ITEM 3. Legal Proceedings
Sheep Mountain Partners Arbitration/Litigation
Arbitration. On June 26, 1991, CRIC submitted certain disputed matters concerning SMP to arbitration before the American Arbitration Association in Denver, Colorado, to which USE and Crested filed a responsive pleading and counterclaims alleging violations of contracts and duties by CRIC related to SMP. CRIC asserted that USE and Crested, d/b/a/ USECC, were in default under the SMP partnership agreement ("SMP Agreement"). Prior to initiation of arbitration proceedings, USE and Crested had notified CRIC it was in default under the SMP Agreement. The issues raised in the arbitration proceedings were generally incorporated in the Federal proceedings (see below), wherein the U.S. District Court of Colorado stayed further proceedings in arbitration. See also "Stipulated Arbitration", below.
Federal Proceedings. On July 3, 1991, USE and Crested ("plaintiffs") filed Civil Action No. 91- B-1153 in the United States District Court for the District of Colorado against CRIC, Nukem and various affiliates of CRIC and Nukem (together, the "defendants"), alleging that CRIC and Nukem misrepresented material facts to and concealed material information from the plaintiffs to induce their entry into SMP Agreement and various related agreements. Plaintiffs also claimed CRIC and Nukem have wrongfully pursued a plan to obtain ownership of the USE-Crested interests in SMP through various means, including overcharging SMP for uranium "sold" to SMP by defendants. Plaintiffs further alleged that defendants refused to provide a complete accounting with respect to dealings in uranium with and on behalf of SMP, and that certain defendants misappropriated SMP property and engaged in other wrongful acts relating to the acquisition of uranium by SMP.
Plaintiffs requested that the court order rescission of the SMP Agreement and related contracts, and asked the court to determine the amounts payable to CRIC by USECC as a result of any such rescission order to place the parties in status quo. USE and Crested also requested that the court order defendants to make a complete accounting to them concerning the matters alleged in the Amended Complaint. They requested an award of damages (including punitive, exemplary and treble damages, interest, costs and attorneys' fees) in an amount to be determined at trial. Plaintiffs further requested imposition of a constructive trust on all property of SMP held by defendants, and on profits wrongfully realized by defendants on transactions with SMP.
The defendants filed various motions, including an application to stay judicial process and compel arbitration and to dismiss certain of plaintiff's claims. The defendants also filed an answer and counterclaims against plaintiffs, claiming plaintiffs breached the SMP Agreement and misappropriated a partnership opportunity by providing certain information about SMP to Kennecott and entering into the GMMV with Kennecott involving the Green Mountain uranium properties. The defendants also claim that plaintiffs wrongfully sold an interest in SMP to Kennecott through the GMMV without CRIC's consent and without providing CRIC a right of first refusal to purchase such interests; that USE breached the uranium marketing agreement between CRIC and SMP, which had been assigned by CRIC to Nukem, by agreeing with Kennecott in the GMMV that Kennecott could market all the uranium from Green Mountain, thereby depriving Nukem of commissions to be earned under such marketing agreement; that Registrant and Crested interfered with certain SMP supply contracts, costing CRIC legal fees and costs; that CRIC and Nukem are entitled to be indemnified for purchases of uranium made on behalf of SMP; that USE and Crested failed to perform their obligations under an Operating Agreement with SMP in a proper manner, resulting in additional costs to SMP; that Registrant and Crested overcharged SMP for certain services under the SMP Partnership Agreement and refused to allow SMP to pay certain marketing fees to Nukem under the Uranium Marketing Agreement; that USE and Crested breached the SMP Partnership Agreement by failing to maintain a toll milling agreement with Pathfinder Mines Corporation, thereby rendering SMP's uranium resources worthless; and that USE and Crested have engaged in vexatious litigation against CRIC and Nukem. Defendants also requested damages (including punitive, exemplary and treble damages under RICO, interest costs and attorney fees).
Stipulated Arbitration. In fiscal 1994, the plaintiffs and defendants agreed to proceed with exclusive, binding arbitration before a panel of three arbitrators (the "Panel") with respect to any and all post-December 21, 1988 disputes, claims and controversies (including those brought in the 1991 arbitration proceedings, the U.S. District Court proceeding and the Colorado State Court proceeding described below), that any party may assert against the other. All pre-December 21, 1988 claims, disputes and controversies pending before the U.S. District Court have been stayed by stipulation between the parties, until the Panel enters an order and award in the arbitration proceeding.
In connection with agreeing to proceed to arbitration as stated above, USE and Crested affirmed the Sheep Mountain Partners partnership, and proceeded on common law damages and other claims in the arbitration. Approximately $18,000,000 cash, comprising part of the damages claimed by plaintiffs, was placed in escrow by agreement of the parties pending resolution of the disputes.
The arbitration evidentiary proceedings were completed on May 31, 1995, following which the parties filed with the arbitrators proposed findings of fact and conclusions of law and proposed order, award, briefs of law and responses to the other party's submittals. NUKEM and CRIC sought damages against USECC in the amount of $47,122,535. For its claims, USECC sought damages of approximately $258,000,000 from Nukem and CRIC, which amount USECC requested be trebled under the Racketeer Influenced and Corrupt Organizations Act ("RICO") and similar state law provisions.
On April 18, 1996, the Arbitration Panel entered an Order and Award (the "Order"). The Panel found generally in favor of USE and Crested on certain claims made by USE and Crested (including the claims for reimbursement of standby maintenance expense and other expenses on the SMP mines), and in favor of Nukem/CRIC and against USE and Crested on certain other claims.
USE and Crested were awarded monetary damages of approximately $7,800,000 with interest, which amount is after deduction of monetary damages which the Panel awarded in favor of Nukem/CRIC and against USE and Crested. An additional amount of approximately $4,800,000 was awarded by the Panel to USE and Crested, to be paid out of cash funds held in SMP bank accounts, which accounts have been accruing operating funds from SMP since the arbitration/litigation proceedings were commenced.
The Panel ordered that one utility supply contract for 980,000 pounds of uranium oxide held by Nukem/CRIC belonged to SMP, and ordered such contract assigned to SMP. The contract expires in 2000.
The fraud and RICO claims of USE and Crested against Nukem and CRIC were dismissed.
The timing and assurance of payment by Nukem/CRIC to USE and Crested of the $7,800,000 monetary damages with interest is presently uncertain. On April 30, 1996 Nukem/CRIC filed with the Panel two motions (the "Nukem Motions") requesting correction of the Order, claiming to have discovered errors and inconsistencies in two of the 36 claims addressed in the Order that they allege improperly increased the damages awarded to USE and Crested by an aggregate amount exceeding $16,000,000.
On May 15, 1996, USE and Crested filed the Order (under seal with respect to certain portions containing commercially sensitive information) with the United States District Court for the District of Colorado (the "Court") and a petition for confirmation of the Order. At a hearing on May 24, 1996 the Court remanded the Order to the Panel for limited review of the Nukem Motions, without taking further evidence. The petition for confirmation of the Order and motions filed by USE and Crested for dissolution of SMP, for the appointment of a receiver to oversee the obligations of SMP to make delivery of uranium concentrates to utilities and supervise the formal dissolution of SMP, and for an order directing distribution of the escrowed proceeds, were stayed by the Court pending a ruling by the Panel on the Nukem Motions.
USE and Crested filed their opposition to the Nukem Motions with the Panel on June 14, 1996. On July 3, 1996, the Panel entered an Order in response to the Nukem motions and reaffirmed its April 18, 1996 Order and Award.
After a series of motions by the parties, the District Court entered orders and a judgment on November 5, 1996 confirming the Panel's Order and Award. In November 1996, USECC received the additional $4,367,000 awarded by the Arbitration Panel out of SMP escrowed funds and its bank account per the Court's November 5, 1996 Judgment. Thereafter, Nukem filed a motion to modify and/or vacate portions of the Judgment and USECC filed a motion to modify one paragraph of the Judgment deducting $265,213 from the amounts Nukem and CRIC claimed to have advanced to purchase uranium for SMP. In December 1996, Nukem and CRIC filed a notice with the 10th Circuit Court of Appeals ("CCA") appealing the Court's November 5, 1996 Judgment. However, the 10th CCA held that appeal in abeyance pending the issuance of the U. S. District Court's final judgment.
Following the hearing on USECC's motion to correct the Court's November 5, 1996 Order and Judgment and motions to enter a final judgment, on March 7, 1997, Judge Lewis T. Babcock of the U. S. District Court of Colorado entered an "Order for Entry of Amended Judgment as Final," and an Amended Judgment as of March 7, 1997. The Amended Judgment further confirmed the Order and Award of the Panel but did not include equitable portion of the Award in favor of SMP.
In the March 7, 1997 Amended Judgment, which included rulings on some 12 monetary claims of the parties, Judge Babcock ordered Nukem to pay USECC a net of approximately $8,465,000 as monetary damages. The Amended Judgment did not contain the equitable relief granted in the Panel's Order and Award, so USE and Crested filed another motion with the U.S. District Court to correct clerical omissions. Nukem/CRIC opposed the motion but on June 30, 1997, the Court entered its Second Amended Judgment ordering Nukem to assign the PSE&G contract to SMP and impressing 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. The District court also stayed USECC's right to execute on the judgment against Nukem/CRIC when Nukem/CRIC posted a supersedeas bond in the amount of $8,613,600. Thereafter, Nukem/CRIC filed a motion for clarification and/or limited remand of the Second Amended Judgment. On August 13, 1997, the U.S. District Court denied the motion so Nukem and CRIC now have until September 12, 1997 to file a notice of appeal with the Tenth Circuit Court of Appeals of the June 30, 1997 Second Amended Judgment.
Colorado State Court Proceeding. On September 16, 1991, USE and Crested filed Civil Action No. 91CV7082 in Denver District Court against SMP, seeking reimbursement of $85,000 per month from the spring of 1991 for maintaining the SMP underground uranium mines at Crooks Gap on a standby basis. On behalf of SMP, CRIC filed an answer, affirmative defenses and a counterclaim against plaintiffs. Plaintiffs filed a motion for summary judgment; the court denied the motion and stayed all proceedings pending resolution of the Federal proceeding, which in turn have been stayed through arbitration (see "Stipulated Arbitration" above).
On July 17, 1997, USECC filed a lien on Nukem/CRIC's interest in the mining claims subject of the SMP partnership for $523,553 being the standby costs from March 31, 1996 to June 1, 1997 and $35,620 per month thereafter. These are the amounts of Nukem/CRIC's share of the monies SMP owes USECC for the expenses of care and maintenance of SMP's properties in Wyoming. USECC have six months within which to foreclose the lien through a civil lawsuit.
BGBI Litigation
USE and Crested are defendants and counter- or cross-claimants in certain litigation in the District Court of the Fifth Judicial District of Nye County, Nevada, brought by Bond Gold Bullfrog Inc. ("BGBI") on July 30, 1991. BGBI (now known as Barrick Bullfrog, Inc.) is an affiliate of Barrick Corp., a large international gold producer headquartered in Toronto, Canada. The litigation primarily concerns
extralateral rights associated with two patented mining claims owned by Parador Mining Company Inc. ("Parador") and initially leased to a predecessor of BGBI, which claims are in and adjacent to BGBI's Bullfrog open pit and underground mine. USE and Crested assert certain interests in the claims under an April 1991 assignment and lease with Parador, which is subject to the lease to BGBI's predecessor.
Parador, USE and Crested had previously advised BGBI that they are entitled to royalty payments with respect to extralateral rights of the subject claims on minerals produced at the Bullfrog Mine, claiming that the lode or vein containing the gold mineralization apexes on the Parador claims and dips under the claims leased to BGBI by a third party.
BGBI seeks to quiet title to its leasehold interest in the subject claims, alleging that Parador's lease thereof to USE and Crested is adverse to the interest claimed by BGBI, and that the assertions by USE and Crested of an interest in the claims have no foundation. BGBI seeks a determination that USE and Crested have no rights in the claims and an order enjoining USE and Crested from asserting any interest in them. BGBI further asserts that, in attempting to lease an interest in the subject claims to USE and Crested, Parador breached the provisions of its lease to BGBI, and that Parador is responsible for the legal fees and costs incurred by BGBI in the quiet title action, which may be offset against royalties. Under an arrangement to pay certain legal expenses of Parador, USE and Crested may be responsible for any such amounts.
BGBI alleges that by entering into the Assignment and Lease of Mining Claims with Parador, USE and Crested disrupted the contractual relationship between BGBI and Parador. In addition, BGBI claims that the USECC-Parador agreement slanders BGBI's title to the claims. BGBI seeks compensatory damages from Parador, USE, and Crested; punitive damages from USE and Crested; and costs and other appropriate relief from Parador, USE and Crested, all in amounts to be determined.
A partial or bifurcated trial to the court of the extralateral rights issues was held on December 11 and 12, 1995. The purpose of the hearing was to determine whether the Bullfrog orebody is a "vein, lode or ledge" as described in the General Mining Law and, if so, whether the facts of the case warrant the application of the doctrine of extralateral rights as set forth in such statute. Although the Court sat as both the finder of fact and law with respect to such issues, the Court concluded that the questions are ultimately one of law which must be decided based on the testimony and exhibits introduced at the trial concerning the description of the orebody. USE, Crested and Parador presented five experts in the field of geology, including the person who was responsible for the discovery of the gold deposit at the mine. All five experts opined that the deposit was a lode and it apexed on a portion of Parador's two mining claims. The defendant H.B. Layne Contractor, Inc. ("Layne") presented a single witness who testified that there was no apex within the Parador claims. The Court nevertheless 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 Court entered a partial judgment in favor of Layne and ordered that Parador pay Court costs to Layne. Parador, USE and Crested filed an appeal of the Court's ruling as erroneous as a matter of law and the Supreme Court of Nevada dismissed the appeal as premature. The partial trial did not address any of the issues pending in the litigation other than those required to decide the question of whether the doctrine of extralateral rights is applicable to this case. All other claims and counterclaims remain pending before the Court. The parties intend to seek permission of the trial court to again appeal and/or try the remaining issues in the case.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
Information Concerning Executive Officers Who Are Not Directors.
The following information is provided pursuant to Instruction 3, Item 401 of Reg. S-K, regarding certain of the executive officers of Crested who are not also directors.
Robert Scott Lorimer, age 46, has been Controller and Chief Accounting Officer for USE and Crested for more than the past five years. Mr. Lorimer also has been Chief Financial Officer for both these companies since May 25, 1991, and their Treasurer since December 14, 1990. He serves at the will of the Boards of Directors. There are no understandings between Mr. Lorimer and any other person, pursuant to which he was named as an officer, and he has no family relationship with any of the other executive officers or directors of USE or Crested. During the past five years, he has not been involved in any Reg. S-K Item 401(f) listed proceeding.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market information.
The principal trading market for the Registrant's Common Stock, $.001 par value, is the over-the-counter market. Prices are reported by the National Quotation Bureau on Pink Sheets. The range of high and low bid quotations for the Common Stock is set forth below for each quarter in the two most recently completed fiscal years. Retail markup or markdown, or commissions, are not reflected.
High Low ---- --- Fiscal year ended May 31, 1997 ------------------------------ Fourth quarter ended 5/31/97 $0.7187 $0.3437 Third quarter ended 2/28/97 0.9375 0.625 Second quarter ended 11/30/96 1.4375 0.875 First quarter ended 8/31/96 1.50 0.191
Fiscal year ended May 31, 1996 ------------------------------ Fourth quarter ended 5/31/96 $1.94 $1.07 Third quarter ended 2/29/96 .16 1.75 Second quarter ended 11/30/95 .22 .19 First quarter ended 8/31/95 .38 .22
(b) Holders.
(b)(1) At September 3, 1997 there were 1,867 stockholders of record for Crested common stock.
(b)(2) Not applicable.
(c) Crested has not paid any cash dividends with respect to its common stock. There are no contractual restrictions on Crested's present or future ability to pay cash dividends, however, Crested intends to retain any earnings in the near future for operations.
(d) During the year ended May 31, 1997, Crested recorded the issuance of 81,600 shares of Common Stock for issue to non-employee directors, as compensation for services. Such shares were issued in fact in fiscal 1998. In addition, 8,000 shares of Common Stock were issued to employees, as compensation for services. No underwriter was involved in the transactions. All shares were issued as restricted securities, in reliance on Sec. 4(2) exemption from registration under the Securities Act of 1933.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
(1) Incudes $725,900, $725,900, $725,900, $847,800 and $847,800 of accrued reclamation costs on uranium properties for fiscal 1997, 1996, 1995, 1994 and 1993, respectively.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following is Management's Discussion and Analysis of significant factors that have affected the Crested's liquidity, capital resources and results of operations during the periods included in the accompanying financial statements.
The Company has generated losses in the last three years, as a result of holding costs and permitting activities in the mineral segment and gas operations and from certain commercial operations. The Company is in the process of developing and/or holding investments in gold and uranium properties that are currently not generating any operating revenues, but for which the Company has high expectations. These properties require expenditures for permitting, development, care and maintenance, holding fees, corporate overhead and administrative expenses, etc. In addition, legal expenses associated with the litigation and arbitration surrounding the SMP Partnership and the inability of the Company to utilize funds that have been awarded to the Company and USE by the Arbitration Panel and confirmed by the Federal Court have compounded the Company's operating and cash flow situation. Nevertheless, the Company believes that it will meet its obligations in the coming year, as further discussed below.
Liquidity and Capital Resources at May 31, 1996
Working Capital Components. Cash used in operating and financing activities was $703,200 and $496,700, respectively for the year ended May 31, 1997. Cash provided by investing activities during fiscal 1997 was $1,184,400. For the year, these activities resulted in a net decrease of $15,500 in cash. At May 31, 1997, the Company had a working capital deficit of $5,542,900 as compared to a working capital deficit of $6,252,100 at May 31, 1996.
The change in working capital of $709,200 is as a result of increases in accounts receivable, inventory and other assets and a reductions of the line of credit and debt to affiliates of $460,300, $14,700, $88,000 and $436,900 respectively. These increases in working capital were offset by reductions in long-term receivables of $6,200 and increases in accounts payable of $256,600 and current portion of long-term debt of $12,400.
Accounts receivable affiliates increased by $454,600 primarily as a result of increased amounts to due USECC from GMMV, $406,100 and SGMC of $56,000. These amounts were paid after May 31, 1997. At May 31, 1996, the Company owed $88,000 on the line of credit of $1,000,000 that the Company and USE have. During fiscal 1997, this amount was paid off and at May 31, 1997 a total of $1,000,000 remained available to the Company and USE on the line of credit.
Cash used in financing resulted in a net decrease in debt to affiliates of $436,900 and the line of credit of $88,000. Increased long-term debt payable to non-affiliates of $28,200 is as a result of the Company financing various prepaid working capital items.
Cash generated from investing activities were principally from proceeds of a distribution of SMP and a reduction in the Company's ownership of Sutter Gold Mining Company. In November 1996, the Company and USE received $4,300,000 from the SMP escrow accounts as partial satisfaction of the monetary damages awarded by the Arbitration Panel. These funds were applied first to the amounts due the Company and USE for standby costs. This reduced the Company's investment in SMP by $1,384,000. The balance was recorded as income of which Crested's portion was $501,900. The other major reduction in investments was as a result of the Company and USE accepting contingent warrants
from Sutter Gold Mining Company. The acceptance of these contingent warrants reduced the investment in SGMC by $589,900 while at the same time $651,000 was recorded as an investment in a contingent warrant.
Capital Requirements - General: The primary requirements for Crested's working capital during fiscal 1997 are expected to be the costs associated with development activities of Plateau (see "Capital Requirements - Plateau"), care and maintenance costs of SMP, payments of holding fees for mining claims, purchase of uranium for delivery to utility customers of SMP, overhead expenses of Energx and corporate general and administrative expenses, including costs associated with continuing litigation and arbitration.
Capital Requirements - SGMC: SGMC's properties contain reserves of gold. Preliminary estimates are that a 500 ton per day ("tpd") mine/mill operation using a cyanide-flotation process, will require up to $15,000,000 to place the proposed mine and mill into full operation.
During the first and second quarters of fiscal 1997 SGMC sold 424,000 shares of its common stock in a private placement. These shares were sold for $3.00 per share. SGMC received $1,106,600 in net proceeds after deducting commissions and offering costs.
During the fourth quarter of fiscal 1997, as a result of a planned equity offering, the initial investors of SGMC agreed to a 1 for 2 reverse stock split, exclusive of the 424,000 private placement shares discussed above. In addition to the reduction of the shares owned by founders and insiders, the Company and USE agreed to have their holdings reduced from 870,469 common shares and 6,964,531 common shares to 172,258 common shares and 1,503,060 common shares, respectively.
In consideration of this reduction in their common shares owned, the Company and USE accepted a Stock Purchase Warrant dated March 21, 1997 which provides the Company and USE the right to acquire for no additional consideration common shares of SGMC's $.001 par value common stock having an aggregate value of $10,000,000. The Stock Purchase Warrant is only exercisable to the extent proven and probable ore reserves, as defined in the Stock Purchase Warrant, in excess of 300,000 ounces are added to SGMC's reserves based on $25 per ounce of proven reserves added to SGMC's reserves between 300,000 and 700,000 ounces. The number of shares issuable are based on the greater of $4.07 per share for the fair market value of SGMC's common stock (as defined). The Stock Purchase Warrant has a term of ten years extending to March 21, 2007, and is exercisable partially or in total, semi-annually beginning on June 30, 1997. SGMC has the right to satisfy the exercise of all or any portion of the Stock Purchase Warrant with net cash flows, as defined, at $25 for each new ounce of proven and probable ore in excess of 300,000 ounces. The Stock Purchase Warrant benefits the Company and USE on a basis of 11.1% and 88.9%, respectively.
It is anticipated that SGMC will sell an additional $10,000,000 in equity during fiscal 1998. There can be no assurance that the IPO will be successfully completed. If the offering is successful, no additional financing will be needed to place the SGMC properties into production. If SGMC is not successful in its offering of equity, other sources of capital will be required to complete the mine and mill design and construction.
Capital Requirements - SMP: There are no current plans to mine the SMP Crooks Gap properties during fiscal 1998, however, Crested and USE will continue to preserve the ore bodies and develop concepts to reduce care and maintenance costs, including driving a decline to reduce pumping costs (which also would reduce future mining costs by reducing hoisting costs). Although funds are
available in SMP's bank account of approximately $15,600,000 as of May 31, 1997, these funds are restricted and have not been made available to pay standby costs.
Notwithstanding disputes between the SMP partners, Crested and USE have delivered an agreed-upon portion of the uranium concentrates required to fill contract delivery requirements on certain long-term U3O8 contracts since July 1, 1991. During 1997 all of the deliveries to fill the SMP contracts were made by Nukem. It is uncertain what protocol with Nukem will be in place for 1998 and thereafter. If the SMP partners are unable to agree on how to separately effect contract performance for the various SMP customers, resulting delivery delays and/or incomplete deliveries could adversely affect the contracts, and therefore Crested. Further, the Company and USE are awaiting Nukem's response to the Federal Courts confirmation of the Arbitration panel's Award. Nukem has until September 12, 1997 to file a notice of appeal with the Tenth Circuit Court of Appeals. No assurance can be given on the outcome of a potential appeal.
Capital Requirements - GMMV: Operations of GMMV are not requiring Crested's capital resources. On June 23, 1997, USE and USECC signed an Acquisition Agreement with Kennecott for the right to acquire Kennecott's interest in the Green Mountain Mining Venture ("GMMV") for $15,000,000 and other consideration. Kennecott paid USE and USECC a $4,000,000 bonus on signing, 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 Uranium Mine for production and in changing the status of the Sweetwater Mill from standby to operational.
The $16,000,000 loan being provided by Kennecott to the GMMV was advanced to Kennecott by an affiliate, Kennecott Energy Company ("KEC") under a secured recourse Promissory Note (the "Note") bearing interest at 10.5% per annum starting April 1999 until paid in full. The Note is payable quarterly out of 20% of cash flow from the GMMV properties, but not more than 50% of the earnings for such quarter from the GMMV operations, before interest, income tax, depreciation and amortization; however, the Note is payable (i) in full on June 23, 2010 regardless of cash flow and earnings of the GMMV, or (ii) sooner (on December 31, 2005) if an economically viable uranium mine has not been placed into production by such date. The Note is secured by a first mortgage lien against Kennecott's 50% interest in the GMMV pursuant to a Mortgage, Security Agreement, Financing Statement and Assignment of Proceeds, Rents and Leases granted by Kennecott to KEC (the "Mortgage"). USE and USECC will assume the Note, and the assets of the GMMV will be subject to the Mortgage, at closing of the acquisition.
Pursuant to the Acquisition Agreement, the Mineral Lease, and the Mill Contract, USECC is to develop the proposed Jackpot Mine and nearby Big Eagle Mine, and work with Kennecott in preparing the Sweetwater Mill for renewed operations. Such work will be funded from the $16,000,000 loan being provided to the GMMV by Kennecott. Kennecott will be entitled to a credit against Kennecott's original $50,000,000 commitment to fund the GMMV, in the amount of two dollars of credit for each one dollar of such funds advanced under the $16,000,000 loan to be provided by Kennecott to the GMMV, plus the $4,000,000 paid to USE and USECC on signing of the Acquisition Agreement. It is anticipated that such credits will satisfy the balance of Kennecott's initial funding commitment to the GMMV.
Closing of the Acquisition Agreement is subject to USE and USECC satisfying several conditions, including: (i) the acquiring entity (which may be USE, USECC, or an entity formed by USE and USECC to acquire Kennecott's interest in the GMMV) must have a market capitalization of at least $200,000,000; (ii) the parties to the Acquisition Agreement must have received all authorizations, consents, permits and approvals of government agencies required to transfer Kennecott's interest in the GMMV to the acquiring entity; (iii) USE and USECC shall have replaced, or caused the replacement of, approximately
$25,000,000 of reclamation bonds, in addition to other guarantees, indemnification and suretyship agreements posted by Kennecott on behalf of the GMMV; and (iv) USE and USECC, or the acquiring entity, must pay $15,000,000 cash to Kennecott at closing and assume all obligations and liabilities of Kennecott with respect to the GMMV (including repayment of the $16,000,000 loan and the Mortgage) from and after the closing. Under very limited circumstances, the scheduled closing date may be postponed to another date not later than October 30, 1998.
If the Acquisition Agreement is not closed by December 1, 1997, then USE and USECC (or an entity formed by them to acquire the GMMV interest owned by Kennecott) are to provide to Kennecott a commitment letter from a recognized national investment banking firm to complete an underwritten public offering of the securities of USE (or the entity formed to acquire Kennecott's interest), in amount sufficient to close the Acquisition Agreement transactions. Such amount is estimated by USE to be approximately $40,000,000 (for the $15,000,000 closing cash purchase price to Kennecott, plus $25,000,000 to assume or cause the replacement of reclamation bonds, guarantees, indemnification agreements and suretyship agreements related to the GMMV properties and the Sweetwater Mill. Alternatively, USE and USECC (or the acquiring entity) may provide evidence to Kennecott of a commitment letter from a bank or other institutional or industry entity to provide private or joint venture financing in such approximate amount. Failure to provide evidence of such financial commitment by December 1, 1997 will terminate the Acquisition Agreement, the Mineral Lease and the Mill Contract.
Subject to providing evidence of adequate financial resources to close the Acquisition Agreement with funds from a public financing or otherwise, the $4,000,000 signing bonus paid by Kennecott is nonrefundable.
If the Acquisition Agreement is not closed, USE and USECC, and Kennecott, shall continue to own their respective 50% interests in the GMMV, and Kennecott's obligation to repay the $16,000,000 loaned by KEC shall remain Kennecott's obligation, without any adverse effect on the 50% interest in GMMV held by USE and USECC. However, the Jackpot Mine development work and Sweetwater Mill upgrade work funded by the $16,000,000 advance will have benefitted all parties to the GMMV.
Capital Requirements - Plateau: On August 11, 1993, USE purchased all the outstanding shares of Plateau Resources, Limited ("Plateau"). Plateau owns various real estate developments in and around Ticaboo, Utah and the Shootaring Uranium Mill. Although Crested has no ownership in Plateau, the Directors of Crested and USE have agreed to divide equally one-half of the obligations incurred in excess of the total $14.2 million which was held by Plateau at the time of the USE acquisition. Management of Crested and USE are currently in the process of having the Shootaring Mill license changed to operational. At such time as the mill is licensed to operate, significant amounts of capital will be required to place the mill and mines into operation. It is expected that these funds will either be provided by cash received as a result of the SMP arbitration, equity financing on the Plateau U3O8 assets or a joint venture partner.
Capital Requirements - Energx: Another requirement of Crested's and USE's working capital is the continued funding of Energx overhead expenses. Energx held several gas leases and participated in one gas venture (on the Fort Peck Indian reservation in Montana) with NuGas, a Canadian firm; the gas venture required NuGas to fund the drilling of the first eight wells. The eight gas wells were drilled and no economic production of gas was found. Energx does not currently have any plans for future exploration or development drilling.
Capital Requirements - Yellow Stone Fuels Corp. ("YSFC"): In June 1996, the Company and USE assisted YSFC in organizing and funded certain administrative costs. The Company and USE each
own 14% of YSFC. The president and vice president of YSFC are the son and son-in-law, respectively, of Company's Chairman. On May 15, 1997, the Company and USE signed a $400,000 convertible promissory note with YSFC which bears interest at 10% and is due December 1998. The debt is repayable at YSFC's option in cash or its common stock.
Long-Term Debt and Other Obligations: Debt at May 31, 1997 was $6,035,800. Of the debt, $6,023,400 is due to USE as a result of advances that USE made on behalf of Crested in the various mining operations in which the companies participate jointly. It is not anticipated that USE will demand payment on any of this debt in fiscal 1998 unless funds are received from the arbitration proceedings. At May 31, 1997, Crested signed a promissory note in favor of USE in the amount of $6,023,407. The note bears interest at 6% and is due on October 1, 1999.
Reclamation Costs. Prior to fiscal 1996, Crested and USE assumed the reclamation obligations, environmental liabilities and contingent liabilities for employee injuries, from mining the Crooks Gap and other properties in the Sheep and Green Mountain Mining Districts. The reclamation obligations, which are established by governmental regulators, were most recently set at $1,451,800, one half of which amount, $725,900, is shown on Crested's balance sheet as a long-term obligation.
To assure the reclamation work will be performed, regulatory agencies require posting of a bond or other security. Crested and USE satisfied this requirement with respect to SMP properties by mortgaging their executive office building in Riverton, Wyoming. Crested and USE have also posted a cash bond in the amount of $176,000 for this reclamation bond. Crested and USE are negotiating with government agencies to decrease the $176,000 cash bond and either forego the additional collateral or take other real estate and improvements with equal value. A portion of the funds for the reclamation of SMP's properties was to have been provided by SMP, which agreed to pay up to $.50 per pound of uranium produced from its properties to Crested and USE for reclamation work. The status of this commitment could be impacted by the ultimate resolution of the litigation with SMP.
Reclamation obligations on the contiguous Big Eagle properties and the Sweetwater Mill, estimated at approximately $23,620,000, have been assumed by the GMMV venturers, and secured by a bank letter of credit provided by Kennecott. The reclamation and environmental costs associated with the Sweetwater Mill will not commence prior to conclusion of mining activities on Green Mountain. As uranium is processed through the Mill, a reclamation reserve will be funded on a per unit of production basis. Up to $8,000,000 (in 1990 dollars) in any reclamation costs which may be incurred prior to commencement of production or 2001 will be paid for by UNOCAL.
Reclamation obligations of Plateau are covered by a $6,883,500 cash bond at May 31, 1997 to the U.S. Nuclear Regulatory Commission and a $1,622,800 cash deposit as of May 31, 1997 for the resolution of any environmental or nuclear claims.
Reclamation work on any of the above properties need not be fully completed until a decision is made to abandon the properties, or as otherwise required by regulatory agencies. Reclamation and environmental costs associated with any of these properties are not expected to require Crested funding in fiscal 1996, because such costs are not anticipated to be incurred for many years.
See Note K to the Crested consolidated financial statements regarding reclamation and environmental costs, and the funding thereof.
Capital Resources: The primary source of Crested capital resources for fiscal 1998 will be cash on hand, advances from USE, equity financing for affiliated companies, the resolution of the
arbitration/litigation with Nukem and commercial debt. Additionally, Crested and USE will continue to offer for sale various non-core assets such as lots and homes in Ticaboo, real estate holdings in Wyoming, Colorado and Utah and mineral interests. Fees from oil production (Ft. Peck Lustre Field, Montana), rentals of real estate holdings and equipment, aircraft chartering and aviation fuel sales, also will provide cash.
Additional sources of capital will be needed to develop and build the mine and mill complex for the Lincoln Project, for which capital costs SGMC presently is seeking equity financing. There is no certainty as to the outcome of these efforts. Continued funding of such costs could cause Crested and USE to incur short term working capital deficiencies and increase the Company's working capital deficit.
Funding of SMP care and maintenance costs may require additional capital, depending on the outcome of the SMP arbitration/litigation. Although management is of the opinion that the SMP arbitration/litigation will be resolved in favor of Crested and USE during fiscal 1998, which will result in funds being available to fund projects, this outcome is not assured. In any event, further delays in resolution of the arbitration are expected, and may exacerbate short term liquidity requirements.
Crested believes available working capital excluding the debt to affiliates, operating revenues and anticipated financing will continue to be adequate to fund working capital requirements. However, Crested may require continued support from USE and additional sources of funding to continue the development of and investment in its various mineral ventures, as stated above.
Although Crested and USE currently are not in production on any mineral properties, development work continues on several of their major investments. Crested and USE are not using hazardous substances and known pollutants to any great degree in these activities. Consequently, recurring costs for managing hazardous substances, and capital expenditures for monitoring hazardous substances or pollutants have not been significant. Likewise, Crested and USE do not have properties which require current remediation. Crested and USE are also not aware of any claims for personal injury or property damages that need to be accrued or funded.
The tax years through May 31, 1991 are closed after audit by the IRS. Crested currently has filed a request for an appeal hearing on an IRS agent's findings for the years ended May 31, 1993 and 1994. Although the findings of the IRS audit for 1993 and 1994 will not cause any additional tax to become due to the Government, the findings of the audit could affect the tax net operating los of the Company. Management of Crested feels confident that they will prevail on the majority of the issues. No assurance of the outcome of the appeal can be given.
Results of Operations
Fiscal 1997 Compared to Fiscal 1996
Revenues for the twelve months ended May 31, 1997 totaled $1,703,500 as compared to revenues at May 31, 1996 of $2,509,200. This decrease in revenues of $805,700 is primarily as a result of no revenues being recognized from mineral sales in fiscal 1997 (decrease of $1,558,400). During the prior year Crested and USE had made certain deliveries of U3O8 for SMP. Other decreases in revenues were oil sales, $22,800; sales of assets, $147,800, and interest, $58,800. These decreases in revenues were offset by increased commercial sales, $79,300; advance royalties from Climax, $103,600; partial distribution of SMP funds, $501,900, and increased management fees and other revenues, $297,300.
With the exception of mineral operations and bad debt expense, costs and expenses remained the same as they had been in 1996. Mineral operations declined by $1,364,600 primarily as a result of Crested and USE not delivering any U3O8 under the SMP contracts. Bad debt expense increased as a result of a provision for doubtful accounts of $570,800 which was taken as a result of a third party defaulting on a note payable on certain real estate that Crested sold in a prior year. Crested also wrote off an investment of $71,500 in a mining property that was abandoned. The increases in general and administrative expenses were reduced by overhead and direct charges to GMMV, SMP and SGMC.
Equity losses recognized by Crested increased by $450,100. This increase was as a result of increases of the equity losses in SGMC, YSFC, and SMP. These increases in equity losses were offset by a reduction in equity losses in Energx. Additionally, there was no equity income recognized from USE in fiscal 1997 while there was equity income of $73,500 in fiscal 1996.
Operations resulted in a net loss of $1,670,300 or $(.16) per share in 1997 as compared to a net loss of $1,168,900 or $(.12) in 1996.
Fiscal 1996 Compared to Fiscal 1995
Revenues increased by $1,349,000 to $2,509,200 for the year ended May 31, 1996. This increase was primarily due to an increase of $1,558,400 in mineral sales and option (primarily as a result of U3O8 deliveries made in fiscal 1996 to two of the utilities who have contracts with SMP). No deliveries were made by Crested or USE during the year ended May 31, 1995. Due to the litigation/arbitration between Crested, USE and Nukem/CRIC, virtually all SMP deliveries have been in dispute. Certain deliveries are made 100% by either partner, while others are delivered on agreed to percentages. Crested and USE have turned over any profits they have made on these deliveries to SMP. Due to the difficulties between Crested, USE and Nukem/CRIC.
The gain in mineral sales revenue during fiscal 1996 was offset in part by a reduction of $318,300 in gain on sale of assets. This decrease was a result of large gains recognized on the sale of real estate in Colorado in fiscal 1995. No comparable sales took place during fiscal 1996 except for the sale of Crested's and USE's mobile home park on which a gain of $126,300 was recognized.
Expenses from mineral operations increased by $958,900 to $1,786,000. This increase is directly a result of the cost of U3O8 sold during fiscal 1996, as no U3O8 was sold during fiscal 1995 due to disputes between the SMP partners relating to contract deliveries. This increase was partially offset by a reduction mineral operations expense associated with mining properties.
General and administrative costs and expenses increased by $204,400 to $642,200 primarily as a result of costs associated with the SMP litigation. The increased costs are related to amounts paid to lawyers, expert witnesses and the Arbitrators.
Operations resulted in a before tax and equity loss in affiliates of $811,000 for fiscal 1996 as compared to a loss of $1,031,100 for fiscal 1995. This reduction in the operating loss is due to the increased mineral sales and option revenues and reduced mine property holding costs and expenses.
Equity losses in affiliates have been recorded using the equity method. Please refer to Notes A and E to the consolidated financial statements. After accounting for equity losses of $357,900 and $415,900 for fiscal 1996 and 1995, respectively, operations resulted in losses of $1,168,900, $.12 per share, and $1,447,000, $.14 per share, for the fiscal years ended May 31, 1996 and 1995, respectively.
EFFECTS OF CHANGES IN PRICES
Mining operations and the acquisition, development and disposition of mineral properties are significantly affected by changes in mineral commodity prices. As prices for a particular mineral increase, prices for prospects for that mineral also increase, making acquisitions of such properties more costly and difficult, and dispositions advantageous and easier. Conversely, a mineral commodity price decline facilitates acquisitions of properties for that mineral, but makes sales of such properties more difficult and less attractive. Operational impacts of changes in mineral commodity prices are common in the mining industry.
Uranium and Gold.
Changes in the prices of uranium and gold affect the Registrant to the greatest extent, as its principal holdings are of prospects for those minerals. When uranium prices were relatively high in fiscal 1988, USE and Crested acquired the Crooks Gap properties, and thereafter put the properties into production. When uranium prices fell sharply during fiscal 1989-1991, USECC suspended mining operations for SMP, because uranium could be purchased at prices less than the costs of producing uranium. Uranium production in the United States reportedly fell by 25% to 33% in 1990, due to the lowest prices for uranium since the market developed in the 1960s.
Changes in uranium prices directly affect the profitability of SMP's uranium supply agreements with electric utilities. Certain of those agreements become advantageous to the Registrant when the spot market price for uranium falls significantly below the price which a utility has agreed to pay. Some of the supply agreements of SMP were acquired before the fall of uranium spot market prices during fiscal 1989-1991. Those fixed-price contracts, which have contract prices exceeding current spot market rates, are currently advantageous to the Registrant, as the uranium to fill them can be readily obtained at favorable prices. Although such contracts benefit SMP and the Registrant in a falling market, a corresponding adverse impact would not be anticipated in the event of substantially increased prices. SMP would produce uranium from its Crooks Gap properties to fill those contracts, in the event of a prolonged increase in the spot market price above the contract prices.
With the acquisition of its interest in SGMC and its Lincoln Mine, gold prices directly affect the Registrant. Crested believes SGMC's Lincoln Mine will be profitable with gold prices over $290 per ounce. The price of gold has remained relatively stable over the past year between $370 and $390 per ounce.
Molybdenum and Oil.
Changes in prices of molybdenum and petroleum are not expected to materially affect the Registrant with respect to either its molybdenum advance royalties or its fees associated with oil production. A significant and sustained increase in the price of molybdenum would be required for the development of the Mt. Emmons properties by Cyprus Amax.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements meeting the requirements of Regulation S-X for the Registrant and its affiliate USECC, follow immediately. Financial statements of GMMV are included as schedules and immediately follow the index at Item 14(a)(2).
Report of Independent Public Accountants
To Crested Corp.:
We have audited the accompanying consolidated balance sheets of CRESTED CORP. (a Colorado corporation), AND AFFILIATE as of May 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended May 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note G, the note payable to U.S. Energy is currently due on October 1, 1999. However, U.S. Energy may unilaterally accelerate the due date of this note given its majority control over the Company, even though management of U.S. Energy has no current intentions to do so. Crested's current projections indicate that there may not be sufficient cash flow from operations to fund that obligation when due and it continues to rely on advances from U.S. Energy to fund its current operating requirements. If Crested is unable to generate sufficient funds from operations or other sources, it may be required to sell certain assets in order to satisfy such obligations to U.S. Energy.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Crested Corp. and affiliate as of May 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado, August 15, 1997.
CRESTED CORP. AND AFFILIATE
CONSOLIDATED BALANCE SHEETS
CRESTED CORP. AND AFFILIATE
CONSOLIDATED BALANCE SHEETS
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF OPERATIONS
CRESTED CORP. AND AFFILIATE
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF CASH FLOWS
CRESTED CORP. AND AFFILIATE
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995
A. BUSINESS ORGANIZATION AND OPERATIONS:
Crested Corp. (the "Company" or "Crested") was incorporated in the State of Colorado on September 18, 1970. It engages in the acquisition, exploration, sale and/or development of mineral properties, mining and marketing of minerals. Principal mineral interests are in uranium, gold and molybdenum. However, none are producing at the present time. Currently, the Company holds various real properties used in commercial operations and engages in the exploration, development and production of petroleum. Most of these activities are conducted through the joint venture discussed below and in Note B.
The Company and U.S. Energy Corp. ("USE"), an approximate 52% shareholder of the Company (see Note J), are engaged in two ventures to develop certain uranium properties, one a joint venture with Kennecott Uranium Company ("Kennecott") known as the Green Mountain Mining Venture ("GMMV"), and the second a partnership with Nukem, Inc. ("Nukem") through its wholly owned subsidiary Cycle Resource Investment Corporation ("CRIC") known as Sheep Mountain Partners ("SMP"). Subsequent to May 31, 1997, the Company and USE entered into an Agreement with Kennecott whereby they may purchase Kennecott's interest in the GMMV if certain conditions are met (see Note L). During fiscal 1991, the Company and USE formed USECC Gold Limited Liability Company ("USECC Gold"), and with Seine River Resources Inc. ("SRRI") operated Sutter Gold Venture ("SGV") to develop certain gold properties. USECC Gold acquired SRRI's remaining interest in SGV during fiscal 1994 and then owned 100% of SGV. During fiscal 1995, SGV was terminated when USE and Crested formed a new Wyoming corporation, Sutter Gold Mining Company, and exchanged their interests in USECC Gold for common stock of Sutter Gold Mining Company (hereafter, "SGMC"). During fiscal 1997, SGMC sold shares in two private placements and the Company and USE accepted contingent stock purchase warrants in exchange for certain shares previously held in SGMC. These activities combined reduced the Company's share ownership interest in SGMC to approximately 3.2% (see Notes E and F).
The Company has a significant working capital deficit which has been impacted by the litigation/arbitration with Nukem and CRIC, which is discussed in Note K. Expenditures made on behalf of SMP are recorded as an investment in SMP. In November 1996, the Company and USE received $4,367,000 (of which one-half was attributable to the Company) as partial resolution of the monetary damages in the SMP arbitration/litigation. This entire amount was applied to the Company's investment in SMP. After cost recovery, a total of $501,900 was recognized as income by the Company (see Note E). Recovery of the Company's advances and improvement in its liquidity position are dependent on the ultimate outcome of this litigation/arbitration. This matter has also impacted the Company's ability to pay its obligations to its affiliates, primarily USE. As of May 31, 1997, the Company owes USE $6,023,400.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements of Crested and affiliate (USECC Joint Venture ("USECC")) include the accounts of the Company and one-half of the account balances of USECC, a joint venture through which the Company and its controlling shareholder USE, conduct the bulk of their operations. USECC has interests in uranium mining ventures (see Notes E and F), and owns real estate and other equipment (see Note D). USECC is owned equally by the Company and USE.
Investments
Investments in other joint ventures and 20% to 50% owned companies are accounted for by the equity method. The Company accounts for its 8% investment in USE using the equity method because the Company is controlled by USE (52% shareholder). Investments in other companies of less than 20% are accounted for by the cost method (see Note E). All material intercompany profits, transactions and balances have been eliminated.
Inventory
Inventory consists of aviation fuel and associated aircraft supplies. The inventory is carried at the lower of cost or market.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying amount of cash equivalents approximates fair value because of the short maturity of those instruments.
Properties and Equipment
Land, buildings, improvements and other equipment are carried at the Company's share of cost.
Depreciation of buildings, improvements and other equipment is provided by the straight-line and declining-balance methods over the estimated useful lives of three to forty-five years.
The Company capitalizes all costs associated with the acquisition, exploration and development of mineral properties as incurred. Capitalized costs are charged to operations at the time the Company determines that no economic ore bodies exist on such properties. Costs and expenses related to general corporate overhead are expensed as incurred.
The Company and USE have acquired substantial mining property assets and associated facilities at minimal cash cost, primarily through the assumption of reclamation and environmental liabilities. These assets are owned by various ventures accounted for by the equity method. Accordingly, the market
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
value of these assets and most of the reclamation and environmental liabilities associated with them are not reflected in the accompanying consolidated balance sheets (see Note K).
Proceeds from the sale of undeveloped mineral properties are treated as a recovery of cost with any excess of proceeds over cost recognized as gain.
The Company follows the full-cost method of accounting for oil and gas properties whereby all costs incurred in the acquisition, exploration and development of the properties, including unproductive wells, are capitalized, limited to the present value of the estimated proved reserves, and the lower of cost or estimated fair value of unproved properties.
Depreciation, depletion and amortization of oil and gas properties are provided by the units of production method based on the estimated recoverable reserves. All oil and gas properties were fully amortized at May 31, 1997.
Long-lived Assets - The Company evaluates potential impairment of long-lived assets and long-lived assets to be disposed of in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 establishes procedures for review of recoverability, and measurement of impairment if necessary, of long-lived assets and certain identifiable intangibles held and used by the entity. SFAS No. 121 requires that those assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. SFAS No.121 also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less estimated selling costs. As of May 31, 1997, management believes that there has not been any impairment of the Company's long-lived assets or other identifiable intangibles.
Fair Value of Financial Instruments - The recorded amounts for cash and cash equivalents, receivables, other current assets, and accounts payable and accrued expenses approximate fair value due to the short-term nature of these financial instruments.
Revenue Recognition
Advance royalties which are payable only from future production or which are non-refundable are recognized as revenue when received. Revenue from commercial operations are recognized as goods and services are delivered. Oil and gas sales revenue is recognized as the products are produced (see Notes D and F).
Net Loss Per Share
Net loss per share is computed using the weighted average of common shares outstanding during each period. Stock options outstanding are deemed to be common stock equivalents but have been excluded because they are antidilutive. Statement of Financial Accounting Standards No. 128 ("SFAS 128"), which established standards for computing and presenting earnings per share, is effective for years
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
ending after December 15, 1997. Management does not believe the adoption of SFAS 128 will materially affect reported earnings per share.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes". This statement requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets, liabilities and carry forwards.
SFAS No. 109 requires recognition of deferred tax assets for the expected future effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for any tax benefits which, based on current circumstances, are not expected to be realized.
Reclassifications
Certain reclassifications have been made in the 1996 and 1995 financial statements to conform to the classifications used in 1997.
Management's Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
C. RELATED-PARTY TRANSACTIONS:
The Company does not have employees, but utilizes USE's employees and pays for one-half of the costs of these employees under the USECC Agreement. The Board of Directors of USE adopted the U.S. Energy Corp. 1989 Employee Stock Ownership Plan ("ESOP") in 1989, for the benefit of USE's employees. In fiscal 1997, 1996 and 1995, the Board of Directors of USE contributed 24,069, 10,089 and 37,204 shares of USE stock to the ESOP at prices of $8.87, $8.65 and $5.38 per share, respectively. The Company is responsible for one-half of the value of these contributions or $106,800, $43,700 and $100,000 in fiscal 1997, 1996 and 1995, respectively.
As of May 31, 1997, the Company had notes receivable due from certain officers and employees of the Company and USE totaling $290,000 which bear interest at 10% per annum and are due in fiscal 1998. A portion of these notes receivable are collateralized by 160,000 shares of USE stock which are owned by a director of the Company. In addition, the Company has receivables from certain other employees of $76,600. The Company also has advances to affiliates of $825,700.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
The Company and USE provide management and administrative services for affiliates under the terms of various management agreements. Revenues from these services provided by the Company were $329,900, $116,500 and $99,200 in fiscal 1997, 1996 and 1995, respectively.
In November 1992, the Company entered into a sale agreement, and sold certain machinery and equipment to an affiliate. This machinery and equipment was being rented from the affiliate on a month- to month basis for $6,800 per month and was charged to commercial operations in the accompanying consolidated statement of operations. The Company had deferred the gain of $127,800 on this sale. In fiscal 1996, the affiliate was sold and USE and Crested repurchased the same equipment from the buyer. The deferred gain offset Crested's portion of the purchase price of the assets.
On May 15, 1997, the Company and USE entered into a convertible promissory note with Yellow Stone Fuels Corp. ("YSFC"). The Company and USE each own 14.3% of YSFC. The convertible note bears interest at 10% and is due on December 31, 1998. YSFC can at its option either repay the debt with cash or its common stock. However, if YSFC defaults in paying the note on December 31, 1998, the note is convertible into a number of shares which will give USE and Crested a combined 51% ownership interest in YSFC.
See Note J with respect to stock grants to employees of USE who provide services to the Company.
D. USECC JOINT VENTURE:
USECC operates the Glen L. Larsen office complex; an aircraft hangar with a fixed base operation and office space; certain aircraft; holds interests in various minerals operations including SMP and the GMMV; conducts oil and gas operations; and transacts all operating and payroll expenses, except for specific expenses which are allocated directly to each venturer. In addition, through April 1996 USECC operated Wind River Estates ("Wind River"), a 100 unit mobile home park. During 1996, USECC sold Wind River (which had a net book value of approximately $512,700) to Arrowstar Investment, Inc. ("Arrowstar"), an entity which is owned by family members of the Company's chairman. USECC recognized a gain of $252,600 on this sale of Wind River of which 50% or $126,300 is Crested's portion and is reflected as a gain on sale of assets in the accompanying statements of operations. The Company received consideration of $765,300 for Wind River. The $765,300 was comprised of the following:
Cash $ 500,000 Note receivable 56,000 Debt forgiven 47,900 50% interest in First-N-Last LLC 161,400 ---------- $ 765,300 ==========
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
The debt forgiven was an amount due to Arrowstar from USECC. First-N-Last LLC owns and operates a convenience store near Lake Powell in Utah. Subsequently, USECC then transferred its acquired 50% ownership in First-N-Last LLC to Plateau Resources Limited, a 100% owned subsidiary of USE.
The joint venture agreement also provides for the allocation of certain operating expenses to other affiliates. Condensed financial information of USECC, of which 50% is proportionately consolidated by the Company, follows.
CONDENSED BALANCE SHEETS - USECC
May 31, ------------------------------- 1997 1996 ---- ---- Current assets $ 1,468,100 $ 735,200 Properties and equipment 7,858,300 7,731,500 Undeveloped mineral properties 27,900 27,900 Accumulated depreciation (3,623,600) (3,253,700) Other long-term assets 2,583,500 4,514,700 ----------- ----------- $ 8,314,200 $ 9,755,600 =========== ===========
Current liabilities $ 1,139,400 $ 704,900 Reclamation liability 1,451,900 1,451,900 Other liabilities 31,500 75,000 Venturers' capital 5,691,400 7,523,800 ----------- ----------- $ 8,314,200 $ 9,755,600 =========== ===========
CONDENSED STATEMENTS OF OPERATIONS - USECC
Year Ended May 31, ---------------------------------------------- 1997 1996 1995 ---- ---- ---- Revenues $ 3,043,600 $ 4,855,500 $ 2,225,600 Costs and expenses (3,963,500) (6,789,300) (4,453,600) ------------ ------------ ------------ Net loss $ (919,900) $ (1,933,800) $ (2,228,000) ============ ============ ============
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
E. INVESTMENTS IN AFFILIATES:
The Company's investments in affiliates are as follows:
Carrying Value at May 31, ---------------------------------------- Ownership 1997 1996 --------- ---- ---- Equity Method Investments: GMMV 25% $ 116,300 $ 116,300 SGMC* 3.2% 417,800 1,190,600 SMP (Notes F and K) 25% -- 1,383,900 ENERGX Ltd. 45% 62,900 90,300 YFI (YSFC) 14% (122,400) -- USE (Note B) 8% 1,316,700 1,558,100 Others various 5,500 5,500 ---------- ----------- $1,796,800 $ 4,344,700 ========== =========== *Approximately 9% in 1996.
Equity in income (loss) from investments accounted for by the equity method is as follows:
Year Ended May 31, ----------------------------------------- 1997 1996 1995 ---- ---- ----
YFI (YSFC) $(122,400) $ -- $ -- GMMV -- -- -- SGMC (121,800) (39,700) (37,500) SMP (Note F) (264,900) (211,300) (219,600) ENERGX, LTD. (27,400) (180,400) (5,000) USE (271,400) 73,500 (153,800) --------- ---------- ---------- $(807,900) $ (357,900) $ (415,900) ========= ========== ==========
There are currently litigation and arbitration proceedings with the Company's partner in the SMP partnership, as discussed further in Note K. Because of the litigation and arbitration, the Company has been required to advance funds to SMP for standby mine care and maintenance, the rental of certain mining equipment and administrative costs.
SMP has entered into various market related and base price escalated uranium sales contracts with certain domestic utilities which require approximately 1,500,000 pounds of uranium concentrates to be delivered from 1997 through 2000 depending on utility requirements. These contracts also allow for the quantities to be substantially increased or decreased by the utilities. Until the disputes between the SMP partners are resolved, the Company and USE are arranging for the purchase and delivery of their portion of some of the contracts or are allowing Nukem and CRIC to make the balance of the deliveries. The deliveries will be satisfied either by purchases in the spot market, existing purchase contracts, uranium inventories or by producing from SMP properties, if and when a mill becomes available. Most market
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
related sales contracts can be settled through spot market purchases. The last delivery under the remaining base price sales contract was made in May 1996 and exceeded the spot market price as of May 31, 1996. Revenues from such uranium sales of $1,383,400 have been included in the accompanying consolidated statements of operations for the year ended May 31, 1996, which would normally have been sales of SMP. All sales contracts were filled by Nukem in 1997 and 1995, and as a result, no revenues from uranium sales were recognized during 1997 and 1995. The cash from uranium sales is accumulating in SMP's bank accounts and is subject to the Order and Award of the arbitration proceedings with Nukem/CRIC discussed in Note F.
Condensed combined financial statements of the Company's equity investees include the GMMV, SMP, Energx, Ltd., SGMC and USE for fiscal 1997, 1996 and 1995. GMMV and SGMC are in the development stage and have not commenced operations. GMMV expenses certain general and administrative, maintenance and holding costs. However, the Company has not recognized equity losses in GMMV because Kennecott was committed to fund 100% of the first $50 million of development and operating costs of this joint venture. Subsequent to May 31, 1997, the Company and USE entered into an agreement with Kennecott whereby they may be able to purchase Kennecott's interest in the GMMV (see Note L). The Company's investment in GMMV of $116,300 in the accompanying consolidated balance sheets is substantially lower than its equity basis in GMMV. SGMC is considered an equity investment because of the combined control exerted by USE and the Company.
CONDENSED COMBINED BALANCE SHEETS: EQUITY INVESTEES
1997 1996 ---- ---- Current assets $ 25,904,200 $ 11,292,700 Non-current assets 106,624,800 91,884,400 ------------- ------------- $ 132,529,000 $ 103,177,100 ============= ============= Current liabilities $ 24,363,500 $ 9,952,200 Reclamation and other liabilities 45,694,300 48,928,000 Excess in assets 62,471,200 44,296,900 ------------- ------------- $ 132,529,000 $ 103,177,100 ============= =============
CONDENSED COMBINED STATEMENTS OF OPERATIONS: EQUITY INVESTEES
1997 1996 1995 ---- ---- ---- Revenues $ 6,648,200 $ 10,195,400 $ 5,163,800 Discontinued operations -- 2,604,600 296,200 Costs and expenses (13,188,200) (13,901,100) (8,902,400) ------------ ------------ ------------ Net loss $ (6,540,000) $ (1,101,100) $ (3,442,400) ============ ============ ============
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
F. MINERAL TRANSACTIONS AND MINING PROPERTIES:
GMMV
During fiscal 1991, the Company and USE entered into an agreement with Kennecott, a wholly-owned, indirect subsidiary of The RTZ Corporation PLC, for Kennecott to acquire a 50% interest in certain uranium mineral properties in Wyoming known as the Green Mountain Properties. The purchase price was $15,000,000 and a commitment to fund the first $50,000,000 of development and operating costs. Before the mineral properties were contributed to the GMMV, a portion of the Green Mountain Properties was owned by USE and the remainder was owned by USECC.
The Boards of Directors of the Company and USE adopted a method of apportioning the initial consideration of $15,000,000, on a ratio of 16% to the Company and 84% to USE. This division was based on analyses of the projected cash flows from the properties contributed by USE and USECC and other criteria.
Kennecott committed to fund 100% of the first $50,000,000 of development costs and operating expenses of the GMMV joint venture. Kennecott also committed to pay additional amounts if certain future operating margins are achieved. USE and USECC participate in cash flows of the GMMV in accordance with their ownership of the mining claims prior to the formation of GMMV. Because USE owned all of the claims on that portion of the Green Mountain Properties where the Round Park (Jackpot) uranium deposit was delineated, the Company has no interest in GMMV's cash flow from the ore produced in mining operations on the Round Park properties, which have been scheduled for initial development.
GMMV has incurred approximately $20,416,400 in the development and operations of the above uranium mineral properties through May 31, 1997. This was funded by Kennecott out of the $50,000,000 funding commitment. As previously mentioned, the Company's carrying value of its investment in GMMV is $116,300 at May 31, 1997, which is substantially lower than its equity basis in GMMV. Reclamation obligations of GMMV are discussed in Note K. Development of the properties and pursuit of mining permits continues in anticipation of future uranium price increases.
On June 23, 1997, USE and USECC signed an Acquisition Agreement with Kennecott for the right to acquire Kennecott's interest in the Green Mountain Mining Venture ("GMMV") for $15,000,000 and other consideration. Kennecott paid USE and USECC a $4,000,000 bonus on signing, and committed to loan the GMMV up to $16,000,000 for payment of reimbursable costs incurred by USECC in developing the proposed underground Jackpot Uranium Mine for production and in changing the status of the Sweetwater Mill from standby to operational.
The $16,000,000 loan being provided by Kennecott to the GMMV was advanced to Kennecott by an affiliate, Kennecott Energy Company ("KEC") under a secured recourse Promissory Note (the "Note") bearing interest at 10.5% per annum starting April 1999 until paid in full. The Note is payable quarterly out of 20% of cash flow from the GMMV properties, but not more than 50% of the earnings for such quarter from the GMMV operations, before interest, income tax, depreciation and amortization;
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
however, the Note is payable (i) in full on June 23, 2010 regardless of cash flow and earnings of the GMMV, or (ii) sooner (on December 31, 2005) if an economically viable uranium mine has not been placed into production by such date. The Note is secured by a first mortgage lien against Kennecott's 50% interest in the GMMV pursuant to a Mortgage, Security Agreement, Financing Statement and Assignment of Proceeds, Rents and Leases granted by Kennecott to KEC (the "Mortgage"). USE and USECC will assume the Note, and the assets of the GMMV will be subject to the Mortgage, at closing of the acquisition.
Pursuant to the Mineral Lease and the Mill Contract of the Acquisition Agreement, USECC is to expend the funds in developing the proposed Jackpot Mine and nearby Big Eagle Mine, and work with Kennecott in preparing the Sweetwater Mill for renewed operations. Such work will be funded from the $16,000,000 loan being provided to the GMMV by Kennecott. Kennecott will be entitled to a credit against Kennecott's original $50,000,000 commitment to fund the GMMV, in the amount of two dollars of credit for each one dollar of such funds advanced under the $16,000,000 loan to be provided by Kennecott to the GMMV, plus the $4,000,000 paid to USE and USECC on signing of the Acquisition Agreement. It is anticipated that such credits will satisfy the balance of Kennecott's initial funding commitment to the GMMV.
Closing of the Acquisition Agreement is subject to USE and USECC satisfying several conditions, including: (i) the acquiring entity (which may be USE, USECC, or an entity formed by USE and USECC to acquire Kennecott's interest in the GMMV) must have a market capitalization of at least $200,000,000; (ii) the parties to the Acquisition Agreement must have received all authorizations, consents, permits and approvals of government agencies required to transfer Kennecott's interest in the GMMV to the acquiring entity; (iii) USE and USECC shall have replaced, or caused the replacement of, approximately $25,000,000 of reclamation bonds, in addition to other guarantees, indemnification and suretyship agreements posted by Kennecott on behalf of the GMMV; and (iv) USE and USECC, or the acquiring entity, must pay $15,000,000 cash to Kennecott at closing and assume all obligations and liabilities of Kennecott with respect to the GMMV (including repayment of the $16,000,000 loan and the Mortgage) from and after the closing. Under very limited circumstances, the scheduled closing date may be postponed to another date not later than October 30, 1998.
If the Acquisition Agreement is not closed by December 1, 1997, then USE and USECC (or an entity formed by them to acquire the GMMV interest owned by Kennecott) are to provide to Kennecott a commitment letter from a recognized national investment banking firm to complete an underwritten public offering of the securities of USE (or the entity formed to acquire Kennecott's interest), in amount sufficient to close the Acquisition Agreement transactions. Such amount is estimated by USE to be approximately $40,000,000 (for the $15,000,000 closing cash purchase price to Kennecott, plus $25,000,000 to assume or cause the replacement of reclamation bonds, guarantees, indemnification agreements and suretyship agreements related to the GMMV properties and the Sweetwater Mill). Alternatively, USE and USECC (or the acquiring entity) may provide evidence to Kennecott of a commitment letter from a bank or other institutional or industry entity to provide private or joint venture financing in such approximate amount. Failure to provide evidence of such financial commitment by December 1, 1997 will terminate the Acquisition Agreement, the Mineral Lease and the Mill Contract.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
Subject to providing evidence of adequate financial resources to close the Acquisition Agreement with funds from a public financing or otherwise, the $4,000,000 signing bonus paid by Kennecott is nonrefundable and will serve to reduce USE and Crested's ultimate $15,000,000 purchase obligation.
If the Acquisition Agreement is not closed, USE and USECC, and Kennecott, shall continue to own their respective interests in the GMMV, and Kennecott's obligation to repay the $16,000,000 loaned by KEC shall remain Kennecott's obligation, without any adverse effect on the interest in GMMV held by USE and USECC. However, the Jackpot Mine development work and Sweetwater Mill upgrade work funded by the $16,000,000 advance will have benefitted all parties to the GMMV and will fully satisfy Kennecott's original $50,000,000 funding obligation to GMMV.
SMP
During fiscal 1989, USE and the Company, through USECC, entered into an agreement to sell a 50% interest in their Sheep Mountain properties, to Nukem through its wholly-owned subsidiary Cycle Resource Investment Corporation ("CRIC"). USECC and CRIC each contributed their 50% interests in the properties to a newly formed Colorado partnership, Sheep Mountain Partners. SMP was established to further develop and mine the uranium claims on Sheep Mountain, to market uranium and acquire additional uranium sales contracts. Certain disputes have arisen between USECC and CRIC and its parent Nukem, Inc. over the formation and operation of SMP. These disputes have been in litigation/arbitration for the past six years. In the arbitration, the American Arbitration Association Panel issued its Order and Award during fiscal 1996. On June 27, 1997, the United States District Court entered its Second Amended Judgment confirming the Order and Award and including the equitable portion of the Order and Award. Nukem/CRIC filed a motion for clarification and/or limited remand. The Court denied the motion and Nukem has until September 12, 1997 to determine if it will appeal the Second Amended Judgment to the Tenth Circuit Court of Appeals. See Notes E and K for a description of the investment and a discussion of the related litigation/arbitration.
AMAX Transactions
During prior years, the Company and USE conveyed interests in mining claims to AMAX Inc. ("AMAX") in exchange for cash, advance and production royalties, and other consideration including interest-free loans, due in 2010. In connection with a renegotiation of various rights and duties of the parties, AMAX agreed to amortize the principal amount of those loans. The loans were completely amortized in fiscal 1994. AMAX was acquired by Cyprus Minerals Corporation in November 1993 and is now doing business as Cyprus Amax Minerals Company ("Cyprus Amax"). AMAX and its successor Cyprus Amax have not placed the properties into production as of May 31, 1997.
Cyprus Amax may elect to return the properties to the Company and USE, which would cancel the advance royalty obligation. If Cyprus Amax formally decides to place the properties into production, it will pay $2,000,000 to the Company and USE. Under the terms of the initial agreement with AMAX, if AMAX sells the properties, the Company and USE will receive 15% of the first $25,000,000 received by AMAX.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
In addition, Cyprus Amax now pays the Company and USE jointly an annual advance royalty of 50,000 pounds of molybdenum (or its cash equivalent). Cyprus Amax is entitled to a partial credit against future royalties for any advance royalty payments made, but such royalties are not refundable if the properties are not placed into production. The Company recognized $103,600, $-0- and $42,700 of revenues from the advance royalty payments in fiscal 1997, 1996 and 1995, respectively.
USE and Crested held an option to purchase certain real estate located in Gunnison owned by Cyprus Amax. During fiscal 1995, USE and Crested reached an agreement with Cyprus Amax whereby USE and Crested would forego six quarters of advance royalties as payment of this option exercise price. USE and Crested received no advance royalties during 1996 as a result of this agreement. Thereafter, USE (together with Crested) signed two option agreements with Pangolin Corporation, a Park City, Utah developer, for sale of the 57 acres, and a separate parcel owned in Gunnison County, Colorado.
The first option (exercised by Gunnison Center Properties LLC in January 1995) was for 57 commercial and noncommercial zoned acres in the City of Gunnison, Colorado; the net purchase price was $970,300. This resulted in a gain for the Company of $491,100. Pangolin paid $345,000 cash and $625,300 in nonrecourse promissory notes. The first note for $137,900 was paid in fiscal 1995. The second note for $487,366 was a three year promissory note, bearing interest at 7.5% per year and calling for interest only payments in January 1996 and 1997 with the balance due in January 1998, of which $0 and $35,600 was received during fiscal 1997 and 1996, respectively. Effective December 1, 1996 a replacement promissory note was given to USE and Crested by Contour Development Company LLC in the principal amount of $454,900 payable January 1998, bearing interest at the rate of 7.5% per annum, and secured by Contour's 73% interest in a limited liability company owning a 2.93 acre subdivided lot in the City of Gunnison currently approved for development of an 87 unit apartment project. As of May 31, 1997 the second note had an outstanding principal balance of $451,865, of which Crested's 50% portion, or $225,932, is reflected in the accompanying consolidated balance sheet, before a valuation allowance of $43,400.
The second option covered 472.5 acres of ranch land northwest of the City of Gunnison, Colorado and was exercised by Castle Mountain Ranches LLC in May 1995 (purchase price $822,460). Pangolin paid $10,000 for the option; on option exercise and closing, Pangolin paid $36,090 in cash for 22 acres and gave Crested two nonrecourse promissory notes totalling $776,370, each due May 30, 1998, and secured by the remaining acreage. One note for $145,500 bore interest at the rate of 7.5% per annum until August 28, 1995 and thereafter at the rate of 12% per annum until paid. A principal payment in the amount of $35,000 was due on May 30, 1996 but was not paid. The second note for $630,873 bore interest at the rate of 7.5% per annum with interest only payments due May 30, 1996 and May 30, 1997 and principal and interest due at maturity. Effective December 1, 1996 a replacement note from Contour Development Company LLC was given to Crested in the principal amount of $872,508 bearing interest at the rate of 8.39% per annum until May 30, 1997, at which time a principal payment of $128,138, together with accrued interest, was due, but was not paid. As a result of Contour's default in the payment due May 30, 1997, Crested has declared the entire principal balance of this note to be due and payable and has declared a default in the pledge of Contour's 73% interest in the limited liability company building the apartment project in the City of Gunnison. Crested recorded a bad debt expense of $527,300 and a reversal of deferred gain of $312,100 as a result of Contour's default and has established a
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
corresponding valuation allowance against the receivable in the amount of $839,500. Crested and USE are currently evaluating their potential remedies against Contour (which may include litigation).
Sutter Gold Mining Company
Sutter Gold Mining Company ("SGMC") acquired indirect ownership of the Sutter Gold Venture ("SGV") a joint venture between USE and SRRI formed to acquire, hold and develop mineral leases and mining claims in Amador County, California (the "Lincoln Project"). On December 14, 1990, Crested purchased one-ninth of USE's beneficial interest in the SGV Properties hereinafter fully described, for $500,000 and the commitment to fund one-ninth of the future costs and liabilities. USE and Crested formed USECC Gold Limited Liability Company ("USECC Gold") which became the joint venturer with SRRI on the Lincoln Project. USECC Gold was owned 88.89% by USE and 11.11% by Crested. SGMC was established to conduct operations on mining leases and to produce gold from the Lincoln Project.
USE (i) funded $4,500,000 of the $5,000,000 purchase price of SGV's properties; (ii) agreed to initially fund SRRI's share of holding and development costs totaling $500,000; and (iii) agreed to provide its share of the holding costs and assessments of SGV. SRRI, the second venture partner, through a subsidiary, funded $500,000 of the property purchase price, and agreed to pay $2,000,000 to USE to equalize the investments so that USE and SRRI would each initially hold 50% interests in SGV. USE was to recover the $500,000 of predecessor holding costs and SGV's initial development costs paid by them, out of SGV's initial cash flows.
SRRI issued a $2,000,000 note to USE, bearing interest at 10% per annum. The note provided that $500,000 of principal and accrued interest was due April 12, 1991, and the balance of $1,500,000 with interest was due October 12, 1991. In February 1991, USE and Crested formed USECC Gold and transferred their respective interests in the Lincoln Project to USECC Gold. When the installments on the $2,000,000 note to USE were not paid when due, the interests of USECC Gold and SRRI in SGV were adjusted to equal the percentage of the $5,000,000 purchase price of SGV's properties that each of them provided. On July 16, 1991, the 50% interest of SRRI in SGV was reduced to 40%, with a corresponding increase in the USECC Gold interest to 60%. On October 12, 1991, SRRI's interest was further reduced to 10% and USECC Gold's interest increased to 90%. On May 23, 1994, SRRI released its remaining 10% interest and issued 400,000 shares of SRRI common stock to USE in exchange for the release of all SRRI's liabilities relating to SGV and USECC Gold. Accordingly, SRRI's capital investment of $257,900 and all liabilities of SGV to USE and its affiliates on behalf of SRRI totaling $1,550,600 were transferred to USECC Gold's capital investment. In addition, SGV released SRRI of its obligation to SGV totaling $1,970,500, which included accrued but unrecorded interest of approximately $579,800.
SGMC was incorporated in Wyoming in January 1994 and on August 5, 1994, USE, Crested and SGMC entered into an agreement whereby USE and Crested each conveyed their eight-ninths and one-ninth interest, respectively, in USECC Gold in exchange for common shares of SGMC. USE and Crested ultimately received approximately 100% of the outstanding shares of SGMC's common stock, for their eight-ninths and one-ninth interest, respectively, in USECC Gold.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
SGMC is in the development stage and additional development is required prior to the commencement of commercial production. SGMC has yet to generate any significant revenue and has no assurance of future revenue. During fiscal 1992, SGV shipped a bulk sample of gold ore mined during development operations to an independent mill to determine mill availability and assay information. Approximately 1,400 ounces of gold were recovered and sold. The related mining costs were recognized. All acquisition and other mine development costs since inception have been capitalized. Since test production in 1992, SGV and SGMC have focused their efforts on obtaining a reserve study, developing a mine plan, acquiring permits, seeking financing and pursuing a partner to assist in the financing of its mineral development and ultimate production. SGMC will continue to be considered in the development stage until such time as it generates significant revenue from its principal operations.
Since inception, the Company and USE have funded approximately $7,858,900 in development and holding costs. These costs were funded by the Company and USE on a one-ninth/eight-ninths basis, respectively. As of May 31, 1997, the Company's total investment in SGMC had a carrying value of $1,068,800.
During May 1996, SGMC issued shares of its common stock to certain individuals, including a related party for total proceeds of $98,600. Such shares were authorized to be sold by SGMC in October 1995 to raise funds to pay for legal and other costs of a possible future equity financing. Subsequent to the above issuance of shares, USE and Crested owned 74% and 9%, respectively, of SGMC.
During the first and second quarters of fiscal 1997, SGMC sold additional shares of its common stock in a private placement. These shares were sold for $3.00 per share. SGMC received $1,106,600 in net proceeds from this equity placement.
During the fourth quarter of fiscal 1997, management of SGMC entered into an Engagement Letter with a different underwriter in Toronto to complete an offering of additional shares of SGMC's common stock, which closed in May, 1997 raising approximately $5,404,500 in net cash proceeds. At the underwriter's request, the initial investors (including USE and the Company) agreed to have the amount of their common shares owned reduced by 50 percent. The investors in the $3.00 per share private placement discussed above were not affected as those shares were sold in contemplation of the 1 for 2 reverse split.
In connection with this offering, USE and Crested accepted a Contingent Stock Purchase Warrant ("USECC Warrant") dated March 21, 1997 which provides USE and Crested the right to acquire for no additional consideration common shares of SGMC's $.001 par value common stock having an aggregate value of $10,000,000 (US), valued at the greater of $4.07 per share or the then market value as defined.. The USECC Warrant has a term of ten years extending to March 21, 2007, and is exercisable partially or in total, semi-annually beginning on June 30, 1997. However, the USECC Warrant is only exercisable to the extent proven and probable ore reserves, as defined in the USECC Warrant, in excess of 300,000 ounces are added to SGMC's reserves. In addition, SGMC shall have the right to satisfy the exercise of all or any portion of the USECC Warrant with the net cash flows, as defined, at $25.00 (US) for each new ounce of proven and probable ore in excess of 300,000 ounces (limited to a maximum of 700,000 ounces). The USECC Warrant benefits USE and Crested on a basis of 88.9% and 11.1%, respectively.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
Accordingly, the Company has allocated the carrying value of SGMC shares exchanged for the Contingent Stock Purchase Warrant to its investment in such contingent warrants.
Plateau Resources Limited
Effective August 11, 1993, USE entered into an agreement with Consumers Power Company to acquire all the issued and outstanding common stock of Plateau Resources Limited ("Plateau"), a Utah corporation. Plateau owns a uranium processing mill and support facilities and certain other real estate assets through its wholly-owned subsidiary Canyon Homesteads, Inc. "(CHI") in southeastern Utah. USE paid nominal cash consideration for the Plateau stock and agreed to assume all environmental liabilities and reclamation bonding obligations. Prior to closing the agreement, Plateau transferred $2,500,000 cash to fund the NRC Surety Trust Agreement to pay future costs of mill decommissioning, site reclamation and long-term site surveillance. Plateau also transferred $4,800,000 cash to an Agency Agreement to indemnify the seller against possible environmental or nuclear claims. At the date of acquisition, Plateau held an additional $6,900,000 of unencumbered cash to be used for care and maintenance costs on the mill and other assets acquired. As of May 31, 1997, most of the unencumbered cash has been used for care and maintenance costs or was loaned to USE for development of certain properties held by USE and the Company. Although the Company has no ownership in Plateau, Directors of the Company and USE have agreed to divide equally one-half of the obligations incurred in excess of the total $14,200,000 described above and will share in one-half of all cash flows derived from operations of these assets.
On August 25, 1994, Plateau Resources Limited, a wholly-owned subsidiary of USE, signed a letter of intent with a third party to sell part interest in Canyon Homesteads, Inc. ("CHI"), a wholly-owned subsidiary of Plateau, and to develop the Ticaboo Townsite, in south central Utah and other resort properties near Lake Powell. The purchaser later defaulted and the $100,000 earnest money deposit was recognized as income in fiscal 1995 by Plateau.
CHI entered into a joint venture, First-N-Last LLC, with Arrowstar Investments, Inc. ("Arrowstar") to develop on a 50/50 basis, certain properties at the Ticaboo Townsite. Arrowstar is owned by certain shareholders of the Company. During 1996, Arrowstar gave its 50% interest in First- N-Last LLC to USECC as part of the consideration for Wind River (see Note D). USECC then transferred its 50% ownership in First-N-Last LLC to Plateau. As of May 31, 1997, Plateau/CHI owns 100% of First-N-Last, LLC.
Energx, Ltd.
During fiscal 1994, USE and Crested formed Energx to engage in the exploration, development and operation of natural gas properties. Energx currently has leased properties in Wyoming and on the Fort Peck Indian Reservation, Montana. Energx is owned by USE (45%), Crested (45%) and the Assiniboine and Sioux Tribes (10%).
During fiscal 1995, Energx sold a 50% interest in the leases on the Fort Peck Indian Reservation for the sum of $200,000 plus $100,000 to be used only for the acquisition and consolidation of additional
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
leases, and for committing to drill 8 exploratory wells. Eight exploratory wells were drilled. No further activity is planned for this project.
During 1997 and 1996, Energx abandoned certain of its leases and as a result wrote off $164,500 and $328,700, respectively, of costs capitalized associated with these leases.
G. DEBT:
The Company and USE have a $1,000,000 line of credit with a commercial bank. The line of credit bears interest at a variable rate (10.25% as of May 31, 1997). The weighted average interest rate for 1997 and 1996 was 10.25%. The line of credit had an outstanding balance for the Company and USE jointly of $-0- and $176,000 as of May 31, 1997 and 1996, respectively, of which Crested's 50% portion is $-0- and $88,000. This line of credit is secured by a share of the net proceeds of fees from production of oil wells and certain assets of USECC.
Debt of the Company consists primarily of a note to USE bearing interest at 6% per annum and due on October 1, 1999. The debt is primarily due to U.S. Energy for funding all of the operations of USECC of which 50% is the responsibility of the Company. All debt is classified as current as of May 31, 1996 and 1997 as a result of USE's unilateral ability to modify the repayment terms under the promissory note agreement. The Company signed a two year promissory note as of May 31, 1997 to USE for the full amount of its indebtedness reserving the right to pay all or part of the note through the issuance of Crested common stock.
May 31, ------------------------------ 1997 1996 ---- ---- Notes payable - U.S. Energy, 6% interest balance payable in full on demand (see Note A) $ 6,023,400 $ 6,460,300 Note payable to bank, 8.75% interest, balance due July 1, 1999 28,200 -- ------------- ----------- Total $ 6,051,600 $ 6,460,300 Less - current portion 6,035,800 6,460,300 ------------- ----------- $ 15,800 $ -- ============= ===========
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
H. INCOME TAXES:
The components of deferred taxes as of May 31, 1997 and 1196 are as follows:
At May 31, 1997, the Company had available, for federal income tax purposes, net operating loss carryforwards of approximately $11,200,000 which expire in 2006 through 2012 and investment tax credit carryforwards of approximately $83,000 which, if not used, will begin to expire in 1998. The Company has established a valuation allowance for the full amount of the net deferred tax assets due to the recurring losses of the Company and the uncertainty of the Company's ability to generate future taxable income to utilize the NOL carryforwards.
For fiscal years 1997, 1996 and 1995, the Company incurred losses for both book and tax purposes. The income tax provision is different from the amounts computed by applying the statutory federal income tax rate to income before taxes. The reasons for these differences are as follows:
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
There were no taxes payable as of May 31, 1997, 1996 or 1995.
The Internal Revenue Service ("IRS") is currently auditing the Company's and USECC's tax returns for the fiscal years ended May 31, 1995 and 1996. The audit is not completed as of the date of the accompanying financial statements.
I. SEGMENTS AND MAJOR CUSTOMERS:
The Company's primary business activities include the sales of minerals and the acquisition exploration, holding, development and sale of mineral bearing properties. No properties are currently producing. The second reportable industry segment is commercial operations, primarily real estate activities and operations of an airport fixed base operation. The following is information related to industry segments:
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
During fiscal 1996, 89% of mineral revenue were from sales of minerals. There were no mineral sales in fiscal 1997 or 1995.
Commercial revenues in the statements of operations consist of mining equipment, office and other real property rentals, charter flights and fuel sales.
J. SHAREHOLDERS' EQUITY:
The Boards of Directors of both the Company and USE, from time to time, issued stock bonuses to certain directors, employees and third parties. Such shares are forfeitable to the Company and USE until earned. The Company is responsible for one-half of the compensation expense related to these issuances (see Note C). For the years ending May 31, 1997, 1996 and 1995, the Company recognized compensation expense of $76,300, $59,800 and $35,300, respectively, resulting from these issuances. A schedule of forfeitable shares for both Crested and USE is set forth in the following table.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
Issue Number Issue Total Date of Shares Issuer Price Compensation ---- --------- ------ ----- ------------
May 1990 40,300 USE $ 9.75 $392,925 June 1990 66,300 USE 11.00 729,300 November 1990 (stock dividend) 10,660 USE N.A. N.A. June 1990 25,000 Crested 1.06 26,562 December 1990 7,500 Crested .50 3,750 January 1993 18,520 USE 3.00 55,560 January 1993 6,500 Crested .22 1,430 January 1994 18,520 USE 4.00 74,080 January 1994 6,500 Crested .28 1,828 January 1995 18,520 USE 3.75 69,450 January 1995 6,500 Crested .19 1,219 January 1996 7,700 USE 15.125 116,462 January 1996 5,000 Crested .3125 1,562 January 1997 36,832 USE 11.02 405,830 January 1997 8,000 Crested .9375 7,500
No shares were earned out in fiscal 1997 or 1996. During fiscal 1993, the Company's Board of Directors amended the stock bonus plan. As a result, the earn out dates of certain individuals were extended until retirement, which is the earn out date of the amended stock bonus plan. The amended plan grants a stock-bonus of 20% of the previous plan per year for five years.
In April 1993, the Board of Directors of the Company authorized the Company to issue 160,000 shares of its common stock at $.27 per share to an affiliate for cash in an effort to increase the Company's operating capital. The Company also granted this affiliate options for 300,000 common shares at $.40 per share. These options are exercisable over a five year period. During 1996 this affiliate was sold to an unrelated third party, but the shares and options were transferred to other affiliated entities, SGMC and Plateau Resources Limited.
In May 1996, the Board of Directors of U.S. Energy approved an annual incentive compensation arrangement for its CEO and four other officers of U.S. Energy payable in shares of U.S. Energy common stock. The arrangement was subject to approval of the formal 1996 Stock Award Program by the Company's shareholders in December 1996. The shares are to be issued annually, starting January 15, 1997, as long as each officer is employed by USE, provided the Company has been profitable in the preceding fiscal year. The officers will receive up to an aggregate total of 67,000 shares per year for the years 1997 through 2002. One-half of the compensation under the 1996 Stock Award Program is the responsibility of Crested. The number of shares awarded each year out of such 67,000 shares aggregate annual limit will be based on earnings per share of Common Stock to be determined in the plan, and in addition is subject to approval by the shareholders of the Company for each award each year. In fiscal 1997, 14,158 share were authorized for issuance by shareholder approval to five officers of USE. The Stock Award Program was modified to reflect the intent of the directors of USE which was to provide
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
incentive to the officers of the Company and USE to remain with the Companies. The shares under the plan therefore became forfeitable until retirement, death or disability of the officer. The shares are held in trust by the Company's treasurer and are voted by the non-employee directors of USE. Additionally, the modified plan delegates the responsibility of determining the number of shares to be issued to USE's Compensation Committee and eliminates the previously required vote of shareholders to approve the issuance. All such modifications to the 1996 Stock Award Program will be voted on by the shareholders of USE at the 1997 Annual Meeting.
K. COMMITMENTS, CONTINGENCIES AND OTHER:
Legal Proceedings
Sheep Mountain Partners (SMP)
Arbitration Proceedings Concerning SMP. In June 1991, Nukem's wholly-owned subsidiary Cycle Resource Investment Corporation ("CRIC") instituted arbitration proceedings against the Company and USE. CRIC claimed that the Company and USE violated the Sheep Mountain Partners ("SMP") partnership agreement by assigning to the Green Mountain Mining Venture (GMMV) the amounts equal to any SMP cash distributions to USECC derived from sales of uranium under SMP supply contracts. CRIC also asserted that by entering into the GMMV agreement, the Company and USE misappropriated a business opportunity of SMP. CRIC sought damages and certain equitable remedies from the Company and USE and sought to expel the Company and USE from the SMP Partnership.
Federal Court Action Concerning SMP. On July 3, 1991, the Company and USE d/b/a USECC filed a civil action in the U. S. District Court of Colorado against Nukem, CRIC and their affiliates, alleging that Nukem, CRIC and their affiliates fraudulently misrepresented facts and concealed information from the Company and USE to induce their entry into the agreements forming SMP and seek rescission, damages and other relief. The Company and USE further alleged that Nukem and CRIC have refused to provide information about transactions by CRIC and its affiliates with SMP, and that the defendants had engaged in various wrongful acts relating to financing and acquisition of uranium for SMP. Nukem and CRIC filed an answer and a variety of counterclaims against the Company and USE. Certain of Nukem's affiliates (excluding CRIC) were thereafter dismissed from the lawsuit. The U. S. District Court granted the motion of the Company and USE to stay the above arbitration initiated by CRIC and also ordered the Company and USE to amend their complaint. On April 6, 1992, the Company and USE filed an amended complaint against Nukem and CRIC setting out the alleged fraud with particularity, and Nukem and CRIC filed answers and counterclaims to the amended complaint.
State Court Action Concerning SMP. On September 16, 1991, USECC filed a civil action in the Denver District Court against SMP seeking reimbursement of $85,000 per month since the spring of 1991 for the care and maintenance of the SMP underground uranium mines and properties in south-central Wyoming. On May 11, 1993, the Denver District Court stayed all proceedings until the U.S. District Court for Colorado case is resolved.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
Summary. The discovery stage in the case filed by the Company and USE on July 3, 1991 in the U. S. District Court of Colorado against Nukem, CRIC et al has been protracted and vigorously contested by all parties. On November 6, 1993, the remaining parties in that suit, Nukem and CRIC, agreed with the Company and USE that the majority of the litigation post the formation of SMP on December 21, 1988, would be handled through consensual arbitration with the American Arbitration Association ("AAA"). The agreement to arbitrate was finally reduced to writing and executed on February 7, 1994. The arbitration hearing commenced on June 27, 1994 before a three member AAA arbitration panel. After 73 hearing days and some 15,000 pages of testimony, the parties rested their cases on May 31, 1995. Per order of the Panel, the parties filed their proposed Findings of Fact and Conclusions of Law, Award and a brief of the law on August 7, 1995. Each side submitted responsive proposed findings of fact and conclusions of law, responsive proposed award and reply briefs by September 21, 1995.
The Panel entered its Order and Award on April 18, 1996 but did not dissolve the Partnership. Nukem objected to the Award by filing two motions indicating there was a material miscalculation and a double recovery. The U.S. District Court remanded the matter to the Arbitration Panel to consider Nukem's motions. On July 3, 1996, the Panel found there was not double recovery and confirmed the Order and Award, which awarded Crested and USE approximately $12,500,000 and Nukem/CRIC $7,100,000 through March 31, 1996. On November 4, 1996 the United States District Court issued a Judgment and Order confirming the Arbitration Panel's Order and Award during fiscal 1997. The Company and USE received a total of $4,300,000 as a result of this Order and Award. That balance of the Award due the Company and USE is due from Nukem and CRIC. On June 27, 1997 the Federal Court issued a Second Amended Judgment which confirmed the monetary award of the Arbitration Panel and clarified the equitable damages due USECC from Nukem/CRIC. Nukem/CRIC filed a motion for clarification and/or limited remand and the Court denied the motion of August 13, 1997. Nukem has until September 12, 1997 to file a notice of appeal with the Tenth Circuit Court of Appeals. Nukem has posted a $8,600,000 supersedeas bond on the monetary portion of the Award. If Nukem seeks to appeal the equitable portion of the Award, the Company and USE will ask that the supersedeas bond be raised to $111,000,000.
Illinois Power. Illinois Power Company ("IPC"), one of the utilities with whom SMP has a long-term uranium supply contract, unilaterally sought to terminate the contract on October 28, 1993 and filed suit contemporaneously in the Federal District Court, Danville, Illinois, against the Company, USE, CRIC, SMP, Nukem Luxembourg GmbH ("NULUX") and the Dresdner Bank, seeking a declaratory judgment that the contract with USECC, which was assigned to SMP and thereafter to NULUX, had been breached by USECC filing a Motion for Appointment of Receiver in the SMP litigation. The Dresdner Bank was dismissed from the case, and the remaining defendants filed answers denying IPC's allegations and filed counterclaims for damages due under the IPC contract. These defendants also filed Motions for Summary Judgment and a hearing was held on the motions on May 27, 1994. On September 1, 1994, the U. S. District Court for the Central District of Illinois granted the defendants' motions for summary judgment against IPC dismissing IPC's complaint, and further granted those defendant's counterclaims against IPC for breach of contract by IPC. After various negotiating sessions the parties reached agreement in June 1995 to settle the case by entering into an amendment to the original agreement to increase the price per pound of U3O8 delivered to IPC and provide for 3 deliveries totalling 486,443 lbs.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
U3O8 in 1995, 1996 and 1997. The first delivery of 226,443 lbs. U3O8 was made on June 30, 1995 by Nukem on behalf of SMP. A delivery of 130,000 lbs. U3O8 was made during fiscal 1996 and the last delivery of 130,000 lbs. U3O8 under the contract was made in May 1997. The Company and USE received a distribution from SMP of the profits for the last delivery to IPC on June 13, 1997 of $838,500.
Parador Mining Company, Inc. ("Parador")
On July 30, 1991, Bond Gold Bullfrog, Inc. ("BGBI") filed Civil Action No. 11877 in the District Court of the Fifth Judicial District, Nye County, Nevada naming USE, Crested, Parador and H.B. Layne Contractor, Inc. (Layne) as defendants. The complaint primarily concerns extralateral rights associated with two patented lode mining claims (the "Claims") owned by Parador which were initially leased to a predecessor of BGBI and subsequently, the residuals of that lease were assigned and leased by Parador to USE and Crested. Parador, USE and Crested answered the complaint, filed a counterclaim against the Plaintiff and a cross claim against Layne. A bifurcated trial was held on December 11-12, 1995 before the District Court for the Fifth Judicial District for the State of Nevada, County of Nye, at which time the parties presented evidence relative to the issue of extralateral rights. Other claims between the parties were bifurcated by the Court and were not at issue at the trial. Parador, USE and Crested submitted expert testimony by five renowned geologists opining that a gold lode apexed on Parador's Sunset No. 1 patented lode mining claim, from which apex the lode extended in a continuous downward direction outside the surface boundaries of that claim and under the surface boundaries of a claim owned by an adjacent property owner. No contrary testimony was submitted by the other parties.
The District Court took the matter under advisement at the conclusion of the evidentiary proceedings, and on December 26, 1995, issued a written ruling denying apex rights and extralateral royalties to Parador, USE and Crested. It is the belief of Parador, USE and Crested that the trial court's ruling is erroneous as a matter of law and, consequentially, on February 2, 1996, an appeal was lodged with the appellate court asking that Court to reverse the trial court's ruling. The Appellate Court dismissed the appeal pending a resolution of all claims before the District Court. Parador, USE and Crested intend to proceed with the litigation.
Reclamation and Environmental Liabilities
Most of the Company's mine development, exploration and operating activities are subject to federal and state regulations that require the Company to protect the environment. The Company attempts to conduct its mining operations so as to comply with these regulations, but they are continually changing and generally becoming more restrictive. Consequently, the Company's current estimates of its reclamation obligations and its current level of expenditures to perform ongoing reclamation may change in the future. At the present time, however, the Company cannot predict the outcome of future regulation or its impact on costs. Nonetheless, the Company has recorded its best estimate of future reclamation and closure costs based on currently available facts and technology and enacted laws and regulations. Certain regulatory agencies, such as the Nuclear Regulatory Commission, the Bureau of Land Management and the Wyoming Department of Environmental Quality review the Company's reclamation, environmental and decommissioning liabilities, and the Company believes its recorded amounts are consistent with those reviews and related bonding requirements. To the extent that planned production on its properties is
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
delayed, interrupted or discontinued because of regulation or the economics of the properties, the future earnings of the Company would be adversely affected. The Company believes it has accrued all necessary reclamation costs and there are no additional contingent losses or unasserted claims to be disclosed or recorded in the reclamation liability. The Company has not disposed of any properties for which it has a commitment or is liable for any known environmental liabilities.
The majority of the Company's environmental obligations relate to former mining properties acquired by the Company. Since the Company currently does not have properties in production, the Company's policy of providing for future reclamation and mine closure costs on a unit-of-production basis has not resulted in any significant annual expenditures. For the obligations recorded on acquired properties, including site-restoration, closure and monitoring costs, actual expenditures for reclamation will occur over a number of years, and since these properties are all considered future production properties, those expenditures, particularly the closure costs, may not be incurred for many years. The Company also does not believe that any significant capital expenditures to monitor or reduce hazardous substances or other environmental impacts are currently required. As a result, the near term reclamation obligations are not expected to have a significant impact on the Company's liquidity.
As of May 31, 1997 and 1996, the Company has recorded estimated reclamation obligations, including standby costs, of $725,900, as reflected in reclamation and other long-term, liabilities in the accompanying financial statements. In addition, the GMMV, in which the Company is a 25% equity investor, has recorded a $23,620,000 liability for future reclamation and closure costs. See GMMV discussion below for likelihood of liabilities being incurred by the Company. None of these liabilities have been discounted, and the Company has not recorded any potential offsetting recoveries from other responsible parties or from any insurance companies.
The Company and USE currently have four mineral properties or investments that account for most of its environmental obligations. The Company is a partner in SMP, a joint venturer in the GMMV, and owns an interest in Plateau and SGMC. The environmental obligations and the nature and extent of cost sharing arrangements with other potentially responsible parties, as well as any uncertainties with respect to joint and several liability of each are discussed in the following paragraphs:
Sheep Mountain Partners ("SMP")
The Company and USE agreed to assume the reclamation obligations, environmental liabilities and liabilities for injuries to employees in mining operations with respect to the Crooks Gap properties, which are part of SMP. The reclamation obligations, which are established by regulatory authorities, were reviewed by the Company and the regulatory authorities during fiscal 1995 and the balance in the reclamation liability account at May 31, 1997 of $1,451,800, ($725,900 or 50% of which is recorded in the accompanying balance sheet), was determined by the Company and the regulatory authorities to be adequate. The obligation will be satisfied over the life of the mining project which is estimated to be at least 20 years. The Company and USE self bonded this obligation by mortgaging certain of their real estate holdings. A portion of the funds for the reclamation of SMP's properties is expected to be provided by SMP which has agreed to pay up to $.50 per pound of uranium to the Company and USE for
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
reclamation work, as the uranium is produced from the properties. The final outcome of the arbitration proceedings with Nukem and CRIC could result in changes to these agreements between the parties.
Green Mountain Mining Venture ("GMMV")
During fiscal 1991, the Company and USE acquired developed minerals properties on Green Mountain known as the Big Eagle Property. In connection with that acquisition, the Company and USE agreed to assume reclamation and other environmental liabilities associated with the property. Reclamation obligations imposed by regulatory authorities were established at $7,300,000 at the time of acquisition. Immediately after the acquisition, the Company and USE transferred a one-half interest in them to Kennecott, and Kennecott, the Company and USE contributed the Big Eagle properties to GMMV, which assumed the reclamation and other environmental liabilities. Kennecott obtained a commercial bank letter of credit as security for the performance of the reclamation obligations for the benefit of GMMV.
During fiscal 1993, GMMV entered into an agreement to acquire the Sweetwater uranium mill and related properties from UNOCAL. GMMV's consideration for the acquisition of the Sweetwater Mill Property was the assumption of all environmental liabilities and reclamation bonding obligations. The environmental obligations of GMMV are guaranteed by Kennecott Corporation (parent of Kennecott Uranium Company, the other joint venture partner). However, UNOCAL also agreed that if GMMV incurs expenditures for environmental liabilities prior to the earlier of commercial production by GMMV or February 1, 2001 (which liabilities are not due solely to the operations of GMMV), UNOCAL will reimburse GMMV the first $8,000,000 of such expenditures. Any such reimbursement may be recovered by UNOCAL from 20% of future cash flows from sale of uranium concentrates processed through the mill. In any event, until such time as environmental and reclamation undertakings are liquidated against Kennecott Corporation, such costs are not deemed expenditures under Kennecott's $50,000,000 development commitment (although bond costs may be charged against this development commitment).
The reclamation and environmental liabilities assumed by GMMV concern two categories: (1) cleanup of an inactive open pit mine site near the Mill, including water (heavy metals and other contaminants) and tailings (heavy metals and other dust contaminant abatement and erosion control) associated with the pit, and (2) decontamination and cleanup and disposal of the Mill building and equipment and tailings cells after Mill decommissioning. Current liabilities for such efforts have been established at approximately $19,767,000 by the Wyoming Department of Environmental Quality for mine pit site matters (exercising EPA-delegated jurisdiction to administer the Clean Water Act and the Clean Air Act, and directly administering Wyoming statutes on mined land reclamation), and by the NRC for decontamination and cleanup of the Mill and Mill tailings cells. An irrevocable letter of credit has been provided by the Morgan Guaranty Trust Company of New York in lieu of a surety bond to cover the reclamation costs for the open pit mine site and the mill. The letter of credit was obtained by Kennecott Uranium Company to cover all reclamation costs related to mining and drilling operations in the State of Wyoming. The EPA has continuing jurisdiction under the Resource Conservation and Recovery Act, pertaining to any hazardous materials which may be on site when cleanup work is started.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
Although Crested and the other GMMV parties are liable for all reclamation and environmental compliance costs associated with Mill and site maintenance, as well as Mill decontamination and cleanup and site reclamation and cleanup after the Mill is decommissioned, Crested believes it is unlikely Crested will have to pay for such costs directly. First, based on current estimates of cleanup and reclamation costs (reviewed annually by the oversight agencies), such costs may be within the $50,000,000 development commitment of Kennecott Uranium Company for GMMV subject to the provisions of the Acquisition Agreement. These costs are not expected to increase materially, if the Mill is not put into full operation. Second, to the extent GMMV is required to spend money on reclamation and environmental liabilities related to previous Mill and site operations during ownership by Minerals Exploration Company (a UNOCAL subsidiary), UNOCAL has agreed to fund up to $8,000,000 of such costs (provided such costs are incurred before February 1, 2001 and before Mill production resumes), which would be recoverable only out of future Mill production (see above). Third, payment of the GMMV reclamation and environmental liabilities related to the mill is guaranteed by Kennecott Corporation, parent of Kennecott Uranium Company. Last, GMMV will set aside a portion of operating revenues to fund reclamation and environmental liabilities once mining and milling commences. To date, ongoing Mill maintenance expense is funded by Kennecott as part of its development commitment.
Kennecott will be entitled to contribution from the USE parties in proportion to their participation interests in GMMV, if Kennecott is required to pay Mill cleanup costs directly pursuant to its guarantee. Such payments by Kennecott only would be reimbursed if the liabilities cannot be satisfied within the initial $50,000,000 expenditure commitment, and then only to the extent there are insufficient funds from the reclamation reserve (to be built up out of GMMV operating revenues). In addition, if and to the extent such liabilities resulted from UNOCAL's Mill operations, and payment of the liabilities was required before February 1, 2001 and before Mill production resumes, then up to $8,000,000 of that amount would be paid by UNOCAL, before Kennecott would be required to pay on its guarantee. Accordingly, although the extent of any ultimate Crested liability for contribution to Mill cleanup costs cannot be predicted, USE and Crested will only be required to pay its proportional share of Mill cleanup if a) the liabilities cannot be satisfied with the initial $50,000,000 expenditure commitment from Kennecott, b) there are insufficient funds from the reclamation reserve to be built up out of GMMV operating revenues and c) payments are not available from UNOCAL. As of June 1997, the obligation to continue to hold the mill in a standby mode to protect certain tax benefits sold by Consumers Power expired and the Company and USE are no longer under this obligation.
Sutter Gold Mining Company ("SGMC")
SGMC which is currently owned 3.2% by the Company, 30.7% by USE and 66.1% by other investors, owns interests in gold mineral properties in California. Currently, the property is in development and costs consist of drilling, permitting, holding costs and administrative costs. No substantial mining has been completed, although a 2,800 foot decline through the identified ore zones for an underground mine was acquired in the purchase. SGMC's policy is to provide reclamation reserves as ore is produced on a unit-of-production basis. Current reclamation obligations are covered by a $27,000 reclamation bond, which SGMC has recorded as a reclamation liability as of May 31, 1997.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997, 1996 and 1995 (continued)
Plateau Resources Limited ("Plateau")
The environmental obligations acquired with the acquisition of Plateau include all environmental and reclamation obligations relating to the Shootaring Mill. Based on the bonding requirements, Plateau transferred $2,500,000 to a trust account as financial surety to pay future costs of mill decommissioning, site reclamation and long-term site surveillance. In addition, Plateau has recorded additional obligations for the estimated holding and maintenance costs needed until the mill is placed in service or decommissioning begins. In fiscal 1997, Plateau increased the NRC surety to a cash bond of $6,784,000 in order to have its standby license changed by the NRC to operational. As of June 1997, the obligation to continue to hold the Shootaring Canyon Mill in a standby mode to protect certain tax benefits associated with the Mill and sold by Consumers Power expired. The Company and USE used the funds held for this purpose to increase the NRC surety cash bond.
Executive Benefits
The Company and USE are committed to pay the estates of certain of their officers an amount equal to one year's salary for one year after their death, and reduced amounts to be set by the Board of Directors, for a period of up to five years thereafter.
PART III
In the event a definitive proxy statement containing the information being incorporated by reference into this Part III is not filed within 120 days of May 31, 1997, the Registrant will file such information under cover of a Form 10-K/A.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 with respect to directors and certain executive officers is incorporated herein by reference to Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders. The information regarding the remaining executive officer is contained in Part I of this report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference to the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated herein by reference to the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by reference to the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, REPORTS AND FORM 8-K.
(a) The following financial statements are filed as a part of this Report as Item 8:
Page No. (1) Financial Statements
Registrant and Affiliate
Report of Independent Public Accountants................................49
Consolidated Balance Sheets - May 31, 1997 and 1996..................50-51
Consolidated Statements of Operations for the Years Ended May 31, 1997, 1996 and 1995 ........................52
Consolidated Statements of Shareholders' Equity for the Years Ended May 31, 1997, 1996 and 1995..................53
Consolidated Statements of Cash Flows for the Years Ended May 31, 1997, 1996 and 1995......................54-55
Notes to Consolidated Financial Statements...........................................................56-84
(ii) Affiliate Financials as Schedules
(a) Green Mountain Mining Venture
Report of Independent Public Accountants........................93
Balance Sheet - December 31, 1996 and 1995......................94
Statement of Operations for the Period from June 1, 1990 (Date of Inception) through December 31, 1996.......................................95
Statement of Changes in Partners' Capital for the Period from June 1, 1990 (Date of Inception) through December 31, 1996............................96
Statement of Cash Flows for the Period from June 1, 1990 (Date of Inception) through December 31, 1996.......................................97
Notes to Financial Statements...............................98-103
(b) Sheep Mountain Partners
The Registrant's partner in SMP, Nukem/CRIC, have refused to provide certain information concerning SMP to SMP's independent public accountants. The information requested concerns partnership costs for uranium purchases. USECC and Nukem/CRIC disagree as to whether uranium costs of the partnership means: (i) the price at which Nukem/CRIC pays for purchases of uranium for SMP; or (ii) the price which CRIC charges SMP for the uranium.
As a result, the independent public accountants have informed the Registrant and USE that they have been unable to complete their audit of SMP, and are unable to render a report on SMP's financial statements. The Registrant and SMP's independent public accountants are seeking to resolve these uncertainties so that SMP's financial statements may be finalized and filed. When these matters are resolved, the SMP financial statements will be filed under cover of a Form 10-K/A.
Balance Sheets - May 31, 1997 and 1996........................*
Statements of Operations - Years Ended May 31, 1976, 1996 and 1995...................................*
Statements of Changes in Partners' Capital - Years Ended May 31, 1997, 1996 and 1995...................................*
Statements of Cash Flows - Years Ended May 31, 1997, 1996 and 1995...................................*
Notes to the Financial Statements.............................*
*To be filed under cover of a Form 10-K/A.
All other schedules have been omitted because the information is not applicable or because the information is included in the financial statements.
(3) Exhibits Required to be Filed.
Exhibit Sequential No. Title of Exhibit Page No.
3.1 Restated Articles of Incorporation..........................[1]
3.4 By-Laws.....................................................[2]
4.1 USE 1989 Incentive Stock Option Plan as Amended through 12/95....................................[9]
4.2 Form of Stock Option Agreement and Schedule, Options issued 1992...............................[9]
4.3 Form of Stock Option Agreement and Schedule, Options issued 1/96...............................[9]
4.4 USE Restricted Stock Bonus Plan as Amended through 2/94.....................................[9]
4.5 Amendment to Warrant to Purchase 200,000 Common Shares of USE.......................................104
4.6 Amendment to USE 1989 Incentive Stock Option Plan (12/13/96).....................................105
4.7 USE 1996 Stock Award Program (Plan)....................106-107
4.8 USE Restated 1996 Stock Award Plan and Amendment to USE 1990 Restricted Stock Bonus Plan...................108-111
10.1 Promissory Note from Crested to USE (5/31/97)..........112-113
10.2 Management Agreement - USE - CC.............................[3]
10.3 Joint Venture Agreement - Registrant and USE................[2]
10.4 U.S. Energy Corp. Employee Stock Ownership Plan.............[2]
10.5 Assignment and Lease - Parador..............................[3]
10.6 Employment Agreement - Daniel P. Svilar.....................[2]
10.7 Executive Officer Death Benefit Plan........................[2]
10.9 Big Eagle Acquisition Agreement with PMC....................[4]
10.10 Ft. Peck Agreement - Drilling and Production Services.......[3]
10.17 Sweetwater Mill Acquisition Agreement.......................[3]
10.18 Self Bond Agreement - Crooks Gap Properties....................[1]
10.21 Master Agreement - Mt. Emmons/AMAX Inc.........................[5]
10.23 Crooks Gap Property Acquisition Agreement......................[6]
10.26 Memorandum of Partnership Agreement - GMMV.....................[2]
10.27 Mineral Properties Agreement - Congo Area - PMC................[2]
10.29 Memorandum of Partnership Agreement - SMP......................[1]
10.30 Plateau Acquisition - Stock Purchase Agreement and Related Exhibits...........................................[7]
10.41 Option and Sales Agreements - Gunnison Property Parcel A.....................................[8]
10.42 Option and Sales Agreements - Gunnison Property Parcel B.....................................[8]
10.43 Contract for Sale of Wind River Estates to Arrowstar...................................................[9]
10.44 Contract for sale of Jeffrey City Six-Plex to Tag Development, Inc........................................[9]
10.45 Development Agreement with First-N-Last........................[9]
10.46 Operating Agreement with First-N-Last..........................[9]
10.49 Acquisition Agreement between Kennecott Uranium Company, USE and USECC regarding GMMV (6/23/97).....................114-148
10.50 Exhibit A to Acquisition Agreement (see 10.49) Promissory Note from Kennecott Uranium Company to Kennecott Energy Company regarding GMMV ...................149-153
10.51 Exhibit B to Acquisition Agreement (see 10.49) Mortgage, Security Agreement, Financing Statement and Assignment of Proceeds, Rents and Leases...................154-183
10.52 Exhibit G to Acquisition Agreement (see 10.49) - Contract Services Agreement for the Sweetwater Uranium Mill Facility...................184-217
10.53 Exhibit H to Acquisition Agreement (see 10.49) - Mineral Lease Agreement .....................218-245
10.54 Exhibit I to Acquisition Agreement (see 10.49) - Fourth Amendment of Mining Venture Agreement among Kennecott Uranium Company, USE and USECC...................246-257
10.55 Master Resolution Agreement regarding Gunnison Properties..............................258-262
10.56 Membership Pledge Agreement regarding Gunnison Properties..............................263-269
10.57 Management Agreement between SGMC and USECC................270-286
10.58 Outsourcing and Lease Agreement between YSFC and USECC.....287-290
10.59 Convertible Promissory Note from YSFC to USECC.............291-293
21 Subsidiaries of Registrant.....................................294
By Reference
[1] Incorporated by reference from the like-numbered exhibits to the Registrant's Form 10-K for the year ended May 31, 1989.
[2] Incorporated by reference from the like-numbered exhibits to the Registrant's Form 10-K for the year ended May 31, 1990.
[3] Incorporated by reference from the like-numbered exhibits to the Registrant's Form 10-K for the year ended May 31, 1991.
[4] Incorporated by reference from the like-numbered exhibit to the Registrant's Form 10-Q for the period ended February 28, 1991.
[5] Incorporated by reference from the like-numbered exhibits of AMAX's Schedule 13D filed on or about August 3, 1987.
[6] Incorporated by reference from the like-numbered exhibits of Registrant's Form 10-K for the year ended May 31, 1988.
[7] Incorporated by reference from exhibit A to the U.S. Energy Corp. Form 8-K reporting an event of August 11, 1993.
[8] Incorporated by reference from the like- numbered exhibits of the Registrant's Form 10-K for the year ended May 31, 1995.
[9] Incorporated by reference from the like- numbered exhibits of the Registrant's Form 10-K for the year ended May 31, 1996.
(b) Reports filed on Form 8-K.
During the fourth quarter of the fiscal year ended on May 31, 1997, the Registrant filed one report on Form 8-K under Item 5, Other Events, reporting an event of March 6, 1997.
(c) Required exhibits follow the signature page and are listed above under Item 14 (a)(3).
(d) Required financial statement schedules are listed and attached hereto in Item 14(a)(2).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CRESTED CORP. (Registrant)
Date: September 10, 1997 By: /S/ JOHN L. LARSEN ---------------------------------- JOHN L. LARSEN, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: September 10, 1997 By: /S/ JOHN L. LARSEN ---------------------------------- JOHN L. LARSEN, Director
Date: September 10, 1997 By: /S/ MAX T. EVANS ---------------------------------- MAX T. EVANS, Director
Date: September 10, 1997 By: /S/ DANIEL P. SVILAR ---------------------------------- DANIEL P. SVILAR, Director
Date: September 12, 1997 By: /S/ MICHAEL D. ZWICKL ---------------------------------- MICHAEL D. ZWICKL, Director
Date: September ___, 1997 By: ---------------------------------- KATHLEEN R. MARTIN, Director
Date: September 12, 1997 By: /S/ ROBERT SCOTT LORIMER ---------------------------------- ROBERT SCOTT LORIMER, Principal Financial Officer and Chief Accounting Officer
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
Report on Audits of Financial Statements as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994, and the period from inception (June 1, 1990) to December 31, 1996
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of the Management Committee of Green Mountain Mining Venture Riverton, Wyoming
We have audited the accompanying balance sheet of Green Mountain Mining Venture (A Joint Venture in the Development Stage) as of December 31, 1996 and 1995, and the related statements of operations, changes in Venture partners' capital, and cash flows for the years ended December 31, 1996, 1995 and 1994, and the period from inception (June 1, 1990) to December 31, 1996. These financial statements are the responsibility of the Venture's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Green Mountain Mining Venture as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years ended December 31, 1996, 1995 and 1994, and the period from inception (June 1, 1990) to December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Salt Lake City, Utah May 6, 1997, except for Note 5, as to which the date is June 17, 1997
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
In December 1990, GMMV acquired additional mineral properties in exchange for the assumption of reclamation liabilities associated with those properties of $7.3 million. In 1992, GMMV acquired an established uranium processing mill (the Sweetwater Mill) in exchange for the assumption of reclamation liabilities associated with this property of $16.3 million. Such amounts represent the estimated costs at the acquisition date to reclaim these properties. Kennecott, on behalf of GMMV, is self-bonded in the amount of $24.3 million, which is payable to the Wyoming Department of Environmental Quality ("WDEQ") and the U.S. Nuclear Regulatory Commission in the event GMMV does not properly reclaim the above properties or violates the Wyoming Environmental Quality Act. Before the earlier of January 1, 2001, and resumption of production, if the GMMV is required to incur reclamation or environmental costs, the seller of the mill will be liable for the first $8 million of these costs at the Sweetwater Mill.
The Venture properties include state leases which will expire in May 2001 and October 2006. All fees required to hold the unpatented mining claims have been paid to the state of Wyoming as of December 31, 1996.
Continued
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
3. BUILDINGS, MINERAL PROPERTIES AND MINE DEVELOPMENT COSTS, Continued:
At December 31, 1996 and 1995, costs capitalized as property and equipment are composed of the following:
1996 1995 -------------- ------------- Acquisition costs $ 39,347,000 $ 39,347,000 Development costs 8,683,086 7,911,314 -------------- -------------
$ 48,030,086 $ 47,258,314 ============== =============
Acquisition costs include the partners' initial contribution of mineral properties and buildings recorded at the contributing partners' historical cost of $15,727,000 and mineral properties and buildings acquired in exchange for the assumption of reclamation liabilities totaling $23,620,000.
4. CONTINGENCIES:
In June 1994, Kennecott was served with a complaint filed by Nukem Inc. (Nukem) and Cycle Resource Investment Corporation (Cycle). The complaint alleges that when Kennecott entered into the Green Mountain Mining Venture with USE on June 1, 1990, that Kennecott interfered with a Uranium Marketing Agreement (UMA) between Nukem and USE and the Sheep Mountain Partners Partnership Agreement (SMPA) between USE and Cycle. Nukem and Cycle are each seeking damages in excess of $14 million and punitive damages.
The case was stayed pending the conclusion of an arbitration proceeding between Cycle, Nukem and USE. The arbitration panel entered its order in April 1996, and the stay in this case was lifted. The arbitration panel held against Nukem in material respects stating that, even if the UMA had been breached, Nukem suffered no damages thereby. The panel denied the relief that Cycle sought for alleged breach of the SMPA. Accordingly, on January 6, 1997, Kennecott filed a motion for summary judgment contending, among other things, that the arbitration findings collaterally estop all claims asserted by Nukem and Cycle. The motion is currently pending. If the motion is denied,
Continued
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage) NOTES TO FINANCIAL STATEMENTS, Continued
4. CONTINGENCIES, Continued:
the case will proceed to trial scheduled in 1997. Kennecott intends to vigorously prosecute the summary judgment motion, and to vigorously defend the litigation in the event the motion is denied.
Although the Venture is not a party to the complaint filed by Nukem and Cycle, the ultimate resolution of this contingency could have an impact on the properties held by the Venture.
5. SUBSEQUENT EVENT:
Subsequent to year end, Kennecott and USECC continued negotiations whereby the parties are attempting to extract Kennecott from the GMMV. These negotiations contemplate USECC buying out the Kennecott interest in GMMV. No assurance can be given that the negotiations will be successfully concluded.
Continued