years ended December 31, 1996, 1995 and 1994,
and the period from inception
(June 1, 1990) to December 31, 1996
158
<PAGE>
Report of Independent Accountants
To the Members of the Management Committee of
Green Mountain Mining Venture
Riverton, Wyoming
We have audited the accompanying balance sheet of Green Mountain Mining Venture
(A Joint Venture in the Development Stage) as of December 31, 1996 and 1995, and
the related statements of operations, changes in Venture partners' capital, and
cash flows for the years ended December 31, 1996, 1995 and 1994, and the period
from inception (June 1, 1990) to December 31, 1996. These financial statements
are the responsibility of the Venture's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Green Mountain Mining Venture
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years ended December 31, 1996, 1995 and 1994, and the period from
inception (June 1, 1990) to December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Salt Lake City, Utah
May 6, 1997
159
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
<TABLE>
BALANCE SHEET
------
<CAPTION>
As of December 31,
------------------------
1996 1995
---- ----
ASSETS
Assets:
<S> <C> <C>
Due from USECC $ -- $ 1,212
Property and equipment (Note 3):
Mineral properties and mine development costs 22,812,077 22,443,305
Buildings 24,815,009 24,815,009
Machinery and equipment 403,000 --
48,030,086 47,258,314
----------- -----------
Total assets $48,030,086 $47,259,526
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Due to USECC $ 469,032 $ --
Reclamation liabilities (Note 3) 23,620,000 23,620,000
----------- -----------
Total liabilities 24,089,032 23,620,000
----------- -----------
Commitments and contingencies (Notes 3 and 4)
Partners' capital:
Kennecott Uranium Company 11,970,527 11,819,763
USECC 11,970,527 11,819,763
----------- -----------
23,941,054 23,639,526
----------- -----------
Total liabilities and partners' capital $48,030,086 $47,259,526
=========== ===========
The accompanying notes are an integral
part of these financial statements
</TABLE>
160
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
<TABLE>
STATEMENT OF OPERATIONS
-------
<CAPTION>
Period from
inception
(June 1, 1990)
Year ended December 31, to December 31,
--------------------------------------------- ---------------
1996 1995 1994 1996
----------- ------------ ------------ ---------------
Cost and expenses:
<S> <C> <C> <C> <C>
Maintenance and holding costs $ 1,838,820 $ 1,697,234 $ 1,877,528 $ 9,457,836
Marketing costs - - 85,676 247,598
----------- ------------ ------------ ------------
Net loss $ 1,838,820 $ 1,697,234 $ 1,963,204 $ 9,705,434
============ ============ ============ ============
The accompanying notes are an integral
part of these financial statements
</TABLE>
161
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
<TABLE>
STATEMENT OF CHANGES IN VENTURE PARTNERS CAPITAL
-----
<CAPTION>
Period from
inception
(June 1, 1990)
Year ended December 31, to December 31,
----------------------------------------------- ---------------
1996 1995 1994 1996
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 11,819,763 $ 11,510,240 $ 11,348,745 $ -
Kennecott Uranium Company 11,819,763 11,510,240 11,348,745
Capital Contributions (Note 1):
Kennecott Uranium Company 1,070,174 1,158,140 1,143,097 16,823,244
USECC 1,070,174 1,158,140 1,143,097 16,823,244
Net loss:
Kennecott Uranium Company (919,40) (848,617) (981,602) (4,852,717)
USECC (919,410) (848,617) (981,602) (4,852,717)
Balance at end of period:
Kennecott Uranium Company $ 11,970,527 $ 11,819,763 $ 11,510,240 $ 11,970,527
USECC $ 11,970,527 $ 11,819,763 $ 11,510,240 $ 11,970,527
The accompanying notes are an integral
part of these financial statements
</TABLE>
162
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
<TABLE>
STATEMENT OF CASH FLOWS
-----
<CAPTION>
Period from
inception
(June 1, 1990)
Year ended December 31, to December 31,
------------------------------------------------ ---------------
1996 1995 1994 1996
------------- ------------- ------------- --------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net loss $ (1,838,820) $ (1,697,234) $ (1,963,204) $ (9,705,434)
Increase (decrease) in due to and due from
USECC 329,171 (47,889) (34,782) 298,447
------------ ------------ ------------ ------------
Net cash used in operating activities (1,509,649) (1,745,123) (1,997,986) (9,406,987)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Cost of buildings, mineral properties mine
development, and machinery and equipment (771,772) (555,448) (283,194) (8,683,086)
Increase (decrease) due to and due from
USECC 141,073 (15,709) (5,014) 170,585
------------ ------------ ------------ ------------
Net cash used in investing activities (630,699) (571,157) (288,208) (8,512,501)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Capital contributions 2,140,348 2,316,280 2,286,194 17,919,488
------------ ------------ ------------ ------------
Net change in cash and cash equivalents $ - $ - $ - $ -
=========== ============= ============= ============
Cash and cash equivalents:
At beginning of period $ - $ - $ - $ -
At end of period - - - -
Supplemental schedule of non-cash activities:
During 1990 and 1992 the Venture acquired mineral
properties an an established uranium processing
milling exchange for the assumption of reclamation
liabilities associated with the properties. $ 23,620,000
In 1990 the Venture partners contributed mineral properties and
buildings which were recorded at the contributing partners'
historical cost. $ 15,727,000
The accompanying notes are an integral
part of these financial statements
</TABLE>
163
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
1. Organization of the Joint Venture:
Green Mountain Mining Venture ("GMMV" or the "Venture") is a joint
venture with a 30 year life, formed by U.S. Energy Corp. ("USE"),
Crested Corp. ("Crested") and Kennecott Uranium Company ("Kennecott"),
the Venture partners, to explore for, evaluate, develop, mine and
market the mineral resources from the Green Mountain properties located
in south-central Wyoming. Kennecott has a 50% interest in GMMV, and USE
and Crested ("USECC") collectively have a 50% interest. GMMV was formed
June 1, 1990, with each partner contributing its portion of the Green
Mountain properties. Kennecott acquired its portion of the Green
Mountain properties from USECC in 1990 for a cash payment of $15.0
million. Thereafter, the partners are required to contribute funds
based upon their respective participating interests, subject to certain
provisions as provided for in the joint venture agreement.
Kennecott has agreed to contribute the first $50 million of operating
and development expenses pursuant to Management Committee budgets. As
of May 6, 1997, the Management Committee has not approved a budget for
the year ending December 31, 1997. Kennecott has also agreed to pay a
disproportionate share (up to an additional $45,000,000) of GMMV
operating expenses, but only out of cash operating margins from sales
of processed uranium at more than $24.00/lb (for $30,000,000 of such
operating expenses), and from sales of processed uranium at more than
$27.00/lb (for the next $15,000,000 of such operating expenses).
Through December 31, 1996, Kennecott has contributed $17,919,488 to the
Venture for operating and development expenses. During this period, 50%
of the capital contributions made by Kennecott have been allocated to
USECC. Income or loss and the cash flows from the Venture will be
allocated 50% to Kennecott and 50% to USECC. The allocation of the
USECC portion of cash flows will be determined by the ownership
interests of USE and Crested in the various GMMV properties.
Effective October 29, 1992, Kennecott replaced USECC as manager of the
Venture. Kennecott contracts with USECC to perform work on behalf of
the Venture.
Continued
164
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization of the Joint Venture, Continued:
Through December 31, 1996, the activities of the Venture have consisted
primarily of the development and maintenance of the Green Mountain
properties. While these activities are expected to continue in the
future, additional development at substantially higher annual levels is
required prior to the commencement of commercial production. Such
commencement is not expected to occur until the venture partners have
agreed that all economic and other conditions justify such
commencement. Therefore, the Venture is considered to be in the
development stage as defined in Statement of Financial Accounting
Standards No. 7.
2. Summary of Significant Accounting Policies:
Mineral properties contributed to the Venture were recorded at the
partners' historical cost at the date of contribution. Costs incurred
in the acquisition of mineral properties are capitalized and either
charged to operations on the units-of-production method over the
estimated reserves to be recovered or charged to operations at the time
the property is sold or abandoned. Mine development costs incurred
either to expand the capacity of operating mines, develop new ore
bodies or develop mine areas substantially in advance of production are
capitalized and charged to operations on the units-of-production method
over the estimated reserves to be recovered. Amortization of mine
properties and development costs will commence when mining operations
start. Mine development costs incurred to maintain production are
included in operating costs and expenses. Maintenance and holding costs
are expensed as incurred.
The cost of mining equipment, less estimated salvage value, will be
depreciated on the units-of-production method over the estimated
reserves to be recovered or on the straight-line method over the
estimated life of the equipment, whichever is shorter. The cost of
buildings will be depreciated on the straight-line method. Depreciation
of mining equipment and buildings will commence when mining operations
start. Costs of repairs and maintenance are expensed as incurred.
Expenditures that substantially extend the useful lives of assets are
capitalized. When assets are retired or otherwise disposed of, all
applicable costs and accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized currently.
Continued
165
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, Continued:
The Venture evaluates the recoverability of capitalized acquisition and
development costs based on the expected undiscounted future net
revenues from the related mining properties. An impairment loss will be
recorded if the unamortized costs exceed the expected undiscounted
future net revenues.
The recorded loss will be based on the difference between the
unamortized costs and the expected discounted future net revenues from
the related mining properties. The Venture believes that uranium prices
will reach levels sufficient to justify commencement of commercial
production in the future. The Venture also believes the expected
undiscounted future net revenues from the Green Mountain properties
will be sufficient to allow recoverability of these costs assuming
commencement of commercial production.
The estimated net future costs of dismantling, restoring and reclaiming
operating mines which result from future mining operations will be
accrued during such operations. The provision will be made using the
units of production sold method on the basis proven and probable ore
reserves and estimated costs at the balance sheet date. The effect of
changes in estimated costs and production will be recognized on a
prospective basis.
No provision has been made for federal, state and local income taxes,
credits, or benefits since tax liabilities are the responsibility of
the individual partners.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
3. Buildings, Mineral Properties and Mine Development Costs:
USECC conducts operations at the mine site on behalf of the Venture.
All accounts payable are due to USECC for costs incurred by USECC in
the normal course of business on behalf of GMMV. Through December 31,
1996 Kennecott had reimbursed USECC for substantially all development
costs incurred.
Continued
166
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
3. Buildings, Mineral Properties and Mine Development Costs, Continued:
Building, mineral property and mine development costs incurred by each
of the Venture partners are as follows:
<TABLE>
<CAPTION>
Period from
inception
(June 1, 1990)
Year ended December 31, to December 31,
-------------------------------------- ---------------
1996 1995 1994 1996
---------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Kennecott 31,597 43,626 137,482 2,732,181
--------- --------- --------- -----------
Total $ 771,772 $ 555,448 $ 283,194 $ 8,683,086
========= ========= ========= ===========
</TABLE>
In December 1990, GMMV acquired additional mineral properties in
exchange for the assumption of reclamation liabilities associated with
those properties of $7.3 million. In 1992, GMMV acquired an established
uranium processing mill (the Sweetwater Mill) in exchange for the
assumption of reclamation liabilities associated with this property of
$16.3 million. Such amounts represent the estimated costs at the
acquisition date to reclaim these properties. Kennecott, on behalf of
GMMV, is self-bonded in the amount of $24.3 million, which is payable
to the Wyoming Department of Environmental Quality ("WDEQ") and the
U.S. Nuclear Regulatory Commission in the event GMMV does not properly
reclaim the above properties or violates the Wyoming Environmental
Quality Act. Before the earlier of January 1, 2001, and resumption of
production, if the GMMV is required to incur reclamation or
environmental costs, the seller of the mill will be liable for the
first $8 million of these costs at the Sweetwater Mill.
The Venture properties include state leases which will expire in May
2001 and October 2006. All fees required to hold the unpatented mining
claims have been paid to the state of Wyoming as of December 31, 1996.
Continued
167
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
3. Buildings, Mineral Properties and Mine Development Costs, Continued:
At December 31, 1996 and 1995, costs capitalized as property and
equipment are composed of the following:
1996 1995
------------- -------------
Acquisition costs $ 39,347,000 $ 39,347,000
Development costs 8,683,086 7,911,314
------------- -------------
$ 48,030,086 $ 47,258,314
============= =============
Acquisition costs include the partners' initial contribution of mineral
properties and buildings recorded at the contributing partners'
historical cost of $15,727,000 and mineral properties and buildings
acquired in exchange for the assumption of reclamation liabilities
totaling $23,620,000.
4. Contingencies:
In June 1994, Kennecott was served with a complaint filed by Nukem Inc.
(Nukem) and Cycle Resource Investment Corporation (Cycle). The
complaint alleges that when Kennecott entered into the Green Mountain
Mining Venture with USE on June 1, 1990, that Kennecott interfered with
a Uranium Marketing Agreement (UMA) between Nukem and USE and the Sheep
Mountain Partners Partnership Agreement (SMPA) between USE and Cycle.
Nukem and Cycle are each seeking damages in excess of $14 million and
punitive damages.
The case was stayed pending the conclusion of an arbitration proceeding
between Cycle, Nukem and USE. The arbitration panel entered its order
in April 1996, and the stay in this case was lifted. The arbitration
panel held against Nukem in material respects stating that, even if the
UMA had been breached, Nukem suffered no damages thereby. The panel
denied the relief that Cycle sought for alleged breach of the SMPA.
Accordingly, on January 6, 1997, Kennecott filed a motion for summary
judgment contending, among other things, that the arbitration findings
collaterally estop all claims asserted by Nukem and Cycle. The motion
is currently pending.
If the motion is denied,
Continued
168
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
4. Contingencies, Continued:
the case will proceed to trial scheduled in 1997. Kennecott intends to
vigorously prosecute the summary judgment motion, and to vigorously
defend the litigation in the event the motion is denied.
Although the Venture is not a party to the complaint filed by Nukem and
Cycle, the ultimate resolution of this contingency could have an impact
on the properties held by the Venture.
5. Subsequent Event:
Subsequent to year end, Kennecott and USECC continued negotiations
whereby the parties are attempting to extract Kennecott from the GMMV.
These negotiations contemplate USECC buying out the Kennecott interest
in GMMV. No assurance can be given that the negotiations will be
successfully concluded.
6. Update of Certain Events (Unaudited):
On June 23, 1997, Kennecott and USECC signed an Acquisition Agreement
wherein USECC agreed to purchase Kennecott's interest in the GMMV for
$15,000,000 and the assumption of various reclamation and other
liabilities. Kennecott paid $4,000,000 to USECC on signing and is
required to provide a line of credit to GMMV of up to $16,000,000 for
payment of costs related to the Jackpot mine development and Sweetwater
mill preparation work. Amounts advanced under this line-of-credit bear
interest at 10.5% with repayment amounts based upon the cash flow and
earnings of GMMV with any unpaid balance payable in full no later than
June 23, 2010 in the event USECC or its affiliate purchases Kennecott's
interest in the GMMV. The line-of-credit is collateralized by a first
mortgage lien against Kennecott's 50% interest in GMMV. Closing of the
Acquisition Agreement is subject to several conditions and governmental
approvals. Kennecott is entitled to a credit against their original
$50,000,000 commitment of two dollars for each dollar provided under
the line-of-credit and the $4,000,000 paid on signing.
Concerning the litigation and arbitration proceedings described in
Footnote 4 between Kennecott and Nukem and Cycle Resource Investment
Corporation (Cycle), on August 22, 1997 the trial court granted
Kennecott's motion for summary judgement and dismissed the claims of
Nukem and Cycle. Following the motion, the parties agreed to settle the
case, and in February 1998 a settlement agreement was signed.
169
<PAGE>
U.S. ENERGY CORP.
662,987 COMMON SHARES
PROSPECTUS TABLE OF CONTENTS
Summary of the Offering 6
Risk Factors 8
The Company 18
Selected Financial Data 20
Business and Properties 22
Uranium 22
Gold 44
Molybdenum 52
Parador 54
Oil and Gas 54
Brunton 56
Real Estate and Other Commercial 57
Construction 60
Legal Proceedings 60
Market for USE Common Shares
and Related Stockholder Matters 69
Management's Discussion and Analysis of
Financial Condition and Results of Operations 70
Directors and Executive Officers 83
Certain Relationships and Related Transactions 94
Security Ownership of Certain
Beneficial Owners and Management 99
Description of Securities 103
Plan of Distribution 105
Holders of the Common Shares 106
Selling Shareholders 106
Experts 108
Legal Matters 108
Index to Financial Statements 109
170
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Legal $ 6,000* Audit 2,000* SEC and state fees 2,000* -------- $ 10,000*
* Estimate
Item 14. Indemnification of Directors and Officers.
The Wyoming Business Corporation Act ("WBCA"), W.S. 17-16-850 et seq., provides
for indemnification of the registrant's officers, directors, employees, and
agents against liabilities which they may incur in such capacities. A
summarization of circumstances in which such indemnification may be available
follows, but is qualified by reference to registrant's Articles of Incorporation
and the text of the statute.
In general, any officer, director, employee, or agent may be indemnified against
expenses, fines, settlements, or judgments arising in connection with a legal
proceeding to which such person is a party, as a result of such relationship, if
that person's actions were in good faith, were believed by him or her to be in
(or at least not opposed to) registrant's best interests, and in the case of any
criminal proceeding, he or she had no reasonable cause to believe his or her
conduct was unlawful. Unless such person is successful upon the merits in such
an action, indemnification may be awarded only after a determination by decision
of the board of directors (by directors not at the time parties to the
proceeding) or by majority shareholder vote (excluding shares held or controlled
by directors who are at the time parties to the proceeding), or by opinion of
special legal counsel.
The circumstances under which indemnification would be made in connection with
an action brought on behalf of the registrant are generally the same as stated
above, except that indemnification is permitted only for reasonable expenses.
In addition, registrant has statutory authority to purchase insurance to protect
its officers, directors, employees, and agents against any liabilities asserted
against them, or incurred in connection with their service in such capacities.
Further, registrant may advance or reimburse funds to a director who is a party
to a proceeding, for reasonable expenses incurred in connection with a
proceeding.
Item 15. Recent Sales of Unregistered Securities.
(a)(1) In August, 1993 Registrant sold a $300,000 convertible promissory note to
The Brunton Company, which note was subsequently converted (on October 19, 1993)
to 100,000 shares of common stock of the Registrant at $3.00 per share.
(2) From November 28, 1995 to March 31, 1995 Registrant sold 400,000
restricted shares of its common stock, principally to its officers and employees
or members of their immediate families out of a total 400,000 shares offered.
(3) From June 8, 1995 July 28, 1995, Registrant sold 812,432 restricted
shares of its common stock to accredited investors at $4.00 per share, out of
1,750,000 shares offered.
171
<PAGE>
(4) On September 15, 1994, Registrant delivered 20,000 shares of its Common
Stock, that Registrant borrowed from Keith G. Larsen, to Gladys L. May (13,334
shares), Kenneth E. May (3,333 shares) and Vicki Juhl Guier (3,333) shares in
exchange for a total of 9,000 common shares of Ticaboo Development, Inc.
("TDI"), a Utah Corporation, pursuant to an Agreement and Plan of Reorganization
dated September 2, 1994 (the "Agreement") among Registrant, TDI and TDI's three
shareholders named above. The 20,000 shares of Registrant's Common Stock was
acquired by Keith G. Larsen (who is not an affiliate of Registrant) in open
market transactions and was used by Registrant to acquire all of the outstanding
shares of TDI pursuant to the terms of the Agreement. In December 21, 1994
Registrant issued to Keith G. Larsen 20,000 restricted shares of its Common
Stock to replace the 20,000 free trading shares borrowed from him to complete
the transaction described above.
(5) In March 1996 Registrant issued the Warrant to Shamrock Partners, Ltd.
as compensation for services as a financial consultant and advisor under an
agreement dated January 9, 1996.
(6) In January 1996 Registrant issued an aggregate of 32,901 shares of its
common stock to 30 employees as a Christmas bonus for services performed during
the 1995 calendar year.
(7) In July 1996 Registrant issued 25,000 shares of its common stock for
exercise of Warrants under the Shamrock Partners, Ltd Warrant.
(8) In September 1996 Registrant issued 100,000 shares of its common stock
for exercise of Warrants under the Shamrock Partners, Ltd Warrant.
(9) In October 1996 Registrant issued 30,000 shares of its common stock for
exercise of Warrants under the Shamrock Partners, Ltd Warrant.
(10) In December 1996 Registrant issued 25,000 shares of its common stock
for exercise of Warrants under the Shamrock Partners, Ltd Warrant.
(11) In fiscal 1997, the Registrant issued 14,158 shares of Common Stock to
its officers under the Registrant's 1996 Stock Award Program.
(12) In November 1997, the Registrant issued 20,000 shares of its common
stock for exercise of Warrants under the Shamrock Partners, Ltd Warrant.
(13) In July 1997, the Registrant issued 10,000 shares on exercise of an
Incentive Stock Option.
(14) In September 1997, the Registrant issued 6,000 on exercise of an
Incentive Stock Option.
(15) In October 1997, the Registrant issued 14,000 shares on exercise of
Incentive Stock Options.
(16) In December 1997, the Registrant issued 17,000 shares on exercise of
Incentive Stock Options.
(17) In January 1998, the Registrant issued 5,000 shares on exercise of an
Incentive Stock Option.
(18) In May 1998, the Registrant issued 4,902 shares to employees; 2,500
shares to one director; 2,500 to a member of the Advisory Board; and 5,000
shares on exercise of an Incentive Stock Option.
(b)(1), (2), (4) through (13) No underwriters were involved in transactions
(a)(1), (2), (4), (5) and (6). RAF Financial Corporation was placement agent for
the (a)(3) private offering, receiving a 10 percent sales commission and a 3
percent nonaccountable expense allowance on shares sold, and warrants to
purchase 10 percent of total shares sold.
(c)(1) See above.
172
<PAGE>
(2) Shares were offered at $3.00.
(3) Shares were offered at $4.00.
(4) See (a)(4) above.
(5) See (a)(5) above.
(6) See (a)(6) above.
(7) See (a) (7) through (10), and (a) (11), shares were sold at $5.00.
(11),(12) Shares were issued at market prices, except for the options which
were exercised in fiscal 1997 and 1998 at the market price in effect when the
options were issued (December 1996).
(d)(1), (4), (5), (6) and (11). The securities referenced in (a)(1), (4)
through (12), were offered and sold in reliance on the section 4(2) exemption
from section 5 registration, and the shares issued for the option exercises
under (13) - (18) were registered on Form S-8.
(d)(2) and (3). The common stock issued and sold in the private placements
were offered and have been sold in reliance on the section 4(2) exemption from
registration, and Rule 506 of Regulation D thereunder. Total nonaccredited
purchasers in the two private placements were 34; the balance of investors were
accredited persons. Further, Registrant believes the two placements were
different offerings, not subject to integration under Commission criteria.
Item 16. Exhibits and Financial Statement Schedules.
Schedules have been omitted because the information is not applicable
or because the information is included in the financial statements.
(b) Exhibits.
Exhibit No. Reference
3.1 USE Restated Articles of Incorporation *
3.1(a) USE Articles of Amendment to
Restated Articles of Incorporation *
3.2 USE Bylaws, as amended through April 22, 1992 *
4.1 Shamrock Partners, Ltd. 1/9/96 Warrant to
Purchase 200,000 Common Shares of USE *
4.2 USE 1989 Incentive Stock Option Plan,
as amended through 1/94 *
4.3 USE Restricted Stock Bonus Plan,
as amended through 2/94 *
173
<PAGE>
4.4 Amendment to 1/9/96 Shamrock Warrant *
4.5 Agreement with Shamrock Partners, Ltd (1/20/98) *
4.6 Shamrock Partners, Ltd. 1/23/98 Warrant to Purchase
200,000 Common Shares of USE *
4.7 1996 Stock Award Program *
4.8 Restated 1996 Stock Award Program *
4.9 Agreement with Sunrise Financial Group (12/1/97) *
4.10 Sunrise Financial Group 1/9/98 Warrant to Purchase
225,000 Common Shares of USE *
5.1 Opinion of Stephen E. Rounds, Esq. *
10.1 USECC Joint Venture Agreement - Amended *
10.2 Management Agreement with USECC *
10.4 Contract for Sale of Stock of Brunton
to Silva A.B. *
10.5 Assignment and Lease - Parador *
10.6 Employment Agreement - Daniel P. Svilar *
10.7 Airport Ground Lease - City of Riverton *
10.8 Executive Officer Death Benefit Plan *
10.9 Big Eagle Acquisition Agreement with PMC *
10.11 Sweetwater Mill Acquisition Agreement *
10.12 Ft. Peck Agreement - Drilling
and Production Services *
10.13 USE/Seine River Letter Agreement - SGV *
10.14 Agreement to Sell SGV Interest to Crested *
10.18 Master Agreement - Mt. Emmons/AMAX *
10.20 Promissory Notes - ESOP/USE *
174
<PAGE>
10.21 Self Bond Agreement - Crooks Gap Properties *
10.22 Security Agreement - ESOP Loans *
10.27 Mineral Properties Agreement
Congo Area - PMC *
10.28 Memorandum of Joint Venture Agreement - GMMV *
10.29 Memorandum of Partnership Agreement - SMP *
10.32 Employee Stock Ownership Plan *
10.33 1989 Stock Option Plan *
10.34 Form of Stock Option and Schedule - 1989 Plan *
10.35 Severance Agreement (Form) *
10.36 1992 Stock Compensation Plan
Non-Employee Directors *
10.37 Executive Compensation (John L. Larsen) *
10.38 Executive Compensation
(Non-qualified Options) *
10.39 ESOP and Option Plan Amendments (1992) *
10.40 Plateau Acquisition -
Stock Purchase Agreement and Related Exhibits *
10.41 Option and Sales Agreements
Gunnison Property Parcel A *
10.42 Option and Sales Agreements
Gunnison Property Parcel B *
10.43 Option Agreement - USE and Arrowstar
Aircraft Hanger *
10.44 Amendment to Contract with Arrowstar for Hangar *
10.45 Contract for Sale of Wind River Estates *
10.46 Contract for sale of Jeffrey City Six-Plex *
175
<PAGE>
10.47 Development Agreement with First N-Last *
10.48 Operating Agreement with First-N-Last *
10.49 USE/Dominick & Dominick Securities, Inc. Stock
Purchase Agreement for 157,530 Common Shares of USE *
10.50 USE/BPI Canadian Resource Fund Stock Purchase
Agreement for 125,341 Common Shares of USE *
10.51 USE/BPI Canadian Opportunities II Fund Stock
Purchase Agreement for 125,341 Common Shares of USE *
10.52 USE/BPI Canadian Small Companies Fund Stock
Purchase Agreement for 250,683 Common Shares of USE *
10.53 USE/Yellow Stone Fuels Corp. Exchange Rights Agreement *
22.1 Subsidiaries of Registrant *
23.1 Consent of Arthur Andersen LLP **
23.2 Consent of Coopers & Lybrand L.L.P. **
* Previously Filed.
** Filed herewith
Item 17. Undertakings.
The registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registrations statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(a)(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities
176
<PAGE>
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(a)(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of this
offering.
(h) Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers, and controlling
persons of the registrant, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any action
suit or proceeding) is asserted by such officer, director, or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
177
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Riverton, Wyoming, on
June 25, 1998.
U.S. ENERGY CORP.
(Registrant)
Date: June 25, 1998 By: s/ John L. Larsen
-----------------------------
JOHN L. LARSEN,
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
Date: June 25, 1998 By: s/ John L. Larsen
-----------------------------
JOHN L. LARSEN, Director
Date: June 25, 1998 By: s/ Harold F. Herron
-----------------------------
HAROLD F. HERRON, Director
Date: June 25, 1998 By: s/ Nick Bebout
-----------------------------
NICK BEBOUT, Director
Date: June ____, 1998 By:
-----------------------------
DON C. ANDERSON, Director
Date: June ____, 1998 By:
----------------------------
DAVID W. BRENMAN, Director
Date: June 25, 1998 By: s/ H. Russell Fraser
-----------------------------
H. RUSSELL FRASER, Director
Date: June 25, 1998 By: s/ Keith G. Larsen
-----------------------------
KEITH G. LARSEN, Director
Date: June 25, 1998 By: s/ Robert Scott Lorimer
-----------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer
and Chief Accounting Officer
178
EXHIBIT 5.1
STEPHEN E ROUNDS
Attorney at Law
4635 EAST EIGHTEENTH AVENUE TELEPHONE (303) 377-6997
DENVER COLORADO 80220 USA FACSIMILE (303) 377-0231
June 29, 1998
U.S. Energy Corp.
877 North 8th West
Riverton, Wyoming 82501
Re: Registration Statement on Form S-1
Gentlemen:
U.S. Energy Corp. ("Company") proposes to file a registration statement
for the offer and sale, to the public, of 662,987 shares of issued and
outstanding Common Stock, of which 546,365 shares are held by four Canadian
investment funds, 112,530 shares will be issued to one of such funds when the
registration statement is declared effective, and 4,092 shares are held by 23
employees of the Company. Hereafter, the funds and the employees are
collectively referred to as the "Selling Shareholders." My opinion and consent
is required in connection with such registration filing.
Documents Reviewed
I have examined originals, certified copies or other copies identified
to my satisfaction, of the following:
1. Restated Articles of Incorporation, and Amendment to Restated
Articles of Incorporation, of the Company.
2. Bylaws of the Company.
3. All exhibits listed in Part II of the registration statement.
4. The Company's registration statement on Form S-1, with which this
opinion is filed as an exhibit.
5. Minutes of proceedings of the Company board of directors for the
last four fiscal years, and from May 31, 1998 to the date hereof.
<PAGE>
U.S. Energy Corp.
June 29, 1998
Page -2-
I have also consulted with officers and representatives of the Company,
and received representations and assurances concerning the exhibits described in
paragraph 3 and the registration statement described in paragraph 4, as I have
deemed advisable or necessary under the circumstances. Although I have not
undertaken independent verification of the matters covered by this paragraph, I
have no reason to believe that the representations and assurances received are
materially inaccurate or false.
Opinion
Subject to compliance with applicable state securities laws, and to
declaration of effectiveness of the Company's Form S-1 registration statement,
and based on my review of the documents listed above, it is my opinion that the
shares of Common Stock to be offered and sold by the Selling Shareholders named
in the registration statement are duly and validly issued, fully paid and
non-assessable common shares of the Company.
My opinion assumes that the Selling Shareholders deliver copies of the
definitive prospectus to each purchaser of the registered securities, in
accordance with the Securities Act of 1933, as amended, and applicable rules of
the Securities and Exchange Commission.
Yours Sincerely,
s/ Stephen E. Rounds
EXHIBIT 23.1
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our Report dated August 15, 1997, in this Form S-1 Registration
Statement.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
June 25, 1998
179
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EXHIBIT 23.2
Consent of Independent Accountants
We consent to the reference to our firm under the caption "Experts" in the
registration statement on Form S-1 of U.S. Energy Corp.
/s/ Coopers & Lybrand L.L.P.
Salt Lake City, Utah
June 25, 1998
180
EXHIBIT 23.2
STEPHEN E ROUNDS
Attorney at Law
4635 EAST EIGHTEENTH AVENUE TELEPHONE (303) 377-6997
DENVER COLORADO 80220 USA FACSIMILE (303) 377-0231
June 29, 1998
U.S. Energy Corp.
877 North 8th West
Riverton, Wyoming 82501
Re: Registration Statement on Form S-1
Gentlemen:
I hereby consent to the filing of my opinion as an exhibit to the
registration statement on Form S-1. However, I do not admit that I am in the
category of those persons whose consent is required to be so filed by Section
7(a) of the Securities Act of 1933.
Yours Sincerely,
s/ Stephen E. Rounds
