ITEM 1 AND ITEM 2.
ITEM 3. LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
In 1991, disputes arose between USE/Crested, and Nukem, Inc. and its subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation and operation of the Sheep Mountain Partners partnership for uranium mining and marketing, and activities of the parties outside SMP. Arbitration proceedings were initiated by CRIC in June 1991 and in July 1991, USECC filed a lawsuit against Nukem, CRIC and others in the U.S. District Court (District of Colorado). Later, USECC filed another suit for the standby costs at the SMP mines against SMP in the Colorado State Court. The Federal Court stayed the arbitration proceedings and the State Court case was also stayed. In fiscal 1994, all of the parties agreed to exclusive and binding arbitration of the disputes before the American Arbitration Association, for which the legal claims made by both sides included fraud and misrepresentation, breach of contract, breach of duties owed to the SMP partnership, and other claims.
Following 73 hearing days and various submissions by the parties, the arbitration panel (the "Panel") entered an Order and Award (the "Order") in April 1996 finding generally in favor of USE and Crested on certain of their claims (including the claims for reimbursement for standby maintenance expenses and profits denied SMP in Nukem's trading of uranium), and in favor of Nukem/CRIC and against USE and Crested on certain other claims.
Approximately $18 million of SMP cash had been placed in escrow and a bank account by agreement of the parties pending resolution of the disputes.
The April 1996 Order awarded USE and Crested monetary damages of approximately $7,800,000 with interest (after deduction of monetary damages which the Arbitration panel awarded in favor of Nukem/CRIC and against USE and Crested). An additional amount of approximately $4,300,000 was awarded by the Panel to USE and Crested, to be paid out of the escrowed $18 million and SMP cash. This $4,300,000 was USE and Crested's share of SMP profits from selling uranium to utilities and advances to purchase uranium for SMP. The Panel also ordered that one utility supply contract which had been in dispute belonged to SMP, not Nukem, and that Nukem was to assign that contract to SMP. The Panel further ordered that certain contracts which Nukem had obtained for the purchase of uranium from countries in the CIS (former Soviet republics) belonged to SMP.
After motions and further proceedings in the Federal District Court, and a reaffirmation Order by the Panel in July 1996, the U.S. District Court confirmed the Panel's Order and Award. In November 1996, USECC received the $4,367,000 of the damage award out of the SMP escrowed funds and a separate SMP bank account. In confirming the Panel's Order, the Court ordered Nukem to assign a utility contract to SMP; to pay USECC a net amount of approximately $8,465,000 in monetary damages; and impressed a constructive trust in favor of SMP on Nukem's rights to purchase CIS uranium, the uranium acquired pursuant to those rights, and profits therefrom. Nukem/CRIC posted a supersedeas bond for $8,613,600 and the Court stayed execution on the judgment. The bond did not cover the value of the CIS contracts at issue because the Panel's Order did not value such contracts.
Nukem/CRIC appealed the District Court's Judgment to the 10th Circuit Court of Appeals, and the matter is set for oral argument on September 24, 1998 in Oklahoma City, Oklahoma. The issues to be decided are: whether the U.S. District Court, in confirming the Panel's Order, provided for a double recovery to USE and Crested (i.e., awarding both $8,465,000 in monetary damages and one-half of the profits SMP has made on uranium contracts); and whether the constructive trust on the CIS contracts covers only an amount of profits necessary to secure Nukem/CRIC's payment of the $8,645,000 monetary award in favor of USE and Crested. USE's positions on these issues are that there is no double recovery; and that the constructive trust of SMP on
the CIS contracts extends to all such contracts and profits therefrom, because Nukem obtained the contracts for its own account outside of and hence in violation of Nukem's fiduciary obligations to SMP as a general partner.
During the fourth quarter of fiscal 1998, USE and Crested entered into a partial settlement with Nukem and CRIC on certain of the claims not on appeal. Under the partial settlement, USECC received (i) from SMP an assignment of all of the mining claims and equipment which had been held by SMP (USECC remains responsible for the reclamation liabilities associated with the claims as had always been the case when the properties were in SMP); (ii) from Nukem and CRIC, $484,361 which settled USE and Crested's claim to their share of the past and future profits on a utility contract which Nukem had wrongfully kept outside of SMP (and Nukem was allowed to keep this contract as part of the settlement); (iii) from Nukem and CRIC, $4,540,000 to settle all claims by USE against Nukem, CRIC and SMP (including Nukem/CRIC's one-half share of the SMP mine maintenance costs); (iv) from SMP, a contract to sell 1,076,842 pounds of uranium oxide to a utility; and (v) from SMP, a contract to purchase 600,000 pounds of uranium oxide from another producer in North America (200,000 pounds annually through 2000). In connection with the partial settlement, the parties agreed to the dismissal with prejudice of the Colorado and Wyoming State Court proceedings (for reimbursement of SMP mine maintenance costs), and all claims in the Federal District Court and the arbitration, except for the issues pending before the 10th Circuit Court of Appeals. The cash settlement portion under (iii) above is in addition to the $4,367,000 received by USECC in November 1996 out of the SMP escrowed funds. USECC is negotiating to sell the purchase contract under (v) to Nukem.
TICABOO TOWNSITE LITIGATION. In fiscal 1998, a prior contract operator of the Ticaboo restaurant and lounge, and two employees supervising the motel and convenience store in Utah (owned by Canyon Homesteads, Inc.) sued USE, Crested and others in Utah State Court. After a five day trial, a jury denied the claims of two of three plaintiffs but awarded the third plaintiff $156,000 in damages against USE. USE is appealing the award.
BGBI LITIGATION
USE and Crested are defendants and counter- or cross-claimants in certain litigation in the District Court of the Fifth Judicial District of Nye County, Nevada, brought by Bond Gold Bullfrog Inc. ("BGBI") on July 30, 1991. BGBI (now known as Barrick Bullfrog, Inc.) is an affiliate of Barrick Corp., a large international gold producer headquartered in Toronto, Canada. The litigation primarily concerns extralateral rights associated with two patented mining claims owned by Parador Mining Company Inc. ("Parador") and initially leased to a predecessor of BGBI, which claims are in and adjacent to BGBI's Bullfrog open pit and underground mine. USE and Crested assert certain interests in the claims under an April 1991 assignment and lease with Parador, which is subject to the lease to BGBI's predecessor.
BGBI seeks to quiet title to its leasehold interest in the subject claims, a determination that USE and Crested have no rights in the claims, and an order enjoining USE and Crested from asserting any interest in them. BGBI further asserts other claims and that, in attempting to lease an interest in the subject claims to USE and Crested, Parador breached the provisions of its lease to BGBI, and that Parador is responsible for the legal fees and costs incurred by BGBI in the quiet title action, which may be offset against royalties.
A partial or bifurcated trial to the Court of the extralateral rights issues was held on December 11 and 12, 1995, to determine whether the Bullfrog orebody is a "vein, lode or ledge" as described in the General Mining Law and, if so, whether the facts warrant application of the doctrine of extralateral rights as set forth in such statute. The Court found that Parador had failed to meet its burden of proof and therefore Parador, USE and Crested have no right, title and interest in the minerals lying beneath the claims of Layne pursuant to extralateral rights. The partial trial did not address the issues of breach of contract by the defendants and BGBI for specific performance and they were tried before the Court commencing on January 26, 1998. After
the trial, the Court found against the parties on their respective claims, and the plaintiff and these defendants filed a Notice of Cross-Appeal and Notice of Appeal, respectively to the Nevada Supreme Court. The record on appeal has been filed with the Nevada Supreme Court and the appeals process is underway.
DEPARTMENT OF ENERGY LITIGATION
On July 20, 1998, eight uranium mining companies with operations in the United States (including USE, Crested, YSFC) and the Uranium Producers of America (a trade organization) filed a complaint against the United States Department of Energy (the "DOE") in a lawsuit (file no. 98 CV 1775) in the United States District Court, Cheyenne, Wyoming. The complaint seeks declaratory judgment and injunctive relief. The plaintiffs allege that the DOE violated the USEC Privatization Act of 1996, when the DOE transferred 45 metric tons of low enriched uranium and 3,800 metric tons of natural uranium to United States Enrichment Corp. ("USEC"). See Item 1, "Business, Uranium Marketing - U.S. Enrichment Corporation" above.
Specifically, the plaintiffs allege that the USEC Privatization Act authorizes the DOE to transfer to USEC "without charge" an initial 50 metric tons of highly enriched uranium and 7,000 metric tons of natural uranium. The Act authorizes the DOE to sell (not merely transfer) additional quantities of uranium out of the DOE stockpile, but only upon payment of fair market value for the uranium and then only upon specific finding by the DOE that such a sale would not have an adverse material impact on the domestic uranium, mining, conversion or enrichment industry, taking into account sales under the Russian HEU Agreement and the Suspension Agreement.
The plaintiffs have asked the Court to declare that (i) the DOE violated its statutory authority by transferring uranium to USEC in excess of statutory limits on volume; (ii) the excess amounts were not "sold" by the DOE to USEC for fair value, as required by the Act, and mandated findings by the DOE concerning possible adverse impacts were not supported in fact; and (iii) the DOE be enjoined from future transfers in violation of the Act.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the United States District Court, Denver, Colorado against Contour Development Company, L.L.C. and entities and persons associated with Contour Development Company, L.L.C. (together, "Contour") seeking compensatory and consequential damages of more than $1.3 million from the defendants for dealings in certain real estate.
Specifically, USE (which is the assignee of Crested's rights and interests in certain of the promissory notes, contracts and agreements) alleges that Contour has breached contracts for the sale of USE's and Crested's Gunnison properties, and is in default on the promissory notes delivered to pay for the Gunnison properties. USE has further alleged that Contour fraudulently induced USE and Crested to enter into restructuring agreements for the original transactions between the parties in such properties; and further, that Contour has breached the duties of good faith, honesty, full disclosure and fair dealing which were owed to USE and Crested by Contour in the course of the transactions. USE has made additional claims against Contour for unjust enrichment and conversion of the real estate assets. See Item 1, "Business - Commercial Operations - Real Estate and Other Commercial Operations - Colorado Properties" above.
As of the date of this Report, Contour has not filed an answer to the complaint.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
INFORMATION CONCERNING EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS.
The following information is provided pursuant to Instruction 3, Item 401 of Reg. S-K, regarding certain of the executive officers of USE who are not also directors.
ROBERT SCOTT LORIMER, age 47, has been Controller and Chief Accounting Officer for both USE and Crested for more than the past five years. Mr. Lorimer also has been Chief Financial Officer for both these companies since May 25, 1991, their Treasurer since December 14, 1990, and Vice President Finance since April 1998. He serves at the will of each board of directors. There are no understandings between Mr. Lorimer and any other person, pursuant to which he was named as an officer, and he has no family relationship with any of the other executive officers or directors of USE or Crested. During the past five years, he has not been involved in any Reg. S-K Item 401(f) listed proceeding.
DANIEL P. SVILAR, age 69, has been General Counsel for USE and Crested for more than the past five years. He also has served as Secretary and a director of Crested, and Assistant Secretary of USE. His positions of General Counsel to, and as officers of the companies, are at the will of each board of directors. There are no understandings between Mr. Svilar and any other person pursuant to which he was named as officer or General Counsel. He has no family relationships with any of the other executive officers or directors of USE or Crested, except his nephew Nick Bebout is a USE director. During the past five years, Mr. Svilar has not been involved in any Reg. S-K Item 401(f) proceeding.
MAX T. EVANS, age 73, has been Secretary for USE and President of Crested for more than the past five years. Mr. Evans had been a director of USE for more than the past five years, prior to April 17, 1997. He serves at the will of each board of directors. There are no understandings between Mr. Evans and any other person pursuant to which he was named as an officer. He has no family relationships with any of the other executive officers or directors of USE or Crested. During the past five years, Mr. Evans has not been involved in any Reg. S-K Item 401(f) proceeding.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Shares of USE Common Stock are traded on the over-the-counter market, and prices are reported on a "last sale" basis by the National Market System ("NMS") of the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). The range by quarter of high and low sales prices for the Common Stock is set forth below for fiscal 1998 and 1997.
High Low ---- --- Fiscal year ended May 31, 1998 ------------------------------ First quarter ended 8/31/97 $11.63 $7.13 Second quarter ended 11/30/97 11.75 7.45 Third quarter ended 2/29/98 10.13 6.75 Fourth quarter ended 5/31/98 8.63 5.75
Fiscal year ended May 31, 1997 ------------------------------ First quarter ended 8/31/96 $22.00 $14.50 Second quarter ended 11/30/96 19.00 11.94 Third quarter ended 2/28/97 11.25 9.38 Fourth quarter ended 5/31/97 13.00 5.75
(b) Holders
(1) At August 17, 1998, the closing bid price was $2.31 per share and there were approximately 696 shareholders of record for Common Stock.
(2) Not applicable.
(c) USE has not paid any cash dividends with respect to its common stock. There are no contractual restrictions on USE's present or future ability to pay cash dividends, however, USE intends to retain any earnings in the near future for operations.
(d) During the year ended May 31, 1998, USE issued (i) an aggregate of 4,092 shares of Common Stock to employees as compensation for services., and (ii) 546,365 shares of Common Stock to three Canadian Funds for cash and the exchange of securities of Sutter Gold Mining Company. Another 112,530 shares will be issued to a fourth fund when USE's resale prospectus for the Funds is effective with the SEC. No underwriter was involved in any of these transactions. All shares were issued as restricted securities, in reliance on the Sec. 4(2) exemption from registration under the Securities Act of 1933.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is Management's Discussion and Analysis of those significant factors which have affected the Company's liquidity, capital resources and results of operations during the periods covered in the Company's Consolidated Financial Statements filed with this Report.
Some of the statements in this Management's Discussion and Analysis constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward- looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES AT MAY 31, 1998
Working capital increased by $5,231,900 during fiscal 1998 to $8,238,900 at May 31, 1998 from $3,007,000 as of May 31, 1997. The primary components of the increase are increases in cash and cash equivalents, litigation settlement receivable, and accounts receivable from affiliates of $4,233,600, $5,026,000, and $687,400, respectively. These increases in working capital were offset by increases in accounts payable, the deferred GMMV purchase option and the current portion of long term debt of $523,800, $4,000,000 and $144,400, respectively.
Cash increased due to the reconsolidation of Sutter Gold Mining Company ("SGMC") which resulted in increased cash of $3,124,000 and $1,800,500 from the sale of the Company's common stock. These receipts of cash were used primarily in mine development of $1,125,000, purchases of equipment of $1,947,200, increased investment in affiliates of $102,300, and cash used in operations. During the fourth quarter of 1998 the Company and Crested were able to negotiate a settlement of certain of the issues in the Sheep Mountain Partners ("SMP") arbitration with Nukem and CRIC which resulted in settlement proceeds to the Company and Crested of $5,026,000. The increase in accounts receivable affiliates is primarily the result of the Company advancing funds for Crested in the various ventures in which the companies participate and advances that the Company and Crested made on behalf of Yellow Stone Fuels Corp.
Accounts payable increased due to the increased activity of the Green Mountain Mining Venture ("GMMV") where the Company and Crested acted as the operator for the development of the two decline tunnels to access the uranium mineralized material on Green Mountain. The current portion of long term debt increased as a result of a balloon payment coming due on one of the Company's long term notes payable.
During the first quarter of fiscal 1998, the Company and Crested entered into an Acquisition Agreement with Kennecott to acquire Kennecott's interest in the GMMV. As part of that Agreement Kennecott paid the Company and Crested $4,000,000 upon execution which is recorded as a deferred purchase option. If the Company and Crested are successful in closing the Acquisition Agreement and purchasing Kennecott's interest in GMMV, the $4,000,000 will be considered a component (i.e., a reduction) of the acquisition/purchase price of $15,000,000 (please see Note F to the Consolidated Financial Statements). If the Company and Crested are not able to close the Acquisition Agreement, the $4,000,000 will be applied against any future reimbursable costs/contributions due the GMMV. After these costs and any remaining obligations are satisfied, the remainder, if any, will be recognized as income.
Investments in affiliates decreased by $4,127,800 primarily as a result of reconsolidating SGMC and equity losses from affiliates of $3,179,600 and $575,700, respectively. Restricted investments increased as a result of an investment by SGMC in a non affiliated company for $53,400 and the increase of the certificates
of deposit held by Plateau Resources Ltd. ("Plateau") of $326,500 for future reclamation expenses as a result of earned interest.
During the year ended May 31, 1998, property plant and equipment increased by $13,409,400. This increase was primarily as a result of reconsolidating SGMC of $12,499,000, development of mining properties of $1,125,000 and the acquisition of equipment of $1,947,200. The majority of these development and equipment purchase expenses benefitted the GMMV and SGMC properties. There were also capital expenditures made to keep the mill facility owned by Plateau in standby status.
Notes receivable from employees decreased by $393,300 as the Company's chairman retired $431,900 of obligations to the Company and Crested. Notes receivable other decreased by $336,800 primarily as a result of Silva Production A.B. paying its second installment of $333,333 plus interest on the note due the Company for the purchase of The Brunton Company in fiscal 1996. Deposits and other increased by $387,600 primarily as a result of 67,000 shares of Company common stock being issued to executive officers of the Company under the 1996 Stock Award Program. Such shares are retained by the Company until the executive retires and are forfeitable under certain conditions.
CAPITAL RESOURCES
GENERAL: The primary source of the Company's capital resources for fiscal 1999 will be cash on hand at May 31, 1998, equity financing for affiliated companies, and the expected final resolution of the SMP arbitration. Additionally, the Company and Crested will continue to offer for sale various non-core assets such as lots and homes in Ticaboo, real estate holdings in Wyoming, Colorado and Utah and mineral interests. Interest, rentals of real estate holdings and equipment, aircraft chartering and aviation fuel sales also will provide cash.
LINE OF CREDIT: The Company and Crested have a $1,000,000 line of credit with a commercial bank. The line of credit is secured by various real estate holdings and equipment belonging to the Company and Crested. This facility is currently available to the Company. It is anticipated that this line of credit may be used to finance working capital needs as well as the purchase of uranium to deliver against a SMP delivery contract that the Company and Crested recently received as a partial settlement of certain SMP arbitration matters.
FINANCING: Equity financing for SGMC and Plateau are dependant on the market price of gold and uranium, among other things. At May 31, 1998, the prices for these metals were depressed and it is not known when they will recover, if at all. Management of the Company and Crested believe, based on independent projections, that the market prices for these metals will improve in the short term. No assurance can be given that the prices will improve during fiscal 1999. If the prices do not improve, the ability of the Company and Crested to raise equity financing for these subsidiaries will be impaired.
The Company believes that cash on hand, in addition to its line of credit and cash projected to be received from operations will be adequate to fund working capital requirements through fiscal 1999. However, these capital resources may not be sufficient to provide the funding for major capital expansions of the Company's mineral properties and,accordingly, the Company's development plans may be either temporarily or permanently impacted. Net cash provided by financing activities for the year ended May 31, 1998 of $4,922,300 was primarily the result of issuances of the Company's common stock.
CAPITAL REQUIREMENTS
GENERAL: The primary requirements for the Company's working capital during fiscal 1999 are expected to be the costs associated with development activities of Plateau, care and maintenance costs of the former SMP properties, payments of holding fees for mining claims, purchase of uranium for delivery to the utility contract that was distributed to the Company and Crested as a result of the settlement agreement reached regarding the SMP arbitration, the Company's portion of the costs associated with the GMMV properties and corporate general and administrative expenses.
SGMC: Effective April 7, 1998, the Company purchased 889,900 Special Warrant Units from certain Canadian investors in an arm's length, bargained transaction between unrelated entities. As consideration, the Units were purchased with 488,895 shares of the Company's common stock. The transaction resulted in the Company increasing its ownership to 59% of the outstanding common stock of SGMC as of May 31, 1998 from 39% at May 31, 1997.
Due primarily to the sustained decline in gold prices, the Company recorded a $1,500,000 impairment on its investment in SGMC. If financing is not obtained in fiscal 1999 and/or gold prices further decline from present levels, the Company will reevaluate the need for an additional impairment on its investment in SGMC, which includes the Stock Purchase Warrant that is contingent on SGMC identifying ounces of gold in excess of 300,000 ounces. The Company acknowledges that it may be required to record a significant impairment under Generally Accepted Accounting Principles should financing not be obtained by SGMC to develop the project or if gold prices decline further.
SGMC's properties contain reserves of gold. Preliminary estimates are that a 500 ton per day ("tpd") mine/mill operation using a cyanide-flotation process, will require up to $15,000,000 to place the proposed mine and mill into full operation. It is the Company's intent to complete the necessary financing to develop the reserves of SGMC. Management believes that if adequate funding is obtained, production will begin in fiscal 2000. SGMC is currently attempting to negotiate financing with an investment firm with a proposed plan for the necessary financing intended to be completed in fiscal 1999. Sufficient capital resources are available to SGMC to continue its permitting and capital raising activities.
SMP: As part of a settlement agreement reached during the fourth quarter of fiscal 1998 regarding the SMP Arbitration, the SMP mines and associated properties were transferred to the Company and Crested. All past holding costs of the SMP mines were resolved and the future costs of standby as well as reclamation are the obligation of the Company and Crested. These costs are estimated at approximately $85,000 per month. There are no current plans to mine the SMP Crooks Gap properties during fiscal 1999. However, the Company and Crested will continue to preserve the mineral properties and develop concepts to reduce care and maintenance costs.
All matters in the SMP arbitration have been settled with the exception of two issues that are currently before the 10th Circuit Court of Appeals. Oral arguments are scheduled on these issues for September 24, 1998. Management of the Company cannot predict the timing or ultimate outcome of this hearing but believes that the issues will be resolved during fiscal 1999 unless Nukem and CRIC elect to appeal the decision further to the U.S. Supreme Court and that court decides to hear the appeal.
GMMV: On June 23, 1997, USE and USECC signed an Acquisition Agreement with Kennecott for the right to acquire Kennecott's interest in the GMMV for $15,000,000 and other consideration. As discussed in Note F to the financial statements, Kennecott paid the Company $4 million upon execution of the Agreement, which became nonrefundable upon the satisfaction of certain terms. The $4 million is classified
as a deferred purchase option since it will be recorded as a reduction of the Company's purchase price if the Acquisition Agreement closes.
During July 1998, the GMMV Management Committee unanimously agreed to place the Jackpot Mine and Sweetwater Mill on active standby status. This decision was made as a result of uncertainties in the short term uranium market. These same uncertainties have made the financing of the acquisition of Kennecott's interest in GMMV more difficult. The Company continues in its financing activities in an effort to raise sufficient capital to acquire the Kennecott interest in the GMMV. Currently, it is believed that such financing efforts may not be concluded by the terms of the Acquisition Agreement with Kennecott. Kennecott continues to work with the Company in its efforts to successfully close the purchase of Kennecott's interest.
The standby costs of the GMMV mine, associated property and mill will eventually become the responsibility of the individual partners on a percentage ownership basis. The partners in the GMMV are currently discussing how to operate and fund the operations of the properties. Budgets have not been finalized, but it is projected the annual holding costs of the mine and mill will be approximately $2,000,000. The Company and Crested will be obligated to pay their share (50%) of these costs once the obligations of Kennecott are completely satisfied. Due to the unpredictability of the uranium market, the Company is unable to predict when the GMMV properties will again be put on an active basis or when or if it will be able to purchase Kennecott's interest in the GMMV.
PLATEAU: Plateau owns and operates the Ticaboo townsite, motel, convenience store and restaurant. The operations resulted in fiscal 1998 losses of $800,000, which were absorbed by the Company. The Company continues to work on methods of increasing revenues and reducing costs. There has been an annual growth in sales since the Company has owned Plateau. The Company has constructed a total of seven homes which are held for sale. During fiscal 1998, the homes were written down by $100,000 to the appraised value.
The Company is currently working to obtain the necessary permits from the NRC and State of Utah to place the Shootaring mill which is owned by Plateau and located in southern Utah into production. The Company is seeking debt or equity financing of between $6,000,000 to $9,000,000 to put the mill and Tony M. Mine into production. Until such time as the financing is obtained and profitable contracts are obtained, the Company will not put the properties into production.
YELLOW STONE FUELS CORP. ("YSFC"): In Management's opinion, YSFC has sufficient cash to complete its projected 1999 exploration program on its in-situ uranium properties. At May 31, 1998, YSFC owed the Company and Crested $400,000 on a convertible promissory note plus $40,000 in interest for a total of $440,000. The note bears interest at 10% per annum and is due in December 1998. YSFC also owed the Company and Crested $161,700 for miscellaneous payroll and operating expenses. YSFC has indicated its desire to pay the total indebtedness in cash but it is not certain that a cash payment will occur as YSFC may elect at its option to pay the promissory note with shares of its common stock.
TERM DEBT AND OTHER OBLIGATIONS: Debt at May 31, 1998 of $503,900 constitutes a relatively low percentage of capitalization given the value of assets owned by the Company and the various activities it participates in. The debt is primarily for property and equipment purchased by USECC, Sutter and FNG. The debt bears different interest rates and is due under various payment terms. It is anticipated that all debt payments will be able to be made in the normal course of the Company's business.
RECLAMATION OBLIGATIONS: It is not anticipated that any of the Company's working capital will be used in fiscal 1999 for the reclamation of any of its mineral properties. The reclamation costs are long term and are either bonded through the use of cash bonds or the pledge of assets. It is not anticipated that any of the Company's mining properties will enter the reclamation phase prior to May 31, 1999.
Prior to fiscal 1996, the Company and Crested assumed the reclamation obligations, environmental liabilities and contingent liabilities for employee injuries, from mining the Crooks Gap and other properties in the Sheep and Green Mountain Mining Districts as well as the SGMC properties. The reclamation obligations, which are established by government agencies, were most recently set at $1,451,800 for the SMP properties and $27,000 on the SGMC properties. The amount of accruals for environmental liabilities for each site are determined by estimating costs associated with current or expected reclamation and remediation plans. These plans include detailed descriptions of the work to be performed, and in many cases involve the work of third party consultants. The plans are submitted annually to government agencies who review them and set the bond amounts.
To assure the reclamation work will be performed, regulatory agencies require posting of a bond or other security. The Company and Crested satisfied this requirement with respect to SMP properties by mortgaging their executive office building in Riverton, Wyoming.
Reclamation obligations on the GMMV Big Eagle properties and the Sweetwater Mill, estimated at approximately $23,620,000, have been assumed by the GMMV venturers, and secured by a bank letter of credit provided by Kennecott. The reclamation and environmental costs associated with the Sweetwater Mill will not commence prior to conclusion of mining activities on Green Mountain except for the open pit mine near the Mill. As uranium is processed through the Mill, a reclamation reserve will be funded on the unit of production basis. Up to $8,000,000 (in 1990 dollars) in any reclamation costs on the Sweetwater mill and associated properties which may be incurred prior to commencement of production or 2001 will be loaned by UNOCAL to the GMMV to be repaid only out of production.
Reclamation obligations of Plateau are covered by a $7,270,400 cash bond at May 31, 1998 to the U.S. Nuclear Regulatory Commission and a $1,561,600 cash deposit as of May 31, 1998 for the resolution of any environmental or nuclear claims.
OTHER: Although the Company and Crested currently are not in production on any mineral properties, development work continues on several of their major investments. The Company and Crested are not using hazardous substances or known pollutants to any great degree in these activities. Consequently, recurring costs for managing hazardous substances, and capital expenditures for monitoring hazardous substances or pollutants have not been significant. Likewise, the Company and Crested do not have properties which require current remediation. The Company and Crested are also not aware of any claims for personal injury or property damages that need to be accrued or funded.
The tax years through May 31, 1992 are closed after audit by the IRS. The Company currently has filed a request for an appeal hearing on an IRS agent's findings for the years ended May 31, 1993 and 1994. Although all indicators are that the findings of the IRS audit for 1993 and 1994 will not result in additional tax, the findings of the audit could affect the tax net operating loss of the Company. Management of the Company feels confident that it will prevail on a majority of the issues. No assurance of the outcome of the appeal can be given. The tax years ended May 31, 1995 and 1996 are also currently being audited by the IRS. No determination on these audits can be made as they are not yet completed.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Operations resulted in a net after tax loss of $983,200 or $0.15 per share as compared to a net after tax loss of $3,724,500 or $0.58 per share. The primary cause of this reduction in the Company's loss during fiscal 1998 were increased revenues of $5,768,300 while costs and expenses only increased by $1,697,300.
Net cash used in operating activities decreased to $2,245,000 in 1998 from $2,647,600 in 1997 primarily due to the decrease in loss from operations offset by other working capital changes.
REVENUES: Mineral revenues increased by $862,400 as the result of the Company receiving its proportionate share of the net proceeds from the delivery of pounds of uranium under an SMP contract. This was the last delivery under this contract and no similar delivery proceeds were received during fiscal 1997.
Commercial operations revenue increased by $1,304,100 as a result of an increase of $1,019,100 pertaining to increased equipment rentals to the GMMV and the development of mining properties. Additionally, revenues generated at the Company's Ticaboo townsite increased by $285,000 in fiscal 1998. SMP litigation settlements are recorded net of any accounts receivable from SMP for holding costs of the mining properties. During fiscal 1998, such revenues increased by a net of $3,586,200 to $4,590,000.
Construction contract revenues decreased by $1,038,600 as a result of the Company's subsidiary Four Nines Gold, Inc.("FNG") not obtaining any commercial construction contracts. FNG's equipment and employees were used exclusively during fiscal 1998 on the construction of various roads, ponds and other excavation projects for the GMMV. Revenues from Management fees increased significantly due to the work that was done under the GMMV agreements that allow the Company to receive a 10% management fee on all billable charges under the 1990 GMMV agreement.
COSTS AND EXPENSES: Mineral operation expenses and General and administrative expenses increased by $821,700 and $2,029,900, respectively due to increased operations at the Company's GMMV and Plateau mineral and commercial operations, and increased salary expense. The Company recognized a mineral interest impairment of $1,500,000 pertaining to SGMC as discussed above. There was no impairment of mineral properties taken during fiscal 1997. There was however an abandonment of mining claims in 1997 pertaining to certain mining claims in the amount of $1,225,800. No abandonments of mining claims occurred in fiscal 1998.
Construction costs decreased by $716,200 due to FNG not performing any commercial construction work, and provision for doubtful accounts decreased by $614,200 as no additional provision was required.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues for the twelve months ended May 31, 1997 totaled $5,790,200 as compared to revenues at May 31, 1996 of $9,632,200. This decrease in revenues of $3,842,000 is primarily the result of no revenues being recognized from mineral sales in fiscal 1997 (decrease of $3,116,700). During the prior year, USE and Crested made certain deliveries of U3O8 for SMP. Other decreases in revenues were oil sales, $45,500; sales of assets, $312,800; and construction revenues from USE's subsidiary FNG, $2,755,900. These decreases in revenues were offset by increased commercial sales, $780,300; advance royalties from Cyprus Amax, $207,300; partial distribution of SMP funds, $1,003,800; and increased management fees and other revenues, $323,600.
With the exception of cost of minerals sold, construction costs and commercial operations, costs and expenses remained the same as they had been in 1996. Cost of minerals sold declined by $2,766,700 as a result of Crested and USE not delivering any U3O8 under the SMP contracts during fiscal 1997. Construction costs declined by $2,325,200 as a result of USE's subsidiary FNG not being able to secure construction contracts. Currently, FNG is using its equipment and employees on the construction of earth structures and roads for the GMMV. It is not known if FNG will be able to obtain contracts in the future. During fiscal 1997, USE also recognized a provision for doubtful accounts of $614,200. This is as a result of a third party
defaulting on a sale of land that USE and Crested sold during a prior period. USE also recognized an increase in the abandonment of mineral leases of $897,100. The total expense of $1,225,800 for mineral property abandonment was the result of Crested abandoning a mineral property having a book value of $71,500 and SGMC abandoning properties with a book value of $1,154,300.
General and administrative expenses increased only slightly by $238,600 due to expansion of operations. Increases in general and administrative expenses were reduced by overhead and direct charges to GMMV, SMP and SGMC.
Equity losses recognized by USE increased by $272,300. Operations resulted in a net loss of $3,724,500 or $0.58 per share in 1997 as compared to a net profit of $270,700 or $0.04 per share in 1996.
FUTURE OPERATIONS:
The Company has generated losses in two of the last three years, as a result of holding costs and permitting activities in the mineral segment along with impairments of mining claims and investments in subsidiaries that are involved in the minerals business and from certain commercial operations. The Company is in the process of developing and/or holding investments in gold and uranium properties that are currently not generating any operating revenues. These properties require expenditures for items such as permitting, development, care and maintenance, holding fees, corporate overhead and administrative expenses. Success in the minerals industry is dependant on the price that a company can receive for the minerals produced. The Company cannot predict what the long term price for gold and uranium will be and therefore cannot predict when, or if, the Company will generate net income from operations..
In addition, legal expenses associated with the litigation and arbitration surrounding the SMP Partnership and the inability of the Company to utilize all the funds that have been awarded to the Company and Crested by the Arbitration Panel and confirmed by the Federal Court have compounded the Company's operating and cash flow position in the past. The Company believes that the SMP arbitration will be resolved during fiscal 1999. The Company believes that it will meet its obligations in fiscal 1999 as well as be able to secure financing to further the development of its mineral properties and place them into production.
YEAR 2000 ISSUE
Computer programs written in the past utilize a two digit format to identify the applicable year. Any date sensitive software beyond December 31, 1999 could fail, if not modified. The result could be, among other possibilities, disruptions to operations and the inability to process financial transactions. The Company has evaluated the operating systems on all headquarter and field office computers and operating systems and has consulted with various vendors of the computer software which is being used by the Company and affiliates. The vendors have confirmed to the Company that all of the Company's software and information systems are Year 2000 compliant. The Company therefore does not believe that significant expenditures will be required for the Year 2000 event.
EFFECTS OF CHANGES IN PRICES
Mining operations and the acquisition, development and sale of mineral properties are significantly affected by changes in commodity prices. As prices for a particular mineral increase, prices for prospects for that mineral also increase, making acquisitions of such properties costly, and sales advantageous. Conversely, a price decline facilitates acquisitions of properties containing that mineral, but makes sales of such properties more difficult. Operational impacts of changes in mineral commodity prices are common in the mining industry.
URANIUM AND GOLD. Changes in the prices of uranium and gold affect USE to the greatest extent. When uranium prices were relatively high in fiscal 1988, USE and Crested acquired the Crooks Gap properties, and thereafter put the properties into production. When uranium prices fell sharply during fiscal 1989-1991, USECC suspended the mining operations of SMP, because uranium could be purchased at prices less than the costs of producing uranium. Uranium production in the United States reportedly fell by 25 percent to 33 percent in 1990, due to the lowest prices for uranium since the market developed in the 1960s. However, these low prices created opportunities for the acquisition of the Sweetwater Mill and the Shootaring Mill.
Changes in uranium prices directly affect the profitability of uranium supply agreements with utilities. Fixed-price agreements become advantageous when the spot market price for uranium falls significantly below the price which a utility has agreed to pay.
Several of the original SMP utility contracts have been completed, and the rest assigned out to the partners in connection with the partial settlement of litigation with Nukem/CRIC. For fiscal 1998, USE and Crested have one utility supply contract, which is market related, and one purchase contract, which is market related. However, the purchase contract requires six months notice to the supplier before delivery, which notice fixes the price. a price decline between notice and delivery could adversely impact USE and Crested. Additional contracts with utilities will be sought as the uranium properties of USE and Crested go into production.
USE believes SGMC's Lincoln Mine will be profitable with gold prices over $290 per ounce. The price of gold was adversely impacted in October and November 1997 and prices in late July 1998 were approximately $295 per ounce.
MOLYBDENUM AND OIL. Changes in prices of molybdenum and petroleum are not expected to materially affect USE with respect to either its molybdenum advance royalties or its fees associated with oil production. a significant and sustained increase in demand for molybdenum would be required for the development Mt. Emmons properties by Cyprus Amax since Cyprus Amax has other producing mines.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS.
Financial statements for the Company follow immediately. Financial statements of GMMV are included as schedules and immediately follow the index at Item 14(a)(2).
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To U.S. Energy Corp.:
We have audited the accompanying consolidated balance sheets of U.S. ENERGY CORP. (a Wyoming corporation) AND SUBSIDIARIES as of May 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended May 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of U.S. Energy Corp. and subsidiaries as of May 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado, September 11, 1998.
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CONSOLIDATED BALANCE SHEETS
ASSETS
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CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
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CONSOLIDATED STATEMENTS OF OPERATIONS
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CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
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CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998
A. BUSINESS ORGANIZATION AND OPERATIONS:
U.S. Energy Corp. (the "Company" or "USE") was incorporated in the State of Wyoming on January 26, 1966. The Company's primary business is the acquisition, exploration, holding, sale and/or development of mineral properties and mining and marketing of minerals. Principal mineral interests are in uranium, gold, and molybdenum. The Company also holds various real and personal properties used in commercial activities and operates an airport fixed base facility in Riverton, Wyoming. Most of these activities are conducted through the joint venture discussed below and in Note D. The Company, through its previously wholly-owned subsidiary, The Brunton Company ("Brunton"), which was sold in February 1996, engaged in the manufacturing and marketing of compasses and the distribution of outdoor recreational products. In addition, through its majority owned subsidiary, Four Nines Gold, Inc. ("FNG"), the Company historically engaged in projects such as the construction of municipal sewage systems, irrigation and other civil engineering projects. At May 31, 1998, FNG was primarily engaged in activities for the Company at its Green Mountain uranium property.
The Company and its 52%-owned subsidiary, Crested Corp. ("Crested") are engaged in a venture to develop certain uranium properties with Kennecott Uranium Company ("Kennecott") known as the Green Mountain Mining Venture ("GMMV"), formed in 1990, and is also involved in a partnership with Nukem, Inc. ("Nukem") through its wholly-owned subsidiary, Cycle Resource Investment Corporation ("CRIC"), known as Sheep Mountain Partners ("SMP"). As discussed in Note K, SMP is currently involved in significant legal proceedings between its partners. During fiscal 1995, USE and Crested formed a new Wyoming corporation, Sutter Gold Mining Company ("SGMC"), which was the successor of USECC Gold Limited Liability Company ("USECC Gold") and Sutter Gold Venture ("SGV"). These companies were formed to develop and mine gold reserves in California. The Company also owns 100% of the outstanding stock of Plateau Resources Limited ("Plateau"), which owns a nonoperating uranium mill and support facilities in southeastern Utah. Currently, the mill is nonoperating but has been granted a license to operate, pending certain conditions. See further discussion of these entities in Note F. As used, hereafter, "Company" refers to USE and its consolidated entities unless otherwise specified.
LIQUIDITY AND OPERATING LOSSES
As a result of the SMP litigation/arbitration (see Note K) and the significant amount of standby/maintenance, permitting and development costs being incurred on the Company's mineral properties (none of which are in production), the Company has incurred significant losses from continuing operations during each of the last three years. During the past few years, the Company has relied primarily on the sale of its common stock through private placements and the exercise of common stock warrants/options, borrowing on its lines of credit, term loans and the sale of its subsidiary, Brunton, to fund its losses and cash needs. During fiscal 1998, the Company received $858,700 for a delivery made on an SMP contract. Subsequent to year end, the Company and Crested received $5,026,000 as partial payment of the monetary resolution of the American Arbitration Association's Order and Award for the portion of the SMP arbitration/litigation ("SMP litigation") that was finalized in fiscal 1998. For accounting purposes, the Company and Crested first applied the proceeds against their recorded investment balance in SMP of $436,000, with the remaining balance of $4,590,000, after cost recovery, being recognized as income. These transactions have resulted in the Company having net working capital of $8,238,900 as of May 31, 1998.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
The Company anticipates obtaining additional funds from those issues presently on appeal before the 10th Circuit Court of Appeals in connection with the SMP litigation, as further discussed in Note K. If the anticipated award is delayed, reduced or overturned, additional sources of funding will be required to place Plateau into production as well as to purchase the Kennecott interest in GMMV (see Note F). Equity and/or debt financing will be the primary source of these funds. There is no assurance such financing sources will be available to the Company. If the additional financings do not occur as planned, the Company believes it can delay its development activities so that available cash, operating cash flow and bank borrowings will be adequate to fund its working capital requirements and commitments for fiscal 1999.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of USE and affiliates include the accounts of the Company, the accounts of its majority-owned subsidiaries Plateau (100%), Energx, Ltd ("Energx") (90%), FNG (50.9%), SGMC (59%), Crested (52%) and the USECC Joint Venture ("USECC"), a proportionately consolidated joint venture which is equally owned by the Company and Crested through which the bulk of their operations are conducted. USECC owns the buildings and other equipment used by the Company and holds an interest in SMP (see Notes E and F). The accounts of Brunton have been reflected as discontinued operations in the 1996 financial statements as Brunton was sold in February 1996.
With the exception of SMP, investments in other joint ventures and 20% to 50% owned companies are accounted for by the equity method (see Note E). SGMC was an equity investee through March 1998 when the Company purchased special warrant units from certain investors and increased its ownership to 59%, requiring consolidation of April and May 1998 operations (see Note F). Investments of less than 20% in companies are accounted for by the cost method. All material intercompany profits, transactions and balances have been eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying amount of cash equivalents approximates fair value because of the short maturity of these instruments.
INVESTMENTS
Based on the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, the Company accounts for its investment in certain securities as held-to-maturity. Held-to-maturity securities are measured at amortized cost and are carried at the lower of aggregate cost or fair market value.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
INVENTORIES
Inventories consist primarily of aviation fuel, associated aircraft parts, mining supplies, stockpiled uranium and gold ore. Retail inventories are stated using the average cost method. Other inventory is stated at the lower of cost or market.
PROPERTIES AND EQUIPMENT
Land, buildings, improvements, aircraft and other equipment are carried at cost.
Depreciation of buildings, improvements, aircraft and other equipment is provided principally by the straight-line method over estimated useful lives ranging from three to 45 years.
The Company capitalizes all costs incidental to the acquisition and development of mineral properties as incurred. Mineral exploration costs are expensed as incurred. The costs of mine development are deferred until production begins as these costs will be recovered through future mining operations. Once commercial production begins, mine development costs incurred to maintain production will be amortized using a units-of- production method over the estimated useful life of the ore-body. Costs are charged to operations if the Company determines that an ore body is no longer economical. Costs and expenses related to general corporate overhead are expensed as incurred.
The Company and Crested have acquired substantial mining property assets and associated facilities at minimal cash cost, primarily through the assumption of reclamation and environmental liabilities. Certain of these assets are owned by various ventures in which the Company is either a partner or venturer. The market value of these assets are not reflected in the accompanying consolidated balance sheets (see Note K).
LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amount may not be recoverable based upon an assessment of estimated future cash flows or fair market value, whichever is more objectively ascertainable. If the sum of estimated future cash flows on an undiscounted basis or the fair value is less than the carrying amount of the related asset, an asset impairment is considered to exist. The related impairment loss is measured by comparing estimated future cash flows on a discounted basis or the fair value of the asset less any selling costs to the carrying amount of the asset. Changes in significant assumptions underlying future cash flow estimates or fair values of assets may have a material effect on the Company's financial position and results of operations. A low commodity price market, if sustained for an extended period of time or an inability to obtain financing necessary to develop mineral interests may result in asset impairment. During 1998, the Company recorded an impairment of $1,500,000 on its investment in SGMC (see Note F).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts for short-term and long-term debt, receivables, other current assets, and accounts payable and accrued expenses approximate fair value.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
REVENUE RECOGNITION
Advance royalties which are payable only from future production or which are non-refundable are recognized as revenue when received (see Note F).
Revenues from gold and uranium sales are recognized upon delivery. Revenues are recognized from the rental of certain assets ratably over the related lease terms. Revenues from commercial operations, which represent primarily real estate activity, and an airport fixed base operation, are recognized as goods and services are delivered. Revenues from long-term construction contracts are recognized on the percentage-of-completion method. If estimated total costs on any contract indicate a loss, the Company provides currently for the total anticipated loss on the contract.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." This statement requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets, liabilities and carryforwards.
SFAS 109 requires recognition of deferred tax assets for the expected future effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are reduced, if deemed necessary, by a valuation allowance for any tax benefits which, based on current circumstances, are not expected to be realized.
NET INCOME (LOSS) PER SHARE
In February 1997, SFAS No. 128 "Earnings per Share" was issued and specifies the computation, presentation and disclosure requirements for earnings per share. SFAS 128 is effective for periods ended after December 15, 1997 and requires retroactive restatement of prior period earnings per share. The statement replaces "primary earnings per share" with "basic earnings per share" and replaces "fully diluted earnings per share" with "diluted earnings per share." Adoption of SFAS 128 required restatement of 1997 earnings per share as forfeitable shares were included in the calculations of primary earnings per share for the year ended May 31, 1997, the loss per share was (.55) prior to restatement. The following table presents a reconciliation of basic and diluted earnings per share calculations:
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130 "Reporting Comprehensive Income" ("SFAS 130") was issued and establishes standards for reporting and displaying comprehensive income and its components in the financial statements. In addition to net income, comprehensive income includes all changes in equity during a period, except those resulting from investments by and distributions to owners. The Company will adopt SFAS 130, which is effective for fiscal years beginning after December 15, 1997, in the first quarter of fiscal 1999. Management does not expect the adoption of this pronouncement to have a material impact on its consolidated financial statements.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") was issued and establishes standards for reporting information about operating segments in annual and interim financial statements. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 is effective for fiscal years beginning after December 15, 1997, and will be adopted in fiscal 1999. Reporting and disclosures under SFAS 131 are not expected to be materially different than those disclosures in Note I.
In February 1998, SFAS No. 132 "Employers' Disclosures about Pensions and Other Post Retirement Benefits" ("SFAS 132") was issued and standardizes disclosure requirements for pension and other post retirement benefit plans. Adoption of this standard is required for fiscal years beginning after December 15, 1997, and restatement of prior period comparative disclosures is required. The Company will adopt SFAS 132 in fiscal 1999. The adoption of SFAS 132 is not expected to materially affect the Company's disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which establishes accounting and reporting standards for derivative instruments and for hedging activity. SFAS 133 is effective for all periods in fiscal years beginning after June 15, 1999. SFAS No. 133 requires all derivatives to be recorded on the balance sheet as either an asset or liability and measured at fair value. Changes in the derivative's fair value will be recognized currently in earnings unless specific hedge accounting criteria are met. The Company does not expect the adoption of SFAS 133 to have a material effect on its financial position or results of operations.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 financial statements to conform with the 1998 presentation.
C. RELATED-PARTY TRANSACTIONS:
The Company and Crested provide management and administrative services for affiliates under the terms of various management agreements. The Company also provides all employee services required by Crested. In exchange, Crested is obligated to the Company for its share of these costs. Revenues from services by the Company to unconsolidated affiliates were $849,000, $397,000 and $92,900 in fiscal 1998, 1997 and 1996, respectively. The Company has $1,604,400 of receivables from unconsolidated subsidiaries and short-term advances to employees totaling $101,300 as of May 31, 1998.
At May 31, 1998, the Company's principal shareholder and his immediate family were indebted to the Company in the amount of $338,000 which is represented by notes secured by 104,000 shares of the Company's common stock.
On May 15, 1997, Yellow Stone Fuels Corp. ("YSFC"), a 12.7% owned affiliate of USE and a 12.7% owned affiliate of Crested, entered into a line of credit arrangement with USECC. As of May 31, 1998, YSFC owed USECC $440,000 which included $40,000 of accrued interest. This note bears interest at 10% and is due on December 31, 1998. In lieu of paying the note in cash on or before its maturity date, YSFC may convert this debt, at its option, into YSFC shares of common stock at $1.00 per share of debt and interest. However, if YSFC defaults in paying the note by December 31, 1998, the note is convertible into a number of shares which will give USE and Crested a combined 51% ownership interest in YSFC. The Company has classified the $440,000 note as an investment in YSFC based upon YSFC's current financial condition.
D. USECC JOINT VENTURE:
USECC operates the Glen L. Larsen office complex; an aircraft hangar with a fixed base operation, office space and certain aircraft; holds interests in various mineral properties and ventures including SMP and GMMV; conducts oil and gas operations; and transacts all operating and payroll expenses, except for specific expenses allocated directly to each venturer. The joint venture agreement also provides for the allocation of certain operating expenses to other affiliates. In addition, through April 1996, USECC operated Wind River Estates ("Wind River"), a 100 unit mobile home park. During 1996, USECC sold Wind River (which had a net book value of approximately $512,700) and recognized a gain of $252,600, which is reflected as a Gain on Sale of Assets in the accompanying Consolidated Statements of Operations.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
E. INVESTMENTS AND ADVANCES:
The Company's restricted investments secure various decommissioning costs, reclamation and holding costs. Investments are comprised of debt securities issued by the U.S. Treasury that mature at varying times from three months to one year from the original purchase date. As of May 31, 1998, the cost of debt securities was a reasonable approximation of fair market value. These investments are classified as held-to-maturity under SFAS 115 and are measured at amortized cost.
The Company's investment in and advances to affiliates are as follows:
* Approximately 39% until March, 1998; consolidated at May 31, 1998.
**Includes notes receivable from YSFC of $440,000 and $392,200, respectively (see Note C), reduced by equity in losses.
Equity loss from investments accounted for by the equity method are as follows:
GMMV expenses certain general and administrative, maintenance and holding costs. However, the Company has not recognized equity losses in GMMV because Kennecott was committed to fund 100% of the first $50,000,000 of development and operating costs of the Joint Venture. In 1998, the Company and USECC entered into an Acquisition Agreement with Kennecott whereby the Company may be able to purchase Kennecott's interest in the GMMV (see Note F). The Company's carrying value of its investment in GMMV of $724,800 in the accompanying balance sheets is substantially lower than its underlying equity in GMMV.
Condensed combined statements of operations of the Company's equity investees include GMMV, YSFC and Ruby Mining Company.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
CONDENSED COMBINED BALANCE SHEETS - EQUITY INVESTEES
CONDENSED COMBINED STATEMENTS OF OPERATIONS - EQUITY INVESTEES
SMP entered into various market related and base price escalated uranium sales contracts with certain utilities which require approximately 1,500,000 pounds of uranium concentrates to be delivered from 1997 through 2000 depending on utility requirements. These contracts also allow for the quantities to be substantially increased by the utilities. As discussed in Note K, SMP has been the subject of significant litigation and arbitration proceedings between the SMP partners since 1991, portions of which are currently still in progress. Pending the resolution of the remaining proceedings, the partners in SMP agreed to fulfill certain of the SMP's uranium sales contracts outside of the partnership with each partner delivering a mutually- agreed portion of the delivery commitments on an individual basis. In 1998 and 1996, the Company recognized revenues of $858,700 and $1,383,400, respectively (no related revenues were recognized in 1997) from these deliveries. Revenues from these transactions have been included in the accompanying Consolidated Statements of Operations as Mineral Sales, which would normally have been sales of SMP.
Due to the litigation and arbitration proceedings, audited financial statements for SMP are not obtainable. Accordingly, the Company has recorded only its direct investment in, and results of operations from the partnership. The Company had no carrying value of its investment in SMP for either 1998 or 1997 as proceeds from litigation and arbitration proceedings were accounted for under the cost recovery method of accounting as discussed in Note K. The Company's direct loss generated from its investment in SMP, which represent mine standby costs incurred by the Company, was $436,000, $442,700 and $416,200 for the years ended May 31, 1998, 1997 and 1996, respectively. No amounts attributable to SMP are included in the Condensed Combined Balance Sheets or Condensed Combined Statements of Operations of the Company's equity investees presented above.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
F. MINERAL CLAIMS TRANSACTIONS AND MINING PROPERTIES:
GMMV
During fiscal 1990, the Company and Crested entered into an agreement with Kennecott, a wholly-owned, indirect subsidiary of The RTZ Corporation PLC, for Kennecott to acquire a 50% interest in certain uranium mineral properties in Wyoming known as the Green Mountain Properties. The purchase price was $15,000,000 and a commitment to fund the first $50 million of development and operating costs. Kennecott committed to fund 100% of the first $50 million of capital contributions to the GMMV. Kennecott also committed to pay additional amounts if certain future operating margins are achieved. USE and USECC participate in cash flows of the GMMV in accordance with their ownership of the mining claims prior to the formation of the GMMV.
On June 23, 1997, USE and USECC signed an Acquisition Agreement with Kennecott for the right to acquire Kennecott's interest in the GMMV for $15,000,000 and other consideration. Kennecott paid USE and USECC $4,000,000 on signing, and committed to loan the GMMV up to $16,000,000 for payment of reimbursable costs incurred by USECC in developing the proposed underground Jackpot Uranium Mine for production and in changing the status of the Sweetwater Mill from standby to operational.
Pursuant to the Acquisition Agreement, the Mineral Lease, and the Mill Contract, USECC is to develop the proposed Jackpot Mine and nearby Big Eagle Mine, and work with Kennecott in preparing the Sweetwater Mill for renewed operations. Such work will be funded from the $16,000,000 being loaned to the GMMV by Kennecott. Kennecott will be entitled to a credit against Kennecott's original $50,000,000 commitment to fund the GMMV, in the amount of two dollars of credit for each one dollar of such funds out of the $16,000,000 loaned by Kennecott to the GMMV, plus the $4,000,000 paid to USE and USECC on signing of the Acquisition Agreement. It is anticipated that such credits will fully satisfy the balance of Kennecott's initial funding commitment to the GMMV.
Closing of the Acquisition Agreement is subject to USE and USECC satisfying several conditions, including: (i) the acquiring entity (which may be USE, USECC, or an entity formed by USE and USECC to acquire Kennecott's interest in the GMMV) must have a market capitalization of at least $200,000,000; (ii) the parties to the Acquisition Agreement must have received all authorizations, consents, permits and approvals of government agencies required to transfer Kennecott's interest in the GMMV to the acquiring entity; (iii) USE and USECC shall have replaced, or caused the replacement of, approximately $25,000,000 of reclamation bonds, in addition to other guarantees, indemnification and suretyship agreements posted by Kennecott on behalf of the GMMV; and (iv) USE and USECC, or the acquiring entity, must pay $15,000,000 cash to Kennecott at closing and assume all obligations and liabilities of Kennecott with respect to the GMMV (including repayment of the $16,000,000 Note and the Mortgage) from and after the closing. Under very limited circumstances, the scheduled closing date may be postponed to not later than October 30, 1998.
USECC satisfied the terms of the Acquisition Agreement to the point that the $4,000,000 deferred GMMV purchase option benefit paid by Kennecott is nonrefundable and will serve to reduce USE's and Crested's ultimate $15,000,000 purchase price. If the acquisition is unsuccessful, the signing payment will be applied against any future reimbursable costs and contributions due the GMMV. After such costs and remaining obligations are satisfied, the remainder, if any, will be recognized as income.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
In 1996, the U.S. Government adopted the "USEC Privatization Act of 1996" to privatize the U.S. Enrichment Corp. ("USEC"). In July 1998, in filings with the U.S. Securities and Exchange Commission, USEC disclosed its planned sale of significant quantities of uranium in the U.S. marketplace. Accordingly, forecasted demand for uranium and forecasted uranium sales prices have decreased in the short-term. As a result, on July 31, 1998, GMMV halted development activities at the Jackpot Mine and has placed the facility on active standby. This action required the layoff of mine workers. Due to the uncertainty of the uranium market, it is not known when the mine will operate again or if USECC will be able to conclude the financing necessary to buy Kennecott's interest.
If the Acquisition Agreement is not closed, USE, USECC and Kennecott shall continue to own their respective 50% interests in the GMMV, and Kennecott's obligation to repay the $16,000,000 loaned by KEC shall remain Kennecott's obligation, without any adverse effect on the 50% interest in GMMV held by USE and USECC. However, the Jackpot Mine development work and Sweetwater Mill upgrade work funded by the $16,000,000 advance will have benefitted all parties to the GMMV and will fully satisfy Kennecott's original $50,000,000 funding obligation to GMMV.
SMP
During fiscal 1989, USE and Crested, through USECC, entered into an agreement to sell a 50% interest in their Sheep Mountain properties to Nukem's subsidiary CRIC. USECC and CRIC immediately contributed their 50% interests in the properties to a newly-formed partnership, SMP. SMP was established to further develop and mine the uranium claims on Sheep Mountain, acquire uranium supply contracts and market uranium. Certain disputes arose among USECC, CRIC and its parent Nukem, Inc. over the operation of SMP. These disputes have been in litigation/arbitration for the past seven years. See Notes E and K for a description of the investment and a discussion of the related litigation/arbitration.
CYPRUS AMAX
During prior years, the Company and Crested conveyed interests in mining claims to AMAX Inc. ("AMAX") in exchange for cash, royalties, and other consideration. AMAX and its successor Cyprus Amax Minerals, Inc. ("Cyprus Amax") have not placed the properties into production as of May 31, 1998.
Cyprus Amax now pays the Company and Crested an annual advance royalty of 50,000 pounds of molybdenum (or its cash equivalent). Cyprus Amax is entitled to a partial credit against future royalties for any advance royalty payments made, but such royalties are not refundable if the properties are not placed into production. The Company recognized $211,000, $207,300 and $-0- of revenue from the advance royalty payments in fiscal 1998, 1997, and 1996, respectively.
Cyprus Amax may elect to return the properties to the Company and Crested, which would cancel the advance royalty obligation. If Cyprus Amax formally decides to place the properties into production, it will pay $2,000,000 to the Company and Crested. If Cyprus Amax sells the properties, the Company and Crested will receive 15% of the first $25 million received by Cyprus Amax.
The Company and Crested also held an option to purchase certain real estate located in Gunnison, Colorado owned by Cyprus Amax. During fiscal 1995, USE and Crested reached an agreement with Cyprus
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
Amax whereby USE and Crested would forego six quarters of advance royalties as payment of this option exercise price. Accordingly, USE and Crested received no advance royalties during 1996 as a result of this agreement. Thereafter, USE (together with Crested) signed two option agreements with Pangolin Corporation ("Pangolin"), a Park City, Utah developer, for sale of the land owned in Gunnison. Pangolin made a cash payment and signed promissory notes for the purchase of the properties. As of May 31, 1998, the promissory notes were in default and are adequately reserved for. USECC is endeavoring to resolve the default and filed a legal action to protect its interest (see Note K).
SGMC
Sutter Gold Mining Company ("SGMC") was established in 1990 to conduct operations on mining leases and to produce gold from the Lincoln Project.
SGMC is in the development stage and additional development is required prior to the commencement of commercial production. SGMC has not generated any significant revenue and has no assurance of future revenue. All acquisition and mine development costs since inception have been capitalized. Since test production in 1992, SGMC has focused its efforts on obtaining a reserve study, developing a mine plan and pursuing a partner to assist in the financing of its mineral development and ultimate production. As of May 31, 1998, due to the decline in the spot price for gold, SGMC has put the development of the mine on hold. Until the time when development begins, SGMC does not expect to require capital contributions from USE, Crested or other sources of financing to maintain its current activities. SGMC will continue to be considered in the development stage until the time it generates significant revenue from its principal operations.
During the first and second quarters of fiscal 1997, SGMC sold shares of its common stock in a private placement. These shares were sold for $3.00 per share. SGMC received approximately $1,100,000 in net proceeds from this equity placement. During the fourth quarter of fiscal 1997, an additional offering of shares of SGMC's special warrant units was completed and raised approximately $5,400,000 in net cash proceeds. Each special warrant unit is convertible into one share of SGMC common stock for no additional consideration and one stock purchase warrant. The warrant allows the holder to purchase an additional share of SGMC common stock for a CAN$6.00. The warrant expires in November 1998. At the underwriter's request, the initial investors (including USE and Crested) agreed to have the amount of their common shares owned reduced by 50 percent. The investors in the $3.00 per share private placement discussed above were not affected as those shares were sold in contemplation of the 1 for 2 reverse split.
In connection with the second offering, the Company and Crested accepted a Contingent Stock Purchase Warrant dated March 21, 1997 which provides the Company and Crested the right to acquire, for no additional consideration, common shares of SGMC's $.001 par value common stock having an aggregate value of $10,000,000 (US). The Stock Purchase Warrant has a term of ten years extending to March 21, 2007, and is exercisable partially or in total, semi-annually beginning on June 30, 1997. However, the Stock Purchase Warrant is only exercisable to the extent proven and probable ore reserves, as defined in the Stock Purchase Warrant, in excess of 300,000 ounces are added to SGMC's reserves. In addition, SGMC has the right to satisfy the exercise of all or any portion of the Stock Purchase Warrant with the net cash flows, as defined, at $25.00 (US) for each new ounce of proven and probable ore in excess of 300,000 ounces up to a maximum of 700,000 ounces. Accordingly, the Company has allocated the carrying value of SGMC shares
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
exchanged for the Contingent Stock Purchase Warrant to its investment in such contingent warrants. The Stock Purchase Warrant benefits the Company and Crested on a basis of 88.9% and 11.1%, respectively.
On March 31, 1998, the Company purchased 889,900 Special Warrant units from certain Canadian investors. The units were purchased with 488,895 of the Company's common stock. In addition, the Company sold 170,000 shares of common stock to the Canadian investors at the then market price ($7.00 per share). As a result of this purchase, the Company and Crested's combined ownership interest in SGMC was 59%. Therefore, as of April 1, 1998 the Company began consolidating SGMC's results of operations. Had the Company consolidated SGMC for the entire 12-month period ended May 31, 1998, the 1998 consolidated net loss would have been approximately $190,000 greater.
Primarily as a result of the sustained decline in gold prices and the April 1998 issuance of shares for additional equity interest in SGMC, the Company evaluated the May 31, 1998 carrying value of its investment in SGMC for impairment. The Company determined its aggregate investment in SGMC, which includes the Stock Purchase Warrant discussed previously, exceeded the fair value of the investment by approximately $1,500,000. Accordingly, in fiscal 1998, the Company recorded an impairment in the amount of $1,500,000 which is classified as Impairment of Mineral Interests in the accompanying Consolidated Statements of Operations.
Additional financing will be required in order to develop the reserves of SGMC. Management of SGMC is currently attempting to negotiate a proposed financing plan to be executed in fiscal 1999. However, if financing is not obtained in fiscal 1999, or should other events occur such as a sustained or further decline in gold prices, the Company will reevaluate the need for an additional impairment of its carrying value in SGMC. If a determination is made that an impairment has occurred, it is likely the amount of such impairment will be material to the Company's financial position and results of operations.
PLATEAU RESOURCES LIMITED
During fiscal 1994, USE entered into an agreement with Consumers Power Company to acquire all the issued and outstanding common stock of Plateau Resources Limited ("Plateau"), a Utah corporation. Plateau owns a uranium processing mill and support facilities and certain other real estate assets through its wholly-owned subsidiary Canyon Homesteads, Inc. in southeastern Utah. USE paid nominal cash consideration for the Plateau stock and agreed to assume all environmental liabilities and reclamation bonding obligations. At May 31, 1998, Plateau had a cash security in the amount of $7,270,408 to cover reclamation of the properties (see Note K).
USECC is currently evaluating the best utilization of Plateau's assets. Evaluations are ongoing to determine when, or if, the mine and mill properties should be placed into production. The primary factor in these evaluations relates to the current depressed uranium market. Alternative uses of the properties are also being evaluated.
In fiscal 1998, the Company had an independent appraisal performed on its modular homes held for resale. Based upon the analysis performed, the Company recorded a $100,000 write-down to more accurately reflect the fair value of these assets as of May 31, 1998. The write-down is included in Commercial Costs
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
and Expenses in the accompanying Consolidated Statements of Operations. The Company continues to review its investment in these assets for impairment.
ENERGX, LTD.
Energx is engaged in the exploration, development and operation of natural gas properties. Energx currently has leased properties in Wyoming and on the Fort Peck Indian Reservation, Montana. Energx is owned by USE (45%), Crested (45%) and the Assiniboine and Sioux Tribes (10%).
During fiscal 1997 and 1996, Energx abandoned certain of its leases and as a result wrote off $164,500 and $328,700, respectively, of related capitalized costs. The write off is reflected as Abandonment of Mineral Interests in the accompanying Consolidated Statements of Operations.
G. DEBT:
LINES OF CREDIT
USE and Crested have a $1,000,000 line of credit from a commercial bank. The line of credit bears interest at the bank's prime rate plus .5% (10.25% as of May 31, 1998). The weighted average interest rate for both 1998 and 1997 was 10.25%. The line of credit is secured by certain real property and a share of the net proceeds of fees from production from certain oil wells. No amounts were outstanding as of May 31, 1998 and 1997.
NOTES PAYABLE
The components of notes payable as of May 31, 1998 and 1997 are as follows:
Principal requirements on notes payable are $225,700; $117,000; $84,300; $24,700; $22,600; and $29,600 for the years 1999 through 2003 and thereafter, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
H. INCOME TAXES:
The components of deferred taxes as of May 31, 1998 and 1997 are as follows:
The Company has established a valuation allowance of $6,800,300 against deferred tax assets due to the losses incurred by the Company in past fiscal years. The Company's ability to generate future taxable income to utilize the NOL and capital loss carryforwards is uncertain.
The income tax provision (benefit) is different from the amounts computed by applying the statutory federal income tax rate to income before taxes. The reasons for these differences are as follows:
There were no taxes currently payable as of May 31, 1998, 1997 or 1996 related to continuing operations.
At May 31, 1998, the Company and its subsidiaries had available, for federal income tax purposes, net operating loss carryforwards of approximately $19,700,000 which will expire from 2004 to 2013 and investment tax credit carryforwards of $213,800 which, if not used, will expire from 1999 to 2001. The Internal Revenue Code contains provisions which limit the NOL carryforwards available which can be used in a given year when significant changes in company ownership interests occur. In addition, the NOL and credit amounts are subject to examination by the tax authorities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
The Internal Revenue Service has audited the Company's and affiliates' tax returns through fiscal 1994, and is currently auditing the fiscal years ended May 31, 1996 and May 31, 1995. The Company's income tax liabilities are settled through fiscal 1992. The Company has received 30 day letters for the years ended May 31, 1994 and 1993. The Company has submitted a written appeal to protest the findings of the examining agent to preserve its NOL. Management believes the Company will prevail on the significant issues in dispute, and therefore, no significant changes will result from the findings.
I. SEGMENTS AND MAJOR CUSTOMERS:
The Company's primary business activity is the sale of minerals and the acquisition, exploration, holding, development and sale of mineral bearing properties although the Company has no producing mines. Other reportable industry segments include commercial operations, primarily real estate activities, an airport fixed base operation, and construction activities. The following is information related to these industry segments:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
During fiscal 1998 and 1996 approximately 100% and 89% of mineral revenues were from the sale of uranium. There were no uranium sales during fiscal 1997.
The Company subleases excess office space, contracts aircraft for charter flights and sells aviation fuel. Commercial Revenues in the accompanying Consolidated Statements of Operations consist of mining equipment rentals, office and other real property rentals, charter flights and fuel sales.
J. SHAREHOLDERS' EQUITY:
In May 1996, the Board of Directors of USE approved an annual incentive compensation arrangement ("1996 Stock Award Program") for its CEO and four other officers of USE payable in shares of the Company's common stock. The 1996 Stock Award Program was subsequently modified to reflect the intent of the directors of the Company which was to provide incentive to the officers of the Company and Crested to remain with the companies. The shares are to be issued annually on or before January 15 of each year, starting January 15, 1997, as long as each officer is employed by USE, provided the Company has been profitable in the preceding fiscal year. The officers will receive up to an aggregate total of 67,000 shares per year for the years 1997 through 2002. One-half of the compensation under the 1996 Stock Award Program is the responsibility of Crested. The shares under the plan are forfeitable until retirement, death or disability of the officer. The shares are held in trust by the Company's treasurer and are voted by the Company's non-
employee directors. As of May 31, 1998, 245,378 total shares have been issued to the five officers of the Company and Crested.
In December 1997, the Company entered into a warrant purchase agreement with an investment advisory firm to purchase 225,000 shares at an exercise price of $10.50 expiring December 2, 2000. The warrants were issued in exchange for services to be provided during the period December 1997 to December 1998. The Company determined the fair value associated with these warrants to be $186,000, which will be recognized ratably over the term of the related advisory agreement. Accordingly, $108,000 was recognized as expense in fiscal 1998, with the remaining amount to be recognized in fiscal 1999.
In January 1998, the Company entered into a warrant purchase agreement with another investment advisory firm to purchase 200,000 shares at an exercise price of $7.50 expiring January 20, 2000. The warrants were issued in exchange for services to be provided during the period from January 1998 to January 1999. The Company determined the fair value associated with these warrants to be $264,000, which will be recognized ratably over the term of the related advisory agreement. Accordingly, $88,000 was recognized as expense in fiscal 1998, with the remaining amount to be recognized in fiscal 1999.
In January 1996, the Company entered into a warrant purchase agreement with an investment advisory firm. Pursuant to the Agreement, this firm received a warrant to purchase 200,000 common shares of the Company's common stock at $5.00 per share in exchange for consultation services to be provided through January 9, 1997. In connection with this warrant agreement, the Company recognized $148,300 of consulting expense in fiscal 1997 which the Company determined to be the fair value. During fiscal 1997, 180,000 of these warrants were exercised resulting in total proceeds to the Company of $900,000. The remaining 20,000 shares were exercised in 1998 resulting in $100,000 of proceeds to the Company.
The Board of Directors adopted the U.S. Energy Corp. 1989 Stock Option Plan (the "Option Plan") for the benefit of USE's key employees. The Option Plan, amended in December 1995, reserves 925,000 shares of the Company's $.01 par value common stock for issuance under the Option Plan. During fiscal 1992, the Company issued options to certain of its executive officers, Board members and others. Under this Plan, 371,200 non-qualified options were issued at prices ranging from $2.75 to $2.90 per share. These options will expire on April 14, 2002 and April 30, 2002. During fiscal 1996, the Company issued 360,000 non-qualified options to employees who are not officers or directors at a purchase price of $4.00 per share, expiring on December 31, 2000. During fiscal 1998, options were exercised for the purchase of 62,000 shares. In fiscal 1997, the shareholders of USE ratified an amendment to the Option Plan and on that same date all outstanding non-qualified options were converted to qualified options by the Board of Directors of USE.
The Board of Directors of USE adopted the U.S. Energy Corp. 1989 Employee Stock Ownership Plan ("ESOP") in 1989, for the benefit of USE employees. During fiscal 1998, 1997 and 1996, the Board of Directors of USE contributed 49,470, 24,069 and 10,089 shares to the ESOP at prices of $6.57, $8.87 and $8.65 per share, respectively. The Company is responsible for one-half of these contributions amounting to $162,300, $106,700 and $43,600 in fiscal 1998, 1997 and 1996, respectively. Crested is responsible for the remainder. USE has loaned the ESOP $1,014,300 to purchase 125,000 shares from the Company and 38,550 shares on the open market. These loans, which are secured by pledges of the stock purchased with the loan proceeds, bear interest at the rate of 10% per annum. The loans are reflected as unallocated ESOP
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
contribution in the equity section of the accompanying Consolidated Balance Sheets. During fiscal 1996, the Company released 10,089 of the shares to fund the 1996 ESOP contribution by $87,300 as reflected in the Consolidated Statement of Stockholders' Equity.
The Board of Directors of both the Company and Crested issue shares of stock as bonuses to certain directors, employees and third parties. The stock bonus shares have been reflected outside of the Shareholders' Equity section in the accompanying Consolidated Balance Sheets because such shares are forfeitable to the Company and Crested until earned. During fiscal 1993, the Company's Board of Directors amended the stock bonus plan. As a result, the earn out dates of certain individuals were extended until retirement, which is the earn out date of the amended stock bonus plan. In exchange for this amendment, the amended plan grants a stock-bonus of 20% of the previous plan per year for five years. Crested is responsible for one half of the compensation expense related to these issuances. For the years ended May 31, 1998, 1997 and 1996, the Company had compensation expense of $54,600, $152,600 and $116,500 respectively, resulting from these issuances. A schedule of forfeitable shares for both USE and Crested is set forth in the following table:
No shares were earned in fiscal 1998 or 1997. Also included in the forfeitable common stock are 15,000 shares to directors which are vesting at 20% a year beginning in November 1992, of which 9,000 are earned but not released as of May 31, 1997.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value based method of accounting for employee stock options or similar equity instruments. However, SFAS 123 allows the continued measurement of compensation cost for such plans using the intrinsic value based method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), provided that pro forma
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
disclosures are made of net income or loss and net income or loss per share, assuming the fair value based method of SFAS 123 had been applied. The Company has elected to account for its stock-based compensation plans under APB 25; accordingly, for purposes of the pro forma disclosures presented below, the Company has computed the fair values of all options granted during fiscal year 1996 using the Black- Scholes pricing model and the following weighted average assumptions (no options were granted during 1998 and 1997):
---- Risk-free interest rate 5.45% Expected lives 5 years Expected volatility 135.2% Expected dividend yield 0%
To estimate expected lives of options for this valuation, it was assumed options will be exercised upon becoming fully vested at the end of the five years. All options are initially assumed to vest. Cumulative compensation cost recognized in pro forma net income or loss with respect to options that are forfeited prior to vesting is adjusted as a reduction of pro forma compensation expense in the period of forfeiture.
The total fair value of options granted was computed to be approximately $1,274,900 during the year ended May 31, 1996. This amount is amortized ratably over the vesting periods of the options. Pro forma stock-based compensation, net of the effect of forfeitures, was $98,100, $255,000 and $106,200 for 1998, 1997 and 1996, respectively.
If the Company had accounted for its stock-based compensation plans in accordance with SFAS 123, the Company's net loss and pro forma net loss per common share would have been reported as follows:
Weighted average shares used to calculate pro forma net loss per share were determined as described in Note B, except in applying the treasury stock method to outstanding options, net proceeds assumed received upon exercise were increased by the amount of compensation cost attributable to future service periods and not yet recognized as pro forma expense.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
A summary of the Stock Option Plan activity for the years ended May 31, 1998 and 1997 is as follows:
The following table summarizes information about employee stock options outstanding and exercisable at May 31, 1998:
K. COMMITMENTS, CONTINGENCIES AND OTHER:
LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS (SMP)
ARBITRATION/LITIGATION PROCEEDINGS CONCERNING SMP. In June 1991, Nukem's wholly-owned subsidiary Cycle Resource Investment Corporation ("CRIC") instituted arbitration proceedings against the Company and Crested. CRIC claimed that the Company and Crested violated the Sheep Mountain Partners ("SMP") partnership agreement. On July 3, 1991, the Company and Crested, through USECC, filed a civil action in the U. S. District Court of Colorado against Nukem, CRIC and their affiliates, alleging Nukem/CRIC fraudulently misrepresented facts and concealed information from the Company and Crested to induce their entry into the agreements forming the SMP partnership and sought rescission, damages and other relief. Certain of Nukem's affiliates (excluding CRIC) were thereafter dismissed from the lawsuit. The U. S. District Court granted the motion of the Company and Crested to stay the above arbitration initiated by CRIC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
On September 16, 1991, USECC filed another civil action in the Denver District Court against SMP seeking reimbursement of $85,000 per month since the spring of 1991 for the care and maintenance of the SMP underground uranium mines and properties. On May 11, 1993, the Denver District Court stayed all proceedings in state court until the case in the U.S. District Court for Colorado case was resolved. Thereafter in February 1994, USECC, Nukem and CRIC, agreed that the majority of the litigation subsequent to the formation of SMP on December 21, 1988, would be handled through consensual arbitration before a three member panel of the American Arbitration Association (the "Panel"). The arbitration hearing consumed 73 hearing days commencing on June 27, 1994 and concluded on May 31, 1995. The Panel entered its Order and Award on April 18, 1996. Nukem filed two motions with the district court indicating there was a material miscalculation and a double recovery. The District Court remanded the matter to the Arbitration Panel to consider Nukem's motions. On July 3, 1996, the Panel found there was no double recovery and approved the Order and Award, which awarded Crested and USE $12,500,000 and Nukem/CRIC $7,100,000 through March 31, 1996. On November 4, 1996 the United States District Court issued a Judgment and Order confirming the Arbitration Panel's Order and Award.
In November 1996, USE and Crested received $4,300,000 from the SMP escrow bank accounts as partial payment of the monetary award of the Arbitration Panel. This $4,300,000 was accounted for under the cost recovery method of accounting, wherein it was applied to outstanding amounts due USECC and USE and the balance of $1,003,800 was recognized as income. Nukem/CRIC filed a motion asking for limited remand and on June 27, 1997 the Federal Court reviewed the motion and issued a Second Amended Judgment which confirmed the monetary award of the Arbitration Panel and clarified the equitable damages due USECC from Nukem/CRIC. Nukem filed a notice of appeal with the Tenth Circuit Court of Appeals and posted a $8,613,600 supersedeas bond on the monetary portion of the Award. Nukem's appeal is based on two issues, the District Court erred in confirming the double recovery finding in the AAA Panel's Order and Award and that the Order placing Nukem's uranium purchase contracts with the CIS republics in constructive trust with SMP. During the fourth quarter of fiscal 1998, a settlement agreement was reached whereby U.S. Energy and Crested received $5,026,000 as a partial settlement and, in addition, USECC received the Sheep Mountain Uranium Mines and certain other properties from SMP and one uranium delivery contract along with a 50% interest in a uranium supply contract. This settlement does not in any way affect issues presently on appeal and pending before the 10th Circuit Court of Appeal ("CCA"). A hearing is currently scheduled before a three judge panel court of the 10th CCA on September 24, 1998 in Oklahoma City, Oklahoma.
ILLINOIS POWER. Illinois Power Company ("IPC"), one of the utilities with whom SMP has a long-term uranium supply contract, unilaterally sought to terminate the contract on October 28, 1993 and filed suit in the U.S. Federal District Court, Danville, Illinois, against the Company, Crested, et al. seeking a declaratory judgment that IPC's contract with SMP was void. After various negotiating sessions the parties reached agreement in June 1995 to settle the case by entering into an amendment to the original supply contract to provide for 3 deliveries totaling 486,443 lbs. U3O8. The final delivery was made in May 1997. On June 13, 1997, USE and Crested received $838,500 as a distribution of profits from the final delivery under this SMP contract.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
PARADOR MINING COMPANY, INC. ("PARADOR")
On July 30, 1991, Bond Gold Bullfrog, Inc. ("BGBI") filed Civil Action No. 11877 in the District Court of the Fifth Judicial District, Nye County, Nevada naming USE, Crested, Parador and H.B. Layne Contractor, Inc. as defendants. The complaint primarily concerns extra lateral rights associated with two patented lode mining claims (the "Claims") owned by Parador which were initially leased to a predecessor of BGBI and subsequently, the residuals of that lease were assigned and leased by Parador to USE and Crested. A bifurcated trial was held on December 11-12, 1995 before the District Court for the Fifth Judicial District for the State of Nevada, County of Nye, at which time the parties presented evidence relative to the issue of extra lateral rights. Other claims between the parties were bifurcated by the Court and were not at issue at the trial. On December 26, 1995, the district court issued a ruling denying apex rights and extra lateral royalties to Parador, the Company and Crested. The partial trial did not address the other issues pending in the litigation but limited the trial to those issues required to decide the question of extra lateral rights. All other remaining claims and counterclaims were considered by the Court on January 26-28, 1998 in a bench trial and the Court entered judgment against the plaintiff and the defendants on their claims. BGBI, USECC and Parador appealed this judgment to the Nevada Supreme Court. On June 23, 1998, a mandatory Settlement Conference was held in Reno, NV but no settlement was achieved. The Settlement Mediator referred the case to the Nevada Supreme Court for an expedited hearing and the appeal is currently pending.
TICABOO TOWNSITE LITIGATION. In fiscal 1998, the prior contract operator of the restaurant and lounge and two of its employees who operated the motel and convenience store at Ticaboo (owned by Canyon Homesteads, Inc.) sued USE, Crested and Plateau Resources Ltd., et al in Utah State Court. After a five day trial, the jury found against the two plaintiff employees but found for the third plaintiff and a judgment was entered for $153,371 in damages against USE, which was recorded in fiscal 1998. USE intends to vigorously appeal the award.
DEPARTMENT OF ENERGY LITIGATION. On July 20, 1998, eight uranium mining companies with operations in the United States (including USE, Crested, YSFC) and the Uranium Producers of America, a trade organization, filed a complaint against the United States Department of Energy (the "DOE") and the acting secretary in a lawsuit (file no. 98 CV 1775) in the U.S. District Court, Cheyenne, Wyoming. The complaint seeks declaratory judgment and injunctive relief. The plaintiffs allege that the DOE violated the USEC Privatization Act of 1996, when the DOE transferred 45 metric tons of low enriched uranium and 3,800 metric tons of natural uranium to the United States Enrichment Corp. ("USEC") in May 1998.
The plaintiffs have asked the Court among other claims to declare that (i) the DOE violated its statutory authority by transferring uranium to USEC in excess of statutory limits on volume; (ii) the excess amounts were not sold by the DOE to USEC for fair value, as required by the Act, and mandated findings by the DOE concerning possible adverse impacts were not supported in fact; and (iii) the DOE be enjoined from future transfers in violation of the Act. The defendants have not yet responded to the complaint.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the U.S. District Court, Denver, Colorado against Contour Development Company, L.L.C. and entities and persons associated with Contour Development Company,
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
L.L.C. (collectively, "Contour") seeking compensatory and consequential damages from the defendants for dealings in certain real estate.
Specifically, USE alleges that Contour has breached contracts for the sale of the Gunnison properties of USE and Crested, and is in default on the contracts and promissory notes delivered to pay for the Gunnison properties.
As of the filing date of this Report, Contour and the other defendants have not filed an answer to the complaint but negotiations are underway to settle the issues.
RECLAMATION AND ENVIRONMENTAL LIABILITIES
Most of the Company's mine development, exploration and operating activities are subject to federal and state regulations that require the Company to protect the environment. The Company attempts to conduct its mining operations in accordance with these regulations, but the rules are continually changing and generally becoming more restrictive. Consequently, the Company's current estimates of its reclamation obligations and its current level of expenditures to perform ongoing reclamation may change in the future. At the present time, however, the Company cannot predict the outcome of future regulation or its impact on costs. Nonetheless, the Company has recorded its best estimate of future reclamation and closure costs based on currently available facts, technology and enacted laws and regulations. Certain regulatory agencies, such as the Nuclear Regulatory Commission ("NRC"), the Bureau of Land Management ("BLM") and the Wyoming Department of Environmental Quality ("WDEQ") review the Company's reclamation, environmental and decommissioning liabilities, and the Company believes its recorded amounts are consistent with those reviews and related bonding requirements. To the extent that planned production on its properties is delayed, interrupted or discontinued because of regulation or the economics of the properties, the future earnings of the Company would be adversely affected. The Company believes it has accrued all necessary reclamation costs and there are no additional contingent losses or unasserted claims to be disclosed or recorded. The Company has not disposed of any properties for which it has a commitment or is liable for any known environmental liabilities.
The majority of the Company's environmental obligations relate to former mining properties acquired by the Company. Since the Company currently does not have properties in production, the Company's policy of providing for future reclamation and mine closure costs on a unit-of-production basis has not resulted in any significant annual expenditures or costs. For the obligations recorded on acquired properties, including site-restoration, closure and monitoring costs, actual expenditures for reclamation will occur over several years, and since these properties are all considered future production properties, those expenditures, particularly the closure costs, may not be incurred for many years. The Company also does not believe that any significant capital expenditures to monitor or reduce hazardous substances or other environmental impacts are currently required. As a result, the near term reclamation obligations are not expected to have a significant impact on the Company's liquidity.
As of May 31, 1998, the Company has recorded estimated reclamation obligations, including standby costs, of $13,055,600 which is included in Reclamation and Other Long-term Liabilities in the accompanying Consolidated Balance Sheets. In addition, the GMMV, in which the Company is a 50% owner, has recorded a $23,620,000 liability for future reclamation and closure costs. None of these liabilities have been
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
discounted, and the Company has not recorded any potential offsetting recoveries from other responsible parties or from any insurance companies.
The Company currently has four mineral properties or investments that account for most of its environmental obligations, SMP, GMMV, Plateau and SGMC. The environmental obligations and the nature and extent of cost sharing arrangements with other potentially responsible parties, as well as any uncertainties with respect to joint and several liability of each are discussed in the following paragraphs:
SMP - ---
The Company and Crested are responsible for the reclamation obligations, environmental liabilities and liabilities for injuries to employees in mining operations with respect to the Crooks Gap properties. The reclamation obligations, which are established by regulatory authorities, were reviewed by the Company and the regulatory authorities during fiscal 1998 and the balance in the reclamation liability account at May 31, 1998 of $1,451,800 is believed by management to be adequate. The obligation will be satisfied over the life of the mining project which is estimated to be at least 20 years. The Company and Crested self bonded this obligation by mortgaging certain of its real estate assets and by holding certificates of deposits. A portion of the funds for the reclamation of SMP's properties will be provided by a sinking fund of up to $.50 per pound of uranium for reclamation work as the uranium is produced from the properties.
GMMV - ----
During fiscal 1991, the Company and Crested acquired developed mineral properties on Green Mountain known as the Big Eagle Property. In connection with that acquisition, the Company and Crested agreed to assume reclamation and other environmental liabilities associated with the property. Reclamation obligations imposed by regulatory authorities were established at $7,300,000 at the time of acquisition. Immediately after the acquisition, the Company and Crested transferred a one-half interest to Kennecott, with Kennecott, the Company and Crested contributing the Big Eagle properties to GMMV, which assumed the reclamation and other environmental liabilities. Kennecott holds a commercial bank letter of credit as security for the performance of the reclamation obligations for the benefit of GMMV.
During fiscal 1993, GMMV entered into an agreement to acquire the Sweetwater uranium mill and related properties from UNOCAL. GMMV's consideration for the acquisition of the Sweetwater Mill Property was the assumption of all environmental liabilities and reclamation bonding obligations. The environmental obligations of GMMV are guaranteed by Kennecott. However, UNOCAL also agreed that if GMMV incurs expenditures for environmental liabilities prior to the earlier of commercial production by GMMV or February 1, 2001 (which liabilities are not due solely to the operations of GMMV), UNOCAL will reimburse GMMV for the first $8,000,000 of such expenditures. Any reimbursement may be recovered by UNOCAL from 20% of future cash flows from the sale of uranium concentrates processed through the Mill.
On June 18, 1996, Kennecott had a letter of credit in the amount of approximately $19,767,000 issued to the WDEQ for minesite matters (executing EPA-delegated jurisdiction to administer the Clean Water Act and the Clean Air Act, and directly administering Wyoming statutes on mined land reclamation), and $5,400,000 issued to the NRC for decontamination and cleanup of the Mill and related tailings cells. An irrevocable letter of credit has been provided by the Morgan Guaranty Trust Company of New York in lieu
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
of a surety bond to cover the reclamation costs for the minesite and a performance bond by St. Paul Insurance Company was obtained for the Mill. The letter of credit was obtained by Kennecott Uranium Company to cover all reclamation costs related to mining and drilling operations in the State of Wyoming. The EPA has continuing jurisdiction under the Resource Conservation and Recovery Act pertaining to any hazardous materials which may be on site when cleanup work commences.
Although USE and the other GMMV parties are liable for all reclamation and environmental compliance costs associated with Mill and site maintenance, as well as Mill decontamination and cleanup and site reclamation and cleanup after the Mill is decommissioned, USE believes it is unlikely it will have to pay for such costs directly. First, based on current estimates of cleanup and reclamation costs (reviewed annually by the oversight agencies), these costs may be within the $50,000,000 development commitment and related $16,000,000 loan of Kennecott Uranium Company for the GMMV. These costs are not expected to increase materially if the mill is not put into full operation. Second, to the extent GMMV is required to spend money on reclamation and environmental liabilities related to previous mill and site operations during UNOCAL's ownership, UNOCAL has agreed to fund up to $8,000,000 of costs (provided these costs are incurred before February 1, 2001 and before Mill production resumes), which would be recoverable only out of future mill production (see above). Third, payment of the GMMV reclamation and environmental liabilities related to the mill is guaranteed by Kennecott Corporation, parent of Kennecott Uranium Company. Last, GMMV will set aside a portion of operating revenues to fund reclamation and environmental liabilities should mining and milling commence.
Kennecott will be entitled to contribution from the USE Parties in proportion to their participation interests in GMMV if Kennecott is required to pay mill cleanup costs directly pursuant to its guarantee. Such payments by Kennecott only would be reimbursed if the liabilities cannot be satisfied within the initial $50,000,000 expenditure commitment, and then only to the extent there are insufficient funds from the reclamation reserve (to be established from GMMV operating revenues). In addition, if and to the extent these liabilities resulted from UNOCAL's mill operations, and payment of the liabilities was required before February 1, 2001 and before mill production resumes, then up to $8,000,000 of that amount would be paid by UNOCAL before Kennecott Corporation would be required to pay on its guarantee. Accordingly, although the extent of any ultimate USE liability for contribution to mill cleanup costs cannot be predicted, USE and Crested will only be required to pay its proportional share of mill cleanup if a) the liabilities cannot be satisfied with the initial $50,000,000 expenditure commitment from Kennecott, b) there are insufficient funds from the reclamation reserve to be established out of GMMV operating revenues and c) payments are not available from UNOCAL.
Sutter Gold Mining Company - --------------------------
SGMC is currently owned 55% by the Company, 4% by Crested and 41% by private investors. SGMC owns gold mineral properties in California. Currently, these properties are in development and costs consist of drilling, permitting, holding and administrative costs. No substantial mining has been completed, although a 2,800 foot decline through the identified ore zones for an underground mine was acquired in the purchase. The Company's policy is to provide reclamation on a unit-of-production basis. Currently, reclamation obligations are covered by a $27,000 reclamation bond which SGMC has recorded as a reclamation liability as of May 31, 1998.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
Plateau Resources, Limited - --------------------------
The environmental and reclamation obligations acquired with the acquisition of Plateau include obligations relating to the Shootaring mill. Based on the bonding requirements, Plateau transferred $2,500,000 to a trust account as financial surety to pay future costs of mill decommissioning, site reclamation and long-term site surveillance. In fiscal 1997, Plateau increased the NRC surety to a cash bond of $6,784,000 in order to have its standby license changed by the NRC to operational.
YSFC Exchange Rights Agreement - ------------------------------
The Company and YSFC have entered into an Exchange Rights Agreement (the "Agreement"). Under the Agreement the YSFC private placement shareholders and related broker agent have the right, but not the obligation, to exchange their shares in YSFC for USE common stock if YSFC's common shares are not listed and available for quotation on the NASDAQ marketing system by March 1999. The exchange rate for USE shares will be the price paid for the YSFC's common shares plus 10% per annum of total cost from the date of purchase. The number of USE shares exchanged will be based on the exchange rate for a share of USE common stock for the five business days prior to the date of notice given by the YSFC shareholder to exchange their shares.
EXECUTIVE COMPENSATION
The Company and Crested are committed to pay the estates of certain of their officers an amount equal to one year's salary for one year after their death and reduced amounts, to be set by the Board of Directors, for a period up to five years thereafter.
L. DISCONTINUED OPERATIONS.
In February 1996, the Company completed the sale of 100% of the 8,267,450 outstanding shares of common stock of Brunton to a third party for $4,300,000 in accordance with a Stock Purchase Agreement dated January 30, 1996 (the "Purchase Agreement"). The Company received $300,000 at execution of the Purchase Agreement and approximately $3,000,000 at closing. The Company received two of the three annual installments of $333,333 on a $1,000,000 note, plus interest at a rate of 7% per year during February 1997 and 1998. One additional payment is due the Company in the amount of $333,333 plus interest in February 1999. In addition, the Company is entitled to receive 45% of the profits before taxes as defined in the Purchase Agreement related to Brunton products existing at the time the Purchase Agreement was executed for a period of 4 years and three months, beginning February 1, 1996. The Company received payments of $292,600 for profits in 1997.
As a result of selling 100% of the common stock of Brunton, the Company has reflected the operations of Brunton as discontinued in the accompanying financial statements. Revenues for the discontinued operations for the year ended May 31, 1996 was $2,870,800. The Company recognized a gain on the disposal of Brunton of $2,295,700 net of income taxes of approximately $50,000.
ITEM 9.
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, 1998, the Registrant will file such information under cover of a Form 10-K/A.
ITEM 10.
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 1998 Annual Meeting of Shareholders. The information regarding the remaining executive officers is contained in Part I of this Report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference to the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders.
ITEM 12.
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 1998 Annual Meeting of Shareholders.
ITEM 13.
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 1998 Annual Meeting of Shareholders.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, REPORTS AND FORMS 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........................49
Consolidated Balance Sheets - May 31, 1998 and 1997..........50-51
Consolidated Statements of Operations for the Years Ended May 31, 1998, 1997 and 1996 .............52-53
Consolidated Statements of Shareholders' Equity for the Years Ended May 31, 1998, 1997 and 1996.......54-56
Consolidated Statements of Cash Flows for the Years Ended May 31, 1998, 1997 and 1996..............57-59
Notes to Consolidated Financial Statements ..................60-86
(ii) Financial and Schedules of Affiliates
(a) Green Mountain Mining Venture
Report of Independent Public Accountants..................95
Balance Sheet - December 31, 1997 and 1996................96
Statement of Operations for the Period from June 1, 1990 (Date of Inception) through December 31, 1997.................................97
Statement of Changes in Partners' Capital for the Period from June 1, 1990 (Date of Inception) through December 31, 1997.................................98
Statement of Cash Flows for the Period from June 1, 1990 (Date of Inception) through December 31, 1997.........................................99
Notes to Financial Statements........................100-105
(b) Sheep Mountain Partners
Due to the litigation and arbitration proceedings, audited financial statements for SMP are not obtainable. They are therefore not included as an Exhibit to the Registrant's Form 10-K.
All other schedules have been omitted because the information is not applicable or because the information is included in the financial statements.
(3) Exhibits Required to be Filed. Each individual exhibit filed herewith is sequentially paginated corresponding to the pagination of the entire Form 10-K. As a result of this pagination, the page numbers of documents filed herewith containing a table of contents will not be the same as the page number contained in the original hard copy.
Exhibit Sequential No. Title of Exhibit Page No. ------ -------------------------------- ----------
3.1 USE Restated Articles of Incorporation....................[5]
3.1(a) USE Articles of Amendment to Restated Articles of Incorporation..........................................[3]
3.2 USE Bylaws, as amended through April 22, 1992.............[3]
4.1 Warrant to Purchase 200,000 Common Shares of USE.........[14]
4.2 USE 1998 Incentive Stock Option Plan and Form of Stock Option Agreement....................106-116
4.3 USE Restricted Stock Bonus Plan, as amended through 2/94..................................[14]
4.4 Form of Stock Option Agreement, and Schedule, Options Issued 1/96.........................[1]
4.5 Amendment to Warrant to Purchase 200,000 Common Shares of USE.............................[15]
4.6 Amendment to USE 1989 Incentive Stock Option Plan (12/13/96).............................[15]
4.7 USE 1996 Stock Award Program (Plan)......................[15]
4.8 USE Restated 1996 Stock Award Plan and Amendment to USE 1990 Restricted Stock Bonus Plan.....................[15]
4.9 Agreement with Sunrise Financial Group (12/1/97).........[16]
4.10 Sunrise Financial Group 1/9/98 Warrant to Purchase 225,000 Common Shares of USE....................[16]
10.1 USECC Joint Venture Agreement - Amended...................[6]
10.2 Management Agreement with USECC...........................[4]
10.3 Promissory Note from Crested to USE (5/31/97)............[15]
10.4 Contract for Sale of Stock of Brunton to Silva A.B.......[13]
10.5 Assignment and Lease - Parador............................[4]
10.6 Employment Agreement - Daniel P. Svilar...................[5]
10.7 Airport Ground Lease - City of Riverton...................[4]
10.8 Executive Officer Death Benefit Plan......................[5]
10.9 Big Eagle Acquisition Agreement with PMC..................[7]
10.10 [intentionally left blank]
10.11 Sweetwater Mill Acquisition Agreement.....................[4]
10.12 Ft. Peck Agreement - Drilling and Production Services ....[4]
10.13 [intentionally left blank]
10.18 Master Agreement - Mt. Emmons/AMAX........................[9]
10.19 [intentionally left blank]
10.20 Promissory Notes - ESOP/USE..............................[10]
10.21 Self Bond Agreement - Crooks Gap Properties...............[6]
10.22 Security Agreement - ESOP Loans..........................[11]
10.23 - 10.26 [intentionally left blank]
10.27 Mineral Properties Agreement Congo Area - PMC.............[5]
10.28 Memorandum of Joint Venture Agreement - GMMV..............[5]
10.29 Memorandum of Partnership Agreement - SMP................[6]
10.30 [intentionally left blank]
10.31 [intentionally left blank]
10.32 Employee Stock Ownership Plan.............................[6]
10.33 [intentionally left blank]
10.34 Form of Stock Option Agreement and Schedule - 1989 Plan...[5]
10.35 Severance Agreement (Form)................................[3]
10.36 1992 Stock Compensation Plan Non-Employee Directors.......[3]
10.37 Executive Compensation (John L. Larsen)...................[3]
10.38 Executive Compensation (Non-qualified Options)............[3]
10.39 ESOP and Option Plan Amendments (1992)....................[3]
10.40 Plateau Acquisition - Stock Purchase Agreement and Related Exhibits............................[8]
10.41 Option and Sales Agreements - Gunnison Property Parcel A................................[2]
10.42 Option and Sales Agreements - Gunnison Property Parcel B................................[2]
10.43 - 10.48 [intentionally left blank]
10.49 Acquisition Agreement between Kennecott Uranium Company, USE and USECC regarding GMMV (6/23/97)...................[15]
10.50 Exhibit A to Acquisition Agreement (see 10.49) Promissory Note from Kennecott Uranium Company to Kennecott Energy Company regarding GMMV .................[15]
10.51 Exhibit B to Acquisition Agreement (see 10.49) Mortgage, Security Agreement, Financing Statement and Assignment of Proceeds, Rents and Leases...............................[15]
10.52 Exhibit G to Acquisition Agreement (see 10.49) - Contract Services Agreement for the Sweetwater Uranium Mill Facility.................[15]
10.53 Exhibit H to Acquisition Agreement (see 10.49) - Mineral Lease Agreement ...................[15]
10.54 Exhibit I to Acquisition Agreement (see 10.49) - Fourth Amendment of Mining Venture Agreement among Kennecott Uranium Company, USE and USECC.................[15]
10.49 USE/Dominick & Dominick Securities, Inc. Stock Purchase Agreement for 157,530 Common Shares of USE......[16]
10.50 USE/BPI Canadian Resource Fund Stock Purchase Agreement for 125,341 Common Shares of USE...............[16]
10.51 USE/BPI Canadian Opportunities II Fund Stock Purchase Agreement for 125,341 Common Shares of USE......[16]
10.52 USE/BPI Canadian Small Companies Fund Stock Purchase Agreement for 250,683 Common Shares of USE......[16]
10.53 USE/Yellow Stone Fuels Corp. Exchange Rights Agreement................................[16]
10.55 Master Resolution Agreement regarding Gunnison Properties............................[15]
10.56 Membership Pledge Agreement regarding Gunnison Properties............................[15]
10.57 Management Agreement between SGMC and USECC..............[15]
10.58 Outsourcing and Lease Agreement between YSFC and USECC ..........................[15]
10.59 Convertible Promissory Note from YSFC to USECC...........[15]
21.1 Subsidiaries of Registrant...............................[15]
[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,
[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, 1995.
[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, 1992.
[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, 1991.
[5] 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.
[6] 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.
[7] Incorporated by reference from the like-numbered exhibit to the Registrant's Form 10-Q for the period ended February 28, 1991.
[8] Incorporated by reference from exhibit A to the Registrant's Form 8-K reporting an event of August 11, 1993.
[9] Incorporated by reference from the like-numbered exhibit to a Schedule 13D filed by AMAX on or about August 3, 1987.
[10] 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.
[11] 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.
[12] Incorporated by reference from an exhibit to the Registrant's Post-Effective Amendment No. 1 to Form S-3, SEC File No. 333-1967.
[13] Incorporated by reference from the like-numbered exhibit to the Registrant's Form 8-K, reporting an event of February 26, 1996.
[14] Incorporated by reference from the like-numbered exhibit to the Registrant's Form S-1 (SEC File No. 333-6189).
[15] Incorporated by reference from the like-numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended May 31, 1997.
[16] Incorporated by reference from the like numbered exhibit to Registrant's S-1 registration statement (333-5797).
(b) Reports filed on Form 8-K.
During the fourth quarter of the fiscal year ended on May 31, 1998, the Registrant filed no Form 8-K Reports.
(c) Required exhibits are attached hereto and listed above under Item 14 (a)(3).
(d) Required financial statement schedules are listed and attached hereto in Item 14(a)(2).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
U.S. ENERGY CORP. (Registrant)
Date: September 11, 1998 By: /s/ John L. Larsen ------------------------------------- JOHN L. LARSEN, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: September 11, 1998 By: /s/ John L. Larsen ------------------------------------- JOHN L. LARSEN, Director
Date: September 11, 1998 By: /s/ Keith G. Larsen ------------------------------------- KEITH G. LARSEN, Director
Date: September 11, 1998 By: /s/ Harold F. Herron ------------------------------------- HAROLD F. HERRON, Director
Date: September ______, 1998 By: ------------------------------------- DON C. ANDERSON, Director
Date: September ______, 1998 By: ------------------------------------- DAVID W. BRENMAN, Director
Date: September 11, 1998 By: /s/ Nick Bebout ------------------------------------- NICK BEBOUT, Director
Date: September 11, 1998 By: /s H. Russell Fraser ------------------------------------- H. RUSSELL FRASER, Director
Date: September 11, 1998 By: /s/ Robert Scott Lorimer ------------------------------------- ROBERT SCOTT LORIMER, Principal Financial Officer and Chief Accounting Officer
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
Report on Audits of Financial Statements as of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995, and the period from inception (June 1, 1990) to December 31, 1997
Report of Independent Accountants
To the Members of the Management Committee of Green Mountain Mining Venture Riverton, Wyoming
We have audited the accompanying balance sheet of Green Mountain Mining Venture (A Joint Venture in the Development Stage) as of December 31, 1997 and 1996, and the related statements of operations, changes in Venture partners' capital, and cash flows for the years ended December 31, 1997, 1996 and 1995, and the period from inception (June 1, 1990) to December 31, 1997. These financial statements are the responsibility of the Venture's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Green Mountain Mining Venture as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years ended December 31, 1997, 1996 and 1995, and the period from inception (June 1, 1990) to December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Salt Lake City, Utah April 3, 1998
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
BALANCE SHEET ------
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
STATEMENT OF OPERATIONS ------
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
STATEMENT OF CHANGES IN VENTURE PARTNERS CAPITAL ------
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
STATEMENT OF CASH FLOWS ------
The accompanying notes are an integral part of these financial statements
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS ------
1. Organization of the Joint Venture:
Green Mountain Mining Venture ("GMMV" or the "Venture") is a joint venture with a 30 year life, formed by U.S. Energy Corp. ("USE"), Crested Corp. ("Crested") and Kennecott Uranium Company ("Kennecott"), the Venture partners, to explore for, evaluate, develop, mine and market the mineral resources from the Green Mountain properties located in south-central Wyoming. Kennecott has a 50% interest in GMMV, and USE and Crested ("USECC") collectively have a 50% interest. GMMV was formed June 1, 1990, with each partner contributing its portion of the Green Mountain properties. Kennecott acquired its portion of the Green Mountain properties from USECC in 1990 for a cash payment of $15 million. Thereafter, the partners are required to contribute funds based upon their respective participating interests, subject to certain provisions as provided for in the joint venture agreement.
Kennecott has agreed to contribute the first $50 million of operating and development expenses pursuant to Management Committee budgets. Kennecott also agreed to pay a disproportionate share (up to an additional $45 million) of GMMV operating expenses, but only out of cash operating margins from sales of processed uranium at more than $24.00/lb (for $30 million of such operating expenses), and from sales of processed uranium at more than $27.00/lb (for the next $15 million of such operating expenses).
Effective October 29, 1992, Kennecott replaced USECC as manager of the Venture. Kennecott contracts with USECC to perform work on behalf of the Venture.
On June 23, 1997, Kennecott and USECC signed an Acquisition Agreement wherein USECC agreed to purchase Kennecott's interest in GMMV for $15 million plus the assumption of Kennecott's share of various reclamation and other liabilities. Kennecott paid $4 million to USECC on signing the Acquisition Agreement and under the terms of the Acquisition Agreement is required to provide a line of credit to GMMV of up to $16 million for payment of costs related to the Jackpot mine development and Sweetwater mill preparation work. Amounts advanced under this line of credit bear interest at 10.5% with repayment based upon the cash flow and earnings of GMMV. Any unpaid balance is payable in full no later than June 23, 2010 as long as USECC or its affiliate purchases Kennecott's interest in the GMMV. The line of credit is collateralized by a first mortgage lien against Kennecott's 50% interest in GMMV. Closing of the Acquisition Agreement is subject to several conditions and governmental approvals and must occur by October 1998. Kennecott is entitled to a credit against their original $50 million commitment of two dollars for each dollar provided under the line of credit and the $4 million paid on signing. As of December 31, 1997, Kennecott has approximately $10.8 million remaining to contribute to the Venture for operating and development expenses.
Continued
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued ------
1. Organization of the Joint Venture, Continued:
Through December 31, 1997, the activities of the Venture have consisted primarily of the development and maintenance of the Green Mountain properties. While these activities are expected to continue in the future, additional development at substantially higher annual levels is required prior to the commencement of commercial production. Such commencement is not expected to occur until the venture partners agree that all economic and other conditions justify such commencement. Therefore, the Venture is considered to be in the development stage as defined in Statement of Financial Accounting Standards No. 7.
2. Summary of Significant Accounting Policies:
All highly liquid securities with a maturity of three months or less are considered to be cash equivalents.
Mineral properties contributed to the Venture were recorded at the partners' historical cost at the date of contribution. Costs incurred in the acquisition of mineral properties are capitalized and will be either charged to operations on the units-of-production method over the estimated reserves to be recovered or charged to operations at the time the property is sold or abandoned. Mine development costs incurred either to expand the capacity of operating mines, develop new ore bodies or develop mine areas substantially in advance of production are capitalized and will be charged to operations on the units-of-production method over the estimated reserves to be recovered. Amortization of mineral properties and development costs will commence when mining operations start. Mine development costs incurred to maintain production are included in operating costs and expenses. Maintenance and holding costs are expensed as incurred.
The cost of mining equipment, less estimated salvage value, will be depreciated on the units-of- production method over the estimated reserves to be recovered or on the straight-line method over the estimated life of the equipment, whichever is shorter. The cost of buildings will be depreciated on the straight-line method. Depreciation of mining equipment and buildings will commence when mining operations start. Costs of repairs and maintenance are expensed as incurred. Expenditures that substantially extend the useful lives of assets are capitalized. When assets are retired or otherwise disposed of, all applicable costs and accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized currently.
Continued
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued ------
2. Summary of Significant Accounting Policies, Continued:
The Venture evaluates the recoverability of capitalized acquisition and development costs based on the expected undiscounted future net revenues from the related mining properties. An impairment loss will be recorded if the unamortized costs exceed the expected undiscounted future net revenues. The recorded loss will be based on the difference between the unamortized costs and the expected discounted future net revenues from the related mining properties. The Venture believes that uranium prices will reach levels sufficient to justify commencement of commercial production in the future. The Venture also believes the expected undiscounted future net revenues from the Green Mountain properties will be sufficient to allow recoverability of these capitalized costs, assuming commencement of commercial production.
The estimated net future costs of dismantling, restoring and reclaiming operating mines which result from future mining operations will be accrued during such operations. The provision will be made using the units-of-production method over the estimated reserves to be recovered and estimated costs at the balance sheet date. The effect of changes in estimated costs and production will be recognized on a prospective basis.
No provision has been made for federal, state and local income taxes, credits, or benefits since tax liabilities are the responsibility of the individual partners.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain amounts in 1996 have been reclassified for comparability to 1997 amounts.
Continued
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued ------
3. Property and Equipment:
USECC conducts operations at the mine site on behalf of the Venture. All accounts payable are due to USECC for costs incurred by USECC in the normal course of business on behalf of GMMV. Through December 31, 1997 Kennecott had reimbursed USECC for substantially all development costs incurred.
The cost of building, mineral properties and mine development and mining equipment incurred by each of the Venture partners are as follows:
In December 1990, GMMV acquired additional mineral properties in exchange for the assumption of reclamation liabilities associated with those properties of $7.3 million. In 1992, GMMV acquired an established uranium processing mill (the Sweetwater Mill) in exchange for the assumption of reclamation liabilities associated with this property of $16.3 million. Such amounts represent the estimated costs at the acquisition date to reclaim these properties. Kennecott, on behalf of GMMV, is self-bonded in the amount of $24.3 million, which is payable to the Wyoming Department of Environmental Quality ("WDEQ") and the U.S. Nuclear Regulatory Commission in the event GMMV does not properly reclaim the above properties or violates the Wyoming Environmental Quality Act. Before the earlier of January 1, 2001, or resumption of production, if the GMMV is required to incur reclamation or environmental costs, the seller of the mill will be liable for the first $8 million of these costs at the Sweetwater Mill.
The Venture properties include state leases which will expire in May 2001 and October 2006. All fees required to hold these unpatented mining claims have been paid to the state of Wyoming as of December 31, 1997.
Continued
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued ------
3. Property and Equipment, Continued:
At December 31, 1997 and 1996, costs capitalized as property and equipment are composed of the following:
Acquisition costs include the partners' initial contribution of mineral properties and buildings recorded at the contributing partners' historical cost of $15,727,000 and mineral properties and buildings acquired in exchange for the assumption of reclamation liabilities totaling $23,620,000.
4. Contingencies:
In June 1994, Kennecott was served with a complaint filed by Nukem Inc. (Nukem) and Cycle Resource Investment Corporation (Cycle). The complaint alleged that when Kennecott entered into the Green Mountain Mining Venture with USE on June 1, 1990, Kennecott interfered with a Uranium Marketing Agreement (UMA) between Nukem and USE and the Sheep Mountain Partners Partnership Agreement (SMPA) between USE and Cycle. Nukem and Cycle were each seeking damages in excess of $14 million and punitive damages.
The case was stayed pending the conclusion of an arbitration proceeding between Cycle, Nukem and USE. The arbitration panel entered its order in April 1996, and the stay in this case was lifted. The arbitration panel held against Nukem in material respects stating that, even if the UMA had been breached, Nukem suffered no damages thereby. The panel denied the relief that Cycle sought for alleged breach of the SMPA. Accordingly, on January 6, 1997, Kennecott filed a motion for summary judgment contending, among other things, that the arbitration findings collaterally estop all claims asserted by Nukem and Cycle. On August 22, 1997 the trial court granted Kennecott's motion for summary judgement and dismissed the claims of Nukem and Cycle. Following the motion, the parties agreed to settle the case, and in February 1998 a settlement agreement was signed which resulted in both parties agreeing to suspend all litigation and claims against each other.
Continued
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued ------
5. Subsequent Events:
In 1996, the U.S. government adopted the "USEC Privatization Act of 1996" to privatize the U.S. Enrichment Corp. In July 1998, in a S-1 Registration Statement filed with U.S. Securities and Exchange Commission, USEC Inc. disclosed its planned sale of significant quantities of uranium in the U.S. marketplace. Accordingly, forecasted demand for uranium and forecasted uranium sales prices have decreased in the short-term. As a result, GMMV has halted development activities at the Jackpot Mine, and has placed the facility on active standby.