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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended May 31, 1999 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ______ to ______
Commission file number 0-6814
U.S. ENERGY CORP.
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(Exact Name of Registrant as Specified in its Charter)
Wyoming 83-0205516
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West
Riverton, WY 82501
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (307) 856-9271
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
-----------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ___
The aggregate market value of the shares of voting stock held by
non-affiliates of the Registrant as of August 26, 1999, computed by reference to
the average of the bid and asked prices of the Registrant's common stock as
reported by the National Market System of NASDAQ on that date, was approximately
$25,365,521.
Class Outstanding at August 26, 1999
- --------------------------------------- ------------------------------------
Common Stock, $0.01 par value 8,771,330 shares
Documents incorporated by reference: Portions of the documents listed below have
been incorporated by reference into the indicated parts of this report as
specified in the responses to the referenced sections of this filing.
Annual Meeting Proxy Statement for the fiscal year ended May 31, 1999
into Part III of the filing.
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
fact included in this Report, including without limitation the statements under
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the disclosures about the Green Mountain Mining Venture development
schedule for the Wyoming properties, the projected operating status of Plateau
Resources Limited's Shootaring Canyon uranium mill in Utah, future market prices
for uranium oxide, possible utility contracts for uranium oxide, and the plan of
operations for Yellow Stone Fuels Corp. and Sutter Gold Mining Company
(subsidiaries of U.S. Energy Corp.), are forward-looking statements. In
addition, when words like "expect," "anticipate" or "believe" are used, U.S.
Energy Corp. is making forward-looking statements.
Although U. S. Energy Corp. believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct. Important factors that could cause
actual results to differ materially from such expectations are disclosed in this
Annual Report. The forward-looking statements should be carefully considered in
the context of all the information set forth in this Annual Report.
PART I
ITEM 1 AND ITEM 2. BUSINESS AND PROPERTIES
(A) GENERAL.
U.S. Energy Corp. ("USE") is in the business of acquiring, exploring,
developing and/or selling or leasing mineral properties, and the mining and
marketing of minerals. USE is now engaged in two principal mineral sectors,
uranium and gold; both sectors are currently in the care and maintenance mode.
The most significant uranium properties are located on Green Mountain and Sheep
Mountain in Wyoming, and in southeast Utah. The gold property is located in
Sutter Creek, California, east of Sacramento. Interests are held in other
mineral properties (principally molybdenum), but are either non-operating
interests or undeveloped claims. USE also carries on small oil and gas
operations in Montana and Wyoming. Other USE business segments are commercial
operations (real estate and general aviation) and construction operations.
USE has a May 31 fiscal year.
USE was incorporated in Wyoming in 1966. USE and Crested Corp.
("Crested") originally were independent companies, with two common affiliates
(John L. Larsen and Max T. Evans). In 1980, USE and Crested formed a joint
venture to do business together (unless one or the other elected not to pursue
an individual project). As a result of USE funding certain of Crested's
obligations from time to time (due to Crested's lack of cash on hand), and later
payment of the debts by Crested issuing common stock to USE, Crested became a
majority-owned subsidiary of USE in fiscal 1993. All of USE's (and Crested's)
operations are in the United States. Principal executive offices are located in
the Glen L. Larsen building at 877 North 8th Street West, Riverton, Wyoming
82501, telephone 307.856.9271.
Most of USE operations are conducted through a joint venture with
Crested and various jointly-owned subsidiaries of USE and Crested. The joint
venture with Crested is referred to as "USECC". Gold operations are conducted
through Sutter Gold Mining Company("SGMC"), a jointly-owned subsidiary.
Construction operations are carried on primarily through USE's subsidiary Four
Nines Gold, Inc. ("FNG").
In fiscal 1998, USE and USECC signed an agreement with Kennecott Uranium
Company ("Kennecott"), for the purchase of Kennecott's interest in the Wyoming
uranium project held by the Green
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Mountain Mining Venture ("GMMV"). This agreement expired on October 30, 1998.
Please see "Information About USE - Business and Properties -
Minerals-Uranium-The Green Mountain Mining Project - Amendment to GMMV."
In fiscal 1998, USE and Crested continued the development of the GMMV's
Jackpot uranium mine and the upgrade of the GMMV's Sweetwater uranium mill and
the Shootaring Canyon uranium mill in southeast Utah (owned by Plateau Resources
Ltd., a wholly-owned USE subsidiary). In addition, USE intends to implement
plans for it and Crested to consolidate their uranium assets into a single
subsidiary and finance the startup of its mines and mill operations, subject to
obtaining the necessary debt or equity funding. There is no assurance such
financing can be obtained.
For fiscal 2000, USE seeks the financing necessary to re-commence
development work at the Jackpot Mine. In late July 1998, USE, Crested and
Kennecott made a business decision to temporarily cease development work at the
Jackpot Mine; this decision was based upon the expected negative impact on
uranium prices from the uranium inventory which USEC Inc. announced was held in
its inventory and could be sold into the uranium market. USEC Inc. originally
was the United States Enrichment Corporation, which was created in 1992 to hold
the uranium enrichment facilities of the United States Department of Energy.
USEC Inc. is not affiliated with USE or USECC. However, other factors are
affecting the global uranium market (reductions in current and planned
production). These other factors may justify the resumption of development work
and putting the Utah uranium properties into production in the near-term may be
warranted. See "Information About USE - Business and Properties - Uranium Market
Information." USE is in discussions with various sources of capital to fund its
uranium projects in Utah and Wyoming, but no funding agreements have been
reached. See the GMMV Financial Statements in this Prospectus. For a discussion
of this matter, see "Information About USE - Business and Properties - Minerals
- - Uranium - The Green Mountain Mining Venture."
USE also is refining plans to build a mine and mill for the Sutter Gold
Mine Project in California (held by Sutter Gold Mining Company), with the
objective of continuing mine development, building a gold mill and producing
gold. Permitting will be funded internally by SGMC . Additional funding will be
needed to build the mine and mill, however, there now are no funding agreements.
Gold prices have reached new lows since early in calendar 1999 and continued low
prices will make financing the gold property difficult. As a result, management
has determined that a significant amount of SGMC's mineral assets are impaired.
See Footnote F in the accompanying consolidated financial statements.
Until February 1996, USE conducted manufacturing and/or marketing of
professional and recreational outdoor products through The Brunton Company
("Brunton"), a wholly-owned subsidiary. As of February 1, 1996, USE sold Brunton
to Silva Production AB. The sale eliminated Brunton's manufacturing and/or
marketing of professional and recreational outdoor products from the commercial
segment of USE's business as of January 31, 1996, except to the extent that
there are net profits payments from Silva through 2000.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Registrant operates in three business segments: (i) minerals, (ii)
commercial operations, and (iii) construction operations. The Registrant engages
in other miscellaneous activities such as oil and gas exploration, development
and production. The principal products of the operating units within each of the
reportable industry segments are:
3
INDUSTRY SEGMENTS PRINCIPAL PRODUCTS
Minerals Sales and leases of mineral-bearing
properties and, from time to time, the
production and/or marketing of uranium,
gold and molybdenum.
Commercial Operations Operation of a motel and
rental of real estate, operation of an
aircraft fixed base operation (aircraft
fuel sales, flight instruction and
aircraft maintenance), and provision of
various contract services, including
managerial services for subsidiary
companies.
Construction Operations Construction of irrigation,
flood control, municipal sewer, roads,
ponds, site work, culverts, erosion and
similar projects.
Percentage of Net Revenue contributions by the three segments in the last three
fiscal years were:
Percentage of Net Revenues During the Year Ended
------------------------------------------------
May 31, May 31, May 31,
1999 1998 1997
-------- -------- --------
Minerals 2% 9% 4%
Commercial Operations 27% 23% 56%
Construction Operations 0% 0% 18%
In fiscal 1999, USE received $87,500 in revenues from the sale of
uranium, compared to $858,000 in revenues from the sale of uranium in fiscal
1998. Mineral revenues were generated from sales of uranium under certain of the
utility supply contracts held by Sheep Mountain Partners ("SMP"), a Colorado
general partnership and the molybdenum royalty. During fiscal 1997, there were
no revenues from mineral sales (except for molybdenum royalty interest) in part
due to the arbitration proceedings involving SMP (see Item 3, "Legal Proceedings
- - Sheep Mountain Partners Arbitration/Litigation"). Additional mineral revenue
was generated by USE's molybdenum interest. In Construction Operations, all of
FNG's revenues were derived from renting FNG construction revenues were derived
from renting FNG construction equipment for the development work at the Jackpot
Mine for fiscal 1998 and 1999.
(C) NARRATIVE DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT (INCLUDING ITEM 2 -
PROPERTIES DISCLOSURE).
MINERALS
MINERALS - URANIUM
GENERAL. USE has interests in several uranium-bearing properties in
Wyoming and Utah and in uranium processing mills in Sweetwater County, Wyoming
(the "Sweetwater Mill") and in southeastern Garfield County, Utah (the
"Shootaring Mill"). All the uranium-bearing properties are in areas which
produced significant amounts of uranium in the 1970s and 1980s. USE plans to
develop and operate these properties (directly or through a subsidiary company
or a joint venture) to produce uranium concentrates ("U3O8") for sale to public
utilities that operate nuclear powered electricity generating plants. In
addition, other uranium-bearing properties in New Mexico and Wyoming are held by
Yellow Stone Fuels Corp. (a minority joint subsidiary of USE and Crested).
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THE PROPERTY INTERESTS OF USE IN WYOMING ARE:
GREEN MOUNTAIN
521 unpatented lode mining claims (the "Green Mountain Claims") on Green
Mountain in Fremont County, Wyoming, including 105 claims on which the Round
Park (Jackpot) uranium deposit is located, and the Sweetwater Mill,
(approximately 23 miles south of the proposed Jackpot Mine). These assets are
held by the Green Mountain Mining Venture ("GMMV"), owned 50 percent by USE and
USECC (the "USE Parties"), and 50 percent by Kennecott Uranium Company ("KUC" or
"Kennecott"), a subsidiary of Kennecott Energy and Coal Company of Gillette, WY.
Kennecott Energy and Coal Company is a subsidiary of Rio Tinto plc, formerly RTZ
plc of London.
Exploration and delineation of the principal uranium resources in the
proposed Jackpot Mine have been substantially completed. A final Environmental
Impact Statement ("EIS") for the proposed mine was completed, and on June 25,
1996, the Wyoming Department of Environmental Quality ("WDEQ") issued Mine
Permit No. 660 that is required for GMMV to develop the underground Jackpot Mine
and mine the uranium deposits. The proposed Jackpot Mine supported by facilities
at the Big Eagle Mine are accessible by county and private roads. The Big Eagle
Mine was first operated by Pathfinder Mines Corporation ("PMC") starting in the
late 1970s and was acquired for the Jackpot Mine infrastructure.
SHEEP MOUNTAIN
Unpatented lode mining claims, underground and open pit uranium mines
and mining equipment in the Crooks Gap area are located on Sheep Mountain in
Fremont County, Wyoming and are adjacent to and west of the GMMV mining claims.
From December 21, 1988 to June 1, 1998, these assets were held by Sheep Mountain
Partners ("SMP"). On June 1, 1998, USECC received back from SMP all of the Sheep
Mountain mineral properties and equipment, in partial settlement of disputes
with Nukem, Inc. ("Nukem") and its subsidiary Cycle Resource Investment Corp.
("CRIC"). The monetary judgment against Nukem/CRIC and the CIS uranium supply
contracts in trust remained in dispute. See "Legal Proceedings." The Sheep
Mountain Mines 1 and 2 were first operated by Western Nuclear, Inc., a
subsidiary of Phelps Dodge Corporation, in the late 1970s.
YELLOW STONE FUELS CORP.
Yellow Stone Fuels Corp.("YSFC"), was organized on February 17, 1997 in
Ontario, Canada. As of February 17, 1997, YSFC acquired all the outstanding
shares of Common Stock of Yellow Stone Fuels, Inc. (a Wyoming corporation which
was organized on June 3,1996), in exchange for YSFC issuing the same number of
shares of YSFC Stock to the former shareholders of Yellow Stone Fuels, Inc.
("YFI"). YSFC and its wholly-owned subsidiary Yellow Stone Fuels, Inc. are
herein collectively referred to as YSFC.
YSFC has 11,851,500 shares of Common Stock issued and outstanding,
including 2,700,250 shares (22.8%) issued to USE and 1,568,750 shares (13.2%)
issued to Crested.
In order to concentrate the efforts of USECC on conventional uranium
mining using the Shootaring Canyon and Sweetwater Mills, USECC decided to take a
minority position in YSFC and not be directly involved in properties believed
suitable for the production of uranium through the in-situ leach ("ISL") mining
process. USECC will have the right of first refusal with respect to any uranium
ore bodies YSFC discovers which are amenable to conventional mining and milling
and YSFC will have the right of first refusal with respect to ore bodies
discovered by USECC amenable to the ISL process. In the ISL process, groundwater
fortified with oxidizing agents is pumped to the ore body, causing the uranium
contained in the ore to dissolve. The resulting solution is pumped to the
surface where it is further processed to uranium oxide which is shipped
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to conversion facilities for eventual sale. Generally, the ISL process is more
cost effective and environmentally benign compared to conventional mining
techniques. In addition, less time may be required to bring an ISL mine into
operation than to permit and build a conventional mine and mill.
In Wyoming, YSFC has staked and/or holds 243 unpatented mining claims
and has entered into four State leases covering a total of 8,700 acres located
in the Powder River Basin and Red Desert uranium districts.
In New Mexico, YSFC has staked and holds 39 unpatented mining
claims(approximately 780 acres) in the Grants uranium region of New Mexico.
MATERIAL CONTRACTS BETWEEN YSFC, USE AND CRESTED. In fiscal 1997, USE,
USECC and the GMMV entered into several agreements with YSFC. One contract is a
Milling Agreement through Plateau Resources; the Shootaring Canyon mill will be
available to YSFC to transport uranium concentrate slurry and loaded resin to
the mill and process it into uranium oxide ("yellowcake"), for which Plateau
will be paid its direct costs plus 10%. Other contracts include a Drill Rig
Lease Agreement for YSFC to access USE drilling rigs at the prevailing market
rates; an Outsourcing and Lease Agreement for assistance from USECC accounting
and technical personnel for $2,500 per month and a sublease for 1,000 square
feet of office space and USE of various office equipment for $1,500 per month;
and a Ratification of Understanding by which USECC will offer to YSFC (with a
reserved royalty in amounts to be agreed on later) any uranium properties
amenable to in-situ production which USECC acquires or has the right to acquire.
In return, YSFC will offer to USECC ( with a reserve royalty in amounts to be
agreed on later) uranium properties amenable to conventional mining methods
which YSFC acquires or has the right to acquire. USECC also will make its
library of geological information and related materials available to YSFC. YSFC
also has a Storage Agreement with GMMV by which YSFC stores used processing
equipment at the Sweetwater Mill.
In fiscal 1998, YSFC sold 1,219,000 shares of Common Stock to 94
investors in a private placement, at $2.00 per share; net proceeds to YSFC were
$2,041,060 after payment of $316,940 in commissions to the placement agent
(AFFC, Denver, Colorado) and $80,000 in legal and accounting expenses. Most of
these investors were "accredited" investors. The securities were sold pursuant
to Rule 506 of Regulation D under the Securities Act of 1933, and are restricted
from resale under Rule 144. In connection with the private placement, in
September 1997, USE entered into an Exchange Rights Agreement with YSFC and
AFFC, pursuant to which a registered Exchange Offer was made and is ongoing as
of August 30, 1999.
REGISTERED EXCHANGE OFFER. Pursuant to the September 17, 1997 Exchange
Rights Agreement between USE, YSFC and AFFC, USE has made an Exchange Offer to
each of the YSFC shareholders who invested in YSFC through AFFC in late 1997 and
early 1998. Each such YSFC shareholder may exchange some or all the YSFC shares
owned for shares of USE Common Stock until the expiration of the Exchange Offer
at 5:00 pm MDT on September 13, 1999. The Exchange Offer also was made by USE to
each holder of the YSFC Warrants, who exchanged some or all of the YSFC Warrants
for USE Warrants (see below). Shareholders of YSFC who did not invest in YSFC
through AFFC are not eligible to participate in the Exchange Offer.
The Exchange Rights Agreement was intended to provide liquidity to the
YSFC shareholders (and the holders of the YSFC Warrants), by allowing them the
opportunity to exchange their securities in a private company (YSFC) for
securities in a Nasdaq NMS public company (USE). The Exchange Rights Agreement
was negotiated at arms' length between YSFC, USE (which had founded and
organized YSFC), and AFFC (as YSFC's placement agent in the private offering of
YSFC restricted shares). Under the Exchange Rights Agreement, if YSFC were not
listed on Nasdaq NMS by the eighteenth month anniversary of the Exchange Rights
Agreement, USE would be required at that time to make an offer to the YSFC
shareholders to exchange free trading shares of USE Common Stock for their
restricted shares of YSFC. An initial listing on Nasdaq
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NMS would require YSFC to meet several conditions, including having minimum net
tangible assets of $6,000,000 and at least 400 shareholders. YSFC did not meet
these conditions to listing. Therefore, USE filed a registration statement on
Form S-4 (declared effective in March 1999), and the Exchange Offer is being
made to the YSFC shareholders and holders of the YSFC Warrants pursuant to the
Exchange Rights Agreement, and prospectus.
The Exchange Ratio for shares is based upon (x) the original investment
amount paid by the YSFC shareholder plus 10 percent simple annual interest,
divided by (y) the average of the closing Nasdaq NMS bid prices for a share of
USE Common Stock for the five trading days before USE receives the Notice of
Election to Exchange from each YSFC shareholder. The average price for USE
Common Stock is referred to as the "USE share value." No fractional USE shares
will be issued; any fractional shares will be rounded up to the next full USE
share.
As of May 31, 1999 USE had issued 677,167 shares in exchange for
1,122,750 YSFC shares, and USE Warrants to purchase 67,025 USE shares (at $3.64
per share) in exchange for all the YSFC Warrants. YSFC has 11,851,500 shares of
Common Stock issued and outstanding as of August 26, 1999, including 4,260,250
shares (36%) issued to USE and Crested.
THE PROPERTY INTERESTS OF USE IN UTAH THROUGH PLATEAU RESOURCES LIMITED
("PLATEAU") ARE:
Plateau Resources Limited is a wholly-owned subsidiary of USE, however,
Crested owns an interest in Plateau. See "Plateau Shootaring Canyon Mill" below.
The Tony M Mine and the Frank M properties, underground uranium deposits
in San Juan County, Utah are located partially on Utah State mining leases.
Plateau is the lessee of the Tony M Mine and portions of the Frank M
properties and has posted a bond securing Plateau's obligations to reclaim these
properties. The Tony M mine was originally developed by Plateau at the time
Plateau was owned by Consumers Power Company ("CPC"), a Michigan public utility.
Significant areas of uranium mineralization have been accessed and delineated by
the prior owner's underground workings. When the Tony M Mine was in production
(while Plateau was owned by CPC), it produced ore containing from three to eight
pounds of uranium concentrates per ton. Some of this ore was processed at the
Shootaring Mill. In addition, low grade uranium ore was stockpiled at the Tony M
Mine and at the Shootaring Mill.
Plateau also acquired the Velvet Mine and the nearby Woods Complex in
the Lisbon Valley area in southeastern Utah. The Velvet Mine was fully developed
and permitted by its prior owner and is located approximately 178 miles by road
from the Shootaring Mill. The Woods Complex was formerly an operating uranium
mine with a remaining undeveloped resource. Access to this resource would be by
extending a drift approximately 2,500 feet from the former Wood Mine. The Woods
Mine property is not permitted, but USE does not expect difficulty in obtaining
a new permit because the surface facilities would occupy the site that has been
disturbed from previous operations.
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THE GREEN MOUNTAIN MINING VENTURE ("GMMV") PROJECT
GMMV. In fiscal 1998, USE and USECC signed the Acquisition Agreement to
acquire Kennecott Uranium Company's interest in the GMMV. The following is a
description of the formation of GMMV and certain of its terms, which have been
modified as a result of the Acquisition Agreement and related transactions, as
set forth under the "Amendment to GMMV" below.
In fiscal 1991, USE and USECC entered into an agreement to sell 50
percent of their interests in the Green Mountain uranium claims, and certain
other rights, to Kennecott for $15,000,000 (USE's share of the proceeds was
$12,600,000, and the balance was Crested's) and a commitment by Kennecott to
fund the first $50,000,000 of GMMV expenditures pursuant to Management Committee
budgets. At the same time, USE and USECC ("USE Parties") and Kennecott formed
the GMMV and entered into a joint venture agreement (the "GMMV Agreement") with
the USE Parties to develop, mine and mill uranium ore from the Green Mountain
Claims, and market uranium oxide. For detailed explanation of the GMMV
agreement, please see U.S. Energy Corp's. 1998 Form 10-K at pages 8-11.
The GMMV Management Committee has three Kennecott representatives and
two USECC representatives, acts by majority vote, and appoints and supervises
the project manager. In fiscal 1993, Kennecott became the GMMV project manager
and has continued as project manager through the date of this Prospectus. USECC
has continued work on a contract basis at Kennecott's request.
Activities on the GMMV properties have included environmental and mining
equipment studies, mine permitting and planning work, property maintenance,
setting up a uranium marketing program, acquisition and monitoring of the
Sweetwater Mill and preparation of converting the Sweetwater Mill U.S. Nuclear
Regulatory Commission ("NRC") license from standby to an operating license. USE
has completed the construction of additional mining support facilities at the
Jackpot Mine including: the installation of natural gas lines and phone
services; construction of a new shop building containing offices, a dry-change
room, emergency generators, air compressors and mechanical repair base;
upgrading the ore haul road; and installation of a conveyor and stacker and
other incidental mine activities, while maintaining all permits and licenses at
the Jackpot Mine and Sweetwater Mill. For underground mine development work, the
GMMV has driven twin decline tunnels 18 feet wide and 12 feet high on a -17
percent grade approximately 2,000 feet each into Green Mountain with 1,000 feet
of cross cuts between the declines. All of these development costs in fiscal
1998 and 1999 were funded through approximately $14,000,000 advanced to the GMMV
in connection with Kennecott's $50,000,000 work commitment (for its 50 percent
interest).
JUNE 23, 1997 ACQUISITION AGREEMENT WITH KENNECOTT URANIUM COMPANY
On June 23, 1997, USE and USECC signed an Acquisition Agreement with
Kennecott, for the right to acquire Kennecott's interest in the GMMV for
$15,000,000 and other consideration. This Agreement was not closed by the
October 30, 1998 deadline because of difficulties in trying to raise the
financing in light of the depressed prices in the uranium oxide market.
Kennecott paid USE and USECC $4,000,000 as a purchase option, and committed to
provide the GMMV up to $16,000,000 for payment of reimbursable costs incurred by
USECC in developing the proposed underground Jackpot Mine for production and in
changing the status of the Sweetwater Mill from standby to operational. The work
was performed by USECC as lessee of all the GMMV mineral properties under a
Mineral Lease Agreement between the GMMV and USECC (the "Mineral Lease"), and as
an independent contractor under a Contract Services Agreement (the "Mill
Contract") between Kennecott (as manager of the GMMV) and USECC. Both the
Mineral Lease and the Mill Contract, as well as a Fourth Amendment to the GMMV
Mining Venture Agreement among Kennecott, USE and USECC (the "Fourth Amendment
to the GMMV Agreement"), were executed simultaneously with the Acquisition
Agreement. Under the Fourth Amendment to the GMMV Agreement, Kennecott received
a credit against its original $50,000,000 commitment to fund the GMMV. See
"Properties and Mine Plan" below.
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Because the Acquisition Agreement was not closed, the Mineral Lease and
Mill Contract were terminated, and all operations on the GMMV project are now
conducted pursuant to the amended GMMV Agreement. USE and USECC, and Kennecott
retain their respective 50% interests in the GMMV, and Kennecott's obligation to
repay the money loaned by KEC remains Kennecott's obligation, without any
adverse effect on the 50% interest in the GMMV held by USE and USECC. However,
the Jackpot Mine development work and Sweetwater Mill upgrade work funded by
about $14,500,000 advanced (out of the $16,000,000 loan) has benefitted all
parties. If one of the parties does not pay its share, its percentage in the
GMMV is reduced if the other party pays instead. If USE has the funding to pay
for all costs to continue the development of the Jackpot Mine and the upgrade
work at the Sweetwater Mill, and USE makes the decision to continue the project,
then Kennecott's interest would be reduced. Thus, it is possible that USE could
indirectly purchase Kennecott's interest through funding the project through the
GMMV. USE does not presently have the financial resources to fund the GMMV by
itself.
GMMV Management Committee has agreed on a GMMV budget but the USE
Parties have elected not to participate in financing the budgeted expenditures
and its percentage ownership of the GMMV may be reduced. Therefore, the USE
Parties' 50% interest in the GMMV is being diluted by a small amount.
However, the GMMV will not be affected otherwise.
Due to continued depressed market price of uranium concentrates and lack
of funding, the GMMV mineral assets were impaired.
USEC INC. In 1992, Congress enacted the "Energy Policy Act of 1992"
creating the U.S. Enrichment Corporation ("USEC") to operate the U.S. Department
of Energy's ("DOE") uranium enrichment program. Congress later enacted the "USEC
Privatization Act of 1996" to privatize USEC and allowed the DOE to transfer
various forms of uranium to USEC. The DOE has transferred approximately 75
million pounds of uranium and uranium equivalents to USEC. On July 22, 1998,
USEC changed its name to USEC Inc. and became a publicly traded company. Because
of the anticipated negative impact of USEC Inc.'s sales of new uranium inventory
in the market (see "Marketing - U.S. Enrichment Corporation" below) on uranium
oxide prices, on July 31, 1998, GMMV Management Committee made a business
decision to temporarily place the Jackpot Mine on standby, which resulted in the
lay off of approximately 45 employees. Resumption of development work by the
GMMV will depend on resolution of the USEC Inc. uranium inventory sales issue
(see "U.S. Enrichment Corporation" below and "Legal Proceedings") and improved
uranium prices, and USE's ability to raise the funds to pay its share of GMMV
costs.
PROPERTIES AND MINE PLAN
The GMMV owns the Big Eagle Properties on Green Mountain, which contain
substantial uranium mineralization, and are adjacent to the other GMMV mining
claims. The Big Eagle Properties contain two open-pit mines, as well as related
roads, utilities, buildings, structures, equipment and a stockpile of 500,000
tons of uranium material with a grade of approximately one pound of U3O8 per ton
of mineralized material. The assets include two buildings (38,000 square feet
and 8,000 square feet) formerly used by Pathfinder Mines Corporation ("PMC") in
mining operations. Also included are three ore-hauling vehicles, each having a
100-ton capacity. Permits transferred to the GMMV for the properties include: a
permit to mine, an air quality permit, and water discharge and water quality
permits. The GMMV owns the mineral rights to the underlying unpatented lode
mining claims.
The Round Park (Jackpot) mining claims contain deposits of uranium which
have been estimated to contain 52,000,000 pounds of U3O8; the grade averages 4.6
pounds of U3O8 per ton of mineralized material. The GMMV plans to mine this
mineralized material from two decline tunnels (-17 percent slope) at the Jackpot
Mine, which will be continued underground from the south side of Green Mountain
when operations
9
resume. The first of several mineralized horizons is about 2,300 feet vertically
down from the surface of Green Mountain.
The declines will ultimately extend up to 12,300 feet in length to
access the different zones of the deposit; one decline will be used for fresh
air ventilation and transportation of personnel, and the other will convey ore,
rock and waste out of the mine with exhaust ventilation. The mine plan estimates
that the Jackpot Mine will produce about 3,000 tons of uranium ore per day and
will have an expected mine life of 13 to 22 years. The Big Eagle Mine facilities
located about three miles west of the Jackpot Mine site will be utilized. As
many as 250 workers may be required during full mining operations. To the date
of this Prospectus, USE has run approximately 2,000 feet of tunnel in each
decline.
SWEETWATER MILL. In fiscal 1993, the GMMV acquired the Sweetwater
uranium processing mill and associated properties located in Sweetwater County,
Wyoming, approximately 23 miles south of the proposed Jackpot Mine, from a
subsidiary of Union Oil Company of California ("UNOCAL"), primarily in
consideration of Kennecott and the GMMV assuming environmental liabilities, and
decommissioning and reclamation obligations.
The Sweetwater Mill was designed as a 3,000 ton per day ("tpd")
facility. UNOCAL's subsidiary, Minerals Exploration Company, reportedly
processed in excess of 4,200 tpd for sustained periods. The Mill is one of the
newest uranium milling facilities in the United States, and has been maintained
in good condition. UNOCAL has reported that the mill buildings and equipment
have historical costs of $10,500,000 and $26,900,000, respectively.
As consideration for the Sweetwater Mill, GMMV agreed to indemnify
UNOCAL against certain reclamation and environmental liabilities, which
indemnification obligations are guaranteed by Kennecott Energy and Coal Company
(parent of Kennecott Uranium Company). GMMV has agreed to be responsible for
compliance with mill decommissioning and land reclamation laws, for which the
environmental and reclamation bonding requirements are approximately
$24,330,000, which includes a $4,560,000 bond required by the NRC. None of the
GMMV future reclamation and closure costs are reflected in the Consolidated
Financial Statements (see "Notes F and K to USE Consolidated Financial
Statements").
Although the GMMV is liable for all reclamation and environmental
compliance costs associated with mill and site maintenance, as well as mill
decontamination and cleanup and site reclamation and cleanup after the mill is
decommissioned, USECC believes it is unlikely USECC would have to pay for such
costs directly. First, based on current estimates of cleanup and reclamation
costs (reviewed annually by the oversight agencies), such costs covered by the
letters of credit or other surety appear to be within the $24,330,000 of
reclamation bonds posted by Kennecott for GMMV. These costs are not expected to
increase materially if the mill is not put into operation. Second, UNOCAL has
agreed that if the GMMV incurs expenditures for environmental liabilities prior
to the earlier of commercial production by GMMV or January 1, 2001, (which
liabilities are not due solely to the operations of GMMV), then UNOCAL will loan
the GMMV the first $8,000,000 (escalated according to the Consumer Price Index
to current dollars, from 1993) of such expenditures. Any reimbursement for the
loan may only be recovered by UNOCAL from 20% of future cash flows from sale of
uranium concentrates processed through the Sweetwater Mill. Third, payment of
reclamation and environmental liabilities related to the Mill is guaranteed by
Kennecott. The GMMV intends to set aside a portion of operating revenues to fund
reclamation and environmental liabilities when mining and milling operations are
finally shut down.
Kennecott will be entitled to contribution from the USE Parties in
proportion to their participating interests in the GMMV, if Kennecott is
required to pay mill cleanup costs directly pursuant to its guarantee. Such
contributions would be required only if the liabilities cannot be satisfied by
Kennecott within the balance of any development commitment as provided by the
Acquisition Agreement, after the credits provided by the
10
Fourth Amendment to the GMMV Agreement (see "Amendment to GMMV" above). In
addition, if and to the extent such liabilities resulted from UNOCAL's mill
operations, and payment of the liabilities are required before January 1, 2001
and before mill production resumes, then up to $8,000,000 (escalated) of that
amount would be advanced in a loan from UNOCAL payable out of production from
the Mill, before Kennecott would be required to pay on its guarantee. Kennecott
has made application to the Wyoming DEQ for a third five year interim
stabilization plan on the Sweetwater Pit where uranium mineralized material was
mined and processed through the Mill with the Wyoming DEQ. The Wyoming
Environmental Quality Council is currently reviewing the application. A decision
is expected in September 1999.
PERMITTING AND ACTIVITIES. The WDEQ issued a mine permit for the Jackpot
Mine on June 26, 1996. This Permit allows the GMMV to proceed with construction
of mine surface facilities, further underground mine development and eventual
mining of the Round Park (Jackpot) Deposit.
The Jackpot Mine Plan of Operations and a combination of the
alternatives analyzed in the EIS will allow for the disposal of mine waste rock
in the Big Eagle Mine pits some three miles from the Jackpot declines, the
upgrading of existing roads, and the construction of new haul road segments to
transport ore to the Sweetwater Mill. These roads will be subject to
modification in alignment necessary to minimize or avoid adverse impacts to
riparian and cultural resources.
Kennecott initiated discussions and made filings with the NRC regarding
amendments to the Source Material License to resume ore processing at the
Sweetwater Mill. On August 25, 1999, the Company was advised that the NRC issued
the Operating License for the Mill.
USE believes all of the uranium operations in which it owns an interest
are in compliance with these rules. There ultimately will be an effect on the
earnings of USE and Crested from environmental compliance expenditures by the
GMMV, since the GMMV operations are accounted for by the equity method. GMMV's
expenses for compliance with environmental laws (as well as other matters) are
not expected to materially affect the cash flow of USE and Crested during the
next two years.
PLATEAU'S SHOOTARING CANYON MILL
ACQUISITION OF PLATEAU RESOURCES LIMITED ("PLATEAU"). In August 1993,
USE purchased from Consumers Power Company ("CPC"), all of the outstanding stock
of Plateau which owns the Shootaring Canyon uranium processing mill and support
facilities in southeastern Utah (the "Shootaring Mill") for a nominal cash
consideration. The Shootaring Mill holds a source materials license from the
NRC. In the purchase of the stock from CPC, USE agreed to various obligations
more fully set out in USE's 1998 Form 10-K at pages 15 and 16.
Subsequent to closing the purchase agreement with CPC, USE and Crested
agreed that after Plateau's unencumbered cash has been depleted, USE and Crested
each will assume one-half of Plateau's obligations, and share equally in
Plateau's operating cash flows, pursuant to the USECC Joint Venture.
SHOOTARING MILL AND FACILITIES. The Shootaring Mill is located in
southeastern Utah and occupies 19 acres of a 265 acre plant site. The mill was
designed to process 750 tpd, but only operated on a trial basis for two months
in mid-summer of 1982. In 1984, Plateau placed the mill on standby because CPC
had canceled the construction of an additional nuclear energy plant.
Plateau also owns approximately 90,000 tons of uranium mineralized
material stockpiled at the mill site and approximately 172,000 tons of
mineralized material stockpiled at the Tony M Mine. Included with mill assets
are tailings cells, laboratory facilities, equipment shop and inventory. The NRC
issued a license to Plateau authorizing production of uranium concentrates,
however, since the mill was shut down, only
11
maintenance and required safety and environmental inspection activities were
performed and the source materials license with the NRC was for standby
operations only. Plateau applied to the NRC to convert the source materials
license from standby to operational and upon increasing the reclamation bond to
$6,700,000, the NRC issued the new license on May 2, 1997. Plateau has an
additional $2,390,900 of government securities available for further bonding
needs.
In fiscal 1998 and 1999, in anticipation of resuming milling operations,
Plateau has significantly performed a reactivation and rehabilitation program at
the Mill. Plateau obtained approval of a water control permit for the tailings
cell from the Utah Water Control Division and is awaiting the NRC's review of
the operating license conditions so Plateau can continue with construction of
tailing facilities.
TICABOO TOWNSITE
Plateau owns all of the outstanding stock of Canyon Homesteads, Inc.
("Canyon"), a Utah corporation, which developed the Ticaboo, Utah Townsite 3.5
miles south of the Shootaring Mill. The Ticaboo site includes a motel,
restaurant, lounge, convenience store and single family, mobile home and
recreational vehicle sites (all with utility access). The Townsite is located on
a State of Utah lease near Lake Powell and is being operated as a commercial
enterprise. An amendment was entered into on April 1, 1997 on the Utah State
lease covering the Ticaboo Townsite whereby the State deeded portions of the
Townsite to Canyon on a sliding scale basis. USE and Crested are developing the
Townsite and are selling home and mobile home sites.
SHEEP MOUNTAIN PARTNERS ("SMP")
PARTNERSHIP. In February 1988, USE and Crested acquired uranium mines,
mining equipment and mineralized properties (Sheep Mountain Mines) at Crooks Gap
in south-central Fremont County, Wyoming, from Western Nuclear, Inc. These
Crooks Gap mining properties are adjacent to the Green Mountain uranium
properties. SMP mined and sold uranium ore from one of the underground Sheep
Mines during fiscal 1988 and 1989. Production ceased in fiscal 1989, because
uranium could be purchased from the spot market at prices below the mining and
milling costs of SMP. In December 1988, USE and Crested sold 50 percent of their
interests in the Crooks Gap properties to Nukem's subsidiary CRIC for cash. The
parties thereafter contributed the properties to and formed Sheep Mountain
Partners ("SMP"), in which USECC received an undivided 50 percent interest. SMP
is a Colorado general partnership formed on December 21, 1988, between USECC and
Nukem, Inc. of Stamford, CT ("Nukem") through its wholly-owned subsidiary Cycle
Resource Investment Corporation ("CRIC"). Nukem is a uranium brokerage and
trading concern. The SMP Partnership agreement provided that each partner
generally had a 50 percent interest in SMP net profits, and an obligation to
contribute 50 percent of funds needed for partnership programs or discharge of
liabilities. Capital needs were to have been met by loans, credit lines and
contributions.
SMP was directed by a management committee, with three members appointed
by USECC, and three members appointed by Nukem/CRIC. The committee has not met
since 1991 as a result of the SMP arbitration/litigation. During fiscal 1991,
certain disputes arose between the partners of SMP. These disputes resulted in
arbitration/litigation and subsequent consensual arbitration from which an Order
and Award was issued on April 18, 1996. (see "Legal Proceedings - Sheep Mountain
Partners Arbitration/Litigation").
PROPERTIES. Until June 1, 1998, SMP owned 80 unpatented lode mining
claims on the Crooks Gap properties, including two open-pit and five underground
uranium mines and an inventory of uranium ore. In connection with a partial
settlement of litigation/arbitration between USE/Crested and Nukem/CRIC, SMP
conveyed these mineral properties and equipment to USECC. Production from the
properties is subject to sliding-scale royalties payable to Western Nuclear,
Inc., with rates ranging from one to four percent on
12
recovered uranium concentrates. As of October 30, 1998, SMP and/or USE and USECC
owned 98 unpatented lode mining claims and a 644 acre Wyoming State Mineral
Lease in the Crooks Gap area.
The ion exchange plant on the properties was used to remove natural
soluble uranium from mine water. USE, on behalf of USECC, has submitted a plan
to the NRC to decommission this facility and obtained a three year extension for
timeliness of decommissioning. Management is reviewing the economics of
relicensing this facility as part of a potential in-situ leach uranium mining
operation.
PROPERTY MAINTENANCE. Currently, USECC has a maintenance staff on site
to care for and maintain the mines and pump mine water to prevent flooding of
the mines, which could destroy equipment and the concrete lined vertical shafts
accessing the various levels of uranium mineralization.
PERMITS. Permits to operate existing mines on the Crooks Gap properties
have been issued by the State of Wyoming. Amendments are needed to open new
mines within the permit area. As a condition to issuance of the permits, a NPDES
water discharge permit under the Clean Water Act has been obtained. Monitoring
and treatment of water removed from the mines and discharged in nearby Crooks
Creek is generally required. During the past two years, SMP did not discharge
wastewater into Crooks Creek, and the mine water is presently being discharged
into the McIntosh Pit.
URANIUM MARKET INFORMATION.
URANIUM SPOT MARKET. Uranium spot prices averaged $10.41/lb. U3O8 on
June 30, 1999, a decrease of 4% from $10.80 at the end of the first calendar
quarter. Although spot demand from utilities and producers was stronger than
last year, sellers were concluding sales by offering lower prices as the quarter
came to a close. During the quarter, total spot market volume was approximately
5 million pounds U3O8 bringing the year-to-date total to more than 13 million
pounds, a significant improvement over the 4 million pounds sold in the first
half of 1998. Currently, the restricted spot price for U3O8 was reported in the
$10.10 to $10.60/lb.
range.
URANIUM LONG-TERM MARKET. The long-term market continued to be
relatively quiet in the second calendar quarter with the long-term uranium price
indicator declining marginally to $10.65/lb. U3O8 from $11.75 at the end of the
previous quarter. Demand in the long-term market is expected to increase over
the remainder of the year as utilities move to cover future needs and volume for
the year is expected to exceed the 1998 estimated level of 50 million pounds
U3O8.
For a detailed analysis of past uranium market developments, please see
U.S. Energy Corp.'s 1998 Form 10-K pages 20 - 26.
GOLD
SUTTER GOLD MINE (CALIFORNIA)
SUTTER GOLD MINING COMPANY. In fiscal 1991, USE acquired an interest in
the Lincoln Project (including the underground Lincoln Mine and the 2,800 foot
Stringbean Alley decline) in the Mother Lode Mining District of Amador County,
California. The entire Lincoln Project is now owned by Sutter Gold Mining
Company, a Wyoming corporation ("SGMC"), which is a 59% subsidiary of USE as of
November 30, 1998. The Lincoln Project has been renamed the Sutter Gold Mine
("SGM").
As discussed below, SGMC has a plan to put the SGM into production.
However, implementation of this plan will require substantial capital financing.
Recent record low prices for gold have made financing difficult. These low
prices and the lack of capital have resulted in a substantial write down of the
SGMC
13
assets. See "Managements Discussion and Analysis of Financial Condition and
Results of Operations" for fiscal 1999.
In fiscal 1997, SGMC completed private financings totaling a net of
US$7,115,400 ($1,272,000 through a private placement conducted in the United
States by RAF Financial Corp., now American Fronteer Financial Corp. or "AFFC",
and $5,843,400 through a private placement conducted in Toronto, Ontario, Canada
by C.M. Oliver & Company Limited). The net proceeds of $6,511,200 from these
financings (after deduction of commissions and offering costs) were applied to
pre-production mine development, mill design, permitting and property holding
and acquisition cost. Additional financing of up to $15,000,000 will be sought
to fund the development and construction of the mine/mill.
SGMC does not have any class of its securities registered with the
Commission, and none of its securities are traded in the United States or
Canada.
Due to the depressed gold price and lack of available funding, SGMC has
deferred the start of construction of the 1,000 ton-per-day gold mill complex
and development of the underground mine, but is exploring plans to develop the
mine into a visitor's center to generate positive cash flow while the gold
prices remain depressed.
During fiscal 1998, SGMC amended its 1993 Conditional USE Permit (see
"Permits and Future Plans"), finalized the process flow of the mill, entered
into the final design engineering contract with the engineering firm of Lockwood
Greene of Dallas, Texas and built the entrance road to the mine. In fiscal 1999,
preparation of the mill and office site started and the engineering firm has
finished construction drawings for the mill. Once a decision to commence
production is made, from that date, it is estimated it will take approximately
18 months to complete the mill complex construction and pour the first bar of
gold.
After completion of the two private financings, and taking into account
a restructuring of the ownership of USE and Crested in SGMC, USE and Crested own
a $10,000,000 Contingent Stock Purchase Warrant (the "USECC Warrant") which was
issued to USE and Crested in connection with the restructuring of SGMC for the
Canadian private placement. The USECC Warrant is owned 88.9% by USE and 11.1% by
Crested. The USECC Warrant provides that for each ounce of gold over 300,000
ounces added to the proven and probable category of SGMC's reserves (up to a
maximum of 400,000 additional ounces), using a cut-off grade of 0.10 ounces of
gold per ton (at a minimum vein thickness of 4 feet), USE and Crested will be
entitled to cash or additional shares of Common Stock from SGMC (without paying
additional consideration) at SGMC's election. The number of additional shares
issuable for each new ounce of gold reserves will be determined by dividing
US$25 by the greater of $5.00 or the weighted average closing price of the
Common Stock for the 20 trading days before exercise of the USECC Warrant. The
USECC Warrant is exercisable semi-annually. SGMC may prevent the exercise of the
USECC Warrant by paying USE and Crested US$25 in cash for each new ounce of gold
(payable out of a maximum of 60% of net cash-flow from SGMC's mining
operations).
APRIL 1998 TRANSACTION FOR CASH AND SGMC SPECIAL WARRANTS. As of April
7, 1998, USE entered into four separate Stock Purchase Agreements with four
Canadian investment funds, for the issuance of 658,895 shares of Common Stock of
USE, in consideration of the funds' payment to USE of $1,190,000 in cash and the
delivery to USE of 888,900 Special Warrants of SGMC. The funds had paid SGMC a
total of Cdn$4,888,950 in May 1997, pursuant to a private offering in Canada, to
purchase the Special Warrants from SGMC. In fiscal 1999, the Company issued
89,059 shares of its common stock in exchange for 207,500 Special Warrants from
SGMC shareholders increasing the Company's ownership of SGMC by 4%. For further
information on the transaction, please see Footnote F to the Financial
Statements.
14
USECC MANAGEMENT AGREEMENT WITH SGMC. Effective June 1, 1996, SGMC
entered into a Management Agreement under which USECC provides administrative
staff and services to SGMC. USECC is reimbursed for actual costs incurred, plus
an extra 10% during the exploration and development phases; 2% during the
construction phase; and 2.5% during the mining phase (such 2.5% charge to be
replaced with a fixed sum which the parties will negotiate at the end of two
years starting when the mining phase begins). The Management Agreement replaces
a prior agreement by which USECC provided administrative services to SGMC.
PROPERTIES. SGMC (through its subsidiary USECC Gold L.L.C.) holds
approximately 14 acres of surface and mineral rights (owned), 240 acres of
surface rights (owned), 436 acres of surface rights (leased), 158 acres of
mineral rights (leased), and 380 acres of mineral rights (owned), all on
patented mining claims near Sutter Creek, Amador County, California. The acreage
of mineral rights owned will be decreased to about 280-300 acres in 1999. The
properties are located in the western Sierra Nevada Mountains at from 1,000 to
1,500 feet in elevation; year round climate is temperate. Access is by
California State Highway 16 from Sacramento to California State Highway 49, then
by paved county road approximately .4 miles outside of Sutter Creek.
Surface and mineral rights holding costs will aggregate approximately
$225,000 from June 1, 1999 through May 31, 2000. Property taxes for fiscal 2000
are estimated to be $30,000.
The leases are for varying terms, and require rental fees, advance
production royalties, real property taxes and insurance. The lease that was to
expire in February 1998 has been extended through its force majeure clause due
to the low price of gold. Leases expiring before 2010 will generally be extended
automatically, so long as minerals are continuously produced from the property
that is subject to the lease or minimum payments are made . Other leases may be
extended for various periods on terms similar to those contained in the original
leases. Production royalties are from 2.5% to 6% (most are 4%). The various
leases have different methods of calculating royalty payments (net smelter
return and gross proceeds).
A separate holder of four of the properties that were assembled into the
SGM holds a 5 percent net profits interest on production from such properties,
which was granted by a prior owner of the project. An additional 0.5 percent net
smelter return royalty is held by a consultant to a lessee prior to that owner's
acquisition of the properties, which 0.5 percent interest covers the same four
properties.
PERMITS AND FUTURE PLANS. In August 1993, the Amador County Board of
Supervisors issued a Conditional USE Permit ("CUP") allowing mining of the SGM
and milling of production, subject to conditions relating to land USE,
environmental and public safety issues, road construction and improvement, and
site reclamation. The permit will allow construction of the mine and mill
facilities in stages as the project gets underway, thereby reducing initial
capital outlays. Additional permits (for road work, dust control and
construction of mill and other surface improvements) need to be applied for in
due course. In August and September 1998, the Amador County Board of Supervisors
certified the Final Subsequent Environmental Impact Report ("FSEIR") and
approved all of the amendments requested by SGMC. Amendments to the CUP will
remove two tailings dams, eliminate the need to use cyanide on-site, and
eliminate mine related traffic on two county roads. The certification and
decision has been challenged in a lawsuit filed by a local citizens' group, see
"Legal Proceedings. "Since SGMC already has a valid CUP, SGMC believes it may be
able to move forward on certain parts of the development of the
mine/mill/visitor center. In any event, SGMC does not expect the appeal process
to materially impact the current development plan or schedule.
VISITOR'S CENTER. SGMC is evaluating the possibility of developing the
tourist potential of Sutter Gold Mine, while it waits for the price of gold to
rebound. Demographics indicate, that within 150 mile radius of SGM's operation,
there is a total market population of 19.4 million people with 9.0 million
tourists visiting the area each year. The Sutter Gold Mine/Museum attraction
would be located along scenic Highway 49
15
(known as the Gold Road) between the historic gold mining towns of Sutter Creek
and Amador City, Amador County, California. The Amador County Chamber of
Commerce estimates that 2.5 million people drive by SGM's entrance each year.
SGMC's initial studies indicates that the number of tourists could approximate
2,000 per day. Facilities would include a Visitor's Center with a gift shop and
museum, a self-guided tour of modern mining activities, visitor gallery/museum
attached to the mill building (when built), hiking trails, picnic areas and a
special gold panning area. Revenues would come from admission tickets, gold
value-added products and other appropriate merchandise. The early 19th century
architecture, combined with expansion of underground tourist displays, rides and
exhibits should allow SGMC to continually upgrade and generate new and renewed
interest in the visitor attractions.
MOLYBDENUM
As holders of royalty, reversionary and certain other interests in
properties located at Mt. Emmons near Crested Butte, Colorado, USE and Crested
are entitled to receive annual advance royalties of 50,000 pounds of molybdenum,
or cash equivalent (one-half to each). AMAX Inc. (which was acquired by Cyprus
Minerals Company and was renamed Cyprus Amax Minerals Company in November 1993)
delineated a deposit of molybdenum containing approximately 146,000,000 tons of
mineralization averaging 0.43% molybdenum disulfide on the properties of USE and
Crested.
Advance royalties are paid in equal quarterly installments, until: (in)
commencement of production; (ii) failure to obtain certain licenses, permits,
etc., that are required for production; or (iii) AMAX's return of the properties
to USE and Crested. See "Note F to the USE Consolidated Financial Statements."
The advance royalty payments reduce the operating royalties (six percent of
gross production proceeds) which would otherwise be due from Cyprus Amax from
production. There is no obligation to repay the advance royalties if the
property is not placed in production.
The Agreement with AMAX also provides that USE and Crested are to
receive $2,000,000 (one-half to each), at such time as the Mt. Emmons properties
are put into production and, in the event AMAX sells its interest in the
properties, USE and Crested would receive 15 percent of the first $25,000,000
(one-half to each) received by AMAX. USE and Crested have asserted that the
acquisition of AMAX by Cyprus Minerals Company was a sale of AMAX's interest in
the properties which would entitle USE and Crested to such payment. Cyprus Amax
has rejected such assertion and USE and Crested are considering their remedies.
USE recognized $150,600, $211,000 and $207,300 of revenues in fiscal 1999, 1998
and 1997, respectively, related to this royalty interest.
MOLYBDENUM MARKET INFORMATION
Molybdenum is a metallic element with applications in both metallurgy
and chemistry. Principal consumers include the steel industry, which uses
molybdenum alloying agents to enhance strength and other characteristics of its
products, and the chemical, super-alloy and electronics industries, which
purchase molybdenum in upgraded product forms.
The molybdenum market is cyclical with prices influenced by production
costs and the rate of production of foreign and domestic primary and by-product
producers, world-wide economic conditions particularly in the steel industry,
the U.S. dollar exchange rate, and other factors such as the rate of consumption
of molybdenum in end-USE products. When molybdenum prices rose dramatically in
the late 1970s, for example, steel alloys were modified to reduce reliance on
molybdenum. AMAX and Cyprus Minerals Company were the two major primary
producers of molybdenum in the United States until November 1993, when AMAX was
acquired by Cyprus. In a recent public announcement, ASARCO proposes to acquire
Cyprus Amax through a merger forming ASARCO Cyprus Inc., which would be the
largest publicly traded copper company. More recently, Phelps Dodge made a
buyout offer of Cyprus Amax
16
and Asarco. This would further concentrate these companies' copper production
capabilities and add molybdenum reserves to the surviving companies. It is too
early to evaluate the affect of the merger and acquisition may have on USECC's
molybdenum interest at Mt. Emmons, Co.
PARADOR MINING (NEVADA)
USE and Crested are sublessees and assignees from Parador Mining Co.,
Inc. ("Parador"), of certain rights under two patented mining claims located in
the Bullfrog Mining District of Nye County, Nevada. The claims are immediately
adjacent to and part of a gold mine operated by Bond Gold Bullfrog, Inc.
("BGBI"), a non-affiliated third party (now known as Barrick Bullfrog, Inc.).
USE and Crested have also been assigned certain extralateral rights associated
with the claims and certain royalty rights relating to a prior lease on those
properties. The lease to USE and Crested is for a ten year primary term, is
subject to a prior lease to BGBI on the properties, and allows USE and Crested
to explore for, develop and mine minerals from the claims. If USE and Crested
conduct activities on the claims, they are entitled to recover costs out of
revenues from extracted minerals. After recovering any such costs, USE and
Crested will pay Parador a production royalty of 50 percent of the net value of
production sold from the claims.
USE, Crested and Parador presently are in litigation concerning this
property. See "Legal Proceedings - BGBI Litigation" below.
OIL AND GAS.
FORT PECK LUSTRE FIELD (MONTANA). USECC conducts a small oil production
operations at the Lustre Oil Field on the Ft. Peck Indian Reservation in
north-eastern Montana. Until December 1998, four wells were producing, but were
shut in pending an increase in oil prices. Recently, two of the wells were again
placed into production. USE and Crested received a fee based on oil produced.
The wells were shut in pending a price increase. USE is the operator of record.
No further drilling is expected in this field. This fee and certain real
property of USE and Crested, have been pledged or mortgaged as security for a
$1,000,000 line of credit from a bank.
COMMERCIAL OPERATIONS
REAL ESTATE AND OTHER COMMERCIAL OPERATIONS. USE owns varying interests,
alone and with Crested, in affiliated companies engaged in real estate,
transportation, and commercial businesses. The affiliated organizations include
Western Executive Air, Inc. ("WEA") and Canyon Homesteads, Inc. (through
Plateau). Activities of these and other subsidiaries in the business sectors
include ownership and management of a commercial office building, the townsite
of Jeffrey City, Wyoming and the townsite, motel, convenience store and other
commercial facilities in Ticaboo, Utah.
WYOMING PROPERTIES. USECC owns a 14-acre tract in Riverton, Wyoming,
with a two-story 30,400 square foot office building (including underground
parking). The first floor is rented to affiliates, nonaffiliates and government
agencies; the second floor is occupied by USE and Crested and is adequate for
their executive offices. The property is mortgaged to the WDEQ as security for
future reclamation work on the SMP Crooks Gap uranium properties.
USE and Crested (through WEA) also owns a fixed base aircraft operation
at the Riverton Municipal Airport, including a 10,000 square foot aircraft
hangar and 7,000 square feet of associated offices and facilities. This
operation is located on land leased from the City of Riverton for a term ending
December 16, 2005, with an option to renew on mutually agreeable terms for five
years. The annual rent is presently $1,180 (adjusted annually to reflect changes
in the Consumer Price Index), plus a $0.02 fee per gallon of fuel sold.
17
WEA owns and operates an aircraft fixed base operation with fuel sales, flight
instruction services and aircraft maintenance in Riverton, Wyoming.
USE and Crested also own 18 semi-developed lots on 26.8 acres and 63
acres of undeveloped land near the Riverton Municipal Airport, and three
mountain sites covering 16 acres in Fremont County, Wyoming.
USECC owns various buildings, 290 city lots and/or tracts and other
properties at the Jeffrey City townsite in south-central Wyoming. Nearly 4,000
people resided in Jeffrey City in the early 1980s, when the nearby Crooks Gap
and Big Eagle uranium mining projects were active. The townsite may be utilized
for worker housing as the Jackpot Mine and Sweetwater Mill are put into
operation.
In Riverton, Wyoming, USE owns five city lots and a 20-acre tract with
improvements including two smaller office buildings and three other buildings
with 19,000 square feet of office facilities, 5,000 square feet of laboratory
space and repair and maintenance shops containing 8,000 square feet.
COLORADO PROPERTIES. In connection with the AMAX transaction for the Mt.
Emmons molybdenum properties near Crested Butte, Colorado, USECC acquired an
option from AMAX (now Cyprus Amax) to purchase approximately 57 acres for
$200,000 in Mountain Meadows Business Park, Gunnison, Colorado. See "Minerals -
Molybdenum" above. The property is zoned commercial and industrial, and is
adjacent to Western State College. In fiscal 1995, USECC and Cyprus Amax agreed
to exercise the option by USE and Crested agreeing to forego six quarters of
advance royalties from Cyprus Amax (the option purchase price was $200,000),
plus payment of certain expenses i.e. real property taxes from 1987 and other
expenses amounting to $19,358. Thereafter, USE (together with Crested) signed
option agreements with Pangolin Corporation, a Park City, Utah developer, for
sale of the 57 acres, and a separate parcel owned in Gunnison County, Colorado.
Although initial payments on the option agreements were received, the
developer is in default on the balance. In July 1998, USE filed a lawsuit
seeking recovery of the balance owing on promissory notes and contracts. See
"Item 3 - Legal Proceedings."
UTAH PROPERTIES. Canyon Homesteads, Inc. (a Plateau subsidiary) owns a
majority interest in a joint venture which holds the Ticaboo Townsite in
Ticaboo, Utah (see "Minerals - Uranium-Shootaring Canyon Mill - Ticaboo
Townsite" above). In fiscal 1995, USE acquired the minority interest in the
joint venture from a nonaffiliate.
CONSTRUCTION
FOUR NINES GOLD, INC. For fiscal 1999, FNG had no contracts for
construction work, but has rented its equipment to USECC for use by the GMMV at
the Jackpot Mine and Plateau Resources at Ticaboo, Utah..
Rental revenues totaled $197,600 for fiscal 1999 at a profit of $14,100.
Neither commercial nor construction operations are dependent upon a
single customer, or a few customers, the loss of which would have a materially
adverse effect on the Company.
RESEARCH AND DEVELOPMENT
USE has incurred no research and development expenditures, either on its
own account or sponsored by customers, during the past three fiscal years.
18
ENVIRONMENTAL
GENERAL. USE's operations are subject to various federal, state and
local laws and regulations regarding the discharge of materials into the
environment or otherwise relating to the protection of the environment,
including the Clean Air Act, the Clean Water Act, the Resource Conservation and
Recovery Act ("RCRA"), and the Comprehensive Environmental Response Compensation
Liability Act ("CERCLA"). With respect to mining operations conducted in
Wyoming, Wyoming's mine permitting statutes, Abandoned Mine Reclamation Act and
industrial development and siting laws and regulations also impact USE. Similar
laws and regulations in California affect SGMC, operations and in Utah laws and
regulations effect Plateau's operations.
USE's management believes USE is currently in compliance in all material
respects with existing environmental regulations. To the extent that production
by SMP, GMMV or SGMC is delayed, interrupted or discontinued due to need to
satisfy existing or new provisions which relate to environmental protection,
future USE earnings could be adversely affected.
CROOKS GAP. An inoperative ion exchange facility at Crooks Gap currently
holds a NRC license for possession of uranium operations byproducts. USE has
applied to the NRC for permission to decommission and decontaminate the plant,
dispose low level waste into the Sweetwater Mill tailings cell, and keep intact
such of the facility as does not require dismantling and which is approved for
unrestricted operation.
OTHER ENVIRONMENTAL COSTS. Actual costs for compliance with
environmental laws may vary considerably from estimates, depending upon such
factors as changes in environmental laws and regulation (e.g., the new Clean Air
Act), and conditions encountered in minerals exploration and mining. USE does
not anticipate that expenditures to comply with laws regulating the discharge of
materials into the environment, or which are otherwise designed to protect the
environment, will have any substantial adverse impact on the Registrant's
competitive position.
EMPLOYEES
As of the date of this Report, USE had approximately 82 full-time
employees (including mine and mill employees in Wyoming and Utah) compared to
175 before the Jackpot Mine on Green Mountain was put on standby. Crested uses
approximately 50 percent of the time of USE employees, and reimburses USE on a
cost reimbursement basis.
MINING CLAIM HOLDINGS
TITLE TO PROPERTIES. Nearly all the uranium mining properties held by
GMMV, USE and Plateau are on federal unpatented claims. Unpatented claims are
located upon federal public land pursuant to procedure established by the
General Mining Law. Requirements for the location of a valid mining claim on
public land depend on the type of claim being staked, but generally include
discovery of valuable minerals, erecting a discovery monument and posting
thereon a location notice, marking the boundaries of the claim with monuments,
and filing a certificate of location with the county in which the claim is
located and with the BLM. If the statutes and regulations for the location of a
mining claim are complied with, the locator obtains a valid possessory right to
the contained minerals. To preserve an otherwise valid claim, a claimant must
also pay certain rental fees annually to the federal government (currently $100
per claim) and make certain additional filings with the county and the BLM.
Failure to pay such fees or make the required filings may render the mining
claim void or voidable. Because mining claims are self-initiated and
self-maintained, they possess some unique vulnerabilities not associated with
other types of property interests. It is impossible to ascertain the validity of
unpatented mining claims solely from public real estate records and it can be
difficult or impossible to confirm that all of the requisite steps have been
followed for location and maintenance of a
19
claim. If the validity of an unpatented mining claim is challenged by the
government, the claimant has the burden of proving the present economic
feasibility of mining minerals located thereon. Thus, it is conceivable that
during times of falling metal prices, claims which were valid when located could
become invalid if challenged. Disputes can also arise with adjoining property
owners for encroachment or under the doctrine of extralateral rights (see "Legal
Proceedings - BGBI Litigation").
PROPOSED FEDERAL LEGISLATION. The U.S. Congress has, in legislative
sessions in recent years, actively considered several proposals for major
revision of the General Mining Law, which governs mining claims and related
activities on federal public lands. If any of the recent proposals become law,
it could result in the imposition of a royalty upon production of minerals from
federal lands and new requirements for mined land reclamation and other
environmental control measures. It remains unclear whether the current Congress
will pass such legislation and, if passed, the extent such new legislation will
affect existing mining claims and operations. The effect of any revision of the
General Mining Law on USE' operations cannot be determined conclusively until
such revision is enacted; however, such legislation could materially increase
the carrying costs of the Green Mountain mineral properties, the SMP properties
and some of Plateau's mineral properties which are located on federal unpatented
mining claims, and could increase both the capital and operating costs for such
projects and impair USE's ability to hold or develop such properties, as well as
other mineral prospects on federal unpatented mining claims.
ITEM 3. LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
In 1991, disputes arose between USE/Crested, and Nukem, Inc. and its
subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation
and operation of the Sheep Mountain Partners partnership for uranium mining and
marketing, and activities of the parties outside SMP. Arbitration proceedings
were initiated by CRIC in June 1991 and in July 1991, USECC filed a lawsuit
against Nukem, CRIC and others in the U.S. District Court (District of
Colorado). Later, USECC filed another suit for the standby costs at the SMP
mines against SMP in the Colorado State Court. The Federal Court stayed both the
arbitration proceedings and the State Court case. In February 1994, all of the
parties agreed to exclusive and binding arbitration of the disputes before the
American Arbitration Association ("AAA"), for which the legal claims made by
both sides included fraud and misrepresentation, breach of contract, breach of
duties owed to the SMP partnership, and other claims.
Following 73 hearing days and various submissions by the parties, the
AAA panel (the "Panel") entered an Order and Award (the "Order") in April 1996
and clarifying the Order on July 3, 1996, finding generally in favor of USE and
Crested on certain of their claims (including the claims for reimbursement for
standby maintenance expenses and profits denied SMP in Nukem's trading of
uranium), and in favor of Nukem/CRIC and against USE and Crested on certain
other claims. For more details of the litigation, see Item 3 of the 1998 Form
10-K for USE and Footnote K to the Financial Statements.
A three judge panel of the 10th CCA issued an Order and Judgment in the
Nukem/CRIC arbitration/litigation matter on October 22, 1998, which unanimously
affirmed the Federal District Court Second Amended Judgment without
modification. The ruling of the 10th CCA affirmed (i) the imposition of a
constructive trust in favor of SMP on Nukem's rights to purchase CIS uranium,
the uranium acquired pursuant to those rights, and the profits therefrom; and
(ii) the damage award against Nukem/CRIC. As a result of the ruling of the 10th
CCA, USE and Crested received an additional $6,077,264 (including interest and
court costs) from Nukem in February 1999 for a total net monetary award of
$15,468,625 in the arbitration/litigation, and equitable relief in the form of
USE's and Crested's interest in SMP, which holds the constructive trust over the
CIS contracts. Nukem/CRIC filed motions for entry of final satisfaction of
Judgment. The U.S. District Court denied both motions, the last one on July 16,
1999 and on August 16,
20
1999, Nukem filed a Notice of Appeal to the 10th CCA. USECC intends to
vigorously oppose the appeal and seek Judicial intervention to enforce the
Constructive Trust.
TICABOO TOWNSITE LITIGATION
In fiscal 1998, a prior contract operator of the Ticaboo restaurant and
lounge, and two employees supervising the motel and convenience store in Utah
(owned by Canyon Homesteads, Inc.) and their corporation Dejavue, Inc. sued USE,
Crested and others in Utah State Court 3rd Judicial District. See footnote K to
the Financial Statements in the Annual Report. After a five day trial, a jury
denied the claims of two of three plaintiffs but awarded the third plaintiff
$156,000 in damages against USE and awarded the plaintiff Dejavue, Inc. $91,668
in attorney fees. USE filed motions including a motion for judgment
notwithstanding the verdict, but the motions were denied by the Court. USE
posted a supersedeas bond for $275,000 to appeal the judgment and plaintiffs
also appealed the judgment to the Utah Court of Appeals. Plaintiffs and USE have
both filed their briefs on appeal and are awaiting a decision from the Utah
Court of Appeals whether to have oral arguments.
BGBI LITIGATION
USE and Crested are defendants and counter- or cross-claimants in
certain litigation in the District Court of the Fifth Judicial District of Nye
County, Nevada, brought by Bond Gold Bullfrog Inc. ("BGBI") on July 30, 1991.
BGBI (now known as Barrick Bullfrog, Inc.) is an affiliate of Barrick Corp., a
large international gold producer headquartered in Toronto, Canada. The
litigation primarily concerns extra-lateral rights associated with two patented
mining claims owned by Parador Mining Company Inc. ("Parador") and initially
leased to a predecessor of BGBI, which claims are in and adjacent to BGBI's
Bullfrog open pit and underground mine. USE and Crested assert certain interests
in the claims under an April 1991 assignment and lease with Parador, which is
subject to the lease to BGBI's predecessor.
A partial or bifurcated trial to the Court of the extra-lateral rights
issues was held on December 11 and 12, 1995, to determine whether the Bullfrog
orebody is a vein apexing on Parador's Claims. The Court found that Parador had
failed to meet its burden of proof and therefore Parador, USE and Crested have
no right, title and interest in the minerals lying beneath the claims of Layne
pursuant to extralateral rights. The partial trial did not address the issues of
breach of contract by the defendants and BGBI for specific performance and they
were tried before the Court commencing on January 26, 1998. After the trial, the
Court found against the parties on their respective claims. BGBI and Parador,
and USE/Crested all appealed the decision to the Nevada Supreme Court. BGBI
filed its brief on appeal and Parador and USECC have until August 31, 1999 to
file their answer and opening brief.
DEPARTMENT OF ENERGY LITIGATION
On July 20, 1998, eight uranium mining companies with operations in the
United States (including USE, Crested, YSFC) and the Uranium Producers of
America (a trade organization) filed a complaint against the United States
Department of Energy (the "DOE") in a lawsuit (file no. 98 CV 1775) in the
United States District Court, Cheyenne, Wyoming. The complaint seeks declaratory
judgment and injunctive relief. The plaintiffs allege that the DOE violated the
USEC Privatization Act of 1996, when the DOE transferred 45 metric tons of low
enriched uranium and 3,800 metric tons of natural uranium to United States
Enrichment Corp. ("USEC").
The plaintiffs have asked the Court to declare that (in) the DOE
violated its statutory authority by transferring uranium to USEC in excess of
statutory limits on volume; (ii) the excess amounts were not "sold" by the DOE
to USEC for fair value, as required by the Act, and mandated findings by the DOE
concerning possible adverse impacts were not supported in fact; and (iii) the
DOE be enjoined from future transfers in
21
violation of the Act. The DOE filed a motion to dismiss the complaint claiming
that the U.S. Congress withdrew its consent to be sued in connection with the
USEC Inc. privatization and that USEC Inc. must be joined as an indispensable
party. The State of Wyoming moved to join in the litigation on behalf of the
plaintiffs. A hearing was held on the motions on January 8, 1999 before the U.S.
District Court in Cheyenne, Wyoming. The Court took the motions under advisement
and as of August 18, 1999, had not entered a decision.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the United States District
Court, Denver, Colorado against Contour Development Company, L.L.C. and entities
and persons associated with Contour Development Company, L.L.C. (together,
"Contour") and the original developer Pangolin Corporation, seeking compensatory
and consequential damages of more than $1.3 million from the defendants for
dealings in real estate owned by USE and Crested in Gunnison, Colorado.
Specifically, USE (which is the assignee of Crested's rights and
interests in certain of the promissory notes, contracts and agreements) alleges
that Contour has breached contracts for the sale of USE's and Crested's Gunnison
properties, and is in default on the promissory notes delivered to pay for the
Gunnison properties. USE has further alleged that Contour fraudulently induced
USE and Crested to enter into restructuring agreements for the original
transactions between the parties in such properties; and further, that Contour
has breached the duties of good faith, honesty, full disclosure and fair dealing
which were owed to USE and Crested by Contour in the course of the transactions.
USE has made additional claims against Contour for unjust enrichment and
conversion of the real estate assets and added additional parties as defendants.
See "Business - Commercial Operations - Real Estate and Other Commercial
Operations - Colorado Properties" above.
Three of the defendants also filed motions to dismiss seeking relief
from USE's notice of lis pendens. That motion has not been decided pending
settlement discussions that were terminated by USE on July 15, 1999. Litigation
is expected to resume against all defendants other than Gunnison Center
Properties, L.L.C. which voluntarily petitioned for protection under Chapter 11
of the Bankruptcy Code. The remaining defendants own other property which USE
believes has sufficient value to satisfy any judgment that USE may obtain.
SGMC LITIGATION
In 1993, Amador County issued a conditional use permit ("CUP") to allow
SGMC to develop the SGM near the town of Sutter Creek, Amador County,
California. A number of conditions were attached to the original CUP which
accommodated local citizen and government agency concerns about noise, waste
disposal, traffic and other aspects of the proposed mining operation.
In 1997 and 1998, SGMC proposed amendments to the CUP for a new design
of the SGM which would lower its environmental impact by reducing traffic,
potentially eliminating the use of cyanide on-site, and removing two large
tailings dams which would have been built to hold mine and mill waste. The new
design also would significantly reduce capital and operating costs for the
mine/mill complex, but cover more land for waste disposal and other purposes.
The certification and approval by the Amador County Planning Commission of the
Final Subsequent Environmental Impact Report ("FSEIR") and CUP amendments on
July 14, 1998 was appealed (by another local citizens project opposition group)
to the Amador County Board of Supervisors. In August and September 1998, the
Board of Supervisors certified the FSEIR and approved the amendments to the CUP.
22
On September 28, 1998 a lawsuit was filed in Amador County Superior
Court, California (Case No. 98 CV 3298) by Concerned Citizens of Amador County
as plaintiffs, against the County of Amador and the Amador County Board of
Supervisors, and against SGMC as a real party in interest. The lawsuit
challenges the actions of Amador County and its Board of Supervisors in
certifying the FSEIR and approving the amended CUP. A hearing was held on June
7, 1999 and the Court took the matter under advisement. Under California Law,
the Court has 90 days from the hearing date to enter its decision.
DENNIS SELLEY ET AL VS U.S. ENERGY CORP., CRESTED CORP. ET AL. On May
14, 1999, Dennis Selley personally and as personal representative of the Estate
of Hannah Selley and his wife Mary B. Selley, filed a Civil Action No. 30869 in
the Ninth Judicial District Court of Fremont County, Wyoming against U.S. Energy
Corp. and Crested Corp., Plateau Resources Limited and USECC the joint venture,
alleging that the defendants were negligent as a landlord in renting a
doublewide trailer converted to a bunkhouse near Ticaboo, Utah to plaintiffs'
daughter Hannah Selley and seek various unspecified damages. Hannah Selley was
employed by U.S. Energy Corp. ("USE") at the Ticaboo Lodge in June 1998. Because
no housing was available for employees, she and five other USE employees rented
rooms in the bunk house provided by USE, located about 1/2 mile from the Ticaboo
Lodge. In the late evening of June 5, 1998 and early the next morning, the
occupants built a bonfire near the bunkhouse and had guests over for a party. At
about 4:00 a.m. the morning of June 6, 1998, a fire started in the bunkhouse.
All occupants were awakened and left the living quarters during the fire except
Ms. Selley who perished in the fire. Plaintiffs allege inter alia that
defendants were negligent in providing faulty living quarters and that
defendants submitted a false filing with the Utah Workers Compensation Fund.
Defendants deny negligence in providing the living facility and assert various
defenses including plaintiffs' complaint is barred by the Workers Compensation
statutory immunity as well as the defense of an intervening clause. Discovery is
underway.
DECLARATORY JUDGMENT ACTION. The Workers Compensation Fund of Utah has
filed a complaint for declaratory relief on or about July 26, 1999 against U.S.
Energy Corp., Crested Corp., Plateau Resources Limited, Dennis and Mary Selley
and others in Civil Action No. 99090 7500 before the Utah Third Judicial Court
of Salt Lake County, Utah. The suit is to determine its obligation to defend and
indemnify U.S. Energy Corp. and its affiliates in the above Hannah Selley case.
U.S. Energy Corp., Crested Corp. and affiliates have not yet responded to the
complaint in the case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
INFORMATION CONCERNING EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS.
The following information is provided pursuant to Instruction 3, Item
401 of Reg. S-K, regarding certain of the executive officers of USE who are not
also directors.
ROBERT SCOTT LORIMER, age 48, has been the Chief Accounting Officer for
both USE and Crested for more than the past five years. Mr. Lorimer also has
been Chief Financial Officer for both these companies since May 25, 1991, their
Treasurer since December 14, 1990, and Vice President Finance since April 1998.
He serves at the will of each board of directors. There are no understandings
between Mr. Lorimer and any other person, pursuant to which he was named as an
officer, and he has no family relationship with any of the other executive
officers or directors of USE or Crested. During the past five years, he has not
been involved in any Reg. S-K Item 401(f) listed proceeding.
DANIEL P. SVILAR, age 70, has been General Counsel for USE and Crested
for more than the past five years. He also has served as Secretary and a
director of Crested, and Assistant Secretary of USE. His positions of General
Counsel to, and as officers of the companies, are at the will of each board of
directors.
23
There are no understandings between Mr. Svilar and any other person pursuant to
which he was named as officer or General Counsel. He has no family relationships
with any of the other executive officers or directors of USE or Crested, except
his nephew Nick Bebout is a USE director. During the past five years, Mr. Svilar
has not been involved in any Reg. S-K Item 401(f) proceeding.
MAX T. EVANS, age 74, has been Secretary for USE and President of
Crested for more than the past five years. Mr. Evans had been a director of USE
for more than the past five years, prior to April 17, 1997. He serves at the
will of each board of directors. There are no understandings between Mr. Evans
and any other person pursuant to which he was named as an officer. He has no
family relationships with any of the other executive officers or directors of
USE or Crested. During the past five years, Mr. Evans has not been involved in
any Reg. S-K Item 401(f) proceeding.
PART II
ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Shares of USE Common Stock are traded on the over-the-counter market,
and prices are reported on a "last sale" basis by the National Market System
("NMS") of the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"). The range by quarter of high and low sales prices for the
Common Stock is set forth below for fiscal 1999 and 1998.
High Low
---- ---
Fiscal year to end May 31, 1999
-------------------------------
First quarter ended 8/31/98 $7.25 $1.63
Second quarter ended 11/30/98 4.06 .81
Third quarter ended 2/28/99 3.63 1.56
Fourth quarter ended 5/31/99 6.75 3.25
Fiscal year ended May 31, 1998
------------------------------
First quarter ended 8/31/97 $11.63 $7.13
Second quarter ended 11/30/97 11.75 7.45
Third quarter ended 2/28/98 10.13 6.75
Fourth quarter ended 5/31/98 8.63 5.75
(b) Holders
(1) At August 18, 1999, the closing bid price was $3.75 per share and there were
approximately 734 shareholders of record for Common Stock.
(2) Not applicable.
(c) USE has not paid any cash dividends with respect to its common stock. There
are no contractual restrictions on USE's present or future ability to pay cash
dividends, however, USE intends to retain any earnings in the near future for
operations.
(d) During the year ended May 31, 1999, USE issued (in) an aggregate of 100,000
shares of Common Stock to employees as compensation for services; 25,000 shares
to an outside consultant; 6,136 shares to outside directors; 89,059 shares of
Common Stock to private investors for cash and the exchange of securities
24
of Sutter Gold Mining Company; and 677,167 shares in an exchange of YSFC common
stock. No underwriter was involved in any of these transactions.
ITEM 6. SELECTED FINANCIAL DATA.
The following tables show certain selected historical financial data for
USE for the five years ended May 31, 1999. The selected financial data is
derived from and should be read with the Financial Statements for USE included
in this Report.
May 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Current assets $12,718,900 $14,301,000 $ 4,400,900 $ 2,912,400 $ 3,390,100
Current liabilities 5,355,600 6,062,100 1,393,900 2,031,200 3,368,200
Working capital 7,363,300 8,238,900 3,007,000 881,200 21,900
Total assets 33,391,000 45,019,100 30,387,100 34,793,300 33,384,500
Long-term obligations(1) 14,526,900 14,468,600 14,377,200 15,020,700 15,769,600
Shareholders' equity 10,180,300 17,453,500 12,723,600 14,617,000 12,168,400
(1)Includes $8,860,900, $8,778,800, $8,751,800 $3,978,800 and $3,951,800 of
accrued reclamation costs on mining properties at May 31, 1999, 1998, 1997, 1996
and 1995, respectively. See Note K of Notes to Consolidated Financial
Statements.
25
For Years Ended May 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenues $ 10,853,600 $ 11,558,500 $ 5,790,200 $ 9,632,200 $ 4,600,600
Income (loss) before
equity in income
(loss) of affiliates,
provision for
income taxes and
extraordinary item (16,057,800) 365,000 (3,706,000) (2,524,100) (2,577,700)
Equity in loss of
affiliates (59,100) (575,700) (690,800) (418,500) (442,300)
Net income (loss) (11,648,500) (983,200) (3,724,500) 270,700 (2,070,600)
Income loss per share before
extraordinary item $ (1.63) $ (.15) $ (.58) $ (.39) $ (.48)
Extraordinary item -- -- -- -- --
----------- ------------ ----------- ----------- -----------
Income loss per share
before cumulative effect
of accounting change (1.63) (.15) (.58) (.39) (.48)
Income from discontinued
operations -- -- -- .05 .06
Gain on disposal of
subsidiary operations in
discontinued segment -- -- -- .38 --
Cumulative effect at
June 1, 1993 of income
tax accounting change -- -- -- -- --
----------- ------------ ----------- ----------- -----------
Net income (loss)
per share, basic
and diluted $ (1.63) $ (.15) $ (.58) $ .04 $ (.42)
=========== ============ =========== =========== ===========
Cash dividends per share $ -0- $ -0- $ -0- $ -0- $ -0-
=========== ============ =========== =========== ===========
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is Management's Discussion and Analysis of those
significant factors which have affected the Company's liquidity, capital
resources and results of operations during the periods covered in the Company's
Consolidated Financial Statements filed with this Report.
Some of the statements in this Management's Discussion and Analysis
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward- looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES AT MAY 31, 1999
During fiscal 1999, cash and cash equivalents increased by $4,522,500 to
a balance of $10,173,000 at May 31, 1999. Cash increases came primarily as a
result of the receipt of cash from the settlement of various Sheep Mountain
Partners ("SMP") arbitration/litigation issues, the collection of accounts and
notes receivable, the sale of certain assets and the consolidation of Yellow
Stone Fuels Corp. ("YSFC"). Cash was provided from operations and financing
activities of $4,287,000 and $1,153,300 respectively. Cash of $917,800 was used
in investing activities.
The Company received two payments as partial settlement of various
disputes existing between the partners of SMP. The first payment of $5,026,400,
which was recorded as an account receivable at May 31, 1998, represented matters
which the partners of SMP agreed to settle based on the April 18, 1996 Order and
Award which was rendered by the Arbitration Panel and confirmed by the U.S.
District Court of Colorado. The Company received an additional payment of
$6,077,300 after a decision was reached by the 10th Circuit Court of Appeals,
which affirmed the Second Amended Judgment of the U.S. District Court of
Colorado, without modification.
During the twelve months ended May 31, 1999, accounts receivable from
affiliates decreased by $815,000. This reduction came primarily as a result of
Green Mountain Mining Venture ("GMMV") reducing the amount it owed the Company
for operations at the GMMV uranium properties by $554,000 and payment of
accounts receivable from YSFC of $137,500. The Company also received its final
payment of $333,333, plus interest of $23,300, on a three year installment
promissory note of $1,000,000 as a result of the sale of The Brunton Company in
fiscal 1996 to a third party. YSFC was consolidated beginning in the fourth
quarter of fiscal 1999. As a result of the consolidation of YSFC, cash increased
by $1,423,200.
Cash was used to reduce accounts payable and accrued expenses by,
$1,318,800; reduce debt by $395,200; purchase and renovate assets, $1,057,900;
purchase treasury stock, $123,800 and fund continuing operations. During fiscal
1999, proceeds from long term debt were $249,000. The net decrease in long term
debt of $146,200 was primarily the result of scheduled debt payments, net of
purchases of additional mineral properties by Sutter Gold Mining Company
("SGMC"), $16,800; and the purchase of additional equipment, $37,600.
Other subsidiaries of the Company consumed cash and obtained financing
to purchase additional equipment and construct or renovate existing facilities.
Additions to the capital equipment and facilities at the commercial operations
in southern Utah included the partial construction of a boat storage facility,
$576,600; renovations to the Plateau Resources Limited ("Plateau") motel and
C-store facilities in southern
27
Utah, $72,600; and the purchase of vehicles, mobile homes and other equipment
$83,700. Airport operations in Wyoming underwent a $79,600 renovation to its
fuel storage facility. Other capital expenditures included the purchase of
various pieces of equipment for $191,600. These purchases of capital equipment
were offset by the sale of various equipment which generated $303,900 in cash
proceeds.
CAPITAL RESOURCES
GENERAL: The primary source of the Company's capital resources for
fiscal 2000 will be cash on hand at May 31, 1999, cash generated from commercial
operations in southern Utah, possible equity financing for the Company and its
affiliated companies, and the expected final resolution of the SMP arbitration.
The Company will also continue to offer for sale various other assets such as
lots and homes in Ticaboo, Utah, real estate holdings in Wyoming, Colorado and
Utah and various mineral interests. Advance royalties, interest, rentals of real
estate holdings and equipment, aircraft chartering and aviation fuel sales will
also provide cash.
LINE OF CREDIT: The Company has a $1,000,000 line of credit with a
commercial bank. The line of credit is secured by various real estate holdings
and equipment belonging to the Company. This facility is currently available to
the Company. It is anticipated that this line of credit may be used to finance
working capital needs.
FINANCING: Equity financings for SGMC, Plateau and YSFC are dependent on
the market price of gold and uranium, among other things. Currently, the prices
for these metals are depressed and it is not known when they will recover.
Management of the Company believes, based on its analysis of independent
projections, that the market prices for these metals will improve in the future.
No assurance can be given that the prices will improve during fiscal 2000. If
the prices do not improve, the ability of the Company to raise equity financing
will be impaired.
The Company believes that cash on hand, its line of credit and cash
projected to be received from operations, along with potential cut backs in
capital development, general and administrative and operating expenses, will be
adequate to fund working capital requirements through fiscal 2000. These capital
resources are not sufficient to provide the necessary funding for major capital
expenditures of the Company's mineral properties and, accordingly, the Company's
development plans may be either temporarily or permanently impacted.
The Company issued shares of its common stock to various individuals and
employee benefit plans which conserved its cash during fiscal 1999. The
issuances of shares included: (1) 89,600 shares of common stock were issued to
fund the 1999 obligation to the Employee Stock Ownership Plan which accounted
for compensation expense of $358,400; (2) 25,000 shares to an outside
consultant, for services over a two year period, which created an expense in
fiscal 1999 of $11,460 and deferred expenses of $57,290 which will be amortized
over a 20 month period; (3) 50,000 shares of restricted common stock each to two
of its employees for their extraordinary time and expertise that was devoted to
the Company resulting in the successful efforts of the Company in the SMP
arbitration/litigation. These shares were valued at market for which the Company
recorded an expense of $293,750; (4) 6,136 shares of common stock issued to
outside directors for services rendered which were valued at $25,200; (5) 67,000
shares, which are forfeitable under the 1996 Stock Award Program, valued at
$268,000, which will be amortized over a five year period; and (6) the issuance
of 95,000 purchase warrants to outside consultants, for services over a one to
two year period, which have a value of $176,000 that will be amortized over a 20
month period. The Company will continue to fund employee retirement and bonus
plans and outside director's fees with its common stock.
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These changes in components of working capital along with minor
increases in accounts and notes receivable trade, $27,300; assets held for
resale and other assets, $15,400; and inventory of $29,500 resulted in a net
decrease in working capital of $875,600 to working capital at May 31, 1999 of
$7,363,300. It is anticipated that this working capital along with the line of
credit and cash received from operations, as well as reductions in capital
expenditures and general and administrative and operational costs, will be
sufficient to supply the working capital needs of the Company during fiscal
2000. Until either the remaining SMP arbitration issue is resolved or equity
financing is raised, the Company plans to curtail major development projects on
its mineral properties, general and administrative expenses and commercial
operations.
CAPITAL REQUIREMENTS
GENERAL: The primary requirements for the Company's working capital
during fiscal 2000 are expected to be associated with corporate general and
administrative expenses and care and maintenance costs of Plateau, SMP, YSFC and
SGMC mineral properties. The Company will also be responsible for the purchase
of uranium for a delivery pursuant to the one utility contract that was assigned
to the Company as a result of the partial settlement agreement reached with
Nukem, Inc. in the SMP arbitration. It is not anticipated that the net gain or
loss on the delivery to this uranium contract will be material to the net income
of the Company during fiscal 2000.
SGMC: During fiscal 1999 and 1998, the Company issued 89,059 and 488,895
shares, respectively, of its common stock to purchase 207,500 and 889,900
Special Warrant Units respectively from certain SGMC investors in an arm's
length, bargained transaction. The transaction resulted in the Company
increasing its ownership of SGMC by 4% to 63% of the outstanding common stock
of SGMC as of May 31, 1999.
The Company continually evaluates carrying values of its long lived
assets. Due to various market related factors, the market price for gold was
pushed to 20 year lows. As a result of the continuing decline in the market
price of gold, the Company recorded impairments of $10,718,326 and $1,500,000 in
fiscal 1999 and 1998 respectively on its SGMC mineral assets. Management of the
Company currently plans to maintain the property in a care and maintenance mode
until the price of gold rebounds.
Preliminary estimates are that the proposed mine/mill operation will
require approximately $15,000,000 to place the proposed mine and mill into full
operation. The Company will need to obtain these funds from either an equity
partner, the equity market or commercial borrowings prior to the SGMC properties
going into production. The Company is also exploring alternative uses for the
property, including tourism.
SMP: The Company is responsible for all care and maintenance costs of
the SMP properties. During fiscal 1999 these costs averaged $56,900 per month.
There are no current plans to mine the SMP Crooks Gap properties during fiscal
2000. However, the Company will continue to preserve the mineral properties and
evaluate concepts to reduce care and maintenance costs.
All matters in the SMP arbitration have been settled with the exception
of the resolution of the Constructive Trust which was impressed by the
arbitration panel on several supply contracts with three republics of the former
Soviet Union. The existence of a Constructive Trust on the contracts was
confirmed by the U. S. District Court of Colorado and affirmed by the 10th
Circuit Court of Appeals. Management believes that the resolution of the
Constructive Trust issue will occur during fiscal 2000. However, no assurance of
the resolution or its ultimate impact on the financial condition or earnings of
the Company can be predicted.
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GMMV: Pursuant to an Acquisition Agreement that was signed on June 23,
1997, Kennecott paid the Company $4 million upon execution of the Agreement,
which became non-refundable upon the satisfaction of certain terms. Due to
continued depressed market prices for uranium concentrates The Company was
unsuccessful in obtaining financing which would have allowed the Company to
purchase Kennecott's interest in the GMMV. The $4 million advanced at closing is
classified as a deferred purchase option and will be offset against any future
cash commitments the Company may incur on the GMMV properties.
During July 1998, the GMMV Management Committee unanimously agreed to
place the Jackpot Mine and Sweetwater Mill on active standby status. This
decision was made as a result of uncertainties in the short term uranium market.
During fiscal 1999, the Company elected under the original GMMV agreement to
become a non-participating partner in the budgets of the GMMV. This decision by
the Company will have a dilutive effect on its ownership in the GMMV. The
Company can buy back any dilution it may suffer in its ownership under certain
conditions of the GMMV contract. The Company believes that due to significantly
reduced annual care and maintenance costs, the dilution of its interest will be
minor in the short term.
As a result of continued depressed uranium prices, the decision to
curtail development activities and lack of funding GMMV took an impairment
against its mineral assets. This impairment does not affect the Company's
carrying value of its investment in GMMV or its results of operations.
PLATEAU: In addition to maintaining the mill and mine properties,
Plateau owns and operates the Ticaboo townsite, motel, convenience store and
restaurant. Operations in fiscal 1999 resulted in a loss of $708,500. This loss
is a reduction of approximately $100,000 from the loss experienced in fiscal
1998. In addition to commercial operations, Plateau is developing real estate
sales on developed home and trailer sites as well as constructed homes.
The Company is currently working to obtain the necessary permits from
the NRC and State of Utah to place the Shootaring mill, which is owned by
Plateau and located in southern Utah into production. The Company is seeking
debt or equity financing of between $6,000,000 to $9,000,000 to put the mill and
Tony M. Mine into production. Until such time as the market price for uranium
concentrates reaches economic levels, financing is obtained and profitable
contracts are secured, the Company will not put the properties into production.
Plateau is also evaluating alternate uses for its mill site including a disposal
site for low level radioactive material.
YSFC: During fiscal 1999 the Company issued 677,167 shares of its common
stock in an exchange with private investors in YSFC pursuant to an Exchange
Agreement in a private placement of YSFC stock. Due to the acquisition of
substantially all the outside shareholder's interest, the Company began
consolidating YSFC on March 1, 1999. The Company recorded an impairment on its
YSFC mineral assets $2,506,000 during fiscal 1999 due to continued depressed
market prices for uranium concentrates. YSFC retained its properties and
anticipates placing them into production at such time as they become economical.
No prediction can be made when the market price for uranium concentrates will
recover to the level that the YSFC properties will be economical to produce.
TERM DEBT AND OTHER OBLIGATIONS: Debt is primarily for land and
equipment purchased by SGMC, the Company, and FNG. The debt bears various
interest rates and is due under various payment terms. It is anticipated that
all debt payments will be able to be made in the normal course of the Company's
business.
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RECLAMATION OBLIGATIONS: It is not anticipated that any of the Company's
working capital will be used in fiscal 2000 for the reclamation of any of its
mineral properties. The reclamation costs are long term and are either bonded
through the use of cash bonds or the pledge of assets. It is not anticipated
that any of the Company's mining properties will enter the reclamation phase
prior to May 31, 2000. At May 31, 1999, all reclamation obligations of the
Company were fully covered by cash, bonds, the pledge of real estate assets, or
in the case of GMMV,