SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended May 31, 1999 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ______ to ______
Commission file number 0-6814
U.S. ENERGY CORP.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Wyoming 83-0205516
- -------------------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West
Riverton, WY 82501
- -------------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (307) 856-9271
----------------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
-----------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ___
The aggregate market value of the shares of voting stock held by
non-affiliates of the Registrant as of August 26, 1999, computed by reference to
the average of the bid and asked prices of the Registrant's common stock as
reported by the National Market System of NASDAQ on that date, was approximately
$25,365,521.
Class Outstanding at August 26, 1999
- --------------------------------------- ------------------------------------
Common Stock, $0.01 par value 8,771,330 shares
Documents incorporated by reference: Portions of the documents listed below have
been incorporated by reference into the indicated parts of this report as
specified in the responses to the referenced sections of this filing.
Annual Meeting Proxy Statement for the fiscal year ended May 31, 1999
into Part III of the filing.
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
<PAGE>
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
fact included in this Report, including without limitation the statements under
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the disclosures about the Green Mountain Mining Venture development
schedule for the Wyoming properties, the projected operating status of Plateau
Resources Limited's Shootaring Canyon uranium mill in Utah, future market prices
for uranium oxide, possible utility contracts for uranium oxide, and the plan of
operations for Yellow Stone Fuels Corp. and Sutter Gold Mining Company
(subsidiaries of U.S. Energy Corp.), are forward-looking statements. In
addition, when words like "expect," "anticipate" or "believe" are used, U.S.
Energy Corp. is making forward-looking statements.
Although U. S. Energy Corp. believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct. Important factors that could cause
actual results to differ materially from such expectations are disclosed in this
Annual Report. The forward-looking statements should be carefully considered in
the context of all the information set forth in this Annual Report.
PART I
ITEM 1 AND ITEM 2. BUSINESS AND PROPERTIES
(A) GENERAL.
U.S. Energy Corp. ("USE") 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 currently in the care and maintenance mode.
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 as "USECC". Gold operations are conducted
through Sutter Gold Mining Company("SGMC"), 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
2
<PAGE>
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). In addition, USE intends to implement
plans for it and Crested to consolidate their uranium assets into a single
subsidiary and finance the startup of its mines and mill operations, subject to
obtaining the necessary debt or equity funding. There is no assurance such
financing can be obtained.
For fiscal 2000, USE seeks the financing necessary to re-commence
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. 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."
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. Permitting will be funded internally by SGMC . Additional funding will be
needed to build the mine and mill, however, there now are no funding agreements.
Gold prices have reached new lows since early in calendar 1999 and continued low
prices will make financing the gold property difficult. As a result, management
has determined that a significant amount of SGMC's mineral assets are impaired.
See Footnote F in the accompanying consolidated financial statements.
Until February 1996, USE conducted manufacturing and/or marketing of
professional and recreational outdoor products through The Brunton Company
("Brunton"), a wholly-owned subsidiary. As of February 1, 1996, USE sold Brunton
to Silva Production AB. The sale eliminated Brunton's manufacturing and/or
marketing of professional and recreational outdoor products from the commercial
segment of USE's business as of January 31, 1996, except to the extent that
there are net profits payments from Silva through 2000.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Registrant operates in three business segments: (i) minerals, (ii)
commercial operations, and (iii) construction operations. The Registrant engages
in other miscellaneous activities such as oil and gas exploration, development
and production. The principal products of the operating units within each of the
reportable industry segments are:
3
<PAGE>
INDUSTRY SEGMENTS PRINCIPAL PRODUCTS
Minerals Sales and leases of mineral-bearing
properties and, from time to time, the
production and/or marketing of uranium,
gold and molybdenum.
Commercial Operations Operation of a motel and
rental of real estate, operation of an
aircraft fixed base operation (aircraft
fuel sales, flight instruction and
aircraft maintenance), and provision of
various contract services, including
managerial services for subsidiary
companies.
Construction Operations Construction of irrigation,
flood control, municipal sewer, roads,
ponds, site work, culverts, erosion and
similar projects.
Percentage of Net Revenue contributions by the three segments in the last three
fiscal years were:
Percentage of Net Revenues During the Year Ended
------------------------------------------------
May 31, May 31, May 31,
1999 1998 1997
-------- -------- --------
Minerals 2% 9% 4%
Commercial Operations 27% 23% 56%
Construction Operations 0% 0% 18%
In fiscal 1999, USE received $87,500 in revenues from the sale of
uranium, compared to $858,000 in revenues from the sale of uranium in fiscal
1998. Mineral revenues were generated from sales of uranium under certain of the
utility supply contracts held by Sheep Mountain Partners ("SMP"), a Colorado
general partnership and the molybdenum royalty. During fiscal 1997, there were
no revenues from mineral sales (except for molybdenum royalty interest) in part
due to the arbitration proceedings involving SMP (see Item 3, "Legal Proceedings
- - Sheep Mountain Partners Arbitration/Litigation"). Additional mineral revenue
was generated by USE's molybdenum interest. In Construction Operations, all of
FNG's revenues were derived from renting FNG construction revenues were derived
from renting FNG construction equipment for the development work at the Jackpot
Mine for fiscal 1998 and 1999.
(C) NARRATIVE DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT (INCLUDING ITEM 2 -
PROPERTIES DISCLOSURE).
MINERALS
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).
4
<PAGE>
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.
Exploration and delineation of the principal uranium resources in the
proposed Jackpot Mine have been substantially completed. A final Environmental
Impact Statement ("EIS") for the proposed mine was completed, 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 Jackpot Mine supported by facilities
at the Big Eagle Mine are accessible by county and private roads. The Big Eagle
Mine was first operated by Pathfinder Mines Corporation ("PMC") starting in the
late 1970s and was acquired for the Jackpot Mine infrastructure.
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 December 21, 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 monetary judgment against Nukem/CRIC and the CIS uranium supply
contracts in trust remained in dispute. See "Legal Proceedings." The Sheep
Mountain Mines 1 and 2 were first operated by Western Nuclear, Inc., a
subsidiary of Phelps Dodge Corporation, in the late 1970s.
YELLOW STONE FUELS CORP.
Yellow Stone Fuels Corp.("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. are
herein collectively referred to as YSFC.
YSFC has 11,851,500 shares of Common Stock issued and outstanding,
including 2,700,250 shares (22.8%) issued to USE and 1,568,750 shares (13.2%)
issued to Crested.
In order to concentrate the efforts of USECC on conventional uranium
mining using the Shootaring Canyon and Sweetwater Mills, USECC decided to take a
minority position in YSFC and not be directly involved in properties believed
suitable for the production of uranium through the in-situ leach ("ISL") mining
process. USECC will have 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 to the ore body, causing the uranium
contained in the ore to dissolve. The resulting solution is pumped to the
surface where it is further processed to uranium oxide which is shipped
5
<PAGE>
to conversion facilities for eventual sale. Generally, the ISL process is more
cost effective and environmentally benign compared to conventional mining
techniques. In addition, less time may be required to bring an ISL mine into
operation than to permit and build a conventional mine and mill.
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.
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 oxide ("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 for $2,500 per month and a sublease for 1,000 square
feet of office space and USE of various office equipment for $1,500 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 processing
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 a registered Exchange Offer was made and is ongoing as
of August 30, 1999.
REGISTERED EXCHANGE OFFER. Pursuant to the September 17, 1997 Exchange
Rights Agreement between USE, YSFC and AFFC, USE has made an Exchange Offer 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 the Exchange Offer
at 5:00 pm MDT on September 13, 1999. The Exchange Offer also was made by USE to
each holder of the YSFC Warrants, who exchanged some or all of the YSFC Warrants
for USE Warrants (see below). Shareholders of YSFC who did not invest in YSFC
through AFFC are not eligible to participate in the 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 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 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
6
<PAGE>
NMS would require YSFC to meet several conditions, including having minimum net
tangible assets of $6,000,000 and at least 400 shareholders. YSFC did not meet
these conditions to listing. Therefore, USE filed a registration statement on
Form S-4 (declared effective in March 1999), and the Exchange Offer is being
made to the YSFC shareholders and holders of the YSFC Warrants pursuant to the
Exchange Rights Agreement, and prospectus.
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 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 of May 31, 1999 USE had issued 677,167 shares in exchange for
1,122,750 YSFC shares, and USE Warrants to purchase 67,025 USE shares (at $3.64
per share) in exchange for all the YSFC Warrants. YSFC has 11,851,500 shares of
Common Stock issued and outstanding as of August 26, 1999, including 4,260,250
shares (36%) issued to USE and Crested.
THE PROPERTY INTERESTS OF USE IN UTAH THROUGH PLATEAU RESOURCES LIMITED
("PLATEAU") ARE:
Plateau Resources Limited is a wholly-owned subsidiary of USE, however,
Crested owns an interest in Plateau. See "Plateau Shootaring Canyon Mill" below.
The Tony M Mine and the Frank M properties, underground uranium deposits
in San Juan County, Utah are located partially on Utah State mining leases.
Plateau is the lessee of the Tony M Mine and portions of the Frank M
properties and has posted a bond securing Plateau's obligations to reclaim these
properties. The Tony M mine was originally developed by Plateau at the time
Plateau was owned by Consumers Power Company ("CPC"), a Michigan public utility.
Significant areas of uranium mineralization have been accessed and delineated by
the prior owner's underground workings. When the Tony M Mine was in production
(while Plateau was owned by CPC), it produced ore containing from three to eight
pounds of uranium concentrates per ton. Some of this ore was processed at the
Shootaring Mill. In addition, low grade uranium ore was stockpiled at the Tony M
Mine and at the Shootaring Mill.
Plateau also acquired the Velvet Mine and the nearby Woods Complex in
the Lisbon Valley area in southeastern Utah. The Velvet Mine was fully developed
and permitted by its prior owner and is located approximately 178 miles by road
from the Shootaring Mill. The Woods Complex was formerly an operating uranium
mine with a remaining undeveloped resource. Access to this resource would be by
extending a drift approximately 2,500 feet from the former Wood Mine. The 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.
7
<PAGE>
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 uranium oxide. For detailed explanation of the GMMV
agreement, please see U.S. Energy Corp's. 1998 Form 10-K at pages 8-11.
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 converting the Sweetwater Mill U.S. Nuclear
Regulatory Commission ("NRC") 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, 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 1999 were funded through approximately $14,000,000 advanced to the GMMV
in connection with Kennecott's $50,000,000 work commitment (for its 50 percent
interest).
JUNE 23, 1997 ACQUISITION AGREEMENT WITH KENNECOTT URANIUM COMPANY
On June 23, 1997, USE and USECC signed an Acquisition Agreement with
Kennecott, for the right to acquire Kennecott's interest in the GMMV for
$15,000,000 and other consideration. This Agreement was not closed by the
October 30, 1998 deadline because of difficulties in trying to raise the
financing in light of the depressed 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 Mine for production and in
changing the status of the Sweetwater Mill from standby to operational. The work
was performed by USECC as lessee of all the GMMV mineral properties under a
Mineral Lease Agreement between the GMMV and USECC (the "Mineral Lease"), and as
an independent contractor under a Contract Services Agreement (the "Mill
Contract") between Kennecott (as manager of the GMMV) and USECC. Both the
Mineral Lease and the Mill Contract, as well as a Fourth Amendment to the GMMV
Mining Venture Agreement among Kennecott, USE and USECC (the "Fourth Amendment
to the GMMV Agreement"), were executed simultaneously with the Acquisition
Agreement. Under the Fourth Amendment to the GMMV Agreement, Kennecott received
a credit against its original $50,000,000 commitment to fund the GMMV. See
"Properties and Mine Plan" below.
8
<PAGE>
Because the Acquisition Agreement was not closed, the Mineral Lease and
Mill Contract were terminated, and all operations on the GMMV project are now
conducted pursuant to the amended GMMV Agreement. USE and USECC, and Kennecott
retain their respective 50% interests in the GMMV, and Kennecott's obligation to
repay the money loaned by KEC remains Kennecott's obligation, without any
adverse effect on the 50% interest in the GMMV held by USE and USECC. However,
the Jackpot Mine development work and Sweetwater Mill upgrade work funded by
about $14,500,000 advanced (out of the $16,000,000 loan) has benefitted all
parties. If one of the parties does not pay its share, its percentage in the
GMMV is reduced if the other party pays instead. 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.
GMMV Management Committee has agreed on a GMMV budget but the USE
Parties have elected not to participate in financing the budgeted expenditures
and its percentage ownership of the GMMV may be reduced. Therefore, the USE
Parties' 50% interest in the GMMV is being diluted by a small amount.
However, the GMMV will not be affected otherwise.
Due to continued depressed market price of uranium concentrates and lack
of funding, the GMMV mineral assets were impaired.
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, GMMV Management Committee made a business
decision to temporarily place the Jackpot Mine on standby, which resulted in the
lay off of approximately 45 employees. Resumption of development work 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.
PROPERTIES AND MINE PLAN
The GMMV 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) at the Jackpot
Mine, which will be continued underground from the south side of Green Mountain
when operations
9
<PAGE>
resume. The first of several mineralized horizons is about 2,300 feet vertically
down from the surface 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 fresh
air ventilation and transportation of personnel, and the other will convey ore,
rock and waste out of the mine with exhaust ventilation. 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.
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.
The Sweetwater 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").
Although the GMMV is liable for all reclamation and environmental
compliance costs associated with mill and site maintenance, as well as mill
decontamination and cleanup and site reclamation and cleanup after the mill is
decommissioned, USECC believes it is unlikely USECC would have to pay for such
costs directly. First, based on current estimates of cleanup and reclamation
costs (reviewed annually by the oversight agencies), such costs covered by the
letters of credit or other surety appear to be within the $24,330,000 of
reclamation bonds posted by Kennecott for GMMV. These costs are not expected to
increase materially if the mill is not put into operation. Second, UNOCAL has
agreed that if the GMMV incurs expenditures for environmental liabilities prior
to the earlier of commercial production by GMMV or January 1, 2001, (which
liabilities are not due solely to the operations of GMMV), then UNOCAL will loan
the GMMV the first $8,000,000 (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. The GMMV intends to 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
10
<PAGE>
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 are required before January 1, 2001
and before mill production resumes, then up to $8,000,000 (escalated) of that
amount would be advanced in a loan from UNOCAL payable out of production from
the Mill, before Kennecott would be required to pay on its guarantee. Kennecott
has made application to the Wyoming DEQ for a third five year interim
stabilization plan on the Sweetwater Pit where uranium mineralized material was
mined and processed through the Mill with the Wyoming DEQ. The Wyoming
Environmental Quality Council is currently reviewing the application. A decision
is expected in September 1999.
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 initiated discussions and made filings with the NRC regarding
amendments to the Source Material License to resume ore processing at the
Sweetwater Mill. On August 25, 1999, the Company was advised that the NRC issued
the Operating License for the Mill.
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. In the purchase of the stock from CPC, USE agreed to various obligations
more fully set out in USE's 1998 Form 10-K at pages 15 and 16.
Subsequent to closing the purchase agreement with CPC, 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 of 1982. In 1984, Plateau placed the mill on standby because CPC
had canceled the construction of an additional nuclear energy plant.
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
11
<PAGE>
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 $2,390,900 of government securities available for further bonding
needs.
In fiscal 1998 and 1999, in anticipation of resuming milling operations,
Plateau has significantly performed a reactivation and rehabilitation program at
the Mill. Plateau obtained approval of a water control permit for the tailings
cell from the Utah Water Control Division and is awaiting the NRC's review of
the operating license conditions so Plateau can continue with construction of
tailing facilities.
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. 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. (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
12
<PAGE>
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.
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. 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.
PERMITS. Permits to operate existing mines on the Crooks Gap properties
have been issued by the State of Wyoming. Amendments are needed to open new
mines within the permit area. As a condition to issuance of the permits, a NPDES
water discharge permit under the Clean Water Act has been obtained. Monitoring
and treatment of water removed from the mines and discharged in nearby Crooks
Creek is generally required. During the past two years, SMP did not discharge
wastewater into Crooks Creek, and the mine water is presently being discharged
into the McIntosh Pit.
URANIUM MARKET INFORMATION.
URANIUM SPOT MARKET. Uranium spot prices averaged $10.41/lb. U3O8 on
June 30, 1999, a decrease of 4% from $10.80 at the end of the first calendar
quarter. Although spot demand from utilities and producers was stronger than
last year, sellers were concluding sales by offering lower prices as the quarter
came to a close. During the quarter, total spot market volume was approximately
5 million pounds U3O8 bringing the year-to-date total to more than 13 million
pounds, a significant improvement over the 4 million pounds sold in the first
half of 1998. Currently, the restricted spot price for U3O8 was reported in the
$10.10 to $10.60/lb.
range.
URANIUM LONG-TERM MARKET. The long-term market continued to be
relatively quiet in the second calendar quarter with the long-term uranium price
indicator declining marginally to $10.65/lb. U3O8 from $11.75 at the end of the
previous quarter. Demand in the long-term market is expected to increase over
the remainder of the year as utilities move to cover future needs and volume for
the year is expected to exceed the 1998 estimated level of 50 million pounds
U3O8.
For a detailed analysis of past uranium market developments, please see
U.S. Energy Corp.'s 1998 Form 10-K pages 20 - 26.
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").
As discussed below, SGMC has a plan to put the SGM into production.
However, implementation of this plan will require substantial capital financing.
Recent record low prices for gold have made financing difficult. These low
prices and the lack of capital have resulted in a substantial write down of the
SGMC
13
<PAGE>
assets. See "Managements Discussion and Analysis of Financial Condition and
Results of Operations" for fiscal 1999.
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) were 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 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.
Due to the depressed gold price and lack of available funding, SGMC has
deferred the start of construction of the 1,000 ton-per-day gold mill complex
and development of the underground mine, but is exploring plans to develop the
mine into a visitor's center to generate positive cash flow while the gold
prices remain depressed.
During fiscal 1998, SGMC 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 built the entrance road to the mine. In fiscal 1999,
preparation of the mill and office site started and the engineering firm has
finished construction drawings for the mill. 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.
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 own
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. In fiscal 1999, the Company issued
89,059 shares of its common stock in exchange for 207,500 Special Warrants from
SGMC shareholders increasing the Company's ownership of SGMC by 4%. For further
information on the transaction, please see Footnote F to the Financial
Statements.
14
<PAGE>
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.
PROPERTIES. SGMC (through its subsidiary USECC Gold L.L.C.) holds
approximately 14 acres of surface and mineral rights (owned), 240 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.
Surface and mineral rights holding costs will aggregate approximately
$225,000 from June 1, 1999 through May 31, 2000. Property taxes for fiscal 2000
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.
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/visitor center. In any event, SGMC does not expect the appeal process
to materially impact the current development plan or schedule.
VISITOR'S CENTER. SGMC is evaluating the possibility of developing the
tourist potential of Sutter Gold Mine, while it waits for the price of gold to
rebound. Demographics indicate, that within 150 mile radius of SGM's operation,
there is a total market population of 19.4 million people with 9.0 million
tourists visiting the area each year. The Sutter Gold Mine/Museum attraction
would be located along scenic Highway 49
15
<PAGE>
(known as the Gold Road) between the historic gold mining towns of Sutter Creek
and Amador City, Amador County, California. The Amador County Chamber of
Commerce estimates that 2.5 million people drive by SGM's entrance each year.
SGMC's initial studies indicates that the number of tourists could approximate
2,000 per day. Facilities would include a Visitor's Center with a gift shop and
museum, a self-guided tour of modern mining activities, visitor gallery/museum
attached to the mill building (when built), hiking trails, picnic areas and a
special gold panning area. Revenues would come from admission tickets, gold
value-added products and other appropriate merchandise. The early 19th century
architecture, combined with expansion of underground tourist displays, rides and
exhibits should allow SGMC to continually upgrade and generate new and renewed
interest in the visitor attractions.
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: (in)
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. 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
(one-half to each) 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.
USE recognized $150,600, $211,000 and $207,300 of revenues in fiscal 1999, 1998
and 1997, respectively, related to this royalty interest.
MOLYBDENUM MARKET INFORMATION
Molybdenum is a metallic element with applications in both metallurgy
and chemistry. Principal consumers include the steel industry, which uses
molybdenum alloying agents to enhance strength and other characteristics of its
products, and the chemical, super-alloy and electronics industries, which
purchase molybdenum in upgraded product forms.
The molybdenum market is cyclical with prices influenced by production
costs and the rate of production of foreign and domestic primary and by-product
producers, world-wide economic conditions particularly in the steel industry,
the U.S. dollar exchange rate, and other factors such as the rate of consumption
of molybdenum in end-USE products. When molybdenum prices rose dramatically in
the late 1970s, for example, steel alloys were modified to reduce reliance on
molybdenum. AMAX and Cyprus Minerals Company were the two major primary
producers of molybdenum in the United States until November 1993, when AMAX was
acquired by Cyprus. In a recent public announcement, ASARCO proposes to acquire
Cyprus Amax through a merger forming ASARCO Cyprus Inc., which would be the
largest publicly traded copper company. More recently, Phelps Dodge made a
buyout offer of Cyprus Amax
16
<PAGE>
and Asarco. This would further concentrate these companies' copper production
capabilities and add molybdenum reserves to the surviving companies. It is too
early to evaluate the affect of the merger and acquisition may have on USECC's
molybdenum interest at Mt. Emmons, Co.
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. Until December 1998, four wells were producing, but were
shut in pending an increase in oil prices. Recently, two of the wells were again
placed into production. USE and Crested received a fee based on oil produced.
The wells were shut in pending a price increase. 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
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.
USE and Crested (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.
17
<PAGE>
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 semi-developed lots on 26.8 acres and 63
acres of undeveloped land 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 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
"Item 3 - Legal Proceedings."
UTAH PROPERTIES. Canyon Homesteads, Inc. (a Plateau subsidiary) owns a
majority interest in a joint venture which holds the Ticaboo Townsite in
Ticaboo, Utah (see "Minerals - Uranium-Shootaring Canyon Mill - Ticaboo
Townsite" above). In fiscal 1995, USE acquired the minority interest in the
joint venture from a nonaffiliate.
CONSTRUCTION
FOUR NINES GOLD, INC. For fiscal 1999, FNG had no contracts for
construction work, but has rented its equipment to USECC for use by the GMMV at
the Jackpot Mine and Plateau Resources at Ticaboo, Utah..
Rental revenues totaled $197,600 for fiscal 1999 at a profit of $14,100.
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.
18
<PAGE>
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 Report, 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 or impossible to confirm that all of the requisite steps have been
followed for location and maintenance of a
19
<PAGE>
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.
ITEM 3. LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
In 1991, disputes arose between USE/Crested, and Nukem, Inc. and its
subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation
and operation of the Sheep Mountain Partners partnership for uranium mining and
marketing, and activities of the parties outside SMP. Arbitration proceedings
were initiated by CRIC in June 1991 and in July 1991, USECC filed a lawsuit
against Nukem, CRIC and others in the U.S. District Court (District of
Colorado). Later, USECC filed another suit for the standby costs at the SMP
mines against SMP in the Colorado State Court. The Federal Court stayed 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
and clarifying the Order on July 3, 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. For more details of the litigation, see Item 3 of the 1998 Form
10-K for USE and Footnote K to the Financial Statements.
A three judge panel of the 10th CCA 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 without
modification. The ruling of the 10th CCA 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 ruling of the 10th
CCA, USE and Crested received an additional $6,077,264 (including interest and
court costs) from Nukem in February 1999 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. Nukem/CRIC filed motions for entry of final satisfaction of
Judgment. The U.S. District Court denied both motions, the last one on July 16,
1999 and on August 16,
20
<PAGE>
1999, Nukem filed a Notice of Appeal to the 10th CCA. USECC intends to
vigorously oppose the appeal and seek Judicial intervention to enforce the
Constructive Trust.
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.) and their corporation Dejavue, Inc. sued USE,
Crested and others in Utah State Court 3rd Judicial District. See footnote K to
the Financial Statements in the Annual Report. 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 and awarded the plaintiff Dejavue, Inc. $91,668
in attorney fees. USE filed motions including a motion for judgment
notwithstanding the verdict, but the motions were denied by the Court. USE
posted a supersedeas bond for $275,000 to appeal the judgment and plaintiffs
also appealed the judgment to the Utah Court of Appeals. Plaintiffs and USE have
both filed their briefs on appeal and are awaiting a decision from the Utah
Court of Appeals whether to have oral arguments.
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 extra-lateral 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.
A partial or bifurcated trial to the Court of the extra-lateral rights
issues was held on December 11 and 12, 1995, to determine whether the Bullfrog
orebody is a vein apexing on Parador's Claims. 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 all appealed the decision to the Nevada Supreme Court. BGBI
filed its brief on appeal and Parador and USECC have until August 31, 1999 to
file their answer and opening brief.
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").
The plaintiffs have asked the Court to declare that (in) 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
21
<PAGE>
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. The Court took the motions under advisement
and as of August 18, 1999, had not entered a decision.
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.
Three of the defendants also filed motions to dismiss seeking relief
from USE's notice of lis pendens. That motion has not been decided pending
settlement discussions that were terminated by USE on July 15, 1999. Litigation
is expected to resume against all defendants other than Gunnison Center
Properties, L.L.C. which voluntarily petitioned for protection under Chapter 11
of the Bankruptcy Code. The remaining defendants own other property which USE
believes has sufficient value to satisfy any judgment that USE may obtain.
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.
22
<PAGE>
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. A hearing was held on June
7, 1999 and the Court took the matter under advisement. Under California Law,
the Court has 90 days from the hearing date to enter its decision.
DENNIS SELLEY ET AL VS U.S. ENERGY CORP., CRESTED CORP. ET AL. On May
14, 1999, Dennis Selley personally and as personal representative of the Estate
of Hannah Selley and his wife Mary B. Selley, filed a Civil Action No. 30869 in
the Ninth Judicial District Court of Fremont County, Wyoming against U.S. Energy
Corp. and Crested Corp., Plateau Resources Limited and USECC the joint venture,
alleging that the defendants were negligent as a landlord in renting a
doublewide trailer converted to a bunkhouse near Ticaboo, Utah to plaintiffs'
daughter Hannah Selley and seek various unspecified damages. Hannah Selley was
employed by U.S. Energy Corp. ("USE") at the Ticaboo Lodge in June 1998. Because
no housing was available for employees, she and five other USE employees rented
rooms in the bunk house provided by USE, located about 1/2 mile from the Ticaboo
Lodge. In the late evening of June 5, 1998 and early the next morning, the
occupants built a bonfire near the bunkhouse and had guests over for a party. At
about 4:00 a.m. the morning of June 6, 1998, a fire started in the bunkhouse.
All occupants were awakened and left the living quarters during the fire except
Ms. Selley who perished in the fire. Plaintiffs allege inter alia that
defendants were negligent in providing faulty living quarters and that
defendants submitted a false filing with the Utah Workers Compensation Fund.
Defendants deny negligence in providing the living facility and assert various
defenses including plaintiffs' complaint is barred by the Workers Compensation
statutory immunity as well as the defense of an intervening clause. Discovery is
underway.
DECLARATORY JUDGMENT ACTION. The Workers Compensation Fund of Utah has
filed a complaint for declaratory relief on or about July 26, 1999 against U.S.
Energy Corp., Crested Corp., Plateau Resources Limited, Dennis and Mary Selley
and others in Civil Action No. 99090 7500 before the Utah Third Judicial Court
of Salt Lake County, Utah. The suit is to determine its obligation to defend and
indemnify U.S. Energy Corp. and its affiliates in the above Hannah Selley case.
U.S. Energy Corp., Crested Corp. and affiliates have not yet responded to the
complaint in the case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
INFORMATION CONCERNING EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS.
The following information is provided pursuant to Instruction 3, Item
401 of Reg. S-K, regarding certain of the executive officers of USE who are not
also directors.
ROBERT SCOTT LORIMER, age 48, has been the Chief Accounting Officer for
both USE and Crested for more than the past five years. Mr. Lorimer also has
been Chief Financial Officer for both these companies since May 25, 1991, their
Treasurer since December 14, 1990, and Vice President Finance since April 1998.
He serves at the will of each board of directors. There are no understandings
between Mr. Lorimer and any other person, pursuant to which he was named as an
officer, and he has no family relationship with any of the other executive
officers or directors of USE or Crested. During the past five years, he has not
been involved in any Reg. S-K Item 401(f) listed proceeding.
DANIEL P. SVILAR, age 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, and Assistant Secretary of USE. His positions of General
Counsel to, and as officers of the companies, are at the will of each board of
directors.
23
<PAGE>
There are no understandings between Mr. Svilar and any other person pursuant to
which he was named as officer or General Counsel. He has no family relationships
with any of the other executive officers or directors of USE or Crested, except
his nephew Nick Bebout is a USE director. During the past five years, Mr. Svilar
has not been involved in any Reg. S-K Item 401(f) proceeding.
MAX T. EVANS, age 74, has been Secretary for USE and President of
Crested for more than the past five years. Mr. Evans had been a director of USE
for more than the past five years, prior to April 17, 1997. He serves at the
will of each board of directors. There are no understandings between Mr. Evans
and any other person pursuant to which he was named as an officer. He has no
family relationships with any of the other executive officers or directors of
USE or Crested. During the past five years, Mr. Evans has not been involved in
any Reg. S-K Item 401(f) proceeding.
PART II
ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Shares of USE Common Stock are traded on the over-the-counter market,
and prices are reported on a "last sale" basis by the National Market System
("NMS") of the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"). The range by quarter of high and low sales prices for the
Common Stock is set forth below for fiscal 1999 and 1998.
High Low
---- ---
Fiscal year to end May 31, 1999
-------------------------------
First quarter ended 8/31/98 $7.25 $1.63
Second quarter ended 11/30/98 4.06 .81
Third quarter ended 2/28/99 3.63 1.56
Fourth quarter ended 5/31/99 6.75 3.25
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 2/28/98 10.13 6.75
Fourth quarter ended 5/31/98 8.63 5.75
(b) Holders
(1) At August 18, 1999, the closing bid price was $3.75 per share and there were
approximately 734 shareholders of record for Common Stock.
(2) Not applicable.
(c) USE has not paid any cash dividends with respect to its common stock. There
are no contractual restrictions on USE's present or future ability to pay cash
dividends, however, USE intends to retain any earnings in the near future for
operations.
(d) During the year ended May 31, 1999, USE issued (in) an aggregate of 100,000
shares of Common Stock to employees as compensation for services; 25,000 shares
to an outside consultant; 6,136 shares to outside directors; 89,059 shares of
Common Stock to private investors for cash and the exchange of securities
24
<PAGE>
of Sutter Gold Mining Company; and 677,167 shares in an exchange of YSFC common
stock. No underwriter was involved in any of these transactions.
ITEM 6. SELECTED FINANCIAL DATA.
The following tables show certain selected historical financial data for
USE for the five years ended May 31, 1999. The selected financial data is
derived from and should be read with the Financial Statements for USE included
in this Report.
<TABLE>
<CAPTION>
May 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current assets $12,718,900 $14,301,000 $ 4,400,900 $ 2,912,400 $ 3,390,100
Current liabilities 5,355,600 6,062,100 1,393,900 2,031,200 3,368,200
Working capital 7,363,300 8,238,900 3,007,000 881,200 21,900
Total assets 33,391,000 45,019,100 30,387,100 34,793,300 33,384,500
Long-term obligations(1) 14,526,900 14,468,600 14,377,200 15,020,700 15,769,600
Shareholders' equity 10,180,300 17,453,500 12,723,600 14,617,000 12,168,400
<FN>
(1)Includes $8,860,900, $8,778,800, $8,751,800 $3,978,800 and $3,951,800 of
accrued reclamation costs on mining properties at May 31, 1999, 1998, 1997, 1996
and 1995, respectively. See Note K of Notes to Consolidated Financial
Statements.
</FN>
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
For Years Ended May 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 10,853,600 $ 11,558,500 $ 5,790,200 $ 9,632,200 $ 4,600,600
Income (loss) before
equity in income
(loss) of affiliates,
provision for
income taxes and
extraordinary item (16,057,800) 365,000 (3,706,000) (2,524,100) (2,577,700)
Equity in loss of
affiliates (59,100) (575,700) (690,800) (418,500) (442,300)
Net income (loss) (11,648,500) (983,200) (3,724,500) 270,700 (2,070,600)
Income loss per share before
extraordinary item $ (1.63) $ (.15) $ (.58) $ (.39) $ (.48)
Extraordinary item -- -- -- -- --
----------- ------------ ----------- ----------- -----------
Income loss per share
before cumulative effect
of accounting change (1.63) (.15) (.58) (.39) (.48)
Income from discontinued
operations -- -- -- .05 .06
Gain on disposal of
subsidiary operations in
discontinued segment -- -- -- .38 --
Cumulative effect at
June 1, 1993 of income
tax accounting change -- -- -- -- --
----------- ------------ ----------- ----------- -----------
Net income (loss)
per share, basic
and diluted $ (1.63) $ (.15) $ (.58) $ .04 $ (.42)
=========== ============ =========== =========== ===========
Cash dividends per share $ -0- $ -0- $ -0- $ -0- $ -0-
=========== ============ =========== =========== ===========
</TABLE>
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is Management's Discussion and Analysis of those
significant factors which have affected the Company's liquidity, capital
resources and results of operations during the periods covered in the Company's
Consolidated Financial Statements filed with this Report.
Some of the statements in this Management's Discussion and Analysis
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward- looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES AT MAY 31, 1999
During fiscal 1999, cash and cash equivalents increased by $4,522,500 to
a balance of $10,173,000 at May 31, 1999. Cash increases came primarily as a
result of the receipt of cash from the settlement of various Sheep Mountain
Partners ("SMP") arbitration/litigation issues, the collection of accounts and
notes receivable, the sale of certain assets and the consolidation of Yellow
Stone Fuels Corp. ("YSFC"). Cash was provided from operations and financing
activities of $4,287,000 and $1,153,300 respectively. Cash of $917,800 was used
in investing activities.
The Company received two payments as partial settlement of various
disputes existing between the partners of SMP. The first payment of $5,026,400,
which was recorded as an account receivable at May 31, 1998, represented matters
which the partners of SMP agreed to settle based on the April 18, 1996 Order and
Award which was rendered by the Arbitration Panel and confirmed by the U.S.
District Court of Colorado. The Company received an additional payment of
$6,077,300 after a decision was reached by the 10th Circuit Court of Appeals,
which affirmed the Second Amended Judgment of the U.S. District Court of
Colorado, without modification.
During the twelve months ended May 31, 1999, accounts receivable from
affiliates decreased by $815,000. This reduction came primarily as a result of
Green Mountain Mining Venture ("GMMV") reducing the amount it owed the Company
for operations at the GMMV uranium properties by $554,000 and payment of
accounts receivable from YSFC of $137,500. The Company also received its final
payment of $333,333, plus interest of $23,300, on a three year installment
promissory note of $1,000,000 as a result of the sale of The Brunton Company in
fiscal 1996 to a third party. YSFC was consolidated beginning in the fourth
quarter of fiscal 1999. As a result of the consolidation of YSFC, cash increased
by $1,423,200.
Cash was used to reduce accounts payable and accrued expenses by,
$1,318,800; reduce debt by $395,200; purchase and renovate assets, $1,057,900;
purchase treasury stock, $123,800 and fund continuing operations. During fiscal
1999, proceeds from long term debt were $249,000. The net decrease in long term
debt of $146,200 was primarily the result of scheduled debt payments, net of
purchases of additional mineral properties by Sutter Gold Mining Company
("SGMC"), $16,800; and the purchase of additional equipment, $37,600.
Other subsidiaries of the Company consumed cash and obtained financing
to purchase additional equipment and construct or renovate existing facilities.
Additions to the capital equipment and facilities at the commercial operations
in southern Utah included the partial construction of a boat storage facility,
$576,600; renovations to the Plateau Resources Limited ("Plateau") motel and
C-store facilities in southern
27
<PAGE>
Utah, $72,600; and the purchase of vehicles, mobile homes and other equipment
$83,700. Airport operations in Wyoming underwent a $79,600 renovation to its
fuel storage facility. Other capital expenditures included the purchase of
various pieces of equipment for $191,600. These purchases of capital equipment
were offset by the sale of various equipment which generated $303,900 in cash
proceeds.
CAPITAL RESOURCES
GENERAL: The primary source of the Company's capital resources for
fiscal 2000 will be cash on hand at May 31, 1999, cash generated from commercial
operations in southern Utah, possible equity financing for the Company and its
affiliated companies, and the expected final resolution of the SMP arbitration.
The Company will also continue to offer for sale various other assets such as
lots and homes in Ticaboo, Utah, real estate holdings in Wyoming, Colorado and
Utah and various mineral interests. Advance royalties, interest, rentals of real
estate holdings and equipment, aircraft chartering and aviation fuel sales will
also provide cash.
LINE OF CREDIT: The Company has a $1,000,000 line of credit with a
commercial bank. The line of credit is secured by various real estate holdings
and equipment belonging to the Company. This facility is currently available to
the Company. It is anticipated that this line of credit may be used to finance
working capital needs.
FINANCING: Equity financings for SGMC, Plateau and YSFC are dependent on
the market price of gold and uranium, among other things. Currently, the prices
for these metals are depressed and it is not known when they will recover.
Management of the Company believes, based on its analysis of independent
projections, that the market prices for these metals will improve in the future.
No assurance can be given that the prices will improve during fiscal 2000. If
the prices do not improve, the ability of the Company to raise equity financing
will be impaired.
The Company believes that cash on hand, its line of credit and cash
projected to be received from operations, along with potential cut backs in
capital development, general and administrative and operating expenses, will be
adequate to fund working capital requirements through fiscal 2000. These capital
resources are not sufficient to provide the necessary funding for major capital
expenditures of the Company's mineral properties and, accordingly, the Company's
development plans may be either temporarily or permanently impacted.
The Company issued shares of its common stock to various individuals and
employee benefit plans which conserved its cash during fiscal 1999. The
issuances of shares included: (1) 89,600 shares of common stock were issued to
fund the 1999 obligation to the Employee Stock Ownership Plan which accounted
for compensation expense of $358,400; (2) 25,000 shares to an outside
consultant, for services over a two year period, which created an expense in
fiscal 1999 of $11,460 and deferred expenses of $57,290 which will be amortized
over a 20 month period; (3) 50,000 shares of restricted common stock each to two
of its employees for their extraordinary time and expertise that was devoted to
the Company resulting in the successful efforts of the Company in the SMP
arbitration/litigation. These shares were valued at market for which the Company
recorded an expense of $293,750; (4) 6,136 shares of common stock issued to
outside directors for services rendered which were valued at $25,200; (5) 67,000
shares, which are forfeitable under the 1996 Stock Award Program, valued at
$268,000, which will be amortized over a five year period; and (6) the issuance
of 95,000 purchase warrants to outside consultants, for services over a one to
two year period, which have a value of $176,000 that will be amortized over a 20
month period. The Company will continue to fund employee retirement and bonus
plans and outside director's fees with its common stock.
28
<PAGE>
These changes in components of working capital along with minor
increases in accounts and notes receivable trade, $27,300; assets held for
resale and other assets, $15,400; and inventory of $29,500 resulted in a net
decrease in working capital of $875,600 to working capital at May 31, 1999 of
$7,363,300. It is anticipated that this working capital along with the line of
credit and cash received from operations, as well as reductions in capital
expenditures and general and administrative and operational costs, will be
sufficient to supply the working capital needs of the Company during fiscal
2000. Until either the remaining SMP arbitration issue is resolved or equity
financing is raised, the Company plans to curtail major development projects on
its mineral properties, general and administrative expenses and commercial
operations.
CAPITAL REQUIREMENTS
GENERAL: The primary requirements for the Company's working capital
during fiscal 2000 are expected to be associated with corporate general and
administrative expenses and care and maintenance costs of Plateau, SMP, YSFC and
SGMC mineral properties. The Company will also be responsible for the purchase
of uranium for a delivery pursuant to the one utility contract that was assigned
to the Company as a result of the partial settlement agreement reached with
Nukem, Inc. in the SMP arbitration. It is not anticipated that the net gain or
loss on the delivery to this uranium contract will be material to the net income
of the Company during fiscal 2000.
SGMC: During fiscal 1999 and 1998, the Company issued 89,059 and 488,895
shares, respectively, of its common stock to purchase 207,500 and 889,900
Special Warrant Units respectively from certain SGMC investors in an arm's
length, bargained transaction. The transaction resulted in the Company
increasing its ownership of SGMC by 4% to 63% of the outstanding common stock
of SGMC as of May 31, 1999.
The Company continually evaluates carrying values of its long lived
assets. Due to various market related factors, the market price for gold was
pushed to 20 year lows. As a result of the continuing decline in the market
price of gold, the Company recorded impairments of $10,718,326 and $1,500,000 in
fiscal 1999 and 1998 respectively on its SGMC mineral assets. Management of the
Company currently plans to maintain the property in a care and maintenance mode
until the price of gold rebounds.
Preliminary estimates are that the proposed mine/mill operation will
require approximately $15,000,000 to place the proposed mine and mill into full
operation. The Company will need to obtain these funds from either an equity
partner, the equity market or commercial borrowings prior to the SGMC properties
going into production. The Company is also exploring alternative uses for the
property, including tourism.
SMP: The Company is responsible for all care and maintenance costs of
the SMP properties. During fiscal 1999 these costs averaged $56,900 per month.
There are no current plans to mine the SMP Crooks Gap properties during fiscal
2000. However, the Company will continue to preserve the mineral properties and
evaluate concepts to reduce care and maintenance costs.
All matters in the SMP arbitration have been settled with the exception
of the resolution of the Constructive Trust which was impressed by the
arbitration panel on several supply contracts with three republics of the former
Soviet Union. The existence of a Constructive Trust on the contracts was
confirmed by the U. S. District Court of Colorado and affirmed by the 10th
Circuit Court of Appeals. Management believes that the resolution of the
Constructive Trust issue will occur during fiscal 2000. However, no assurance of
the resolution or its ultimate impact on the financial condition or earnings of
the Company can be predicted.
29
<PAGE>
GMMV: Pursuant to an Acquisition Agreement that was signed on June 23,
1997, Kennecott paid the Company $4 million upon execution of the Agreement,
which became non-refundable upon the satisfaction of certain terms. Due to
continued depressed market prices for uranium concentrates The Company was
unsuccessful in obtaining financing which would have allowed the Company to
purchase Kennecott's interest in the GMMV. The $4 million advanced at closing is
classified as a deferred purchase option and will be offset against any future
cash commitments the Company may incur on the GMMV properties.
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.
During fiscal 1999, the Company elected under the original GMMV agreement to
become a non-participating partner in the budgets of the GMMV. This decision by
the Company will have a dilutive effect on its ownership in the GMMV. The
Company can buy back any dilution it may suffer in its ownership under certain
conditions of the GMMV contract. The Company believes that due to significantly
reduced annual care and maintenance costs, the dilution of its interest will be
minor in the short term.
As a result of continued depressed uranium prices, the decision to
curtail development activities and lack of funding GMMV took an impairment
against its mineral assets. This impairment does not affect the Company's
carrying value of its investment in GMMV or its results of operations.
PLATEAU: In addition to maintaining the mill and mine properties,
Plateau owns and operates the Ticaboo townsite, motel, convenience store and
restaurant. Operations in fiscal 1999 resulted in a loss of $708,500. This loss
is a reduction of approximately $100,000 from the loss experienced in fiscal
1998. In addition to commercial operations, Plateau is developing real estate
sales on developed home and trailer sites as well as constructed homes.
The Company is currently working to obtain the necessary permits from
the NRC and State of Utah to place the Shootaring mill, which is owned by
Plateau and located in southern Utah into production. The Company is seeking
debt or equity financing of between $6,000,000 to $9,000,000 to put the mill and
Tony M. Mine into production. Until such time as the market price for uranium
concentrates reaches economic levels, financing is obtained and profitable
contracts are secured, the Company will not put the properties into production.
Plateau is also evaluating alternate uses for its mill site including a disposal
site for low level radioactive material.
YSFC: During fiscal 1999 the Company issued 677,167 shares of its common
stock in an exchange with private investors in YSFC pursuant to an Exchange
Agreement in a private placement of YSFC stock. Due to the acquisition of
substantially all the outside shareholder's interest, the Company began
consolidating YSFC on March 1, 1999. The Company recorded an impairment on its
YSFC mineral assets $2,506,000 during fiscal 1999 due to continued depressed
market prices for uranium concentrates. YSFC retained its properties and
anticipates placing them into production at such time as they become economical.
No prediction can be made when the market price for uranium concentrates will
recover to the level that the YSFC properties will be economical to produce.
TERM DEBT AND OTHER OBLIGATIONS: Debt is primarily for land and
equipment purchased by SGMC, the Company, and FNG. The debt bears various
interest rates and is due under various payment terms. It is anticipated that
all debt payments will be able to be made in the normal course of the Company's
business.
30
<PAGE>
RECLAMATION OBLIGATIONS: It is not anticipated that any of the Company's
working capital will be used in fiscal 2000 for the reclamation of any of its
mineral properties. The reclamation costs are long term and are either bonded
through the use of cash bonds or the pledge of assets. It is not anticipated
that any of the Company's mining properties will enter the reclamation phase
prior to May 31, 2000. At May 31, 1999, all reclamation obligations of the
Company were fully covered by cash, bonds, the pledge of real estate assets, or
in the case of GMMV, surety bonds posted by Kennecott. The Company evaluates all
reclamation liabilities annually with the responsible regulatory agency. When
increases are required, provisions are made in the cash deposits or bonding.
OTHER: The Company is not using hazardous substances or known pollutants
to any great degree in these activities. Consequently, recurring costs for
managing hazardous substances, and capital expenditures for monitoring hazardous
substances or pollutants have not been significant. Likewise, the Company does
not have properties which require current remediation. The Company is not aware
of any claims for personal injury or property damages that need to be accrued or
funded.
The tax years through May 31, 1994 are closed after audit by the IRS.
The Company currently has filed a request for an appeal hearing on an IRS
agent's findings for the years ended May 31, 1995 and 1996.
No assurance of the outcome of the appeal can be given. However, management of
the Company believes that the results of the appeal will not have a material
affect on the financial position of the Company.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
Although the Company experienced positive cash flows during fiscal 1999,
operations resulted in a net loss after taxes of $11,648,500 or $1.63 per share
as compared to a loss of $983,200 or $0.15 per share in fiscal 1998. Decreased
revenue and the impairment of mineral assets are the primary cause for the
increase in the fiscal 1999 loss.
REVENUES: Mineral sales decreased by $831,500 during fiscal 1999. This
decrease resulted from no revenues recognized during fiscal 1999 from a SMP base
escalated uranium delivery contract, which generated revenues of $858,600 during
fiscal 1998 from the final delivery under the contract. There were reduced
revenues from the advance royalty from Cyprus Amax of $60,400, due to reduced
market prices for molybdenum. These decreases in mineral sales revenue were
slightly offset by net profits received from one of the SMP purchase contracts
of $87,500 during fiscal 1999 while no such revenues were recorded in fiscal
1998.
Commercial operations revenues decreased by $545,700. This decrease
occurred primarily as a result of reduced equipment rentals to the GMMV. The
GMMV properties were on a standby basis during most of fiscal 1999 due to
reduced uranium prices. This decrease of equipment rental of $751,300 was offset
by increased fuel sales at the Company's southern Utah commercial operations of
$141,700.
Oil sales decreased by $86,900 as a result of temporarily closing down
oil production due to continued depressed market prices for crude oil and a
continuing decline in the production of the oil wells. Subsequent to May 31,
1999 the Company began producing from two of the oil wells. The Company will
continue to evaluate future production based on estimated production rates and
market prices for crude oil.
Management fees and other revenues decreased by $784,900, primarily due
to reduced contract work performed at the GMMV properties and management
services at the SMP properties. The Company is paid
31
<PAGE>
a percentage of all costs at the GMMV properties for contract services provided.
During fiscal 1999, operations were significantly reduced at the GMMV
properties, which reduced the related management fees. Upon receiving the SMP
mining properties in a partial settlement of the SMP arbitration issues, the
Company was no longer entitled to management fees on the SMP properties.
COSTS AND EXPENSES: Mineral operations increased from $1,664,800 during
fiscal 1998 to $2,309,800 during fiscal 1999. This increase of $645,000
primarily related to care and maintenance costs associated with the SMP
properties. The Company became responsible for 100% of these costs at the
beginning of fiscal 1999 due to a partial settlement of the SMP
arbitration/litigation issues which conveyed ownership of the SMP mining
properties to the Company.
General and Administrative expenses increased from $4,793,200 during
fiscal 1998 by $2,656,200 to $7,449,400 during fiscal 1999. This increase was a
result of (1) the consolidation of SGMC for the full year of fiscal 1999 of
$1,928,900; (2) the consolidation of YSFC for the fourth quarter of 1999,
$93,500; and (3) the amortization of warrants granted to consultants of $291,700
and deferred compensation of $81,900.
The largest increases in costs and expenses were impairments in mineral
assets and provision for doubtful accounts. During fiscal 1999, the Company
recorded a total impairment on mineral assets of $13,224,400 as compared to an
impairment on mineral assets of $1,500,000 for fiscal 1998. The impairment in
fiscal 1999, consisted of an impairment of the SGMC assets of $10,718,300 and
the YSFC assets of $2,506,100. The impairment of the SGMC and YSFC assets
related primarily to mineral properties and equipment.
The Company also recognized non-cash expenses in the form of a provision
for doubtful accounts of $365,000 and the write-off of an investment made in a
non affiliated company during fiscal 1999 of $100,000. The provision for
doubtful accounts is a result of the continual inability of a third party to
pay amounts due the Company on real estate sold in prior years. The Company will
pursue collection of these amounts.
FISCAL 1998 COMPARED TO FISCAL 1997
Operations resulted in a net after tax loss of $983,200 or $0.15 per
share as compared to a net after tax loss of $3,724,500 or $0.58 per share. The
primary cause of this reduction in the Company's loss during fiscal 1998 were
increased revenues of $5,768,300 while costs and expenses only increased by
$1,697,300. Net cash used in operating activities decreased to $2,245,000 in
1998 from $2,647,600 in 1997 primarily due to the decrease in loss from
operations offset by other working capital changes.
REVENUES: Mineral revenues increased by $862,400 as the result of the
Company receiving its proportionate share of the net proceeds from the delivery
of pounds of uranium under an SMP contract. This was the last delivery under
this contract and no similar delivery proceeds were received during fiscal 1997.
Commercial operations revenue increased by $1,304,100 as a result of an
increase of $1,019,100 pertaining to increased equipment rentals to the GMMV and
the development of mining properties. Additionally, revenues generated at the
Company's Ticaboo townsite increased by $285,000 in fiscal 1998. SMP litigation
settlements are recorded net of any accounts receivable from SMP for holding
costs of the mining properties. During fiscal 1998, such revenues increased by a
net of $3,586,200 to $4,590,000.
32
<PAGE>
Construction contract revenues decreased by $1,038,600 as a result of
the Company's subsidiary Four Nines Gold, Inc.("FNG") not obtaining any
commercial construction contracts. FNG's equipment and employees were used
exclusively during fiscal 1998 on the construction of various roads, ponds and
other excavation projects for the GMMV. Revenues from Management fees increased
significantly due to the work that was done under the GMMV agreements that allow
the Company to receive a 10% management fee on all billable charges under the
1990 GMMV agreement.
COSTS AND EXPENSES: Mineral operation expenses and General and
administrative expenses increased by $821,700 and $2,029,900, respectively due
to increased operations at the Company's GMMV and Plateau mineral and commercial
operations, and increased salary expense. The Company recognized a mineral
interest impairment of $1,500,000 pertaining to SGMC as discussed above. There
was no impairment of mineral properties taken during fiscal 1997. There was
however an abandonment of mining claims in 1997 pertaining to certain mining
claims in the amount of $1,225,800. No abandonments of mining claims occurred in
fiscal 1998.
Construction costs decreased by $716,200 due to FNG not performing any
commercial construction work, and provision for doubtful accounts decreased by
$614,200 as no additional provision was required.
FUTURE OPERATIONS
The Company has generated losses in each of the last three years, as a
result of holding costs and permitting activities in the mineral segment along
with impairments of mineral assets. The Company is in the process of holding its
investments in gold and uranium properties that are currently not generating any
operating revenues. These properties require expenditures for items such as
permitting, care and maintenance, holding fees, corporate overhead and
administrative expenses. Success in the minerals industry is dependant on the
price that a company can receive for the minerals produced. The Company cannot
predict what the long term price for gold and uranium will be and therefore
cannot predict when, or if, the Company will generate net income from
operations. The Company has sufficient capital resources to maintain its mineral
properties on a stand by basis through fiscal 2000. Development activities of
the mineral properties and expansion of commercial operations are dependant on
the Company obtaining equity financing or commercial loans.
In addition, legal expenses associated with the litigation and
arbitration surrounding the SMP Partnership and the inability of the Company to
utilize all the funds that have been awarded to the Company by the Arbitration
Panel and confirmed by the Federal Courts have compounded the Company's
operating and cash flow position in the past. The Company believes that the SMP
arbitration/litigation will be resolved during fiscal 2000.
YEAR 2000 ISSUE
Computer programs written in the past utilize a two digit format to
identify the applicable year. Any date sensitive software beyond December 31,
1999 could fail, if not modified. The result could be, among other
possibilities, disruptions to operations and the inability to process financial
transactions. The Company has evaluated the operating systems on all headquarter
and field office computers and operating systems and has consulted with its
vendors of the computer software which is being used by the Company and its
affiliates. The vendors have confirmed to the Company that all of the Company's
software and information systems are Year 2000 compliant. The Company therefore
does not believe that significant expenditures will be required for the Year
2000 event. In the event that the Company experiences technical problems because
of the Year
33
<PAGE>
2000 problem it will change software vendors. Such a change would not have a
material affect on the Company's results of operations or financial position.
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 the
Company to the greatest extent. Currently, both gold and uranium are at
historical low prices. The Company is continually evaluating market trends and
data. The Company does not plan to go forward with any additional development of
its mineral properties until the market price for gold and uranium obtain and
remain at higher levels which will make the operations profitable.
MOLYBDENUM AND OIL. Changes in prices of molybdenum and petroleum are
not expected to materially affect the Company 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 of the Mt. Emmons properties by Cyprus Amax since Cyprus
Amax has other producing mines.
ITEM 8. FINANCIAL STATEMENTS
Financial statements for the Company follow immediately.
34
<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, 1999 and 1998, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended May 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of U.S. Energy Corp. and
subsidiaries as of May 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
August 26, 1999
35
<PAGE>
Page 1 of 2
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
May 31,
----------------------------
1999 1998
---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 10,173,000 $ 5,650,500
Accounts and notes receivable:
Trade, net of allowance for doubtful
accounts of $30,900 223,100 195,800
Affiliates 1,063,400 1,878,400
Current portion of long-term notes receivable, net -- 335,800
Assets held for resale and other 1,116,200 1,100,800
SMP settlement receivable, net -- 5,026,000
Inventory 143,200 113,700
------------ ------------
Total current assets 12,718,900 14,301,000
INVESTMENTS AND ADVANCES:
Affiliates 751,600 871,800
Restricted investments 9,160,400 8,889,100
------------ ------------
9,912,000 9,760,900
PROPERTIES AND EQUIPMENT:
Mineral properties and mine development costs 1,472,500 13,346,600
Buildings and improvements 6,411,400 6,424,000
Aircraft and other related equipment 8,444,300 8,761,400
Developed oil and gas properties, full cost method 1,773,600 1,773,600
Land 1,506,000 951,000
------------ ------------
19,607,800 31,256,600
Less accumulated depreciation,
depletion and amortization (10,171,300) (11,806,300)
------------ ------------
9,436,500 19,450,300
OTHER ASSETS:
Accounts and notes receivable:
Real estate sales 20,400 398,000
Employees 366,600 352,000
Deposits and other 936,600 756,900
------------ ------------
1,323,600 1,506,900
------------ ------------
Total assets $ 33,391,000 $ 45,019,100
============ ============
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
36
<PAGE>
Page 2 of 2
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
May 31,
----------------------------
1999 1998
---- ----
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable and accrued expenses $ 1,229,600 $ 1,836,400
Deferred GMMV purchase option 4,000,000 4,000,000
Current portion of long-term debt 126,000 225,700
------------ ------------
Total current liabilities 5,355,600 6,062,100
LONG-TERM DEBT 786,700 278,200
RECLAMATION LIABILITIES 8,860,900 8,778,800
OTHER ACCRUED LIABILITIES 3,734,500 4,266,800
DEFERRED TAX LIABILITY 1,144,800 1,144,800
COMMITMENTS AND CONTINGENCIES (Note K)
MINORITY INTERESTS IN SUBSIDIARIES 856,500 4,561,300
FORFEITABLE COMMON STOCK,
$.01 par value; 339,208 and 312,378
shares issued respectively, forfeitable until earned 2,471,700 2,473,600
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; 8,550,624 and 7,523,492 shares issued,
respectively 85,600 75,200
Additional paid-in capital 33,014,900 28,526,200
Accumulated deficit (19,408,600) (7,760,100)
Treasury stock at cost, 930,532 and 865,943 shares,
respectively (2,584,600) (2,460,800)
Unallocated ESOP contribution (927,000) (927,000)
------------ ------------
10,180,300 17,453,500
------------ ------------
Total liabilities and shareholders' equity $ 33,391,000 $ 45,019,100
============ ============
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
37
<PAGE>
Page 1 of 2
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
REVENUES:
<S> <C> <C> <C>
Mineral revenues $ 238,200 $ 1,069,700 $ 207,300
Construction contract revenues -- -- 1,038,600
Commercial operations 2,977,800 3,523,500 2,219,400
SMP settlements, net 6,077,300 4,590,000 1,003,800
Oil sales 83,200 170,100 164,600
Management fees from affiliates and other 584,400 1,369,300 423,800
Interest 847,600 836,100 693,300
Gain (loss) on sales of asset 45,100 (200) 39,400
------------ ------------ ------------
10,853,600 11,558,500 5,790,200
------------ ------------ ------------
COSTS AND EXPENSES:
Mineral operations 2,309,800 1,664,800 843,100
Construction costs 14,800 36,400 752,600
Commercial operations 3,438,900 3,055,100 3,059,600
General and administrative 7,449,400 4,793,200 2,763,300
Abandonment of mining claims -- -- 1,225,800
Impairment of mineral assets 13,224,400 1,500,000 --
Oil production 64,600 68,000 96,800
Interest 44,500 76,000 140,800
Provision for doubtful accounts 365,000 -- 614,200
------------ ------------ ------------
26,911,400 11,193,500 9,496,200
------------ ------------ ------------
(LOSS) INCOME BEFORE MINORITY INTEREST
AND EQUITY IN LOSS OF AFFILIATES
AND INCOME TAXES (16,057,800) 365,000 (3,706,000)
MINORITY INTEREST IN LOSS (INCOME)
OF CONSOLIDATED SUBSIDIARIES 4,468,400 (772,500) 672,300
EQUITY IN LOSS OF AFFILIATES (59,100) (575,700) (690,800)
------------ ------------ ------------
(Continued)
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
38
<PAGE>
Page 2 of 2
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
LOSS BEFORE INCOME TAXES $(11,648,500) $ (983,200) $ (3,724,500)
INCOME TAXES (Note H) -- -- --
------------ ------------ ------------
NET LOSS $(11,648,500) $ (983,200) $ (3,724,500)
============ ============ ============
NET LOSS PER SHARE,
BASIC AND DILUTED $ (1.63) $ (.15) $ (.58)
============ ============ ============
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 7,137,114 6,657,549 6,466,855
============ ============ ============
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
39
<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, 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 -- -- -- 213,600 213,600
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>
40
<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, 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
Issuance of stock for SGMC
exercised option 75,000 700 261,800 -- 100,000 (262,500) -- --
Reconsolidation of SGMC -- -- -- -- 75,000 (16,300) -- (16,300)
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. "Basic and Diluted Weighted Average Shares Outstanding" also
includes the 865,943 shares of 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>
41
<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, 1998 7,523,492 $75,200 $28,526,200 $ (7,760,100) 865,943 $(2,460,800) $(927,000) $ 17,453,500
Funding of ESOP 89,600 900 357,500 -- -- -- -- 358,400
Issuance of employee options
below market value -- -- 262,000 -- -- -- -- 262,000
Issuance of common stock
for services rendered 131,136 1,300 386,400 -- -- -- -- 387,700
Issuance of common stock
for exercise of YSFC exchange 677,167 6,800 2,591,500 -- -- -- -- 2,598,300
Fair value of warrants and
options issued for
services rendered -- -- 176,000 -- -- -- -- 176,000
Fair value of warrants issued
for exercise of YSFC exchange -- -- 167,000 -- -- -- -- 167,000
Issuance of common
stock to acquire SGMC
special warrants, net of
offering costs 89,059 1,000 278,900 -- -- -- -- 279,900
Purchase of treasury stock -- -- -- -- 64,589 (123,800) -- (123,800)
Forfeitable shares earned 40,170 400 269,400 -- -- -- -- 269,800
Net loss -- -- -- (11,648,500) -- -- -- (11,648,500)
--------- ------- ----------- ------------ ------- ----------- --------- ------------
Balance May 31, 1999 8,550,624 $85,600 $33,014,900 $(19,408,600) 930,532 $(2,584,600) $(927,000) $ 10,180,300
========= ======= =========== ============ ======= =========== ========= ============
<FN>
Total Shareholders' Equity at May 31, 1999 does not include 339,208 shares
currently issued but forfeitable if certain conditions are not met by the
recipients. "Basic and Diluted Weighted Average Shares Outstanding" also
includes the 812,915 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>
42
<PAGE>
Page 1 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $(11,648,500) $ (983,200) $ (3,724,500)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest in income (loss) of
consolidated subsidiaries (4,468,400) 772,500 (672,300)
Depreciation, depletion and amortization 726,400 657,600 658,900
Impairment of assets held for sale -- 100,000 --
Abandoned mineral claims -- -- 1,225,800
Impairment of mineral assets 13,224,400 1,500,000 --
Equity in loss of affiliates 59,100 575,700 690,800
SMP settlement receivable 5,026,000 (4,590,000) (1,003,800)
Loss (gain) on sale of assets (45,100) 200 (39,400)
Provision for doubtful accounts 465,000 -- 614,200
Common stock issued to fund ESOP 358,400 324,600 213,600
Non-cash compensation 267,900 82,700 --
Common stock and warrants
issued for services 825,700 196,000 286,800
Other (168,800) 287,800 177,600
Net changes in:
Accounts and notes receivable 946,500 172,400 (706,500)
Other assets (44,900) (226,900) 318,200
Accounts payable and accrued expenses (1,318,800) (176,200) (331,700)
Reclamation and other liabilities 82,100 (938,200) (355,300)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 4,287,000 (2,245,000) (2,647,600)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of mining properties (18,100) (1,125,000) (719,300)
Development of gas properties -- -- (29,100)
Increase in restricted investment (271,300) -- --
Proceeds from sale of property and equipment 375,300 4,000 273,500
Purchases of property and equipment (1,057,900) (1,947,200) (208,600)
Changes in notes receivable, net -- 726,800 (121,400)
Distribution from affiliate 54,200 -- 4,367,000
Investments in affiliates -- (102,300) (1,413,700)
Deferred GMMV purchase option -- 4,000,000 --
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (917,800) 1,556,300 2,148,400
------------ ------------ ------------
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
43
<PAGE>
Page 2 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Proceeds from issuance of common stock $ -- $ 1,800,500 $ 1,270,300
Proceeds from subsidiary stock sale -- -- 1,106,700
Proceeds from long-term debt 249,000 307,700 554,400
Payments on lines of credit -- -- (499,000)
Purchase of treasury stock (123,800) -- (235,600)
Repayments of long-term debt (395,200) (309,900) (789,200)
Increase (decrease) in cash related to
consolidation of subsidiary 1,423,300 3,124,000 (484,100)
------------ ------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 1,153,300 4,922,300 923,500
------------ ------------ ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 4,522,500 4,233,600 424,300
CASH AND CASH EQUIVALENTS, Beginning of year 5,650,500 1,416,900 992,600
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, End of year $ 10,173,000 $ 5,650,500 $ 1,416,900
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 44,500 $ 76,000 $ 118,900
============ ============ ============
Income taxes paid $ -- $ -- $ --
============ ============ ============
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
44
<PAGE>
Page 3 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------------
1999 1998 1997
---- ---- ----
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
<S> <C> <C> <C>
Payment of note receivable - affiliate
with stock from affiliate $ 275,000 $ -- $ --
=========== =========== ==========
Acquisition of land through issuance of debt $ 555,000 $ -- $ --
=========== =========== ==========
Exchange of common stock
investment in affiliate for
Contingent Stock
Purchase Warrant $ -- $ -- $4,594,000
============ ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Consolidation/Deconsolidation of subsidiary
in 1999, 1998 and 1997, respectively:
<S> <C> <C> <C>
Other assets $ 10,900 $ 49,200 $ 77,600
Investment in affiliates -- 358,400 355,000
Investment in Contingent Stock Purchase Warrant -- (4,594,000) --
Restricted investment -- -- 27,000
Property, plant and equipment 388,000 12,499,000 11,560,600
Notes payable (400,000) (241,700) 185,000
Accounts payable and accrued expenses (254,700) (700,000) 433,900
Reclamation -- (27,000) --
Minority interest 871,000 (3,788,700) 2,069,900
Issuance of common stock to acquire
SGMC special warrants, net of
offering costs
Common stock 6,800 4,900 --
Additional paid-in capital 2,598,300 3,329,200 --
Warrants issued for professional services 167,000 254,000 --
Forfeitable stock issued for services 268,000 581,200 405,800
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
45
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
A. BUSINESS ORGANIZATION AND OPERATIONS:
U.S. Energy Corp. (the "Company" or "USE") was incorporated in the State
of Wyoming on January 26, 1966. The Company's primary business is the
acquisition, exploration, holding, sale and/or development of mineral properties
and mining and marketing of minerals. Principal mineral interests are in
uranium, gold, and molybdenum. The Company also holds various real and personal
properties used in commercial activities. Most of these activities are conducted
through the joint venture discussed below and in Note D. In addition, through
its majority owned subsidiary, Four Nines Gold, Inc. ("FNG"), the Company
historically engaged in projects such as the construction of municipal sewage
systems, irrigation and other civil engineering projects.
The Company and its 52%-owned subsidiary, Crested Corp. ("Crested") are
engaged in a venture to develop certain uranium properties with Kennecott
Uranium Company ("Kennecott") known as the Green Mountain Mining Venture
("GMMV"), formed in 1990, and is also involved in a partnership with Nukem, Inc.
("Nukem") through its wholly-owned subsidiary, Cycle Resource Investment
Corporation ("CRIC"), known as Sheep Mountain Partners ("SMP"). As discussed in
Note K, SMP is currently involved in significant legal proceedings between its
partners. During fiscal 1995, USE and Crested formed a Wyoming corporation,
Sutter Gold Mining Company ("SGMC)", which was the successor of USECC Gold
Limited Liability Company ("USECC Gold") and Sutter Gold Venture ("SGV"). These
companies were formed to develop and mine gold reserves in California. The
Company also owns 100% of the outstanding stock of Plateau Resources Limited
("Plateau"), which owns a nonoperating uranium mill and support facilities in
southeastern Utah. Currently, the mill is nonoperating but has been granted a
license to operate, pending certain conditions. See further discussion of these
entities in Note F.
LIQUIDITY AND OPERATING LOSSES
As a result of the SMP litigation/arbitration (see Note K) and the
significant amount of standby/maintenance and permitting costs being incurred on
the Company's mineral properties (none of which are in production), the Company
has incurred significant net losses during each of the last three years. During
the past few years, the Company has relied primarily on the receipt of funds
from the SMP arbitration award, contract development work done at the GMMV
properties, the sale of its common stock through private placements and the
exercise of common stock warrants/options, borrowing on its lines of credit and
the sale of its subsidiary, The Brunton Company ("Brunton"), to fund its losses
and cash needs. The Company and Crested received $6,077,300 as partial
settlement of the SMP arbitration/litigation during the third quarter of fiscal
1999. During fiscal 1998, the Company received $858,700 for a delivery made on
an SMP contract. On June 1, 1998, the Company and Crested received $5,026,000 as
partial payment of the monetary resolution of the American Arbitration
Association's Order and Award for the portion of the SMP arbitration/litigation
("SMP litigation") that was finalized in fiscal 1998. For accounting purposes,
the Company and Crested first applied the proceeds against their recorded
investment balance in SMP of $436,000, with the remaining balance of $4,590,000,
after cost recovery, being recognized as income in fiscal 1998.
Additional sources of funding will be required to place Plateau and SGMC
into production as well as to purchase the Kennecott interest in GMMV (see Note
F). Equity and/or debt financing will be the primary source of these funds.
There is no assurance such financing sources will be available to the Company.
If the additional financings do not occur as planned, the Company believes it
can delay its development activities so that available cash, operating cash
flow, bank borrowings and affiliate financings will be adequate to fund its
working capital requirements and commitments for fiscal 2000.
46
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of USE and subsidiaries include
the accounts of the Company, the accounts of its majority-owned subsidiaries
Plateau (100%), Energx, Ltd ("Energx") (90%), FNG (50.9%), SGMC (63%), Crested
(52%), Yellowstone Fuels Corp. ("YSFC") (35.9%) and the USECC Joint Venture
("USECC"), a proportionately consolidated joint venture which is equally owned
by the Company and Crested through which the bulk of their operations are
conducted. USECC owns the buildings and other equipment used by the Company and
holds an interest in SMP (see Notes E and F).
With the exception of SMP and YSFC's investments in other joint ventures
and 20% to 50% owned companies are accounted for by the equity method (see Note
E). SGMC was an equity investee through March 1998 when the Company purchased
special warrant units from certain investors and increased its ownership to 59%,
requiring consolidation subsequent to April 1, 1998 (see Note F). YSFC was an
equity investee through February 1999, at which time the Company purchased the
majority of the shares of common stock of YSFC owned by outside shareholders by
issuing 677,167 shares of Company's common stock. The purchase of these shares
of YSFC resulted in an increase of 9% ownership of YSFC resulting in 22.7%
ownership. As a result of the common directors and control of YSFC by USE and
its employees, YSFC was consolidated as of March 1, 1999. Investments of less
than 20% are accounted for by the cost method. All material intercompany
profits, transactions and balances have been eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The carrying amount
of cash equivalents approximates fair value because of the short maturity of
these instruments.
INVESTMENTS
Based on the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, the Company accounts for its investment in certain securities
as held-to-maturity. Held-to-maturity securities are measured at amortized cost
and are carried at the lower of aggregate cost or fair market value.
INVENTORIES
Inventories consist primarily of aviation fuel, associated aircraft
parts, mining supplies, stockpiled uranium ore, gold ore stockpiles and modular
homes held for resale. Retail inventories are stated using the average cost
method. Other inventory is stated at the lower of cost or market.
47
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
PROPERTIES AND EQUIPMENT
Land, buildings, improvements, aircraft and other equipment are carried
at cost.
Depreciation of buildings, improvements, aircraft and other equipment is
provided principally by the straight-line method over estimated useful lives
ranging from three to forty-five years.
The Company capitalizes all costs incidental to the acquisition and
development of mineral properties as incurred. Mineral exploration costs are
expensed as incurred. The costs of mine development are deferred until
production begins as these costs will be recovered through future mining
operations. Once commercial production begins, mine development costs incurred
to maintain production will be amortized using a units-of- production method
over the estimated useful life of the ore-body. Costs are charged to operations
if the Company determines that an ore body is no longer economical. Costs and
expenses related to general corporate overhead are expensed as incurred.
The Company and Crested have acquired substantial mining property assets
and associated facilities at minimal cash cost, primarily through the assumption
of reclamation and environmental liabilities. Certain of these assets are owned
by various ventures in which the Company is either a partner or venturer.
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
or the fair value is less than the carrying amount of the related asset, an
asset impairment is considered to exist. The related impairment loss is measured
by comparing estimated future cash flows on a discounted basis or the fair value
of the asset, less any selling costs, to the carrying amount of the asset.
Changes in significant assumptions underlying future cash flow estimates or fair
values of assets may have a material effect on the Company's financial position
and results of operations. A low commodity price market, if sustained for an
extended period of time, or an inability to obtain financing necessary to
develop mineral interests, may result in asset impairment. During 1999, the
Company recorded an impairment of $10,718,300 on its mineral assets in SGMC and
$2,506,100 on its mineral assets in YSFC. During 1998, the Company recognized an
impairment loss of $1,500,000 on its mineral assets in SGMC. See Note F for
further discussion.
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.
48
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(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).
Non-refundable option deposits are recognized as revenue when the option
expires.
Revenues from gold and uranium sales are recognized upon delivery.
Revenues are recognized from the rental of certain assets ratably over the
related lease terms. Revenues from commercial operations, which represent
primarily real estate activity, and an airport fixed base operation, are
recognized as goods and services are delivered. Revenues from long-term
construction contracts are recognized on the percentage-of- completion method.
If estimated total costs on any contract indicate a loss, the Company provides
currently for the total anticipated loss on the contract. Oil and gas revenue is
recognized at the time of production.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This statement requires recognition of deferred
income tax assets and liabilities for the expected future income tax
consequences, based on enacted tax laws, of temporary differences between the
financial reporting and tax bases of assets, liabilities and carryforwards.
SFAS 109 requires recognition of deferred tax assets for the expected
future effects of all deductible temporary differences, loss carryforwards and
tax credit carryforwards. Deferred tax assets are reduced, if deemed necessary,
by a valuation allowance for any tax benefits which, based on current
circumstances, are not expected to be realized.
NET 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 did not have an effect on the Company's previously
reported net loss per common share.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130 "Reporting Comprehensive Income" ("SFAS 130")
was issued and establishes standards for reporting and displaying comprehensive
income and its components in the financial statements. In addition to net
income, comprehensive income includes all changes in equity during a period,
except those resulting from investments by and distributions to owners. The
adoption of SFAS 130 in the first quarter of fiscal 1999 had no impact to the
consolidated financial statements of the Company.
49
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
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 was
adopted by the Company in fiscal 1999 (See Note I).
In February 1998, SFAS No. 132 "Employers' Disclosures about Pensions
and Other Post Retirement Benefits" ("SFAS 132") was issued and standardizes
disclosure requirements for pension and other post retirement benefit plans.
Adoption of this standard is required for fiscal years beginning after December
15, 1997, and restatement of prior period comparative disclosures is required.
The Company adopted SFAS 132 in fiscal 1999. The adoption of SFAS 132 did not
have a material affect on it's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
establishes accounting and reporting standards for derivative instruments and
for hedging activity. SFAS 133 is effective for all periods in fiscal years
beginning after June 15, 1999. SFAS No. 133 requires all derivatives to be
recorded on the balance sheet as either an asset or liability and measured at
fair value. Changes in the derivative's fair value will be recognized currently
in earnings unless specific hedge accounting criteria are met. The Company will
adopt SFAS 133 in Fiscal 2000. The Company does not expect the adoption of SFAS
133 to have a material effect on its financial position or results of
operations.
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 1998 and 1997 financial
statements to conform with the 1999 presentation.
50
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
C. RELATED-PARTY TRANSACTIONS:
The Company and Crested provide management and administrative services
for affiliates under the terms of various management agreements. The Company
provides all employee services required by Crested. In exchange, Crested is
obligated to the Company for its share of these costs. Revenues from services by
the Company to unconsolidated affiliates were $584,400, $849,000 and $397,000 in
fiscal 1999, 1998 and 1997, respectively. The Company has $979,600 of
receivables from unconsolidated subsidiaries and short-term advances to
employees totaling $83,800 as of May 31, 1999.
At May 31, 1999, the Company's principal shareholder and his immediate
family were indebted to the Company in the amount of $339,205 which is
represented by notes secured by 164,000 shares of the Company's common stock.
As of May 31, 1999, the Company has recorded a $100,000 convertible note
receivable from Heritage Memorial Services, Inc. ("HMS"). The Company's
principal shareholder and the principal shareholder of YSFC currently hold seats
on the Board of Directors of HMS as Chairman and Director, respectively. As of
May 31, 1999, due to uncertainties related to the collectibility or future
convertibility, the Company has recorded a valuation allowance for the entire
amount of the note receivable from HMS.
On May 15, 1997, Yellow Stone Fuels Corp. ("YSFC"), a 22.7% owned
affiliate of USE and a 13.2% 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. The note bore interest at 10% per
annum and was due on December 31, 1998. The Company and Crested extended the
note to March 31, 1999. YSFC repaid the debt by issuing 68,250 shares of its
common stock each to the Company and Crested, respectively, and paying a total
of $200,000. The shares of YSFC common stock were valued per the conversion
clause of the promissory note at $2.00 per share.
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.
51
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
E. INVESTMENTS AND ADVANCES:
The Company's restricted investments secure various decommissioning
costs, reclamation and holding costs. Investments are comprised of debt
securities issued by the U.S. Treasury that mature at varying times from three
months to one year from the original purchase date. As of May 31, 1999 and 1998,
the cost of debt securities was a reasonable approximation of fair market value.
These investments are classified as held-to- maturity under SFAS 115 and are
measured at amortized cost.
The Company's investment in and advances to affiliates are as follows:
<TABLE>
<CAPTION>
Consolidated Carrying Value at May 31,
Ownership 1999 1998
------------- ---- ----
Equity Method:
<S> <C> <C> <C>
GMMV 50.0% $ 727,000 $ 724,800
Ruby Mining Company 26.7% 24,600 32,100
YSFC 35.9%* -- * 114,900
----------- -----------
$ 751,600 $ 871,800
=========== ===========
<FN>
*Consolidated beginning March 1, 1999
</FN>
</TABLE>
Equity loss from investments accounted for by the equity method are as
follows:
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
GMMV $ -- $ -- $ --
Ruby Mining Company (3,100) (500) (3,300)
YSFC** (56,000)** (140,300) (224,800)
--------- ---------- -----------
$ (59,100) $ (140,800) $ (228,100)
========= ========== ===========
<FN>
**Consolidated beginning March 1, 1999. This represents the equity loss
through February 28, 1999.
</FN>
</TABLE>
GMMV expenses certain general and administrative, maintenance and
holding costs. However, the Company has not recognized equity losses in GMMV
because Kennecott was committed to fund 100% of the first $50,000,000 of
development and operating costs of the Joint Venture. In fiscal 1998, the
Company and USECC entered into an Acquisition Agreement with Kennecott whereby
the Company under certain conditions could purchase Kennecott's interest in the
GMMV. Those conditions were not met and the Company became a non-participating
partner in the funding of GMMV costs during 1999 (see Note F).
Condensed combined balance sheets and statements of operations of the
Company's equity investees include GMMV and Ruby Mining Company.
52
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
CONDENSED COMBINED BALANCE SHEETS - EQUITY INVESTEES
May 31,
----------------------------
1999 1998
---- ----
Current assets $ 37,100 $ 1,762,300
Non-current assets 802,400 71,583,100
------------ ------------
$ 839,500 $ 73,345,400
============ ============
Current liabilities $ 718,500 $ 1,952,000
Reclamation and other liabilities 23,620,000 33,770,300
Assets over (under) liabilities (23,499,000) 37,623,100
------------ ------------
$ 839,500 $ 73,345,400
============ ============
See Note F for a discussion of the reduction in the carrying value of such
investee assets.
CONDENSED COMBINED STATEMENTS OF OPERATIONS - EQUITY INVESTEES
Year Ended May 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
Revenues $ 10,500 $ 54,900 $ 1,100
Costs and expenses (62,307,800) (1,646,900) (3,116,900)
------------ ------------ ------------
Net loss $(62,297,300) $ (1,592,000) $ (3,115,800)
============ ============ ============
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 commitment on an individual basis. In 1999 and 1998, the Company
recognized revenues of $87,500 and $858,700, 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 Revenues, which would normally have been sales of SMP. As a result of a
partial settlement in June of 1998, the Company was assigned one of the SMP
utility contracts, which calls for total deliveries of 198,000, 81,000, 125,000,
84,000 and 208,000 pounds of uranium in fiscal 2000, 2001, 2002, 2003 and 2004,
respectively. These deliveries are to be made at an average of the three month
market price preceding the delivery. The utility has the option of increasing
the delivery amounts by plus or minus thirty percent.
Due to the litigation and arbitration proceedings, audited financial
statements for SMP are not obtainable. Accordingly, the Company has recorded
only its direct investment in, and results of operations
53
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
from the partnership. The Company had no carrying value of its investment in SMP
for either 1999 or 1998 as proceeds from litigation and arbitration proceedings
were accounted for under the cost recovery method of accounting as discussed in
Note K. The Company's direct loss generated from its investment in SMP, which
represent mine standby costs incurred by the Company, was $704,100, $436,000 and
$442,700 for the years ended May 31, 1999, 1998 and 1997, respectively. No
amounts attributable to SMP are included in the Condensed Combined Balance
Sheets or Condensed Combined Statements of Operations of the Company's equity
investees.
As part of a settlement agreement dated June 1, 1998, the Company was
awarded the return of its Sheep Mountain uranium mines and certain other
properties. Accordingly, all mine standby costs and other holding costs were
expensed solely by the Company during fiscal 1999.
F. MINERAL CLAIMS TRANSACTIONS AND MINING PROPERTIES:
GMMV
During fiscal 1990, the Company and Crested entered into an agreement
with Kennecott, a wholly-owned, indirect subsidiary of The RTZ Corporation PLC,
for Kennecott to acquire a 50% interest in certain uranium mineral properties in
Wyoming known as the Green Mountain Properties. The purchase price was
$15,000,000 and a commitment to fund the first $50 million of development and
operating costs. Kennecott 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 continued to develop the proposed Jackpot Mine and nearby Big
Eagle Mine, and work with Kennecott in preparing the Sweetwater Mill for renewed
operations. Such work was funded from the $16,000,000 loaned to the GMMV by
Kennecott. Kennecott was 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.
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 filing with the
U.S. Securities and Exchange Commission, USEC Inc. ("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
54
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
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.
USECC was able to satisfy the terms of the Acquisition Agreement to the
point that the $4,000,000 signing bonus paid by Kennecott is non-refundable. As
a result of the continuing depressed uranium market, the Company and Crested
were not able to close the Acquisition Agreement. The signing payment will be
applied against any further reimbursable costs and contributions the Company and
Crested may become obligated to make to the GMMV.
The Company, USECC and Kennecott continue to own their respective 50%
interests in the GMMV, and Kennecott's obligation to repay the $16,000,000
loaned by them shall remain Kennecott's obligation, without any adverse effect
on the 50% interest in GMMV held by the Company and USECC. Kennecott funded
$14,458,200 of the $16,000,000 loan obligation. The balance of the loan,
$1,541,800, is available when development work is resumed. As a result of the
funds advanced under the loan and the signing bonus, which gave Kennecott a 2
for 1 credit against its $50 million work commitment, the $50 million work
commitment under the 1990 GMMV Agreement is fully satisfied. The Company and
Crested have elected to have their interest diluted by becoming
non-participating on the work plans and budgets. Kennecott is obligated to fund
the annual plans and budgets. If the Company's and USECC's participating
interests drop below 10%, their interests will be automatically converted to a
1% to 3% gross proceeds interest. It is not anticipated that such dilution will
occur in the near term.
Primarily as a result of sustained depressed uranium prices, GMMV
evaluated the carrying value of its mineral assets for impairment. GMMV
determined the carrying valve of its assets exceeded the future cash flows.
Accordingly, in fiscal 1999, the GMMV recorded an impairment in the amount of
$59,545,150 related to its mineral assets. The Company's carrying value of its
investment in GMMV reflects management's estimate of its portion of the salvage
value of GMMV's mineral assets, net of liabilities.
SMP
During fiscal 1989, the Company 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 eight years. See Notes
E and K for a description of the investment and a discussion of the related
litigation/arbitration.
CYPRUS AMAX
During prior years, the Company and Crested conveyed interests in mining
claims to AMAX Inc. ("AMAX") in exchange for cash, royalties, and other
consideration. AMAX and its successor Cyprus Amax Minerals, Inc. ("Cyprus Amax")
have not placed the properties into production as of May 31, 1999.
55
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
Cyprus Amax now pays the Company and Crested an annual advance royalty
of 50,000 pounds of molybdenum (or its cash equivalent). Cyprus Amax is entitled
to a partial credit against future royalties for any advance royalty payments
made, but such royalties are not refundable if the properties are not placed
into production. The Company recognized $150,100, $211,000 and $207,300 of
revenue from the advance royalty payments in fiscal 1999, 1998, and 1997,
respectively.
Cyprus Amax may elect to return the properties to the Company and
Crested, which would cancel the advance royalty obligation. If Cyprus Amax
formally decides to place the properties into production, it will pay $2,000,000
to the Company and Crested. If Cyprus Amax sells the properties, the Company and
Crested will receive 15% of the first $25 million received by Cyprus Amax.
The Company and Crested also held an option to purchase certain real
estate located in Gunnison, Colorado owned by Cyprus Amax. During fiscal 1995,
USE and Crested reached an agreement with Cyprus Amax whereby USE and Crested
would forego six quarters of advance royalties as payment of this option
exercise price. 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, 1999, the
promissory notes were in default and are fully reserved. 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 in
California.
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. 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 compensation and one stock
purchase warrant. The warrant allows the holder to purchase an additional share
of SGMC common stock for a CDN$6.00. The warrant expired on November 1998. At
the underwriter's request, the initial investors (including USE and Crested)
agreed to have the amount of their common shares
56
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
owned reduced by 50 percent. The investors in the $3.00 per share private
placement discussed above were not affected as those shares were sold in
contemplation of the 1 for 2 reverse split.
In connection with the second offering, the Company and Crested accepted
a Contingent Stock Purchase Warrant dated March 21, 1997 which provides the
Company and Crested the right to acquire, for no additional consideration,
common shares of SGMC's $.001 par value common stock having an aggregate value
of $10,000,000 (US). The Stock Purchase Warrant has a term of ten years
extending to March 21, 2007, and is exercisable partially or in total,
semi-annually beginning on June 30, 1997. However, the Stock Purchase Warrant is
only exercisable to the extent proven and probable ore reserves, as defined in
the Stock Purchase Warrant, in excess of 300,000 ounces are added to SGMC's
reserves. In addition, SGMC has the right to satisfy the exercise of all or any
portion of the Stock Purchase Warrant with the net cash flows, as defined, at
$25.00 (US) for each new ounce of proven and probable ore in excess of 300,000
ounces up to a maximum of 700,000 ounces. Accordingly, the Company has allocated
the carrying value of SGMC shares exchanged for the Contingent Stock Purchase
Warrant to its investment in such contingent warrants. The Stock Purchase
Warrant benefits the Company and Crested on a basis of 88.9% and 11.1%,
respectively.
On March 31, 1998, the Company purchased 889,900 Special Warrant units
from certain Canadian investors. The units were purchased with 488,895 shares of
the Company's common stock. In addition, the Company sold 170,000 shares of
common stock to the Canadian investors at the then market price ($7.00 per
share). As a result of this purchase, the Company and Crested's combined
ownership interest in SGMC reached 59%. Therefore, as of April 1, 1998 the
Company began consolidating SGMC's results of operations. During 1999, the
Company issued an additional 89,059 shares of common stock to acquire an
additional 207,500 SGMC Special Warrants. This purchase increased the Company's
ownership of SGMC to 63%.
Primarily as a result of the sustained decline in gold prices and the
lack of significant financing necessary to further develop the Lincoln project,
the Company evaluated the carrying value of its SGMC assets for impairment. The
Company determined the carrying value of its assets exceeded its fair value.
Accordingly, in fiscal 1999 and 1998, the Company recorded an impairment in the
amount of $10,718,300 and $1,500,000, which is classified as Impairment of
Mineral Assets in the accompanying Consolidated Statements of Operations. The
impairment related to mineral properties and mine development costs ($10,315,700
and $1,500,000 for 1999 and 1998, respectively) and equipment ($402,600 and $-0-
for 1999 and 1998, respectively).
Additional financing will be required in order to develop SGMC.
Management of SGMC is currently attempting to negotiate a proposed financing
plan. Management is also considering alternate uses of the Sutter property until
such time as the price for gold increases. Options that management has
considered include the development of a visitors's center.
57
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
YELLOWSTONE FUELS CORP.
In fiscal 1998, the Company became contractually obligated to exchange
its common stock for common stock of YSFC, plus interest, if certain conditions
were not met (See Note J). As a result of depressed market prices for uranium,
YSFC was not successful in the public offering of its common stock. As a result,
the terms of the exchange agreement became effective between the Company and
YSFC shareholders. The Company therefore issued 677,167 of its commons stock at
a value of $2,591,500. The exchange offer for YSFC will remain effective until
September 13, 1999.
Due to continued low uranium market prices and the inability to raise
financing to place the YSFC properties into production, the Company recorded an
impairment of $2,506,100 related to YSFC's Mineral Assets during fiscal 1999,
which is classified as Impairment of Mineral Assets in the accompanying
Consolidated Statements of Operations. The impairment was specifically related
to the Company's investment in YSFC ($2,248,200) and the write-down of mineral
properties ($257,900) in fiscal 1999.
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, 1999, Plateau had a cash security in the amount of $7,583,900 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. Commercial revenues are being generated
from the townsite assets which include a motel, C-store, lounge/restaurant, boat
storage facility and housing.
In fiscal 1998, the Company had an independent appraisal performed for
its modular homes held for resale inventory. Based upon the analysis performed,
the Company recorded a $100,000 write-down to more accurately reflect the fair
value of these assets as of May 31, 1998. The write-down is included in
Commercial Costs and Expenses in the accompanying Consolidated Statements of
Operations. The Company will continue to monitor these assets to insure the
carrying value does not exceed its fair value.
58
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(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, Energx abandoned certain of its leases and as a
result wrote off $164,500 of related capitalized costs. The write off is
reflected as Abandonment of Mineral Interests in the accompanying Consolidated
Statements of Operations. During fiscal 1999, the oil production from oil wells
on the Fort Peck Indian Reservation was stopped due to depressed oil prices and
declining production. Production will resume once the market price for crude oil
increases to the level where the wells are again profitable.
G. DEBT:
LINES OF CREDIT
The Company and Crested have a $1,000,000 line of credit from a
commercial bank. The line of credit bears interest at a variable rate (8.75% as
of May 31, 1999). The weighted average interest rate for 1999 and 1998 was
10.25% and 9.5%, respectively. 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, 1999 and 1998. LONG-TERM
DEBT
The components of long-term debt as of May 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
May 31,
-----------------------
1999 1998
---- ----
<S> <C> <C>
Installment notes - secured by equipment;
interest at 8.75% - 9.5%, matures in 2000 $ 88,200 $ 167,100
SGMC installment notes - secured by
certain mining properties, interest at
7.5% to 8.0%, maturity from 1999 - 2004 767,900 235,000
FNG installment notes - secured by FNG
equipment, interest at 8.75% to 8.9%
maturity from 1997 - 2002 56,600 101,800
--------- ---------
912,700 503,900
Less current portion (126,000) (225,700)
--------- ---------
$ 786,700 $ 278,200
========= =========
</TABLE>
Principal requirements on long-term debt are $126,000; $89,400; $32,100;
$87,000; $23,100; and $555,000 for the years 2000 through 2004 and thereafter,
respectively.
59
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
H. INCOME TAXES:
The components of deferred taxes as of May 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
May 31,
------------------------------
1999 1998
---- ----
Deferred tax assets:
<S> <C> <C>
Deferred compensation $ 152,400 $ 87,300
Net operating loss carryforwards 6,234,900 6,703,900
Tax Credits 143,800 213,800
Other 275,800 541,900
Tax basis in excess of book basis 4,315,300 2,087,900
------------ ------------
Total deferred tax assets 11,122,200 9,634,800
------------ ------------
Deferred tax liabilities:
Development and exploration costs 1,928,300 (3,979,300)
------------ ------------
Total deferred tax liabilities 1,928,300 (3,979,300)
------------ ------------
9,193,900 5,655,500
Valuation allowance (10,338,700) (6,800,300)
------------ ------------
Net deferred tax liability $ (1,144,800) $ (1,144,800)
============ ============
</TABLE>
The Company has established a valuation allowance of $10,338,700 against
deferred tax assets due to the losses incurred by the Company in past fiscal
years. The Company's ability to generate future taxable income to utilize the
NOL 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,
------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected federal income tax $(3,960,500) $ (320,300) $(1,266,330)
Net operating losses not previously
benefitted and other 422,100 155,100 (86,670)
Valuation allowance 3,538,400 165,200 1,353,000
----------- ----------- -----------
Income tax provision $ -- $ -- $ --
=========== =========== ===========
</TABLE>
There were no taxes currently payable as of May 31, 1999, 1998 or 1997
related to continuing operations.
60
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
At May 31, 1999, the Company and its subsidiaries had available, for
federal income tax purposes, net operating loss carryforwards of approximately
$18,000,000 which will expire from 2004 to 2013 and investment tax credit
carryforwards of $128,000 which, if not used, will expire from 2000 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.
The Internal Revenue Service has audited the Company's and subsidiaries
tax returns through the year ended May 31, 1996. The Company's income tax
liabilities are settled through fiscal 1994. The Company has received 30 day
letters for the years ended May 31, 1995 and 1996. The Company has submitted a
written appeal to protest the findings of the examining agent for the years
ended May 31, 1995 and May 31, 1996 to preserve its NOL. The Company does not
expect that the resolution of the audits will have a material effect on the
Company's financial position or results of operations.
61
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
I. SEGMENTS AND MAJOR CUSTOMERS:
The Company's primary business activity is the sale of minerals and the
acquisition, exploration, holding, development and sale of mineral bearing
properties although the Company has no producing mines. Other reportable
industry segments include commercial operations, primarily real estate
activities, an airport fixed base operation, and construction activities. The
following is information related to these industry segments:
<TABLE>
<CAPTION>
Year Ended May 31, 1999
---------------------------------------------------------
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues $ 238,200 $2,977,800 $ -- $ 3,216,000
============ ========== ==========
Interest and other revenues 7,637,600
------------
Total revenues $ 10,853,600
============
Operating loss $ (2,071,600) $ (461,100) $ (14,900) $ (2,547,600)
============ =========== =========
Interest and other revenues 7,637,600
General corporate and other expenses (16,679,400)
Equity in loss of affiliates (59,100)
------------
Loss before income taxes,
discontinued operations
and extraordinary item $(11,648,500)
Identifiable net assets at
May 31, 1999 $ 10,632,900 $8,107,300 $ 144,700 $ 18,884,900
============ ========== =========
Investments in affiliates 751,600
Corporate assets 13,754,500
------------
Total assets at May 31, 1999 $ 33,391,000
============
Capital expenditures $ 725,400 $ 944,200 $ --
============ ========== ==========
Depreciation, depletion and
amortization $ 300,200 $ 348,600 $ 77,600
============ ========= =========
</TABLE>
62
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
<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)
Income 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>
63
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(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>
During fiscal 1999 and 1998 approximately 100% of mineral revenues were
from the sale of uranium. There were no uranium sales during fiscal 1997.
The Company subleases excess office space, contracts aircraft for
charter flights and sells aviation fuel. Commercial Revenues in the accompanying
Consolidated Statements of Operations consist of mining equipment rentals,
office and other real property rentals, charter flights and fuel sales.
64
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
J. SHAREHOLDERS' EQUITY:
In May 1996, the Board of Directors of USE approved an annual incentive
compensation arrangement ("1996 Stock Award Program") for its CEO and four other
officers of USE payable in shares of the Company's common stock. The 1996 Stock
Award Program was subsequently modified to reflect the intent of the directors
of the Company which was to provide incentive to the officers of the Company and
Crested to remain with the companies. The shares are to be issued annually on or
before January 15 of each year, starting January 15, 1997, as long as each
officer is employed by USE, provided the Company has been profitable in the
preceding fiscal year. The officers will receive up to an aggregate total of
67,000 shares per year for the years 1997 through 2002. One-half of the
compensation under the 1996 Stock Award Program is the responsibility of
Crested. The shares under the plan are forfeitable until retirement, death or
disability of the officer. The shares are held in trust by the Company's
treasurer and are voted by the Company's non-employee directors. As of May 31,
1999, 148,158 total shares have been issued to the five officers of the Company
and Crested under the 1996 Stock Award Plan.
During fiscal 1998, the Company and YSFC entered into an Exchange Rights
Agreement (the "Agreement"). Under the Agreement the YSFC private placement
shareholders and related broker agent had the right, but not the obligation, to
exchange their shares in YSFC for USE common stock if YSFC's common shares were
not listed and available for quotation on the NASDAQ marketing system by March
1998. During fiscal 1999 the Company exchanged 677,167 shares of its common
stock, at a fair value of $2,591,500, for 1,131,500 shares of YSFC common stock
or 9% of the outstanding shares of YSFC. The cost to issue these shares was
recorded as an additional investment in YSFC during fiscal 1999. The exchange
rate for USE shares was 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 was 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. Under the Agreement, the Company has the option to
exchange shares of its common stock to the remaining shareholders of YSFC at a
rate to be negotiated at a later date to obtain one hundred percent of the
ownership of YSFC.
Also, during fiscal 1999, the Company issued warrants in exchange for
outstanding YSFC warrants, which were originally issued for services provided by
outside consultants in connection with the agreement discussed above. The
Company issued 67,025 warrants at an exercise price of $3.64 expiring September
19, 2002. The Company determined the fair value associated with these warrants
to be $167,000, which was recorded as an additional investment in YSFC during
fiscal 1999.
In February 1999, the Company entered into a consulting agreement with
an individual to provide consulting and other services for a period of 24
months, commencing on February 8, 1999 and ending on January 31, 2001. As
consideration for services to be performed, the Company granted the individual
25,000 shares of the Company's common stock at a grant price of $2.75 per share
and entered into a 5 year warrant purchase agreement to purchase up to 75,000
shares of the Company's common stock at an exercise price of $2.25, expiring
February 8, 2004. The Company determined the fair value associated with the
stock grant to be $68,750 and the warrants to be $140,000, which will be
recognized ratably over the term of the consulting agreement. Accordingly,
$28,950 was recognized as expense in fiscal 1999 related to this agreement. The
65
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
warrants are reflected as fair value of warrants issued for services rendered in
the accompanying Consolidated Statements of Shareholders' Equity.
In February of 1999, the Company entered into a warrant purchase
agreement with a consulting firm to purchase 20,000 shares of the Company's
common stock at an exercise price of $2.62 expiring January 31, 2002. The
warrants were issued in exchange for services to be provided during the period
from February 1999 to February 2000. The Company determined the fair value
associated with these warrants to be $36,000, which will be recognized ratably
over the term of the consulting agreement. Accordingly, $9,000 was recognized as
expense in fiscal 1999.
In December 1997, the Company entered into a warrant purchase agreement
with an investment advisory firm to purchase 225,000 shares of the Company's
common stock at an exercise price of $10.50/share expiring December 2, 2000. The
warrants were issued in exchange for services to be provided during the period
from December 1997 to December 1998. The Company determined the fair value
associated with these warrants to be $186,000, which will be recognized ratably
over the term of the related advisory agreement. Accordingly, $108,000 was
recognized as expense in fiscal 1998 and $78,000 in fiscal 1999.
In January 1998, the Company entered into a warrant purchase agreement
with another investment advisory firm to purchase 200,000 shares of the
Company's common stock at an exercise price of $7.50/share expiring January 20,
2000. The warrants were issued in exchange for services to be provided during
the period from January 1998 to January 1999. The Company determined the fair
value associated with these warrants to be $264,000, which will be recognized
ratably over the term of the related advisory agreement. Accordingly, $88,000
was recognized as expense in fiscal 1998 and $176,000 in fiscal 1999.
In January 1996, the Company entered into a warrant purchase agreement
with an investment advisory firm. Pursuant to the Agreement, this firm received
a warrant to purchase 200,000 common shares of the Company's common stock at
$5.00/share in exchange for consultation services to be provided through January
9, 1997. In connection with this warrant agreement, the Company recognized
$148,300 of consulting expense in fiscal 1997 which the Company determined to be
the fair value. During fiscal 1997, 180,000 of these warrants were exercised
resulting in total proceeds to the Company of $900,000. The remaining 20,000
shares were exercised in 1998 resulting in $100,000 of proceeds to the Company.
The Board of Directors adopted the U.S. Energy Corp. 1989 Stock Option
Plan (the "Option Plan") for the benefit of USE's key employees. The Option
Plan, amended in December 1995 and 1998, reserves 2,750,000 shares of the
Company's $.01 par value common stock for issuance under the Option Plan. During
fiscal 1992, the Company issued options to certain of its executive officers,
Board members and others. Under this Plan, 371,200 non-qualified options were
issued at prices ranging from $2.75 to $2.90 per share. These options will
expire on April 14, 2002 and April 30, 2002. During fiscal 1996, the Company
issued 360,000 non-qualified options to employees who are not officers or
directors at a purchase price of $4.00 per share, expiring on December 31, 2000.
During fiscal 1998, options were exercised for the purchase of 62,000 shares. In
fiscal 1997, the shareholders of USE ratified an amendment to the Option Plan
and on that same date all outstanding non-qualified options were converted to
qualified options by the Board of Directors of USE.
66
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
In fiscal 1999, the shareholders of the Company ratified an amendment to
the 1989 Stock Plan which increased the number of shares from 975,000 shares to
2,750,000 shares and reset the term to June 15, 2008. During fiscal 1999, the
Company issued 837,500 options under the Stock Option Plan, including 299,462
non-qualified and 538,038 qualified options. The non-qualified options were
issued at a price below fair market value, resulting in the recognition of
$262,000 in compensation expense at the time of issuance.
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 1999, 1998 and 1997, the Board of Directors of USE
contributed 89,600, 49,470 and 24,069 shares to the ESOP at prices of $4.00,
$6.57 and $8.87 per share, respectively. The Company is responsible for one-half
of these contributions amounting to $179,200, $162,300 and $106,700 in fiscal
1999, 1998 and 1997, respectively. Crested is responsible for the remainder. USE
has loaned the ESOP $1,014,300 to purchase 125,000 shares from the Company and
38,550 shares on the open market. These loans, which are secured by pledges of
the stock purchased with the loan proceeds, bear interest at the rate of 10% per
annum. The loans are reflected as unallocated ESOP contribution in the equity
section of the accompanying Consolidated Balance Sheets.
The Board of Directors of both the Company and Crested issue shares of
stock as bonuses to certain directors, employees and third parties. The stock
bonus shares have been reflected outside of the Shareholders' Equity section in
the accompanying Consolidated Balance Sheets because such shares are forfeitable
to the Company and Crested until earned. During fiscal 1993, the Company's Board
of Directors amended the stock bonus plan. As a result, the earn out dates of
certain individuals were extended until retirement, which is the earn out date
of the amended stock bonus plan. In exchange for this amendment, the amended
plan granted 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, 1999, 1998 and 1997, the Company had
compensation expense of $90,400, $54,600 and $152,600, respectively, resulting
from these issuances. A schedule of forfeitable shares for both USE and Crested
is set forth in the following table:
67
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
Issue Number Issue Total
Date of Shares Price Compensation
---- --------- ----- ------------
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 28,380 10.875 308,600
December 1996 8,452 11.50 97,200
-------- -----------
Balance at
May 31, 1997 232,352 1,892,400
August 1997 7,320 10.875 79,600
August 1997 5,706 10.875 62,100
May 1998 67,000 6.56 439,500
-------- -----------
Balance at
May 31, 1998 312,378 2,473,600
May 1999 67,000 4.00 268,000
Shares earned (40,170) -- (269,900)
-------- -----------
Balance at
May 31, 1999 339,208 $ 2,471,700
======== ===========
During 1999, 40,170 shares were earned. 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.
The Company has elected to account for its stock-based compensation plans under
APB 25; accordingly, for purposes of the pro forma disclosures presented below,
the Company has computed the fair values of all options granted during fiscal
year 1999 using the Black- Scholes pricing model and the following weighted
average assumptions (no options were granted during 1998 and 1997):
68
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
1999
----
Risk-free interest rate 4.65%
Expected lives 10 years
Expected volatility 102%
Expected dividend yield 0%
To estimate expected lives of options for this valuation, it was assumed
options will be exercised upon expiration at the end of the ten 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
$2,124,500 during the year ended May 31, 1999. This amount is amortized ratably
over the vesting periods of the options. Pro forma stock-based compensation, net
of the effect of forfeitures, was $2,314,700, $98,100 and $255,000 for 1999,
1998 and 1997, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss and pro forma net loss per
common share would have been reported as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------------------------
1999 1998 1997
---- ---- ----
Net loss
<S> <C> <C> <C>
As reported $ (11,648,500) $ (983,200) $ (3,724,500)
Pro forma $ (13,963,200) $ (1,081,300) $ (3,979,500)
Net loss per common
share, basic and diluted
As reported $ (1.63) $ (.15) $ (.58)
Pro forma, Basic $ (1.96) $ (.16) $ (.62)
Pro forma, Diluted $ (1.96) $ (.16) $ (.62)
</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.
69
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
A summary of the Stock Option Plan activity for the years ended May 31,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 534,700 $3.34 596,700 $3.41
Granted 837,500 $2.55 -- --
Canceled (67,000) $4.00 -- --
Exercised (5,000) $4.00 (62,000) $4.00
--------- --------
Outstanding at end of year 1,300,200 $2.79 534,700 $3.34
========= ========
Exercisable at end of year 1,223,200 $2.72 394,700 $3.11
========= ========
</TABLE>
The following table summarized information about employee stock options
outstanding and exercisable at May 31, 1999:
<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, 1999 Life in years Price May 31, 1999 Price
------ ------------ ------------- ----- ------------ -----
<S> <C> <C> <C> <C> <C>
$2.00 312,500 9.50 $2.00 312,500 $2.00
2.75 49,400 2.92 2.75 49,400 2.75
2.88 525,000 9.50 2.88 525,000 2.88
2.90 264,300 2.88 2.90 264,300 2.90
4.00 149,000 1.50 4.00 72,000 4.00
--------- ---------
1,300,200 1,223,200
========= =========
</TABLE>
70
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
K. COMMITMENTS, CONTINGENCIES AND OTHER:
LEGAL PROCEEDINGS
ARBITRATION/LITIGATION PROCEEDINGS CONCERNING SMP. In June 1991, Nukem's
wholly-owned subsidiary Cycle Resource Investment Corporation ("CRIC")
instituted arbitration proceedings against U.S. Energy Corp. ("USE") and Crested
Corp.("Crested") d/b/a USECC. CRIC claimed that USECC violated the partnership
agreement forming Sheep Mountain Partners ("SMP"), a Colorado general
partnership in which USECC owned 50% and Nukem, Inc. through its subsidiary CRIC
owned the other 50%. On July 3, 1991, USECC filed a civil action in the U. S.
District Court of Colorado against Nukem, CRIC, their affiliates and others
alleging Nukem/CRIC fraudulently misrepresented facts and concealed information
from USECC to induce its entry into the agreements forming SMP and sought
rescission, damages and other relief. Certain of Nukem's affiliates (excluding
CRIC) and others were thereafter dismissed from the lawsuit. The U. S. District
Court granted the motion of USECC to stay the arbitration initiated by CRIC.
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 in Wyoming. On May 11, 1993, the Denver District Court stayed all
proceedings until the case pending in the U.S. District Court for Colorado was
resolved. In February 1994, USECC and Nukem/CRIC, agreed that the majority of
the issues raised in the litigation subsequent to the formation of SMP on
December 21, 1988, would be handled through consensual binding arbitration with
the American Arbitration Association ("AAA"). The arbitration hearing commenced
on June 27, 1994 before a three member AAA arbitration panel (the "Panel"), and
the parties rested their cases on May 31, 1995 after 73 hearing days. The Panel
entered its Order and Award on April 18, 1996 but refused to dissolve the SMP
Partnership. Nukem appealed the Award by filing motions with the U.S. District
Court for remand of various issues to the Panel alleging inter alia there was a
material miscalculation and a double recovery. The U.S. District Court remanded
the matter to the Panel to consider Nukem's motions. On July 3, 1996, the Panel
entered its Order finding there was no double recovery and clarified its April
18, 1996 Order and Award regarding the impression of a Constructive Trust in
favor of SMP on the CIS contracts Nukem entered into with CIS republics using
SMP uranium sales contracts.
On November 4, 1996, the United States District Court granted USECC's
motions for confirmation and issued a Judgment and Order confirming the
Arbitration Panel's Orders and Award. Later in November 1996, USECC received
$4,300,000 from the SMP escrow bank accounts as partial payment of the monetary
award of the Panel and confirmed by the District Court. This $4,300,000 was
accounted for under the cost recovery method of accounting, and it was applied
to outstanding amounts due USECC. The balance of $1,003,800 was recognized as
income. After considering a series of motions, the Federal Court issued a Second
Amended Judgment on June 27, 1997, which confirmed the monetary award of the
Panel and clarified the equitable award impressing the CIS contracts in
Constructive Trust in favor of SMP. Nukem/CRIC filed notices of appeal to the
Tenth Circuit Court of Appeals ("10th CCA") and posted a $8,613,600 supersedeas
bond covering the monetary portion of the Judgment. Nukem/CRIC's appeal was
based on claims that the District Court erred in confirming the Panel's Orders
and Award on double recovery and impressing Nukem's uranium purchase contracts
with the CIS republics in constructive trust with SMP.
71
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
On June 1, 1998, USECC and Nukem/CRIC entered into a partial Settlement
Agreement of the various issues. USECC received $5,026,500 as a partial
settlement of the Second Amended Judgment. USECC also received the Sheep
Mountain uranium mines and certain other properties from SMP plus one uranium
supply contract along with a 50% interest in another uranium supply contract.
This settlement did not in any way affect the issues then pending on appeal
before the 10th CCA.
A hearing on the appeal was held before a three judge panel of the 10th
CCA on September 24, 1998. On October 22, 1998, the 10th CCA issued its Order
and Judgment affirming the U.S. District Court's Second Amended Judgment
(without modification) (the "Judgment"). The Judgment ordered that the contracts
Nukem entered into to purchase uranium from CIS republics including the purchase
rights, the uranium acquired pursuant to those rights and the profits therefrom
were impressed with a constructive trust in favor of SMP.
On November 13, 1998, Nukem/CRIC filed motions for entry of full
satisfaction of the Judgment if Nukem/CRIC paid only the balance remaining due
on the monetary portion of the Judgment. USECC responded denying the motions and
requesting payment of the balance of the monetary award. On February 8, 1999,
the District Court denied the motion of Nukem/CRIC for entry of final
satisfaction of the Judgment and ordered Nukem/CRIC to forthwith pay USECC the
balance of $5,971,600 plus interest of $105,700.
Nukem/CRIC made the payment to USECC on February 9, 1999.
On April 28, 1999, USECC filed a petition in the U.S. District Court to
dissolve SMP and for an accounting. Nukem/CRIC responded that the District Court
did not have jurisdiction and again filed a motion seeking entry of final
satisfaction of the Judgment. On July 16, 1999, the U.S. District Court again
denied the motion of Nukem/CRIC for entry of final satisfaction of judgment and
denied USECC's petition for dissolution because neither USECC nor Nukem/CRIC
petitioned the Court for dissolution of SMP before the Court entered the Second
Amended Judgment. On August 2, 1999, Nukem/CRIC filed a Notice of Appeal to the
10th Circuit Court of Appeals of the July 16, 1999 Order. USECC opposes the
appeal and will seek judicial intervention to receive an accounting and profits
from the CIS contracts impressed in Constructive Trust with SMP.
ILLINOIS POWER COMPANY LITIGATION. Illinois Power Company ("IPC"), one
of the utilities with whom SMP had a long-term uranium supply contract,
unilaterally sought to terminate the contract. On October 28, 1993, IPC filed
suit in the Federal District Court, Danville, Illinois, against SMP, USECC, CRIC
et al. seeking a declaratory judgment that the contract with SMP was void and
for other relief. After various negotiating sessions, the parties reached an
agreement in June 1995 to settle the case by amending to the original uranium
sales agreement to provide for 3 more deliveries of uranium concentrates (U3O8)
totaling 486,443 lbs. The final delivery was made in May 1997 and on June 13,
1997, USECC received $858,700 as a distribution of profits from the last
delivery to IPC of U3O8 under this SMP contract.
SELLEY ET AL VS U.S. ENERGY CORP., CRESTED CORP. ET AL. On May 14, 1999,
Dennis Selley personally and as personal representative of the Estate of Hannah
Selley and his wife Mary B. Selley, filed a Civil Action No. 30869 in the Ninth
Judicial District Court of Fremont County, Wyoming against U.S. Energy Corp. and
Crested Corp., Plateau Resources Limited and USECC the joint venture, alleging
that the defendants were negligent as a landlord in renting a doublewide trailer
converted to a bunkhouse near Ticaboo, Utah to
72
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
plaintiffs' daughter Hannah Selley and seek various unspecified damages. Hannah
Selley was employed by U.S. Energy Corp. ("USE") at the Ticaboo Lodge in June
1998. Because no housing was available for employees, she and five other USE
employees rented rooms in the bunk house provided by USE, located about 1/2 mile
from the Ticaboo Lodge. In the late evening of June 5, 1998 and early the next
morning, the occupants built a bonfire near the bunkhouse and had guests over
for a party. At about 4:00 O'clock a.m. the morning of June 6, 1998, a fire
started in the bunkhouse. All occupants were awakened and left the living
quarters during the fire except Ms. Selley who perished in the fire. Plaintiffs
allege inter alia that defendants were negligent in providing faulty living
quarters and that defendants submitted a false filing with the Utah Workers
Compensation Fund. Defendants deny negligence in providing the living facility
and assert various defenses including plaintiffs' complaint is barred by the
Workers Compensation statutory immunity as well as the defense of an intervening
clause. Discovery is underway.
DECLARATORY JUDGMENT ACTION. The Workers Compensation Fund of Utah has
filed a complaint for declaratory relief on or about July 26, 1999 against U.S.
Energy Corp., Crested Corp., Plateau Resources Limited, Dennis and Mary Selley
and others in Civil Action No. 99090 7500 before the Utah Third Judicial Court
of Salt Lake County, Utah. The suit is to determine its obligation to defend and
indemnify U.S. Energy Corp. and its affiliates in the above Hannah Selley case.
U.S. Energy Corp., Crested Corp. and affiliates have not yet responded to the
complaint in the case.
PARADOR MINING CO., 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
Mining Co., Inc.("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 in and adjacent to
plaintiff's Bullfrog gold mine near Beatty, NV. The Claims were initially leased
to a predecessor of BGBI and subsequently, a portion of the residuals of that
lease were assigned and leased by Parador to USECC. A bifurcated bench trial was
held on December 11-12, 1995, before the District Court for the Fifth Judicial
District Nye County, Nevada 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 an issue in the trial. On December 26,
1995, the District Court issued a ruling denying that an apex of a vein existed
on Parador's Claims and thus no extra-lateral royalties were due to Parador and
USECC. All other remaining claims and counterclaims were considered by the Court
in another bench trial on January 26-28, 1999. Following the presentation of
evidence, the Court entered judgment against the plaintiff BGBI and the
defendants Parador and USECC on certain of their respective 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 reached. BGBI filed its opening brief on appeal and USECC and Parador have
until the end of August 1999 to file their answer brief as appellees and brief
as cross-appellants in the appeal.
TICABOO TOWNSITE LITIGATION. In fiscal 1998, two individuals and their
corporation, Dejavue, Inc., who were contract operators of the restaurant and
lounge facility, the lodge and convenience store in Ticaboo, Utah (owned by
Canyon Homesteads, Inc.), sued USE, Crested and others in Utah State Court. The
plaintiffs' corporation Dejavue, Inc. was awarded $156,000 in damages by a jury
and attorney fees of $91,700 by the Court against USE. This was recorded in
fiscal 1998. The plaintiffs appealed and filed an opening brief with
73
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
the Utah Court of Appeals arguing that the Trial Court erred in not awarding
interest on the judgment. U.S. Energy appealed and filed its opening and answer
brief in July 1999 also contending that the Trial Court erred in various other
ways. The case is pending on appeal.
DEPARTMENT OF ENERGY LITIGATION. On July 20, 1998, eight uranium mining
companies with operations in the United States (including USE, Crested, Yellow
Stone Fuel Corporation) and the Uranium Producers of America, a trade
organization, filed a complaint against the United States Department of Energy
(the "DOE") and its acting secretary in a lawsuit (file no. 98 CV 1775) in the
United States District Court, Cheyenne, Wyoming. The complaint seeks a
declaratory judgment and injunctive relief. The plaintiffs allege that the DOE
violated the USEC Privatization Act of 1996 (the "Act"), 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. USEC
became a publicly traded corporation in July 1998.
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 and a hearing was held on January 8, 1999 before the U.S. District
Court. The Court took the motion under advisement and the case is pending.
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. (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 USE's and Crested's Gunnison properties, and is in default on the
promissory notes delivered to pay for the Gunnison properties. USE also alleges
a pattern of fraud, interference with contractual relation, breach of fiduciary
duty, conversion of USE's security for payment of the promissory notes and
unjust enrichment in Contour's dealings with USE and Crested regarding such real
estate. Contour answered denying all allegations of wrongdoing, asserting
certain counterclaims, which USE has denied, and claiming that USE's and
Crested's refusal to consent to a requested transfer of one of the properties
excuses Contour from paying the balances due on the promissory notes. Three of
the defendants also filed motions to dismiss seeking relief from USE's notice of
lis pendens. That motion has not been decided pending settlement discussions
that were terminated by USE on July 15, 1999. Litigation is expected to resume
against all defendants other than Gunnison Center Properties, L.L.C., which has
voluntarily petitioned for protection under Chapter 11 of the Bankruptcy Code.
The remaining defendants own other property which USE believes has sufficient
value to satisfy any judgment that USE may obtain. As of May 31, 1999, the
Company has recorded a valuation allowance for the full amount of the promissory
notes due the Company related to the Gunnison properties.
74
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
RECLAMATION AND ENVIRONMENTAL LIABILITIES
Most of the Company's mine development, exploration and operating
activities are subject to federal and state regulations that require the Company
to protect the environment. The Company attempts to conduct its mining
operations in accordance with these regulations, but the rules are continually
changing and generally becoming more restrictive. Consequently, the Company's
current estimates of its reclamation obligations and its current level of
expenditures to perform ongoing reclamation may change in the future. At the
present time, however, the Company cannot predict the outcome of future
regulation or its impact on costs. Nonetheless, the Company has recorded its
best estimate of future reclamation and closure costs based on currently
available facts, technology and enacted laws and regulations. Certain regulatory
agencies, such as the Nuclear Regulatory Commission ("NRC"), the Bureau of Land
Management ("BLM") and the Wyoming Department of Environmental Quality ("WDEQ")
review the Company's reclamation, environmental and decommissioning liabilities,
and the Company believes its recorded amounts are consistent with those reviews
and related bonding requirements. To the extent that planned production on its
properties is delayed, interrupted or discontinued because of regulation or the
economics of the properties, the future earnings of the Company would be
adversely affected. The Company believes it has accrued all necessary
reclamation costs and there are no additional contingent losses or unasserted
claims to be disclosed or recorded. The Company has not disposed of any
properties for which it has a commitment or is liable for any known
environmental liabilities.
The majority of the Company's environmental obligations relate to former
mining properties acquired by the Company. Since the Company currently does not
have properties in production, the Company's policy of providing for future
reclamation and mine closure costs on a unit-of-production basis has not
resulted in any significant annual expenditures or costs. For the obligations
recorded on acquired properties, including site-restoration, closure and
monitoring costs, actual expenditures for reclamation will occur over several
years, and since these properties are all considered future production
properties, those expenditures, particularly the closure costs, may not be
incurred for many years. The Company also does not believe that any significant
capital expenditures to monitor or reduce hazardous substances or other
environmental impacts are currently required. As a result, the near term
reclamation obligations are not expected to have a significant impact on the
Company's liquidity.
As of May 31, 1999, the Company has recorded estimated reclamation
obligations, including standby costs, of $8,860,900 which is included in
Reclamation and Other Long-term Liabilities in the accompanying Consolidated
Balance Sheets. In addition, the GMMV, in which the Company is a 50% owner, has
recorded a $23,620,000 liability for future reclamation and closure costs. None
of these liabilities have been discounted, and the Company has not recorded any
potential offsetting recoveries from other responsible parties or from any
insurance companies.
The Company currently has four mineral properties or investments that
account for most of its environmental obligations, SMP, GMMV, Plateau and SGMC.
The environmental obligations and the nature and extent of cost sharing
arrangements with other potentially responsible parties, as well as any
uncertainties with respect to joint and several liability of each are discussed
in the following paragraphs:
75
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
SMP
The Company and Crested are responsible for the reclamation obligations,
environmental liabilities and liabilities for injuries to employees in mining
operations with respect to the Crooks Gap properties. The reclamation
obligations, which are established by regulatory authorities, were reviewed by
the Company and the regulatory authorities during fiscal 1998 and the balance in
the reclamation liability account at May 31, 1999 of $1,451,800 is believed by
management to be adequate. The obligation will be satisfied over the life of the
mining project which is estimated to be at least 20 years. The Company and
Crested self bonded this obligation by mortgaging certain of its real estate
assets, including the Glen L. Larsen building, and by holding certificates of
deposits. A portion of the funds for the reclamation of SMP's properties will be
provided by a sinking fund of up to $.50 per pound of uranium for reclamation
work as the uranium is produced from the properties.
GMMV
During fiscal 1991, the Company and Crested acquired developed mineral
properties on Green Mountain known as the Big Eagle Property. In connection with
that acquisition, the Company and Crested agreed to assume reclamation and other
environmental liabilities associated with the property. Reclamation obligations
imposed by regulatory authorities were established at $7,300,000 at the time of
acquisition. Immediately after the acquisition, the Company and Crested
transferred a one-half interest to Kennecott, with Kennecott, the Company and
Crested contributing the Big Eagle properties to GMMV, which assumed the
reclamation and other environmental liabilities. Kennecott holds a commercial
bank letter of credit as security for the performance of the reclamation
obligations for the benefit of GMMV.
During fiscal 1993, GMMV entered into an agreement to acquire the
Sweetwater uranium mill and related properties from UNOCAL. GMMV's consideration
for the acquisition of the Sweetwater Mill Property was the assumption of all
environmental liabilities and reclamation bonding obligations. The environmental
obligations of GMMV are guaranteed by Kennecott. However, UNOCAL also agreed
that if GMMV incurs expenditures for environmental liabilities prior to the
earlier of commercial production by GMMV or February 1, 2001 (which liabilities
are not due solely to the operations of GMMV), UNOCAL will reimburse GMMV for
the first $8,000,000 of such expenditures. Any reimbursement may be recovered by
UNOCAL from 20% of future cash flows from the sale of uranium concentrates
processed through the Mill.
On June 18, 1996, Kennecott had a letter of credit in the amount of
approximately $19,767,000 issued to the WDEQ for minesite matters (executing
EPA-delegated jurisdiction to administer the Clean Water Act and the Clean Air
Act, and directly administering Wyoming statutes on mined land reclamation), and
$5,400,000 issued to the NRC for decontamination and cleanup of the Mill and
related tailings cells. An irrevocable letter of credit has been provided by the
Morgan Guaranty Trust Company of New York in lieu of a surety bond to cover the
reclamation costs for the minesite and a performance bond by St. Paul Insurance
Company was obtained for the Mill. The letter of credit was obtained by
Kennecott Uranium Company to cover all reclamation costs related to mining and
drilling operations in the State of Wyoming. The EPA has continuing jurisdiction
under the Resource Conservation and Recovery Act pertaining to any hazardous
materials which may be on site when cleanup work commences.
76
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
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 January 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 59% by the Company, 4% by Crested and 37% by
private investors. SGMC owns gold mineral properties in California. Currently,
these properties are in development and costs consist of drilling, permitting,
holding and administrative costs. No substantial mining has been completed,
although a 2,800 foot decline through the identified ore zones for an
underground mine was acquired in the purchase. The Company's policy is to
provide reclamation on a unit-of-production basis. Currently, reclamation
obligations are covered by a $27,000 reclamation bond which SGMC has recorded as
a reclamation liability as of May 31, 1999.
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
77
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
$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. In fiscal 1999,
Plateau increased the bond amount to $6,866,000 in order to reflect the increase
in the consumer price index.
EXECUTIVE COMPENSATION
The Company and Crested are committed to pay the estates of certain of
their officers in an amount equal to one year's salary for one year after their
death and reduced amounts, to be set by the Board of Directors, for a period up
to five years thereafter.
L. DISCONTINUED OPERATIONS.
In February 1996, the Company completed the sale of 100% of the
8,267,450 outstanding shares of common stock of Brunton to a third party for
$4,300,000 in accordance with a Stock Purchase Agreement dated January 30, 1996
(the "Purchase Agreement"). The Company received $300,000 at execution of the
Purchase Agreement and approximately $3,000,000 at closing. The Company has been
paid in full on a $1,000,000 note, plus interest at a rate of 7% as of May 31,
1999. In addition, the Company is entitled to receive 45% of the profits before
taxes as defined in the Purchase Agreement related to Brunton products existing
at the time the Purchase Agreement was executed for a period of 4 years and
three months, beginning February 1, 1996. The Company received payments of
$94,900 and $292,600 for profits in 1999 and 1998, respectively.
78
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
In the event a definitive proxy statement containing the information
being incorporated by reference into this Part III is not filed within 120 days
of May 31, 1999, the Registrant will file such information under cover of a Form
10-K/A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 with respect to directors and
certain executive officers in incorporated herein by reference to Registrant's
Proxy Statement for the 1999 Annual Meeting of Shareholders. The information
regarding the remaining executive officers is contained in Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference
to the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 11 is incorporated herein by reference
to the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 11 is incorporated herein by reference
to the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders.
79
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, REPORTS AND FORMS 8-K.
(a) The following financial statements are filed as a part of the Report in Item
8:
Consolidated Financial Statements
U.S. Energy Corp. and Subsidiaries Page No.
Report of Independent Public Accounts.................................35
Consolidated Balance Sheets - May 31, 1999 and 1998................36-37
Consolidated Statements of Operations
for the Years Ended May 31, 1999, 1998, and 1997...................38-39
Consolidated Statements of Shareholders'
Equity for the Years Ended May 31, 1999, 1998, and 1997............40-42
Consolidated Statements of Cash Flows
for the Years Ended May 31, 1999, 1998, and 1997...................43-45
Notes to Consolidated Financial Statements.........................46-78
(2) Not applicable.
(3) Exhibits Required to be Filed. Each individual exhibit filed herewith is
sequentially paginated corresponding to the pagination of the entire
Form 10-K. As a result of this pagination, the page numbers of documents
filed herewith containing a table of contents will not be the same as
the page number contained in the original hard copy.
Exhibit Sequential
No. Title of Exhibit Page No.
--- ---------------- --------
3.1 USE Restated Articles of Incorporation.........................[4]
3.1(a) USE Articles of Amendment to
Restated Articles of Incorporation.............................[8]
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
80
<PAGE>
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]
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]
81
<PAGE>
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]
10.48 Exhibit I to Acquisition Agreement (see 10.43) - Fourth
Amendment of Mining Venture Agreement among
Kennecott Uranium Company, USE and USECC......................[21]
10.49 USE/Dominick & Dominick Securities, Inc. Stock
Purchase Agreement for 157,530 Common Shares of USE...........[22]
10.50 USE/BPI Canadian Resource Fund Stock Purchase
Agreement for 125,341 Common Shares of USE....................[22]
10.51 USE/BPI Canadian Opportunities II Fund Stock
Purchase Agreement for 125,341 Common Shares of USE...........[22]
10.52 USE/BPI Canadian Small Companies Fund Stock
Purchase Agreement for 250,683 Common Shares of USE...........[22]
10.53 USE/Yellow Stone Fuels Corp. Exchange Rights Agreement........[28]
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]
82
<PAGE>
10.60 Consulting Services Agreement between USE
and RJ Falkner & Company......................................[28]
10.61 Investment Banking Consulting Agreement
with Michael Bayback and Company, Inc...........................86
21.1 Subsidiaries of Registrant....................................[15]
[1] Incorporated by reference from the like-numbered exhibit to a
Schedule 13D filed by AMAX on or about August 3, 1987.
[2] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1989.
[3] Incorporated by reference from exhibit 3 to Amendment No 4. of a
Schedule 13D filed by John L. Larsen, reporting an event of
January 2, 1990.
[4] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1990.
[5] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form 10-Q for the period ended February 28, 1991.
[6] Incorporated by reference from exhibit 2 to Amendment No. 6 of a
Schedule 13D filed by John L. Larsen, reporting an event of May
28, 1991.
[7] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1991.
[8] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May
31, 1992.
[9] Incorporated by reference from exhibit A to the Registrant's
Form 8-K reporting an event of August 11, 1993.
[10] - [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]
83
<PAGE>
[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).
[28] Incorporated by reference from the like-numbered exhibit to the
Registrant's S-4 registration statement (SEC File No. 333-72703,
filed February 22, 1999).
(b) Reports filed on Form 8-K.
During the fourth quarter of the fiscal year ended on May 31, 1999, the
Registrant filed no Form 8-K Reports.
(c) Required exhibits are attached hereto and listed above under Item 14 (a)(3).
(d) Required financial statement schedules are listed and attached hereto in
Item 14(a)(2).
84
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
U.S. ENERGY CORP. (Registrant)
Date: August 27, 1999 By: /s/ John L. Larsen
------------------------------------
JOHN L. LARSEN,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: August 27, 1999 By: /s/ John L. Larsen
------------------------------------
JOHN L. LARSEN, Director
Date: August 27, 1999 By: /s/ Keith G. Larsen
------------------------------------
KEITH G. LARSEN, Director
Date: August 27, 1999 By: /s/ Harold F. Herron
------------------------------------
HAROLD F. HERRON, Director
Date: August ______, 1999 By:
------------------------------------
DON C. ANDERSON, Director
Date: August ______, 1999 By:
------------------------------------
DAVID W. BRENMAN, Director
Date: August 27, 1999 By: /s/ Nick Bebout
------------------------------------
NICK BEBOUT, Director
Date: August 27, 1999 By: /s/ H. Russell Fraser
------------------------------------
H. RUSSELL FRASER, Director
Date: August 27, 1999 By: /s/ Robert Scott Lorimer
------------------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer and
Chief Accounting Officer
85
<PAGE>
EXHIBIT 10.61
Michael Baybak and Company, Inc.
Corporate Public Affairs
Financial Relations
Market Planning
Counsel
February 6, 1999
Mr. John L. Larsen
U.S. ENERGY COPR.
877 North 8th West
Riverton, WY 82501
RE: Investment Banking Consulting Agreement
Dear Mr. Larsen:
This will confirm the arrangements, terms and conditions pursuant to which
Michael Baybak and Company, Inc. (the "Consultant") has been retained to serve
as a financial consultant and advisor to U.S. Energy Corp. (the "Company"), on a
nonexclusive basis for a period of twenty four (24) months commencing upon
February 1, 1999 and ending on January 31, 2001. The undersigned hereby agrees
to the following terms and conditions.
1. Duties of Consultant. Consultant shall, at the request of the
Company, upon reasonable notice, render the following services to the
Company from time to time.
a. Consulting Services. Consultant will provided such financial
consulting ------------------- services and advice pertaining
to the Company's business affairs as the Company may from time
to time reasonably request. Without limiting the generality of
the foregoing, Consultant will assist the Company in
developing, studying and evaluating financing, merger and
acquisition proposals, prepare reports and studies thereon
when advisable and assist in negotiations and discussions
pertaining thereto. The Agreement is not a contract for
listing services. b. Financing. Consultant will assist and
represent the Company in obtaining both short and long-term
financing. The Consultant will be entitled to additional
compensation under such terms as may be agreed to by the
parties.
86
<PAGE>
John L. Larsen
U.S. ENERGY CORP.
Page 2
c. Wall Street Liaison. Consultant will, when appropriate, arrange
meetings between representatives of the Company and individuals
and financial institutions in the investment community, such as
security analysts, portfolio managers and market makers.
The services described in the Section 1 shall be rendered by Consultant
without any direct supervision by the Company and at such time and place
and in such manner (whether by conference, telephone, letter or
otherwise) as Consultant may determine.
2. Term. This Agreement shall continue for a period twenty-four (24)
months from the date hereof (the "Full Term"). In the event the
Company wishes to terminate this Agreement before the completion of
the Full Term, it shall give no less than thirty (30) days notice
thereof, in writing, addressed to the Consultant.
3. Compensation. As compensation for Consultant's services hereunder,
the Company agrees to issue and deliver 25,000 shares of its $.01 par
value restricted common stock to Consultant upon Consultant signing
an appropriate Investments Letter and the Company shall grant of
Consultant a five (5) year Warrant to purchase 75,000 common shares
USE at an exercise price of $2.25 per share; that such shares are
subject to a demand registration right by the Consultant as part of
the next subsequent appropriate SEC USE registration with the SEC in
which such shares could be registered by USE. In the event that no
filing occurs within the term of this Agreement, the Consultant shall
have the right to demand that the Company file a registration
statement with the SEC for sale the shares acquired under the
Warrant, if all of the 75,000 shares are acquired under the Warrant.
4. Available Time. Consultant shall make available such time as it, in
its sole discretion, shall deem appropriate for the performance of
its obligations under this Agreement.
5. Relationship. Nothing herein shall constitute Consultant as an
employee or agent of the Company, except to such extent as might
hereinafter be agreed upon for a particular purpose. Except as might
hereinafter be expressly agreed, Consultant shall not have the
authority to obligate or commit the Company in any manner whatsoever.
87
<PAGE>
John L. Larsen
U.S. ENERGY CORP.
Page 3
6. Confidentiality. Except in the course of the performance of its
duties hereunder, Consultant agrees that it shall not disclose any
trade secrets, know-how, or other proprietary information not in the
public domain learned as a result of this Agreement unless and until
such information becomes generally known.
7. Assignment and Termination. This Agreement shall not be assignable by
any party except such shares or Warrant and such underlying shares
may be transferred by the Consultant to related parties but only in
compliance with the securities laws, which will have to be
established to the Company's reasonable satisfation without prior
notification to the Company. These reissued Warrants or shares will
be subject to the same terms and conditions as those granted to the
Consultant.
Agreed upon this 6th day of February, 1999.
U.S. ENERGY CORP. MICHAEL BAYBAK & CO., INC.
/s/ Keith G. Larsen /s/ Michael Baybak
- --------------------------------------- ------------------------------------
Mr. Keith G. Larsen, President Michael Baybak
88
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
U.S. ENERGY CORP. FORM 10-K FOR THE YEAR ENDED MAY 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000101594
<NAME> U.S. ENERGY CORP.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 10,173,000
<SECURITIES> 0
<RECEIVABLES> 1,317,400
<ALLOWANCES> (30,900)
<INVENTORY> 143,200
<CURRENT-ASSETS> 12,718,900
<PP&E> 19,607,800
<DEPRECIATION> 10,171,300
<TOTAL-ASSETS> 33,391,000
<CURRENT-LIABILITIES> 5,355,600
<BONDS> 0
0
0
<COMMON> 85,600
<OTHER-SE> 10,094,700
<TOTAL-LIABILITY-AND-EQUITY> 33,391,000
<SALES> 3,299,200
<TOTAL-REVENUES> 10,006,000
<CGS> 0
<TOTAL-COSTS> 5,828,100
<OTHER-EXPENSES> 16,629,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,500
<INCOME-PRETAX> (11,648,500)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,648,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,648,500)
<EPS-BASIC> (1.63)
<EPS-DILUTED> (1.63)
</TABLE>
