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, 2000 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 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, 2000, computed by reference to
the average of the bid and asked prices of the Registrant's common stock as
reported by the National Market System of NASDAQ on that date, was approximately
$14,551,464.
Class Outstanding at August 26, 2000
---------------------------------------- -----------------------------------
Common Stock, $0.01 par value 9,041,261 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, 2000
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., Rocky Mountain Gas, Inc. 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" or the "Company") 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 three principal
mineral sectors, uranium and gold, both of which are currently in the care and
maintenance mode, and coalbed methane gas. 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. The
coalbed methane gas property development and contract drilling and construction
sector is conducted through Rocky Mountain Gas, Inc. in southeastern Montana and
northeastern and southwestern Wyoming. 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 subsidiaries, a joint
venture with Crested and various jointly-owned subsidiaries of USE and Crested.
The joint venture with Crested is referred to as "USECC". Construction
operations are carried on primarily through USE's subsidiary Four Nines Gold,
Inc. ("FNG").
2
<PAGE>
Until September 11, 2000, USE and Kennecott Uranium Company
("Kennecott"), owned the Green Mountain Mining Venture ("GMMV"), which holds a
large uranium deposit and uranium mill in Wyoming. The GMMV ceased mine
development operations in fiscal 1999 and its properties are in a care and
maintenance status due to the depressed market for uranium oxide. On September
11, 2000, USE and Crested settled litigation with Kennecott involving the GMMV
by selling all their interest in the GMMV and its properties back to Kennecott
for $3.25 million. Please see "Minerals-Uranium-The Green Mountain Mining
Project" below. Other principal uranium properties and an uranium mill in
southeast Utah are held by Plateau Resources Ltd., a wholly-owned subsidiary of
USE. The Utah uranium properties are also in a care and maintenance status. At
some future date, if the uranium oxide market improves, USE and Crested may
consolidate their remaining 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 are no current plans to implement this strategy at
the present time.
The gold assets held by Sutter Gold Mining Company ("SGMC"), a
majority-owned subsidiary of USE, are also in a care and maintenance status,
with a minor amount of improvements being made to the surface infrastructure in
fiscal 2000, because the current price of gold (less than $280/oz. in early
August 2000) prevents raising the capital necessary to put the properties into
production. See "Gold" below.
In fiscal 2000, USE provided contract drilling and related services to
companies that own and are developing coalbed methane ("CBM") wells in the
Powder River Basin of Wyoming and Montana and other basins in Wyoming. USE
bought more drilling equipment for this purpose to meet the expanding market for
contract services. Numerous major oil and gas companies, utilities and gas
transmission companies have, drilled and are producing a significant number of
CBM wells in Wyoming.
In addition, in fiscal 2000, USE and Crested formed Rocky Mountain Gas,
Inc. ("RMG"), a Wyoming corporation, to acquire properties with potential for
coalbed methane in the Powder River Basin of Wyoming and Montana, and other
basins in Wyoming, for development of coalbed methane gas wells for RMG's own
account.
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.
USE operates in three business segments: (i) minerals, (ii) commercial
operations, and (iii) contract drilling/construction. The Company 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.
Advance royalties on molybdenum
property.
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.
Contract drilling/Construction Contract drilling of coalbed
methane gas wells, construction of
drill sites, gas pipe lines,
reservoirs and reclamation of
locations.
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,
2000 1999 1998
-------- -------- ------
Minerals 2% 2% 9%
Commercial Operations 36% 27% 23%
Construction Operations 46% 0% 0%
Interest and Other 16% 71% 68%
In fiscal 2000, USE received $132,600 in revenues from the minerals
segment as compared to $150,600 in fiscal 1999. USE had no sales of uranium
during fiscal 2000 as compared to $87,600 for uranium sales in fiscal 1999, when
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 1998, there were
revenues from mineral sales of $211,000 from molybdenum advance royalties and
$858,700 for uranium contract deliveries.
Commercial operations during fiscal 2000 resulted in revenues of
$2,786,800 as compared to revenues of $2,977,800 during fiscal 1999. The
decrease in fiscal 2000 was as a result of no equipment being rented to the GMMV
during fiscal 2000. Contract drilling and construction operations in the coalbed
methane business resulted in revenues of $3,504,900 during fiscal 2000. No
revenues were recognized in this segment prior to fiscal 2000.
4
<PAGE>
(C) NARRATIVE DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT (INCLUDING ITEM 2 -
PROPERTIES DISCLOSURE).
MINERALS
COALBED METHANE
GENERAL. Rocky Mountain Gas, Inc. ("RMG") was incorporated in Wyoming
on November 1, 1999 as a subsidiary of USE (owning 92%). Separately, through
USECC, in fiscal year 2000, USE offered independent drilling and completion
services to owners of CBM properties in the Rocky Mountain area (principally
Wyoming and Montana).
Methane is the primary commercial component of natural gas produced
from conventional gas wells. Methane also exists in its natural state in coal
seams. Natural gas produced from conventional wells also contains, in varying
amounts, other hydrocarbons, which generally require the natural gas to be
processed. However, the methane gas produced from coalbeds generally contains
only methane and is pipeline-quality gas after simple water dehydration.
CBM production is similar to conventional natural gas production in
terms of the physical producing facilities. However, the subsurface mechanisms
that allow the gas to move to the wellbore are very different. Conventional
natural gas wells require a porous and permeable reservoir, hydrocarbon
migration and a natural structural or stratigraphic trap. Coalbed methane gas is
trapped (adsorbed) in the coal itself and in the water contained in the pore
space, until released by pressure changes when the water contained in the
coalbed is removed. In contrast to conventional gas wells, new coalbed methane
wells initially produce water for several months; then, as the water production
decreases, the containing water pressure on the gas in the coal drops, and
methane gas production increases.
Methane is a common component of coal since methane is created as part
of the coalification process. Coals vary in their methane content as measured by
standard cubic feet per ton. Whether a coalbed will produce commercial
quantities of methane gas depends on the coal quality, its content of natural
gas per ton of coal, the thickness of the coalbeds, the reservoir pressure, the
existence of natural fractures and the permeability of the coal.
Due to the shallow coal seams in the Powder River Basin, the drilling,
discovery, development and production of CBM has significant economic advantages
compared with conventional gas targets. Over the past several years, CBM has
become an important source of pipeline quality gas in the United States. Methane
gas production from coalbed reservoirs has grown from virtually nothing a decade
ago to more than five percent of the total United States gas production today.
Development of coalbed methane in the Powder River Basin of northeastern Wyoming
and southeastern Montana is the fastest growing CBM play in the United States.
The principal coals in the Powder River Basin include the thick coal
seams of the Tongue River member of the Paleocene Fort Union Formation, which
are among the thickest in the world. Individual coalbeds range in thickness from
a few feet up to 250 feet. A typical well might penetrate multiple coal zones
over a 200 to 1,200 foot range. Based on reports filed by other companies with
the State of Wyoming, reserves per CBM well can vary considerably but a typical
estimate can exceed 300 million cubic feet (MMcf) of gas per well. Given the
expected low drilling and completion costs, these levels of reserves have made
CBM wells attractive to gas companies and resulted in a significant amount of
exploration and production activity in the Powder River Basin.
5
<PAGE>
To date, RMG has drilled, deepened and/or tested 3 wells on the Quantum
property to depths of 1,044 ft., 1,103 ft. and 1,503 ft. In two of the wells,
testing of four zones indicated potential for gas. Further drilling has been
curtailed by the temporary moratorium imposed by the Montana Oil and Gas
Commission.
CBM CONTRACT SERVICES. USE owns 10 truck mounted drilling rigs
(drilling capacity generally down to 1,500 feet, with one rig to 5,000 feet) and
related equipment with which it provides services to third parties who own and
develop CBM properties in the Powder River Basin in Wyoming and Montana. These
services include site preparation, drilling, casing, completion, dam
construction, compressor and gathering pipeline construction and site
reclamation.
For fiscal 2000, USE had completed or was performing at May 31, 2000,
contract services for approximately 12 companies active in the CBM sector.
During this period, USE worked on over 300 CBM wells (including infrastructure
projects involving CBM wells). USE spent approximately $1,557,800 to buy
additional equipment and materials for the contract services business in fiscal
2000. See Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations. The contracts are negotiated on a turnkey or time and
materials basis, depending on the project and the customer's needs. USECC
contracts with the operator of the wells; USECC does not act as the operator on
any of the services wells or projects. The largest customer in fiscal 2000 was
J.M. Huber, Inc., representing $2,603,100, 33% of USE's gross revenues and 73%
of its net revenues from all contract drilling and construction operations.
Due to the expected continued growth in the CBM play in Wyoming and
Montana, the amount of business done by USE's contract services business in
fiscal 2000 could continue at the same or improved levels in fiscal 2001, if RMG
and Quantum start developing substantial numbers of CBM wells on their acreage
position. See below.
ROCKY MOUNTAIN GAS, INC. RMG was formed by USE and Crested as an
independent energy company to engage in the acquisition, exploration,
development, production and exploitation of CBM, for its own account. It is
expected that USECC will provide support services in CBM property development by
RMG for RMG's own account, and may also provide competitive services to develop
wells on acreage held by RMG and Quantum (see below). Compression of the coalbed
methane gas in order for it to be fed into a pipeline and pipeline construction,
is presently planned to be contracted out to others seeking to buy gas
production.
CBM wells in the Powder River Basin are generally 300 to 1200 feet
deep, typically take three to ten days to drill and complete and cost between
$30,000 - $120,000 per well. In comparison to conventional oil and gas wells,
Powder River Basin coalbed methane wells can generally be characterized by their
low cost and short drilling time frame. RMG intends to continue acquiring CBM
acreage. While the costs to acquire leasehold interests in the Powder River
Basin have increased, RMG believes that attractive lease acquisition
opportunities are still available.
In fiscal 2000, RMG acquired from Quantum Energy LLC an undivided 50%
working interest (WI) and 40% net revenue interest (NRI) in approximately
185,000 net mineral acres of coalbed methane leases located in the Powder River
Basin of southeastern Montana. See "The Quantum Agreement" below. With this
acquisition, RMG became one of the larger holders of gas leases in this area.
The gas collection systems and related equipment associated with these wells may
be furnished by RMG or provided by a third party (transmission company) at a
negotiated price per thousand cubic feet (Mcf) of gas transported in the
pipeline. The produced and gathered gas would then be sold into a transmission
company's pipeline.
In addition to the acreage held with Quantum, RMG has acquired
approximately 64,000 net acres of other coalbed methane prospects in Wyoming.
See below.
6
<PAGE>
RMG presently does not have any proved developed or undeveloped gas
reserves. RMG plans to drill a total of 125 coalbed methane wells in fiscal 2001
and 2002. Quantum also plans to drill an additional 100 wells in which RMG will
have a 50% working interest. Attaining these objectives will depend on when and
where on RMG's acreage in Wyoming and Montana the necessary drilling permits can
be obtained, see "CBM Permits" below. RMG and Quantum have identified over 200
drilling locations on state and fee portions of the acreage. The actual number
of wells to be drilled in fiscal 2001 and 2002 will depend on future operating
results, availability of capital, the prevailing price of methane gas, and
issuance of permits.
To fund startup operations and acquire acreage interests from Quantum
Energy LLC, RMG sold 1,203,333 shares of restricted common stock at $3.00 per
share to accredited investors (including USE and Yellow Stone Fuels Corp.) for
net proceeds of $3,509,000 ($100,000 was paid in offering expenses and
commissions to a registered broker-dealer for placement services on sales to
investors other than USE and Yellow Stone Fuels Corp.). These shares are in
addition to the initial shares acquired by USE and employees of the companies on
the formation of RMG. Additional capital from institutions and/or joint ventures
with industry partners is needed in fiscal 2001 and 2002 to begin fully
exploiting the CBM acreage. See Item 7.
THE QUANTUM AGREEMENT. RMG's largest prospects are the Castle
Rock/Kirby prospects in southeast Montana consisting of approximately 185,000
net mineral acres jointly owned with Quantum. RMG acquired a 50% working
interest (WI) and 40% net revenue interest (NRI), on these properties under an
Agreement with Quantum, which closed on January 3, 2000. RMG and Quantum are
also currently negotiating to acquire additional acres in their area of mutual
interest ("AMI") of the Powder River Basin in Montana. Under the Quantum
Agreement, the ultimate purchase price is $5,500,000, of which $3,200,000 was
paid on January 3, 2000 and $1,000,000 was paid on May 1, 2000. A payment of
$1,300,000 is due on or before December 31, 2000. If RMG fails to pay the last
purchase installment of $1,300,000 on or before December 31, 2000, RMG must
assign 12% of its undivided 50% WI in the properties back to Quantum. At
Quantum's sole option, it may elect to have RMG drill and complete additional
wells for the equivalent cost of $1,300,000. If Quantum exercises this option,
RMG would own a 50% WI (40% NRI) in the wells drilled with those funds, but only
after Quantum has received $1,300,000 in net revenues (payback) from those
wells.
The acreage held with Quantum is all in Montana, and includes 82,807
net acres of BLM land, 14,910 net acres of state land (Montana), and 90,430 net
acres of fee land.
A separate provision in the Quantum Agreement requires RMG to spend
$2,500,000 to drill and complete 25 CBM wells, as identified and agreed to by
the operating company Powder River Gas, LLC (see below).
Quantum will have a carried working interest in these wells, which
means that RMG must pay all of the drilling and completion costs for these
wells; after production begins, the 80% net revenue interest will be split 40%
to RMG and 40% to Quantum, and operating costs will be split 50% to RMG and 50%
to Quantum. RMG will not be entitled to recover any of the drilling and
completion costs for these wells.
If RMG does not spend $2,500,000 to drill and complete the 25 wells by
November 30, 2000, and Quantum spends part or all of that amount of funds to
drill and complete wells on the acreage, then RMG will have the right (until
November 30, 2001) in effect to buy back its 50% WI for an amount equal to
Quantum's expenditures, plus Quantum's cost of funds (if borrowed). Quantum will
hold 100% of the WI and the full 80% NRI until such time as RMG buys back its
50% WI in the subject wells. If RMG buys back its 50% WI, Quantum would hold a
48% NRI, and a 50% working interest in the subject wells until two years after
RMG buys back its 50% working interest. In this period of time, RMG would hold a
50% WI but only a 32% NRI from the subject wells. After two years from the buy
back date, RMG would hold a 40% net revenue interest in production from the
subject wells; RMG would maintain its 50% WI starting with its buy back date.
7
<PAGE>
In addition, the Quantum Agreement calls for RMG and Quantum to drill
and complete a total of an additional 100 wells between January 1, 2000 and
December 31, 2000, subject to force majeure. Each party shall pay 50% of the
wells' drilling and completion costs during the year 2000, for a 40% net revenue
interest to each party. Neither RMG nor Quantum will have a carried interest in
any of these wells. Instead, in the event that either Quantum or RMG elects not
to drill the wells during the year 2000, then the party who elects to drill the
wells shall recover the funds advanced by it to pay for the other party's share
of costs to drill and complete the wells, plus a 300% penalty. Until the paying
party recovers its costs plus the penalty, the paying party will hold 100% of
the working interest and the full (i.e., 80%) net revenue interest. After such
recovery of advances and penalty, the non-consenting party will own its 50%
working interest and 40% net revenue interest. This penalty provision shall also
apply to all future years between the parties as to wells not equally
participated in on the Quantum acreage.
The RMG-Quantum properties will be operated through Powder River Gas,
LLC, a Wyoming limited liability company owned 50% by RMG and 50% by Quantum.
CBM well sites will be selected from the acreage as approved by a management
committee in which Quantum and RMG have equal representation; drilling,
completion and gathering system costs will be authorized by the committee and
funded by RMG and Quantum according to their interests in the acreage as
determined by the Agreement with Quantum. USECC has the right to provide
drilling services on the first 25 wells drilled by Powder River Gas, LLC based
on competitive drilling rates in the areas surrounding the wells to be drilled.
Thereafter, USECC will have the right to submit bids on a competitive basis to
Powder River Gas LLC for drilling contracts on additional acreage.
RMG plans to operate a majority, if not all of the Powder River Basin
properties it owns outside the Quantum acreage.
PERMITTING
Drilling CBM wells requires obtaining permits from various governmental
agencies. The ease of obtaining the necessary permits depends on the type of
mineral ownership and the state in which the property is located. Intermittent
delays in the permitting process can reasonably be expected throughout the
development of any play. For example, there is currently a temporary moratorium
for drilling CBM wells on fee and state lands in Montana. RMG may shift its
strategy as needed to drill in different parts of the CBM play or drill
conventional shallow natural gas wells in order to evaluate all formations,
including coal, for gas potential and expedite production capabilities. As with
all governmental permit processes, there is no assurance that permits will be
issued in a timely fashion or in a form consistent with RMG's anticipated
operations.
On March 16, 2000, the Northern Plains Resource Council, Inc. (NPRC)
filed suit against the Montana Board of Oil and Gas Conservation requesting an
order of the court compelling the defendant to prepare a Supplemental
Environmental Impact Statement (EIS) for coalbed methane development, which
could further delay development. RMG and others have filed a motion to intervene
to participate in this litigation and to ensure that drilling can be performed
during any environmental analysis. The case is pending.
The Wyodak Environmental Impact Statement (EIS) for the Powder River
Basin in Wyoming was issued in the fall of 1999, which allowed the permitting of
5,000 CBM wells to be drilled on Federal lands in Wyoming. More CBM well
applications have been submitted causing the BLM to begin a second EIS for the
Powder River Basin Area in Wyoming that will include CBM and conventional oil
and gas wells. This new EIS is scheduled to commence in early summer 2000 and
continue for 20 to 24 months. Development on Federal lands in Wyoming has been
stopped with the balance of the Wyodak EIS permitted wells (4,000) occurring on
fee and state lands. BLM has started an EA reviewing drainage issues which could
allow an additional 1,500 new CBM well permits in the same region. This was
scheduled for scoping in early April
8
<PAGE>
2000 with completion expected the following October. Again, there is no
assurance that the EA and EIS will not negatively impact RMG's business or
operations.
In addition, the Wyoming and Montana Departments of Environmental
Quality have regulations applying to the surface disposal of water produced from
CBM drilling operations. CBM operators are currently seeking changes in permit
requirements and department policy that would allow operators more flexibility
to discharge water on the surface. If these changes are not made, it may be
necessary to install and operate treatment facilities or drill disposal wells to
reinject the produced water back into the underground rock formations adjacent
to the coal seams or lower sandstone horizons. If RMG is unable to obtain the
appropriate permits or if applicable laws or regulations require water to be
disposed of in an alternative manner, the costs to dispose produced water will
likely increase. These costs could have a material effect on operations in this
area, including potentially rendering future production and development in the
affected areas uneconomic.
In Montana, RMG has pending applications to the BLM for approximately
60 permits to drill into shallow gas sand formations on Federal land held with
Quantum; these permits are expected to be issued in September 2000, and may be
converted to production status upon receiving approval from the Montana Board of
Oil and Gas. These wells would evaluate potential CBM production as well as
conventional gas. Regarding other land held with Quantum in Montana, the State
of Montana may lift its moratorium for CBM wells on private and state ground in
Montana, and start issuing new permits on these lands in October 2000 (a
voluntary moratorium is currently in place for wells on private and state ground
in Montana). RMG has not determined to what extent it will participate in this
procedure, and is evaluating how best to protect its position to have reasonable
exploration for CBM wells proceed on state and fee ground.
As approximately 40% of RMG's acreage in the Castle Rock prospect in
Montana (held with Quantum) is on Federal land, RMG expects to have ample
acreage permitted by the BLM by late calendar 2000 to begin drilling and
evaluating gas potential in both shallow sands and coal formations. These
favorable outcomes are predicted but not assured.
GATHERING AND TRANSMISSION OF CBM GAS
Companies involved in CBM production generally outsource their gas
gathering, compression and transmission. RMG intends to outsource its
compression and gathering needs as well, possibly on a competitive basis with
transmission companies in the immediate area. Negotiations with various
transmission companies have been initiated by RMG in order to better manage
future capital investment, but no contracts have been signed to date.
Coalbed methane production growth in the Powder River Basin has
historically been impeded by a shortage of gathering system capacity and
transport capacity out of the Basin. However, two large diameter gathering
pipelines were completed in September 1999 and a third was ready for service in
early 2000. The two completed pipelines will provide an additional 900 million
cubic feet, or MMcf, of daily gas capacity as set forth below:
Fort Union Gas Gathering, LLC's 106-mile, 24" gathering pipeline,
commenced operations September 1, 1999, with an initial capacity of 450 MMcf per
day;
Thunder Creek Gas Services, LLC's 126-mile, 24" gathering pipeline,
commenced operations September 1, 1999, with an initial capacity of 450 MMcf per
day; and
Additionally, CMS Energy's 110-mile, Big Horn Gas Gathering pipeline,
that connects to the northern terminus of the Fort Union pipeline, is continuing
to be expanded in length and has an initial capacity of 256
9
<PAGE>
MMcf per day which can readily be upgraded to 500 MMcf per day with the addition
of booster compression. Further, on June 19, 2000, Big Horn Gas Gathering
announced the extension of its pipeline to serve producers in the Sheridan area.
This 50+ mile extension will place a 20" high pressure pipeline within 5 miles
of the Montana border and within close proximity to the development planned by
RMG and Quantum in their Kirby Prospect area.
Wyoming Interstate Gas Company's 143-mile, 24" Medicine Bow Lateral
pipeline commenced operations in November 1999 with an initial capacity of 260
MMcf per day. This pipeline will transport natural gas from the Thunder Creek
and Fort Union pipelines at the south end of the Powder River Basin to
interconnect with multiple interstate pipelines accessing markets to the east
and along the front range of Colorado. This system is already being expanded as
demand for transportation space grows. Further transmission lines are being
planned by other companies in the area.
POWDER RIVER BASIN PROPERTIES. As of June 1, 2000, RMG owned a 50%
working interest in oil and gas leases covering approximately 185,000 net acres
in the Powder River Basin in Montana. These leases generally have two to ten
year primary terms. The federal leases are generally ten year term leases and
newly acquired fee and state leases are generally two to five year term leases.
There are five separate project areas as follows:
1. CASTLE ROCK. This property consists of approximately 125,000 net
acres of leases held jointly with Quantum located in Powder River County, west
of Broadus, Montana. Additional properties in this area are under negotiation.
The Castle Rock prospect covers a large area and there are four separate
prospective areas: Otter Creek, Kirby, Bartholemew and Castle Rock areas.
Coals present in the Castle Rock prospect are in the Tongue River
Member of the Fort Union Formation. Coalbed methane production in the Wyoming
portion of the Powder River Basin is also from the Tongue River Member coals.
Coals of primary interest are the Sawyer, Knobloch and Flowers-Goodale coals.
Other coals present in the prospect area include the Pawnee, Brewster Arnold,
Terret and Stag coals. Gas shows from the Sawyer, Knobloch, and Flowers-Goodale
coals have been noted in several shallow water wells drilled in the area. The
apparent character, quality and gassiness of RMG project coals in the Castle
Rock project appear comparable to the coals in CBM projects by other operators
located near the Montana/Wyoming border area in Johnson and Campbell Counties,
Wyoming.
An initial permitting and drilling program in this area began in late
1999 and, to date, three holes have been completed. Coals encountered in the
first drill test are outlined in the following table:
COAL DEPTH THICKNESS
---- ----- ---------
Pawnee 245 feet 26 feet
Brewster 348 feet 20 feet
Sawyer 565 feet 22 feet
Knobloch 640 feet 20 feet
Flowers-Goodale 850 feet 26 feet
Misc other coals various 16 feet
-------
TOTAL COAL 130 feet
2. KIRBY: This lease block contains approximately 60,000 net acres held
jointly with Quantum located in Big Horn and Rosebud Counties, Montana, north of
Sheridan, Wyoming. Additional property in the area is being considered for
acquisition.
The prospect is located in the northwestern portion of the Powder River
Basin. Coalbed methane production has been established south of the prospect at
another field which is currently being developed by
10
<PAGE>
Redstone Gas Partners. Redstone recently received Discharge Permits from the
Montana DEQ to discharge up to 1,650 gallons per minute into the Tongue River.
Redstone has production with 150 active locations in the field at this time.
Pennaco Energy is planning to drill several wells on a prospect east of the
field. PETCO is reportedly planning a 20 well test project offsetting project
acreage.
Several coal seams are present in the prospect area with total coal
thickness of approximately 100 feet. The thickest coal is the Wall coal which is
50-85 feet thick. Drilling depth to the Wall coal is about 500 feet and drilling
to 1000-1400 feet will test all coal sections.
Coals present at Kirby prospect are in the Tongue River member of the
Tertiary Fort Union Formation. Productive coals in the Wyoming portion of the
Powder River Basin in the CX field are also Fort Union Formation coals.
Potentially productive coals at Kirby prospect include the Canyon, Wall,
Carlson, Poker Jim-Pawnee, Brewster-Arnold, King-Sawyer, and Flowers-Goodale
coals. The Wall coal is the thickest coal in the prospect area with 50-60 feet
of development throughout the area. The Wall coal splits and thins south and
east of the prospect area. Drilling depth to the Wall coal is about 500 feet
over most of the prospect. The Wall coal outcrops along the Kirby on the east
margin of the prospect and along Rosebud Creek on the northwest portion of the
prospect.
At present there has been no gas content analysis of the Wall coal in
the immediate vicinity. However, at a recent spacing hearing before the Montana
Oil and Gas Commission for wells located in T9S R42E, Pennaco Energy presented
an exhibit with estimated gas content for various coals. Pennaco's estimate for
the Wall coal is 118 ft3/ton.
The coal intervals below the Wall coal range in thickness from 5 feet
or less to around 20 feet. The King-Sawyer coal and Flowers-Goodale are each
10-15 feet thick throughout the prospect area. Both of these coal zones have
produced some gas from shallow water wells located east of the prospect area.
Total combined coal thickness over the area is around 100 feet.
The Kirby prospect is located in a developing portion of the Powder
River Basin. Production and sales of coalbed methane have been established south
of the prospect. Gas market and pipeline access are closely established in the
area. Thick and multiple coals are present in the prospect area. Production from
the area may be enhanced by the structural features present over the prospect.
Successful completion of multiple coal zones in wells will greatly add to the
potential reserves of the area. CMS's Big Horn Gas Gathering is extending a new
20" gathering system to the Montana border near Decker, Montana.
3. GILLETTE NORTH. RMG holds a 100% working interest in 80 acres of
leases in this project area located in Campbell County, Wyoming. This State
lease lies at the north end of the City of Gillette. Potential exists for one
billion cubic feet of gas on this 80 acres alone. Existing coalbed methane wells
lay in the section immediately north. Permitting of 2 wells has begun on RMG's
property. RMG intends to conduct test drilling and production techniques in this
area that lies in the heart of the current coalbed methane play in the Gillette
area.
4. FINLEY. RMG holds 160 acres of leases in this project area located
in Converse County, Wyoming. This prospect is a State lease 12 miles east of
Edgerton, Wyoming. Review for a two well test is underway.
5. SUSSEX. RMG holds 640 acres of leases in this project area located
in Johnson County, Wyoming. This State lease lies 3 miles south of Sussex,
Wyoming. RMG has a 100% working interest.
OTHER PROPERTIES
RMG has also acquired two properties in Wyoming.
11
<PAGE>
6. BAGGS NORTH. This prospect contains 120 acres of leases located in
Carbon County, Wyoming. This State lease is located 7 miles north of Baggs,
Wyoming. RMG has a 100% working interest in this prospect.
7. OYSTER RIDGE. Oyster Ridge is located in southwestern Wyoming in the
Ham's Fork Coal Field. It is midway between Evanston and Kemmerer, Wyoming and
lies in the counties of Uinta and Lincoln. Wyoming Highway 189 provides
excellent access into the area. Total property held by RMG at Oyster Ridge is
approximately 63,000 net mineral acres. RMG holds a 100% working interest and a
net revenue interest of 81.5% to 83.5%. Surface and mineral ownership is
approximately 60% Union Pacific Resources (UPR), 35% BLM, 5% state of Wyoming.
Union Pacific Resources retains the right to back into each years exploration
program for a 25% working interest. The coal formations of interest on this
project are the Cretaceous Frontier and Adaville. Both formations trend roughly
north-south through the project area. The Frontier Formation (early Late
Cretaceous) outcrops on the east side and dips westerly at 15(degree) to
30(degree). The Frontier coals are higher rank but much thinner than the
Adaville. The Adaville Formation (Late Cretaceous) outcrops on portions of the
west side of the property. Dips here are also 15(degree) to 30(degree).
Cumulative coal thickness in the Adaville is up to 100 feet. Frontier cumulative
coal thickness varies from 10 to 20 feet.
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).
However, until uranium oxide prices improve significantly, all of the
uranium properties are in care and maintenance mode, meaning that work is
performed to keep the assets in stand-by mode and ready for later activity and
permitting work is done as needed (mostly monitoring and reporting) to keep
existing permits in effect.
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), are held by the
Green Mountain Mining Venture ("GMMV"), owned 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. Until September 11, 2000, USE (and Crested and
USECC) owned a 50% interest in the GMMV, but sold its interest to Kennecott in a
settlement of litigation. See below.
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, USE received back from SMP all of the Sheep
Mountain mineral properties and equipment, in partial settlement of disputes
with Nukem, Inc. ("Nukem")
12
<PAGE>
and its subsidiary Cycle Resource Investment Corp. ("CRIC"). The judgment
against Nukem/CRIC and the CIS uranium supply contracts in constructive 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.
In order to concentrate the efforts of USE on conventional uranium
mining using the Shootaring Canyon and Sweetwater Mills, USE 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. USE 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 USE 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 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.
YSFC has ceased operations and abandoned all of its claims, due to the
depressed market for uranium oxide. YSFC's equipment which had been stored at
the GMMV's Sweetwater Uranium Mill, has been conveyed to Kennecott as part of
the settlement agreement with Kennecott.
REGISTERED EXCHANGE OFFER. 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 the Exchange Rights Agreement between USE, YSFC and AFFC,
USE made a registered Exchange Offer to each of the YSFC shareholders who
invested in YSFC through AFFC in late 1997 and early 1998. 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 were 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
13
<PAGE>
on NASDAQ NMS would require YSFC to meet several conditions, including having
minimum net tangible assets of $6,000,000 and at least 400 shareholders. YSFC
did not meet these conditions to listing. Therefore, USE filed a registration
statement on Form S-4 (declared effective in March 1999).
The Exchange Ratio for shares was 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, 2000, the Exchange Offer had been completed. USE issued
734,919 shares in exchange for 1,219,000 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, 2000, including 4,359,000 shares (36.8%) 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. 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.
THE GREEN MOUNTAIN MINING VENTURE ("GMMV") PROJECT
GMMV. In fiscal 1991, USE entered into an agreement to sell 50 percent
of its interests in the Green Mountain uranium claims, and certain other rights,
to Kennecott for $15,000,000 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 Kennecott formed the GMMV and entered into a joint venture
agreement (the "GMMV Agreement") with USE 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. 1999 Form 10-K
at pages 8-11, and footnote F to the financial statements.
14
<PAGE>
In fiscal 2000, Kennecott filed a lawsuit to dissolve the GMMV. USE
counterclaimed for damages. This lawsuit was settled on September 11, 2000.
Kennecott and USE have agreed to ask the Court to dismiss all parties' claims in
the lawsuit. Under the settlement agreement, Kennecott has paid the Company
$0.25 million and will pay $1,375,000 five days after court approval is received
and another $1,625,000 in January 2001, to acquire all of USE's (and Crested and
USECC's) interest in the GMMV, its properties and the Sweetwater Uranium Mill
(with certain exemptions). Kennecott also has assumed all reclamation and other
liabilities associated with the GMMV, its properties, the Sweetwater Mill and
all liabilities associated with the GMMV since its inception, including the
historical liabilities associated with the Sweetwater Mill prior to its
acquisition by the GMMV. USE (and Crested and USECC) together have retained a 4%
net profits royalty in any future uranium oxide produced from the GMMV mining
claims through the Sweetwater Mill (currently in a standby mode and not
operational).
The ion exchange facility on the Sheep Mountain properties will not be
transferred to Kennecott, nor will the cleanup liabilities associated therewith
be assumed by Kennecott. However, USE and Kennecott have agreed to cooperate in
the disposal of the facility into the Sweetwater Mill's disposal and impoundment
areas.
Also, certain items of mining equipment held by the GMMV have been
conveyed to USE, and will be removed from the GMMV properties in 2001.
At such time as Kennecott has completed necessary reclamation work on
the Green Mountain unpatented lode mining claims (including the Round Park
uranium deposit proposed to be mined through the Jackpot Mine) Kennecott will
quit claim all such mining claims to USE (and Crested), as well as certain
equipment currently being used at the mine (including a compressor and standby
generator). Kennecott will keep the Sweetwater Mill.
For information on the Green Mountain claims, see below.
PROPERTIES
The Green Mountain claims include the Big Eagle Properties on Green
Mountain, which contain substantial uranium mineralization, and are adjacent to
other mining claims. The Big Eagle Properties contain two open-pit mines, as
well as related roads, utilities, buildings, structures, equipment and a
stockpile of 500,000 tons of uranium material with a grade of approximately .05%
U3O8. The assets include two buildings (38,000 square feet and 8,000 square
feet) formerly used by Pathfinder Mines Corporation ("PMC") in mining
operations. Also included are three ore-hauling vehicles, each having a 100-ton
capacity.
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 had
planned to mine this mineralized material from two decline tunnels (-17 percent
slope) in the Jackpot Mine driven underground from the south side of Green
Mountain. The first of several mineralized horizons in the Round Park deposits,
is about 2,300 feet vertically down from the surface of Green Mountain. This
work was halted in July 1998.
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
15
<PAGE>
is one of the newest uranium milling facilities in the United States, and has
been maintained in good condition. UNOCAL has reported that the mill buildings
and equipment have historical costs of $10,500,000 and $26,900,000,
respectively.
As consideration for the Sweetwater Mill, GMMV agreed to indemnify
UNOCAL against certain reclamation and environmental liabilities, which
indemnification obligations are guaranteed by Kennecott Corporation (parent of
Kennecott Uranium Company). The GMMV is 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.
The reclamation and environmental liabilities assumed by the GMMV (and
now Kennecott's sole responsibility) consist of two categories: (1) cleanup of
the inactive open pit mine site near the Mill (the source of ore feedstock for
the mill when operating under UNOCAL), including water (heavy metals and other
contaminants) and tailings (heavy metals dust and other contaminants requiring
abatement and erosion control) associated with the pit; and (2) decontamination
and cleanup and disposal of the Mill building, equipment and tailings cells
after Mill decommissioning. The Wyoming DEQ exercises delegated jurisdiction
from the United States Environmental Protection Agency ("EPA") to administer the
Clean Water Act and the Clean Air Act, and directly administers Wyoming statutes
on mined land reclamation. The Sweetwater Mill is also regulated by the NRC for
tailings cells and mill decontamination and cleanup. The EPA has continuing
jurisdiction under the Resource Conservation and Recovery Act, pertaining to any
hazardous materials which may be on site when cleanup work is started.
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.
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 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, the NRC issued the new license on May 2, 1997.
Plateau has a cash bond in favor of the NRC in the amount of $7,952,602 plus an
additional $1,315,100 in government securities for future bonding and licenses
for reclamation.
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.
16
<PAGE>
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 have been
developing the Townsite and are selling home and mobile home sites.
YELLOW STONE FUELS CORP.
YSFC has abandoned all of its unpatented mining claims and State leases
due to historically low uranium market prices.
SHEEP MOUNTAIN PARTNERS ("SMP")
SMP PARTNERSHIP. In February 1988, USE 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 sold 50 percent of the 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 USE received an undivided 50 percent interest. SMP is a Colorado general
partnership formed on December 21, 1988, between USE and Nukem, Inc. of
Stamford, CT ("Nukem") through its wholly-owned subsidiary Cycle Resource
Investment Corporation ("CRIC"). Each group provided one-half of $315,000 to
purchase equipment from Western Nuclear, Inc.; USE also contributed its
interests in three uranium supply contracts to SMP and agreed to be responsible
for property reclamation obligations. The SMP Partnership agreement provided
that each partner generally had a 50 percent interest in SMP net profits, and an
obligation to contribute 50 percent of funds needed for partnership programs or
discharge of liabilities. Capital needs were to have been met by loans, credit
lines and contributions. Nukem is a uranium brokerage and trading concern.
SMP was directed by a management committee, with three members
appointed by USE, 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. Such proceedings are
still under appeal.
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 and Nukem/CRIC, SMP conveyed
these mineral properties and equipment to USE. Production from the properties is
subject to sliding-scale royalties payable to Western Nuclear, Inc., with rates
ranging from one to four percent on recovered uranium concentrates. As of the
date of this report, 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.
An ion exchange plant is located on the properties which can be used to
remove natural soluble uranium from mine water. USE has submitted a plan to the
NRC to decommission this facility and obtained
17
<PAGE>
a three year extension for timeliness of decommissioning. This facility may be
disposed of at the Sweetwater Mill impoundment facility (see above).
PROPERTY MAINTENANCE. Currently, USE has a maintenance staff on site to
care for and maintain the properties.
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 SMP McIntosh Pit.
URANIUM MARKET INFORMATION.
URANIUM SPOT MARKET. Uranium spot prices averaged $8.05/lb. U3O8 on
August 7, 2000, a decrease of 5.9% from $8.45 at the end of May, 2000. During
the first half of 2000, total spot market volume was approximately 7 million
pounds U308 compared with 14 million pounds for the first half of 1999.
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 at 9.50/lb. U3O8. 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 1999 demand. For a detailed
analysis of past uranium market development, please see USE's 1998 Form 10-k.
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 66.3% owned and controlled
subsidiary of USE as of May 31, 2000. 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 assets. See "Managements Discussion and Analysis of Financial Condition and
Results of Operations" for fiscal 1999.
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. Plans to develop the mine into a
visitor's center to generate cash flow while the gold prices remain depressed
are being evaluated.
Like uranium, current gold prices are too low to allow SMGC to raise
the capital necessary to place the gold property into production. Except for
limited infrastructure improvements in 2000, the assets are in care and
maintenance mode and the exploration permits are being kept current as
necessary.
18
<PAGE>
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.
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. 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 in SGMC, USE owns a $10,000,000
Contingent Stock Purchase Warrant (the "USE Warrant") which was issued to USE in
connection with the restructuring of SGMC for the Canadian private placement.
The USE 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 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 USE Warrant. The USE Warrant is
exercisable semi-annually. SGMC may prevent the exercise of the USE Warrant by
paying USE 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). Additional ore reserves
will be determined by an independent geologist agreed upon by the parties.
APRIL 1998 TRANSACTION FOR CASH AND SGMC SPECIAL WARRANTS. As of April
7, 1998, USE entered into four separate Stock Purchase Agreements with four
Canadian investment funds, for the issuance of 658,895 shares of Common Stock of
USE, in consideration of the funds' payment to USE of $1,190,000 in cash and the
delivery to USE of 888,900 Special Warrants of SGMC. The funds had paid SGMC a
total of Cdn $4,888,950 in May 1997, pursuant to a private offering in Canada,
to purchase the Special Warrants from SGMC. In fiscal 1999, USE issued 89,059
shares of its common stock in exchange for 207,500 Special Warrants from SGMC
shareholders increasing USE's ownership of SGMC by 4%. For further information
on the transaction, please see Footnote F to the financial statements.
USECC MANAGEMENT AGREEMENT WITH SGMC. Effective June 1, 1996, SGMC
entered into a Management Agreement under which USE provides administrative
staff and services to SGMC. USE 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 USE 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 2000. 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
19
<PAGE>
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, 2000 through May 31, 2001. Property taxes for fiscal 2001
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. In fiscal 2000, SGMC spent approximately $298,000 for
surface infrastructure related to improving access to the mine site, and to a
lesser extent tourist related improvements. These improvements will help SGMC
develop the tourist potential of Sutter Gold Mine, pending improvements in the
price of gold. Demographics indicate that within a 150 mile radius, 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 is located
along scenic Highway 49 (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. Facilities include a Visitor's Center with a gift shop
and museum, a self-guided tour of modern mining activities, visitor
gallery/museum, hiking trails, picnic areas and a special gold panning area.
SGMC is evaluating how the tourism business performs during fiscal 2000 and the
first quarter of 2001. These evaluations could result in the business being
curtailed, shut down or sold.
MOLYBDENUM
As a holder of royalty, reversionary and certain other interests in
properties located at Mt. Emmons near Crested Butte, Colorado, USE is entitled
to receive annual advance royalties of 50,000 pounds of molybdenum, or cash
equivalent. AMAX Inc. (which was acquired by Cyprus Minerals Company and was
20
<PAGE>
renamed Cyprus Amax Minerals Company in November 1993 and was acquired later by
Phelps Dodge) delineated a deposit of molybdenum containing approximately
146,000,000 tons of mineralization averaging 0.43% molybdenum disulfide on the
properties of USE.
Advance royalties are paid in equal quarterly installments until: (i)
commencement of production; (ii) failure to obtain certain licenses, permits,
etc., that are required for production; or (iii) AMAX's return of the properties
to USE. 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 receive $2,000,000, at
such time as the Mt. Emmons properties are put into production and, in the event
AMAX sells its interest in the properties, USE receives 15 percent of the first
$25,000,000 received by AMAX. USE has asserted that the acquisition of AMAX by
Cyprus Minerals Company was a sale of AMAX's interest in the properties which
would entitle USE to such payment. Cyprus Amax has rejected such assertion and
USE is considering remedies. USE recognized $132,600, $150,600 and $211,000 of
revenues in fiscal 2000, 1999 and 1998 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 and formed Cyprus AMAX. Thereafter, Phelps Dodge acquired
Cyprus Amax. This further concentrates copper production capabilities and added
molybdenum reserves to Phelps Dodge.
PARADOR MINING (NEVADA)
USE is a sublessee and assignee 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 has 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 is for a ten year primary term, is subject to a prior lease to
BGBI on the properties, and allows USE to explore for, develop and mine minerals
from the claims. If USE conducts activities on the claims, they are entitled to
recover costs out of revenues from extracted minerals. After recovering any such
costs, USE will pay Parador a production royalty of 50 percent of the net value
of production sold from the claims.
USE and Parador presently are in litigation concerning this property.
See "Legal Proceedings - BGBI Litigation" below.
21
<PAGE>
OIL AND GAS
FORT PECK LUSTRE FIELD (MONTANA). USE 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, three of the wells were
again placed into production. USE received a fee based on oil produced. USE is
the operator of record. No further drilling is expected in this field. This fee
and certain real property of USE, 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. USE 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. 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, where about
130 people presently live. 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 when, and if 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
22
<PAGE>
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.
Commercial operations are not dependent upon a single customer, or a
few customers, the loss of which would have a materially adverse effect on the
Company.
CONSTRUCTION
FOUR NINES GOLD, INC. For fiscal 2000, FNG had one contract for
construction work. It also performed contract construction work in the coalbed
methane business for various companies. Rental revenues totaled $260,400 for
fiscal 2000 at a profit of $54,000.
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.
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, SGMC or RMG 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
23
<PAGE>
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 competitive
position of the Company.
EMPLOYEES
As of August 26, 2000, USE had approximately 86 full-time employees.
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 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").
RMG's properties and mineral leases of BLM, state and fee lands, which
require annual cash payments totaling approximately $515,000 during fiscal 2001,
50% of which is the obligation of RMG to keep the leases in effect.
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 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.
24
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
In 1991, disputes arose between USE/Crested, and Nukem, Inc. and its
subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation
and operation of the Sheep Mountain Partners partnership for uranium mining and
marketing, and activities of the parties outside SMP. Arbitration proceedings
were initiated by CRIC in June 1991 and in July 1991, USECC filed a lawsuit
against Nukem, CRIC and others in the U.S. District Court (District of Colorado)
in Civil No. 91B1153. 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. USECC filed a petition for confirmation on the Order and on June
30, 1997, the U.S. District Court confirmed the Order in its Second Amended
Judgment (the "Judgment"). Thereafter, Nukem/CRIC appealed the Judgment to the
10th Circuit Court of Appeals ("10th CCA") in Nos. 96-1532 ss. 97-1332.
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, 1999, Nukem filed a Notice of Appeal to the 10th CCA.
USECC opposes the appeal and filed a brief in opposition to Nukem/CRIC brief in
the 10th CAA. The appeal is pending. For more information see Note K to the
financial statements.
GMMV LITIGATION
On November 10, 1999, Kennecott Uranium Company and Kennecott Energy
Company ("Kennecott") filed a civil action against defendants U.S. Energy Corp.,
Crested Corp. an USECC in the Sixth Judicial District Court, Campbell County,
Wyoming, No. 22406. Kennecott is seeking to dissolve the GMMV joint venture with
USECC and judicial approval of a plan to sell the GMMV or liquidate its assets
plus attorney fees and costs. Defendants filed a motion to change venue to the
District Court in Fremont County, Wyoming and the Sixth Judicial District court
granted the motion. The case was then transferred to the Ninth Judicial District
Court of Fremont county, Wyoming in civil Action No. 31322. The parties have
initiated discovery proceedings each seeking production of documents from the
other and certain documents of the parties have been received and reviewed.
25
<PAGE>
On March 13, 2000, defendants U.S. Energy, Crested Corp. and USECC
filed an answer denying the various allegations of Kennecott and counterclaims
against plaintiff Kennecott and its parent Rio Tinto plc. Defendants also filed
a separate third party complaint against Rio Tinto plc. Kennecott filed a motion
to dismiss the complaint and Rio Tinto filed a motion for judgment on the
pleadings. A hearing date on the respective motions was set for May 30, 2000 but
was continued for a time in September or October, 2000 to be set by the Court,
as the parties are attempting to negotiate a settlement. On July 14, 2000,
Kennecott and USECC entered into a partial settlement wherein Kennecott paid
USECC $250,000 to settle claims peripheral to the case concerning accounts
receivables and other minor claims for work done and equipment used and
mobilized by USECC for the GMMV.
On September 11, 2000, the parties executed a settlement agreement and
related documentation and releases (the "Settlement"). Under the Settlement,
USECC will sell all of its interests in the GMMV and the GMMV properties,
including those within a described Area of Interest to an affiliate of
Kennecott. The purchase consideration is $3,250,000 in cash and a 4% net profits
royalty interest in certain of the mining claims at the Big Eagle and Jackpot
Mines. USECC is allowed to retain certain mining equipment and supplies, and has
the right to receive certain mining claims that may be abandoned by Kennecott.
Until final bond release, USECC may not compete in the Area of Interest.
Kennecott assumes the reclamation obligations (to the extent required by
applicable regulatory authority) at the GMMV properties and USECC retains
liabilities relating to its activities as a contractor to the GMMV. The
Settlement provides that Kennecott is under no obligation to develop any of the
properties or the underlying claims and may instead choose to sell the
properties and claims or to abandon the claims as they are no longer required.
USECC and Kennecott agree to dismiss the case and to release each other from
further liability. The Settlement is effective upon approval by the trial judge.
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 in Civil No.
960901865CV. The Plaintiff, Dejavue, Inc., recovered a judgment against USE and
USE appealed to the Utah Court of Appeals which affirmed the judgment. After a
denial by the Utah Supreme Court, USE petitioned for Writ of Certiorari, USE
paid $294,787 being the full amount of the judgment plus interest. USE is
seeking reimbursement from the insurance company. See footnote K.
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 in Civil No. 11877, 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
26
<PAGE>
parties on their respective claims. BGBI, Parador and USE/Crested all appealed
the decision to the Nevada Supreme Court. The appeal is pending.
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 (i) the DOE
violated its statutory authority by transferring uranium to USEC in excess of
statutory limits on volume; (ii) the excess amounts were not "sold" by the DOE
to USEC for fair value, as required by the Act, and mandated findings by the DOE
concerning possible adverse impacts were not supported in fact; and (iii) the
DOE be enjoined from future transfers in violation of the Act. The DOE filed a
motion to dismiss the complaint claiming that the U.S. Congress withdrew its
consent to be sued in connection with the USEC Inc. privatization and that USEC
Inc. must be joined as an indispensable party. The State of Wyoming moved to
join in the litigation on behalf of the plaintiffs. A hearing was held on the
motions on January 8, 1999 before the U.S. District Court in Cheyenne, Wyoming.
The Court took the motions under advisement and has not entered a decision.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the United States District
Court, Denver, Colorado, Case No. 98WM1630, 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.
See "Business - Commercial Operations - Real Estate and Other
Commercial Operations - Colorado Properties" above, and Note K to the
Consolidated Financial Statements.
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. The
defendants, Gunnison Center Properties, L.L.C. and Val Olson, 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
27
<PAGE>
land for waste disposal and other purposes. The certification and approval by
the Amador County Planning Commission of the Final Subsequent Environmental
Impact Report ("FSEIR") and CUP amendments on July 14, 1998 was appealed (by
another local citizens project opposition group) to the Amador County Board of
Supervisors. In August and September 1998, the Board of Supervisors certified
the FSEIR and approved the amendments to the CUP.
On September 28, 1998 a lawsuit was filed in Amador County Superior
Court, California (Case No. 98 CV 3298) by Concerned Citizens of Amador County
as plaintiffs, against the County of Amador and the Amador County Board of
Supervisors, and against SGMC as a real party in interest. The lawsuit
challenges the actions of Amador County and its Board of Supervisors in
certifying the FSEIR and approving the amended CUP. A hearing was held on June
7, 1999 and the Court denied all claims by the Concerned Citizens Plaintiff. The
matter is on appeal, see Note K to the financial statements.
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 double
wide 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 bunkhouse 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. The case is
scheduled for a pre-trial conference on September 8, 2000 and if Defendants'
various motions are denied, the trial may commence on September 25, 2000. See
Note K to the financial statements.
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.
Defendants filed a motion for summary judgment in July 2000. See Note K to
financial statements.
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 49, 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.
28
<PAGE>
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, Mr. Lorimer
has not been involved in any Reg. S-K Item 401(f) listed proceeding.
DANIEL P. SVILAR, age 71, has been General Counsel for USE and Crested
for more than the past five years. He also has served as Secretary and a
director of Crested, and Assistant Secretary of USE. His positions of General
Counsel to, and as officers of the companies, are at the will of each board of
directors. There are no understandings between Mr. Svilar and any other person
pursuant to which he was named as officer or General Counsel. He has no family
relationships with any of the other executive officers or directors of USE or
Crested, except his nephew Nick Bebout is a USE director. During the past five
years, Mr. Svilar has not been involved in any Reg. S-K Item 401(f) proceeding.
MAX T. EVANS, age 75, 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.
29
<PAGE>
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 ended May 31, 2000
First quarter ended 8/31/99 $5.09 $3.25
Second quarter ended 11/30/99 4.50 3.19
Third quarter ended 2/29/00 3.88 3.13
Fourth quarter ended 5/31/00 3.63 2.06
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
(b) Holders
(1) At August 31, 2000, the closing bid price was $2.19 per share and there
were approximately 731 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, 2000, USE issued 6,020 shares to outside
directors; 15,357 shares of Common Stock to private investors for the exchange
of securities of Sutter Gold Mining Company; and 57,752 shares in an exchange of
YSFC common stock. No underwriter was involved in any of these transactions.
30
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following tables show certain selected historical financial data
for USE for the five years ended May 31, 2000. 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,
------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current assets $ 3,456,800 $ 12,718,900 $ 14,301,000 $ 4,400,900 $ 2,912,400
Current liabilities 6,617,900 5,355,600 6,062,100 1,393,900 2,031,200
Working capital (deficit) (3,161,100) 7,363,300 8,238,900 3,007,000 881,200
Total assets 30,876,100 33,391,000 45,019,100 30,387,100 34,793,300
Long-term obligations(1) 14,025,200 14,526,900 14,468,600 14,377,200 15,020,700
Shareholders' equity 4,683,800 10,180,300 17,453,500 12,723,600 14,617,000
<FN>
(1)Includes $8,906,800, $8,860,900, $8,778,800, $8,751,800 and $3,978,800 of
accrued reclamation costs on mining properties at May 31, 2000, 1999, 1998, 1997
and 1996, respectively. See Note K of Notes to Consolidated financial
statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
For Years Ended May 31,
-----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 7,773,800 $ 10,853,600 $ 11,558,500 $ 5,790,200 $ 9,632,200
Income (loss) before minority
interests, equity in
income (loss) of affiliates,
and income taxes (11,148,200) (16,057,800) 365,000 (3,706,000) (2,524,100)
Minority interest in loss
(income) of consolidated
subsidiaries 509,300 4,468,400 (772,500) 672,300 608,700
Equity in loss of affiliates (2,900) (59,100) (575,700) (690,800) (418,500)
Income taxes -- -- -- -- --
Income from discontinued
operations and disposal of
discontinued segment -- -- -- -- 2,604,600
Preferred stock dividends (20,800) -- -- -- --
-------------- -------------- ------------- ------------- ------------
Net (loss) income
to common shareholders $ (10,662,600) $ (11,648,500) $ (983,200) $ (3,724,500) $ 270,700
============== ============= ============ ============ ============
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
For Years Ended May 31,
--------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Per shares financial data
<S> <C> <C> <C> <C> <C>
Revenues $ 1.01 $ 1.52 $ 1.74 $ .85 $ 1.55
Income (loss) before minority
interests, equity in income
(loss) of affiliates and
income taxes $ (1.45) $ (2.25) $ 0.05 $ (.55) $ (.41)
Minority interest in loss (income)
of consolidated subsidiaries .06 .63 (.12) .10 .10
Equity in loss of affiliates -- (.01) (.08) (.10) (.07)
Income taxes -- -- -- -- --
Income from discontinued
operations and disposal
of discontinued segment -- -- -- -- .42
------------ ------------ ------------ ------------ ----------
Net income (loss)
per share, basic $ (1.39) $ (1.63) $ (.15) $ (.55) $ .04
=========== =========== =========== =========== ==========
Net income (loss)
per share diluted $ (1.33) $ (1.63) $ (.15) $ (.55) $ .04
=========== =========== =========== =========== ==========
Cash dividends per share $ -0- $ -0- $ -0- $ -0- $ -0-
=========== =========== =========== =========== ===========
</TABLE>
32
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is Management's Discussion and Analysis of significant
factors which have affected the Company's liquidity, capital resources and
results of operations during the periods included in the accompanying financial
statements. The discussion contains forward-looking statements that involve
risks and uncertainties. Due to uncertainties in the minerals business, the
Company's actual results may differ materially from the results discussed in any
such forward-looking statements.
OVERVIEW OF BUSINESS
The Company is in the business of acquiring, exploring, developing and
or selling mineral properties, including coalbed methane gas, uranium and gold.
As part of its mineral business, Company has been in the contract drilling and
construction business for third party coalbed methane companies. The Company
also owns commercial properties which are in the tourism and rental business.
The Company entered into a contract with Quantum Energy, L.L.C.
("Quantum") through its newly formed subsidiary Rocky Mountain Gas, Inc. (RMG),
to acquire a 50% working interest and 40% net revenue interest in approximately
185,000 acres of leases on properties having potential for coalbed methane
exploration and development in the Powder River Basin of southeastern Montana.
The Company also holds additional properties in Northeastern Wyoming that are
part of the Powder River Basin. These leases are outside the boundaries of the
agreement that controls the 185,000 acres in Montana and consist of 880 acres in
which the Company owns varying interests. In addition to the coalbed methane
properties held in the Powder River Basin, the Company holds a 100% working
interest and a net revenue interest of 81.5% to 83.5% in approximately 63,120
net mineral acres in the Ham's Fork Coal Fields in Southwestern Wyoming. It is
anticipated that the business operations of the Company will be largely directed
toward the development of its coalbed methane properties during fiscal 2001 and
well into the future.
As in all mineral development operations, there are risks involved in
the development of coalbed methane gas fields. Some of the known risks in the
coalbed methane development and production business are; government regulations,
delays in permitting, environmental restrictions, market price for methane gas,
availability and capacity of pipe lines. The Company cannot accurately predict
what if any of these risks will have on its business in the future. The Company
will continue to seek financing through either the sale of equity in RMG or the
Company's common stock or a joint venture with an industry partner to fund its
obligations on the maintenance and development of these properties.
The Company owns, and during fiscal 2000 purchased additional, drilling
and construction equipment that was used during fiscal 2000 on a contract basis
for non-related companies in coalbed methane development. This work consisted of
site preparation, drilling, casing, completion, dam construction, compressor and
gathering pipeline construction and site reclamation. During August of 2000, the
Company determined it would no longer perform such services on a contract basis
for third parties and concentrate its efforts on developing properties in which
it owns an interest. Part of the drilling and construction equipment will be
sold and a portion will be retained for work that the Company will do on the
properties that the Company owns an interest in.
The Company has interests in uranium properties in Central Wyoming and
Southern Utah. Both properties in Central Wyoming have been or are part of
partnership arrangements. In fiscal 1989 the Company entered into an agreement
to sell a 50% interest in its Sheep Mountain properties to Cycle Resources,
Inc., a wholly owned subsidiary of Nukem, Inc.("Nukem") This partnership, Sheep
Mountain Partners ("SMP"), and the assets contained in it have been in
litigation for the past nine years. During fiscal 1999, a partial settlement
agreement was reached wherein the Company received all the mineral properties
33
<PAGE>
and one uranium supply contract. Nukem has for a second time appealed the
decision to the 10th Circuit Court of Appeals. The appeal is pending.
In fiscal 1990 the Company entered into an agreement to sell a 50%
interest in its uranium properties to Kennecott. These properties were then
placed into the Green Mountain Mining Venture ("GMMV"). The GMMV also acquired
additional mining properties and a uranium mill. During fiscal 2000, Kennecott
filed a civil action against the Company in Wyoming State Court. The Company
responded by filing an answer denying the allegations of Kennecott and
counterclaimed certain damages against Kennecott.
Settlement discussions to resolve the issues surrounding the GMMV have
been successful in resolving the disputes. The Company and Kennecott have agreed
that the Company will sell all of its remaining interest in the GMMV to
Kennecott for cash compensation of $3.25 million, payable at the signing of the
letter of intent, $.25 million, $1.375 million five days after the court
approves the terms of the agreement and dismisses the case and $1.625 in January
2001. Kennecott assumed all reclamation liabilities of the mine and mill
properties. The Company has the responsibility of removing certain assets from
the mine properties including a GMIX plant which will likely be buried in the
Sweetwater Mill tailings cell. The clean up of the GMIX plant is covered by a
cash reclamation bond that management believes sufficient to cover cost of
reclamation. The company also received certain equipment and a 4% net profits
royalty on any uranium produced from the GMMV mine properties.
The Company's uranium property in Southern Utah consists of uranium
mining claims and a state of the art uranium mill. Due to current depressed
uranium prices, the Company has placed all of its uranium properties on care and
maintenance status. The Company is currently evaluating the prospects of the
uranium market and may determine to dispose of part or all of it's interests in
uranium through the sale of such interests or the reclamation of the properties.
The reclamation liabilities of clean up of all the Company's uranium properties
are covered by cash bonds, bonds secured by certain real estate assets of the
Company. The Company is evaluating the long term uranium market and may conclude
to reclaim these assets.
The Company's gold properties in the Mother Lode Mining District of
California are on a care and maintenance basis. Due to the lack of available
funding, which is as a result of the depressed gold price, plans to construct a
1,000 ton-per-day gold mill complex and further development of the underground
mine have been deferred. During Fiscal 1999, the Company recorded an impairment
on these properties which did not affect the ownership of the properties but
reflected only an economic realization evaluation of the properties at the then
market price of gold and the known proven reserves of the property. The Company
has evaluated the possibility of using the property as a tourism asset until the
price of gold recovers. Such evaluations may result in the tourism business
being sold, leased or discontinued.
The Company has commercial operations in Wyoming and Southern Utah. The
Wyoming commercial operations at Ticaboo Utah near Lake Powell, consist of
various real estate rental properties and the operation of an airport fixed base
operation. The Utah commercial operations include a motel, restaurant, lounge,
convenience store, boat storage, rental space for mobile homes and recreational
vehicles and the sale of home lots and finished homes.
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 2000, the Company had a working capital deficit of
$3,161,100 as compared to working capital of $7,363,300. Included in the working
capital deficit is a $4,000,000 deferred purchase option from GMMV. This is as a
result of a payment made to the Company from Kennecott. This payment is non
refundable and is carried as deferred revenue at May 31, 2000. Pursuant to the
settlement of the GMMV litigation this amount plus the cash purchase price will
be offset against the Company's investment in certain GMMV equipment and the
balance will be recorded as revenues.
34
<PAGE>
The primary reason for the decrease in working capital of $10,524,400
was primarily as a result of decreases in cash, $9,256,600 and assets held for
resale and other, $269,400 increased accounts payable of $454,200, current
portion of long term debt, $158,100, and draw down of the line of credit of
$650,000. These decreases in working capital were partially offset by an
increase in accounts receivable of $277,400.
Cash of $6,621,200 was consumed by operations. The non-cash items that
went into operations that resulted in a net loss from operations for the year of
$10,662,600 were depreciation of $699,600, provision for doubtful accounts of
$708,600, issuance of stock to the Company sponsored ESOP retirement plan for
employees of $371,400, non-cash compensation of $3,191,000 and a change in other
current assets of $283,400. The provision for doubtful accounts is a reserve
that was established on receivables from employee notes and accounts receivable
and the valuation of collateral on a loan made to the ESOP. In prior years the
Company made a loan to the ESOP in the amount of $927,000. The ESOP purchased
common shares of the Company with this loan which have been held as collateral
for the loan. Due to the market price at the year end of Fiscal 2000 for the
common stock of the Company, a reserve in the amount of $436,500 was taken on
this receivable. Due to the issuance of stock to employees, directors and others
of RMG stock at below market price, a non-cash compensation charge was taken to
earnings. These shares are restricted and are forefeitable until retirement,
total disability or death of the individuals who received them.
Cash was also consumed in investing activities in the amount of
$7,478,700. Major components of investing activities were the purchase of
coalbed methane properties in the amount of $4,727,200, the purchase of
equipment of $2,542,700, and the decrease in restricted investments of $200,600.
The coalbed methane gas properties were purchased by RMG in developing areas
having potential of coalbed methane gas. It is believed that these properties
will be developed into significant coalbed methane producing properties.
Additionally equipment was purchased to expand the Company's fleet of
construction, drilling and support equipment. This equipment was used throughout
fiscal 2000 in contract construction and drilling activities and a portion of it
will be used in future coalbed methane development work for the Company's
properties. Restricted investments increased as these cash deposits earn
interest until such time as they are used for reclamation associated with the
Company's uranium mill in southern Utah.
Financing activities provided $4,843,300 in cash during Fiscal 2000.
This cash came from the issuance of preferred stock of the Company, net
$1,840,000, proceeds from the sale of stock by RMG of $2,160,000, proceeds from
long term debt through the financing of equipment purchases of $1,392,400 and
the draw down of the Company's line of credit with its bank of $650,000.
The 200 shares of preferred stock, were issued at $10,000 per share,
are convertible at the holders option to either 666,667 shares of the common
stock of RMG or into common stock of the Company based on the market price at
the time of conversion. Such conversion rights exist for a two year period,
beginning April 11, 2000. The preferred shares bear interest at 71/2% per annum
which is payable quarterly.
During Fiscal 2000, RMG received a total of $2,160,000 for the sale of
719,666 shares of its common stock to third parties. 333,333 of these shares of
RMG stock are subject to the payment of 10% per annum interest, payable annually
on the anniversary of the initial investment. This interest payment is payable
in the common stock of the Company at the market price of the common stock of
the Company on the date the interest is due. This interest payment is due and
payable until such time as an initial public offering for RMG becomes effective
with the Securities and Exchange Commission. RMG also sold an additional 486,667
shares of common stock to the Company and its affiliates for $1,460,000.
Long term debt financing and the draw down of the line of credit were
used to purchase additional drilling and construction equipment and fund
on-going operations. Proceeds from long term debt financing were $1,392,400
while a total of $1,246,300 in cash was applied to long term debt. At May 31,
2000 the Company had total long term debt, including the current portion, of
$1,184,200 and owed $650,000 on its
35
<PAGE>
line of credit with a banking institution. The total limit on the line of credit
is $1,000,000. All long term debt and the line of credit are secured by assets
which have sufficient value, management believes, to retire the debt.
The Company has generated significant net losses during fiscal 1999 and 2000
resulting in an accumulated deficit of approximately $30,071,200 at May 31,
2000. The Company also has a working capital deficit of approximately $3,161,100
at May 31, 2000 that includes a $4,000,000 deferred purchase option. If the
deferred purchase option is excluded, the company has positive working capital
of $838,900. At year end, the Company did not have the working capital necessary
to continue the level of capital development completed during fiscal 2000 or to
fund a similar level of operations over the next year. In order to reduce its
overhead costs, the Company has reduced its staff. The company also has certain
assets that are unencumbered that could be sold to generate cash to ensure its
survival during the next year. However, there can be no assurances that Company
assets could be liquidated in excess of their carrying values.
CAPITAL RESOURCES
The primary source of the Company's capital resources are the cash on
hand; collection of receivables from contract construction and drilling
operations at May 31, 2000, $884,400; projected equity financing from RMG; sale
of mine, construction and drilling equipment; sale of partial ownership interest
in mineral properties; proceeds under the line of credit; the GMMV settlement
proceeds; and possible settlement discussions with Phelps Dodge regarding a
dispute on a molybdenum property and final determination of the SMP
arbitration/litigation. The Company also will continue to receive revenues from
its commercial operations in southern Utah along with the rental and fixed base
airport operations in Wyoming. Additionally, the Company will continue to offer
for sale various assets such as lots and homes at the Company's southern Utah
commercial operations along with real estate holdings in Wyoming, Colorado and
Utah.
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. At May 31, 2000 the line of credit had been drawn down
by $650,000 and by the date of this Report $850,000. The line of credit is being
used for short term working capital needs associated with operations.
The Company believes that cash resources on hand at May 31, 2000, cash
received from Kennecott as part of the GMMV settlement and the collection of
outstanding receivables will be sufficient to sustain operations during fiscal
2001. The cash resources plus cash from Kennecott for the GMMV settlement will
not be sufficient, however, to provide funding for the Company's maintenance and
development of its coalbed methane gas business. The Company and RMG are seeking
additional equity or an industry partner financing arrangement to develop its
coalbed methane leases.
CAPITAL REQUIREMENTS
The primary requirements for the Company's working capital during
Fiscal 2000 are expected to be general and administrative costs, the cost of
maintaining the SMP and southern Utah uranium properties and the SGMC gold
properties and the costs associated with the expansion and development of the
coalbed methane gas properties.
36
<PAGE>
COALBED METHANE GAS
To acquire a 50% working interest in 185,000 acres of leaseholds, RMG
paid $3,200,000 to Quantum Energy, ("Quantum") in January 2000 and an additional
$1,000,000 in May 2000. RMG is committed to pay Quantum an additional $1,300,000
on or before December 31, 2000. If RMG does not make this final payment it must
assign 12% of its undivided 50% WI in the properties back to Quantum. Quantum,
at its sole option, may elect to have RMG drill and complete additional wells
for the equivalent cost of $1,300,000. If Quantum exercises this option, RMG
would own a 50% WI (40% NRI) in the wells drilled with those funds, but only
after Quantum has received $1,300,000 in net revenues (payback) from those
wells. If these payments are not made, the 50% working interest could be
reduced.
Under the terms of the Quantum agreement, the Company through RMG has a
$2,500,000 work commitment to drill and complete 25 coalbed methane wells. If
RMG does not complete the work commitment and Quantum spends part or all of that
amount of funds to drill and complete wells on the Quantum acreage, then RMG
will have the right to buy back its 50% working interest by satisfying certain
penalties. RMG also has the obligation to fund 50% of the delay rentals on the
Quantum properties which amounts to $515,000 ($257,500) for RMG's share during
fiscal 2001.
To fund all of the RMG commitments, financing will need to be obtained
from equity funding or an industry partner through the sale of a portion or all
of RMG's ownership in the Quantum properties.
MINERAL HOLDING COSTS
SMP URANIUM PROPERTIES
The care and maintenance costs associated with the Sheep Mountain
uranium mineral properties are the responsibility of the Company. The holding
costs during Fiscal 2000 were approximately $48,300 per month. The Company has
initiated alternative methods of managing the properties in an effort to reduce
these holding costs during Fiscal 2001. The Company has the obligation to
deliver uranium to a utility under one of the SMP supply contracts. The Company
believes that it can either continue to deliver these pounds at a small profit
margin or sell the entire contract to a third party supplier.
GMMV URANIUM PROPERTIES
The Company and Kennecott filed various court actions against each
other during fiscal 2000. On September 11, 2000, the Company and Kennecott
entered into a settlement agreement which resolved these disputes. The Company
sold its remaining interest in the GMMV properties to Kennecott for a total of
$3.25 million. The Company received $.25 million upon signing the letter of
agreement to settle all disputes, it will receive $1.375 five days after the
court approves the settlement agreement and dismisses all claims and $1.625 in
January 2001. The Company also received certain mining equipment and a 4% net
profits royalty. Kennecott assumed all reclamation liabilities of the GMMV mine
and mill properties. The Company is responsible to remove certain assets
including the GMIX plant from the properties.
PLATEAU RESOURCES URANIUM PROPERTIES
Plateau owns and operates the Ticaboo townsite, motel, convenience
store, boat storage, restaurant and lounge. Additionally, Plateau owns and
maintains the Tony M uranium mine and Shootaring Canyon Uranium Mill. The
Company is pursuing alternative uses for these properties including alternative
feed or waste disposal of low level nuclear waste. The Company is seeking joint
venture partners and equity financing to enter into the alternative feed and
waste disposal business as the expansion into this business will require
additional capital. It is not known what the outcome of these discussions will
be. In the management of the
37
<PAGE>
commercial operations of the Plateau properties, the Company has determined it
will shut many of the operations down during the winter months which should
improve the annual profits of the commercial operations.
SUTTER GOLD MINING COMPANY GOLD PROPERTIES
Due to the depressed market price of gold, the development of the gold
properties has been deferred into the future. SGMC has explored the possibility
of using the properties as a tourism business until such time as the price for
gold recovers. The results of limited operations in the tourism business are
being evaluated. The results of these evaluations may result in the tourism
business being expanded or terminated. The core assets of the SGMC properties
will continue to be maintained at as low a cost as possible.
DEBT PAYMENTS
Debt to non-related parties at May 31, 2000 was $1,184,200 as compared
to $912,700 at May 31, 1999. The increase in debt to non-related parties
consists primally of debt due on the financing of equipment and annual insurance
premiums. The balance of the debt to non-related parties is for the purchase of
land and buildings by SGMC and various pieces of heavy equipment and bears
different interest rates with various maturity dates. All payments on the debt
are current. If construction or drilling operations are permanently reduced or
discontinued, the equipment will be sold and the debt retired.
At May 31, 2000, the Company had borrowed $650,000 of its line of
credit and as of the date of this report $850,000. This debt is secured by the
pledge of equipment and real estate assets of the Company. This debt will be
retired through profits from operations, the settlement with Kennecott and
possible settlement of the Nukem dispute or the sale of an interest in assets.
FEDERAL INCOME TAX ISSUES
The tax years through May 31, 1994 are closed after audit by the IRS.
The Company has attended appeals hearings with the IRS in Denver Colorado to
discuss resolving issues raised for fiscal 1995 and 1996.
The issues have been resolved with the IRS. A final settlement agreement has
not yet been approved but it is not believed that the settlement will have a
material affect on the Company.
RECLAMATION COSTS
It is not anticipated that any of the Company's working capital will be
used in fiscal 2001 for the reclamation of any of its mineral property
interests. The reclamation costs are long term and are either bonded through the
use of cash bonds or the pledge of assets.
As a result of the settlement agreement entered into on September 11,
2000, Kennecott assumed all reclamation liabilities of the GMMV mine and mill
properties with the exception of the GMIX plant and the removal of certain
equipment from the GMMV properties. The reclamation of the GMIX plant is bonded
with a cash bond which management anticipates will fully satisfy the obligation
of reclamation.
The reclamation liability on the Plateau uranium properties is
$7,382,100 which is reflected on the Balance Sheet as a reclamation liability.
This liability is fully covered by cash investments which are recorded as long
term restricted assets.
The future reclamation costs on the Sheep Mountain properties are
covered by a reclamation bond which is secured by a pledge of certain of the
Company's real estate assets. The reclamation bond amount
38
<PAGE>
is reviewed annually by the state regulatory agencies. The Company's reclamation
liability on the Sheep Mountain properties is currently $1,496,800.
The reclamation of SGMC gold properties is approximately $27,900. This
reclamation obligation is bonded with a cash bond.
FISCAL 2000 COMPARED TO FISCAL 1999
RESULTS OF OPERATIONS
REVENUES:
--------
During fiscal 2000, the Company recognized revenues in three segments;
minerals in the form of advance royalties on its molybdenum property, $132,600,
contract drilling and construction work in the coalbed methane industry,
$3,584,900, commercial operations in southern Utah and other rental properties
in Wyoming, $2,786,800. The Company also recognized other revenues from oil
sales of $159,200 from its interest in the Lustre Field on the Fort Peck
Reservation, interest revenues of $813,600 on cash equivalents invested in
interest bearing accounts and management fees of $277,300 for services provided
to the GMMV.
Total revenues during fiscal 2000 were $7,773,800, a decrease of
$3,079,800 from revenues of $10,853,600 in fiscal 1999. This decrease was as a
result of decreased revenues in Mineral sales of $105,600, commercial operations
of $191,000, revenues from the partial settlement of the SMP
arbitration/litigation of $6,077,300, management fees and other revenues of
$307,100, interest revenues of $34,000 and the gain on disposal of assets of
$25,700. These decreases in revenues were offset by increased revenues from
contract drilling/construction operations of $3,584,900 and oil sales of
$76,000.
The decrease in mineral sales is as a result of the Company recognizing
revenues of $87,600 from the sale of uranium under a SMP contract during fiscal
1999. No revenues were recognized from sales of uranium during fiscal 2000. This
decrease in uranium sales plus the a decrease in the market price for
molybdenum, which reduced the advance royalty from Cyprus Amax during fiscal
2000 by $18,000, accounted for the reduction in mineral sales revenues.
Commercial operations decreased by $191,000 as a result of reduced
equipment rental revenues received by the Company for the rental of equipment to
the GMMV during Fiscal 2000 as compared to fiscal 1999. Commercial operations at
the Ticaboo operations in southern Utah increased by $405,200 during fiscal
2000. The reduced activity at GMMV during Fiscal 2000 also was the main
contributor to the reduced management fee revenue when compared with fiscal
1999.
Revenues in contract drilling/construction operations were generated as
a result of the Company entering into the drilling and earth construction
contract work in the coalbed methane gas business during fiscal 2000. No
revenues from contract drilling/construction work were recorded in fiscal 1999.
The profit margin in the contract drilling and construction business is a
function of the number of available contractors and is often very small. The
Company has suspended operations in this area. It is not known if the Company
will resume this type of work on a contract basis. The Company will maintain a
certain amount of equipment in order to perform this type of work in for future
for its own account.
Increased oil revenues were as a result of higher market prices for oil
which allowed the Company to produce from more of its wells in the Lustre Field
during fiscal 2000.
39
<PAGE>
COSTS AND EXPENSES
Costs and expenses were reduced in fiscal 2000 by $7,989,400 to
$18,922,000 from $26,911,400 during fiscal 1999. This reduction was primary as a
decrease in the impairment of mineral properties of $13,224,400. No impairment
of mineral properties was taken during fiscal 2000. During fiscal 1999 the
Company determined that an impairment should be taken on the SGMC assets of
$10,718,300 and the Yellow Stone Fuels Corp.("YSFC") assets of $2,506,100. The
impairment of the SGMC and YSFC assets related to the recover ability of the
Company's investment in the mineral properties and equipment based on the then
market prices for gold and uranium. Other decreases in costs and expenses were a
$51,600 reduction in commercial operations as a result of cost cutting efforts
and $9,100 in oil production costs due to less repair expenditures being made on
the wells during fiscal 2000.
Increases in costs and expenses during fiscal 2000 over fiscal 1999 are
$341,400 in mineral operations, $4,164,400 in contract drilling/construction
operations, provision for doubtful accounts of $343,600 and interest expense of
$38,300.
Costs and expenses in mineral operations during fiscal 2000 increased
as a result of increased activities for the Company's own account where mineral
operations in previous years were associated primary with joint ventures that
either reimbursed a portion or all of the costs. Contract drilling and
construction costs recorded during fiscal 2000 have no comparative costs and
expenses during fiscal 1999. These costs include all labor, equipment operating
and repair expenses and other costs associated with contract drilling and
construction. Prior to fiscal 2000 there were no contract drilling and
construction operations.
General and Administrative costs and expenses increased by $408,000
during fiscal 2000. Included in this increase is non-cash compensation of
$3,139,100 which was as a result of the issuance of common shares of RMG stock
below market. The increase in General and Administrative costs and expenses was
offset by reductions of General and Administrative costs and expenses at SGMC
and other Company operations resulting in a net decrease in General and
Administrative costs and expenses of $2,731,100.
The increase in provision for doubtful accounts of $343,600 during
fiscal 2000 was primary as a result of the valuation to market of the collateral
held for the loan to the Company's ESOP retirement plan. Interest expense
increased by $38,300 during fiscal 2000 as a result of additional equipment
financing activity.
Operations resulted in a loss of $10,662,600 or $1.33 per share fully
diluted as compared to a loss of $11,648,500 or $1.63 per share fully diluted
during fiscal 1999.
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.
40
<PAGE>
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 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.
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 maintaining 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 dependent on the price that a
producer can receive for its minerals. 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 believes
it has sufficient capital resources to maintain its mineral properties on a
41
<PAGE>
stand by basis through fiscal 2001. Development activities of the mineral
properties and expansion of commercial operations are dependant on the Company
obtaining equity financing or commercial loans. It may also be necessary to
generate cash through the sale of equipment or other assets.
At May 31, 2000 the Company was committed to be in the coalbed methane
business well into the future. Uranium prices and market projections are being
evaluated. Decisions to liquidate part or all of the Company's uranium holdings
are being considered. The Company is also evaluating its commitment to the gold
business and at what time the price for gold may recover.
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 Phelps Dodge it has other
producing mines.
ITEM 8. FINANCIAL STATEMENTS
Financial statements for the Company follow immediately. Because of
litigation between USE, Crested and USECC, and Kennecott Uranium Company,
regarding disputes about the Green Mountain Mining Venture ("GMMV"), financial
statements for the GMMV for the fiscal year ended December 31, 1999 have not
been provided to USE and therefore are not filed with this report.
42
<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, 2000 and 1999, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended May 31, 2000. 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 auditing standards generally accepted
in the United States. 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, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
2000, in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
Denver, Colorado,
September 11, 2000
43
<PAGE>
<TABLE>
<CAPTION>
Page 1 of 2
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
May 31,
-------------------------------
2000 1999
---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 916,400 $ 10,173,000
Accounts receivable:
Trade, net of allowance of $27,800
and $30,900, respectively 1,055,000 223,100
Affiliates 508,900 1,063,400
Assets held for resale and other 846,800 1,116,200
Inventory 129,700 143,200
------------ ------------
Total current assets 3,456,800 12,718,900
INVESTMENTS AND ADVANCES:
Affiliates 9,600 24,600
Restricted investments 9,361,000 9,160,400
------------ ------------
Total investments and advances 9,370,600 9,185,000
PROPERTIES AND EQUIPMENT:
Land 1,499,100 1,506,000
Buildings and improvements 7,825,000 6,411,400
Machinery and equipment 10,386,200 9,171,300
Developed oil and gas properties, full cost method 1,773,600 1,773,600
Undeveloped coalbed methane properties 4,727,200 --
Other mineral properties and mine development costs 1,494,700 1,472,500
------------ ------------
Total property and equipment 27,705,800 20,334,800
Less-Accumulated depreciation,
depletion and amortization (10,948,900) (10,171,300)
------------ ------------
Net property and equipment 16,756,900 10,163,500
OTHER ASSETS:
Accounts and notes receivable:
Real estate sales 58,600 20,400
Employees 295,200 366,600
Deposits and other 938,000 936,600
------------ ------------
Total other assets 1,291,800 1,323,600
------------ ------------
Total assets $ 30,876,100 $ 33,391,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an part of these statements.
44
<PAGE>
<TABLE>
<CAPTION>
Page 2 of 2
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
May 31,
------------------------------
2000 1999
---- ----
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable and accrued expenses $ 1,683,800 $ 1,229,600
Deferred GMMV purchase option 4,000,000 4,000,000
Current portion of long-term debt 284,100 126,000
Line of credit 650,000 --
------------ ------------
Total current liabilities 6,617,900 5,355,600
LONG-TERM DEBT 900,100 786,700
RECLAMATION LIABILITY 8,906,800 8,860,900
OTHER ACCRUED LIABILITIES 3,073,500 3,734,500
DEFERRED TAX LIABILITY 1,144,800 1,144,800
MINORITY INTERESTS 1,124,600 856,500
COMMITMENTS AND CONTINGENCIES
FORFEITABLE COMMON STOCK,
$.01 par value; 396,608 and 339,208
shares issued, forfeitable until earned 2,584,600 2,471,700
PREFERRED STOCK,
$.01 par value; 1,000 shares authorized,
200 shares issued and outstanding 1,840,000 --
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 20,000,000 shares
authorized; 8,763,155 and 8,550,624 shares issued,
respectively 87,700 85,600
Additional paid-in capital 37,797,700 33,014,900
Accumulated deficit (30,071,200) (19,408,600)
Treasury stock at cost, 944,725 and 930,532
shares respectively (2,639,900) (2,584,600)
Unallocated ESOP contribution (490,500) (927,000)
------------ ------------
Total shareholders' equity 4,683,800 10,180,300
------------ ------------
Total liabilities and shareholders' equity $ 30,876,100 $ 33,391,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an part of these statements.
45
<PAGE>
<TABLE>
<CAPTION>
Page 1 of 2
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended May 31,
------------------------------------------------
2000 1999 1998
---- ---- ----
REVENUES:
<S> <C> <C> <C>
Mineral sales $ 132,600 $ 238,200 $ 1,069,700
Contract drilling/construction 3,584,900 -- --
Commercial operations 2,786,800 2,977,800 3,523,500
Oil sales 159,200 83,200 170,100
Management fees and other 277,300 584,400 1,369,300
Interest 813,600 847,600 836,100
SMP settlements, net -- 6,077,300 4,590,000
Gain (loss) on sales of assets 19,400 45,100 (200)
------------ ------------ ------------
Total revenues 7,773,800 10,853,600 11,558,500
COSTS AND EXPENSES:
Mineral operations 2,651,200 2,309,800 1,664,800
Contract drilling/construction operations 4,179,200 14,800 36,400
Commercial operations 3,387,300 3,438,900 3,055,100
Oil production 55,500 64,600 68,000
General and administrative 7,857,400 7,449,400 4,793,200
Provision for doubtful accounts 708,600 365,000 --
Impairment of mineral assets -- 13,224,400 1,500,000
Interest 82,800 44,500 76,000
------------ ------------ ------------
Total cost and expenses 18,922,000 26,911,400 11,193,500
------------ ------------ ------------
(LOSS) INCOME BEFORE MINORITY INTEREST
AND EQUITY IN LOSS OF AFFILIATES (11,148,200) (16,057,800) 365,000
MINORITY INTEREST IN LOSS (INCOME)
OF CONSOLIDATED SUBSIDIARIES 509,300 4,468,400 (772,500)
EQUITY IN LOSS OF AFFILIATES (2,900) (59,100) (575,700)
------------ ------------ ------------
</TABLE>
(Continued)
The accompanying notes to consolidated financial statements
are an part of these statements.
46
<PAGE>
<TABLE>
<CAPTION>
Page 2 of 2
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
Year Ended May 31,
-------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
LOSS BEFORE INCOME TAXES $(10,641,800) $(11,648,500) $ (983,200)
PROVISION FOR INCOME TAXES -- -- --
------------ ------------ ------------
NET LOSS $(10,641,800) $(11,648,500) $ (983,200)
PREFERRED STOCK DIVIDENDS (20,800) -- --
------------ ------------ ------------
NET LOSS TO COMMON SHAREHOLDERS (10,662,600) (11,648,500) (983,200)
============ ============ ============
NET LOSS PER SHARE,
TO COMMON SHAREHOLDERS
BASIC $ (1.39) $ (1.63) $ (.15)
============ ============ ============
NET LOSS PER SHARE, TO
COMMON SHAREHOLDERS
DILUTED $ (1.33) $ (1.63) $ (.15)
============ ============ ============
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 7,673,475 7,137,114 6,657,549
============ ============ ============
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 8,008,895 7,137,114 6,657,549
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
47
<PAGE>
<TABLE>
<CAPTION>
Page 1 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Treasury Stock Unallocated Total
------------------ Paid-In Accumulated --------------------- 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
========== ======== ============ ============ ======== ============ ========== ============
</TABLE>
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.
48
<PAGE>
<TABLE>
<CAPTION>
Page 2 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(CONTINUED)
Common Stock Additional Treasury Stock Unallocated Total
------------------- Paid-In Accumulated ---------------------- 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
========= ======== ============ ============ ======= ============ ========= ============
</TABLE>
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.
49
<PAGE>
<TABLE>
<CAPTION>
Page 3 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(CONTINUED)
Common Stock Treasury Stock Unallocated Total
------------------- Paid-In Accumulated ---------------------- ESOP Shareholders'
Shares Amount Capital Deficit Shares Amount Contribution Equity
------ ------ --------- ----------- ------ ------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Funding of ESOP 123,802 1,200 370,200 -- -- -- -- 371,400
Issuance of common stock
to outside directors 6,020 100 21,000 -- -- -- -- 21,100
Issuance of common stock
for purchase of
subsidiary stock 73,109 700 259,900 -- -- -- -- 260,600
Forfeitable shares earned 9,600 100 88,000 -- -- -- -- 88,100
Treasury stock from
consolidation of
subsidiaries Ruby Mining Co.
and Northwest Gold, Inc. -- -- -- -- 14,193 (55,300) -- (55,300)
Unrealized gain on sale of
subsidiary stock -- -- 1,053,700 -- -- -- -- 1,053,700
Non-cash compensation
paid by subsidiary -- -- 2,990,000 -- -- -- -- 2,990,000
Writedown of unallocated
ESOP contribution -- -- -- -- -- -- 436,500 436,500
Net Loss -- -- -- (10,662,600) -- -- -- (10,662,600)
--------- -------- ------------ ------------ ------- ------------ ---------- ------------
Balance May 31, 2000 8,763,155 $ 87,700 $ 37,797,700 $(30,071,200) 944,725 $ (2,639,900) $ (490,500) $ 4,683,800
========= ======== ============ ============ ======= ============ ========== ============
</TABLE>
Total Shareholders' Equity at May 31, 2000 does not include 396,608 shares
currently issued but forfeitable if certain conditions are not met by the
recipients. "Basic and Diluted Weighted Average Shares Outstanding" also
includes the 827,108 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.
50
<PAGE>
<TABLE>
<CAPTION>
Page 1 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended May 31,
--------------------------------------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $(10,662,600) $(11,648,500) $ (983,200)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest in loss of
consolidated subsidiaries (509,300) (4,468,400) 772,500
Depreciation 699,500 726,400 657,600
Impairment of assets held for sale -- -- 100,000
Impairment of mineral interests -- 13,224,400 1,500,000
Equity in loss from affiliates 2,900 59,100 575,700
SMP settlement -- 5,026,000 (4,590,000)
Gain on sale of assets (19,400) (45,100) 200
Provision for doubtful accounts 708,600 465,000 --
Common stock issued to fund ESOP 371,400 358,400 324,600
Non-cash compensation 3,191,000 267,900 82,700
Common stock and warrants
issued for services 21,100 825,700 196,000
Other -- (168,800) 287,800
Net changes in assets and liabilities:
Accounts and notes receivable (536,500) 946,500 899,200
Other assets 283,400 (44,900) (226,900)
Accounts payable and accrued expenses (217,200) (1,318,800) (176,200)
Reclamation and other 45,900 82,100 (938,200)
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (6,621,200) 4,287,000 (1,518,200)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of coalbed methane gas properties (4,727,200) -- --
Development of mining properties (22,200) (18,100) (1,125,000)
Proceeds from sale of property and equipment 26,300 375,300 4,000
Increase in restricted investments (200,600) (271,300) --
Purchase of property and equipment (2,542,500) (1,057,900) (1,947,200)
Investments in affiliates (12,500) 54,200 (102,300)
Deferred GMMV purchase option -- -- 4,000,000
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (7,478,700) (917,800) 829,500
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
51
<PAGE>
<TABLE>
<CAPTION>
Page 2 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Year Ended May 31,
-------------------------------------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Proceeds from issuance of common stock $ -- $ -- $ 1,800,500
Proceeds from issuance of preferred stock 1,840,000 -- --
Proceeds from sale of stock by subsidiary 2,160,000 -- --
Proceeds from long-term debt 1,392,400 249,000 307,700
Net proceeds from lines of credit 650,000 -- --
Purchase of treasury stock -- (123,800) --
Repayments of long-term debt (1,246,300) (395,200) (309,900)
Cash acquired in purchase of subsidiary 47,200 1,423,300 3,124,000
------------ ------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 4,843,300 1,153,300 4,922,300
------------ ------------ ------------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (9,256,600) 4,522,500 4,233,600
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 10,173,000 5,650,500 1,416,900
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 916,400 $ 10,173,000 $ 5,650,500
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
52
<PAGE>
<TABLE>
Page 3 of 3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Year Ended May 31,
------------------------------------------------
2000 1999 1998
---- ---- ----
SUPPLEMENTAL DISCLOSURE
<S> <C> <C> <C>
Income tax paid $ -- $ -- $ (983,200)
============ ============= ===========
Interest paid $ 35,800 $ 44,500 $ --
============ ============= ===========
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Satisfaction of receivable - affiliate
with stock in affiliate $ 196,700 $ 275,000 $ --
============ ============= ===========
Acquisition of land through issuance of debt $ -- $ 555,000 $ --
============ ============= ===========
Issuance of stock for retired employee $ 88,100 $ -- $ --
============ ============= ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
53
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
A. BUSINESS ORGANIZATION AND OPERATIONS:
U.S. Energy Corp. and subsidiaries (the "Company" or "USE") was
incorporated in the State of Wyoming on January 26, 1966. The Company engages in
the acquisition, exploration, holding, sale and/or development of mineral and
coalbed methane gas properties, the production of petroleum properties and
marketing of minerals and methane gas. Principal mineral interests are in
uranium, gold, molybdenum and coalbed methane. None of the Company's mineral
properties are currently in production. The Company also holds various real and
personal properties used in commercial activities. The Company also performs
contract drilling and construction work on third party properties. Most of these
activities are conducted through the joint venture discussed below and in Note
D.
The Company engages in the maintenance of two uranium properties, one a
joint venture with Kennecott Uranium Company ("Kennecott") known as the Green
Mountain Mining Venture ("GMMV"), and the second known as Sheep Mountain
Partners ("SMP"). Both of these ventures have been involved in significant
litigation (see Note K). All issues and disputes in the SMP litigation have been
resolved with the exception of certain market rights and the profits therefrom
on certain CIS related uranium sales contracts. The resolution of the other
issues resulted in the payment of cash to the Company and the receipt of the SMP
mineral properties and one uranium delivery contract. The remaining outstanding
issue in the SMP litigation is on appeal before the U.S. 10th Circuit Court of
Appeals. The litigation with Kennecott has been settled. Sutter Gold Mining
Company ("SGMC"), a Wyoming corporation owned 66.3% by the Company at May 31,
2000, manages the Company's interest in gold properties. 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. Rocky Mountain Gas, Inc. ("RMG") was formed in
fiscal 2000 to consolidate all methane gas operations of the Company. The
Company owns and controls 84% of RMG as of May 31, 2000.
The Company has generated significant net losses during fiscal 1999 and
2000 resulting in an accumulated deficit of approximately $30,071,200 at May 31,
2000. The Company also has a working capital deficit of approximately $3,161,100
at May 31, 2000 that includes a $4,000,000 deferred purchase option. If the
deferred purchase option is excluded, the company has positive working capital
of $838,900. The Company's cash balance has decreased from $10,173,000 at the
prior year end to $916,400 at May 31, 2000. At year end, the Company did not
have the working capital necessary to continue the level of capital development
completed during fiscal 2000 or to fund a similar level of operations over the
next year. In order to reduce its overhead costs, the Company has reduced its
staff. The Company also has certain assets that are unencumbered that could be
sold to generate cash to ensure its survival during the next year. However,
there can be no assurances that Company assets could be liquidated in excess of
their carrying values. In addition, the Company continues to believe that it
will ultimately receive more cash from the final settlement of the SMP
litigation. Subsequent to year end, the Company settled a dispute with its GMMV
partner that will result in the receipt of cash. (See Note M). Taken together,
the Company believes it will be able to meet its obligations during the upcoming
year.
54
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(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%), Four Nines Gold, Inc. ("FNG")
(50.9%), SGMC (66.3%), Crested Corp. ("Crested") (52%), Yellowstone Fuels Corp.
("YSFC") (35.9%) Rocky Mountain Gas ("RMG") (82%), Ruby Mining Company ("Ruby")
(91%), Northwest Gold, Inc. ("NWG") (96%) and the USECC Joint Venture ("USECC"),
a consolidated joint venture which is equally owned by U.S. Energy Corp. and
Crested, through which the bulk of their operations are conducted.
With the exception of YSFC, investments in joint ventures and all 20%
to 50% owned companies are accounted for using the equity method (see Note E).
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. As a result of
the common directors and control of YSFC by USE and its employees, YSFC was
consolidated as of March 1, 1999. 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). 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 restricted cash equivalents.
RESTRICTED INVESTMENTS
Based on the provisions of Statement of Financial Accounting Standards
No. 115 ("SFAS 115"), the Company accounts for its restricted 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 and automobile fuel,
associated aircraft parts, mining supplies, gold ore stockpiles and retail
inventory for commercial operations. Retail inventories are stated using the
average cost method. Other inventory is stated at the lower of cost or market.
PROPERTIES AND EQUIPMENT
Land, buildings, improvements, machinery and equipment are carried at
cost. Depreciation of buildings, improvements, machinery and equipment is
provided principally by the straight-line method over estimated useful lives
ranging from three to forty-five years.
55
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
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 has 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
is less than the carrying amount of the related asset, an asset impairment is
considered to exist. The related impairment loss is measured by comparing
estimated future cash flows on a discounted basis to the carrying amount of the
asset. Changes in significant assumptions underlying future cash flow estimates
may have a material effect on the Company's financial position and results of
operations. An uneconomic commodity market price, 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. As of May 31, 2000, management
believes no further impairment is necessary. See Note F for further discussion.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, receivables, other current
assets, accounts payable and accrued expenses approximates fair value because of
the short-term nature of those instruments. The recorded amounts for short-term
and long-term debt, approximate fair value due to the variable nature of the
interest rates on the debt.
REVENUE RECOGNITION
Advance royalties 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-
56
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
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 under the provisions of Statement
of Financial Accounting Standards No. 109 ("SFAS 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) INCOME PER SHARE
The Company reports net (loss) income per share pursuant to Statement
of Financial Accounting Standards No. 128 ("SFAS 128"). SFAS 128 specifies the
computation, presentation and disclosure requirements for earnings per share.
Basic earnings per share is computed based on the weighted average number of
common shares outstanding. Diluted earnings per share is computed based on the
weighted average number of common shares outstanding adjusted for the
incremental shares attributed to outstanding options to purchase common stock,
if dilutive.
COMPREHENSIVE INCOME
There are no components of comprehensive income which have been
excluded from net income and, therefore, no separate statement of comprehensive
income has been presented.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes fair value accounting and reporting standards for
derivative instruments and hedging activities. The Company will adopt SFAS No.
133 in the first quarter of fiscal 2001. The Company is currently assessing the
effect of adoption, if any, on its financial position, results of operations and
cash flows.
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.
57
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 1998 financial
statements to conform with the 2000 presentation.
C. RELATED-PARTY TRANSACTIONS:
The Company provides management and administrative services for
affiliates under the terms of various management agreements. Revenues from
services by the Company to unconsolidated affiliates were $39,900, $584,400 and
$849,000 in fiscal 2000, 1999 and 1998, respectively. The Company has $408,300
of receivables from unconsolidated subsidiaries and advances to employees
totaling $100,600 as of May 31, 2000.
As of May 31, 2000, the Company had notes receivable due from certain
directors and employees of the Company totaling $462,000 which bear interest at
10% per annum and are due December 31, 2001. This indebtedness is secured by
166,500 shares of the Company's common stock.
D. USECC JOINT VENTURE:
The Company 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 operations; conducts oil and gas operations; and
transacts all operating and payroll expenses through a joint venture with
Crested, the USECC joint venture.
E. INVESTMENTS IN AND ADVANCES TO AFFILIATES:
The Company's restricted investments secure various decommissioning
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, 2000 and 1999, 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>
Carrying Value at May 31,
Consolidated -------------------------
Ownership 2000 1999
------------- ---- ----
<S> <C> <C> <C>
GMMV 50.0% $ -- $ --
Other -- 9,600 --
Ruby Mining Company 26.7%* -- 24,600
--------- ---------
$ 9,600 $ 24,600
========= =========
<FN>
*Consolidated beginning December 1, 1999
</FN>
</TABLE>
58
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
Equity loss from investments accounted for by the equity method are as
follows:
<TABLE>
<CAPTION>
Year Ended May 31,
------------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
GMMV $ -- $ -- $ --
Ruby Mining Company** (2,900)** (3,100) (500)
YSFC*** -- (56,000)*** (140,300)
---------- ----------- ------------
$ (2,900) $ (59,100) $ (140,800)
========== =========== ============
<FN>
** Consolidated beginning December 1, 1999. This represents the
equity loss through November 30, 1999.
*** Consolidated beginning March 1, 1999. This represents the equity
loss through February 28, 1999.
</FN>
</TABLE>
Condensed combined balance sheets and statements of operations of the
Company's equity investees for fiscal 1999 include the GMMV and Ruby Mining
Company. For fiscal 2000, Ruby Mining Company has been consolidated and no
balance sheet for the GMMV has been presented due to the litigation with
Kennecott as discussed in Notes, F, K and M. Because of this dispute, the
Company did not receive any financial or operating results of the GMMV from
Kennecott, the operator of the GMMV, for fiscal 2000. Nevertheless, the
Company's total investment in the GMMV is zero, except for the salvage value of
certain equipment totaling $727,000 held by the GMMV which is included in
property and equipment in the accompanying balance sheets. As discussed in Note
M, subsequent to year end, the Company has settled its dispute with Kennecott
and has been released from any and all GMMV obligations.
CONDENSED COMBINED BALANCE SHEETS - EQUITY INVESTEES
1999
----
Current assets $ 37,100
Non-current assets 802,400
--------------
$ 839,500
==============
Current liabilities $ 718,500
Reclamation and other liabilities 23,620,000
Assets over (under) liabilities (23,499,000)
--------------
$ 839,500
==============
See Note F for a discussion of the reduction in the carrying value of
such investee assets.
59
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
CONDENSED COMBINED STATEMENTS OF OPERATIONS - EQUITY INVESTEES
Year Ended May 31,
-------------------------------------------
1999 1998
---- ----
Revenues $ 10,500 $ 54,900
Costs and expenses (62,307,800) (1,646,900)
-------------- -------------
Net loss $ (62,297,300) $ (1,592,000)
============== =============
F. MINERAL CLAIMS TRANSACTIONS AND MINING PROPERTIES:
GMMV
----
During fiscal 1990, the Company 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
million and a commitment to fund the first $50 million of development and
operating costs and additional amounts if certain future operating margins are
achieved.
On June 23, 1997, the Company signed an Acquisition Agreement with
Kennecott for the right to acquire Kennecott's interest in the GMMV. Kennecott
paid the Company $4 million on signing and committed to loan the GMMV up to $16
million to be used in developing the proposed underground Jackpot Uranium Mine
and change the status of the Sweetwater Mill from standby to operational. Under
the Acquisition Agreement, Kennecott received a credit of two dollars for each
dollar advanced against the original work commitment of $50 million.
During fiscal 1998 and 1999, the Company and Kennecott continued to own
their respective 50% interests in the GMMV, and Kennecott advanced approximately
$14.5 million of the $16 million loan obligation called for in the Acquisition
Agreement. Due to the continued depressed market price for uranium concentrates,
the Company was unable to purchase Kennecott's interest in the GMMV, and the
GMMV stopped development activities at the Jackpot Mine and placed the facility
on active standby on July 31, 1998.
As of May 31, 2000, the Company and Kennecott continue to own their
respective 50% interests in the GMMV. The GMMV no longer has the obligation to
repay the $14.5 million advanced under the $16 million loan from Kennecott. As a
result of the funds advanced under the loan and the signing bonus discussed
above, the original $50 million work commitment under the 1990 GMMV Agreement is
fully satisfied. The Company has elected to have its 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 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.
As a result of sustained depressed uranium prices, GMMV determined the
carrying value of its assets exceeded the future cash flows. Accordingly, in
fiscal 1999, GMMV recorded an impairment in the amount of $59.5 million related
to its mineral assets. This impairment had no effect on the Company's carrying
value
60
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
of its investment in the GMMV. The Company's carrying value reflects
management's estimates of its portion of the salvage value of the GMMV's
machinery and equipment.
Subsequent to year end, as discussed in Note M, the Company settled its
dispute with Kennecott and dissolved the GMMV for cash and release from all
reclamation and environmental liabilities.
SMP
---
During fiscal 1989, the Company, 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 nine years. See Note K for a description
of the investment and a discussion of the related litigation/arbitration.
The Company is responsible for one SMP market related delivery contract
which requires approximately 942,644 pounds of uranium concentrates to be
delivered. These deliveries are priced at an average of the three month market
price preceding each delivery. The customer has the option of increasing or
decreasing the quantity by plus or minus thirty percent. In 1999 and 1998,
deliveries by the Company on SMP contracts resulted in revenues of $87,500 and
$858,700, respectively (no such revenues were recognized in 2000). Revenues from
these transaction have been included in the accompanying Consolidated Statements
of Operations as Mineral Revenues, which would normally have been sales of SMP.
Delivery requirements for fiscal 2000 are 206,407 pounds of uranium.
Arrangements have been made to complete this delivery in the second quarter of
2001.
Due to the litigation and arbitration proceedings involving SMP for the
past 9 years, the Company has expensed all of its costs related to SMP and has
had no carrying value of its investment in SMP for either 2000 or 1999 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 represents mine standby
costs incurred directly by the Company, was $711,300, $704,10, and $436,000 for
the years ended May 31, 2000, 1999 and 1998, respectively.
As part of a partial 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 2000 and 1999.
PHELPS DODGE
------------
During prior years, the Company conveyed interests in mining claims to
AMAX Inc. ("AMAX") in exchange for cash, royalties, and other consideration.
AMAX merged with Cyprus Minerals ("Cyprus Amax") which was purchased by Phelps
Dodge Mining Company ("Phelps Dodge") in December of 1999. The properties have
not been placed into production as of May 31, 2000.
61
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
Cyprus Amax paid the Company an annual advance in royalty of 50,000
pounds of molybdenum (or its cash equivalent). During fiscal 2000, Phelps Dodge
has assumed this obligation and made its first advance royalty payment to the
Company during the first quarter of 2001. Phelps Dodge 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 $132,600, $150,100 and $211,000 of revenue from the
advance royalty payments in fiscal 2000, 1999 and 1998, respectively.
Phelps Dodge may elect to return the properties to the Company, which
would cancel future obligations under the advance royalty obligation. If Phelps
Dodge formally decides to place the properties into production, it is obligated
to pay $2,000,000 to the Company.
The Company has recently entered into discussions with Phelps Dodge
concerning the purchase of the properties from Cyprus Amax. Per the contract
with Amax, the Company is to receive 15% of the first $25,000,000, or
$3,750,000, if the properties are sold, which the Company believes has occurred.
SUTTER GOLD MINE 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 and the lack of adequate financing, SGMC has put the development of the
mine on hold. Until the time when development begins, SGMC will require capital
contributions from affiliates or other sources 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.
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).
In connection with a private offering, on March 21, 1997, the Company
and Crested accepted a Contingent Stock Purchase Warrant 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 probably ore reserves, as defined in
the Stock
62
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
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 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%. During fiscal 2000, the Company issued an additional 15,357 shares of
its common stock to acquire 5,500 additional SGMC Special Warrants. This
purchase increased the Company's ownership of SGMC to 66%.
Additional financing will be required in order to develop SGMC.
YELLOW STONE FUELS CORP.
------------------------
In fiscal 1998, the Company became contractually obligated to exchange
its common stock for common stock of YSFC, plus interest, because 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 shares of
its common stock. The exchange offer for YSFC remained 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, the Company entered into an agreement with
Consumers Power Company to acquire all the issued and outstanding common stock
of 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. The Company paid
nominal cash consideration for the Plateau stock and agreed to assume all
environmental liabilities and reclamation bonding obligations. At May 31, 2000,
Plateau had a cash security in the amount of $7,952,600 to cover reclamation of
the properties (see Note K).
63
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
The Company 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. 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 their fair value.
ENERGX, LTD.
------------
Energx is engaged in the operation of oil wells in Montana. Energx is
owned by 90% by the Company and 10% by the Assiniboine and Sioux Tribes.
Revenues from the sale of oil during fiscal 2000, 1999 and 1998 was $159,200,
$83,200 and $170,000, respectively.
During fiscal 1997, Energx abandoned certain of its leases and as a
result wrote off $164,500 of related capitalized costs. 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.
ROCKY MOUNTAIN GAS, INC.
------------------------
During fiscal 2000, the Company organized RMG to enter into the coalbed
methane gas business. RMG is engaged in the acquisition of coalbed methane gas
properties and the future exploration, development and production of methane gas
from those properties. The Company owns and controls 86% of RMG. RMG sold
1,206,333 shares of its common stock in a private placement during fiscal 2000
for total proceeds of approximately $3,619,000.
RMG entered into an agreement with Quantum Energy, L.L.C. ("Quantum")
on January 3, 2000 to purchase a 50% working interest and 40% net revenue
interest in approximately 185,000 acres of unproven leasehold interests in the
Powder River Basin of Southeastern Montana.
The terms of the Quantum agreement were payments of $3,200,000 on
closing, $1,000,000 on or before May 1, 2000 and $1,300,000 on or before
December 31, 2000. All payments through May 31, 2000 were made to Quantum. If
RMG does not pay the $1,300,000 payment by December 31, 2000, RMG will assign
12% of its undivided 50% working interest to Quantum.
RMG also has a $2,500,000 work commitment to drill 25 wells on the
Quantum properties by November 30, 2000. As of May 31, 2000, no wells had been
drilled on the Quantum properties due to delays in the permitting process. Funds
to complete this work commitment will be raised through equity financing.
64
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
RMG also acquired a 100% working interest (82% revenue interest) in
63,000 net mineral acres in southwest Wyoming. These coalbed methane gas leases
are in the greater Green River Basin. RMG purchased these leases for cash and a
commitment to drill two wells before December 31, 2000.
On February 2, 2000, RMG and Quantum organized Powder River Gas, L.L.C.
("Powder River") to operate the exploration, development and production of the
jointly owned leases in the Powder River Basin. RMG and Quantum each own 50% of
Powder River.
G. DEBT:
LINES OF CREDIT
---------------
The Company has a $1,000,000 line of credit from a commercial bank. The
line of credit bears interest at a variable rate (10.5% as of May 31, 2000). The
weighted average interest rate for 2000 and 1999 was 9.8%. As of May 31, 2000,
$650,000 was outstanding on this line of credit. 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.
LONG-TERM DEBT
--------------
The components of long-term debt as of May 31, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
May 31,
----------------------------------
2000 1999
---- ----
<S> <C> <C>
Installment notes - secured by equipment;
interest at 7.9% to 11.4%, matures in 2001-2005 $ 315,500 $ 88,200
SGMC installment notes - secured by
certain mining properties, interest at
7.5% to 8.0%, maturity from 2001 - 2005 740,800 767,900
RMG installment note - secured by
coalbed methane leases, interest at 8%
due before December 31, 2000 106,200 --
FNG installment note - secured by FNG
equipment, interest at 8.9%
maturity 2002 21,700 56,600
------------- -------------
1,184,200 912,700
Less current portion (284,100) (126,000)
------------- -------------
$ 900,100 $ 786,700
============= =============
</TABLE>
Principal requirements on long-term debt are $284,100; $92,500;
$132,600; $66,300; $19,100; $589,600 for the years 2001 through 2005 and
thereafter, respectively.
65
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
H. INCOME TAXES:
The components of deferred taxes as of May 31, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
May 31,
--------------------------------------
2000 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 213,400 $ 152,400
Net operating loss carryforwards 9,583,200 6,234,900
Tax Credits 17,900 143,800
Non-deductible reserves and other 1,146,000 275,800
Tax basis in excess of book basis 3,876,500 4,315,300
-------------- --------------
Total deferred tax assets 14,837,000 11,122,200
-------------- --------------
Deferred tax liabilities:
Development and exploration costs 2,014,300 1,928,300
-------------- --------------
Total deferred tax liabilities 2,014,300 1,928,300
-------------- --------------
12,822,700 9,193,900
Valuation allowance (13,967,500) (10,338,700)
-------------- --------------
Net deferred tax liability $ (1,144,800) $ (1,144,800)
============== ==============
</TABLE>
The Company has established a valuation allowance of $13,967,500 and
$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,
----------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Expected federal income tax $ (3,618,200) $ (3,960,500) $ (320,300)
Net operating losses not previously
benefitted and other (10,600) 422,100 155,100
Valuation allowance 3,628,800 3,538,400 165,200
------------- ------------- -------------
Income tax provision $ -- $ -- $ --
============= ============= =============
</TABLE>
There were no taxes currently payable as of May 31, 2000, 1999 or 1998
related to continuing operations.
At May 31, 2000, the Company and its subsidiaries had available, for
federal income tax purposes, net operating loss carryforwards of approximately
$28,000,000 which will expire from 2001 to 2020 and investment tax credit
carryforwards of $17,900 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
66
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
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 audit of fiscal 1996 is
complete and the Company has attended appeals hearings. A tentative settlement
has been reached, however, final tax liability has not been determined. The
Company does not expect that the resolution of the audit will have a material
effect on the Company's financial position or results of operations.
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 and, an airport fixed base operation, and construction activities.
The following is information related to these industry segments:
<TABLE>
<CAPTION>
Year Ended May 31, 2000
------------------------------------------------------------------
Drilling/
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues $ 132,600 $ 2,786,800 $ 3,584,900 $ 6,504,300
============= ============ ============
Interest and other revenues 1,269,500
--------------
Total revenues $ 7,773,800
==============
Operating (loss) profit $ (2,518,600) $ (600,500) $ (594,300) $ (3,713,400)
============= ============ ============
Interest and other revenues 1,269,500
General corporate and other expenses (8,195,000)
Equity in loss of affiliates (2,900)
--------------
Loss before income taxes $ (10,641,800)
==============
Identifiable net assets at May 31, 2000 $ 17,543,700 $ 4,880,900 $ 2,163,300 $ 24,587,900
============= ============ ============
Investments in affiliates 9,600
Corporate assets 6,278,600
--------------
Total assets at May 31, 2000 $ 30,876,100
==============
Capital expenditures $ 4,749,300 $ 944,600 $ 1,551,800
============= ============ ============
Depreciation, depletion and
amortization $ 72,600 $ 148,100 $ 155,400
============ ============ =============
</TABLE>
67
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
<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 $ (11,648,500)
==============
Identifiable net assets at
May 31, 1999 $ 10,632,900 $ 8,107,300 $ 144,700 $ 18,884,900
============= ============ ==========
Investments in affiliates 24,600
Corporate assets 14,481,500
--------------
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>
68
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(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)
--------------
Loss before income taxes $ (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>
During fiscal 1999 and 1998 approximately 100% of mineral revenues were
from the sale of uranium. There were no uranium sales during fiscal 2000.
69
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
J. SHAREHOLDERS' EQUITY:
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, as amended, 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 371,200 non-qualified options to certain of its executive officers, Board
members and others 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 at an exercise
price of $4.00 per share, expiring on December 31, 2000. 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. During fiscal 1998, options were exercised for
the purchase of 62,000 shares. During fiscal 1999, the Company issued 837,500
options under the 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 2000, 1999 and 1998, the Board of Directors of USE
contributed 123,802, 89,600 and 49,470 shares to the ESOP at prices of $3.00,
$4.00 and $6.57 per share, respectively. The Company has recognized $371,400,
$358,400 and $324,600 in fiscal 2000, 1999, and 1998, respectively related to
these contributions. 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, 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.
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 the Company payable in shares of the Company's common stock. The
1996 Stock Award Program was subsequently modified to reflect the intent of the
directors which was to provide incentive to the officers of the Company to
remain with USE. The shares are to be issued annually pursuant to the
recommendation of the Compensation Committee on or before January 15 of each
year, beginning January 15, 1997, as long as each officer is employed by the
Company. The officers will receive up to an aggregate total of 67,000 shares per
year for the years 1997 through 2002. 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, 2000, 215,158 total shares have been issued to the five
officers of the Company and Crested under the 1996 Stock Award Plan.
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.
70
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
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.
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. The Company exchanged 677,167 shares of its
common stock during fiscal 1999, 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. During
fiscal 2000, the Company issued an additional 57,752 shares of its common stock
valued at $206,900 for an additional 96,250 shares of YSFC common stock or an
additional 1% of the outstanding shares of YSFC common stock. The exchange rate
for USE shares was the price paid for the YSFC's common shares plus 10% per
annum return to the investor 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.
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 and $27,000
in fiscal 2000.
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 and $27,000 in fiscal 2000.
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
71
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
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 and 2000 related to this agreement.
During fiscal 2000, the Company issued 200 shares of its $.01 par value
mandatorily convertible preferred stock for $2,000,000. A commission of $160,000
was paid to an independent broker on this transaction. This preferred stock is
mandatorily convertible into either 677,667 shares of common stock of RMG or
into shares of common stock of the Company at the market price of the Company's
common stock on the date of conversion. The preferred shares are convertible at
the earlier of the date RMG completes an initial public offering of its common
stock or April 11, 2002. The convertible preferred shares pay dividends at the
rate of 7.5% per annum while they are outstanding. These preferred shares have
been reflected outside of shareholders' equity in the accompanying consolidated
balance sheets due to the convertible nature of the securities into common stock
of RMG.
The Board of Directors of the Company issues 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 as such shares are forfeitable to the Company 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. For the years ended May 31, 2000, 1999 and 1998, the Company
had compensation expense of $201,000, $173,300 and $119,700 respectively,
resulting from these issuances. A schedule of total forfeitable shares for the
Company is set forth in the following table:
72
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
<TABLE>
<CAPTION>
Issue Number Issue Total
Date of Shares Price Compensation
---- --------- ----- ------------
<S> <C> <C> <C>
May 1990 40,300 $ 9.75 $ 392,900
June 1990 66,300 11.00 729,300
November 1992 10,660 N/A N/A
May 1993 20,000 3.375 67,500
November 1993 18,520 3.00 55,600
January 1994 18,520 4.00 74,100
January 1995 13,520 3.75 50,700
February 1996 7,700 15.125 116,500
December 1996 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
May 2000 67,000 $3.00 201,000
Shares earned (9,600) -- (88,100)
-------- -----------
Balance at May 31, 2000 396,608 $ 2,584,600
======== ===========
</TABLE>
During 2000 and 1999, 9,600 and 40,170 shares were earned,
respectively. No shares were earned in fiscal 1998.
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 using the
Black-Scholes pricing model and the following weighted average assumptions (no
options were granted during 2000 and 1998):
73
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
2000
----
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. Pro forma stock-based compensation, net of
the effect of forfeitures, was $0, $2,314,700 and $98,100 for 2000, 1999 and
1998, 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,
----------------------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net loss to common shareholders
As reported $ (10,662,600) $ (11,648,500) $ (983,200)
Pro forma $ (10,662,600) $ (13,963,200) $ (1,081,300)
Net loss per common share
As reported, Basic $ (1.39) $ (1.63) $ (.15)
As reported, Diluted $ (1.33) $ (1.63) $ (.15)
Pro forma, Basic $ (1.39) $ (1.96) $ (.16)
Pro forma, Diluted $ (1.33) $ (1.96) $ (.16)
</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.
74
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
A summary of the Stock Option Plan activity for the years ended May 31,
2000 and 1999 is as follows:
<TABLE>
<CAPTION>
2000 1999
--------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,300,200 2.79 534,700 $3.34
Granted -- -- 837,500 $2.55
Canceled -- -- (67,000) $4.00
Exercised -- -- (5,000) $4.00
------------ -----------
Outstanding at end of year 1,300,200 2.79 1,300,200 $2.79
============ ===========
Exercisable at end of year 1,300,200 2.79 1,223,200 $2.72
============ ===========
</TABLE>
The following table summarized information about employee stock options
outstanding and exercisable at May 31, 2000:
Weighted
Weighted Number of Average Number
Average Options Remaining of Options
Exercise Outstanding at Contractual Exercisable at
Price May 31, 2000 Life in years May 31, 2000
----- ------------ ------------- ------------
$2.00 312,500 8.50 312,500
2.75 49,400 1.92 49,400
2.88 525,000 8.50 525,000
2.90 264,300 1.88 264,300
4.00 149,000 .50 149,000
--------- ---------
1,300,200 1,300,200
========= =========
75
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
K. COMMITMENTS, CONTINGENCIES AND OTHER:
LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
In 1991, disputes arose between the Company through USECC and Nukem,
Inc. and its subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the
formation and operation of the SMP partnership for uranium mining and marketing,
and activities of the parties outside SMP. Arbitration proceedings were
initiated against USECC by CRIC in June 1991 before the American Arbitration
Association ("AAA"). A three member panel of the AAA held hearings on the SMP
issues and entered an Order and Award in April 1996 and clarifying it in July
1996. The Order and Award were confirmed by the U.S. District Court of Colorado
in its Second Amended Judgment (the "Judgment") in June 1997. The Judgment
ordered Nukem/CRIC to pay USECC a monetary award and ordered the uranium
purchase contracts Nukem entered into with three CIS republics including the
purchase rights, the uranium acquired pursuant to those rights and the profits
therefrom, be impressed with a constructive trust in favor of SMP of which USECC
owned one half. Nukem appealed the judgment to the 10th Circuit Court of Appeals
("10th CCA"). On October 22, 1998, the 10th CCA issued its Order and Judgment
affirming the District Court's Judgment (without modification).
On November 13, 1998, Nukem/CRIC filed a motion 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 opposing the motion and
requested 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 that 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 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 its Second Amended
Judgment. On August 2, 1999, Nukem/CRIC filed a Notice of Appeal to the 10th CCA
of the District Court's July 16, 1999 Order. Thereafter, USECC filed a request
with the District Court for post judgment assistance to compel Nukem to account
for its profits on the CIS contracts. This request was denied. USECC filed a
motion to dismiss the appeal of Nukem/CRIC to the 10th CCA, which is also
pending. On or about March 7, 2000, Nukem and CRIC filed their opening brief
with the 10th CCA. USECC filed its answer brief on April 10, 2000 and Nukem and
CRIC filed their reply brief and the appeal is pending.
TOWNSITE LITIGATION
In fiscal 1998, a prior contract operator of the restaurant and lounge
at Ticaboo, UT, and two employees supervising the motel and convenience store
(owned by Canyon Homesteads, Inc.) and their corporation Dejavue, Inc. sued USE,
Crested and others in the Utah 3rd District State Court. One of the
76
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
plaintiffs received a judgment against USE. USE appealed the judgment to the
Utah Court of Appeals and the appeal was denied. USE petitioned for a writ of
certiorari and the Utah Supreme Court denied the petition. On April 26, 2000,
USE paid $294,787 being the full amount of the judgment with interest. USE is
seeking reimbursement of the payment from USE's insurance company.
BOND GOLD BULLFROG INC. LITIGATION
USECC is a defendant and counter- or cross-claimant 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 gold mine. USECC asserted certain interests in the claims
under an April 1991 assignment and lease from Parador, which is subject to the
lease to BGBI's predecessor. After a trial, the Court found against certain of
the parties including Parador and USECC on their claims for extra lateral rights
and BGBI on its claims. Parador, USECC and BGBI all appealed the decision to the
Nevada Supreme Court. The appeal is pending.
DEPARTMENT OF ENERGY LITIGATION
On July 20, 1998, eight uranium mining companies with operations in the
United States, including U.S. Energy Corp., 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 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 to date, has not entered a decision.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the United States District
Court, Denver, Colorado (Case No. 98 WM 1630) 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 the Company'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 unjust
enrichment in Contour's dealings with the Company regarding such real estate.
Contour answered denying all allegations of wrongdoing, asserting certain
counterclaims, which USE has denied, and claiming that the Company's refusal to
consent to a requested transfer of one of the properties excused Contour from
paying the balances due on the promissory notes.
77
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
Three of the defendants also filed motions to dismiss seeking relief from USE's
notice of lis pendens. That motion was not granted pending further discovery.
Settlement discussions have not been fruitful and USE is expected to resume the
litigation against all defendants other than Val Olsen who petitioned for
protection under Chapter 7 of the Bankruptcy Code and Gunnison Center
Properties, L.L.C. which petitioned for protection under Chapter 11 of the
Bankruptcy Code and several of Gunnison Center properties have been sold. The
remaining defendants own other property which USE believes has sufficient value
to satisfy any judgment that USE may obtain.
SGMC LITIGATION
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 Final Subsequent Environmental Impact Report (FSEIR) and
approving the amended Conditional Use Permit (CUP).
A hearing was held on June 7, 1999, and on August 30, 1999, the
Honorable Susan C. Harlan, Judge of the Superior Court in Amador County, issued
a detailed written Memorandum of Opinion, denying every cause of action of
Appellants'/Petitioners' Petition for Writ of Mandate, and upholding the
County's certification of the FSEIR and approval of the amended CUP. In
September 1999, the Concerned Citizens appealed Amador County Superior Court's
decision to the Court of Appeals of the State of California Third Appellate
District. On appeal, Appellants presented a more targeted approach, alleging
only two violations of the Planning and Zoning Law and two violations of
California Environmental Quality Act (CEQA). SGMC and the County filed their
respective Respondent Briefs in March 2000. The appeal before the Court of
Appeals is pending.
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., Crested Corp., Plateau and USECC, alleging that the defendants were
negligent as a landlord in renting a double wide trailer (converted to a
bunkhouse) near Ticaboo, Utah to plaintiffs' daughter Hannah Selley and seek
various unspecified damages. Discovery is underway and the defendants have filed
motions to stay the trial scheduled for September 25, 2000 because of the
declaratory judgment action filed in Utah which may be dispositive of all
issues. The motions are pending.
DECLARATORY JUDGMENT ACTION. The Workers Compensation Fund of Utah (the
"Fund") filed a complaint for declaratory relief on July 26, 1999 against U.S.
Energy Corp., Crested, Plateau, Lexington Insurance Company, Dennis Selley, as
personal representative for the estate of Hannah 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 if Hannah Selley died in the course of her
employment and the Fund's and Lexington Insurance Company's obligation to defend
and indemnify the Company in the above Hannah Selley case. Lexington Insurance
Company and the Company filed a joint motion for summary judgment in the case on
July 21, 2000 alleging among other allegations that Hannah Selley was in the
course and scope of her employment at the
78
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
time of her death. The Selleys filed their opposition to the motion on or about
July 31, 2000. The motion is pending.
KENNECOTT URANIUM LITIGATION
On November 10, 1999, Kennecott Uranium Company and Kennecott Energy
Company ("Kennecott") filed a civil action against defendants U.S. Energy Corp.,
Crested and USECC in the Sixth Judicial District Court, Campbell County,
Wyoming, No. 22406. Kennecott is seeking to dissolve the GMMV joint venture with
USECC and judicial approval of a plan to sell the GMMV or liquidate its assets
plus attorney fees and costs. Defendants filed a motion to change venue to the
District Court in Fremont County, Wyoming and the Sixth Judicial District court
granted the motion. The case was then transferred to the Ninth Judicial District
Court of Fremont county, WY in Civil Action No. 31322.
On March 13, 2000, the Company filed an answer denying the various
allegations of Kennecott and counterclaims against plaintiff Kennecott and its
parent Rio Tinto plc. The Company also filed a separate third party complaint
against Rio Tinto plc. Kennecott filed a motion to dismiss the complaint and Rio
Tinto filed a motion for judgment on the pleadings. A hearing date on the
respective motions was set for May 30, 2000 but was continued for a time in
September or October, 2000 to be set by the Court, as the parties attempted to
negotiate a settlement. On July 14, 2000, Kennecott and USECC entered into a
partial settlement wherein Kennecott paid USECC $250,000 to settle claims
peripheral to the case concerning accounts receivables and other minor claims
for work done and equipment used and mobilized by USECC for the GMMV. The
litigation was settled on September 11, 2000. See Note M.
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 conducts its mining operations in
accordance with these regulations. 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
79
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
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, 2000, the Company has recorded estimated reclamation
obligations, including standby costs, of $8,906,800 which is included in
Reclamation and Other Long-term Liabilities in the accompanying Consolidated
Balance Sheets. 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:
SMP
---
The Company is responsible for the reclamation obligations,
environmental liabilities and liabilities for injuries to employees in mining
operations with respect to the Sheep Mountain properties. The reclamation
obligations, which are established by regulatory authorities, were reviewed by
the Company and the regulatory authorities during fiscal 2000 and the balance in
the reclamation liability account at May 31, 2000 of $1,496,800 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 self
bonded this obligation by mortgaging certain of its real estate assets,
including the Glen L. Larsen building, and by posting cash bonds.
GMMV
----
During fiscal 1991, the Company acquired developed mineral properties
on Green Mountain known as the Big Eagle Property. In connection with that
acquisition, the Company 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 transferred a
one-half interest to Kennecott, with Kennecott and the Company contributing
their ownership in the Big Eagle properties to GMMV, which assumed the
reclamation and other environmental liabilities. Kennecott provides bonding for
the reclamation obligations for the benefit of GMMV.
As part of the settlement of the GMMV litigation with Kennecott, the
Company has been released from any and reclamation and environmental obligations
related to the GMMV. See Note M.
80
<PAGE>
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000
(CONTINUED)
SUTTER GOLD MINING COMPANY
SGMC is currently owned 62% by the Company, 4% by Crested and 34% by
private investors. SGMC owns gold mineral properties in California. Currently,
these properties are on standby and have never been in production. Reclamation
obligations are covered by a $27,000 reclamation bond which SGMC has recorded as
a reclamation liability as of May 31, 2000.
PLATEAU RESOURCES, LIMITED
The environmental and reclamation obligations acquired with the
acquisition of Plateau include obligations relating to the Shootaring mill.
Based on the bonding requirements, Plateau transferred $2,500,000 to a trust
account as financial surety to pay future costs of mill decommissioning, site
reclamation and long-term site surveillance. In fiscal 1997, Plateau increased
the NRC surety to a cash bond of $6,784,000 in order to have its standby license
changed by the NRC to operational. As of May 31, 2000, Plateau held a cash
deposit for reclamation in the amount of $7,952,600 which management believes
will satisfy the obligation of reclamation.
EXECUTIVE COMPENSATION
The Company and USE are committed to pay the estates of certain of
their officers one years' salary and an amount to be determined by the Boards of
Directors, for a period of up to five years thereafter. This commitment applies
only in the event of the death or total disability of those officers who are
full-time employees of the Company and USE at the time of total disability or
death.
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 also
since been paid in full on the $1,000,000 balance. 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 $52,000, $94,900 and $292,600
for profits in 2000, 1999 and 1998, respectively.
M. SUBSEQUENT EVENT
On September 11, 2000, the Company entered into a Settlement agreement
with Kennecott related to the pending legal dispute discussed in Note K. In
connection with this Settlement agreement, the Company has transferred its
ownership interests in the GMMV to Kennecott, including its ownership interest
in the Sweetwater Mill, the Jackpot Mine, the Big Eagle Mine and shop, and all
patented and unpatented mining claims. The Company will receive various
machinery and equipment held by the GMMV at the Jackpot Mine and $3.25 million
of cash payments from Kennecott. In addition, Kennecott has assumed all the
liabilities of the GMMV, including all reclamation and bonding requirements,
except the reclamation liability associated with the Green Mountain Ion
Exchange.
81
<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, 2000, 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 2000 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 2000 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 2000 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 2000 Annual Meeting of Shareholders.
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 Page No.
--------
U.S. Energy Corp. and Subsidiaries
Report of Independent Public Accounts...............................43
Consolidated Balance Sheets - May 31, 1999 and 1998..............44-45
Consolidated Statements of Operations
for the Years Ended May 31, 1999, 1998, and 1997.................46-47
Consolidated Statements of Shareholders'
Equity for the Years Ended May 31, 1999, 1998, and 1997..........50-49
Consolidated Statements of Cash Flows
for the Years Ended May 31, 1999, 1998, and 1997.................51-53
Notes to Consolidated Financial Statements.......................54-81
(2) Not applicable.
82
<PAGE>
(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]
3.1(b) USE Articles of Amendment to
Restated Articles of Incorporation (June 27, 2000)..........89
3.2 USE Bylaws, as amended through April 22, 1992..............[8]
4.1 Shamrock Partners, Ltd. 1/9/96 Warrant
to Purchase 200,000 Common Shares of USE..................[13]
4.2 USE 1998 Incentive Stock Option Plan
and Form of Stock Option Agreement 1/99...................[26]
4.3 USE Restricted Stock Bonus Plan,
as amended through 2/94...................................[13]
4.4 Form of Stock Option Agreement,
and Schedule, Options Issued 1/96.........................[14]
4.5 1/8/97 Amendment to Shamrock Partners, Ltd.
1/9/96 Warrant to Purchase 200,000
Common Shares of USE......................................[15]
4.6 Amendment to USE 1989 Incentive
Stock Option Plan (12/13/96)..............................[15]
4.7 USE 1996 Stock Award Program (Plan).......................[15]
4.8 USE Restated 1996 Stock Award Plan and
Amendment to USE 1990 Restricted Stock Bonus Plan.........[15]
4.9 Agreement with Sunrise Financial Group (12/1/97)..........[22]
4.10 Sunrise Financial Group 1/9/98 Warrant to
Purchase 225,000 Common Shares of USE.....................[22]
4.11 Agreement with Shamrock Partners, Ltd. (1/20/98)..........[23]
4.12 Shamrock Partners, Ltd Warrant to Purchase
200,000 Common Shares of USE (1/23/98)....................[24]
83
<PAGE>
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]
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]
84
<PAGE>
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]
10.60 [intentionally left blank]
10.61 [intentionally left blank]
10.62 Agreement for Purchase and Sale of Assets
(Rocky Mountain Gas, Inc. and Quantum Energy L.L.C.........92
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.
85
<PAGE>
[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]
[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).
86
<PAGE>
[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, 2000, 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).
87
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
U.S. ENERGY CORP. (Registrant)
Date: September 11, 2000 By: /s/ John L. Larsen
--------------------------------
JOHN L. LARSEN,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: September 11, 2000 By: /s/ John L. Larsen
--------------------------------
JOHN L. LARSEN, Director
Date: September 11, 2000 By: /s/ Keith G. Larsen
--------------------------------
KEITH G. LARSEN, Director
Date: September 11, 2000 By: /s/ Harold F. Herron
--------------------------------
HAROLD F. HERRON, Director
Date: September __, 2000 By:
--------------------------------
DON C. ANDERSON, Director
Date: September __, 2000 By:
--------------------------------
DAVID W. BRENMAN, Director
Date: September 11, 2000 By: /s/ Nick Bebout
--------------------------------
NICK BEBOUT, Director
Date: September 11, 2000 By: /s/ H. Russell Fraser
--------------------------------
H. RUSSELL FRASER, Director
Date: September 11, 2000 By: /s/ Robert Scott Lorimer
--------------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer and
Chief Accounting Officer
88
