SEC File No. 333-__________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE 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: March 16, 1999.
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 167.
<PAGE>
<TABLE>
<CAPTION>
Calculation of Registration Fee
Title of Amount to be Proposed Proposed Amount of
each class registered maximum maximum registration fee
of securities offering offering
to be registered price per unit price
<S> <C> <C> <C> <C>
Common 1,462,804 $3.25 (2) $4,754,113(1) $1,322.00(2)
stock, $.01 shares (1)
par value
Warrants to 121,900 $3.25 (3) $396,175 (3) $111.00
purchase common warrants
stock
Common 121,900 $3.25 (5) $396,175 (5) $111.00
stock, $.01 shares (4)
par value
Total 1,706,604 $3.25 $5,546,463 $1,544.00
</TABLE>
(1) Under rule 457(f)(1), these shares are being offered in exchange for
$2,925,608 of securities of an affiliate (YSFC) not already owned by the issuer.
The value of securities of YSFC which may be acquired has been determined by
contract with the issuer. YSFC is a private corporation.
(2) Pursuant to rule 457(c), the securities being registered will be offered for
sale to the market from time to time by the holders who acquire the shares in
the exchange. 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.
(3) The registration fee for the warrants 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.
(4) Number of shares underlying warrants to purchase issuer's Common Stock.
(5) The registration fee for the shares under issuer's warrants is based on
their exercise price of $3.25 per share, under rule 457(g).
<PAGE>
Cross Reference Sheet
under Rule 501
Information Required in the Prospectus
A. Information About the Transaction
<TABLE>
<S> <C> <C>
Item 1. Forepart of Registration Facing page, outside front
Statement and Outside Front Cover cover of Prospectus
Item 2. Inside Front and Outside Back Cover Inside front and outside
Pages of Prospectus back Prospectus cover
Item 3. Risk Factors, Ratio of Earnings to Fixed Summary of the Offering; Risk Factors
Charges and Other Information
Item 4. Terms of the Transaction Summary of the Offering; Terms of the
Exchange Offer
Item 5. Pro Forma Financial Information Not applicable
Item 6. Material Contracts with the Company Information About YSFC
Being Acquired
Item 7. Additional Information Required for Information About the Holders of
Reoffering by Persons and Parties Warrants
Deemed to be Underwriters
Item 8. Interests of Named Experts and Counsel Legal Matters
Item 9. Disclosure of Commission Position on Not applicable
Indemnification for Securities Act
Liabilities
</TABLE>
B. Information About the Registrant
<TABLE>
<S> <C> <C>
Item 10. Information with Respect to S-3 Not applicable
Registrants
Item 11. Incorporation of Certain Information by How to Obtain Additional Information
Reference About USE and YSFC
Item 12. Information with Respect to S-2 or S-3 Not Applicable
Registrants
Item 13. Incorporation of Certain Information by Not Applicable
Reference
Item 14. Information with Respect to Registrants Information About USE; USE
Other Than S-2 or S-3 Registrants Consolidated Financial Statements
</TABLE>
i
<PAGE>
C. Information About the Company Being Acquired
<TABLE>
<S> <C> <C>
Item 15. Information with Respect to S-3 Not applicable
Companies
Item 16. Information with Respect to S-2 or S-3 Not applicable
Companies
Item 17. Information with Respect to Companies Information About YSFC; YSFC
Other Than S-2 or S-3 Companies Financial Statements
</TABLE>
D. Voting and Management Information
<TABLE>
<S> <C> <C>
Item 18. Information if Proxies, Consents or Not applicable
Authorizations Are to Be Solicited
Item 19. Information if Proxies, Consents or Voting and Management Information
Authorization Are Not to Be Solicited or
in an Exchange Offer
</TABLE>
ii
<PAGE>
Prospectus Subject to Completion,
Dated February ____, 1999
U.S. ENERGY CORP.
OFFER TO EXCHANGE SHARES OF U.S. ENERGY CORP.
FOR SHARES OF YELLOW STONE FUELS CORP.
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U.S. Energy Corp. ("USE") offers to issue shares of USE Common Stock in
exchange for the shares of Common Stock of Yellow Stone Fuels Corp. ("YSFC")
owned by persons who bought YSFC shares through American Fronteer Financial
Corporation ("AFFC", formerly RAF Financial Corporation). The persons who so
invested in YSFC are referred to in this Prospectus as the "shareholders." AFFC
acted as the placement agent for YSFC in a private placement financing in late
1997 and early 1998. USE also offers to issue Warrants to Purchase Common Stock
of USE ("USE Warrants") in exchange for the Warrants to Purchase Common Shares
of YSFC ("YSFC Warrants") which were issued to AFFC as partial compensation for
its placement agent services. YSFC shareholders (including holders of YSFC
Warrants who have exercised their Warrants for YSFC shares) may exchange all or
part of their YSFC shares for USE shares. Holders of unexercised YSFC Warrants
may exchange all or some of their Warrants for USE Warrants. Shareholders of
YSFC who did not invest in YSFC through AFFC cannot participate in this Exchange
Offer.
This Exchange Offer is made pursuant to the September 17, 1997 Exchange
Rights Agreement between YSFC, USE and AFFC. There are no underwriting
arrangements known to USE in connection with this Exchange Offer. Any selling
discounts or commissions due on sale of the USE shares or USE Warrants acquired
pursuant to this Exchange Offer will be paid by the sellers.
The number of USE shares offered to each YSFC shareholder is equal to
(x) the original investment amount plus 10 percent annual interest, divided by
(y) the average of the closing Nasdaq NMS bid prices for a share of USE Common
Stock for the five trading days before USE receives the Notice of Election to
Exchange from each YSFC shareholder and each holder of YSFC Warrants. The
average price for USE Common Stock, as so determined from time to time, is
referred to in this Prospectus as the "USE share value." The number of USE
Warrants offered to each holder of YSFC Warrants is equal to (x) the number of
YSFC shares underlying the holder's YSFC Warrants multiplied by $2.00, divided
by (y) the USE share value. The USE Warrants will be exercisable until September
19, 2002 (the original term of the YSFC Warrants) at an exercise price per USE
share which is equal to the USE share value. For information on how to exchange
YSFC shares or YSFC Warrants, please see "Terms of the Exchange." The Exchange
Offer will expire on September 22, 1999. No meeting of the YSFC shareholders
will be held in connection with this Exchange Offer. On February 16, 1999 the
USE share value was $3.00.
These are Speculative Securities which
Involve a High Degree of Risk.
See "Risk Factors" starting on page _____.
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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This Exchange Offer Expires at 5:00 pm MST on September
22, 1999.
The date of this Prospectus is March ______, 1999
1
<PAGE>
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.
HOW TO OBTAIN ADDITIONAL INFORMATION ABOUT USE AND YSFC
USE is a public corporation and is subject to the information
requirements of the Securities Exchange Act of 1934 (the "Exchange Act").
Therefore, USE files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). These materials 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 these
materials 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.
YSFC is a private corporation, and is not subject to the information
requirements of the Exchange Act.
This Prospectus incorporates important business and financial
information about USE and YSFC that is not included in or delivered with this
Prospectus. This information is available without charge to YSFC shareholders.
Direct your oral or written request for information to Steven Richmond, Office
Manager of USE or Mark Larsen, President of YSFC, at 877 North 8th West,
Riverton, Wyoming 82501. USE's and YSFC's telephone number is 307.856.9271;
USE's and YSFC's fax number is 307.857.3050. In order to ensure timely delivery
of the documents, any request should be made as soon as possible. There is no
meeting of the YSFC shareholders, and the Exchange Offer will not expire until
September 22, 1999. The deadline for requesting information is September 7,
1999.
FORWARD LOOKING STATEMENTS MAY PROVE INACCURATE
This Prospectus includes "forward-looking statements" within the
meaning of Section 21E of the Exchange Act. All statements other than statements
of historical fact included in this Prospectus, including without limitation the
statements under Management's Discussion and Analysis of Financial Condition and
Results of Operations, the disclosures about the 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, are forward-looking statements. In addition, when words like "expect,"
"anticipate" or "believe" are used, we are making forward- looking statements.
Although we believe that our expectations reflected in such
forward-looking statements are reasonable, our expectations may not 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." Other factors which are relevant to assessing the forward-looking
statements are contained throughout this Prospectus. You should carefully
consider the forward-looking statements in the context of all the information in
this Prospectus.
2
<PAGE>
SUMMARY OF THE OFFERING
U.S. Energy Corp. U.S. Energy Corp. ("USE") 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 sectors are in the development stage.
The most significant uranium properties are located on Green Mountain and Sheep
Mountain in Wyoming, and in southeast Utah. The gold property is located in
Sutter Creek, California, east of Sacramento. 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. USE and Crested Corp.
("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. All of USE's (and Crested's)
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 and various jointly-owned subsidiaries of USE and Crested. The joint
venture with Crested is referred to in this Prospectus as "USECC". Gold
operations are conducted through Sutter Gold Mining Company, a jointly-owned
subsidiary. Construction operations are carried on primarily through USE's
subsidiary Four Nines Gold, Inc. ("FNG").
In fiscal 1998, USE and USECC signed an agreement with Kennecott
Uranium Company ("Kennecott"), for the purchase of Kennecott's interest in the
Wyoming uranium project held by the Green Mountain Mining Venture ("GMMV"). This
agreement expired on October 30, 1998. Please see "Information About USE -
Business and Properties - Minerals-Uranium-The Green Mountain Mining Project
Amendment to GMMV."
In fiscal 1998, USE and Crested continued the development of the GMMV's
Jackpot uranium mine 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).
For fiscal 1999 and 2000, USE seeks 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; this decision was based upon the expected negative impact on
uranium prices from the uranium inventory which USEC Inc. announced was held in
its inventory and could be sold into 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). These other factors may justify the resumption of development work
and putting the Utah uranium properties into production in the near-term may be
warranted. See "Information About USE - 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. Kennecott has recently "fully
impaired" its investment in the GMMV. See the GMMV Financial Statements in this
Prospectus. For a discussion of this matter, see "Information About USE -
Business and Properties - Minerals - Uranium - The Green Mountain Mining
Venture."
3
<PAGE>
USE also is refining plans to build a mine and mill for the Sutter Gold
Mine 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 some capital costs will be funded
internally by Sutter Gold Mining Company. Additional funding will be needed to
build the mine and mill, however, there are no funding agreements as of the date
of this Prospectus. See "Information About USE - Gold."
Yellow Stone Fuels Corp. Yellow Stone Fuels Corp. ("YSFC") is a
corporation organized under the laws of Ontario, Canada. All operations are
conducted through Yellow Stone Fuels, Inc., a Wyoming corporation which is
wholly-owned by YSFC. Through its subsidiary, YSFC holds (through lease or
ownership) approximately 9,480 acres of properties in Wyoming and New Mexico.
The properties are believed to be suitable for uranium production using the in
situ leach ("ISL") process. ISL mining pumps fortified water through underground
uranium deposits to dissolve uranium, then pumps the pregnant solution back to
the surface for processing to remove and concentrate the uranium. None of YSFC's
properties are in production. YSFC will require significant amounts of capital
to start any mining operations, but YSFC does not have such capital. YSFC's
business of acquiring uranium properties will not be affected by the Exchange
Offer.
USE and Crested own a total of 3,000,000 (25.6%) of the issued and
outstanding shares of YSFC Common Stock. Employees and affiliates of USE and
Crested own an additional 7,495,000 shares (64.0%) of YSFC. The YSFC
shareholders own 1,219,000 shares (10.4%) of YSFC.
The Exchange Offer
Securities Offered 1,462,804 Shares of USE Common Stock (1)
Warrants to Purchase 121,900 Shares
of USE Common Stock (2)
USE Common Stock Outstanding Before
Exchange Offer 7,906,526 Shares
USE Common Stock Outstanding After
Exchange Offer 9,490,330 Shares (1)(2)(3)
Nasdaq NMS Symbol "USEG"
- ----------------------------
(1) Assumes that (i) the USE share value is $2.00 on the last day of the
Exchange Offer period; and (ii) all the YSFC shares are exchanged on the last
day of the Exchange Offer. To the extent the USE share value goes down or up
from $2.00, and/or YSFC shares are exchanged before the last day of the Exchange
Offer, then more or less USE shares and USE Warrants will be issued in the
exchange.
(2) Assumes that (i) the USE share value is $2.00 for all USE Warrants; and (ii)
that all YSFC Warrants are exchanged for USE Warrants.
(3) Assumes that all USE Warrants are exercised to purchase shares of USE Common
Stock. See "Description of USE Securities."
No meeting of the YSFC shareholders will be held in connection with
this Exchange Offer. If all of the YSFC shareholders exchange all of their YSFC
shares, USE will own 4,219,000 shares (36.0%) of YSFC (including the YSFC shares
currently held by Crested). YSFC will not be merged into USE in connection with
4
<PAGE>
this Exchange Offer, and it is not presently anticipated that such a merger will
be effected in the future. For additional information on this Exchange Offer,
please see "Terms of the Exchange" below.
SELECTED FINANCIAL DATA
The following tables shows certain selected historical financial data
for USE for the five years ended May 31, 1998, and for YSFC for the two years
ended May 31, 1998. Unaudited historical financial data for the six month
periods ended November 30, 1998 and 1997, for both companies, also is shown. The
selected data is derived from and should be read with the Financial Statements
for USE and YSFC included in this Prospectus.
In the opinion of each of USE and YSFC management, the unaudited
financial data of each company have been prepared on a basis which is consistent
with the audited financial data, and the interim financial data include all
adjustments (which consist only of normal recurring adjustments) necessary for a
fair presentation of interim results.
U.S. Energy Corp. May 31,
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
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 USE Consolidated Financial
Statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
November 30, 1998
-----------------
(unaudited)
<S> <C>
Current assets $ 10,050,000
Current liabilities 5,423,500
Working capital 4,626,500
Total assets 40,299,800
Long-term obligations(2) 14,192,700
Shareholders' equity 14,085,000
<FN>
(2)Includes $8,860,900 accrued reclamation costs at November 30, 1998.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
For Years Ended May 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 11,558,500 $ 5,790,200 $ 9,632,200 $ 4,600,600 $ 8,776,300
Income (loss) before
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>
6
<PAGE>
<TABLE>
<CAPTION>
For Six Months Ended November 30,
----------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues $ 3,012,600 $ 4,163,800
(Loss) income before
minority interest
and equity in loss
of affiliates (3,506,100) 294,900
Equity in loss of
affiliates $ (43,600) $ (406,300)
Net loss (3,244,700) (174,000)
Net loss per share
basic and diluted $ (0.42) $ (0.03)
============ ===========
Cash dividends per share $ -0- $ -0-
============ ===========
</TABLE>
<TABLE>
<CAPTION>
Yellow Stone Fuels Corp. May 31, November 30,
- ------------------------ ----------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Current assets $ 1,718,400 $ 23,300 $ 1,410,250 $ 1,276,100
Current liabilities 605,700(1) 2,500 557,802(1) 54,900
Working capital 1,112,700 20,800 852,448 1,221,200
Total assets 1,996,400 218,400 1,801,611 1,534,100
Notes payable to affiliates -- 400,300 -- 400,00
Shareholders' equity (deficit) 1,390,700 (184,400) 1,243,809 1,071,800
<FN>
(1) Includes notes payable to affiliates USE and Crested of $400,000.
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
For the Period
from Inception
For Year (June 3, 1996) November 30,
Ended through -------------------------------
May 31, 1998 May 31, 1997 1998 1997
------------ ------------ ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 49,300 $ -- $ 40,730 $ 6,400
Net loss (546,000) (395,300) (160,595) (222,200)
Net loss per share,
basic and diluted $ (0.05) $ (0.04) $ (0.01) $ (.02)
========== ====-===== ========== ==========
Cash dividends per share $ -0- $ -0- $ -0- $ -0-
========== ====-===== ========== ==========
</TABLE>
Selected Historical and Unaudited Pro Forma Per Share Financial Data
The following sets forth selected historical and unaudited pro forma
per share data of USE, and historical and equivalent unaudited pro forma per
share data for YSFC, as if the Exchange Offer had been consummated for all the
eligible YSFC shares, as of May 31 and November 30, 1998 and the one year and
six month periods then ended, and as if (i) the USE share value was $2.00 and
(ii) the value of all such YSFC shares included 24 months of interest at 10
percent annually. The unaudited pro forma data are derived from the unaudited
financial data for each company included in this Prospectus. The unaudited pro
forma financial data are not necessarily indicative of the future results of
operations or future financial positions of USE or YSFC. See "Terms of the
Exchange Offer - Accounting Treatment of the Exchange Offer."
<TABLE>
<CAPTION>
At May 31, 1998 At November 30, 1998 Pro Forma
--------------- -------------------- ----------------------------------------
(unaudited) May 31, 1998 Nov. 30, 1998
------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net loss $ 983,200 $ 3,244,700 $ 1,039,460 (1) $ 3,261,714 (1)
Book value
per share $ 2.32 $ 1.87 $ 2.27 (2) $ 1.89 (2)
Loss per
share basic
and diluted $ (0.15) $ (0.42) $ (0.13) (3) $ (0.35) (3)
Cash dividends
declared -0- -0- -0- -0-
<FN>
(1) Amounts represent the historical loss of USE and gives the effect of the
additional 10.4% equity in loss of YSFC as if the additional interest was
acquired at the beginning of the respective periods.
(2) Amount is calculated by dividing pro forma stockholders' equity by the
proforma total outstanding shares of USE after the acquisition of the additional
interest in YSFC.
</FN>
</TABLE>
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<PAGE>
(3) Amount is calculated by dividing the pro forma net loss by the pro forma
weighted average shares outstanding as if the acquisition of the additional
interest occurred at the beginning of the respective period.
Comparative Market Value of the Securities of USE and YSFC. The
Exchange Rights Agreement was signed on September 17, 1997. On September 16,
1997 the closing bid price of USE Common Stock was $10.125. On that date, there
was no market for YSFC Common Stock and YSFC remains a private company as of the
date of this Prospectus. However, as of September 16, 1997, AFFC and YSFC had
signed an Agency Agreement for AFFC to sell shares of YSFC Common Stock in a
private placement at a price of $2.00 per share. Therefore, $2.00 should be
regarded as the historical per share price for YSFC as of September 16, 1997.
Because the Exchange Rights Agreement was intended to make the dollar investment
in YSFC shares equal to the dollar value of USE shares (except for the 10%
interest factor), the shares of YSFC will be worth the same dollar amount of USE
shares when an exchange is made, compared to the dollar investment on September
16, 1997.
Equivalent YSFC Market
USE Market Value per YSFC Market Value per Share Value per Share at
Share at Sept. 16, 1997 Share at Sept. 16, 1997 Sept. 16, 1997(1)
----------------------- ----------------------- -----------------
$10.125 $2.00 $2.00
(1) Equal to (i) the original amount invested by the YSFC shareholder,
divided by (ii) the USE share value on September 16, 1997, then (iii) multiplied
by the USE share value on September 16, 1997.
Comparison of the Percentage of Outstanding Shares of USE and YSFC Held
by Affiliates. No Voting Is Required.
As of the date of this Prospectus, the officers, directors and
affiliates of USE own (or control the voting of) 21% of the issued and
outstanding shares of USE Common Stock (not including unexercised options to buy
USE Common Stock). The officers, directors and affiliates of YSFC, including USE
and Crested, own (or control the voting of) 70% of the issued and outstanding
shares of YSFC Common Stock.
See "Voting and Management Information."
No approval by the shareholders of either USE or YSFC is required in
connection with this Exchange Offer.
No Regulatory Approvals Required. No Dissenters' Rights of Appraisal
Apply. No approval from any federal or state regulatory agency will be required
to be obtained in connection with this Exchange Offer. No dissenters' rights of
appraisal are available to the YSFC shareholders in connection with this
Exchange Offer, which means that YSFC shareholders may exchange all or part of
their YSFC shares, but they do not have the right to sell back their YSFC shares
to YSFC for cash equal to the "fair value" of the YSFC shares. See "Voting and
Management Information."
Tax Consequences. YSFC shareholders who elect to participate in this
Exchange Offer may realize income in the form of capital gain when they sell
their USE shares in the future. However, the participating YSFC shareholders
will realize ordinary income equal to 10 percent annual interest on their
original investment in YSFC. See "Terms of the Exchange Offer."
RISK FACTORS
The YSFC shareholders and the holders of the YSFC Warrants should note
that the business of USE is subject to certain risks, including the following:
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1. Limited Development Capital. USE's expected cash requirements for
the balance of fiscal 1999 and fiscal 2000 are the funding of on-going general
and administrative expenses; mine and mill development and holding costs of the
Sutter gold property; 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 USE and Crested hold.
As of the date of this Prospectus, USE does not have enough capital or
credit resources to put its uranium and/or gold properties into production, and
has limited capital to start construction work on the gold property. It is
possible, furthermore, that Kennecott will not fund any more development of the
GMMV's Jackpot Mine. Therefore, USE will need substantial capital to prepare its
properties for production and mine and mill uranium and/or gold from these
properties. USE may not obtain the necessary capital.
See "Information About USE - USE's 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 which is held through Sutter Gold Mining Company ("SGMC"). This
investment represents a significant portion of USE's consolidated assets.
Although SGMC completed private financings in fiscal 1997 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 USE is unable to fund SGMC's development and production costs from
internally generated funds, USE may be adversely affected. In fiscal 1998, USE
recorded an impairment of $1.5 million on its investment in SGMC; further
impairments may have to be recorded during the remainder of fiscal 1999. See
"Information About USE - Business and Properties - Gold - Lincoln Project
(California)".
3. Additional Shares to Market; Possible Dilution. USE may issue
additional common stock in a private placement or a public offering if needed
for development capital (see Risk Factor 1 above).
In addition, USE and Crested may finance the development of the uranium
assets through a new entity. The new entity would hold the principal uranium
assets of USE and Crested, and USE and Crested would be the principal
shareholders of the new entity. The impact of such a restructuring on the
shareholders of USE and Crested will not be known until terms of the transaction
have been finalized.
4. Variable Revenues and Recent Losses. Due to the nature of USE'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 similar revenues were recognized from fiscal 1992
through fiscal 1995. USE 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, USE 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 USE 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 navy vessels and weapons manufacture, and an immaterial amount consumed by
the medical sector. There are approximately 18 electric 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 potential customers for USE's uranium at any one time is likely to
be very limited.
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6. Public Resistance to 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 ("NRC") 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 "Information About USE -
Business and Properties - Uranium Market Information."
7. Project Delay. USE'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 financing,
unanticipated permitting requirements, or legal obstruction in the permitting
process by project opponents. In addition to increasing project capital costs
(and possibly operating costs), extended delays could result in a write off of
all or a portion of USE's investment in the delayed project, and/or could
trigger certain reclamation obligations sooner than planned.
8. Debt. At May 31, 1998 USE 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%).
The $1,000,000 line of credit has expired, but USE presently is negotiating to
obtain a new bank line of credit for $2,500,000. At November 30, 1998, USE had
$203,700 of long-term debt ($544,200 including the current portion of $340,500).
The amount of debt is small relative to USE's financial condition. However,
because of estimated reclamation obligations and standby costs of $13,055,600
(at May 31, 1998), USE 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 USE to develop and
operate its uranium and gold projects profitably will be significantly affected
by changes in the market price of uranium and gold. From 1988 until mid-1996,
the spot market price for uranium concentrates (U3O8) was depressed and had been
below $8.00 per pound as recently as 1992. See "Information About USE - Business
and Properties Uranium - Uranium Market Information." Uranium prices are subject
to a number of factors beyond the control of USE 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 U3O8 in the United States
recovered to between $16.25 and $16.50 per pound as of May 31, 1996, however,
prices were between $10.30 and $14.80 per pound in fiscal 1997. The market price
at January 19, 1999 was $10.00 per pound. USE believes that if the price
increases substantially, more utilities will seek long term price stabilizing
uranium supply contracts. If USE is able to obtain long term uranium supply
contracts with assured prices exceeding its cost of production, then Plateau's
and GMMV's properties will be profitable. USE 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
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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 USE's control, including international economic trends,
currency exchange fluctuations, the extent of forward sales of gold by
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 are decreasing. The aggregate effect of these factors is
impossible to predict at any one time. As of February 12, 1999, the Comex spot
price of gold was $290.50 per ounce, compared to $373 per ounce on November 24,
1996.
10. Proposed Federal Legislation. In recent years, the U.S. Congress
has considered several proposals for major revisions of the General Mining Law
of 1872, which governs mining claims and related activities on federal public
lands. If any of the 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 Congress will pass such legislation. The effect of any revision
of the General Mining Law of 1872 on USE'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. Efforts at the Sutter Gold
Mine to identify additional gold ore reserves may not be successful. Moreover,
substantial expenditures are required to establish additional ore reserves
through drilling and build mining and processing facilities. During the time
required to establish additional reserves 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 USE'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 USE 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.
USE carries property damage insurance with claim limits of $10,000,000.
13. Title to Properties. Nearly all the uranium mining properties held
by USE, 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 USE's title rights, such challenges in the future
could jeopardize title and possibly cause delays in operations on the affected
properties. See "Information About USE - Business and Properties - Mining Claim
Holdings."
14. Reclamation and Environmental Liabilities. USE'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,
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the Resource Conservation and Recovery Act and the Comprehensive Environmental
Response Compensation Liability Act. With respect to mining operations conducted
in Wyoming, the mine permitting statutes, the 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, USE's uranium mill in Utah and the GMMV mill in Wyoming
are subject to jurisdiction of the Nuclear Regulatory Commission ("NRC").
To the knowledge of USE, 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 environmental laws and regulations have on USE's capital
expenditures, see "Information About USE Business and Properties -
Environmental" and "Notes F and K to USE's Consolidated Financial Statements."
15. Possible Losses on Uranium Contracts. USE 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 for properties and capital. USE's competitors include a number of major
mining 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. There
also is competition 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 "Information
About USE- Business and Properties - Uranium - Uranium Market Information" and
"NUEXCO Exchange Value".
17. Estimates of Mineralized Materials. 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.
However, such estimates are necessarily imprecise and depend to some extent on
statistical inferences from limited sampling results which may, on occasion,
prove unreliable.
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Should USE encounter mineralization or formations at any of its mines or
projects different from those predicted by drilling and similar examinations,
those estimates may have to be adjusted and mining plans may have to be altered
in a way that could adversely affect USE's operations.
18. Bullfrog Litigation. USE 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
from royalties on the 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 "Information About USE - 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 Board of Directors of USE has
authority to create one or more 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 USE'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 USE. 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. USE's Board of
Directors is presently divided into classes. 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."
TERMS OF THE EXCHANGE OFFER
General. This Exchange Offer is made pursuant to the September 17, 1997
Exchange Rights Agreement between USE, YSFC and AFFC. This Exchange Offer is
made by USE to each of the YSFC shareholders who invested in YSFC through AFFC
in late 1997 and early 1998. Each such YSFC shareholder may exchange some or all
the YSFC shares owned for shares of USE Common Stock until the expiration of
this Exchange Offer at 5:00 pm MST on September 22, 1999. This Exchange Offer
also is made by USE to each holder of the YSFC Warrants, who may exchange some
or all of the YSFC Warrants for USE Warrants. Shareholders of YSFC who did not
invest in YSFC through AFFC cannot participate in this Exchange Offer.
The Exchange Rights Agreement was intended to provide liquidity to the
YSFC shareholders (and the holders of the YSFC Warrants), by allowing them the
opportunity to exchange their securities in a private company (YSFC) for
securities in a Nasdaq NMS public company (USE). The Exchange Rights Agreement
was negotiated at arms' length between YSFC, USE (which had founded and
organized YSFC and owns a substantial number of YSFC shares), and AFFC (as
YSFC's placement agent in the private offering of YSFC restricted shares). Under
the Exchange Rights Agreement, if YSFC were not listed on Nasdaq NMS by the
eighteenth month anniversary of the Exchange Rights Agreement, USE would be
required at that time to make
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an offer to the YSFC shareholders to exchange free trading shares of USE Common
Stock for their restricted shares of YSFC. An initial listing on Nasdaq NMS
would require YSFC to meet several conditions, including having minimum net
tangible assets of $6,000,000 and at least 400 shareholders. YSFC does not meet
these conditions to listing (and does not anticipate meeting these conditions in
1999 or 2000). Therefore, this Exchange Offer is being made to the YSFC
shareholders and holders of the YSFC Warrants pursuant to the Exchange Rights
Agreement.
The basic terms of the Exchange Rights Agreement were approved by the
USE board of directors at a special meeting of the directors of USE and Crested
on August 19, 1997. At that meeting, the directors of USE and Crested discussed
the various basic terms of the Exchange Rights Agreement as proposed by AFFC,
the funding of YSFC through that date by USE and Crested and other factors
including USE share value in August 1997. The directors of USE and Crested
discussed the difficulties which had been encountered in trying to obtain
funding for YSFC before, and they discussed the amount of funding to be raised
for YSFC by AFFC. At that meeting USE and Crested authorized John L. Larsen and
Max T. Evans, directors of USE and Crested, respectively, and Daniel P. Svilar
(general counsel to both companies) and R. Scott Lorimer (chief financial
officer for both companies) to negotiate with AFFC to include a cost sharing
provision in the Exchange Rights Agreement, and to execute such Agreement on
behalf of USE and Crested. AFFC did not agree to the cost sharing proposal (ie.
to pay any of the costs of this Prospectus). The Exchange Rights Agreement was
executed by all parties on September 17, 1997.
Exchange Ratio - Shares. The Exchange Ratio for shares is based upon
(x) the original investment amount paid by the YSFC shareholder plus 10 percent
simple annual interest, divided by (y) the average of the closing Nasdaq NMS bid
prices for a share of USE Common Stock for the five trading days before USE
receives the Notice of Election to Exchange from each YSFC shareholder. The
average price for USE Common Stock is referred to in this Prospectus as the "USE
share value." No fractional USE shares will be issued; any fractional shares
will be rounded up to the next full USE share.
As an example of how the Exchange Offer to YSFC shareholders might be
applied, USE would issue 5,813 shares to a YSFC shareholder who bought 5,000
shares of YSFC on October 16, 1997, and through this Exchange Offer, elected to
exchange all of his or her YSFC shares for USE shares and sent the Notice of
Election to Exchange to USE on June 1, 1999 when the USE share value is assumed
to be $2.00.
Example of How the Exchange Ratio for Shares Is Calculated
Total USE Number of USE
Invested Amount Interest(1) Share Value Shares Exchanged
--------------- ----------- ----------- ----------------
$10,000.00 $1,624.94 $2.00 5,813 Shares
(1) Interest is calculated at $83.33 per month for this example (based
on 10 percent per year on the $10,000.00 investment, divided by 12 months);
interest accrues for the 19.5 months from October 16, 1997 to June 1, 1999.
Exchange Ratio - Warrants. The Exchange Ratio for warrants is based on
(x) the number of YSFC shares underlying the holder's YSFC Warrants multiplied
by $2.00, divided by (y) the USE share value. The USE Warrants will be
exercisable until September 19, 2002 (the original term of the YSFC Warrants) at
an exercise price per USE share which is equal to the USE share value. See
"Description of USE Securities."
As an example of how the Exchange Offer to holders of YSFC Warrants
might be applied, USE would issue USE Warrants to purchase 16,254 USE shares to
a holder of YSFC Warrants who elected to exchange YSFC Warrants when the USE
share value is assumed to be $2.00.
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Example of How the Exchange Ratio for Warrants Is Calculated
Number of YSFC Shares YSFC Shares x USE USE Shares
Under YSFC Warrant By $2.00 Share Value Under Warrant
------------------ -------- ----------- -------------
24,380 $48,760 $2.00 16,254 Shares
USE will pay all of the costs of the Exchange Offer (legal and
accounting fees, and printing and mailing costs), which are related to this
Prospectus and the registration statement which includes this Prospectus. USE
will not pay any commissions on resale of the USE shares or USE Warrants
acquired by YSFC shareholders or holders of YSFC Warrants under the Exchange
Offer.
Plan of Distribution.
The USE shares will be offered for sale by the holders of the USE
shares and Warrants acquired in this Exchange Offer at market prices from time
to time. Selling commissions will be paid by such persons.
No sales proceeds will be paid to USE or any subsidiary of USE.
The USE shares and Warrants may be offered from time to time (i) in
transactions in the Nasdaq NMS over-the-counter market, 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 the sellers for who
they may act as agents or the persons to who 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 securities may be made pursuant to this
Prospectus or pursuant to Rule 144 adopted under the 1933 Act.
No underwriting arrangements exist as of the date of this Prospectus.
Upon being advised of any underwriting arrangements that may be entered into by
the holders of the USE shares or Warrants after the date of this Prospectus, USE
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.
USE is paying the expenses estimated at $10,000 of registering the USE
securities under the 933 Act.
How to Participate in the Exchange Offer. If you want to participate in
the Exchange Offer, you must complete and sign the Notice of Election to
Exchange (included with this Prospectus), and send it to USE together with your
certificates for YSFC shares (and a signed stock power) or your YSFC Warrants.
Your stock power must be stamped guaranteed by a bank or brokerage firm which
participates in the Medallion stamp program.
Your Notice of Election to Exchange will be irrevocable once received
and accepted by USE. You are entitled to only one election; however, you may
exchange some or all of your YSFC securities at that time. USE will issue shares
of Common Stock and YSFC Warrants to the participating YSFC shareholders and
holders of the YSFC Warrants, based on the USE share value in effect when your
Notice of Election to Exchange is received, and, in the case of YSFC shares, the
amount of interest which has accrued. Please allow at least 10 days for
processing and mailing certificates for USE shares to you. Along with your
certificates, you will receive a computation of the Exchange Ratio which was
applied to your YSFC securities.
The Notice of Election to Exchange and other documents must be received
at USE on or before September 22, 1999. No Notice of Election to Exchange will
be accepted after September 22, 1999.
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The Exchange Rights Agreement is included in this Prospectus.
Federal Income Tax Consequences of the Exchange Offer.
The Exchange Offer is not a "tax free" transaction. The following
summary is intended to highlight the most important federal income tax
consequences of the Exchange Offer for participating YSFC shareholders. It
should be noted that USE has not obtained any legal opinion concerning the
federal income tax consequences of the Exchange Offer for YSFC shareholders who
participate in the Exchange Offer. In addition, the summary does not discuss the
tax consequences for holders of YSFC Warrants who participate in the Exchange
Offer. YSFC shareholders and the holders of YSFC Warrants should consult their
own tax advisors to determine the federal (and state) income tax consequences of
participating in the Exchange Offer.
In general, a participating YSFC shareholder will acquire most of his
or her USE shares with a basis (for income tax purposes) equal to the original
investment in YSFC shares ($2.00 per share). If a participating YSFC shareholder
holds the USE shares received in the Exchange Offer for more than 12 months, any
gain or loss realized on sale thereafter will be treated as capital gains or
losses under the Internal Revenue Code of 1986, as amended (the "IRC"), using a
basis of $2.00 per USE share.
In addition, the USE shares received in payment of the accrued 10
percent annual interest on the original investment in YSFC shares will
constitute ordinary income under the IRC; the income will be deemed earned in
the calendar year of receipt, and the tax will be due in the following year. The
amount of income will be equal to the market value of the USE shares
representing payment of that interest amount.
DESCRIPTION OF USE SECURITIES
The USE Restated 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 USE 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 Restated Articles of Incorporation and the Wyoming
Management Stability Act, shares of USE Common Stock held by affiliated
companies (Crested, Plateau and SGMC) may be voted by such affiliated companies
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 and the shares of USE Common
Stock to be issued in the Exchange Offer will be, when issued, fully paid and
nonassessable.
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Preferred Stock. The USE 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 Stock. 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 USE
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.
Warrant to Shamrock Partners, Ltd. On January 20, 1998 USE 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 USE in arranging meetings
between representatives of USE 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 USE authorized the
issuance to SPL a Warrant to Purchase 200,000 shares of Common Stock of USE at a
price of $6.00 cash per share; the Warrant is exercisable through January 20,
2000. The Holder (or substitute Holders) of the Warrants are not entitled to any
rights of a shareholder in USE 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. 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.
As of the date of this Prospectus, SPL has not exercised the Warrant,
and USE has not filed a registration statement for SPL in connection with the
Warrant. This Prospectus does not include such Warrant or any shares of Common
Stock issuable on its exercise.
Warrant to Sunrise Financial Group, Inc. As of December 1, 1997, USE
retained Sunrise Financial Group, Inc. ("Sunrise") to serve as a financial
consultant and advisor on a nonexclusive basis until December 1, 1998. Sunrise
provided a limited amount of services and advice pertaining to USE's business.
As compensation for Sunrise's services, in December 1997, USE issued to Sunrise
a Warrant to Purchase 225,000 shares of Common Stock; the Warrant is exercisable
until December 1, 2000 at $10.50 per share. Sunrise has the right to demand that
USE register the purchased shares for sale to the public through filing a
registration statement with the Commission. As of the date of this Prospectus,
Sunrise has not exercised the Warrant. This Prospectus does not include such
Warrant or any shares of Common Stock issuable on exercise of such Warrant.
Share Option to R.J. Falkner & Company. In February 1999, USE retained
R.J. Falkner & Company ("RJF") for shareholder relations and stock brokerage
communication services for one year. USE will pay RJF $2,000 per month, plus
expenses, and will grant a three year option to R. Jerry Falkner, an affiliate
of RJF, to purchase 20,000 shares of restricted USE shares of Common Stock at
$2.62 per share until February 1, 2002. USE will register the exercise of the
options and resale of the USE shares purchased on exercise with the Commission,
by including the securities in another registration statement filed by USE, or
at Mr. Falkner's request, made at any time before February 1, 2001.
USE Warrants. On September 19, 1997, YSFC issued YSFC Warrants to AFFC
and three individuals associated with AFFC, pursuant to the Agency Agreement
between AFFC and YSFC by which AFFC, acting as YSFC's placement agent, sold
shares of restricted Common Stock of YSFC to customers of
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AFFC. The YSFC Warrants are exercisable at any time during the four years ending
September 19, 2002, to purchase an aggregate of 121,900 shares of restricted
Common Stock of YSFC at a price of $2.00 per share. Pursuant to the terms of the
YSFC Warrants, YSFC shares may be purchased for cash, or in a cashless
transaction by YSFC issuing YSFC shares in number equal to result of dividing
(x) the market value of the underlying shares less $2.00, by (y) the market
value of the underlying share, then (z) multiplying the resulting fraction by
the number of YSFC shares issuable on exercise of the holder's YSFC Warrant. The
cashless exercise method would reduce the number of shares issuable on exercise
of the YSFC Warrants, but would not result in any cash proceeds being received
by YSFC.
The YSFC Warrants contain anti-dilution provisions which would adjust
the exercise price of the Warrants in the event YSFC were to issue shares for
consideration which is less than the $2.00 exercise price of the Warrants. These
provisions will continue to be available to holders of YSFC Warrants who
participate in this Exchange Offer. The USE Warrants issued to participating
holders of the YSFC Warrants will contain similar anti-dilution provisions,
which would adjust the exercise price of the USE Warrants as necessary after the
holder's Notice of Election to Exchange is received by USE.
USE Warrants issued to the holders of YSFC Warrants who elect to
participate in this Exchange Offer will have terms identical to the terms of the
YSFC Warrants, except that the exercise price for the USE Warrants will be equal
to the USE share value determined on the date the holder's Notice of Election to
Exchange is received by USE.
Comparison of the Rights of Holders of Securities of YSFC and USE.
There are no material differences between the rights of holders of Common Stock
of YSFC, and the rights of holders of Common Stock of USE or between the rights
of holders of YSFC Warrants and the rights under the USE Warrants.
Accounting Treatment of the Exchange Offer. Assuming all of the YSFC
shares and YSFC Warrants are exchanged for USE shares and USE Warrants pursuant
to this Exchange Offer, the accounting treatment of the Exchange Offer by USE
will be as follows:
If all of the YSFC shares are exchanged for USE shares, USE's
percentage ownership of YSFC will increase from its current 25.6 percent to 36.0
percent (38 percent if YSFC converts the debt owed to USE and Crested to YSFC
shares, see "Information About YSFC"). As a result of USE's increased ownership
in YSFC, a greater percentage of the equity in YSFC's operating results will be
included in USE's operating results, and reflected in the USE financial
statements on a quarterly and annual basis. In addition, as a result of the
shares exchanged under this Exchange Offer, a greater number of USE shares will
be stated as outstanding on the USE balance sheets. However, USE will not own a
majority of the YSFC shares, and therefore YSFC's financial statements will not
be consolidated into the USE financial statements.
Except for summary information, this Prospectus does not include pro
forma financial information (which would show financial information about USE as
if the Exchange Offer were completed as of May 31, 1998, the 12 months then
ended, and the six months ended November 30, 1998), because after the Exchange
Offer (i) YSFC will remain a minority subsidiary of USE, and (ii) the increase
in equity ownership by USE in YSFC as a result of the Exchange Offer would not
have materially affected USE's operating results on a pro forma basis. See
"Summary of the Offering - Selected Financial Data - Selected Historical and
Unaudited Pro Forma Per Share Financial Data" above.
The Exchange Offer will effect a percentage dilution to the ownership
of USE by its current shareholders. If the USE share value in effect at the date
of this Prospectus remains at $2.00 throughout the Exchange Offer, the YSFC
shareholders could acquire up to 15.85 percent of USE. This percentage will
decrease or increase depending on (i) the number of YSFC shares actually
exchanged, and (ii) USE share values in effect from time to time during the
Exchange Offer. In addition, there will be dilution in the per
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share net tangible book value of the USE shares presently outstanding ($1.87 at
November 30, 1998 before the Exchange Offer, $1.89 at November 30, 1998 on a pro
forma basis assuming the Exchange Offer were consummated for all YSFC shares as
of that date and a USE share value of $2.00).
Information About the Holders of Warrants
The number of YSFC Warrants, and the number of USE shares owned by the
holders of the YSFC Warrants after the Exchange Offering shown in the table
below. None of the holders has had any position or served as an officer or
director of YSFC or USE or any other company affiliated with USE. American
Fronteer Financial Corporation acted as placement agent for a private financing
of YSFC in 1997. The individual holders Robert L. Long, John P. Kanouff and
Robert H. Taggart, Jr. still are associated with AFFC.
<TABLE>
<CAPTION>
Number of Number of USE Warrants or
Name of Holder YSFC Warrants USE Warrants Shares Offered
- -------------- ------------- ------------ --------------
<S> <C> <C> <C>
American Fronteer
Financial Corporation 48,760 48,760 48,760
Robert L. Long 30,475 30,475 30,475
John P. Kanouff 30,475 30,475 30,475
Robert H. Taggart, Jr. 12,190 12,190 12,190
-------- -------- --------
121,900 243,800 (1) 243,800
<FN>
(1) Assumes that the USE share value is $2.00 on the date(s) when all the YSFC
Warrants are exchanged for USE Warrants and that all YSFC Warrants are exchanged
for USE Warrants. To the extent the USE share value goes down or up from $2.00,
then more or less USE Warrants will be issued in the Exchange Offer.
</FN>
</TABLE>
INFORMATION ABOUT USE
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 is a subsidiary of Rio Tinto plc, formerly RTZ
plc of London. Rio Tinto plc is one of the world's leading natural resource
companies and
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owns 69% of Rossing Uranium Corp.'s operations in Namibia in southwest Africa.
Rossing currently produces about 6,000,000 lbs. of U3O8 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.
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 Sheep Mountain Partners
("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,
Inc. ("Nukem") and its subsidiary Cycle Resource Investment Corp. ("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 9,480 acres of properties are held by 282 unpatented lode
mining claims which have been staked by YSFC, plus four state leases held by
YSFC. The properties are located in Wyoming and New Mexico, and are believed to
be prospective of uranium and suitable for in-situ leaching.
The property interests of USE in Utah through Plateau Resources Limited
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 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
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<PAGE>
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 Woods 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 Limited 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 "Amendment to GMMV" 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 and entered into a joint venture agreement (the "GMMV Agreement") with
the USE Parties 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 Agreement, each party's participation interest in
the GMMV is subject to reduction for voluntary or involuntary failure to pay its
share of expenses as required in approved budgets (including Kennecott's
commitment to fund the initial $50,000,000 of the GMMV expenditures), so that in
effect, the interest held by each party collateralizes its performance. However,
a defaulting party would remain liable for third party liabilities incurred
during the GMMV operations, proportionate to its interest before reduction.
The GMMV cash flows will be shared between Kennecott and the USE
Parties according to their participation interests. However, 105 of the Green
Mountain Claims, which cover the Round Park (Jackpot) uranium deposit, currently
believed to be the most significant mineralized resource on Green Mountain, were
formerly owned solely by USE. Pursuant to an agreement between USE and Crested,
cash flow from production of uranium out of these 105 Green Mountain Claims will
be distributed only to USE and Kennecott, and GMMV expenditures on such
properties will be shared 50 percent by USE and 50 percent by Kennecott. Milling
costs will be paid by USE and Kennecott as operating costs.
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
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<PAGE>
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 the date of this Prospectus. USECC
has continued work on a contract basis at Kennecott's request.
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 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).
Amendment to 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. 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 purchase option, 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. See "USE
Management's Discussion and Analysis - Liquidity and Capital Resources - May 31,
1998." 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 until paid in full. As of the
date of this Prospectus, approximately $12,900,000 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
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<PAGE>
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 $12,900,000 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 the financial resources to fund the GMMV by
itself.
The USE Parties and Kennecott have not agreed upon the GMMV budget for
the three month period ending February 28, 1999, and the USE Parties will not be
paying for their share of that budget of expenditures. Therefore, the USE
Parties' 50% interest in the GMMV will be reduced by a small amount.
However, the GMMV will not be affected otherwise.
Kennecott, which is one-half owner of the GMMV, has determined that its
investment in the GMMV is "fully impaired." Kennecott has more than $52 million
invested in the GMMV (including the $15 million paid to USE when the GMMV was
formed in 1991), compared to USE/Crested's investment of approximately $950,000.
Therefore, even though Kennecott, and USE/Crested, are one-half owners in the
GMMV, Kennecott would have to realize significantly greater cash flows than
USE/Crested out of GMMV operations to recover its investment. See GMMV Audited
Financial Statements included in this Prospectus.
USE believes the decisions to finish the Jackpot Mine development work,
get the Sweetwater mill licensed for operation and start mining operations
should be based on careful analysis of all of the project mining and milling
costs, and that pricing models for long term contracts to supply uranium oxide
to utilities should be taken into account. See "Uranium Market Information"
below.
USE will continue to evaluate project mining and milling costs, and the
uranium oxide market in terms of both spot market prices and potential demand
from utilities for long term supply contracts. It is possible that no impairment
of USE's investments in its uranium properties (including the Utah properties
and the properties held by YSFC) will be necessary. However, it is also possible
that an impairment, or reduction in the carrying value of the uranium property
investments, will be necessary in the future. Any impairment would be recorded
as an expense on USE's consolidated statement of operations, and a reduction in
total assets on its balance sheet.
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 47 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
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<PAGE>
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 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 mineralized material from two decline tunnels (-17 percent slope) in
the Jackpot Mine, which will be continued underground from the south side of
Green Mountain when operations resume. 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 may be
required during full mining 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 purchase option payment, 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.
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<PAGE>
Sweetwater Mill. In fiscal 1993, the 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 the 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.
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 Energy and Coal Company
(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
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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 Agreement (see "Amendment to GMMV" above). In addition, if and to the
extent such liabilities resulted from UNOCAL's mill operations, and payment of
the liabilities was required before February 1, 2001 and before mill production
resumes, then up to $8,000,000 (escalated) of that amount would be paid by
UNOCAL, before Kennecott would be required to pay on its guarantee. However,
notwithstanding the preceding, the extent of any ultimate USECC liability for
contribution to mill cleanup costs cannot be predicted.
Permitting and Activities. The WDEQ issued a mine permit for the
Jackpot Mine on June 26, 1996. This Permit allows the GMMV to proceed with
construction of mine surface facilities, further underground mine development
and eventual mining of the Round Park (Jackpot) Deposit.
The Jackpot Mine Plan of Operations and a combination of the
alternatives analyzed in the EIS will allow for the disposal of mine waste rock
in the Big Eagle Mine pits some three miles from the Jackpot 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 advised that the Operating Permit would be issued
in October or November 1998, however, as of the date of this Prospectus the
Operating Permit has not been issued.
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 are accounted for by the equity method. 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:
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(a) to perform all studies, remedial or other response actions or other
activities necessary from time to time for Plateau to comply with environmental
monitoring and other provisions of (i) federal and state environmental laws
relating to hazardous or toxic substances, and (ii) the Uranium Mill Tailings
Radiation Control Act, the Atomic Energy Act of 1954, and administrative orders
and licenses relating to nuclear or radioactive substances or materials on the
property of, or produced or released by, Plateau; and
(b) to indemnify CPC from all liabilities and costs related to the
presence of hazardous substances or radioactive materials on Plateau property,
and to any future violation of laws and administrative orders and licenses
relating to the environment or to nuclear or radioactive substances.
Plateau transferred $2,500,000 cash to fund the "NRC Surety Trust
Agreement" with a commercial bank as trustee. The trustee is to pay future
decommissioning costs of Shootaring Mill as directed by the NRC. The amount
transferred to the trust is the minimum amount now required by the NRC as
financial assurance reclamation of the Shootaring Mill.
Plateau transferred $4,800,000 cash to fund the "Agency Agreement" with
a commercial bank. These funds will be available to indemnify CPC against
possible claims related to environmental or nuclear matters as described above,
and against third-party claims related to an agreement between Plateau and the
third-party (see "Note K to the USE Consolidated Financial Statements for fiscal
year ended May 31, 1998").
There are no present claims against funds held under either the Trust
Agreement or Agency Agreement. Funds (including accrued interest) not disbursed
under the Trust and Agency Agreements will be paid over to Plateau upon
termination of such Agreements with NRC concurrence.
Subsequent to closing, USE and Crested agreed that after Plateau's
unencumbered cash has been depleted, USE and Crested each will assume one-half
of Plateau's obligations, and share equally in Plateau's operating cash flows,
pursuant to the USECC Joint Venture.
Shootaring Mill and Facilities. The Shootaring Mill is located in
southeastern 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 ground water discharge permit for the
tailings facility from the State of Utah Water Control Division.
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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 are developing the
townsite and are selling home and mobile home sites.
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.
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 by settlement between the parties and the rest have been
determined by the 10th Circuit Court of Appeals ("CCA") (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,
Inc., with rates ranging from one to four percent on recovered uranium
concentrates. As of October 30, 1998, SMP and/or USE and USECC owned 98
unpatented lode mining claims and a 644 acre Wyoming State Mineral Lease in the
Crooks Gap area.
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.
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Of the claims, which contain a previously-mined open-pit uranium mine
and three underground mines, Pathfinder Mines Corporation ("PMC") had 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. On October 30, 1998, PMC
transferred all its interest in the Congo area back to USECC.
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
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.
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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 produced
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.
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 1999.
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
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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. Recently, Kazakhstan has terminated its Suspension
Agreement.
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 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.
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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.
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
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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
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
34
<PAGE>
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 $10.00/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.
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 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.
35
<PAGE>
NUEXCO EXCHANGE VALUE
Years Ended US $/pound of U3O8
------------------
May 31, High Low
------------- ---- ---
1992 $ 9.05 $ 7.75
1993 10.05 7.75
1994 9.60 9.05
1995 12.20 9.65
1996 16.50 13.00
1997 14.25 10.20
1998 12.05 10.50
1999 10.00* 8.75
* Through January 21, 1999 the price was $10.00/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 90 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.
Gold
Sutter Gold Mine (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. The entire Lincoln Project is now owned by Sutter Gold Mining
Company, a Wyoming corporation ("SGMC"), which is a 59% subsidiary of USE as of
November 30, 1998. The Lincoln Project has been renamed the Sutter Gold Mine
("SGM").
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 Corp., now American Fronteer Financial Corp. or "AFFC",
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, permitting 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 "USE Management's Discussion and Analysis of 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.
36
<PAGE>
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, amended its 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. In
fiscal 1999, preparation of the mill and office site has started and the
engineering firm has finished construction drawings for the mill. If SGMC
obtains the necessary funding within the balance of fiscal 1999, SGMC could be
in production in fiscal 2001. 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
Commission, and none of its securities are traded in the United States or
Canada.
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.
(b) Together, a $10,000,000 Contingent Stock Purchase Warrant (the
"USECC Warrant") which 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.
SGMC may prevent the exercise of the USECC Warrant by paying 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).
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
37
<PAGE>
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.
USE 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 were restricted
securities, but pursuant to the terms of the Stock Purchase Agreements, USE has
filed an effective registration statement with the Commission to permit the
resale to the public of the funds' shares.
The Stock Purchase Agreements for three Canadian Funds, and the Stock
Purchase Agreement for the fourth fund with respect to the cash portion thereof,
closed as of April 7, 1998, at which date the closing bid price of USE shares
was $6.876. A price of $7.00 per USE share was utilized by the funds and USE for
purposes of determining the number of USE shares to be issued under the Stock
Purchase Agreements.
The 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 February 1999, USE issued 89,158 restricted shares of USE Common
Stock to acquire 207,500 shares of SGMC Common Stock. The SGMC shares which were
acquired were part of the private offering through AFFC in fiscal 1997. The
transaction was based on a USE share value of $7.00 (2.33 SGMC shares for 1 USE
share), and was initiated by USE to provide liquidity to the private investors.
As a result of the transaction (which is now completed), USE's ownership
interest in SGMC was slightly increased.
USECC Management Agreement with SGMC. Effective June 1, 1996, SGMC
entered into a Management Agreement 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.
38
<PAGE>
Properties. SGMC (through its subsidiary USECC Gold L.L.C.) 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 acreage
of mineral rights owned will be decreased to about 280-300 acres in 1999. The
properties are located in the western Sierra Nevada Mountains at from 1,000 to
1,500 feet in elevation; year round climate is temperate. Access is by
California State Highway 16 from Sacramento to California State Highway 49, then
by paved county road approximately .4 miles outside of Sutter Creek.
On October 1, 1996, SGMC entered into three letter agreements (the
"Lincoln Letter Agreements") with the property owners of 185 acres ("185 Acre
Property") on the west side of California State Highway 49 ("Hwy 49") and 32.58
acres ("32 Acre Property") of minerals which include 20.5 acres of surface on
the east side of Hwy 49 adjacent to the Stringbean Decline. The 185 Acre
Property is the proposed new location for the Surface Fill Unit and the 32 Acre
Property 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 into
the SGM holds a 5 percent net profits interest on production from such
properties, which was granted by a prior owner of the project. An additional 0.5
percent net smelter return royalty is held by a consultant to a lessee prior to
that owner's acquisition of the properties, which 0.5 percent interest covers
the same four properties.
Through May 31, 1998, an estimated $21,000,000 was spent on the SGM by
Meridian, USECC Gold and other of their predecessors to acquire the SGM 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 SGM 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)
39
<PAGE>
mines within the SGM 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 SGM is typical of the historic Mother Lode
region of California, with a steeply dipping to vertical sequence of
metavolcanic and metasedimentary rocks hosting the gold-bearing veins. Depending
on location along the strike length on the vein systems, the gold-bearing veins
are slate, metavolcanic greenstone, or an interbedded unit of slates and
volcanics. The Lincoln Project covers over 11,000 feet of strike length along
the Mother Lode vein systems.
Permits and Future Plans. In August 1993, the Amador County Board of
Supervisors issued a Conditional USE Permit ("CUP") allowing mining of the SGM
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 fourth 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
40
<PAGE>
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.
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
41
<PAGE>
1970s, for example, steel alloys were modified to reduce reliance on molybdenum.
AMAX and Cyprus Minerals Company were the two major primary producers of
molybdenum in the United States until November 1993, when AMAX was acquired by
Cyprus.
Worldwide demand for molybdic oxide in calendar 1996 was reported at
approximately 230,000,000 pounds, its highest level ever. Production for that
period was about 225,000,000 pounds. There is, however, excess capacity from the
primary molybdenum mines which are currently not producing. In addition, by-
product molybdenum (primarily from Chilean copper mining companies) has a major
impact on available supplies. It is unlikely that any major new primary deposits
will be developed during fiscal 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" below.
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.
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
installments to be paid on February 15, 1997, February 15, 1998 and February 15,
1999 The installments for 1997 and 1998 have been received.
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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.
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
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Crested are selling lots at Jeffrey City and made sales aggregating $38,400 and
$21,150 during fiscal 1998 and 1997, respectively.
In Riverton, Wyoming, 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.
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.
Although initial payments on the option agreements were received, the
developer is in default on the balance. In July 1998, USE filed a lawsuit
seeking recovery of the balance owing on promissory notes and contracts. See
"Legal Proceedings."
Utah Properties. Canyon Homesteads, Inc. (a Plateau subsidiary) owns a
majority interest in a joint venture which holds the Ticaboo Townsite in
Ticaboo, Utah (see "Minerals - Uranium-Shootaring Canyon Mill - Ticaboo
Townsite" above). In fiscal 1995, USE acquired the minority interest in the
joint venture from a nonaffiliate. Revenues from sale of homesites and operation
of the motel were nominal in 1998.
Construction
Four Nines Gold, Inc. On September 13, 1995, FNG was awarded a
construction contract for $618,270 by the United States Department of the
Interior, Bureau of Reclamation, for the Minor Laterals, North Canal, Stage 5,
Belle Fourche Unit, South Dakota. As of May 31, 1997 FNG had completed 100% of
the contract, billing and receiving $618,270. The contract as of May 31, 1997,
had resulted in a loss of $48,426 to FNG, however, a claim for $172,977 was
submitted. On July 2, 1998 the claim was denied by the Bureau of Reclamation and
FNG has 12 months to appeal.
For fiscal 1998, FNG has had no contracts for construction work, but
has rented its equipment to USECC for USE by the GMMV at the Jackpot Mine.
Rental revenues totaled $478,338 for fiscal 1998 at a profit of $263,409, and
the rentals are continuing into fiscal 1999.
Neither commercial nor construction operations are dependent upon a
single customer, or a few customers, the loss of which would have a materially
adverse effect on the Company.
Research and Development
USE has incurred no research and development expenditures, either on
its own account or sponsored by customers, during the past three fiscal years.
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Environmental
General. USE'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 USE. Similar
laws and regulations in California affect SGMC, operations and in Utah laws and
regulations effect Plateau's operations.
USE's management believes USE 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 and which is
approved for unrestricted operation.
Other Environmental Costs. Actual costs for compliance with
environmental laws may vary considerably from estimates, depending upon such
factors as changes in environmental laws and regulation (e.g., the new Clean Air
Act), and conditions encountered in minerals exploration and mining. USE does
not anticipate that expenditures to comply with laws regulating the discharge of
materials into the environment, or which are otherwise designed to protect the
environment, will have any substantial adverse impact on the Registrant's
competitive position.
Employees
As of the date of this Prospectus, USE had approximately 82 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 pay certain rental fees annually 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
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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 USE' 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 USE's ability to hold or develop such properties, as well as
other mineral prospects on federal unpatented mining claims.
LEGAL PROCEEDINGS
Sheep Mountain Partners Arbitration/Litigation
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 both the
arbitration proceedings and the State Court case. In February 1994, all of the
parties agreed to exclusive and binding arbitration of the disputes before the
American Arbitration Association ("AAA"), 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
AAA 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
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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
$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 Second Amended 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 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 three years 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 Second Amended
Judgment. The ruling of the 10th Circuit Court of Appeals 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 received an additional $6,077,264
(including interest and court costs) from Nukem in February 1998 for a total net
monetary award of $15,468,625 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.
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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 notwithstanding the verdict
("JNOV"). The motions were denied by the Court and USE posted a supersedeas bond
for $275,000 to appeal the judgment. The appeal is pending.
BGBI Litigation
USE and Crested are defendants and counter- or cross-claimants in
certain litigation in the District Court of the Fifth Judicial District of Nye
County, Nevada, brought by Bond Gold Bullfrog Inc. ("BGBI") on July 30, 1991.
BGBI (now known as Barrick Bullfrog, Inc.) is an affiliate of Barrick Corp., a
large international gold producer headquartered in Toronto, Canada. The
litigation primarily concerns extralateral rights associated with two patented
mining claims owned by Parador Mining Company Inc. ("Parador") and initially
leased to a predecessor of BGBI, which claims are in and adjacent to BGBI's
Bullfrog open pit and underground mine. USE and Crested assert certain interests
in the claims under an April 1991 assignment and lease with Parador, which is
subject to the lease to BGBI's predecessor.
BGBI seeks to quiet title to its leasehold interest in the subject
claims, a determination that USE and Crested have no rights in the claims, and
an order enjoining USE and Crested from asserting any interest in them. BGBI
further asserts other claims and that, in attempting to lease an interest in the
subject claims to USE and Crested, Parador breached the provisions of its lease
to BGBI, and that Parador is responsible for the legal fees and costs incurred
by BGBI in the quiet title action, which may be offset against royalties.
A partial or bifurcated trial to the Court of the extralateral rights
issues was held on December 11 and 12, 1995, to determine whether the Bullfrog
orebody is a "vein, lode or ledge" as described in the General Mining Law and,
if so, whether the facts warrant application of the doctrine of extralateral
rights as set forth in such statute. The Court found that Parador had failed to
meet its burden of proof and therefore Parador, USE and Crested have no right,
title and interest in the minerals lying beneath the claims of Layne pursuant to
extralateral rights. The partial trial did not address the issues of breach of
contract by the defendants and BGBI for specific performance and they were tried
before the Court commencing on January 26, 1998. After the trial, the Court
found against the parties on their respective claims. BGBI and Parador, and
USE/Crested are appealing the decision to the Nevada Supreme Court.
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,
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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 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 State of Wyoming moved to
join in the litigation on behalf of the plaintiffs. A hearing was held on the
motions on January 8, 1999 before the U.S. District Court in Cheyenne, Wyoming
and the Court took the motions under advisement.
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") and the original developer Pangolin Corporation, seeking compensatory
and consequential damages of more than $1.3 million from the defendants for
dealings in real estate owned by USE and Crested in Gunnison, Colorado.
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, the parties are negotiating for a
settlement, however, no final settlement has been reached.
SGMC Litigation
In 1993, Amador County issued a conditional use permit ("CUP") to allow
SGMC to develop the SGM 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 SGM 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.
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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.
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 to end May 31, 1999
-------------------------------
First quarter ended 8/31/98 $ 6.88 $ 1.25
Second quarter ended 11/30/98 3.94 0.75
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 February 12, 1999, the closing bid price was $3.00 per share and
there were approximately 696 shareholders of record for Common Stock.
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USE has not paid any cash dividends with respect to the Common Stock.
There are no contractual restrictions on USE's present or future ability to pay
cash dividends, however, USE intends to retain any earnings in the near future
for operations.
USE 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 USE's liquidity, capital resources and
results of operations during the periods covered in USE'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 USE to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements.
Liquidity and Capital Resources at November 30, 1998
During the six months ended November 30, 1998, USE and its subsidiary
Crested received $5,026,000 in cash as a result of a partial settlement of Sheep
Mountain Partners ("SMP") arbitration. Primarily as a result of receiving these
funds the cash position of USE increased to $5,900,800 at November 30, 1998 from
$5,650,500 at May 31, 1998. Other increases in components of working capital
were increases in assets held for resale and other assets of $155,800 and
accounts receivable affiliates of $356,400.
The components of the increase in assets held for resale and other assets was
an increase of $134,400 in prepaid insurance and $21,400 improvements in assets
held for sale by USE's subsidiary Plateau Resources Ltd. ("Plateau"). Accounts
receivable affiliates increased due to USE and Crested advancing funds for the
Green Mountain Mining Venture ("GMMV") operations. These advances had not yet
been reimbursed by the GMMV at November 30, 1998, due to certain differences of
opinion between the GMMV participants relating to allowable charges under the
temporary standby status of the GMMV properties. As of December 31, 1998, the
majority of these advances had been repaid by the GMMV. USE, Crested and
Kennecott continue to work on resolving the balance of the funds due USE and
Crested. Inventories also increased by $38,700 as a result of operational needs
of USE's subsidiaries Plateau and Western Executive Air, Inc.
The current portion of long term debt increased by $114,800 during the
six months ended November 30, 1998, as a result of financing the annual
insurance premium. Total long term debt as a result of the financing of these
insurance premiums along with other minor financings resulted in an increase of
$201,000 in long term debt. During the six months ended November 30, 1998, there
was also a reduction of long term debt through cash payments of $160,700 for a
net increase in long term debt of $40,300.
During the six months ended November 30, 1998, USE and its consolidated
subsidiaries purchased a various pieces of mining equipment for a total of
$188,600. In the normal course of evaluating equipment needs, USE and its
subsidiary also received $203,900 in proceeds from the sale of various pieces of
equipment that were no longer needed.
During the six months ended November 30, 1998, USE purchased a total of
45,700 shares of its Common Stock from the open market at a total purchase price
of $123,800. These shares are held as treasury shares.
As part of the 1997 agreement to purchase Kennecott's interest in the
GMMV, USE and Crested received a $4,000,000 payment. This amount is carried as a
deferred purchase option until such time as an
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acquisition of the Kennecott interest is concluded (which would be on terms
different from the original 1997 Acquisition Agreement), or standby costs are
offset against the $4,000,000 deferred purchase option until it is reduced to
zero.
Capital Resources
General: The primary source of USE's capital resources for the
remaining six months of fiscal 1999 are the cash on hand at November 30, 1998;
the potential receipt of cash from the SMP Arbitration Award; possible equity
financing from affiliated companies; and proceeds under the line of credit after
it is renewed. 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 had a $1,000,000 line of credit
with a commercial bank. The line of credit was secured by various real estate
holdings and equipment. USE and Crested are currently negotiating with the
commercial bank to increase the line of credit. No assurance can be given that
the line of credit will be increased. The commercial bank however has given
initial indications that at a minimum the line of credit will be renewed in its
initial amount of $1,000,000 during the third quarter of 1999, and possibly for
up to $2,500,000. It is anticipated that the 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 dependent on the market price of gold and
uranium among other conditions. As of November 30, 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 can not 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 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 November 30, 1998 and the
anticipated proceeds from the Nukem litigation will be adequate to fund working
capital requirements through fiscal 1999. However, these capital resources will
not be sufficient to provide the funding for major capital expansions and
development of mineral properties. For these expansions USE and Crested continue
to seek joint venture partners.
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 portion of the
costs associated with the GMMV properties should USE elect to participate in the
holding costs, and corporate general and administrative expenses.
SGMC: USE owns a majority interest in SGMC and is therefore potentially
responsible for the ongoing administrative and development costs of the
properties owned by 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.
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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 six months
ended November 30, 1998, USE was continuing its search for development capital
and has several interested parties, however no financing commitments has been
obtained.
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 real estate assets. The dollar amount
for the reclamation bond is reviewed annually by State regulatory agencies. USE
and Crested currently have a reclamation liability on the SMP properties of
$1,451,800 which 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 placed into operation. There are no major reclamation obligations
during the balance of Fiscal 1999 that USE and Crested are aware of on the
properties.
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 will be one delivery under this contract during the third
quarter of fiscal 1999, which requirement was sold to a third party; USE and
Crested will make a nominal profit on the sale during the third quarter of 1999.
As of November 30, 1998, USE has no additional delivery or financing commitments
for the sale or purchase of uranium during Fiscal 1999.
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 made the financing of the acquisition of
Kennecott's interest in the GMMV more difficult. USE and Crested had until
October 30, 1998 to complete the financing efforts to purchase Kennecott's
interest. The financing was not successfully completed and the Acquisition
Agreement, which was signed on June 23, 1997, expired on October 30, 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 are
desirous that the expenses be held to a minimum. All parties to the GMMV will
need to elect to either participate in the standby costs or become diluted by
not participating.
Certain disagreements as to how the holding costs from July 1998
forward are to be funded have existed between Kennecott and USE and Crested.
Until such time as the disagreements are resolved and a firm understanding is
arrived at, no estimate as to any potential financial commitment for the holding
costs
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of the properties to USE and Crested can be made. If the GMMV participants are
not able to resolve the disagreements on holding cost obligations, the GMMV
contracts direct such disagreements to arbitration for resolution.
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 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.
During the six months ended November 30, 1998 the reclamation liability
on the Plateau properties was increased by $82,100 to provide for estimates made
by regulatory agencies. USE does not anticipate placing the Plateau properties
into production during Fiscal 1999. It is also anticipated that the reclamation
liabilities, (fully bonded by a cash bond), which are associated with the
Plateau properties will not be performed until well into the future.
Yellow Stone Fuels Corp. ("YSFC"): In USE's opinion, YSFC has
sufficient cash to complete its projected 1999 exploration program on its
in-situ uranium properties. As of November 30, 1998, YSFC owed USE and Crested
$400,000 in a convertible promissory note plus interest at 10% per annum. The
note was not paid on the due date of December 31, 1998. The directors of YSFC
and management of USE and Crested are discussing how the note will be retired.
Presently, it is anticipated that the note will be retired partially in cash and
partially in stock of YSFC pursuant to the terms of the note and will be
completely retired by these two methods during March of 1999. Additional amounts
of money totaling $157,800 have been advanced by USE and Crested for YSFC for a
total indebtedness at November 30, 1998 of $577,800 plus accrued interest. YSFC
has sufficient cash on hand to retire this indebtedness.
Term Debt: Debt to third parties at November 30, 1998 was $544,200 as
compared to $503,900 at May 31, 1998. The increase in debt to third parties
consists primary of debt due on the financing of annual insurance premiums and
various purchases of equipment.
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. Further, it is not
anticipated that any of the mining properties in which USE owns an interest in
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 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 damage 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 and Crested 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.
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Results of Operations
Six Months Ended November 30, 1998
Compared to Six Months Ended November 30, 1997
During the six months ended November 30, 1998, revenues decreased from
those revenues reported during the same period of the previous year by
$1,151,200 to total revenues of $3,012,600. The major reduction was as a result
of USE not receiving any revenues from the delivery of uranium on one of the SMP
contracts. During the six months ended November 30, 1997, USE recognized
$969,100 in revenue from the profits derived from a SMP contract delivery. No
such revenues were recognized during the six months ended November 30, 1998.
Revenues from management fees increased by $44,700 during the six months ended
November 30, 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 six months ended November 30, 1998 increased
by $2,649,800 over the same period of the previous year. The increase in costs
primarily came as a result of increased activity on mineral properties,
associated with development of the Jackpot Mine declines in June and July on the
GMMV properties and subsequent shut down expenses of the GMMV properties, Sutter
Gold permitting and Plateau permitting of mine and mill properties and real
estate development. Commercial operations and increased general and
administrative overhead to supervise the increased activity also contributed to
increased general and administrative costs. USE and Crested also paid cash
bonuses of $561,000 (including taxes due) to four employees in recognition of
the extraordinary dedication they had given to their work in the SMP
arbitration/litigation. The projects which are being developed, are currently
not in the production phase and therefore 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 however
made in July 1998 to place the GMMV mines on active standby. USE is therefore
anticipating reductions in costs.
As a result of the reduced revenues and increased costs discussed
above, operations for the six months ended November 30, 1998 resulted in a loss
of $3,244,700 or $0.42 per share as compared to a loss of $174,000 or $0.03 per
share for the quarter ended November 30, 1997.
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 the operations and the inability to process financial
transactions. USE has evaluated the operating systems on all headquarter and
field office computers and consulted with all of the vendors of the computer
software which is being used by USE and affiliates. The vendors have confirmed
to USE that all of USE's software and information systems are Year 2000
compliant. There are no pieces of equipment in the field which operate on
imbeded computer chips.
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
which resulted in increased cash of $3,124,000, and $1,800,500 from the sale of
USE's common stock. These receipts of cash were used
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primarily in mine development of $1,125,000, purchases of equipment of
$1,947,200, increased investment in affiliates of $102,300, and cash used in
operations. During the fourth quarter of 1998 USE 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
USE and Crested of $5,026,000. The increase in accounts receivable affiliates is
primarily the result of USE advancing funds for Crested in the various ventures
in which the companies participate and advances that USE 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 USE 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 USE's long term notes payable.
During the first quarter of fiscal 1998, USE and Crested entered into
an Acquisition Agreement with Kennecott to acquire Kennecott's interest in the
GMMV. As part of that Agreement Kennecott paid USE and Crested $4,000,000 upon
execution which is recorded as a deferred purchase option. Because the
Acquisition Agreement was not closed, 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 USE's chairman
retired $431,900 of obligations to USE and Crested. See "Voting and Management
Information - Directors and Executive Officers of USE - 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 USE 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 USE under the 1996 Stock Award Program. Such shares are retained by
USE until the executive retires and are forfeitable under certain conditions.
Capital Resources
General: The primary source of USE'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, 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. This facility
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is currently available to USE. 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 USE 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 USE 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 USE and Crested to raise equity
financing for these subsidiaries will be impaired.
USE 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 USE's
mineral properties and, accordingly, USE'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 USE's common stock.
Capital Requirements
General: The primary requirements for USE'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 USE and Crested as a result of the settlement
agreement reached regarding the SMP arbitration, USE's portion of the costs
associated with the GMMV properties and corporate general and administrative
expenses.
SGMC: Effective April 7, 1998, USE 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 USE's common stock. The transaction
resulted in USE 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, 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.
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 USE's intent to complete the necessary financing to
develop the reserves of SGMC. Management believes that if adequate funding is
obtained, production will begin in fiscal 2000. SGMC is currently attempting to
negotiate financing with an investment firm with a proposed plan for the
necessary financing intended to be completed in fiscal 1999. Sufficient capital
resources are available to SGMC to continue its permitting and capital raising
activities.
SMP: As part of a settlement agreement reached during the fourth
quarter of fiscal 1998 regarding the SMP Arbitration, the SMP mines and
associated properties were transferred to USE and Crested. All past
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holding costs of the SMP mines were resolved and the future costs of standby as
well as reclamation are the obligation of USE 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, USE 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 USE
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 USE $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 USE'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 made the financing of the acquisition of Kennecott's
interest in GMMV more difficult.
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. USE 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, USE 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 USE. USE continues to work on methods of
increasing revenues and reducing costs. There has been an annual growth in sales
since USE has owned Plateau. USE 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.
USE 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. USE 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, USE will not put the properties into production.
Yellow Stone Fuels Corp. ("YSFC"): YSFC has sufficient cash to complete
its fiscal 1999 exploration program on its in-situ uranium properties. At May
31, 1998, YSFC owed USE 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. At May 31, 1998, YSFC also owed USE and
Crested $161,700 for miscellaneous payroll and operating expenses. YSFC has
indicated its desire to pay the 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.
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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 USE 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 USE's business.
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 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 USE's mining properties will enter the reclamation phase prior to
May 31, 1999.
Prior to fiscal 1996, USE and Crested assumed the reclamation
obligations, environmental liabilities and contingent liabilities for employee
injuries, from mining the Crooks Gap and other properties in the Sheep and Green
Mountain Mining Districts 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. USE 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 USE and Crested currently are not in production on any
mineral properties, development work continues on several of their major
investments. USE and Crested are not using hazardous substances 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, USE and
Crested do not have properties which require current remediation. USE and
Crested are also not aware of any claims for personal injury or property damages
that need to be accrued or funded.
The tax years through May 31, 1992 are closed after audit by the IRS.
USE 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 USE. Management of USE feels confident that it will prevail on a
majority of the issues. No assurance of the outcome of the appeal can be
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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 USE'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 USE
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 USE'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
USE'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
USE 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 USE's GMMV and Plateau mineral and commercial
operations, and increased salary expense. USE recognized a mineral interest
impairment of $1,500,000 pertaining to SGMC as discussed above. There was no
impairment of mineral properties taken during fiscal 1997. There was however an
abandonment of mining claims in 1997 pertaining to certain mining claims in the
amount of $1,225,800. No abandonments of mining claims occurred in fiscal 1998.
Construction costs decreased by $716,200 due to FNG not performing any
commercial construction work, and provision for doubtful accounts decreased by
$614,200 as no additional provision was required.
Fiscal 1997 Compared to Fiscal 1996
Revenues for the twelve months ended May 31, 1997 totaled $5,790,200 as
compared to revenues at May 31, 1996 of $9,632,200. This decrease in revenues of
$3,842,000 is primarily the result of no revenues being recognized from mineral
sales in fiscal 1997 (decrease of $3,116,700). During the prior year, USE and
Crested made certain deliveries of U3O8 for SMP. Other decreases in revenues
were oil sales, $45,500; sales of assets, $312,800; and construction revenues
from USE's subsidiary FNG, $2,755,900. These decreases in revenues were offset
by increased commercial sales, $780,300; advance royalties from Cyprus Amax,
$207,300; partial distribution of SMP funds, $1,003,800; and increased
management fees and other revenues, $323,600.
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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:
USE 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. USE 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. USE cannot predict what the long term price
for gold and uranium will be and therefore cannot predict when, or if, USE will
generate net income from operations.
In addition, legal expenses associated with the litigation and
arbitration surrounding the SMP Partnership and the inability of USE to utilize
all the funds that have been awarded to USE and Crested by the Arbitration Panel
and confirmed by the Federal Court have compounded USE's operating and cash flow
position in the past. USE believes that the SMP arbitration will be resolved
during fiscal 1999. USE 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.
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
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less than the costs of producing uranium. Uranium production in the United
States reportedly fell by 25 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 1999, 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 USE 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 January 1999 were approximately $290 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.
INFORMATION ABOUT YSFC
Yellow Stone Fuels Corp., was organized on February 17, 1997 in
Ontario, Canada. As of February 17, 1997, YSFC acquired all the outstanding
shares of Common Stock of Yellow Stone Fuels, Inc. (a Wyoming corporation which
was organized on June 3,1996), in exchange for YSFC issuing the same number of
shares of YSFC Stock to the former shareholders of Yellow Stone Fuels, Inc.
("YFI"). YSFC and its wholly-owned subsidiary Yellow Stone Fuels, Inc. are
herein collectively referred to as YSFC.
In order to concentrate the efforts of USECC on conventional uranium
mining using the Shootaring and Sweetwater Mills, USECC decided to take a
minority position in Yellow Stone Fuels, Inc. and not be directly involved in
properties believed suitable for the production of uranium through the in-situ
leach ("ISL") mining process. USECC will have the right of first refusal with
respect to any uranium ore bodies YSFC discovers which are amenable to
conventional mining and milling and YSFC will have the right of first refusal
with respect to ore bodies discovered by USECC amenable to the ISL process. In
the ISL process, groundwater fortified with oxidizing agents is pumped in the
ore body, causing the uranium contained into the ore to dissolve. The resulting
solution is pumped to the surface where it is further processed to a dried form
of uranium which is shipped to conversion facilities for eventual sale.
Generally, the ISL process is more cost effective and environmentally benign
compared to conventional underground mining techniques. In addition, less time
may be required to bring an ISL mine into operation than to permit and build a
conventional mine.
In Wyoming, YSFC has staked and/or holds 243 unpatented mining claims
and has entered into four State leases covering a total of 8,700 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 June 1, 2008; each require annual rental of $1.00 per acre for five
years, then $2.00 for the second
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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.
In New Mexico, YSFC has staked and holds 39 unpatented mining
claims(approximately 780 acres) in the Grants uranium region of New Mexico.
Material Contracts Between YSFC, USE and Crested. In fiscal 1997, USE,
USECC and the GMMV entered into several agreements with YSFC. One contract is a
Milling Agreement through Plateau Resources; the Shootaring Canyon mill 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 contracts 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 $2,000
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.
In fiscal 1998, YSFC sold 1,219,000 shares of Common Stock to 94
investors in a private placement, at $2.00 per share; net proceeds to YSFC were
$2,041,060 after payment of $316,940 in commissions to the placement agent
(AFFC, Denver, Colorado) and $80,000 in legal and accounting expenses. Most of
these investors were "accredited" investors. 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
AFFC, pursuant to which this Exchange Offer is made.
YSFC has 11,714,000 shares of Common Stock issued and outstanding,
including 3,000,000 shares (25.6%) issued to USE and Crested. YSFC has 128
shareholders. Most of the funds used by YSFC have been provided by USECC under a
$400,000 loan facility. For more information on this item, see "Voting and
Management Information - Certain Relationships and Related Transactions." 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 would have voting control of more than 50% of the
outstanding shares of YSFC if YSFC does not repay the loan. If the loan is
repaid, the Voting Trust Agreement is terminated.
In addition to advances under the loan facility, USECC has paid
$117,800 (through November 30, 1998) of expenses incurred by YSFC; these amounts
are owed t USECC by YSFC.
YSFC MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources at November 30, 1998
During the six months ended November 30, 1998, cash and cash
equivalents decreased by $308,100 to $1,410,300 from $1,718,499 as of May 31,
1998. This decrease in cash came as a result of $100,500 cash being consumed in
the development of mining properties, a $10,900 net reduction of various
accounts payable
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and $163,600 being used in operations. Although the cash position of YSFC
decreased, the working capital of YSFC remained at $832,500.
YSFC has current long term debt of $400,000 with accrued interest of
approximately $60,000. This debt is payable at YSFC's option to its affiliate
USE and its subsidiary Crested by paying either cash or common stock of YSFC on
or before December 31, 1998. It was not known at November 30, 1998 how YSFC
would elect to repay the debt. In addition to this indebtedness YSFC is indebted
to the USECC Joint Venture, ("USECC") in the amount of $117,800 for expenses
that have been paid by USECC.
The source of capital that YSFC will draw upon to retire debt to USECC,
USE and Crested will be the USE of cash on hand. YSFC continues to search for
joint venture partners to assist in the development of its mineral properties.
No assurance can be given that such ventures can be established and funded.
YSFC's mineral properties consist of uranium mineral claims. As of November 30,
1998 the price of uranium was depressed. It is not known when the spot market
price will increase to the point where funding for operations can be obtained to
put the properties into production.
Results of Operations
Three Months Ended November 30, 1998
Compared to Three Months Ended November 30, 1997
During the six months ended November 30, 1998, YSFC recognized $40,700
of interest revenues from cash held in interest bearing accounts. During the six
months ended November 30, 1997, YSFC recognized $6,400 of interest revenues. The
increased revenues during the six months ended November 30, 1998 resulted from
larger cash balances for longer periods of time during the current period.
Costs and expenses remained relative constant as YSFC continued its
exploration and development programs.
Due to the increased revenues recognized during the six months ended
November 30, 1998, YSFC's net loss decreased from $222,200 at November 30, 1997
to $163,600 at November 30,1998.
Liquidity and Capital Resources at May 31, 1998
During the year ended May 31, 1998 YSFC issued 1,219,000 shares of its
common stock and received $2,121,100 net from the issuance of this stock. Cash
was used in operations and investing activities $315,000 and $118,000
respectively. The cash consumed in investing operations was used in the purchase
of mineral properties, $52,500 and property and equipment, $65,500.
The increase in working capital as a result of increased cash was
offset by an increase in accounts payable to affiliates, $201,600, and the
current portion of notes receivable, $397,500. The increase in accounts payable
to affiliates was as a result of various expenses being paid by USECC Joint
Venture and billed to YSFC. These expenses relate to payroll expenses and
miscellaneous accounts payable. At May 31, 1998 the note payable to USECC was
classified as current as it is due on or before December 31, 1998. At May 31,
1997 the note payable to USECC was classified as long term.
Sources of capital during the year ended May 31, 1999 will be provided
by cash on hand, interest earned on the cash investments and the potential sale
of mineral properties to joint venture properties.
Requirements for YSFC's capital resources are on going General and
Administrative expenses, continued exploration of YSFC's mineral properties and
the location of new properties and businesses. The long term debt due USECC in
the amount of $400,000 bears interest at 10% per annum and comes due on
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December 31, 1998. YSFC may elect at its option to pay the indebtedness in
either cash or its common stock. The retirement of this debt therefore may not
require the USE of any of YSFC's capital resources should the debt be retired by
the issuance of common stock. YSFC also plans a limited exploration drilling
program on its mineral properties.
It is anticipated that YSFC will be able to satisfy all of its capital
commitments with the cash it had on hand at May 31, 1998. Management of YSFC
continues to pursue new business opportunities as well as joint venture partners
on the exploration and development of its mineral properties.
Results of Operations
Fiscal 1998 Compared to Fiscal 1997
Revenues for the year ended May 31, 1998 were $49,300 as compared to no
revenues being recognized during the year ended May 31, 1997. The increase in
revenues was as a result of the investment of funds received from the issuance
of YSFC's common stock.
During the year ended May 31, 1998 costs and expenses increased by
$200,000. This increase was in general and administrative expenses and interest
expense of $165,100 and $40,300 respectively. General and administrative
expenses increased as a result of additional employees being hired to explore
and develop existing mineral properties and locate new ones. Interest expense
increased as a result of the borrowing from USECC in the amount of $400,000 at
10% interest per annum.
Due to the lack of revenues during the year ended May 31, 1998,
operations resulted in a loss of $546,000. The increase in the loss of $150,700
over the loss experienced during the year ended May 31, 1997 of $395,300 was as
a result of increased operations.
VOTING AND MANAGEMENT INFORMATION
Directors and Executive Officers of USE
Keith G. Larsen, 40, has been principally employed by USE 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 USE 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 USE and Crested Corp. for more than the past five years. He is also
a director of USE'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 USE'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
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Administration from the University of Nebraska at Omaha. His term as a director
expires at the 2001 Annual Meeting of Shareholders.
David W. Brenman, 42, has been a director of USE since January 1989.
Since September 1988, Mr. Brenman has been a self-employed financial consultant.
In that capacity, Mr. Brenman has assisted USE 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 2001
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 USE. 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.
H. Russell Fraser, 57, is founder, chairman, and chief executive
officer of ACA Financial Guaranty corp., in New York, NY. ACA is a financial
guaranty surety insurance company specializing in insurance of bonds that are
not rated or rated "A", "BBB", or "BB", with improving credit characteristics.
It is the first and only financial guaranty company in the U.S. to be granted
and "A" rating by its own design. ACA serves the municipal, structured finance,
international and specialty surety markets. Prior to founding ACA in 1997, Mr.
Fraser served as chairman and chief executive officer of Fitch IBCA, a bond
rating agency since 1989. In 1980, Mr. Fraser was named president and chief
executive officer of AMBAC. AMBAC's assets grew from $35 million in 1980 to more
than $1 billion at the end of 1988. During the same period, net income after
taxes grew to $57 million from a loss in 1979. Before joining AMBAC, Mr. Fraser
was senior vice president and director of Fixed Income Research at Paine Webber,
Inc. in New York. As a member of the board of directors there, he participated
in the corporate and public finance departments and headed Paine Webber's
corporate bond products trading and sales activities. Previously, Mr. Fraser
managed corporate ratings at Standard & Poor's and supervised research analysis
of corporate bonds, preferred stock and commercial paper. Mr. Fraser holds a
bachelor's degree 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, an organization for which he served for two terms as
president.
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 USE, and none of the findings or recommendations of the
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Advisory board will be binding upon USE. 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
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 70 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 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 48 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 USE.
Executive Compensation
USE. Under a Management Agreement dated August 1, 1981, USE 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 USE and Crested are devoted to the business of
both companies.
All USECC personnel are USE employees, in order to utilize USE's ESOP
as an employee benefit mechanism. USE 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 USE.
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
<FN>
(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.
</FN>
</TABLE>
68
<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 of
Directors 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, USE paid Mr. Larsen a bonus of $732,000 ($615,000
after taxes) in recognition of his service to USE 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 purchase option payment of $4,000,000 to
USE and Crested. The bonus was recommended by USE's Compensation Committee,
taking into account pay levels at comparable corporations in the mining
industry, and was approved by the Board of Directors. USE 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 USE.
USE 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 USE and Crested.
Mr. Svilar has an employment agreement with USE 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 USE
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, USE 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 USE (see below).
In fiscal 1992, USE 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 USE, occurring within
three years after a change in control of USE, 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 USE'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, USE is unaware of any proposed hostile takeover.
69
<PAGE>
In June 1998, USE 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 USE and Crested receiving
approximately $8,000,000 from Nukem and CRIC, net of the legal and related costs
incurred by USE. 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. In February 1999, USE issued 50,000 restricted shares each to Mr.
Svilar and Mr. Lorimer for their success in getting the final $6 million of the
Nukem judgment paid.
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.
USE 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 USE).
Crested and USE are each responsible for one-half of that amount (i.e.,
$162,327.50) and Crested currently owes its one-half to USE. 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 USE 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 USE.
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. USE has an incentive stock option plan ("ISOP"),
reserving an aggregate of 2,750,000 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.
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.
70
<PAGE>
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. 737,500 of
the options have an exercise price of $2.00 per share (the closing stock market
price of USE stock on September 25, 1998 was $1.50); 100,000 options are
qualified and have an exercise price of $2.875 per share (the closing stock
market price of USE stock on December 4, 1998). The options issued to officers
included 112,500 to John L. Larsen, 87,500 to Keith G. Larsen, 75,000 to Harold
F. Herron, 75,000 to Daniel P. Svilar, 75,000 to R. Scott Lorimer, and 50,000 to
Max T. Evans. Outside directors Nick Bebout, H. Russell Fraser, Don C. Anderson
and David W. Brenman, and Advisory Board Member Alan K. Simpson, each received
an option for 12,500 shares, with the same exercise price.
On December 4, 1998, the USE shareholders approved amendments to the
Incentive Stock Option Plan, which increased the shares authorized under the
Plan up to 2,750,000 shares, and reset the Plan's term to expire 2008.
The following table shows unexercised options, how much thereof were
exercisable, and the dollar values for in-the-money options, at May 31, 1998.
71
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
Shares FY-End (#) FY-End($)
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>
1996 Stock Award Program. USE 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 USE, in amounts determined
each year based on earnings of USE for the prior fiscal.
72
<PAGE>
Shares are issued annually, but each officer to whom shares are to be
issued must be employed by USE as of the issue date of the grant year, and USE
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 USE. Voting rights are exercised over
the shares by the non-employee directors of USE; 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 USE'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%. USE 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
USE ($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, USE would have reported a
$515,800 profit for fiscal 1998.
Under a previous equity incentive program, USE and Crested have issued
stock bonuses to various executive officers and directors of USE 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
USE, and the sale of Brunton in 1996, have not affected the Brunton 401(k) plan.
Other than as set forth above, neither USE 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 USE.
Other than as set forth above, no executive officer received other compensation
in any form which, with respect to any individual named in the Cash Compensation
Table, exceeded ten percent of the compensation reported for that person, nor
did all executive officers as a group receive other compensation in any form
which exceeded ten percent of the compensation reported for the group.
Directors' Fees and Other Compensation
USE pays non-employee directors a fee of $150 per meeting attended. All
directors are reimbursed for expenses incurred with attending meetings.
73
<PAGE>
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 USE. USE 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 USE to the financial community in New York City.
Executive Compensation - YSFC
For the year ended May 31, 1998, the officers of YSFC were paid
salaries as follows: Mark J. Larsen, president ($90,000 including $22,500 from
USE), Peter Schoonmaker ($90,000 including $22,500 from USE), and Fred Craft,
vice president ($65,000 including $32,500 from USE).
Certain Relationships and Related 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 entered into a line of credit arrangement with
USECC. As of November 30, 1998, YSFC owed USECC $460,000 which included $60,000
of accrued interest. This loan 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 early 1999, USE, Crested and YSFC amended the note for the loan to
allow USE and Crested the right to be paid, at their election, not more than
$200,000 of the principal and accrued interest in cash; the balance will be paid
in YSFC shares of Common Stock, at the rate of 1 share for each $1.50 of
remaining principal and interest (if USE and Crested have been paid less than
$100,000 in cash), or 1 share for each $2.00 of remaining principal and interest
(if USE and Crested have been paid more than $100,000 in cash, not to exceed
$200,000 in cash). The original $1.00 conversion price was negotiated 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 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. The changes to the note effected in 1999 were
negotiated by those directors of USE and Crested who are not shareholders or
officers or directors of YSFC.
YSFC also owed USECC $117,800 in accrued expenses that USECC paid on
behalf of YSFC.
Transactions with Directors. Two of USE'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
74
<PAGE>
with their obligations as directors of USE 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 USE 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 USE for leasehold improvements totaling
$22,830. USE 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 USE.
Other Information. USE 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. Through November 30, 1998 45,700 shares had be repurchased at a cost
of $123,800.
In May 1998, USE 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
USE 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 USE, 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."
USE and Crested provide management and administrative services for
affiliates under the terms of various management agreements. Revenues from
services by USE and Crested from unconsolidated affiliates were $857,600 in
fiscal 1998 and $397,700 in fiscal 1997. USE provides all employee services
required by Crested, which is obligated to USE for its share of the costs for
providing such employees.
Transactions Involving USECC. USE and Crested conduct most of their
activities through their equally-owned joint venture, USECC. From time to time
USE 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 USE and Crested. The party extending funds is
subsequently reimbursed by the other venturer. USE 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 USE
as follows (each loan is secured with shares of Common Stock of USE 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 USE's Common Stock). For information on Mr.
Brenman's loan see
75
<PAGE>
"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 USE,
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 USE for $745,300 secured by 160,000 shares
of USE'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, USE 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 USE'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. In fiscal 1999,
USE 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.
Security Ownership of USE by Certain Beneficial Owners and Management
The following table sets forth, as of January 7, 1999, the shares of
Common Stock, and the $.001 par value common stock of USE's 52%-owned
subsidiary, Crested, held by each director 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 USE's Board of Directors.
Voting and dispositive powers are shared by USE's non-employee directors
(Messrs. Anderson, Bebout, Brenman and Fraser) over forfeitable shares held by
USE'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.
76
<PAGE>
<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) 25.7% 5,579,182(13) 54.1%
Keith G. Larsen 241,063(3) 3.01 5,300,297(14) 51.4%
Harold F. Herron 849,394(4) 10.9% 5,424,999(15) 52.6%
Don C. Anderson 302,953(5) 3.9% 5,300,297(14) 51.4%
Nick Bebout 317,404(6) 4.1% 5,300,297(14) 51.4%
David W. Brenman 298,798(7) 3.9% 5,300,297(14) 51.4%
H. Russell Fraser 301,298(8) 3.9% 5,300,297(14) 51.4%
Max T. Evans 1,254,952(9) 16.0% 264,236(16) 2.6%
Daniel P. Svilar 766,609(19) 9.8% 281,850(17) 2.6%
R. Scott Lorimer 152,033(11) 1.9% 15,000(18) *
Kennedy Capital
Management, Inc. 528,748 6.8%
All officers and
directors as a
group (ten persons) 3,547,342(12) 35.0% 5,946,085(19) 57.7%
<FN>
* Less than one percent.
(1) Percent of class is computed by dividing the number of shares
beneficially owned plus any options held by the reporting person or group, by
the number of shares outstanding plus the shares underlying the options held by
that person or group.
(2) Mr. John L. Larsen exercises sole voting powers over 243,663
directly owned shares, 106,000 shares held in joint tenancy with his wife,
312,600 shares underlying options and 29,386 shares held in the U.S. Energy
Corp. Employee Stock Ownership Plan ("ESOP") account established for his
benefit. The directly owned shares include 27,500 shares gifted to his wife,
that have remained in Mr. Larsen's name. He exercises shared voting rights over
155,811 shares held by the ESOP, which have not been allocated to accounts
established for specific beneficiaries and shares held by corporations of which
Mr. Larsen is a director consisting of 512,359 shares held by Crested Corp.
("Crested"), 125,556 shares held by Plateau Resources Limited ("Plateau"),
175,000 shares held by Sutter Gold Mining Company ("SGMC"), and 12,612 shares
held by Ruby Mining Company ("Ruby"). Mr. Larsen shares the voting rights over
such shares with the other directors of those corporations. Mr. Larsen shares
voting powers over the unallocated ESOP shares in his capacity as an ESOP
Trustee with the other ESOP Trustees. Shares over which sole dispositive rights
77
<PAGE>
are exercised consist of directly owned shares, joint tenancy shares and
options, less the 27,500 shares gifted, but not transferred, to his wife. Shares
for which shared dispositive powers are held consist of the 426,296 shares held
by the ESOP, 101,850 shares held by employees and a non-employee director of USE
which are subject to forfeiture ("Forfeitable Shares"), the shares held by
Crested, Plateau, SGMC and Ruby. The shares listed under "Total Beneficial
Ownership" also include 49,426 shares beneficially held by Mr. Larsen which are
subject to forfeiture. USE's non-employee directors exercise shared voting and
dispositive powers over such shares. The shares shown as beneficially owned by
Mr. Larsen do not include 42,350 shares owned directly by his wife, who
exercises the sole investment and voting powers over those shares.
(3) 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 USE which are subject to forfeiture ("Forfeitable
Shares"), with the other directors of USE.
(4) Mr. Herron exercises sole voting powers over 52,486 directly owned
shares, 12,000 shares held for his minor children under the Wyoming Uniform
Transfers to Minors Act (the "Minor's shares"), 86,000 shares underlying
options, 6,231 shares held in the ESOP account established for his benefit and
1,581 shares held by Northwest Gold, Inc. ("NWG"). Sole dispositive powers are
exercised over the directly held shares, the Minor's shares, the shares
underlying options and the shares held by NWG. Mr. Herron exercises sole voting
and investment powers over the NWG shares as NWG's sole director. Mr. Herron
exercises shared voting rights over 125,556 shares held by Plateau, 12,612
shares held by Ruby and the 155,811 unallocated ESOP shares. Shared dispositive
rights are exercised over the shares held by Plateau, Ruby, all ESOP shares and
the 101,850 Forfeitable Shares. Mr. Herron exercises shared dispositive and
voting powers over the shares held by Plateau and Ruby as a director of those
companies with the other directors of those companies and over the ESOP shares
in his capacity as an ESOP Trustee with the other ESOP Trustees. The shares
listed under "Total Beneficial Ownership" also include 31,013 shares
beneficially held by Mr. Herron which are subject to forfeiture. USE's
non-employee directors exercise shared voting and dispositive powers over such
shares. The shares shown as beneficially owned by Mr. Herron do not include
2,895 shares owned directly by his wife who exercises the sole voting and
dispositive powers over those shares.
(5) 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 USE. 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.
(6) 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 USE 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. He
also exercises shared voting and dispositive powers over 7,500 shares held by
private corporations of which he is a director with the other directors of those
corporations.
78
<PAGE>
(7) 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 USE. 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.
(8) 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 USE. 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.
(9) Mr. Evans exercises sole voting and dispositive powers over 3,821
directly owned shares, 36,389 shares held in joint tenancy with his wife, 13,045
shares held in an Individual Retirement Account ("IRA") for his benefit and
107,200 shares underlying options. Shares over which Mr. Evans exercises shared
voting rights consist of the shares held by Crested, Plateau and the unallocated
ESOP shares. He exercises shared dispositive rights over the shares held by
Crested, Plateau and the ESOP. Mr. Evans shares voting and dispositive powers
over the shares held by Crested and Plateau with the remaining directors of
those companies and over the ESOP shares with the other ESOP Trustees. The
shares listed under "Total Beneficial Ownership" also include 30,036 shares
beneficially held by Mr. Evans which are subject to forfeiture. USE's
non-employee directors exercise shared voting and dispositive powers over such
shares.
(10) Mr. Svilar exercises sole voting powers over 22,567 directly owned
shares, 18,950 shares held in joint tenancy with his wife, 1,000 shares held as
custodian for his minor child under the Wyoming Uniform Transfers to Minors Act
(the "Minor's shares"), 141,000 shares underlying options and 24,504 shares held
in the ESOP account established for his benefit. He holds sole dispositive power
over his directly held shares, joint tenancy shares, Minor's shares and the
shares underlying his options. As a director of Crested, Mr. Svilar exercises
shared voting and dispositive rights over the 512,359 shares held by Crested
with the other directors of Crested, and over 5,000 shares held by a private
corporation of which Mr. Svilar is a director with the other directors of that
corporation. The shares listed under "Total Beneficial Ownership" also include
40,850 shares beneficially held by Mr. Svilar which are subject to forfeiture.
USE's non-employee directors exercise shared voting and dispositive powers over
such shares.
(11) 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
Ownership" also include 27,233 shares beneficially held by Mr. Lorimer which are
subject to forfeiture. USE's non-employee directors exercise shared voting and
dispositive powers over such shares.
(12) 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.
(13) Consists of 5,300,297 Crested shares held by USE, 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.
79
<PAGE>
(14) Consist of the Crested shares held by USE with respect to which
shared voting and dispositive powers are exercised as a director with the other
directors of USE.
(15) 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 USE, 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.
(16) 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.
(17) 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.
(18) 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.
(19) 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.
</FN>
</TABLE>
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 USE. 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 USE, 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 USE 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
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 USE 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.
Directors And Executive Officers of YSFC
Mark J. Larsen is a founder of YSFC, has been an officer and director
of YSFC since its incorporation in 1996 and is currently the President, Chairman
and Chief Executive Officer. Mr. Larsen is also the President and co-owner of
Arrowstar Investments, Inc. Mr. Larsen was employed as the sales manager of the
professional product division with The Brunton Company from 1986 to 1990. He
then accepted a position as business manager for USE in 1990 and was promoted to
manager of Commercial Development for USE in 1993, a position which he still
holds. He is the son of John L. Larsen, Chairman and Chief Executive Officer of
USE. He attended college at the University of Wyoming and received his degree in
1985.
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<PAGE>
Peter G. Schoonmaker is a founder of YSFC, has been an officer and
director of YSFC since its incorporation and is currently the Executive Vice
President. In 1985 he acquired and managed a ranching feedlot business which he
operated for 10 years under the name Schoonmaker Land and Cattle Inc. Mr.
Schoonmaker is experienced in negotiating oil/gas/mineral leases and permitting.
Mr. Schoonmaker is the son-in-law of John L. Larsen, Chairman and Chief
Executive Officer of USE.
Roland Horst has been a director of YSFC since its incorporation. He
became the President and Chief Executive Officer of Minorca Resources, Inc., a
mining company in 1996. From 1994 to 1996 he was the director of corporate
finance at Richardson Greenshields of Canada Limited, an investment banking
firm. From 1992 to 1994 Mr. Horst was a director of corporate finance at Nesbitt
Thompson Inc., an investment banking firm; and from 1987 to 1992 he was a vice
president of corporate finance at Nesbitt Thompson Inc. Mr. Horst received a
masters and business administration degree and a law degree from the University
of Western Ontario in 1983 and a bachelor of science degree in geology from
McGill University in 1983.
Norman Anderson has been a director of YSFC since 1997. In 1992, he
became the President of the management consulting firm of Anderson and
Associates. Mr. Anderson is a former Chairman and Chief Executive Officer of
Cominco Ltd. Mr. Anderson is a director of Homestake Mining Company, Finning
Ltd., Solv-Ex Corporation and The Toronto-Dominion Bank. Mr. Anderson is a
professional engineer in British Columbia, a Fellow and Chartered Engineer of
the Institute of Mining and Metallurgy. Mr. Anderson received a geological
engineering degree from the University of Manitoba in 1953.
John L. Larsen has been a director of YSFC since 1997. Since 1966 he
has been the Chairman and Chief Executive Officer of USE. Mr. Larsen is also the
Chairman of Crested.
Mark Dorricott has been a director of YSFC since 1997. In 1996 he
became the President of Brunton Canada and sales executive of Barnett
International (Canada). Both firms are sporting goods manufacturers and
distributors. Mr. Dorricott is responsible for Canadian sales for both
companies.
John Vettese has been a director of YSFC since 1997. From 1994 to 1997
Mr. Vettese has been practicing law in the firm of Cassels Brock & Blackwell of
Toronto, Ontario. From 1993 to 1994 Mr. Vettese was an associate in the law rim
of Holden Day Wilson. Mr. Vettese is also an office of Trans Hex International
Ltd., a diamond exploration company listed on the Toronto Stock Exchange. He
received a law degree from Osgoode Hall Law School.
R. Scott Lorimer has been the Chief Financial Officer for YSFC since
1997. Since 1991 he has been the Chief Financial Officer of both USE and
Crested. Mr. Lorimer is also an officer of Sutter Gold Mining Company, an
affiliate of USE and Crested. Mr. Lorimer received a degree in accounting from
Brigham Young University in 1975.
Frederick R. Craft has been the Vice President of Operations for YSFC
since 1996. From 1979 to 1996 Mr. Craft was the resident manager of Homestake
Mining Company's uranium properties in Grants, New Mexico. Mr. Craft serves as a
director of numerous mining and regulatory boards. He received a B.S. degree in
environmental engineering from the Montana College of Mineral Science and
Technology in 1976.
Security Ownership of YSFC by YSFC Management
The following table sets forth as of the date of this Prospectus
certain information with respect to the shares of YSFC's Common Stock owned of
record or beneficially by (i) each director of YSFC; (ii) each person who owns
beneficially more than 5% of the shares of YSFC Common Stock outstanding; and
(iii) all directors and executive officers of YSFC as a group. Unless otherwise
noted, all ownership is direct, without shared voting or other dispositive
power.
81
<PAGE>
<TABLE>
<CAPTION>
Amount and Percentage of Percentage of
Nature of Class Before Class After Giving
Name and Address Beneficial the Exchange Effect to the
Beneficial Ownership Ownership Offering Exchange Offer
- -------------------- --------- -------- --------------
Principal Shareholders
- ----------------------
<S> <C> <C> <C> <C> <C>
U.S. Energy Corp. 1,568,750 (1)(6) 13.2% 18.4% (7)
877 North 8th West
Riverton, Wyoming 82501
Crested Corp. 1,568,750 (1)(6) 13.2% 18.4% (7)
877 North 8th West
Riverton, Wyoming 82501
Richard P. Larsen 1,050,000 (1)(2) 8.9% 8.9%
877 North 8th West
Riverton, Wyoming 82501
Keith G. Larsen 750,000 (1) 6.3% 6.3%
877 North 8th West
Riverton, Wyoming 82501
Directors and Executive Officers
- --------------------------------
Mark J. Larsen 2,500,000 (1)(3)(6) 21.1% 21.1%
877 North 8th West
Riverton, Wyoming 82501
Peter G. Schoonmaker 2,500,000 (1)(4)(6) 21.1% 20.2%
877 North 8th West
Riverton, Wyoming 82501
John L. Larsen 3,137,500 (1)(5) 26.5% 36.8%
877 North 8th West
Riverton, Wyoming 82501
Roland Horst 50,000 NIL NIL
4 King Street West, Suite 1320
Toronto, Ontario
Canada M5H 1B6
Norman Anderson 50,000 NIL NIL
502-455 Grandville Street
Vancouver, British Columbia
Canada V6C 1V2
82
<PAGE>
John Vettese 50,000 NIL NIL
Cassels Brock and Blackwell
40 King Street West, Suite 2100
Toronto, Ontario
Canada M5H 3C2
Mark Dorricott 50,000 NIL NIL
RR#4, Station Main
Petersborough, Ontario
Canada K9J 6X5
All Officers and Directors 8,337,500 70.3% 80.1% (7)
as a Group (7 persons)
<FN>
(1) Of the total Common Shares beneficially owned, 1,500,000 were
acquired at $0.02 per share. Also assumes the conversion of a promissory note
for $475,000 (principal and interest) into a maximum of 137,500 Common Shares at
a conversion rate of $2.00 per share and distribution equally between USE and
Crested. See "Information About YSFC" and "USE of Proceeds."
(2) Includes 300,000 Common Shares held by Mr. Larsen's wife as
custodian for their minor children under the Wyoming Uniform Transfers to Minors
Act.
(3) Includes 300,000 Common Shares held by Mr. Larsen's wife as
custodian for their minor children under the Wyoming Uniform Transfers to Minors
Act.
(4) Includes 200,000 Common Shares held by Mr. Schoonmaker's wife as
custodian for their minor children under the Wyoming Uniform Transfers to Minors
Act.
(5) Owned by U.S. Energy Corp. and Crested Corp. but attributed to Mr.
John L. Larsen who is a controlling person of those companies.
(6) Pursuant to a Voting Trust Agreement dated September 1, 1997, as
amended, Mark J. Larsen, Peter G. Schoonmaker, U.S. Energy Corp. and Crested
Corp. agreed, for a period of the earlier of 24 months from the date of the YSFC
Offering Memorandum or the date that the loan from USE and Crested Corp. is
paid, to transfer all Common Shares beneficially owned by the parties to the
Treasurer of USE as Trustee. The agreement instructs the Trustee to vote all
such Common Shares at all meetings of the stockholders of YSFC as directed by
the boards of directors of USE and Crested. The number of common Shares subject
to the Voting Agreement is 7,500,000 representing more than 51% of YSFC's
outstanding Common Stock. However, if the loan is paid off, the Voting Agreement
automatically terminates. The beneficial ownership amounts and percentages in
the above chart for USE and Crested do not reflect their voting control over
Common Shares owned by Messrs. Mark Larsen and Peter Schoonmaker.
(7) Includes shares acquired in the Exchange Offer by USE for a total
of 9,556,500 YSFC shares owned by officers and directors of USE.
</FN>
</TABLE>
83
<PAGE>
EXPERTS
The consolidated financial statements of USE included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their 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 upon the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that 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. YSFC has been represented in matters of
Ontario law by the law firm Cassels Brock & Blackwell, Toronto, Ontario. John
Vettese, a member of that firm, is a shareholder and director of YSFC.
84
<PAGE>
NOTICE OF ELECTION TO EXCHANGE
SHARES OF YELLOW STONE FUELS CORP. FOR
SHARES OF U.S. ENERGY CORP.
U.S. Energy Corp. ("USE") offers to issue shares of USE Common Stock to
certain of the shareholders of Yellow Stone Fuels Corp. ("YSFC") who invested in
YSFC through RAF Financial Corp. (now American Fronteer Financial Corp.,
"AFFC"). The terms and conditions of the Exchange Offer, and information about
USE and YSFC, are contained in the USE Prospectus dated March ____, 1999. You
should read the Prospectus carefully before making your investment decision.
Instructions
1. General. If you elect to participate in the Exchange Offer, you must
complete and sign this Notice of Election to Exchange, and send it to USE with
your certificates for YSFC shares (and a signed stock power) or your YSFC
Warrants. Your signature on the stock power must be stamped guaranteed by a bank
or brokerage firm which participates in the Medallion stamp program.
Your Notice of Election to Exchange will be irrevocable once received
and accepted by USE. Under the Exchange Offer, you may elect to exchange some or
all of the YSFC securities which you own, but you are entitled to only one
election. If you elect to exchange, USE will issue shares of Common Stock or USE
Warrants to you, based on the USE share value in effect when your Notice of
Election to Exchange is received.
Please allow at least 10 days for USE to process your Notice of
Election to Exchange and have the stock transfer agent mail certificates for USE
shares to you. If you are exchanging YSFC Warrants, USE will issue USE Warrants
directly to you. Along with your certificates or USE Warrants, we will send you
our calculation of the Exchange Ratio which was applied to your YSFC securities.
Your completed Notice of Election to Exchange and YSFC stock
certificates or YSFC Warrants must be received at USE not later than September
16, 1999. Send Your Completed Notice of Election to Exchange and the YSFC Stock
Certificates or YSFC Warrants to U.S. Energy Corp., 877 North 8th West,
Riverton, Wyoming 82501.
If you do not wish to exchange your YSFC securities for USE securities,
do not send this Notice of Election to Exchange to USE.
85
<PAGE>
2. Information About You. Please complete the following:
______________________________________
Name
Address:
______________________________________ Telephone: (___)___________
Number and Street
______________________________________
City State Zip
Social Security Number or EIN (if an entity): ____________________
If you want the shares of USE Common Stock or the USE Warrants issued
to someone other than yourself, please check here __ and tell us who will
receive the securities:
_____________________________________
Name
Address:
_____________________________________
Number and Street
_____________________________________
City State Zip
3. Information About Your Decision.
If you want to exchange all of your YSFC shares, please check here ___.
If you want to exchange part of your YSFC shares, please check here ___
and tell us how many YSFC shares you want to exchange for shares of USE
:___________.
4. Signature.
_____________________________________
Signature (and title if signing
for entity)
86
<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 USE'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.
87
<PAGE>
<TABLE>
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>
88
<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>
89
<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>
90
<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>
91
<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>
92
<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>
93
<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>
94
<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>
95
<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>
96
<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>
97
<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. USE'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. USE 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. USE, 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"), USE 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 USE at its Green Mountain uranium property.
USE 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. USE 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 USE's mineral properties (none of which are in production),
USE has incurred significant losses from continuing operations during each of
the last three years. During the past few years, USE 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, USE received $858,700 for a delivery made on an SMP contract.
Subsequent to year end, USE 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, USE 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 USE having net working
capital of $8,238,900 as of May 31, 1998.
98
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
USE 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 USE. If
the additional financings do not occur as planned, USE 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 USE, 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 USE and Crested through which the bulk of their
operations are conducted. USECC owns the buildings and other equipment used by
USE 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 USE 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
USE 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, USE 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.
99
<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.
USE 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 USE determines that an ore
body is no longer economical. Costs and expenses related to general corporate
overhead are expensed as incurred.
USE 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 USE 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
USE 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 USE'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, USE 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.
100
<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, USE provides currently
for the total anticipated loss on the contract.
Income Taxes
USE 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:
101
<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.
USE 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.
USE will adopt SFAS 132 in fiscal 1999. The adoption of SFAS 132 is not expected
to materially affect USE'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. USE does not
expect the adoption of SFAS 133 to have a material effect on its financial
position or results of operations.
102
<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:
USE and Crested provide management and administrative services for
affiliates under the terms of various management agreements. USE also provides
all employee services required by Crested. In exchange, Crested is obligated to
USE for its share of these costs. Revenues from services by USE to
unconsolidated affiliates were $849,000, $397,000 and $92,900 in fiscal 1998,
1997 and 1996, respectively. USE 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, USE's principal shareholder and his immediate family
were indebted to USE in the amount of $338,000 which is represented by notes
secured by 104,000 shares of USE'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. USE 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.
103
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
E. INVESTMENTS AND ADVANCES:
USE'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.
USE'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, USE 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, USE and USECC entered into an
Acquisition Agreement with Kennecott whereby USE may be able to purchase
Kennecott's interest in the GMMV (see Note F). USE'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 USE's equity investees
include GMMV, YSFC and Ruby Mining Company.
104
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
CONDENSED COMBINED BALANCE SHEETS - EQUITY INVESTEES
<TABLE>
<CAPTION>
May 31,
---------------------------------------
1998 1997
---- ----
<S> <C> <C>
Current assets $ 1,762,300 $ 5,776,300
Non-current assets 71,583,100 75,947,500
--------------- --------------
$ 73,345,400 $ 81,723,800
=============== ==============
Current liabilities $ 1,952,000 $ 1,402,500
Reclamation and other liabilities 33,770,300 30,114,700
Excess in assets 37,623,100 50,206,600
--------------- --------------
$ 73,345,400 $ 81,723,800
=============== ==============
</TABLE>
CONDENSED COMBINED STATEMENTS OF OPERATIONS - EQUITY INVESTEES
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $ 54,900 $ 1,100 $ 1,200
Costs and expenses (1,646,900) (3,116,900) (609,900)
------------- ------------ ------------
Net loss $ (1,592,000) $ (3,115,800) $ ( 608,700)
============= ============ ============
</TABLE>
SMP entered into various market related and base price escalated
uranium sales contracts with certain utilities which require approximately
1,500,000 pounds of uranium concentrates to be delivered from 1997 through 2000
depending on utility requirements. These contracts also allow for the quantities
to be substantially increased by the utilities. As discussed in Note K, SMP has
been the subject of significant litigation and arbitration proceedings between
the SMP partners since 1991, portions of which are currently still in progress.
Pending the resolution of the remaining proceedings, the partners in SMP agreed
to fulfill certain of the SMP's uranium sales contracts outside of the
partnership with each partner delivering a mutually- agreed portion of the
delivery commitments on an individual basis. In 1998 and 1996, USE 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, USE has recorded only its
direct investment in, and results of operations from the partnership. USE 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. USE's direct loss
generated from its investment in SMP, which represent mine standby costs
incurred by USE, 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 USE's equity investees presented above.
105
<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, USE 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.
106
<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, USE 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 USE 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. USE 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 USE 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 USE
and Crested. If Cyprus Amax sells the properties, USE and Crested will receive
15% of the first $25 million received by Cyprus Amax.
USE 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 Amax
107
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
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, USE and Crested accepted a
Contingent Stock Purchase Warrant dated March 21, 1997 which provides USE 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, USE has allocated the carrying value of SGMC shares
exchanged for the
108
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
Contingent Stock Purchase Warrant to its investment in such contingent warrants.
The Stock Purchase Warrant benefits USE and Crested on a basis of 88.9% and
11.1%, respectively.
On March 31, 1998, USE purchased 889,900 Special Warrant Units from
certain Canadian investors. The units were purchased with 488,895 shares of
USE's common stock. In addition, USE 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, USE and Crested's combined ownership interest in SGMC was 59%.
Therefore, as of April 1, 1998 USE began consolidating SGMC's results of
operations. Had USE 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, USE
evaluated the May 31, 1998 carrying value of its investment in SGMC for
impairment. USE 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, USE
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, USE 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 USE'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, USE had an independent appraisal performed on its
modular homes held for resale. Based upon the analysis performed, USE 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 and Expenses in
the accompanying Consolidated Statements of Operations. USE continues to review
its investment in these assets for impairment.
109
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
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.
110
<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>
USE has established a valuation allowance of $6,800,300 against
deferred tax assets due to the losses incurred by USE in past fiscal years.
USE'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, USE 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.
111
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
The Internal Revenue Service has audited USE's and affiliates' tax
returns through fiscal 1994, and is currently auditing the fiscal years ended
May 31, 1996 and May 31, 1995. USE's income tax liabilities are settled through
fiscal 1992. USE has received 30 day letters for the years ended May 31, 1994
and 1993. USE has submitted a written appeal to protest the findings of the
examining agent to preserve its NOL. Management believes USE will prevail on the
significant issues in dispute, and therefore, no significant changes will result
from the findings.
I. SEGMENTS AND MAJOR CUSTOMERS:
USE's primary business activity is the sale of minerals and the
acquisition, exploration, holding, development and sale of mineral bearing
properties although USE 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>
112
<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>
113
<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.
USE 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 USE's common stock. The 1996 Stock Award
Program was subsequently modified to reflect the intent of the directors of USE
which was to provide incentive to the officers of USE 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 USE 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 USE's treasurer and are voted by USE's non-employee directors.
As of May 31, 1998, 245,378 total shares have been issued to the five officers
of USE and Crested.
114
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
In December 1997, USE 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. USE
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, USE 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. USE
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, USE 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 USE'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, USE recognized $148,300 of
consulting expense in fiscal 1997 which USE determined to be the fair value.
During fiscal 1997, 180,000 of these warrants were exercised resulting in total
proceeds to USE of $900,000. The remaining 20,000 shares were exercised in 1998
resulting in $100,000 of proceeds to USE.
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 USE's $.01 par value
common stock for issuance under the Option Plan. During fiscal 1992, USE 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, USE 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. USE 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 USE and 38,550 shares
on the open market. These loans, which are secured by pledges of the stock
purchased with the loan proceeds, bear interest at the rate of 10% per annum.
The loans are reflected as unallocated ESOP contribution in the equity section
of the accompanying Consolidated Balance Sheets. During fiscal 1996, USE
released 10,089 of the shares to fund the 1996 ESOP contribution by $87,300 as
reflected in the Consolidated Statement of Stockholders' Equity.
115
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
The Board of Directors of both USE 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
USE and Crested until earned. During fiscal 1993, USE'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, USE 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 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.
USE has elected to account for its stock-based compensation plans under APB 25;
accordingly, for purposes of the pro forma disclosures presented below, USE has
computed
116
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
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 USE had accounted for its stock-based compensation plans in
accordance with SFAS 123, USE'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.
117
<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 USE and Crested. CRIC claimed that
USE and Crested violated the Sheep Mountain Partners ("SMP") partnership
agreement. On July 3, 1991, USE 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 USE 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 USE and Crested to
stay the above arbitration initiated by CRIC.
118
<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 USE, 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.
119
<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, USE 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,
120
<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 USE's mine development, exploration and operating activities
are subject to federal and state regulations that require USE to protect the
environment. USE attempts to conduct its mining operations in accordance with
these regulations, but the rules are continually changing and generally becoming
more restrictive. Consequently, USE'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, USE cannot predict the
outcome of future regulation or its impact on costs. Nonetheless, USE 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 USE's reclamation, environmental and decommissioning
liabilities, and USE 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 USE would be
adversely affected. USE believes it has accrued all necessary reclamation costs
and there are no additional contingent losses or unasserted claims to be
disclosed or recorded. USE has not disposed of any properties for which it has a
commitment or is liable for any known environmental liabilities.
The majority of USE's environmental obligations relate to former mining
properties acquired by USE. Since USE currently does not have properties in
production, USE'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. USE 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 USE's liquidity.
As of May 31, 1998, USE 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 USE is a 50% owner, has recorded a $23,620,000
liability for future reclamation and closure costs. None of these liabilities
have been discounted, and USE has not recorded any potential offsetting
recoveries from other responsible parties or from any insurance companies.
121
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
USE 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
USE 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
USE 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. USE 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, USE and Crested acquired developed mineral
properties on Green Mountain known as the Big Eagle Property. In connection with
that acquisition, USE 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, USE and Crested transferred a
one-half interest to Kennecott, with Kennecott, USE 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 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
122
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(Continued)
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 USE, 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. USE'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.
123
<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
USE 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
USE 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, USE 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"). USE received $300,000 at execution of the Purchase Agreement and
approximately $3,000,000 at closing. USE 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 USE in the
amount of $333,333 plus interest in February 1999. In addition, USE 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.
USE received payments of $292,600 for profits in 1997.
As a result of selling 100% of the common stock of Brunton, USE 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. USE recognized a gain on the disposal of
Brunton of $2,295,700 net of income taxes of approximately $50,000.
124
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
November 30, May 31,
1998 1998
------------- ------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents $ 5,900,800 $ 5,650,500
Accounts and notes receivable:
Trade 169,600 195,800
Affiliates 2,234,800 1,878,400
Current portion of long-term
notes receivables 335,800 335,800
Assets held for resale and other 1,256,600 1,100,800
SMP settlement receivable, net - - 5,026,000
Inventory 152,400 113,700
------------- ------------
TOTAL CURRENT ASSETS 10,050,000 14,301,000
INVESTMENTS
Affiliates 664,900 871,800
Restricted investments 9,075,900 8,889,100
------------- ------------
9,740,800 9,760,900
PROPERTIES AND EQUIPMENT 31,294,900 31,256,600
Less accumulated depreciation,
depletion and amortization (12,185,100) (11,806,300)
------------- ------------
19,109,800 19,450,300
OTHER ASSETS:
Accounts and notes receivable:
Real estate sales, net of valuation allowance 353,700 398,000
Employees 361,000 352,000
Other 1,000 1,800
Deposits and other 683,500 755,100
------- -------
1,399,200 1,506,900
------------- ------------
$ 40,299,800 $ 45,019,100
============= ============
</TABLE>
See notes to condensed consolidated financial statements.
125
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
November 30, May 31,
1998 1998
------------ ------------
(Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable and accrued expenses $ 1,083,000 $ 1,836,400
Deferred GMMV purchase option 4,000,000 4,000,000
Current portion of long-term debt 340,500 225,700
------------ ------------
TOTAL CURRENT LIABILITIES 5,423,500 6,062,100
LONG-TERM DEBT 203,700 278,200
RECLAMATION LIABILITIES 8,860,900 8,778,800
OTHER ACCRUED LIABILITIES 3,983,300 4,266,800
DEFERRED TAX LIABILITY 1,144,800 1,144,800
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS IN SUBSIDIARIES 4,125,000 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 and outstanding 75,200 75,200
Additional paid-in capital 28,526,200 28,526,200
Accumulated deficit (11,004,800) (7,760,100)
Treasury stock, 911,643 shares, at cost (2,584,600) (2,460,800)
Unallocated ESOP contribution (927,000) (927,000)
-------- --------
14,085,000 17,453,500
---------- ----------
$ 40,299,800 $ 45,019,100
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
126
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
---------------------------- ----------------------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES:
<S> <C> <C> <C> <C>
Mineral revenue $ 35,600 $ 52,900 $ 84,700 $ 969,100
Commercial revenues 451,800 850,200 1,994,900 2,409,500
Oil sales 34,700 28,100 53,700 76,600
Management and other fees 72,700 197,100 390,700 346,000
Interest 254,400 175,800 434,300 362,800
Gain on sales of assets -- (900) 54,300 (200)
----------- ----------- ---------- ----------
849,200 1,303,200 3,012,600 4,163,800
----------- ----------- ---------- ----------
COSTS AND EXPENSES:
Mineral operations $ 531,600 348,300 1,186,000 723,200
Commercial operations 865,400 799,700 1,823,300 1,637,500
General and administrative 1,413,000 798,000 3,423,500 1,409,700
Oil production 16,900 29,000 39,000 43,500
Interest 14,800 17,000 31,400 32,900
Construction costs 9,200 10,400 15,500 22,100
----------- ----------- ---------- ----------
2,850,900 2,002,400 6,518,700 3,868,900
----------- ----------- ---------- ----------
(LOSS) INCOME BEFORE
MINORITY INTEREST AND
EQUITY IN LOSS OF AFFILIATES (2,001,700) (699,200) (3,506,100) 294,900
MINORITY INTEREST IN LOSS
(INCOME) OF CONSOLIDATED
SUBSIDIARIES 44,300 83,900 305,000 (62,600)
EQUITY IN LOSS OF AFFILIATES - NET (30,100) (242,500) (43,600) (406,300)
----------- ----------- ---------- ----------
LOSS BEFORE FOR INCOME TAXES (1,987,500) (857,800) (3,244,700) (174,000)
PROVISION FOR INCOME TAXES -- -- -- --
----------- ----------- ---------- ----------
NET LOSS $(1,987,500) $ (857,800) $(3,244,700) $ (174,000)
=========== =========== =========== ===========
NET LOSS
PER SHARE BASIC AND DILUTED $ (0.26) $ (0.13) $ (0.42) $ (0.03)
=========== =========== =========== ===========
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 7,741,096 6,850,913 7,752,587 6,821,138
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
127
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
November 30,
----------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) income $(3,244,700) $ (174,000)
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating activities:
Minority interest in (loss) income
of consolidated subsidiaries (305,000) 62,600
Increase in Reclamation Liabilities 82,100 --
Depreciation, depletion and amortization 384,500 481,800
Equity in loss of affiliates 43,600 406,300
Gain on sale of assets (54,300) 200
Other 71,600 (46,200)
Net changes in components
of working capital 3,464 500 (1,127,700)
----------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 442,300 (397,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of mining properties (5,000) (14,500)
Proceeds from sale of property and equipment 203,900 4,000
Increase in restricted investments (186,800) (259,400)
Purchase of property and equipment (188,600) (875,100)
Change in note receivable 36,100 23,000
Investments in affiliates 31,900 (345,700)
Deferred GMMV purchase option -- 4,000,000
----------- ----------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (108,500) 2,532,300
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of options for common stock -- 220,000
Proceeds from long-term debt 201,000 160,900
Purchase of treasury stock (123,800) --
Payment on long-term debt (160,700) (211,100)
----------- ----------
NET CASH (USED IN)
FINANCING ACTIVITIES (83,500) 169,800
----------- ----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 250,300 2,305,100
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 5,650,500 1,416,900
----------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 5,900,800 $ 3,722,000
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
128
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
November 30,
----------------------------
1998 1997
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Income tax paid $ 21,000 $ --
=========== ===========
Interest paid $ 31,400 $ 15,900
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
129
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1) The Condensed Consolidated Balance Sheet as of November 30, 1998 and
the Condensed Consolidated Statements of Operations for the three and six months
and Cash Flows for the six months ended November 30, 1998 and 1997 have been
prepared by USE without audit. The Condensed Consolidated Balance Sheet as of
May 31, 1998, has been taken from the audited financial statements included in
USE's Annual Report on Form 10-K for the year then ended. In the opinion of USE,
the accompanying financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to fairly present the financial
position of USE and its subsidiaries as of November 30, 1998 and May 31, 1998,
the results of operations for the three and six months ended November 30, 1998
and 1997, and the cash flows for the six months then ended.
2) Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these financial
statements be read in conjunction with USE's May 31, 1998 Form 10-K. The results
of operations for the periods ended November 30, 1998 and 1997 are not
necessarily indicative of the operating results for the full year.
3) The consolidated financial statements of USE include 100% of the
accounts of USECB Joint Venture ("USECB" or "USECC") which is owned 50% by USE
and 50% by USE's subsidiary, Crested Corp. (Crested). The consolidated financial
statements also reflect 100% of the accounts of its majority-owned subsidiaries:
Energx Ltd. (90%), Crested (52%), Plateau Resources Limited (100%) Sutter Gold
Mining Co. (59%) and Four Nines Gold, Inc. (50.9%) All material intercompany
profits and balances have been eliminated.
4) Deferred income at November 30, 1998 and 1997 consists of the
$4,000,000 purchase option payment received when USE and its subsidiary, Crested
entered into an Acquisition Agreement with Kennecott Uranium Company to acquire
properties. The amount was forfeitable until certain actions are taken by USE
and Crested (See GMMV discussion in Item 2).
5) Accrued reclamation obligations and standby costs of $12,844,200 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 and will not be commenced until such time as all the uranium
mineralization contained in the properties is produced or the properties
abandoned. It is not anticipated that either of these events will occur for
sometime into the future.
6) 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 did not have an effect on USE's previously reported
net income (loss) per common share.
7) Certain reclassifications have been made in the May 31, 1998
financial statements to conform to the classifications used in November 30,
1998.
130
<PAGE>
Report of Independent Public Accountants
----------------------------------------
To Yellow Stone Fuels Corp.:
We have audited the accompanying consolidated balance sheets of YELLOW STONE
FUELS CORP. (an Ontario corporation in the development stage) AND SUBSIDIARY as
May 31, 1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year ended May 31, 1998 and for the
periods from inception (June 3, 1996) through May 31, 1997 and 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 United States 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 Yellow Stone Fuels Corp. as of
May 31, 1997 and 1998, and the results of its operations and its cash flows for
the year ended May 31, 1998 and for the periods from inception (June 3, 1996)
through May 31, 1997 and 1998, in conformity with United States generally
accepted accounting principles.
Denver, Colorado,
August 14, 1998
131
<PAGE>
YELLOW STONE FUELS CORP. AND SUBSIDIARY
(A Company in the Development Stage)
(After Corporate Reorganization - See Note A)
CONSOLIDATED BALANCE SHEETS
May 31, 1998 and 1997
($ U.S.)
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,718,400 $ 21,300
Subscriptions receivable -- 2,000
---------- ----------
1,718,400 23,300
PROPERTY AND EQUIPMENT, at cost:
Mining properties and development costs 144,700 117,500
Other 133,300 77,600
---------- ----------
278,000 195,100
---------- ----------
Total Assets $1,996,400 $ 218,400
========== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of note payable to affiliate $ 400,000 $ 2,500
Accounts payable 4,100 --
Accounts payable and accrued
interest to affiliates 201,600 --
---------- -----------
605,700 2,500
NOTES PAYABLE TO AFFILIATE -- 400,300
COMMITMENTS AND CONTINGENCIES (Note D)
SHAREHOLDERS' EQUITY:
Preference shares, no par value;
unlimited number of preference
shares authorized; none issued -- --
Common shares, no par value; unlimited
number of common shares authorized;
11,764,000 and 10,545,000 shares issued
and outstanding, respectively 2,332,000 210,900
Deficit accumulated during the development stage (941,300) (395,300)
---------- -----------
1,390,700 (184,400)
---------- -----------
Total Liabilities and Shareholders' Equity $1,996,400 $ 218,400
========== ===========
</TABLE>
The accompanying notes to financial statements are an
integral part of these consolidated balance sheets.
132
<PAGE>
YELLOW STONE FUELS CORP. AND SUBSIDIARY
(A Company in the Development Stage)
(After Corporate Reorganization - See Note A)
CONSOLIDATED STATEMENTS OF OPERATIONS
($ U.S.)
<TABLE>
<CAPTION>
For the Period Period from
from Inception Inception
Year (June 3, 1996) (June 3, 1996)
Ended through through
May 31, 1998 May 31, 1997 May 31, 1998
------------ ------------ ----------------
<S> <C> <C> <C>
REVENUES
Interest income $ 49,300 $ -- $ 49,300
COSTS AND EXPENSES
General and administrative 529,700 364,600 894,300
Interest expense 40,300 -- 40,300
Abandonment of mineral properties 25,300 30,700 56,000
595,300 395,300 990,600
LOSS BEFORE PROVISION
FOR INCOME TAXES (546,000) (395,300) (941,300)
PROVISION FOR INCOME TAXES -- -- --
NET LOSS $ (546,000) $ (395,300) $ (941,300)
NET LOSS PER SHARE -
BASIC AND DILUTED $ (.05) $ (.04)
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING -
BASIC AND DILUTED 11,229,225 10,545,000
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
133
<PAGE>
YELLOW STONE FUELS CORP. AND SUBSIDIARY
(A Company in the Development Stage)
(After Corporate Reorganization - See Note A)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($US)
<TABLE>
<CAPTION>
Deficit
Accumulated
During the Total
Common Stock Development Shareholders'
Shares Amount Stage Equity/(Deficit)
------------------------------- -------------- -----------------
<S> <C> <C> <C> <C>
Balance at inception -- $ -- $ -- $ --
(June 3, 1996 - See Note A )
Issuance of common shares
to founders and insiders ($.02 per share) 7,525,000 150,500 -- 150,500
Issuance of common shares
in exchange for services ($.02 per share) 3,000,000 60,000 -- 60,000
Issuance of common shares
in exchange for property ($.02 per share) 20,000 400 -- 400
Net loss -- -- (395,300) (395,300)
---------- ----------- ------------ -----------
Balance at May 31, 1997 10,545,000 $ 210,900 $ (395,300) $ (184,400)
---------- ----------- ------------ ----------
Issuance of common shares
($2.00 per share), net of cash
offering costs of $316,900
(See Note G) 1,219,000 2,121,100 -- 2,121,100
Net loss -- -- (546,000) (546,000)
---------- ----------- ------------ ----------
Balance at May 31, 1998 11,764,000 $ 2,332,000 $ (941,300) $1,390,700
========== =========== ============ ==========
The accompany notes to consolidated financial statements are an integral part of these statements.
</TABLE>
134
<PAGE>
YELLOW STONE FUELS CORP. AND SUBSIDIARY
(A Company in the Development Stage)
(After Corporate Reorganization - See Note A)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. $)
<TABLE>
<CAPTION>
For the Period Inception
For the Year from Inception (June 3, 1996)
Ended (June 3, 1996) to
May 31, 1998 through May 31, 1997 May 31, 1998
------------ -------------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss $ (546,000) $ (395,300) $ (941,300)
Adjustment to reconcile net loss
to net cash used in operating activities:
Abandonment of mineral properties 5,300 30,700 56,000
Service received in exchange
for common shares -- 60,000 60,000
Increase in accounts payable
and accrued expenses 205,700 -- 205,700
------------ ------------ ------------
NET CASH USED IN
OPERATING ACTIVITIES (315,000) (304,600) (619,600)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase and development of
mineral properties (52,500) (148,200) (200,700)
Purchase of property and equipment (65,500) (77,200) (140,700)
------------ ------------ ------------
NET CASH USED IN
INVESTING ACTIVITIES (118,000) (225,400) (343,400)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common shares (net of
$316,900 cash offering costs in 1998) 2,121,100 148,500 2,269,600
Proceeds from notes payable 7,800 478,600 486,400
Repayments of notes payable (800) (75,800) (76,600)
Proceeds from shares subscriptions receivable 2,000 -- 2,000
------------ ------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 2,130,100 551,300 2,681,400
NET INCREASE IN CASH AND
CASH EQUIVALENTS 1,697,100 21,300 1,718,400
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 21,300 -- --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,718,400 $ 21,300 $ 1,718,400
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
135
<PAGE>
YELLOW STONE FUELS CORP. AND SUBSIDIARY
(A Company in the Development Stage)
(After Corporate Reorganization - See Note)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. $)
<TABLE>
<CAPTION>
For the Period Inception
For the Year from Inception (June 3, 1996)
Ended (June 3, 1996) to
May 31, 1998 through May 31, 1997 May 31, 1998
------------ -------------------- ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Cash paid for interest $ 1,000 $ -- $ 1,000
============ ============ ============
Cash paid for taxes $ -- $ -- $ --
============ ============ ============
Issuance of common shares for services $ -- $ 60,000 $ 60,000
============ ============ ============
Shares subscriptions receivable
(paid subsequent to year end) $ -- $ 2,000 $ 2,000
============ ============ ============
Issuance of common shares for
property and equipment $ -- $ 400 $ 400
============ ============ ============
Issuance of shares purchase warrants
in connection with private
placement $ 25,500 $ -- $ 25,500
============ ============ ============
Net book value of equipment traded in
and corresponding debt
retired for leased equipment $ 9,800 $ -- $ 9,800
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
136
<PAGE>
YELLOW STONE FUELS CORP. AND SUBSIDIARY
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(All amounts expressed in US$)
A. BUSINESS ORGANIZATION AND DEVELOPMENT STAGE RISKS
Yellow Stone Fuels, Inc. ("YSFI") was incorporated in the State of Wyoming on
June 3, 1996, to engage in the acquisition, exploration and development and/or
sale or lease of uranium properties. On February 17, 1997, Yellow Stone Fuels
Corp., (the "Company") was incorporated under the Ontario Business Corporations
Act. Effective February 17, 1997, YSFI became a wholly-owned subsidiary of the
Company through the exchange of one share of Yellow Stone Fuels Corp. common
shares for each outstanding share of YSFI common share existing at that date.
YSFI continues as a wholly-owned subsidiary of the Company in order to transact
business in the United States. The accompanying financial statements have been
prepared on a basis of reorganization accounting (on a continuity of interests
basis) as though the Company had been in existence since inception of its
wholly-owned subsidiary on June 3, 1996. All references to the Company within
the accompanying consolidated financial statements and notes collectively refer
to Yellow Stone Fuels Corp. and YSFI and include transactions entered into by
YSFI prior to the February 1997 corporate reorganization.
The Company currently has no operating activities, but is involved in the
location and acquisition of uranium properties. The current target properties
are those through which uranium concentrates (U3O8) can be produced using
in-situ leaching methods rather than conventional mining. The Company currently
holds mineral interests through patented claims in New Mexico and Wyoming. The
Company does not currently anticipate the construction of a conventional mill
facility. If the necessary permitting can be obtained to operate the mills and
if contracts can be arranged and milling capacity is available, the final
processing is expected to occur at milling facilities owned by U.S. Energy Corp.
("USE") and Crested Corp. ("Crested") (each 13% and 14% shareholders of the
Company as of May 31, 1998 and 1997, respectively) and their affiliates (see
Note C) .
The Company and USE/Crested have agreed that should the Company acquire or have
the right to acquire any conventional uranium prospect, it would first be
offered to USE/Crested with a reserved royalty in favor of the Company.
Conversely, if USE/Crested were to acquire or have the right to acquire any
in-situ uranium mining prospect, it would first be offered to the Company with a
reserved royalty in favor of USE/Crested. USE/Crested have also agreed to
cooperate with the Company in any refining processes needed should the Company
engage in production and need the benefit of such refining processes or
regulatory licenses obtained by USE/Crested.
The Company is in the development stage and significant additional development,
including development of well fields on the Company's uranium properties and
gathering systems to remove the U3O8 from mineralized formations, is required
prior to the commencement of commercial production. The Company has not
generated any revenues to date and has incurred a cumulative net loss from
inception (June 3, 1996) through May 31, 1998 of $915,800. The Company is
subject to various risks and uncertainties typical of development stage
companies. These risks include, but are not limited to, the following:
137
<PAGE>
As a development stage enterprise, activities to date have primarily been the
acquisition of uranium properties, obtaining equity financing, and
administrative matters. Successful future operations are subject to development
stage risks, including the ability of the Company to successfully locate
additional uranium properties, mine and market its products and generate revenue
related to the sale of such products sufficient to support ongoing operations.
Before revenues and cash flows from operations can be realized, the Company will
require additional equity and/or debt financing which may not be available to
it.
Although the Company believes some of its acquired and leased properties contain
uranium mineralization, more geological, geophysical, engineering, drilling,
hydrological and metallurgical work remains to be done before an independent
engineer could confirm the existence of ore or quantify the extent of ore
reserves and for the recoverability of such reserves on any of the Company's
prospects. No assurance can be given that any of the Company's prospects contain
ore bodies or are suitable for the economic production of uranium by in- situ
leaching methods.
The Company's revenues are expected to be derived primarily from the sale of
uranium. Historically, uranium prices have been volatile and will continue to be
affected by numerous factors beyond the Company's control, such as demand for
nuclear power, political and economic conditions in uranium producing and
consuming countries, production levels and cost of production. Therefore, there
is no assurance the Company will be able to generate sufficient revenue in order
to achieve successful operations.
Management is currently evaluating different methods to raise the funds required
for further exploration and acquisition activities and the development of its
mineral properties. There can be no assurance the Company will be successful in
raising sufficient funding for the Company to develop its mineral properties and
begin production.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with United States generally accepted accounting principles using
U.S. dollars as the reporting currency. These financial statements are also in
accordance with Canadian generally accepted accounting principles in all
material aspects.
Use of Estimates
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 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.
138
<PAGE>
Property and Equipment
The Company capitalizes all costs related to the acquisition and development of
mineral properties and the acquisition of equipment. Costs capitalized through
May 31, 1998 are primarily acquisition and lease costs. Capitalized costs will
be amortized using the units of production method once mining commences, or the
costs will be charged to operations should the properties be determined to have
declined in value or are abandoned. Exploration costs are expensed as incurred.
Depreciation of mining equipment acquired will be provided by the straight-line
method over the estimated useful lives of the related assets when placed into
service.
The Company currently has no operations on its mineral claims in Wyoming and New
Mexico. In addition, the Company is aware of various title issues, but believes
such issues are of the type often found in connection with mining claims, and
are not material relative to the overall economics of the Company's properties.
If material title problems arise that affect any of the key properties, the
Company could lose one or more of its most important properties, or such title
problems could render one or more of the properties uneconomical.
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. If the sum of estimated future cash flows on an undiscounted basis
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 to the carrying amount of the
asset. Changes in significant assumptions underlying future cash flow estimates
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, may result in asset impairment. As of May 31, 1998, management believes
there has not been any impairment of the Company's long-lived assets.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash equivalents include
highly-liquid investments with original maturities of three months or less.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 "Accounting For Income Taxes" ("SFAS No. 109"). See
Note E.
C. RELATED PARTY TRANSACTIONS
The Company is an affiliate of USE and its majority owned subsidiary Crested
because of family relationships and the substantial equity ownership of these
entities in the Company. USE/Crested acquired a combined 28% initial equity
interest in the Company (3,000,000 common shares) in exchange for $60,000 of
technical support, general and administrative services and the utilization of
USE/Crested personnel and equipment. USE/Crested have several conventional
underground uranium mining projects in various stages of exploration,
development or pre-production.
USE and Crested provide certain management and administrative services
(including accounting and legal services, office space, rental of equipment,
etc.) to the Company under an Outsourcing and Lease Agreement, which provides
for reimbursement of USE's and Crested's actual costs incurred plus up to 10% of
such actual
139
<PAGE>
costs. During the year ended May 31, 1998 and for the period from inception
(June 3, 1996) to May 31, 1997, the Company was charged a total of $684,800 and
$467,400, respectively, by USE and Crested for such services. As of May 31,
1998, the Company owed USE and Crested $161,700 under this agreement.
D. COMMITMENTS AND CONTINGENCIES
As the Company is currently in the development stage and costs incurred to date
consist primarily of acquisition, permitting, holding and administrative costs,
no mining has been initiated. Nevertheless, future reclamation and mine closure
costs will be the responsibility of the Company and are based on legal and
regulatory requirements. These laws and regulations are continually changing and
are generally becoming more restrictive. Because the Company has had no mining
operations to date, it has no reclamation obligations as of May 31, 1998 and
1997. The Company will make future expenditures as necessary to comply with
environmental reclamation laws and regulations and will accrue for the ultimate
reclamation obligations on the units of production method once mining commences.
Lease Agreements
The Company leases its office space under a month-to-month lease agreement with
USE and Crested. The current monthly rate is $1,800. Rent expense for the year
ended May 31, 1998 and for the period from inception (June 3, 1996) through May
31, 1997 was $18,200 and $10,000, respectively.
Effective October 2, 1996, the Company leases certain of its mineral properties
from the State of Wyoming. The leases expire on October 1, 2006 and are
cancelable at the Company's option. The annual rental of these properties is
$1.00 per acre for the first five years or prior to the discovery of commercial
quantities of uranium and $2.00 thereafter. The Company currently leases 3,200
acres. A royalty of 5% to 10% of the gross value of any minerals mined and
removed from the leased lands must be paid to the State of Wyoming.
The Company also leases certain mineral properties located in New Mexico from
Parador Mining Co., Inc. ("Parador"). This lease agreement requires rent
payments of $500 per month and is cancelable at the option of the Company.
Royalty payments of 5% of total gross proceeds the Company receives from the
sale of uranium obtained from the leased mineral properties are payable to
Parador.
E. INCOME TAXES
Under SFAS 109, the current provision for income taxes represents actual or
estimated amounts payable or refundable on tax returns filed or to be filed for
each year. Deferred tax assets and liabilities are recorded for the estimated
future tax effects of temporary differences between the tax bases of assets and
liabilities and the financial reporting bases of assets and liabilities and tax
credit carryforwards. The overall change in deferred tax assets and liabilities
for the period measures the deferred tax provision for the period. Effects of
changes in enacted tax laws on deferred tax assets and liabilities are reflected
as adjustments to tax expense in the period of enactment. The measurement of
deferred tax assets are to be reduced by a valuation allowance if, based on a
judgmental assessment of available evidence, it is deemed more likely than not
that some or all of the deferred tax assets will not be realized.
To date, the Company has generated approximately $884,000 in net operating
losses for U.S. Federal income tax purposes and the Company has no material
temporary differences due to the initial stage of its operations. The net
operating losses begin expiring in 2012. The Company has established a valuation
allowance for the entire amount of deferred tax assets. The Internal Revenue
Code contains provisions which may limit the net
140
<PAGE>
operating loss carryforwards available to be used in any given year upon the
occurrence of certain events, including significant changes in ownership.
F. NOTE PAYABLE TO AFFILIATE
During May 1997, the Company secured a line of credit from USE and Crested for
$400,000, which represents a restructuring of the Company's advances from USE
and Crested. The facility accrues interest at 10% per annum, with interest and
principal due on December 31, 1998 and is convertible into equity under certain
circumstances. Until December 31, 1998, the Company may prepay the note at any
time, or convert any outstanding amounts into one share of common stock for each
$1 outstanding, if the Company has either raised an equivalent additional amount
from the sale of equity, or has realized income from operations equal to such
amount. If the Company is unable to repay the note at maturity, the note is
convertible into a number of shares which will give USE and Crested a 51%
interest in the Company when added to the shares already owned by USE and
Crested. At May 31, 1998 and 1997, the Company had $400,000 and $392,200
outstanding under this facility, respectively. The Company owed $40,000 of
accrued interest on this line of credit as of May 31, 1998.
The Company also had a note payable to a commercial bank, bearing interest at
9.5%, with a balance of $10,600 as of May 31, 1997. This note was paid in full
during 1998.
G. SHAREHOLDERS' EQUITY
Under the Company's Articles of Incorporation and as permitted by the Ontario
Business Corporation Act ("OBCA"), the Board of Directors of the Company has
authority to create series of preferred shares, and to issue shares thereof,
without the approval of any shareholders. The creation and issue of such
preferred shares with dividend rights senior to the common shares could
adversely affect common shareholder participation in future earnings through
dividends that otherwise would be available for distribution to the owners of
common shares. Such preferred shares also could inhibit a takeover of the
Company. Under the OBCA, separate voting approval by classes of shares is
required for certain substantive corporate transactions. If the interests of
preferred shareholders are perceived to be different from those of the common
shareholders, the preferred shareholders could withhold approval of the
transactions needed to effect the takeover.
During 1997, the Company completed a private placement of $1,219,000 shares of
common shares at $2.00 per share. The Company received $2,121,100 of net cash
proceeds from the private placement. In addition to a 13% commission on the
shares sold, the broker agent received common share purchase warrants for up to
121,900 shares of the Company's common stock at $2.00 per share through
September 2002. The common share purchase warrants valued at $25,500 are
included in common stock in the accompanying balance sheet.
As of May 31, 1998, none of the stock purchase warrants were exercised.
The shares sold are subject to an Exchange Rights Agreement (the "Agreement").
Under the Agreement, the private placement shareholders and the broker agent
have the right, but not the obligation, to exchange their shares in the Company
for USE common stock if the Company'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 Company's common shares, plus 10%
per annum on such 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 shareholder to
exchange his or her shares.
141
<PAGE>
Voting Trust Agreement
Pursuant to a Voting Trust Agreement dated September 1, 1997, USE and Crested
agreed, for a period of 24 months from the date of the private offering, to
transfer all common shares beneficially owned by the such parties to the
Treasurer of USE as Trustee. The agreement instructs the Trustee to vote all
such common shares at all meetings (or by written action) of the shareholders of
the Company as directed by the Boards of Directors of USE and Crested. If
direction is not received by the Trustee from the Boards of Directors of USE and
Crested, the agreement provides the Trustee is to vote such common shares in the
Trustee's sole discretion for the best interests of USE and Crested. Assuming
conversion of the promissory note referenced in Note F, the number of common
shares subject to the Voting Agreements is approximately 7,900,000 common
shares. By amendment dated September 17, 1997, the Voting Trust Agreement will
become null and void upon either the repayment of the Promissory Note to USE or
the conversion of such note into common shares of the Company.
H. STOCK OPTION PLAN
The Company has adopted a Stock Option Plan (the "Plan") under which the Company
has reserved an aggregate of 2,000,000 shares of common stock for issuance
pursuant to the exercise of options. Options may be granted to key employees of
the Company, including directors who are also employees of the Company. The Plan
is administered by the Board of Directors in accordance with the rules and
policies of the Toronto Stock Exchange. Subject to the terms of the Plan, the
Board of Directors determines the persons to whom awards are granted, the type
of award granted, the number of shares granted, the vesting schedule, the type
of consideration to be paid to the Company upon exercise of options, and the
term of each option (not to exceed five years). During February 1997, 600,000
shares were granted at an option price of $1.75 per share with a term of five
years from the date of the grant, of which 20% exercisable at the grant date and
an additional 20% exercisable for each of the four years after the grant date.
During July 1997, the company granted 50,000 shares at an option price of $1.75
per share with terms identical to those granted in February 1997. The company
recognized $12,500 of compensation expense during fiscal 1998 related to this
grant.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value based
method of accounting for employee stock options or similar equity instruments.
However, SFAS 123 allows the continued measurement of compensation cost for such
plans using the intrinsic value based method prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), provided that pro forma
disclosures are made of net income or loss and net income or loss per share,
assuming the fair value based method of SFAS 123 had been applied. The Company
has elected to account for its stock-based compensation plans under APB 25.
Accordingly, for purposes of the pro forma disclosures required by SFAS 123, the
Company has computed the fair values of all options granted during fiscal year
1998 and 1997 using the Black-Scholes pricing model and the following weighted
average assumptions:
142
<PAGE>
1998 1997
---- ----
Risk-free interest rate 5.9% 6.4%
Expected lives 3.6 years 5 years
Expected volatility .001% .001%
Expected dividend yield 0% 0%
If the Company had accounted for its stock-based compensation plan in accordance
with SFAS 123, the Company's net loss would have been reported as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net loss:
As reported $ (520,500) $ (395,300)
============ ============
Pro forma $ (542,300) $ (395,300)
============ ============
Basic and diluted net loss per share:
As reported $ (.05) $ (.04)
============ ============
Pro forma $ (.05) $ (.04)
============ ============
</TABLE>
A summary of the Stock Option Plan activity for the year ended May 31, 1998 and
for the period ended May 31, 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 600,000 $ 1.75 0 $ --
Granted 50,000 1.75 600,000 1.75
Canceled (50,000) 1.75 0
Exercised -- -- -- --
------- --------- ------- --------
Outstanding at end of year 600,000 $ 1.75 600,000 $ 1.75
======= ========= ======= ========
Exercisable at end of year 230,000 120,000
======= =======
Weighted average fair value at grant date $ .30 $ -0-
======= =======
</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 Weighted
Options Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Price May 31, 1998 Life in years Price May 31, 1998 Price
----- ------------ ------------- ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
$1.75 600,000 3.83 $1.75 230,000 $1.75
</TABLE>
143
<PAGE>
J. RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS
In February 1998, Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5") was issued which provides guidance on the
financial reporting of start-up and organizational costs. It requires costs of
start-up activities and organization costs to be expensed as incurred. The
Company will adopt SOP 98-5 during fiscal 1999. As of May 31, 1998, management
does not believe SOP 98-5 will have a material impact on the Company's results
of operations or financial position.
In February 1997, Statement of Financial Accounting Standards No. 128 "Earnings
per Share", ("SFAS 128") 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 did not have an
effect on the Company's previously reported net loss per common share. The
following table presents a reconciliation of basic and diluted earnings per
share calculations:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------- ---------------------------------------
Net Per Share Net Per Share
Loss Shares Amount Loss Shares Amount
---- ------ ------ ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net loss
applicable
to common shares $ (546,000) 11,229,225 $ (.05) $ (395,300) 10,545,000 $ (.04)
Effect of dilutive Securities
Equivalent common
shares from stock options
and warrants -- -- -- -- -- --
----------- ---------- ----- ----------- ---------- ------
Diluted Earnings Per Share
Net loss applicable
to common shares $ (546,000) 11,229,225 $ (.05) $ (395,300) 10,545,000 $ (.04)
=========== ========== ====== =========== ========== ======
</TABLE>
Because a substantial majority of shares outstanding at May 31, 1997 are held by
affiliates and related parties, all shares are considered to have been
outstanding since inception. Because of the net loss reported in 1998 and 1997,
all common share purchase warrants and stock options were excluded from the
calculation of diluted net loss per share as their effect is antidilutive.
144
<PAGE>
YELLOW STONE FUELS CORP.
(A Company in the Development Stage)
BALANCE SHEETS
(Unaudited)
November 30, 1998
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents (Note 1) $1,410,300
Bonding 10,900
PROPERTY AND EQUIPMENT (Note 2)
Equipment 135,200
Undeveloped mining claims 245,200
380,400
Total Assets $1,801,600
==========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES:
<S> <C>
Accounts payable - USECC $ 177,800
Current Portion long-term debt 400,000
-------
577,800
LONG TERM DEBT --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value;
issued 11,764,000 shares $ 11,800
Additional paid-in capital 2,316,900
Accumulated deficit (941,300)
Year-to-date retained earnings (163,600)
--------
1,223,800
Total Liabilities and Shareholders' Equity $1,801,600
==========
</TABLE>
The accompanying notes to financial statements
are an integral part of this balance sheet.
145
<PAGE>
YELLOW STONE FUELS CORP. AND SUBSIDIARY
(A Company in the Development Stage)
STATEMENTS OF OPERATIONS
($ U.S.)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C>
Interest income $ 6,000 $ 6,400 $ 40,700 $ 6,400
COSTS AND EXPENSES
General and administrative 30,900 160,100 184,300 228,300
Interest expense 10,000 100 20,000 300
--------- --- ------ ---
40,900 160,200 204,300 228,600
LOSS BEFORE PROVISION
FOR INCOME TAXES (34,900) (153,800) (163,600) (222,200)
PROVISION FOR INCOME TAXES -- -- -- --
--------- ----------- -------- ----------
NET LOSS $ (34,900) $ (153,800) $(163,600) $ (222,200)
========= =========== ========= ===========
NET LOSS PER SHARE -
BASIC AND DILUTED $ * $ (0.01) $ (0.01) $ (0.02)
========= =========== ========= ===========
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING -
BASIC AND DILUTED 11,764,000 10,545,000 11,764,000 10,545,000
========== ========== ========== ==========
*Less than $0.01 per share.
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
146
<PAGE>
YELLOW STONE FUELS CORP. AND SUBSIDIARY
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
November 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss $ (163,600) $ (222,200)
Adjustment to reconcile net loss
to net cash used in operating activities:
Increase (decrease) in accounts
payable and accrued expenses (27,900) 52,400
----------- -----------
NET CASH USED IN
OPERATING ACTIVITIES (191,500) (169,800)
CASH FLOWS FROM INVESTING ACTIVITIES:
Bonding for mineral properties (10,900) --
Purchase and development of
mineral properties (100,500) (27,100)
Purchase of property and equipment (1,900) (5,100)
----------- -----------
NET CASH USED IN
INVESTING ACTIVITIES (113,300) (32,200)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common shares -- 1,447,700
Purchase of treasury shares -- 7,000
Commissions on stock sales (3,300) --
Repayments of notes payable -- 2,000
----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (3,300) 1,456,700
----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (308,100) 1,254,700
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,718,400 21,300
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,410,300 $ 1,276,000
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
147
<PAGE>
YELLOW STONE FUELS CORP. AND SUBSIDIARY
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
November 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Cash paid for interest $ -- $ --
=========== ===========
Cash paid for taxes $ -- $ --
=========== ===========
Issuance of common shares for services $ -- $ --
=========== ===========
Shares subscriptions receivable
(paid subsequent to year end) $ -- $ 2,000
=========== ===========
Issuance of common shares for
property and equipment $ -- $ --
=========== ===========
Issuance of shares purchase warrants
in connection with private
placement $ -- $ 1,447,700
=========== ===========
Net book value of equipment traded in
and corresponding debt
retired for leased equipment $ -- $ --
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
148
<PAGE>
YELLOW STONE FUELS CORP. AND SUBSIDIARY
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
1) The Balance Sheet as of November 30, 1998, and the Statement of
Operations and Cash Flows for the six months ended November 30, 1998 and 1997,
have been prepared by YSFC without audit. The Balance Sheet at may 31, 1998, has
been taken from the audited financial statements. In the opinion of YSFC, the
accompanying financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to fairly present the financial position of
YSFC and its affiliate as of November 30, 1998 and May 31, 1997, the results of
operations for the three and six months ended November 30, 1998 and 1997, and
the cash flows for the six months ended.
2) Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these financial
statements be read in conjunction with YSFC's May 31, 1998 financial statements.
The results of operations for the periods ended November 30, 1998 and 1997 are
not necessarily indicative of the operating results for the full year.
3) Debt at May 31, 1998 and November 30, 1998 consists primarily of the
balance on a note payable to YSFC's affiliate USE of $400,000 plus interest.
4) 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 did not have an effect on YSFC's previously
reported net income (loss) per common share.
5) Certain reclassifications have been made in the May 31, 1998
financial statements to conform to the classifications used in November 30,
1998.
149
<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
150
<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 February 19, 1999
151
<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>
152
<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>
153
<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>
154
<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
155
<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
156
<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
157
<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
158
<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 holds an
irrevocable letter of credit through Morgan Guaranty Trust of New York
in the amount of $19,767,079 in favor of 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
159
<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:
1997 1996
---- ----
Acquisition costs $ 39,347,000 $ 39,347,000
Development costs 13,596,261 8,683,086
------------ ------------
$ 52,943,261 $ 48,030,086
============ ============
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
160
<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.
On October 30, 1998, the Acquisition Agreement between USECC and
Kennecott was terminated due to difficulties experienced by USECC in
raising the financing needed to complete the Agreement. Subsequent to
December 31, 1997, Kennecott fully impaired its investment in the GMMV
due to the continued softness in the uranium oxide market. However,
because of its commitments under the GMMV permits and licenses,
Kennecott will continue to fund its share of GMMV expenses.
161
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Legal $ 7,000*
Audit 2,000*
SEC and
state fees 2,000*
---------
$ 11,000*
* Estimate
Item 20. Indemnification of Directors and Officers.
The Wyoming Business Corporation Act ("WBCA"), W.S. 17-16-850 et seq., provides
for indemnification of USE'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 21. 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]
162
<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 1/99......................[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...............................*
10.1 USECC Joint Venture Agreement - Amended as of 1/20/89.........[2]
10.2 Management Agreement with USECC...............................[7]
10.3-10.4 [intentionally left blank]
10.5 Assignment and Lease - Parador................................[7]
10.6 Employment Agreement - Daniel P. Svilar.......................[4]
10.7 Airport Ground Lease - City of Riverton.......................[7]
10.8 Executive Officer Death Benefit Plan..........................[4]
163
<PAGE>
10.9 - 10.10 [intentionally left blank]
10.11 Sweetwater Mill Acquisition Agreement.........................[7]
10.12 - 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 - 10.27 [intentionally left blank]
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 - 10.42 [intentionally left blank]
10.43 Acquisition Agreement between
Kennecott Uranium Company,
USE and USECC regarding GMMV (6/23/97).......................[16]
10.44 - 10.47 [intentionally left blank]
164
<PAGE>
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 Ston Fuels Corp. Exchange Rights Agreement.........170
10.54 - 10.57 [intentionally left blank]
10.58 Outsourcing and Lease Agreement between YSFC and USECC......[15]
10.59 Convertible Promissory Note from YSFC to USECC...............[15]
10.60 Consulting Services Agreement between USE
and RJ Falkner & Company.....................................175
21.1 Subsidiaries of Registrant...................................[15]
23.1 Consent of Arthur Andersen LLP................................177
23.2 Consent of PricewaterhouseCoopers LLP.........................178
* To be filed by amendment.
[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.
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[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] - [11] [intentionally left blank]
[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] - [20] [intentionally left blank]
[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] Incorporated 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).
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<PAGE>
Item 22. Undertakings.
(a) Pursuant to Item 512 of Regulation S-K, 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 registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(a)(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(a)(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of this
offering.
(b) Pursuant to Item 22(b) of Form S-4, the registrant undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form S-4 within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration Statement
through the date of responding to the request.
(c) Pursuant to Item 22(c) of Form S-4, the registrant undertakes to supply by
means of a post-effective amendment all information concerning a transaction and
the company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(g)(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(g)(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Act, 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.
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(h) Insofar as indemnification for liabilities arising under the Securities Act
of 1933, 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.
168
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement on Form S-4 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Riverton, Wyoming,
on February 19, 1999.
U.S. ENERGY CORP.
(Registrant)
Date: February 19, 1999 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: February 19, 1999 By: s/ John L. Larsen
-----------------------------
JOHN L. LARSEN, Director
Date: February 19, 1999 By: s/ Harold F. Herron
-----------------------------
HAROLD F. HERRON, Director
Date: February 19, 1999 By: s/ Nick Bebout
-----------------------------
NICK BEBOUT, Director
Date: February _____, 1999 By:
-----------------------------
DON C. ANDERSON, Director
Date: February _____, 1999 By:
-----------------------------
DAVID W. BRENMAN, Director
Date: February 19, 1999 By: s/ H. Russell Fraser
-----------------------------
H. RUSSELL FRASER, Director
Date: February 19, 1999 By: s/ Keith G. Larsen
-----------------------------
KEITH G. LARSEN, Director
Date: February 19, 1999 By: s/ Robert Scott Lorimer
-----------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer
and Chief Accounting Officer
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EXHIBIT 10.53
EXCHANGE RIGHTS AGREEMENT
This Exchange Rights Agreement (the "Agreement") is entered into as of
September 17, 1997 by and between Yellow Stone Fuels Corporation ("YSFC"), an
Ontario, Canada corporation with offices at 877 North 8th West, Riverton,
Wyoming 82501, U.S. Energy Corp. ("USE"), a Wyoming corporation with offices at
877 North 8th West, Riverton, Wyoming 82501, and R A F Financial Corporation
("RAF"), a corporation with offices at 1700 Lincoln Street, 32nd Floor, Denver,
Colorado 80203.
RECITALS
Whereas, USE and its affiliated corporation, Crested Corp. ("Crested"),
own shares of Common Stock of YSFC and have the right to convert indebtedness to
additional shares of Common Stock of YSFC; and
Whereas, USE has taken the initiative in founding and organizing YSFC
and may be deemed to be a founder and promoter of YSFC; and
Whereas, YSFC has or will enter into an Selling Agent Agreement ("Agent
Agreement") with RAF under which RAF has agreed to or will agree to use its best
efforts, as agent for YSFC, to place (sell) shares of Common Stock of YSFC for
YSFC in a private offering (the "Private Offering") for up to US$3 million in
gross proceeds; provided that, YSFC and RAF prior to the end of the Private
Offering may mutually agree to increase the size of the Private Offering up to a
maximum of US$5 million in gross proceeds. Hereafter, the shares of Common Stock
which will be sold in the Private Offering are referred to as the "Private
Offering Shares" and the information about YSFC and the Private Offering to be
delivered to the purchasers ("Investors") in the Private Offering is referred to
as the "Private Placement Memorandum"; and
Whereas, RAF will receive, as a part of its compensation for sale of
the Private Offering Shares, Warrants to Purchase Common Shares of YSFC
("Agent's Warrants", and the future holders of such Agent's Warrants are
referred to as the "Warrantholders"); and
Whereas, the offer and sale of the Private Offering Shares will not be
registered with the Securities and Exchange Commission ("SEC") pursuant to
Section 5 of the Securities Act of 1933 ("1933 Act") or any state securities
laws and, therefore, the Private Offering Shares will constitute "restricted
securities" under SEC Rule 144 and state securities laws; and
Whereas, USE, YSFC and RAF have negotiated the terms and conditions
under which the Investors and their assignees will have the opportunity to
exchange all or a part of their Private Offering Shares for USE Shares if YSFC
is not listed on, and the Common Stock of YSFC is not available for quotation
on, the Nasdaq National Market System ("NNM") by the eighteen month anniversary
of the date of the Private Placement Memorandum (the "Listing Period"); and
Whereas, USE, YSFC and RAF have negotiated the terms and conditions
under which the Warrantholders and the holders of Common Stock of YSFC acquired
upon the exercise of the Agent's Warrants ("Exercise Shares") will have the
opportunity to exchange all or a part of their Agent's Warrants or Exercise
Shares for USE Warrants or for USE Shares, respectively, if YSFC is not listed
on, and the Common Stock of YSFC is not available for quotation on, NNM during
the Listing Period; and
Whereas, the Common Stock of USE is listed on NNM.
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AGREEMENT
Now, therefore, the parties agree as follows:
i. Definitions. In addition to the terms
defined above, the following terms shall have
the following meanings:
"Exchange Date" shall mean the date when the Investor's
Exchange Shares, the Warrantholder's Agent's Warrants or the Exercise
Shares and a duly completed and executed notice of election to exchange
relating thereto are received by USE.
"Exchange Offer Documents" shall mean (i) the prospectus
included in the Registration Statement on Form S-1 or other appropriate
SEC form, which prospectus is to be delivered by USE ("USE Prospectus")
as a part of the Exchange Offer Documents pursuant to paragraph 2 of
this Agreement and which registration statement shall have registered
and/or qualified by the first day of the Exchange Period the offers to
sell (exchange) and the sale (exchange) of the USE Shares and USE
Warrants by USE and the exercise of the USE Warrants to purchase the
USE Shares underlying the USE Warrants with the SEC and the states in
which the Investors, the Investors' assignees, the Warrantholders and
the holders of the Exercise Shares reside and (ii) such accompanying
documents, including the form of notice of election to exchange, as are
necessary to effect the exchange pursuant to this Agreement.
"Exchange Period" shall mean the period of time beginning on
the date when the Exchange Offer Documents are first mailed pursuant to
Paragraph 2 of this Agreement to the Investors, to the Investors'
assignees, to the Warrantholders and to those persons who have Exercise
Shares, and ending on the six-month anniversary of the date of such
mailing, or the next business day if the six-month anniversary falls on
a bank holiday; provided, that the Exchange Offer Documents must be
mailed to the Investors, to the Investors' assignees, to the
Warrantholders and to those persons who have Exercise Shares not later
than the first business day after the expiration of the Listing Period.
"Investor's Exchange Shares" shall mean the Private Offering
Shares owned by an Investor or an Investor's assignee at the beginning
of the Exchange Period; provided, that USE will only recognize and this
Agreement only shall be enforceable with respect to an Investor's
assignee of an Investor's Exchange Shares if (i) the Investor's
Exchange Shares have been assigned or otherwise transferred in
compliance with the 1933 Act and such compliance is established to the
reasonable satisfaction of YSFC before such assignment or transfer is
approved by YSFC; and (ii) the assignee or transferee did not acquire
the Investor's Exchange Shares in a United States or Canadian stock
market or stock exchange transaction.
"Investor's Exchange Value" shall mean the total original cash
cost to the Investor of the Private Offering Shares owned by the
Investor or the Investor's assignee, plus annual interest at the rate
of 10% calculated on a 360 day year basis starting the day after the
Investor's Subscription Agreement was accepted and approved by YSFC for
the Investor's purchase of the Private Offering Shares in the Private
Offering and ending on the Exchange Date.
"USE Shares" shall mean shares of Common Stock of USE, $0.01
par value and any other class of securities ranking on a parity with
such Common Stock.
"USE Share Value" shall mean the average of the closing bid
prices for a share of USE Common Stock on NNM for the five trading days
before the Exchange Date, as reported by NNM. If USE is not listed on,
or the USE Shares are not available for quotation on, NNM on the
Exchange
171
<PAGE>
Date, the USE Share Value shall be based on the average of the closing
bid prices for such five day period of the USE Shares on a national
securities exchange if the USE Shares are listed on a national
securities exchange or admitted to unlisted trading privileges on such
an exchange, or, if not, based upon the average of the closing bid
prices for such five day period if the USE Shares are listed for
trading on another trading system of the National Association of
Securities Dealers, Inc. If the USE Shares are not so listed on such
exchange or system or admitted to unlisted trading privileges, the USE
Share Value shall be the average of the closing bid prices reported by
the National Quotation Bureau, Inc. for the five trading days before
the Exchange Date. If the USE Shares are not so listed or admitted to
unlisted trading privileges and if bid prices are not so reported, the
current value shall be an amount, not less than book value, determined
in such reasonable manner as may be prescribed by the board of
directors of the Company.
"USE Warrants" shall mean warrants to purchase shares of
Common Stock of USE, with the same terms, including but not limited to
registration rights, as the Agent's Warrants surrendered in exchange
therefor, except that the USE Warrants shall be (i) exercisable only
for the unexpired term of the Agent's Warrants and (ii) exercisable to
purchase that number of USE Shares equal to (a) the product of (x) the
number of shares of Common Stock underlying the Agent's Warrants
multiplied by (z) the price per share of Common Stock of YSFC in the
Private Offering divided by (b) the USE Share Value and except that the
exercise price per share of the USE Warrants shall be equal to the USE
Share Value.
ii. YSFC Notice to USE and RAF of No NNM Listing;
Exchange Offer Documents. At least 30 days before the
expiration of the Listing Period, YSFC shall give
written notice to RAF and USE as to whether or not
YSFC will be listed on, and the Common Stock of YSFC
available for quotation on, NNM at the end of the
Listing Period. If not, not later than the first
business day after the end of the Listing Period, USE
shall mail the Exchange Offer Documents to Investors,
to Investors' assignees, to the Warrantholders and to
those persons who have Exercise Shares.
iii. Exchange Offer Terms.
(1) To Investors. During the Exchange Period,
each Investor and each Investor's assignee
shall have the right to exchange all of part
of the Investor's Exchange Shares for the
number of fully paid and nonassessable USE
Shares which equals the Investor's Exchange
Value divided by the USE Share Value.
(2) To Warrantholders and Holders of Exercise
Shares. During the Exchange Period, each
Warrantholder and each holder of Exercise
Shares shall have the right to exchange (i)
all or part of the Agent's Warrants owned by
the Warrantholder for USE Warrants, and/or
(ii) all or part of the Exercise Shares for
USE Shares on the same basis as the
Investor's Exchange Shares are exchangeable
as provided in paragraph 3.a above.
(3) Receipt During Exchange Period; No
Fractions; Irrevocable Election. No notice
of election to exchange which is given after
the expiration of the Exchange Period will
be accepted by USE. No fractional USE Shares
or USE Warrants shall be issued; any
fractional USE Share or USE Warrant which
would otherwise result shall be rounded up
to the next whole USE Share or USE Warrant.
Each Investor, each Investor's assignee,
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each Warrantholder and each holder of
Exercise Shares shall have the right, one
time only, to exchange some or all of the
Investor's Exchange Shares, the
Warrantholder's Agent's Warrants or the
Exercise Shares for USE Shares or USE
Warrants, as applicable. On the Exchange
Date, the notices of election to exchange
shall be irrevocable and shall not be
changed to increase or decrease the number
of Investor's Exchange Shares, Agent's
Warrants or Exercise Shares to be exchanged.
(4) Certificates for USE Shares and USE
Warrants. From time to time during the
Exchange Period (i) certificates for the USE
Shares shall be issued by USE to the persons
exercising their right of exchange for USE
Shares, and (ii) USE Warrants shall be
issued by USE to the persons who have
exchanged Agent's Warrants for USE Warrants.
iv. Current Registration Statement; Expenses of
Registration and Qualification. USE shall keep the
registration statement current until the day after
the last day of the Exchange Period. USE shall pay
for all expenses incurred in connection with such
registration statement and, in addition, for all
expenses incurred in connection with registering
or qualifying the offer and sale of the USE Shares,
USE Warrants and underlying USE Shares under the
securities laws of the states wherein the Investors,
Investors' assignees, Warrantholders and each holder
of Exercise Shares reside. USE shall not pay any
commissions or other compensation to any person in
connection with such offers and sales.
v. Adjustments for Recapitalizations; No
Termination. In the event that between the date of
the Private Placement Memorandum and the day after
the last day of the Exchange Period, YSFC or USE
declares any stock dividend or effectuates any stock
split or undergoes a capital reorganization or other
transaction which changes the kind or number of
shares of Common Stock of YSFC or USE, then full and
equitable adjustment in the number of USE Shares and
USE Warrants shall be made with the objective of
maintaining after the transaction the relative values
of the Investor's Exchange Value and the USE Share
Value before such stock dividend or other capital
reorganization or other transaction as if such
transaction had not occurred, taking into account
changes in USE Share Value which have resulted
otherwise than from such stock dividend or stock
split, etc.
USE and YSFC agree that from the date of this Agreement until the day
after the last day of the Exchange, neither USE nor YSFC will take or permit any
action, including, but not limited to, a merger, reorganization or sale of
assets, which would terminate or diminish the rights of the Investors,
Investors' assignees, Warrantholders or holders of Exercise Shares under this
Agreement.
vi. Injunctive Relief. USE irrevocably grants RAF and its
assignees, in addition to other legal remedies
available, the right to apply for an injunction,
without bond exceeding $500, to enforce USE's
covenants herein and USE's sole remedy in the event
of the entry of such injunctive relief shall be the
dissolution of such injunctive relief, if warranted,
upon hearing duly held (all claims for damages by
reason of the wrongful issuance of such injunction
being expressly waived hereby).
vii. Complete Agreement; Governing Law and Expenses
of Resolution; Notice. This Agreement represents the
complete agreement among the parties with
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respect to the subject matter hereof, except for the
Agent Agreement and the Agent's Warrants the terms of
which shall control in the event of any conflict with
this Agreement. This Agreement shall be construed and
interpreted under the laws of the State of Colorado;
this Agreement is entered into in Denver, Colorado.
In the event of litigation to enforce the rights of
the parties hereto, the party which prevails shall be
entitled to recover from the other parties the costs
and expenses (including reasonable attorney's fees)
of such litigation. Notice to the parties hereto
shall be given by first class mail to the address of
the party stated in this Agreement; notice to the
Investors, Investor assignees, Warrantholders and
holders of Exercise Shares shall be by first class
mail to the addresses of such persons as reflected in
the records of the Company. Unless otherwise stated
in this Agreement, all notices under this Agreement
shall be given when postmarked after having been
deposited in the U.S.
Mail, postage prepaid.
viii. Binding Nature. This Agreement shall be binding upon
the parties hereto, and inure to the benefit of the
parties, their respective heirs, administrators,
executors, successors and assigns. Further, RAF shall
have the right, in its sole discretion, to enforce
this Agreement on behalf of the Investors, Investor
assignees, Warrantholders and holders of Exercise
Shares or to assign the rights to enforcement hereof
to one or more of the Investors, Investor assignees,
Warrantholders and holders of Exercise Shares.
This Agreement is effective as of the date first stated above.
YELLOW STONE FUELS CORP. U.S. ENERGY CORP.
By: /s/ Mark J. Larsen By: /s/ John L. Larsen
------------------------------ --------------------------------
Mark J. Larsen, President John L. Larsen, Chairman
RAF FINANCIAL CORPORATION
/s/ Robert L. Long
- ----------------------------------------
Robert L. Long,
Senior Vice President, Corporate Finance
174
<PAGE>
EXHIBIT 10.60
RJ FALKNER AND COMPANY
Investment Research and Financial Communications
P. O. Box 1230
Crested Butte, CO 81224
CONTRACT
Customer: U. S. Energy Corp.
Date: February 1, 1999
Term of Contract: One Year
Contract Begins: February 1, 1999
******************************************************************************
The undersigned, acting on behalf of U. S. Energy Corp. ("the customer"), hereby
contracts with R. J. Falkner & Company, Inc., for a period of not less than one
year, for the provision of consulting services to include the following:
(1) The preparation of at least two "Research Profile" reports during the next
twelve months;
(2) Distribution of such reports to the brokerage community, money managers,
mutual funds, and individual investors, upon request, or as instructed by the
customer, along with exposure of such reports on the StreetNet investor
information site on the Internet and on the R. J. Falkner & Company, Inc.
website (www.rjfalkner.com);
(3) Distribution of news releases and other company communiques to the brokerage
community, institutional and individual investors, and research analysts
throughout the U. S., Europe, and Canada;
A cash retainer fee for these services will be payable at the rate of $2,000 per
month, in advance. In addition to such monthly retainer, the customer will be
invoiced for reimbursement of expenses directly incurred in the provision of
these services on a monthly basis. Such expenses will primarily involve
publishing, printing and postage costs related to the distribution of "Research
Profile" reports; telephone calls placed on the customer's behalf; and travel
expenses required to visit the customer and/or for trips to visit brokerage
firms/investor groups/institutions on behalf of the customer (such trip expenses
are pro-rated among several customers). Documentation of these expenses, which
should not exceed $500 per month unless pre-approved by the customer, will be
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<PAGE>
provided on each monthly invoice, and the customer agrees to reimburse R. J.
Falkner & Company, Inc. for such expenses within 30 days following receipt of
such invoices.
In addition to the cash compensation outlined above, R. Jerry Falkner (as an
individual) will be granted a 3-year option to purchase 20,000 shares of U. S.
Energy Corp. common stock, with such option to be issued no later than February
28, 1999. The exercise price on the option will be $2.62 per share. Customer
hereby agrees to register the shares underlying this option within 24 months of
the "start date" of this contract.
This contract may be cancelled by the Customer after twelve months, upon written
notice to be received by R. J. Falkner & Company on or before February 1, 2000.
If such notice is not forthcoming, the services of R. J. Falkner & Company, Inc.
will continue on a month-to-month basis. At any time after completion of the
initial one-year term of the contract's starting date, either party may cancel
the services of R. J. Falkner & Company, Inc. upon 60 days' written notice. If
the customer chooses to terminate the services of R. J. Falkner & Company, Inc.
prior to February 1, 2000, customer agrees to pay R. J. Falkner & Company, Inc.
all advance retainer fees for the months remaining in the initial twelve-month
term of the contract, plus unreimbursed expenses.
In the event of dispute, the prevailing party will be entitled to recover its
costs, including reasonable attorney's fees.
The parties acknowledge that this contract is entered into in the state of
Wyoming and that any litigation arising from this contract must be adjudicated
in Wyoming courts in accordance with Wyoming law.
This contract cannot be assigned without the agreement of both parties.
Signed:
s/ Keith G. Larsen
- ----------------------------------
Keith G. Larsen
President
U. S. ENERGY CORP.
s/ R. Jerry Falkner
- ----------------------------------
R. Jerry Falkner, CFA
President
R. J. Falkner & Company, Inc.
Date: 2/1/99
------------------------------
Note: Please retain one original copy of this contract for your records, and
return one original copy to R. J. Falkner & Company, Inc.
176
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EXHIBIT 23.1
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our Report dated September 11, 1998 in this Form S-4 Registration
Statement, initial filing.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
February 19, 1999
177
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EXHIBIT 23.2
Consent of Independent Accountants
We consent to the reference to our firm under the caption "Experts" in the
registration statement on Form S-4, initial filing, of U.S. Energy Corp.
/s/ Coopers & Lybrand L.L.P.
Salt Lake City, Utah
February 19, 1999
178
