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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 [Fee Required] for the fiscal year ended May 31, 1995 or
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[_] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
[No Fee Required] for the transition period from_________to_________
Commission file number 0-6814
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U.S. ENERGY CORP
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(Exact Name of Registrant as Specified in its Charter)
Wyoming 83-0205516
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West
Riverton, WY 82501
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (307) 856-9271
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
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(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 _____
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The aggregate market value of the shares of voting stock held by non-
affiliates of the Registrant as of September 1, 1995, computed by reference to
the closing price of the Registrant's common stock as reported by the National
Market System of NASDAQ on that date, was approximately $19,266,342.
Class Outstanding at September 1, 1995
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Common Stock, $0.01 par value 6,210,129 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, 1995 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. [_]
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(A) GENERAL.
U.S. Energy Corp. ("USE", the "Company" or the "Registrant") is in the general
minerals business of acquiring, developing, exploring and/or selling or leasing
of mineral properties and, from time to time, mining and marketing of minerals.
USE is now engaged in two principal mineral sectors: uranium and gold.
Interests are held in other mineral properties (principally molybdenum), but are
either non-operating interests or undeveloped claims. It also carries on a
small oil and gas operation. Other USE business segments are commercial
operations (real estate and general aviation), manufacturing and marketing of
professional and recreational outdoor products, and construction operations.
Most USE operations are conducted through a joint venture with Crested Corp.
("Crested", a majority-owned subsidiary), and various joint subsidiaries of USE
and Crested. The joint venture with Crested is hereafter referred to as
"USECC". Construction operations are carried on primarily through USE's
subsidiary Four Nines Gold, Inc. ("FNG"). Manufacturing and/or marketing of
professional and recreational outdoor products is conducted through The Brunton
Company ("Brunton"), a wholly-owned USE subsidiary. USE and Crested also own
oil and gas operations in Montana and Wyoming, which are carried on through
Energx, Ltd., a subsidiary of the Company and Crested.
USE and Crested originally were independent companies,with two common affiliates
(John L. Larsen and Max T. Evans). In 1980, USE and Crested formed a joint
venture to do business together (unless one or the other elected not to pursue
an individual project). As a result of USE funding certain of Crested's
obligations from time to time (due to Crested's lack of cash on hand), and later
payment of the debts by Crested issuing common stock to USE, Crested became a
majority owned subsidiary of USE in fiscal 1993. See Part III of this Report.
USE was incorporated in Wyoming in 1966. All operations are in the United
States. Principal executive offices are located at 877 North 8th Street West,
Riverton, Wyoming 82501, telephone (307) 856-9271.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
(1) The Registrant operates in three business segments: (i) minerals, (ii)
commercial operations, and (iii) construction operations. See Footnote I to the
Consolidated Financial Statements. The Registrant engages in other
miscellaneous activities such as oil and gas exploration, development and
production, and process engineering services and sales. The principal products
of the operating units within each of the reportable industry segments are:
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.
2
Commercial Operations Manufacture and marketing of professional and
recreational compasses, and the distribution of
outdoor recreational products, including knives
and binoculars. Operation and rental of real
estate, operation of an aircraft fixed base
operation (including airplane charter service,
aircraft fuel sales, flight instruction and
aircraft maintenance), and provision of various
contract services, including managerial services
for subsidiary companies; operations (through
Plateau Resources Limited ("Plateau"), a wholly-
owned subsidiary of USE) of a motel and rental
real estate in Utah.
Construction Operations Construction of irrigation, flood control,
municipal sewer and similar projects.
(2) The Registrant is not required to include interim financial statements.
NET REVENUES BY USE SEGMENT
Percentage of Net Revenue contributions by the three USE segments in the last
three fiscal years were:
Percentage of Net Revenue During Year Ended
---------------------------------------------
May 31, May 31, May 31,
1995 1994 1993
------- ------- -------
Minerals 1% 50% 53%
Commercial Operations 60% 13% 10%
Construction Operations 14% 30% 20%
USE did not receive revenues from the mining of either uranium or gold in the
three fiscal years ended May 31, 1995. Moreover, during fiscal 1995, there were
no revenues from mineral sales as a result of the arbitration involving Sheep
Mountain Partners ("SMP", a partnership). During fiscal 1994 and 1993, mineral
revenues were received from sales of mineral properties and from sales of
uranium under certain of the utility supply contracts held by SMP, USE and
Crested delivering their one-half share of uranium and receiving sales proceeds
therefrom. Future uranium contract revenues are expected to be affected by the
outcome of the SMP arbitration/litigation (see Item 3 - "Legal Proceedings").
However, regardless of the outcome of such proceedings, commencement of uranium
mining at Green Mountain, Wyoming and/or Ticaboo, Utah is expected to result in
the procurement of utility supply contracts for Green Mountain Mining Venture
(of which USE and Crested are joint venture partners with Kennecott Uranium
Company), and/or Plateau. There can be no assurance such mining operations will
commence, or that new utility supply contracts will be procured. See
Description of "Business - Minerals - Uranium."
For the fiscal year ended May 31, 1995, USE commercial and construction
operations provided a majority of net revenues to USE. For a discussion of why
revenues from mineral sales decreased in this period, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Results
of Operations for Fiscal 1995 Compared to 1994."
(C) NARRATIVE DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT (INCLUDING ITEM 2 -
PROPERTIES DISCLOSURE).
3
MINERALS
URANIUM
USE has interests in several uranium properties in Wyoming and Utah, including
uranium processing mills in Sweetwater County, Wyoming ("Sweetwater Mill") and
in southeastern Garfield County, Utah ("Shootaring Mill"). USE is holding these
interests in anticipation of renewed demand for uranium concentrates
("U\\3\\O\\8\\") by public utilities in the United States that operate nuclear
powered electrical generation facilities.
All the uranium properties are located in areas which have produced significant
amounts of uranium in the 1970s and 1980s.
The property interests are:
Unpatented lode mining claims on Green Mountain (Fremont County, Wyoming),
including 105 claims on which the Round Park uranium deposit is located, and
the Sweetwater Mill, (23 miles south of Green Mountain). These assets are held
by the Green Mountain Mining Venture ("GMMV"), owned 50 percent by USE and
USECC, and 50 percent by Kennecott Uranium Company ("Kennecott"), a subsidiary
of Kennecott Corporation. All claims are accessible by county and United States
Bureau of Land Management ("BLM") access roads. Exploration and delineation of
the principal uranium resources in the proposed Jackpot Mine into the Round Park
deposit have been substantially completed and the BLM has prepared a draft
Environmental Impact Statement for the proposed mine. The proposed Jackpot Mine
has had no previous operators, and would be a new mine when opened. The Big
Eagle Mine and related claim groups (which are part of the claims held by GMMV),
are accessible by county and private roads. The Big Eagle Mine was first
operated by Pathfinder Mines Corporation ("PMC") starting in the late 1970s.
Unpatented lode mining claims, underground and open pit uranium mines and mining
equipment in the Crooks Gap area are located on Sheep Mountain in Fremont
County, Wyoming (these claims are adjacent to and west of the Big Eagle mining
claims held by GMMV). These assets are held by the Sheep Mountain Partners
partnership ("SMP"), the partners of which are USE and Crested, doing business
as the USECC Joint Venture, and Nukem, Inc. ("NUKEM") through its wholly-owned
subsidiary Cycle Resource Investment Corporation ("CRIC"). The Sheep Mountain
Mines 1 and 2 are accessible by county and private roads and were first operated
by Western Nuclear, Inc. in the late 1970s.
The above properties contain uranium mineralization in sandstones of Tertiary
age, as is typical of most Wyoming uranium deposits. Electric power to all the
above Wyoming properties is furnished by either Pacific Power & Light or Hot
Springs Rural Electric Association.
The Tony M and Frank M Mines are underground uranium mines located on unpatented
lode mining claims in San Juan County, Utah. These mines are accessible by
county roads. The mines (originally developed by Plateau at the time Plateau
was owned by Consumers Power Company, a Michigan public utility), the nearby
Shootaring Mill, low grade uranium ore stockpiled at the mill, and related mill
support facilities, are held by Plateau. Significant areas of uranium
mineralization have been accessed and delineated by the prior owner's
underground workings. When the above uranium mines are in production, they
produce ore containing about four to eight pounds of uranium concentrates per
ton and this ore must be processed at a mill into U\\3\\O\\8\\, the saleable
product.
4
There can be no assurance of renewed market demand for uranium concentrates,
that would result in sufficient price increases for concentrates, to warrant
commencement of mining and milling operations on any of the foregoing
properties.
GREEN MOUNTAIN PROJECT
GMMV. In fiscal 1990, USE and Crested sold 50 percent of their interests in
certain unpatented lode mining claims on Green Mountain (hereafter, "Green
Mountain Claims), and certain other rights, to Kennecott for $15,000,000 cash
(USE's share of the proceeds was $12,600,000, and the balance was Crested's).
In fiscal 1991, USE and USECC ("USE Parties") and Kennecott formed the GMMV to
develop, mine and mill uranium ore from the Green Mountain Claims, and market
uranium oxide concentrates to utilities using nuclear power to generate
electricity.
Kennecott agreed to fund the first $50,000,000 of GMMV expenditures, pursuant to
Management Committee budgets. Thereafter, GMMV expenses will be shared by the
parties generally in accordance with their participating interests (50 percent
Kennecott, 50 percent USE Parties). Kennecott will also pay a disproportionate
share (up to an additional $45,000,000) of GMMV operating expenses, but only out
of cash operating margins from sales of processed uranium at more than $24.00/lb
(for $30,000,000 of such operating expenses), and from sales of processed
uranium at more than $27.00/lb (for $15,000,000 of such operating expenses).
Pursuant to the joint venture agreement, each party's participation interest in
the GMMV is subject to reduction for voluntary or involuntary failure to pay its
share of expenses as required in approved budgets (including Kennecott's
commitment to fund the initial $50,000,000 of GMMV expenditures), so that in
effect the interest held by each party collateralizes its performance. However,
a defaulting party would remain liable for third party liabilities incurred
during GMMV operations, proportionate to its interest before reduction.
GMMV cash flows will be shared between Kennecott and the USE Parties according
to their participation interests. However, 105 of the Green Mountain Claims
cover the Round Park uranium deposit, currently believed to be the most
significant mineralized resource on Green Mountain. These 105 claims were
formerly owned solely by USE. Pursuant to an agreement between USE and Crested,
cash flow from production of uranium out of these 105 Green Mountain Claims will
be distributed only to USE and Kennecott, and GMMV expenditures from such
properties will be shared 50 percent by USE and 50 percent by Kennecott.
The USE Parties' share of GMMV cash flow resulting from the balance of the
properties (outside the 105 claims) previously owned by USE and Crested
together, will be shared equally by USE and Crested; GMMV expenditures from such
properties will be shared 25 percent each by USE and Crested, and 50 percent by
Kennecott. Such latter properties are expected to be developed after the Round
Park deposit is developed and placed into production and may be accessed through
the proposed tunnels at the Jackpot Mine.
The GMMV Management Committee has three Kennecott representatives and two USECC
representatives, acts by majority vote, and appoints and supervises the project
manager. The USE Parties acted as project manager during fiscal 1991 and 1992
and in fiscal 1993, Kennecott succeeded as project manager and has continued as
project manager since then. USECC has continued work on a contract basis at
Kennecott's request.
5
Pre-development activities on the GMMV properties have included environmental
and mining equipment studies, mine permitting and planning work, property
maintenance, setting up a uranium marketing program, acquisition and monitoring
of the Sweetwater Mill and application to the U. S. Nuclear Regulatory
Commission ("NRC") to convert the Sweetwater Mill license from standby to an
operating license. For fiscal 1996, GMMV plans to complete a sediment dam,
sediment basin and drainage diversion ditch, build a fuel storage facility and
other support facilities and make improvements to existing facilities.
PROPERTIES AND MINE PLAN. GMMV owns 443 Green Mountain Claims, including the
105 claims on which the Round Park uranium deposit is located. Surface rights
are owned by the United States Government under management by the BLM. In
addition, other uranium mineralization has been delineated in the Phase 2 and
Whiskey Peak deposits on these properties, which formerly belonged to USE and
Crested. These deposits are undeveloped.
Drilling and exploration work has been conducted on the Round Park deposit, and
USECC has constructed two portals for the Jackpot Mine declines. Roads and
utilities have been put in place, which are believed to be satisfactory to
support future mine development.
GMMV also owns the Big Eagle Properties on Green Mountain, which contain
substantial uranium mineralization, and are adjacent to the other GMMV mining
claims. The Big Eagle Properties contain one underground and two open-pit
mines, as well as related roads, utilities, buildings, structures, equipment and
a stockpile of ore. The assets include 38,000 and 8,000 square foot buildings
formerly used by PMC in mining operations. Also included are three ore-hauling
vehicles, each having a 100-ton capacity. Permits transferred to GMMV for the
properties include: a permit to mine, an air quality permit, and water discharge
and water quality permits. GMMV owns the mineral rights to the underlying
unpatented lode mining claims.
The Round Park mining claims contain a deposit of uranium which has been
estimated by USECC to contain 52 million pounds of U\\3\\O\\8\\ averaging .23%
uranium oxide using a grade-thickness cut-off of .6 (i.e., deposit areas were
excluded unless deposit bed thickness at intercept, times intercept grade of
uranium mineralization, exceeded .6). GMMV plans to mine this deposit from the
Jackpot Mine, which will be driven underground from the south side of Green
Mountain when the market for uranium oxide concentrates improves. The first of
several mineralization horizons is about 2,300 feet down from the top of Green
Mountain.
The mine plan provides for two declines to be driven from the side of Green
Mountain, extending about 10,400 feet into the deposit; one decline will be used
for ventilation and transportation of personnel, and the other will convey ore,
rock and waste out of the mine.
USE expects mine development costs will not exceed $25,000,000 to begin
production from the Round Park deposit. However, cost estimates may change as
exploration and initial development progress. Pursuant to the GMMV agreement,
Kennecott has agreed to fund the initial $50,000,000 in development costs
including reclamation costs. Additional costs would be funded by operations
and/or by cash assessments on the venturers.
SWEETWATER MILL. In fiscal 1993, GMMV acquired the Sweetwater uranium
processing mill and associated properties located in Sweetwater County, Wyoming,
23 miles south of the proposed Jackpot Mine, from Union Oil Company of
California ("UNOCAL"), primarily in consideration of Kennecott and GMMV assuming
environmental liabilities, and decommissioning and reclamation obligations.
6
Kennecott is manager of the Sweetwater Mill and, as such, will be compensated by
GMMV out of production. Payments for pre-operating management will be based on
a sliding scale percentage of Mill cash operating costs prior to Mill operation;
payments for operating management will be based on 13 percent of mill cash
operating costs when processing ore. Cash operating costs are defined as all
costs for labor (supervisory, operating, maintenance and laboratory), reagents,
utilities, materials and supplies (fuels, grinding balls and other mill
equipment, etc.), road and access maintenance, environmental and regulatory
costs (including permitting and remediation costs), concentrate shipping costs,
vehicle and equipment operating costs, insurance, and employee health and
benefit costs.
Kennecott, as mill operator, has initiated discussions and appropriate filings
with the NRC regarding amendments to the Source Material License to resume ore
processing at the Sweetwater Mill. Separately, Kennecott has applied to the NRC
for permission to use a mill tailings cell to hold low level tailings waste from
an ion exchange plant owned by USE and Crested in the Crooks Gap area.
The Sweetwater Mill includes buildings, milling and related equipment, real
estate improvements, mining and mill site claims and other real property
interests, personal property and intangible property (including government
permits relating to operation of those properties). The major assets are the
mill buildings and equipment located on approximately 92 acres.
The mill was designed as a 3,000 ton per day ("tpd") facility. UNOCAL's
subsidiary Minerals Exploration Company reportedly processed in excess of 4,200
tpd at times. The mill is one of the newest uranium milling facilities in the
United States, and has been maintained in good condition. UNOCAL has reported
that the mill buildings and equipment have historical costs of $10,500,000 and
$26,900,000, respectively.
As consideration for the Sweetwater Mill, GMMV agreed to indemnify UNOCAL
against certain reclamation and environmental liabilities, which indemnification
obligations are guaranteed by Kennecott Corporation (parent of Kennecott Uranium
Company). GMMV has agreed to be responsible for compliance with mill
decommissioning and land reclamation laws, for which the environmental and
reclamation bonding requirements are approximately $23,960,000. None of the
GMMV future reclamation and closure costs are reflected in the USE Consolidated
Financial Statements (see Note K to USE Consolidated Financial Statements).
UNOCAL has agreed that if GMMV incurs expenditures for environmental liabilities
prior to the earlier of commercial production by GMMV or February 1, 2001,
(which liabilities are not due solely to the operations of GMMV), then UNOCAL
will reimburse GMMV the first $8,000,000 of such expenditures. Any such
reimbursement may be recovered by UNOCAL from 20% of future cash flows from sale
of uranium concentrates processed through the mill. In any event, until such
time as environmental and reclamation undertakings are liquidated against the
bonds, such costs are not deemed expenditures under Kennecott's $50,000,000
development commitment (but bond costs may be charged against such commitment).
The reclamation and environmental liabilities assumed by GMMV consist of two
categories: (1) cleanup of the inactive open pit mine site near the mill (the
source of ore feedstock for the mill when operating under UNOCAL), including
water (heavy metals and other contaminants) and tailings (heavy metals dust and
other contaminants requiring abatement and erosion control) associated with the
pit; and (2) decontamination and cleanup and disposal of the mill building,
equipment and tailings cells after mill decommissioning. Current liabilities
for such efforts have been established at approximately $16,322,900 by the
Wyoming Department of Environmental Quality ("WDEQ") for mine pit site matters
(exercising EPA-delegated jurisdiction to administer the Clean Water Act and the
Clean Air Act, and directly
7
administering Wyoming statutes on mined land reclamation), and by the NRC for
tailings cells and mill decontamination and cleanup. The EPA has continuing
jurisdiction under the Resource Conservation and Recovery Act, pertaining to any
hazardous materials which may be on site when cleanup work is started.
Although the GMMV is liable for all reclamation and environmental compliance
costs associated with mill and site maintenance, as well as mill decontamination
and cleanup and site reclamation and cleanup after the mill is decommissioned,
USE believes it is unlikely USE would have to pay for such costs directly.
First, based on current estimates of cleanup and reclamation costs (reviewed
annually by the oversight agencies), such costs may be within the $50,000,000
development commitment of Kennecott Uranium Company for GMMV. These costs are
not expected to increase materially if the mill is not put into operation.
Second, to the extent GMMV is required to spend money on reclamation and
environmental liabilities related to mill and site operations during ownership
by Minerals Exploration Company, UNOCAL has agreed to fund up to $8,000,000 of
such costs (provided such costs are incurred before February 1, 2001 and before
mill production resumes), which would be recoverable only out of future mill
production (see above). Third, payment of reclamation and environmental
liabilities related to the mill is guaranteed by Kennecott Corporation, parent
of Kennecott Uranium Company. Last, the GMMV will set aside a portion of
operating revenues to fund reclamation and environmental liabilities when mining
and milling operations are shut down.
Kennecott Corporation will be entitled to contribution from the USE Parties in
proportion to their participation interests in GMMV, if Kennecott Corporation is
required to pay mill cleanup costs directly pursuant to its guarantee. Such
contributions to Kennecott Corporation only would be required if the liabilities
cannot be satisfied within the initial $50,000,000 development commitment, and
then only to the extent there are insufficient funds from the accumulated
reclamation reserve. In addition, if and to the extent such liabilities
resulted from UNOCAL's mill operations, and payment of the liabilities was
required before February 1, 2001 and before mill production resumes, then up to
$8,000,000 of that amount would be paid by UNOCAL, before Kennecott Corporation
would be required to pay on its guarantee. However, notwithstanding the
preceding, the extent of any ultimate USE liability for contribution to mill
cleanup costs cannot be predicted.
PERMITS. In March 1993, GMMV applied to the WDEQ for a Permit to Mine the Round
Park deposit through the Jackpot Mine, for up to 22 years; this document
presently is under review and a hearing has been set on the permit before the
Wyoming Environmental Quality Council ("EQC") for the week of September 18,
1995. Until this Permit is granted, no further construction of mine facilities
is allowed; no further underground mine development can occur, and the Round
Park Deposit cannot be mined.
Initial environmental studies have been submitted to appropriate governmental
regulators, and are being reviewed. Applications to appropriate water have been
made, and an NPDES permit has been obtained (expiring December 31, 1997).
Additional surface water, weather and wetland studies have also been initiated.
In 1993, the BLM, as manager of federal lands, determined that the potential
effects of the Jackpot Mine (and associated work areas and roads) on surface and
ground waters, air quality, animal habitat and local fauna at Green Mountain
should be presented and analyzed by an environmental impact statement ("EIS").
A draft EIS has been prepared by the BLM (funded by the GMMV) and published for
public comment. A final EIS is expected to be submitted to the WDEQ in the near
future. Following the WDEQ technical review of the Jackpot Mine plan, the
Permit Application will be presented for public comment. After the EIS record
of decision by the BLM, the Permit to Mine would be issued by the WDEQ (with any
amendments to conditions required after public hearings and final WDEQ review).
8
Also in 1993, an application was submitted to the BLM for upgrading roads to the
Sweetwater Mill. This application is still under review as part of the EIS.
Uranium was mined on Green Mountain in the 1970s and 1980s. USE and Crested do
not anticipate any adverse environmental impacts from the Jackpot Mine which
cannot be mitigated to acceptable levels. Accordingly, the Permit to Mine the
Round Park deposit through the Jackpot Mine portal is expected to be issued by
the WDEQ in due course, subject to delays from objections and appeals of WDEQ
decision by possible project opponents.
The Environmental Protection Agency has promulgated final rules for radon
emissions. These regulations affect the mining and milling of uranium and may
require substantial expenditures for compliance. GMMV may need to install
venting at mine sites, and must monitor radon emissions at the mines, as well as
wind speed, direction and other conditions. USE believes all of the uranium
operations in which it owns an interest, are in compliance with these rules.
CONCERNING KENNECOTT. Kennecott Corporation is a wholly-owned United States
subsidiary of The RTZ Corporation PLC ("RTZ"),. a United Kingdom public company.
RTZ is one of the world's leading international natural resource companies and
one of the largest companies in the United Kingdom with a market capitalization
exceeding $9 billion. Kennecott Corporation owns and operates several mines
through wholly-owned subsidiaries, including the Bingham Canyon, Utah open pit
copper mine which was started in 1906.
USE has no knowledge of any guarantee by Kennecott Corporation or RTZ of the
performance by Kennecott Uranium Company of Kennecott Uranium Company's
development commitment under the GMMV joint venture agreement. Further, USE has
no knowledge whether earnings of Kennecott Uranium Company are retained by it,
or remitted to its parent Kennecott Corporation. Accordingly, performance by
Kennecott Uranium Company of its development commitment under the GMMV joint
venture agreement is not assured.
SHOOTARING CANYON MILL
ACQUISITION OF PLATEAU RESOURCES. On August 11, 1993, USE purchased from
Consumers Power Company ("CPC"), all outstanding stock of Plateau, a Utah
corporation. Plateau owns the Shootaring Canyon uranium processing mill and
support facilities in southeastern Utah ("Shootaring Mill"). The Shootaring
Mill holds a source materials license from the NRC.
USE paid nominal cash consideration for the Plateau stock, but as additional
consideration, USE has agreed:
(a) to perform or cause Plateau to perform all studies, remedial or other
response actions or other activities necessary from time to time for Plateau to
comply with environmental monitoring and other provisions of (i) federal and
state environmental laws relating to hazardous or toxic substances, and (ii) the
Uranium Mill Tailings Radiation Control Act, the Atomic Energy Act of 1954, and
administrative orders and licenses relating to nuclear or radioactive substances
or materials on the property of or produced or released by Plateau; and
(b) to indemnify CPC from all liabilities and costs related to the presence of
hazardous substances or radioactive materials on Plateau property, and to any
future violation of laws and administrative orders and licenses relating to the
environment or to nuclear or radioactive substances.
9
At closing, Plateau transferred $2,500,000 cash to fund the "NRC Surety Trust
Agreement" with a commercial bank as trustee. The trustee is to pay future
costs of Shootaring Mill decommissioning, site reclamation, and long term site
surveillance, as directed by the NRC. The amount transferred to the trust is
the minimum amount now required by the NRC as financial assurance for clean up
after permanent shut down of the Shootaring Mill.
Also at closing, Plateau transferred $4,800,000 cash to fund the "Agency
Agreement" with a commercial bank. These funds will be available to indemnify
CPC against possible claims related to environmental or nuclear matters, as
disclosed above, and against third-party claims related to an agreement between
Plateau and the third-party. See Note K to the USE audited Consolidated
Financial Statements.
There are no present claims against funds held under either the Trust Agreement
or Agency Agreement. Funds (including accrued interest) not disbursed under the
Trust and Agency Agreements will be paid over to Plateau upon termination of
such Agreements with NRC concurrence.
The consideration paid by USE was determined by negotiation with CPC, taking
into account estimated annual Shootaring Mill holding costs, and estimated
future Mill decommissioning and site reclamation costs as required by the NRC
and the Utah Department of Natural Resources, Division of Oil, Gas and Mining
("DOGM").
The Plateau acquisition was negotiated and closed solely for the account of USE,
in light of potential NRC objections to selling Plateau to the USECC joint
venture. Subsequent to closing, in September 1993, USE and Crested agreed that
after Plateau's unencumbered cash has been depleted, USE and Crested each will
assume one-half of Plateau's obligations, and share equally in Plateau operating
cash flows, pursuant to the USECC Joint Venture.
SHOOTARING MILL AND FACILITIES. The Shootaring Mill is located in south-eastern
Utah, approximately 13 miles north of Lake Powell, and 50 miles south of
Hanksville, Utah via State Highway 276, then four miles west on good gravel
roads. The entire facility occupies 18.9 acres of a 264.52 acre plant site.
The mill was designed to process 750 tpd, but only operated on a trial basis for
two months in mid-summer 1982. In 1984, Plateau suspended operations and put
the mill on standby because of the depressed uranium concentrate market.
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 have been performed.
The current source materials license with the NRC is for a standby operation
only and expired on December 31, 1993. Prior to expiration, USE applied for, and
expects either license renewal or extension of its expiration date in due
course.
Plateau owns approximately 90,000 tons of low grade uranium ore stockpiled at
the mill site.
USE intends to cause Plateau to continue maintenance activities pending
evaluation of resuming Shootaring Mill operations to process uranium ores to
concentrates in anticipation of increased concentrate prices. NRC and DOGM
approval will be required prior to commencing such operations.
10
TICABOO TOWNSITE
Plateau also 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 mill. The Ticaboo site includes a 66 room motel, general
store, laundromat facility, 98 single family home sites, 151 mobile home sites,
and 26 recreational vehicle sites (all with utility access). The townsite is
located on a State of Utah lease near Lake Powell, and is being operated as a
commercial enterprise. USE and Crested plan to further develop the townsite,
and have been seeking financial partners. Interim funding for limited
improvements on the commercial operations are being provided by a private
company affiliated with a director of USE. See Part III, Item 12 "Certain
Relationships and Related Transactions."
SHEEP MOUNTAIN PARTNERS ("SMP")
PARTNERSHIP. SMP is a Colorado general partnership formed on December 21, 1988
between USECC, and Nukem, Inc. through its wholly-owned subsidiary Cycle
Resource Investment Corporation ("CRIC"). Nukem, of Stamford, Connecticut is a
uranium brokerage and trading concern. During fiscal 1991, certain disputes
arose among the partners of SMP. These matters are in arbitration and a
decision is expected by December 1995 or early in calendar 1996. See Item 3 -
"Legal Proceedings."
In February 1988, USE and Crested acquired uranium mines and mining equipment
properties (Sheep Mountain Mines) at Crooks Gap in south-central Fremont County,
Wyoming, from Western Nuclear, Inc. (a subsidiary of Phelps-Dodge Corporation).
USE and Crested, doing business as USECC, mined and sold uranium ore from one of
the underground mines in fiscal 1988 and 1989. Production ceased in fiscal
1989, because uranium could be purchased from the spot market at prices below
SMP mining and milling costs. These Crooks Gap properties are adjacent to the
Green Mountain Project.
USE and Crested sold 50 percent of their interests in the Crooks Gap properties
to Nukem's subsidiary CRIC for cash; the parties thereafter contributed the
properties to SMP, in which USE and Crested received an undivided 50 percent
interest. Each group provided one-half of $350,000 (later reduced to $315,000)
to purchase equipment from Western Nuclear, Inc.; USE and Crested also
contributed their interests in three uranium supply contracts to SMP and agreed
to be responsible for property reclamation obligations. The SMP Partnership
agreement provided that each partner generally had a 50 percent interest in SMP
net profits, and an obligation to contribute 50 percent of funds needed for
partnership programs or discharge of liabilities. Capital needs were to have
been met by loans, credit lines and contributions.
SMP was directed by a management committee, with three members appointed by
USECC, and three members appointed by Nukem/CRIC. The committee has not met
since 1991 because of the arbitration/litigation pending between the parties.
PROPERTIES. SMP owns 77 unpatented lode mining claims on the Crooks Gap
properties, including two open-pit and five underground uranium mines, mining
equipment, and an inventory of uranium ore. An ion-exchange plant is located
near the SMP properties, but is held by USECC and not SMP. Production from the
properties is subject to sliding-scale royalties payable to Western Nuclear,
Inc.; the rates are from one to four percent on recovered uranium concentrates.
Two Wyoming State leases (one for minerals covering 640 acres, and one for
surface use covering 142 acres) expired in early 1994, and will not be renewed.
Various structures and equipment are located on the properties: three operating
and three non-operating mine headframes with hoists; maintenance shops; offices;
and other buildings, equipment and supplies.
11
SMP also has interests in 59 unpatented mining claims, one State mineral lease
and one State surface use lease, which have been conveyed to Pathfinder Mines
Corporation ("PMC"). The conveyance originally was made to induce PMC to mill
ore produced from the properties, at PMC's mill. These properties contain a
previously-mined open-pit uranium mine (the Congo pit) and three underground
mines. PMC has the right to mine a portion of these properties (the Congo
area), by open-pit or in-situ techniques to certain depths, without royalty or
other obligations to SMP. PMC has the responsibility for reclamation work
needed thereon as a result of its activities. If PMC mines any portion of the
properties outside the Congo area, a 3% royalty is owed to SMP. Conversely, SMP
has the right to mine portions of the claims and leases outside the Congo area
(and specified surrounding zones) by underground mining techniques, subject to a
3% royalty to PMC. PMC has completed an exploration program on a portion of
these properties, and advises it presently does not intend any further
development. The 59 claims and two leases may be reacquired from PMC by SMP.
PMC has decommissioned and dismantled its two uranium mills in the vicinity.
An ion exchange plant on the former PMC properties (and now held by USECC) was
used to remove natural soluble uranium from mine water. USE on behalf of USECC
has submitted a plan to the NRC to decommission this facility. However,
management is reviewing the economics of relicensing this facility as part of a
potential in-situ leach uranium mining operation.
PROPERTY MAINTENANCE. As operating manager for SMP, USECC is responsible for
exploration, mining, and care and maintenance of SMP mineral properties. USECC
was to have been reimbursed by SMP for certain expenditures on the properties.
Nukem/CRIC have refused to allow SMP to pay USECC for care and maintenance and
other work performed since the spring of 1991. Currently, USECC has a limited
care and maintenance staff on site to maintain the mines and pump mine water to
prevent flooding of the mines.
SMP MARKETING. Nukem, Inc. was engaged by SMP to provide SMP with financial
expertise and marketing services. SMP entered into a marketing agreement with
CRIC, which was assigned to and assumed by Nukem, to provide marketing and
trading services for SMP, which included acquiring uranium for SMP by purchasing
or borrowing. Nukem was to be reimbursed at its direct costs for acquiring such
uranium for SMP. USECC, SMP and Nukem had seven long-term contracts (five
remaining) for sales of uranium to eight domestic utilities. SMP had paid
annual nonaccountable fees of $300,000 for marketing to Nukem, but SMP ceased
making such payments in the spring of 1991, when Nukem/CRIC refused to authorize
payment of care and maintenance costs.
SMP's uranium supply contracts either are base-price escalated or market-related
(referring to how price is determined for uranium to be delivered). Base-price
escalated contracts set a floor price which is escalated over the term of the
contract to reflect changes in the GNP price deflator. The current base-price
escalated contract of SMP requires deliveries of 130,000 pounds of uranium
concentrates per year through 1997. The amounts deliverable under the contract
may be increased or decreased by the utility, in amounts from 10% to 25%.
Prices of uranium for deliveries under the base-escalated price contract
currently exceed prices at which uranium can be purchased in the spot market.
Under the market-related contracts, the purchaser's cost depends on quoted
market prices and the price at which a willing seller will sell its U\\3\\O\\8\\
during specified periods before delivery. Some of these contracts place a
ceiling on the purchase price, substituting a base-price escalated amount, if
the market price exceeds a certain level. Under the terms of the various
market-price related contracts, SMP is required to deliver from 903,200 to
1,213,800 pounds of uranium annually from 1996 to 2000, which amounts may be
increased or decreased by specified percentages.
12
Through fiscal 1995, USE and its affiliates have satisfied most of these
contracts with either uranium previously produced by SMP, borrowed from others,
or purchased on the open market. A number of disputes have arisen among USECC
and Nukem/CRIC, and USECC initiated litigation against Nukem, CRIC and certain
of their affiliates, which, by stipulation of the parties, is to be resolved by
binding arbitration. See Item 3 - "Legal Proceedings."
Nukem's performance under the SMP utility supply contracts has been in dispute
since fiscal 1993, and the cooperation of Nukem to assure deliveries to
customers pending resolution of the SMP disputes, is not assured.
PERMITS. Permits to operate current mines on SMP properties have been issued by
the State of Wyoming. Amendments are needed to open new mines within the permit
area. As a condition to issuance of the permits, an NPDES permit under the
Clean Water Act has been obtained. Monitoring and treatment of water removed
from the mines and discharged in nearby Crooks Creek is generally required.
During the past year, SMP did not discharge wastewater into Crooks Creek, and
the mine water is presently being discharged into the McIntosh Pit.
URANIUM MARKET INFORMATION. In recent years there have been several major
producers of uranium in the United States (Pathfinder Mines Corporation, Chevron
Resources, Uranium Resources Inc., Freeport-McMoRan Resource Partners, L.P.,
Energy Fuels Nuclear, Inc., Ferrett Exploration, General Atomics and others).
Many of these operations are in standby mode due to current low prices for
U\\3\\O\\8\\. There are currently several major producers in Canada (Cameco,
Cogema Canada, Ltd. and Rio Algom); Australia (Energy Resources of Australia and
Pancontinental Mining, Ltd.); Africa (Cogema and RTZ's Rossing unit), and
Europe. The market deteriorated as the Commonwealth of Independent States
("CIS"), increased exports to the western uranium spot market, which slowed down
the reduction of western inventories.
Uranium is primarily used in nuclear reactors that heat water to drive turbines
that generate electricity. There are presently some 546 commercial nuclear
power plants worldwide either operating, under construction or planned. Of
them, 72 are under construction and 52 are planned. Current worldwide
consumption is about 150 million pounds of U\\3\\O\\8\\ per year, but worldwide
production is only about 75 million pounds per year. Published reports indicate
that approximately 31 percent of the worldwide nuclear-powered electrical
generating capacity is in the U.S., 49 percent is in western Europe, and 14
percent is in the Far East. Although the reactors in western Europe have a
greater aggregate generating capacity and fuel usage, the supply of uranium for
those reactors has been obtained for relatively long periods, and the market
requiring the greatest supply of uranium for the next few years is believed to
be the United States. The Asia Pacific region is also developing into a
significant uranium consumer, due to announced plans for rapid expansion of
nuclear power programs in Japan, Korea, Taiwan and the Russian Federation. This
region accounts for most of the 72 power plants which are ordered or under
construction.
Pursuant to Suspension Agreements signed in fiscal 1993 between the United
States Department of Commerce ("DOC") and certain of the Republics of the CIS,
to rectify prior damage to domestic United States uranium producers from dumping
sales of U\\3\\O\\8\\ by certain CIS republics, all spot sales of U\\3\\O\\8\\
delivered into the U.S. now reflect quota restrictions on U\\3\\O\\8\\ imports
from the CIS. However, there are provisions which allow certain long-term
uranium sales contracts entered into with domestic utilities prior to March 5,
1992, to be grandfathered.
13
NUEXCO EXCHANGE VALUE. The market related contracts of SMP are based on an
average of the Nuexco Exchange Value ("NEV") for 2, 3 or more months before
uranium delivery. The high and low NEV reported on U\\3\\O\\8\\ sales during
USE's past five fiscal years are shown below. NUEXCO Exchange Values are
reported monthly and represent NUEXCO's judgment of the price at which spot and
near term transactions for significant quantities could be concluded. NEVs for
fiscal 1993 are higher for U.S. transactions, due to the impact of CIS import
restrictions since late 1992. These prices ("US NEV") were reported by NUEXCO
for spot sales in the restricted U.S. market.
NUEXCO EXCHANGE VALUE
--------------------------
Years Ended US $/pound of U\\3\\O\\8\\
--------------------------
May 31, High Low
----------- ---- ---
1991..............11.70 8.35
1992...............9.05 7.75
1993..............10.05 7.75
1994..............10.20 9.25
1995..............11.00 9.50
US NEV was $11.85 as of July 31, 1995.
On August 31, 1993, NUEXCO made a public release that clarified its definition
of the NEV with reference to restricted and unrestricted terminology, so that
the restricted market values apply to all products and services delivered in the
U.S. as well as non-CIS origin products and services delivered outside the U.S.
In the U.S., uranium is generally supplied to electric utilities under medium to
long-term supply agreements, which require deliveries more than one year after
entry into the contract. These agreements are designed to provide both the
producer-supplier and the customer with comfort as to the amount of uranium
desired and the availability of supply at a predictable price. Utilities
generally seek supply contracts at least two to three years before their needs
occur. It is expected that a large portion of U.S. demand will be secured by
electric utilities entering into contracts in the next two to four years. There
also is an active spot market, through which approximately 5 to 10 percent of
uranium concentrate needs are satisfied.
NUEXCO reports that through the first six months of 1995, U.S. utilities bought
22,100,000 pounds U\\3\\O\\8\\ equivalent in the spot and near term market, and
another 64,000,000 pounds U\\3\\O\\8\\ equivalent was purchased under
outstanding long-term contracts. A portion of the spot and near term market
sales may have supplied purchases under long-term contracts. While total demand
in 1994 exceeded domestic production, there remains a near-term supply of
U\\3\\O\\8\\ equivalent from domestic producers' inventory, and from
unrestricted (i.e., not under quotas) foreign producers current production and
inventory. USE expects these and other factors (e.g., weapons grade uranium
conversions) will moderate price increases, which otherwise might be expected
from the shortfall of United States production meeting demand, into fiscal 1996,
in spite of increasing interest from U.S. utilities in renewing long-term
contracts at higher than spot market prices. To date in fiscal 1995, long-term
contract prices have increased moderately.
14
GOLD
LINCOLN PROJECT (CALIFORNIA)
SUTTER GOLD MINING COMPANY. In fiscal 1991, USE acquired an interest in the
Lincoln Project (including the underground Lincoln Mine) in the Mother Lode
Mining District of Amador County, California. This property, formerly held by
the Sutter Gold Venture ("SGV"), a mining joint venture, is now wholly owned by
USECC Gold L.L.C., a Wyoming limited liability company. Until the end of fiscal
1994, Seine River Resources Inc. (a Vancouver Stock Exchange listed company
which is not affiliated with USE or its subsidiaries, "SRRI") was a joint
venture party in SGV. USECC Gold is a subsidiary of Sutter Gold Mining Company,
a Wyoming corporation ("SGMC").
USECC Gold expects to commence additional exploration and mine development as
soon as funding is provided through a joint venture or other source. Although
SGMC is in discussions with possible joint venture partners, there can be no
assurance that sufficient funding will be made available. It is unlikely,
therefore, that this property will be placed into production during the 1996
fiscal year. See "Permits and Future Plans."
USECC Gold and SRRI had intended to operate SGV as equal 50 percent venturers.
However, because of SRRI defaults on its obligations, USE and Crested had
acquired (through USECC Gold) by the end of fiscal 1993 a 90 percent aggregate
equity interest in the Lincoln Project (and the interests in USECC Gold were
owned 88.89 percent by USE, and 11.11 percent by Crested). By the end of fiscal
1994, SRRI owed USE and Crested $1,970,507 for SGV property holding costs,
permitting costs and mine maintenance expense incurred and paid for by USE and
Crested since March 1992, including interest and management fees charged by USE
and Crested. As of May 23, 1994 SRRI agreed to assign its remaining 10 percent
interest in SGV to USE as payment for the $1,970,507 owed USE and Crested.
However, only the $1,389,272 of costs and expenses paid for by USE and Crested
was recorded; $581,235 for interest and management fees was written off as
uncollectible. SRRI also issued 400,000 common shares of stock and delivered
them to USE as final payment of any deficiencies for pre-fiscal 1994
indebtedness (owed by SRRI to SGV) which had been secured with SRRI's interest
in SGV and which USE and Crested acquired in lieu of foreclosure (see Note F to
the USE Consolidated Financial Statements). SRRI's 10% interest was delivered
to USE and Crested in fiscal 1994.
Subsequent to the end of fiscal 1994, the Sutter Gold Venture was terminated,
USE and Crested formed Sutter Gold Mining Company, and agreed to exchange their
interests in USECC Gold for common stock of Sutter Gold Mining Company
(hereafter, "SGMC"). SGMC is owned 89 percent by USE and 11 percent by Crested;
USECC Gold is a subsidiary of SGMC.
SGMC continues to seek an industry partner or other means to obtain the capital
necessary for additional exploration, mine development, construction of a gold
mill and related facilities, and startup capital to put the gold mine into full
production at an initial rate of 300 tons per day.
During fiscal years 1992 through 1995, SGV conducted environmental studies,
drafted initial mine and mill designs, mined bulk samples from the Lincoln Mine
for assay and mill design purposes, installed an underground water treatment
plant to treat mine water seepage, and performed other work to support
application for operating permits. See "Properties", below.
PROPERTIES. SGMC (through its subsidiary USECC Gold) holds approximately 14
acres of surface and mineral rights (owned), 362 acres of surface rights
(leased), 217 acres of mineral rights (leased), and 374 acres of mineral rights
(owned), all on patented mining claims near Sutter Creek, Amador County,
15
California. The properties are located in the western Sierra Nevada Mountains
at from 1,000 to 1,500 feet elevation; year round climate is temperate. Access
is by California State Highway 16 from Sacramento to California State Highway
49, then by paved county road approximately .4 miles outside Sutter Creek.
Total land holding costs are estimated at $418,200 for the two fiscal years
ending May 31, 1997, including $77,400 for payments on two parcels (14 acres)
purchased in 1994; payment of advance royalties and lease rental payments coming
due in 1995 and 1996 on other surface and mineral properties, totalling
$340,840; and property taxes of $60,000 ($30,000 annually); and other
miscellaneous lease payments. Property taxes will increase to about $100,000
annually when the mill is built and the mine is in production.
The leases are for varying terms (the earliest expires in November 1995), and
require rental fees, advance production royalties, real property taxes and
insurance. Leases expiring before 2010 will generally be extended, so long as
minerals are continuously produced from the property that is subject to the
lease. Other leases may be extended for various periods on terms similar to
those contained in the original leases. Production royalties are from four to
seven percent, and up to 20 percent for some areas of high-grade ore. The
various leases have different methods of calculating royalty payments (net
smelter return, gross proceeds, and net profits interest).
Amador United Gold Mines ("Amador United") was a prior owner of certain leases
which it conveyed to the Lincoln Project when owned by Meridian Minerals, in
return for which Amador United received a right of first refusal to buy the
Lincoln Project and a 20 percent net profits interest in production from any of
the Lincoln Project properties. Although all of the properties which Amador
United conveyed to the Lincoln Project were relinquished by Meridian as
uneconomic or of marginal utility to the Project, Amador United remains entitled
to its net profits interest. "Net profits" will be determined by deducting from
gross revenues from sale of minerals produced by the Lincoln Project, an amount
equal to 105 percent of all costs and expenses in excess of $6,000,000 which are
directly or indirectly attributable and necessary or incidental to the
acquisition, exploration, development, mining and marketing of minerals produced
from all of the properties comprising the Lincoln Project. Costs and expenses
are defined to include (but not be limited to): ad valorem real property and
personal property taxes; reasonably anticipated reclamation costs; salaries and
wages of employees assigned to property acquisition, exploration, development,
mining and marketing activities; travel expenses and transportation of
employees, material equipment and supplies; all payments to contractors; assay,
metallurgical testing and other analyses to determine the quality and quantity
of minerals on all of the properties; costs to obtain environmental permits and
other permits, rights-of-way and similar rights, as incurred in connection with
acquisition, exploration, development, mining and marketing activities; property
acquisition and holding expenses; costs for feasibility studies; costs for title
curative work; and 1.25 percent monthly interest on such costs and expenses
which are not paid.
A separate holder of four of the properties that were assembled by Meridian into
the Lincoln Project holds a 5 percent net profits interest on production from
such properties, which was granted by Meridian when it acquired the properties.
The "net profits" generally will be determined in the same manner as the Amador
United net profits interest (i.e., gross mineral revenues less an amount equal
to 105 percent of numerous categories of costs and expenses). An additional 0.5
percent net profits interest is held by a consultant to a lessee prior to
Meridian's acquisition of the properties, which 0.5 percent interest covers the
same properties in the Lincoln Project.
There have been an estimated $15,000,000 of investments to date in the Lincoln
Project by Meridian and USECC Gold, and current estimates call for up to
$17,974,000 of additional investment to put the properties
16
into full production. Payment of any amount to Amador United and the other
holders of net profits interests will only occur after the Lincoln Project has
generated gross revenues in excess of the amount invested. Lease royalties
burdening the Lincoln Project properties are in addition to Amador United's net
profits interest.
In connection with SRRI's transfer of interests in the Lincoln Project to USE
and Crested at formation of the SGV, and thereafter upon USE's and Crested's
acquisition of SRRI's remaining interests in SGV due to default by SRRI, Amador
United was provided notice of its right of first refusal to acquire such
interests for amounts equal to USE's and Crested's advances to SRRI. Amador
United has made technical objections to the notices given, however, USE and
Crested believe these objections are without merit.
Since fiscal 1991, USE and Crested expended $12,305,000 to acquire the Lincoln
Project and for mine development, mining and processing bulk samples of
mineralization, exploration, feasibility studies, project permitting costs,
holding costs, and related general and administrative costs, which amount
includes advances by USE and Crested to cover SRRI's share of such costs. The
amount of such expenditures during the 1995 fiscal year was $675,100.
GEOLOGY AND RESERVES. The minerals consulting firm Pincock, Allen & Holt
("PAH") has prepared a prefeasibility study of the Lincoln Project. PAH
reviewed core drilling data on the Lincoln Zone on 100-foot centers from the
surface, and drilling on the Comet Zone from both surface and underground. PAH
also reviewed data from drilling on the Keystone Zone from surface on 200-foot
centers. Total data is from 162 exploration core holes (surface and
underground), with total footage of 64,700 feet. PAH based its estimate of
proven reserves on mineralized material within 25 feet of sample information;
probable reserves were based on material located between 25 and 50 feet of
sample information. In nearly all cases, the veins (approximately 17 in
number, though at some points several veins appear to briefly converge) in the
three areas sampled are believed by PAH to extend well beyond these limits.
Using a cutoff grade of 0.25 ounces of gold per ton in place, PAH estimates the
Lincoln Project contains 194,740 tons of proven and probable reserves grading
0.57 ounces of gold per ton. If operating economics indicate a lower cutoff
grade is feasible, the tonnages for the stated reserves would be increased.
In fiscal 1992, SGV mined 8,000 tons of material (including waste rock and low
grade mineralization) out of drifts and raises off the Stringbean Alley decline
(see "Permits and Future Plans", below) in a bulk sampling program to test
mining techniques and milling recoveries. Milling results indicated at least 94
percent of the gold in the ore should be recoverable with gravity, flotation and
cyanidation milling circuits (1,400 ounces of gold were recovered in this
program). Subsequent metallurgical tests by the engineering firm Brown & Root,
Inc. (using test data from the Lincoln Project developed by Hazen Research,
Inc.) indicate mill recovery could be in excess of 96 percent. PAH has
estimated the recovery rate as between 93 and 95 percent.
The geology within the Lincoln project is typical of the historic Mother Lode
region of California, with a steeply dipping to vertical sequence of
metavolcanic and metasedimentary rocks hosting the gold-bearing veins.
Depending on location along the strike length on the vein systems, the gold-
bearing veins are slate, metavolcanic greenstone, or an interbedded unit of
slates and volcanics. The Lincoln Project covers over 11,000 feet of strike
length along the Mother Lode vein systems.
PERMITS AND FUTURE PLANS. In August 1993, the Amador County Board of
Supervisors issued a Conditional Use Permit ("CUP") allowing mining of the
Lincoln Mine and milling of production, subject to conditions relating to land
use, environmental and public safety issues, road construction and
17
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.
Initial mining using standard cut-and-fill overhead stoping techniques, is
planned for the Lincoln and Comet Zones, by an existing 15 feet by 12 feet by
2,800 feet decline (the Stringbean Alley decline), which runs from the surface
down through the Comet and into the Lincoln Zone. Screened tailings from the
mill flotation circuit will be used to back-fill the stopes and stabilize the
wall rocks; this recycling will also greatly reduce the volume of tailings going
into the tailings ponds. In the pre-production stage, the Stringbean Alley
decline will be extended down to 750 feet, then a drift driven back horizontally
along the 750 foot level (above sea level).
The CUP requires that within 18 months after operations start up, a new decline
(to be named the Lincoln Decline) will have to be completed running for 1,850
feet from the surface at the mill site (1,340 feet above sea level) down to a
new drift to be driven at the 1,000 foot (above sea) level; the new decline will
be used for access of mining personnel and supplies to the underground workings,
as well as to permit ore haulage up the decline by conveyor, thus eliminating
ore haulage on the surface from mine portal to the mill.
Concurrently with production mining, SGMC intends to maintain an aggressive
underground development program to delineate (on an on-going basis) two to three
years of developed ore in sight.
Preliminary estimates are that SGMC will require up to $17,974,000 financing to
construct the mill and prepare the mine for full scale production, and for
interim holding costs. The mill design has been reviewed by PAH, and SGMC
expects to follow PAH's recommendations in building the recovery circuits. The
mill will be constructed to allow a 500 ton per day operations, but initially
equipped so as to handle 300 tons per day throughput. Exclusive of attached lab
and other support facilities, the central mill building is expected to cover
approximately 20,000 square feet, and will be constructed with interior
mezzanine levels to hold different banks of equipment. Adequate power is
available at the boundaries of the Lincoln Project from the local utility; water
also is available from a utility if needed, although the Lincoln Mine is
expected to produce adequate water for mining and milling operations.
SGMC is in discussions with possible joint venture partners, to provide
additional funding, but there can be no assurance that sufficient funding will
be made available to proceed with mine development.
MOLYBDENUM
As holders of royalty, reversionary and certain other interests in properties
located at Mt. Emmons near Crested Butte, Colorado, USE and Crested are entitled
to receive annual advance royalties of 50,000 pounds of molybdenum, or cash
equivalent (one-half to each). AMAX, Inc. (which merged with Cyprus Mineral
Company and was renamed Cyprus Amax Minerals Company in November, 1993)
delineated a deposit of molybdenum containing approximately 146 million tons of
mineralization averaging 0.43% molybdenum on the properties.
Advance royalties are paid in equal quarterly installments, until: (i)
commencement of production; (ii) failure to obtain certain licenses, permits,
etc., that are required for production; or (iii) AMAX's return of the properties
to the USE and Crested. During fiscal 1995, USE recognized $85,500 of advance
royalty revenue under this arrangement. These royalties are shown in the
Statements of Operations as a component of gains from restructuring mineral
properties agreements. See Note F to the USE
18
Consolidated Financial Statements. The royalty payments reduce the operating
royalties (six percent of gross production proceeds) which would otherwise be
due from Cyprus Amax from production. There is no obligation to repay the
advance royalties if the property is not placed in production. The Agreement
with AMAX also provides that USE and Crested are to receive $2,000,000 (one-half
to each), at such time as the Mt. Emmons properties are put into production and,
in the event AMAX sells its interest in the properties, USE and Crested would
receive 15 percent of the first $25,000,000 received by AMAX. The Company has
asserted that the reported merger of AMAX into Cyprus Minerals Company was a
sale of AMAX's interest in the properties which would entitle USE and Crested to
such payment. Cyprus Amax has rejected such assertion and the Company is
considering its remedies.
Subsequent to May 31, 1994, USE and Crested reached agreement with Cyprus Amax
to forego six quarters of advance royalties (starting fourth quarter calendar
1994) as payment for the option exercise price for certain real estate in
Gunnison, Colorado owned by Cyprus Amax and the subject of a purchase option
held by USE and Crested. The option exercise price is valued at $266,250. USE
and Crested exercised its option in August, 1994 and subsequently sold that
property for $970,300 in cash and notes receivable. The advance royalties will
resume in mid-fiscal 1996.
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 the
companies merged.
Worldwide demand for molybdenum in calendar 1994 was reportedly 220 million
pounds, its highest level ever. Production for that period was about 210
million pounds, but is projected to increase to 220 million pounds in 1995 as
excess capacity of the primary producers is put back into production. In
addition, by-product molybdenum (primarily from Chilean copper mining companies)
has a major impact on available supplies. It is unlikely that any major new
primary deposits will be developed during fiscal 1996.
Molybdenum prices on the open spot market increased substantially, from $3.35
per pound of technical molybdic oxide (the principal product) in September 1994,
to $15.50-17.50 per pound in February 1995. However, by mid-August 1995 prices
had declined to $4.25 to $5.00 per pound.
PARADOR MINING (NEVADA)
USE and Crested are sublessees and assignees from Parador Mining Co., Inc.
("Parador"), on certain rights under two patented mining claims located in the
Bullfrog Mining District of Nye County, Nevada. The claims are immediately
adjacent to and part of a gold mine operated by Bond Gold Bullfrog, Inc.
("BGBI"), a non-affiliated third party. They have also been assigned certain
extralateral rights associated with the claims and certain royalty rights
relating to a prior lease on those properties. The lease to USE
19
and Crested is for a ten year primary term, is subject to a prior lease to BGBI
on the properties, and allows USE and Crested to explore for, develop and mine
minerals from the claims. If USE and Crested conduct activities on the claims,
they are entitled to recover costs out of revenues from extracted minerals.
After recovering any such costs, USE and Crested will pay Parador a production
royalty of 50 percent of the net value of production sold from the claims.
USE, Crested and Parador have informed BGBI that payments are owed to them
pursuant to extralateral rights on the claims. BGBI in turn has initiated legal
proceedings to establish the rights of the various parties in the claims.
Thereafter, Parador notified BGBI that BGBI had defaulted in its lease and that
Parador had terminated the lease. BGBI denies that it has defaulted. The case
was set for July 1995 but because of a conflict, the Judge reset the case for
December 11-14, 1995. See Item 3 - "Legal Proceedings."
OIL AND GAS.
FORT PECK LUSTRE FIELD (MONTANA). USECC conducts oil production operations at
the Lustre Oil Field on the Ft. Peck Indian Reservation in north-eastern
Montana; five wells are producing, and USE and Crested receive a fee based on
oil produced. USE is the operator of record. No further drilling is expected
in this Field. This fee and certain real property of USE and Crested, have been
pledged or mortgaged as security for a $1,000,000 line of credit from a bank.
ENERGX, LTD. FORT PECK GAS PROJECT. Energx, LTD., a Wyoming corporation owned
45% by USE, 45% by Crested, and 10% by the Assiniboine and Sioux Tribes, signed
in October 1993 an "Agreement Between The Assiniboine and Sioux Tribes of the
Fort Peck Indian Reservation and Energx, LTD. to Explore, Develop and Produce
Shallow Gas." This Agreement has been approved by the Secretary of the Interior
and the United States Bureau of Indian Affairs. Energx intends to drill and
test three exploratory wells, and otherwise develop the area in conjunction with
NuGas Resources U. S. Inc. ("NuGas"). If Energx determines there is potential
for a natural gas field, Energx (and NuGas) will have exclusive exploration
rights for shallow gas (down to the top of the Muddy formation, approximately
4,000 feet) on approximately 325,000 acres of tribal mineral lands on the
Reservation for a period of five years. The Agreement is renewable for
successive five year terms, provided Energx drills another five exploration
wells during each term. The first three dry holes would be funded by NuGas.
With additional fee and Tribal allotted acreage assembled by Energx and NuGas,
and the 170,000 acres subject to a farmout agreement with Placid Oil (see
below), the Agreement now covers approximately 500,000 contiguous acres within
the Fort Peck Indian Reservation.
Durring the initial exploration program, proceeds from production will be
allocated to NuGas to recoup the initial eight wells' drilling and completion
expense (except for up to three dry holes), Thereafter, net revenues will be
allocated 40 percent to the Tribes and 60 percent to Energx and NuGas. Pursuant
to United States Law, only the Tribes may own beneficial interests in
reservation minerals; Energx' and NuGas' share of net revenues is compensation
for operating services.
The Fort Peck tribal lands are believed to contain significant shallow gas
deposits, analogous to the Bowdoin Gas Field (eastern Montana) and other
Cretaceous age gas producing reservoirs in the Northern Great Plains Gas
Province. Numerous wells drilled for deep oil on the Fort Peck tribal lands
have documented shallow gas shows. However, no reserves have been established
for the acreage subject to the Agreement with Energx. Two major gas transmission
systems cross the Fort Peck Reservation (Northern Border and Williston Basin).
20
NUGAS RESOURCES (U.I.) INC. AGREEMENT. By the Joint Venture Agreement ("JVA")
of July 18, 1994, NuGas is obligated to Energx to drill and complete (or
abandon) at NuGas' sole expense, eight exploratory shallow gas wells on the Fort
Peck Reservation (three before December 31, 1994, now extended to late fall
1995, and five more by July 1, 1996), to earn a one-half interest in Energx'
rights under the Fort Peck Shallow Gas Agreement. Well gathering, gas
dehydration and related equipment costs will be shared equally by NuGas and
Energx. Energx will not be required to contribute to the costs of drilling the
first eight exploratory wells.
NuGas has contributed $100,000 to pay for costs of acquiring leases and
easements on non-Tribal lands contiguous to Tribal lands, to assemble adequate
sized drilling units for the first three exploratory wells. Due to the
unexpected complexity of assembling the necessary land packages, NuGas and
Energx have postponed the drilling of the initial exploratory wells until late
in the fall of 1995.
NuGas and Energx each will receive 50 percent of proceeds from gas produced and
sold from the initial eight wells, until NuGas receives 50 percent of such
wells' drilling, completion, geological and equipping costs; thereafter,
distributions will be shared 30 percent each to NuGas and Energx, and 40 percent
to the tribes pursuant to the Fort Peck Shallow Gas Agreement. NuGas will not
be entitled to recoup any of drilling and geological costs related to up to
three dry holes drilled in the initial eight well drilling program. All
activities after the initial exploration drilling program will be funded equally
by NuGas and Energx.
Energx received $200,000 under the JVA as a prospect generation fee, and will be
the operator of record.
NuGas is a subsidiary of a Toronto Stock Exchange company with substantial
experience in shallow gas exploration and production, principally in the
northern plains states and Canada, where the company currently operates more
than 500 shallow gas wells and produces 30,000,000 cubic feet of gas per day.
FARMOUT AGREEMENT. In late August 1995, Placid Oil Company, a subsidiary of
Occidental Petroleum and other parties (hereafter together referred to as
"Placid"), submitted a Farmout Agreement to Energx and NuGas which is currently
under review. Under the proposed agreement, Energx and NuGas as operator will
have the right to drill and complete shallow gas wells on approximately 170,000
acres of non-Tribal lands within the Fort Peck Indian Reservation, at the sole
expense of the operator. The Farmout Agreement contemplates three phases: (i)
drilling and completion (or abandonment) of three test wells on widely dispersed
drilling locations; (ii) subject to performance of (i), continuous drilling and
completion (or abandonment) of option wells, also on widely dispersed drilling
locations; and (iii) subject to performance of (i), continuous drilling and
completion (or abandonment) of additional wells on blocks not covered by (i) and
(ii). The first three wells are to be drilled on specific sections within the
170,000 acres.
Drilling of the first test well is to commence in October 1995; the last of the
three wells is to be drilled and completed (or abandoned) within 45 days of the
commencement of drilling the first well. Upon completion of the last test well,
and on or before June 1, 1996, the operator has the option to continue drilling
on the acreage until March 31, 1997, with not more than 30 days to elapse
between completion (or abandonment) date for a well and commencement of drilling
of the next well, until all the acreage has been fully developed.
On or before the March 31, 1997 Farmout Agreement termination date, the operator
shall make an election as to each lease in the acreage that is undeveloped or
which covers lands not included in a producing unit from the drilling of test or
option wells, to (i) continuously drill wells so as to fully
21
develop the lease on 160 acre units, (ii) pay Placid $35.00/acre rental on the
desired acreage, or (iii) forego the subject acreage and reassign it back to
Placid, et al.
In addition to lessor royalties, Placid will receive a 6 percent overriding
royalty interest on the acreage developed under the Farmout Agreement. Operator
will reimburse Placid for delay rentals on the acreage until placed into
production.
Energx has agreed with NuGas that NuGas' payment of all drilling and completion
(or abandonment) costs on the three test wells under the Farmout Agreement will
constitute performance by NuGas as to the first three wells required under the
Energx/NuGas agreement. In turn, the Tribes have agreed that drilling and
completion (or abandonment) of the three test wells under the Farmout Agreement
will be accepted in lieu of drilling the first three test wells required under
the Fort Peck Shallow Gas Agreement. Energx will be an equal participant with
NuGas in paying for the Farmout Agreement option wells' drilling and completion
(or abandonment) costs and production proceeds therefrom.
WIND RIVER BASIN, WYOMING - MONUMENT BUTTE PROSPECT. Approximately 30,000 acres
of BLM leases (10 year term) in Fremont County, WY are now held by Energx, and
are believed to be prospective of shallow coalbed methane and conventional
stratigraphic natural gas and oil deposits. Acreage in this part of the basin
has been leased by major oil and gas companies in the past, but very little of
the Energx acreage has been drilled. Energx expects to negotiate farmout
arrangements with other companies to test the acreage. Two large independent
oil and gas exploration and production companies have acreage near Energx's
positions.
BIG HORN COUNTY, MONTANA - BIG HORN PROSPECT. On October 24, 1994 Energx signed
a Prospect Participation Agreement with Harrington & Bibler, Inc. ("H&B"),
Kalispell, Montana, by which Energx had the right to acquire 53 percent of H&B's
coalbed methane rights in approximately 24,000 contiguous acres in Big Horn
County, Montana. H&B has represented it holds a minimum 81 percent net revenue
interest in the leases covered by the Prospect Participation Agreement.
Approximately another 24,000 acres were acquired jointly with H&B. Energx'
rights to earn were subject to Energx drilling and completion through setting of
production casing, at Energx expense, seven wells down to the first coalbed
methane producing horizon (but not more than 1,000 feet).
All the acreage is prospective of coalbed methane gas. The drilling schedule
required under the Prospect Participation Agreement was to have been completed
by June 30, 1995. No wells have been drilled by Energx to date. However, due
to lack of access agreements from surface interest owners, the BLM (at Energx's
request) has suspended expiration of the leases targeted for drilling, and in
turn granded an extension of the drilling schedule for the seven wells. Current
status of surface access to the acreage surrounding three of the wells presently
is uncertain.
No drilling schedule has been established for the other 12,500 acres, whereon
drilling and completion costs would have been shared equally by Energx and H&B.
In early September 1995, Energx elected to cease paying delay rentals on all
acreage covered by the Prospect Participation Agreement, thereby terminating the
agreement, and resigned as operator of the project.
Energx operations to date have been funded with USECC equity investments and
advances, and transaction revenue (the NuGas prospect generation fee). Energx
expects to fund future operations by a combination of private equity financing
and by seeking industry and private investor participation on prospects.
However, due to depressed gas prices in calendar 1995, equity financing as well
as joint
22
venture industry participation of natural and coalbed methane gas projects has
been difficult to obtain. Accordingly, in fiscal 1996 Energx will be monitoring
its acreage positions (other than Fort Peck) to evaluate whether to continue
paying the acreage holding costs and/or drill to earn acreage rights (as
applicable), or to turn operations over to another company in the industry in
exchange for an overriding royalty from future production payable to Energx.
COMMERCIAL OPERATIONS
THE BRUNTON COMPANY
Brunton operates in the industry segment of manufacture and sales of outdoor
professional and sporting products and professional engineering products. All
common stock of Brunton not previously owned by USE was acquired by USE as of
May 1994, in exchange for 276,470 registered common shares of USE.
Brunton is the manufacturer of the original Brunton pocket transit (developed by
D.W. Brunton in 1884), and has been manufacturing and marketing pocket transits
to the professional surveying, mining, geology and military markets world wide
since 1972, when the product line was purchased from a Denver company and moved
to Riverton, Wyoming.
Brunton also manufactures and sells a line of sporting compass products, and
imports and distributes optical products and Lakota cutlery, having acquired
Lakota cutlery in 1982. These products are marketed through traditional
sporting goods channels by distributors, catalog houses, retailers and chain
stores nationally and internationally. Additional markets include ad specialty,
military and the U.S. government. A majority of the products are marketed as
quality items commanding premium prices.
Brunton sales for fiscal 1995 (compared to fiscal 1994) by product line were:
39 percent (35 percent) sporting compasses; 22 percent (26 percent) professional
products; 31 percent (27 percent) optical products; and 6 percent (7 percent)
cutlery. The balance of 1995 revenues were from interest income, paint shop
custom work, and warranty service. All Brunton sporting products experience
seasonal sales, with stronger sales in July through December and declining in
January and February. No customer accounted for more than 10 percent of Brunton
sales in any of the three fiscal years ended May 31, 1995. Loss of any one of
the major customers would not have a material adverse effect on Brunton,
however, loss of more than one in any one product line could cause significant
market share loss.
Brunton has 37 full-time employees and 15 part-time employees, none under
collective bargaining agreements. Employee relations are considered
satisfactory.
PROFESSIONAL PRODUCTS
POCKET TRANSITS AND ACCESSORIES. Brunton is a manufacturer of pocket transits.
This instrument is a hand-held compass with a mirrored protective cover and long
bar sight, capable of calculating both horizontal (compass bearings) and
vertical (inclination) angles. Primary advantages of the pocket transit include
small size and accuracy.
Several versions of this instrument are produced to satisfy the needs of civil
engineers, mining engineers, archaeologists, foresters, geologists and military
personnel. Many units are waterproof. Numerous product options, high quality
and ready serviceability separate Brunton instruments from its competition.
Suggested retail price for the pocket transit range from $191 to $274 per unit.
Brunton also manufactures and sells non-magnetic tripods and field accessories.
23
Professional products are sold on a direct basis to 240 wholesale dealers,
distributors and catalog supply houses throughout the world. In addition,
Brunton markets professional products to the U.S. government (GSA) and military
organizations including the U.S. Army.
Brunton faces competition for its pocket transits with look-a-like models
manufactured in the far east by companies substantially larger than Brunton who
include their competing product as one of several surveying type instruments
available from the company. Despite larger competitors, and despite somewhat
higher prices for Brunton pocket transits, management believes Brunton holds a
majority of the United States market share for the pocket transit market. This
is due to name brand recognition, highest quality workmanship, excellent
wholesale and consumer service and consistent advertising programs.
Sales of pocket transits are seasonal with increased sales in the spring and
summer due to minerals exploration and college/university field exercises.
Brunton currently seeks to increase penetration of South American markets to
counter seasonality of North American sales.
One customer accounted for 13 percent of professional product sales in fiscal
1995. Loss of this customer would not have a material adverse effect on
Brunton.
SPORTING PRODUCTS
There are three lines of Brunton sporting products: compasses, optics and
cutlery. Compasses and optics are marketed under the Brunton name; cutlery is
marketed under the Lakota label.
COMPASSES. Brunton map compasses were first introduced in 1979 to the general
sporting goods market. To the best of management's knowledge, Brunton compasses
continue to be the only 100 percent made in USA map compasses. A complete
priced line of compasses (22 different models) is offered, with a suggested
retail price range of $3.99 to $274. All sporting compasses are liquid damped,
which means that the compass housing contains a clear oil-based fluid to dampen
the action of the magnetic needle, which allows for quicker and more accurate
instrument readings.
Two national discount chains accounted for approximately 26 percent of compass
sales in fiscal 1995, compared to 21 percent in fiscal 1994. Loss of these
customers would have a material impact on Brunton's operations.
Competition in the compass line is provided by several foreign firms, including
Silva in Sweden and Suunto in Finland. Brunton is unable to determine its
market share for compass sales, as data therefor are unreliable, but Silva and
Suunto are believed to have larger market shares than Brunton in the United
States compass market; such companies are believed to have resources
substantially greater than Brunton.
OPTICS. Brunton optics include a range of high quality binoculars and
monoculars, which are manufactured primarily in Japan and Korea to Brunton
specifications. Brunton optical products are targeted to wholesale accounts
that market to quality conscious consumers willing to pay premium prices for
quality optical products. Additional features are found on its optics,
including upgraded lenses and prisms, fully-coated optics, long eye relief (so
eyeglass wearers can enjoy full field of view), and lens coatings (to
significantly reduce both ultraviolet (UV) and infrared (IR) light from entering
the product). Suggested retail prices for the 11 standard optical products
range from $99 to $749. A new optics product introduced in fiscal 1995 is the
Intelloptics/tm/ binoculars line, featuring LED and range finding micro
electronic components, whereby the user can focus on distant objects and
immediately determine their distance from the user.
24
Brunton optical products compete with products form at least ten other firms,
all of which have a larger percentage of the United States binocular market.
Most of these competitors have substantially greater marketing and other
resources.
Substantially all optics are manufactured for Brunton by one Japanese firm.
Although the services of such firm could be replaced if necessary, attendant
delays would adversely impact Brunton and could result in eroding market share.
Relations between such firm and Brunton are considered excellent. However,
further erosion of the dollar against the yen could lead to price increases
which may be difficult for Brunton to pass along to customers.
Loss of any one of the major customers would not have a material adverse effect
on Brunton, however, loss of more than one in the same product line could cause
significant market share loss.
CUTLERY. Lakota cutlery offers high quality cutlery for the outdoors person,
with models that include unique lockback and fixed blade designs. Lakota
cutlery is manufactured in Japan by a quality conscious subcontractor. Leather
sheaths and packaging are assembled at Brunton headquarters. A majority of
Lakota designs are for hunters, campers and fishermen. Twenty models are
currently in the Lakota line, with a suggested retail price range of $15 to
$171. The current cutlery manufacturer could be replaced if necessary, although
Brunton would be adversely affected depending on the lead time required for a
new firm to come on line.
Lakota cutlery faces competition from over ten competitors, all of which have
larger United States market shares and greater marketing and other resources
than Brunton.
All Brunton sporting products are distributed throughout the United States and
overseas markets by its direct sales force and manufacturers sales
representatives, to over 1,000 retailers, including sporting goods retailers,
mass merchandisers, catalog houses, cutlery shops, and certain U.S. Army/Navy PX
stores. In addition, Brunton sells some of nearly every model of its products
to corporations and other organizations for promotional purposes, premium and
employee gift award programs, and corporate identity programs.
In fiscal 1995, foreign sales represented 14 percent of Brunton sales (all
lines), and sales in the United States represented 86 percent of sales. These
percentages are not expected to change materially in fiscal 1996.
INTELLECTUAL PROPERTY
Brunton currently holds United States utility patent Nos. 4,175,333 (expires
2005), covering its pocket transit, and 5,079,846, covering a liquid-type
survival compass (expires 2009). Eight other United States utility patents are
held which cover different compass constructions that expired in 1993 to 1994,
and one United States utility patent (4,578,864) is held on a cutlery model
(expires 2002).
Five United States design patents are held on compasses and cutlery, which
expire between 1998 and 2004.
United States patent applications are filed for significant new products, as
developed. No notice of adverse determinations has been received with respect
to pending applications.
Foreign patent protection in certain countries (principally Canada and Europe)
has been obtained on a limited number of products.
25
REAL ESTATE AND OTHER COMMERCIAL OPERATIONS
USE owns varying interests, alone and with Crested, in affiliated companies
engaged in real estate, transportation, and engineering businesses. The
affiliated organizations include Western Executive Air, Inc. ("WEA") and Canyon
Homesteads, Inc. through Plateau. Activities of these subsidiaries in these
business sectors include a variety of real estate operations (ownership and
management of a commercial office building, ownership and management of a
trailer home park in Riverton, Wyoming, and ownership and management of town
sites and a motel facility in Ticaboo, Utah). WEA owns and operates an aircraft
fixed base operation with fuel sales, charter planes and flight school in
Riverton, Wyoming.
USECC
WYOMING PROPERTIES. USECC owns a 14-acre tract in Riverton, Wyoming, with a two-
story 30,400 square foot office building (including underground parking). The
first floor is rented to affiliates, nonaffiliates and government agencies; the
second floor is occupied by USE and Crested and is adequate for their executive
offices. USECC also owns and operates Wind River Estates, a 100-unit trailer
park on 19.7 acres in Riverton. The preceding two properties are mortgaged to
the State of Wyoming as security for future reclamation work on the SMP
properties.
USECC owns a fixed base aircraft operation at the Riverton Municipal Airport,
including a 10,000 square foot aircraft hangar and 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 $1,156 (adjusted
annually to reflect changes in the Consumer Price Index), plus a $0.02 fee per
gallon of fuel sold.
On June 14, 1995, USECC signed a six year option to acquire a 7,200 square foot
hangar at the Riverton airport, for $110,000, from a private company affiliated
with a director of USE and of Crested. See Part III, Item 12, "Certain
Relationships and Related Transactions." The purchase price under the option
agreement is a minimum $110,000, subject to upward adjustment for market values
for similar improved commercial real estate in Riverton.
USE and Crested also own 18 undeveloped lots on 26.8 acres of the Wind River
Airpark near the Riverton Municipal Airport, and three mountain sites covering
16 acres in Fremont County, Wyoming.
USECC owns various buildings, 600 city lots and other properties at the Jeffrey
City townsite in south-central Wyoming. More than 4,000 people resided in
Jeffrey City in the early 1980s, when the nearby Crooks Gap and Big Eagle
uranium mining projects were active. The townsite may be utilized for worker
housing as the Jackpot Mine and Sweetwater Mill are put into operation.
USE owns five city lots and a 20-acre tract with improvements including two
smaller office buildings and three other buildings with 19,000 square feet of
office facilities, 5,000 square feet of laboratory space and repair and
maintenance shops containing 8,000 square feet, all in Riverton, Wyoming.
COLORADO PROPERTIES. In connection with the AMAX transaction for the molybdenum
properties near Crested Butte, Colorado, USECC acquired an option from AMAX (now
Cyprus Amax) to purchase (until June, 2002) approximately 57 acres for $200,000
in Mountain Meadows Business Park, Gunnison, Colorado. The property is zoned
commercial and industrial, and is adjacent to Western State College. In fiscal
1995, USECC and Cyprus Amax agreed on exercise of the option by USE and Crested
agreeing to forego six quarters of advance royalties from Cyprus Amax (the
option purchase price was $200,000), plus payment of certain expenses i.e. real
property taxes from 1987 and other expenses amounting to
26
$19,358. See "Minerals -Molybdenum" above. 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. If both options are exercised, the combined purchase price is
US$1,851,920. The acreage is not otherwise encumbered and was sold in fiscal
1995.
The first option (exercised in February, 1995) was for the 57 commercial and
noncommercial zoned acres in the City of Gunnison, Colorado; the purchase price
was $970,300. Pangolin paid $345,000 cash and $625,300 in three year nonrecourse
promissory notes, of which $137,900 was repaid during fiscal 1995. 19.25 acres
have been deeded to Pangolin; the remaining acreage secures the note, and will
be released to the buyer against principal payments on the note as development
(mixed commercial and residential) advances. The remaining note bears interest
at 7.5% per annum.
The second option covers 472.5 acres of ranch land northwest of the City of
Gunnison, Colorado (purchase price $822,460). Pangolin paid $10,000 for the
option; on option exercise and closing, Pangolin paid $46,090 in cash and
$776,370 by two nonrecourse promissory notes (each with principal and unpaid
interest due on the third anniversary of closing except for $35,000 on the first
anniversary). At closing, 22.19 acres were deeded to Pangolin; different parcels
of the remaining acreage secure the notes, and will be released for principal
payments in the course of development. The sale was accounted for as an
installment sale and thus the gain on sale was deferred to be recorded as the
notes are paid.
Both notes ($145,500 and $630,870) will require annual payments of accrued
interest: the larger note accrues interest at 7.5 percent; the initial interest
rate on the smaller note was 7.5 percent through August 28, 1995 and 12 percent
thereafter (with a $35,000 principal payment on the first anniversary).
CANYON HOMESTEADS, INC.
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 Mill and Facilities, above). In fiscal 1994,
a swimming pool was built at the motel. In fiscal 1995, USE agreed to acquire
the minority interest in the joint venture from a nonaffiliate. Further
recreational improvements to the townsite are planned for fiscal 1996, to
develop a commercial operation directed to Lake Powell tourists. However, as the
anticipated joint venture partners did not fund development plans in fiscal
1995, (and the proposed joint ventures for such purpose were not formed), and
USE and Crested have not been successful in finding other sources of development
funding, limited interim funding has been provided by a private company
(Arrowstar Investments, Inc.) controlled by USE affiliates. See Part III
information ("Certain Transactions").
CONSTRUCTION
FOUR NINES GOLD, INC. On May 5, 1995 FNG was awarded a 14 month $2,584,434
contract by the City of Lead, South Dakota for municipal road and drainage
construction, and rock slide area stabilization. As of August 4, 1995, change
orders by the City of Lead have increased the contract to $3,178,615 and FNG had
performed 42 percent ($1,330,391) of the contract, billing $1,197,351 (after 10
percent retainage by the City of Lead against completion of the project). As of
August 4, 1995, $965,584 had been paid, and $231,767 was due. FNG expects the
contract to be profitable
See Note I to USE Consolidated Financial Statements for information concerning a
significant customer in the minerals business. Neither commercial nor
construction operations are dependent upon a single customer, or a few
customers, the loss of which would have a materially adverse effect on USE.
27
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
USE 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 impact USE. Similar laws in
California affect SGMC operations. Utah statutes will effect Plateau's
operations.
To USE's knowledge, it is in compliance in all material respects with current
environmental regulations. To the extent that production by SMP, GMMV or SGMC is
delayed, interrupted or discontinued due to need to meet additional provisions
which relate to environmental protection, future USE earnings could be adversely
affected.
CERTAIN PERMITS, COSTS
A number of legislative proposals and regulations have been introduced in
Congress and in the legislative bodies of various states which, if enacted,
would significantly affect the minerals industry. For example, in fiscal 1993
the Mining Law of 1872 was revised to change methods of acquiring and
maintaining mining claims on public lands, by requiring the payment of an annual
fee of $100 per claim for assessment rather than performing $100 worth of work
on each unpatented mining claim. This law already has affected USE, as a number
of unpatented claims were dropped in fiscal 1993 due to high holding costs. A
limited number of such claims are currently held.
Status and estimated future costs for permits not previously disclosed in this
Report follow:
CROOKS GAP. An inoperative ion exchange facility at Crooks Gap currently holds a
NRC license for possession of uranium operations byproducts. To date, a notice
of minor violations was received from the NRC, which USE has resolved. USE has
applied to the NRC for permission to decommission and decontaminate the plant,
dispose low level waste into the Sweetwater Mill tailings cell, and keep intact
such of the facility as does not require dismantling. Costs for this two year
effort (once approved by the NRC) are not expected to exceed $150,000.
Management of USE and Crested are reviewing the economics of relicensing this
facility as part of a potential in-situ leach uranium mining operation.
GMMV. During the fiscal year ending May 31, 1995, expenditures by GMMV to comply
with provisions of the mine permits and licenses, or otherwise to protect the
environment, were approximately $200,000, of which approximately 50 percent were
for capital expenditures. There ultimately will be an effect on USE earnings
from environmental compliance expenditures by GMMV, since GMMV operations will
be accounted for by the equity method. GMMV's expenses for compliance with
environmental laws (as well as other matters) are not expected to materially
affect USE cash flow during the next two years, as Kennecott will fund the first
$50,000,000 of costs of GMMV.
28
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 of SMP, GMMV and SGMC 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 impact
on the USE's competitive position.
EMPLOYEES
USE has 54 full-time employees not including Brunton. Crested uses approximately
50 percent of the time of USE employees, and reimburses USE accordingly. Payroll
expense has been shared by USE and Crested since 1981.
MINING CLAIM HOLDINGS
The majority of mining properties owned by USE are unpatented mining claims,
valid title to which depends upon numerous factual matters. Due to changes in
the 1872 Mining Law, USE and/or its co-venturers is obligated to pay $100 annual
per claim in order to preserve the right to possession of unpatented mining
claims. In addition to annual rental fee obligations there are a number of
technical requirements which must be met to establish a valid mining claim.
Satisfaction of these technical requirements cannot be assured.
ITEM 3. LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
ARBITRATION. On June 26, 1991, CRIC submitted certain disputed matters
concerning SMP to arbitration before the American Arbitration Association in
Denver, Colorado, to which USE and Crested filed a responsive pleading and
counterclaim alleging violations of contracts and duties by CRIC related to SMP.
CRIC asserted that USE and Crested, d/b/a/ USECC, were in default under the SMP
partnership agreement ("SMP Agreement"). Prior to initiation of arbitration
proceedings, USE and Crested had notified CRIC it was in default under the SMP
Agreement. The issues raised in the arbitration proceedings were generally
incorporated in the Federal proceedings (see below), wherein the U.S. District
Court of Colorado stayed further proceedings in arbitration. See "Stipulated
Arbitration", below.
FEDERAL PROCEEDINGS. On July 3, 1991, USE and Crested ("plaintiffs") filed Civil
Action No. 91-B-1153 in the United States District Court for the District of
Colorado against CRIC, Nukem and various affiliates of CRIC and Nukem (together,
the "defendants"), alleging that CRIC and Nukem misrepresented material facts to
and concealed material information from the plaintiffs to induce their entry
into SMP Agreement and various related agreements. Plaintiffs also claim CRIC
and Nukem have wrongfully pursued a plan to obtain ownership of the USE-Crested
interests in SMP through various means, including overcharging SMP for uranium
"sold" to SMP by defendants. Plaintiffs further allege that defendants refused
to provide a complete accounting with respect to dealings in uranium with and on
behalf of SMP, and that certain defendants misappropriated SMP property and
engaged in other wrongful acts relating to the acquisition of uranium by SMP.
Plaintiffs requested that the court order rescission of the SMP Agreement and
related contracts, and ask the court to determine the amounts payable to CRIC by
USECC as a result of any such rescission order to place the parties in status
quo. USE and Crested also requested that the court order defendants to
29
make a complete accounting to them concerning the matters alleged in the Amended
Complaint. They requested an award of damages (including punitive, exemplary and
treble damages, interest, costs and attorneys' fees) in an amount to be
determined at trial. Plaintiffs further requested imposition of a constructive
trust on all property of SMP held by defendants, and on profits wrongfully
realized by defendants on transactions with SMP.
The defendants filed various motions, an answer and counterclaims against
plaintiffs, claiming plaintiffs misappropriated a partnership opportunity by
being involved with Kennecott on the Green Mountain uranium properties.
Defendants also requested damages (including punitive, exemplary and treble
damages, interest costs and attorney fees).
STIPULATED ARBITRATION. In fiscal 1994, the plaintiffs and defendants agreed to
proceed with exclusive, binding arbitration before a panel of three arbitrators
with respect to any and all post-December 21, 1988 disputes, claims and
controversies (including those brought in the 1991 arbitration proceedings, the
U.S. District Court proceeding and the Colorado State Court proceeding described
below), that any party may assert against the other. All pre-December 21, 1988
claims, disputes and controversies pending before the U.S. District Court have
been stayed by stipulation between the parties, until the arbitrators enter an
order and award in the arbitration proceeding.
In connection with agreeing to proceed to arbitration as stated above, the
plaintiffs have affirmed the Sheep Mountain Partners partnership, and are
proceeding on common law damages and other claims in the arbitration.
Approximately $15 million cash, comprising part of the damages claimed by
plaintiffs, has been placed in escrow by agreement of the parties pending
resolution of the disputes. Both parties are claiming substantial additional
damages.
The arbitration evidentiary proceedings were completed on May 31, 1995,
following which the parties filed with the arbitrators proposed findings of fact
and conclusions of law and proposed awards on August 7, 1995. Nukem and CRIC
have alleged, among other things, that USECC violated its fiduciary duty to SMP;
transferred USECC's interest in SMP to Kennecott in violation of the SMP
partnership agreement; breached the Uranium Marketing Agreement between USECC
and Nukem; failed to perform under the Operating Agreement for the Sheep
Mountain properties, and overcharged SMP. NUKEM and CRIC seek damages against
USECC in the amount of $47,122,535.
For its claims, USECC is seeking damages against Nukem and CRIC in an amount
exceeding $200 million, which amount USECC requested be trebled under RICO and
similar state law provisions.
The award of the arbitrators is expected by December 1995 or early in calendar
1996. As in most litigation, there is no assurance of the outcome.
COLORADO STATE COURT PROCEEDING. On September 16, 1991, USE and Crested filed
Civil Action No. 91CV7082 in Denver District Court against SMP, seeking
reimbursement of $85,000 per month from the spring of 1991 for maintaining the
SMP underground uranium mines at Crooks Gap on a standby basis. On behalf of
SMP, CRIC filed an answer, affirmative defenses and a counterclaim against
plaintiffs. Plaintiffs filed a motion for summary judgment; the court denied the
motion and stayed all proceedings pending resolution of the Federal proceeding,
which in turn have been stayed through arbitration (see "Stipulated Arbitration"
above).
30
BGBI LITIGATION
On July 30, 1991, Bond Gold Bullfrog, Inc. ("BGBI") filed Civil Action No. 11877
in the District Court of the Fifth Judicial District of Nye County, Nevada,
naming USE, Crested, USECC, Parador and H. B. Layne Contractor, Inc. ("Layne"),
as defendants. The complaint primarily concerns extralateral rights associated
with two patented mining claims owned by Parador and initially leased to a
predecessor of BGBI. USE and Crested assert certain interests in the claims
under an April 1991 assignment and lease with Parador, which claims are in and
adjacent to BGBI's Bullfrog open pit and underground mine.
The BGBI complaint alleges Layne owns 20 unpatented mining claims adjacent to or
in the vicinity of the subject claims, which 20 claims are allegedly under lease
by Layne to BGBI. BGBI seeks a declaratory judgment on any extralateral rights
of defendants to the various claims at the Bullfrog Mine. Parador, USE and
Crested had previously advised BGBI that they are entitled to royalty payments
with respect to extralateral rights of the subject claims on minerals produced
at the Bullfrog Mine, claiming that the lode or vein containing the gold
mineralization apexes on the Parador claims and dips under the Layne claims.
BGBI also seeks to quiet title to its leasehold interest in the subject claims,
alleging that lease thereof to USE and Crested is adverse to the interest
claimed by BGBI, and that the assertions by USE and Crested of an interest in
the claims have no foundation. BGBI seeks a determination that USE and Crested
have no rights in the Claims, and an order enjoining USE and Crested from
asserting any interest in them. BGBI further asserts that in attempting to lease
an interest in the subject claims to USE and Crested, Parador breached the
provisions of its lease to BGBI, and that Parador is responsible for the legal
fees and costs incurred by BGBI in the quiet title action which may be offset
against royalties. Under an arrangement to pay certain legal expenses of
Parador, USE and Crested may be responsible for any such amounts.
BGBI alleges that by entering into the Assignment and Lease of Mining Claims
with Parador, USE and Crested disrupted the contractual relationship between
BGBI and Parador. In addition, BGBI claims that the USECC-Parador agreement
slanders BGBI's title to the Claims. BGBI seeks compensatory damages from
Parador, USE and Crested; punitive damages from USE and Crested; and costs and
other appropriate relief from Parador, USE and Crested, all in amounts to be
determined.
USE and Crested believe that they have rightfully acquired interests in
extralateral rights concerning the subject claims, and have filed an answer,
counterclaim against BGBI and cross-claim against Layne asserting rights to
royalties and other obligations due from BGBI.
The parties have held discovery conferences, exchanged exhibits and scheduled
depositions. USE and Crested filed a motion for summary judgment, which was
denied, and Layne has filed a motion for summary judgment against USE, Crested
and Parador which is pending. This litigation is not expected to have a material
adverse impact on USE, regardless of its outcome. If USE's and Crested's
position concerning extralateral rights is sustained, substantial additional
revenues and income may be received by USE and Crested from royalties payable
with respect to gold produced from the Bullfrog Mine. Trial of the extralateral
rights issues is scheduled for December 11-14, 1995.
ILLINOIS POWER COMPANY LITIGATION
On October 29, 1993, Illinois Power Company ("IPC") filed Civil Action No. 93-
2247 in United States District Court, Central District of Illinois, naming USE,
Crested, USECC, CRIC, Nulux Nukem Luxemburg GmbH ("Nulux") Dresdner Bank, and
SMP, seeking a declaratory judgment that IPC was
31
entitled to terminate the 1988 uranium supply contract between IPC (a utility)
and USECC. Under this contract, IPC agreed to purchase a total of 1.2 million
pounds of uranium in increments from 1990 to 2000 with an option for an
additional 479,440 pounds U\\3\\O\\8\\. Contract prices started at $20.00 per
pound plus escalator provisions, and currently are substantially over spot
market prices.
The Dresdner Bank was dismissed from the case in fiscal 1994. The remaining
defendants filed Motions for Summary Judgment. Following the hearing on May 27,
1994, the Court granted defendants' motions to dismiss IPC's complaint, and
granted summary judgment on all of the defendants' counterclaims against IPC. A
trial to the court on the amounts of plaintiffs' damages was set for October 23,
1995. But in June 1995, the parties settled by amending the IPC contract (with
IPC affirming the validity of the contract), to provide for SMP delivery of
486,443 pounds of uranium concentrates over a three year period, at prices
substantially in excess of current spot market prices. The first delivery of
226,443 pounds U3O8 was made on June 30, 1995 and the monies were placed in
escrow. IPC's payments on the contract as it is performed will be escrowed, with
escrowed payments to go to the prevailing party or as otherwise directed by the
arbitrators in the SMP arbitration. Payments after the SMP dispute is resolved,
will be made as directed by the arbitrators in their award.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On November 23, 1994 USE sent a proxy statement and proxy to its
shareholders of record on October 28, 1994, for the Annual Meeting of
Shareholders held on December 16, 1994.
(b) Proxies for the meeting were solicited under Regulation 14 of the
Securities Exchange Act of 1934; there was no solicitation in opposition to
management's slate, and nominees John L. Larsen and Max T. Evans were elected.
Directors Don C. Anderson and Nick Bebout, Harold F. Herron and David W. Brenman
continued as directors. Voting results were:
Director Name Votes For Votes Withheld
------------- --------- --------------
John L. Larsen 3,435,184 15,898
Max T. Evans 3,434,911 16,091
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 44, has been Controller and Chief Accounting Officer
for 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, and their
Treasurer since December 14, 1990. He serves at the will of the Boards of
Directors. There are no understandings between Mr. Lorimer and any other person,
pursuant to which he was named as an officer, and he has no family relationship
with any of the other executive officers or directors of USE or Crested. During
the past five years, he has not been involved in any Reg. S-K Item 401(f) listed
proceeding.
DANIEL P. SVILAR, age 66, 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.
32
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 USE common
stock is set forth below for fiscal 1994 and 1995.
High Low
---- ---
Fiscal year ended May 31, 1995
------------------------------
First quarter ended 8/31/94 $5.13 $3.88
Second quarter ended 11/30/94 4.75 3.50
Third quarter ended 2/28/95 4.63 3.38
Fourth quarter ended 5/31/95 7.55 4.63
Fiscal year ended May 31, 1994
------------------------------
First quarter ended 8/31/93 $6.25 $4.25
Second quarter ended 11/30/93 5.00 4.12
Third quarter ended 2/28/94 4.12 3.75
Fourth quarter ended 5/31/94 5.13 4.12
(b) Holders
(1) At September 1, 1995, there were 922 stockholders of record for USE 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.
ITEM 6. SELECTED FINANCIAL DATA.
------------------------
May 31,
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Current assets $ 4,058,000 $ 3,866,600 $ 1,650,300 $ 3,260,500 $ 7,302,300
Current liabilities 4,036,000 1,291,700 1,592,100 681,900 816,000
Working capital 22,000 2,574,900 58,200 2,578,600 6,486,300
Total assets 34,165,000 33,090,300 24,037,200 24,583,000 20,500,100
Long-term obligations(1) 15,882,300 16,612,500 2,900,000 4,540,400 3,244,100
Shareholders' equity 12,168,400 12,559,100 15,063,200 14,982,900 15,045,500
__________
/(1)/Includes $3,951,800, $3,951,800, $1,695,600, $1,695,600 and $725,900 of
accrued reclamation costs on uranium property at May 31, 1995, 1994, 1993, 1992,
and 1991, respectively. See Note K of Notes to Consolidated Financial
Statements.
33
For Years Ended May 31,
--------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Revenues $ 9,148,000 $8,776,300 $ 9,045,500 $ 6,353,600 $ 9,569,100
Income (loss) before
equity in income
(loss) of affiliates,
provision for
income taxes and
extraordinary item (2,281,500) (3,587,900) (103,100) 819,200 6,082,900
Equity in (loss) of
affiliates (442,300) (390,700) (444,700) (324,900) (96,100)
Net income (loss) (2,070,600) (3,370,800) (221,900) 613,200 6,164,900
Income (loss) per share before
extraordinary item $ (.42) $ (.70) $ (.05) $ .09 $ .93
Extraordinary item -- -- -- .06 .62
------- ------- ------- ------ ------
Income (loss) per share
before cumulative effect
of accounting change (.42) (.70) (.05) .15 1.55
Cumulative effect at
June 1, 1993 of income
tax accounting change -- (.06) -- -- --
------- ------- ------- ------ ------
Net income (loss)
per share $ (.42) $ (.76) $ (.05) $ .15 $ 1.55
======= ======= ======= ====== ======
Cash dividends per share $ -0- $ -0- $ -0- $ -0- $ -0-
======= ======= ======= ====== ======
34
ITEM 7. USE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is Managements's Discussion and Analysis of those significant
factors which have affected USE's liquidity, capital resources and results of
operations during the periods covered in the USE Consolidated Financial
Statements filed with this Report.
The Company has generated significant losses in the last two years, which
have primarily been driven by the activities in the mineral and oil and gas
operations. The Company is in the process of developing and/or holding
investments in gold, uranium, and oil and gas properties that are currently not
generating any operating revenues, but for which the Company has high
expectations. These properties require expenditures for development, care and
maintenance, holding fees, corporate overhead and administrative expenses, etc.
In addition, legal expenses associated with the litigation and arbitration
surrounding the SMP Partnership and the inability of the Company to utilize
funds generated by that Partnership have compounded the Company's operating and
cash flow situation. Nevertheless, the Company believes that it will meet its
obligations in the coming year, as further discussed below.
LIQUIDITY AND CAPITAL RESOURCES AT MAY 31, 1995
WORKING CAPITAL COMPONENTS. Net cash used in operating activities and
investing activities was $2,479,700 and $537,300, respectively for fiscal 1995.
For the year, these activities resulted in a net cash decrease of $630,400. Cash
provided by financing activities was $2,386,600. This was due primarily to the
draw down of an operating line with a commercial bank of $960,000 and a private
placement in November 1994 of 400,000 shares of the Company's common stock at
$3.00 per share. The Company is obligated to either buy back the stock in
October 1995 at $3.50 per share or issue an additional share of stock for every
three shares purchased during the private placement and register both the
private placement and additional share by February 1996. Management of the
Company intends to issue the additional common shares (133,333).
Working capital decreased during the fiscal year ended May 31, 1995 by
$2,552,900 to $22,000 (from $2,574,900 at May 31, 1994). The principal
components of the decrease were a $630,400 decline in cash and cash equivalents,
a $1,553,900 increase in accounts payable and accrued expenses, and a $1,366,000
increase in lines of credit. These were partially offset by increases in
accounts receivable of $539,400, and in inventory of $142,700.
Cash was primarily used in operations and investing activities during the
period. Cash was used in the development of mining properties, primarily SGMC's
Lincoln gold project ($455,100), development of the Energx gas properties
($218,200), purchases and modification of property and equipment ($178,900) and
the continued investment in affiliates, primarily SMP ($830,500).
Due to disputes among the SMP partners, USE and Crested have not been
reimbursed for care and maintenance costs for the SMP properties since the
spring of 1991. Such costs, including the running of a decline to reduce pumping
and production costs, were approximately $878,500 in fiscal 1995.
CAPITAL REQUIREMENTS - GENERAL: The primary requirements for USE's working
capital during fiscal 1996 are expected to be the costs associated with
development activities of SGMC care and maintenance costs of SMP, care and
maintenance of the Plateau uranium properties in Utah, payments of holding fees
for all mining claims, purchase of uranium for delivery to utility customers of
SMP, drilling and overhead expenses of Energx, and corporate general and
administrative expenses, including costs associated with continuing litigation
and arbitration.
35
CAPITAL REQUIREMENTS - SGMC: SGMC's properties contain reserves of gold. A
portion of those properties has been the subject of a preliminary feasibility
study for the development of the underground Lincoln Mine. The study estimated
that for a 500 ton per day ("tpd") mine/mill operation using a cyanide-flotation
process, up to $18,000,000 may be needed for mine site development, mill and
tailings construction, permitting and the like, to place the proposed mine into
full operation. However, more recent studies indicate a gravity milling process
will produce satisfactory gold recovery rates. Thus, USE and Crested anticipate
building the gravity process system initially, estimated to cost less than
$3,000,000. USE and Crested have already purchased a used semiautogeneous
grinding mill and other equipment for the front end of the facility.
Although pre-production mine development and underground exploration is
substantially complete with respect to currently defined reserves, capital
resources in addition to those currently on hand, will be needed to expand
reserves, complete mine development and construct a mill facility. The timing of
these expenditures will depend upon internal cash flow or additional financing
or finding a joint venture partner. The holding costs are estimated at $418,200
for the two fiscal years ending May 31, 1997.
CAPITAL REQUIREMENTS - SMP: There are no current plans to mine the SMP
Crooks Gap properties during fiscal 1996. However, USE and Crested will continue
to preserve the ore bodies and develop concepts to reduce care and maintenance
costs, including driving a decline to reduce pumping costs (which also would
reduce future mining costs by reducing hoisting costs). Although funds are
available in SMP's bank account of $15,037,800 as of August 1995; these funds
are restricted and subject to a decision by the Arbitration Panel. Since early
1991 SMP has not paid USE and Crested the operating costs and fees associated
with their services as operating manager of the Crooks Gap properties; such
accumulated costs and fees were $4,521,600 at May 31, 1995. Until resolved,
USECC will have to continue funding SMP's care and maintenance expenditures.
Such expenditures were $878,500 in fiscal 1995. The dispute between the SMP
participants should largely be resolved in fiscal 1996.
Notwithstanding disputes between the SMP partners, USE and Crested have
delivered an agreed-upon portion of the uranium concentrates required to fill
contract delivery requirements on certain long-term U\\3\\O\\8\\ contracts since
July 1, 1991. However, during fiscal 1995 all of the deliveries to fill the SMP
contracts were made by Nukem/CRIC. It is uncertain what the protocol will be on
future SMP deliveries. If the SMP partners are unable to agree on how to
separately effect contract performance for the various SMP customers, resulting
delivery delays and/or incomplete deliveries could adversely affect the
contracts, and therefore USE.
CAPITAL REQUIREMENTS - GMMV: Operations of GMMV are not requiring USE's
capital resources, as the initial $50,000,000 of expenses on the GMMV properties
is being paid by Kennecott. USE and Crested continue to project the proposed
Jackpot Mine can be put into production for less than $25,000,000. However,
depending on results of exploration and development projects on the properties,
additional expenditures may be required. GMMV expenditures for fiscal 1996 will
depend on whether one or both declines for the proposed mine are started. A
decision by the Management Committee of GMMV regarding the declines will be made
after all necessary permits are acquired. Nonetheless, GMMV should not require
any funding from USE during fiscal 1996.
CAPITAL REQUIREMENTS - PLATEAU: During fiscal 1995 the annual care and
maintenance costs for the Shootaring Mill were $465,900. It is anticipated that
these costs will continue until the mill is either placed into production or
decommissioned and will be a cash drain to USE unless USE is able to sell or
joint venture a portion of the Plateau assets.
36
CAPITAL REQUIREMENTS - ENERGX: Another requirement of USE's and Crested's
working capital is the continued funding of Energx overhead expenses and
drilling operations. Energx holds several gas leases and participates in two gas
ventures. One venture on the Fort Peck Indian Reservation in Montana with NuGas,
a Canadian firm, requires NuGas to fund the drilling of the first eight wells.
Therefore, capital expenditures by USE on this venture are not anticipated to be
significant in 1996. The second venture, in Montana, required that Energx, as a
condition of its earn-in to the venture, fund the drilling of seven exploratory
wells. However, in September 1995 Energx terminated its interest in this second
venture.
LONG-TERM DEBT AND OTHER OBLIGATIONS: Long-term debt at May 31, 1995, was
$1,161,400, the current portion of which is $232,900 (see Note G to the
Consolidated Financial Statements).
RECLAMATION COSTS. Prior to fiscal 1995, USE and Crested assumed the
reclamation obligations, environmental liabilities and contingent liabilities
for employee injuries, from mining the Crooks Gap and other properties in the
Sheep and Green Mountain Mining Districts. The reclamation obligations, which
are established by governmental regulators, were most recently set at
$1,451,800, which amount is shown on USE's balance sheet as a long-term
obligation.
To assure the reclamation work will be performed, regulatory agencies
require posting of a bond or other security. USE and Crested satisfied this
requirement with respect to SMP properties by mortgaging their executive office
building and a trailer park in Riverton, Wyoming. A portion of the funds for the
reclamation of SMP's properties was to have been provided by SMP, which agreed
to pay up to $.50 per pound of uranium produced from its properties to USE and
Crested for reclamation work. The status of this commitment could be impacted by
the ultimate resolution of the arbitration/litigation with Nukem/CRIC.
Reclamation obligations on the contiguous Big Eagle properties and the
Sweetwater Mill are estimated at approximately $23,960,000. These obligations
have been assumed by the GMMV venturers and secured by a bank letter of credit
provided by Kennecott. The major part of the reclamation and environmental costs
associated with the Sweetwater Mill are not expected to be paid prior to
conclusion of mining activities on Green Mountain. As uranium is processed
through the Mill, a reclamation reserve will be funded on a per unit of
production basis. Up to $8,000,000 (in 1990 dollars) in any reclamation costs
which may be incurred prior to commencement of production or 2001 will be paid
for by UNOCAL.
Reclamation obligations of Plateau are covered by a $2,500,000 cash bond
posted with the U. S. Nuclear Regulatory Commission and a $4,800,000 cash
deposit which will be available for the resolution of any environmental or
nuclear claims if Plateau does not begin decommissioning the mill complex prior
to June 1997. See Item 1 - "Description of Business - Uranium - Shootaring
Canyon Mill."
Reclamation work on any of the above properties need not be fully completed
until a decision is made to abandon the properties, or as otherwise required by
regulatory agencies. Reclamation and environmental costs associated with any of
these properties are not expected to require a material amount of USE funding in
fiscal 1996.
See Note K to the Consolidated Financial Statements for further information
regarding reclamation and environmental costs, and the funding thereof.
37
CAPITAL RESOURCES: The primary source of USE capital resources for fiscal
1996 will be cash on hand, a private placement of the Company's common stock,
sale of certain marketable securities and miscellaneous non-core assets, and
proceeds from financing activities. Fees from oil production (Ft. Peck Lustre
Field, Montana), rentals of real estate holdings and equipment, aircraft
chartering and aviation fuel sales, also will provide cash.
In June and July 1995, the Company sold 812,432 restricted common shares in
a private placement for net proceeds of $2,827,300 ($4.00 per share). USE
voluntarily suspended the offering on July 13, 1995, at the request of the
Securities and Exchange Commission ("SEC") because of an integration question
involving the private offering and the concurrent registration of USE shares
owned by The Brunton Company. No subsequent action has been taken by the SEC and
management and counsel believe no further action will be taken. Resale of these
shares by the private investors will be registered with the SEC in October 1995.
In connection with this private placement, warrants to purchase 81,243 common
shares at $4.80 per share are to be issued to the selling agent. These warrants
are exercisable through July 28, 2000.
Additional capital will be needed to develop and build the mine and mill
complex for the SGMC Lincoln Project. SGMC presently is seeking financing by
joint venture partner or public offering of equity (see Item 1 - "Description of
Business-Gold"). If such financing cannot be obtained, USE and Crested will be
forced to either sell the Lincoln Project or continue funding SGMC's property
holding costs. Continued funding of such costs could cause USE and Crested to
look for other short term working capital resources.
To fund the Energx drilling on the Fort Peck Reservation as well as other
locations USE plans to seek a joint venture partner or obtain financing through
banking institutions or the public market.
Funding of SMP care and maintenance costs may require additional funding,
depending on the outcome of the SMP arbitration/litigation. See "Item 3. Legal
Proceedings Concerning Sheep Mountain Partners." Although USE management is of
the opinion that the SMP arbitration/litigation will be resolved in favor of USE
and Crested, which will result in funds being available to repay USE and Crested
for advances to SMP, this outcome is not assured. In any event, further delays
may also cause short term liquidity requirements.
As of the end of fiscal 1994, USE had a $1,000,000 commercial bank credit
line. Borrowings of $960,000 under the credit line were outstanding at May 31,
1995. In July 1995, the Company paid off this line of credit with some of the
funds from the private placement of USE common shares and renegotiated the line
for an additional twelve months. As of the date of this Report the entire
$1,000,000 of the new line is available.
Although USE currently is not in production on any mineral properties,
development work continues on several of its major investments. USE is not using
hazardous substances and known pollutants to any significant extent in these
activities. Consequently, recurring costs for managing hazardous substances, and
capital expenditures for monitoring hazardous substances or pollutants have not
been significant. Likewise, USE does not have properties which require current
remediation. USE is not aware of any claims for personal injury or property
damages that need to be accrued or funded.
USE and USECC received a notification of tax deficiency from the Internal
Revenue Service for fiscal years ended May 31, 1989, 1990 and 1991. USE filed a
response to the proposed deficiency, and has requested an administrative appeal
of the initial examiner's deficiency finding. To date, USE has received a
preliminary indication that a major portion of the findings have been resolved
in favor of USE.
38
However, no written confirmation has been received as of the date of filing this
Report, and therefore no quantitative amount of tax deficiency can be
determined. USE does not believe the remaining issues will have a material
effect on its financial condition or results of operations. Further, USE is
confident the matters will be resolved favorably at the administrative appeals
level. Until such time, if ever, as the deficiency claim goes to Tax Court after
exhaustion of administrative hearings, management is of the opinion that this
dispute is not a legal proceedings matter.
USE believes available cash, operating revenues, borrowing under its
current line of credit and subsequent financing activities will be adequate to
fund working capital requirements. However, with the exception of GMMV, USE will
require additional sources of funding or joint venture partners to continue its
development of and investment in its various mineral ventures, as stated above.
RESULTS OF OPERATIONS
FISCAL 1995 COMPARED TO FISCAL 1994
The revenues increased slightly in fiscal 1995 to $9,148,000 (compared to
$8,776,300 in fiscal 1994), and total costs and expenses declined slightly in
fiscal 1995 to $11,429,500 (compared to $12,364,200 in fiscal 1994). This
resulted in a reduction in the net operating loss by $1,300,200 to a loss of
$2,070,600 in fiscal 1995 from a loss of $3,370,800 in fiscal 1994. The
improvement in operations can be attributed to two major events, the sale of
property and the consolidation of Brunton's statement of operations. Brunton's
operation were not consolidated in 1994 as the acquisition of Brunton occurred
in May 1994.
Gain on sales of assets increased by $1,229,600 during fiscal 1995 compared
to the corresponding period of the prior year. The increase is due to the sale
of certain real estate in Colorado for $951,600; receipt by Plateau of an option
payment of $100,000 for certain properties in Utah, and sale by Energx of an
interest in a gas property for $195,900. During fiscal 1994, there were only
sales of miscellaneous equipment for $52,800.
There were no mineral sales in fiscal 1995, as a result of the SMP
arbitration, to compare with the $3,732,500 in revenues from the sale of
U\\3\\O\\8\\ in fiscal 1994. However, this had no significant effect on the net
operating losses because of the corresponding reduction in the cost of sales.
During fiscal 1994, USE and Crested made all or a portion (50 percent) of
certain of the uranium deliveries required under the SMP contracts. However,
during fiscal 1995, USE and Crested have not been allowed to make such
deliveries, due to disputes with the other SMP partners; under agreements
reached on an interim basis for the remainder of time required for the SMP
dispute resolution, all deliveries have been made by Nukem. Once the arbitration
proceedings are concluded, deliveries will be made in accordance with the
decision of the arbitration panel.
The consolidated statement of operations for fiscal 1995 of Brunton is
reflected as recreational product sales of $4,452,300. This increase in revenues
was offset by increases in cost of goods sold, and general and administrative
and interest expenses as a result of the consolidation. This resulted in a net
effect of $296,400 to the fiscal 1995 consolidated operations. Legal, accounting
and related expenses of the Brunton acquisition were approximately $50,000.
Although the revenues from Brunton were not consolidated for fiscal 1994,
Brunton had revenues of $4,118,800 during that period, and a net operating
income of $386,700.
39
In fiscal 1995, $1,069,600 was incurred in legal, arbitration fees and
expert fees incurred in connection with the SMP arbitration/litigation, compared
to $576,500 in fiscal 1994. Such expense will be reduced in fiscal 1996.
The reduction in mineral property transactions is related to the Mt. Emmons
molybdenum property, in which USE and Crested have a six percent gross royalty.
In addition to the gross royalty, there were promissory notes of $7,500,000 each
issued to USE and Crested in 1980, with provision for advance royalties. In
1985, AMAX, USE and Crested agreed to amortize the notes at an annual rate of
$1,000,000 each to USE and Crested ($250,000 each, per quarter), in lieu of most
of the advance royalties. Advance royalties of 50,000 pounds of molybdic oxide
(or its cash equivalent) remains payable. During fiscal 1994, the final $500,000
was amortized on the long term note, so there was consequently no amortization
of such debt in fiscal 1995. The remaining component of the decrease in gain
from restructuring mining properties agreements, is as a result of the
fluctuation of the market price of molybdenum, which is paid in kind by AMAX in
lieu of the advance royalty.
Construction operation revenues for the year ended May 31, 1995 decreased
by $1,303,000 from the previous year due to decreased contract work performed by
USE's subsidiary Four Nines Gold, Inc. ("FNG"). The reason for this decrease can
be attributed to FNG not being successful in the bidding process for new
construction work. During fiscal 1995, FNG spent the majority of its time
bidding on a large ($3,500,000) contract for structure work. Late in fiscal
1995, FNG was awarded this contract which is projected to be profitable. Long
term growth and profits for the construction segment is based on FNG's ability
to competitively bid for work and at the same time remain profitable. It is
anticipated that FNG will grow, however, there will be periods of time that show
declines in revenue, as was experienced during fiscal 1995.
On June 1, 1993, USE implemented SFAS No. 109. See Footnote 2 to the USE
Consolidated Financial Statements. The cumulative effect for the year ended May
31, 1994, of this tax accounting change was a decrease of net income of
$267,000. No provision for income taxes was necessary in fiscal 1995.
Interest income increased to $479,900 from $328,700 for the previous year
as a result of higher overall interest rates on invested cash.
Interest expense increased to $279,000 from $117,000 due to higher
borrowing levels related to the line of credit and overall higher interest
rates.
FISCAL 1994 COMPARED TO FISCAL 1993
Overall, while revenues declined only slightly (by $269,200) in fiscal 1994
to $8,776,300 (compared to $9,045,500 for the prior year), costs and expenses
increased substantially (by $3,215,600) in fiscal 1994 to $12,364,200 (compared
to $9,148,600 for 1993). Although operating losses were recorded for some
activities, as discussed below, two items contributed significantly to the
overall operating loss of $3,370,800 for the year. First, general and
administrative expense increased by $741,500 to $2,696,800 (compared to
$1,955,300), reflecting the one-time legal and accounting expenses of acquiring
Brunton (which closed at the end of fiscal 1994), increased general and
administrative expenses associated with SGMC, general and administrative
expenses associated with Plateau, and the write down of a note receivable to
market prior to its assumption by Crested. Second, costs associated with mineral
operations, which are producing no revenues, increased by $469,100 to $1,129,000
(compared to $659,900 for the prior year). This increase is due primarily to the
litigation over the SMP
40
and Parador disputes and increased maintenance cost of heavy mining equipment
due to underground development work on the SMP properties.
Mineral sales revenues increased primarily as a result of the sale and
delivery during the year of U\\3\\O\\8\\ in accordance with SMP utility supply
contracts, however an operating loss of $665,100 for the year was recognized due
to contracted price being lower than the price at which USE could acquire the
U\\3\\O\\8\\ and increased maintenance costs on properties and equipment.
Construction contract revenues increased by $579,900 (to $2,606,400 compared to
$2,026,500 for fiscal 1993), due to increased contract work by USE's subsidiary
Four Nines Gold, Inc. ("FNG"), resulting to an operating profit of $317,500 for
construction contract activities for the year.
Oil sales revenues (recorded for services provided by USE as operator of
the Ft. Peck Lustre Field) dropped by $102,600 to $183,700 (compared to $286,300
in fiscal 1993) due to lower production rates and lower prices for the first two
quarters of fiscal 1994. Separately, but related to oil and gas activities,
certain start-up operations in coalbed methane gas contributed $157,800 to 1994
costs and expenses. See Item 1 - "Description of Business - Oil and Gas -
Energx."
Interest income increased by $250,500 to $328,700 (compared to $78,200 for
fiscal 1993) because of higher cash balances from the Plateau acquisition early
in the year.
During the quarter ended August 31, 1993, USE implemented Statement of
Financial Accounting Standard No. 109 ("Accounting for Income Taxes", hereafter
"SFAS 109"). The cumulative effect of this tax accounting change is a $267,000
decrease in net income for fiscal 1994.
EFFECTS OF CHANGES IN PRICES
Mining operations and the acquisition, development and sale of mineral
properties are significantly affected by changes in commodity prices. As prices
for a particular mineral increase, prices for prospects for that mineral also
increase, making acquisitions of such properties costly, and sales advantageous.
Conversely, a price decline facilitates acquisitions of properties containing
that mineral, but makes sales of such properties more difficult. Operational
impacts of changes in mineral commodity prices are common in the mining
industry.
URANIUM AND GOLD. Changes in the prices of uranium and gold affect USE to
the greatest extent. When uranium prices were relatively high in fiscal 1988,
USE and Crested acquired the Crooks Gap properties, and thereafter put the
properties into production. When uranium prices fell sharply during fiscal 1989-
1991, USECC suspended mining operations for SMP, because uranium could be
purchased at prices less than the costs of producing uranium. Uranium production
in the United States reportedly fell by 25 percent to 33 percent in 1990, due to
the lowest prices for uranium since the market developed in the 1960s. However,
these low prices created opportunities for the acquisition of the Sweetwater
Mill and the Shootaring Mill.
Changes in uranium prices directly affect the profitability of SMP's
uranium supply agreements with utilities. Certain of those agreements become
advantageous to USE when the spot market price for uranium falls significantly
below the price which a utility has agreed to pay. Some of the supply agreements
of SMP were acquired before the fall of spot market prices during fiscal 1989-
1991. Those fixed-price contracts, which have contract prices exceeding current
spot market rates, are currently advantageous, as the uranium to fill them can
be readily obtained at favorable prices. Although such contracts benefit SMP and
USE in a falling market, a corresponding adverse impact would not be anticipated
in the event of substantially increased prices. SMP would produce uranium from
its Crooks
41
Gap properties to fill those contracts, in the event of a sustained increase in
the spot market price above the contract prices.
USE believes SGMC's Lincoln Mine will be profitable with gold prices over
$290 per ounce. The price of gold has remained relatively stable over the past
year between $340 and $390 per ounce.
MOLYBDENUM AND OIL. Changes in prices of molybdenum and petroleum are not
expected to materially affect USE with respect to either its molybdenum advance
royalties or its fees associated with oil production. A significant sustained
increase in the price of molybdenum could increase the likelihood that the Mt.
Emmons properties will be developed, but such an increase is not anticipated in
fiscal 1996.
ITEM 8. FINANCIAL STATEMENTS.
Financial statements meeting the requirements of Regulation S-X for the
Registrant and its affiliate, USECC, follow immediately. Financial statements of
GMMV are included as schedules and immediately follow the index at Item
14(a)(2).
42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and Shareholders of
U.S. Energy Corp.:
We have audited the accompanying consolidated balance sheets of U.S. Energy
Corp. (the "Company") (a Wyoming corporation) and affiliates as of May 31, 1995
and 1994, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended May 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of U.S. Energy Corp. and
affiliates as of May 31, 1995 and 1994, and the results of their operations and
their cash flows for each of the three years in the period ended May 31, 1995,
in conformity with generally accepted accounting principles.
As discussed further in Notes E, F and K, the Company and its 52%-owned
subsidiary, Crested Corp., (together referred to as "USECC") are involved in
litigation and arbitration with their 50/50 partner in Sheep Mountain Partners
("SMP"), Nukem, Inc. and its subsidiary Cycle Resource Investment Corporation
("CRIC"). USECC, CRIC and Nukem have filed claims and counterclaims against each
other alleging violations of the SMP Partnership Agreement among other various
allegations. As a consequence of this litigation and arbitration, USECC has been
required to fund all of the expenditures to maintain the SMP mineral properties
on standby, resulting in advances to SMP of $4,521,600. USECC has expensed its
equity portion of these advances as of May 31, 1995. Recovery of the remaining
investment and advances of $2,481,600 is dependent upon the outcome of the
litigation and arbitration, which is uncertain at this time. Most of the
litigation claims were consensually submitted to binding arbitration. The
evidentiary stage of the arbitration proceedings are concluded and damage claims
have been submitted to the arbitration panel. USECC is seeking damages in excess
of $200 million. Nukem and CRIC are seeking damages of approximately $48
million. The resolution of these matters is not anticipated until December 1995.
Counsel for the Company has indicated that an evaluation of the likelihood of an
unfavorable outcome or any estimate of the amount or range of potential loss is
premature at this time given the state of the proceedings. Accordingly, the
accompanying financial statements do not reflect any adjustments that might
result from this litigation and arbitration.
As discussed in Notes B and H to the consolidated financial statements,
effective June 1, 1993, the Company changed its method of accounting for income
taxes.
ARTHUR ANDERSEN LLP
Denver, Colorado,
August 28, 1995.
43
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
ASSETS
May 31,
-------------------------------
1995 1994
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 551,300 $ 1,181,700
Accounts and notes receivable (Note C):
Trade, net of allowance of $51,000
and $32,600 for doubtful accounts 1,484,100 1,009,800
Related parties, net of allowance of $1,600
and $1,600 for doubtful accounts 231,600 166,500
Inventory (Note B) 1,567,300 1,424,600
Current portion long-term
notes receivable (Note F) 74,400 --
Other 149,300 84,000
------------ ------------
TOTAL CURRENT ASSETS 4,058,000 3,866,600
INVESTMENTS AND ADVANCES (Notes E and F):
Affiliates 3,244,600 2,807,900
Restricted investments 7,757,400 7,728,500
------------ ------------
11,002,000 10,536,400
PROPERTIES AND EQUIPMENT (Notes B, C, D and F):
Land and mobile home park 2,771,900 2,803,100
Buildings and improvements 6,010,800 5,918,800
Aircraft and other equipment 6,104,000 6,047,600
Developed oil properties, full cost method 1,769,800 1,769,800
Undeveloped gas properties 422,000 207,900
Mineral properties and mine development costs 10,121,700 9,505,000
------------ ------------
27,200,200 26,252,200
Less accumulated depreciation, depletion
and amortization (9,700,800) (8,874,000)
------------ ------------
17,499,400 17,378,200
------------ ------------
OTHER ASSETS:
Accounts and notes receivable:
Real estate sales and other (Note F) 945,700 28,700
Affiliates and related parties 25,000 25,000
Employees (Note C) 505,100 366,000
Buildings and improvements held for sale 7,500 758,200
Long-term deferred compensation (Note J) 5,100 17,300
Deposits and other 117,200 113,900
------------ ------------
1,605,600 1,309,100
------------ ------------
$ 34,165,000 $ 33,090,300
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets
44
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
May 31,
---------------------------
1995 1994
---- ----
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,276,100 $ 722,200
Lines of credit (Note G) 1,527,000 161,000
Current portion of long-term debt (Note G) 232,900 408,500
------------ ------------
TOTAL CURRENT LIABILITIES 4,036,000 1,291,700
LONG-TERM DEBT (Note G) 928,500 1,109,100
RECLAMATION LIABILITY (Notes F and K) 3,951,800 3,951,800
OTHER ACCRUED LIABILITIES (Note F) 10,818,700 11,284,600
DEFERRED TAX LIABILITY (Note H) 183,300 267,000
COMMITMENTS AND CONTINGENCIES (Note K)
MINORITY INTERESTS 708,200 1,326,400
FORFEITABLE COMMON STOCK,
$.01 par value; issued 187,820 and
169,300, shares, respectively, forfeitable
until earned (Notes C and J) 1,370,100 1,300,600
SHAREHOLDERS' EQUITY (Notes C and J):
Preferred stock, $.01 par value; authorized,
100,000 shares; none issued or outstanding -- --
Common stock, $.01 par value; authorized,
20,000,000 shares; issued 5,262,794 and
4,693,090 shares, respectively 52,500 46,800
Additional paid-in capital 18,629,000 16,784,800
Accumulated deficit (3,256,400) (1,185,800)
Treasury stock at cost, 769,943 and 713,276
shares, respectively (2,242,400) (2,072,400)
Unallocated ESOP contribution (1,014,300) (1,014,300)
------------ ------------
12,168,400 12,559,100
------------ ------------
$ 34,165,000 $ 33,090,300
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets
45
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended May 31,
------------------------------------------
1995 1994 1993
---- ---- ----
REVENUES:
Mineral sales (Note E) $ -- $ 3,732,500 $ 2,690,800
Construction contract revenues 1,303,400 2,606,400 2,026,500
Commercial operations 1,253,200 1,165,100 894,400
Recreational product sales (Notes A and B) 4,452,300 -- --
Oil sales 194,500 183,700 286,300
Gain on sales of assets (Note F) 1,282,400 52,800 326,000
Gain on sale of investments -- -- 408,600
Gain from restructuring mineral
properties agreements (Note F) 85,500 626,800 2,105,800
Interest 479,900 328,700 78,200
Management fees and other (Note C) 96,800 80,300 228,900
------------ ------------ -----------
9,148,000 8,776,300 9,045,500
------------ ------------ -----------
COSTS AND EXPENSES:
Cost of minerals sold -- 3,895,400 2,617,600
Mineral operations 1,654,300 1,129,000 659,900
Construction costs 1,038,300 2,288,900 1,760,400
Commercial operations 2,070,100 1,989,400 1,573,000
Cost of recreational products sold 2,407,000 -- --
Oil production 78,100 89,800 122,400
General and administrative 3,606,100 2,696,800 1,955,300
Abandonment of mining claims -- -- 378,700
Gas operations 206,600 157,800 --
Loss on sale of investments 90,000 -- --
Interest 279,000 117,100 81,300
------------ ------------ -----------
11,429,500 12,364,200 9,148,600
------------ ------------ -----------
LOSS BEFORE MINORITY INTEREST
IN LOSS, EQUITY IN LOSS OF
AFFILIATES AND INCOME TAXES (2,281,500) (3,587,900) (103,100)
MINORITY INTEREST IN LOSS OF
CONSOLIDATED SUBSIDIARIES 653,200 874,800 325,900
EQUITY IN LOSS OF AFFILIATES (442,300) (390,700) (444,700)
------------ ------------ -----------
(Continued)
46
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
Year Ended May 31,
-------------------------------------------
1995 1994 1993
---- ---- ----
LOSS BEFORE INCOME TAXES $ (2,070,600) $ (3,103,800) $ (221,900)
INCOME TAXES (Note H) -- -- --
------------ ------------ -----------
LOSS BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (2,070,600) (3,103,800) (221,900)
CUMULATIVE EFFECT AT JUNE 1, 1993
OF INCOME TAX ACCOUNTING CHANGE
(Notes B and H) -- (267,000) --
------------ ------------ -----------
NET LOSS $ (2,070,600) $ (3,370,800) $ (221,900)
============ ============ ===========
LOSS PER SHARE AMOUNTS:
Loss before cumulative
effect of accounting change $ (.42) $ (.70) $ (.05)
Cumulative effect at June 1, 1993 of
income tax accounting change -- (.06) --
------------ ------------ -----------
NET LOSS PER SHARE $ (.42) $ (.76) $ (.05)
============ ============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 4,977,050 4,431,469 4,248,848
============ ============ ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
47
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Accumulated
Additional Deficit)/ Unallocated
Common Stock Paid-In Retained Treasury Stock ESOP
--------------------- ----------------------
Shares Amount Capital Earnings Shares Amount Contribution
------ ------ --------- ------------ ------ ------ ------------
Balance, May 31, 1992 4,163,201 $ 41,600 $ 14,749,600 $ 2,406,900 435,301 $(1,200,900) $(1,014,300)
Funding of ESOP 49,087 400 183,000 -- -- -- --
Issuance of common stock
to affiliate for cash 50,000 500 137,000 -- -- -- --
Common stock issued to a
third party in prior year
that was forfeitable (5,000) -- (18,700) -- -- -- --
Net loss -- -- -- (221,900) -- -- --
----------- -------- ------------- ------------ ------- ------------ ------------
Balance, May 31, 1993 4,257,288 42,500 15,050,900 2,185,000 435,301 (1,200,900) (1,014,300)
Funding of ESOP 46,332 400 184,900 -- -- -- --
Issuance of common stock
to affiliate in lieu of
payment of loan 100,000 1,000 299,000 -- -- -- --
Issuance of common stock
to purchase an affiliate 276,470 2,800 1,197,100 -- -- -- --
Issuance of common stock
to third party for
services rendered 7,000 100 26,900 -- -- -- --
Issuance of common stock
to an employee for
services rendered 1,000 -- 4,300 -- -- -- --
Issuance of common stock 5,000 -- 21,700 -- -- -- --
Common stock owned by
Brunton -- -- -- -- 150,000 (437,500) --
Common stock owned by
Crested Corp. -- -- -- -- 127,975 (434,000) --
Net loss -- -- -- (3,370,800) -- -- --
----------- -------- ------------- ------------ ------- ------------ ------------
Balance, May 31, 1994 4,693,090 $ 46,800 $ 16,784,800 $(1,185,800) 713,276 $(2,072,400) $(1,014,300)
=========== ======== ============= ============ ======= ============ ============
Total
Shareholders'
Equity
-------------
Balance, May 31, 1992 $14,982,900
Funding of ESOP 183,400
Issuance of common stock
to affiliate for cash 137,500
Common stock issued to a
third party in prior year
that was forfeitable (18,700)
Net loss (221,900)
------------
Balance, May 31, 1993 15,063,200
Funding of ESOP 185,300
Issuance of common stock
to affiliate in lieu of
payment of loan 300,000
Issuance of common stock
to purchase an affiliate 1,199,900
Issuance of common stock
to third party for
services rendered 27,000
Issuance of common stock
to an employee for
services rendered 4,300
Issuance of common stock 21,700
Common stock owned by
Brunton (437,500)
Common stock owned by
Crested Corp. (434,000)
Net loss (3,370,800)
------------
Balance, May 31, 1994 $ 12,559,100
============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
48
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(continued)
(Accumulated
Additional Deficit)/ Unallocated
Common Stock Paid-In Retained Treasury Stock ESOP
--------------------- ----------------------
Shares Amount Capital Earnings Shares Amount Contribution
------ ------ --------- ------------ ------ ------ ------------
Balance May 31, 1994 4,693,090 $ 46,800 $ 16,784,800 $(1,185,800) 713,276 $(2,072,400) $(1,014,300)
Funding of ESOP 37,204 400 199,600 -- -- -- --
Issuance of common stock
through private placement
(Note J) 400,000 4,000 1,196,000 -- 56,667 (170,000) --
Issuance of common stock
to third party for
services rendered 5,000 -- 23,100 -- -- -- --
Issuance of common stock
for exercised option 107,500 1,100 345,700 -- -- -- --
Issuance of common stock
to buyout third party
in property venture 20,000 200 79,800 -- -- -- --
Net loss -- -- -- (2,070,600) -- -- --
----------- -------- ------------ ----------- ------- ----------- -----------
Balance May 31, 1995 5,262,794 $ 52,500 $ 18,629,000 $(3,256,400) 769,943 $(2,242,400) $(1,014,300)
=========== ======== ============ =========== ======= =========== ===========
Total
Shareholders'
Equity
-------------
Balance May 31, 1994 $12,559,100
Funding of ESOP 200,000
Issuance of common stock
through private placement
(Note J) 1,030,000
Issuance of common stock
to third party for
services rendered 23,100
Issuance of common stock
for exercised option 346,800
Issuance of common stock
to buyout third party
in property venture 80,000
Net loss (2,070,600)
-----------
Balance May 31, 1995 $12,168,000
===========
Shareholders' Equity at May 31, 1995 does not include 187,820 shares currently
issued but forfeitable if certain conditions are not met by the recipients.
However, both the "Outstanding Shares at August 25, 1995" on the cover page and
the "Weighted Average Shares Outstanding" on the Consolidated Statement of
Operations include the forfeitable shares. These two line items also include the
717,026 shares of common stock held by a majority-owned subsidiary, which, in
consolidation, are treated as treasury shares.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
49
U.S. ENERGY CORP. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended May 31,
----------------------------------------------
1995 1994 1993
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,070,600) $ (3,370,800) $ (221,900)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest in loss of
consolidated subsidiaries (653,200) (874,800) (325,900)
Depreciation, depletion and amortization 766,200 720,200 908,400
Abandoned mining claims -- -- 378,700
Gain from restructuring mineral properties
agreements -- (500,000) (2,000,000)
Equity in loss from affiliates 442,300 390,700 444,700
Gain on sale of assets (1,282,400) (52,800) (326,000)
(Gain) loss on sale of marketable
equity securities 90,000 -- (408,600)
Common stock issued to fund ESOP 200,000 185,300 183,400
Non-cash compensation 69,500 75,900 55,600
Common stock exchanged for services 23,100 34,300 --
Other (318,200) (149,900) (246,400)
Net changes in:
Accounts receivable (539,400) 468,700 (406,800)
Inventory (142,700) (9,100) 407,300
Other assets (68,600) (4,000) 62,200
Accounts payable and accrued expenses 1,553,900 (573,700) 557,900
Other liabilities (465,900) (415,400) --
Deferred tax liability (83,700) 267,000 --
------------ ------------ -----------
NET CASH USED IN OPERATING ACTIVITIES (2,479,700) (3,808,400) (937,400)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in purchase of subsidiaries -- 7,193,500 --
Development of mining properties (455,100) (796,300) (740,500)
Development of gas properties (218,200) (207,900) --
Proceeds from sale of property and equipment 854,300 149,700 848,800
Proceeds from sale of investments 199,300 -- 611,200
Purchases of property and equipment (178,900) (855,800) (656,700)
Changes in notes receivable 91,800 73,700 (173,400)
Investments in affiliates (830,500) (760,500) (1,108,600)
------------ ------------ -----------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (537,300) 4,796,400 (1,219,200)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,376,800 -- 137,500
Proceeds from long-term debt 626,400 368,400 914,600
Net proceeds from lines of credit 1,366,000 -- --
Repayments of long-term debt (982,600) (654,300) (202,700)
------------ ------------ -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 2,386,600 (285,900) 849,400
------------ ------------ -----------
(Continued)
The accompanying notes to consolidated financial statements are an integral part
of these statements.
50
U.S ENERGY CORP. AND AFFILLIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Year Ended May 31,
----------------------------------------
1995 1994 1993
---- ---- ----
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ (630,400) $ 702,100 $(1.307,200)
CASH AND CASH EQUIVALENTS, Beginning of year 1,181,700 479,600 1,786,800
----------- ---------- -----------
CASH AND CASH EQUIVALENTS, End of year $ 551,300 $1,181,700 $ 479,600
=========== ========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 242,100 $ 114,200 $ 79,100
=========== ========== ===========
Income taxes paid $ -- $ -- $ --
=========== ========== ===========
Non-cash investing and financing activities:
Notes received for sale of assets $ 1,550,000 $ -- $ --
=========== ========== ===========
Issuance of common stock to acquire affiliate $ 80,000 $1,199,900 $ --
=========== ========== ===========
Issuance of common stock in lieu of payment
on debt to affiliate $ -- $ 300,000 $ --
=========== ========== ===========
Release of forfeitable common stock bonus
to third party $ -- $ 18,000 $ --
=========== ========== ===========
Issuance of common stock to officers and employees
for services rendered $ -- $ 104,400 $ --
=========== ========== ===========
Change in valuation of reclamation liability $ -- $ (243,800) $ --
=========== ========== ===========
Conversion of SRRI receivable to
investment upon SRRI loan default $ -- $1,857,800 $ --
=========== ========== ===========
Undeveloped mining properties contributed to
the Green Mountain Mining Venture $ -- $ 243,800 $ --
=========== ========== ===========
Acquisition of USE common stock in exchange
for shareholder notes receivable $ -- $ 445,300 $ --
=========== ========== ===========
Significant assets acquired and liabilities assumed in 1994 acquisition of
subsidiaries:
Reclamation liability $ 2,500,000
Other accrued liabilities 11,700,000
Restricted investments (7,300,000)
Other 293,500
-----------
Net cash acquired in
purchase of subsidiaries $ 7,193,500
===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
51
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
A. BUSINESS ORGANIZATION AND DESCRIPTION:
U.S. Energy Corp. (the "Company" or "USE") was incorporated in the State of
Wyoming on January 26, 1966. The Company engages in the acquisition,
exploration, holding, sale and/or development of mineral properties, mining and
marketing of minerals. Principal mineral interests are in uranium, gold, and
molybdenum. The Company also holds various real and personal properties used in
commercial operations and engages in the exploration, development and production
of petroleum and methane gas. Most of these activities are conducted through
the joint venture discussed below and in Note B. The Company, through its
wholly-owned subsidiary, The Brunton Company ("Brunton"), (see Note C), also
engages in the manufacturing and/or marketing of compasses and the distribution
of outdoor recreational products, including knives and binoculars. In addition,
through its majority owned subsidiary, Four Nines Gold, Inc. ("FNG"), the
Company engages in projects such as the construction of municipal sewage
systems, irrigation projects and other civil engineering matters.
The Company and its 52%-owned subsidiary, Crested Corp. ("Crested") (see
Note E) are engaged in two ventures to develop certain uranium properties, one
with Kennecott Uranium Company ("Kennecott") known as Green Mountain Mining
Venture ("GMMV"), formed on June 1, 1990, and the second, a partnership with
Nukem, Inc. ("Nukem") through its wholly-owned subsidiary Cycle Resource
Investment Corporation ("CRIC"), known as Sheep Mountain Partners ("SMP").
During fiscal 1991, the Company and Crested formed USECC Gold Limited Liability
Company ("USECC Gold"), and with Seine River Resources Inc. ("SRRI") established
the Sutter Gold Venture ("SGV") to develop certain gold properties located in
California. The remaining interest of SRRI was acquired by the Company and
Crested during fiscal 1994 (see Note F). During fiscal 1995, the Sutter Gold
Venture was terminated, USE and Crested formed a new Wyoming corporation, Sutter
Gold Mining Company, and agreed to exchange their interests in USECC Gold for
common stock of Sutter Gold Mining Company (hereafter, "SGMC").
During fiscal 1994, the Company also acquired 100% of the outstanding stock
of Plateau Resources Limited ("Plateau"), which owns a uranium mill and support
facilities in Southeastern Utah. Currently the mill is nonoperating but being
maintained. See a further discussion of the acquisition details in Note F.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of USE and affiliates include the
accounts of the Company, the accounts of its majority-owned subsidiaries:
Brunton (100%), Plateau Resources Ltd ("Plateau") (100%), Energx, Ltd ("Energx")
(90%), FNG (50.9%), SGMC (100%), Crested (52%) and USECC Joint Venture
("USECC"), a joint venture through which USE and Crested conduct the bulk of
their operations. USECC is owned equally by the Company and Crested. USECC
owns the buildings and other equipment (see Note D) used by the Company and has
invested in SMP (see Notes E and F). The accompanying consolidated balance
sheets include the accounts of USE, Brunton, Plateau, Energx, FNG, USECC, SGMC
and Crested for both 1995 and 1994. The accompanying consolidated statements of
52
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
operations include USE, Brunton, Plateau, Energx, FNG, USECC, SGMC and Crested
for fiscal 1995, and USE, Plateau, Energx, FNG, USECC, SGMC and Crested for
fiscal 1994. Brunton was not consolidated in the statement of operations and
cash flows in 1994 or prior because the Company acquired it on May 20, 1994.
The accompanying consolidated statement of operations for fiscal 1993 includes
USE, FNG, USECC, SGMC and Crested.
Investments in other joint ventures and 20% to 50% owned companies are
accounted for by the equity method (Note E). Investments of less than 20% in
companies are accounted for by the cost method. All material intercompany
profits, transactions and balances have been eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
INVESTMENTS
The Company adopted Statement of Financial Accounting Standards No. 115
("SFAS No. 115"), "Accounting for Certain Investments in Debt and Equity
Securities" in fiscal 1995. Based on the provisions of SFAS No. 115, the
Company accounts for investments as held-to-maturity. Held-to-maturity
securities are measured at amortized cost and are carried at the lower of
aggregate cost or fair market value.
INVENTORIES
Inventories consist primarily of outdoor recreational products including
compasses, knives and binoculars. Other inventory includes aviation fuel,
associated aircraft parts, mining supplies, purchased uranium and gold ore
stockpile. Manufactured and retail inventories are stated using the average
cost method of accounting for inventories. Finished goods and work in process
inventories include related materials, labor and applied overhead. Other
inventory is stated at the lower of cost or market.
Inventories consist of the following:
May 31,
------------------------------
1995 1994
----------- -----------
Outdoor Recreational Products:
Raw materials $ 385,100 $ 508,900
Work in process 201,100 161,600
Finished goods 895,000 664,600
Other 86,100 89,500
----------- -----------
$ 1,567,300 $ 1,424,600
=========== ===========
53
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
PROPERTIES AND EQUIPMENT
Land, buildings, improvements, aircraft and other equipment are carried at
cost.
Depreciation of buildings and improvements, aircraft and other equipment
is provided principally by the straight-line method over estimated useful lives
ranging from three to forty-five years.
The Company capitalizes all costs incidental to the acquisition,
exploration, holding and development of mineral properties as incurred. The
costs of mine development are deferred until production begins on the basis that
they will be recovered through future mining operations. Once commercial
production begins, mine development costs incurred to maintain production will
be expensed. Capitalized costs are charged to operations at the time the
Company determines that no economic ore bodies exist on such properties. An
impairment allowance is charged to operations at such time when, in the opinion
of management, the carrying value of the property exceeds its expected future
economic benefit. Costs and expenses related to general corporate overhead are
expensed as incurred.
The Company and Crested have acquired substantial mining property assets
and associated facilities at minimal cash cost, primarily through the assumption
of reclamation and environmental liabilities. Certain of these assets are owned
by various ventures in which the Company is either a partner or venturer. The
market value of these assets and the reclamation and environmental liabilities
associated with them are not reflected in the accompanying balance sheets (see
Note K).
Proceeds from the sale of undeveloped mineral properties are treated as a
recovery of cost with any excess of proceeds over cost recognized as gain.
The Company follows the full-cost method of accounting for oil and gas
properties whereby all costs incurred in the acquisition, exploration and
development of the properties, including unproductive wells, are capitalized,
limited to the present value of the estimated proved reserves and the lower of
cost or estimated fair value of unproved properties.
Depreciation, depletion and amortization of oil properties is provided by
the unit of production method based on the estimated reserves to be recovered.
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121")
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" was issued in March 1995. The provisions of SFAS No. 121
require the Company to evaluate the carrying value of its long-term assets when
certain events occur that may effect the realizability of its assets. SFAS No.
121 is required to be adopted in fiscal 1996. The Company has not determined
the impact, if any, the adoption of SFAS No. 121 will have on its financial
position or results of operations.
54
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
REVENUE RECOGNITION
Advance royalties which are payable only from future production or which
are non-refundable are recognized as revenue when received (see Note F). Non-
refundable option deposits are recognized as revenue when the option expires.
Sales of gold and uranium are recognized upon delivery. Revenues are
recognized from the rental of certain assets as they are rented. Revenue from
commercial operations are recognized as goods and services are delivered. Oil
sales revenue is recognized as the oil is produced (see Notes D and F.)
Revenue from long-term construction contracts is recognized on the
percentage-of-completion method determined by the ratio of costs incurred to
management's estimate of total anticipated costs. If estimated total costs on
any contract indicate a loss, the Company provides currently for the total
anticipated loss on the contract. Billings on uncompleted long-term contracts
may be greater than or less than incurred costs and estimated earnings, and are
shown as current liabilities or current assets in the accompanying balance
sheets.
Revenue from sales of outdoor recreational products are recognized upon
shipment of products.
INCOME TAXES
Effective June 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes".
This statement requires recognition of deferred income tax assets and
liabilities for the expected future income tax consequences, based on enacted
tax laws, of temporary differences between the financial reporting and tax basis
of assets, liabilities and carryforwards.
In contrast to the previous method, SFAS No. 109 requires recognition of
deferred tax assets for the expected future effects of all deductible temporary
differences, loss carryforwards and tax credit carryforwards. Deferred tax
assets are then reduced, if deemed necessary, by a valuation allowance for any
tax benefits which, based on current circumstances, are not assured of
realization.
The Company previously followed Accounting Principles Board Opinion No. 11
whereby deferred income taxes were provided to reflect the tax effect of timing
differences.
As a result of adopting SFAS No. 109, the Company recognized a cumulative
provision for change in accounting principle of $267,000 or $(0.06) per common
share as of the beginning of the fiscal year. The provision is included under
the caption "cumulative effect at June 1, 1993 of income tax accounting change"
in the accompanying Consolidated Statements of Operations.
55
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding during each period. The dilutive effect of stock options is
not included in the computation, because they were antidilutive.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1994 and 1993 financial
statements to conform to the classifications used in 1995.
C. RELATED-PARTY TRANSACTIONS:
In November 1993, USE and Brunton executed an Agreement and Plan of Share
Exchange ("Agreement") which closed in late May 1994. The Exchange Agreement
provided for the Exchange of 276,470 shares of USE common stock for all
5,529,200 outstanding shares of Brunton's common stock, which were not owned by
USE. Brunton was therefore now owned 100% by USE as of May 31, 1994. The
transaction was accounted for as a purchase.
The Company and Crested provide management and administrative services for
affiliates under the terms of various management agreements. The Company
provides all employee services required by Crested. In exchange, Crested is
obligated to the Company for its share of the costs for providing such
employees. Revenues from services by the Company to affiliates other than
Crested were $88,300, $80,300 and $113,000 in fiscal 1995, 1994 and 1993,
respectively.
At May 31, 1995, the Company's President and immediate family were indebted
to the Company in the amount of $609,000, of which $460,300 is represented by
notes secured by 150,600 shares of the Company's common stock.
On August 19, 1994, the Company sold a house in Riverton, Wyoming, to
Harold F. Herron, Vice President of the Company for an amount equal to a current
independent appraisal. At the same time the Company loaned to Mr. Herron the
sum of $112,170 secured by 30,000 shares of the Company's common stock for a
period of five years. This amount is included in the $609,000 discussed above.
As of May 31, 1995, the Company holds a $260,600 non-interest bearing, non-
recourse promissory note from an affiliate. The note is secured by 60,000
shares of the Company's common stock and is due October 30, 1995. This note is
eliminated in consolidation.
In April 1993, the Company received a $211,800 advance from an affiliate
and sold 50,000 shares of common stock to this affiliate for $2.75 per share,
which approximated market value. The advance is in the form of a note to be
repaid by 2003, with interest at 2.5% above prime. This note was paid off
during fiscal 1994. As further consideration for the note, the Company granted
the affiliate options for 150,000 common shares at $3.50 per share. These
options are exercisable over a five year period. None of these options have
been exercised as of May 31, 1995.
56
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
In November 1992, the Company entered into a sale/leaseback agreement as
the lessee, and sold certain machinery and equipment to Brunton. This machinery
and equipment is being leased from the affiliate on a month to month basis for
$6,800. The Company had deferred the gain of $249,800 on this sale as of May
31, 1993. The deferred gain was eliminated in consolidation as of May 31, 1995
and 1994 (Note B).
On May 26, 1992, the Company received 1,618,746 shares of Crested common
stock in exchange for the cancellation of accounts receivable of $809,300 due to
the Company from Crested. The receipt of these shares increased the Company's
ownership in Crested to 52.9%. Therefore, both the balance sheets and
statements of operation have been consolidated with the Company for all years
presented.
On June 14, 1995, USECC signed a six year option to acquire a 7,200 square
foot hangar at the Riverton Regional Airport, for $110,000, from a private
company affiliated with a director of USE and Crested.
D. USECC JOINT VENTURE:
USECC operates the Glen L. Larsen office complex; Wind River Estates, a
100-unit mobile home park; an aircraft hangar with a fixed base operation,
office space and certain aircraft; holds interests in various mineral properties
and ventures including SMP and GMMV; conducts oil and gas operations; and
transacts all operating and payroll expenses, except for specific expenses
allocated directly to each venturer. The joint venture agreement also provides
for the allocation of certain operating expenses to other affiliates.
E. INVESTMENTS AND ADVANCES:
The Company's restricted investments are in place to secure various
decommissioning costs, reclamation and holding costs. Investments are comprised
of debt securities issued by the U. S. Treasury that mature at varying times
from three months to one year from the original purchase date. As of May 31,
1995, the cost of debt securities was a reasonable approximation of fair market
value.
The Company's investment in and advances to affiliates are as follows:
Consolidated Carrying Value at May 31,
-------------------------
Ownership 1995 1994
------------ ---- ----
Equity Method:
GMMV 50.0% $ 724,800 $ 724,800
Ruby Mining Company 26.7% 38,200 40,700
SMP (Note F) 50.0% 2,481,600 2,042,400
----------- -----------
$ 3,244,600 $ 2,807,900
=========== ===========
57
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
Equity income (loss) from investments and writedowns of investments
accounted for by the equity method are as follows:
Year Ended May 31,
-------------------------------------------
1995 1994 1993
---- ---- ----
SMP (Note F) $(439,200) $(514,800) $(532,000)
Brunton (Note B)
(consolidated beginning in 1995) -- 140,500 85,600
Ruby Mining Company (3,100) (16,400) 1,700
GMMV -- -- --
--------- --------- ---------
$(442,300) $(390,700) $(444,700)
========= ========= =========
There are currently litigation and arbitration proceedings with the
Company's partner in the SMP partnership, as discussed further in Note K.
Because of the litigation and arbitration, the Company has provided funding to
SMP in the amount of $4,521,600 for standby mine care and maintenance, the
rental of certain mining equipment and administrative costs as of May 31, 1995.
These advances are included in the above investment account net of the Company's
equity share of SMP's expenses. The Company considers the $4,521,600 to be a
receivable from SMP. Whether or not the $4,521,600 of advances are recovered
will depend on the outcome of the litigation and arbitration with Nukem and its
wholly-owned subsidiary CRIC as further discussed in Note K.
SMP has entered into various market related and base price escalated
uranium sales contracts with certain utilities which require delivery of an
estimated 903,200 to 1,213,800 pounds of uranium annually from 1996 through
2000. These contracts also allow for the quantities to be substantially
increased by the utilities. Until the disputes between the SMP partners are
resolved, the Company and Crested are arranging for the purchase and delivery of
their portion of the contracts or are allowing Nukem and CRIC to make the entire
delivery. The deliveries will be satisfied by purchases in the spot market,
existing purchase contracts, uranium inventories or by producing from SMP
properties. Production will not be commenced, however, until uranium prices rise
substantially. Most market related sales contracts can be settled through spot
market purchases. All base price sales contracts exceed the spot market price as
of May 31, 1995. Revenues from such uranium sales of $2,893,800 and $2,690,800
have been included in the accompanying consolidated statements of operations for
the years ended May 31, 1994 and 1993, which would normally have been sales of
SMP. All sales contracts were filled by Nukem in 1995, and as a result, no
revenues from uranium sales were recognized during 1995. The cash from uranium
sales is accumulating in SMP's bank accounts which as of May 31, 1995 amounted
to $7,505,000.
GMMV expenses certain general and administrative, maintenance and holding
costs. However, the Company has not recognized equity losses in GMMV because
Kennecott is committed to fund 100% of the first $50,000,000 of development and
operating costs of the Joint Venture. The Company's investment in GMMV of
$727,000 in the accompanying balance sheets is substantially lower than its
equity in GMMV.
Condensed combined statements of operations of the Company's equity
investees include GMMV, SMP and Ruby Mining Company ("Ruby) for 1995 and GMMV,
SMP, Brunton and Ruby for 1994 and 1993. Condensed combined balance sheets do
not include Brunton for 1994 as Brunton's balance sheet was consolidated with
USE as of May 31, 1994.
58
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(CONTINUED)
CONDENSED COMBINED BALANCE SHEETS - EQUITY INVESTEES
May 31,
----------------------------
1995 1994
---- ----
Current assets $ 8,408,500 $ 720,700
Non-current assets 49,211,100 48,795,700
----------- -----------
$57,619,600 $49,516,400
=========== ===========
Current liabilities $ 7,312,700 $ 6,529,000
Other long-term debt 30,782,900 23,621,600
Excess in assets 19,524,000 19,365,800
----------- -----------
$57,619,600 $49,516,400
=========== ===========
CONDENSED COMBINED STATEMENTS OF OPERATIONS - EQUITY INVESTEES
Year Ended May 31,
----------------------------------------
1995 1994 1993
---- ---- ----
Revenues $ 368,300 $ 4,570,500 $ 3,604,800
Less costs and expenses (1,402,400) (7,336,800) (8,500,500)
----------- ----------- -----------
Net loss $(1,034,100) $(2,766,300) $(4,895,700)
=========== =========== ===========
F. MINERAL CLAIMS TRANSACTIONS AND MINING PROPERTIES:
GMMV
During fiscal 1990, the Company and Crested entered into an agreement with
Kennecott, a wholly-owned, indirect subsidiary of The RTZ Corporation PLC, for
Kennecott to acquire a 50% interest in certain uranium mineral properties known
as the Green Mountain Properties. The purchase price was $15,000,000. Before
they were contributed to GMMV, the Green Mountain Properties were owned by the
Company, with a portion owned by USECC.
The Boards of Directors of the Company and Crested adopted a method of
apportioning the initial consideration of $15,000,000, on a ratio of 84% to the
Company and 16% to Crested. This division was based on analyses of the projected
cash flows of the properties contributed by USE and USECC.
Kennecott committed to fund 100% of the first $50 million of capital
contributions to the joint venture. Kennecott will also pay additional amounts
if certain future operating margins are achieved. Because the Company held 100%
of the claims containing the Round Park Deposit portion of the Green Mountain
properties, it has the right to receive 50% of the cash flows from the
operations relating to that portion of GMMV properties. With respect to portions
of GMMV properties previously held by USECC, the Company and Crested share in
cash flows attributable to their combined 50% interest in GMMV.
59
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
GMMV has incurred $14,316,300 in the development and operations of the
above uranium mineral properties through May 31, 1995. This was funded by
Kennecott out of the $50 million funding commitment. As previously mentioned,
the Company's carrying value of its investment in GMMV is $727,000 at May 31,
1995, which is substantially lower than its equity basis in GMMV. Reclamation
obligations of GMMV are discussed in Note K. Development of the properties
continues in anticipation of future uranium price increases.
SMP
During fiscal 1989, USE and Crested, through USECC, entered into an
agreement to sell a 50% interest in their Sheep Mountain properties to Nukem's
subsidiary CRIC. USECC and CRIC immediately contributed their 50% interests in
the properties to a newly-formed partnership, SMP. SMP was established to
further develop and mine the uranium claims on Sheep Mountain, acquire uranium
supply contracts and market uranium. In 1989 USECC agreed to assign three
uranium delivery contracts to SMP. USECC, however, remained solely responsible
for the reclamation of the properties and future environmental liabilities. SMP
agreed to deposit up to $.50 per pound of U\\3\\O\\8\\ as it is produced from
the properties for reclamation obligations. See Notes E and K for a description
of the investment and a discussion of related litigation.
AMAX TRANSACTIONS
During prior years, the Company and Crested conveyed interests in mining
claims to AMAX Inc. ("AMAX") in exchange for cash, royalties, and other
consideration including interest-free loans, due in 2010. In connection with a
renegotiation of various rights and duties of the parties, AMAX agreed to
amortize the principal amount of those loans to the Company and Crested by
$250,000 each quarter, subject to certain conditions and until AMAX put the
properties into production, which has not occurred. The last quarterly
amortization of $250,000 for a non-interest bearing loan from AMAX in lieu of
advance royalties, was recognized in the first quarter of fiscal 1994.
AMAX may elect to return the properties to the Company and Crested, which
would cancel the advance royalty obligation. If AMAX formally decides to place
the properties into production, it will pay $2,000,000 to the Company and
Crested. If AMAX sells the properties, the Company and Crested will receive 15%
of the first $25 million received by AMAX.
60
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
In addition, AMAX pays the Company and Crested an annual advance royalty of
50,000 pounds of molybdenum (or its cash equivalent). AMAX is entitled to a
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 $85,500, $126,800 and $105,800 of revenue from the
advance royalty payments in fiscal 1995, 1994 and 1993, respectively.
In fiscal 1995, USECC and Cyprus Amax agreed on exercise of the option by
USE and Crested agreeing to forego six quarters of advance royalties from Cyprus
Amax (the option purchase price was $200,000). See "Minerals -Molybdenum" above.
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. If both options are
exercised, the combined purchase price is US$1,851,920. The acreage is not
otherwise encumbered and was sold in fiscal 1995.
The first option (exercised in February, 1995) was for the 57 commercial
and noncommercial zoned acres in the City of Gunnison, Colorado; the purchase
price was $970,300. Pangolin paid $345,000 cash and $625,300 in three year
nonrecourse promissory notes, of which $137,900 was paid during fiscal 1995.
19.25 acres have been deeded to Pangolin; the remaining acreage secures the
note, and will be released to the buyer against principal payments on the note
as development (mixed commercial and residential) advances. The remaining note
bears interest at 7.5% per annum.
The second option covers 472.5 acres of ranch land northwest of the City of
Gunnison, Colorado (purchase price $822,460). Pangolin paid $10,000 for the
option; on option exercise and closing, Pangolin paid $46,090 in cash and
$776,370 by two nonrecourse promissory notes (each with principal and unpaid
interest due on the third anniversary of closing except for $35,000 on the first
anniversary). At closing, 22.19 acres were deeded to Pangolin; different parcels
of the remaining acreage secure the notes, and will be released for principal
payments in the course of development. The sale was accounted for as an
installment sale and thus the gain on sale was deferred to be recorded as the
notes are paid.
SUTTER GOLD MINING COMPANY
During fiscal 1991, the Company acquired a one-half interest in Sutter Gold
Venture ("SGV"), a joint venture formalized to acquire mineral leases and
develop and mine gold from properties in California. The Company, in conjunction
with Crested, formed USECC Gold and transferred one-ninth of its interest in SGV
to Crested in exchange for Crested's agreement to pay one-ninth of the Company's
acquisition costs for its interest in the joint venture, plus accrued interest
as described below.
The Company acquired its interest in SGV for: (i) $4,500,000 of the
$5,000,000 purchase price of SGV's properties; (ii) an agreement to fund
predecessor holding costs and the initial development costs of SGV totalling
$500,000; and (iii) its agreement to provide its share of costs and assessments
of SGV. SRRI, the other initial venturer in SGV, provided $500,000 of the
property purchase price, and agreed to pay $2,000,000 to the Company to equalize
their investments in SGV. The Company and SRRI agreed that they would each
initially hold 50% interests in SGV.
SRRI issued a $2,000,000 note to the Company, bearing interest at 10% per
annum. The note provided that $500,000 of principal and accrued interest was due
April 12, 1991, and the balance of $1,500,000 was due October 12, 1991, with
interest. If the installments were not paid when due, the
61
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
interests of the Company and SRRI in SGV were to be adjusted to equal the
percentage of the $5,000,000 purchase price of SGV's properties that each of
them provides.
Crested's purchase price for its interest in SGV was: (i) $500,000 (one-
ninth of the $4,500,000 provided by the Company to purchase the SGV properties)
with interest; (ii) an agreement to pay the Company $55,556 (one-ninth of the
initial $500,000 of predecessor holding costs and initial development costs of
SGV which the Company agreed to pay) with interest; and (iii) an agreement to
fund one-ninth of the assessments and liabilities imposed on the Company-Crested
ownership interest in SGV. In exchange, Crested received one-ninth of the
Company's interest in SGV, which initially entitled it to a 5.6% interest in the
project. Crested was also entitled to one-ninth of any payments on the
$2,000,000 note by SRRI.
In exchange for an agreement to issue 475,000 shares of SRRI's common stock
(one-ninth to Crested and eight-ninths to the Company), SRRI obtained an
extension of the due date for the initial $500,000 note obligation to July 16,
1991. Payment was not received by the extended due date, and the 50% interest of
SRRI in SGV was reduced to 40%, with a corresponding increase in the Company-
Crested interest to 60%. Payment was not received on the remaining portion of
the debt by the final due date and USECC Gold's percentage interest in SGV
increased to 90%. During May 1994, the Company, Crested and SRRI reached an
agreement under which SRRI gave up all rights, title and interest in SGV and
delivered 400,000 shares of its common stock in exchange for forgiveness of all
accounts and notes payable by SRRI to the Company and Crested. Consequently, USE
and Crested own 100% of SGV. During fiscal 1995, the Sutter Gold Venture was
terminated, USE and Crested formed a new Wyoming corporation, Sutter Gold Mining
Company, and agreed to exchange their interests in USECC Gold for common stock
of Sutter Gold Mining Company (hereafter, "SGMC").
In connection with SRRI's transfer of interests in the Lincoln Project
to USE and Crested at formation of the SGV, and thereafter upon USE's and
Crested's acquisition of SRRI's remaining interests in SGV due to default by
SRRI, Amador United was provided notice of its right of first refusal to acquire
such interests for amounts equal to USE's and Crested's advances to SRRI. Amador
United has made technical objections to the notices given, however, USE and
Crested believe these objections are without merit.
SGMC is in the development stage at May 31, 1995, and is primarily engaged
in mine development, exploration and feasibility work, permitting and
acquisition of mill equipment. Limited revenues have been generated to date from
processed ore samples. The related mining costs were recognized along with all
general and administrative type costs. All acquisition and other mine
development costs have been capitalized, amounting to $10,374,400 at May 31,
1995.
PLATEAU RESOURCES LIMITED
On August 11, 1993, the Company concluded the June 30, 1993 Stock Purchase
Agreement ("SPA") with Consumers Power Company ("CPC"), by which the Company
purchased from CPC all of the outstanding stock of Plateau Resources Limited
("Plateau"). Plateau, a Utah corporation, owns the Shootaring Canyon Uranium
Mill and support facilities in southeastern Utah. At the present time, Plateau
has applied to renew its materials license with the United States Nuclear
Regulatory Commission ("NRC"). See paragraph (b) below.
62
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
In 1984, because of a severely depressed market for uranium concentrates,
Plateau indefinitely extended the suspension of operations of its uranium
processing facility and ceased development of the Ticaboo Townsite project.
Therefore, the acquisition consisted of non-operating assets with no reportable
continuing operations. The Company paid nominal cash consideration for the
Plateau stock. As additional consideration, the Company agreed:
(a) to perform or cause the performance by Plateau of all studies, remedial
or other response actions or other activities necessary from time to time for
Plateau to comply with environmental monitoring, site exit and other provisions
of (i) federal and state environmental laws relating to hazardous or toxic
substances, and (ii) the Uranium Mill Tailings Radiation Control Act, the Atomic
Energy Act of 1954, and administrative orders and licenses relating to nuclear
or radioactive substances or materials on the property of or produced or
released by Plateau; and
(b) to indemnify CPC from all liabilities and costs related to the presence
of hazardous substances or radioactive materials on Plateau property, and of any
future violation of laws and administrative orders and licenses relating to the
environment or to nuclear or radioactive substances.
At closing of the SPA, Plateau's assets included $14,200,000 in cash and
cash equivalents. Of this amount, $2,500,000 was transferred at closing by
Plateau to fund the "NRC Surety Trust Agreement" with a commercial bank as
trustee. The trustee is to pay future costs of mill decommissioning, site
reclamation, and long term site surveillance, as directed by the NRC. The amount
transferred to the trust is the minimum amount now required by the NRC as
financial assurance for clean up after permanent shut down of the mill.
Also at closing, $4,800,000 was transferred by Plateau to fund the "Agency
Agreement" with a commercial bank. These funds will be available to indemnify
CPC against possible claims related to environmental or nuclear matters, as
disclosed above, and against third-party claims related to a tax benefit
transfer agreement between Plateau and the third-party, in the event of a
"disqualification event" as provided in such agreement. The $4,800,000 and
$2,500,000 are reflected as Restricted Investments. No value has been recorded
by the Company for the mill and related operating assets received in the
transaction because of their current nonoperating nature and the lack of cash
flow from any operations in the foreseeable future. The Company recorded the
specified $2,500,000 reclamation liability, an additional liability for
$4,800,000 related to an indemnification of other possible claims against
Plateau and recorded a liability of $6,900,000 for estimated care and
maintenance costs on the mill. Certain care and maintenance costs incurred
during the year reduced this liability to $6,018,700 at yearend. Together with
the $4,800,000 indemnification reserve, these estimated obligations are recorded
as Other Accrued Liabilities of $10,818,700 in the accompanying consolidated
financial statements.
On August 25, 1994, Plateau signed a letter of intent with an unrelated
third party to sell part interest in Canyon Homesteads, Inc. ("CHI"), a wholly
owned subsidiary of Plateau, and to develop the Ticaboo Townsite, in south
central Utah and other resort properties near Lake Powell. The total purchase
price for a one-half interest in Canyon Homesteads was to be $6,000,000. The
party had made a non refundable earnest payment of $100,000 to Plateau to be
credited to the purchase price, with the remainder to be paid in cash from the
purchaser and out of operations, at specified times. In fiscal 1995 the
purchaser defaulted, and as a result, the $100,000 was recognized as income in
fiscal 1995.
63
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(CONTINUED)
CHI entered into a joint venture with Arrowstar Investments, Inc. ("AII")
to develop on a 50/50 basis, certain properties at the Ticaboo Townsite. AII is
owned by certain shareholders of the Company. As of May 31, 1995, the Company
has recorded $112,400 related to AII's initial funding commitment to the joint
venture which is included in accounts receivable trade on the accompanying
Balance Sheet.
ENERGX
During fiscal 1994, USE and Crested formed Energx to engage in the
exploration, development and operation of natural gas properties. Energx
currently has leased properties in Wyoming and the Fort Peck Indian Reservation,
Montana. Energx is owned by USE (45%), Crested (45%) and the Assiniboine and
Sioux Tribes (10%).
During fiscal 1995, Energx sold a 50% interest in the leases on the Fort
Peck Indian Reservation for the sum of $200,000 plus $100,000 to be used only
for the acquisition and consolidation of additional leases, and for committing
to drill 8 exploratory wells. This resulted in a gain of $197,000 being recorded
on this undeveloped property sale. Energx is in the lease acquisition stage on
this property. No exploratory wells have been drilled to date.
G. DEBT:
During fiscal 1995, USE and Crested obtained a $1,000,000 line of credit
from a bank. The line of credit accrued interest at the banks prime rate plus
.5% (8.5% initially) and matured on July 23, 1995. The weighted average interest
rate for 1995 for the line of credit was 9.82%. $960,000 is outstanding as of
May 31, 1995. Subsequently this line was repaid with funds received in the July
8, 1995 private placement. The Company has renegotiated this $1,000,000 line of
credit and extended the maturity date to July 23, 1996. The line of credit is
secured by certain real property and a share of the net proceeds of production
from certain oil and gas wells. No amounts are currently outstanding on this
line of credit.
The Company's debt also includes the $500,000 revolving line of credit of
Brunton with a commercial bank. The line of credit accrues interest at 1% above
prime and expires in August, 1995. As of May 31, 1995, $387,000 was outstanding
on the line of credit. Brunton also has a $200,000 line of credit that matures
in August 1995. No amounts are outstanding as of May 31, 1995. Both of the
Brunton lines of credit were renegotiated for $500,000 and $250,000 respectively
to mature August 2, 1996 with interest at 1% over bank index rate. The weighted
average for these lines for 1995 was 9.35%. FNG holds a $200,000 line of credit
with a commercial bank. This line of credit accrues interest at 2.25% over the
bank's prime rate and expires on February 28, 1996, $180,000 was outstanding as
of May 31, 1995. The weighted average rate for 1995 for this line of credit was
10.29%
Brunton has two installment notes bearing interest at 8.25% secured
generally by all the assets of Brunton. FNG also has various installment notes
bearing interest from 7.5% to 11.75% which are secured by FNG equipment with
maturity dates through 1997.
64
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(CONTINUED)
The components of debt as of May 31, 1995 and 1994 are as follows:
May 31,
---------------------------
1995 1994
---- ----
Installment note - secured by equipment,
interest at 8%, matures February 1996 $ 84,600 $ 220,200
Installment notes - secured by real estate,
interest at 7.9% - 8%, matures 1998-2004 270,500 287,600
Brunton installment notes 722,700 770,000
FNG installment notes 57,200 157,800
Notes payable - other 26,400 82,000
---------- -----------
1,161,400 1,517,600
Less current portion (232,900) (408,500)
---------- -----------
$ 928,500 $ 1,109,100
========== ===========
Principal requirements on debt for the five years after May 31, 1995 are as
follows: 1996 - $232,900; 1997 - $121,100; 1998 - $107,100; 1999 - $200,500;
2000 - $344,100 and thereafter $155,700.
H. INCOME TAXES:
The Company adopted SFAS 109 during fiscal 1994.
The components of deferred taxes as of May 31, 1995 and 1994 are as
follows:
May 31,
-----------------------------
1995 1994
---- ----
Deferred tax assets:
Deferred compensation $ 50,400 $ 26,300
Deferred gain on sale of assets 143,900 85,000
Net operating loss carryforwards 6,535,200 4,601,100
Capital loss carryforwards 182,100 452,000
Tax Credits 325,000 325,000
Other 33,000 36,000
----------- -----------
Total deferred tax assets 7,269,600 5,525,400
----------- -----------
Deferred tax liabilities:
Accelerated depreciation for tax (1,073,400) (1,112,900)
Development and exploration costs (2,095,700) (2,039,900)
----------- -----------
Total deferred tax liabilities (3,169,100) (3,152,800)
----------- -----------
4,100,500 2,372,600
Valuation allowance (4,283,800) (2,639,600)
----------- -----------
Net deferred tax liability $ (183,300) $ (267,000)
=========== ===========
65
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(CONTINUED)
The Company has established a valuation allowance of $4,224,900 against
deferred tax assets due to the losses incurred by the Company in fiscal 1995,
1994 and 1993. The Company's ability to generate future taxable income to
utilize the NOL and capital loss carryforwards is uncertain.
For the year ended May 31, 1993, the tax effect of deferred taxes resulting
from timing differences in the recognition of revenues and expenses for tax and
financial statement purposes were as follows.
May 31,
1993
----------
Gain on sale of property and equipment $ (81,800)
Operating loss carryforwards for
income tax reporting purposes (311,200)
Deferred compensation expense (55,600)
Exploration and development costs 437,700
Depreciation 54,000
Other (43,100)
----------
Deferred income taxes $ --
==========
The income tax provision (benefit) is different from the amounts computed
by applying the federal income tax rate to income before taxes. The reasons for
these differences are as follows:
Year Ended May 31,
-------------------
1995 1994 1993
---- ---- ----
Expected federal income tax $ (704,000) $(1,055,300) $ --
Utilization of capital loss carryforward (269,900) -- --
Net operating losses not previously benefitted (670,300) -- --
Valuation allowance 1,644,200 1,055,300 --
---------- ----------- -----------
Income tax provision $ -- $ -- $ --
========== =========== ===========
There were no taxes payable as of May 31, 1995, 1994 or 1993.
At May 31, 1995, the Company and its subsidiaries had available, for
federal income tax purposes, net operating loss carryforwards of approximately
$19,221,000 which will expire from 1996 to 2010 and investment tax credit
carryforwards of $325,000 which, if not used, will expire from 1996 to 2001. The
Internal Revenue Code contains provisions which limit the NOL carryforwards
available which can be used in a given year when significant changes in company
ownership interests occur. In addition, the NOL and credit amounts are subject
to examination by the tax authorities.
The Internal Revenue Service has audited the Company's and affiliates' tax
returns through fiscal 1986, and their income tax liabilities are settled
through that year. The IRS has recently audited the Company's and affiliates',
which includes USECC, fiscal years 1989, 1990 and 1991 tax returns. The Company
has received a deficiency letter for the years 1989 through 1991. The Company
has submitted a written appeal to protest the findings of the examining agent.
Management believes the Company will prevail on the significant issues in
dispute, and therefore, that significant liabilities will not result from the
findings.
66
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(CONTINUED)
I. SEGMENTS AND MAJOR CUSTOMERS:
The Company's primary business activity is the sale of minerals and the
acquisition, exploration, holding development and sale of mineral bearing
properties although the Company has no producing mines. Other reportable
industry segments included commercial operations, primarily manufacturing and
distribution of outdoor recreation products, real estate activities and
operation of an airport fixed base operation and construction operations. The
following is information related to these industry segments:
Year Ended May 31, 1995
------------------------------------------------------
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ------------ ------------
Revenues $ 85,500 $5,705,500 $1,303,400 $ 7,094,400
=========== ========== ==========
Interest and other revenues 2,053,600
------------
Total Revenues $ 9,148,000
============
Operating (loss) profit $(1,568,800) $1,228,400 $ 265,100 $ (75,300)
=========== ========== ==========
Interest and other revenues 2,053,600
General corporate and other expenses (3,606,600)
Equity in loss of affiliates (442,300)
------------
loss before income taxes $(2,070,600)
============
Identifiable assets at May 31, 1995 $18,518,300 $9,074,300 $ 292,700 $27,885,300
=========== ========== ==========
Investments in affiliates 3,244,600
Corporate assets 3,035,100
------------
Total assets at May 31, 1995 $34,492,700
============
Capital expenditures $ 455,100 $ 186,400 $ 28,100
=========== ========== ==========
Depreciation, depletion and
amortization $ -- $ 637,600 $ 116,500
=========== ========== ==========
67
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(CONTINUED)
Year Ended May 31, 1994
------------------------------------------------------
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ------------ ------------
Revenues $ 4,359,300 $1,165,100 $2,606,400 $ 8,130,800
=========== ========== ==========
Interest and other revenues 645,500
------------
Total Revenues $ 8,776,300
============
Operating profit (loss) $ (665,100) $ (824,300) $ 317,500 $(1,171,900)
=========== ========== ==========
Interest and other revenues 645,500
General corporate and other expenses (2,186,700)
Equity in loss of affiliates (390,700)
Loss before income taxes
and cumulative effect $(3,103,800)
============
Identifiable assets at May 31, 1994 $17,745,200 $8,898,400 $ 371,200 $27,014,800
=========== ========== ==========
Investments in affiliates 2,807,900
Corporate assets 3,267,600
------------
Total assets at May 31, 1994 $33,090,300
============
Capital expenditures $ 1,190,700 $ 441,600 $ 19,800
=========== ========== ==========
Depreciation, depletion and
amortization $ -- $ 505,600 $ 160,200
=========== ========== ==========
68
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(CONTINUED)
Year Ended May 31, 1993
------------------------------------------------------
Commercial Construction
Minerals Operations Operations Consolidated
-------- ---------- ------------ ------------
Revenues $ 4,796,600 $ 894,400 $2,026,500 $ 7,717,500
=========== ========== ==========
Interest and other revenues 1,328,000
------------
Total Revenues $ 9,045,500
============
Operating profit (loss) $ 1,140,400 $ (678,600) $ 266,100 $ 727,900
=========== ========== ==========
Interest and other revenues 1,328,000
General corporate and other expenses (1,833,100)
Equity in loss of affiliates (444,700)
------------
Loss before income taxes
and extraordinary item $ (221,900)
============
Identifiable assets at May 31, 1993 $ 8,765,100 $5,605,800 $1,190,200 $15,561,100
=========== ========== ==========
Investments in affiliates 2,706,700
Corporate assets 5,769,400
------------
Total assets at May 31, 1993 $24,037,200
============
Capital expenditures $ 3,300 $ 169,800 $ 819,900
=========== ========== ==========
Depreciation, depletion and
amortization $ -- $ 419,400 $ 162,200
=========== ========== ==========
During fiscal 1994 and 1993, approximately 14% and 44% of mineral revenues
were from amortization of principal on the AMAX notes and annual advance
royalties of molybdenum from AMAX. During fiscal 1994 and 1993, 86% and 56%,
respectively, of mineral revenues were from sales of uranium. There were no
uranium sales during fiscal 1995.
The Company subleases excess office space, contracts aircraft for charter
flights and sells aviation fuel. Commercial revenues in the statements of
operations consist of mining equipment, office and other real property rentals,
charter flights and fuel sales. Commercial operations for 1995 include the
operations of Brunton.
J. SHAREHOLDERS' EQUITY:
In March 1995, the Company completed a private placement of 400,000 shares
of stock at $3.00 per share. The majority of the proceeds were from employees of
the Company. This offering carried terms by which the Company, at its option,
would either redeem the common shares sold from each investor, at a cash
redemption price of $3.50 per share or issue one additional common share for
each three shares originally purchased. Management of the Company intends to
issue the additional common shares (133,333 shares). The Company is obligated to
register all shares issued in connection with this private placement by January
1996.
69
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
In June and July, 1995 the Company sold common stock at $4.00 per share
(812,432 shares, net proceeds to the Company of $2,827,300). In connection with
this private placement, warrants to purchase 81,243 USE common shares at $4.80
per share are to be issued to the selling agent. These warrants are exercisable
through July 25, 2000.
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,
later amended reserves 550,000 shares of the Company's $.01 par value common
stock for issuance under the Option Plan. During fiscal 1992, the Company issued
options to certain of its executive officers, Board members and others. 371,200
non-qualified options were issued at purchase prices ranging from $2.00 per
share to $2.90 per share. The options will expire on April 14, 2002 and April
30, 2002. During fiscal 1995, options were exercised for the purchase of 7,500
shares.
The Board of Directors of USE adopted the U.S. Energy Corp. 1989 Employee
Stock Ownership Plan ("ESOP") in 1989, for the benefit of USE's employees.
During fiscal 1995, 1994 and 1993, the Board of Directors of USE contributed
37,204, 46,332 and 49,087, shares to the ESOP at prices of $5.38, $4.00 and
$3.75 per share, respectively. The Company is responsible for one-half of these
contributions amounting to $100,000, $92,500 and $91,700 in fiscal 1995, 1994
and 1993, respectively. Crested is responsible for the remainder (see Note C).
USE has loaned the ESOP $1,014,300 to purchase 125,000 shares from the Company
and 38,550 shares on the open market. These loans, which are secured by pledges
of the stock purchased with the loan proceeds, bear interest at the rate of 10%
per annum and are due in fiscal 1996.
The Board of Directors of both the Company and Crested issue shares of
stock as bonuses to certain directors, employees and third parties. The stock
bonus shares have been reflected outside of the Shareholders' Equity section in
the accompanying balance sheets because such shares are forfeitable to the
Company and Crested until earned. Crested is responsible for one half of the
compensation expense related to these issuances (see Note C). Compensation
expense will be recognized over the various earn out periods. As of May 31,
1995, 1994 and 1993, the Company had compensation expense of $200,000, $116,700
and $271,700, respectively, resulting from these issuances. During fiscal 1993,
the Company's Board of Directors amended the stock bonus plan. As a result, the
earn out dates have been extended until retirement, which is the earn out date
of the amended stock bonus plan. The new plan grants a stock bonus of 20% of the
previous plan per year for five years. Additional information related to these
stock issuances is set forth in the following table:
70
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
Issue Number Issue Total
Date of Shares Issuer Price Compensation
---- --------- ------ ----- ------------
May 1990 40,300 USE $ 9.75 $392,925
June 1990 66,300 USE 11.00 729,300
November 1990
(stock dividend) 10,660 USE N.A. N.A.
June 1990 25,000 Crested 1.06 26,562
December 1990 7,500 Crested .50 3,750
January 1993 18,520 USE 3.00 55,560
January 1993 6,500 Crested .22 1,430
January 1994 18,520 USE 4.00 74,080
January 1994 6,500 Crested .28 1,828
January 1995 18,520 USE 3.75 69,450
January 1995 6,500 Crested .19 1,219
No shares were earned out in fiscal 1993 or 1995; however, 5,000 shares of
USE stock were earned out and released to a third party in fiscal 1994. During
fiscal 1993, the Company's Board of Directors amended the stock bonus plan. As
a result, the earn out dates of certain individuals were extended until
retirement, which is the earn out date of the amended stock bonus plan. The
amended plan grants a stock-bonus of 20% of the previous plan per year for five
years. Also included in forfeitable common stock are 15,000 shares to directors
which are vesting at 20% a year beginning in November 1992, of which 9,000 are
earned out but not released as of May 31, 1995.
In April 1993, the Board of Directors of USE authorized the issuance of
50,000 shares of its common stock at $2.75 per share to an affiliate for cash in
an effort to increase the Company's operating capital. USE also granted this
affiliate options for 150,000 common shares at $3.50 per share. None of these
options have been exercised as of May 31, 1995.
On November 11, 1993, the Company issued 100,000 shares of its common stock
at $3.00 per share to Brunton in lieu of payment on a $300,000 line of credit.
K. COMMITMENTS, CONTINGENCIES AND OTHER:
LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS (SMP)
ARBITRATION PROCEEDING CONCERNING SMP. During fiscal 1992, Nukem's wholly-
-------------------------------------
owned subsidiary Cycle Resource Investment Corporation ("CRIC") instituted
arbitration proceedings against the Company and Crested. CRIC claimed that the
Company and Crested violated the SMP partnership agreement by assigning to the
Green Mountain Mining Venture (GMMV) the amounts equal to any SMP cash
distributions to USECC derived from sales of uranium under SMP supply contracts.
CRIC also asserted that by entering into the GMMV agreement, the Company and
Crested misappropriated a business opportunity of SMP. CRIC seeks damages and
certain equitable remedies from the Company and Crested, in an amount to be
determined and seeks to expel the Company and Crested from the SMP
71
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
Partnership. The Company and Crested do not believe their entry into the GMMV
agreement violated the restraints on transfer of SMP property set forth in the
SMP agreement. They have vigorously defended themselves against the allegations
of CRIC.
FEDERAL COURT ACTION CONCERNING SMP. On July 3, 1991, the Company and
-----------------------------------
Crested filed a civil action in the U. S. District Court of Colorado against
Nukem, CRIC and their affiliates, alleging that Nukem, CRIC and their affiliates
fraudulently misrepresented facts and concealed information from the Company and
Crested to induce their entry into the agreements forming SMP and seek
rescission, damages and other relief. The Company and Crested further alleged
that Nukem and CRIC have refused to provide information about transactions by
CRIC and its affiliates with SMP, and that the defendants had engaged in various
wrongful acts relating to financing and acquisition of uranium for SMP. Nukem
and CRIC filed an answer and a variety of counterclaims against the Company and
Crested. Certain of Nukem's affiliates (excluding CRIC) were thereafter
dismissed from the lawsuit. The U. S. District Court granted the motion of the
Company and Crested to stay the above arbitration initiated by CRIC and also
ordered the Company and Crested to amend their complaint. On April 6, 1992, the
Company and Crested filed an amended complaint against Nukem and CRIC setting
out the alleged fraud with particularity, and Nukem and CRIC filed answers and
counterclaims to the amended complaint.
STATE COURT ACTION CONCERNING SMP. On September 16, 1991, USECC filed a
---------------------------------
civil action in the Denver District Court against SMP seeking reimbursement of
$85,000 per month since the spring of 1991 for the care and maintenance of the
SMP underground uranium mines and properties in south-central Wyoming. On May
11, 1993, the Denver District Court stayed all proceedings until the U.S.
District Court for Colorado case is resolved.
SUMMARY. The discovery stage in the case filed by the Company and Crested
-------
on July 3, 1991 in the U. S. District Court of Colorado against Nukem, CRIC et
al has been protracted and vigorously contested by all parties. On November 6,
1993, the remaining parties in that suit, Nukem and CRIC, agreed with the
Company and Crested that the majority of the claims post the formation of SMP on
December 21, 1988, would be handled through consensual arbitration with the
American Arbitration Association ("AAA"). The agreement to arbitrate was
finally reduced to writing and executed effective on February 7, 1994. The
arbitration hearing commenced on June 27, 1994 before a three member AAA
arbitration panel. After 73 hearing days and some 15,000 pages of testimony,
the parties rested their cases on May 31, 1995. Per order of the Panel, the
parties filed their proposed Findings of Fact and Conclusions of Law, Award and
a brief of the law on August 7, 1995. Each side shall submit responsive
proposed findings of fact and conclusions of law, responsive proposed award and
reply briefs by September 21, 1995. The Panel will make its Order and Award
within 90 days thereafter, unless the period of time is extended.
Nukem and CRIC are seeking $47,172,535 against USE and USECC and the right
to purchase USECC's interest in SMP for $2,350,000. USE and Crested are seeking
the dissolution of the SMP Partnership, the return of the Sheep Mountain Mining
properties and damages against Nukem and CRIC in excess of $200,000,000 with
requests that they be trebled under RICO and COCCA. USECC has denied all the
allegations made by CRIC and denied any liability. The Company and counsel
believe that an evaluation of the likelihood of an unfavorable outcome and any
estimate of the amount or range of potential loss is premature at this time
given to the state of the proceedings. The resolution of these matters by the
arbitration panel is expected by December 1995 or early calendar 1996. The
Company also expects to vigorously pursue all pre-SMP Partnership claims which
have been reserved by the parties before the Federal Court once the arbitration
proceedings are completed.
72
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
ILLINOIS POWER. Illinois Power Company ("IPC"), one of the utilities with
--------------
whom SMP has a long-term uranium supply contract, unilaterally sought to
terminate the contract on October 28, 1993 and filed suit contemporaneously in
the Federal District Court, Danville, Illinois, against the Company, Crested,
CRIC, SMP, Nukem Luxembourg GmbH ("NULUX") and the Dresdner Bank, seeking a
declaratory judgment that the contract with USECC, which was assigned to SMP and
thereafter to NULUX, had been breached by USECC filing of a Motion for
Appointment of Receiver in the SMP litigation. The Dresdner Bank was dismissed
from the case, and the remaining defendants filed answers denying IPC's
allegations and filed counterclaims for damages due under the IPC contract.
These defendants also filed Motions for Summary Judgment and a hearing was held
on the motions on May 27, 1994. On September 1, 1994, the U. S. District Court
for the Central District of Illinois granted the defendants' motions for summary
judgment against IPC dismissing IPC's complaint, and further granted those
defendant's counterclaims against IPC for breach of contract by IPC. After
various negotiating sessions the parties reached agreement in June 1995 to
settle the case by entering into an amendment to the original agreement to
increase the price per pound of U\\3\\O\\8\\ delivered to IPC and provide for 3
deliveries totalling 486,443 lbs. U\\3\\O\\8\\ in 1995, 1996 and 1997. The
first delivery of 226,443 lbs. U\\3\\O\\8\\ was made on June 30, 1995. This
amendment to the IPC contract will be subject to the decision of the Arbitration
Panel.
Declaratory Judgment Action on Extralateral Rights: On July 30, 1991, Bond
--------------------------------------------------
Gold Bullfrog, Inc. ("BGBI") filed Civil Action No. 11877 in the District Court
of the Fifth Judicial District, Nye County, Nevada naming USE, Crested, Parador
Mining Company, Inc. ("Parador") and H.B. Layne Contractor, Inc. (Layne) as
defendants. The complaint primarily concerns extralateral rights associated
with two patented mining claims (the "Claims") owned by Parador which were
initially leased to a predecessor of BGBI and subsequently, the residuals of
that lease were assigned and leased by Parador to USE and Crested. Parador, USE
and Crested answered the complaint, filed a counterclaim against the Plaintiff
and a cross claim against Layne. Pursuant to the Nevada Rules of Civil
Procedure, the parties through their attorneys have met and prepared a report
outlining various matters required by the Nevada Rules regarding discovery and
depositions. Parador has notified BGBI that it has terminated the lease to a
predecessor of BGBI of its two patented claims (being part of the Bullfrog Open
Pit Mine). On or about June 30, 1993, Layne filed a motion for summary judgment
against Parador, USE and Crested claiming there is no issue of material fact and
Layne is entitled to judgment as a matter of law. Parador, USE and Crested are
preparing a response to this motion. Pursuant to the Assignment and Lease of
Mining Claims entered into as of April 1, 1991 between USE, Crested and Parador,
USE and Crested are to receive 50% of damages or production royalties due
Parador from production of precious metals out of the mined lode or veins
dipping down from where the lode apexes on Parador's mining claims. USE agreed
to advance $200,000 to cover attorney and other costs and fees which may be
first recovered out of production royalties or damages. Any expenditures over
$200,000 shall be borne solely by USE and Crested. If Bond Gold should produce
precious metals from within the boundaries of Parador's Claims which are not
related to extralateral rights, Parador shall receive 100% of the royalties. If
USE and Crested mine precious metals from the Claims, Parador shall receive a
royalty of 40% NSR. Depositions have been taken in the case and Layne has filed
the above Motion for Summary Judgment. The parties agreed to stay the motion
until discovery is completed. The Court set the trial on the issue of
extralateral rights for July 17, 1995, but recently the notified the parties
that because of a conflict, the case will not be heard until December 11, 1995.
73
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
RECLAMATION AND ENVIRONMENTAL LIABILITIES
Most of the Company's mine development, exploration and operating
activities are subject to federal and state regulations that require the Company
to protect the environment. The Company attempts to conduct its mining
operations so as to comply with these regulations, but they are continually
changing and generally becoming more restrictive. Consequently, the Company's
current estimates of its reclamation obligations and its current level of
expenditures to perform ongoing reclamation may change in the future. At the
present time, however, the Company cannot predict the outcome of future
regulation or its impact on costs. Nonetheless, the Company has recorded its
best estimate of future reclamation and closure costs based on currently
available facts and technology and enacted laws and regulations. Certain
regulatory agencies, such as the Nuclear Regulatory Commission, the Bureau of
Land Management and the Wyoming Department of Environmental Quality review the
Company's reclamation, environmental and decommissioning liabilities, and the
Company believes its recorded amounts are consistent with those reviews and
related bonding requirements. To the extent that planned production on its
properties is delayed, interrupted or discontinued because of regulation or the
economics of the properties, the future earnings of the Company would be
adversely affected. The Company believes it has accrued all necessary
reclamation costs and there are no additional contingent losses on unasserted
claims to be disclosed or recorded in the reclamation liability. The Company has
not disposed of any properties for which it has a commitment or is liable for
any known environmental liabilities.
The majority of the Company's environmental obligations relate to former
mining properties acquired by the Company. Since the Company currently does not
have properties in production, the Company's policy of providing for future
reclamation and mine closure costs on a unit-of-production basis has not
resulted in any significant annual expenditures or costs. For the obligations
recorded on acquired properties, including site-restoration, closure and
monitoring costs, actual expenditures for reclamation will occur over a number
of years, and since these properties are all considered future production
properties, those expenditures, particularly the closure costs, may not be
incurred for many years. The Company also does not believe that any significant
capital expenditures to monitor or reduce hazardous substances or other
environmental impacts are currently required. As a result, the near term
reclamation obligations are not expected to have a significant impact on the
Company's liquidity.
As of May 31, 1995, the Company has recorded estimated reclamation
obligations, including standby costs, of $14,770,500, as reflected in
reclamation and other long-term liabilities in the accompanying financial
statements. In addition, the GMMV joint venture, in which the Company is a 50%
equity investor, has recorded a $23,960,000 liability for future reclamation and
closure costs. None of these liabilities have been discounted, and the Company
has not recorded any potential offsetting recoveries from other responsible
parties or from any insurance companies.
The Company currently has four mineral properties or investments that
account for most of its environmental obligations. The Company is a partner in
SMP, a joint venturer of GMMV and owner of SGMC and Plateau. 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:
74
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
SMP
---
The Company and Crested agreed to assume the reclamation obligations,
environmental liabilities and liabilities for injuries to employees in mining
operations with respect to the Crooks Gap properties, which are part of the SMP
venture. The reclamation obligations, which are established by regulatory
authorities, were reviewed by the Company and the regulatory authorities during
fiscal 1994 and the balance in the reclamation liability account at May 31, 1995
of $1,451,800 was determined by the Company to be adequate. The obligation will
be satisfied over the life of the mining project which is estimated to be at
least 20 years. The Company and Crested self bonded this obligation by
mortgaging certain of their real estate holdings. A portion of the funds for the
reclamation of SMP's properties is expected to be provided by SMP which has
agreed to pay up to $.50 per pound of uranium to the Company and Crested for
reclamation work, as the uranium is produced from the properties. The current
arbitration proceedings with Nukem and CRIC could result in changes to these
agreements between the parties.
GMMV
----
During fiscal 1991, the Company and Crested acquired developed minerals
properties on Green Mountain known as the Big Eagle Property. In connection
with that acquisition, the Company and Crested agreed to assume reclamation and
other environmental liabilities associated with the property. Reclamation
obligations imposed by regulatory authorities were established at $7,300,000 at
the time of acquisition. Immediately after the acquisition, the Company and
Crested transferred a one-half interest in them to Kennecott, and Kennecott, the
Company and Crested contributed the Big Eagle properties to GMMV, which assumed
the reclamation and other environmental liabilities. Kennecott holds a
commercial bank letter of credit as security for the performance of the
reclamation obligations for the benefit of GMMV.
During fiscal 1993, GMMV entered into an agreement to acquire the
Sweetwater uranium mill and related properties from UNOCAL. GMMV's
consideration for the acquisition of the Sweetwater Mill Property was the
assumption of all environmental liabilities and reclamation bonding obligations.
The environmental obligations of GMMV are guaranteed by Kennecott Corporation
(parent of Kennecott Uranium Company, the other joint venture partner).
However, UNOCAL also agreed that if GMMV incurs expenditures for environmental
liabilities prior to the earlier of commercial production by GMMV or February 1,
2001 (which liabilities are not due solely to the operations of GMMV), UNOCAL
will reimburse GMMV the first $8,000,000 of such expenditures. Any such
reimbursement may be recovered by UNOCAL from 20% of future cash flows from sale
of uranium concentrates processed through the Mill. In any event, until such
time as environmental and reclamation undertakings are liquidated against
Kennecott Corporation, such costs are not deemed expenditures under Kennecott's
$50,000,000 development commitment (although bond costs may be charged against
this development commitment).
The reclamation and environmental liabilities assumed by GMMV concern two
categories: (1) cleanup of an inactive open mine pit site near the Mill,
including water (heavy metals and other contaminants) and tailings (heavy metals
and other dust contaminant abatement and erosion control) associated with the
pit, and (2) decontamination and cleanup and disposal of the Mill building and
equipment and tailings cells after Mill decommissioning. Current liabilities
for such efforts have been
75
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
established at approximately $16,322,900 by the Wyoming Department of
Environmental Quality for mine pit site matters (exercising EPA-delegated
jurisdiction to administer the Clean Water Act and the Clean Air Act, and
directly administering Wyoming statutes on mined land reclamation), and by the
NRC for decontamination and cleanup of the Mill and Mill tailings cells. The EPA
has continuing jurisdiction under the Resource Conservation and Recovery Act,
pertaining to any hazardous materials which may be on site when cleanup work is
started.
Although USE and the other GMMV parties are liable for all reclamation and
environmental compliance costs associated with Mill and site maintenance, as
well as Mill decontamination and cleanup and site reclamation and cleanup after
the Mill is decommissioned, USE believes it is unlikely USE will have to pay for
such costs directly. First, based on current estimates of cleanup and
reclamation costs (reviewed annually by the oversight agencies), such costs may
be within the $50,000,000 development commitment of Kennecott Uranium Company
for GMMV. These costs are not expected to increase materially, if the Mill is
not put into full operation. Second, to the extent GMMV is required to spend
money on reclamation and environmental liabilities related to previous Mill and
site operations during ownership by Minerals Exploration Company (a UNOCAL
subsidiary), UNOCAL has agreed to fund up to $8,000,000 of such costs (provided
such costs are incurred before February 1, 2001 and before Mill production
resumes), which would be recoverable only out of future Mill production (see
above). Third, payment of the GMMV reclamation and environmental liabilities
related to the mill is guaranteed by Kennecott Corporation, parent of Kennecott
Uranium Company. Last, GMMV will set aside a portion of operating revenues to
fund reclamation and environmental liabilities once mining and milling
commences. To date, ongoing Mill maintenance expense is funded by Kennecott as
part of its development commitment.
Kennecott Corporation will be entitled to contribution from the USE parties
in proportion to their participation interests in GMMV, if Kennecott Corporation
is required to pay Mill cleanup costs directly pursuant to its guarantee. Such
payments by Kennecott Corporation only would be reimbursed if the liabilities
cannot be satisfied within the initial $50,000,000 expenditure commitment, and
then only to the extent there are insufficient funds from the reclamation
reserve (to be built up out of GMMV operating revenues). In addition, if and to
the extent such liabilities resulted from UNOCAL's Mill operations, and payment
of the liabilities was required before February 1, 2001 and before Mill
production resumes, then up to $8,000,000 of that amount would be paid by
UNOCAL, before Kennecott Corporation would be required to pay on its guarantee.
Accordingly, although the extent of any ultimate USE liability for contribution
to Mill cleanup costs cannot be predicted, USE and Crested will only be required
to pay its proportional share of Mill cleanup if a) the liabilities cannot be
satisfied with the initial $50,000,000 expenditure commitment from Kennecott, b)
there are insufficient funds from the reclamation reserve to be built up out of
GMMV operating revenues and c) payments are not available from UNOCAL.
SGMC
----
The Company and Crested currently own 100% of SGMC, which owns gold mineral
properties in California. Currently, the property is in development and costs
consist of drilling, permitting, holding costs and administrative costs. No
substantial mining has been completed, although a 2,800 foot decline through the
identified ore zones for an underground mine was acquired in the purchase.
Because the mine is not in the production stage and the Company's policy is to
provide reclamation on a unit-of-
76
U.S. ENERGY CORP. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(continued)
production basis, no environmental liabilities have been accrued as of May 31,
1995. Any reclamation liability for SGMC properties which currently exist is
insignificant.
Plateau
-------
The environmental obligations acquired with the acquisition of Plateau
include all environmental and reclamation obligations relating to the Shootaring
Mill. Based on the bonding requirements, Plateau transferred $2,500,000 to a
trust account to pay future costs of mill decommissioning, site reclamation and
long-term site surveillance. In addition, Plateau has recorded additional
obligations of $10,818,700 as of May 31, 1995, for the estimated holding and
maintenance costs needed until the mill is placed in service or decommissioning
begins. The estimated future Shootaring Mill decommissioning and site
reclamation costs noted above ,as required by the NRC and the Utah Department of
Natural Resources, were determining factors in the consideration paid by the
Company
EXECUTIVE COMPENSATION
The Company and Crested are committed to pay the estates of certain of
their officers an amount equal to one year's salary for one year after their
death and reduced amounts, to be set by the Board of Directors, for a period up
to five years thereafter.
77
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, 1994, 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 is incorporated herein by reference to Registrant's Proxy
Statement for the 1995 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 Registrant's Proxy Statement for the 1995 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------
The information required by Item 12 is incorporated herein by reference to
the Registrant's Proxy Statement for the 1995 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
The information required by Item 13 is incorporated herein by reference to
the Registrant's Proxy Statement for the 1995 Annual Meeting of Shareholders.
78
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, REPORTS AND FORM 8-K
---------------------------------------------------------------
Page No.
--------
(a) The following financial statements are filed as a part of
this Report in Item 8:
(1) Consolidated Financial Statements
Registrant and Affiliates
Report of Independent Public Accountants..............................43
Consolidated Balance Sheets - May 31, 1995 and 1994................44-45
Consolidated Statements of Operations
for the Years Ended May 31, 1995, 1994 and 1993....................46-47
Consolidated Statements of Shareholders'
Equity for the Years Ended May 31, 1995, 1994 and 1993.............48-49
Consolidated Statements of Cash Flows
for the Years Ended May 31, 1995, 1994 and 1993....................50-51
Notes to Consolidated Financial Statements.........................52-77
(ii) Financials and Schedules of Affiliates
(a) Green Mountain Mining Venture
Report of Independent Public Accountants..........................85
Balance Sheet - December 31, 1994 and 1993........................86
Statement of Operations for the Period from June 1, 1990
(Date of Inception) through December 31, 1994.....................87
Statement of Changes in Partners' Capital for the Period from
June 1, 1990 (Date of Inception) through December 31, 1994........88
Statement of Cash Flows for the Period from June 1, 1990
(Date of Inception) through December 31, 1994.....................89
Notes to Financial Statements..................................90-93
(b) Sheep Mountain Partners
The Registrant's partner in SMP, Nukem/CRIC, have refused to provide
certain information concerning SMP to SMP's independent public
accountants. The information requested concerns partnership costs for
uranium purchases. USECC and Nukem/CRIC disagree as
79
to whether uranium costs of the partnership means: (i) the price which
Nukem/CRIC pays for purchases of uranium for SMP; or (ii) the price
which CRIC charges SMP for uranium.
As a result, the independent public accountants have informed the
Registrant and Crested that they have been unable to complete their
audit of SMP, and are unable to render a report on SMP's financial
statements. The Registrant and SMP's independent public accountants are
seeking to resolve these uncertainties so that SMP's financial
statements may be finalized and filed. When these matters are resolved,
the SMP financial statements will be filed under cover of a Form 10-K/A.
Balance Sheets - May 31, 1995 and 1994............................*
Statements of Operations - Years Ended
May 31, 1995, 1994 and 1993.......................................*
Statements of Changes in Partners' Capital - Years Ended
May 31, 1995, 1994 and 1993.......................................*
Statements of Cash Flows - Years Ended
May 31, 1995, 1994 and 1993.......................................*
Notes to the Financial Statements.................................*
*To be filed under cover of a Form 10-K/A.
All other schedules have been omitted because the information is not
applicable or because the information is included in the financial
statements.
80
(3) Exhibits Required to be Filed.
Exhibit Sequential
No. Title of Exhibit Page No.
------- ------------------------------------------------ ----------
3.1 Restated Articles of Incorporation.............................[3]
3.1(a) Articles of Amendment..........................................[1]
3.2 By-Laws........................................................[3]
3.2(a) Amended By-Laws................................................[1]
10.1 USECC Joint Venture Agreement - Amended........................[4]
10.2 Management Agreement between - USECC...........................[2]
10.3 Warrant Agreement - H.I. R. Management.........................[3]
10.4 Acquisition Agreement - Four Nines Gold, Inc...................[2]
10.5 Assignment and Lease - Parador.................................[2]
10.6 Employment Agreement - Daniel P. Svilar........................[3]
10.7 Airport Ground Lease - City of Riverton........................[2]
10.8 Executive Officer Death Benefit Plan...........................[3]
10.9 Big Eagle Acquisition Agreement with PMC.......................[5]
10.11 Sweetwater Mill Acquisition Agreement..........................[2]
10.12 Ft. Peck Agreement - Drilling and Production Services..........[2]
10.13 USE/Seine River Letter Agreement - SGV.........................[7]
10.14 Agreement to Sell SGV Interest to Crested......................[2]
10.15 USE/Seine River Amendment to Letter Agreement - SGV............[8]
10.16 Loan and Security Agreement - Seine River......................[9]
10.17 Seine River Promissory Note - SGV Property Purchase...........[10]
10.18 Master Agreement - Mt. Emmons/AMAX ...........................[11]
10.19 Seine River Promissory Notes - SGV Operating Expenses..........[2]
10.20 Promissory Notes - ESOP/USE...................................[12]
81
10.21 Self Bond Agreement - Crooks Gap Properties....................[4]
10.22 Security Agreement - ESOP Loans...............................[13]
10.23 Milling Agreement - PMC.......................................[14]
10.27 Mineral Properties Agreement - Congo Area - PMC................[3]
10.28 Memorandum of Joint Venture Agreement - GMMV...................[3]
10.29 Memorandum of Partnership Agreement - SMP.....................[4]
10.32 Employee Stock Ownership Plan..................................[4]
10.33 Stock Option Plan..............................................[4]
10.34 Form of Stock Option and Schedule - 1989 Plan..................[3]
10.35 Severance Agreement (Form).....................................[1]
10.36 1992 Stock Compensation Plan Non-Employee Directors............[1]
10.37 Executive Compensation (John L. Larsen)........................[1]
10.38 Executive Compensation (Non-qualified Options).................[1]
10.39 ESOP and Option Plan Amendments................................[1]
10.40 Plateau Acquisition - Stock Purchase Agreement and Related
Exhibits.......................................................[6]
10.41 Option and Sales Agreements - Gunnison Property Parcel A... 94-105
10.42 Option and Sales Agreements - Gunnison Property Parcel B.. 106-114
10.43 Option Agreement - USE and Arrowstar - Aircraft Hangar.... 115-116
21 Subsidiaries of Registrant.................................... 117
[1] 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.
[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,
1991.
[3] 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.
[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,
1989.
82
[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 A to the Registrant's Form
8-K reporting an event of August 11, 1993.
[7] Incorporated by reference from exhibit 28.1 to the Registrant's
Form 8-K reporting an event of October 12, 1990.
[8] Incorporated by reference from exhibit 28.2 to the Registrant's
Form 8-K reporting an event of June 1, 1991.
[9] Incorporated by reference from exhibit 28.3 to the Registrant's
Form 8-K reporting an event of June 1, 1991.
[10] Incorporated by reference from exhibit 28.4 to the Registrant's
Form 8-K reporting an event of June 1, 1991.
[11] Incorporated by reference from the like-numbered exhibit to a
Schedule 13D filed by AMAX on or about August 3, 1987.
[12] 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.
[13] 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.
[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,
1988.
(b) Reports filed on Form 8-K.
During the fourth quarter of the fiscal year ended on May 31, 1994, the
Registrant reported the Brunton acquisition on Form 8-K.
(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).
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
U.S. ENERGY CORP. (Registrant)
Date: August 30 , 1995 By: /s/ John L. Larsen
------ ------------------------------
JOHN L. LARSEN,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: August 30 , 1995 By: /s/ John L. Larsen
------ ------------------------------
JOHN L. LARSEN, Director
Date: September 7 , 1995 By: /s/ Max T. Evans
------ ------------------------------
MAX T. EVANS, Director
Date: September 5 , 1995 By: /s/ Harold F. Herron
------ ------------------------------
HAROLD F. HERRON, Director
Date: September ______, 1995 By: ______________________________
DON C. ANDERSON, Director
Date: September ______, 1995 By: ______________________________
DAVID W. BRENMAN, Director
Date: September 7 , 1995 By: /s/ Nick Bebout
------ ------------------------------
NICK BEBOUT, Director
Date: September 5 , 1995 By: /s/ Robert Scott Lorimer
------ ------------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer
and Chief Accounting Officer
84
Report of Independent Accountants
---------------------------------
To the Members of the Management Committee of
Green Mountain Mining Venture
Riverton, Wyoming
We have audited the accompanying balance sheet of Green Mountain Mining Venture
(A Joint Venture in the Development Stage) as of December 31, 1994 and 1993, and
the related statements of operations, changes in Venture partners' capital, and
cash flows for the years ended December 31, 1994, 1993 and 1992, and the period
from inception (June 1, 1990) to December 31, 1994. These financial statements
are the responsibility of the Venture's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Green Mountain Mining Venture
as of December 31, 1994 and 1993, and the results of its operations and its cash
flows for the years ended December 31, 1994, 1993 and 1992, and the period from
inception (June 1, 1990) to December 31, 1994, in conformity with generally
accepted accounting principles.
Salt Lake City, Utah
April 10, 1995
85
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
BALANCE SHEET
as of December 31, 1994 and 1993
______
1994 1993
------------- -------------
Assets:
Property and equipment (Note 3):
Mineral properties and mine
development costs $ 21,887,857 $ 21,604,663
Buildings 24,815,009 24,815,009
------------- -------------
Total assets $ 46,702,866 $ 46,419,672
============= =============
Liabilities and Partners' Capital:
Due to USECC $ 62,386 $ 102,182
Reclamation liabilities (Note 3) 23,620,000 23,620,000
------------- -------------
Total liabilities 23,682,386 23,722,182
------------- -------------
Commitments (Note 3)
Partners' capital:
Kennecott Uranium Company 11,510,240 11,348,745
USECC 11,510,240 11,348,745
------------- -------------
23,020,480 22,697,490
------------- -------------
Total liabilities and partners' capital $ 46,702,866 $ 46,419,672
============= =============
The accompanying notes are an integral
part of these financial statements
86
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF OPERATIONS
for the years ended December 31, 1994, 1993 and 1992,
and the period from inception (June 1, 1990)
to December 31, 1994
______
Period from
inception to
December 31,
1994 1993 1992 1994
------------ ------------ ------------ ------------
Costs and expenses:
Maintenance and holding
costs $ 1,877,528 $ 1,982,005 $ 2,061,349 $ 5,921,782
Marketing costs 85,676 83,977 69,445 247,598
------------ ------------ ------------ ------------
Net loss $ 1,963,204 $ 2,065,982 $ 2,130,794 $ 6,169,380
============ ============ ============ ============
The accompanying notes are an integral
part of these financial statements
87
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF CHANGES IN VENTURE PARTNERS' CAPITAL
for the years ended December 31, 1994, 1993 and 1992,
and the period from inception (June 1, 1990)
to December 31, 1994
______
Period from
inception to
December 31,
1994 1993 1992 1994
----------- ----------- ----------- -------------
Balance at beginning of period:
Kennecott Uranium Company $11,348,745 $11,049,433 $10,478,378 $ -
USECC 11,348,745 11,049,433 10,478,378 -
Capital contributions (Note 1):
Kennecott Uranium Company 1,143,097 1,332,303 1,636,452 14,594,930
USECC 1,143,097 1,332,303 1,636,452 14,594,930
Net loss:
Kennecott Uranium Company (981,602) (1,032,991) (1,065,397) (3,084,690)
USECC (981,602) (1,032,991) (1,065,397) (3,084,690)
Balance at end of period:
Kennecott Uranium Company 11,510,240 11,348,745 11,049,433 11,510,240
USECC 11,510,240 11,348,745 11,049,433 11,510,240
The accompanying notes are an integral
part of these financial statements
88
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF CASH FLOWS
for the years ended December 31, 1994, 1993 and 1992,
and the period from inception (June 1, 1990)
to December 31, 1994
______
Period from
inception to
December 31,
1994 1993 1992 1994
------------ ------------ ------------ ------------
Cash flows used in operating activities:
Net loss $(1,963,204) $(2,065,982) $(2,130,794) $(6,169,380)
Increase (decrease) in due to USECC (34,782) 51,947 - 17,165
----------- ----------- ----------- -----------
Net cash used in operating
activities (1,997,986) (2,014,035) (2,130,794) (6,152,215)
----------- ----------- ----------- -----------
Cash flows used in investing activities:
Cost of buildings, mineral properties
and mine development (283,194) (666,975) (698,298) (7,355,866)
Increase (decrease) in due to USECC (5,014) 16,404 (443,812) 45,221
----------- ----------- ----------- -----------
Net cash used in investing
activities (288,208) (650,571) (1,142,110) (7,310,645)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Capital contributions 2,286,194 2,664,606 3,272,904 13,462,860
----------- ----------- ----------- -----------
Net change in cash and cash
equivalents $ - $ - $ - $ -
=========== =========== =========== ===========
Cash and cash equivalents:
At beginning of period $ - $ - $ - $ -
At end of period - - - -
The accompanying notes are an integral
part of these financial statements
89
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
_____
1. Organization of the Joint Venture:
---------------------------------
Green Mountain Mining Venture ("GMMV" or the "Venture") is a joint venture
with a 30 year life, formed by U.S. Energy Corp. ("USE"), Crested Corp.
("Crested") and Kennecott Uranium Company ("Kennecott"), the Venture
partners, to develop mining claims and produce uranium from the Green
Mountain properties located in south-central Wyoming. Kennecott has a 50%
interest in GMMV, and USE and Crested ("USECC") collectively have a 50%
interest. GMMV was formed June 1, 1990, with each partner contributing its
portion of the Green Mountain properties. Thereafter, the partners are
required to contribute funds based upon their respective participating
interests, subject to certain provisions as provided for in the joint
venture agreement.
Kennecott has agreed to contribute the first $50 million of operating and
development expenses. Through December 31, 1994, Kennecott has contributed
$13,462,808 to the Venture for operating and development expenses. During
this period, 50% of the capital contributions made by Kennecott are
allocated to USECC. The cash flows from the Venture will be allocated 50%
to Kennecott and 50% to USECC. The allocation of the USECC portion of cash
flows will be determined by the ownership interests of USE and Crested in
the various GMMV properties.
Effective October 29, 1992, Kennecott replaced USECC as manager of the
Venture. Kennecott contracts with USECC to perform work on behalf of the
Venture.
Through December 31, 1994, the activities of the Venture have consisted
primarily of the development and maintenance of the Green Mountain
properties. Additional development is required prior to the commencement
of commercial production. Such commencement is not expected to occur until
uranium prices increase significantly above current levels. Therefore, the
Venture is considered to be in the development stage as defined in
Statement of Financial Accounting Standards No. 7.
2. Summary of Significant Accounting Policies:
------------------------------------------
Mineral properties contributed to the Venture were recorded at the
partners' historical cost at the date of contribution. Costs incurred in
the acquisition of mineral properties are deferred until the properties
are put into operation, sold or abandoned. Mine
Continued
90
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
______
2. Summary of Significant Accounting Policies, Continued:
-----------------------------------------------------
development costs incurred either to expand the capacity of operating
mines, develop new ore bodies or develop mine areas substantially in
advance of production are capitalized and will be charged to operations on
the units-of-production method over the estimated reserves to be
recovered. Mine development costs incurred to maintain production will be
included in operating costs and expenses. Maintenance and holding costs
are expensed as incurred.
The cost of mining equipment, less estimated salvage value will be
depreciated on the units-of-production method over the estimated reserves
to be recovered or on the straight-line method over the estimated life of
the equipment, whichever is shorter. The cost of buildings will be
depreciated on the straight-line method. Costs of repairs and maintenance
are expensed as incurred. Expenditures that substantially extend the
useful lives of assets are capitalized. When assets are retired or
otherwise disposed all applicable costs and accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized
currently.
No provision has been made for federal, state and local income taxes,
credits, or benefits since tax liabilities are the responsibility of the
individual partners.
3. Buildings, Mineral Properties and Mine Development Costs:
--------------------------------------------------------
USECC conducts operations at the mine site on behalf of the Venture. All
accounts payable are due to USECC for costs incurred by USECC in the
normal course of business on behalf of GMMV. Through December 31, 1994
Kennecott had reimbursed USECC for substantially all development costs
incurred.
Continued
91
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
______
3. Buildings, Mineral Properties and Mine Development Costs, Continued:
--------------------------------------------------------
Building, mineral property and mine development costs incurred by each of
the Venture partners are as follows:
Period from
Year ended Year ended Year ended inception through
December 31, December 31, December 31, December 31,
1994 1993 1992 1994
----------- ----------- ----------- -------------
USECC $ 145,712 $ 296,869 $ 319,110 $ 4,698,908
Kennecott 137,482 370,106 379,188 2,656,958
----------- ----------- ----------- -------------
Total $ 283,194 $ 666,975 $ 698,298 $ 7,355,866
=========== =========== =========== =============
In December 1990, GMMV acquired additional mineral properties in exchange
for the assumption of reclamation liabilities associated with those
properties of $7.3 million. In 1992, GMMV acquired an established uranium
processing mill (the Sweetwater Mill) in exchange for the assumption of
reclamation liabilities associated with this property of $16.3 million.
Such amounts represent the estimated costs at the acquisition date to
reclaim these properties. Kennecott, on behalf of GMMV, is self-bonded in
the amount of $24.3 million, which is payable to the Wyoming Department of
Environmental Quality and the U.S. Nuclear Regulatory Commission in the
event GMMV does not properly reclaim the above properties or violates the
Wyoming Environmental Quality Act. If production does not commence before
the year 2000, the seller is liable for the first $8 million of the
reclamation costs at the Sweetwater Mill.
The Venture properties contain approximately 16 square miles, of which
8,860 acres are unpatented lode mining claims and 1,280 acres are state
leases subject to a royalty of 5% of the gross value of uranium bearing
ore mined and removed from said lands. The state leases will expire August
1996 and May 2001. All fees required to hold the unpatented mining claims
have been paid to the state of Wyoming for the period ended December 31,
1994.
Continued
92
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
______
3. Buildings, Mineral Properties and Mine Development Costs, Continued:
--------------------------------------------------------
At December 31, 1994 and 1993, costs capitalized as property and equipment
are composed of the following:
1994 1993
---------- ----------
Acquisition costs $39,347,000 $39,347,000
Development costs 7,355,866 7,072,672
---------- ----------
$46,702,866 $46,419,672
========== ==========
Acquisition costs include the partners' initial contribution of
$15,727,000 of mineral properties and buildings recorded at the
contributing partners' historical cost and $23,620,000 of mineral
properties and buildings acquired in exchange for the assumption of
reclamation liabilities noted above.
93