SEC FILE NO. 333-57957
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT UNDER SECURITIES ACT OF 1933
U.S. ENERGY CORP.
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(Exact Name of registrant as specified in its 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 138.
<PAGE>
Calculation of Registration Fee
<TABLE>
<CAPTION>
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
within 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 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 OCTOBER ____, 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 (the "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 9.
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 OCTOBER ____, 1998.
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. The Company's
Common Stock is traded on the NASDAQ/NMS quotation system. As of October 15,
1998, the closing bid price for the Company's Common Stock was $2.28 per share.
See "Market for USE Common Stock and Related Stockholder Matters." There are no
underwriting arrangements known to the Company. 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 the public, by the
filing of the Registration Statement (of which this Prospectus is a part) with
the Securities and Exchange Commission (the "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.
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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
The Company 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 and
Exchange Commission, Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or they may be obtained 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.
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 Report, including without limitation the statements under
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the disclosures about the Green Mountain Mining Venture development
schedule for the Wyoming properties, the projected operating status of Plateau
Resources Limited's Shootaring Canyon uranium mill in Utah, future market prices
for uranium oxide, possible utility contracts for uranium oxide, and the plan of
operations for Yellow Stone Fuels Corp. and Sutter Gold Mining Company
(subsidiaries of U.S. Energy Corp.), are forward-looking statements. In
addition, when words like "expect," "anticipate" or "believe" are used, U.S.
Energy Corp. is making forward- looking statements.
Although U. S. Energy Corp. believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from such expectations are disclosed
in this Prospectus. See "Risk Factors" starting on page 8. Other factors which
are relevant to assessing the forward-looking statements are contained
throughout this Prospectus. The forward-looking statements should be carefully
considered in the context of all the information set forth in this Prospectus.
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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
(A) GENERAL.
U.S. Energy Corp. ("USE" or the "Registrant") is in the business of
acquiring, exploring, developing and/or selling or leasing mineral properties,
and the mining and marketing of minerals. USE is now engaged in two principal
mineral sectors: uranium and gold, both of which are in the development stage.
The most significant uranium properties are located on Green Mountain and Sheep
Mountain in Wyoming, and in southeast Utah. USE's gold operations are conducted
through Sutter Gold Mining Company, a 59% owned subsidiary. Interests are held
in other mineral properties (principally molybdenum), but are either
non-operating interests or undeveloped claims. USE also carries on small oil and
gas operations in Montana and Wyoming. Other USE business segments are
commercial operations (real estate and general aviation) and construction
operations. USE has a May 31 fiscal year.
USE was incorporated in Wyoming in 1966. All of its operations are in
the United States. Principal executive offices are located in the Glen L. Larsen
building at 877 North 8th Street West, Riverton, Wyoming 82501, telephone (307)
856-9271.
Most of USE operations are conducted through a joint venture with
Crested Corp. ("Crested"), a majority-owned subsidiary, and various jointly
owned subsidiaries of USE and Crested. The joint venture with Crested is
referred to in this Prospectus as "USECC". Construction operations are carried
on primarily through USE's subsidiary Four Nines Gold, Inc. ("FNG"). Oil and gas
operations are carried out through Energx, Ltd., a subsidiary of USE and
Crested. USE and Crested originally were independent companies, with two common
affiliates (John L. Larsen and Max T. Evans). In 1980, USE and Crested formed a
joint venture to do business together (unless one or the other elected not to
pursue an individual project). As a result of USE funding certain of Crested's
obligations from time to time (due to Crested's lack of cash on hand), and later
payment of the debts by Crested issuing common stock to USE, Crested became a
majority owned subsidiary of USE in fiscal 1993.
In fiscal 1998, USE and USECC signed an agreement with Kennecott
Uranium Company ("Kennecott"), for the purchase of Kennecott's interest in the
Green Mountain Mining Venture ("GMMV") (the "Acquisition Agreement"). This
agreement expires on October 30, 1998. Please see "Business and Properties -
Minerals-Uranium-The Green Mountain Mining Project-June 23, 1997 Amendment to
GMMV with Kennecott Uranium Company" below.
In fiscal 1998, USE and Crested continued the development of the GMMV
uranium mines and the upgrade of the GMMV's Sweetwater uranium mill and the
Shootaring Canyon uranium mill in southeast Utah (owned by Plateau Resources
Ltd., a wholly-owned USE subsidiary) In addition, USE intends to implement plans
for it and Crested to consolidate their uranium assets into a single subsidiary
and finance the startup of its mines and mill operations, subject to obtaining
the necessary debt or equity funding. There is no assurance such financing can
be obtained.
For fiscal 1999, USE intends to seek the financing necessary to
continue development work at the Jackpot Mine. In late July 1998, USE, Crested
and Kennecott made a business decision to temporarily cease development work at
the Jackpot Mine because of the expected negative impact on uranium prices due
to the amount of uranium inventory which USEC Inc. announced was held in its
inventory and could be sold into
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the uranium market. USEC Inc. originally was the United States Enrichment
Corporation, which was created in 1992 to hold the uranium enrichment facilities
of the United States Department of Energy; USEC Inc. is not affiliated with USE
or USECC. However, other factors are affecting the global uranium market
(reductions in current and planned production), such that the resumption of
development work and putting the Utah uranium properties into production in the
near-term may be warranted. See "Business and Properties Uranium Market
Information." USE is in discussions with various sources of capital to fund its
uranium projects in Utah and Wyoming, but no funding agreements have been
reached as of the date of this Prospectus.
USE also will be refining the mine and mill plan for the Lincoln
Project in California (held by Sutter Gold Mining Company), with the objective
of continuing mine development, building a gold mill and producing gold,
possibly in fiscal 2000. Permitting and capital raising costs for the Lincoln
Project will be funded internally by Sutter Gold Mining Company. Additional
funding will be needed to develop the properties, however, there are no funding
agreements as of the date of this Prospectus and there is no assurance needed
funding will be received. See "Gold" below.
Until February 1996, USE conducted manufacturing and/or marketing of
professional and recreational outdoor products through The Brunton Company
("Brunton"), a wholly-owned subsidiary. As of February 1, 1996, USE sold Brunton
to Silva Production AB. The sale eliminated Brunton's manufacturing and/or
marketing of professional and recreational outdoor products from the commercial
segment of USE's business as of January 31, 1996, except to the extent that
there are net profits payments from Silva through 2000. For the fiscal year
ended May 31, 1996, Brunton's sales provided 25% of net revenues of USE (before
reclassification to reflect Brunton as discontinued operations with respect to
USE). See "Business and Properties - Commercial Operations" below.
THE OFFERING
Securities Offered (1).......................................662,987 shares
of Common Stock(2)
USE Common Stock Outstanding
Before and After Offering .................................7,741,068 shares(3)
NASDAQ/NMS Symbol"USEG"
- ----------------
(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, continued low uranium prices,
litigation and competition. See "RISK FACTORS" beginning on the next page.
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."
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Common Shares
Canadian Fund Registered for Sale
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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,
including three officers (see "Selling Shareholders"). These shares were issued
as 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. The Company's expected cash
requirements for the balance of fiscal 1999 are the funding of on-going general
and administrative expenses; mine and mill development and holding costs of the
Sutter gold property described below; holding (standby) costs for the uranium
mills in Wyoming and southeastern Utah; SMP and GMMV mine care and maintenance
costs; and costs to acquire uranium oxide under the supply contract which the
Company and Crested hold.
As of the date of this Prospectus, the Company does not have enough
funds or credit resources to put its uranium and/or gold properties into
production. It is possible, furthermore, that Kennecott will not fund any more
development of the GMMV's Jackpot Mine. Therefore, the Company will need
substantial capital to prepare its properties for production, and after May 31,
1999, to fund general and administrative expenses, and pay property holding
costs. The Company may not obtain the necessary financing in fiscal 1999 or
thereafter.
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
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investment represents a significant portion of USE's consolidated assets.
Although SGMC completed private financings for a total of $7,115,100, additional
financing will be required to put the property into full production and build a
mill on the property. If third-party financing cannot be obtained and the
Company is unable to fund SGMC's development and production costs from
internally generated funds over the next two years, the Company may be adversely
affected. In fiscal 1998, the Company recorded an impairment of $1.5 million on
its investment in SGMC, and further impairments may have to be recorded at the
end of fiscal 1999. See "Business and Properties - Gold - Lincoln Project
(California)".
3. ADDITIONAL SHARES TO MARKET; POSSIBLE DILUTION. The Company 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 Company and Crested may finance the development of its
uranium assets through a new entity. The new entity would hold the principal
uranium assets of the Company and Crested, and the Company and Crested would 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
Company and Crested will not be determinable until final terms of the
transaction are reached. See "Business and Properties - Green Mountain Mining
Venture."
4. VARIABLE REVENUES AND RECENT LOSSES. Due to the nature of the
Company's business, there are from time to time major changes in revenues from
sale of mineral properties or otherwise. 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, the Company realized net income 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. In 1998, revenues were $11,558,500 but the Company lost
$983,200.
5. LIMITED NUMBER OF CUSTOMERS FOR URANIUM. The worldwide market for
uranium is marked by few buyers, aside from governments which buy uranium oxide
for marine vessel and weapons manufacture purposes, and an immaterial amount
consumed by the medical sector. There are approximately 18 electricity utilities
in the United States (and 97 more in the rest of the world) which operate
nuclear reactors (108 reactors in the United States, 331 in the rest of the
world). Therefore the number of customers for the Company's uranium at any one
time is likely to be very limited.
6. PUBLIC ACCEPTANCE OF NUCLEAR ENERGY. In the late 1970s, a safety
system failure at a nuclear reactor located at the Three Mile Island,
Pennsylvania generating station resulted in an incident which decreased public
acceptance of nuclear-powered electricity. Because of this incident, the Nuclear
Regulatory Commission adopted and imposed new safety regulations on electric
utilities which used nuclear power. A number of reactors which then were in the
planning or construction phases were canceled by the domestic utility industry.
Another nuclear reactor safety incident could again adversely affect public
acceptance of nuclear power in the United States, and result in more
regulations, which might cause some utilities to cut back on their plans to
continue operating nuclear reactors or cancel plans to build new reactors. Any
decrease in the number of operating and/or planned reactors might decrease
future demand and prices for uranium oxide.
See "Business and Properties - Uranium Market Information."
7. PROJECT DELAY. The Company'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 9), mining risks (see Risk Factor 12), difficulty in arranging
needed
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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.
8. DEBT. At May 31, 1998 the Company had $278,200 of long-term debt
($503,900 including the current portion of $225,700), and a $1,000,000 secured
line of credit from a commercial bank (with interest at the bank's prime rate
plus .5%). At August 31, 1998, the Company had $246,600 of long-term debt
($673,100 including the current portion of $426,700). No amount is owed on the
line of credit at September 30, 1998. The amount of debt is small relative to
the Company's financial condition. However, because of estimated reclamation
obligations and standby costs of $13,055,600 (at May 31, 1998), the Company may
have a limited borrowing base and therefore could be unable to borrow
significant amounts of money if the need arises. For information on the
reclamation obligations and standby costs, see Risk Factor 14 and "Note K to the
USE Consolidated Financial Statements."
9. COMMODITY PRICE FLUCTUATIONS. The ability of the Company to develop
and operate its uranium and gold projects profitably will 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 Company'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 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 November
9, 1998 was $9.10 per pound. The Company believes that if the price increases
substantially, more utilities will seek long term price stabilizing uranium
supply contracts. If the Company is able to obtain long term uranium supply
contracts with assured prices exceeding its cost of production, then Plateau's
and GMMV's properties should be profitable. The Company estimates that its
production costs will be comparable to the production costs of the more
efficient uranium mines and mills now in operation, primarily because the mine
and mill capital costs have been paid for by others. USE would be adversely
affected if the United States utilities with nuclear power plants do not seek
more long term uranium supply contracts by the end of calendar 2000. Although
the extent of such adverse impact cannot be predicted, if uranium prices
remained so depressed through calendar 2000 that USE's properties and facilities
were not put into operation, the economic value of such assets might decrease.
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, the extent of forward sales of gold by
other producers, consumption patterns (gold jewelry and gold coins), purchases
and sales of gold bullion holdings by central banks or other large gold bullion
holders or dealers and global or regional political events. Gold market prices
are also affected by worldwide production levels, which increased in recent
years, but currently appear to be decreasing. The aggregate effect of these
factors is impossible to predict at any one time. As of October 14, 1998, the
Comex spot price of gold was $297.50 per ounce, compared to $373 per ounce on
November 24, 1996.
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10. 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 of 1872, 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 of 1872 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 uranium
properties which are located on federal unpatented mining claims, and could
increase both the capital and operating costs for such projects.
11. EXPLORATION RISKS. Mineral exploration, particularly for gold,
involves many risks and frequently is nonproductive. There can be no assurance
that the Company's efforts at SGMC's Lincoln Project to identify additional gold
ore reserves will be successful. Moreover, substantial expenditures are required
to establish additional ore reserves through drilling, to determine
metallurgical processes to extract the metal from the ore and to construct
mining and processing facilities. During the time required to establish
additional ore reserves, determine suitable metallurgical processes and
construct facilities, the economic feasibility of production may change because
of fluctuating gold prices (see Risk Factor 9).
12. 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 Company'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 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 adequate insurance will
continue to be available.
The Company carries property damage insurance with claim limits of
$10,000,000.
13. TITLE TO PROPERTIES. Nearly all the uranium mining properties held
by the Company, GMMV and Plateau are on federal unpatented claims. Unpatented
claims are located upon federal public land pursuant to procedures established
by the General Mining Law of 1872. Title to such properties can be challenged.
Although there now are no challenges to the Company's title rights, such
challenges in the future could jeopardize title and possibly cause delays in
operations on the affected properties. See "Business and Properties - Mining
Claim Holdings."
14. RECLAMATION AND ENVIRONMENTAL LIABILITIES. The Company's projects
and operations are subject to various federal, state and local laws and
regulations regarding the discharge of materials into the environment or
otherwise relating to the protection of the environment, including the Clean Air
Act, the Clean Water Act, the Resource Conservation and Recovery Act and the
Comprehensive Environmental Response Compensation Liability Act. With respect to
mining operations conducted in Wyoming, Wyoming's mine permitting statutes,
Abandoned Mine Reclamation Act and industrial development and siting laws and
regulations will impact USE. Similar laws in California affect SGMC operations
and in Utah will affect Plateau's operations. In addition, Registrant's uranium
mill in Utah and the GMMV mill in Wyoming are subject to jurisdiction of the
Nuclear Regulatory Commission ("NRC").
To the Company's knowledge, it is in compliance in all material
respects with current environmental regulations. To the extent that production
by GMMV or SGMC is delayed, interrupted or discontinued due to need to satisfy
present or any future laws or regulations which relate to environmental
protection, future USE earnings could be adversely affected. For additional
information concerning the effect such
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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."
15. POSSIBLE LOSSES ON URANIUM CONTRACTS. The Company holds a contract
for delivery of U3O8 to a domestic utility through 2000, exclusive of the
utility's rights to increase or decrease delivery amounts by 10 to 30 percent.
Profit or loss on the deliveries will depend on the cost of inventory.
As of the date of this Prospectus, the prices under the 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 the contract prior to the time that
their uranium properties are in production, thus reducing potential profits or
possibly producing losses.
16. 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.
The location and composition of mineral ore bodies are of great
importance to the competitive position of a mining company. Producers of
high-grade ore with readily extractable minerals are in an advantageous
position. Producers of one mineral may be able to efficiently recover other
minerals as by-products, with significant competitive impact on primary
producers. Substantial capital costs for equipment and mine-works are often
needed. As a result, owners of producing properties, particularly if purchase
contracts for the production are in place, generally enjoy substantial
competitive advantages over organizations that propose to develop non-producing
properties. Competition is also keen in the search for mineral properties and
prospects and in the employment and retention of qualified personnel.
USE 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 USEC Inc. 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".
17. RESERVE ESTIMATES. While the estimates of mineralized resources at
the GMMV's Round Park uranium ore deposit in Wyoming and SGMC's gold property 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, 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.
18. BULLFROG LITIGATION. The Company and Crested 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.
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
12
<PAGE>
gold produced from the Bullfrog Mine. If, however, the final decision in this
litigation is adverse to USE and Crested, USE and Crested could be adversely
affected. See "Legal Proceedings."
19. 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 Company'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.
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.
20. POTENTIAL ANTI-TAKEOVER EFFECTS OF STAGGERED BOARD. The Company's
Board of Directors is presently divided into three classes of two directors
each. Pursuant to the 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."
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,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current assets $14,301,000 $ 4,400,900 $ 2,912,400 $ 3,390,100 $ 3,866,600
Current liabilities 6,062,100 1,393,900 2,031,200 3,368,200 1,291,700
Working capital 8,238,900 3,007,000 881,200 21,900 2,574,900
Total assets 45,019,100 30,387,100 34,793,300 33,384,500 33,090,300
Long-term obligations(1) 14,468,600 14,377,200 15,020,700 15,769,600 16,612,500
Shareholders' equity 17,453,500 12,723,600 14,617,000 12,168,400 12,559,100
<FN>
(1)Includes $8,778,800, $8,751,800, $3,978,800, $3,951,800 and $3,951,800 of
accrued reclamation costs on mining properties at May 31, 1998, 1997, 1996, 1995
and 1994, respectively. See Note K of Notes to Consolidated Financial
Statements.
</FN>
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
August 31, 1998
(unauditied)
------------
<S> <C>
Current assets $12,533,600
Current liabilities 5,670,700
Working capital 6,862,900
Total assets 42,997,400
Long-term obligations(2) 14,343,100
Shareholders' equity 16,196,300
<FN>
(2)Includes $8,778,800 of accrued reclamation costs at August 31, 1998.
</FN>
</TABLE>
<TABLE>
<CAPTION>
For Years Ended May 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 11,558,500 $ 5,790,200 $ 9,632,200 $ 4,600,600 $ 8,776,300
Income (loss) before
minority interest
and equity in loss
of affiliates, and
income taxes 365,000 (3,706,000) (2,524,100) (2,577,700) (3,587,900)
Equity in loss of
affiliates (575,700) (690,800) (418,500) (442,300) (531,200)
Net income (loss) (983,200) (3,724,500) 270,700 (2,070,600) (3,370,800)
Loss per share $ (.15) $ (.58) $ (.39) $ (.48) $ (.73)
Loss per share
before cumulative effect
of accounting change (.15) (.58) (.39) (.48) (.73)
Income from discontinued
operations -- -- .05 .06 .03
Gain on disposal of
subsidiary operations in
discontinued segment -- -- .38 -- --
Cumulative effect at
June 1, 1993 of income
tax accounting change -- -- -- -- (.06)
------------ ------------ ------------ ------------ ------------
Net income (loss)
per share, basic
and diluted $ (.15) $ (.58) $ .04 $ (.42) $ (.76)
============ ============ ============ ============ ============
Cash dividends per share $ -0- $ -0- $ -0- $ -0- $ -0-
============ ============ ============ ============ ============
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
For Three Months Ended August 31,
--------------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues $ 2,163,400 $ 2,860,600
(Loss) income before
minority interest
and equity in loss
of affiliates (1,504,400) 944,100
Equity in loss of
affiliates (13,500) (163,800)
Net (loss) income (1,257,200) 683,800
Loss per share $ (.18) $ .10
Net (loss) income
per share, basic
and diluted $ (.18) $ .10
============= ===========
Cash dividends per share $ -0- $ -0-
============= ===========
</TABLE>
BUSINESS AND PROPERTIES
MINERALS
URANIUM
GENERAL
USE has interests in several uranium-bearing properties in Wyoming and
Utah and in uranium processing mills in Sweetwater County, Wyoming (the
"Sweetwater Mill") and in southeastern Garfield County, Utah (the "Shootaring
Mill"). All the uranium-bearing properties are in areas which produced
significant amounts of uranium in the 1970s and 1980s. USE plans to develop and
operate these properties (directly or through a subsidiary company or a joint
venture) to produce uranium concentrates ("U3O8") for sale to public utilities
that operate nuclear powered electricity generating plants. In addition, other
uranium- bearing properties in New Mexico and Wyoming are held by Yellow Stone
Fuels Corp. (a minority joint subsidiary of USE and Crested).
The property interests of USE in Wyoming are:
---------------------------------------------
Green Mountain
521 unpatented lode mining claims (the "Green Mountain Claims") on
Green Mountain in Fremont County, Wyoming, including 105 claims on which the
Round Park (Jackpot) uranium deposit is located, and the Sweetwater Mill,
(approximately 23 miles south of the proposed Jackpot Mine). These assets are
held by the Green Mountain Mining Venture ("GMMV"), owned 50 percent by USE and
USECC (the "USE Parties"), and 50 percent by Kennecott Uranium Company ("KUC" or
"Kennecott"), a subsidiary of Kennecott Energy and Coal Company of Gillette, WY.
Kennecott Energy and Coal Company and Kennecott Corporation of
15
<PAGE>
Salt Lake City, UT are subsidiaries of Rio Tinto plc, formerly RTZ PLC of
London. Rio Tinto plc is one of the world's leading natural resource companies
and owns 69% of Rossing Uranium Corp.'s operations in Namibia in southwest
Africa. Rossing currently produces about 6,000,000 lbs. of U3O8 out of its
10,000,000 lb. annual capacity. Rio Tinto has delayed indefinitely the
construction of its 4,000,000 lb. U3O8 per year Kintyre uranium project in
Western Australia. Kennecott Corporation owns and operates several mines
including the Bingham Canyon, Utah open pit copper mine which opened in 1906.
All of the GMMV mining claims are accessible by county, private and/or
United States Bureau of Land Management ("BLM") access roads. Exploration and
delineation of the principal uranium resources in the proposed Jackpot Mine have
been substantially completed. The BLM has signed a Record of Decision approving
the Jackpot Mine Plan of Operations following preparation of a final
Environmental Impact Statement ("EIS") for the proposed mine, and on June 25,
1996, the Wyoming Department of Environmental Quality ("WDEQ") issued Mine
Permit No. 660 that is required for GMMV to develop the underground Jackpot Mine
and mine the uranium deposits. The proposed mine has had no previous operators,
and will be a new mine when opened. The Big Eagle Mine and related claim groups
(which are near the proposed Jackpot Mine and are part of the Green Mountain
Claims held by the GMMV), are accessible by county and private roads. The Big
Eagle Mine was first operated by Pathfinder Mines Corporation ("PMC") starting
in the late 1970s.
Sheep Mountain
--------------
Unpatented lode mining claims, underground and open pit uranium mines
and mining equipment in the Crooks Gap area are located on Sheep Mountain in
Fremont County, Wyoming and are adjacent to and west of the GMMV mining claims.
From 1988 to June 1, 1998, these assets were held by SMP. On June 1, 1998, USECC
received back from SMP all of the Sheep Mountain mineral properties and
equipment, in partial settlement of disputes with Nukem and CRIC. The
disposition of SMP cash and the CIS uranium supply contracts, remain in dispute.
See "Legal Proceedings." The Sheep Mountain Mines 1 and 2 are accessible by
county and private roads and were first operated by Western Nuclear, Inc., a
subsidiary of Phelps Dodge Corporation, in the late 1970s.
Yellow Stone Fuels Corp.
------------------------
Approximately 10,825 acres of properties are held by 437 unpatented
lode mining claims which have been staked by, plus four leases (including three
state leases) held by Yellow Stone Fuels Corp. (an Ontario, Canada corporation,
or by its wholly-owned subsidiary Yellow Stone Fuels, Inc., a Wyoming
corporation, hereafter collectively or individually referred to as "YSFC"). The
properties are located in Wyoming and New Mexico, and are believed to be
prospective of uranium and suitable for in-situ leaching. USE and Crested each
own 12.7% of YSFC.
The property interests of USE in Utah through Plateau Resources Ltd. are:
-------------------------------------------------------------------------
The Tony M Mine and the Frank M properties, underground uranium
deposits in San Juan County, Utah located partially on Utah State mining leases.
These properties are accessible by county roads.
Plateau is the lessee of the Tony M Mine and portions of the Frank M
properties and has posted a bond securing Plateau's obligations to reclaim these
properties. The Tony M mine was originally developed by Plateau at the time
Plateau was owned by Consumers Power Company ("CPC"), a Michigan public utility.
Significant areas of uranium mineralization have been accessed and delineated by
the prior owner's underground workings. When the Tony M Mine was in production
(while Plateau was owned by CPC), it produced ore containing from three to eight
pounds of uranium concentrates per ton. Some of this ore was
16
<PAGE>
processed at the Shootaring Mill. In addition, low grade uranium ore was
stockpiled at the Tony M Mine and at the Shootaring Mill.
Plateau also acquired the Velvet Mine and the nearby Woods Complex in
the Lisbon Valley area in southeastern Utah. The Velvet Mine was fully developed
and permitted by its prior owner and is located approximately 178 miles by road
from the Shootaring Mill. The Woods Complex was formerly an operating uranium
mine with a remaining undeveloped resource. Access to this resource would be by
extending a drift approximately 2,500 feet from the former Wood Mine. The Wood
Mine property is not permitted, but USE does not expect difficulty in obtaining
a new permit because the surface facilities would occupy the site that has been
disturbed from previous operations.
Plateau Resources Ltd. is a wholly-owned subsidiary of USE, however,
Crested will have an interest in Plateau. See "Plateau Shootaring Canyon Mill"
below.
THE GREEN MOUNTAIN MINING VENTURE ("GMMV") PROJECT
GMMV. In fiscal 1998, USE and USECC signed the Acquisition Agreement to
acquire Kennecott Uranium Company's interest in the GMMV. The following is a
description of the formation of GMMV and certain of its terms, which have been
modified as a result of the Acquisition Agreement and related transactions, as
set forth under the "June 23, 1997 Amendment to GMMV with Kennecott Uranium
Company" below.
In fiscal 1991, USE and USECC entered into an agreement to sell 50
percent of their interests in the Green Mountain uranium claims, and certain
other rights, to Kennecott for $15,000,000 (USE's share of the proceeds was
$12,600,000, and the balance was Crested's) and a commitment by Kennecott to
fund the first $50,000,000 of GMMV expenditures pursuant to Management Committee
budgets. At the same time, USE and USECC ("USE Parties") and Kennecott formed
the GMMV to develop, mine and mill uranium ore from the Green Mountain Claims,
and market U3O8.
After the first $50,000,000 of GMMV expenditures advanced by Kennecott
is spent (which has been completed, see "Properties and Mine Plan" below), the
GMMV expenses are to be shared by the parties generally in accordance with their
participating interests (50 percent Kennecott, 50 percent USE Parties). The
agreement also provides that Kennecott will pay a disproportionate share (up to
an additional $45,000,000) of GMMV operating expenses, but only out of cash
operating margins from sales of processed uranium at more than $24.00/lb (for
$30,000,000 of such operating expenses), and from sales of processed uranium at
more than $27.00/lb (for the next $15,000,000 of such operating expenses).
Pursuant to the GMMV joint venture agreement, each party's
participation interest in the GMMV is subject to reduction for voluntary or
involuntary failure to pay its share of expenses as required in approved budgets
(including Kennecott's commitment to fund the initial $50,000,000 of the GMMV
expenditures), so 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
17
<PAGE>
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), which were previously owned by USE and
Crested together, will be shared equally by USE and Crested. GMMV expenditures
from such properties will be shared 25 percent each by USE and Crested, and 50
percent by Kennecott. Such latter properties are expected to be developed after
the Round Park (Jackpot) deposit is placed into production and the uranium
deposits on these properties may be accessed through the proposed tunnels at the
Jackpot Mine. Development work at the Jackpot Mine was temporarily halted in
late July 1998, see "USEC Inc." below.
The GMMV Management Committee has three Kennecott representatives and
two USECC representatives, acts by majority vote, and appoints and supervises
the project manager. In fiscal 1993, Kennecott became the GMMV project manager
and has continued as project manager through May 31, 1998. USECC has continued
work on a contract basis at Kennecott's request through May 31, 1998.
Activities on the GMMV properties have included environmental and
mining equipment studies, mine permitting and planning work, property
maintenance, setting up a uranium marketing program, acquisition and monitoring
of the Sweetwater Mill and preparation of an application to the U. S. Nuclear
Regulatory Commission ("NRC") to convert the Sweetwater Mill license from
standby to an operating license. USE has completed the construction of
additional mining support facilities at the Jackpot Mine in fiscal 1998,
including; the installation of natural gas lines and phone services;
construction of a new shop building containing offices, a dry-change room,
emergency generators, air compressors and mechanical repair base; upgrading the
ore haul road; and installation of a conveyor and stacker and other incidental
mine activities, while maintaining all permits and licenses at the Jackpot Mine
and Sweetwater Mill. For underground mine development work, as of the date of
this Prospectus, the GMMV has driven twin decline tunnels 18 feet wide and 12
feet high on a -17 percent grade approximately 2,000 feet each into Green
Mountain with 1,000 feet of cross cuts between the declines. All of these
development costs in fiscal 1998 and to date in fiscal 1999 have been funded
through approximately $14,000,000 advanced to the GMMV in connection with
Kennecott's $50,000,000 work commitment (for its 50 percent interest).
JUNE 23, 1997 AMENDMENT TO GMMV WITH KENNECOTT URANIUM COMPANY
On June 23, 1997, USE and USECC signed an Acquisition Agreement with
Kennecott, for the right to acquire Kennecott's interest in the GMMV for
$15,000,000 and other consideration. This Agreement was not closed by the
October 30, 1998 deadline because of difficulties in trying to raise the
financing in light of current prices in the uranium oxide market. Kennecott paid
USE and USECC $4,000,000 as a signing payment, and committed to provide the GMMV
up to $16,000,000 for payment of reimbursable costs incurred by USECC in
developing the proposed underground Jackpot Uranium Mine for production and in
changing the status of the Sweetwater Mill from standby to operational. The work
was performed 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. Under the Fourth Amendment to the GMMV Agreement, Kennecott received
a credit against its original $50,000,000 commitment to fund the GMMV. See
"Properties and Mine Plan" below.
The funding was advanced to Kennecott by an affiliate, Kennecott Energy
Company ("KEC") under a secured recourse Promissory Note (the "Note") bearing
interest at 10.5% per annum starting in April 1999
18
<PAGE>
until paid in full. As of October 22, 1998, approximately $14,000,000 of the
$16,000,000 has been provided to the GMMV. The Acquisition Agreement was not
closed, and therefore the Note remains an obligation of Kennecott alone. The
Note is secured by a first mortgage lien against Kennecott's 50% interest in the
GMMV pursuant to a Mortgage granted by Kennecott to KEC.
Because the Acquisition Agreement was not closed, the Mineral Lease and
Mill Contract were terminated, and all operations on the GMMV project are now
conducted pursuant to the amended GMMV Agreement. USE and USECC, and Kennecott
retain their respective 50% interests in the GMMV, and Kennecott's obligation to
repay the money loaned by KEC remains 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
$14,000,000 advanced (out of the $16,000,000 loan) has benefitted all parties.
The GMMV parties will remain in the GMMV, and the development, mining and
milling costs will be paid for by such parties. If one of the parties does not
pay its share, its percentage in the GMMV is reduced if the other party pays
instead. Kennecott may not wish to participate further in the project. If USE
has the funding to pay for all costs to continue the development of the Jackpot
Mine and the upgrade work at the Sweetwater Mill, and USE makes the decision to
continue the project, then Kennecott's interest would be reduced. Thus, it is
possible that USE could indirectly purchase Kennecott's interest through funding
the project through the GMMV. USE does not presently have sufficient money to
fund the GMMV by itself.
USEC INC. In 1992, Congress enacted the "Energy Policy Act of 1992"
creating the U.S. Enrichment Corporation ("USEC") to operate the U.S. Department
of Energy's ("DOE") uranium enrichment program. Congress later enacted the "USEC
Privatization Act of 1996" to privatize USEC and allowed the DOE to transfer
various forms of uranium to USEC. The DOE has transferred approximately 75
million pounds of uranium and uranium equivalents to USEC. On July 22, 1998,
USEC changed its name to USEC Inc. and became a publicly traded company. Because
of the anticipated negative impact of USEC Inc.'s sales of new uranium inventory
in the market (see "Marketing - U.S. Enrichment Corporation," below) on uranium
oxide prices, on July 31, 1998, Kennecott and USE and Crested made a business
decision to temporarily place the Jackpot Mine on standby, which resulted in the
lay off of approximately 50 employees. Resumption of development work by the
GMMV will depend on resolution of the USEC Inc. uranium inventory sales issue
(see "U.S. Enrichment Corporation" below and "Legal Proceedings") and improved
uranium prices, and USE's ability to raise the funds to pay its share of GMMV
costs. USE believes the GMMV's decision to place the development of the Jackpot
Mine on standby, should be viewed as an interim event, because anticipated
improved uranium prices based on supply and demand projections, or even
continued level prices, could lead to a decision to resume development work on
the Jackpot Mine. See "Uranium Market Information" below.
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. "Mineral Deposit" or "mineralized
material" is a mineralized body which has been delineated by appropriately
spaced drilling and/or underground sampling to support a sufficient tonnage and
average grade of metal(s). Such a deposit does not qualify as a reserve until a
comprehensive evaluation based upon unit cost, grade, recoveries, and other
material factors conclude legal and economic feasibility. Roads and utilities
have been put in place, which are satisfactory to support mine development.
The GMMV also owns the Big Eagle Properties on Green Mountain, which
contain substantial uranium mineralization, and are adjacent to the other GMMV
mining claims. The Big Eagle Properties contain two open-pit mines, as well as
related roads, utilities, buildings, structures, equipment and a stockpile
19
<PAGE>
of 500,000 tons of uranium material with a grade of approximately one pound of
U3O8 per ton of mineralized material. The assets include two buildings (38,000
square feet and 8,000 square feet) formerly used by Pathfinder Mines Corporation
("PMC") in mining operations. Also included are three ore-hauling vehicles, each
having a 100-ton capacity. Permits transferred to the GMMV for the properties
include: a permit to mine, an air quality permit, and water discharge and water
quality permits. The GMMV owns the mineral rights to the underlying unpatented
lode mining claims.
The Round Park (Jackpot) mining claims contain deposits of uranium
which have been estimated to contain 52,000,000 pounds of U3O8; the grade
averages 4.6 pounds of U3O8 per ton of mineralized material. The GMMV plans to
mine this mineralize material from two decline tunnels (-17 percent slope) in
the Jackpot Mine, which are being driven underground from the south side of
Green Mountain. The first of several mineralized horizons is about 2,300 feet
vertically down from the top of Green Mountain.
The declines will ultimately extend up to 12,300 feet in length to
access the different zones of the deposit; one decline will be used for
ventilation and transportation of personnel, and the other will convey ore, rock
and waste out of the mine. The mine plan estimates that the Jackpot Mine will
produce about 3,000 tons of uranium ore per day and will have an expected mine
life of 13 to 22 years. The Big Eagle Mine facilities located about three miles
west of the Jackpot Mine site will be utilized. As many as 250 workers will be
required during mining full operations. To the date of this Prospectus, USE has
run approximately 2,000 feet of tunnel in each decline.
The USE Parties expect the Jackpot Mine development costs will not
exceed an additional $10,000,000 to reach the "B" zone to continue the
development in the ore at the Round Park deposit. However, cost estimates may
change as the development progresses. Pursuant to the GMMV agreement, Kennecott
agreed to fund the initial $50,000,000 in development costs including
reclamation costs. To April 30, 1997, such expenditures totaled approximately
$20,355,142. In fiscal 1998, approximately $10,160,896 of additional GMMV costs
had been funded by advances to the GMMV out of the $16,000,000 loan to
Kennecott. With the 2 for 1 credit provision in the Acquisition Agreement which
also applied to the $4,000,000 signing bonus, Kennecott had completed its
$50,000,000 commitment. Since June 1997, Kennecott has advanced approximately
$14,000,000 of the $16,000,000 to the GMMV, leaving a balance of $2,000,000.
Whether this $2,000,000 will be made available by Kennecott for the GMMV to keep
the Jackpot Mine on standby status has not been determined as of the date of
this Prospectus.
SWEETWATER MILL. In fiscal 1993, GMMV acquired the Sweetwater uranium
processing mill and associated properties located in Sweetwater County, Wyoming,
approximately 23 miles south of the proposed Jackpot Mine, from a subsidiary of
Union Oil Company of California ("UNOCAL"), primarily in consideration of
Kennecott and the GMMV assuming environmental liabilities, and decommissioning
and reclamation obligations.
Kennecott is manager and operator of the Sweetwater Mill and, as such,
will be compensated by GMMV out of production. Payments for pre-operating
management will be based on a sliding scale percentage of mill cash operating
costs prior to mill operation; payments for operating management will be based
on 13 percent of mill cash operating costs when processing ore. Mill holding
costs have been paid by the GMMV and funded by Kennecott as part of its (now
completed) $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.
20
<PAGE>
The mill was designed as a 3,000 ton per day ("tpd") facility. UNOCAL's
subsidiary, Minerals Exploration Company, reportedly processed in excess of
4,200 tpd for sustained periods. The mill is one of the newest uranium milling
facilities in the United States, and has been maintained in good condition.
UNOCAL has reported that the mill buildings and equipment have historical costs
of $10,500,000 and $26,900,000, respectively.
As consideration for the Sweetwater Mill, GMMV agreed to indemnify
UNOCAL against certain reclamation and environmental liabilities, which
indemnification obligations are guaranteed by Kennecott Corporation (parent of
Kennecott Uranium Company). GMMV has agreed to be responsible for compliance
with mill decommissioning and land reclamation laws, for which the environmental
and reclamation bonding requirements are approximately $24,330,000, which
includes a $4,560,000 bond required by the NRC. None of the GMMV future
reclamation and closure costs are reflected in the Consolidated Financial
Statements (see "Notes F and K to USE Consolidated Financial Statements").
The reclamation and environmental liabilities assumed by the GMMV
consist of two categories: (1) cleanup of the inactive open pit mine site near
the mill (the source of ore feedstock for the mill when operating under UNOCAL),
including water (heavy metals and other contaminants) and tailings (heavy metals
dust and other contaminants requiring abatement and erosion control) associated
with the pit; and (2) decontamination and cleanup and disposal of the mill
building, equipment and tailings cells after mill decommissioning. On June 18,
1996, Kennecott established an irrevocable Letter of Credit through Morgan
Guaranty Trust Company of New York City in the amount of $19,767,079 in favor of
the Wyoming Department of Environmental Quality ("WDEQ") for reclamation
requirements of the GMMV. The Letter of Credit was increased by $10,000 on
August 26, 1996 to cover off-permit wetland enhancement. The WDEQ exercises
delegated jurisdiction from the United States Environmental Protection Agency
("EPA") to administer the Clean Water Act and the Clean Air Act, and directly
administers Wyoming statutes on mined land reclamation. The Sweetwater Mill is
also regulated by the NRC for tailings cells and mill decontamination and
cleanup. The EPA has continuing jurisdiction under the Resource Conservation and
Recovery Act, pertaining to any hazardous materials which may be on site when
cleanup work is started.
Although the GMMV is liable for all reclamation and environmental
compliance costs associated with mill and site maintenance, as well as mill
decontamination and cleanup and site reclamation and cleanup after the mill is
decommissioned, USECC believes it is unlikely USECC would have to pay for such
costs directly. First, based on current estimates of cleanup and reclamation
costs (reviewed annually by the oversight agencies), such costs covered by the
letters of credit or other surety appear to be within the $24,330,000 of
reclamation bonds posted by Kennecott for GMMV. These costs are not expected to
increase materially if the mill is not put into operation. Second, UNOCAL has
agreed that if the GMMV incurs expenditures for environmental liabilities prior
to the earlier of commercial production by GMMV or February 1, 2001, (which
liabilities are not due solely to the operations of GMMV), then UNOCAL will loan
the GMMV the first $8,000,000 (escalated according to the Consumer Price Index
to current dollars, from 1993) of such expenditures. Any reimbursement for the
loan may only be recovered by UNOCAL from 20% of future cash flows from sale of
uranium concentrates processed through the Sweetwater Mill. Third, payment of
reclamation and environmental liabilities related to the Mill is guaranteed by
Kennecott. Last, the GMMV will set aside a portion of operating revenues to fund
reclamation and environmental liabilities when mining and milling operations are
finally shut down.
Kennecott will be entitled to contribution from the USE Parties in
proportion to their participating interests in the GMMV, if Kennecott is
required to pay mill cleanup costs directly pursuant to its guarantee. Such
contributions would be required only if the liabilities cannot be satisfied by
Kennecott within the balance of any development commitment as provided by the
Acquisition Agreement, after the credits provided by the Fourth Amendment to the
GMMV (see "June 23, 1997 Amendment to GMMV with Kennecott Uranium Company"
above). In addition, if and to the extent such liabilities resulted from
UNOCAL's mill operations,
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and payment of the liabilities was required before February 1, 2001 and before
mill production resumes, then up to $8,000,000 (escalated) of that amount would
be paid by UNOCAL, before Kennecott would be required to pay on its guarantee.
However, notwithstanding the preceding, the extent of any ultimate USECC
liability for contribution to mill cleanup costs cannot be predicted.
PERMITTING AND ACTIVITIES. The WDEQ issued a mine permit for the
Jackpot Mine on June 26, 1996. This Permit allows the GMMV to proceed with
construction of mine surface facilities, further underground mine development
and eventual mining of the Round Park (Jackpot) Deposit.
The Jackpot Mine Plan of Operations and a combination of the
alternatives analyzed in the EIS will allow for the disposal of mine waste rock
in the Big Eagle Mine pits some three miles from the Jackpot declines, the
upgrading of existing roads, and the construction of new haul road segments to
transport ore to the Sweetwater Mill. These roads will be subject to
modification in alignment necessary to minimize or avoid adverse impacts to
riparian and cultural resources.
Kennecott has initiated discussions and made filings with the NRC
regarding amendments to the Source Material License to resume ore processing at
the Sweetwater Mill. The NRC has advised that the Operating Permit should be
issued in October or November 1998.
USE believes all of the uranium operations in which it owns an interest
are in compliance with these rules. There ultimately will be an effect on the
earnings of USE and Crested from environmental compliance expenditures by the
GMMV, since the GMMV operations will continue to be accounted for by the equity
method if the acquisition of Kennecott's interest in the GMMV pursuant to the
Acquisition Agreement does not close. GMMV's expenses for compliance with
environmental laws (as well as other matters) are not expected to materially
affect the cash flow of USE and Crested during the next two years.
PLATEAU'S SHOOTARING CANYON MILL
ACQUISITION OF PLATEAU RESOURCES, LIMITED ("PLATEAU"). In August 1993,
USE purchased from Consumers Power Company ("CPC"), all of the outstanding stock
of Plateau which owns the Shootaring Canyon uranium processing mill and support
facilities in southeastern Utah (the "Shootaring Mill") for a nominal cash
consideration. The Shootaring Mill holds a source materials license from the
NRC. USE agreed:
(a) to perform all studies, remedial or other response actions or other
activities necessary from time to time for Plateau to comply with environmental
monitoring and other provisions of (i) federal and state environmental laws
relating to hazardous or toxic substances, and (ii) the Uranium Mill Tailings
Radiation Control Act, the Atomic Energy Act of 1954, and administrative orders
and licenses relating to nuclear or radioactive substances or materials on the
property of, or produced or released by, Plateau; and
(b) to indemnify CPC from all liabilities and costs related to the
presence of hazardous substances or radioactive materials on Plateau property,
and to any future violation of laws and administrative orders and licenses
relating to the environment or to nuclear or radioactive substances.
Plateau transferred $2,500,000 cash to fund the "NRC Surety Trust
Agreement" with a commercial bank as trustee. The trustee is to pay future
decommissioning costs of Shootaring Mill as directed by the NRC. The amount
transferred to the trust is the minimum amount now required by the NRC as
financial assurance reclamation of the Shootaring Mill.
Plateau transferred $4,800,000 cash to fund the "Agency Agreement" with
a commercial bank. These funds will be available to indemnify CPC against
possible claims related to environmental or nuclear matters
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as described above, and against third-party claims related to an agreement
between Plateau and the third-party (see "Note K to the USE Consolidated
Financial Statements for fiscal year ended May 31, 1998").
There are no present claims against funds held under either the Trust
Agreement or Agency Agreement. Funds (including accrued interest) not disbursed
under the Trust and Agency Agreements will be paid over to Plateau upon
termination of such Agreements with NRC concurrence.
Subsequent to closing, USE and Crested agreed that after Plateau's
unencumbered cash has been depleted, USE and Crested each will assume one-half
of Plateau's obligations, and share equally in Plateau's operating cash flows,
pursuant to the USECC Joint Venture.
SHOOTARING MILL AND FACILITIES. The Shootaring Mill is located in
south-eastern Utah and occupies 19 acres of a 265 acre plant site. The mill was
designed to process 750 tpd, but only operated on a trial basis for two months
in mid-summer 1982. In 1984, Plateau put the mill on standby because of the
depressed U3O8 market.
Plateau also owns approximately 90,000 tons of uranium mineralized
material stockpiled at the mill site and approximately 172,000 tons of
mineralized material stockpiled at the Tony M Mine. Included with mill assets
are tailings cells, laboratory facilities, equipment shop and inventory. The NRC
issued a license to Plateau authorizing production of uranium concentrates,
however, since the mill was shut down, only maintenance and required safety and
environmental inspection activities were performed and the source materials
license with the NRC was for standby operations only. Plateau applied to the NRC
to convert the source materials license from standby to operational and upon
increasing the reclamation bond to $6,700,000, the NRC issued the new license on
May 2, 1997. Plateau has an additional $1,600,000 of government securities
available for further bonding needs.
In fiscal 1998, in anticipation of resuming milling operations, Plateau
has significantly performed a reactivation and rehabilitation program at the
Mill. Plateau is awaiting approval of the water control permit for the tailings
facility from the State of Utah Water Control Division.
TICABOO TOWNSITE
Plateau owns all of the outstanding stock of Canyon Homesteads, Inc.
("Canyon"), a Utah corporation, which developed the Ticaboo, Utah townsite 3.5
miles south of the Shootaring Mill. The Ticaboo site includes a motel,
restaurant, lounge, convenience store and single family, mobile home and
recreational vehicle sites (all with utility access). The townsite is located on
a State of Utah lease near Lake Powell and is being operated as a commercial
enterprise. An amendment was entered into on April 1, 1997 on the Utah State
lease covering the Ticaboo townsite whereby the State deeded portions of the
Townsite to Canyon on a sliding scale basis. USE and Crested may develop the
townsite to sell home and mobile home sites as the nearby Shootaring Canyon
uranium mill commences operations.
YELLOW STONE FUELS CORP.
Yellow Stone Fuels Corp., was organized on February 17, 1997 in
Ontario, Canada. As of February 17, 1997, YSFC acquired all the outstanding
shares of Common Stock of Yellow Stone Fuels, Inc. (a Wyoming corporation which
was organized on June 3,1996), in exchange for YSFC issuing the same number of
shares of YSFC Stock to the former shareholders of Yellow Stone Fuels, Inc.
("YFI"). YSFC and its wholly-owned subsidiary Yellow Stone Fuels, Inc. are
herein collectively referred to as YSFC.
In order to concentrate the efforts of USECC on conventional uranium
mining using the Shootaring and Sweetwater Mills, USECC decided to take a
minority position in Yellow Stone Fuels, Inc. and not be
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directly involved in properties believed suitable for the production of uranium
through the in-situ leach ("ISL") mining process. USECC will have the right of
first refusal with respect to any uranium ore bodies YSFC discovers which are
amenable to conventional mining and milling and YSFC will have the right of
first refusal with respect to ore bodies discovered by USECC amenable to the ISL
process. In the ISL process, groundwater fortified with oxidizing agents is
pumped in the ore body, causing the uranium contained into the ore to dissolve.
The resulting solution is pumped to the surface where it is further processed to
a dried form of uranium which is shipped to conversion facilities for eventual
sale. Generally, the ISL process is more cost effective and environmentally
benign compared to conventional underground mining techniques. In addition, less
time may be required to bring an ISL mine into operation than to permit and
build a conventional mine.
In Wyoming, YSFC has staked and/or holds 356 unpatented mining claims
and has entered into four State leases covering a total of 9,040 acres located
in the Powder River Basin and Red Desert uranium districts. Three State leases
have a 10 year term expiring October 1, 2006; one State lease has a 10 year term
expiring October 1, 2008; each require annual rental of $1.00 per acre for five
years, then $2.00 for the second five years, or sooner upon the discovery of
commercial quantities of minerals; plus a 5% gross royalty of the value of
uranium bearing ore mined from the leased properties is payable to the State of
Wyoming.
Also in Wyoming, YSFC owns or leases a total of 113 unpatented mining
claims in the Powder River Uranium District. One group of 63 claims is located
approximately 20 miles northwest of the producing Rio Algom's Smith Ranch Mine.
These claims may be similar in geology and hydrology to the Smith Ranch and
Cameco's Highland ISL operations.
In New Mexico, YSFC has staked and holds 39 unpatented mining claims
and has leased 8 patented mining claims (approximately 945 acres) in the Grants
uranium region of New Mexico. The 8 unpatented mining claims (covering 165
acres) are held by a 5 year renewable lease ($500 monthly rental, and a 5% gross
royalty on revenues from uranium sold from the property). Other claims in the
immediate area were mined for up to 600,000 pounds U3O8 at a grade of 0.24% by
other companies in the 1970s. The extent of further mineral resources on the
properties is presently unknown.
In fiscal 1997, USE, USECC and the GMMV have entered into several
agreements with YSFC, including a Milling Agreement through Plateau Resources.
The Shootaring Canyon mill facilities will be available to YSFC to transport
uranium concentrate slurry and loaded resin to the mill and process it into
uranium concentrate ("yellowcake"), for which Plateau will be paid its direct
costs plus 10%. Other agreements include a Drill Rig Lease Agreement for YSFC to
access USE drilling rigs at the prevailing market rates; an Outsourcing and
Lease Agreement for assistance from USECC accounting and technical personnel on
a cost plus 10% basis and a sublease for 1,000 square feet of office space and
use of various office equipment for $3,000 per month; and a Ratification of
Understanding by which USECC will offer to YSFC (with a reserved royalty in
amounts to be agreed on later) any uranium properties amenable to in-situ
production which USECC acquires or has the right to acquire. In return, YSFC
will offer to USECC ( with a reserve royalty in amounts to be agreed on later)
uranium properties amenable to conventional mining methods which YSFC acquires
or has the right to acquire. USECC also will make its library of geological
information and related materials available to YSFC. YSFC also has a Storage
Agreement with GMMV by which YSFC stores used low-level contaminated mining
equipment at the Sweetwater Mill.
YSFC has 11,764,000 shares of Common Stock issued and outstanding,
including 3,000,000 shares 25.4%) issued to USE and Crested. Most of the funds
used by YSFC have been provided by USECC under a $400,000 loan facility. As part
consideration for the loan, USE and Crested entered into a Voting Trust
Agreement having an initial term of 24 months with two principal shareholders of
YSFC, whereby USE and Crested will have voting control of more than 50% of the
outstanding shares of YSFC.
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In fiscal 1998, YSFC sold 1,219,000 shares of Common Stock in a private
placement, at $2.00 per share; net proceeds to YSFC were $2,034,100 after
payment of $315,900 in commissions to the placement agent (RAF Financial Corp.,
Denver, Colorado) and $80,000 in legal and accounting expenses. The securities
were sold pursuant to Rule 506 of Regulation D under the Securities Act of 1933,
and are restricted from resale under Rule 144. In connection with the private
placement, in September 1997, USE entered into an Exchange Rights Agreement with
YSFC and RAF, pursuant to which USE agreed that the investors in the YSFC
private offering would have the opportunity to exchange all or a part of their
YSFC shares for shares of Common Stock of USE, if YSFC is not listed on and its
Common Stock is not available for quotation on, the Nasdaq National Market
System by March 16, 1999. The number of USE shares which a YSFC investor would
be entitled to receive by exchanging YSFC shares, would equal the amount
invested in the original purchase of the YSFC shares (plus 10% annual interest),
divided by the average market price of USE shares for the five trading days
before notice of exchange is given to the YSFC shareholders (excluding USE and
Crested). Warrants to purchase YSFC shares, issued to RAF in partial
compensation for placement services, would be exchangeable for warrants to
purchase shares of USE Common Stock. The Warrants are exercisable to purchase
121,900 shares of YSFC Common Stock, at $2.00 per share. These Warrants would be
exchanged for new Warrants to purchase shares of USE Common Stock, equal to
$243,800 divided by the same market prices for USE shares. The exercise price
for the new Warrants would equal the same USE share market prices used to issue
the exchange shares of USE to the YSFC shareholders. The original Warrants
expire (and any new Warrants will expire) in 2002. The new Warrants will be
exercisable for unrestricted (registered) shares. The exchange transaction would
be registered with the SEC under the Securities Act of 1933, such that the
exchanging YSFC shareholders would receive unrestricted (registered) shares of
USE. The number of USE shares which may be issued under the Exchange Rights
Agreement is presently not determinable. USE expects that even if all the YSFC
shares were exchanged in May 1999 for shares of USE, pursuant to the Exchange
Rights Agreement, the resulting increase in the outstanding shares of USE would
constitute less than 5% of the total outstanding shares of USE on a proforma
basis, assuming USE share prices move back to the $8-$9 range of early fiscal
1998. However, if share prices remain at current low levels ($3.00 at October 6,
1998), such new shares issued could constitute more than 5% of the outstanding
shares on a proforma basis.
To date, YSFC is not listed on the Nasdaq National Market System
("NMS"), but YSFC is pursuing a possible listing on a Canadian stock exchange in
fiscal 1999.
SHEEP MOUNTAIN PARTNERS ("SMP")
PARTNERSHIP. In February 1988, USE and Crested acquired uranium mines,
mining equipment and mineralized properties (Sheep Mountain Mines) at Crooks Gap
in south-central Fremont County, Wyoming, from Western Nuclear, Inc. These
Crooks Gap mining properties are adjacent to the Green Mountain uranium
properties. SMP mined and sold uranium ore from one of the underground Sheep
Mines during fiscal 1988 and 1989. Production ceased in fiscal 1989, because
uranium could be purchased from the spot market at prices below the mining and
milling costs of SMP. In December 1988, USE and Crested sold 50 percent of their
interests in the Crooks Gap properties to Nukem's subsidiary CRIC for cash. The
parties thereafter contributed the properties to and formed Sheep Mountain
Partners ("SMP"), in which USECC received an undivided 50 percent interest. SMP
is a Colorado general partnership formed on December 21, 1988, between USECC and
Nukem, Inc. of Stamford, CT ("Nukem") through its wholly-owned subsidiary Cycle
Resource Investment Corporation ("CRIC"). Nukem is a uranium brokerage and
trading concern. Each group provided one-half of $315,000 to purchase equipment
from Western Nuclear, Inc.; USE and Crested also contributed their interests in
three uranium supply contracts to SMP and agreed to be responsible for property
reclamation obligations. The SMP Partnership agreement provided that each
partner generally had a 50 percent interest in SMP net profits, and an
obligation to contribute 50 percent of funds needed for partnership programs or
discharge of liabilities. Capital needs were to have been met by loans, credit
lines and contributions.
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SMP was directed by a management committee, with three members
appointed by USECC, and three members appointed by Nukem/CRIC. The committee has
not met since 1991 as a result of the SMP arbitration/litigation. During fiscal
1991, certain disputes arose between the partners of SMP. These disputes
resulted in arbitration/litigation and subsequent consensual arbitration from
which an Order and Award was issued on April 18, 1996. USE and Crested filed
petitions for confirmation of the Order and Award with the U.S. District Court
of Colorado and the Court has entered a Second Amended Judgment confirming the
monetary and equitable provisions of the Order and Award. Some of the claims
have been resolved and the rest are to be determined by the 10th Circuit Court
of Appeals ("CCA"), which is expected to occur in fiscal 1999 (see "Legal
Proceedings - Sheep Mountain Partners Arbitration/Litigation").
PROPERTIES. Until June 1, 1998, SMP owned 80 unpatented lode mining
claims on the Crooks Gap properties, including two open-pit and five underground
uranium mines and an inventory of uranium ore. In connection with a partial
settlement of litigation/arbitration between USE/Crested and Nukem/CRIC, SMP
conveyed these mineral properties and equipment to USECC. Production from the
properties is subject to sliding-scale royalties payable to Western Nuclear,
with rates ranging from one to four percent on recovered uranium concentrates.
Various structures and equipment are located on the properties
including three operating and three non-operating mine headframes with hoists,
maintenance shops, offices, and other buildings, equipment and supplies. An
ion-exchange plant is located on the properties.
Of the claims, which contain a previously-mined open-pit uranium mine
and three underground mines, Pathfinder Mines Corporation ("PMC") has the right
to mine a portion (the Congo area), by open-pit or in-situ techniques to certain
depths, without royalty or other obligations to USECC. PMC has the
responsibility for reclamation work needed thereon as a result of its
activities. If PMC mines any portion of the properties outside the Congo area, a
3% royalty is owed to USECC. Conversely, USECC has the right to mine portions of
the claims and leases outside the Congo area (and specified surrounding zones)
by underground mining techniques, subject to a 3% royalty to PMC. PMC had
conducted an exploration program on a portion of these properties, and has
advised the Company that it does not intend any further development. PMC has
decommissioned and dismantled its two uranium mills in the vicinity.
The ion exchange plant on the properties was used to remove natural
soluble uranium from mine water. USE, on behalf of USECC, has submitted a plan
to the NRC to decommission this facility and obtained a three year extension for
timeliness of decommissioning. Management is reviewing the economics of
relicensing this facility as part of a potential in-situ leach uranium mining
operation.
PROPERTY MAINTENANCE. As operating manager for SMP, USECC was
responsible for exploration, mining, and care and maintenance of the SMP mineral
properties. USECC was to have been reimbursed by SMP for certain expenditures on
the properties. During the SMP arbitration/litigation, Nukem/CRIC refused to
allow SMP to pay USECC for care and maintenance and other work performed on the
properties since the spring of 1991. As part of the Order and Award made on
April 18, 1996, the Arbitration Panel awarded USECC $2,065,989 for Nukem/CRIC's
50% share of care and maintenance expenses for the SMP properties plus interest
of $446,834 to March 31, 1996 and per diem cost of $616 thereafter. See "Legal
Proceedings Sheep Mountain Partners Arbitration/Litigation - Stipulated
Arbitration." Currently, USECC has a maintenance staff on site to care for and
maintain the mines and pump mine water to prevent flooding of the mines, which
could destroy equipment and the concrete lined vertical shafts accessing the
various levels of uranium mineralization.
SMP MARKETING. Nukem, Inc. was engaged by SMP to provide SMP with
financial expertise and marketing services. SMP entered into a marketing
agreement with CRIC, which was concurrently assigned to and assumed by Nukem.
Nukem was to provide marketing and trading services for SMP, which included
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acquiring uranium for SMP by purchasing or borrowing. Nukem was to be reimbursed
at its direct costs for acquiring such uranium for SMP. USECC, SMP and Nukem had
seven long-term contracts plus an additional long-term contract with a domestic
utility that was awarded to SMP by the Arbitration Panel (three of these
contracts remained in SMP until the partial settlement on June 1, 1998). The
contracts all were for sales of uranium originally to eight domestic utilities.
SMP's uranium supply contracts were either base-price escalated or
market-related (referring to how price is determined for uranium to be delivered
at a future date). Base- price escalated contracts set a floor price which is
escalated over the term of the contract to reflect changes in the GNP price
deflator. Two of the base priced contracts have been fulfilled and the third
base-price escalated contract of SMP required a delivery of 130,000 pounds of
uranium concentrates on May 15, 1997 which was made, completing that contract.
The fourth contract of SMP (which has been transferred to USECC) is a
market-related contract, and calls for delivery of unspecified quantities of
U3O8 totaling approximately 1,000,000 lbs. U3O8 (depending on the number of
reactors this utility is operating and their consumption levels). This contract
may be completed in calendar 2000.
Under the market-related contracts, the purchaser's cost depends on
quoted market prices based on estimated prices at which a willing seller would
sell its U3O8 during specified periods before delivery.
Through fiscal 1997 and for prior years, USECC and its affiliates have
satisfied most of these contracts with uranium concentrates previously produced
by SMP, borrowed from others, or purchased on the open market. In fiscal 1998
$858,000 in revenues was received representing USE's portion of revenues for a
delivery made (apparently in late fiscal 1997) by Nukem. See "Legal Proceedings
- - Sheep Mountain Partners Arbitration/Litigation."
PERMITS. Permits to operate existing mines on the Crooks Gap properties
have been issued by the State of Wyoming. Amendments are needed to open new
mines within the permit area. As a condition to issuance of the permits, a NPDES
water discharge permit under the Clean Water Act has been obtained. Monitoring
and treatment of water removed from the mines and discharged in nearby Crooks
Creek is generally required. During the past two years, SMP did not discharge
wastewater into Crooks Creek, and the mine water is presently being discharged
into the McIntosh Pit.
URANIUM MARKET INFORMATION.
There are currently nine producers of uranium in the United States,
which collectively produced 5,800,000 pounds of U3O8 during calendar 1997 and
produced approximately 6,300,000 pounds in calendar 1996. Production in the U.S.
for 1998 is estimated at 5,000,000 pounds. In addition, there are several major
producers in Canada (Cameco, Cogema Canada, Ltd., Rio Algom and Uranerz);
Australia (Energy Resources of Australia and Pancontinental Mining, Ltd.);
Africa (Cogema and Rio Tinto's Rossing unit), and Europe, which collectively
produced about 78,000,000 pounds of U3O8 during calendar year 1997 and are
expected to produce approximately the same amount in calendar 1998. Several
members of the Commonwealth of Independent States ("CIS") also export uranium
into the western markets although the amount of such exports to the United
States and European markets are currently limited.
Uranium is primarily used in nuclear reactors to heat water which drive
turbines to generate electricity. According to the Uranium Institute based in
London, England, nuclear plants generated approximately 17% of the world's
electricity in 1996, up from less than 2% in 1970. According to the Uranium
Institute, through the year 2000, nuclear generating capacity is expected to
grow at 1 % per annum primarily as a result of new reactor construction outside
the United States and increased efficiencies of existing reactors.
In 1997, 440 nuclear power plants were operating and 28 were under
construction worldwide, according to the Uranium Institute. Uranium consumption
by world commercial reactors has increased from about 60,000,000 pounds in 1981
to approximately 165,000,000 pounds in 1997.
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SUPPLY AND DEMAND
From the early 1970s through 1980, the Western World uranium industry
was characterized by increasing uranium production fueled by overly optimistic
projections of nuclear power growth. From 1970 to 1985, production exceeded
consumption by approximately 500,000,000 pounds U3O8. By the end of 1985, enough
inventory had been amassed to fuel Western World reactor needs for over five
years. In response, sales of excess inventory followed and prices plummeted from
highs above $40 per pound in 1979 to below $8 per pound U3O8 in 1992. As prices
fell, Western World production declined dramatically from a high of 115,000,000
pounds in 1980 to a low of 57,000,000 pounds by 1994. Since 1985, uranium demand
in the Western World has exceeded Western World production by over 400,000,000
pounds. In 1995, uranium demand in the Western World was 129,000,000 pounds,
nearly double the production of 66,000,000 pounds by Western World producers. In
1997, total world demand rose to an estimated 165,000,000 pounds, while world
mine supply increased only to an estimated 93,000,000 pounds (including the
78,000,000 pounds produced in North America, Australia, Africa and Europe, see
above). Accordingly, by the end of 1997, excess inventory levels in the Western
World (inventory in excess of preferred levels) had been reduced to less than
1.5 years of forward reactor requirements, and the excess inventories in the
U.S. had been reduced to less than one year of projected forward requirements.
This trend is expected to continue in calendar 1998.
Countering the drawdown of Western World inventories and contributing
directly to the downturn of market prices was the importation of uranium from
the CIS republics, and to a lesser extent, from Eastern Europe and mainland
China starting in 1989. As the result of an anti-dumping suit filed in the U.S.
("CIS Anti-dumping Suit") in 1991 against republics of the CIS, suspension
agreements were signed by six CIS republics (Russia, Ukraine, Kazakhstan,
Uzbekistan, Kyrgyzstan and Tajikistan) in October 1992. These Suspension
Agreements applied price related volume quotas to CIS uranium permitted to be
imported into the U.S., so that to rectify prior damage to domestic United
States uranium producers from dumping sales of U3O8, all spot sales of U3O8
delivered into the U.S. now reflect quota restrictions on U3O8 imports from the
CIS. Exceptions are allowed by provisions which allow CIS uranium to be imported
for certain long-term uranium sales contracts entered into with domestic
utilities prior to March 5, 1992 ("grandfathered contracts").
The Suspension Agreement with Russia was amended in March 1994 allowing
for up to 43,000,000 pounds of Russian uranium to be imported into the U.S. over
the 10 years beginning March 1994, but only if it is matched with an equal
volume of new U.S. production. Based on U.S. consumption for the 1994-2003
period (as reported or projected by the Department of Energy), the matched
volumes could account for up to 18% of the supply to the U.S. market during this
period.
In 1995, the Republics of Kazakhstan and Uzbekistan concluded
negotiations with the U.S. DOC to amend their respective Suspension Agreements.
Both amendments lowered initial prices relating to their respective import
quotas allowing imports to occur. Additionally, the amendments require that
uranium mined in those Republics and enriched in another country for importation
in the U.S. will count against their respective quotas. The Uzbekistan amendment
replaces the price-tied quota system with one based upon U.S. production rates
after October 1997. As U.S. production rates increase, additional imports from
Uzbekistan are allowed.
Although these amendments to three of the Suspension Agreements may
increase the supply of uranium to the U.S. market, they also provide increased
predictability concerning CIS imports into the U.S. Due to declining production
levels in the CIS republics, uranium from these sources has recently been
difficult to obtain. Consequently, the market impact of CIS primary production
may be diminishing.
In January 1994, the U.S. and Russia entered into an agreement (the
"Russian HEU Agreement") to convert highly enriched uranium ("HEU"), derived
from dismantling nuclear weapons, to low enriched
28
<PAGE>
uranium ("LEU") suitable for use in nuclear power plants. At a projected maximum
conversion rate for HEU to LEU, approximately 24,000,000 pounds of U3O8 per year
will be available to Western World markets.
In 1996, the U.S. Congress passed legislation in compliance with the
Suspension Agreements, which allows the converted Russian HEU material to be
sold in the U.S. market at an annual rate not to exceed 2,000,000 pounds in
1998, increasing gradually to 20,000,000 pounds in 2009. At this maximum rate,
HEU material could supply approximately 40% of annual U.S. reactor requirements
projected for 2009. However, the Russians may require much of the material for
its own internal use and the amounts which may be imported into the U.S. cannot
be predicted. In addition, an uncertain amount of HEU material is allowed to be
used in the U.S. for overfeeding of enrichment facilities and as a source of
Russian uranium for matching sales.
Industry analysts expect annual Western World consumption to be at
levels between 135,000,000 and 165,000,000 pounds U3O8 through 2001. USE
management estimates that between 30,000,000 and 40,000,000 pounds U3O8 of this
demand could be filled by a combination of government stockpiles (including
converted Russian and U.S. HEU) and imports from CIS republics and former
Eastern Bloc countries. To achieve market equilibrium by 2001, primary
production in the Western World will need to supply between 95,000,000 and
120,000,000 pounds U3O8 on an annual basis subject to some adjustment for any
remaining inventory drawdown and limited uranium reprocessing. Production from
existing facilities in the Western World, however, is projected to decline from
current levels (78,000,000 pounds in 1998) to approximately 57,000,000 pounds
U3O8 by 2001 as reserves are depleted. New production therefore will have to be
brought on line to fill a potential annual gap of between 38,000,000 and
63,000,000 pounds U3O8. While current price levels may sustain 1998 production
levels, USE believes that higher prices will be needed to support the required
investment by other uranium producers in new higher cost production facilities
as lower cost production reserves are depleted.
Overall, USE believes that adequate supply of U3O8 material to meet
firm demand (i.e. to supply future long term contracts with utilities) cannot be
sustained at spot price levels below $15.00 per pound. And, while production
remains at levels just above 50% of consumption in the Western World, existing
and planned new production combined will not equal consumption even if the new
production comes on stream as planned.
Published reports indicate that approximately 31 percent of the
worldwide nuclear-powered electrical generating capacity is in the U.S., 49
percent is in Western Europe, and 14 percent is in the Far East. Although the
reactors in Western Europe have a greater aggregate generating capacity and fuel
usage, the supply of uranium for those reactors has been secured for relatively
long periods. The market requiring the greatest supply of uranium for the next
few years is believed to be the United States. The Asia Pacific region is also
developing into a significant uranium consumer, due to announced plans for rapid
expansion of nuclear power programs in Japan, Korea, Taiwan and the Russian
Federation. This region accounts for most of the 98 power plants which are
ordered or under construction.
USEC INC. The United States Enrichment Corporation ("USEC") was created
by the United States Congress as part of the Energy Policy Act of 1992. USEC
began operations in July 1993 when the United States Department of Energy
("DOE") transferred the DOE's uranium enrichment facilities to USEC. USEC
enriches uranium at two gaseous diffusion process plants (at Paducah, Kentucky
and near Portsmouth, Ohio) as part of the process to transform natural uranium
into fuel for commercial power plants. USEC has a substantial share of the world
market for enrichment services, and dominates the North American market for
enrichment services. In 1996, Congress enacted the "USEC Privatization Act of
1996" to privatize USEC and allowed the DOE to transfer certain amounts of
various forms of uranium to USEC.
29
<PAGE>
In July 1998, USEC became a wholly-owned subsidiary of USEC Inc. when
it completed its privatization through a $1.4 billion public offering by USEC
Inc. USEC Inc. represented in filings with the Securities and Exchange
Commission that it now holds or intends to acquire 95 metric tons enriched
uranium (50 tons highly enriched, 45 tons low enriched) and 10,800 tons of
natural uranium (uranium oxide as produced from uranium milling, prior to
concentration). USEC Inc. has represented its intention to supplement uranium
enrichment services revenues through sales of natural uranium.
Based upon the amounts of uranium USEC Inc. purportedly has, or will be
acquiring in shipments from DOE, USEC Inc. may be seeking to sell up to 75
million pounds of uranium or uranium equivalents through the year 2005. On an
annual basis, such sales would adversely impact the domestic uranium market for
producers such as USE and Crested, because USEC Inc.'s sales would amount to
more on an annual basis than all domestic producers (including USE and Crested)
will produce and plan to sell combined.
USE and Crested believe that a substantial portion of the uranium (45
metric tons of low enriched uranium and 7,000 tons of natural uranium) which
USEC Inc. has acquired and will acquire from the DOE, in fact was transferred
and will be transferred by DOE in violation of the USEC Privatization Act of
1996. USE and Crested have joined with other uranium producers and the Uranium
Producers of America ("UPA") in the filing of a lawsuit for declaratory judgment
and injunctive relief against the Department of Energy, with respect to the
excess transfers, in an attempt to prevent USEC Inc. from enjoying a market
advantage over the domestic uranium producers which is prohibited by law. See
"Legal Proceedings" below.
MARKET SUMMARY - IMPLICATIONS FOR FUTURE URANIUM PRICES. With the
privatization of USEC and the prospect of natural uranium coming to the market
from USEC Inc. inventories, uranium prices may not rise significantly over the
next 12 months, as previously had been anticipated in reports by industry
analysts and by USE management. Nevertheless, USE believes that uranium prices
eventually will be determined and moved up significantly by the fundamentals of
the market, because all excess inventories built up in the 1980s will eventually
be consumed. In addition, USEC Inc. has stated that USEC Inc. would sell its
uranium in a rational and responsible manner indicating (in the opinion of USE
management) that USEC Inc. may keep its market sales at levels which would not
drive down uranium prices.
As detailed below, many projects have been delayed or postponed since
mid-1997 for various reasons, which will have a significant impact on future
supply/demand fundamentals. If, as it appears to be the case, the possible
introduction of the new USEC Inc. inventories currently has a depressing effect
on the price of uranium concentrates, then new planned uranium production will
be curtailed more than indicated below.
<TABLE>
<CAPTION>
Delay/Loss of Annual
Production Potential
Date The Events Reported lbs. of U3O8
---- ------------------- ------------
<S> <S> <C>
July 1997 Former Soviet Union production declines 27% 5 million
(1992-1996)
July 28, 1997 Russia announces it may require 30-50% of 6-10 million
the HEU feed for internal use
August 11, 1997 Kazakhs annul World Wide Contract at 1-2 million
Tselinney Project, Kazakhstan
September 1, 1997 Rio Tinto suspends development at Kintyre 3-4 million
30
<PAGE>
September 1, 1997 McClean Lake, Can., schedule slips 6 million
from 1997 to 1998
November 3, 1997 Rio Algom begins production at Smith Ranch 1-2 million
Wyo. behind schedule
November 10, 1997 Midwest and Cigar Lake, Can., timing delayed 18 million
from 1999 to 2001
November 24, 1997 Aborigines veto ERA's plan to truckore 6 million
to Ranger Mill, Aust.
July 1998 U.S. Energy/Crested Corp. suspend operations 2-4 million
at Green Mountain, Wyoming
August 1998 World Wide Minerals puts the Dornod project in 1-2 million
Mongolia on standby citing market conditions
August 1998 Cogema will put Cluff Lake, Can., Mine on 2-3 million
standby on Dec. 31, 2000. -------------
Total 51-62 million
</TABLE>
With these delays, postponements, and possible further delays or
cancellations of planned uranium production projects, USE believes that it is
possible that the market price for uranium may increase substantially in mid -
to late 1999, in spite of possible sales from the USEC inventory. The
fundamentals for higher uranium prices are ascertainable. Currently, all nuclear
reactors worldwide consume approximately 160 million lbs. of natural uranium per
year and by most estimates, will continue at that rate for at least the next 20
years. Total world production for 1997 was approximately 90 million lbs. Over
the next four years, three mines located in Canada (Key Lake, Cluff Lake and
Rabbit Lake) will have exhausted their reserves and will be shut down. Three new
Canadian mines (McArthur River, McClean Lake/Midwest and Cigar Lake) are
scheduled to produce approximately 40 million lbs. of U3O8 annually when they
are in full production.
USE management believes that other delays and cancellations of projects
may be imminent and that eventually all inventories (government and public) will
be consumed. New significant production will be needed to fuel existing and
planned reactors into the 21st century. USE management believes that prices must
rise significantly from current levels of $10.50/lb., and possibly up to the
$18.00/lb. range over the next 2-3 years, to motivate existing and new mines to
move forward as planned. In addition, no new mine/mill construction would be
justifiable for selling into only the spot market. At least 80 percent of a
uranium producer's production has to be sold to long term contracts, because
only with long term contracts can the mine/ mill process over the life of the
mine be planned and financed.
In contrast to finding, developing and mining new properties and
building new mills, USE's uranium properties are believed to contain well
defined uranium deposits delineated by others which do not require further
exploration work prior to beginning production. Development work is
significantly advanced at both the principal Wyoming site (the Jackpot Mine) and
the Utah mines. The uranium mills in Wyoming and Utah were acquired fully built
at no cost to USE and Crested, and the remaining work required to put the mills
into operating status will not consume significant amounts of capital. For these
reasons, USE believes that its uranium properties will be low cost uranium
producers compared to some of the other uranium mines now in operation, and also
compared to the costs to develop new properties and build new uranium mills.
31
<PAGE>
Nonetheless the decision by USE to put any mine into production, and
the commitment of funds necessary to implement that commitment, must be made
well in advance of the time when revenues from the mined resource are received.
Price fluctuations between the time the production commitment is made, and the
time when production and sales occur, can significantly impact the economics of
the mine. If the sales revenues fall below production costs for a substantial
period of time, it is possible that USE could determine that it is not then
economically feasible to continue production operations. Taking into account all
of the relevant factors discussed above, USE intends throughout fiscal 1999 to
seek the financing to put the uranium properties into production, and in the
meantime to seek long term utility contracts to take the uranium production,
with the ultimate goal of being in full production in Wyoming in April 2000, and
milling the stockpiled uranium in Utah in early fiscal 2000. There is no
assurance such financing will be obtained, nor is there assurance prices will
not decrease, which would make obtaining such financing more expensive or
impossible.
NUEXCO EXCHANGE VALUE. The market related contracts to sell uranium
oxide to utilities usually are based on an average of the Nuexco Exchange Value
("NEV") or some other market quotes for 2, 3 or more months before the uranium
delivery. The high and low NEV reported on U3O8 sales during USE's past seven
fiscal years are shown below. NUEXCO Exchange Values are now reported weekly by
TradeTech and represents its judgment of the price at which spot and near term
transactions for significant quantities could be concluded. NEVs for fiscal 1993
are higher for U.S. transactions, due to the impact of CIS import restrictions
since late 1992. These prices ("US NEV") were reported by NUEXCO for spot sales
in the restricted U.S. market.
NUEXCO EXCHANGE VALUE
Years Ended US $/pound of U3O8
------------------
May 31, High Low
------------- ---- ---
1992 $ 9.05 $ 7.75
1993 10.05 7.75
1994 9.60 9.05
1995 12.20 9.65
1996 16.50 13.00
1997 14.25 10.20
1998* 12.05 10.50
* Through August 10, 1998 when it was $10.50/lb. The price at November
9, 1998 was $9.10/lb.
NUEXCO's restricted market values ("U.S. NEV") apply to all products
and services delivered in the U.S. as well as non-CIS origin products and
services delivered outside the U.S.
The foregoing prices represent the "spot" market only, and indicate
transactions primarily by utilities purchasing to cover short positions.
Long-term supply contracts, which cover up to 10 to 15 percent of the uranium
sold from year to year, carry prices which are in excess of the spot market.
This price premium is paid by the utilities to assure long term price stability;
the producer demands the premium to compensate for future price increases which
could (but may not) exceed the premium. Utilities keep their long term contract
provisions confidential, so it is difficult to assess any one utility company's
long term contract plans or needs. The amount of the price premium will vary
from time to time.
32
<PAGE>
GOLD
LINCOLN PROJECT (CALIFORNIA)
SUTTER GOLD MINING COMPANY. In fiscal 1991, USE acquired an interest in
the Lincoln Project (including the underground Lincoln Mine and the 2,800 foot
Stringbean Alley decline) in the Mother Lode Mining District of Amador County,
California, held by a mining joint venture known as the Sutter Gold Venture
("SGV"). The entire interest of SGV is now owned by USECC Gold L.L.C., a Wyoming
limited liability company, which is a subsidiary of Sutter Gold Mining Company,
a Wyoming corporation ("SGMC").
In fiscal 1997, SGMC completed private financings totaling a net of
US$7,115,400 ($1,272,000 through a private placement conducted in the United
States by RAF Financial Corporation ("RAF"), and $5,843,400 through a private
placement conducted in Toronto, Ontario, Canada by C.M. Oliver & Company
Limited). The net proceeds of $6,511,200 from these financings (after deduction
of commissions and offering costs) are being applied to pre-production mine
development, mill design, and property holding and acquisition cost. Additional
financing of up to $15,000,000 will be sought to fund the development and
construction of the mine/mill. SGMC's properties contain an estimated amount of
proven reserves (see below). Because the properties are not yet in production
and the needed funding is not yet available to do so (gold is at $290 per ounce,
which has hampered efforts to raise capital), the recorded value of SGMC's
mineral properties has been reduced as of May 31, 1998. See "Management's
Discussion and Analysis - Financial Condition and Results of Operations." If
such financing is not available by the end of fiscal 1999, or if gold prices do
not improve, USE will determine whether a further impairment of the carrying
value of its investment in SGMC is necessary. SGMC intends to fund the
development and construction of the project through private or public debt
and/or equity financing. As of the date of this Prospectus, SGMC is in
discussions with certain investment banks, however, no agreements for financing
have been reached, and there is no assurance any agreements will be reached.
Due to the depressed gold price and gold equity market, SGMC deferred
the start of construction of the 1,000 ton-per-day gold mill complex and
development of the underground mine.
During fiscal 1998, SGMC did not commence production, but did pursue
amendments to its approved 1993 Conditional Use Permit (see "Permits and Future
Plans"), finalized the process flow of the mill, entered into the final design
engineering contract with the engineering firm of Lockwood Greene of Dallas,
Texas and started to build the entrance road to the mine. If SGMC obtains the
necessary funding within the balance of fiscal 1999, SGMC could be in production
in fiscal 2000. However, delays in obtaining financing would delay the start of
production. Once a decision to commence production is made, from that date, it
is estimated it will take approximately 18 months to complete the mill complex
construction and pour the first bar of gold.
SGMC does not have any class of its securities registered with the
Securities and Exchange Commission, and none of its securities are traded in the
United States.
After completion of the two private financings, and taking into account
a restructuring of the ownership of USE and Crested in SGMC, USE and Crested
each own the following securities of SGMC:
(a) Together, a majority (after the April 1998 transaction, discussed
below) of the outstanding shares of SGMC Common Stock, which would be reduced in
the event outstanding warrants held by the remaining Canadian investors to
purchase 564,900 more shares of Common Stock are exercised at Cdn$6.00 per share
18 months from the date of closing of the private offerings (which were
completed in May 1997) and the outstanding warrants held by C.M. Oliver to
purchase 145,480 more shares of Common Stock are exercised at Cdn$5.50 per
share, before May 13, 1999. The preceding does not reflect SGMC shares that may
be acquired by USE and Crested pursuant to the USECC $10,000,000 Contingent
Stock Purchase Warrant
33
<PAGE>
(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 made in contemplation of its private placement of SGMC shares, and
a second reorganization was made in contemplation of the Canadian private
placement.
(b) A $10,000,000 Contingent Stock Purchase Warrant (the "USECC
Warrant") was issued to USE and Crested in connection with the restructuring of
SGMC for the Canadian private placement. The USECC Warrant is owned 88.9% by USE
and 11.1% by Crested. The USECC Warrant provides that for each ounce of gold
over 300,000 ounces added to the proven and probable category of SGMC's reserves
(up to a maximum of 400,000 additional ounces), using a cut-off grade of 0.10
ounces of gold per ton (at a minimum vein thickness of 4 feet), USE and Crested
will be entitled to cash or additional shares of Common Stock from SGMC (without
paying additional consideration) at SGMC's election. The number of additional
shares issuable for each new ounce of gold reserves will be determined by
dividing US$25 by the greater of $5.00 or the weighted average closing price of
the Common Stock for the 20 trading days before exercise of the USECC Warrant.
The USECC Warrant is exercisable semi-annually. If SGMC decides against the
exercise of the USECC Warrant, it can pay USE and Crested US$25 in cash for each
new ounce of gold (payable out of a maximum of 60% of net cash-flow from SGMC's
mining operations). Additions to reserves will be determined by an independent
geologist agreed upon by the parties.
APRIL 1998 TRANSACTION FOR CASH AND SGMC SPECIAL WARRANTS. As of April
7, 1998, USE entered into four separate Stock Purchase Agreements with four
Canadian investment funds, for the issuance of 658,895 shares of Common Stock of
USE, in consideration of the funds' payment to USE of $1,190,000 in cash and the
delivery to USE of 888,900 Special Warrants of SGMC. The funds had paid SGMC a
total of Cdn$4,888,950 in May 1997, pursuant to a private offering in Canada, to
purchase the Special Warrants from SGMC. Each Special Warrant entitles the
holder to acquire from SGMC, at no further cost, one share of Common Stock of
SGMC, and one Purchase Warrant; each Purchase Warrant entitles the holder to
purchase one share of Common Stock of SGMC, at a price of Cdn$6.00 per whole
share (the "Purchase Warrants"), through November 13, 1998.
Pursuant to the terms and conditions of the Special Warrants, if SGMC
were to fail to obtain prospectus qualification before the October 10, 1997
qualification deadline (as such terms were defined in the Special Warrants) from
the securities commissions of the Canadian Provinces wherein purchasers of the
Special Warrants reside, the holders of the Special Warrants would be entitled
to receive a dilution penalty in the amount of 1.1 shares of SGMC Common Stock
and 1.1 Purchase Warrants, for each Special Warrant exercised after the
qualification deadline if prospectus qualification were not obtained by the
qualification deadline. Such qualification required listing of the SGMC shares
and Purchase Warrants on a principal Canadian stock exchange.
The prospectus qualification was not obtained by SGMC, due primarily to
the drop in gold prices in the latter part of 1997 and the resulting lack of
interest in new listings of gold companies in the Canadian markets. However, as
discussed below, none of the four Canadian Funds, has received additional shares
of SGMC Common Stock or additional Purchase Warrants in payment of the dilution
penalty with respect to the Special Warrants and their constituent securities.
The dilution penalty may have to be paid with respect to the other Canadian
investors in the Special Warrants.
Each of the four Canadian Funds, in order to diversify and increase
their original investment, made offers to USE to purchase shares of USE $.01 par
value Common Stock. Each of the four funds, and USE, negotiated the terms of
acceptance of the funds' offer by USE. As a result of the offer and subsequent
negotiations with each of the funds, USE entered into separate Stock Purchase
Agreements with the funds.
34
<PAGE>
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; and (iii) the relinquishment by
each of the four funds of their rights to the dilution penalty. USE issued
658,895 shares of Common Stock in consideration of the cash, the Special
Warrants, and the relinquishments. The USE shares are restricted securities.
Pursuant to the terms of the Stock Purchase Agreements, USE has filed a resale
registration statement (which includes this Prospectus) with the SEC to permit
the resale of the funds' shares. The 658,895 Common Shares include the balance
of 112,530 shares of USE Common Stock to be issued to the fourth fund when the
resale registration statement is declared effective, for its delivery of the
204,600 Special Warrants to USE in payment for such 112,530 shares of USE Common
Stock. Such 112,530 shares are counted as issued and outstanding as of the date
of this Prospectus. Cash proceeds from the transaction with the Canadian Funds
are being used for general corporate purposes by USE.
The Stock Purchase Agreements for three Canadian Funds, and the Stock
Purchase Agreement for the fourth fund with respect to the cash portion thereof,
closed as of April 7, 1998, at which date the closing bid price of USE shares
was $6.876. A price of $7.00 per USE share was utilized by the funds and USE for
purposes of determining the number of USE shares to be issued under the Stock
Purchase Agreements. There will be no adjustment in the terms of the Stock
Purchase Agreements for changes in USE share market prices.
The dilution penalty, if paid, would have resulted in the issuance to
the Canadian Funds of an additional 88,890 shares of Common Stock of SGMC and
Purchase Warrants to buy another 88,890 shares of Common Stock of SGMC. USE will
retain the SGMC Special Warrants acquired from the Canadian Funds.
In fiscal 1999, USE may issue additional shares of its Common Stock to
the shareholders of SGMC who invested through RAF, in exchange for such
investors' SGMC shares. The amount of USE shares which might be issued in such
an exchange is not currently known, and therefore the extent of any dilution to
current shareholders cannot be predicted. However, it is not expected that any
material dilution would result. It is expected that USE will register (with the
SEC) all such USE shares for resale under the Securities Act of 1933, at such
time as another registration statement is filed by USE.
USECC MANAGEMENT AGREEMENT WITH SGMC. Effective June 1, 1996, SGMC
entered into a Management Agreement (dated as of May 22, 1996) with USE under
which USECC provides administrative staff and services to SGMC. USECC is
reimbursed for actual costs incurred, plus an extra 10% during the exploration
and development phases; 2% during the construction phase; and 2.5% during the
mining phase (such 2.5% charge to be replaced with a fixed sum which the parties
will negotiate at the end of two years starting when the mining phase begins).
The Management Agreement replaces a prior agreement by which USECC provided
administrative services to SGMC.
PROPERTIES. SGMC (through its subsidiary USECC Gold) holds
approximately 14 acres of surface and mineral rights (owned), 55 acres of
surface rights (owned), 436 acres of surface rights (leased), 158 acres of
mineral rights (leased), and 380 acres of mineral rights (owned), all on
patented mining claims near Sutter Creek, Amador County, California. The
properties are located in the western Sierra Nevada Mountains at from 1,000 to
1,500 feet in elevation; year round climate is temperate. Access is by
California State Highway 16 from Sacramento to California State Highway 49, then
by paved county road approximately .4 miles outside of Sutter Creek.
On October 1, 1996, SGMC entered into three letter agreements (the
"Lincoln Letter Agreements") with the property owners of 185 acres ("185 Acre
Property") on the west side of California State Highway 49 ("Hwy 49") and 32.58
acres ("32 Acre Property") of minerals which include 20.5 acres of surface on
the
35
<PAGE>
east side of Hwy 49 adjacent to the Stringbean Decline. The 185 Acre Property is
the proposed new location for the Surface Fill Unit and the 32 Acre Property
provides the land necessary for access and utility easements to Hwy 49.
Surface and mineral rights holding costs will aggregate approximately
$225,000 from June 1, 1998 through May 31, 1999. Property taxes for fiscal 1999
are estimated to be $30,000.
The leases are for varying terms, and require rental fees, advance
production royalties, real property taxes and insurance. The lease that was to
expire in February 1998 has been extended through its force majeure clause due
to the low price of gold. Leases expiring before 2010 will generally be extended
automatically, so long as minerals are continuously produced from the property
that is subject to the lease or minimum payments are made . Other leases may be
extended for various periods on terms similar to those contained in the original
leases. Production royalties are from 2.5% to 6% (most are 4%). The various
leases have different methods of calculating royalty payments (net smelter
return and gross proceeds).
A separate holder of four of the properties that were assembled by
Meridian into the Lincoln Project holds a 5 percent net profits interest on
production from such properties, which was granted by Meridian when it acquired
the properties. The "net profits" generally will be equal to gross mineral
revenues less an amount equal to 105 percent of numerous categories of costs and
expenses. An additional 0.5 percent net smelter return royalty is held by a
consultant to a lessee prior to Meridian's acquisition of the properties, which
0.5 percent interest covers the same four properties in the Lincoln Project.
Through May 31, 1998, an estimated $21,000,000 was spent on the Lincoln
Project by Meridian, USECC Gold and other of their predecessors to acquire the
Lincoln Project and for mine development, mining and processing bulk samples of
mineralization, exploration, feasibility studies, permitting costs, holding
costs, and related general and administrative costs. The amount of such
expenditures during the 1998 fiscal year was approximately $1,410,800 ($572,700
in 1997).
GEOLOGY AND RESERVES. The minerals consulting firm Pincock, Allen &
Holt of Lakewood, CO ("PAH") prepared a prefeasibility study of the Lincoln
Project in fiscal 1994 (and updated the study in 1997). PAH reviewed core
drilling data on the Lincoln Zone on 100-foot centers from the surface, and
drilling on the Comet Zone from both surface and underground. PAH also reviewed
data from drilling on the Keystone Zone from surface on 200-foot centers. Total
data is from 162 exploration core holes (surface and underground), with total
footage of 64,700 feet. PAH based its estimate of proven reserves on mineralized
material within 25 feet of sample information; probable reserves were based on
material located between 25 and 50 feet of sample information.
Using a cutoff grade of 0.15 ounces of gold per ton in place, PAH
estimates the Lincoln Project contains approximately 350,000 tons of proven and
probable reserves grading approximately 0.4 ounces of gold per ton. If operating
economics indicate a lower cutoff grade is feasible, the tonnages for the stated
reserves would be increased. Historical data (underground maps and production
records) from historic (now closed) mines within the Lincoln Project boundaries
indicate certain areas of those mines were not "mined out," such that additional
mineralized resources may exist on the property.
The geology within the Lincoln Project is typical of the historic
Mother Lode region of California, with a steeply dipping to vertical sequence of
metavolcanic and metasedimentary rocks hosting the gold- bearing veins.
Depending on location along the strike length on the vein systems, the
gold-bearing veins are slate, metavolcanic greenstone, or an interbedded unit of
slates and volcanics. The Lincoln Project covers over 11,000 feet of strike
length along the Mother Lode vein systems.
36
<PAGE>
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. In August and September 1998, the Amador County Board of Supervisors
certified the Final Subsequent Environmental Impact Report ("FSEIR:) and
approved all of the amendments requested by SGMC. Amendments to the CUP will
remove two tailings dams, eliminate the need to use cyanide on-site, and
eliminate mine related traffic on two county roads. The certification and
decision has been challenged in a lawsuit filed by a local citizens' group, see
"Legal Proceedings."Since SGMC already has a valid CUP, SGMC believes it may be
able to move forward on certain parts of the development of the mine/mill. In
any event, SGMC does not expect the appeal process to materially impact the
development plan or schedule.
PROPOSED MINE PLAN
In should be noted that the mine workings actually developed may vary
substantially from the plan adopted, depending on the different conditions and
grades of mineralization that are encountered. SGMC proposes to mine the Lincoln
and Comet Zones initially by access through the existing Stringbean Alley
decline. Production will be by overhand cut-and-fill and open sub-level stoping
techniques. Screened tailings from the mill (support fill) will be used to back
fill the stopes, which will stabilize the hanging and foot wall vein rocks, and
greatly reduce the volume of processed ore going into the Surface Fill Unit.
Mining at startup is expected to increase up to 500 tons per day
("tpd") during the first six months of mining operations. Ore will be conveyed
to the surface through an off shoot portal from the Stringbean Alley decline. a
new underground level is planned to be driven at 1,000 feet above sea level,
(approximately 120 feet below surface) during the next six months. Mining will
coincide with development of additional stopes and may allow an increase in mine
production up to 1,000 tpd in approximately the third year of operation.
Concurrently with production mining, SGMC intends to maintain an aggressive
underground development program to delineate (on an on-going basis) two to three
years of developed ore in sight.
MILL PLAN
There are three stages of milling and processing the ore. The first
stage involves wet grinding of the ore to the size of fine sand in a
semi-autogenous grinding ("SAG") mill. The resulting finely-milled ore is
treated in a gravity separator which employs centrifugal force to separate the
heavier free gold particles from the lighter rock particles. Next, the gold
concentrate is run across a set of cleaning tables to upgrade the gold
concentrate. The second stage takes the middlings and tails from the first and
again involves wet grinding in a ball mill to a finer size particle. This ground
ore is again treated in a similar gravity separator which is tuned for this
finer size particle and the gold concentrate is run across a different set of
cleaning tables. The third stage separates the remaining gold by flotation
wherein minute quantities of non-toxic chemicals are added to the ground ore
which makes the gold bearing particles attach to air bubbles. The gold bearing
particles are then separated from the ground ore into a flotation concentrate.
At this stage, the flotation concentrate is either reground and processed with a
dilute solution of sodium cyanide or shipped offsite. SGMC is planning on
shipping the flotation concentrate offsite, even though its CUP allows
processing with sodium cyanide. The mill is designed to produce several
gold-bearing products: a high-grade gravity concentrate; a flotation concentrate
or a gold precipitate if the cyanide process is used. These gold-bearing
products will be smelted to dore bullion for shipment to a precious metal
refinery. During processing, 95 to 97% of the processed ore will be removed. Of
this material, approximately 65% will be placed underground as structural fill
and 35% will be placed into the Surface Fill Unit.
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MOLYBDENUM
As holders of royalty, reversionary and certain other interests in
properties located at Mt. Emmons near Crested Butte, Colorado, USE and Crested
are entitled to receive annual advance royalties of 50,000 pounds of molybdenum,
or cash equivalent (one-half to each). AMAX Inc. (which was acquired by Cyprus
Minerals Company and was renamed Cyprus Amax Minerals Company in November 1993)
delineated a deposit of molybdenum containing approximately 146,000,000 tons of
mineralization averaging 0.43% molybdenum disulfide on the properties of USE and
Crested.
Advance royalties are paid in equal quarterly installments, until: (i)
commencement of production; (ii) failure to obtain certain licenses, permits,
etc., that are required for production; or (iii) AMAX's return of the properties
to USE and Crested. USECC did not receive any advance royalties during fiscal
1996 because of an arrangement with Cyprus Amax described below. These royalties
are shown in the Consolidated Statements of Operations as a component of gains
from restructuring mineral properties agreements. See "Note F to the USE
Consolidated Financial Statements." The advance royalty payments reduce the
operating royalties (six percent of gross production proceeds) which would
otherwise be due from Cyprus Amax from production. There is no obligation to
repay the advance royalties if the property is not placed in production.
The Agreement with AMAX also provides that USE and Crested are to
receive $2,000,000 (one-half to each), at such time as the Mt. Emmons properties
are put into production and, in the event AMAX sells its interest in the
properties, USE and Crested would receive 15 percent of the first $25,000,000
received by AMAX. USE and Crested have asserted that the acquisition of AMAX by
Cyprus Minerals Company was a sale of AMAX's interest in the properties which
would entitle USE and Crested to such payment. Cyprus Amax has rejected such
assertion and USE and Crested are considering their remedies.
In fiscal 1995, USE and Crested reached agreement with Cyprus Amax to
forego six quarters of advance royalties (starting fourth quarter calendar 1994)
as payment for the option exercise price for certain real estate in Gunnison,
Colorado owned by Cyprus Amax and the subject of a purchase option held by USE
and Crested. The option exercise price is valued at $266,250. USE and Crested
exercised their option in August 1994 and subsequently sold that property for
$970,300 in cash and notes receivable. The advance royalties resumed in the
second quarter of calendar 1996, however, the payment was not received until
June 1996, being the first quarter of fiscal 1997. USE recognized $211,000 and
$207,300 of revenues in fiscal 1998 and 1997, respectively, related to this
royalty interest.
MOLYBDENUM MARKET INFORMATION
Molybdenum is a metallic element with applications in both metallurgy
and chemistry. Principal consumers include the steel industry, which uses
molybdenum alloying agents to enhance strength and other characteristics of its
products, and the chemical, super-alloy and electronics industries, which
purchase molybdenum in upgraded product forms.
The molybdenum market is cyclical with prices influenced by production
costs and the rate of production of foreign and domestic primary and by-product
producers, world-wide economic conditions particularly in the steel industry,
the U.S. dollar exchange rate, and other factors such as the rate of consumption
of molybdenum in end-use products. When molybdenum prices rose dramatically in
the late 1970s, for example, steel alloys were modified to reduce reliance on
molybdenum. AMAX and Cyprus Minerals Company were the two major primary
producers of molybdenum in the United States until November 1993, when AMAX was
acquired by Cyprus.
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,
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excess capacity from the primary molybdenum mines which are currently not
producing. In addition, by- product molybdenum (primarily from Chilean copper
mining companies) has a major impact on available supplies. It is unlikely that
any major new primary deposits will be developed during fiscal 1999.
Molybdenum prices on the open spot market increased substantially, from
$3.35 per pound of technical grade molybdic oxide (the principal product) in
September 1994, to $15.50 - $17.50 per pound in February 1995. However, by May
31, 1996, prices declined to $3.00 - $3.35 per pound but were in the $4.00 to
$4.40 per pound range in September 1997 and $3.75 in July 1998.
PARADOR MINING (NEVADA)
USE and Crested are sublessees and assignees from Parador Mining Co.,
Inc. ("Parador"), of certain rights under two patented mining claims located in
the Bullfrog Mining District of Nye County, Nevada. The claims are immediately
adjacent to and part of a gold mine operated by Bond Gold Bullfrog, Inc.
("BGBI"), a non-affiliated third party (now known as Barrick Bullfrog, Inc.).
USE and Crested have also been assigned certain extralateral rights associated
with the claims and certain royalty rights relating to a prior lease on those
properties. The lease to USE and Crested is for a ten year primary term, is
subject to a prior lease to BGBI on the properties, and allows USE and Crested
to explore for, develop and mine minerals from the claims. If USE and Crested
conduct activities on the claims, they are entitled to recover costs out of
revenues from extracted minerals. After recovering any such costs, USE and
Crested will pay Parador a production royalty of 50 percent of the net value of
production sold from the claims.
USE, Crested and Parador presently are in litigation concerning this
property. See "Legal Proceedings - BGBI Litigation."
OIL AND GAS.
FORT PECK LUSTRE FIELD (MONTANA). USECC conducts a small oil production
operations at the Lustre Oil Field on the Ft. Peck Indian Reservation in
north-eastern Montana; four wells are producing, and USE and Crested receive a
fee based on oil produced. USE is the operator of record. No further drilling is
expected in this field. This fee and certain real property of USE and Crested,
have been pledged or mortgaged as security for a $1,000,000 line of credit from
a bank.
ENERGX, LTD. FORT PECK GAS PROJECT. Energx, Ltd., a Wyoming corporation
owned 45% by USE, 45% by Crested, and 10% by the Fort Peck (Montana) Assiniboine
and Sioux Tribes, had certain rights to explore Montana properties for shallow
natural gas. Exploration efforts were unsuccessful prior to 1998, and Energx was
released from the property agreements in 1998. Other Energx projects have also
been unsuccessful. Accordingly, in fiscal 1998 Energx decided to cease all
operations pending evaluation of future options.
COMMERCIAL OPERATIONS
BRUNTON.
In fiscal 1996, USE sold The Brunton Company to Silva Production AB, a
closely held Swedish corporation ("Silva") for $4,300,000. Brunton is engaged in
the manufacture and marketing of professional and recreational outdoor products
and at the time of its sale Brunton was 100% owned by USE.
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
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installments to be paid on February 15, 1997, February 15, 1998 and February 15,
1999 The installments for 1997 and 1998 have been received.
In addition, Silva agreed to pay USE 45% of the net profits before
taxes derived from Brunton products and operations (including new products then
being developed by Brunton) for a period of four years and three months
commencing February 1, 1996. The profits payment for the period February 1, 1996
through April 30, 1997 of $292,600 was received after May 31, 1997; the profits
payment for fiscal 1998 has not yet been received.
Certain items of equipment and personal property were withheld by USE
from the Agreement and transferred from Brunton to USE, by mutual agreement with
Silva, for USE's assumption of the indebtedness thereon, including 225,556
shares of USE's common stock, and options to purchase 150,000 shares of USE's
common stock for $3.50 per share; and 160,000 shares of Crested common stock,
and options to purchase (from Crested) 300,000 shares of Crested common stock
for $0.40 per share. USE subsequently transferred to Plateau 125,556 shares of
USE (and options to purchase 75,000 shares of USE), plus 60,000 shares of
Crested (and options to purchase 150,000 shares of Crested) in partial payment
of debt owed to Plateau by USECC. The remaining 100,000 USE shares (and options
to purchase 75,000 USE shares), plus 100,000 Crested shares (and options to
purchase 150,000 shares of Crested) were transferred to SGMC. In fiscal 1998,
SGMC exercised its USE options. Plateau did not exercise its USE options, and
neither SGMC or Plateau exercised their Crested options, which have expired.
The sale eliminated Brunton's manufacturing and/or marketing of
professional and recreational outdoor products from the commercial segment of
USE's business for fiscal 1997 and thereafter, except to the extent of future
net profit payments from Silva.
REAL ESTATE AND OTHER COMMERCIAL OPERATIONS
USE owns varying interests, alone and with Crested, in affiliated
companies engaged in real estate, transportation, and commercial businesses. The
affiliated organizations include Western Executive Air, Inc. ("WEA") and Canyon
Homesteads, Inc. (through Plateau). Activities of these and other subsidiaries
in the business sectors include ownership and management of a commercial office
building, the townsite of Jeffrey City, Wyoming and the townsite, motel,
convenience store and other commercial facilities in Ticaboo, Utah.
WYOMING PROPERTIES. USECC owns a 14-acre tract in Riverton, Wyoming,
with a two-story 30,400 square foot office building (including underground
parking). The first floor is rented to affiliates, nonaffiliates and government
agencies; the second floor is occupied by USE and Crested and is adequate for
their executive offices. The property is mortgaged to the WDEQ as security for
future reclamation work on the SMP Crooks Gap uranium properties.
USECC (through WEA) also owns a fixed base aircraft operation at the
Riverton Municipal Airport, including a 10,000 square foot aircraft hangar and
7,000 square feet of associated offices and facilities. This operation is
located on land leased from the City of Riverton for a term ending December 16,
2005, with an option to renew on mutually agreeable terms for five years. The
annual rent is presently $1,180 (adjusted annually to reflect changes in the
Consumer Price Index), plus a $0.02 fee per gallon of fuel sold. WEA owns and
operates an aircraft fixed base operation with fuel sales, flight instruction
services and aircraft maintenance in Riverton, Wyoming.
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.
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USECC owns various buildings, 290 city lots and/or tracts and other
properties at the Jeffrey City townsite in south-central Wyoming. Nearly 4,000
people resided in Jeffrey City in the early 1980s, when the nearby Crooks Gap
and Big Eagle uranium mining projects were active. The townsite may be utilized
for worker housing as the Jackpot Mine and Sweetwater Mill are put into
operation. In the interim, USE and Crested are selling lots at Jeffrey City and
made sales aggregating $38,400 and $21,150 during fiscal 1998 and 1997,
respectively.
USE owns five city lots and a 20-acre tract with improvements including
two smaller office buildings and three other buildings with 19,000 square feet
of office facilities, 5,000 square feet of laboratory space and repair and
maintenance shops containing 8,000 square feet, all in Riverton, Wyoming.
COLORADO PROPERTIES. In connection with the AMAX transaction for the
Mt. Emmons molybdenum properties near Crested Butte, Colorado, USECC acquired an
option from AMAX (now Cyprus Amax) to purchase approximately 57 acres for
$200,000 in Mountain Meadows Business Park, Gunnison, Colorado. See "Minerals -
Molybdenum" above. The property is zoned commercial and industrial, and is
adjacent to Western State College. In fiscal 1995, USECC and Cyprus Amax agreed
to exercise the option by USE and Crested agreeing to forego six quarters of
advance royalties from Cyprus Amax (the option purchase price was $200,000),
plus payment of certain expenses i.e. real property taxes from 1987 and other
expenses amounting to $19,358. Thereafter, USE (together with Crested) signed
option agreements with Pangolin Corporation, a Park City, Utah developer, for
sale of the 57 acres, and a separate parcel owned in Gunnison County, Colorado.
The first option (exercised in February, 1995) was for the 57
commercial and noncommercial zoned acres in the City of Gunnison, Colorado; the
purchase price was $970,300. Pangolin paid $345,000 cash and $625,300 in three
year nonrecourse promissory notes, of which $137,900 was paid during fiscal 1995
and $35,600 was paid during fiscal 1996. The remaining note carried interest at
7.5% per annum.
The second option covered 472.5 acres of ranch land, owned by Crested,
northwest of the City of Gunnison, Colorado (purchase price $822,460). Pangolin
paid $10,000 for the option; on option exercise and closing, Pangolin paid
$46,090 in cash and $776,370 by two nonrecourse promissory notes. USE did not
receive the $35,000 as scheduled. At closing, 22.19 acres were deeded to
Pangolin; different parcels of the remaining acreage secured the notes, and were
to be released for principal payments in the course of development. The sale was
accounted for as an installment sale and thus the gain on sale was deferred, to
be recorded as the notes were paid. Both notes required annual interest
payments.
In fiscal 1997, USE and Crested agreed with Pangolin to restructure the
remaining obligations of Pangolin. Under the restructuring, Contour Development
Company LLC gave USE and Crested two recourse, secured promissory notes: the
first note for $454,894 due January 26, 1998, the second note for $872,508. The
notes are secured by Contour's 73% interest in Tenderfoot Properties LLC ( a
Colorado limited liability company affiliated with Contour). USE and Crested
conveyed a key lot in the Gunnison parcel to Tenderfoot, upon which Contour and
Tenderfoot were to construct an apartment building with HUD construction loan
financing to be obtained by Contour and Tenderfoot. USE and Crested had intended
the restructuring to result in a faster recovery by USE and Crested of their
investments in the land than would have been realized under the terms of the
original Pangolin obligations.
Although the initial payments on the two new notes were paid when due
in January 1997, thereafter, on May 30, 1997, Contour defaulted in making a
payment to Crested of $164,439 (principal plus interest). Also, the first note
($454,894) was not paid in January 1998. In July 1998, USE and Crested filed a
lawsuit against Contour and associated parties to seek recovery of the balance
owing on the promissory notes and contracts. See "Legal Proceedings."
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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. Revenues from sale of homesites and operation
of the motel were nominal in 1998.
CONSTRUCTION
FOUR NINES GOLD, INC. On September 13, 1995, FNG was awarded a
construction contract for $618,270 by the United States Department of the
Interior, Bureau of Reclamation, for the Minor Laterals, North Canal, Stage 5,
Belle Fourche Unit, South Dakota. As of May 31, 1997 FNG had completed 100% of
the contract, billing and receiving $618,270. The contract as of May 31, 1997,
had resulted in a loss of $48,426 to FNG, however, a claim for $172,977 was
submitted. On July 2, 1998 the claim was denied by the Bureau of Reclamation and
FNG has 12 months to appeal.
For fiscal 1998, FNG has had no contracts for construction work, but
has rented its equipment to USECC for use by the GMMV at the Jackpot Mine.
Rental revenues totaled $478,338 for fiscal 1998 at a profit of $263,409, and
the rentals are continuing into fiscal 1999.
Neither commercial nor construction operations are dependent upon a
single customer, or a few customers, the loss of which would have a materially
adverse effect on the Company.
RESEARCH AND DEVELOPMENT
The Company has incurred no research and development expenditures,
either on its own account or sponsored by customers, during the past three
fiscal years.
ENVIRONMENTAL
GENERAL. Registrant's operations are subject to various federal, state
and local laws and regulations regarding the discharge of materials into the
environment or otherwise relating to the protection of the environment,
including the Clean Air Act, the Clean Water Act, the Resource Conservation and
Recovery Act ("RCRA"), and the Comprehensive Environmental Response Compensation
Liability Act ("CERCLA"). With respect to mining operations conducted in
Wyoming, Wyoming's mine permitting statutes, Abandoned Mine Reclamation Act and
industrial development and siting laws and regulations also impact the Company.
Similar laws and regulations in California affect SGMC operations and in Utah,
will effect Plateau's operations.
The Company's management believes it is currently in compliance in all
material respects with existing environmental regulations. To the extent that
production by SMP, GMMV or SGMC is delayed, interrupted or discontinued due to
need to satisfy existing or new provisions which relate to environmental
protection, future USE earnings could be adversely affected.
CROOKS GAP. An inoperative ion exchange facility at Crooks Gap
currently holds a NRC license for possession of uranium operations byproducts.
USE has applied to the NRC for permission to decommission and decontaminate the
plant, dispose low level waste into the Sweetwater Mill tailings cell, and keep
intact such of the facility as does not require dismantling.
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. The Company
does not anticipate that expenditures to comply with laws regulating the
discharge of materials into the
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environment, or which are otherwise designed to protect the environment, will
have any substantial adverse impact on the Registrant's competitive position.
EMPLOYEES
As of the date of this Prospectus, USE had approximately 120 full-time
employees (including mine and mill employees in Wyoming and Utah) compared to
175 before the Jackpot Mine on Green Mountain was put on standby. Crested uses
approximately 50 percent of the time of USE employees, and reimburses USE on a
cost reimbursement basis.
MINING CLAIM HOLDINGS
TITLE TO PROPERTIES. Nearly all the uranium mining properties held by
GMMV, USE and Plateau are on federal unpatented claims. Unpatented claims are
located upon federal public land pursuant to procedure established by the
General Mining Law. Requirements for the location of a valid mining claim on
public land depend on the type of claim being staked, but generally include
discovery of valuable minerals, erecting a discovery monument and posting
thereon a location notice, marking the boundaries of the claim with monuments,
and filing a certificate of location with the county in which the claim is
located and with the BLM. If the statutes and regulations for the location of a
mining claim are complied with, the locator obtains a valid possessory right to
the contained minerals. To preserve an otherwise valid claim, a claimant must
also annually pay certain rental fees to the federal government (currently $100
per claim) and make certain additional filings with the county and the BLM.
Failure to pay such fees or make the required filings may render the mining
claim void or voidable. Because mining claims are self-initiated and
self-maintained, they possess some unique vulnerabilities not associated with
other types of property interests. It is impossible to ascertain the validity of
unpatented mining claims solely from public real estate records and it can be
difficult or impossible to confirm that all of the requisite steps have been
followed for location and maintenance of a claim. If the validity of an
unpatented mining claim is challenged by the government, the claimant has the
burden of proving the present economic feasibility of mining minerals located
thereon. Thus, it is conceivable that during times of falling metal prices,
claims which were valid when located could become invalid if challenged.
Disputes can also arise with adjoining property owners for encroachment or under
the doctrine of extralateral rights (see "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
In 1991, disputes arose between USE/Crested, and Nukem, Inc. and its
subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation
and operation of the Sheep Mountain Partners partnership for uranium mining and
marketing, and activities of the parties outside SMP. Arbitration proceedings
were initiated by CRIC in June 1991 and in July 1991, USECC filed a lawsuit
against Nukem, CRIC and others in the U.S. District Court (District of
Colorado). Later, USECC filed another suit for the standby costs at the SMP
mines against SMP in the Colorado State Court. The Federal Court stayed the
arbitration proceedings and the State Court case was also stayed. In fiscal
1994, all of the parties agreed to exclusive and binding arbitration of the
disputes before the American Arbitration Association, for which the legal claims
made by both sides included fraud and misrepresentation, breach of contract,
breach of duties owed to the SMP partnership, and other claims.
Following 73 hearing days and various submissions by the parties, the
arbitration panel (the "Panel") entered an Order and Award (the "Order") in
April 1996 finding generally in favor of USE and Crested on certain of their
claims (including the claims for reimbursement for standby maintenance expenses
and profits denied SMP in Nukem's trading of uranium), and in favor of
Nukem/CRIC and against USE and Crested on certain other claims.
Approximately $18 million of SMP cash had been placed in escrow and a
bank account by agreement of the parties pending resolution of the disputes.
The April 1996 Order awarded USE and Crested monetary damages of
approximately $7,800,000 with interest (after deduction of monetary damages
which the Arbitration panel awarded in favor of Nukem/CRIC and against USE and
Crested). An additional amount of approximately $4,300,000 was awarded by the
Panel to USE and Crested, to be paid out of the escrowed $18 million and SMP
cash. This $4,300,000 was USE and Crested's share of SMP profits from selling
uranium to utilities and advances to purchase uranium for SMP. The Panel also
ordered that one utility supply contract which had been in dispute belonged to
SMP, not Nukem, and that Nukem was to assign that contract to SMP. The Panel
further ordered that certain contracts which Nukem had obtained for the purchase
of uranium from countries in the CIS (former Soviet republics) belonged to SMP.
After motions and further proceedings in the Federal District Court,
and a reaffirmation Order by the Panel in July 1996, the U.S. District Court
confirmed the Panel's Order and Award. In November 1996, USECC received the
$4,367,000 of the damage award out of the SMP escrowed funds and a separate SMP
bank account. In confirming the Panel's Order, the Court ordered Nukem to assign
a utility contract to SMP; to pay USECC a net amount of approximately $8,465,000
in monetary damages; and impressed a constructive trust in favor of SMP on
Nukem's rights to purchase CIS uranium, the uranium acquired pursuant to those
rights, and profits therefrom. Nukem/CRIC posted a supersedeas bond for
$8,613,600 and the Court stayed execution on the judgment. The bond did not
cover the value of the CIS contracts at issue because the Panel's Order did not
value such contracts.
Nukem/CRIC appealed the District Court's Judgment to the 10th Circuit
Court of Appeals. The appeal was argued before the Court of Appeals on September
24, 1998.
During the fourth quarter of fiscal 1998, USE and Crested entered into
a partial settlement with Nukem and CRIC on certain of the claims not on appeal.
Under the partial settlement, USECC received (i) from SMP an assignment of all
of the mining claims and equipment which had been held by SMP (USECC remains
responsible for the reclamation liabilities associated with the claims as had
always been the case when
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the properties were in SMP); (ii) from Nukem and CRIC, $484,361 which settled
USE and Crested's claim to their share of the past and future profits on a
utility contract which Nukem had wrongfully kept outside of SMP (and Nukem was
allowed to keep this contract as part of the settlement); (iii) from Nukem and
CRIC, $4,540,000 to settle all claims by USE against Nukem, CRIC and SMP
(including Nukem/CRIC's one-half share of the SMP mine maintenance costs); (iv)
from SMP, a contract to sell 1,076,842 pounds of uranium oxide to a utility; and
(v) from SMP, a contract to purchase 600,000 pounds of uranium oxide from
another producer in North America (200,000 pounds annually through 2000). In
connection with the partial settlement, the parties agreed to the dismissal with
prejudice of the Colorado and Wyoming State Court proceedings (for reimbursement
of SMP mine maintenance costs), and all claims in the Federal District Court and
the arbitration, except for the issues pending before the 10th Circuit Court of
Appeals. The cash settlement portion under (iii) above is in addition to the
$4,367,000 received by USECC in November 1996 out of the SMP escrowed funds.
In September 1998, USECC sold the purchase contract ((v) above) to
Nukem for $35,000 for each year wherein Nukem buys uranium from the producer; if
Nukem doesn't purchase any uranium in any year, no payment is owed to USECC for
that year.
A three judge panel of the 10th Circuit court of Appeals issued an
Order and Judgment in the Nukem/CRIC arbitration/litigation matter on October
22, 1998, which unanimously affirmed the Federal District Court Judgment. The
10th Circuit Court of Appeals ruling affirmed (i) the imposition of 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; and
(ii) the damage award against Nukem/CRIC. As a result of the court of Appeals
ruling, USE and Crested will receive an additional $5,900,000 cash for a total
net monetary award of $15,224,000 in the arbitration/litigation, and equitable
relief in the form of USE's and Crested's interest in SMP, which holds the
constructive trust over the CIS contracts. However, the value of the interest in
SMP cannot be determined until a full accounting of those contracts has been
completed by SMP. The length of time such an accounting will require presently
cannot be estimated.
Nukem/CRIC has until November 5, 1998 to file a petition for rehearing
with the Court of Appeals. Unless such a petition is granted, the Court of
Appeals will issue a mandate on or before November 12, 1998 to the Federal
District Court to enforce the terms of the Federal District Court Judgment.
However, the issue of such a mandate could be changed if the Court of Appeals
shortens or enlarges the time within which Nukem/CRIC is allowed to file a
petition for rehearing.
TICABOO TOWNSITE LITIGATION.
In fiscal 1998, a prior contract operator of the Ticaboo restaurant and
lounge, and two employees supervising the motel and convenience store in Utah
(owned by Canyon Homesteads, Inc.) sued USE, Crested and others in Utah State
Court. After a five day trial, a jury denied the claims of two of three
plaintiffs but awarded the third plaintiff $156,000 in damages against USE. USE
has filed motions including a motion for judgment nothwithstanding the verdict
("JNOV"), and the motions are pending. USE intends to appeal the judgment if the
motion for JNOV is not granted.
BGBI LITIGATION
USE and Crested are defendants and counter- or cross-claimants in
certain litigation in the District Court of the Fifth Judicial District of Nye
County, Nevada, brought by Bond Gold Bullfrog Inc. ("BGBI") on July 30, 1991.
BGBI (now known as Barrick Bullfrog, Inc.) is an affiliate of Barrick Corp., a
large international gold producer headquartered in Toronto, Canada. The
litigation primarily concerns extralateral rights associated with two patented
mining claims owned by Parador Mining Company Inc. ("Parador") and initially
leased to a predecessor of BGBI, which claims are in and adjacent to BGBI's
Bullfrog open pit and
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underground mine. USE and Crested assert certain interests in the claims under
an April 1991 assignment and lease with Parador, which is subject to the lease
to BGBI's predecessor.
BGBI seeks to quiet title to its leasehold interest in the subject
claims, a determination that USE and Crested have no rights in the claims, and
an order enjoining USE and Crested from asserting any interest in them. BGBI
further asserts other claims and that, in attempting to lease an interest in the
subject claims to USE and Crested, Parador breached the provisions of its lease
to BGBI, and that Parador is responsible for the legal fees and costs incurred
by BGBI in the quiet title action, which may be offset against royalties.
A partial or bifurcated trial to the Court of the extralateral rights
issues was held on December 11 and 12, 1995, to determine whether the Bullfrog
orebody is a "vein, lode or ledge" as described in the General Mining Law and,
if so, whether the facts warrant application of the doctrine of extralateral
rights as set forth in such statute. The Court found that Parador had failed to
meet its burden of proof and therefore Parador, USE and Crested have no right,
title and interest in the minerals lying beneath the claims of Layne pursuant to
extralateral rights. The partial trial did not address the issues of breach of
contract by the defendants and BGBI for specific performance and they were tried
before the Court commencing on January 26, 1998. After the trial, the Court
found against the parties on their respective claims, and the plaintiff and
these defendants filed a Notice of Cross-Appeal and Notice of Appeal,
respectively to the Nevada Supreme Court. The record on appeal has been filed
with the Nevada Supreme Court and the appeals process is underway with opening
briefs due January 26, 1999. No hearing day has been set.
DEPARTMENT OF ENERGY LITIGATION
On July 20, 1998, eight uranium mining companies with operations in the
United States (including USE, Crested, YSFC) and the Uranium Producers of
America (a trade organization) filed a complaint against the United States
Department of Energy (the "DOE") in a lawsuit (file no. 98 CV 1775) in the
United States District Court, Cheyenne, Wyoming. The complaint seeks declaratory
judgment and injunctive relief. The plaintiffs allege that the DOE violated the
USEC Privatization Act of 1996, when the DOE transferred 45 metric tons of low
enriched uranium and 3,800 metric tons of natural uranium to United States
Enrichment Corp. ("USEC"). See "Business and Properties - Uranium Marketing -
USEC Inc." above.
Specifically, the plaintiffs allege that the USEC Privatization Act
authorizes the DOE to transfer to USEC "without charge" an initial 50 metric
tons of highly enriched uranium and 7,000 metric tons of natural uranium. The
Act authorizes the DOE to sell (not merely transfer) additional quantities of
uranium out of the DOE stockpile, but only upon payment of fair market value for
the uranium and then only upon specific finding by the DOE that such a sale
would not have an adverse material impact on the domestic uranium, mining,
conversion or enrichment industry, taking into account sales under the Russian
HEU Agreement and the Suspension Agreement.
The plaintiffs have asked the Court to declare that (i) the DOE
violated its statutory authority by transferring uranium to USEC in excess of
statutory limits on volume; (ii) the excess amounts were not "sold" by the DOE
to USEC for fair value, as required by the Act, and mandated findings by the DOE
concerning possible adverse impacts were not supported in fact; and (iii) the
DOE be enjoined from future transfers in violation of the Act. The DOE has filed
a motion to dismiss the complaint claiming that the U.S. Congress withdrew its
consent to be sued in connection with the USEC Inc. privatization and that USEC
Inc. must be joined as an indispensable party. The motion is pending.
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CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the United States District
Court, Denver, Colorado against Contour Development Company, L.L.C. and entities
and persons associated with Contour Development Company, L.L.C. (together,
"Contour") seeking compensatory and consequential damages of more than $1.3
million from the defendants for dealings in certain real estate.
Specifically, USE (which is the assignee of Crested's rights and
interests in certain of the promissory notes, contracts and agreements) alleges
that Contour has breached contracts for the sale of USE's and Crested's Gunnison
properties, and is in default on the promissory notes delivered to pay for the
Gunnison properties. USE has further alleged that Contour fraudulently induced
USE and Crested to enter into restructuring agreements for the original
transactions between the parties in such properties; and further, that Contour
has breached the duties of good faith, honesty, full disclosure and fair dealing
which were owed to USE and Crested by Contour in the course of the transactions.
USE has made additional claims against Contour for unjust enrichment and
conversion of the real estate assets and added additional parties as defendants.
See "Business - Commercial Operations - Real Estate and Other Commercial
Operations - Colorado Properties" above.
As of the date of this Prospectus, none of the defendants have filed an
answer to the complaint.
SGMC LITIGATION
In 1993, Amador County issued a conditional use permit ("CUP") to allow
SGMC to develop the Lincoln Project near the town of Sutter Creek, Amador
County, California. A number of conditions were attached to the original CUP
which accommodated local citizen and government agency concerns about noise,
waste disposal, traffic and other aspects of the proposed mining operation.
In 1997 and 1998, SGMC proposed amendments to the CUP for a new design
of the Lincoln Project which would lower its environmental impact by reducing
traffic, potentially eliminating the use of cyanide on-site, and removing two
large tailings dams which would have been built to hold mine and mill waste. The
new design also would significantly reduce capital and operating costs for the
mine/mill complex, but cover more land for waste disposal and other purposes.
The certification and approval by the Amador County Planning Commission of the
Final Subsequent Environmental Impact Report ("FSEIR") and CUP amendments on
July 14, 1998 was appealed (by another local citizens project opposition group)
to the Amador County Board of Supervisors. In August and September 1998, the
Board of Supervisors certified the FSEIR and approved the amendments to the CUP.
On September 28, 1998 a lawsuit was filed in Amador County Superior
Court, California (Case No. 98 CV 3298) by Concerned Citizens of Amador County
as plaintiffs, against the County of Amador and the Amador County Board of
Supervisors, and against SGMC as a real party in interest. The lawsuit
challenges the actions of Amador County and its Board of Supervisors in
certifying the FSEIR and approving the amended CUP. Specifically, the
petitioners allege that the FSEIR is inadequate under the California
Environmental Quality Act ("CEQA"), and further, that Amador County and its
Board of Supervisors did not follow the fact finding, publication and other
procedures mandated by CEQA and local land use ordinances. The petitioners have
requested the court to void the FSEIR, rescind the amended CUP, and not permit
Amador County to take further actions to allow implementation of the Lincoln
Project until a revised EIR is completed and local land use ordinances are
revised or complied with.
SGMC has filed an answer to the petition, denying the allegations that:
there are substantive deficiencies in the FSEIR; or that important steps in the
analysis, approval and public comment processes as required under CEQA were not
followed in approving the FSEIR and amended CUP.
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SGMC anticipates the lawsuit could possibly delay the start of
operations at the Lincoln Project. SGMC does not anticipate that the lawsuit
will result in the ultimate cancellation of the Lincoln Project, or prevent
implementation of the more efficient and less expensive (and environmentally
improved) Lincoln Project as contemplated by the amended CUP.
MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Shares of USE Common Stock are traded on the over-the-counter market, and prices
are reported on a "last sale" basis by the National Market System ("NMS") of the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"). The range by quarter of high and low sales prices for the Common
Stock is set forth below for fiscal 1998 and 1997.
High Low
---- ---
Fiscal year ended May 31, 1998
------------------------------
First quarter ended 8/31/97 $11.63 $7.13
Second quarter ended 11/30/97 11.75 7.45
Third quarter ended 2/29/98 10.13 6.75
Fourth quarter ended 5/31/98 8.63 5.75
Fiscal year ended May 31, 1997
------------------------------
First quarter ended 8/31/96 $22.00 $14.50
Second quarter ended 11/30/96 19.00 11.94
Third quarter ended 2/28/97 11.25 9.38
Fourth quarter ended 5/31/97 13.00 5.75
At October 15, 1998, the closing bid price was $2.28 per share and
there were approximately 696 shareholders of record for Common Stock.
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
The following is Management's Discussion and Analysis of those
significant factors which have affected the Company's liquidity, capital
resources and results of operations during the periods covered in the Company's
Consolidated Financial Statements filed with this Prospectus.
Some of the statements in this Management's Discussion and Analysis
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward- looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements.
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LIQUIDITY AND CAPITAL RESOURCES AT AUGUST 31, 1998
During the quarter ended August 31, 1998, USE received $5,026,000 cash
as a result of a partial settlement of Sheep Mountain Partners ("SMP")
arbitration. This increased its cash position at August 31, 1998 to $7,401,900
for a net increase for the quarter in cash of $1,751,400. Other increases in
components of working capital were increases in assets held for resale and other
assets of $134,700 and Accounts Receivable Affiliates of $1,382,800. Other
current assets increased primarily as a result of certain annual prepaid
insurance premiums being paid during the quarter ended August 31, 1998. Accounts
Receivable Affiliates increased due to USE and Crested Corp. ("Crested")
advancing funds for the Green Mountain Mining Venture ("GMMV") operations that
have not yet been reimbursed by the GMMV from the proceeds of the loan from
Kennecott Uranium Company ("KUC").
The current portion of long term debt increased by $201,000 during the
quarter ended August 31, 1998. This increase in debt was as a result of
financing USE's and Crested"s annual insurance premium. The GMMV purchase option
that USE and Crested received during fiscal 1998 of $4 million is carried as a
current liability.
Increased cash reserves were partially consumed by operations in the
amount of $1,511,700. Cash was also used in investing activities to purchase
equipment, $139,500, and increase the investment in certain subsidiaries,
$30,800. Cash was generated from the sale of certain equipment, $203,900, and
increased long term debt of $201,000. Cash was also consumed in the payment of
bonuses to four USE employees as recognition of the extraordinary dedication
they had given to their work in the SMP arbitration/litigation. The amount of
cash consumed in these bonuses which included taxes due was $561,000. These
changes resulted in a net increase of $1,751,400 in cash for a cash balance as
of August 31, 1998 of $7,401,900, compared to a cash balance of $5,650,500 at
August 31, 1997.
CAPITAL RESOURCES
GENERAL: The primary source of USE's capital resources for the
remaining nine months of fiscal 1999 are the cash on hand at August 31, 1998;
the potential receipt of cash from the SMP Arbitration Award once the 10th
Circuit Court of Appeals rules on the Nukem appeal; possible equity financing
from affiliated companies, and proceeds under the line of credit. 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. Interest, rentals of real estate holdings and equipment,
aircraft chartering and aviation fuel sales, also will provide cash.
LINE OF CREDIT: USE and Crested have a $1,000,000 line of credit with a
commercial bank. The line of credit is secured by various real estate holdings
and equipment belonging to USE and Crested. It is anticipated that this line of
credit may be used to finance short term working capital needs.
FINANCING: Equity financing for Sutter Gold Mining Company ("SGMC") and
Plateau Resources Ltd. ("Plateau") are primarily dependent on the market price
of gold and uranium. As of August 31, 1998, the prices for these metals remained
depressed and it is not known when they will recover. USE and Crested continue
to be optimistic concerning the future markets for these metals but cannot
accurately forecast what the prices will be in the short or long term markets.
If the price for these metals do not increase in the short term, working capital
of USE and Crested will be impacted negatively due to holding costs of the
properties and the ability to raise equity funding could be impaired.
SUMMARY: USE believes that cash on hand at August 31, 1998 as well as
proceeds from its line of credit, if needed, will be adequate to fund working
capital requirements through fiscal 1999. However, these
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capital resources will not be sufficient to provide the funding for major
capital expansions and development of USE's mineral properties.
CAPITAL REQUIREMENTS
GENERAL: The primary requirements for USE's working capital during
fiscal 1999 are expected to be the costs associated with the development
activities of Plateau, care and maintenance costs of the former SMP mineral
properties, payments of holding fees for mining claims, USE's share of the costs
associated with the GMMV properties and corporate general and administrative
expenses.
SGMC: USE owns a majority interest in SGMC. USE is therefore assisting
SGMC in its efforts to secure financing to place the properties into production.
SGMC has sufficient cash reserves to fund its ongoing permitting and
administrative expenses. It is anticipated that an additional $15 million is
needed to complete the development of the mine and construction of the
cyanide-flotation mill. Prior to the time that such construction and development
costs are undertaken, SGMC will require either additional debt or equity
financing.
Due primarily to the sustained decline in gold prices during fiscal
1998, USE recorded a $1,500,000 impairment on its investment in SGMC. If
financing is not obtained in fiscal 1999 and/or gold prices further decline from
present levels, USE will reevaluate the need for an additional impairment on its
investment in SGMC, which includes the Stock Purchase Warrant that is contingent
on SGMC identifying ounces of gold in excess of 300,000 ounces. USE acknowledges
that it may be required to record a significant impairment under generally
accepted accounting principles should financing not be obtained by SGMC to
develop the project or if gold prices decline further. As of the three months
ended August 31, 1998, USE was continuing its search for development capital.
SMP: As part of a settlement agreement reached during the fourth
quarter of 1998, the SMP mines and associated properties were transferred to USE
and Crested. The holding and reclamation costs associated with these mining
properties are the responsibility of USE and Crested. The holding costs
historically have been approximately $85,000 per month. USE and Crested continue
to search for improved techniques that will reduce these monthly costs. The
future reclamation costs on the SMP properties are covered by a reclamation bond
which is secured by the pledge of certain of USE's and Crested's real estate
assets. The dollar amount for the reclamation bond is reviewed annually by
Wyoming regulatory agencies. USE's portion of the reclamation liability on the
SMP properties is $1,451,800 and is shown as such in the long term liability
section of its balance sheet.
It is not anticipated that the SMP properties will be placed into
production during fiscal 1999. USE and Crested have determined that the SMP
mining properties should be maintained and prepared for production in the future
when the price of uranium increases into the $15 per pound range or at such time
as USE and Crested are able to obtain long term delivery contracts with
favorable price terms and the Sweetwater Mill, which is owned and operated by
the GMMV, is operating again. There are no major reclamation obligations during
the balance of fiscal 1999 of which USE and Crested are aware.
In addition to receiving the SMP mining properties back in the
settlement of a portion of the SMP arbitration issues, USE and Crested also
received one of the market related delivery contracts which had previously
belonged to SMP. There is one delivery under this contract during the third
quarter of fiscal 1999. The delivery requirement was sold to a third party and
USE and Crested will make a nominal amount of profit on the sale during the
third quarter of 1999. As of August 31, 1998, USE has no additional delivery or
financing commitments for the sale or purchase of uranium during Fiscal 1999.
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GMMV: During July 1998, the GMMV Management Committee unanimously
agreed to place the Jackpot Mine and Sweetwater Mill on active standby status.
This decision was made as a result of uncertainties in the short term uranium
market. These same uncertainties have made the financing of the acquisition of
Kennecott's interest in the GMMV more difficult. It appears unlikely that the
financing will be successfully completed and the Acquisition Agreement, which
was signed on June 23, 1997, will expire on October 31, 1998.
After October 31, 1998 the mines and the mill will continue to be
maintained. Kennecott's obligation to fund the first $50 million in expenditures
is now satisfied and USE and Crested will be obligated to fund their 50% of the
ongoing costs. The Management Committee of the GMMV is currently discussing what
level of expenditures should be made to maintain the properties. A final
decision on these expenditures has not been reached but USE, Crested and
Kennecott want to keep the expenses to a minimum. It is anticipated that if the
annual expenditures do not exceed $2 million for standby and maintenance that
USE and Crested will be able to fund their portion of this commitment through
fiscal 1999.
Expenditures through July 1998 were covered under Kennecott's advances
to the GMMV out of the $16 million dollar loan from Kennecott Energy pursuant to
the Acquisition Agreement. As of October 22, 1998, there were $1,708,000 of
outstanding invoices to the GMMV which had not been paid to USE and Crested by
the GMMV for costs incurred through August 31, 1998. The Management Committee of
Kennecott is currently evaluating the billings, and USE anticipates that they
will be completely resolved in the second quarter of fiscal 1999.
PLATEAU: Plateau owns and operates the Ticaboo townsite, motel,
convenience store and restaurant. Additionally Plateau owns and maintains the
Tony M uranium mine and Shootaring uranium mill. USE and Crested are currently
working to obtain the necessary permits from the NRC and State of Utah to place
the Shootaring mill into production. USE and Crested are seeking debt or equity
financing of between $6 million and $9 million to put the mill and Tony M mine
into production. Until such time as the financing is received and profitable
contracts are obtained, USE and Crested will not put the properties owned by
Plateau into production. Historically, the net holding costs of the Plateau
properties have been $70,000 per month.
YELLOW STONE FUELS CORP. ("YSFC"): In Management's opinion, YSFC has
sufficient cash to complete its projected 1999 exploration program on its
in-situ uranium properties. As of August 31, 1998, YSFC owed USE and Crested
$400,000 on a convertible promissory note plus interest at 10% per annum. YSFC
is indebted to USE and Crested for the promissory note, the interest accrued on
the note and additional amounts that USE and Crested have advanced for YSFC for
a total indebtedness at August 31, 1998 of $709,900. YSFC has sufficient cash on
hand to retire this indebtedness. YSFC has indicated its desire to pay the total
indebtedness in cash but it is not certain that a cash payment will occur as
YSFC may elect, at its option, to pay the promissory note with shares of its
common stock.
TERM DEBT: Debt to non-related parties at August 31, 1998 was $673,100
as compared to $503,900 at August 31, 1997. The increase in debt to non-related
parties consists primary of debt due on the financing of annual insurance
premiums and various purchases of equipment. The debt for the purchase of heavy
equipment bears different interest rates and has various maturity dates. All
payments on the debt are current.
RECLAMATION OBLIGATIONS: It is not anticipated that any of USE's
working capital will be used in fiscal 1999 for the reclamation of any of its
mineral property interests. The reclamation costs are long term and are either
bonded through the use of cash bonds or the pledge of assets. It is not
anticipated that any of the mining properties in which USE owns an interest will
enter the reclamation phase prior to May 31, 1999.
OTHER: USE and Crested currently are not in production on any mineral
properties, and development work continues on several of their major
investments. USE and Crested are not using hazardous substances
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or known pollutants to any great degree in these activities. Consequently,
recurring costs for managing hazardous substances, and capital expenditures for
monitoring hazardous substances or pollutants have not been significant. 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, 1992 are closed after audit by the IRS.
On October 5, 1998 USE met with the Appeals Office of the IRS in Denver,
Colorado to discuss resolving issues raised for fiscal 1993 and 1994. USE and
Crested have resolved all outstanding issues for those years without incurring
any cash commitments for additional taxes due. The IRS is currently concluding
its review of Fiscal 1995 and 1996 for the companies but no final reports have
been issued so no representations can be made as to their ultimate outcome.
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 1998 COMPARED TO
THREE MONTHS ENDED AUGUST 31, 1997
During the three months ended August 31, 1998, revenues decreased from
those revenues reported during the same period of the previous year by $697,200
to total revenues of $2,163,400. The major reduction resulted from USE not
receiving any revenues from the delivery of uranium on one SMP contract. During
the quarter ended August 31, 1997, USE recognized $858,600 in revenue from the
profits derived from a SMP contract delivery. No such revenues were recognized
during the three months ended August 31, 1998. Revenues from management fees
increased by $169,100 during the three months ended August 31, 1998 over the
same period of the previous year as a result increased expenditures at the GMMV
on which USE recognized a management fee.
Costs and expenses for the quarter ended August 31, 1998 increased by
$1,801,300 over the same period of the previous year, primarily due to increased
activity on mineral properties and commercial operations, along with an increase
in general and administrative overhead to supervise the increased activity and
the bonuses paid as discussed above. The projects which are being developed are
currently not in the production phase, and so are not generating cash flow. With
the decline in the market price of uranium, it is not anticipated that the
properties will be placed into production in fiscal 1999. A decision was made in
July 1998 to place the GMMV mines on active standby. USE is therefore
anticipating some reductions in general and administrative overhead costs.
As a result of the reduced revenues and increased costs discussed
above, operations for the quarter ended August 31, 1998 resulted in a loss of
$1,257,200 or $0.18 per share as compared to a profit of $683,800 or $0.10 per
share for the quarter ended August 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES AT MAY 31, 1998
Working capital increased by $5,231,900 during fiscal 1998 to
$8,238,900 at May 31, 1998 from $3,007,000 as of May 31, 1997. The primary
components of the increase are increases in cash and cash equivalents,
litigation settlement receivable, and accounts receivable from affiliates of
$4,233,600, $5,026,000, and $687,400, respectively. These increases in working
capital were offset by increases in accounts payable, the deferred GMMV purchase
option and the current portion of long term debt of $523,800, $4,000,000 and
$144,400, respectively.
Cash increased due to the reconsolidation of Sutter Gold Mining Company
("SGMC") which resulted in increased cash of $3,124,000 and $1,800,500 from the
sale of the Company's common stock. These receipts of cash were used primarily
in mine development of $1,125,000, purchases of equipment of $1,947,200,
increased investment in affiliates of $102,300, and cash used in operations.
During the fourth
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quarter of 1998 the Company and Crested were able to negotiate a settlement of
certain of the issues in the Sheep Mountain Partners ("SMP") arbitration with
Nukem and CRIC which resulted in settlement proceeds to the Company and Crested
of $5,026,000. The increase in accounts receivable affiliates is primarily the
result of the Company advancing funds for Crested in the various ventures in
which the companies participate and advances that the Company and Crested made
on behalf of Yellow Stone Fuels Corp.
Accounts payable increased due to the increased activity of the Green
Mountain Mining Venture ("GMMV") where the Company and Crested acted as the
operator for the development of the two decline tunnels to access the uranium
mineralized material on Green Mountain. The current portion of long term debt
increased as a result of a balloon payment coming due on one of the Company's
long term notes payable.
During the first quarter of fiscal 1998, the Company and Crested
entered into an Acquisition Agreement with Kennecott to acquire Kennecott's
interest in the GMMV. As part of that Agreement Kennecott paid the Company and
Crested $4,000,000 upon execution which is recorded as a deferred purchase
option. If the Company and Crested are successful in closing the Acquisition
Agreement and purchasing Kennecott's interest in GMMV, the $4,000,000 will be
considered a component (i.e., a reduction) of the acquisition/purchase price of
$15,000,000 (please see Note F to the Consolidated Financial Statements). If the
Company and Crested are not able to close the Acquisition Agreement, the
$4,000,000 will be applied against any future reimbursable costs/contributions
due the GMMV. After these costs and any remaining obligations are satisfied, the
remainder, if any, will be recognized as income.
Investments in affiliates decreased by $4,127,800 primarily as a result
of reconsolidating SGMC and equity losses from affiliates of $3,179,600 and
$575,700, respectively. Restricted investments increased as a result of an
investment by SGMC in a non affiliated company for $53,400 and the increase of
the certificates of deposit held by Plateau Resources Ltd. ("Plateau") of
$326,500 for future reclamation expenses as a result of earned interest.
During the year ended May 31, 1998, property plant and equipment
increased by $13,409,400. This increase was primarily as a result of
reconsolidating SGMC of $12,499,000, development of mining properties of
$1,125,000 and the acquisition of equipment of $1,947,200. The majority of these
development and equipment purchase expenses benefitted the GMMV and SGMC
properties. There were also capital expenditures made to keep the mill facility
owned by Plateau in standby status.
Notes receivable from employees decreased by $393,300 as the Company's
chairman retired $431,900 of obligations to the Company and Crested. See
"Directors and Executive Officers - Executive Compensation Plans and Employment
Agreements." Notes receivable other decreased by $336,800 primarily as a result
of Silva Production A.B. paying its second installment of $333,333 plus interest
on the note due the Company for the purchase of The Brunton Company in fiscal
1996. Deposits and other increased by $387,600 primarily as a result of 67,000
shares of Company common stock being issued to executive officers of the Company
under the 1996 Stock Award Program. Such shares are retained by the Company
until the executive retires and are forfeitable under certain conditions.
CAPITAL RESOURCES
GENERAL: The primary source of the Company's capital resources for
fiscal 1999 will be cash on hand at May 31, 1998, equity financing for
affiliated companies, and the expected final resolution of the SMP arbitration.
Additionally, the Company and Crested will continue to offer for sale various
non-core assets such as lots and homes in Ticaboo, real estate holdings in
Wyoming, Colorado and Utah and mineral interests. Interest, rentals of real
estate holdings and equipment, aircraft chartering and aviation fuel sales also
will provide cash.
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LINE OF CREDIT: The Company and Crested have a $1,000,000 line of
credit with a commercial bank. The line of credit is secured by various real
estate holdings and equipment belonging to the Company and Crested. This
facility is currently available to the Company. It is anticipated that this line
of credit may be used to finance working capital needs as well as the purchase
of uranium to deliver against a SMP delivery contract that the Company and
Crested recently received as a partial settlement of certain SMP arbitration
matters.
FINANCING: Equity financing for SGMC and Plateau are dependant on the
market price of gold and uranium, among other things. At May 31, 1998, the
prices for these metals were depressed and it is not known when they will
recover, if at all. Management of the Company and Crested believe, based on
independent projections, that the market prices for these metals will improve in
the short term. No assurance can be given that the prices will improve during
fiscal 1999. If the prices do not improve, the ability of the Company and
Crested to raise equity financing for these subsidiaries will be impaired.
The Company believes that cash on hand, in addition to its line of
credit and cash projected to be received from operations will be adequate to
fund working capital requirements through fiscal 1999. However, these capital
resources may not be sufficient to provide the funding for major capital
expansions of the Company's mineral properties and, accordingly, the Company's
development plans may be either temporarily or permanently impacted. Net cash
provided by financing activities for the year ended May 31, 1998 of $4,922,300
was primarily the result of issuances of the Company's common stock.
CAPITAL REQUIREMENTS
GENERAL: The primary requirements for the Company's working capital
during fiscal 1999 are expected to be the costs associated with development
activities of Plateau, care and maintenance costs of the former SMP properties,
payments of holding fees for mining claims, purchase of uranium for delivery to
the utility contract that was distributed to the Company and Crested as a result
of the settlement agreement reached regarding the SMP arbitration, the Company's
portion of the costs associated with the GMMV properties and corporate general
and administrative expenses.
SGMC: Effective April 7, 1998, the Company purchased 889,900 Special
Warrant Units from certain Canadian investors (the "Canadian Funds") in an arm's
length, bargained transaction between unrelated entities. As consideration, the
Units were purchased with 488,895 shares of the Company's common stock. The
transaction resulted in the Company increasing its ownership to 59% of the
outstanding common stock of SGMC as of May 31, 1998 from 39% at May 31, 1997.
Due primarily to the sustained decline in gold prices, the Company
recorded a $1,500,000 impairment on its investment in SGMC. If financing is not
obtained in fiscal 1999 and/or gold prices further decline from present levels,
the Company will reevaluate the need for an additional impairment on its
investment in SGMC, which includes the Stock Purchase Warrant that is contingent
on SGMC identifying ounces of gold in excess of 300,000 ounces. The Company
acknowledges that it may be required to record a significant impairment under
Generally Accepted Accounting Principles should financing not be obtained by
SGMC to develop the project or if gold prices decline further.
SGMC's properties contain reserves of gold. Preliminary estimates are
that a 500 ton per day ("tpd") mine/mill operation using a cyanide-flotation
process, will require up to $15,000,000 to place the proposed mine and mill into
full operation. It is the Company's intent to complete the necessary financing
to develop the reserves of SGMC. Management believes that if adequate funding is
obtained, production will begin in fiscal 2000. SGMC is currently attempting to
negotiate financing with an investment firm with a proposed plan for the
necessary financing intended to be completed in fiscal 1999. Sufficient capital
resources are available to SGMC to continue its permitting and capital raising
activities.
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SMP: As part of a settlement agreement reached during the fourth
quarter of fiscal 1998 regarding the SMP Arbitration, the SMP mines and
associated properties were transferred to the Company and Crested. All past
holding costs of the SMP mines were resolved and the future costs of standby as
well as reclamation are the obligation of the Company and Crested. These costs
are estimated at approximately $85,000 per month. There are no current plans to
mine the SMP Crooks Gap properties during fiscal 1999. However, the Company and
Crested will continue to preserve the mineral properties and develop concepts to
reduce care and maintenance costs.
All matters in the SMP arbitration have been settled with the exception
of two issues that are currently before the 10th Circuit Court of Appeals; oral
arguments were had on these issues on September 24, 1998. Management of the
Company cannot predict the timing or ultimate outcome of this hearing but
believes that the issues will be resolved during fiscal 1999 unless Nukem and
CRIC elect to appeal the decision further to the U.S. Supreme Court and that
court decides to hear the appeal.
GMMV: On June 23, 1997, USE and USECC signed an Acquisition Agreement
with Kennecott for the right to acquire Kennecott's interest in the GMMV for
$15,000,000 and other consideration. As discussed in Note F to the financial
statements, Kennecott paid the Company $4 million upon execution of the
Agreement, which became nonrefundable upon the satisfaction of certain terms.
The $4 million is classified as a deferred purchase option since it will be
recorded as a reduction of the Company's purchase price if the Acquisition
Agreement closes.
During July 1998, the GMMV Management Committee unanimously agreed to
place the Jackpot Mine and Sweetwater Mill on active standby status. This
decision was made as a result of uncertainties in the short term uranium market.
These same uncertainties have made the financing of the acquisition of
Kennecott's interest in GMMV more difficult. The Company continues in its
financing activities in an effort to raise sufficient capital to acquire the
Kennecott interest in the GMMV. Currently, it is believed that such financing
efforts may not be concluded by the terms of the Acquisition Agreement with
Kennecott. Kennecott continues to work with the Company in its efforts to
successfully close the purchase of Kennecott's interest.
The standby costs of the GMMV mine, associated property and mill will
eventually become the responsibility of the individual partners on a percentage
ownership basis. The partners in the GMMV are currently discussing how to
operate and fund the operations of the properties. Budgets have not been
finalized, but it is projected the annual holding costs of the mine and mill
will be approximately $2,000,000. The Company and Crested will be obligated to
pay their share (50%) of these costs once the obligations of Kennecott are
completely satisfied. Due to the unpredictability of the uranium market, the
Company is unable to predict when the GMMV properties will again be put on an
active basis or when or if it will be able to purchase Kennecott's interest in
the GMMV.
PLATEAU: Plateau owns and operates the Ticaboo townsite, motel,
convenience store and restaurant. The operations resulted in fiscal 1998 losses
of $800,000, which were absorbed by the Company. The Company continues to work
on methods of increasing revenues and reducing costs. There has been an annual
growth in sales since the Company has owned Plateau. The Company has constructed
a total of seven homes which are held for sale. During fiscal 1998, the homes
were written down by $100,000 to the appraised value.
The Company is currently working to obtain the necessary permits from
the NRC and State of Utah to place the Shootaring mill which is owned by Plateau
and located in southern Utah into production. The Company is seeking debt or
equity financing of between $6,000,000 to $9,000,000 to put the mill and Tony M.
Mine into production. Until such time as the financing is obtained and
profitable contracts are obtained, the Company will not put the properties into
production.
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YELLOW STONE FUELS CORP. ("YSFC"): In Management's opinion, YSFC has
sufficient cash to complete its projected 1999 exploration program on its
in-situ uranium properties. At May 31, 1998, YSFC owed the Company and Crested
$400,000 on a convertible promissory note plus $40,000 in interest for a total
of $440,000. The note bears interest at 10% per annum and is due in December
1998. YSFC also owed the Company and Crested $161,700 for miscellaneous payroll
and operating expenses. YSFC has indicated its desire to pay the total
indebtedness in cash but it is not certain that a cash payment will occur as
YSFC may elect at its option to pay the promissory note with shares of its
common stock.
TERM DEBT AND OTHER OBLIGATIONS: Debt at May 31, 1998 of $503,900
constitutes a relatively low percentage of capitalization given the value of
assets owned by the Company and the various activities it participates in. The
debt is primarily for property and equipment purchased by USECC, Sutter and FNG.
The debt bears different interest rates and is due under various payment terms.
It is anticipated that all debt payments will be able to be made in the normal
course of the Company's business.
RECLAMATION OBLIGATIONS: It is not anticipated that any of the
Company's working capital will be used in fiscal 1999 for the reclamation of any
of its mineral properties. The reclamation costs are long term and are either
bonded through the use of cash bonds or the pledge of assets. It is not
anticipated that any of the Company's mining properties will enter the
reclamation phase prior to May 31, 1999.
Prior to fiscal 1996, the Company and Crested assumed the reclamation
obligations, environmental liabilities and contingent liabilities for employee
injuries, from mining the Crooks Gap and other properties in the Sheep and Green
Mountain Mining Districts as well as the SGMC properties. The reclamation
obligations, which are established by government agencies, were most recently
set at $1,451,800 for the SMP properties and $27,000 on the SGMC properties. The
amount of accruals for environmental liabilities for each site are determined by
estimating costs associated with current or expected reclamation and remediation
plans. These plans include detailed descriptions of the work to be performed,
and in many cases involve the work of third party consultants. The plans are
submitted annually to government agencies who review them and set the bond
amounts.
To assure the reclamation work will be performed, regulatory agencies
require posting of a bond or other security. The Company and Crested satisfied
this requirement with respect to SMP properties by mortgaging their executive
office building in Riverton, Wyoming.
Reclamation obligations on the GMMV Big Eagle properties and the
Sweetwater Mill, estimated at approximately $23,620,000, have been assumed by
the GMMV venturers, and secured by a bank letter of credit provided by
Kennecott. The reclamation and environmental costs associated with the
Sweetwater Mill will not commence prior to conclusion of mining activities on
Green Mountain except for the open pit mine near the Mill. As uranium is
processed through the Mill, a reclamation reserve will be funded on the unit of
production basis. Up to $8,000,000 (in 1990 dollars) in any reclamation costs on
the Sweetwater mill and associated properties which may be incurred prior to
commencement of production or 2001 will be loaned by UNOCAL to the GMMV to be
repaid only out of production.
Reclamation obligations of Plateau are covered by a $7,270,400 cash
bond at May 31, 1998 to the U.S. Nuclear Regulatory Commission and a $1,561,600
cash deposit as of May 31, 1998 for the resolution of any environmental or
nuclear claims.
OTHER: Although the Company and Crested currently are not in production
on any mineral properties, development work continues on several of their major
investments. The Company and Crested are not using hazardous substances or known
pollutants to any great degree in these activities. Consequently, recurring
costs for managing hazardous substances, and capital expenditures for monitoring
hazardous substances or pollutants have not been significant. Likewise, the
Company and Crested do not have properties
56
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which require current remediation. The Company and Crested are also not aware of
any claims for personal injury or property damages that need to be accrued or
funded.
The tax years through May 31, 1992 are closed after audit by the IRS.
The Company currently has filed a request for an appeal hearing on an IRS
agent's findings for the years ended May 31, 1993 and 1994. Although all
indicators are that the findings of the IRS audit for 1993 and 1994 will not
result in additional tax, the findings of the audit could affect the tax net
operating loss of the Company. Management of the Company feels confident that it
will prevail on a majority of the issues. No assurance of the outcome of the
appeal can be given. The tax years ended May 31, 1995 and 1996 are also
currently being audited by the IRS. No determination on these audits can be made
as they are not yet completed.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Operations resulted in a net after tax loss of $983,200 or $0.15 per
share as compared to a net after tax loss of $3,724,500 or $0.58 per share. The
primary cause of this reduction in the Company's loss during fiscal 1998 were
increased revenues of $5,768,300 while costs and expenses only increased by
$1,697,300. Net cash used in operating activities decreased to $2,245,000 in
1998 from $2,647,600 in 1997 primarily due to the decrease in loss from
operations offset by other working capital changes.
REVENUES: Mineral revenues increased by $862,400 as the result of the
Company receiving its proportionate share of the net proceeds from the delivery
of pounds of uranium under an SMP contract. This was the last delivery under
this contract and no similar delivery proceeds were received during fiscal 1997.
Commercial operations revenue increased by $1,304,100 as a result of an
increase of $1,019,100 pertaining to increased equipment rentals to the GMMV and
the development of mining properties. Additionally, revenues generated at the
Company's Ticaboo townsite increased by $285,000 in fiscal 1998. SMP litigation
settlements are recorded net of any accounts receivable from SMP for holding
costs of the mining properties. During fiscal 1998, such revenues increased by a
net of $3,586,200 to $4,590,000.
Construction contract revenues decreased by $1,038,600 as a result of
the Company's subsidiary Four Nines Gold, Inc.("FNG") not obtaining any
commercial construction contracts. FNG's equipment and employees were used
exclusively during fiscal 1998 on the construction of various roads, ponds and
other excavation projects for the GMMV. Revenues from Management fees increased
significantly due to the work that was done under the GMMV agreements that allow
the Company to receive a 10% management fee on all billable charges under the
1990 GMMV agreement.
COSTS AND EXPENSES: Mineral operation expenses and General and
administrative expenses increased by $821,700 and $2,029,900, respectively due
to increased operations at the Company's GMMV and Plateau mineral and commercial
operations, and increased salary expense. The Company recognized a mineral
interest impairment of $1,500,000 pertaining to SGMC as discussed above. There
was no impairment of mineral properties taken during fiscal 1997. There was
however an abandonment of mining claims in 1997 pertaining to certain mining
claims in the amount of $1,225,800. No abandonments of mining claims occurred in
fiscal 1998.
Construction costs decreased by $716,200 due to FNG not performing any
commercial construction work, and provision for doubtful accounts decreased by
$614,200 as no additional provision was required.
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FISCAL 1997 COMPARED TO FISCAL 1996
Revenues for the twelve months ended May 31, 1997 totaled $5,790,200 as
compared to revenues at May 31, 1996 of $9,632,200. This decrease in revenues of
$3,842,000 is primarily the result of no revenues being recognized from mineral
sales in fiscal 1997 (decrease of $3,116,700). During the prior year, USE and
Crested made certain deliveries of U3O8 for SMP. Other decreases in revenues
were oil sales, $45,500; sales of assets, $312,800; and construction revenues
from USE's subsidiary FNG, $2,755,900. These decreases in revenues were offset
by increased commercial sales, $780,300; advance royalties from Cyprus Amax,
$207,300; partial distribution of SMP funds, $1,003,800; and increased
management fees and other revenues, $323,600.
With the exception of cost of minerals sold, construction costs and
commercial operations, costs and expenses remained the same as they had been in
1996. Cost of minerals sold declined by $2,766,700 as a result of Crested and
USE not delivering any U3O8 under the SMP contracts during fiscal 1997.
Construction costs declined by $2,325,200 as a result of USE's subsidiary FNG
not being able to secure construction contracts. Currently, FNG is using its
equipment and employees on the construction of earth structures and roads for
the GMMV. It is not known if FNG will be able to obtain contracts in the future.
During fiscal 1997, USE also recognized a provision for doubtful accounts of
$614,200. This is as a result of a third party defaulting on a sale of land that
USE and Crested sold during a prior period. USE also recognized an increase in
the abandonment of mineral leases of $897,100. The total expense of $1,225,800
for mineral property abandonment was the result of Crested abandoning a mineral
property having a book value of $71,500 and SGMC abandoning properties with a
book value of $1,154,300.
General and administrative expenses increased only slightly by $238,600
due to expansion of operations. Increases in general and administrative expenses
were reduced by overhead and direct charges to GMMV, SMP and SGMC.
Equity losses recognized by USE increased by $272,300. Operations
resulted in a net loss of $3,724,500 or $0.58 per share in 1997 as compared to a
net profit of $270,700 or $0.04 per share in 1996.
FUTURE OPERATIONS:
The Company has generated losses in two of the last three years, as a
result of holding costs and permitting activities in the mineral segment along
with impairments of mining claims and investments in subsidiaries that are
involved in the minerals business and from certain commercial operations. The
Company is in the process of developing and/or holding investments in gold and
uranium properties that are currently not generating any operating revenues.
These properties require expenditures for items such as permitting, development,
care and maintenance, holding fees, corporate overhead and administrative
expenses. Success in the minerals industry is dependant on the price that a
company can receive for the minerals produced. The Company cannot predict what
the long term price for gold and uranium will be and therefore cannot predict
when, or if, the Company will generate net income from operations..
In addition, legal expenses associated with the litigation and
arbitration surrounding the SMP Partnership and the inability of the Company to
utilize all the funds that have been awarded to the Company and Crested by the
Arbitration Panel and confirmed by the Federal Court have compounded the
Company's operating and cash flow position in the past. The Company believes
that the SMP arbitration will be resolved during fiscal 1999. The Company
believes that it will meet its obligations in fiscal 1999 as well as be able to
secure financing to further the development of its mineral properties and place
them into production.
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YEAR 2000 ISSUE
Computer programs written in the past utilize a two digit format to
identify the applicable year. Any date sensitive software beyond December 31,
1999 could fail, if not modified. The result could be, among other
possibilities, disruptions to operations and the inability to process financial
transactions. The Company has evaluated the operating systems on all headquarter
and field office computers and operating systems and has consulted with various
vendors of the computer software which is being used by the Company and
affiliates. The vendors have confirmed to the Company that all of the Company's
software and information systems are Year 2000 compliant. The Company therefore
does not believe that significant expenditures will be required for the Year
2000 event.
EFFECTS OF CHANGES IN PRICES
Mining operations and the acquisition, development and sale of mineral
properties are significantly affected by changes in commodity prices. As prices
for a particular mineral increase, prices for prospects for that mineral also
increase, making acquisitions of such properties costly, and sales advantageous.
Conversely, a price decline facilitates acquisitions of properties containing
that mineral, but makes sales of such properties more difficult. Operational
impacts of changes in mineral commodity prices are common in the mining
industry.
URANIUM AND GOLD. Changes in the prices of uranium and gold affect USE
to the greatest extent. When uranium prices were relatively high in fiscal 1988,
USE and Crested acquired the Crooks Gap properties, and thereafter put the
properties into production. When uranium prices fell sharply during fiscal
1989-1991, USECC suspended the mining operations of SMP, because uranium could
be purchased at prices less than the costs of producing uranium. Uranium
production in the United States reportedly fell by 25 percent to 33 percent in
1990, due to the lowest prices for uranium since the market developed in the
1960s. However, these low prices created opportunities for the acquisition of
the Sweetwater Mill and the Shootaring Mill.
Changes in uranium prices directly affect the profitability of uranium
supply agreements with utilities. Fixed-price agreements become advantageous
when the spot market price for uranium falls significantly below the price which
a utility has agreed to pay.
Several of the original SMP utility contracts have been completed, and
the rest assigned out to the partners in connection with the partial settlement
of litigation with Nukem/CRIC. For fiscal 1998, USE and Crested have one utility
supply contract, which is market related. One purchase contract, which is market
related has been sold to Nukem subsequent to May 31, 1998 for $35,000 for each
year if Nukem purchases uranium from the third party; if Nukem doesn't so
purchase, no payment would be made to the Company and Crested . However, the
purchase contract requires six months notice to the supplier before delivery,
which notice fixes the price. a price decline between notice and delivery could
adversely impact USE and Crested. Additional contracts with utilities will be
sought as the uranium properties of USE and Crested go into production.
USE believes SGMC's Lincoln Mine will be profitable with gold prices
over $290 per ounce. The price of gold was adversely impacted in October and
November 1997 and prices in late September 1998 were approximately $295 per
ounce.
MOLYBDENUM AND OIL. Changes in prices of molybdenum and petroleum are
not expected to materially affect USE with respect to either its molybdenum
advance royalties or its fees associated with oil production. a significant and
sustained increase in demand for molybdenum would be required for the
development Mt. Emmons properties by Cyprus Amax since Cyprus Amax has other
producing mines.
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DIRECTORS AND EXECUTIVE OFFICERS
BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS OF DIRECTORS.
KEITH G. LARSEN, 36, 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 and Chief Operating Officer, replacing John L. Larsen as President.
John L. Larsen remains Chairman of the Board and Chief Executive Officer. His
term as a director expires at the 2000 Annual Meeting of Shareholders.
JOHN L LARSEN, 67, has been principally employed as an officer and
director 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. His term
as a director expires at the 2000 Annual Meeting of Shareholders.
HAROLD F. HERRON, 45, 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 was its President from 1987 to
April 1998, and has since been appointed Brunton's Chairman. 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. His term as a director expires at the 1998 Annual Meeting of
Shareholders.
DAVID W. BRENMAN, 42, 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. His term as a
director expires at the 1998 Annual Meeting of Shareholders.
DON C. ANDERSON, 72, 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. His term as a director expires at the 1999 Annual Meeting of
Shareholders.
NICK BEBOUT, 48, 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.
Bebout is also an officer, director and owner of other privately-held entities
involved in the resources industry. His term as a director expires at the 1999
Annual Meeting of Shareholders.
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H. RUSSELL FRASER, 57, 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. His
term as a director expires at the 1999 Annual Meeting of Shareholders.
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.
Mr. Fraser is President and a director of American Capital Access,
Inc., a bond rating company in New York, New York.
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 Chairman of 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-K,
regarding the executive officers of the Company who are not also directors. None
of these officers have been involved in: a federal bankruptcy or state
insolvency proceeding; any criminal proceeding; any injunction proceedings; any
civil or SEC proceeding which resulted in a finding of securities law
violations; or any proceedings which involved commodities transactions.
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.
DANIEL P. SVILAR, age 69 has been General Counsel for USE and Crested
for more than the past five years. He also has served as Secretary and a
director of Crested, Assistant Secretary of USE. His positions of General
Counsel to, and as officers of the companies, are at the will of each board of
directors. There are no understandings between Mr. Svilar and any other person
pursuant to which he was named as officer or
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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.
ROBERT SCOTT LORIMER, age 46, has been Controller and Chief Accounting
Officer for both USE and Crested for more than the past five years. Mr. Lorimer
also has been Chief Financial Officer for both these companies since May 25,
1991, their Treasurer since December 14, 1990, and Vice President Finance since
April 1998. 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.
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. Keith
G. Larsen, a director and President, 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.
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 $100,000 cash in any of the three fiscal years
ended May 31, 1998. The table includes compensation paid such persons by Crested
for 1996, 1997 and 1998, and Brunton for 1996 for such persons' services to such
subsidiaries.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
------------------------------------
Annual Compensation Awards Payouts
----------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Name Annual Restricted All Other
and Compen- Stock LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) SARs(#) ($) ($)(3)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John L. Larsen 1998 $190,700 $732,000 -- $ -- -0- -- $16,000
CEO and 1997 131,200 -0- -- 98,158(1) -0- -- 13,500
Chairman 1996 148,600 -0- -- -- -0- -- 15,566
Keith G. Larsen(4) 1998 $120,200 $ -0- -- $ -- -0- -- $12,000
President
and COO
Daniel P. Svilar 1998 $134,300 $ -0- -- $ -- -0- -- $13,400
General Counsel 1997 109,700 3,400 -- 81,454(1) -0- -- 11,300
and Assistant 1996 124,153 -0- -- -- -0- -- 14,009
Secretary
Harold F. Herron 1998 $ 36,400 $ -0- -- $ -- -0- -- $ 3,600
Vice President 1997 31,900 990 -- 120,858(2) -0- -- 3,300
1996 113,600 -0- -- -- -0- -- 4,037
R. Scott Lorimer 1998 $132,300 $ -0- -- $ -- -0- -- $13,200
Treasurer 1997 100,300 3,200 -- 54,299(1) -0- -- 10,300
and CFO 1996 110,100 -0- -- -- -0- -- 13,749
</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 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.
(3) Dollar values for ESOP contributions and 401K matching
contributions.
(4) Keith G. Larsen was not an executive officer of USE prior to fiscal
1998.
63
<PAGE>
EXECUTIVE COMPENSATION PLANS AND EMPLOYMENT AGREEMENTS
To provide an incentive to Mr. Larsen to develop the GMMV into a
producing operation as soon as possible, in fiscal 1993 the USE Board adopted a
long-term incentive arrangement under which Mr. Larsen was to be paid a
non-recurring $1,000,000 cash bonus, provided that the Nuexco Exchange Value of
uranium oxide concentrates were maintained at $25.00 per pound for six
consecutive months, and provided further that USE had 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 $732,000
($615,000 after taxes) 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 (in fiscal 1994) and the most recent negotiations for USECC to
enter into the Acquisition Agreement (fiscal 1998) to acquire Kennecott's
interest in the GMMV resulting in the signing bonus of $4,000,000 to the Company
and Crested. The bonus was recommended by the Company's Compensation Committee,
taking into account pay levels at comparable corporations in the mining
industry, and was approved by the Board of Directors. The Company and Mr. Larsen
agreed that the bonus is further in full settlement of the bonus to Mr. Larsen
which was authorized (but never paid) by the Board of Directors in 1993, which
had been conditioned on the spot price of uranium concentrates and cash
distributions from the GMMV to the Company.
The Company has adopted a plan to pay the estates of Messrs. Larsen,
Evans and Svilar amounts equivalent to the salaries they are receiving at the
time of their death, for a period of one year after death, and reduced amounts
for up to five years thereafter. The amounts to be paid in such subsequent years
have not yet been established, but would be established by the Boards of the
Company and Crested.
Mr. Svilar has an employment agreement with the Company and Crested,
which provides for an annual salary in excess of $100,000, with the condition
that Mr. Svilar pay an unspecified amount of expenses incurred by him on behalf
of the Company and its affiliates. In the event Mr. Svilar's employment is
involuntarily terminated, he is to receive an amount equal to the salary he was
being paid at termination, for a two year period. If he should voluntarily
terminate his employment, the Company and Crested will pay him that salary for
nine months thereafter. The foregoing is in addition to Mr. Svilar's Executive
Severance and Non-Compete Agreement with the Company (see below).
In fiscal 1992, the Company signed Executive Severance and Non-Compete
Agreements with Messrs. Larsen, Evans, Svilar and Lorimer, providing for payment
to such person upon termination of his employment with the Company, occurring
within three years after a change in control of the Company, of an amount equal
to (i) severance pay in an amount equal to three times the average annual
compensation over the prior five taxable years ending before change in control,
(ii) legal fees and expenses incurred by such persons as a result of
termination, and (iii) the difference between market value of securities
issuable on exercise of vested options to purchase securities in USE, and the
options' exercise price. These Agreements also provide that for the three years
following termination, the terminated individual will not compete with USE in
most of the western United States in regards to exploration and development
activities for uranium, molybdenum, silver or gold. For such non-compete
covenant, such person will be paid monthly over a three year period an agreed
amount for the value of such covenants. 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.
64
<PAGE>
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.
In June 1998, the Company and Crested paid cash bonuses totaling
$325,000 (net after taxes) to four officers for their extraordinary efforts
since 1992 in the litigation and arbitration proceedings with Nukem, Inc. As of
the date the bonuses were paid, these efforts had resulted in the Company and
Crested receiving approximately $8,000,000 from Nukem and CRIC, net of the legal
and related costs incurred by the Company. These bonuses were recommended by the
Compensation Committee of the Board of Directors in the following amounts:
$50,000 for John L. Larsen, $25,000 for Keith G. Larsen, and $125,000 each for
Daniel P. Svilar and R. Scott Lorimer.
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 49,470 shares to the ESOP for fiscal
1998, all of which were contributed under the money purchase pension plan. At
the time the shares were contributed, the market price was $6.57 per share, for
a total contribution with a market value of $324,655 (which has been funded by
the Company). Crested and the Company are each responsible for one-half of that
amount (i.e., $162,327.50) and Crested currently owes its one-half to the
Company. 10,659 of the shares were allocated to the ESOP accounts of the
executive officers.
Employee interests in the ESOP are earned pursuant to a seven year
vesting schedule; after three years of service, the employee is vested to 20% of
the ESOP account, and thereafter at 20% per year. Any portion which is not
vested is forfeited upon termination of employment, other than by retirement,
disability, or death.
The maximum loan outstanding during fiscal 1998 under a loan
arrangement between the Company and the ESOP was $1,014,300 at May 31, 1998 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 or fiscal 1998.
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) and ratified by the Board of Directors.
65
<PAGE>
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.
For information about options issued prior to fiscal 1998, please see
"Note J to the USE Consolidated Financial Statements" for fiscal year ended May
31, 1998. In fiscal 1997, options to purchase 106,100 shares (previously issued
to employees in 1992 and 1996) were exercised. None of the exercised options had
been held by officers or directors.
The Board of Directors approved (on September 25, 1998) the issuance
(to officers, employees, and non-employee directors and an advisory board
member) of options to purchase 837,500 shares of USE Common Stock; the options
have an exercise price of $2.00 per share (the closing NASDAQ/NMS stock market
price of USE stock on September 25, 1998 was $1.50), and the options will expire
in June 2008. The options issued to officers included 112,500 to John L. Larsen,
87,500 to Keith G. Larsen, 75,000 to Harold F. Herron, 75,000 to Daniel P.
Svilar, 75,000 to R. Scott Lorimer, and 50,000 to Max T. Evans. Outside
directors Nick Bebout, H. Russell Fraser, Don C. Anderson and David W. Brenman,
and Advisory Board Member Alan K. Simpson, each received an option for 12,500
shares, with the same exercise price. The options to employees and officers will
be converted to qualified stock options if the Incentive Stock Option Plan
amendments (to increase the shares authorized under the Plan up to 2,750,000
shares, and to reset the Plan's term to expire 2008) are approved at the
December 1998 Annual Meeting of Shareholders.
The following table shows unexercised options, how much thereof were
exercisable, and the dollar values for in-the-money options, at May 31, 1998.
66
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
Shares FY-End (#) FY-End($)
Acquired Value Exercisable/ Exercisable
Name on Exercise (#) Realized($) Unexercisable Unexercisable
- ---- --------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
John L. Larsen, -0- -0- 100,000 $444,000(1)
CEO exercisable exercisable and
unexercised
100,100 $354,354(2)
exercisable exercisable and
unexercised
Keith G. Larsen -0- -0- 10,000 $24,400(3)
President exercisable exercisable and
unexercised
Max T. Evans, -0- -0- 57,200 $202,488 (2)
Secretary exercisable exercisable and
unexercised
Harold F. Herron, -0- -0- 11,000 $38,940(2)
Vice President exercisable exercisable and
unexercised
Daniel P. Svilar -0- -0- 66,000 $233,640(2)
Assistant Secretary exercisable exercisable and
unexercised
R. Scott Lorimer -0- -0- 29,700 $105,138(2)
Treasurer exercisable exercisable and
unexercised
<FN>
(1) Equal to $6.44 closing bid on last trading day in FY 1998 less $2.00 per share option exercise price,
multiplied by all shares exercisable.
(2) Equal to $6.44 closing bid on last trading day in FY 1998, less $2.90 per share option exercise price,
multiplied by all shares exercisable.
(3) Equal to $6.44 closing bid on last trading day in FY 1998, less $4.00 per share option exercise price,
multiplied by all shares exercisable.
</FN>
</TABLE>
67
<PAGE>
1996 STOCK AWARD PROGRAM. The Company has an annual incentive
compensation arrangement for the issuance of up to 67,000 shares of Common Stock
each year (from 1997 through 2002) to executive officers of the Company, in
amounts determined each year based on earnings of the Company for the prior
fiscal.
Shares are issued annually, but each officer to whom shares are to be
issued must be employed by the Company as of the issue date of the grant year,
and the Company must have 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 year, 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
when shares are to be issued.
Each allocation of shares is 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. However, none of the vested shares shall
become available to or come under the control of the officer until termination
of employment by retirement, death or disability. Upon termination, the share
certificates will be released to the officer; until termination, the
certificates are held by the Treasurer of the Company. Voting rights are
exercised over the shares by the non-employee directors of the Company;
dividends or other distributions 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, based on criteria
including the Company's earnings per share for the prior fiscal year. Other
factors may be taken into consideration by the Compensation Committee. The total
shares issued are 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%. The Company was not profitable in
fiscal 1997, so no shares were issued for that year. For fiscal 1998, the
Compensation Committee awarded 67,000 shares to the officers. The award was
based on the revenues of the Company ($11,558,500) in fiscal 1998, and the
finding by the Compensation Committee that but for the $1,500,000 expense which
resulted from a writedown of the investment in the gold property in California,
the Company would have reported a $515,800 profit for fiscal 1998.
Under a previous equity incentive program, 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. The executive officers, as a
group received 97,650 shares of Common Stock through fiscal 1997.
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.
68
<PAGE>
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.
Non-employee directors are compensated for services with $400 per
month, payable each year by the issue of shares of USE Common Stock based on the
closing stock market price as of January 15. In 1998, 2,560 shares were issued
to non-employee directors for service in 1997. Separately, Mr. Fraser, a
director, and the Honorable Alan K. Simpson, Chairman of the Advisory Board,
each received 2,500 shares of USE Common Stock for services in fiscal 1998. The
2,500 shares issued to Mr. Fraser were in addition to shares issued under the
monthly service plan.
In fiscal 1990, 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 arrangements would benefit the Company. The Company
loaned $25,000 to David W. Brenman under this plan in 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 September 30, 1999 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.
COMMITTEES AND MEETING ATTENDANCE
During the fiscal year ended May 31, 1998 there were nine Board
meetings and three Executive Committee meetings. The Executive Committee acts in
place of the Board between meetings of the Board. 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.
An Audit Committee has also been established by the Board. The Audit
Committee did not meet in fiscal 1998, although members of the Audit Committee
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, 1998, the members of the Compensation Committee discussed
compensation matters on an individual basis.
A Management Cost Apportionment Committee was established by USE and
Crested in 1982, for the purpose of reviewing the apportionment of costs between
USE and Crested. John L. Larsen, Max T. Evans and Scott Lorimer are members of
this Committee.
The Board of Directors has a Nominating Committee, which did not meet
during the most recently completed year, but has met in fiscal 199 in connection
with the nominations of Mr. Herron and Mr. Brenman for reelection as directors
at the annual shareholders' meeting in December 1998. The Nominating Committee
will consider nominees recommended by security holders for consideration as
potential nominees.
69
<PAGE>
CERTAIN OTHER TRANSACTIONS
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.
On May 15, 1997, YSFC, a 12.7% owned affiliate of USE and a 12.7% owned
affiliate of Crested, entered into a line of credit arrangement with USECC. As
of May 31, 1998, YSFC owed USECC $440,000, which included $40,000 of accrued
interest. This note bears interest at 10% and is due on December 31, 1998. The
loan was made to provide working capital to YSFC in its start up phase. In lieu
of paying the note in cash on or before its maturity date, YSFC may convert this
debt, at its option, into YSFC shares of common stock at $1.00 per share of debt
and interest. However, if YSFC defaults in paying the note by December 31, 1998,
the note is convertible into a number of shares which will give USE and Crested
a combined 51% ownership interest in YSFC. The conversion price was negotiated
at $1.00 based on the high risk of the loan during YSFC's start up phase. 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 loan facility is
paid, with USE and Crested having voting control of more than 50% of the
outstanding shares of YSFC. The majority of the remaining outstanding YSFC
shares are owned by family members of John L. Larsen, Chairman of USE.
For information about the YSFC Exchange Rights Agreement, see
"Business-Uranium-Yellowstone Fuels Corp." above.
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 and its interest is favorable to the
Company.
OTHER INFORMATION. The Company has adopted a stock repurchase plan
under which it may purchase up to 500,000 shares of its Common Stock at market
prices from time to time. The shares purchased would be retired and canceled.
The Board of Directors believes that the repurchase plan is in the best interest
of all shareholders while the stock is trading at low prices relative to the
book value per share.
70
<PAGE>
In May 1998, the Company issued a warrant to purchase 200,000 shares of
USE Common Stock to Robin J. Kindle, an employee of USE and a son-in-law of John
L. Larsen. The exercise price is $7.50 per share, and the warrant expires in May
2001.
Three of John L. Larsen's sons and three sons-in-law are employed by
the Company or subsidiaries (as President, President of YSFC, Vice President,
chief pilot, landman, and manager of the Ticaboo operations). Mr. Larsen's
son-in-law Harold F. Herron is an officer and director of the Company, and
Chairman of Brunton. Collectively, the six individuals and John L. Larsen
received $1,418,605 in total (gross) cash compensation ($1,301,605 net after
taxes) for services in fiscal 1998, including the $732,000 bonus paid to John L.
Larsen in fiscal 1998. See "Executive Compensation Plans and Employment
Agreements."
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 $857,600
in fiscal 1998 and $397,700 in fiscal 1997. The Company provides all employee
services required by Crested, which 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 most 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 $6,547,100 from Crested at May 31, 1998 ($6,023,400 at May 31,
1997). Crested presently does not have the cash funds to pay the note. USE and
Crested have agreed that USE extending its funds and taking a note therefor from
Crested is preferable to Crested's share of the different activities being
reduced.
LOANS TO DIRECTORS. As of May 31, 1998 two of USE's directors owed the
Company 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); and
David W. Brenman $25,000 (4,000 shares). Max T. Evans, a director of Crested,
owes USECC $22,700 (secured by 7,500 shares of the Company's Common Stock). For
information on Mr. Brenman's loan see "Directors' Fees and Other Compensation"
above. The outstanding amounts on the remaining loans represent various loans
made to the individuals over a period of several years. Mr. Herron's and Evans'
loans mature December 31, 1998 and bear interest at 10% per year. For
information on an additional loan to Mr. Herron, see below. These loans all bear
interest at rates which are favorable to the Company, were made on a secured
basis, and were approved by the disinterested directors in each instance. In
addition, 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. In fiscal 1998, John L. Larsen repaid $410,837 of the
family debt, so the family debt at May 31, 1998 was $338,297. See "Executive
Compensation Plans and Employment Agreements." 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. In fiscal 1999, the
Company loaned Mr. Herron $125,000 with interest at 9%; the debt is due on or
before December 31, 1999 and is secured with personal property of Mr. Herron.
71
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of October 23, 1998, 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, 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 2,065,362(2) 25.6% 5,579,182(10) 54.1%
Keith G. Larsen 241,063(3) 3.0% 5,300,297(11) 51.4%
Harold F. Herron 849,394(2) 10.8% 5,424,999(12) 52.6%
Don C. Anderson 302,953(4) 3.9% 5,300,297(11) 51.4%
Nick Bebout 309,904(5) 4.0% 5,300,297(11) 51.4%
David W. Brenman 298,798(6) 3.8% 5,300,297(11) 51.4%
H. Russell Fraser 301,298(6) 3.9% 5,300,297(11) 51.4%
Max T. Evans 1,254,952(2) 16.0% 264,236(13) 2.6%
Daniel P. Svilar 770,109(2) 9.7% 281,850(14) 2.6%
R. Scott Lorimer 152,033(8) 1.9% 15,000(15) *
Kennedy Capital
Management, Inc. 528,748 6.9%
All officers and
directors as a
group (ten persons) 3,547,342(9) 38.5% 5,946,085(16) 57.7%
</TABLE>
72
<PAGE>
* Less than one percent.
(1) Percent of class is computed by dividing the number of shares
beneficially owned plus any options held by the reporting person or group, by
the number of shares outstanding plus the shares underlying the options held by
that person or group.
(2) See footnotes for this person to the table presented under the
heading "Principal Holders of Voting Securities".
(3) Consists of 1,774 directly held shares, 8,000 shares held the his
minor children of Keith G. Larsen under the Wyoming Uniform Transfers to Minors
Act (the "Minor's shares"), 11,939 shares held in an ESOP account established
for his benefit, 117,500 shares underlying options and 101,850 shares subject to
forfeiture. Mr. K. Larsen exercises sole voting powers over his directly held
shares, the ESOP shares, 8,820 shares subject to forfeiture, the Minor's shares
and the shares underlying his options. Sole dispositive powers are exercised
over the directly held shares, Minor's shares and the shares underlying his
options. He shares dispositive powers over the 101,850 held by employees and a
non-employee director of the Company which are subject to forfeiture
("Forfeitable Shares"), with the other directors of the Company.
(4) Consists of 6,740 directly held shares, 3,055 shares held in an IRA
established for Mr. Anderson's benefit, 213,658 shares subject to forfeiture and
12,500 shares underlying options. Mr. Anderson exercises sole voting and
dispositive power over the directly held shares, IRA shares and the shares
underlying his options. 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 Forfeitable Shares with the other directors of the
Company. As a non-employee director, Mr. Anderson exercises shared voting and
dispositive rights over 178,808 shares held by executive officers which are
subject to forfeiture ("Officers' Forfeitable Shares"), with the other
non-employee directors.
(5) Consists of 16,696 shares held directly, 50 shares held in joint
tenancy with his wife, 12,500 shares underlying options and 213,658 shares
subject to forfeiture. Mr. Bebout exercises sole voting and dispositive powers
over the directly held shares, the joint tenancy shares and the shares
underlying his options. 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
178,808 Officers' Forfeitable Shares, with the other non-employee directors.
(6) Consists of 5,640 shares held directly, 12,500 shares underlying
options and 213,658 shares subject to forfeiture. Mr. Brenman exercises sole
voting and dispositive powers over the directly held shares and the shares
underlying his options. 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 178,808 Officers' Forfeitable Shares, with the other
non-employee directors.
(7) Consists of 4,140 directly held shares, 4,000 shares held in an IRA
for Mr. Fraser's benefit, 12,500 shares underlying options and 213,658 shares
subject to forfeiture. Mr. Fraser exercises sole voting and dispositive rights
over the directly held shares, the IRA shares and the shares underlying his
options. 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
178,808 Officers' Forfeitable Shares, with the other non-employee directors.
(8) Consists of 385 directly held shares and 104,700 shares underlying
options over which Mr. Lorimer exercises sole voting and dispositive rights, and
19,715 shares held in the ESOP account established for his benefit over which he
exercises sole voting rights. The shares listed under "Total Beneficial
73
<PAGE>
Ownership" also include 27,233 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.
(9) Consists of 1,463,423 shares over which the group members exercise
sole voting rights, including 919,000 shares underlying options and 47,556
shares allocated to ESOP accounts established for the benefit of group members.
The listed shares include 1,362,587 shares, including 919,000 shares underlying
options, over which group members exercise sole dispositive rights. Shared
voting and dispositive rights are exercised with respect to 1,160,146 and
1,532,481 shares (including 280,658 shares subject to forfeiture), respectively.
(10) Consists of 5,300,297 Crested shares held by the Company, 100,000
shares held by SGMC, 60,000 shares held by Plateau and 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. J. Larsen exercises shared dispositive
powers with the remaining Crested directors.
(11) 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.
(12) Consists of 6,932 directly held shares and 3,885 shares held by
NWG over which Mr. Herron exercises sole voting and investment powers, and the
Crested shares held by the Company, Ruby and 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. Mr. Herron is the sole
director of NWG.
(13) Consists of 139,236 directly held shares over which Mr. Evans
exercises sole voting and dispositive rights, 60,000 shares 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.
(14) Consists of 216,850 directly held shares, 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.
(15) Consists of 15,000 shares which are subject to forfeiture. Mr.
Lorimer exercises sole voting power over such shares, while the Crested
directors share the dispositive powers over the shares.
(16) Consists of 381,903 shares over which the group members exercise
sole voting rights, including 15,000 shares subject to forfeiture. The listed
shares include 366,903 shares over which group members exercise sole dispositive
rights. Shared voting and dispositive rights are exercised with respect to
5,514,182 and 5,579,182 shares (including 65,000 shares subject to forfeiture),
respectively.
Each director beneficially holds the 2,400,000, 2,040,000 and
255,000,000 shares of Ruby, NWG and Four Nines Gold, Inc. ("FNG") common stock,
respectively, held by the Company. They exercise shared voting and dispositive
powers over those shares as Company directors with the other Company directors.
Those shares represent 26.7%, 7.6%, and 50.9% of the outstanding shares of Ruby,
NWG, and FNG, respectively. John L. Larsen beneficially holds 272,500,000 shares
of FNG common stock (54.4% of the outstanding shares), which includes
255,000,000 shares held by the Company, 5,000,000 held by USECC Joint Venture
and 5,000,000 shares held by Crested, over which Mr. Larsen shares voting and
dispositive powers with the remaining directors of the Company and Crested.
Harold F. Herron beneficially holds 2,400,500, 2,597,500, and 265,000,000 shares
of the common stock of Ruby, NWG, and FNG, respectively, representing 26.7%,
9.7%, and 52.9%, respectively, of those classes of stock. Daniel P. Svilar
beneficially owns 14,000,000 shares of the common stock of FNG (4,000,000 shares
directly in joint tenancy with other
74
<PAGE>
family members), representing 2.8% of that class. None of the other directors or
officers directly hold any other shares of stock of Ruby, NWG or FNG. All
executive officers and directors of the Company as a group (8 persons) hold
2,400,500, 2,597,500, and 284,500,000 shares of the stock of Ruby, NWG, and FNG,
representing 26.7%, 9.7%, 60.0% and 56.2% of the outstanding shares of those
companies, respectively.
The Company has reviewed Forms 3, 4 and 5 reports concerning ownership
of Common Stock in the Company, which have been filed with the SEC under Section
16(a) of the Exchange Act, and received written representations from the filing
persons. Based solely upon review of the reports and representations, Messrs. J.
Larsen, Herron and Lorimer each had one late filing. The Company believes no
other director, executive officer, beneficial owner of more than ten percent of
the Common Stock, or other person subject to obligations, failed to file such
reports on a timely basis during fiscal 1998.
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.
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.
75
<PAGE>
WARRANTS. ADDITIONAL WARRANT TO SHAMROCK PARTNERS, LTD. On January 20,
1998 the Company entered into a nonexclusive one year Investment Banking
Consulting Agreement with Shamrock Partners, Ltd. ("SPL"), 111 Veterans Square,
Media, Pennsylvania, under which SPL is to provide financial consulting services
and advice concerning financing, merger and acquisition proposals, and to assist
the Company in arranging meetings between representatives of the Company and
financial institutions in the investment community (including broker-dealer
firms, security analysts, and portfolio managers). For SPL's services, as of
December 5, 1997 the Company authorized the issuance to SPL a Warrant to
Purchase 200,000 shares of Common Stock of the Company at a price of $6.00 cash
per share; the Warrant is exercisable through May 1, 1999. The Warrant may be
subdivided for substitute Warrants. The Holder (or substitute Holders) of the
Warrants are not entitled to any rights of a shareholder in the Company by
virtue of holding the Warrants.
The Warrant carries certain rights of registration with the Commission
under the 1933 Act as more specifically described in the Warrant, but if the
Company so registers the Warrants solely to accommodate the registration for
public sale of the underlying 200,000 Warrant Shares, the Holder or Holders of
the Warrants may not sell or otherwise transfer the Warrants for a period of 24
months after the effective date of such Registration Statement, which period
prevents sale or transfer of the Warrants prior to their Expiration Date. The
Warrants are governed by and construed in accordance with the laws of Wyoming.
The above-described Warrant is separate and is in addition to the
original Warrant (also for the purchase of 200,000 shares of Common Stock) which
was issued to SPL in January 1996; the original Warrant has been exercised, and
this Prospectus relates to the public resale of the 30,000 Warrant Shares so
purchased. As of the date of this Prospectus, SPL has not exercised the new
Warrant issued to SPL, and the Company has not filed a registration statement
for SPL in connection with the new Warrant. This Prospectus does not include
such new Warrant or any shares of Common Stock issuable on exercise of such
Warrant.
WARRANT TO SUNRISE FINANCIAL GROUP, INC. As of December 1, 1997, the
Company retained Sunrise Financial Group, Inc. ("Sunrise") to serve as a
financial consultant and advisor on a nonexclusive basis for a period of 12
months ending on December 1, 1998. Sunrise will provide such services and advice
pertaining to the Company's business and affairs as the Company may from time to
time 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.
76
<PAGE>
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.
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 this 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.
77
<PAGE>
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.
<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) 140 933 793
Roger T. Berg(1) 331 1,444 1,113
Allen R. Blisset 30 30 -0-
Larry W. Bridger(1) 70 847 777
Connie Brinkerhoff(1) 49 360 311
Ricky L. Brinkerhoff(1) 21 1,061 1,040
Frederick R. Craft(1) 4 1,177 1,173
Glenn Dooley(2) 523 2,645 2,122
Donald A. Fresen(1) 31 425 394
Michele Herrick(1) 14 360 346
John L. Larsen(3) 1,127 470,825 469,698
Robert Scott Lorimer(4) 383 47,353 46,970
Debbie R. Metzger(1) 27 27 -0-
Michael G. Morlang(1) 86 86 -0-
Steve P. Morrill(1) 56 1,803 1,747
Garth F. Noyes(1) 109 500 391
Christopher L. Shepardson(1) 4 4 -0-
Joshua Shepardson(1) 4 4 -0-
Daniel P. Svilar(5) 483 116,750 116,267
John M. Tuner(1) 83 886 803
Allen R. Williams(1) 24 24 -0-
Debbie L. Williams(1) 27 27 -0-
Daryl P. Winters(1) 313 2,592 2,279
<FN>
* 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.
78
<PAGE>
(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, Vice President Finance and Chief Financial
Officer of USE and Crested Corp.; Treasurer and Chief Financial Officer
of Sutter Gold Mining Company, Plateau Resources Limited, Ruby Mining
Company and Northwest Gold, Inc., all affiliates of USE.
(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.
</FN>
</TABLE>
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 report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
The balance sheet of the Green Mountain Mining Venture as of December
31, 1997 and 1996, and the related statements of operations, changes in venture
partners' capital and cash flows for the years ended December 31, 1997, 1996 and
1995 and the period from inception (June 1, 1990) to December 31, 1997 included
in this Prospectus have been included herein in reliance of
PricewaterhouseCoopers LLP, 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.
79
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To U.S. Energy Corp.:
We have audited the accompanying consolidated balance sheets of U.S. ENERGY
CORP. (a Wyoming corporation) AND SUBSIDIARIES as of May 31, 1998 and 1997, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended May 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of U.S. Energy Corp. and
subsidiaries as of May 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
September 11, 1998.
80
<PAGE>
<TABLE>
<CAPTION>
Page 1 of 2
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
May 31,
----------------------------
1998 1997
---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 5,650,500 $ 1,416,900
Accounts and notes receivable:
Trade, net of allowance for doubtful
accounts of $30,900 195,800 368,200
Affiliates 1,878,400 1,191,000
Current portion of long-term
notes receivable 335,800 337,200
Assets held for resale and other 1,100,800 991,600
SMP settlement receivable, net 5,026,000 --
Inventory 113,700 96,000
------------ ------------
Total current assets 14,301,000 4,400,900
INVESTMENTS AND ADVANCES:
Affiliates 871,800 4,999,600
Restricted investments 8,889,100 8,506,300
------------ ------------
9,760,900 13,505,900
INVESTMENT IN SGMC CONTINGENT
STOCK PURCHASE WARRANT -- 4,594,000
PROPERTIES AND EQUIPMENT:
Mineral properties and mine development costs 13,346,600 519,400
Buildings and improvements 6,424,000 5,986,800
Aircraft and other equipment 8,761,400 5,627,900
Developed oil and gas properties, full cost method 1,773,600 1,769,900
Land and mobile home park 951,000 939,000
------------ ------------
31,256,600 14,843,000
Less accumulated depreciation, depletion
and amortization (11,806,300) (8,802,100)
------------ ------------
19,450,300 6,040,900
OTHER ASSETS:
Accounts and notes receivable:
Real estate sales, net of valuation
allowance of $926,300 398,000 394,000
Employees 352,000 745,300
Other 1,800 338,600
Deposits and other 755,100 367,500
------------ ------------
1,506,900 1,845,400
------------ ------------
Total assets $ 45,019,100 $ 30,387,100
============ ============
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
Page 2 of 2
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
May 31,
----------------------------
1998 1997
---- ----
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable and accrued expenses $ 1,836,400 $ 1,312,600
Deferred GMMV purchase option 4,000,000 --
Current portion of long-term debt 225,700 81,300
------------ ------------
Total current liabilities 6,062,100 1,393,900
LONG-TERM DEBT 278,200 183,100
RECLAMATION LIABILITIES 8,778,800 8,751,800
OTHER ACCRUED LIABILITIES 4,266,800 5,259,000
DEFERRED TAX LIABILITY 1,144,800 183,300
COMMITMENTS AND CONTINGENCIES (Note K)
MINORITY INTERESTS IN SUBSIDIARIES 4,561,300 --
FORFEITABLE COMMON STOCK,
$.01 par value; 312,378 and
232,352 shares issued, respectively,
forfeitable until earned 2,473,600 1,892,400
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 100,000 shares
authorized, none issued or outstanding -- --
Common stock, $.01 par value;
20,000,000 shares authorized; 7,523,492 and
6,646,475 shares issued, respectively 75,200 66,500
Additional paid-in capital 28,526,200 22,543,000
Accumulated deficit (7,760,100) (6,776,900)
Treasury stock, at cost, 865,943
and 690,943 shares, respectively (2,460,800) (2,182,000)
Unallocated ESOP contribution (927,000) (927,000)
------------ ------------
17,453,500 12,723,600
------------ ------------
Total liabilities and shareholders' equity $ 45,019,100 $ 30,387,100
============ ============
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
Page 1 of 2
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended May 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Mineral revenues $ 1,069,700 $ 207,300 $ 3,116,700
Construction contract revenues -- 1,038,600 3,794,500
Commercial operations 3,523,500 2,219,400 1,439,100
SMP settlements, net 4,590,000 1,003,800 --
Oil sales 170,100 164,600 210,100
Management fees from affiliates and other 1,369,300 423,800 100,200
Interest 836,100 693,300 619,400
(Loss) gain on asset sales (200) 39,400 352,200
------------ ------------ ------------
11,558,500 5,790,200 9,632,200
------------ ------------ ------------
COSTS AND EXPENSES:
Mineral operations 1,664,800 843,100 3,572,300
Construction costs 36,400 752,600 3,077,800
Commercial operations 3,055,100 3,059,600 2,374,800
General and administrative 4,793,200 2,763,300 2,524,700
Abandonment of mineral interests -- 1,225,800 328,700
Impairment of mineral interests 1,500,000 -- --
Oil production 68,000 96,800 73,000
Interest 76,000 140,800 205,000
Provision for doubtful accounts -- 614,200 --
------------ ------------ ------------
11,193,500 9,496,200 12,156,300
------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND EQUITY IN LOSS OF
AFFILIATES AND INCOME TAXES 365,000 (3,706,000) (2,524,100)
MINORITY INTEREST IN (INCOME) LOSS
OF CONSOLIDATED SUBSIDIARIES (772,500) 672,300 608,700
EQUITY IN LOSS OF AFFILIATES (575,700) (690,800) (418,500)
------------ ------------ ------------
(Continued)
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
Page 2 of 2
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
Year Ended May 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
LOSS BEFORE INCOME TAXES $ (983,200) $ (3,724,500) $ (2,333,900)
INCOME TAXES (Note H) -- -- --
------------ ------------ ------------
LOSS BEFORE
DISCONTINUED OPERATIONS (983,200) (3,724,500) (2,333,900)
DISCONTINUED OPERATIONS:
Income from discontinued operations,
net of income taxes of $0 -- -- 308,900
Gain on sale of subsidiary, net
of income taxes of $50,000 -- -- 2,295,700
------------ ------------ ------------
NET (LOSS) INCOME $ (983,200) $ (3,724,500) $ 270,700
============ ============ ============
INCOME (LOSS) PER SHARE AMOUNTS:
Loss before discontinued operations $ (.15) $ (.58) $ (.39)
Income from discontinued operations -- -- .05
Gain on disposal of subsidiary
operating in discontinued segment -- -- .38
------------ ------------ ------------
NET INCOME (LOSS) PER SHARE,
BASIC AND DILUTED $ (.15) $ (.58) $ .04
============ ============ ============
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 6,657,549 6,466,855 6,028,255
============ ============ ============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
Page 1 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional Unallocated Total
Common Stock Paid-In Accumulated Treasury Stock ESOP Shareholders'
Shares Amount Capital Deficit Shares Amount Contribution Equity
------ ------ ------- ------- ------ ------ ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance May 31, 1995 5,262,794 $52,500 $18,629,000 $(3,256,400) 769,943 $(2,242,400) $(1,014,300) $12,168,400
Funding of ESOP -- -- -- -- -- -- 87,300 87,300
Issuance of common stock
through private placement 812,432 8,100 2,834,100 -- -- -- -- 2,842,200
Issuance of additional common
shares in connection
with prior year
private placement 133,336 1,300 65,400 (66,700) -- -- -- --
Cancellation of common stock
issued for services rendered (5,000) -- (23,100) -- -- -- -- (23,100)
Issuance of common stock to
employees as a bonus 32,901 300 180,600 -- -- -- -- 180,900
Issuance of common stock for
exercised warrants 81,243 800 389,100 -- -- -- -- 389,900
Fair value of warrants issued
above exercise price -- -- 41,700 -- -- -- -- 41,700
Issuance of common stock for
exercised option 6,600 100 41,400 -- -- -- -- 41,500
Dilution of investment
in subsidiary -- -- (1,382,500) -- -- -- -- (1,382,500)
Net income -- -- -- 270,700 -- -- -- 270,700
--------- ------- ----------- ----------- ------- ----------- ----------- -----------
Balance May 31, 1996 6,324,306 $63,100 $20,775,700 $(3,052,400) 769,943 $(2,242,400) $ (927,000) $14,617,000
--------- ------- ----------- ----------- ------- ----------- ----------- -----------
<FN>
The accompanying notes to consolidated financial statements are an integral part of these statements.
</FN>
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
Page 2 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(CONTINUED)
Additional Unallocated Total
Common Stock Paid-In Accumulated Treasury Stock ESOP Shareholders'
Shares Amount Capital Deficit Shares Amount Contribution Equity
------ ------ ------- ------- ------ ------ ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance May 31, 1996 6,324,306 $63,100 $20,775,700 $(3,052,400) 769,943 $(2,242,400) $(927,000) $14,617,000
Funding of ESOP 24,069 200 213,400 -- -- -- -- 213,600
Issuance of common stock for
exercised warrants 180,000 1,800 898,200 -- -- -- -- 900,000
Fair value of warrants issued
above exercise price -- -- 148,300 -- -- -- -- 148,300
Issuance of common stock
for services rendered 12,000 200 138,300 -- -- -- -- 138,500
Issuance of common stock for
exercised option 106,100 1,200 369,100 -- -- -- -- 370,300
Purchase of treasury stock -- -- -- -- 21,000 (235,600) -- (235,600)
Shares of USE stock
held by subsidiary
no longer consolidated -- -- -- -- (100,000) 296,000 -- 296,000
Net loss -- -- -- (3,724,500) -- -- -- (3,724,500)
--------- ------- ----------- ----------- -------- ----------- --------- -----------
Balance May 31, 1997 6,646,475 $66,500 $22,543,000 $(6,776,900) 690,943 $(2,182,000) $(927,000) $12,723,600
========= ======= =========== =========== ======== =========== ========= ===========
<FN>
The accompanying notes to consolidated financial statements are an integral part of these statements.
</FN>
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
Page 3 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(CONTINUED)
Additional Unallocated Total
Common Stock Paid-In Accumulated Treasury Stock ESOP Shareholders'
Shares Amount Capital Deficit Shares Amount Contribution Equity
------ ------ ------- ------- ------ ------ ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance May 31, 1997 6,646,475 $66,500 $22,543,000 $(6,776,900) 690,943 $(2,182,000) $(927,000) $12,723,600
Funding of ESOP 49,470 500 324,100 -- -- -- -- 324,600
Issuance of common stock
for exercised warrant 20,000 200 99,800 -- -- -- -- 100,000
Issuance of common stock
for services rendered 11,647 100 82,600 -- -- -- -- 82,700
Issuance of common stock
for exercised options 62,000 600 247,400 -- -- -- -- 248,000
Fair value of warrants issued
for services rendered -- -- 450,000 -- -- -- -- 450,000
Issuance of common
stock to acquire SGMC
special warrants, net of
offering costs 488,900 4,900 3,329,200 -- -- -- -- 3,334,100
Issuance of common stock 170,000 1,700 1,188,300 -- -- -- -- 1,190,000
Reconsolidation of SGMC -- -- -- -- 75,000 (16,300) -- (16,300)
Issuance of stock for SGMC
exercised option 75,000 700 261,800 -- 100,000 (262,500) -- --
Net loss -- -- -- (983,200) -- -- -- (983,200)
--------- ------- ----------- ----------- ------- ----------- --------- -----------
Balance May 31, 1998 7,523,492 $75,200 $28,526,200 $(7,760,100) 865,943 $(2,460,800) $(927,000) $17,453,500
========= ======= =========== =========== ======= =========== ========= ===========
<FN>
Total Shareholders' Equity at May 31, 1998 does not include 312,378 shares
currently issued but forfeitable if certain conditions are not met by the
recipients. However, Outstanding Shares at May 31, 1998 include the forfeitable
shares. Also, "Basic and Diluted Weighted Average Shares Outstanding" also
includes the 865,943 shares of U.S. Energy common stock held by majority-owned
subsidiaries, which, in consolidation, are treated as treasury shares.
The accompanying notes to consolidated financial statements are an integral part of these statements.
</FN>
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
Page 1 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended May 31,
------------------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ (983,200) $(3,724,500) $ 270,700
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Minority interest in income (loss) of
consolidated subsidiaries 772,500 (672,300) (608,700)
Income from discontinued operations -- -- (308,900)
Depreciation, depletion and amortization 657,600 658,900 788,500
Impairment of assets held for sale 100,000 -- --
Abandoned mineral claims -- 1,225,800 328,700
Impairment of mineral interests 1,500,000 -- --
Equity in loss of affiliates 575,700 690,800 418,500
SMP settlement (received after year end) (4,590,000) (1,003,800) --
Loss (gain) on sale of assets 200 (39,400) (352,200)
Provision for doubtful accounts -- 614,200 --
Gain on sale of subsidiary -- -- (2,295,700)
Proceeds from sale of subsidiary -- -- 607,900
Common stock issued to fund ESOP 324,600 213,600 87,300
Non-cash compensation 82,700 -- 222,600
Common stock and warrants
issued for services 196,000 286,800 (23,100)
Other 287,800 177,600 (455,600)
Net changes in:
Accounts receivable 172,400 (706,500) 88,600
Other assets (226,900) 318,200 (403,800)
Accounts payable and accrued expenses (176,200) (331,700) (774,700)
Reclamation and other liabilities (938,200) (355,300) (377,400)
----------- ----------- -----------
NET CASH USED IN
OPERATING ACTIVITIES (2,245,000) (2,647,600) (2,787,300)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of mining properties (1,125,000) (719,300) (763,000)
Development of gas properties -- (29,100) (42,100)
Proceeds from sale of subsidiary -- -- 3,300,000
Proceeds from sale of property and equipment 4,000 273,500 1,212,900
Proceeds from sale of investments -- -- --
Purchases of property and equipment (1,947,200) (208,600) (1,387,300)
Changes in notes receivable, net 726,800 (121,400) (1,102,800)
Distribution from affiliate -- 4,367,000 --
Investments in affiliates (102,300) (1,413,700) (676,500)
Deferred GMMV purchase option 4,000,000 -- --
----------- ----------- -----------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 1,556,300 2,148,400 541,200
----------- ----------- -----------
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
Page 2 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Year Ended May 31,
------------------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Proceeds from issuance of common stock $ 1,800,500 $ 1,270,300 $ 3,273,600
Proceeds from subsidiary stock sale -- 1,106,700 --
Proceeds from long-term debt 307,700 554,400 4,212,800
Payments on lines of credit -- (499,000) (641,000)
Purchase of treasury stock -- (235,600) --
Repayments of long-term debt (309,900) (789,200) (3,967,300)
Increase (decrease) in cash related to SGMC 3,124,000 (484,100) --
----------- ----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 4,922,300 923,500 2,878,100
----------- ----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 4,233,600 424,300 632,000
CASH AND CASH EQUIVALENTS, Beginning of year 1,416,900 992,600 360,600
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, End of year $ 5,650,500 $ 1,416,900 $ 992,600
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 76,000 $ 118,900 $ 205,000
=========== =========== ===========
Income taxes paid $ -- $ -- $ --
=========== =========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
Page 3 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Year Ended May 31,
------------------------------------------
1998 1997 1996
---- ---- ----
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
<S> <C> <C> <C>
Notes received for sale of assets $ -- $ -- $ 1,000,000
=========== =========== ===========
Exchange of common stock
investment in affiliate for
Contingent Stock
Purchase Warrant $ -- $ 4,594,000 $ --
=========== =========== ===========
Consolidation/Deconsolidation of subsidiary
in 1998 and 1997, respectively:
Other assets $ 49,200 $ 77,600 $ --
Investment in affiliates 358,375 355,000 --
Investment in Contingent Stock Purchase Warrant (4,594,000) -- --
Restricted investment -- 27,000 --
Property, plant and equipment 12,499,000 11,560,600 --
Notes payable (241,700) 185,000 --
Accounts payable and accrued expenses (700,000) 433,900 --
Reclamation (27,000) -- --
Minority interest (3,788,700) 2,069,900 --
Issuance of common stock to acquire
SGMC special warrants, net of
of offering costs
Common stock 4,900 -- --
Additional paid-in capital 3,329,200 -- --
Warrants issued for professional services 254,000 -- --
Forfeitable stock issued for services 581,200 405,800 116,500
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
90
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
A. BUSINESS ORGANIZATION AND OPERATIONS:
U.S. Energy Corp. (the "Company" or "USE") was incorporated in the
State of Wyoming on January 26, 1966. The Company's primary business is the
acquisition, exploration, holding, sale and/or development of mineral properties
and mining and marketing of minerals. Principal mineral interests are in
uranium, gold, and molybdenum. The Company also holds various real and personal
properties used in commercial activities and operates an airport fixed base
facility in Riverton, Wyoming. Most of these activities are conducted through
the joint venture discussed below and in Note D. The Company, through its
previously wholly-owned subsidiary, The Brunton Company ("Brunton"), which was
sold in February 1996, engaged in the manufacturing and marketing of compasses
and the distribution of outdoor recreational products. In addition, through its
majority owned subsidiary, Four Nines Gold, Inc. ("FNG"), the Company
historically engaged in projects such as the construction of municipal sewage
systems, irrigation and other civil engineering projects. At May 31, 1998, FNG
was primarily engaged in activities for the Company at its Green Mountain
uranium property.
The Company and its 52%-owned subsidiary, Crested Corp. ("Crested") are
engaged in a venture to develop certain uranium properties with Kennecott
Uranium Company ("Kennecott") known as the Green Mountain Mining Venture
("GMMV"), formed in 1990, and is also involved in a partnership with Nukem, Inc.
("Nukem") through its wholly-owned subsidiary, Cycle Resource Investment
Corporation ("CRIC"), known as Sheep Mountain Partners ("SMP"). As discussed in
Note K, SMP is currently involved in significant legal proceedings between its
partners. During fiscal 1995, USE and Crested formed a new Wyoming corporation,
Sutter Gold Mining Company ("SGMC"), which was the successor of USECC Gold
Limited Liability Company ("USECC Gold") and Sutter Gold Venture ("SGV"). These
companies were formed to develop and mine gold reserves in California. The
Company also owns 100% of the outstanding stock of Plateau Resources Limited
("Plateau"), which owns a nonoperating uranium mill and support facilities in
southeastern Utah. Currently, the mill is nonoperating but has been granted a
license to operate, pending certain conditions. See further discussion of these
entities in Note F. As used, hereafter, "Company" refers to USE and its
consolidated entities unless otherwise specified.
LIQUIDITY AND OPERATING LOSSES
As a result of the SMP litigation/arbitration (see Note K) and the
significant amount of standby/maintenance, permitting and development costs
being incurred on the Company's mineral properties (none of which are in
production), the Company has incurred significant losses from continuing
operations during each of the last three years. During the past few years, the
Company has relied primarily on the sale of its common stock through private
placements and the exercise of common stock warrants/options, borrowing on its
lines of credit, term loans and the sale of its subsidiary, Brunton, to fund its
losses and cash needs. During fiscal 1998, the Company received $858,700 for a
delivery made on an SMP contract. Subsequent to year end, the Company and
Crested received $5,026,000 as partial payment of the monetary resolution of the
American Arbitration Association's Order and Award for the portion of the SMP
arbitration/litigation ("SMP litigation") that was finalized in fiscal 1998. For
accounting purposes, the Company and Crested first applied the proceeds against
their recorded investment balance in SMP of $436,000, with the remaining balance
of $4,590,000, after cost recovery, being recognized as income. These
transactions have resulted in the Company having net working capital of
$8,238,900 as of May 31, 1998.
91
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
The Company anticipates obtaining additional funds from those issues
presently on appeal before the 10th Circuit Court of Appeals in connection with
the SMP litigation, as further discussed in Note K. If the anticipated award is
delayed, reduced or overturned, additional sources of funding will be required
to place Plateau into production as well as to purchase the Kennecott interest
in GMMV (see Note F). Equity and/or debt financing will be the primary source of
these funds. There is no assurance such financing sources will be available to
the Company. If the additional financings do not occur as planned, the Company
believes it can delay its development activities so that available cash,
operating cash flow and bank borrowings will be adequate to fund its working
capital requirements and commitments for fiscal 1999.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of USE and affiliates include the
accounts of the Company, the accounts of its majority-owned subsidiaries Plateau
(100%), Energx, Ltd ("Energx") (90%), FNG (50.9%), SGMC (59%), Crested (52%) and
the USECC Joint Venture ("USECC"), a proportionately consolidated joint venture
which is equally owned by the Company and Crested through which the bulk of
their operations are conducted. USECC owns the buildings and other equipment
used by the Company and holds an interest in SMP (see Notes E and F). The
accounts of Brunton have been reflected as discontinued operations in the 1996
financial statements as Brunton was sold in February 1996.
With the exception of SMP, investments in other joint ventures and 20%
to 50% owned companies are accounted for by the equity method (see Note E). SGMC
was an equity investee through March 1998 when the Company purchased special
warrant units from certain investors and increased its ownership to 59%,
requiring consolidation of April and May 1998 operations (see Note F).
Investments of less than 20% in companies are accounted for by the cost method.
All material intercompany profits, transactions and balances have been
eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The carrying amount
of cash equivalents approximates fair value because of the short maturity of
these instruments.
INVESTMENTS
Based on the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, the Company accounts for its investment in certain securities
as held-to-maturity. Held-to-maturity securities are measured at amortized cost
and are carried at the lower of aggregate cost or fair market value.
92
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
INVENTORIES
Inventories consist primarily of aviation fuel, associated aircraft
parts, mining supplies, stockpiled uranium and gold ore. Retail inventories are
stated using the average cost method. Other inventory is stated at the lower of
cost or market.
PROPERTIES AND EQUIPMENT
Land, buildings, improvements, aircraft and other equipment are carried
at cost.
Depreciation of buildings, improvements, aircraft and other equipment
is provided principally by the straight-line method over estimated useful lives
ranging from three to 45 years.
The Company capitalizes all costs incidental to the acquisition and
development of mineral properties as incurred. Mineral exploration costs are
expensed as incurred. The costs of mine development are deferred until
production begins as these costs will be recovered through future mining
operations. Once commercial production begins, mine development costs incurred
to maintain production will be amortized using a units-of- production method
over the estimated useful life of the ore-body. Costs are charged to operations
if the Company determines that an ore body is no longer economical. Costs and
expenses related to general corporate overhead are expensed as incurred.
The Company and Crested have acquired substantial mining property
assets and associated facilities at minimal cash cost, primarily through the
assumption of reclamation and environmental liabilities. Certain of these assets
are owned by various ventures in which the Company is either a partner or
venturer. The market value of these assets are not reflected in the accompanying
consolidated balance sheets (see Note K).
LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment when events
or changes in circumstances indicate that the related carrying amount may not be
recoverable based upon an assessment of estimated future cash flows or fair
market value, whichever is more objectively ascertainable. If the sum of
estimated future cash flows on an undiscounted basis or the fair value is less
than the carrying amount of the related asset, an asset impairment is considered
to exist. The related impairment loss is measured by comparing estimated future
cash flows on a discounted basis or the fair value of the asset less any selling
costs to the carrying amount of the asset. Changes in significant assumptions
underlying future cash flow estimates or fair values of assets may have a
material effect on the Company's financial position and results of operations. A
low commodity price market, if sustained for an extended period of time or an
inability to obtain financing necessary to develop mineral interests may result
in asset impairment. During 1998, the Company recorded an impairment of
$1,500,000 on its investment in SGMC (see Note F).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts for short-term and long-term debt, receivables,
other current assets, and accounts payable and accrued expenses approximate fair
value.
93
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
REVENUE RECOGNITION
Advance royalties which are payable only from future production or
which are non-refundable are recognized as revenue when received (see Note F).
Revenues from gold and uranium sales are recognized upon delivery.
Revenues are recognized from the rental of certain assets ratably over the
related lease terms. Revenues from commercial operations, which represent
primarily real estate activity, and an airport fixed base operation, are
recognized as goods and services are delivered. Revenues from long-term
construction contracts are recognized on the percentage-of- completion method.
If estimated total costs on any contract indicate a loss, the Company provides
currently for the total anticipated loss on the contract.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This statement requires recognition of deferred
income tax assets and liabilities for the expected future income tax
consequences, based on enacted tax laws, of temporary differences between the
financial reporting and tax bases of assets, liabilities and carryforwards.
SFAS 109 requires recognition of deferred tax assets for the expected
future effects of all deductible temporary differences, loss carryforwards and
tax credit carryforwards. Deferred tax assets are reduced, if deemed necessary,
by a valuation allowance for any tax benefits which, based on current
circumstances, are not expected to be realized.
NET INCOME (LOSS) PER SHARE
In February 1997, SFAS No. 128 "Earnings per Share" was issued and specifies the
computation, presentation and disclosure requirements for earnings per share.
SFAS 128 is effective for periods ended after December 15, 1997 and requires
retroactive restatement of prior period earnings per share. The statement
replaces "primary earnings per share" with "basic earnings per share" and
replaces "fully diluted earnings per share" with "diluted earnings per share."
Adoption of SFAS 128 required restatement of 1997 earnings per share as
forfeitable shares were included in the calculations of primary earnings per
share for the year ended May 31, 1997, the loss per share was (.55) prior to
restatement. The following table presents a reconciliation of basic and diluted
earnings per share calculations:
94
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
<TABLE>
<CAPTION>
For Years Ended May 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- ----------------------------------- ------------------------------
Per Share Per Share Per Share
Income Shares Amount Loss Shares Amount Income Shares Amount
------ ------ ------ ---- ------ ------ ------ ------ ------
BASIC EPS
Net (loss) income
applicable
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
to common shares $(983,200) 6,657,549 $(.15) $(3,724,500) 6,466,855 $(0.58) $270,700 6,028,255 $ .04
EFFECT OF DILUTIVE SECURITIES
Equivalent common
shares from stock options
and warrants -- -- -- -- -- -- -- 400,814 --
--------- --------- ----- ------------ --------- ------ -------- --------- -----
DILUTED EARNINGS PER SHARE
Net (loss) income applicable
to common shares $(983,200) 6,657,749 $(.15) $(3,724,500) 6,466,855 $(0.58) $ 270,700 6,429,069 $ .04
========= ========= ===== =========== ========= ====== ========= ========= =====
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130 "Reporting Comprehensive Income" ("SFAS
130") was issued and establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. In addition
to net income, comprehensive income includes all changes in equity during a
period, except those resulting from investments by and distributions to owners.
The Company will adopt SFAS 130, which is effective for fiscal years beginning
after December 15, 1997, in the first quarter of fiscal 1999. Management does
not expect the adoption of this pronouncement to have a material impact on its
consolidated financial statements.
In June 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") was issued and establishes
standards for reporting information about operating segments in annual and
interim financial statements. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 is effective for fiscal years beginning after December 15, 1997, and
will be adopted in fiscal 1999. Reporting and disclosures under SFAS 131 are not
expected to be materially different than those disclosures in Note I.
In February 1998, SFAS No. 132 "Employers' Disclosures about Pensions
and Other Post Retirement Benefits" ("SFAS 132") was issued and standardizes
disclosure requirements for pension and other post retirement benefit plans.
Adoption of this standard is required for fiscal years beginning after December
15, 1997, and restatement of prior period comparative disclosures is required.
The Company will adopt SFAS 132 in fiscal 1999. The adoption of SFAS 132 is not
expected to materially affect the Company's disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
establishes accounting and reporting standards for derivative instruments and
for hedging activity. SFAS 133 is effective for all periods in fiscal years
beginning after June 15, 1999. SFAS No. 133 requires all derivatives to be
recorded on the balance sheet as either an asset or liability and measured at
fair value. Changes in the derivative's fair value will be recognized currently
in earnings unless specific hedge accounting criteria are met. The Company does
not expect the adoption of SFAS 133 to have a material effect on its financial
position or results of operations.
95
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform with the 1998 presentation.
C. RELATED-PARTY TRANSACTIONS:
The Company and Crested provide management and administrative services
for affiliates under the terms of various management agreements. The Company
also provides all employee services required by Crested. In exchange, Crested is
obligated to the Company for its share of these costs. Revenues from services by
the Company to unconsolidated affiliates were $849,000, $397,000 and $92,900 in
fiscal 1998, 1997 and 1996, respectively. The Company has $1,604,400 of
receivables from unconsolidated subsidiaries and short-term advances to
employees totaling $101,300 as of May 31, 1998.
At May 31, 1998, the Company's principal shareholder and his immediate
family were indebted to the Company in the amount of $338,000 which is
represented by notes secured by 104,000 shares of the Company's common stock.
On May 15, 1997, Yellow Stone Fuels Corp. ("YSFC"), a 12.7% owned
affiliate of USE and a 12.7% owned affiliate of Crested, entered into a line of
credit arrangement with USECC. As of May 31, 1998, YSFC owed USECC $440,000
which included $40,000 of accrued interest. This note bears interest at 10% and
is due on December 31, 1998. In lieu of paying the note in cash on or before its
maturity date, YSFC may convert this debt, at its option, into YSFC shares of
common stock at $1.00 per share of debt and interest. However, if YSFC defaults
in paying the note by December 31, 1998, the note is convertible into a number
of shares which will give USE and Crested a combined 51% ownership interest in
YSFC. The Company has classified the $440,000 note as an investment in YSFC
based upon YSFC's current financial condition.
D. USECC JOINT VENTURE:
USECC operates the Glen L. Larsen office complex; an aircraft hangar
with a fixed base operation, office space and certain aircraft; holds interests
in various mineral properties and ventures including SMP and GMMV; conducts oil
and gas operations; and transacts all operating and payroll expenses, except for
specific expenses allocated directly to each venturer. The joint venture
agreement also provides for the allocation of certain operating expenses to
other affiliates. In addition, through April 1996, USECC operated Wind River
Estates ("Wind River"), a 100 unit mobile home park. During 1996, USECC sold
Wind River (which had a net book value of approximately $512,700) and recognized
a gain of $252,600, which is reflected as a Gain on Sale of Assets in the
accompanying Consolidated Statements of Operations.
96
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
E. INVESTMENTS AND ADVANCES:
The Company's restricted investments secure various decommissioning
costs, reclamation and holding costs. Investments are comprised of debt
securities issued by the U.S. Treasury that mature at varying times from three
months to one year from the original purchase date. As of May 31, 1998, the cost
of debt securities was a reasonable approximation of fair market value. These
investments are classified as held-to-maturity under SFAS 115 and are measured
at amortized cost.
The Company's investment in and advances to affiliates are as follows:
<TABLE>
<CAPTION>
Consolidated Carrying Value at May 31,
Ownership 1998 1997
------------- ---- ----
<S> <C> <C> <C>
Equity Method:
SGMC 59.0%* $ -- * $ 4,034,800
GMMV 50.0% 724,800 724,800
Ruby Mining Company 26.7% 32,100 32,600
YSFC 25.4%** 114,900 207,400
------------ ------------
$ 871,800 $ 4,999,600
============ ============
</TABLE>
* Approximately 39% until March, 1998; consolidated at May 31, 1998.
**Includes notes receivable from YSFC of $440,000 and $392,200,
respectively (see Note C), reduced by equity in losses.
Equity loss from investments accounted for by the equity method are as
follows:
<TABLE>
<CAPTION>
Year Ended May 31,
------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Ruby Mining Company $ (500) $ (3,300) $ (2,300)
YSFC (140,300) (224,800) --
GMMV (Note F) -- -- --
----------- ------------ ------------
$ (140,800) $ (228,100) $ (2,300)
=========== =========== ============
</TABLE>
GMMV expenses certain general and administrative, maintenance and
holding costs. However, the Company has not recognized equity losses in GMMV
because Kennecott was committed to fund 100% of the first $50,000,000 of
development and operating costs of the Joint Venture. In 1998, the Company and
USECC entered into an Acquisition Agreement with Kennecott whereby the Company
may be able to purchase Kennecott's interest in the GMMV (see Note F). The
Company's carrying value of its investment in GMMV of $724,800 in the
accompanying balance sheets is substantially lower than its underlying equity in
GMMV.
Condensed combined statements of operations of the Company's equity
investees include GMMV, YSFC and Ruby Mining Company.
97
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
<TABLE>
<CAPTION>
May 31,
---------------------------------------
1998 1997
---- ----
<S> <C> <C>
Current assets $ 1,762,300 $ 5,776,300
Non-current assets 71,583,100 75,947,500
--------------- --------------
$ 73,345,400 $ 81,723,800
=============== ==============
Current liabilities $ 1,952,000 $ 1,402,500
Reclamation and other liabilities 33,770,300 30,114,700
Excess in assets 37,623,100 50,206,600
--------------- --------------
$ 73,345,400 $ 81,723,800
=============== ==============
</TABLE>
CONDENSED COMBINED STATEMENTS OF OPERATIONS - EQUITY INVESTEES
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $ 54,900 $ 1,100 $ 1,200
Costs and expenses (1,646,900) (3,116,900) (609,900)
------------- ------------ ------------
Net loss $ (1,592,000) $ (3,115,800) $ ( 608,700)
============= ============ ============
</TABLE>
SMP entered into various market related and base price escalated
uranium sales contracts with certain utilities which require approximately
1,500,000 pounds of uranium concentrates to be delivered from 1997 through 2000
depending on utility requirements. These contracts also allow for the quantities
to be substantially increased by the utilities. As discussed in Note K, SMP has
been the subject of significant litigation and arbitration proceedings between
the SMP partners since 1991, portions of which are currently still in progress.
Pending the resolution of the remaining proceedings, the partners in SMP agreed
to fulfill certain of the SMP's uranium sales contracts outside of the
partnership with each partner delivering a mutually- agreed portion of the
delivery commitments on an individual basis. In 1998 and 1996, the Company
recognized revenues of $858,700 and $1,383,400, respectively (no related
revenues were recognized in 1997) from these deliveries. Revenues from these
transactions have been included in the accompanying Consolidated Statements of
Operations as Mineral Sales, which would normally have been sales of SMP.
Due to the litigation and arbitration proceedings, audited financial
statements for SMP are not obtainable. Accordingly, the Company has recorded
only its direct investment in, and results of operations from the partnership.
The Company had no carrying value of its investment in SMP for either 1998 or
1997 as proceeds from litigation and arbitration proceedings were accounted for
under the cost recovery method of accounting as discussed in Note K. The
Company's direct loss generated from its investment in SMP, which represent mine
standby costs incurred by the Company, was $436,000, $442,700 and $416,200 for
the years ended May 31, 1998, 1997 and 1996, respectively. No amounts
attributable to SMP are included in the Condensed Combined Balance Sheets or
Condensed Combined Statements of Operations of the Company's equity investees
presented above.
98
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
F. MINERAL CLAIMS TRANSACTIONS AND MINING PROPERTIES:
GMMV
During fiscal 1990, the Company and Crested entered into an agreement
with Kennecott, a wholly-owned, indirect subsidiary of The RTZ Corporation PLC,
for Kennecott to acquire a 50% interest in certain uranium mineral properties in
Wyoming known as the Green Mountain Properties. The purchase price was
$15,000,000 and a commitment to fund the first $50 million of development and
operating costs. Kennecott committed to fund 100% of the first $50 million of
capital contributions to the GMMV. Kennecott also committed to pay additional
amounts if certain future operating margins are achieved. USE and USECC
participate in cash flows of the GMMV in accordance with their ownership of the
mining claims prior to the formation of the GMMV.
On June 23, 1997, USE and USECC signed an Acquisition Agreement with
Kennecott for the right to acquire Kennecott's interest in the GMMV for
$15,000,000 and other consideration. Kennecott paid USE and USECC $4,000,000 on
signing, and committed to loan the GMMV up to $16,000,000 for payment of
reimbursable costs incurred by USECC in developing the proposed underground
Jackpot Uranium Mine for production and in changing the status of the Sweetwater
Mill from standby to operational.
Pursuant to the Acquisition Agreement, the Mineral Lease, and the Mill
Contract, USECC is to develop the proposed Jackpot Mine and nearby Big Eagle
Mine, and work with Kennecott in preparing the Sweetwater Mill for renewed
operations. Such work will be funded from the $16,000,000 being loaned to the
GMMV by Kennecott. Kennecott will be entitled to a credit against Kennecott's
original $50,000,000 commitment to fund the GMMV, in the amount of two dollars
of credit for each one dollar of such funds out of the $16,000,000 loaned by
Kennecott to the GMMV, plus the $4,000,000 paid to USE and USECC on signing of
the Acquisition Agreement. It is anticipated that such credits will fully
satisfy the balance of Kennecott's initial funding commitment to the GMMV.
Closing of the Acquisition Agreement is subject to USE and USECC
satisfying several conditions, including: (i) the acquiring entity (which may be
USE, USECC, or an entity formed by USE and USECC to acquire Kennecott's interest
in the GMMV) must have a market capitalization of at least $200,000,000; (ii)
the parties to the Acquisition Agreement must have received all authorizations,
consents, permits and approvals of government agencies required to transfer
Kennecott's interest in the GMMV to the acquiring entity; (iii) USE and USECC
shall have replaced, or caused the replacement of, approximately $25,000,000 of
reclamation bonds, in addition to other guarantees, indemnification and
suretyship agreements posted by Kennecott on behalf of the GMMV; and (iv) USE
and USECC, or the acquiring entity, must pay $15,000,000 cash to Kennecott at
closing and assume all obligations and liabilities of Kennecott with respect to
the GMMV (including repayment of the $16,000,000 Note and the Mortgage) from and
after the closing. Under very limited circumstances, the scheduled closing date
may be postponed to not later than October 30, 1998.
USECC satisfied the terms of the Acquisition Agreement to the point
that the $4,000,000 deferred GMMV purchase option benefit paid by Kennecott is
nonrefundable and will serve to reduce USE's and Crested's ultimate $15,000,000
purchase price. If the acquisition is unsuccessful, the signing payment will be
applied against any future reimbursable costs and contributions due the GMMV.
After such costs and remaining obligations are satisfied, the remainder, if any,
will be recognized as income.
99
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
In 1996, the U.S. Government adopted the "USEC Privatization Act of
1996" to privatize the U.S. Enrichment Corp. ("USEC"). In July 1998, in filings
with the U.S. Securities and Exchange Commission, USEC disclosed its planned
sale of significant quantities of uranium in the U.S. marketplace. Accordingly,
forecasted demand for uranium and forecasted uranium sales prices have decreased
in the short-term. As a result, on July 31, 1998, GMMV halted development
activities at the Jackpot Mine and has placed the facility on active standby.
This action required the layoff of mine workers. Due to the uncertainty of the
uranium market, it is not known when the mine will operate again or if USECC
will be able to conclude the financing necessary to buy Kennecott's interest.
If the Acquisition Agreement is not closed, USE, USECC and Kennecott
shall continue to own their respective 50% interests in the GMMV, and
Kennecott's obligation to repay the $16,000,000 loaned by KEC shall remain
Kennecott's obligation, without any adverse effect on the 50% interest in GMMV
held by USE and USECC. However, the Jackpot Mine development work and Sweetwater
Mill upgrade work funded by the $16,000,000 advance will have benefitted all
parties to the GMMV and will fully satisfy Kennecott's original $50,000,000
funding obligation to GMMV.
SMP
During fiscal 1989, USE and Crested, through USECC, entered into an
agreement to sell a 50% interest in their Sheep Mountain properties to Nukem's
subsidiary CRIC. USECC and CRIC immediately contributed their 50% interests in
the properties to a newly-formed partnership, SMP. SMP was established to
further develop and mine the uranium claims on Sheep Mountain, acquire uranium
supply contracts and market uranium. Certain disputes arose among USECC, CRIC
and its parent Nukem, Inc. over the operation of SMP. These disputes have been
in litigation/arbitration for the past seven years. See Notes E and K for a
description of the investment and a discussion of the related
litigation/arbitration.
CYPRUS AMAX
During prior years, the Company and Crested conveyed interests in
mining claims to AMAX Inc. ("AMAX") in exchange for cash, royalties, and other
consideration. AMAX and its successor Cyprus Amax Minerals, Inc. ("Cyprus Amax")
have not placed the properties into production as of May 31, 1998.
Cyprus Amax now pays the Company and Crested an annual advance royalty
of 50,000 pounds of molybdenum (or its cash equivalent). Cyprus Amax is entitled
to a partial credit against future royalties for any advance royalty payments
made, but such royalties are not refundable if the properties are not placed
into production. The Company recognized $211,000, $207,300 and $-0- of revenue
from the advance royalty payments in fiscal 1998, 1997, and 1996, respectively.
Cyprus Amax may elect to return the properties to the Company and
Crested, which would cancel the advance royalty obligation. If Cyprus Amax
formally decides to place the properties into production, it will pay $2,000,000
to the Company and Crested. If Cyprus Amax sells the properties, the Company and
Crested will receive 15% of the first $25 million received by Cyprus Amax.
The Company and Crested also held an option to purchase certain real
estate located in Gunnison, Colorado owned by Cyprus Amax. During fiscal 1995,
USE and Crested reached an agreement with Cyprus
100
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
Amax whereby USE and Crested would forego six quarters of advance royalties as
payment of this option exercise price. Accordingly, USE and Crested received no
advance royalties during 1996 as a result of this agreement. Thereafter, USE
(together with Crested) signed two option agreements with Pangolin Corporation
("Pangolin"), a Park City, Utah developer, for sale of the land owned in
Gunnison. Pangolin made a cash payment and signed promissory notes for the
purchase of the properties. As of May 31, 1998, the promissory notes were in
default and are adequately reserved for. USECC is endeavoring to resolve the
default and filed a legal action to protect its interest (see Note K).
SGMC
Sutter Gold Mining Company ("SGMC") was established in 1990 to conduct
operations on mining leases and to produce gold from the Lincoln Project.
SGMC is in the development stage and additional development is required
prior to the commencement of commercial production. SGMC has not generated any
significant revenue and has no assurance of future revenue. All acquisition and
mine development costs since inception have been capitalized. Since test
production in 1992, SGMC has focused its efforts on obtaining a reserve study,
developing a mine plan and pursuing a partner to assist in the financing of its
mineral development and ultimate production. As of May 31, 1998, due to the
decline in the spot price for gold, SGMC has put the development of the mine on
hold. Until the time when development begins, SGMC does not expect to require
capital contributions from USE, Crested or other sources of financing to
maintain its current activities. SGMC will continue to be considered in the
development stage until the time it generates significant revenue from its
principal operations.
During the first and second quarters of fiscal 1997, SGMC sold shares
of its common stock in a private placement. These shares were sold for $3.00 per
share. SGMC received approximately $1,100,000 in net proceeds from this equity
placement. During the fourth quarter of fiscal 1997, an additional offering of
shares of SGMC's special warrant units was completed and raised approximately
$5,400,000 in net cash proceeds. Each special warrant unit is convertible into
one share of SGMC common stock for no additional consideration and one stock
purchase warrant. The warrant allows the holder to purchase an additional share
of SGMC common stock for a CAN$6.00. The warrant expires in November 1998. At
the underwriter's request, the initial investors (including USE and Crested)
agreed to have the amount of their common shares owned reduced by 50 percent.
The investors in the $3.00 per share private placement discussed above were not
affected as those shares were sold in contemplation of the 1 for 2 reverse
split.
In connection with the second offering, the Company and Crested
accepted a Contingent Stock Purchase Warrant dated March 21, 1997 which provides
the Company and Crested the right to acquire, for no additional consideration,
common shares of SGMC's $.001 par value common stock having an aggregate value
of $10,000,000 (US). The Stock Purchase Warrant has a term of ten years
extending to March 21, 2007, and is exercisable partially or in total,
semi-annually beginning on June 30, 1997. However, the Stock Purchase Warrant is
only exercisable to the extent proven and probable ore reserves, as defined in
the Stock Purchase Warrant, in excess of 300,000 ounces are added to SGMC's
reserves. In addition, SGMC has the right to satisfy the exercise of all or any
portion of the Stock Purchase Warrant with the net cash flows, as defined, at
$25.00 (US) for each new ounce of proven and probable ore in excess of 300,000
ounces up to a maximum of 700,000 ounces. Accordingly, the Company has allocated
the carrying value of SGMC shares
101
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
exchanged for the Contingent Stock Purchase Warrant to its investment in such
contingent warrants. The Stock Purchase Warrant benefits the Company and Crested
on a basis of 88.9% and 11.1%, respectively.
On March 31, 1998, the Company purchased 889,900 Special Warrant Units
from certain Canadian investors. The units were purchased with 488,895 shares of
the Company's common stock. In addition, the Company sold 170,000 shares of
common stock to the Canadian investors at the then market price ($7.00 per
share). As a result of this purchase, the Company and Crested's combined
ownership interest in SGMC was 59%. Therefore, as of April 1, 1998 the Company
began consolidating SGMC's results of operations. Had the Company consolidated
SGMC for the entire 12-month period ended May 31, 1998, the 1998 consolidated
net loss would have been approximately $190,000 greater.
Primarily as a result of the sustained decline in gold prices and the
April 1998 issuance of shares for additional equity interest in SGMC, the
Company evaluated the May 31, 1998 carrying value of its investment in SGMC for
impairment. The Company determined its aggregate investment in SGMC, which
includes the Stock Purchase Warrant discussed previously, exceeded the fair
value of the investment by approximately $1,500,000. Accordingly, in fiscal
1998, the Company recorded an impairment in the amount of $1,500,000 which is
classified as Impairment of Mineral Interests in the accompanying Consolidated
Statements of Operations.
Additional financing will be required in order to develop the reserves
of SGMC. Management of SGMC is currently attempting to negotiate a proposed
financing plan to be executed in fiscal 1999. However, if financing is not
obtained in fiscal 1999, or should other events occur such as a sustained or
further decline in gold prices, the Company will reevaluate the need for an
additional impairment of its carrying value in SGMC. If a determination is made
that an impairment has occurred, it is likely the amount of such impairment will
be material to the Company's financial position and results of operations.
PLATEAU RESOURCES LIMITED
During fiscal 1994, USE entered into an agreement with Consumers Power
Company to acquire all the issued and outstanding common stock of Plateau
Resources Limited ("Plateau"), a Utah corporation. Plateau owns a uranium
processing mill and support facilities and certain other real estate assets
through its wholly-owned subsidiary Canyon Homesteads, Inc. in southeastern
Utah. USE paid nominal cash consideration for the Plateau stock and agreed to
assume all environmental liabilities and reclamation bonding obligations. At May
31, 1998, Plateau had a cash security in the amount of $7,270,408 to cover
reclamation of the properties (see Note K).
USECC is currently evaluating the best utilization of Plateau's assets.
Evaluations are ongoing to determine when, or if, the mine and mill properties
should be placed into production. The primary factor in these evaluations
relates to the current depressed uranium market. Alternative uses of the
properties are also being evaluated.
In fiscal 1998, the Company had an independent appraisal performed on
its modular homes held for resale. Based upon the analysis performed, the
Company recorded a $100,000 write-down to more accurately reflect the fair value
of these assets as of May 31, 1998. The write-down is included in Commercial
Costs
102
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
and Expenses in the accompanying Consolidated Statements of Operations. The
Company continues to review its investment in these assets for impairment.
ENERGX, LTD.
Energx is engaged in the exploration, development and operation of
natural gas properties. Energx currently has leased properties in Wyoming and on
the Fort Peck Indian Reservation, Montana. Energx is owned by USE (45%), Crested
(45%) and the Assiniboine and Sioux Tribes (10%).
During fiscal 1997 and 1996, Energx abandoned certain of its leases and
as a result wrote off $164,500 and $328,700, respectively, of related
capitalized costs. The write off is reflected as Abandonment of Mineral
Interests in the accompanying Consolidated Statements of Operations.
G. DEBT:
LINES OF CREDIT
USE and Crested have a $1,000,000 line of credit from a commercial
bank. The line of credit bears interest at the bank's prime rate plus .5%
(10.25% as of May 31, 1998). The weighted average interest rate for both 1998
and 1997 was 10.25%. The line of credit is secured by certain real property and
a share of the net proceeds of fees from production from certain oil wells. No
amounts were outstanding as of May 31, 1998 and 1997.
NOTES PAYABLE
The components of notes payable as of May 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
May 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Installment notes - secured by equipment;
interest at 8.75% - 9.5%, matures in 2000 $ 167,100 $ 69,100
SGMC installment notes - secured by
certain mining properties, interest at
7.5% to 8.0%, maturity from 1999 - 2004 235,000 --
FNG installment notes - secured by FNG
equipment, interest at 8.75% to 8.9%
maturity from 1997 - 2002 101,800 195,300
----------- ----------
503,900 264,400
Less current portion (225,700) ( 81,300)
----------- ----------
$ 278,200 $ 183,100
=========== ==========
</TABLE>
Principal requirements on notes payable are $225,700; $117,000;
$84,300; $24,700; $22,600; and $29,600 for the years 1999 through 2003 and
thereafter, respectively.
103
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
H. INCOME TAXES:
The components of deferred taxes as of May 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
May 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 87,300 $ 129,800
Net operating loss carryforwards 6,703,900 6,731,500
Tax credits 213,800 325,100
Other 541,900 655,400
Tax basis in excess of book basis 2,087,900 573,400
----------- -----------
Total deferred tax assets 9,634,800 8,415,200
----------- -----------
Deferred tax liabilities:
Development and exploration costs (3,979,300) (1,963,400)
----------- -----------
Total deferred tax liabilities (3,979,300) (1,963,400)
----------- -----------
5,655,500 6,451,800
Valuation allowance (6,800,300) (6,635,100)
----------- -----------
Net deferred tax liability $(1,144,800) $ (183,300)
=========== ===========
</TABLE>
The Company has established a valuation allowance of $6,800,300 against
deferred tax assets due to the losses incurred by the Company in past fiscal
years. The Company's ability to generate future taxable income to utilize the
NOL and capital loss carryforwards is uncertain.
The income tax provision (benefit) is different from the amounts
computed by applying the statutory federal income tax rate to income before
taxes. The reasons for these differences are as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected federal income tax $(320,300) $(1,266,330) $(793,500)
Net operating losses not previously
benefitted and other 155,100 (86,670) (204,800)
Valuation allowance 165,200 1,353,000 998,300
--------- ----------- ---------
Income tax provision $ -- $ -- $ --
========= =========== =========
</TABLE>
There were no taxes currently payable as of May 31, 1998, 1997 or 1996
related to continuing operations.
At May 31, 1998, the Company and its subsidiaries had available, for
federal income tax purposes, net operating loss carryforwards of approximately
$19,700,000 which will expire from 2004 to 2013 and investment tax credit
carryforwards of $213,800 which, if not used, will expire from 1999 to 2001. The
Internal Revenue Code contains provisions which limit the NOL carryforwards
available which can be used in a given year when significant changes in company
ownership interests occur. In addition, the NOL and credit amounts are subject
to examination by the tax authorities.
104
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
The Internal Revenue Service has audited the Company's and affiliates'
tax returns through fiscal 1994, and is currently auditing the fiscal years
ended May 31, 1996 and May 31, 1995. The Company's income tax liabilities are
settled through fiscal 1992. The Company has received 30 day letters for the
years ended May 31, 1994 and 1993. The Company has submitted a written appeal to
protest the findings of the examining agent to preserve its NOL. Management
believes the Company will prevail on the significant issues in dispute, and
therefore, no significant changes will result from the findings.
I. SEGMENTS AND MAJOR CUSTOMERS:
The Company's primary business activity is the sale of minerals and the
acquisition, exploration, holding, development and sale of mineral bearing
properties although the Company has no producing mines. Other reportable
industry segments include commercial operations, primarily real estate
activities, an airport fixed base operation, and construction activities. The
following is information related to these industry segments:
<TABLE>
<CAPTION>
Year Ended May 31, 1998
-------------------------------------------------------
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues $ 1,069,700 $3,523,500 $ -- $ 4,593,200
=========== ========== ==========
Interest and other revenues 6,965,300
-----------
Total revenues $11,558,500
Operating loss $ (595,100) $ 468,400 $ (36,400) $ (163,100)
=========== ========== ==========
Interest and other revenues 6,965,300
General corporate and other expenses (7,209,900)
Equity in loss of affiliates (575,500)
-----------
Loss before income taxes
and discontinued operations $ (983,200)
===========
Identifiable net assets at May 31, 1998 $22,235,700 $7,717,400 $ 208,200 $30,161,300
=========== ========== ==========
Investments in affiliates 912,900
Corporate assets 15,486,000
-----------
Total assets at May 31, 1998 $46,560,200
===========
Capital expenditures $ 1,175,000 $ 239,400 $ --
=========== ========== ==========
Depreciation, depletion and
amortization $ 243,900 $ 298,600 $ 115,100
=========== ========== ==========
</TABLE>
105
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended May 31, 1997
--------------------------------------------------------
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues $ 207,300 $ 2,219,400 $ 1,038,600 $ 3,465,300
=========== =========== ===========
Interest and other revenues 2,324,900
------------
Total revenues $ 5,790,200
============
Operating (loss) profit $ (843,100) $ (840,200) $ 286,000 $ (1,397,300)
=========== ============ ===========
Interest and other revenues 2,324,900
General corporate and other expenses (3,961,300)
Equity in loss of affiliates (690,800)
------------
Loss before income taxes
and cumulative effect $ (3,724,500)
============
Identifiable net assets at May 31, 1997 $ 9,025,700 $ 6,103,700 $ 301,500 $ 15,430,900
=========== =========== ===========
Investments in affiliates 4,999,600
Corporate assets 9,956,600
------------
Total assets at May 31, 1997 $ 30,387,100
============
Capital expenditures $ 159,500 $ 296,300 $ --
=========== ============ ===========
Depreciation, depletion and
amortization $ -- $ 460,100 $ 198,800
=========== ============ ===========
</TABLE>
106
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended May 31, 1996
---------------------------------------------------------
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues $ 3,116,700 $ 1,439,100 $ 3,794,500 $ 8,350,300
============ =========== ===========
Interest and other revenues 1,281,900
------------
Total revenues $ 9,632,200
============
Operating (loss) profit $ (455,600) $ (935,700) $ 716,700 $ (674,600)
============ ========== ===========
Interest and other revenues 1,281,900
General corporate and other expenses (2,522,700)
Equity in loss of affiliates (418,500)
------------
Loss before income taxes,
discontinued operations
and extraordinary item $ (2,333,900)
============
Identifiable net assets at May 31, 1996 $ 19,724,700 $ 6,196,800 $ 705,500 $ 26,627,000
============ =========== ===========
Investments in affiliates 3,658,500
Corporate assets 4,507,800
------------
Total assets at May 31, 1996 $ 34,793,300
============
Capital expenditures $ 835,200 $ 372,000 $ 903,100
============ =========== ===========
Depreciation, depletion and
amortization $ -- $ 569,000 $ 219,500
============ =========== ===========
</TABLE>
During fiscal 1998 and 1996 approximately 100% and 89% of mineral
revenues were from the sale of uranium. There were no uranium sales during
fiscal 1997.
The Company subleases excess office space, contracts aircraft for
charter flights and sells aviation fuel. Commercial Revenues in the accompanying
Consolidated Statements of Operations consist of mining equipment rentals,
office and other real property rentals, charter flights and fuel sales.
J. SHAREHOLDERS' EQUITY:
In May 1996, the Board of Directors of USE approved an annual incentive
compensation arrangement ("1996 Stock Award Program") for its CEO and four other
officers of USE payable in shares of the Company's common stock. The 1996 Stock
Award Program was subsequently modified to reflect the intent of the directors
of the Company which was to provide incentive to the officers of the Company and
Crested to remain with the companies. The shares are to be issued annually on or
before January 15 of each year, starting January 15, 1997, as long as each
officer is employed by USE, provided the Company has been profitable in the
preceding fiscal year. The officers will receive up to an aggregate total of
67,000 shares per year for the years 1997 through 2002. One-half of the
compensation under the 1996 Stock Award Program is the responsibility of
Crested. The shares under the plan are forfeitable until retirement, death or
disability of the officer. The shares are held in trust by the Company's
treasurer and are voted by the Company's non-
107
<PAGE>
employee directors. As of May 31, 1998, 245,378 total shares have been issued to
the five officers of the Company and Crested.
In December 1997, the Company entered into a warrant purchase agreement
with an investment advisory firm to purchase 225,000 shares at an exercise price
of $10.50 expiring December 2, 2000. The warrants were issued in exchange for
services to be provided during the period December 1997 to December 1998. The
Company determined the fair value associated with these warrants to be $186,000,
which will be recognized ratably over the term of the related advisory
agreement. Accordingly, $108,000 was recognized as expense in fiscal 1998, with
the remaining amount to be recognized in fiscal 1999.
In January 1998, the Company entered into a warrant purchase agreement
with another investment advisory firm to purchase 200,000 shares at an exercise
price of $7.50 expiring January 20, 2000. The warrants were issued in exchange
for services to be provided during the period from January 1998 to January 1999.
The Company determined the fair value associated with these warrants to be
$264,000, which will be recognized ratably over the term of the related advisory
agreement. Accordingly, $88,000 was recognized as expense in fiscal 1998, with
the remaining amount to be recognized in fiscal 1999.
In January 1996, the Company entered into a warrant purchase agreement
with an investment advisory firm. Pursuant to the Agreement, this firm received
a warrant to purchase 200,000 common shares of the Company's common stock at
$5.00 per share in exchange for consultation services to be provided through
January 9, 1997. In connection with this warrant agreement, the Company
recognized $148,300 of consulting expense in fiscal 1997 which the Company
determined to be the fair value. During fiscal 1997, 180,000 of these warrants
were exercised resulting in total proceeds to the Company of $900,000. The
remaining 20,000 shares were exercised in 1998 resulting in $100,000 of proceeds
to the Company.
The Board of Directors adopted the U.S. Energy Corp. 1989 Stock Option
Plan (the "Option Plan") for the benefit of USE's key employees. The Option
Plan, amended in December 1995, reserves 925,000 shares of the Company's $.01
par value common stock for issuance under the Option Plan. During fiscal 1992,
the Company issued options to certain of its executive officers, Board members
and others. Under this Plan, 371,200 non-qualified options were issued at prices
ranging from $2.75 to $2.90 per share. These options will expire on April 14,
2002 and April 30, 2002. During fiscal 1996, the Company issued 360,000
non-qualified options to employees who are not officers or directors at a
purchase price of $4.00 per share, expiring on December 31, 2000. During fiscal
1998, options were exercised for the purchase of 62,000 shares. In fiscal 1997,
the shareholders of USE ratified an amendment to the Option Plan and on that
same date all outstanding non-qualified options were converted to qualified
options by the Board of Directors of USE.
The Board of Directors of USE adopted the U.S. Energy Corp. 1989
Employee Stock Ownership Plan ("ESOP") in 1989, for the benefit of USE
employees. During fiscal 1998, 1997 and 1996, the Board of Directors of USE
contributed 49,470, 24,069 and 10,089 shares to the ESOP at prices of $6.57,
$8.87 and $8.65 per share, respectively. The Company is responsible for one-half
of these contributions amounting to $162,300, $106,700 and $43,600 in fiscal
1998, 1997 and 1996, respectively. Crested is responsible for the remainder. USE
has loaned the ESOP $1,014,300 to purchase 125,000 shares from the Company and
38,550 shares on the open market. These loans, which are secured by pledges of
the stock purchased with the loan proceeds, bear interest at the rate of 10% per
annum. The loans are reflected as unallocated ESOP
108
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
contribution in the equity section of the accompanying Consolidated Balance
Sheets. During fiscal 1996, the Company released 10,089 of the shares to fund
the 1996 ESOP contribution by $87,300 as reflected in the Consolidated Statement
of Stockholders' Equity.
The Board of Directors of both the Company and Crested issue shares of
stock as bonuses to certain directors, employees and third parties. The stock
bonus shares have been reflected outside of the Shareholders' Equity section in
the accompanying Consolidated Balance Sheets because such shares are forfeitable
to the Company and Crested until earned. During fiscal 1993, the Company's Board
of Directors amended the stock bonus plan. As a result, the earn out dates of
certain individuals were extended until retirement, which is the earn out date
of the amended stock bonus plan. In exchange for this amendment, the amended
plan grants a stock-bonus of 20% of the previous plan per year for five years.
Crested is responsible for one half of the compensation expense related to these
issuances. For the years ended May 31, 1998, 1997 and 1996, the Company had
compensation expense of $54,600, $152,600 and $116,500 respectively, resulting
from these issuances. A schedule of forfeitable shares for both USE and Crested
is set forth in the following table:
<TABLE>
<CAPTION>
Issue Number Issue Total
Date of Shares Price Compensation
---- --------- ----- ------------
<S> <C> <C> <C>
May 1990 40,300 $ 9.75 $392,900
June 1990 66,300 11.00 729,300
November 1992 10,660 N/A N/A
May 1993 20,000 3.375 67,500
November 1993 18,520 3.00 55,600
January 1994 18,520 4.00 74,100
January 1995 13,520 3.75 50,700
February 1996 7,700 15.125 116,500
December 1996 36,832 10.875 405,800
------- -----------
Balance at
May 31, 1997 232,352 $1,892,400
August 1997 13,026 10.875 141,700
May 1998 67,000 6.56 439,500
------- -----------
Balance at
May 31, 1998 312,378 $2,473,600
======= ==========
</TABLE>
No shares were earned in fiscal 1998 or 1997. Also included in the
forfeitable common stock are 15,000 shares to directors which are vesting at 20%
a year beginning in November 1992, of which 9,000 are earned but not released as
of May 31, 1997.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair
value based method of accounting for employee stock options or similar equity
instruments. However, SFAS 123 allows the continued measurement of compensation
cost for such plans using the intrinsic value based method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), provided
that pro forma
109
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
disclosures are made of net income or loss and net income or loss per share,
assuming the fair value based method of SFAS 123 had been applied. The Company
has elected to account for its stock-based compensation plans under APB 25;
accordingly, for purposes of the pro forma disclosures presented below, the
Company has computed the fair values of all options granted during fiscal year
1996 using the Black- Scholes pricing model and the following weighted average
assumptions (no options were granted during 1998 and 1997):
1996
----
Risk-free interest rate 5.45%
Expected lives 5 years
Expected volatility 135.2%
Expected dividend yield 0%
To estimate expected lives of options for this valuation, it was
assumed options will be exercised upon becoming fully vested at the end of the
five years. All options are initially assumed to vest. Cumulative compensation
cost recognized in pro forma net income or loss with respect to options that are
forfeited prior to vesting is adjusted as a reduction of pro forma compensation
expense in the period of forfeiture.
The total fair value of options granted was computed to be
approximately $1,274,900 during the year ended May 31, 1996. This amount is
amortized ratably over the vesting periods of the options. Pro forma stock-based
compensation, net of the effect of forfeitures, was $98,100, $255,000 and
$106,200 for 1998, 1997 and 1996, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss and pro forma net loss per
common share would have been reported as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net (loss) income
As reported $ (983,200) $ (3,724,500) $ 270,700
Pro forma $ (1,081,300) $ (3,979,500) $ 164,500
Net (loss) income per common
share, basic and diluted
As reported $ (.15) $ (.58) $ .04
Pro forma, Basic $ (.16) $ (.62) $ .03
Pro forma, Diluted $ (.16) $ (.62) $ .03
</TABLE>
Weighted average shares used to calculate pro forma net loss per share
were determined as described in Note B, except in applying the treasury stock
method to outstanding options, net proceeds assumed received upon exercise were
increased by the amount of compensation cost attributable to future service
periods and not yet recognized as pro forma expense.
110
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
A summary of the Stock Option Plan activity for the years ended May 31,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 596,700 $3.41 724,800 $3.44
Granted -- -- -- --
Canceled -- -- (22,000) $4.00
Exercised (62,000) $4.00 (106,100) $3.49
------- --------
Outstanding at end of year 534,700 $3.34 596,700 $3.41
======= =========
Exercisable at end of year 394,700 $3.11 380,700 $3.07
======= =========
</TABLE>
The following table summarizes information about employee stock options
outstanding and exercisable at May 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ----------------------------
Weighted
Number of Average Weighted Number Weighted
Options Remaining Average of Options Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Prices May 31, 1998 Life in years Price May 31, 1998 Price
------ ------------ ------------- ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
$2.75 49,400 3.92 $2.75 49,400 $2.75
2.90 264,300 3.88 2.90 264,300 2.90
4.00 221,000 2.50 4.00 81,000 4.00
</TABLE>
K. COMMITMENTS, CONTINGENCIES AND OTHER:
LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS (SMP)
ARBITRATION/LITIGATION PROCEEDINGS CONCERNING SMP. In June 1991,
Nukem's wholly-owned subsidiary Cycle Resource Investment Corporation ("CRIC")
instituted arbitration proceedings against the Company and Crested. CRIC claimed
that the Company and Crested violated the Sheep Mountain Partners ("SMP")
partnership agreement. On July 3, 1991, the Company and Crested, through USECC,
filed a civil action in the U. S. District Court of Colorado against Nukem, CRIC
and their affiliates, alleging Nukem/CRIC fraudulently misrepresented facts and
concealed information from the Company and Crested to induce their entry into
the agreements forming the SMP partnership and sought rescission, damages and
other relief. Certain of Nukem's affiliates (excluding CRIC) were thereafter
dismissed from the lawsuit. The U. S. District Court granted the motion of the
Company and Crested to stay the above arbitration initiated by CRIC.
111
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
On September 16, 1991, USECC filed another civil action in the Denver
District Court against SMP seeking reimbursement of $85,000 per month since the
spring of 1991 for the care and maintenance of the SMP underground uranium mines
and properties. On May 11, 1993, the Denver District Court stayed all
proceedings in state court until the case in the U.S. District Court for
Colorado case was resolved. Thereafter in February 1994, USECC, Nukem and CRIC,
agreed that the majority of the litigation subsequent to the formation of SMP on
December 21, 1988, would be handled through consensual arbitration before a
three member panel of the American Arbitration Association (the "Panel"). The
arbitration hearing consumed 73 hearing days commencing on June 27, 1994 and
concluded on May 31, 1995. The Panel entered its Order and Award on April 18,
1996. Nukem filed two motions with the district court indicating there was a
material miscalculation and a double recovery. The District Court remanded the
matter to the Arbitration Panel to consider Nukem's motions. On July 3, 1996,
the Panel found there was no double recovery and approved the Order and Award,
which awarded Crested and USE $12,500,000 and Nukem/CRIC $7,100,000 through
March 31, 1996. On November 4, 1996 the United States District Court issued a
Judgment and Order confirming the Arbitration Panel's Order and Award.
In November 1996, USE and Crested received $4,300,000 from the SMP
escrow bank accounts as partial payment of the monetary award of the Arbitration
Panel. This $4,300,000 was accounted for under the cost recovery method of
accounting, wherein it was applied to outstanding amounts due USECC and USE and
the balance of $1,003,800 was recognized as income. Nukem/CRIC filed a motion
asking for limited remand and on June 27, 1997 the Federal Court reviewed the
motion and issued a Second Amended Judgment which confirmed the monetary award
of the Arbitration Panel and clarified the equitable damages due USECC from
Nukem/CRIC. Nukem filed a notice of appeal with the Tenth Circuit Court of
Appeals and posted a $8,613,600 supersedeas bond on the monetary portion of the
Award. Nukem's appeal is based on two issues, the District Court erred in
confirming the double recovery finding in the AAA Panel's Order and Award and
that the Order placing Nukem's uranium purchase contracts with the CIS republics
in constructive trust with SMP. During the fourth quarter of fiscal 1998, a
settlement agreement was reached whereby U.S. Energy and Crested received
$5,026,000 as a partial settlement and, in addition, USECC received the Sheep
Mountain Uranium Mines and certain other properties from SMP and one uranium
delivery contract along with a 50% interest in a uranium supply contract. This
settlement does not in any way affect issues presently on appeal and pending
before the 10th Circuit Court of Appeal ("CCA"). A hearing is currently
scheduled before a three judge panel court of the 10th CCA on September 24, 1998
in Oklahoma City, Oklahoma.
ILLINOIS POWER. Illinois Power Company ("IPC"), one of the utilities
with whom SMP has a long-term uranium supply contract, unilaterally sought to
terminate the contract on October 28, 1993 and filed suit in the U.S. Federal
District Court, Danville, Illinois, against the Company, Crested, et al. seeking
a declaratory judgment that IPC's contract with SMP was void. After various
negotiating sessions the parties reached agreement in June 1995 to settle the
case by entering into an amendment to the original supply contract to provide
for 3 deliveries totaling 486,443 lbs. U3O8. The final delivery was made in May
1997. On June 13, 1997, USE and Crested received $838,500 as a distribution of
profits from the final delivery under this SMP contract.
111
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
PARADOR MINING COMPANY, INC. ("PARADOR")
On July 30, 1991, Bond Gold Bullfrog, Inc. ("BGBI") filed Civil Action
No. 11877 in the District Court of the Fifth Judicial District, Nye County,
Nevada naming USE, Crested, Parador and H.B. Layne Contractor, Inc. as
defendants. The complaint primarily concerns extra lateral rights associated
with two patented lode mining claims (the "Claims") owned by Parador which were
initially leased to a predecessor of BGBI and subsequently, the residuals of
that lease were assigned and leased by Parador to USE and Crested. A bifurcated
trial was held on December 11-12, 1995 before the District Court for the Fifth
Judicial District for the State of Nevada, County of Nye, at which time the
parties presented evidence relative to the issue of extra lateral rights. Other
claims between the parties were bifurcated by the Court and were not at issue at
the trial. On December 26, 1995, the district court issued a ruling denying apex
rights and extra lateral royalties to Parador, the Company and Crested. The
partial trial did not address the other issues pending in the litigation but
limited the trial to those issues required to decide the question of extra
lateral rights. All other remaining claims and counterclaims were considered by
the Court on January 26-28, 1998 in a bench trial and the Court entered judgment
against the plaintiff and the defendants on their claims. BGBI, USECC and
Parador appealed this judgment to the Nevada Supreme Court. On June 23, 1998, a
mandatory Settlement Conference was held in Reno, NV but no settlement was
achieved. The Settlement Mediator referred the case to the Nevada Supreme Court
for an expedited hearing and the appeal is currently pending.
TICABOO TOWNSITE LITIGATION. In fiscal 1998, the prior contract
operator of the restaurant and lounge and two of its employees who operated the
motel and convenience store at Ticaboo (owned by Canyon Homesteads, Inc.) sued
USE, Crested and Plateau Resources Ltd., et al in Utah State Court. After a five
day trial, the jury found against the two plaintiff employees but found for the
third plaintiff and a judgment was entered for $153,371 in damages against USE,
which was recorded in fiscal 1998. USE intends to vigorously appeal the award.
DEPARTMENT OF ENERGY LITIGATION. On July 20, 1998, eight uranium mining
companies with operations in the United States (including USE, Crested, YSFC)
and the Uranium Producers of America, a trade organization, filed a complaint
against the United States Department of Energy (the "DOE") and the acting
secretary in a lawsuit (file no. 98 CV 1775) in the U.S. District Court,
Cheyenne, Wyoming. The complaint seeks declaratory judgment and injunctive
relief. The plaintiffs allege that the DOE violated the USEC Privatization Act
of 1996, when the DOE transferred 45 metric tons of low enriched uranium and
3,800 metric tons of natural uranium to the United States Enrichment Corp.
("USEC") in May 1998.
The plaintiffs have asked the Court among other claims to declare that
(i) the DOE violated its statutory authority by transferring uranium to USEC in
excess of statutory limits on volume; (ii) the excess amounts were not sold by
the DOE to USEC for fair value, as required by the Act, and mandated findings by
the DOE concerning possible adverse impacts were not supported in fact; and
(iii) the DOE be enjoined from future transfers in violation of the Act. The
defendants have not yet responded to the complaint.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the U.S. District Court,
Denver, Colorado against Contour Development Company, L.L.C. and entities and
persons associated with Contour Development Company,
112
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
L.L.C. (collectively, "Contour") seeking compensatory and consequential damages
from the defendants for dealings in certain real estate.
Specifically, USE alleges that Contour has breached contracts for the
sale of the Gunnison properties of USE and Crested, and is in default on the
contracts and promissory notes delivered to pay for the Gunnison properties.
As of the filing date of this Report, Contour and the other defendants
have not filed an answer to the complaint but negotiations are underway to
settle the issues.
RECLAMATION AND ENVIRONMENTAL LIABILITIES
Most of the Company's mine development, exploration and operating
activities are subject to federal and state regulations that require the Company
to protect the environment. The Company attempts to conduct its mining
operations in accordance with these regulations, but the rules are continually
changing and generally becoming more restrictive. Consequently, the Company's
current estimates of its reclamation obligations and its current level of
expenditures to perform ongoing reclamation may change in the future. At the
present time, however, the Company cannot predict the outcome of future
regulation or its impact on costs. Nonetheless, the Company has recorded its
best estimate of future reclamation and closure costs based on currently
available facts, technology and enacted laws and regulations. Certain regulatory
agencies, such as the Nuclear Regulatory Commission ("NRC"), the Bureau of Land
Management ("BLM") and the Wyoming Department of Environmental Quality ("WDEQ")
review the Company's reclamation, environmental and decommissioning liabilities,
and the Company believes its recorded amounts are consistent with those reviews
and related bonding requirements. To the extent that planned production on its
properties is delayed, interrupted or discontinued because of regulation or the
economics of the properties, the future earnings of the Company would be
adversely affected. The Company believes it has accrued all necessary
reclamation costs and there are no additional contingent losses or unasserted
claims to be disclosed or recorded. The Company has not disposed of any
properties for which it has a commitment or is liable for any known
environmental liabilities.
The majority of the Company's environmental obligations relate to
former mining properties acquired by the Company. Since the Company currently
does not have properties in production, the Company's policy of providing for
future reclamation and mine closure costs on a unit-of-production basis has not
resulted in any significant annual expenditures or costs. For the obligations
recorded on acquired properties, including site-restoration, closure and
monitoring costs, actual expenditures for reclamation will occur over several
years, and since these properties are all considered future production
properties, those expenditures, particularly the closure costs, may not be
incurred for many years. The Company also does not believe that any significant
capital expenditures to monitor or reduce hazardous substances or other
environmental impacts are currently required. As a result, the near term
reclamation obligations are not expected to have a significant impact on the
Company's liquidity.
As of May 31, 1998, the Company has recorded estimated reclamation
obligations, including standby costs, of $13,055,600 which is included in
Reclamation and Other Long-term Liabilities in the accompanying Consolidated
Balance Sheets. In addition, the GMMV, in which the Company is a 50% owner, has
recorded a $23,620,000 liability for future reclamation and closure costs. None
of these liabilities have been
114
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
discounted, and the Company has not recorded any potential offsetting recoveries
from other responsible parties or from any insurance companies.
The Company currently has four mineral properties or investments that
account for most of its environmental obligations, SMP, GMMV, Plateau and SGMC.
The environmental obligations and the nature and extent of cost sharing
arrangements with other potentially responsible parties, as well as any
uncertainties with respect to joint and several liability of each are discussed
in the following paragraphs:
SMP
The Company and Crested are responsible for the reclamation
obligations, environmental liabilities and liabilities for injuries to employees
in mining operations with respect to the Crooks Gap properties. The reclamation
obligations, which are established by regulatory authorities, were reviewed by
the Company and the regulatory authorities during fiscal 1998 and the balance in
the reclamation liability account at May 31, 1998 of $1,451,800 is believed by
management to be adequate. The obligation will be satisfied over the life of the
mining project which is estimated to be at least 20 years. The Company and
Crested self bonded this obligation by mortgaging certain of its real estate
assets and by holding certificates of deposits. A portion of the funds for the
reclamation of SMP's properties will be provided by a sinking fund of up to $.50
per pound of uranium for reclamation work as the uranium is produced from the
properties.
GMMV
During fiscal 1991, the Company and Crested acquired developed mineral
properties on Green Mountain known as the Big Eagle Property. In connection with
that acquisition, the Company and Crested agreed to assume reclamation and other
environmental liabilities associated with the property. Reclamation obligations
imposed by regulatory authorities were established at $7,300,000 at the time of
acquisition. Immediately after the acquisition, the Company and Crested
transferred a one-half interest to Kennecott, with Kennecott, the Company and
Crested contributing the Big Eagle properties to GMMV, which assumed the
reclamation and other environmental liabilities. Kennecott holds a commercial
bank letter of credit as security for the performance of the reclamation
obligations for the benefit of GMMV.
During fiscal 1993, GMMV entered into an agreement to acquire the
Sweetwater uranium mill and related properties from UNOCAL. GMMV's consideration
for the acquisition of the Sweetwater Mill Property was the assumption of all
environmental liabilities and reclamation bonding obligations. The environmental
obligations of GMMV are guaranteed by Kennecott. However, UNOCAL also agreed
that if GMMV incurs expenditures for environmental liabilities prior to the
earlier of commercial production by GMMV or February 1, 2001 (which liabilities
are not due solely to the operations of GMMV), UNOCAL will reimburse GMMV for
the first $8,000,000 of such expenditures. Any reimbursement may be recovered by
UNOCAL from 20% of future cash flows from the sale of uranium concentrates
processed through the Mill.
On June 18, 1996, Kennecott had a letter of credit in the amount of
approximately $19,767,000 issued to the WDEQ for minesite matters (executing
EPA-delegated jurisdiction to administer the Clean Water Act and the Clean Air
Act, and directly administering Wyoming statutes on mined land reclamation), and
$5,400,000 issued to the NRC for decontamination and cleanup of the Mill and
related tailings cells. An irrevocable letter of credit has been provided by the
Morgan Guaranty Trust Company of New York in lieu
115
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
of a surety bond to cover the reclamation costs for the minesite and a
performance bond by St. Paul Insurance Company was obtained for the Mill. The
letter of credit was obtained by Kennecott Uranium Company to cover all
reclamation costs related to mining and drilling operations in the State of
Wyoming. The EPA has continuing jurisdiction under the Resource Conservation and
Recovery Act pertaining to any hazardous materials which may be on site when
cleanup work commences.
Although USE and the other GMMV parties are liable for all reclamation
and environmental compliance costs associated with Mill and site maintenance, as
well as Mill decontamination and cleanup and site reclamation and cleanup after
the Mill is decommissioned, USE believes it is unlikely it will have to pay for
such costs directly. First, based on current estimates of cleanup and
reclamation costs (reviewed annually by the oversight agencies), these costs may
be within the $50,000,000 development commitment and related $16,000,000 loan of
Kennecott Uranium Company for the GMMV. These costs are not expected to increase
materially if the mill is not put into full operation. Second, to the extent
GMMV is required to spend money on reclamation and environmental liabilities
related to previous mill and site operations during UNOCAL's ownership, UNOCAL
has agreed to fund up to $8,000,000 of costs (provided these costs are incurred
before February 1, 2001 and before Mill production resumes), which would be
recoverable only out of future mill production (see above). Third, payment of
the GMMV reclamation and environmental liabilities related to the mill is
guaranteed by Kennecott Corporation, parent of Kennecott Uranium Company. Last,
GMMV will set aside a portion of operating revenues to fund reclamation and
environmental liabilities should mining and milling commence.
Kennecott will be entitled to contribution from the USE Parties in
proportion to their participation interests in GMMV if Kennecott is required to
pay mill cleanup costs directly pursuant to its guarantee. Such payments by
Kennecott only would be reimbursed if the liabilities cannot be satisfied within
the initial $50,000,000 expenditure commitment, and then only to the extent
there are insufficient funds from the reclamation reserve (to be established
from GMMV operating revenues). In addition, if and to the extent these
liabilities resulted from UNOCAL's mill operations, and payment of the
liabilities was required before February 1, 2001 and before mill production
resumes, then up to $8,000,000 of that amount would be paid by UNOCAL before
Kennecott Corporation would be required to pay on its guarantee. Accordingly,
although the extent of any ultimate USE liability for contribution to mill
cleanup costs cannot be predicted, USE and Crested will only be required to pay
its proportional share of mill cleanup if a) the liabilities cannot be satisfied
with the initial $50,000,000 expenditure commitment from Kennecott, b) there are
insufficient funds from the reclamation reserve to be established out of GMMV
operating revenues and c) payments are not available from UNOCAL.
Sutter Gold Mining Company
SGMC is currently owned 55% by the Company, 4% by Crested and 41% by
private investors. SGMC owns gold mineral properties in California. Currently,
these properties are in development and costs consist of drilling, permitting,
holding and administrative costs. No substantial mining has been completed,
although a 2,800 foot decline through the identified ore zones for an
underground mine was acquired in the purchase. The Company's policy is to
provide reclamation on a unit-of-production basis. Currently, reclamation
obligations are covered by a $27,000 reclamation bond which SGMC has recorded as
a reclamation liability as of May 31, 1998.
116
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
Plateau Resources, Limited
The environmental and reclamation obligations acquired with the
acquisition of Plateau include obligations relating to the Shootaring mill.
Based on the bonding requirements, Plateau transferred $2,500,000 to a trust
account as financial surety to pay future costs of mill decommissioning, site
reclamation and long-term site surveillance. In fiscal 1997, Plateau increased
the NRC surety to a cash bond of $6,784,000 in order to have its standby license
changed by the NRC to operational.
YSFC Exchange Rights Agreement
The Company and YSFC have entered into an Exchange Rights Agreement
(the "Agreement"). Under the Agreement the YSFC private placement shareholders
and related broker agent have the right, but not the obligation, to exchange
their shares in YSFC for USE common stock if YSFC's common shares are not listed
and available for quotation on the NASDAQ marketing system by March 1999. The
exchange rate for USE shares will be the price paid for the YSFC's common shares
plus 10% per annum of total cost from the date of purchase. The number of USE
shares exchanged will be based on the exchange rate for a share of USE common
stock for the five business days prior to the date of notice given by the YSFC
shareholder to exchange their shares.
EXECUTIVE COMPENSATION
The Company and Crested are committed to pay the estates of certain of
their officers an amount equal to one year's salary for one year after their
death and reduced amounts, to be set by the Board of Directors, for a period up
to five years thereafter.
L. DISCONTINUED OPERATIONS.
In February 1996, the Company completed the sale of 100% of the
8,267,450 outstanding shares of common stock of Brunton to a third party for
$4,300,000 in accordance with a Stock Purchase Agreement dated January 30, 1996
(the "Purchase Agreement"). The Company received $300,000 at execution of the
Purchase Agreement and approximately $3,000,000 at closing. The Company received
two of the three annual installments of $333,333 on a $1,000,000 note, plus
interest at a rate of 7% per year during February 1997 and 1998. One additional
payment is due the Company in the amount of $333,333 plus interest in February
1999. In addition, the Company is entitled to receive 45% of the profits before
taxes as defined in the Purchase Agreement related to Brunton products existing
at the time the Purchase Agreement was executed for a period of 4 years and
three months, beginning February 1, 1996. The Company received payments of
$292,600 for profits in 1997.
As a result of selling 100% of the common stock of Brunton, the Company
has reflected the operations of Brunton as discontinued in the accompanying
financial statements. Revenues for the discontinued operations for the year
ended May 31, 1996 was $2,870,800. The Company recognized a gain on the disposal
of Brunton of $2,295,700 net of income taxes of approximately $50,000.
117
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31, May 31,
1998 1998
---- ----
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash $ 7,401,900 $ 5,650,500
Accounts receivable
Trade 156,900 195,800
Affiliates 3,261,200 1,878,400
Current portion of long-term
notes receivables 335,800 335,800
Assets held for resale and other 1,235,500 1,100,800
SMP settlement receivable, net -- 5,026,000
Inventory 142,300 113,700
------------ ------------
TOTAL CURRENT ASSETS 12,533,600 14,301,000
INVESTMENTS
Affiliates 829,400 871,800
Restricted investments 8,961,900 8,889,100
------------ ------------
13,596,500 13,505,900
PROPERTIES AND EQUIPMENT 31,242,500 31,256,600
Less accumulated depreciation,
depletion and amortization (12,003,800) (11,806,300)
------------ ------------
5,953,800 6,040,900
OTHER ASSETS:
Accounts and notes receivable:
Real estate sales, net of valuation allowance 676,100 398,000
Employees 36,100 352,000
Other 1,000 1,800
Deposits and other 720,600 755,100
------------ ------------
1,433,800 1,506,900
------------ ------------
$ 42,997,400 $ 45,019,100
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
118
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
August 31, May 31,
1998 1998
---- ----
(Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable and accrued expenses $ 1,244,000 $ 1,836,400
Deferred GMMV purchase option 4,000,000 4,000,000
Current portion of long-term debt 426,700 225,700
------------ ------------
TOTAL CURRENT LIABILITIES 5,670,700 6,062,100
LONG-TERM DEBT 246,400 278,200
RECLAMATION LIABILITIES 8,778,800 8,778,800
OTHER ACCRUED LIABILITIES 4,173,100 4,266,800
DEFERRED TAX LIABILITY 1,144,800 1,144,800
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS IN SUBSIDIARIES 4,313,700 4,561,300
FORFEITABLE COMMON STOCK
$.01 par value; 312,378 shares issued,
forfeitable until earned 2,473,600 2,473,600
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value;
authorized, 100,000 shares;
none issued or outstanding -- --
Common stock, $.01 par value;
20,000,000 shares authorized;
7,523,492 shares issued 75,200 75,200
Additional paid-in capital 28,526,200 28,526,200
Accumulated deficit (9,017,300) (7,760,100)
Treasury stock, 865,943 shares, at cost (2,460,800) (2,460,800)
Unallocated ESOP contribution (927,000) (927,000)
------------ ------------
16,196,300 17,453,500
------------ ------------
$ 42,997,400 $ 45,019,100
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
119
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
----------------------------
1998 1997
REVENUES:
<S> <C> <C>
Mineral revenue $ 49,100 $ 916,200
Commercial revenues 1,543,100 1,559,300
Oil sales 19,000 48,500
Management and other fees 318,000 148,900
Interest 179,900 187,000
Gain on sales of assets 54,300 700
------------ ------------
2,163,400 2,860,600
------------ ------------
COSTS AND EXPENSES:
Mineral operations 654,400 374,900
Construction costs 6,300 11,700
Commercial operations 957,900 837,800
General and administrative 2,010,500 611,700
Oil production 22,100 14,500
Interest 16,600 15,900
------------ ------------
3,667,800 1,866,500
------------ ------------
(LOSS) INCOME BEFORE MINORITY INTEREST
AND EQUITY IN LOSS OF AFFILIATES (1,504,400) 994,100
MINORITY INTEREST IN LOSS (INCOME)
OF CONSOLIDATED SUBSIDIARIES 260,700 (146,500)
EQUITY IN LOSS OF AFFILIATES - NET (13,500) (163,800)
------------ ------------
(LOSS) INCOME BEFORE PROVISION
FOR INCOME TAXES (1,257,200) 683,800
PROVISION FOR INCOME TAXES -- --
------------ ------------
NET (LOSS) INCOME $ (1,257,200) $ 683,800
============ ============
NET (LOSS) INCOME
PER SHARE BASIC AND DILUTED $ (.18) $ .10
============ ============
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 6,969,927 6,816,892
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
120
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
----------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) income $ (1,257,200) $ 683,800
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating activities:
Minority interest in (loss) income
of consolidated subsidiaries (260,700) 146,500
Depreciation, depletion and amortization 203,200 229,800
Equity in loss of affiliates 13,500 163,800
Gain on sale of assets (54,300) --
Non-cash compensation -- 65,600
Other 34,500 (46,100)
Net changes in components
of working capital 2,832 700 (1,912,600)
------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 1,511,700 (669,200)
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of mining properties (1,700) (900)
Proceeds from sale of property and equipment 203,900 --
Increase in restricted investments -- (162,400)
Purchase of property and equipment (139,500) (57,900)
Change in note receivable 38,600 59,400
Investments in affiliates (30,800) (238,500)
Deferred GMMV purchase option -- 4,000,000
------------ ------------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 70,500 3,599,700
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of options for common stock -- 40,000
Proceeds from long-term debt 201,000 --
Payment on long-term debt (31,800) (93,800)
------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 169,200 (53,800)
------------ ------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 1,751,400 2,876,700
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 5,650,500 1,416,900
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 7,401,900 $ 4,293,600
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
121
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
----------------------------
1998 1997
SUPPLEMENTAL DISCLOSURES:
<S> <C> <C>
Income tax paid $ -- $ --
============ ============
Interest paid $ 16,600 $ 15,900
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
122
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) The Condensed Consolidated Balance Sheet as of August 31, 1998, the
Condensed Consolidated Statements of Operations and Cash Flows for the three
months ended August 31, 1998 and 1997 have been prepared by USE without audit.
In the opinion of USE, the accompanying financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to present
fairly the financial position of USE as of August 31, 1998 and May 31, 1998, the
results of operations and cash flows for the three months ended August 31, 1998
and 1997, and the cash flows for the three 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. The results of operations for the
periods ended August 31, 1998 and 1997 are not necessarily indicative of the
operating results for the full year.
3) Accrued reclamation obligations and standby costs of $12,951,900 are
USE's share of a reclamation liability at the SMP mining properties and the full
obligation at the Shootaring Uranium Mill.
The reclamation work may be performed over several years.
123
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
Report on Audits of Financial Statements
as of December 31, 1997 and 1996 and for the
years ended December 31, 1997, 1996 and 1995,
and the period from inception
(June 1, 1990) to December 31, 1997
124
<PAGE>
Report of Independent Accountants
To the Members of the Management Committee of
Green Mountain Mining Venture
Riverton, Wyoming
We have audited the accompanying balance sheet of Green Mountain Mining Venture
(A Joint Venture in the Development Stage) as of December 31, 1997 and 1996, and
the related statements of operations, changes in Venture partners' capital, and
cash flows for the years ended December 31, 1997, 1996 and 1995, and the period
from inception (June 1, 1990) to December 31, 1997. These financial statements
are the responsibility of the Venture's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Green Mountain Mining Venture
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years ended December 31, 1997, 1996 and 1995, and the period from
inception (June 1, 1990) to December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Salt Lake City, Utah April 3, 1998, except for Note 5, as to which the date is
September 11, 1998
125
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
BALANCE SHEET
------
<TABLE>
<CAPTION>
As of December 31,
-----------------------------
1997 1996
---- ----
ASSETS
Assets:
<S> <C> <C>
Cash and cash equivalents $ 95,778 $ -
Property and equipment (Note 3):
Mineral properties and mine
development costs 27,725,252 22,812,077
Buildings 24,815,009 24,815,009
Mining equipment 403,000 403,000
52,943,261 48,030,086
Total assets $53,039,039 $48,030,086
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accounts payable - related parties $ 924,019 $ 469,032
Reclamation liabilities (Note 3) 23,620,000 23,620,000
----------- -----------
Total liabilities 24,544,019 24,089,032
----------- ----------
Commitments and contingencies (Notes 3 and 4)
Partners' capital:
Kennecott Uranium Company 14,247,510 11,970,527
USECC 14,247,510 11,970,527
----------- ----------
28,495,020 23,941,054
---------- ----------
Total liabilities and partners' capital $53,039,039 $48,030,086
=========== ===========
The accompanying notes are an integral
part of these financial statements
</TABLE>
126
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF OPERATIONS
------
<TABLE>
<CAPTION>
Period from
inception
(June 1, 1990)
Year ended December 31, to December 31,
------------------------------------------- ---------------
1997 1996 1995 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cost and expenses:
Maintenance and holding costs $ 3,065,432 $ 1,838,820 $ 1,697,234 $ 12,523,268
Marketing costs -- -- -- 247,598
------------ ------------ ------------ ------------
Total costs and expenses 3,065,432 1,838,820 1,697,234 12,770,866
Other income 14,618 -- -- 14,618
------------ ------------ ------------ ------------
Net loss $ 3,050,814 $ 1,838,820 $ 1,697,234 $ 12,756,248
============ ============ ============ ============
The accompanying notes are an integral
part of these financial statements
</TABLE>
127
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF CHANGES IN VENTURE PARTNERS CAPITAL
------
<TABLE>
<CAPTION>
Period from
inception
(June 1, 1990)
Year ended December 31, to December 31,
----------------------------------------- ---------------
1997 1996 1995 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period
Kennecott Uranium Company $ 11,970,527 $ 11,819,763 $ 11,510,240 $ --
USECC 11,970,527 11,819,763 11,510,240 --
------------ ------------ ------------ ------------
23,941,054 23,639,526 23,020,480 --
------------ ------------ ------------ ------------
Capital Contributions (Note 1):
Kennecott Uranium Company 3,802,390 1,070,174 1,158,140 20,625,634
USECC 3,802,390 1,070,174 1,158,140 20,625,634
------------ ------------ ------------ ------------
7,604,780 2,140,348 2,316,280 41,251,268
------------ ------------ ------------ ------------
Net loss:
Kennecott Uranium Company (1,525,407) (919,410) (848,617) (6,378,124)
USECC (1,525,407) (919,410) (848,617) (6,378,124)
------------ ------------ ------------ ------------
(3,050,814) (1,838,820) (1,697,234) (12,756,248)
------------ ------------ ------------ ------------
Balance at end of period:
Kennecott Uranium Company $ 14,247,510 $ 11,970,527 $ 11,819,763 $ 14,247,510
USECC 14,247,510 11,970,527 11,819,763 14,247,510
------------ ------------ ------------ ------------
$ 28,495,020 $ 23,941,054 $ 23,639,526 $ 28,495,020
============ ============ ============ ============
The accompanying notes are an integral
part of these financial statements
</TABLE>
128
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF CASH FLOWS
------
<TABLE>
<CAPTION>
Period from
inception
Year ended December 31, (June 1, 1990)
--------------------------------------------- to December 31,
1997 1996 1995 1997
------------ ------------ ------------ ------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net loss $(3,050,814) $(1,838,820) $(1,697,234) $(12,756,248)
Increase (decrease) in accounts payable -
related parties 318,491 329,171 (47,889) 616,938
----------- ----------- ----------- ------------
Net cash used in operating activities (2,732,323) (1,509,649) (1,745,123) (12,139,310)
----------- ----------- ----------- ------------
Cash flows from investing activities:
Additions to buildings, mineral properties mine
development and mining equipment (4,913,175) (771,772) (555,448) (13,596,261)
Increase (decrease) in accounts payable -
related parties 136,496 141,073 (15,709) 307,081
----------- ----------- ----------- -----------
Net cash used in investing activities (4,776,679) (630,699) (571,157) (13,289,180)
----------- ----------- ----------- ------------
Cash flows from financing activities:
Capital contributions 7,604,780 2,140,348 2,316,280 25,524,268
----------- ----------- ----------- ------------
Net cash provided by financing activities 7,604,780 2,140,348 2,316,280 25,524,268
----------- ----------- ----------- ------------
Net increase in cash and cash equivalents 95,778 - - 5,778
Cash and cash equivalents:
At beginning of period - - - -
----------- ----------- ----------- ------------
At end of period $ 95,778 $ - $ - $ 95,778
=========== =========== =========== ============
Supplemental schedule of non-cash investing and financing activities:
During 1990 and 1992 the Venture acquired mineral properties and an established
uranium processing milling exchange for the assumption of reclamation
liabilities associated with the
properties. $ 23,620,000
In 1990 the Venture partners contributed mineral properties and
buildings which were recorded at the contributing partners'
historical cost. $ 15,727,000
</TABLE>
The accompanying notes are an integral
part of these financial statements
129
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
------
1. Organization of the Joint Venture:
Green Mountain Mining Venture ("GMMV" or the "Venture") is a joint
venture with a 30 year life, formed by U.S. Energy Corp. ("USE"),
Crested Corp. ("Crested") and Kennecott Uranium Company ("Kennecott"),
the Venture partners, to explore for, evaluate, develop, mine and
market the mineral resources from the Green Mountain properties located
in south-central Wyoming. Kennecott has a 50% interest in GMMV, and USE
and Crested ("USECC") collectively have a 50% interest. GMMV was formed
June 1, 1990, with each partner contributing its portion of the Green
Mountain properties. Kennecott acquired its portion of the Green
Mountain properties from USECC in 1990 for a cash payment of $15
million. Thereafter, the partners are required to contribute funds
based upon their respective participating interests, subject to certain
provisions as provided for in the joint venture agreement.
Kennecott has agreed to contribute the first $50 million of operating
and development expenses pursuant to Management Committee budgets.
Kennecott also agreed to pay a disproportionate share (up to an
additional $45 million) of GMMV operating expenses, but only out of
cash operating margins from sales of processed uranium at more than
$24.00/lb (for $30 million of such operating expenses), and from sales
of processed uranium at more than $27.00/lb (for the next $15 million
of such operating expenses).
Effective October 29, 1992, Kennecott replaced USECC as manager of the
Venture. Kennecott contracts with USECC to perform work on behalf of
the Venture.
On June 23, 1997, Kennecott and USECC signed an Acquisition Agreement
wherein USECC agreed to purchase Kennecott's interest in GMMV for $15
million plus the assumption of Kennecott's share of various reclamation
and other liabilities. Kennecott paid $4 million to USECC on signing
the Acquisition Agreement and under the terms of the Acquisition
Agreement is required to contribute up to $16 million to GMMV for
payment of costs related to the Jackpot mine development and Sweetwater
mill preparation work. Amounts advanced under this line of credit bear
interest at 10.5% with repayment based upon the cash flow and earnings
of GMMV. Any unpaid balance is payable in full no later than June 23,
2010 as long as USECC or its affiliate purchases Kennecott's interest
in the GMMV. The line of credit is collateralized by a first mortgage
lien against Kennecott's 50% interest in GMMV. Closing of the
Acquisition Agreement is subject to several conditions and governmental
approvals and must occur by October 1998. Kennecott is entitled to a
credit against their original $50 million commitment of two dollars for
each dollar provided under the line of credit and the $4 million paid
on signing. As of December 31, 1997, Kennecott has approximately $10.8
million remaining to contribute to the Venture for operating and
development expenses.
Continued
130
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
------
1. Organization of the Joint Venture, Continued:
Through December 31, 1997, the activities of the Venture have consisted
primarily of the development and maintenance of the Green Mountain
properties. While these activities are expected to continue in the
future, additional development at substantially higher annual levels is
required prior to the commencement of commercial production. Such
commencement is not expected to occur until the venture partners agree
that all economic and other conditions justify such commencement.
Therefore, the Venture is considered to be in the development stage as
defined in Statement of Financial Accounting Standards No. 7.
2. Summary of Significant Accounting Policies:
All highly liquid securities with a maturity of three months or less
are considered to be cash equivalents.
Mineral properties contributed to the Venture were recorded at the
partners' historical cost at the date of contribution. Costs incurred
in the acquisition of mineral properties are capitalized and will be
either charged to operations on the units-of-production method over the
estimated reserves to be recovered or charged to operations at the time
the property is sold or abandoned. Mine development costs incurred
either to expand the capacity of operating mines, develop new ore
bodies or develop mine areas substantially in advance of production are
capitalized and will be charged to operations on the
units-of-production method over the estimated reserves to be recovered.
Amortization of mineral properties and development costs will commence
when mining operations start. Mine development costs incurred to
maintain production are included in operating costs and expenses.
Maintenance and holding costs are expensed as incurred.
The cost of mining equipment, less estimated salvage value, will be
depreciated on the units-of- production method over the estimated
reserves to be recovered or on the straight-line method over the
estimated life of the equipment, whichever is shorter. The cost of
buildings will be depreciated on the straight-line method. Depreciation
of mining equipment and buildings will commence when mining operations
start. Costs of repairs and maintenance are expensed as incurred.
Expenditures that substantially extend the useful lives of assets are
capitalized. When assets are retired or otherwise disposed of, all
applicable costs and accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized currently.
Continued
131
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
------
2. Summary of Significant Accounting Policies, Continued:
The Venture evaluates the recoverability of capitalized acquisition and
development costs based on the expected undiscounted future net
revenues from the related mining properties. An impairment loss will be
recorded if the unamortized costs exceed the expected undiscounted
future net revenues. The recorded loss will be based on the difference
between the unamortized costs and the expected discounted future net
revenues from the related mining properties. The Venture believes that
uranium prices will reach levels sufficient to justify commencement of
commercial production in the future. The Venture also believes the
expected undiscounted future net revenues from the Green Mountain
properties will be sufficient to allow recoverability of these
capitalized costs, assuming commencement of commercial production.
The estimated net future costs of dismantling, restoring and reclaiming
operating mines which result from future mining operations will be
accrued during such operations. The provision will be made using the
units-of-production method over the estimated reserves to be recovered
and estimated costs at the balance sheet date. The effect of changes in
estimated costs and production will be recognized on a prospective
basis.
No provision has been made for federal, state and local income taxes,
credits, or benefits since tax liabilities are the responsibility of
the individual partners.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Certain amounts in 1996 have been reclassified for comparability to
1997 amounts.
Continued
132
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
------
3. Property and Equipment:
USECC conducts operations at the mine site on behalf of the Venture.
All accounts payable are due to USECC for costs incurred by USECC in
the normal course of business on behalf of GMMV. Through December 31,
1997 Kennecott had reimbursed USECC for substantially all development
costs incurred.
The cost of building, mineral properties and mine development and
mining equipment incurred by each of the Venture partners are as
follows:
<TABLE>
<CAPTION>
Period from
inception
(June 1, 1990)
Year ended December 31, to December 31,
-------------------------------------- ---------------
1997 1996 1995 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
USECC $4,913,175 $ 740,175 $ 511,822 $ 10,864,080
Kennecott - 31,597 43,626 2,732,181
--------- ---------- ---------- ------------
Total $4,913,175 $ 771,772 $ 555,448 $ 13,596,261
========== ========== ========== ============
</TABLE>
In December 1990, GMMV acquired additional mineral properties in
exchange for the assumption of reclamation liabilities associated with
those properties of $7.3 million. In 1992, GMMV acquired an established
uranium processing mill (the Sweetwater Mill) in exchange for the
assumption of reclamation liabilities associated with this property of
$16.3 million. Such amounts represent the estimated costs at the
acquisition date to reclaim these properties. Kennecott, on behalf of
GMMV, is self-bonded in the amount of $24.3 million, which is payable
to the Wyoming Department of Environmental Quality ("WDEQ") and the
U.S. Nuclear Regulatory Commission in the event GMMV does not properly
reclaim the above properties or violates the Wyoming Environmental
Quality Act. Before the earlier of January 1, 2001, or resumption of
production, if the GMMV is required to incur reclamation or
environmental costs, the seller of the mill will be liable for the
first $8 million of these costs at the Sweetwater Mill.
The Venture properties include state leases which will expire in May
2001 and October 2006. All fees required to hold these unpatented
mining claims have been paid to the state of Wyoming as of December 31,
1997.
Continued
133
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
------
3. Property and Equipment, Continued:
At December 31, 1997 and 1996, costs capitalized as property and
equipment are composed of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Acquisition costs $39,347,000 $39,347,000
Development costs 13,596,261 8,683,086
----------- -----------
$52,943,261 $48,030,086
=========== ===========
</TABLE>
Acquisition costs include the partners' initial contribution of mineral
properties and buildings recorded at the contributing partners'
historical cost of $15,727,000 and mineral properties and buildings
acquired in exchange for the assumption of reclamation liabilities
totaling $23,620,000.
4. Contingencies:
In June 1994, Kennecott was served with a complaint filed by Nukem Inc.
(Nukem) and Cycle Resource Investment Corporation (Cycle). The
complaint alleged that when Kennecott entered into the Green Mountain
Mining Venture with USE on June 1, 1990, Kennecott interfered with a
Uranium Marketing Agreement (UMA) between Nukem and USE and the Sheep
Mountain Partners Partnership Agreement (SMPA) between USE and Cycle.
Nukem and Cycle were each seeking damages in excess of $14 million and
punitive damages.
The case was stayed pending the conclusion of an arbitration proceeding
between Cycle, Nukem and USE. The arbitration panel entered its order
in April 1996, and the stay in this case was lifted. The arbitration
panel held against Nukem in material respects stating that, even if the
UMA had been breached, Nukem suffered no damages thereby. The panel
denied the relief that Cycle sought for alleged breach of the SMPA.
Accordingly, on January 6, 1997, Kennecott filed a motion for summary
judgment contending, among other things, that the arbitration findings
collaterally estop all claims asserted by Nukem and Cycle. On August
22, 1997 the trial court granted Kennecott's motion for summary
judgement and dismissed the claims of Nukem and Cycle. Following the
motion, the parties agreed to settle the case, and in February 1998 a
settlement agreement was signed which resulted in both parties agreeing
to suspend all litigation and claims against each other.
Continued
134
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
------
5. Subsequent Events:
In 1996, the U.S. government adopted the "USEC Privatization Act of
1996" to privatize the U.S. Enrichment Corp. In July 1998, in a S-1
Registration Statement filed with U.S. Securities and Exchange
Commission, USEC Inc. disclosed its planned sale of significant
quantities of uranium in the U.S. marketplace. Accordingly, forecasted
demand for uranium and forecasted uranium sales prices have decreased
in the short-term. As a result, GMMV has halted development activities
at the Jackpot Mine, and has placed the facility on active standby.
135
<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.
136
<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 March 1998, the Registrant issued 546,365 restricted shares to four
Canadian funds, and will issue a certificate to one of the funds, for payment of
cash and exchange of Special Warrants of Sutter Gold Mining Company, a
subsidiary of the Registrant.
137
<PAGE>
(19) 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; 2,560 shares to non-employee
directors; 75,000 shares upon exercise of a Stock Option; and 67,000 shares to
executive officers.
(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. Dominick & Dominick Securities, Inc.
was paid a placement fee of $83,300 by the Registrant on the (a)(18)
transaction.
(c)(1) See above.
(2) Shares were offered at $3.00.
(3) Shares were offered at $4.00.
(4) See (a)(4) above.
(5) See (a)(5) above.
(6) See (a)(6) above.
(7) See (a) (7) through (10), and (a) (11), shares were sold at $5.00.
(11),(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) and (a)(18), 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..........................[4]
3.1(a) USE Articles of Amendment to
Restated Articles of Incorporation..............................[8]
138
<PAGE>
3.2 USE Bylaws, as amended through April 22, 1992...................[8]
4.1 Shamrock Partners, Ltd. 1/9/96 Warrant
to Purchase 200,000 Common Shares of USE.......................[13]
4.2 USE 1998 Incentive Stock Option Plan
and Form of Stock Option Agreement.............................[26]
4.3 USE Restricted Stock Bonus Plan,
as amended through 2/94........................................[13]
4.4 Form of Stock Option Agreement,
and Schedule, Options Issued 1/96..............................[14]
4.5 1/8/97 Amendment to Shamrock Partners, Ltd.
1/9/96 Warrant to Purchase 200,000
Common Shares of USE...........................................[15]
4.6 Amendment to USE 1989 Incentive
Stock Option Plan (12/13/96)...................................[15]
4.7 USE 1996 Stock Award Program (Plan)............................[15]
4.8 USE Restated 1996 Stock Award Plan and
Amendment to USE 1990 Restricted Stock Bonus Plan..............[15]
4.9 Agreement with Sunrise Financial Group (12/1/97)...............[22]
4.10 Sunrise Financial Group 1/9/98 Warrant to
Purchase 225,000 Common Shares of USE..........................[22]
4.11 Agreement with Shamrock Partners, Ltd. (1/20/98)...............[23]
4.12 Shamrock Partners, Ltd Warrant to Purchase
200,000 Common Shares of USE (1/23/98).........................[24]
5.1 Opinion of Stephen E. Rounds, Esq..............................[25]
10.1 USECC Joint Venture Agreement - Amended as of 1/20/89...........[2]
10.2 Management Agreement with USECC.................................[7]
10.3 Promissory Note from Crested to USE (5/31/97)..................[15]
10.4 Contract for Sale of Stock of Brunton to Silva A.B.............[11]
10.5 Assignment and Lease - Parador..................................[7]
10.6 Employment Agreement - Daniel P. Svilar.........................[4]
10.7 Airport Ground Lease - City of Riverton.........................[7]
139
<PAGE>
10.8 Executive Officer Death Benefit Plan............................[4]
10.9 - 10.10 [intentionally left blank]
10.11 Sweetwater Mill Acquisition Agreement...........................[7]
10.12 Ft. Peck Agreement - Drilling and Production Services ..........[7]
10.13 - 10.17 [intentionally left blank]
10.18 Master Agreement - Mt. Emmons/AMAX..............................[1]
10.19 [intentionally left blank]
10.20 Promissory Notes - ESOP/USE.....................................[6]
10.21 Self Bond Agreement with WY DEQ - Crooks Gap Properties.........[2]
10.22 Security Agreement - ESOP Loans.................................[6]
10.23 - 10.26 [intentionally left blank]
10.27 Mineral Properties Agreement Congo Area - PMC...................[4]
10.28 Memorandum of Joint Venture Agreement - GMMV....................[4]
10.29 Memorandum of Partnership Agreement - SMP......................[2]
10.30 - 10.31 [intentionally left blank]
10.32 Employee Stock Ownership Plan...................................[2]
10.33 [intentionally left blank]
10.34 Form of Stock Option Agreement and Schedule - 1989 Plan.........[4]
10.35 Severance Agreement (Form)......................................[8]
10.36 1992 Stock Compensation Plan Non-Employee Directors.............[8]
10.37 Executive Compensation (John L. Larsen).........................[8]
10.38 Executive Compensation (Non-qualified Options)..................[8]
10.39 ESOP and Option Plan Amendments (1992)..........................[8]
10.40 Plateau Acquisition - Stock Purchase
Agreement and Related Exhibits..................................[9]
10.41 Option and Sales Agreements - Gunnison Property Parcel A......[10]
10.42 Option and Sales Agreements - Gunnison Property Parcel B.......[10]
140
<PAGE>
10.43 Acquisition Agreement between Kennecott Uranium Company,
USE and USECC regarding GMMV (6/23/97).........................[16]
10.44 Exhibit A to Acquisition Agreement (see 10.43)
Promissory Note from Kennecott Uranium Company to
Kennecott Energy Company regarding GMMV .......................[17]
10.45 Exhibit B to Acquisition Agreement (see 10.43)
Mortgage, Security Agreement, Financing Statement and
Assignment of Proceeds, Rents and Leases.......................[18]
10.46 Exhibit G to Acquisition Agreement (see 10.43) - Contract
Services Agreement for the Sweetwater Uranium Mill Facility....[19]
10.47 Exhibit H to Acquisition Agreement
(see 10.43) - Mineral Lease Agreement .........................[20]
10.48 Exhibit I to Acquisition Agreement (see 10.43) - Fourth
Amendment of Mining Venture Agreement among
Kennecott Uranium Company, USE and USECC.......................[21]
10.49 USE/Dominick & Dominick Securities, Inc. Stock
Purchase Agreement for 157,530 Common Shares of USE............[22]
10.50 USE/BPI Canadian Resource Fund Stock Purchase
Agreement for 125,341 Common Shares of USE.....................[22]
10.51 USE/BPI Canadian Opportunities II Fund Stock
Purchase Agreement for 125,341 Common Shares of USE............[22]
10.52 USE/BPI Canadian Small Companies Fund Stock
Purchase Agreement for 250,683 Common Shares of USE............[22]
10.53 USE/Yellow Stone Fuels Corp. Exchange Rights Agreement........[22]
10.55 Master Resolution Agreement regarding Gunnison Properties......[15]
10.56 Membership Pledge Agreement regarding Gunnison Properties......[15]
10.57 Management Agreement between SGMC and USECC....................[15]
10.58 Outsourcing and Lease Agreement between YSFC and USECC........[15]
10.59 Convertible Promissory Note from YSFC to USECC.................[15]
21.1 Subsidiaries of Registrant.....................................[15]
23.1 Consent of Arthur Andersen LLP..................................*
23.2 Consent of PricewaterhouseCoopers LLP...........................*
* Previously filed.
141
<PAGE>
[1] Incorporated by reference from the like-numbered exhibit to a
Schedule 13D filed by AMAX on or about August 3, 1987.
[2] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1989.
[3] Incorporated by reference from exhibit 3 to Amendment No 4. of
a Schedule 13D filed by John L. Larsen, reporting an event of
January 2, 1990.
[4] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1990.
[5] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form 10-Q for the period ended February 28, 1991.
[6] Incorporated by reference from exhibit 2 to Amendment No. 6 of
a Schedule 13D filed by John L. Larsen, reporting an event of
May 28, 1991.
[7] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1991.
[8] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1992.
[9] Incorporated by reference from exhibit A to the Registrant's
Form 8-K reporting an event of August 11, 1993.
[10] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1995.
[11] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form 8-K, reporting an event of February 26, 1996.
[12] Incorporated by reference from an exhibit to the Registrant's
Post-Effective Amendment No. 1 to Form S-3 (SEC File No.
333-1967, filed April 3, 1996).
[13] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form S-1 registration statement, initial filing
(SEC File No. 333-1689, filed June 18, 1996).
[14] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1996
[15] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1997.
[16] Incorporated by reference from Exhibit 10.49 to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1997.
[17] Incorporated by reference from Exhibit 10.50 to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1997.
142
<PAGE>
[18] Incorporated by reference from Exhibit 10.51 to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1997.
[19] Incorporated by reference from Exhibit 10.52 to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1997.
[20] Incorporated by reference from Exhibit 10.53 to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1997.
[21] Incorporated by reference from Exhibit 10.54 to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1997.
[22] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form S-1 Post- Effective Amendment No. 2 (SEC File
No. 333-6189, filed April 24, 1998).
[23] Incorporated by reference from Exhibit 4.5 to the Registrant's
Form S-1 Post-Effective Amendment No. 2 (SEC File No. 333-6189,
filed April 24, 1998).
[24] Incorporated by reference from Exhibit 4.6 to the Registrant's
Form S-1 Post-Effective Amendment No. 2 (SEC File No. 333-6189,
filed April 24, 1998).
[25] Incorporated by reference from the like-numbered exhibit to the
Registrant's S-1 registration statement, initial filing (SEC
File No. 333-57957, filed June 29, 1998).
[26] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1998.
[27] Incoporated by reference from the like-numbered exhibit to the
Registrant's S-1 registration statement, Amendment No. 1 (SEC
File No. 333-57957, filed October 29, 1998).
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 offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
143
<PAGE>
(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.
144
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Amendment No. 2 to the Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Riverton, Wyoming, on November 16, 1998.
U.S. ENERGY CORP.
(Registrant)
Date: November 16, 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: November 16, 1998 By: s/ John L. Larsen
--------------------------------
JOHN L. LARSEN, Director
Date: November 16, 1998 By: s/ Harold F. Herron
--------------------------------
HAROLD F. HERRON, Director
Date: November 16, 1998 By: s/ Nick Bebout
--------------------------------
NICK BEBOUT, Director
Date: November _____, 1998 By:
--------------------------------
DON C. ANDERSON, Director
Date: November _____, 1998 By:
DAVID W. BRENMAN, Director
Date: November 16, 1998 By: s/ H. Russell Fraser
--------------------------------
H. RUSSELL FRASER, Director
Date: November 16, 1998 By: s/ Keith G. Larsen
--------------------------------
KEITH G. LARSEN, Director
Date: November 16, 1998 By: s/ Robert Scott Lorimer
--------------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer
and Chief Accounting Officer
145
