SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required] for the fiscal
year ended May 31, 1996 or
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required] for the
transition period from _____ to _____
Commission file number 0-8773
CRESTED CORP.
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(Exact Name of Registrant as Specified in its Charter)
Colorado 84-0608126
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West, Riverton, WY 82501
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (307) 856-9271
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES X NO ____
The aggregate market value of the voting stock held by non-
affiliates of the Registrant as of September 6, 1996, computed by
reference to the average of the bid and asked prices for the
Registrant's common stock as reported by National Quotation Bureau
on Pink Sheets for the week then ended, was approximately
$5,686.637.
Class Outstanding at September 9, 1996
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Common Stock, $0.001 par value 10,213,094 shares
<PAGE>
Documents incorporated by reference: Portions of the documents
listed below have been incorporated by reference into the indicated
parts of this report as specified in the responses to the item
numbers involved:
1996 Annual Meeting Proxy Statement for the fiscal year
ended May 31, 1996, into Items 10-13 of Part III of the
filing.
Indicate by check mark if disclosure of delinquent filers, pursuant
to Item 405 of Regulation S-K is not contained herein and will not
be contained, to the best of the Registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
<PAGE>
PART I
Item 1 and Item 2. Business and Properties
(a) General.
Crested Corp. ("Crested", the "Company" or "Registrant") is in
the general minerals business of acquiring, developing, exploring
and/or selling or leasing mineral properties and, from time to
time, mining and marketing of minerals. Crested is now engaged in
two principal mineral sectors: uranium and gold. Interests are
held in other mineral properties (principally molybdenum), but are
either non-operating interests or undeveloped claims. The Company
also carries on small oil and gas operations in Montana and
Wyoming. Crested is also engaged in commercial operations (real
estate and general aviation).
Most of Crested's operations are conducted through a joint
venture with U.S. Energy Corp. ("USE", its parent company), and
various joint subsidiaries of USE and Crested. The Joint Venture
with USE is hereafter referred to as "USECC". Oil and gas
operations are carried on through Energx, Ltd., a subsidiary of the
Company and USE.
Crested and USE originally were independent companies, with
two common affiliates (Max T. Evans and John L. Larsen). In 1980,
USE and Crested formed a joint venture to do business together
(unless one or the other elected not to pursue an individual
project). As a result of USE funding certain of Crested's
obligations from time to time (due to Crested's lack of cash on
hand), and later payment of the debts by Crested issuing common
stock to USE, Crested became a majority owned subsidiary of USE in
fiscal 1993. See Part III of this Report.
Crested was incorporated in Colorado on September 18, 1970.
All operations are in the United States. Principal executive
offices are located at 877 North 8th Street West, Riverton, Wyoming
82501, telephone (307) 856-9271.
(b) Financial information about industry segments.
(1) The Registrant operates in two business segments: (i)
minerals and (ii) commercial operations. See Footnote I to the
Consolidated Financial Statements. The Registrant engages in other
miscellaneous activities such as oil and gas exploration,
development and production. The principal products of the
operating units within each of the reportable industry segments
are:
INDUSTRY SEGMENTS PRINCIPAL PRODUCTS
Minerals Sales and leases of mineral properties
and, from time to time, the production
and/or marketing of uranium, gold and
molybdenum.
<PAGE>
Commercial Operations Operation and rental of real estate,
operation of an aircraft fixed base
operation (including aircraft fuel sales,
flight instruction and aircraft
maintenance), and provision of various
contract services, including managerial
services for subsidiary companies;
operations (through Plateau Resources
Limited, a wholly-owned subsidiary of
USE) of a motel and rental real estate in
Utah.
(2) The Registrant is not required to include interim
financial statements.
Net Revenues by Crested Segment
Percentage contributions by the two Crested segments in the
last three fiscal years were:
Percentage of Net Revenue During Year Ended
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May 31, May 31, May 31,
1996 1995 1994
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Minerals 62% 4% 76%
Commercial Operations 16% 35% 12%
Crested did not receive revenues from the mining of either uranium
or gold in the three fiscal years ended May 31, 1996. During
fiscal 1996 and 1994, however, mineral revenues were generated from
sales of uranium under certain of the utility supply contracts held
by Sheep Mountain Partners ("SMP", a Colorado general partnership),
USE and Crested delivering their one-half share or 100% of uranium
and receiving net sales proceeds therefrom, with profits deposited
in SMP accounts. In addition, during fiscal 1994 mineral revenues
were received from the sale of mineral properties. For fiscal
1995, there were no revenues from mineral sales in part due to the
arbitration proceedings involving SMP (see Item 3 - "Legal
Proceedings - Sheep Mountain Partners Arbitration/Litigation").
Commencement of uranium concentrates production from the Shootaring
Mill belonging to Plateau Resources, Limited ("Plateau"), a 100%
subsidiary of USE, at Ticaboo, Utah is expected to result in the
procurement of utility supply contracts for Plateau in fiscal 1997.
When USE acquired the Plateau from Consumers Power Company ("CPC")
Crested and USE agreed that, when the unencumbered cash received
with the acquisition of Plateau was expended to maintain the
Plateau properties, USE and Crested each will assume one-half of
Plateau's obligations, and share equally in Plateau's operating
cash flows. There can be no assurance, however, such milling
operations will commence, or that new utility supply contracts will
be procured. See Description of "Business - Minerals - Uranium."
<PAGE>
(c) Narrative description of business by industry segment.
Crested is principally engaged in the general minerals business.
This segment involves the acquisition, exploration, sale or leasing
and/or development of minerals and mining properties, with primary
interests in uranium, gold and molybdenum properties in the western
United States. Crested also holds oil and gas interests in Montana
and Wyoming.
Minerals
Uranium
General
Crested has interests in several uranium-bearing properties in
Wyoming and Utah and in uranium processing mills in Sweetwater
County, Wyoming (the "Sweetwater Mill") and in southeastern
Garfield County, Utah (the "Shootaring Mill"). All the uranium-
bearing properties are located in areas which have produced
significant amounts of uranium in the 1970s and 1980s. The Company
and USE are planning to develop and operate these property
interests (directly or through a joint venture in which another
company may be the operator) to produce uranium concentrates
("U3O8") for sale to public utilities that operate nuclear powered
electricity generating plants.
The property interests in Wyoming are:
521 unpatented lode mining claims (the "Green Mountain Claims") on
Green Mountain in Fremont County, Wyoming, including 105 claims on
which the Round Park (Jackpot) uranium deposit is located, and the
Sweetwater Mill, (approximately 23 miles south of the proposed
Jackpot Mine). These assets are held by the Green Mountain Mining
Venture ("GMMV"), owned 50 percent by the USE and USECC (the "USE
Parties"), and 50 percent by Kennecott Uranium Company ("KUC"), a
subsidiary of Kennecott Energy and Coal Company of Gillette, WY.
Kennecott Energy and Coal Company and Kennecott Corporation of Salt
Lake City, UT are subsidiaries of RTZ PLC of London. KUC is also
referred to in this report as Kennecott. All claims are accessible
by county and United States Bureau of Land Management ("BLM")
access roads. Substantial exploration and delineation of the
principal uranium resources in the proposed Jackpot Mine have been
completed. The BLM has signed a Record of Decision approving the
Jackpot Mine Plan of Operations following preparation of a final
Environmental Impact Statement ("EIS") for the proposed mine, and
on June 25, 1996, the Wyoming Department of Environmental Quality
("WDEQ") issued Mine Permit No. 660 that is required for GMMV to
develop the underground Jackpot Mine and mine the uranium deposit.
The proposed mine has had no previous operators, and will be a new
mine when opened. The Big Eagle Mine and related claim groups
(which are near the proposed Jackpot Mine and are part of the Green
Mountain Claims held by the GMMV), are accessible by county and
private roads. The Big Eagle Mine was first operated by Pathfinder
Mines Corporation ("PMC") starting in the late 1970s.
<PAGE>
Unpatented lode mining claims, underground and open pit uranium
mines and mining equipment in the Crooks Gap area are located on
Sheep Mountain in Fremont County, Wyoming and are held by the Sheep
Mountain Partners partnership ("SMP"), the partners of which are
USE and Crested, doing business as USECC, and Nukem, Inc.
("NUKEM"), through its wholly-owned subsidiary Cycle Resource
Investment Corporation ("CRIC"). These properties are located
adjacent to and west of the Big Eagle mining claims held by GMMV.
The SMP Sheep Mountain Mines 1 and 2 of SMP are accessible by
county and private roads and were first operated by Western
Nuclear, Inc., a subsidiary of Phelps Dodge Corporation, in the
late 1970s. The SMP and GMMV properties contain uranium
mineralization in sandstones of Tertiary age, as is typical of most
Wyoming uranium deposits.
Electric power to all the above Wyoming properties is furnished by
either Pacific Power & Light or Hot Springs Rural Electric
Association.
The property interests in Utah are:
The Tony M Mine and the Frank M property are underground uranium
deposits in San Juan County, Utah located partially on Utah State
mining leases. These properties are accessible by county roads.
USE has a contract with Nuclear Fuels Services calling for transfer
of the Tony M mine and the Frank M properties to USE upon approval
by the State of Utah of a new bond securing Plateau's obligations
to reclaim these properties. The Tony M mine was originally
developed by Plateau at the time Plateau was owned by Consumers
Power Company ("CPC"), a Michigan public utility. Significant
areas of uranium mineralization have been accessed and delineated
by the prior owner's underground workings. When the Tony M Mine
was in production (while Plateau was owned by CPC) it produced ore
containing from three to eight pounds of uranium concentrates per
ton. Some of this ore was processed at the Shootaring Mill into
U3O8, the saleable product. In addition, low grade uranium ore was
stockpiled at the Tony M mine and at the Shootaring Mill, and
related mill support facilities, which are held by Plateau.
Plateau also owns the Velvet Mine and the nearby Wood Mine complex
in the Lisbon Valley area in southeastern Utah. The Velvet uranium
mine was fully developed and permitted by its prior owner and is
located approximately 178 miles by road to the Shootaring Mill.
The Wood Mine complex was formerly an operating uranium mine with
a remaining undeveloped resource. Access to this resource would be
by extending a drift approximately 2,500 feet from the former Wood
Mine. The Wood Mine property is not permitted at this time, but
the Company does not expect difficulty in obtaining a new permit
because the surface facilities would occupy the site that has been
disturbed from previous operations.
<PAGE>
The Green Mountain Mining Venture Project
GMMV. In fiscal 1991, USE and Crested entered into an agreement to
sell 50 percent of their interests in the Green Mountain uranium
claims, and certain other rights to Kennecott for $15,000,000 cash
(Crested's share of the proceeds was $2,400,000, and the balance
was USE's). In fiscal 1991, USE and USECC ("USE Parties") and
Kennecott formed the GMMV to develop, mine and mill uranium ore
from the Green Mountain Claims, and market U3O8 to utilities using
nuclear power to generate electricity.
Kennecott agreed to fund the first $50,000,000 of GMMV
expenditures, pursuant to Management Committee budgets.
Thereafter, GMMV expenses will be shared by the parties generally
in accordance with their participating interests (50 percent
Kennecott, 50 percent USE Parties). The agreement also provides
that Kennecott will pay a disproportionate share (up to an
additional $45,000,000) of GMMV operating expenses, but only out of
cash operating margins from sales of processed uranium at more than
$24.00/lb (for $30,000,000 of such operating expenses), and from
sales of processed uranium at more than $27.00/lb (for the next
$15,000,000 of such operating expenses).
Pursuant to the joint venture agreement, each party's participation
interest in the GMMV is subject to reduction for voluntary or
involuntary failure to pay its share of expenses as required in
approved budgets (including Kennecott's commitment to fund the
initial $50,000,000 of GMMV expenditures), so that in effect, the
interest held by each party collateralizes its performance.
However, a defaulting party would remain liable for third party
liabilities incurred during GMMV operations, proportionate to its
interest before reduction.
GMMV cash flows will be shared between Kennecott and the USE
Parties according to their participation interests. However, 105
of the Green Mountain Claims, which cover the Round Park (Jackpot)
uranium deposit, currently believed to be the most significant
mineralized resource on Green Mountain, were formerly owned solely
by USE. Pursuant to an agreement between USE and Crested, cash
flow from production of uranium out of these 105 Green Mountain
Claims will be distributed only to USE and Kennecott, and GMMV
expenditures on such properties will be shared 50 percent by USE
and 50 percent by Kennecott. Milling costs will be paid by GMMV as
operating costs and shared among the participants according to
their ownership interests in the ore being milled.
The USE Parties' share of GMMV cash flow resulting from the balance
of the properties (outside the 105 claims), previously owned by USE
and Crested together, will be shared equally by USE and Crested.
GMMV expenditures from such properties will be shared 25 percent
each by USE and Crested, and 50 percent by Kennecott. Such latter
properties are expected to be developed after the Round Park
(Jackpot) deposit is placed into production; uranium deposits on
these properties may be accessed through the proposed tunnels at
the Jackpot Mine.
<PAGE>
The GMMV Management Committee has three Kennecott representatives
and two USECC representatives, acts by majority vote, and appoints
and supervises the project manager. In fiscal 1993, Kennecott
became the GMMV project manager and has continued as project
manager since then. USECC has continued work on a contract basis
at Kennecott's request.
Pre-development activities on the GMMV properties have included
environmental and mining equipment studies, mine permitting and
planning work, property maintenance, setting up a uranium marketing
program, acquisition and monitoring of the Sweetwater Mill and
preparation of an application to the U. S. Nuclear Regulatory
Commission ("NRC") to convert the Sweetwater Mill license from
standby to an operating license. During fiscal 1996, GMMV
completed a sediment dam, sediment basin and drainage diversion
ditch, built a fuel storage facility and other support facilities
and made improvements to existing facilities. As of the date this
10-K Report is filed, the GMMV has not established a schedule for
the commencement of mine development work necessary to put the GMMV
properties into production. Discussions are underway between
Kennecott and the USE Parties to consider combining all uranium
assets of the GMMV and USECC to the extent possible into a single
entity. The parties are also exploring various alternative plans.
Properties and Mine Plan. GMMV owns a total of 521 claims on Green
Mountain, including the 105 claims on which the Round Park
(Jackpot) uranium deposit is located. Surface rights are owned by
the United States Government under management by the BLM. In
addition, other uranium mineralization has been delineated in the
Phase 2 and Whiskey Peak deposits on these claims, which formerly
belonged to USE and Crested. These deposits are undeveloped.
Roads and utilities have been put in place, which are believed to
be satisfactory to support future mine development.
GMMV also owns the Big Eagle Properties on Green Mountain, which
appear to contain substantial remaining uranium mineralization, and
are adjacent to the other GMMV mining claims. The Big Eagle
Properties contain one underground and two open-pit mines, as well
as related roads, utilities, buildings, structures, equipment and
a stockpile of ore. The assets include 38,000 and 8,000 square
foot buildings formerly used by Pathfinder Mines Corporation
("PMC") in mining operations. Also included are three ore-hauling
vehicles, each having a 100-ton capacity. Permits transferred to
the GMMV for the properties include: a permit to mine, an air
quality permit, and water discharge and water quality permits. The
GMMV owns the mineral rights to the underlying unpatented lode
mining claims.
The Round Park (Jackpot) mining claims contain deposits of uranium
which have been estimated to contain 52 million pounds of U3O8
averaging .23% uranium oxide using a grade-thickness cut-off of .6
(i.e., deposit areas were excluded unless deposit bed thickness at
intercept, times intercept grade of uranium mineralization,
exceeded .6). The GMMV plans to mine this deposit from the Jackpot
Mine, which will be driven underground from the south side of Green
Mountain. The first of several mineralization horizons is about
2,300 feet vertically down from the top of Green Mountain.
The Jackpot Mine Plan of Operations provides for two declines to be
driven from the side of Green Mountain, extending about 10,400 feet
into the deposits; one decline will be used for ventilation and
transportation of personnel, and the other will convey ore, rock
and waste out of the mine. The mine plan estimates that the
Jackpot Mine will produce about 3,000 tons of uranium ore per day
and will have an expected mine life of 13 to 22 years. It will
utilize the existing Big Eagle Mine facilities located about two
miles west of the Jackpot Mine site. As many as 250 workers will
be required during mining operations.
USE Parties expect mine development costs will not exceed
$25,000,000 to begin production from the Round Park (Jackpot)
deposit. However, cost estimates may change as exploration and
initial development progress. Pursuant to the GMMV agreement,
Kennecott has agreed to fund the initial $50,000,000 in development
costs including reclamation costs. To May 31, 1996, such
expenditures total approximately $16,435,800. Additional costs
would be funded by operations and/or by cash assessments on the
venturers.
Sweetwater Mill. In fiscal 1993, GMMV acquired the Sweetwater
uranium processing mill and associated properties located in
Sweetwater County, Wyoming, approximately 23 miles south of the
proposed Jackpot Mine, from Union Oil Company of California
("UNOCAL"), primarily in consideration of Kennecott and the GMMV
assuming environmental liabilities, and decommissioning and
reclamation obligations.
Kennecott is manager of the Sweetwater Mill and, as such, will be
compensated by GMMV out of production. Payments for pre-operating
management will be based on a sliding scale percentage of mill cash
operating costs prior to mill operation; payments for operating
management will be based on 13 percent of mill cash operating costs
when processing ore. Mill holding costs are paid by GMMV and
funded by Kennecott as part of its $50,000,000 funding commitment.
The Sweetwater Mill includes buildings, milling and related
equipment, real estate improvements, mining and mill site claims
and other real property interests, personal property and intangible
property (including government permits relating to operation of
those properties). The major assets are the mill buildings and
equipment located on approximately 92 acres.
The mill was designed as a 3,000 ton per day ("tpd") facility.
UNOCAL's subsidiary Minerals Exploration Company reportedly
processed in excess of 4,200 tpd for sustained periods. The mill
is one of the newest uranium milling facilities in the United
States, and has been maintained in good condition. UNOCAL has
reported that the mill buildings and equipment have historical
costs of $10,500,000 and $26,900,000, respectively.
As consideration for the Sweetwater Mill, GMMV agreed to indemnify
UNOCAL against certain reclamation and environmental liabilities,
which indemnification obligations are guaranteed by Kennecott
Corporation (parent of Kennecott Uranium Company). GMMV has agreed
to be responsible for compliance with mill decommissioning and land
reclamation laws, for which the environmental and reclamation
bonding requirements are approximately $24,330,000, which includes
a $4,560,000 bond required by the NRC. None of the GMMV future
reclamation and closure costs are reflected in Registrant's
Consolidated Financial Statements (see Note K to Crested
Consolidated Financial Statements for fiscal year ended May 31,
1996).
The reclamation and environmental liabilities assumed by GMMV
consist of two categories: (1) cleanup of the inactive open pit
mine site near the mill (the source of ore feedstock for the mill
when operating under UNOCAL), including water (heavy metals and
other contaminants) and tailings (heavy metals dust and other
contaminants requiring abatement and erosion control) associated
with the pit; and (2) decontamination and cleanup and disposal of
the mill building, equipment and tailings cells after mill
decommissioning. On June 18, 1996, Kennecott established an
irrevocable Letter of Credit through the Morgan Guaranty Trust
Company of New York City in the amount of $19,767,079 in favor of
the Wyoming Department of Environmental Quality ("WDEQ") for
reclamation obligations of the GMMV. The Letter of Credit was
increased by $10,000 on August 26, 1996 to cover off-permit wetland
enhancement. The WDEQ exercises delegated jurisdiction from the
United States Environmental Protection Agency ("EPA") to administer
the Clean Water Act and the Clean Air Act, and directly administers
Wyoming statutes on mined land reclamation. The Sweetwater Mill is
also regulated by the NRC for tailings cells and mill
decontamination and cleanup. The EPA has continuing jurisdiction
under the Resource Conservation and Recovery Act, pertaining to any
hazardous materials which may be on site when cleanup work is
started.
Although the GMMV is liable for all reclamation and environmental
compliance costs associated with mill and site maintenance, as well
as mill decontamination and cleanup and site reclamation and
cleanup after the mill is decommissioned, Crested believes it is
unlikely Crested would have to pay for such costs directly. First,
based on current estimates of cleanup and reclamation costs
(reviewed annually by the oversight agencies), such costs for the
letters of credit or other surety appear to be within the
$50,000,000 development commitment of Kennecott for GMMV. These
costs are not expected to increase materially if the mill is not
put into operation. Second, UNOCAL has agreed that if GMMV incurs
expenditures for environmental liabilities prior to the earlier of
commercial production by GMMV or February 1, 2001, (which
liabilities are not due solely to the operations of GMMV), then
UNOCAL will reimburse GMMV the first $8,000,000 of such
expenditures. Any such reimbursement may be recovered by UNOCAL
from 20% of future cash flows from sale of uranium concentrates
processed through the mill. Third, payment of reclamation and
environmental liabilities related to the mill is guaranteed by
Kennecott. Last, the GMMV will set aside a portion of operating
revenues to fund reclamation and environmental liabilities when
mining and milling operations are finally shut down.
Kennecott will be entitled to contribution from the USE Parties in
proportion to their participation interests in GMMV, if Kennecott
is required to pay mill cleanup costs directly pursuant to its
guarantee. Such contributions would be required only if the
liabilities cannot be satisfied by Kennecott within the initial
$50,000,000 development commitment, and then only to the extent
there are insufficient funds from the accumulated reclamation
reserve. In addition, if and to the extent such liabilities
resulted from UNOCAL's mill operations, and payment of the
liabilities was required before February 1, 2001 and before mill
production resumes, then up to $8,000,000 of that amount would be
paid by UNOCAL, before Kennecott would be required to pay on its
guarantee. However, notwithstanding the preceding, the extent of
any ultimate Crested liability for contribution to mill cleanup
costs cannot be predicted.
Permitting. In March 1993, GMMV applied to the WDEQ for a Permit
to Mine the Round Park deposit through the Jackpot Mine, for up to
22 years. Following preparation of a final EIS by the BLM,
including a series of public meetings and a period for receipt of
written comments on both the preliminary and final EIS, on April
24, 1996 the BLM signed the Record of Decision ("ROD") approving
the Jackpot Mine Plan of Operations. With the entry of the ROD,
the WDEQ issued the mine permit for the Jackpot Mine on June 26,
1996. This Permit allows GMMV to proceed with construction of mine
facilities, further underground mine development and eventual
mining of the Round Park (Jackpot) Deposit.
The Jackpot Mine Plan of Operations and a combination of the
alternatives analyzed in the EIS will allow for the disposal of
mine waste rock in the Big Eagle Mine pits and the upgrading of
existing roads and the construction of new haul road segments for
transport of ore to the Sweetwater Mill. These roads will be
subject to modification in alignment necessary to minimize or avoid
adverse impacts to riparian and cultural resources.
The maximum area of new disturbance required for the project will
be 289 acres. This disturbance will include 118 acres for mine
site development and 171 acres for transportation corridor
construction and/or improvement. When uranium reserves have been
depleted, the mine portals will be plugged and the ground surface
recontoured and reclaimed to blend with the natural landscape.
Also, surface structures will be removed, roads closed per
landowner or BLM request, and disturbed areas reclaimed.
Kennecott, as operator of the Sweetwater Mill, has initiated
discussions and made appropriate filings with the NRC regarding
amendments to the Source Material License to resume ore processing
at the Sweetwater Mill. Separately, Kennecott has applied to the
NRC for permission to use a mill tailings cell to hold low level
tailings waste from an ion exchange plant owned by USE and Crested
in the Crooks Gap area.
The United States Environmental Protection Agency ("EPA") has
advised Kennecott, as operator of the GMMV, that if Kennecott would
level the tailings within the existing tailings impoundment and
install a new liner with leak detection capability, the EPA would
allow the use of the existing 60 acre tailings cell for milling
operations. Crested anticipates that this would result in
substantial cost savings to GMMV and reduce the time required for
the Sweetwater Mill to resume operations.
The Environmental Protection Agency has promulgated final rules for
radon emissions. These regulations affect the mining and milling
of uranium and may require substantial expenditures for compliance.
GMMV may need to install venting at mine sites, and must monitor
radon emissions at the mines, as well as wind speed, direction and
other conditions. Crested believes all of the uranium operations
in which it owns an interest are in compliance with these rules.
There ultimately will be an effect on Crested earnings from
environmental compliance expenditures by GMMV, since GMMV
operations will be accounted for by the equity method. GMMV's
expenses for compliance with environmental laws (as well as other
matters) are not expected to materially affect Crested cash flow
during the next two years, as Kennecott will fund the first
$50,000,000 of costs of GMMV, of which only about $16,565,000 had
been expended as of May 31, 1996.
Kennecott Corporation is a wholly-owned United States subsidiary of
The RTZ Corporation PLC ("RTZ"), a United Kingdom public company.
RTZ (now part of the RTZ-CRA Group) is one of the world's leading
international natural resource companies. Kennecott owns and
operates several mines through wholly-owned subsidiaries, including
the Bingham Canyon, Utah open pit copper mine which was started in
1906.
Registrant is not aware of any guarantee by Kennecott Corporation,
RTZ or any subsidiary of Kennecott Corporation or RTZ of the
performance by Kennecott Uranium Company of Kennecott Uranium
Company's development commitment under the GMMV joint venture
agreement. Further, Crested has no knowledge whether earnings of
Kennecott Uranium Company are retained by it, or remitted to its
parent. Accordingly, performance by Kennecott Uranium Company of
its development commitment under the GMMV joint venture agreement
can not be assured.
<PAGE>
Plateau's Shootaring Canyon Mill
Acquisition of Plateau Resources, Limited ("Plateau"). In August
1993, USE purchased from Consumers Power Company ("CPC"), all of
the outstanding stock of Plateau, which owns the Shootaring Canyon
uranium processing mill and support facilities in southeastern Utah
(the "Shootaring Mill"). The Shootaring Mill holds a source
materials license from the NRC.
USE paid nominal cash consideration for the Plateau stock, but as
additional consideration, USE has agreed:
(a) to perform or cause Plateau to perform all studies, remedial or
other response actions or other activities necessary from time to
time for Plateau to comply with environmental monitoring and other
provisions of (i) federal and state environmental laws relating to
hazardous or toxic substances, and (ii) the Uranium Mill Tailings
Radiation Control Act, the Atomic Energy Act of 1954, and
administrative orders and licenses relating to nuclear or
radioactive substances or materials on the property of, or produced
or released by, Plateau; and
(b) to indemnify CPC from all liabilities and costs related to the
presence of hazardous substances or radioactive materials on
Plateau property, and to any future violation of laws and
administrative orders and licenses relating to the environment or
to nuclear or radioactive substances.
At closing, Plateau transferred $2,500,000 cash to fund the "NRC
Surety Trust Agreement" with a commercial bank as trustee. The
trustee is to pay future costs of Shootaring Mill decommissioning,
site reclamation, and long term site surveillance, as directed by
the NRC. The amount transferred to the trust is the minimum amount
now required by the NRC as financial assurance for clean up after
permanent shut down of the Shootaring Mill.
Also at closing, Plateau transferred $4,800,000 cash to fund the
"Agency Agreement" with a commercial bank. These funds will be
available to indemnify CPC against possible claims related to
environmental or nuclear matters as described above, and against
third-party claims related to an agreement between Plateau and the
third-party (see Note K to the Crested Consolidated Financial
Statements for fiscal year ended May 31, 1996).
There are no present claims against funds held under either the
Trust Agreement or Agency Agreement. Funds (including accrued
interest) not disbursed under the Trust and Agency Agreements will
be paid over to Plateau upon termination of such Agreements with
NRC concurrence.
The consideration paid by USE was determined by negotiation with
CPC, taking into account estimated annual Shootaring Mill holding
costs, and estimated future Mill decommissioning and site
reclamation costs as required by the NRC and the Utah Department of
Natural Resources, Division of Oil, Gas and Mining ("DOGM").
The Plateau acquisition was done solely with USE, in light of
potential NRC objections to selling Plateau to the USECC joint
venture. Subsequent to closing, in September 1993, the Company and
Crested agreed that after Plateau's unencumbered cash has been
depleted, USE and Crested each will assume one-half of Plateau's
obligations, and share equally in Plateau's operating cash flows,
pursuant to the USECC Joint Venture.
Shootaring Mill and Facilities. The Shootaring Mill is located in
south-eastern Utah, approximately 13 miles north of Lake Powell,
and 50 miles south of Hanksville, Utah via State Highway 276, then
four miles west on good gravel roads. The entire facility occupies
18.9 acres of a 264.52 acre plant site. The mill was designed to
process 750 tpd, but only operated on a trial basis for two months
in mid-summer 1982. In 1984, Plateau put the mill on standby
because of the depressed U3O8 market.
Included with mill assets are tailings cells, laboratory
facilities, equipment shop and inventory. The NRC issued a license
to Plateau authorizing production of uranium concentrates, however,
since the mill was shut down, only maintenance and required safety
and environmental inspection activities have been performed. The
current source materials license with the NRC is for a standby
operation only and expired on December 31, 1993. Prior to
expiration, USE applied for an extension of its expiration date.
On July 31, 1996, the NRC approved Plateau's application to
postpone initiation of the requirements of timeliness in
decommissioning of the Shootaring Mill for five years. USE has
also applied to the NRC to convert the source materials license
from standby to operational.
Plateau also owns approximately 90,000 tons of uranium mineralized
material stockpiled at the mill site and approximately 172,000 tons
of mineralized material stockpiled at the Tony M Mine.
USE intends to cause Plateau to continue maintenance activities
pending reassumption of mill operations to process uranium ores to
concentrates. Both NRC and DOGM approval will be required prior to
commencing such operations.
<PAGE>
Ticaboo Townsite
Plateau also owns all of the outstanding stock of Canyon
Homesteads, Inc. ("Canyon"), a Utah corporation, which developed
the Ticaboo, Utah townsite 3.5 miles south of the Shootaring mill.
The Ticaboo site includes a 66 room motel, convenience store,
laundromat facility, 98 single family home sites, 151 mobile home
sites, and 26 recreational vehicle sites (all with utility access).
The townsite is located on a State of Utah lease near Lake Powell,
and is being operated as a commercial enterprise. USE and Crested
plan to further develop the townsite, and have been seeking
financial partners. Interim funding for limited improvements on
the commercial operations was provided by a private corporation
affiliated with a John L. Larsen, Chairman of the Board and Chief
Executive Officer of Crested and USE and President of USE. See
Part III, Item 12 "Certain Relationships and Related Transactions -
Transactions with Arrowstar Investments, Inc.".
Sheep Mountain Partners ("SMP")
Partnership. SMP is a Colorado general partnership formed on
December 21, 1988, between USECC, and Nukem, Inc. of Stamford, CT
("Nukem") through its wholly-owned subsidiary Cycle Resource
Investment Corporation ("CRIC"). Nukem is a uranium brokerage and
trading concern. During fiscal 1991, certain disputes arose among
the partners of SMP. These disputes resulted in litigation and
subsequent arbitration from which an Order and Award was issued on
April 18, 1996. USE and Crested have filed a petition for
confirmation of the Order and Award with the U.S. District Court
together with a petition for appointment of a receiver for the SMP
Partnership. See "Legal Proceedings - Sheep Mountain Partners
Arbitration/Litigation".
In February 1988, USE and Crested acquired uranium mines, mining
equipment and mineralized properties (Sheep Mountain Mines) at
Crooks Gap in south-central Fremont County, Wyoming, from Western
Nuclear, Inc. These Crooks Gap mining properties are adjacent to
the Green Mountain uranium properties. USECC mined and sold
uranium ore from two of the underground Sheep Mines during fiscal
1988 and 1989. Production ceased in fiscal 1989, because uranium
could be purchased from the spot market at prices below the mining
and milling costs of SMP.
USE and Crested sold 50 percent of their interests in the Crooks
Gap properties to Nukem's subsidiary CRIC for cash. The parties
thereafter contributed the properties to SMP, in which USE and
Crested received an undivided 50 percent interest. Each group
provided one-half of $315,000 to purchase equipment from Western
Nuclear, Inc.; USE and Crested also contributed their interests in
three uranium supply contracts to SMP and agreed to be responsible
for property reclamation obligations. The SMP Partnership
agreement provided that each partner generally had a 50 percent
interest in SMP net profits, and an obligation to contribute 50
percent of funds needed for partnership programs or discharge of
liabilities. Capital needs were to have been met by loans, credit
lines and contributions.
SMP was directed by a management committee, with three members
appointed by USECC, and three members appointed by Nukem/CRIC. The
committee has not met since 1991 during the SMP
arbitration/litigation.
Properties. SMP owns 80 (3 of which were conveyed by PMC to SMP in
August 1996, see below) unpatented lode mining claims on the Crooks
Gap properties, including two open-pit and five underground uranium
mines and an inventory of uranium ore. Production from the
properties is subject to sliding-scale royalties payable to Western
Nuclear, Inc.; the rates are from one to four percent on recovered
uranium concentrates.
Various structures and equipment are located on the properties
including three operating and three non-operating mine headframes
with hoists; maintenance shops; offices; and other buildings,
equipment and supplies. An ion-exchange plant is located near the
SMP properties, but is owned by USECC and not SMP.
Until recently, SMP also had interests in 59 unpatented mining
claims, one State mineral lease and one State surface use lease,
which had been conveyed to Pathfinder Mines Corporation ("PMC"). In
August 1996, PMC conveyed 38 of the 59 claims to SMP, retaining 21.
SMP chose to retain only 3 of the 38 claims. These properties
contain a previously-mined open-pit uranium mine and three
underground mines. PMC has the right to mine a portion of these
properties (the Congo area), by open-pit or in-situ techniques to
certain depths, without royalty or other obligations to SMP. PMC
has the responsibility for reclamation work needed thereon as a
result of its activities. If PMC mines any portion of the
properties outside the Congo area, a 3% royalty is owed to SMP.
Conversely, SMP has the right to mine portions of the claims and
leases outside the Congo area (and specified surrounding zones) by
underground mining techniques, subject to a 3% royalty to PMC. PMC
conducted an exploration program on a portion of these properties,
and has advised the Company that it does not intend any further
development. PMC has decommissioned and dismantled its two uranium
mills in Wyoming.
An ion exchange plant on the former PMC properties (and now held by
USECC) was used to remove natural soluble uranium from mine water.
Management is reviewing the economics of relicensing this facility
as part of a potential in-situ leach uranium mining operation.
USECC obtained a three year extension for timeliness in
decommissioning. See "Environmental" below.
Property Maintenance. As operating manager for SMP, USECC is
responsible for exploration, mining, and care and maintenance of
SMP mineral properties. USECC was to have been reimbursed by SMP
for certain expenditures on the properties. During the SMP
arbitration/litigation, Nukem/CRIC refused to allow SMP to pay
USECC for care and maintenance and other work performed on the
properties since the spring of 1991. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources at May 31, 1996". As
part of the Order and Award made on April 18, 1996, the Arbitration
Panel awarded USECC $2,065,989 for Nukem/CRIC's 50% share of care
and maintenance expenses for the SMP properties plus interest of
$446,834 to March 31, 1996 and per diem cost of $616 thereafter,
which award is not yet finalized. See Item 3, Legal Proceedings -
Sheep Mountain Partners Arbitration/Litigation - Stipulated
Arbitration." Currently, USECC has a limited care and maintenance
staff on site to care for and maintain the mines and pump mine
water to prevent flooding of the mines.
SMP Marketing. Nukem, Inc. was engaged by SMP to provide SMP with
financial expertise and marketing services. SMP entered into a
marketing agreement with CRIC, which was concurrently assigned to
and assumed by Nukem, to provide marketing and trading services for
SMP, which included acquiring uranium for SMP by purchasing or
borrowing. Nukem was to be reimbursed at its direct costs for
acquiring such uranium for SMP. USECC, SMP and Nukem had seven
long-term contracts plus an additional long-term contract with
PSE&G that was awarded to SMP by the Arbitration Panel for sales of
uranium originally to nine domestic utilities. SMP's uranium
supply contracts are either base-price escalated or market-related
(referring to how price is determined for uranium to be delivered).
Base-price escalated contracts set a floor price which is escalated
over the term of the contract to reflect changes in the GNP price
deflator. The two current base-price escalated contracts of SMP
require delivery of 130,000 pounds of uranium concentrates through
1997 on one contract and 750,000 lbs. U3O8 through 2000 on the other
contract. Prices of uranium for deliveries under the base-price
escalated contract currently exceed prices at which uranium can be
purchased in the spot market.
Under the market-related contracts, the purchaser's cost depends on
quoted market prices and the price at which a willing seller will
sell its U3O8 during specified periods before delivery. Some of
these contracts place a ceiling on the purchase price, substituting
a base-price escalated amount, if the market price exceeds a
certain level. Under the terms of the various market-price related
contracts, SMP is required to deliver from 250,000 to 970,000
pounds of uranium annually from 1997 to 2000, which amounts may be
increased or decreased by specified percentages.
Through fiscal 1996, USECC has satisfied most of these contracts
with uranium concentrates previously produced by SMP, borrowed from
others, or purchased on the open market. The future role of Nukem
in making deliveries under these contracts on behalf of SMP cannot
be assured notwithstanding the April 18, 1996 Order and Award. See
"Legal Proceedings - Sheep Mountain Partners
Arbitration/Litigation."
Permits. Permits to operate existing mines on SMP properties have
been issued by the State of Wyoming. Amendments are needed to open
new mines within the permit area. As a condition to issuance of
the permits, an NPDES permit under the Clean Water Act has been
obtained. Monitoring and treatment of water removed from the mines
and discharged in nearby Crooks Creek is generally required.
During the past two years, SMP did not discharge wastewater into
Crooks Creek, and the mine water is presently being discharged into
the McIntosh Pit.
Uranium Market Information. There are currently nine producers of
uranium in the United States, which collectively produced 5.8
million pounds of U3O8 during calendar 1995 and are expected to
produce approximately 7.2 million pounds in calendar 1996. In
addition, there currently are several major producers in Canada
(Cameco, Cogema Canada, Ltd., Rio Algom and Uranerz); Australia
(Energy Resources of Australia and Pancontinental Mining, Ltd.);
Africa (Cogema and RTZ's Rossing unit), and Europe, which
collectively produced about 60 million pounds of U3O8 during
calendar year 1995 and are expected to produce approximately 65
million pounds in calendar 1996. Several members of the
Commonwealth of Independent States ("CIS"), also export uranium to
the western markets although the amount of such exports to the
United States and European markets is currently limited.
Uranium is primarily used in nuclear reactors that heat water to
drive turbines that generate electricity. There are presently some
542 commercial nuclear power plants worldwide either operating,
under construction or planned. Of them, 45 are under construction
and 53 are planned. Current worldwide consumption is about 150
million pounds of U3O8 per year, but worldwide production is only
about 72 million pounds per year. Published reports indicate that
approximately 31 percent of the worldwide nuclear-powered
electrical generating capacity is in the U.S., 49 percent is in
western Europe, and 14 percent is in the Far East. Although the
reactors in western Europe have a greater aggregate generating
capacity and fuel usage, the supply of uranium for those reactors
has been obtained for relatively long periods, and the market
requiring the greatest supply of uranium for the next few years is
believed to be the United States. The Asia Pacific region is also
developing into a significant uranium consumer, due to announced
plans for rapid expansion of nuclear power programs in Japan,
Korea, Taiwan and the Russian Federation. This region accounts for
most of the 98 power plants which are ordered or under
construction.
Pursuant to Suspension Agreements signed in October 1992 between
the United States Department of Commerce ("DOC") and certain of the
Republics of the CIS, to rectify prior damage to domestic United
States uranium producers from dumping sales of U3O8 by certain CIS
republics, all spot sales of U3O8 delivered into the U.S. now
reflect quota restrictions on U3O8 imports from the CIS. However,
there are provisions which allow CIS uranium to be imported for
certain long-term uranium sales contracts entered into with
domestic utilities prior to March 5, 1992 ("grandfathered
contracts").
<PAGE>
NUEXCO Exchange Value. The market related contracts of SMP are
based on an average of the Nuexco Exchange Value ("NEV") for 2, 3
or more months before uranium delivery. The high and low NEV
reported on U3O8 sales during Crested's past five fiscal years are
shown below. NUEXCO Exchange Values are reported monthly and
represent NUEXCO's judgment of the price at which spot and near
term transactions for significant quantities could be concluded.
NEVs for fiscal 1993 are higher for U.S. transactions, due to the
impact of CIS import restrictions since late 1992. These prices
("US NEV") were reported by NUEXCO for spot sales in the restricted
U.S. market.
NUEXCO EXCHANGE VALUE
US $/pound of U3O8
Years Ended -----------------------
May 31, High Low
----------- ---- ----
1992 $ 9.05 $ 7.75
1993 10.05 7.75
1994 10.20 9.25
1995 11.00 9.50
1996 16.50 11.85
US NEV was $16.30/lb. as of August 31, 1996.
NUEXCO's restricted market values ("U.S. NEV") apply to all
products and services delivered in the U.S. as well as non-CIS
origin products and services delivered outside the U.S.
In the U.S., uranium is generally supplied to electric utilities
under medium to long-term supply agreements, which require
deliveries more than one year after entry into the contract. These
agreements are designed to provide both the producer-supplier and
the customer with reasonable assurance as to the amount of uranium
desired and the availability of supply at a predictable price.
Utilities generally seek supply contracts at least two to three
years before their needs occur. It is expected that a large
portion of U.S. demand will be secured by electric utilities
entering into contracts in the next one to three years. There also
is an active spot market, through which approximately 5 to 10
percent of uranium concentrate needs are satisfied.
While total demand in 1995 exceeded domestic production, there
remains a near-term supply of U3O8 equivalent from domestic
producers' inventory, and from unrestricted (i.e., not under
quotas) foreign producers current production and inventory. The
Company expects these and other factors (e.g., weapons grade
uranium conversions) will moderate price increases, which otherwise
might be expected from the shortfall of United States production
meeting demand, in spite of increasing interest from U.S. utilities
in renewing long-term contracts at higher than spot market prices.
During fiscal 1996, spot market prices increased approximately 40%
from May 31, 1995.
<PAGE>
Gold
Lincoln Project (California)
Sutter Gold Mining Company. In fiscal 1991, USE acquired an
interest in the Lincoln Project (including the underground Lincoln
Mine) in the Mother Lode Mining District of Amador County,
California in a mining joint venture known as the Sutter Gold
Venture ("SGV"). The entire interest of SGV is now owned by USECC
Gold L.L.C., a Wyoming limited liability company ("USECC Gold).
Until the end of fiscal 1994, Seine River Resources Inc., a
Vancouver Stock Exchange listed company ("SRRI"), which is not
affiliated with USE or its subsidiaries, was a joint venture party
in SGV. USECC Gold is a subsidiary of Sutter Gold Mining Company,
a Wyoming corporation ("SGMC").
SGMC expects to commence additional exploration and mine
development as soon as it raises sufficient funding. There can be
no assurance that funding proposals will be successful in raising
sufficient capital to commence mining and milling operations at the
Lincoln Project. See "Permits and Future Plans."
USECC Gold and SRRI had intended to operate SGV as equal 50 percent
venturers. However, because of SRRI defaults on its obligations,
USE and Crested acquired (through USECC Gold) a 90 percent
aggregate equity interest in the Lincoln Project by the end of
fiscal 1993 (and the interests in USECC Gold were owned 88.89
percent by USE, and 11.11 percent by Crested). By the end of
fiscal 1994, SRRI owed USE and Crested $1,970,507 for SGV property
holding costs, permitting costs and mine maintenance expense
incurred and paid for by USE and Crested since March 1992,
including interest and management fees charged by USE and Crested.
As of May 23, 1994, SRRI agreed to assign its remaining 10 percent
interest in SGV to USE as payment for the $1,970,507 owed USE and
Crested. However, only the $1,389,272 of costs and expenses paid
for by USE and Crested was recorded; $581,235 for interest and
management fees was written off as uncollectible. SRRI also issued
400,000 common shares of stock and delivered them to USE as final
payment of any deficiencies for pre-fiscal 1994 indebtedness (owed
by SRRI to SGV) which had been secured with SRRI's interest in SGV
and which USE and Crested acquired in lieu of foreclosure (see Note
F to the Crested Consolidated Financial Statements for fiscal year
May 31, 1996). SRRI's 10% interest was delivered to Crested and
USE in fiscal 1994.
Subsequent to the end of fiscal 1994, the Sutter Gold Venture was
terminated, USE and Crested formed SGMC and agreed to exchange
their interests in USECC Gold for common stock of SGMC. As of May
31, 1996 a private placement of 896,364 shares was made to a small
group of investors. SGMC currently is owned 74 percent by USE, 9
percent by Crested and 17 percent by private investors.
During fiscal years 1992 through 1995, SGV conducted environmental
studies, drafted initial mine and mill designs, mined bulk samples
from the Lincoln Mine for assay and mill design purposes, installed
an underground water treatment plant to treat mine water seepage,
and performed other work to support application for operating
permits.
Properties. SGMC (through its subsidiary USECC Gold) holds
approximately 14 acres of surface and mineral rights (owned), 436
acres of surface rights (leased), 158 acres of mineral rights
(leased), and 380 acres of mineral rights (owned), all on patented
mining claims near Sutter Creek, Amador County, California. The
majority of these properties were acquired from Meridian Minerals
Company and the balance were acquired by SGV in 1995 and 1994. The
properties are located in the western Sierra Nevada Mountains at
from 1,000 to 1,500 feet elevation; year round climate is
temperate. Access is by California State Highway 16 from
Sacramento to California State Highway 49, then by paved county
road approximately .4 miles outside Sutter Creek.
Surface and mineral rights total holding costs will be
approximately $430,000 through May 31, 1997 (including $39,000 for
payments on two parcels (14 acres) bought in 1994; an estimated
$30,000 for one-time costs to acquire a surface easement and lease
to access the mill site from California State Highway 49; and
property taxes of approximately $30,000 for the year ending May 31,
1997). Annual property taxes are estimated to increase to more
than $100,000 when the Lincoln Project is built and put into
operation.
The leases are for varying terms (the earliest expires in February
1998), and require rental fees, advance production royalties, real
property taxes and insurance. Leases expiring before 2010 will
generally be extended, so long as minerals are continuously
produced from the property that is subject to the lease or minimum
payments are made . Other leases may be extended for various
periods on terms similar to those contained in the original leases.
Production royalties are from 2.5% to 6% (most are 4%). The
various leases have different methods of calculating royalty
payments (net smelter return and gross proceeds).
Amador United Gold Mines ("Amador United") was a prior owner of
certain leases which it conveyed to the Lincoln Project when the
project was owned by Meridian Minerals Company ("Meridian"). In
return for its conveyance of such leases Amador United received a
right of first refusal to buy the Lincoln Project and a 20 percent
net profits interest in production from any of the Lincoln Project
properties. Although all of the properties which Amador United
conveyed to the Lincoln Project were relinquished by Meridian as
uneconomic or of marginal utility to the Project, Amador United
remains entitled to its net profits interest. "Net profits" will
be determined by deducting from gross revenues from sale of
minerals produced by the Lincoln Project, an amount equal to 105
percent of all costs and expenses in excess of $6,000,000 which are
directly or indirectly attributable and necessary or incidental to
the acquisition, exploration, development, mining and marketing of
minerals produced from all of the properties comprising the Lincoln
Project. Costs and expenses are defined to include (but not be
limited to): ad valorem real property and personal property taxes;
reasonably anticipated reclamation costs; salaries and wages of
employees assigned to property acquisition, exploration,
development, mining and marketing activities; travel expenses and
transportation of employees, material, equipment and supplies; all
payments to contractors; assay, metallurgical testing and other
analyses to determine the quality and quantity of minerals on all
of the properties; costs to obtain environmental permits and other
permits, rights-of-way and similar rights, as incurred in
connection with acquisition, exploration, development, mining and
marketing activities; property acquisition and holding expenses;
costs for feasibility studies; costs for title curative work; and
1.25 percent monthly interest on such costs and expenses which are
not paid.
A separate holder of four of the properties that were assembled by
Meridian into the Lincoln Project holds a 5 percent net profits
interest on production from such properties, which was granted by
Meridian when it acquired the properties. The "net profits"
generally will be determined in the same manner as the Amador
United net profits interest (i.e., gross mineral revenues less an
amount equal to 105 percent of numerous categories of costs and
expenses). An additional 0.5 percent net smelter return royalty is
held by a consultant to a lessee prior to Meridian's acquisition of
the properties, which 0.5 percent interest covers the same four
properties in the Lincoln Project.
There has been an estimated $16,858,900 of spending to date in the
Lincoln Project by Meridian, USECC Gold and their predecessors.
Since fiscal 1991, USE and Crested have expended approximately
$12,858,900 to acquire the Lincoln Project and for mine
development, mining and processing bulk samples of mineralization,
exploration, feasibility studies, project permitting costs, holding
costs, and related general and administrative costs, which amount
includes advances by USE and Crested to cover SRRI's share of such
costs. The amount of such expenditures during the 1996 fiscal year
was approximately $637,300. Certain of the expenditures included
in the $12,858,900 have been expenses and the rest have been
capitalized as assets.
Current estimates call for up to $15 million of additional
investment to put the properties into production. Payment of any
amount to Amador United and the other holders of net profits
interests will only occur after the Lincoln Project has generated
gross revenues in excess of the amount invested by the Company and
Meridian (estimated at $69 million, including interest, assuming
production begins in 1997). Lease royalties burdening the Lincoln
Project properties are in addition to Amador United's net profits
interest.
In connection with SRRI and USE receiving their interests in the
Lincoln Project at formation of the SGV, and thereafter upon USE's
and Crested's acquisition of SRRI's remaining interests in SGV due
to default by SRRI, Amador United was provided notices of its right
of first refusal to acquire such interests for amounts equal to the
consideration paid and USE's and Crested's advances to SRRI. Amador
United has objected to the notices given, however, USE and Crested
believe these objections are without merit.
Geology and Reserves. The minerals consulting firm Pincock, Allen
& Holt of Lakewood, CO ("PAH") prepared a prefeasibility study of
the Lincoln Project in fiscal 1994. PAH reviewed core drilling
data on the Lincoln Zone on 100-foot centers from the surface, and
drilling on the Comet Zone from both surface and underground. PAH
also reviewed data from drilling on the Keystone Zone from surface
on 200-foot centers. Total data is from 162 exploration core holes
(surface and underground), with total footage of 64,700 feet. PAH
based its estimate of proven reserves on mineralized material
within 25 feet of sample information; probable reserves were based
on material located between 25 and 50 feet of sample information.
Using a cutoff grade of 0.25 ounces of gold per ton in place, PAH
estimates the Lincoln Project contains 194,740 tons of proven and
probable reserves grading 0.57 ounces of gold per ton. If
operating economics indicate a lower cutoff grade is feasible, the
tonnages for the stated reserves would be increased.
In fiscal 1992, SGV mined 8,000 tons of material (including waste
rock and low grade mineralization) out of drifts and raises off the
Stringbean Alley decline (see "Permits and Future Plans", below) in
a bulk sampling program to test mining techniques and milling
recoveries. Milling results indicated at least 94 percent of the
gold in the ore should be recoverable with gravity, flotation and
cyanidation milling circuits (1,400 ounces of gold were recovered
in this program). Subsequent metallurgical tests by the
engineering firm Brown & Root, Inc. (using test data from the
Lincoln Project developed by Hazen Research, Inc.) indicate mill
recovery could be in excess of 96 percent. PAH has estimated the
recovery rate as between 93 and 95 percent.
The geology within the Lincoln Project is typical of the historic
Mother Lode region of California, with a steeply dipping to
vertical sequence of metavolcanic and metasedimentary rocks hosting
the gold-bearing veins. Depending on location along the strike
length on the vein systems, the gold-bearing veins are slate,
metavolcanic greenstone, or an interbedded unit of slates and
volcanics. The Lincoln Project covers over 11,000 feet of strike
length along the Mother Lode vein systems.
<PAGE>
Permits and Future Plans. In August 1993, the Amador County Board
of Supervisors issued a Conditional Use Permit ("CUP") allowing
mining of the Lincoln Mine and milling of production, subject to
conditions relating to land use, environmental and public safety
issues, road construction and improvement, and site reclamation.
The permit will allow construction of the mine and mill facilities
in stages as the project gets underway, thereby reducing initial
capital outlays. Additional permits (for road work, dust control
and construction of mill and other surface improvements) need to be
applied for in due course.
Initial mining using standard cut-and-fill overhead stoping
techniques is planned for the Lincoln and Comet Zones, by an
existing 15 feet by 12 feet by 2,800 feet decline (the Stringbean
Alley decline), which runs from the surface down through the Comet
and into the Lincoln Zone. Screened tailings from the mill
flotation circuit will be used to back-fill the stopes and
stabilize the wall rocks; this recycling will also greatly reduce
the volume of tailings going into the tailings ponds. In the pre-
production stage, the Stringbean Alley decline will be extended
down to 750 feet, then a drift driven back horizontally along the
750 foot level (above sea level).
The CUP requires that within 18 months after operations start up,
a new decline (to be named the Lincoln Decline) will have to be
completed running for 1,850 feet from the surface at the mill site
(1,340 feet above sea level) down to a new drift to be driven at
the 1,000 foot (above sea) level; the new decline will be used for
access of mining personnel and supplies to the underground
workings, as well as to permit ore haulage up the decline by
conveyor, thus eliminating ore haulage on the surface from mine
portal to the mill.
Concurrently with production mining, SGMC intends to maintain an
aggressive underground development program to delineate (on an on-
going basis) two to three years of developed ore in sight.
Preliminary estimates are that SGMC will require up to $15 million
financing to construct the mill and prepare the mine for full scale
production, and for interim holding costs. The mill design is
being finalized and will be reviewed by PAH or another engineering
firm, and SGMC expects to follow PAH's or such other firm's
recommendations in building the recovery circuits. The mill will
be constructed to allow a 500 ton per day operations, but will be
initially equipped so as to handle 300 tons per day throughput.
Exclusive of attached lab and other support facilities, the central
mill building is expected to cover less than 15,000 square feet,
and will be constructed with interior mezzanine levels to hold
different banks of equipment. Adequate power is available at the
boundaries of the Lincoln Project from the local utility; water
also is available from a utility if needed, although the Lincoln
Mine is expected to produce adequate water for mining and milling
operations.
<PAGE>
Molybdenum
As holders of royalty, reversionary and certain other interests in
properties located at Mt. Emmons near Crested Butte, Colorado, USE
and Crested are entitled to receive annual advance royalties of
50,000 pounds of molybdenum, or cash equivalent (one-half to each).
AMAX Inc. (which was acquired and merged with Cyprus Minerals
Company and was renamed Cyprus Amax Minerals Company in November
1993) delineated a deposit of molybdenum containing approximately
146 million tons of mineralization averaging 0.43% molybdenum
disulfide on the properties.
Advance royalties are paid in equal quarterly installments, until:
(i) commencement of production; (ii) failure to obtain certain
licenses, permits, etc., that are required for production; or (iii)
AMAX's return of the properties to the USE and Crested. Crested
did not receive any advance royalties during fiscal 1996 because of
an arrangement with Cyprus Amax described below. During fiscal
1995, Crested recognized $85,500 of advance royalty revenue under
this arrangement. These royalties are shown in the Consolidated
Statements of Operations as a component of gains from restructuring
mineral properties agreements. See Note F to the Crested
Consolidated Financial Statements for fiscal year ended May 31,
1996. The advance royalty payments reduce the operating royalties
(six percent of gross production proceeds) which would otherwise be
due from Cyprus Amax from production. There is no obligation to
repay the advance royalties if the property is not placed in
production.
The Agreement with AMAX also provides that USE and Crested are to
receive $2,000,000 (one-half to each), at such time as the Mt.
Emmons properties are put into production and, in the event AMAX
sells its interest in the properties, USE and Crested would receive
15 percent of the first $25,000,000 received by AMAX. The Company
has asserted that the reported merger of AMAX into Cyprus Minerals
Company was a sale of AMAX's interest in the properties which would
entitle USE and Crested to such payment. Cyprus Amax has rejected
such assertion and the Company is considering its remedies.
Subsequent to May 31, 1994, USE and Crested reached agreement with
Cyprus Amax to forego six quarters of advance royalties (starting
fourth quarter calendar 1994) as payment for the option exercise
price for certain real estate in Gunnison, Colorado owned by Cyprus
Amax and the subject of a purchase option held by USE and Crested.
The option exercise price is valued at $266,250. USE and Crested
exercised their option in August 1994 and subsequently sold that
property for $970,300 in cash and notes receivable. The advance
royalties resumed in the second quarter of calendar 1996, however,
the payment was not received until June 1996, being the first
quarter of 1997.
<PAGE>
Molybdenum Market Information
Molybdenum is a metallic element with applications in both
metallurgy and chemistry. Principal consumers include the steel
industry, which uses molybdenum alloying agents to enhance strength
and other characteristics of its products, and the chemical, super-
alloy and electronics industries, which purchase molybdenum in
upgraded product forms.
The molybdenum market is cyclical with prices influenced by
production costs and the rate of production of foreign and domestic
primary and by-product producers, world-wide economic conditions
particularly in the steel industry, the U.S. dollar exchange rate,
and other factors such as the rate of consumption of molybdenum in
end-use products. When molybdenum prices rose dramatically in the
late 1970s, for example, steel alloys were modified to reduce
reliance on molybdenum. AMAX and Cyprus Minerals Company were the
two major primary producers of molybdenum in the United States
until November 1993, when the companies merged.
Worldwide demand for molybdenum in calendar 1995 was reportedly 232
million pounds, its highest level ever. Production for that period
was about 230 million pounds. There is however, excess capacity
from the primary molybdenum mines which are currently not
producing. In addition, by-product molybdenum (primarily from
Chilean copper mining companies) has a major impact on available
supplies. It is unlikely that any major new primary deposits will
be developed during fiscal 1997.
Molybdenum prices on the open spot market increased substantially,
from $3.35 per pound of technical molybdic oxide (the principal
product) in September 1994, to $15.50 - $17.50 per pound in
February 1995. However, by May 31, 1996 prices had declined to
$3.00 - $3.35 per pound.
Parador Mining (Nevada)
The Company and USE are sublessees and assignees from Parador
Mining Co., Inc. ("Parador"), on certain rights under two patented
mining claims located in the Bullfrog Mining District of Nye
County, Nevada. The claims are immediately adjacent to and part of
a gold mine operated by Bond Gold Bullfrog, Inc. ("BGBI"), a non-
affiliated third party (now known as Barrick Bullfrog, Inc.). The
Company and Crested have also been assigned certain extralateral
rights associated with the claims and certain royalty rights
relating to a prior lease on those properties. The lease to USE
and Crested is for a ten year primary term, is subject to a prior
lease to BGBI on the properties, and allows USE and Crested to
explore for, develop and mine minerals from the claims. If USE and
Crested conduct activities on the claims, they are entitled to
recover costs out of revenues from extracted minerals. After
recovering any such costs, USE and Crested will pay Parador a
production royalty of 50 percent of the net value of production
sold from the claims.
<PAGE>
USE, Crested and Parador informed BGBI that payments are owed to
them pursuant to extralateral rights on the claims. BGBI in turn
initiated legal proceedings to establish the rights of the various
parties in the claims. Thereafter, Parador notified BGBI that BGBI
had defaulted in its lease and that Parador had terminated the
lease. BGBI denies that it has defaulted. A trial on the
bifurcated issue of extralateral rights only to the court in
December 1995 resulted in a decision that Parador had failed to
meet its burden of proof to establish that its claims are entitled
to assert extralateral rights and that USE, Parador and Crested
have no right, title or interest in the adjacent BGBI claims.
Registrant has filed an appeal of this ruling as erroneous as a
matter of law. The remaining issues have not been set for trial.
See Item 3, "Legal Proceedings - BGBI Litigation".
Oil and Gas.
Fort Peck Lustre Field (Montana). USECC conducts oil production
operations at the Lustre Oil Field on the Ft. Peck Indian
Reservation in north-eastern Montana; four wells are producing, and
USE and Crested receive a fee based on oil produced. USE is the
operator of record. No further drilling is expected in this field.
This fee and certain real property of USE and Crested, have been
pledged or mortgaged as security for a $1,000,000 line of credit
from a bank.
Energx, Ltd. Fort Peck Gas Project. Energx, Ltd., a Wyoming
corporation owned 45% by USE, 45% by Crested, and 10% by the
Assiniboine and Sioux Tribes, signed in October 1993 an "Agreement
Between The Assiniboine and Sioux Tribes of the Fort Peck Indian
Reservation and Energx, Ltd. to Explore, Develop and Produce
Shallow Gas." This Agreement has been approved by the Secretary of
the Interior and the United States Bureau of Indian Affairs. In
the fourth quarter of calendar 1995 Energx drilled and tested three
exploratory wells, in conjunction with NuGas Resources U.S. Inc.
("NuGas"). These three were all dry holes, having been drilled
under a farmout agreement with Placid (see below); these three
wells counted against the eight well commitment under this
Agreement. Energx (and NuGas) had planned to drill and test five
more exploratory wells in July 1996, however, this has been
extended to September 1996. If Energx determines there is
potential for a natural gas field, Energx (and NuGas) will have
exclusive exploration rights for shallow gas (down to the top of
the Muddy formation, approximately 4,000 feet) on approximately
325,000 acres of tribal mineral lands on the Reservation for a
period of five years. The Agreement is renewable for successive
five year terms, provided Energx drills another five exploration
wells during each term. The first three dry holes were funded by
NuGas in accordance with the provisions of the Agreement.
With additional fee and Tribal allotted acreage assembled by Energx
and NuGas, Energx and NuGas now have positions in approximately
330,000 contiguous acres within the Fort Peck Indian Reservation.
The Tribes will not participate in the fee acreage.
<PAGE>
During the initial exploration program, proceeds from production
will be allocated to NuGas to recoup the initial eight wells'
drilling and completion expense (except for up to three dry holes,
see "NuGas Resources (U.S.) Inc. Agreement"), Thereafter, net
revenues will be allocated 40 percent to the Tribes and 60 percent
to Energx and NuGas. Pursuant to United States Law, only the
Tribes may own beneficial interests in reservation minerals;
Energx' and NuGas' share of net revenues is compensation for
operating services.
The Fort Peck tribal lands are believed to contain significant
shallow gas deposits, analogous to the Bowdoin Gas Field (eastern
Montana) and other Cretaceous age gas producing reservoirs in the
Northern Great Plains Gas Province. Numerous wells drilled for
deep oil on the Fort Peck tribal lands have documented shallow gas
shows. However, no reserves have been established for the acreage
subject to the Agreement with Energx. Two major gas transmission
systems cross the Fort Peck Reservation (Northern Border and
Williston Basin).
NuGas Resources (U.S.) Inc. Agreement. By the Joint Venture
Agreement ("JVA") with Energx dated July 18, 1994, NuGas is
obligated to Energx to drill and complete (or abandon) at NuGas'
sole expense, eight exploratory shallow gas wells on the Fort Peck
Reservation by July 1, 1996, which has been extended to July 1,
1997, to earn a one-half interest in Energx' rights under the Fort
Peck Shallow Gas Agreement. Well gathering, gas dehydration and
related equipment costs will be shared equally by NuGas and Energx.
Energx will not be required to contribute to the costs of drilling
the first eight exploratory wells.
NuGas has contributed $100,000 to pay for costs of acquiring leases
and easements on non-Tribal lands contiguous to Tribal lands, to
assemble adequate sized drilling units for the first eight
exploratory wells. In fiscal 1995 Energx received $200,000 under
the JVA as a prospect generation fee. Energx is operator of
record, while NuGas is field operator.
NuGas and Energx each will receive 50 percent of proceeds from gas
produced and sold from the initial eight wells, until NuGas
receives 50 percent of such wells' drilling, completion, geological
and equipping costs; thereafter, distributions will be shared 30
percent each to NuGas and Energx, and 40 percent to the tribes
pursuant to the Fort Peck Shallow Gas Agreement. NuGas will not be
entitled to recoup any drilling and geological costs related to up
to three dry holes drilled in the initial eight well drilling
program. All activities after the initial exploration drilling
program will be funded equally by NuGas and Energx.
NuGas is a subsidiary of a Toronto Stock Exchange company with
substantial experience in shallow gas exploration and production,
principally in the northern plains states and Canada, where the
company currently operates more than 500 shallow gas wells and
produces 30,000,000 cubic feet of gas per day.
<PAGE>
Farmout Agreement. In October 1995, Placid Oil Company, a
subsidiary of Occidental Petroleum and other parties (hereafter
together referred to as "Placid"), signed a Farmout Agreement with
Energx and NuGas. Under the agreement, Energx and NuGas as
operator had the right to drill and complete shallow gas wells on
approximately 170,000 acres of non-Tribal lands within the Fort
Peck Indian Reservation, at the sole expense of the operator. The
Farmout Agreement contemplated three phases: (i) drilling and
completion (or abandonment) of three test wells on widely dispersed
drilling locations; (ii) subject to performance of (i), continuous
drilling and completion (or abandonment) of option wells, also on
widely dispersed drilling locations; and (iii) subject to
performance of (i), continuous drilling and completion (or
abandonment) of additional wells on blocks not covered by (i) and
(ii). The first three wells were drilled on specific sections
within the 170,000 acres.
Drilling of the first test well commenced in October 1995; the last
of the three wells was to be drilled and completed (or abandoned)
within 45 days of the commencement of drilling the first well.
All three wells were dry holes. Contemplating the significant
holding cost for the delay rentals, Energx and NuGas jointly
decided to terminate the Placid Farmout Agreement on January 1,
1996 and relinquished their rights to the 170,000 acres referred to
above as Energx and NuGas determined they would focus their efforts
and resources towards the Tribal acreage.
Wind River Basin, Wyoming - Monument Butte Prospect. During the
1996 fiscal year, Energx terminated BLM leases covering
approximately 13,000 acres in Fremont County, WY, which were
believed to be prospective of shallow coalbed methane and
conventional stratigraphic natural gas and oil deposits. Energx
wrote off $328,700, the cost of acquiring and holding these leases.
Funding Energx: Energx operations to date have been funded with
USECC equity investments and advances, and transaction revenue (the
NuGas prospect generation fee). Energx expects to fund future
operations by a combination of private equity financing and by
seeking industry and private investor participation on prospects.
However, due to depressed gas prices in calendar 1996, equity
financing as well as joint venture industry participation of
natural and coalbed methane gas projects was difficult to obtain.
Accordingly, in fiscal 1997 Energx is monitoring its acreage
positions (other than Fort Peck) to evaluate whether to continue
paying the acreage holding costs and/or drill to earn acreage
rights (as applicable), or to turn operations over to another
company in the industry in exchange for an overriding royalty from
future production payable to Energx or to abandon such position.
<PAGE>
COMMERCIAL OPERATIONS
Real Estate and Other Commercial Operations
Registrant owns varying interests, alone and with USE, in
affiliated companies engaged in real estate, transportation, and
commercial businesses. The affiliated organizations include
Western Executive Air, Inc. ("WEA") and Canyon Homesteads, Inc.
(through Plateau). Activities of these subsidiaries in these
business sectors include ownership and management of a commercial
office building, the townsite of Jeffrey City, Wyoming and the
townsite, motel, convenience store and other commercial facilities
in Ticaboo, Utah. Until it was sold in April 1996, USECC also
owned and managed a mobile home park in Riverton, Wyoming. See
Part III, Item 12, "Certain Relationships and Related Transactions
- - Transactions with Arrowstar Investments, Inc.". WEA owns and
operates an aircraft fixed base operation with fuel sales, flight
instruction and aircraft maintenance in Riverton, Wyoming.
Wyoming Properties. USECC owns a 14-acre tract in Riverton,
Wyoming, with a two-story 30,400 square foot office building
(including underground parking). The first floor is rented to
affiliates, nonaffiliates and government agencies; the second floor
is occupied by USE and Crested and is adequate for their executive
offices. The property is mortgaged to the WDEQ as security for
future reclamation work on the SMP properties.
USECC (through WEA) also owns a fixed base aircraft operation at
the Riverton Municipal Airport, including a 10,000 square foot
aircraft hangar and 7,000 square feet of associated offices and
facilities. This operation is located on land leased from the City
of Riverton for a term ending December 16, 2005, with an option to
renew on mutually agreeable terms for five years. The annual rent
is presently $1,180 adjusted annually to reflect changes in the
Consumer Price Index), plus a $0.02 fee per gallon of fuel sold.
In November 1995, USECC exercised an option to acquire a 7,200
square foot hangar at the Riverton airport, for $75,000, from a
private Wyoming corporation affiliated with John L. Larsen,
Chairman and Chief Executive Officer of the Company and President,
Chairman and Chief Executive Officer of USE. See Part III, Item
12, "Certain Relationships and Related Transactions - Transactions
with Arrowstar Investments, Inc."
USE and Crested also own 18 undeveloped lots on 26.8 acres of the
Wind River Airpark near the Riverton Municipal Airport, and three
mountain sites covering 16 acres in Fremont County, Wyoming.
USECC owns various buildings, 290 city lots and/or tracts and other
properties at the Jeffrey City townsite in south-central Wyoming.
Nearly 4,000 people resided in Jeffrey City in the early 1980s,
when the nearby Crooks Gap and Big Eagle uranium mining projects
were active. The townsite may be utilized for worker housing as
the Jackpot Mine and Sweetwater Mill are put into operation. In
the interim Registrant and Crested have sold 19 lots for an
aggregate of $46,000 during fiscal 1996. In addition, in April 25,
1996, the Registrant and Crested entered into an agreement with a
non-related party to sell 10 six-plex townhouses located in Jeffrey
City for $500,000, conditioned upon purchaser obtaining financing
for the full amount within 60 days. The purchaser did not obtain
financing within the 60 days and the agreement was extended until
September 15, 1996. Full real estate title will be transferred to
the purchaser upon closing, however, if purchaser removes the
townhouses, purchaser must reclaim the land and the real property
where the townhouses were located will be assigned and conveyed
back to USE and Crested by quitclaim deed for full consideration of
$10.00.
Colorado Properties. In connection with the AMAX transaction for
the Mt. Emmons molybdenum properties near Crested Butte, Colorado,
USECC acquired an option from AMAX (now Cyprus Amax) to purchase
approximately 57 acres for $200,000 in Mountain Meadows Business
Park, Gunnison, Colorado. See "Minerals - Molybdenum" above. The
property is zoned commercial and industrial, and is adjacent to
Western State College. In fiscal 1995, USECC and Cyprus Amax
agreed to exercise the option by USE and Crested agreeing to forego
six quarters of advance royalties from Cyprus Amax (the option
purchase price was $200,000), plus payment of certain expenses i.e.
real property taxes from 1987 and other expenses amounting to
$19,358. Thereafter, Crested (together with USE) signed option
agreements with Pangolin Corporation, a Park City, Utah developer,
for sale of the 57 acres, and a separate parcel owned in Gunnison
County, Colorado.
The first option (exercised in February, 1995) was for the 57
commercial and noncommercial zoned acres in the City of Gunnison,
Colorado; the purchase price was $970,300. Pangolin paid $345,000
cash and $625,300 in three year nonrecourse promissory notes, of
which $137,900 was paid during fiscal 1995 and $35,600 was paid
during fiscal 1996. The remaining note bears interest at 7.5% per
annum.
The second option covers 472.5 acres of ranch land northwest of the
City of Gunnison, Colorado (purchase price $822,460). Pangolin
paid $10,000 for the option; on option exercise and closing,
Pangolin paid $46,090 in cash and $776,370 by two nonrecourse
promissory notes (each with principal and unpaid interest due on
the third anniversary of closing except for $35,000 on the first
anniversary). The Company did not receive the $35,000 payment as
scheduled but is negotiating the receipt of it and expects to
collect it in the near future. At closing, 22.19 acres were deeded
to Pangolin; different parcels of the remaining acreage secure the
notes, and will be released for principal payments in the course of
development. The sale was accounted for as an installment sale and
thus the gain on sale was deferred, to be recorded as the notes are
paid.
<PAGE>
Both notes ($145,500 and $630,870) will require annual payments of
accrued interest: the larger note accrues interest at 7.5 percent;
the initial interest rate on the smaller note was 7.5 percent
through August 28, 1995 and 12 percent thereafter (with a $35,000
principal payment on the first anniversary).
The Company and USE are discussing with an affiliate of
Pangolin an arrangement that is intended to result in realization
of the principal balance of the two notes, or a substantial part
thereof, prior to maturity in return for the release of several of
the parcels of land originally securing the notes.
Utah Properties. Canyon Homesteads, Inc. (a Plateau subsidiary)
owns a majority interest in a joint venture which holds the Ticaboo
Townsite in Ticaboo, Utah (see "Minerals - Uranium-Shootaring
Canyon Mill - Ticaboo Townsite, above). In fiscal 1995, USE
acquired the minority interest in the joint venture from a
nonaffiliate. Further recreational improvements to the townsite
were planned for fiscal 1996, to develop a commercial operation
directed to Lake Powell tourists. However, as the anticipated
joint venture partners did not fund development plans, (and the
proposed joint ventures for such purpose were not formed), and USE
and Crested have not been successful in finding other sources of
development funding, limited interim funding was provided by
Arrowstar Investments, Inc. through First-N-Last LLC, a limited
liability company with Canyon Homesteads, Inc. In April 1996,
USECC acquired the entire interest of Arrowstar in First-N-Last LLC
as partial consideration for the sale to Arrowstar of USECC's Wind
River Estates mobile home park in Riverton, WY. See Part III, Item
12, "Certain Relationships and Related Transactions - Transactions
with Arrowstar Investments, Inc."
Commercial operations are not dependent upon a single customer, or
a few customers, the loss of which would have a materially adverse
effect on Crested.
<PAGE>
RESEARCH AND DEVELOPMENT
Registrant has incurred no research and development expenditures,
either on its own account or sponsored by customers, during the
past three fiscal years.
ENVIRONMENTAL
General. Registrant's operations are subject to various federal,
state and local laws and regulations regarding the discharge of
materials into the environment or otherwise relating to the
protection of the environment, including the Clean Air Act, the
Clean Water Act, the Resource Conservation and Recovery Act
("RCRA"), and the Comprehensive Environmental Response Compensation
Liability Act ("CERCLA"). With respect to mining operations
conducted in Wyoming, Wyoming's mine permitting statutes, Abandoned
Mine Reclamation Act and industrial development and siting laws and
regulations also impact the Company. Similar laws and regulations
in California affect SGMC operations and in Utah, will effect
Plateau's operations.
To the Company's knowledge, currently it is in compliance in all
material respects with existing environmental regulations. To the
extent that production by SMP, GMMV or SGMC is delayed, interrupted
or discontinued due to need to satisfy existing or new provisions
which relate to environmental protection, future Crested earnings
could be adversely affected.
Crooks Gap. An inoperative ion exchange facility at Crooks Gap
currently holds a NRC license for possession of uranium operations
byproducts. USE has applied to the NRC for permission to
decommission and decontaminate the plant, dispose low level waste
into the Sweetwater Mill tailings cell, and keep intact such of the
facility as does not require dismantling. Costs for this two year
effort (once approved by the NRC) are not expected to exceed
$150,000. However, management of USE and Crested are reviewing the
economics of relicensing this facility as part of a potential in-
situ leach uranium mining operation.
Other Environmental Costs. Actual costs for compliance with
environmental laws may vary considerably from estimates, depending
upon such factors as changes in environmental laws and regulation
(e.g., the new Clean Air Act), and conditions encountered in
minerals exploration and mining. Registrant does not anticipate
that expenditures to comply with laws regulating the discharge of
materials into the environment, or which are otherwise designed to
protect the environment, will have any substantial adverse impact
on the Registrant's competitive position.
EMPLOYEES
Crested has no full-time employees. Crested uses approximately
50 percent of the time of USE employees, and reimburses USE
accordingly. USE has 78 full-time employees. Payroll expense
has been shared by USE and Crested since 1981.
<PAGE>
MINING CLAIM HOLDINGS
Title to Properties. Nearly all the uranium mining properties held
by GMMV, SMP, and Plateau are on federal unpatented claims.
Unpatented claims are located upon federal public land pursuant to
procedure established by the General Mining Law. Requirements for
the location of a valid mining claim on public land depend on the
type of claim being staked, but generally include discovery of
valuable minerals, erecting a discovery monument and posting
thereon a location notice, marking the boundaries of the claim with
monuments, and filing a certificate of location with the county in
which the claim is located and with the BLM. If the statutes and
regulations for the location of a mining claim are complied with,
the locator obtains a valid possessory right to the contained
minerals. To preserve an otherwise valid claim, a claimant must
also annually pay certain rental fees to the federal government
(currently $100 per claim) and make certain additional filings with
the county and the BLM. Failure to pay such fees or make the
required filings may render the mining claim void or voidable.
Because mining claims are self-initiated and self-maintained, they
possess some unique vulnerabilities not associated with other types
of property interests. It is impossible to ascertain the validity
of unpatented mining claims solely from public real estate records
and it can be difficult or impossible to confirm that all of the
requisite steps have been followed for location and maintenance of
a claim. If the validity of an unpatented mining claim is
challenged by the government, the claimant has the burden of
proving the present economic feasibility of mining minerals located
thereon. Thus, it is conceivable that during times of falling
metal prices, claims which were valid when located could become
invalid if challenged. Disputes can also arise with adjoining
property owners for encroachment or under the doctrine of
extralateral rights (see Item 3, "Legal Proceedings - BGBI
Litigation").
Proposed Federal Legislation. The U.S. Congress has, in
legislative sessions in recent years, actively considered several
proposals for major revision of the General Mining Law, which
governs mining claims and related activities on federal public
lands. If any of the recent proposals become law, it could result
in the imposition of a royalty upon production of minerals from
federal lands and new requirements for mined land reclamation and
other environmental control measures. It remains unclear whether
the current Congress will pass such legislation and, if passed, the
extent such new legislation will affect existing mining claims and
operations. The effect of any revision of the General Mining Law
on the Company's operations cannot be determined conclusively until
such revision is enacted; however, such legislation could
materially increase the carrying costs of the Green Mountain
mineral properties, the SMP properties and some of Plateau's
mineral properties which are located on federal unpatented mining
claims, and could increase both the capital and operating costs for
such projects and impair the Company's ability to hold or develop
such properties, as well as other mineral prospects on federal
unpatented mining claims.
<PAGE>
ITEM 3. Legal Proceedings
Sheep Mountain Partners Arbitration/Litigation
Arbitration. On June 26, 1991, CRIC submitted certain disputed
matters concerning SMP to arbitration before the American
Arbitration Association in Denver, Colorado, to which USE and
Crested filed a responsive pleading and counterclaim alleging
violations of contracts and duties by CRIC related to SMP. CRIC
asserted that USE and Crested, d/b/a/ USECC, were in default under
the SMP partnership agreement ("SMP Agreement"). Prior to
initiation of arbitration proceedings, USE and Crested had notified
CRIC it was in default under the SMP Agreement. The issues raised
in the arbitration proceedings were generally incorporated in the
Federal proceedings (see below), wherein the U.S. District Court of
Colorado stayed further proceedings in arbitration. See 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 claim CRIC and Nukem wrongfully
pursued a plan to obtain ownership of the USE-Crested interests in
SMP through various means, including overcharging SMP for uranium
"sold" to SMP by defendants. Plaintiffs further allege that
defendants refused to provide a complete accounting with respect to
dealings in uranium with and on behalf of SMP, and that certain
defendants misappropriated SMP property and engaged in other
wrongful acts relating to the acquisition of uranium by SMP.
Plaintiffs requested that the court order rescission of the SMP
Agreement and related contracts, and 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.
<PAGE>
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 answers 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 USE and 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 USE 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 USE 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, consensual 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 separate
Colorado State Court proceeding initiated by USE and Crested to
obtain reimbursement for maintaining the SMP mines on a standby
basis, that any party may assert against the other. All pre-
December 21, 1988 claims, disputes and controversies were stayed by
stipulation between the parties, until the Panel entered 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 $19.3 million is held in escrow
at May 31, 1996, 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 their claims, USE and Crested sought
damages of approximately $258 million from Nukem and CRIC, which
amount USE and Crested requested be trebled under the Racketeer
Influenced and Corrupt Organizations Act ("RICO") and similar state
law provisions.
<PAGE>
On April 18, 1996, the Panel entered an Arbitration Order and Award
(the "Award"). The Panel found 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 $7.4
million, 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 $4.8 million 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. It is anticipated that such payment
out of the SMP bank accounts will be made in fiscal 1997.
The Panel ordered that one utility supply contract with PSE&G for
980,000 pounds of uranium oxide held by Nukem belonged to SMP, and
ordered such contract assigned to SMP. That contract expires in
2000. The Panel further awarded SMP the uranium purchase contracts
Nukem entered into with three CIS Republics in constructive trust.
The RICO claims of both parties against the other were either
withdrawn (Nukem) or dismissed by the Panel. In its Award the
Panel did not order SMP dissolved. The timing and ultimate
resolution of the question of SMP dissolution presently is
uncertain. Pending such resolution, USE and Crested are hopeful
that delivery obligations under the various SMP utility supply
contracts can be met through the cooperation of Nukem.
USE and Crested petitioned the U.S. District Court for the District
of Colorado (the "Court") for confirmation of the Award. Nukem
filed two motions to vacate or modify portions of the Award,
alleging that significant portions of the Award were erroneous. On
May 24, 1996, the Court remanded the Award to the Panel for
consideration of these motions. On July 3, 1996, the Panel entered
a new Order essentially affirming its earlier Award. With respect
to the principal claim of error alleged in the Nukem motions,
concerning the award of more than $15 million of damages and
interest to USE and Crested attributable to Nukem's unauthorized
use of SMP uranium supply contracts to obtain rights to purchase
U3O8 from the Commonwealth of Independent States ("CIS"), the Panel
affirmed the amount of its award to USE and Crested. In so doing
the Panel stated that, "There was wrongdoing on the part of Nukem
when it used what were clearly partnership contracts to obtain
financial benefits for itself alone.... Our Award . . . is
premised upon wrongdoing by Nukem and a judgment by us that Nukem
ought not to be permitted to profit from that wrongful conduct."
The Panel affirmed the Award granting SMP the rights to purchase
CIS uranium, the uranium acquired pursuant to those rights and the
profits therefrom, which are impressed with a constructive trust in
favor of SMP. The Panel further stated, "We thus conclude that
there is no inconsistency and no double recovery and no subtraction
that ought to be made from profits already realized...."
<PAGE>
The Panel did correct a portion of the award, to reimburse $137,700
to CRIC for U3O8 it purchased, out of a bank account in Riverton,
WY. The Panel also made a correction to have the $136,500
previously awarded to USE and Crested paid out of the First
Interstate Bank of Riverton account rather than the Norwest Bank
account in Denver, CO. USE and Crested called a mathematical error
to the Panel's attention which was made by Nukem after the close of
evidence in the amount of $265,313.83. The Panel did not consider
that error because it was not directed by the Court to do so and it
remains for the Court to resolve that issue.
In addition to the Petition for Confirmation of the Award (which
was later amended), USE and Crested also filed with the Court a
petition for appointment of a receiver for the SMP partnership and
for an order directing distribution of the escrowed proceeds in the
SMP bank accounts. Nukem/CRIC filed a petition with the Court to
vacate part of the Panel's Award and modify other portions. The U.
S. District Court ordered the parties to respond to each others
pleadings by August 22 and file replies by September 6, 1996. The
Court set a hearing for September 25, 1996 with respect to these
matters.
BGBI Litigation
The Company and USE 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. Registrant, USE 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, Registrant and USE 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.
Registrant and USE have filed an appeal of the Court's ruling as
erroneous as a matter of law, which is pending.
The partial trial did not address any of the other 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 and no hearing date has been set for those issues.
If USE's and Crested's position concerning extralateral rights is
ultimately sustained, substantial additional revenues and income
may be received by USE and Crested from royalties payable with
respect to gold produced from the Bullfrog Mine. If, however, the
final decision of the appellate court is adverse to USE and
Crested, an award of damages against USE and Crested in a
substantial amount could have a significant negative impact on USE
and Crested.
<PAGE>
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 45, 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. 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, 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
Fiscal year ended May 31, 1995
-------------------------------
Fourth quarter ended 5/31/95 $.46 $.25
Third quarter ended 2/28/95 .28 .12
Second quarter ended 11/30/94 .31 .18
First quarter ended 8/31/94 .41 .34
<PAGE>
(b) Holders.
(b)(1) At September 10, 1996, there were 1,912 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.
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA.
May 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current assets $ 596,200 $ 512,600 $ 282,800 $ 432,500 $ 33,300
Current
liabilities 6,848,300 5,518,500 555,000 1,573,100 770,300
Working capital (6,252,100) (5,005,900) (272,200) (1,140,600) (137,000)
Total assets 8,132,500 8,097,800 8,092,900 7,398,200 7,640,700
Long-term
obligations(1) 725,900 853,700 4,688,700 1,169,400 2,104,000
Shareholders'
equity 521,900 1,690,800 2,849,200 4,527,900 4,766,400
(1) Incudes $725,900, $725,900, $847,800, $847,800, and
$725,900 of accrued reclamation costs on uranium
properties for fiscal 1995, 1994, 1993, 1992, and 1991
respectively.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For Years Ended May 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 2,509,200 $ 1,160,200 $ 2,870,000 $ 3,164,600 $ 2,667,500
Income (loss)
before equity
in loss of
affiliates,
provision for
income taxes
and extraor-
dinary item (811,000) (1,031,100) (1,297,600) 41,300 678,100
Equity in (loss)
of affiliates (357,900) (415,900) (657,600) (324,500) (276,900)
Net income (loss) (1,168,900) (1,447,000) (1,955,200) (283,200) 401,200
Income per share
before extraor-
dinary item $ (.12) $ (.14) $ (.19) $ (.03) $ .03
Extraordinary
item -- -- -- -- .02
------------ ------------ ------------ ---------- -----------
Net income (loss)
per share $ (.12) $ (.14) $ (.19) $ (.03) $ .05
============ ============ ============ ========== ===========
Cash dividends
per share -0- -0- -0- -0- -0-
</TABLE>
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 significant 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, uranium, and gas 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 generated by that Partnership have
compounded the Company's operating and cash flow situation.
Nevertheless, the Company believes that it will meet its
obligations in the coming year, as further discussed below.
<PAGE>
Liquidity and Capital Resources at May 31, 1996
Working Capital Components. Cash used in operating and
investing activities was $1,375,600 and $555,100, respectively for
the year ended May 31, 1996. Cash provided by financing activities
during fiscal 1996 was $1,958,900. For the year, these activities
resulted in a net increase of $28,200 in cash. Working capital
decreased during the fiscal year ended May 31, 1996 by $1,246,200
to a working capital deficit of $6,252,100 (from a working capital
deficit of $5,005,900 at May 31, 1995). The principal component of
the decrease was an increase in debt to its parent USE.
Cash provided from financing resulted from increases in debt
to affiliates of $2,343,900 and from third parties of $77,600.
Increased debt to affiliates is as a result of Crested's parent,
USE, funding operations jointly owned by Crested and USE due to
Crested's lack of liquid assets. It is anticipated that the debt
to USE at May 31, 1996 of $6,460,300 will be repaid at least in
part from funds awarded by the Arbitration Panel in the SMP
litigation/arbitration as 50% of the award belongs to Crested.
These increases in debt to its parent, USE, and third parties was
partially offset by the reduction of debt to third parties of
$70,600 and the line of credit of $392,000. Accounts payable and
accrued expenses were reduced by $629,100 during the year ended May
31, 1996. The combined effect of these reductions in current
liabilities is $1,091,700. The offset of these reductions in
current payables against the increase of $2,350,900 in debt to its
parent USE result in a change in working capital of $1,259,200.
Cash generated from investing activities were principally from
proceeds from the sale of property and equipment of $437,100. The
primary source of these funds came from the sale of Wind River
Estates, a mobile home park owned by the Crested and USE, to
Arrowstar, a corporation owned by Crested's chief executive officer
and his sons.
Due to disputes among the SMP partners, Crested and USE have
not been reimbursed for care and maintenance costs for the SMP
properties since the spring of 1991. As of May 31, 1996 the total
amount that SMP owed USECC for standby and maintenance costs was
$5,354,000. On April 18, 1996 the Arbitration Panel ordered
Nukem/CRIC to pay USECC $2,065,989 in standby costs for the SMP
mines plus $446,834 in interest and per diem interest of $616 until
paid for their 50% share of SMP expenses. At August 31, 1996, the
total amount due USECC from Nukem/CRIC was $2,607,100.
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, drilling and
overhead expenses of Energx and corporate general and
administrative expenses, including costs associated with continuing
litigation and arbitration.
<PAGE>
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.
Although pre-production mine development and underground
exploration is substantially complete, capital resources in
addition to those currently on hand, will be needed to complete
mine development and construct a mill facility. The timing of
these expenditures will depend upon internal cash flow or
additional financing.
Subsequent to May 31, 1996, SGMC and as of September 6, 1996,
SGMC received a net of approximately $842,370 in equity financing
which is to be used by SGMC for property holding costs and to
further develop the properties.
On May 14, 1996, SGMC entered into a Letter of Intent with RAF
Financial Corporation ("RAF") whereby RAF is to assist SGMC in
obtaining additional equity financing through an initial public
offering ("IPO"). Under the terms of the IPO Letter of Intent,
SGMC and RAF are proposing a public offering of 3 million shares of
SGMC common stock at an expected price of between $4.00 and $6.00
per common share and up to 3 million Class A warrants at a price of
$0.25 per warrant. The Class A warrants are expected to have an
exercise price of approximately $7.00 per share and will be
exercisable for 3 years following the IPO.
There can be no assurance that the IPO will be successfully
completed.
Capital Requirements - SMP: There are no current plans to
mine the SMP Crooks Gap properties during fiscal 1997, 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 $19.3 million
as of May 31, 1996, these funds are restricted and since early 1991
SMP has not paid Crested and USE the operating costs and fees
associated with their services as operating manager of the Crooks
Gap properties. As part of the Order and Award on April 18, 1996,
the Arbitration Panel awarded USECC $2,065,989 for standby costs
through March 1996, plus interest of $446,834 and per diem interest
of $616 until paid. The Award was based on $71,241 per month for
holding costs. Crested and USE maintain that at least the Award
amount of $71,241 per month is due SMP until SMP resolves the
ultimate disposition of its mining properties. Nukem disputes the
amount of $71,241 per month. It is hoped that this issue will be
resolved by the Federal Court.
<PAGE>
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 1996,
USECC made certain deliveries while during 1995 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 1997 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 SMP partners are awaiting the decision to either
confirm the Arbitration Panel's Award or to, as Nukem has
requested, vacate a portion of the Award. No assurance can be
given on the outcome of the hearing which is scheduled for
September 25, 1996 or any further appeal attempts by Nukem/CRIC.
Capital Requirements - GMMV: Operations of GMMV are not
requiring Crested's capital resources, as the initial $50,000,000
of expenses on the GMMV properties is being paid by Kennecott.
Crested and USE continue to project that the proposed Jackpot Mine
can be put into production for less than $25,000,000. However,
depending on results of exploration and development projects on the
properties, additional expenditures may be required. GMMV
expenditures for fiscal 1997 will depend on whether one or both
declines for the proposed mine are started. A decision by the
Management Committee of GMMV regarding the declines is currently
being considered. Nonetheless, GMMV should not require any funding
from Crested during fiscal 1997. The Management Committee of GMMV
is also considering various financing options which could result in
Kennecott being able to monetize all or a portion of its interest
in GMMV. This could be accomplished by either acquiring new
investors or formation of a new public company to finance the
development of the properties.
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. For a more detailed
discussion of the Plateau transaction please refer to Note F. of
the financial statements.
<PAGE>
Capital Requirements - Energx: Another requirement of
Crested's and USE's working capital is the continued funding of
Energx overhead expenses and drilling operations. Energx held
several gas leases and participates in one gas venture (on the Fort
Peck Indian reservation in Montana) with NuGas, a Canadian firm;
the gas venture requires NuGas to fund the drilling of the first
eight wells. Therefore, capital expenditures for Energx by Crested
on this venture are not anticipated to be significant in 1997.
Without access to equity capital no additional expansion of Energx'
operations is anticipated. If the discovery wells on the Fort Peck
Reservation are successful additional capital will be required and
could possibly be satisfied by either equity or commercial debt.
Long-Term Debt and Other Obligations: Debt at May 31, 1996 was
$6,548,300, including $88,000 on the Company's line of credit, (see
Note G to the Crested Consolidated Financial Statements). Of the
debt, $6,460,300 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 1997 unless funds
are received from the arbitration proceedings.
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 $2,500,000
cash bond with accrued interest of $385,000 at August 31, 1996 to
the U.S. Nuclear Regulatory Commission and a $4,800,000 cash
deposit plus accrued interest of $559,400 as of August 31, 1996 for
the resolution of any environmental or nuclear claims. See Item 1-
Business-Uranium.
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 1997 will be 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 USE to incur short term working capital
deficiencies and increase the Company's working capital deficit.
To fund any Energx drilling beyond the eight wells on the Fort
Peck Reservation as well as any other locations, Crested and USE
plan to seek a joint venture partner or obtain financing through
banking institutions or the equity market.
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 1997, which will result in funds being
available to repay Crested and USE for advances to SMP, this
outcome is not assured. In any event, further delays in resolution
of the arbitration are expected, and may exacerbate short term
liquidity requirements.
<PAGE>
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, with the exceptions of GMMV and Plateau, Crested will
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.
Crested received a notification of tax deficiency from the
Internal Revenue Service for fiscal years ended May 31, 1989, 1990
and 1991. Crested filed a response to the proposed deficiency, and
has requested an administrative appeal of the initial examiner's
deficiency finding. After several hearings, Crested received a
preliminary indication that a major portion of the findings has
been resolved in favor of Crested. No written confirmation has
been received as of the date of filing. Nevertheless, Crested is
confident the matters will be resolved favorably at the
administrative appeals level.
Results of Operations
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.
<PAGE>
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.
Fiscal 1995 Compared to Fiscal 1994
Revenues for fiscal 1995 declined $1,710,600 to $1,160,200
from fiscal 1994, due to mineral sales revenues of $1,866,300 and
to a gain from restructuring mineral properties of $250,000 both
recorded in fiscal 1994 with no corresponding revenues in fiscal
1995, and a reduction in the management fees of $80,800. This
decline was partially off set by an increase in gain from the sale
of assets of $489,700.
There were no mineral sales in fiscal 1995, as a result of the
SMP arbitration, to compare with the $1,866,300 in revenues from
the sale of U3O8 in fiscal 1994. However, this had no significant
effect on the net operating losses because of the corresponding
reduction in the cost of sales. During fiscal 1994, USE and
Crested made all or a portion (50 percent) of certain of the
uranium deliveries required under the SMP contracts. However,
during fiscal 1995, USE and Crested have not been allowed to make
such deliveries, due to disputes with the other SMP partners; under
agreements reached on an interim basis pending the SMP dispute
resolution, all deliveries in fiscal 1995 have been made by Nukem
and CRIC. Once the arbitration proceedings are concluded,
deliveries will be made in accordance with the award. The
arbitration outcome cannot be predicted.
In fiscal 1995, $1,069,600 in legal expense was incurred by
Crested and USE in connection with the SMP arbitration/litigation
of which Crested was obligated for 50% or $534,800. This compared
to $576,500 in fiscal 1994 of which Crested's share was $288,250.
<PAGE>
The reduction in mineral property transactions is related to
the Mt. Emmons molybdenum property, in which USE and Crested have
a six percent gross royalty. In addition to the gross royalty,
there were promissory notes of $7,500,000 each issued to USE and
Crested in 1980, with provision for advance royalties. In 1985,
AMAX, USE and Crested agreed to amortize the notes at an annual
rate of $1,000,000 each to USE and Crested ($250,000 each, per
quarter), in lieu of advance royalties. Advance royalties of
50,000 pounds of molybdic oxide (or its cash equivalent) remains
payable. During fiscal 1994, the final $250,000 was amortized on
the long term note, so there was consequently no amortization of
such debt in fiscal 1995. The remaining component of the decrease
in gain from restructuring mining properties agreements, is as a
result of the fluctuation of the market price of molybdenum, which
is paid in kind by AMAX for the advance royalty.
Gains from the sale of assets increased by $489,700 during
fiscal 1995 compared to the corresponding period of the prior year.
The increase is due to sales for $495,000 of certain real estate in
Colorado. During 1994, there were only sales of miscellaneous
equipment for $5,300. As a result of certain of the sales of
assets during 1995 being partially financed by USE and Crested, the
amount shown on the Statement of Operations exceeds the amount of
gain shown on the Statement of Cash Flows. Accounts and notes
receivable have been adjusted accordingly.
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.
<PAGE>
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. 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).
<PAGE>
Report of Independent Public Accountants
To the Board of Directors and Shareholders of
Crested Corp.:
We have audited the accompanying consolidated balance sheets of
Crested Corp. (the "Company"), a Colorado corporation, and
affiliate as of May 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended May 31, 1996 as
restated (see Notes B and E). These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Crested
Corp. and affiliate as of May 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years
in the period ended May 31, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
August 16, 1996.
<PAGE>
<TABLE>
<CAPTION>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED BALANCE SHEETS
ASSETS
May 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 52,600 $ 24,400
Accounts receivable
Trade, net of allowance of $7,000
and $16,100 for doubtful accounts 58,200 49,700
Affiliates 141,600 115,600
Current portion of long-term receivables
(Notes C and F)
Related parties 210,100 196,500
Other 100,100 71,100
Inventory and other 33,600 55,300
----------- -----------
TOTAL CURRENT ASSETS 596,200 512,600
LONG-TERM RECEIVABLES (Note F): 689,200 657,900
INVESTMENTS IN AFFILIATES, as restated
(Notes B and E): 4,344,700 4,127,200
PROPERTIES AND EQUIPMENT
(Notes B, C, D and F):
Land and mobile home park 397,400 1,307,500
Buildings and improvements 2,185,100 2,149,700
Aircraft and other equipment 1,634,700 1,624,600
Developed oil properties,
full cost method 886,800 886,800
Undeveloped mining properties 85,400 85,400
----------- -----------
5,189,400 6,054,000
Less accumulated depreciation,
depletion and amortization (2,832,800) (3,311,700)
----------- -----------
2,356,600 2,742,300
----------- -----------
OTHER ASSETS 145,800 57,800
----------- -----------
$ 8,132,500 $ 8,097,800
----------- -----------
----------- -----------
The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
May 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and
accrued expenses $ 300,000 $ 819,100
Accounts payable to affiliates -- 110,000
Line of credit (Note G) 88,000 480,000
Debt to affiliates and
others (Note G) 6,460,300 4,109,400
----------- -----------
TOTAL CURRENT LIABILITIES 6,848,300 5,518,500
ACCRUED RECLAMATION COSTS (Note K) 725,900 725,900
DEFERRED GAIN ON SALE OF ASSETS
(Note C) -- 127,800
COMMITMENTS AND CONTINGENCIES (Note K)
FORFEITABLE COMMON STOCK,
$.001 par value; issued
57,000 and 52,000 shares,
respectively, forfeitable
until earned (Note J) 36,400 34,800
SHAREHOLDERS' EQUITY (Notes B and J):
Preferred stock, $.001 par value;
authorized, 100,000 shares;
none issued or outstanding -- --
Common stock, $.001 par value;
authorized, 20,000,000 shares;
issued, 10,156,094 shares 10,100 10,100
Additional paid-in capital 6,319,400 6,319,400
Accumulated deficit,
as restated (Note B) (5,807,600) (4,638,700)
----------- -----------
521,900 1,690,800
----------- -----------
$ 8,132,500 $ 8,097,800
----------- -----------
----------- -----------
The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended May 31,
--------------------------------------------
1996 1995 1994
---- ---- ----
As Restated As Restated
(Note B) (Note B)
<S> <C> <C> <C>
REVENUES:
Mineral sales and
option (Note E) $ 1,558,400 $ -- $ 1,866,300
Commercial operations 409,000 407,900 352,300
Oil sales 105,100 97,300 91,900
Gains from restructuring
mineral properties
agreements (Note F) -- 42,700 313,400
Gain on sale of assets
(Notes D and F) 176,700 495,000 5,300
Interest 97,300 18,100 19,800
Management fees
and other (Note C) 162,700 99,200 221,800
------------ ------------ -----------
2,509,200 1,160,200 2,870,800
------------ ------------ -----------
COSTS AND EXPENSES:
Mineral operations 1,786,100 827,200 2,512,200
Commercial operations 806,900 828,200 888,800
Oil production 36,300 39,000 44,900
Interest 48,700 59,100 20,900
General and administrative 642,200 437,800 701,600
------------ ------------ -----------
3,320,200 2,191,300 4,168,400
------------ ------------ -----------
LOSS BEFORE EQUITY
IN LOSS OF AFFILIATES
AND INCOME TAXES (811,000) (1,031,100) (1,297,600)
EQUITY IN LOSS OF
AFFILIATES (Note E) (357,900) (415,900) (657,600)
------------ ------------ -----------
LOSS BEFORE INCOME TAXES (1,168,900) (1,447,000) (1,955,200)
INCOME TAXES (Note H) -- -- --
------------ ------------ -----------
NET LOSS $ (1,168,900) $ (1,447,000) $(1,955,200)
------------ ------------ -----------
------------ ------------ -----------
PER SHARE AMOUNTS:
NET LOSS PER SHARE $ (.12) $ (.14) $ (.19)
------------ ------------ -----------
------------ ------------ -----------
WEIGHTED AVERAGE
SHARES OUTSTANDING 10,156,094 10,156,094 10,156,094
------------ ------------ -----------
------------ ------------ -----------
The accompanying notes to consolidated financial statements are
an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(As Restated (Notes B and J))
Additional Total
Common Stock Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity
------------------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1993 10,156,094 $ 10,100 $ 6,319,400 $ (1,236,500) $ 5,093,000
Net loss -- -- -- (1,955,200) (1,955,200)
---------- -------- ----------- ------------ -----------
Balance, May 31, 1994 10,156,094 10,100 6,319,400 (3,191,700) 3,137,800
---------- -------- ----------- ------------ -----------
Net loss -- -- -- (1,447,000) (1,447,000)
---------- -------- ----------- ------------ -----------
Balance, May 31, 1995 10,156,094 10,100 6,319,400 (4,638,700) 1,690,800
---------- -------- ----------- ------------ -----------
Net loss -- -- -- (1,168,900) (1,168,900)
---------- -------- ----------- ------------ -----------
Balance, May 31, 1996 10,156,094 $ 10,100 $ 6,319,400 $ (5,807,600) $ 521,900
---------- -------- ----------- ------------ -----------
The accompanying notes to consolidated financial statements are
an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended May 31,
-------------------------------------------------
1996 1995 1994
---- ---- ----
As Restated As Restated
(Note B) (Note B)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,168,900) $ (1,447,000) $ (1,955,200)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation, depletion,
and amortization 252,400 259,100 252,900
Gain from restructuring
mineral properties
agreements -- -- (250,000)
Equity in loss of affiliates 357,900 415,900 657,600
Non-cash compensation 1,600 135,200 130,700
Gain on sale of assets (176,700) (495,000) (5,300)
Loss on sale of investments -- 8,700 --
Net changes in:
Accounts and notes
receivable (34,500) (31,300) 48,100
Inventory and other assets 21,700 (8,800) (5,100)
Accounts payable and
accrued expenses (629,100) 1,024,200 (78,100)
------------- ------------- ------------
NET CASH USED BY
OPERATING ACTIVITIES (1,375,600) (139,000) (1,204,400)
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Reversal of deferred
gain on sale of assets (127,800) -- --
Proceeds from sales of
marketable equity securities -- 23,400 --
Change in investments, other -- (1,500) 67,800
Increase in long-term receivables (104,900) (16,100) (449,900)
Proceeds from long-term
notes receivables 31,000 19,900 43,000
Development of mining claims -- (1,700) (2,500)
Proceeds from sale of
property and equipment 437,100 190,900 13,700
Purchases of property
and equipment (127,100) (16,100) (119,300)
Investments in affiliates (575,400) (600,800) (996,800)
Increase in other assets (88,000) -- --
------------- ------------- ------------
NET CASH USED IN
INVESTING ACTIVITIES (555,100) (402,000) (1,444,000)
------------- ------------- ------------
(continued)
The accompanying notes to consolidated financial statements are
an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Year Ended May 31,
--------------------------------------------------
1996 1995 1994
---- ---- ----
As Restated As Restated
(Note B) (Note B)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from third party debt 77,600 68,900 --
(Payments) proceeds on/from
line of credit, net (392,000) 480,000 --
Increase in debt to
affiliates and other 2,343,900 -- 2,408,300
Proceeds from non-affiliated debt -- 75,100 365,700
Payments on long-term debt
from affiliates (70,600) (160,900) (218,000)
------------- ------------- ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 1,958,900 463,100 2,556,000
------------- ------------- ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 28,200 (77,900) (92,400)
CASH AND CASH EQUIVALENTS,
Beginning of year 24,400 102,300 194,700
------------- ------------- ------------
CASH AND CASH EQUIVALENTS,
End of year $ 52,600 $ 24,400 $ 102,300
------------- ------------- ------------
------------- ------------- ------------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 116,300 $ 49,700 $ 20,900
------------- ------------- ------------
------------- ------------- ------------
Income taxes paid $ -- $ -- $ --
------------- ------------- ------------
------------- ------------- ------------
Noncash investing and financing activities:
Issuance of common stock
to officers and employees
for services rendered $ 1,600 $ 1,200 $ 1,800
------------- ------------- ------------
------------- ------------- ------------
Note receivable on sale
of property $ -- $ 1,125,100 $ --
------------- ------------- ------------
------------- ------------- ------------
The accompanying notes to consolidated financial statements are
an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Year Ended May 31,
--------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Offset of account receivable
from related party against
payable to parent $ -- $ 434,000 $ --
------------- ------------- ------------
------------- ------------- ------------
Accrued reclamation costs
transferred to Green
Mountain Mining Venture $ -- $ -- $ (121,900)
------------- ------------- ------------
------------- ------------- ------------
Conversion of SRRI
receivable to investment
upon loan default $ -- $ -- $ 206,400
------------- ------------- ------------
------------- ------------- ------------
Undeveloped mining
properties transferred to
Green Mountain Mining Venture $ -- $ -- $ 121,900
------------- ------------- ------------
------------- ------------- ------------
Conversion of accounts
payable to affiliates
to long-term debt
to affiliates $ -- $ -- $ 1,384,500
------------- ------------- ------------
------------- ------------- ------------
Assumption of shareholder
note payable to USE
for USE common stock $ -- $ -- $ 260,600
------------- ------------- ------------
------------- ------------- ------------
Property transferred from
affiliate in exchange
for debt assumed $ -- $ -- $ 195,400
------------- ------------- ------------
------------- ------------- ------------
Acquisition of USE common
stock in exchange
for long-term receivable
from related party $ -- $ -- $ 72,700
------------- ------------- ------------
------------- ------------- ------------
Conversion of remaining
SRRI receivable to
reduction in long-term
debt to affiliates $ -- $ -- $ 317,500
------------- ------------- ------------
------------- ------------- ------------
The accompanying notes to consolidated financial statements are
an integral part of these financial statements.
</TABLE>
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
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 and
methane gas. Most of these activities are conducted through the
joint venture discussed below and in Note B.
The Company and U.S. Energy Corp. ("USE"), a 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"). During fiscal 1991, the Company and USE formed USECC Gold
Limited Liability Company ("USECC Gold"), and with Seine River
Resources Inc. ("SRRI") operated the 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, the 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") (see
Note 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, a portion of which are unreimbursed by Nukem/CRIC, have
increased the Company's advances to SMP to $2,612,000 at May 31,
1996 (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, 1996, the Company owes
USE $6,460,300, which is payable on demand, and has only $596,200
of current assets. However, USE management has given assurance
that they will not demand payment of these advances in fiscal year
1997.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(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. Investments in
companies of less than 20% are accounted for by the cost method.
All material intercompany profits, transactions and balances have
been eliminated.
The Company has historically accounted for its 8% investment
in USE using the cost method. However, during 1995 the Company
adopted SFAS No. 115 "Accounting for Certain Investments in Debt
and Equity Securities" and recorded its cost investments at market
value. The Company has now restated its previously issued 1995 and
1994 financial statements included herein to reflect the Company's
investment in USE using the equity method (see Note E). During
fiscal 1996, the Company determined it should use the equity method
because the Company is controlled by USE (52% shareholder). The
Company's accumulated deficit as of May 31, 1993 was reduced by
$596,800 to $1,236,500 as a result of this restatement. In
addition, the restatement eliminated the May 31, 1995 unrealized
holding gain on investments of $1,434,500 and reduced investments
in affiliates as of May 31, 1995 by $1,266,100 to reflect USE on an
equity basis. The Company recorded equity in the losses of USE of
$153,800 and $274,700, respectively, for fiscal 1995 and 1994 which
increased the Company's net loss by a like amount. The net loss
per share for fiscal 1995 and 1994 increased by $.01 and $.03 per
share to $.14 and $.19, respectively.
Inventory
Inventory consists of aviation fuel and associated aircraft
supplies. The inventory is carried at the lower of cost or market.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
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 and 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. An impairment allowance is charged to operations when,
in the opinion of management, the carrying value of the property
exceeds its expected future economic benefit. Costs and expenses
related to general corporate overhead are expensed as incurred.
The Company and 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. The market value of these assets and
most of the reclamation and environmental liabilities associated
with them are not reflected in the accompanying balance sheets (see
Note K).
Proceeds from the sale of undeveloped mineral properties are
treated as a recovery of cost with any excess of proceeds over cost
recognized as gain.
The Company follows the full-cost method of accounting for oil
and gas properties whereby all costs incurred in the acquisition,
exploration and development of the properties, including
unproductive wells, are capitalized, limited to the present value
of the estimated proved reserves, and the lower of cost or
estimated fair value of unproved properties.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
Depreciation, depletion and amortization of oil and gas
properties are provided by the units of production method based on
the estimated recoverable reserves.
Financial Accounting Standards No. 121 ("SFAS No. 121")
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of", was issued in March 1995. The
provisions of SFAS No. 121 require the Company to evaluate the
carrying value of its long-term assets whenever events or changes
in circumstances indicate that the carrying amount of an asset may
not be recoverable. SFAS No. 121 will be adopted by the Company in
fiscal 1997. The Company has not yet determined the impact the
adoption of SFAS No. 121 will have on the financial position of the
Company or its results of operations.
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 sale revenue is
recognized as the oil is 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 have been excluded because they are antidilutive.
Income Taxes
Effective June 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes". This statement requires recognition
of deferred income tax assets and liabilities for the expected
future income tax consequences, based on enacted tax laws, of
temporary differences between the financial reporting and tax bases
of assets, liabilities and carry forwards. There was no cumulative
effect on the financial statements for this change because the
Company did not recognize any benefit of its net operating loss
carryforwards.
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.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
Reclassifications
Certain reclassifications have been made in the 1995 and 1994
financial statements to conform to the classifications used in
1996.
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 1996, 1995
and 1994, the Board of Directors of USE contributed 10,089, 37,204
and 46,332 shares of USE stock to the ESOP at prices of $8.65,
$5.38 and $4.00 per share, respectively. The Company is
responsible for one-half of these contributions or $43,700,
$100,000 and $92,700 in fiscal 1996, 1995 and 1994, respectively.
As of May 31, 1996, the Company had notes receivable due from
certain USE officers and employees of $281,800, which bear interest
at 10% per annum and come due in fiscal 1998. A portion of these
notes receivable are collateralized by 50,000 shares of USE stock
which are owned by a director of the Company. In addition, the
Company has receivables from employees of $39,200.
As of May 31, 1994, the Company had a long-term receivable
from an affiliate of $434,000. This receivable relates to the
Company's share of expenditures made by USECC on behalf of the
affiliate for capital expenditures and operating costs. In 1995,
this receivable was transferred to USE to offset part of the
Company's payable to USE (see Note G).
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
The Company and USE provide management and administrative
services for affiliates under the terms of various management
agreements. Revenues from these services for the Company were
$116,500, $99,200 and $180,000 in fiscal 1996, 1995 and 1994,
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.
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 the Company's chairman and his family. 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
----------
----------
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(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.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS - USECC
May 31,
----------------------------------
1996 1995
---- ----
<S> <C> <C>
Current assets $ 735,200 $ 475,500
Properties and equipment 7,731,500 9,318,200
Undeveloped mineral properties 27,900 27,900
Accumulated depreciation (3,253,700) (4,151,900)
Other long-term assets 4,514,700 3,874,700
----------- -----------
$ 9,755,600 $ 9,544,400
----------- -----------
----------- -----------
Current liabilities $ 704,900 $ 2,714,200
Reclamation liability 1,451,900 1,451,900
Other liabilities 75,000 --
Venturers' capital 7,523,800 5,378,300
----------- -----------
$ 9,755,600 $ 9,544,400
----------- -----------
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
CONDENSED STATEMENTS OF OPERATIONS - USECC
Year Ended May 31,
-----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues $ 4,855,500 $ 2,225,600 $ 5,012,100
Costs and expenses (6,789,300) (4,453,600) (8,463,200)
----------- ----------- -----------
Net loss $(1,933,800) $(2,228,000) $(3,451,100)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
E. INVESTMENTS IN AFFILIATES:
The Company's investments in affiliates are as follows:
Carrying Value at May 31,
------------------------------
Ownership 1996 1995
--------- ---- ----
<S> <C> <C> <C>
Equity Method Investments:
GMMV 25% $ 116,300 $ 116,300
SGMC 9% 1,190,600 1,156,800
SMP (Notes F and K) 25% 1,383,900 1,172,600
ENERGX Ltd. 45% 90,300 191,900
USE (Note B) 8% 1,558,100 1,484,600
Other Investments:
Others various 5,500 5,000
----------- -----------
$ 4,344,700 $ 4,127,200
----------- -----------
----------- -----------
</TABLE>
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
<TABLE>
<CAPTION>
Equity in income (loss) from investments accounted for by the
equity method is as follows:
Year Ended May 31,
-----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
GMMV $ -- $ -- $ --
SGMC (39,700) (37,500) (54,500)
SMP (Note F) (211,300) (219,600) (257,400)
ENERGX, LTD. (180,400) (5,000) (71,000)
USE 73,500 (153,800) (274,700)
--------- --------- ---------
$(357,900) $(415,900) $(657,600)
--------- --------- ---------
--------- --------- ---------
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 $2,612,000 to SMP for standby
mine care and maintenance, the rental of certain mining equipment
and administrative costs as of May 31, 1996, including $422,600 in
fiscal 1996. These advances are included in the above investment
account net of the Company's equity share of SMP's expenses. The
Company considers the $2,612,000 to be a receivable from SMP.
Whether or not the $2,612,000 of advances are realized will depend
on the outcome of the litigation and arbitration with Nukem and its
wholly-owned subsidiary CRIC (see Note K).
SMP has entered into various market related and base price
escalated uranium sales contracts with certain domestic utilities
which require delivery of an estimated 250,000 to 970,000 pounds of
uranium concentrates annually from 1997 through 2000. 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 by purchases in
the spot market, existing purchase contracts, uranium inventories
or by producing from SMP properties. Production will not be
commenced, however, until uranium prices rise substantially. Most
market related sales contracts can be settled through spot market
purchases. The remaining base price sales contract exceeds the
spot market price as of May 31, 1996. Revenues from such uranium
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
sales of $1,383,400 and $1,866,300 have been included in the
accompanying consolidated statements of operations for the years
ended May 31, 1996 and 1994, which would normally have been sales
of SMP. The sales in 1996 were to two customers. The sales in
1994 were to two customers. All sales contracts were filled by
Nukem in 1995, and as a result, no revenues from uranium sales were
recognized during 1995. The cash from uranium sales is
accumulating in SMP's bank accounts which as of May 31, 1996
amounted to $19,336,300.
Condensed combined financial statements of the Company's
equity investees include the GMMV, SMP, Energx, Ltd., SGMC and USE
for fiscal 1996, 1995 and 1994. 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 is committed to fund 100% of the first $50
million of development and operating costs of this joint venture.
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 control exerted by USE and the Company.
</TABLE>
<TABLE>
<CAPTION>
CONDENSED COMBINED BALANCE SHEETS:
EQUITY INVESTEES
1996 1995
---- ----
<S> <C> <C>
Current assets $ 11,292,700 $ 11,770,400
Non-current assets 91,884,400 89,997,900
------------- -------------
$ 103,177,100 $ 101,768,300
------------- -------------
------------- -------------
Current liabilities $ 9,952,200 $ 11,289,200
Reclamation and other
liabilities 48,928,000 48,630,800
Excess in assets 44,296,900 41,848,300
------------- -------------
$ 103,177,100 $ 101,768,200
------------- -------------
------------- -------------
</TABLE>
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
<TABLE>
<CAPTION>
CONDENSED COMBINED STATEMENTS OF OPERATIONS:
EQUITY INVESTEES
Year Ended May 31,
--------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues $ 10,195,400 $ 5,163,800 $ 8,792,400
Discontinued
operations 2,604,600 296,200 140,500
Costs and expenses (13,901,100) (8,902,400) (15,645,100)
------------- ------------ ------------
Net gain (loss) $ (1,101,100) $ (3,442,400) $ (6,712,200)
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
F. MINERAL TRANSACTIONS AND MINING PROPERTIES:
GMMV
During fiscal 1990, 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 million 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 million of
development costs and operating expenses of the GMMV joint venture.
Kennecott will also 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.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
GMMV has incurred approximately $16,435,800 in the development
and operations of the above uranium mineral properties through May
31, 1996. This was funded by Kennecott out of the $50 million
funding commitment. As previously mentioned, the Company's
carrying value of its investment in GMMV is $116,300 at May 31,
1996, 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.
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's 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 among USECC, CRIC and its parent
Nukem, Inc. over the formation and operation of SMP. These
disputes have been in litigation/arbitration for the past five
years. Certain preliminary decisions were reached in the
arbitration during fiscal 1996 which have gone to the court for
approval. 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 by $250,000
each quarter, subject to certain conditions and until AMAX put the
properties into production, which has not occurred. The last
quarterly amortization of $250,000 for a non-interest bearing loan
from AMAX, in lieu of advance royalties, was recognized in the
first quarter of fiscal 1994.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
AMAX may elect to return the properties to the Company and
USE, which would cancel the advance royalty obligation. If AMAX
formally decides to place the properties into production, it will
pay $2,000,000 to the Company and USE. If AMAX sells the
properties, the Company and USE will receive 15% of the first $25
million received by AMAX.
In addition, AMAX pays the Company and USE jointly an annual
advance royalty of 50,000 pounds of molybdenum (or its cash
equivalent). AMAX is entitled to a credit against future royalties
for any advance royalty payments made, but such royalties are not
refundable if the properties are not placed into production. The
Company recognized $-0-, $42,700 and $63,400 of revenues from the
advance royalty payments in fiscal 1996, 1995 and 1994,
respectively.
Effective November 1993, AMAX Inc. was acquired by Cyprus
Minerals Corporation, hereafter Cyprus Amax. 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 Pangolin in February 1995) was
for the 57 commercial and noncommercial zoned acres in the City of
Gunnison, Colorado; the 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 a three year nonrecourse promissory note, of which
$35,600 and $137,900 was paid during fiscal 1996 and 1995,
respectively. As of May 31, 1996, this note had an outstanding
principal balance of $451,800, of which Crested's 50% portion, or
$225,900, is reflected in the accompanying balance sheet. 19.25
acres have been deeded to Pangolin; the remaining acreage secures
the note, and will be released to the buyer against principal
payments on the note as development (mixed commercial and
residential) advances. The note bears interest at 7.5% per annum
and matures in January 1998.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
The second option covers 472.5 acres of ranch land northwest
of the City of Gunnison, Colorado (purchase price $822,460).
Pangolin paid $10,000 for the option; on option exercise and
closing, Pangolin paid $46,090 in cash and $776,370 by two
nonrecourse promissory notes (each with principal and unpaid
interest due on the third anniversary of closing except for $35,000
due on the first anniversary). These notes bear interest at rates
of 7.5% and 12% and mature in May and June 1998. The Company did
not receive the $35,000 payment as scheduled but is negotiating the
receipt of it and expects to collect it in the near future. At
closing, 22.19 acres were deeded to Pangolin; different parcels of
the remaining acreage secure the notes, and will be released for
principal payments in the course of development. The sale was
accounted for as an installment sale and thus the gain on sale was
deferred to be recorded as payments on the notes are received by
the Company. The carrying amount of the notes receivable discussed
above approximates market due to the conditions and terms of these
receivables.
Sutter Gold Mining Company
Sutter Gold Mining Company ("SGMC") was formerly 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
SGMC'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 SGMC.
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 SGMC. USE was to
recover the $500,000 of predecessor holding costs and SGMC's
initial development costs paid by them, out of SGMC's initial cash
flows.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
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 SGMC were adjusted to
equal the percentage of the $5,000,000 purchase price of SGMC's
properties that each of them provided. On July 16, 1991, the 50%
interest of SRRI in SGMC 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 SGMC and USECC Gold. Accordingly, SRRI's capital
investment of $257,900 and all liabilities of SGMC to USE and its
affiliates on behalf of SRRI totaling $1,550,600 were transferred
to USECC Gold's capital investment. In addition, SGMC released
SRRI of its obligation to SGMC totaling $1,970,500, which includes
accrued but unrecorded interest of approximately $579,800.
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
6,964,531 and 870,469 shares of SGMC's common stock, respectively,
for their eight-ninth and one-ninth interest, respectively in USECC
Gold.
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, SGMC 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 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, SGMC has focused its efforts on obtaining a
reserve study, developing a mine plan and pursuing a partner to
assist in the financing of its mineral development and ultimate
production. In the interim SGMC will continue to require capital
contributions from USE, Crested or other sources of financing to
maintain its current activities. SGMC will continue to be
considered in the development stage until such time as it generates
significant revenue from its principal operations.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
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, 1996, the Company's total investment
in SGMC had a carrying value of $1,190,600.
SGMC remains in the development stage at May 31, 1996 and is
primarily engaged in mine development, exploration and feasibility
work, permitting and acquisition of mill equipment.
During May 1996, SGMC issued 896,364 shares of its common
stock at $0.11 per share to certain individuals, including a
related party for total proceeds of $98,000. Such shares were
authorized to be sold by SGMC in October 1995 to raise funds to pay
for the legal and other costs of possible equity financing in the
future.
Subsequent to the above issuance of shares, USE and Crested
own 74% and 9%, respectively, of the SGMC. Subsequent to May 31,
1996 and as of August 16, 1996, SGMC has received approximately
$291,600 in equity financing which is to be used by SGMC for
property holding costs and to further develop the properties.
On May 14, 1996, SGMC entered into a Letter of Intent with RAF
Financial Corporation ("RAF") whereby RAF is to assist SGMC in
obtaining additional equity financing through an initial public
offering ("IPO"). Under the terms of the IPO Letter of Intent,
SGMC and RAF are proposing a public offering of 3 million shares of
SGMC common stock at an expected price of between $4.00 and $6.00
per common share and up to 3 million Class A warrants at a price of
$0.25 per warrant. The Class A warrants are expected to have an
exercise price of approximately $7.00 per share and will be
exercisable for 3 years following the IPO. Each purchaser would
generally be required to purchase one Class A warrant for every two
common shares purchased.
There can be no assurance that the IPO will be successfully
completed.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
Plateau Resources Limited
Effective August 11, 1993, USE entered into an agreement 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 in southeastern Utah. At the present time,
Plateau has applied to renew and convert its source materials
license with the United States Nuclear Regulatory Commission
("NRC") from standby to operational. 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
$6.9 million of unencumbered cash to be used for care and
maintenance costs on the mill and other assets acquired. As of May
31, 1996, 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 $14.2 million 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.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
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. As of May 31, 1995,
the Company had recorded $112,400 related to Arrowstar's initial
funding commitment to the joint venture which is included in
accounts receivable on the accompanying balance sheet as of May 31,
1995. 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, 1996, 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 leases, and for committing to drill 8 exploratory wells.
Three exploratory wells have been drilled to date and others are
planned for the fall of calendar 1996.
During 1996, Energx abandoned certain of its leases and as a
result wroteoff $328,700 of costs capitalized associated with these
leases.
G. DEBT:
The Company and USE have a line of credit with a commercial
bank. The line of credit bears interest at a variable rate (10.5%
as of May 31, 1996). The weighted average interest rate for 1996
was 10.25%. The line of credit had an outstanding balance for the
Company and USE jointly of $176,000 and $960,000 as of May 31, 1996
and 1995, respectively, of which Crested's 50% portion is $88,000
and $480,000. This line of credit is due October 9, 1996 and is
secured by a share of the net proceeds of fees from production of
oil wells and certain assets of USECC.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
Debt of the Company consists primarily of a non-interest
bearing note to USE which was the result of a conversion of the
accounts payable to USE as of May 31, 1994, to a long-term note.
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
1995.
<TABLE>
<CAPTION>
May 31,
------------------------------
1996 1995
---- ----
<S> <C> <C>
Notes payable - U.S. Energy,
non-interest
bearing, balance
payable upon
demand (see Note A) $ 6,460,300 $ 4,053,500
Notes payable - Other,
paid in 1996 -- 55,900
----------- -----------
Total $ 6,460,300 $ 4,109,400
----------- -----------
----------- -----------
</TABLE>
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
H. INCOME TAXES:
The Company adopted SFAS No. 109 in fiscal 1994. There was no
cumulative effect of this change in accounting principle.
The components of deferred taxes as of May 31, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
May 31,
----------------------------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 20,300 $ 29,600
Deferred gain on
sale of assets 106,100 154,900
Net operating loss
carryforwards 3,756,900 3,261,500
Tax credits 83,000 83,000
Capital loss carryforwards 297,100 182,100
----------- -----------
Total deferred tax assets 4,263,400 3,711,100
Deferred tax liabilities:
Accelerated depreciation
for tax (447,500) (504,300)
Development and
exploration costs (35,500) (28,300)
----------- -----------
Total deferred tax liabilities (483,000) (532,600)
----------- -----------
----------- -----------
Net deferred tax assets -
all non-current 3,780,400 3,178,500
Valuation Allowance (3,780,400) (3,178,500)
----------- -----------
Net deferred tax asset $ -- $ --
----------- -----------
----------- -----------
</TABLE>
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
At May 31, 1996, the Company had available, for federal income
tax purposes, net operating loss carryforwards of approximately
$11,050,000, which expire in 2006 through 2011 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 1996, 1995 and 1994, the Company incurred
losses for both book and tax purposes. The income tax provision is
different from the amounts computed by applying the federal income
tax rate to income before taxes. The reasons for these differences
are as follows:
<TABLE>
Year Ended May 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Expected federal
income tax benefit $(397,400) $(491,900) $(664,800)
Capital loss carryforward -- (269,900) --
Other (204,500) (37,900) --
Valuation allowance 601,900 799,700 664,800
--------- --------- ---------
Income taxes $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
There were no taxes payable as of May 31, 1996, 1995 or 1994.
The Internal Revenue Service ("IRS") has audited the Company's
tax returns through fiscal 1986, and its income tax liabilities are
settled through that year. The IRS has audited the Company's and
USECC's fiscal years 1989, 1990 and 1991 tax returns. The Company
has received a deficiency letter for the years 1989 through 1991.
The Company has submitted a written appeal to protest the findings
of the examining agent. Hearings have been held with the appeals
officer assigned to the case and all major issues have been
verbally resolved in favor of the Company. Management believes the
Company will prevail on the significant issues in dispute, and
therefore, believes that no significant liabilities will result
from the findings. The years ended May 31, 1993 and 1994 currently
are being audited by the IRS. The audit is not completed as of the
date of this Report.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
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.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
<TABLE>
<CAPTION>
Year Ended May 31, 1996
-------------------------------------------------
Commercial
Minerals Operations Consolidated
-------- ---------- ------------
<S> <C> <C> <C>
Revenues $ 1,558,400 $ 409,000 $ 1,967,400
----------- ----------
----------- ----------
Interest and other revenues 541,800
-----------
Total Revenues $ 2,509,200
-----------
-----------
Operating loss $ (227,700) $ (397,900) $ (625,600)
----------- ----------
----------- ----------
Interest and other revenues 541,800
General corporate and
other expenses (727,200)
Equity loss in affiliates (357,900)
-----------
Loss before income taxes $(1,168,900)
-----------
-----------
Identifiable assets
at May 31, 1996 $ 96,100 $2,294,900 2,391,000
----------- ----------
----------- ----------
Investments in affiliates 4,344,700
Corporate assets 1,396,800
-----------
Total assets
at May 31, 1996 $ 8,132,500
-----------
-----------
Capital expenditures $ -- $ 127,100
----------- ----------
----------- ----------
Depreciation, depletion
and amortization $ -- $ 249,100
----------- ----------
----------- ----------
</TABLE>
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
<TABLE>
<CAPTION>
Year Ended May 31, 1995
--------------------------------------------------
Commercial
Minerals Operations Consolidated
-------- ---------- ------------
<S> <C> <C> <C>
Revenues $ 42,700 $ 407,900 $ 450,600
----------- -----------
----------- -----------
Interest and other revenues 709,600
-----------
Total Revenues $ 1,160,200
-----------
-----------
Operating loss $ (784,500) $ (420,300) $(1,204,800)
----------- -----------
----------- -----------
Interest and other revenues 709,600
General corporate
and other expenses (535,900)
Equity loss in affiliates (415,900)
-----------
Loss before income taxes $(1,447,000)
-----------
-----------
Identifiable assets
at May 31, 1995 $ 96,100 $ 2,714,300 $ 2,810,400
----------- -----------
----------- -----------
Investments in affiliates 4,127,200
Corporate assets 1,160,200
-----------
Total assets
at May 31, 1995 $ 8,097,800
-----------
-----------
Capital expenditures $ 1,700 $ 16,100
----------- -----------
----------- -----------
Depreciation, depletion
and amortization $ -- $ 259,100
----------- -----------
----------- -----------
</TABLE>
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
<TABLE>
<CAPTION>
Year Ended May 31, 1994
--------------------------------------------------
Commercial
Minerals Operations Consolidated
-------- ---------- ------------
<S> <C> <C> <C>
Revenues $ 2,179,700 $ 352,300 $ 2,532,000
----------- -----------
----------- -----------
Interest and other revenues 338,800
-----------
Total Revenues $ 2,870,800
-----------
-----------
Operating loss $ (332,500) $ (536,500) $ (869,000)
----------- -----------
----------- -----------
Interest and other revenues 338,800
General corporate and
other expenses (767,400)
Equity loss in affiliates (657,600)
-----------
Loss before income taxes $(1,955,200)
-----------
-----------
Identifiable assets
at May 31, 1994 $ 94,400 $ 2,872,200 $ 2,966,600
----------- -----------
----------- -----------
Investments in affiliates 3,942,300
Corporate assets 1,506,200
-----------
Total assets
at May 31, 1994 $ 8,415,100
-----------
-----------
Capital expenditures $ 2,500 $ 119,300
----------- -----------
----------- -----------
Depreciation, depletion
and amortization $ -- $ 252,900
----------- -----------
----------- -----------
</TABLE>
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
In fiscal 1994, approximately 14% of mineral revenues was from
amortization of the AMAX note and molybdenum advance royalties.
During fiscal 1996 and 1994, 89% and 86% of mineral revenue were
from sales of minerals. There were no mineral sales in fiscal
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. During 1996 the Company restated its financial
statements to reflect the forfeitable shares outside of the
stockholders' equity section of the balance sheet. The restatement
resulted in reducing common stock and additional paid in capital by
$34,800 as of May 31, 1995. There was no effect on the statement
of operations related to this restatement. The Company is
responsible for one-half of the compensation expense related to
these issuances (see Note C). For the years ending May 31, 1996,
1995 and 1994, the Company had compensation expense of $59,800,
$35,300 and $52,300, respectively, resulting from these issuances.
A schedule of forfeitable shares for both Crested and USE is set
forth in the following table.
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
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
No shares were earned out in fiscal 1996 or 1995; however,
5,000 shares of USE stock were earned out and released to a third
party in fiscal 1994. During fiscal 1993, the Company's Board of
Directors amended the stock bonus plan. As a result, the earn out
dates of certain individuals were extended until retirement, which
is the earn out date of the amended stock bonus plan. The amended
plan grants a stock-bonus of 20% of the previous plan per year for
five years.
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 is subject to approval of the formal
1996 Stock Award Program by the Company's shareholders in late
calendar 1996. The shares will be issued annually on or before
January 15 of each year, starting January 15, 1997, as long as each
officer is employed by USE, provided the Company has been
profitable in the preceding fiscal year. The officers will receive
up to an aggregate total of 67,000 shares per year for the years
1997 through 2002. One-half of the compensation under the 1996
Stock Award Program is the responsibility of Crested. The number
of shares awarded each year out of such 67,000 shares aggregate
annual limit will be based on earning per share of Common Stock to
be determined in the formal plan to be adopted, and in addition
will be subject to approval by the shareholders of the Company for
each award each year.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
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 seeks damages and certain equitable
remedies from the Company and USE and seeks 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.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(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 appealed 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 $12.5 million
and Nukem/CRIC $7.1 million through July 31, 1996. At filing date
of this report the Federal Court has before it petitions to confirm
the Panel's Order and Award filed by the Company and USE and
motions to vacate portions of the Award filed by Nukem/CRIC. The
court has set a hearing on the petitions and motions for September
25, 1996 in Denver, CO. As of May 31, 1996, no accounting
treatment has been given to the settlement because of the continued
uncertainty of the ultimate resolution.
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.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
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. 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 another delivery
of 130,000 lbs. U3O8 is scheduled for 1997. This amendment to the
IPC contract and the sharing of the revenue from such deliveries is
subject to the Federal Court confirming the decision of the
Arbitration Panel.
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.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
The Trial 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. No ruling has been issued by
that Court. Management intends to vigorously pursue the appeal and
seek to recover the extralateral rights and royalties allegedly due
Parador, U.S. Energy and Crested. If, however, the final decision
of the appellate court is adverse to USE and Crested, an award of
damages against USE and Crested in a substantial amount could have
a significant negative impact on USE and Crested. Management
further intends to pursue the remaining claims, which involve
breaches of the lease between Parador and the operator, and to
defend related claims brought by the operator against Parador, USE
and Crested before the trial court. The Company is expensing all
costs associated with the Parador 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 delayed, interrupted or
discontinued because of regulation or the economics of the
properties, the future earnings of the Company would be adversely
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
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, 1996 and 1995, 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 GMMV, and
owners of SGMC and of Plateau. The environmental obligations and
the nature and extent of cost sharing arrangements with other
potentially responsible parties, as well as any uncertainties with
respect to joint and several liability of each are discussed in the
following paragraphs:
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
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, 1996 of
$1,451,800, ($725,900 or 50% of which is recorded in the
accompanying balance sheet), was determined by the Company to be
adequate. The obligation will be satisfied over the life of the
mining project which is estimated to be at least 20 years. The
Company and 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 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
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
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.
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. These costs are not expected
to increase materially, if the Mill is not put into full operation.
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
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.
Sutter Gold Mining Company ("SGMC")
SGMC which is currently owned 9% by the Company, 74% by USE
and 17% by private investors, owns gold mineral properties in
California. Currently, the property is in development and costs
consist of drilling, permitting, holding costs and administrative
costs. No substantial mining has been completed, although a 2,800
foot decline through the identified ore zones for an underground
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996, 1995 AND 1994
(continued)
mine was acquired in the purchase. The Company'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, 1996.
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 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. The estimated future Shootaring Mill decommissioning and
site reclamation costs noted above as required by the NRC and the
Utah Department of Natural Resources were determining factors in
the consideration paid by the Company.
Executive 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.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
In the event a definitive proxy statement containing the
information being incorporated by reference into this Part III is
not filed within 120 days of May 31, 1996, the Registrant will file
such information under cover of a Form 10-K/A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 with respect to directors
and certain executive officers is incorporated herein by reference
to Registrant's Proxy Statement for the 1996 Annual Meeting of
Shareholders. The information regarding the remaining executive
officer is contained in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by
reference to the Registrant's Proxy Statement for the 1996 Annual
Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by Item 12 is incorporated herein by
reference to the Registrant's Proxy Statement for the 1996 Annual
Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by
reference to the Registrant's Proxy Statement for the 1996 Annual
Meeting of Shareholders.
<PAGE>
PART IV
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 . . . . . . . . . . . . . 39
Consolidated Balance Sheets -
May 31, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . .40-41
Consolidated Statements of Operations
for the Years Ended May 31, 1996, 1995 and 1994 . . . . . . . . . 42
Consolidated Statements of Shareholders'
Equity for the Years Ended
May 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . . 43
Consolidated Statements of Cash Flows
for the Years Ended May 31, 1996, 1995 and 1994. . . . . . . . .44-45
Notes to Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . .46-71
(ii) Affiliate Financials as Schedules
(a) Green Mountain Mining Venture
Report of Independent Public Accountants . . . . . . . . . 78
Balance Sheet - December 31, 1995 and 1994 . . . . . . . . 79
Statement of Operations for the Period
from June 1, 1990 (Date of Inception)
through December 31, 1995. . . . . . . . . . . . . . . . . 80
Statement of Changes in Partners' Capital
for the Period from June 1, 1990
(Date of Inception) through December 31, 1995. . . . . . . 81
Statement of Cash Flows for the Period
from June 1, 1990 (Date of Inception)
through December 31, 1995. . . . . . . . . . . . . . . . . 82
Notes to Financial Statements. . . . . . . . . . . . . .83-87
<PAGE>
(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, 1996 and 1995 . . . . . . . . . . .*
Statements of Operations - Years Ended
May 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . .*
Statements of Changes in Partners' Capital
- Years Ended May 31, 1996, 1995 and 1994. . . . . . . . . .*
Statements of Cash Flows - Years Ended
May 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . .*
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.
<PAGE>
(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. . . . . . . . . . . . . . . . . . 88
4.2 Form of Stock Option Agreement and
Schedule, Options issued 1992 . . . . . . . . . . . . . . . 97
4.3 Form of Stock Option Agreement and
Schedule, Options issued 1/96 . . . . . . . . . . . . . . .102
4.4 USE Restricted Stock Bonus Plan
as Amended through 2/94 . . . . . . . . . . . . . . . . . .108
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. . . . . . . . . . . . . . . . . . . . . . . .110
10.44 Contract for sale of Jeffrey City
Six-Plex to Tag Development, Inc. . . . . . . . . . . . . .117
10.45 Development Agreement with First-N-Last . . . . . . . . . .122
10.46 Operating Agreement with First-N-Last . . . . . . . . . . .129
21 Subsidiaries of Registrant. . . . . . . . . . . . . . . . .[9]
<PAGE>
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.
(b) Reports filed on Form 8-K.
During the fourth quarter of the fiscal year ended on May
31, 1996, the Registrant filed one report on Form 8-K under Item 5,
Other Events, reporting an event of April 18, 1996.
(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).
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CRESTED CORP.
(Registrant)
Date: September 12, 1996 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 12, 1996 By: s/ John L. Larsen
------------------------------
JOHN L. LARSEN, Director
Date: September 13, 1996 By: s/ Max T. Evans
------------------------------
MAX T. EVANS, Director
Date: September 13, 1996 By: s/ Daniel P. Svilar
------------------------------
DANIEL P. SVILAR, Director
Date: September , 1996 By:
------------------------------
MICHAEL D. ZWICKL, Director
Date: September 13, 1996 By: s/ Kathleen R. Martin
------------------------------
KATHLEEN R. MARTIN, Director
Date: September 13, 1996 By: s/ Robert Scott Lorimer
------------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer and
Chief Accounting Officer
<PAGE>
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, 1995 and 1994, and the related statements of
operations, changes in Venture partners' capital, and cash flows
for the years ended December 31, 1995, 1994 and 1993, and the
period from inception (June 1, 1990) to December 31, 1995. 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, 1995 and 1994, and the
results of its operations and its cash flows for the years ended
December 31, 1995, 1994 and 1993, and the period from inception
(June 1, 1990) to December 31, 1995, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Salt Lake City, Utah
April 29, 1996
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
BALANCE SHEET
--------
As of December 31,
--------------------------
1995 1994
---- ----
Assets:
Due from USECC $ 1,212 $ -
----------- -----------
Property and equipment (Note 3):
Mineral properties and mine
development costs 22,443,305 21,887,857
Buildings 24,815,009 24,815,009
----------- -----------
47,258,314 46,702,866
----------- -----------
Total assets $47,259,526 $46,702,866
----------- -----------
----------- -----------
Liabilities and Partners' Capital:
Due to USECC $ - $ 62,386
Reclamation liabilities (Note 3) 23,620,000 23,620,000
----------- -----------
Total liabilities 23,620,000 23,682,386
----------- -----------
Commitments and contingencies
(Notes 3 and 5)
Partners' capital:
Kennecott Uranium Company 11,819,763 11,510,240
USECC 11,819,763 11,510,240
----------- -----------
23,639,526 23,020,480
----------- -----------
Total liabilities
and partners' capital $47,259,526 $46,702,866
----------- -----------
----------- -----------
The accompanying notes are an integral
part of these financial statements
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Period from
inception
Year ended December 31, (June 1, 1990)
-------------------------------------------- to December 31,
1995 1994 1993 1995
----------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Costs and expenses:
Maintenance and
holding costs $ 1,697,234 $ 1,877,528 $ 1,982,005 $ 7,619,016
Marketing costs - 85,676 83,977 247,598
----------- ----------- ----------- -----------
Net loss $ 1,697,234 $ 1,963,204 $ 2,065,982 $ 7,866,614
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The accompanying notes are an integral
part of these financial statements
</TABLE>
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF CHANGES IN VENTURE PARTNERS' CAPITAL
---------
<TABLE>
<CAPTION>
Period from
inception
Year ended December 31, (June 1, 1990)
---------------------------------------------- to December 31,
1995 1994 1993 1995
------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balance at beginning of period:
Kennecott Uranium Company $ 11,510,240 $ 11,348,745 $ 11,049,433 $ -
USECC 11,510,240 11,348,745 11,049,433 -
Capital contributions (Note 1):
Kennecott Uranium Company 1,158,140 1,143,097 1,332,303 15,753,070
USECC 1,158,140 1,143,097 1,332,303 15,753,070
Net loss:
Kennecott Uranium Company (848,617) (981,602) (1,032,991) (3,933,307)
USECC (848,617) (981,602) (1,032,991) (3,933,307)
Balance at end of period:
Kennecott Uranium Company 11,819,763 11,510,240 11,348,745 11,819,763
USECC 11,819,763 11,510,240 11,348,745 11,819,763
</TABLE>
The accompanying notes are an integral
part of these financial statements
<PAGE>
<TABLE>
<CAPTION>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF CASH FLOWS
---------
Period from
inception
Year ended December 31, (June 1, 1990)
----------------------------------------------------- to December 31,
1995 1994 1993 1995
------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,697,234) $ (1,963,204) $ (2,065,982) $ (7,866,614)
Increase (decrease) in due to and
due from USECC (47,889) (34,782) 51,947 (30,724)
------------- ------------- ------------- ------------
Net cash used in operating
activities (1,745,123) (1,997,986) (2,014,035) (7,897,338)
------------- ------------- ------------- ------------
Cash flows from investing activities:
Cost of buildings, mineral properties
and mine development (555,448) (283,194) (666,975) (7,911,314)
Increase (decrease) in due to and
due from USECC (15,709) (5,014) 16,404 29,512
------------- ------------- ------------- ------------
Net cash used in investing
activities (571,157) (288,208) (650,571) (7,881,802)
------------- ------------- ------------- ------------
Cash flows from financing activities:
Capital contributions 2,316,280 2,286,194 2,664,606 15,779,140
------------- ------------- ------------- ------------
Net change in cash and cash
equivalents $ - $ - $ - $ -
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Cash and cash equivalents:
At beginning of period $ - $ - $ - $ -
At end of period - - - -
The accompanying notes are an integral
part of these financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF CASH FLOWS
--------
Period from
inception
Year ended December 31, (June 1, 1990)
----------------------------------------------------- to December 31,
1995 1994 1993 1995
------------- ------------ ----------- --------------
<S> <C>
Supplemental schedule of non-cash
activities:
During 1990 and 1992 the Venture
acquired mineral properties and an
established uranium processing mill
in exchange for the assumption of
reclamation liabilities associated
with the properties. $ 23,620,000
In 1990 the Venture partners con-
tributed mineral properties and
buildings which were recorded at the
contributing partners' historical cost. $ 15,727,000
The accompanying notes are an integral
part of these financial statements
</TABLE>
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
--------
1. Organization of the Joint Venture:
Green Mountain Mining Venture ("GMMV" or the "Venture") is
a joint venture with a 30 year life, formed by U.S. Energy
Corp. ("USE"), Crested Corp. ("Crested") and Kennecott
Uranium Company ("Kennecott"), the Venture partners, to
develop mining claims and produce uranium from the Green
Mountain properties located in south-central Wyoming.
Kennecott has a 50% interest in GMMV, and USE and Crested
("USECC") collectively have a 50% interest. GMMV was formed
June 1, 1990, with each partner contributing its portion of
the Green Mountain properties. Kennecott acquired its
portion of the Green Mountain properties from USECC in 1990
for a cash payment of $15.0 million. Thereafter, the
partners are required to contribute funds based upon their
respective participating interests, subject to certain
provisions as provided for in the joint venture agreement.
Kennecott has agreed to contribute the first $50 million of
operating and development expenses pursuant to Management
Committee budgets. As of April 29, 1996, the Management
Committee has not approved a budget for the year ending
December 31, 1996. Kennecott has also agreed to pay a
disproportionate share (up to an additional $45,000,000) of
GMMV operating expenses, but only out of cash operating
margins from sales of processed uranium at more than
$24.00/lb (for $30,000,000 of such operating expenses), and
from sales of processed uranium at more than $27.00/lb (for
the next $15,000,000 of such operating expenses).
Through December 31, 1995, Kennecott has contributed
$15,779,140 to the Venture for operating and development
expenses. During this period, 50% of the capital
contributions made by Kennecott have been allocated to USECC.
Income or loss and the cash flows from the Venture will be
allocated 50% to Kennecott and 50% to USECC. The allocation
of the USECC portion of cash flows will be determined by the
ownership interests of USE and Crested in the various GMMV
properties.
Effective October 29, 1992, Kennecott replaced USECC as
manager of the Venture. Kennecott contracts with USECC to
perform work on behalf of the Venture.
Through December 31, 1995, the activities of the Venture have
consisted primarily of the development and maintenance of the
Green Mountain properties. Additional development is
required prior to the commencement of commercial production.
Such commencement is not expected to occur until the
Venture partners have reached agreement that all economic
and other conditions justify such commencement.
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
1. Organization of the Joint Venture, Continued:
Therefore, the Venture is considered to be in the development
stage as defined in Statement of Financial Accounting
Standards No. 7.
2. Summary of Significant Accounting Policies:
Mineral properties contributed to the Venture were recorded
at the partners' historical cost at the date of
contribution. Costs incurred in the acquisition of mineral
properties are capitalized and either charged to operations
on the units-of-production method over the estimated reserves
to be recovered or charged to operations at the time the
property is sold or abandoned. Mine development costs
incurred either to expand the capacity of operating mines,
develop new ore bodies or develop mine areas substantially
in advance of production are capitalized and charged to
operations on the units-of-production method over the
estimated reserves to be recovered. Mine development costs
incurred to maintain production are included in operating
costs and expenses. Maintenance and holding costs are
expensed as incurred.
The cost of mining equipment, less estimated salvage value,
will be depreciated on the units-of-production method over
the estimated reserves to be recovered or on the straight-
line method over the estimated life of the equipment,
whichever is shorter. The cost of buildings will be
depreciated on the straight-line method. Depreciation of
mining equipment and buildings will commence when mining
operations start. Costs of repairs and maintenance are
expensed as incurred. Expenditures that substantially extend
the useful lives of assets are capitalized. When assets are
retired or otherwise disposed of, all applicable costs and
accumulated depreciation are removed from the accounts and
any resulting gain or loss is recognized currently.
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
2. Summary of Significant Accounting Policies, Continued:
The Venture evaluates the recoverability of capitalized
acquisition and development costs based on the expected
undiscounted future net revenues from the related mining
properties. An impairment loss will be recorded if the
unamortized costs exceed the expected undiscounted future net
revenues. The recorded loss will be based on the difference
between the unamortized costs and the expected discounted
future net revenues from the related mining properties. The
Venture believes that uranium prices will reach levels
sufficient to justify commencement of commercial production
in the future. The Venture also believes the expected
undiscounted future net revenues from the Green Mountain
properties will be sufficient to allow recoverability of
these costs assuming commencement of commercial production.
The estimated net future costs of dismantling, restoring and
reclaiming operating mines which result from future mining
operations will be accrued during such operations. The
provision will be made using the units of production sold
method on the basis proven and probable ore reserves and
estimated costs at the balance sheet date. The effect of
changes in estimated costs and production will be recognized
on a prospective basis.
No provision has been made for federal, state and local
income taxes, credits, or benefits since tax liabilities are
the responsibility of the individual partners.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
3. Buildings, Mineral Properties and Mine Development Costs:
USECC conducts operations at the mine site on behalf of the
Venture. All accounts payable are due to USECC for costs
incurred by USECC in the normal course of business on behalf
of GMMV. Through December 31, 1995 Kennecott had reimbursed
USECC for substantially all development costs incurred.
Building, mineral property and mine development costs
incurred on behalf of each of the Venture partners are as
follows:
Period from
inception
Year ended December 31, (June 1, 1990)
------------------------------------- to December 31,
1995 1994 1993 1995
----------- ---------- ---------- ---------------
USECC $ 511,822 $ 145,712 $ 296,869 $ 5,210,730
Kennecott 43,626 137,482 370,106 2,700,584
---------- ---------- ---------- ------------
Total $ 555,448 $ 283,194 $ 666,975 $ 7,911,314
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
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. Provided such costs are incurred before February 1, 2001 and
before mill production resumes, the seller is liable for the first
$8 million of the reclamation costs at the Sweetwater Mill.
The Venture properties include state leases which will expire in
August 1996 and May 2001. The Venture intends to renew the state
leases expiring in August 1996. All fees required to hold the
unpatented mining claims have been paid to the state of Wyoming
as of December 31, 1995.
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
At December 31, 1995 and 1994, costs capitalized as property
and equipment are composed of the following:
1995 1994
----------- -----------
Acquisition costs $39,347,000 $39,347,000
Development costs 7,911,314 7,355,866
----------- -----------
$47,258,314 $46,702,866
----------- -----------
----------- -----------
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 totalling $23,620,000.
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
4. Subsequent Event:
On April 24, 1996, the Bureau of Land Management signed the
Record of Decision approving the Jackpot Mine Plan of
Operations. As of April 29, 1996, the Venture had applied
for but not yet received the necessary operating permit for
the Jackpot Mine from the WDEQ. Until this permit is granted
by the WDEQ, no further construction of mine facilities is
allowed, no further underground mine development can occur,
and the Jackpot deposit cannot be mined.
5. 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 between Nukem and USE and the Sheep Mountain Mining
Venture (between USE and Cycle). Nukem and Cycle are each
seeking damages in excess of $14 million and punitive
damages. The proceeding has been stayed pending the
conclusion of an arbitration proceeding between Cycle, Nukem
and USE addressing issues pertinent to the outcome of the
proceeding against Kennecott. The arbitration proceeding was
concluded on April 19, 1996; however, the stay has yet to be
lifted. Once the stay is lifted, Kennecott intends to
vigorously defend this litigation.
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.
EXHIBIT 4.1
U.S. ENERGY CORP.
1989 STOCK OPTION PLAN
As Amended September 1, 1992, September 3, 1993,
Janaury 6, 1994 and December 22, 1995
1. Purpose. Restrictions on Amount Available Under the
Plan. This 1989 Stock Option Plan (the "Plan") is intended to
encourage stock ownership by employees, consultants and directors
of U.S. Energy Corp. (the "Corporation"), its divisions and
Subsidiary Corporations, so that they may acquire or increase their
proprietary interest in the Corporation, and to encourage such
employees and directors to remain in the employ of the Corporation
and to put forth maximum efforts for the success of the business.
It is further intended that options granted by the Committee
pursuant to Section 6 of this Plan shall constitute "incentive
stock options" ("Incentive Stock Options") within the meaning of
Section 422A of the Internal Revenue Code of 1986 and the
regulations issued thereunder (the "Code"), and options granted by
the Committee pursuant to Section 7 of this Plan shall constitute
"nonqualified stock options" ("Nonqualified Stock Options").
2. Definitions. As used in this Plan, the following words
and phrases shall have the meanings indicated:
(a) "Disability" shall mean an Optionee's inability to
engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment that can be
expected to result in death or that has lasted or can be expected
to last for a continuous period of not less than 12 months.
(b) "Fair Market Value" per share as of a particular
date shall mean the last sale price of the Corporation's Common
Stock as reported on a national securities exchange or on the
NASDAQ National Market System or, if last sale reporting quotation
is not available for the Corporation's Common Stock, the average of
the bid and asked prices of the Corporation's Common Stock as
reported by NASDAQ or in the National Quotation Bureau, Inc.'s
"Pink Sheets" or, if such quotations are unavailable, the value
determined by the Committee (as hereinafter defined) in accordance
with their discretion in making a bona fide, good faith
determination of fair market value.
(c) "Parent Corporation" shall mean any corporation
(other than the employer corporation) in an unbroken chain of
corporations ending with the employer corporation if, at the time
of granting an Option, each of the corporations other than the
employer corporation owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the other
corporations in such chain.
(d) "Subsidiary Corporation" shall mean any corporation
(other than the employer corporation) in an unbroken chain of
corporations beginning with the employer corporation if, at the
time of granting an Option, each of the corporations other than the
last corporation in the unbroken chain owns stock possessing 50% or
more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
3. Administration. The Plan shall be administered by a
committee (the "Committee"), consisting of not less than two
members of the Board of Directors of the Corporation (the "Board").
The members of the Committee, who shall be selected at a duly
convened meeting of the Board of Directors, shall be persons who
have not been granted or awarded equity securities of the
Corporation under the Plan or any other plan of the Employer or its
affiliates, during the year prior to awards of securities under the
Plan by the Committee. It is the intent of this Plan that the
Committee members shall be "disinterested administrators" as that
term is used in Rule 16b-3(c)(2)(i) promulgated by the Securities
and Exchange Commission. The members of the Committee shall have
all powers, subject to compliance with the Plan, to select officers
and directors for participation in the Plan, and to make all
decisions concerning the timing, pricing and amount of a grant or
award under the Plan.
The Committee shall have the authority in its discretion,
subject to and not inconsistent with the express provisions of the
Plan, to administer the Plan and to exercise all the powers and
authorities either specifically granted to it under the Plan or
necessary or advisable in the administration of the Plan,
including, without limitation, the authority to grant Options; to
determine which Options shall constitute Incentive Stock Options
and which Options shall constitute Nonqualified Stock Options; to
determine the purchase price of the shares of Common Stock covered
by each Option (the "Option Price"); to determine the persons to
whom, and the time or times at which, Options shall be granted; to
determine the number of shares to be covered by each Option; to
interpret the Plan; to prescribe, amend and rescind rules and
regulations relating to the Plan; to determine the terms and
provisions of the Option Agreements (which need not be identical)
entered into in connection with Options granted under the Plan; and
to make all other determinations deemed necessary or advisable for
the administration of the Plan. The Committee may delegate to one
or more of its members or to one or more agents such administrative
duties as it may deem advisable, and the Committee or any person to
whom it has delegated duties as aforesaid may employ one or more
persons to render advice with respect to any responsibility the
Committee or such person may have under the Plan.
The Board shall fill all vacancies, however caused, in the
Committee. The Board may from time to time appoint additional
members to the Committee, and may at any time remove one or more
Committee members and substitute others. One member of the
Committee shall be selected by the Board as chairman. The
Committee shall hold its meetings at such times and places as it
shall deem advisable. All determinations of the Committee shall be
made by a majority of its members either present in person or
participating by conference telephone at a meeting or by written
consent. The Committee may appoint a secretary and make such rules
and regulations for the conduct of its business as it shall deem
advisable, and shall keep minutes of its meetings.
No member of the Board or Committee shall be liable for any
action taken or determination made in good faith with respect to
the Plan or any Option granted hereunder.
4. Eligibility. Subject to certain limitations hereinafter
set forth, Options may be granted to employees of (including
officers) and consultants to and directors of (whether or not they
are employees) the Corporation or its present or future divisions
and Subsidiary Corporations. In determining the persons to whom
Options shall be granted and the number of shares to be covered by
each Option, the Committee shall take into account the duties of
the respective persons, their present and potential contributions
to the success of the Corporation and such other factors as the
Committee shall deem relevant in connection with accomplishing the
purpose of the Plan. A person to whom an Option has been granted
hereunder is sometimes referred to herein as an "Optionee." An
Optionee shall be eligible to receive more than one grant of an
Option during the term of the Plan, but only on the terms and
subject to the restrictions hereinafter set forth.
5. Stock. The stock subject to Options hereunder shall be
shares of the Corporation's Common Stock, $.01 par value per share
("Common Stock"). Such shares may, in whole or in part, be
authorized but unissued shares or shares that shall have been or
that may be reacquired by the Corporation. The aggregate number of
shares of Common Stock as to which Options may be granted from time
to time under the Plan shall not exceed 925,000. The maximum
number of shares which may be subject to options granted under the
Plan to the officers and directors as a group shall not exceed
275,000 shares of Common Stock. The limitations established by the
preceding sentences shall be subject to adjustment as provided in
Section 8(i) hereof.
In the event that any outstanding Option under the Plan for
any reason expires or is terminated without having been exercised
in full the shares of Common Stock allocable to the unexercised
portion of such Option (unless the Plan shall have been terminated)
shall become available for subsequent grants of options under the
Plan.
6. Incentive Stock Options. Options granted pursuant to
this Section 6 are intended to constitute Incentive Stock Options
and shall be subject to the following special terms and conditions,
in addition to the general terms and conditions specified in
Section 8 hereof. Consultants and directors who are not employees
of the Corporation shall not be entitled to receive Options
pursuant to this Section 6.
The aggregate Fair Market Value (determined as of the date the
Incentive Stock Option is granted) of the shares of Common Stock
with respect to which Options are exercisable for the first time by
an Optionee during any calendar year may not exceed $100,000.00
Incentive Stock Options granted under this Plan are intended
to satisfy all requirements for incentive stock options under the
Code and, notwithstanding any other provision of this Plan, the
Plan and all Incentive Stock Options granted under it shall be so
construed, and all contrary provisions shall be so limited in scope
and effect and, to the extent they cannot be so limited, they shall
be void.
7. Nonqualified Stock Options. Options granted pursuant to
this Section 7 are intended to constitute Nonqualified Stock
Options and shall be subject only to the general terms and
conditions specified in Section 8 hereof.
8. Terms and Conditions of Options. Each Option granted
pursuant to the Plan shall be evidenced by a written Option
Agreement between the Corporation and the Optionee, which agreement
shall comply with and be subject to the following terms and
conditions:
(a) Number of Shares. Each Option Agreement shall state
the number of shares of Common Stock to which the Option relates.
(b) Type of Option. Each Option Agreement shall
specifically identify the portion, if any, of the Option which
constitutes an Incentive Stock Option and the portion, if any,
which constitutes a Nonqualified Stock Option.
(c) Option Price. Each Option Agreement shall state the
Option Price, which shall be not less than 100% of the Fair Market
Value of the shares of Common Stock of the Corporation on the date
of grant of the Option except that any option granted under the
Plan to a person owning more than ten percent of the total combined
voting power of the Common Stock shall be at a price of 110% of
such fair market value and shall be for a term of no more than five
years, in the case of Incentive Stock Options, and not less than
80% of the Fair Market Value of the shares of Common Stock of the
Corporation on the date of grant of the Option in the case of Non-
Qualified Stock Options. The Option Price shall be subject to
adjustment as provided in Section 8(i) hereof. The date on which
the Committee adopts a resolution expressly granting an Option
shall be considered the day on which such Option is granted.
(d) Method of Exercise and Medium and Time of Payment.
Each exercise of an Option granted hereunder, whether in whole or
in part, shall be by written notice to the Secretary of the
Corporation designating the number of shares as to which the Option
is exercised, and shall be accompanied by payment in full of the
Option Price (in cash, shares or property) for the number of shares
so designated, together with any written statements required by any
applicable securities laws. The Option Price shall be paid in
cash, in shares of Common Stock having a Fair Market Value equal to
such Option Price or in property or in a combination of cash,
shares and property, and may be effected in whole or in part (i)
with monies received from the Corporation at the time of exercise
as a compensatory cash payment, or (ii) with monies borrowed from
the Corporation pursuant to repayment terms and conditions as shall
be determined from time to time by the Committee, in its
discretion, separately with respect to each exercise of Options and
each Optionee; provided, however, that each such method and time
for payment and each such borrowing and terms and conditions of
repayment shall be permitted by and be in compliance with
applicable law. The Board of Directors shall have the sole and
absolute discretion to determine whether or not property other than
cash or Common Stock may be used to purchase the shares of Common
Stock hereunder and, if so, to determine the value of the property
received.
(e) Term and Exercise of Options. Options shall be
exercisable over the exercise period as and at the times the
Committee may determine, as reflected in the Option Agreement;
provided, however, that the Committee shall have the authority to
accelerate the exercisability of any outstanding Option at such
time and under such circumstances as it, in its sole discretion,
deems appropriate. The exercise period shall be determined by the
Committee; provided, however, that such exercise period shall not
exceed ten years from the date of grant of the Option. The
exercise period shall be subject to earlier termination as provided
in Sections 8(f) and 8(g) hereof. An Option may be exercised, as
to any or all full shares of Common Stock as to which the Option
has become exercisable; provided, however, that an Option may not
be exercised at any one time as to fewer than 100 shares (or such
number of shares as to which the Option is then exercisable if such
number of shares is less than 100).
(f) Termination. Except as provided in this Section
8(f) and in Section 8(g) hereof, an Option may not be exercised
unless the Optionee is then an employee or director of or
consultant to the Corporation or a division or Subsidiary
Corporation thereof (or a corporation or a Parent or Subsidiary
Corporation of such corporation issuing or assuming the option in
a transaction to which Section 425(a) of the Code applies), and
unless the Optionee has remained continuously as an employee or
director of or consultant to the Corporation since the date of
grant of the Option. In the event that the Optionee ceases to be
an employee or director of or consultant to the Corporation (other
than by reason of death, Disability or retirement), all Options of
such Optionee that are exercisable at the time of such cessation
may, unless earlier terminated in accordance with their terms, be
exercised within three months after such cessation; provided,
however, that if the employment or consulting relationship of an
Optionee shall terminate, or if a director shall be removed, for
cause, all Options theretofore granted to such Optionee shall, to
the extent not theretofore exercised, terminate forthwith. Nothing
in the Plan or in any Option granted pursuant hereto shall confer
upon an individual any right to continue in the employ of the
Corporation or any of its divisions or Subsidiary Corporations or
interfere in any way with the right of the Corporation or its
shareholders or any such division or Subsidiary Corporation to
terminate such employment or other relationship between the
individual and the Corporation or any of its divisions and
subsidiary corporations.
(g) Death Disability or Retirement of Optionee. If an
Optionee shall die while a director of, or employed by, or a
consultant to, the Corporation or a Subsidiary Corporation thereof,
or within three months after the termination of such Optionee's
employment or directorship or consulting relationship, other than
termination for cause, or if the Optionee's employment or
directorship or consulting relationship, shall terminate by reason
of disability or retirement, all Options theretofore granted to
such Optionee (whether or not otherwise exercisable) may, unless
earlier terminated in accordance with their terms, be exercised by
the Optionee or by the Optionee's estate or by a person who
acquired the right to exercise such Option by bequest or
inheritance or otherwise by reason of the death or Disability of
the Optionee, at any time within one year after the date of death,
Disability or retirement of the Optionee.
(h) Nontransferability. Options granted under the Plan
shall not be transferable other than by will or by the laws of
descent and distribution, and Options may be exercised, during the
lifetime of the Optionee, only by the Optionee or by his guardian
or legal representative.
Any attempted sale, pledge, assignment, hypothecation or
other transfer of an option contrary to the provisions hereof and
the levy of any execution, attachment or similar process upon an
option shall be null and void and without force or effect.
As a condition to the transfer of any shares of Common
Stock issued under this Plan, the Corporation may require an
opinion of counsel, satisfactory to the Corporation, to the effect
that such transfer will not be in violation of the Securities Act
of 1933 or any other applicable securities laws or that such
transfer has been registered under federal and all applicable state
securities laws. Further, the Corporation shall be authorized to
refrain from delivering or transferring shares of Common Stock
issued under this Plan until the Board of Directors determines that
such delivery or transfer will not violate applicable securities
laws and the Optionee has tendered to the Corporation any federal,
state or local tax owed by the Optionee as a result of exercising
the Option, or disposing of any Common Stock, when the Corporation
has a legal liability to satisfy such tax. The Corporation shall
not be liable for damages due to delay in the delivery or issuance
of any stock certificate for any reason whatsoever, including, but
not limited to, a delay caused by listing requirements of any
securities exchange or any registration requirements under the
Securities Act of 1933, the Securities Exchange Act of 1934, or
under any other state or federal law, rule or regulation. The
Corporation is under no obligation to take any action or incur any
expense in order to register or qualify the delivery or transfer of
shares of Common Stock under applicable securities laws or to
perfect any exemption from such registration or qualification.
Furthermore, the Corporation will have no liability to any Optionee
for refusing to deliver or transfer shares of Common Stock if such
refusal is based upon the foregoing provisions of this Paragraph.
(i) Effect of Certain Changes.
(1) If there is any change in the number of shares
of Common Stock through the declaration of stock dividends, or
through recapitalization resulting in stock splits, or combinations
or exchanges of such shares, the number of shares of Common Stock
available for Options, the number of such shares covered by
outstanding Options, and the price per share of such Options, shall
be proportionately adjusted by the Committee to reflect any
increase or decrease in the number of issued shares of Common
Stock; provided, however, that any fractional shares resulting from
such adjustment shall be eliminated.
(2) In the event of the proposed dissolution or
liquidation of the Corporation, in the event of any corporate
separation or division, including, but not limited to, split-up,
split-off or spin-off, or in the event of a merger or consolidation
of the Corporation with another corporation, the Committee may
provide that the holder of each Option then exercisable shall have
the right to exercise such Option (at its then Option Price) solely
for the kind and amount of shares of stock and other securities,
property, cash or any combination thereof receivable upon such
dissolution, liquidation, or corporate separation or division, or
merger or consolidation by a holder of the number of shares of
Common Stock for which such Option might have been exercised
immediately prior to such dissolution, liquidation, or corporate
separation or division, merger or consolidation; or the Committee
may provide, in the alternative, that each Option granted under the
Plan shall terminate as of a date to be fixed by the Committee;
provided, however, that not less than 30 days' written notice of
the date so fixed shall be given to each Optionee, who shall have
the right, during the period of 30 days preceding such termination,
to exercise the Options as to all or any part of the shares of
Common Stock covered thereby, including shares as to which such
Options would not otherwise be exercisable.
(3) Paragraph (2) of this Section 8(i) shall not
apply to a merger or consolidation in which the Corporation is the
surviving corporation and shares of Common Stock are not converted
into or exchanged for stock, securities of any other corporation,
cash or any other thing of value. Notwithstanding the preceding
sentence, in case of any consolidation or merger of another
corporation into the Corporation in which the Corporation is the
surviving corporation and in which there is a reclassification or
change (including a change to the right to receive cash or other
property) of the shares of Common Stock (other than a change in par
value, or from par value to no par value, or as a result of a
subdivision or combination, but including any change in such shares
into two or more classes or series of shares), the Committee may
provide that the holder of each Option then exercisable shall have
the right to exercise such Option solely for the kind and amount of
shares of stock and other securities (including those of any new
direct or indirect parent of the Corporation), property, cash or
any combination thereof receivable upon such reclassification,
change, consolidation or merger by the holder of the number of
shares of Common Stock for which such Option might have been
exercised.
(4) In the event of a change in the Common Stock of
the Corporation as presently constituted, which is limited to a
change of all of its authorized shares with par value into the same
number of shares with a different par value or without par value,
the shares resulting from any such change shall be deemed to be the
Common Stock within the meaning of the Plan.
(5) To the extent that the foregoing adjustments
relate to stock or securities of the Corporation, such adjustments
shall be made by the Committee, whose determination in that respect
shall be final, binding and conclusive, provided that each
Incentive Stock Option granted pursuant to this Plan shall not be
adjusted in a manner that causes such option to fail to continue to
qualify as an Incentive Stock Option within the meaning of Section
422A of the Code.
(6) Except as hereinbefore expressly provided in
this Section 8(i), this Optionee shall have no rights by reason of
any subdivision or consolidation of shares of stock of any class or
the payment of any stock dividend or any other increase or decrease
in the number of shares of stock of any class or by reason of any
dissolution, liquidation, merger, or consolidation or spin- off of
assets or stock of another corporation; and any issue by the
Corporation of shares of stock of any class, or securities
convertible into shares of stock of any class, shall not affect,
and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to the
Option. The grant of an Option pursuant to the Plan shall not
affect in any way the right or power of the Corporation to make
adjustments, reclassifications, reorganizations or changes of its
capital or business structures or to merge or to consolidate or to
dissolve, liquidate or sell, or transfer all or part of its
business or assets.
(j) Rights as Shareholder - Non-Distributive Intent.
Neither a person to whom an Option is granted, nor such person's
legal representative, heir, legatee or distributee, shall be deemed
to be the holder of, or to have any rights of a holder with respect
to, any shares subject to such Option, until after the Option is
exercised and the shares are issued to the person exercising such
Options. Upon exercise of an Option at a time when there is no
registration statement in effect under the Securities Act of 1933
relating to the shares issuable upon exercise and available for
delivery of a prospectus meeting the requirements of Section
10(a)(3) of said Act, shares may be issued to the Optionee only if
the Optionee represents and warrants in writing to the Corporation
that the shares purchased are being acquired for investment and not
with a view to the distribution thereof. No shares shall be issued
upon the exercise of an Option unless and until there shall have
been compliance with any then applicable requirements of the
Securities and Exchange Commission, or any other regulatory
agencies having jurisdiction over the Corporation. No adjustment
shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distribution or other rights
for which the record date is prior to the date such stock
certificate is issued, except as provided in Section 8(i) hereof.
(k) Other Provisions. The Option Agreements authorized
under the Plan shall contain such other provisions, including,
without limitation, (i) the imposition of restrictions upon the
exercise of an Option, and (ii) in the case of an Incentive Stock
Option, the inclusion of any condition not inconsistent with such
Option qualifying as an Incentive Stock Option, as the Committee
shall deem advisable.
(l) Forfeiture Provisions: All shares of Common Stock
purchased on exercise of all Nonqualified Options granted after the
date of this Plan Amendment (and all shares of Common Stock
purchased on exercise of all Nonqualified Options granted prior to
such date provided that the holder consents), shall be subject to
forfeiture back to the Corporation in the event of termination of
employee, director or consultant status with the Corporation on or
before January 5 of the second calendar year after exercise. For
example, Common Stock purchased on September 1, 1993 by exercise of
a Nonqualified Option, will be subject to forfeiture through
January 5, 1995. Provided, that upon exercise of a Nonqualified
Option at a time when there is a registration statement in effect
under the Securities Act of 1933 relating to the shares issuable
upon exercise, the preceding forfeiture provisions of this
paragraph shall immediately terminate.
9. Agreement by Optionee Regarding Withholding Taxes. If
the Committee shall so require, as a condition of exercise, each
Optionee shall agree that:
(a) No later than the date of exercise of any Option
granted hereunder, the Optionee will pay to the Corporation or make
arrangements satisfactory to the Committee regarding payment of any
federal, state or local taxes of any kind required by law to be
withheld upon the exercise of such Option; and
(b) The Corporation shall, to the extent permitted or
required by law, have the right to deduct federal, state and local
taxes of any kind required by law to be withheld upon the exercise
of such Option from any payment of any kind otherwise due to the
Optionee.
The Corporation shall not be obligated to advise any
Optionee of the existence of any such tax or the amount which the
Corporation will be so required to withhold.
10. Term of Plan. Options may be granted pursuant to the
Plan from time to time within a period of ten years from the date
the Plan is adopted by the Board, or the date the Plan is approved
by the shareholders of the Corporation, whichever is earlier.
11. Amendment and Termination of the Plan. The Board at any
time and from time to time may suspend, terminate, modify or amend
the Plan; provided, however, that any amendment that would
materially increase the aggregate number of shares of Common Stock
as to which Options may be granted under the Plan or materially
increase the benefits accruing to participants under the Plan or
materially modify the requirements as to eligibility for
participation in the Plan shall be subject to the approval of the
holders of a majority of the Common Stock issued and outstanding,
except that any such increase or modification that may result from
adjustments authorized by Section 8(i) hereof shall not require
such approval. Except as provided in Section 8 hereof, no
suspension, termination, modification or amendment of the Plan may
adversely affect any Option previously granted, unless the written
consent of the Optionee is obtained.
12. Approval of Shareholders. The Plan shall take effect
upon its adoption by the Board but shall be subject to the approval
of the holders of a majority of the issued and outstanding shares
of Common Stock of the Corporation, which approval must occur
within 12 months after the date the Plan is adopted by the Board.
13. Assumption. The terms and conditions of any outstanding
Options granted pursuant to this Plan shall be assumed by, be
binding upon and inure to the benefit of any successor corporation
to the Corporation and shall continue to be governed by, to the
extent applicable, the terms and conditions of this Plan. Such
successor corporation shall not otherwise be obligated to assume
this Plan.
14. Termination of Right of Action. Every right of action
arising out of or in connection with the Plan by or on behalf of
the Corporation or of any Subsidiary, or by any shareholder of the
Corporation or of any Subsidiary against any past, present or
future member of the Board, or against any employee, or by an
employee (past, present or future) against the Corporation or any
Subsidiary, will, irrespective of the place where an action may be
brought and irrespective of the place of residence of any such
shareholder, director or employee, cease and be barred by the
expiration of three years from the date of the act or omission in
respect of which such right of action is alleged to have risen.
15. Tax Litigation. The Corporation shall have the right,
but not the obligation, to contest, at its expense, any tax ruling
or decision, administrative or judicial, on any issue which is
related to the Plan and which the Board believes to be important to
holders of Options issued under the Plan and to conduct any such
contest or any litigation arising therefrom to a final decision.
IN WITNESS WHEREOF, the foregoing is the 1989 Stock Option
Plan of U.S. Energy Corp., as amended at September 1, 1992,
September 3, 1993, January 6, 1994 and December 22, 1995.
U.S. ENERGY CORP.
By: s/ Max T. Evans
----------------------------
MAX T. EVANS, Secretary
EXHIBIT 4.2
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT made as of this 15th day of April, 1992
between U.S. Energy Corp., a Wyoming corporation (the
"Corporation"), and 1~ (the "Optionee").
In accordance with its 1989 Stock Option Plan (the "Plan") as
now or hereafter amended, a copy of which is attached hereto and
incorporated herein by reference, the Corporation desires, in
connection with the services of the Optionee, to provide the
Optionee with an opportunity to acquire $.01 par value common stock
(the "Common Stock") of the Corporation on favorable terms and
thereby increase the Optionee's proprietary interest in the
continued progress and success of the business of the Corporation.
NOW, THEREFORE, in consideration of the premises, the mutual
covenants herein set forth and other good and valuable
consideration, the Corporation and the Optionee agree as follows:
1. Confirmation of Grant of Option. Pursuant to a
determination of the Compensation Committee of the Board of
Directors of the Corporation (the "Board") on April 15, 1992, and
confirmed by the Board of Directors on April 15, 1992, the
Corporation, subject to the terms of the Plan and of this
Agreement, confirms that the Optionee has been irrevocably granted
on April 15, 1992 (the "Date of Grant"), as a matter of separate
inducement and agreement, and in addition to and not in lieu of
salary or other compensation for services, a Non-Qualified Stock
Option pursuant to Section 7 of the Plan (the "Option") to purchase
an aggregate of 2~ Non-Qualified shares of Common Stock on the
terms and conditions herein set forth subject to adjustment as
provided in Section 8 hereof.
2. Purchase Price. The purchase price of shares of Common
Stock covered by the Option will be $2.90 per share (the "Option
Price") subject to adjustment as provided in Section 8 hereof.
3. Exercise of Option. Except as otherwise provided in
Section 8 of the Plan, the Option may be exercised in whole or part
at any time during the term of the Option, provided, however, no
Option shall be exercisable after the expiration of the term
thereof, and no Option shall be exercisable unless the holder shall
at the time of exercise have been an employee or director of or a
consultant to the Corporation or of any subsidiary of the
Corporation for a period of at least three months. The Option may
be exercised only as to whole shares in increments of 100 shares.
The Option may be exercised, as provided in this Section 3, by
notice and payment to the Corporation as provided in Section 10
hereof and Section 8(d) of the Plan.
4. Term of Option. The term of the Option will be through
April 14, 2002, subject to earlier termination or cancellation as
provided in this Agreement. Except as otherwise provided in
Section 7 hereof, the Option will not be exercisable unless the
Optionee shall, at the time of exercise, be an employee or director
of or consultant to the Corporation or of a subsidiary. As used in
this Agreement, the term "subsidiary" refers to and includes each
"subsidiary corporation" as defined in the Plan.
The holder of the Option will not have any rights to dividends
or any other rights of a shareholder with respect to any shares of
Common Stock subject to the Option until such shares shall have
been issued to him (as evidenced by the appropriate transfer agent
of the Corporation) upon purchase of such shares through exercise
of the Option.
5. Nontransferability of Option. The Option may not be
assigned, transferred (except as provided in the next preceding
sentence) or otherwise disposed of, or pledged or hypothecated in
any way (whether by operation of law or otherwise) otherwise than
by will or the laws of descent and distribution, and shall not be
subject to execution, attachment, or other process. Any
assignment, transfer, pledge, hypothecation or other disposition of
the Option or any attempt to make any such levy of execution,
attachment or other process will cause the Option to terminate
immediately upon the happening of any such event, provided,
however, that any such termination of the Option under the
foregoing provisions of this Section 5 will not prejudice any
rights or remedies which the corporation or any subsidiary may have
under this Agreement or otherwise.
6. Exercise Upon Termination. The Optionee's rights to
exercise this Option upon termination of employment or cessation as
a director or consultant shall be as set forth in Section 8(f) of
the Plan.
7. Death, Disability or Retirement of Optionee. The
Optionee's rights to exercise this Option upon the death,
disability or retirement of the Optionee shall be as set forth in
Section 8(g) of the Plan.
8. Adjustments. The Option shall be subject to adjustment
upon the occurrence of certain events as set forth in Section 8(i)
of the Plan.
9. No Registration. The Optionee understands that neither
the Option nor the shares of Common Stock subject thereto and
issuable upon the exercise thereof are registered under the
Securities Act of 1933, as amended. The Optionee represents that
the Option is being acquired by him and that such shares of Common
Stock will be acquired by him for investment and all certificates
for the shares issued upon exercise of the Option will bear the
following legend:
<PAGE>
The shares represented by this Certificate have not been
registered under the Securities Act of 1933 (the "Act"),
and are "restricted securities" as that term is defined
in Rule 144 under the Act. The shares may not be offered
for sale, sold or otherwise transferred except pursuant
to an effective registration statement under the Act, the
availability of which is to be established to the
satisfaction of the Company.
10. Notices. Each notice relating to this Agreement will
be in writing and delivered in person or by certified mail to the
proper address. All notices to the Corporation shall be addressed
to it at its office at Glen L. Larsen Building, 877 North 8th West,
Riverton, Wyoming 82501. All notices to the Optionee or other
person or persons then entitled to exercise the Option shall be
addressed to the Optionee or such other person or Persons at the
Optionee's address below specified. Anyone to whom a notice may be
given under this Agreement may designate a new address by notice to
that effect.
11. Approval of Counsel. The exercise of the Option and
the issuance and delivery of shares of Common Stock pursuant
thereto shall be subject to approval by the Corporation's counsel
of all legal matters in connection therewith, including compliance
with the requirements of the Securities Act of 1933, as amended,
the Securities Exchange Act of 1934, as amended, applicable state
securities laws, the rules and regulations thereunder, and the
requirements of any stock exchange upon which the Common Stock may
then be listed.
12. Benefits of Agreement. This Agreement will inure to
the benefit of and be binding upon each successor and assign of the
Company. All obligations imposed upon the Optionee and all rights
granted to the Corporation under this Agreement will be binding
upon the Optionee's heirs, legal representatives and successors.
13. Governmental and Other Regulations. The exercise of
the Option and the Corporation's obligation to sell and deliver
shares upon the exercise of rights to purchase shares is subject to
all applicable federal and state laws, rules and regulations, and
to such approvals by any regulatory or governmental agency which
may, in the opinion of counsel for the Corporation, be required.
14. Incorporation of the Plan. The Plan is attached hereto
and incorporated herein by reference. In the event that any
provision in this Agreement conflicts with a provision in the Plan,
the Plan shall govern.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Agreement
to be executed in its name by its President or a Vice President and
its corporate seal to be hereunto affixed and attested by its
Secretary or its Assistant Secretary and the Optionee has hereunto
set his hand and seal all as of the date first above written.
U.S. ENERGY CORP.
(Seal)
By s/ John L. Larsen
-------------------------
JOHN L. LARSEN, President
ATTEST:
s/ Max T. Evans
- ------------------------------
MAX T. EVANS, Secretary
The undersigned Optionee understands the terms of this Option
Agreement and the attached Plan and hereby agrees to comply
therewith.
Date _______________, 19____
--------------------------------
--------------------------------
(Address of Optionee)
<PAGE>
SCHEDULE OF OPTIONS ISSUED TO INDIVIDUALS PURSUANT TO THE ABOVE
FORM OF OPTION AGREEMENT.
<TABLE>
<CAPTION>
No. of
Name Option Shares Price/Share Issue Date Expiration Date
- -------------------- ------------- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
John L. Larsen 100,100 $2.90 4/15/92 4/14/2002
Max T. Evans 57,200 $2.90 4/15/92 4/14/2002
Harold F. Herron 11,000 $2.90 4/15/92 4/14/2002
Daniel P. Svilar 66,000 $2.90 4/15/92 4/14/2002
R. Scott Lorimer* 29,700 $2.75 5/01/92 4/30/2002
Kenneth Webber 20,000 $2.90 4/15/92 4/14/2002
Keith G. Larsen 20,000 $2.90 4/15/92 4/14/2002
Mark J. Larsen 20,000 $2.90 4/15/92 4/14/2002
Randall R. VanVleet 10,000 $2.90 4/15/92 4/14/2002
George F. Smith* 29,700 $2.75 5/01/92 4/30/2002
Mark E. Prine 7,500 $2.90 4/15/92 4/14/2002
* Options issued under same terms of above Form of Option Agreement
with dates and price per share changed as indicated on this table.
</TABLE>
EXHIBIT 4.3
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT effective as of the 1st day of January,
1996 between U.S. Energy Corp., a Wyoming corporation (the
"Corporation"), and KEY NAME~ (the "Optionee").
In accordance with its 1989 Stock Option Plan (the "Plan") as
amended, a copy of which is attached hereto and incorporated herein
by reference, the Corporation desires, in connection with the
services of the Optionee, to provide the Optionee with an
opportunity to acquire $.01 par value common stock (the "Common
Stock") of the Corporation on favorable terms and thereby increase
the Optionee's proprietary interest in the continued progress and
success of the business of the Corporation.
NOW, THEREFORE, in consideration of the premises, the mutual
covenants herein set forth and other good and valuable
consideration, the Corporation and the Optionee agree as follows:
1. Confirmation of Grant of Option. Pursuant to a
recommendation of the Compensation Committee of the Board of
Directors of the Corporation (the "Board") made on December 22,
1995 and confirmed by the Board of Directors on that date, the
Corporation, subject to the terms of the Plan and of this
Agreement, confirms that the Optionee has been irrevocably granted
on January 1, 1996 (the "Date of Grant"), as a matter of separate
inducement and agreement, and in addition to and not in lieu of
salary or other compensation for services, a Non-Qualified Stock
Option pursuant to Section 7 of the Plan (the "Option") to purchase
an aggregate of KEY # OF SHARES~ Non-Qualified shares of Common
Stock on the terms and conditions herein set forth subject to
adjustment as provided in Section 8 hereof.
2. Purchase Price. The purchase price of shares of Common
Stock covered by the Option will be $4.00 per share based on the
bid price of such shares remaining above $8.00 for 20 consecutive
business days (the "Option Price"). The Option Price shall be
subject to adjustment as provided in Section 8 hereof.
3. Exercise of Option. Except as otherwise provided in
Section 8 of the Plan, the Option may be exercised in amounts not
to exceed 20% of the number of option shares during each calendar
year for the term of the Option, provided, however, no Option shall
be exercisable after the expiration of the term thereof, and no
Option shall be exercisable unless the holder is an employee of the
Corporation or of any subsidiary of the Corporation on the date of
exercise, except as provided in Sections 6 and 7 hereof and Section
8(f) of the Plan. The Option may be exercised only as to whole
shares in increments of 100 shares. The 20% annual limitation
shall not be increased because of failure to exercise the full 20%
which may have been available in prior years.
<PAGE>
Key Name
Stock Option Agreement
January 1, 1996
Page 2
The Option may be exercised, as provided in this Section 3, by
notice and payment to the Corporation as provided in Section 10
hereof and Section 8(d) of the Plan.
4. Term of Option. The term of the Option will be through
January 1, 1996 through December 31, 2000, subject to earlier
termination or cancellation as provided in this Agreement. Except
as otherwise provided in Sections 6 and 7 hereof, the Option will
not be exercisable unless the Optionee shall, at the time of
exercise, be an employee of the Corporation or of a subsidiary. As
used in this Agreement, the term "subsidiary" refers to and
includes each "subsidiary corporation" as defined in the Plan.
The holder of the Option will not have any rights to dividends
or any other rights of a shareholder with respect to any shares of
Common Stock subject to the Option until such shares shall have
been issued to him (as evidenced by the appropriate transfer agent
of the Corporation) upon purchase of such shares through exercise
of the Option.
5. Nontransferability of Option. The Option may not be
assigned, transferred (except as provided in the next preceding
sentence) or otherwise disposed of, or pledged or hypothecated in
any way (whether by operation of law or otherwise) otherwise than
by will or the laws of descent and distribution, and shall not be
subject to execution, attachment, or other process. Any
assignment, transfer, pledge, hypothecation or other disposition of
the Option or any attempt to make any such levy of execution,
attachment or other process will cause the Option to terminate
immediately upon the happening of any such event, provided,
however, that any such termination of the Option under the
foregoing provisions of this Section 5 will not prejudice any
rights or remedies which the corporation or any subsidiary may have
under this Agreement or otherwise.
6. Exercise Upon Termination. The Optionee's rights to
exercise this Option upon termination of employment shall be as set
forth in Section 8(f) of the Plan.
7. Death, Disability or Retirement of Optionee. The
Optionee's rights to exercise this Option upon the death,
disability or retirement of the Optionee shall be as set forth in
Section 8(g) of the Plan.
8. Adjustments. The Option shall be subject to adjustment
upon the occurrence of certain events as set forth in Section 8(i)
of the Plan.
<PAGE>
Key Name
Stock Option Agreemnt
January 1, 1996
Page 3
9. Registration. The Optionee understands that the Option
and the shares of Common Stock subject thereto and issuable upon
the exercise thereof are registered under Form S-8 (SEC File No.
33-74154) under the Securities Act of 1933, as amended. The
Optionee understands that it is his responsibility to confirm that
the registration is current and effective at the time of exercise
of his Options and sale of shares acquired thereunder.
10. Notices. Each notice relating to this Agreement will
be in writing and delivered in person or by certified mail to the
proper address. All notices to the Corporation shall be addressed
to it at its office at Glen L. Larsen Building, 877 North 8th West,
Riverton, Wyoming 82501. All notices to the Optionee or other
person or persons then entitled to exercise the Option shall be
addressed to the Optionee nor such other person or Persons at the
Optionee's address below specified. Anyone to whom a notice maybe
given under this Agreement may designate a new address by notice to
that effect.
11. Approval of Counsel. The exercise of the Option and
the issuance and delivery of shares of Common Stock pursuant
thereto shall be subject to approval by the Corporation's counsel
of all legal matters in connection therewith, including compliance
with the requirements of the Securities Act of 1933, as amended,
the Securities Exchange Act of 1934, as amended, applicable state
securities laws, the rules and regulations thereunder, and the
requirements of any stock exchange upon which the Common Stock may
then be listed.
12. Benefits of Agreement. This Agreement will inure to
the benefit of and be binding upon each successor and assign of the
Company. All obligations imposed upon the Optionee and all rights
granted to the Corporation under this Agreement will be binding
upon the Optionee's heirs, legal representatives and successors.
13. Governmental and Other Regulations. The exercise of
the Option and the Corporation's obligation to sell and deliver
shares upon the exercise of rights to purchase shares is subject to
all applicable federal and state laws, rules and regulations, and
to such approvals by any regulatory or governmental agency which
may, in the opinion of counsel for the Corporation, be required.
14. Incorporation of the Plan. The Plan, as amended, is
attached hereto and incorporated herein by reference. In the event
that any provision in this Agreement conflicts with a provision in
the Plan, the Plan shall govern.
<PAGE>
Key Name
Stock Option Agreement
January 1, 1996
Page 4
IN WITNESS WHEREOF, the Corporation has caused this Agreement
to be executed in its name by its President or a Vice President and
its corporate seal to be hereunto affixed and attested by its
Secretary or its Assistant Secretary and the Optionee has hereunto
set his hand and seal all as of the date first above written.
U.S. ENERGY CORP.
(Seal)
By: s/ John L. Larsen
--------------------------------
JOHN L. LARSEN, President
ATTEST:
s/ Max T. Evans
- --------------------------------
MAX T. EVANS, Secretary
The undersigned Optionee understands the terms of this Option
Agreement and the attached Plan and hereby agrees to comply
therewith.
Date _____________, 19____
------------------------------------
------------------------------------
(Address of Optionee)
<PAGE>
Schedule of Employees Receiving Stock Options pursuant to the above
Stock Option Agreement.
<TABLE>
<CAPTION>
No. of
Name Option Shares Price/Share Issue Date Expiration Date
- -------------------- ------------- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
Michael E. Sweeney 70,000 $4.00 1/01/96 12/31/2000
Richard P. Larsen 50,000 $4.00 1/01/96 12/31/2000
Mark J. Larsen 50,000 $4.00 1/01/96 12/31/2000
Keith G. Larsen 50,000 $4.00 1/01/96 12/31/2000
M. Shane Larsen 50,000 $4.00 1/01/96 12/31/2000
George F. Smith 60,000 $4.00 1/01/96 12/31/2000
Kenneth Webber 30,000 $4.00 1/01/96 12/31/2000
Thomas M. Evans 25,000 $4.00 1/01/96 12/31/2000
</TABLE>
EXHIBIT 4.4
U. S. ENERGY CORP.
RESTRICTED STOCK BONUS PLAN
Amended February 7, 1994
U.S. Energy Corp. ("USE"), a Wyoming corporation with
executive offices at 877 North 8th West, Riverton, Wyoming, 82501,
adopts this Restricted Stock Bonus Plan effective as of January 6,
1994:
WHEREAS, on May 25, 1990 the USE Board of Directors issued
common shares to certain directors, officers, employees and
consultants for services provided to USE; and
WHEREAS, additional shares were issued to the same individuals
in 1990 and (with the exception of Mr. Herron) in 1993; and
WHEREAS, all shares to date have been issued without
registration under federal securities laws, and subject to
forfeiture in the event various periods of service were not
completed;
NOW THEREFORE, the USE Board of Directors expands and amends
the previously authorized stock issue plan, as follows:
1. There are reserved for issue 550,000 shares of USE $.01
par value common stock under this Restricted Stock Bonus Plan
("Plan"), including all shares issued and to be issued through
January 4, 1994, which is the authorization date for such issue;
and shall control regardless of the date(s) share certificates
therefor are processed and issued.
2. All shares to be issued under the Plan shall be
registered under Form S-8 with the Securities and Exchange
Commission; resale of all shares issued to date and through January
4, 1994, shall be registered for resale through the Reoffer
Prospectus, comprising part of the Form S-8 registration statement;
and resale of future shares to be issued under the Plan shall be
registered under Form S-8, by the filing of post-effective
amendments to the Reoffer Prospectus, as necessary.
3. All shares to be issued after January 4, 1994 shall be
issued only (i) to employees, directors, consultants and others
providing services to USE or its subsidiaries, provided, that no
shares shall be issued in connection with capital formation
activities, (ii) by authority of the USE Board of Directors, (iii)
in accordance with Wyoming law, and (iv) on advice of counsel
regarding possible liabilities for directors, officers and 10
percent share owners, under Section 16 of the Securities Exchange
Act of 1934, as amended.
<PAGE>
4. All shares to be issued after January 4, 1994 shall be
issued (a) to employees of USE, with such forfeiture conditions as
may be established by the Board of Directors from time to time, and
(b) to consultants and other non-employee persons who provide
services to USE, without any forfeiture conditions.
s/ Max T. Evans
- ----------------------------------
Max T. Evans, Secretary
EXHIBIT 10.43
AGREEMENT
THIS AGREEMENT to sell certain improved land and personal
property located in Riverton, Wyoming ("Agreement") made and
entered into as of April 26, 1996 by and between U.S. Energy Corp.
a Wyoming Corporation ("USE"), and USECC Joint Venture, a Wyoming
co-partnership ("USECC") consisting of USE and Crested Corp., a
Colorado Corporation ("Crested") (USE and USECC hereinafter being
referred to collectively as "Sellers"), and Arrowstar Investments
Inc., a Wyoming corporation ("Arrowstar"), as buyer.
WITNESSETH:
WHEREAS, Sellers are engaged in the acquisition, mining,
development and/or marketing of uranium concentrates; and
WHEREAS, Sellers are disposing of assets not directly related
to the production of uranium concentrates to generate cash to meet
obligations incurred in the uranium business and for general
administrative expenses.
NOW THEREFORE for $10.00 and other consideration and the
promises made by the parties one to the other, the Parties agree as
follows:
1. Premises: Sellers jointly agree to sell, and Arrowstar agrees
to purchase, all of that improved land and personal property in the
City of Riverton, Fremont County, Wyoming, more specifically
described on Exhibit A attached to and hereby incorporated by
reference in this Agreement (the "Premises"), known generally as
the Wind River Estates Mobile Home Park and described in the
Appraisal Report (the "Appraisal") prepared for the First
Interstate Bank of Commerce, Gillette, Wyoming (the "Lender"), by
Mike McDonald of McDonald Appraisal Service Inc. of Riverton,
Wyoming. The Premises are sold "AS IS" in the condition existing
on the date of this Agreement and include all fixtures and
improvements to the land (more specifically described in the
Appraisal) and those mobile and modular homes listed on Exhibit A
and all storage sheds, equipment and other personal property
(including all security deposits made by tenants) owned by Sellers
(or either of them) and located on the Premises on the date of this
Agreement (the "Personal Property"), but excluding any and all
mobile and modular homes, trailers, motor vehicles and other
personal property located on the Premises, owned by others (whether
temporarily affixed to the land or not). The sale is subject to
the option in Sellers (or either of them) to repurchase the
Premises in accordance with the terms of paragraph 17 of this
Agreement, which shall survive the closing of the transfer of title
to the Premises (the "Closing") and the delivery of the deeds and
bill of sale pursuant to paragraph 3.
<PAGE>
USE/Arrowstar
April 26, 1996
Page 2
2. Purchase Price: The purchase price for the Premises is the
sum of $804,000, which is its "AS IS" Market Value as of April 5,
1996 determined by the Appraisal. Of this amount, the Parties
agree that $52,000.00 shall be allocated as the purchase price for
the personal property. The purchase price shall be paid by
Arrowstar at Closing in the following manner:
a) $500,000 shall be paid by Lender's bank draft from the
proceeds of a loan from Lender to Arrowstar;
b) $47,934.25 shall be paid by Arrowstar canceling the
balance of that certain promissory note dated September 1,
1995, in the original principal amount of $45,000 given by
USECC to Arrowstar as part of the purchase price for other
real property in the City of Riverton more specifically
described in that certain Option Agreement dated June 14,
1995, as amended November 1, 1995
c) $161,378.34 shall be paid by Arrowstar assigning to USECC
its entire interest in First-N-Last L. L. C., a Utah Limited
Liability Company ("L. L. C."), with the written consent and
waiver of preemptive rights by Canyon Homesteads, Inc.
("CHI"), which USE agrees to deliver or cause CHI to deliver
at Closing. Additionally, USECC will credit Arrowstar
$38,687.41 for goodwill due to Arrowstar's investing in First-
N-Last.
d) The balance of $56,000.00 shall be paid by an Installment
Promissory Note of Arrowstar to Sellers substantially in the
form of Exhibit B attached hereto.
3. Transfer of Title: At Closing Sellers shall convey to
Arrowstar good and marketable title to the Premises by Warranty
Deed from USE in the form attached as Exhibit C-1, and Quitclaim
deed in the form attached as Exhibit C-2 from USECC, and a Bill of
Sale in the form attached as Exhibit C-3 from USE and USECC, which
shall be signed by duly authorized officers of USE and Crested and
shall be attested and/or notarized in form suitable for recording
in Fremont County, Wyoming and accompanied by copies of resolutions
adopted by the board of directors of each of USE and Crested, duly
certified by their respective Secretaries or Assistant Secretaries.
Arrowstar agrees to accept the Premises subject only to: (i)
applicable zoning ordinances of the City of Riverton, WY; (ii) any
state of facts an accurate survey might show; (iii) those existing
leases and occupancy rights, and hereby incorporated herein by this
reference; (iv) any right, title, or interest in any mineral
rights, or related matters, including but not limited to oil, gas,
<PAGE>
USE/Arrowstar
April 26, 1996
Page 3
coal, and other hydrocarbons; (v) easements as delineated on
recorded plat; (vi) general taxes not now payable and matters
relating to special levies or assessments if any, preceding the
same becoming a lien; (vii) any service, installation or connection
charge for sewer, water or electricity; and (viii) such other
defects and encumbrances to title that Lender may accept at Closing
with respect to its loan to Arrowstar, provided the same do not
render title unmarketable. In the event that Sellers are unable to
convey such good and marketable title to the Premises to Arrowstar
at the Closing in accordance with the terms of this Agreement, for
reasons other than Sellers' willful default, then either party may
elect, by written notice to the other party, to postpone the
Closing to another date and time, but not later than 4 P.M. on May
16, 1996, during which time, Sellers shall use their best efforts
to remedy the cause of their inability to convey good and
marketable title. If neither party elects to postpone the Closing
as hereinabove provided or if, upon such other date set for
Closing, Sellers are unable to convey good and marketable title to
the Premises to Arrowstar in accordance with the terms of this
Agreement, then Arrowstar shall have the option of taking such
title as the Sellers can give, without abatement of the purchase
price, or terminate this Agreement and be repaid all moneys (if
any) paid on account of the purchase price, together with the
actual expenses of title examination. In the event Arrowstar
elects to terminate this Agreement as aforesaid, upon Sellers'
payment of the aforesaid monies (if any), this Agreement shall
terminate and there shall be no further liability or obligation by
either of the parties hereunder. Title to the Personal Property
shall be transferred to Arrowstar by a general Bill of Sale which
USE and USECC shall execute and deliver at Closing, together with
such documents of title to mobile and modular homes and other
specific items of Personal Property as may be requested by
Arrowstar subsequent to the Closing, which USE and USECC covenant
to execute and deliver to Arrowstar promptly upon request.
4. Possession: Possession of the Premises shall be given to
Arrowstar at Closing, subject to those mobile and modular home
leases and other occupancy rights existing on the date of this
Agreement.
5. Closing: The closing of title transfer to the Premises and
payment of the purchase price for the Premises shall take place at
the offices of Riverton Title Services, 113 N. 5th East, Riverton,
Wyoming, at 10 o'clock in the morning on Friday April 26, 1996 or
at such other time, place and/or date as the Sellers and Arrowstar
may mutually agree.
6. Conditions to Closing: Closing of the transactions
contemplated in this Agreement shall be simultaneous and each is
conditioned on satisfaction of the following conditions:
<PAGE>
USE/Arrowstar
April 26, 1996
Page 4
a) Sellers' representations set forth in this Agreement
shall be true and accurate as of the date of this Agreement
and as of the time of Closing.
b) Arrowstar's representations set forth in this Agreement
shall be true and accurate as of the date of this Agreement
and as of the time of Closing.
c) Lender shall disburse the proceeds of the loan of
$500,000 to Arrowstar in accordance with separate lending
agreements between Arrowstar and Lender.
d) The Promissory Note given by USECC to Arrowstar (referred
to in paragraph 2 (b) of this Agreement) shall be marked paid
by Arrowstar and delivered to USECC at Closing.
e) Arrowstar shall deliver a good and sufficient instrument
of Assignment to USECC to transfer Arrowstar's entire interest
in L. L. C. to USECC.
f) There shall be no defaults pending at the time of Closing
under the L. L. C. Operating Agreement and L. L. C. shall be
in good standing and qualified to do business in the State of
Utah.
g) Sellers shall convey to Arrowstar good and marketable
title to the real property included in the Premises by a
Warranty Deed and Quit Claim Deed, deliver to Arrowstar a
general Bill of Sale transferring all of Sellers' right, title
and interest in and to the Personal Property to Arrowstar in
accordance with the terms of Paragraph 3 above of this
Agreement.
h) Arrowstar shall deliver its Installment Promissory Note
referred to in subparagraph 2 (d) of this Agreement to USECC,
duly executed by appropriate corporate officers of Arrowstar
and accompanied by a resolution of the board of directors of
Arrowstar, certified by its Secretary or Assistant Secretary
establishing the authority for Arrowstar's delivery of such
Promissory Note.
7. Apportionment of Taxes, etc. All real estate taxes shall be
apportioned as of the date of Closing on the basis of the total
taxes paid or required to be paid with respect to the Premises for
the calendar year 1996. Rents shall be apportioned as of May 1,
1996 with Sellers retaining all rents paid or due for the month of
April irrespective of the portion of the month remaining after the
Closing. Sellers shall deliver to Arrowstar at Closing a list of
rents paid and unpaid as of the day of immediately preceding the
Closing date.
<PAGE>
USE/Arrowstar
April 26, 1996
Page 5
8. Additional Lands Included and Condemnation: The sale and the
purchase price include all right, title and interest, if any, of
the Sellers in and to any strips and gores adjoining any of the
Premises, any land lying in the bed of any street, road or avenue,
opened or proposed, in front of or adjoining the Premises and all
right, title and interest of the Sellers in and to any award made
or to be made in connection with the condemnation or the taking
thereof and in and to any unpaid award for damage to the Premises
by reason of change of grade or width or location or relocation of
any street or road, permanent interference with access to the
Premises, and/or any other compensable occurrence. Sellers agree
to execute and deliver to Arrowstar at Closing, or thereafter on
demand, all proper instruments for the conveyance of such title and
the assignment and collection of any such award.
9. Broker Fees: Each party represents to the other that it has
not dealt with any broker in connection with this sale and each
agrees to indemnify the other from any claims for commission which
may be made by any broker through whom such party has had any
dealing in connection with this transaction.
10. Notices or Ordinances: Sellers have not received any notice
from any governmental body or other public authority having
jurisdiction over the Premises, and have no knowledge of (i) any
assessment or charge against the Premises which remains unpaid on
the date hereof other than real estate taxes referred to in
Paragraph 7 of this Agreement or (ii) any work or improvements
which have been started or are proposed by any governmental body or
public authority for which an assessment or charge could be made
against the Premises. All notices from any governmental body or
other public authority against or affecting the Premises at the
date hereof shall be complied with by Sellers and the Premises
shall be conveyed free of the same, and this provision of this
Agreement shall survive delivery of the deed hereunder. If, at the
time of Closing, the Premises or any part thereof shall be or shall
have been affected by an assessment or assessments which are or may
become payable in installments, then for the purposes of this
Agreement all the unpaid installments of any such assessment that
become due and payable after the delivery of the deed, shall be
deemed to be the responsibility of Arrowstar and shall be paid and
discharged by Arrowstar as they become due and payable.
11. Entire Agreement of Parties and Amendments: This Agreement
constitutes the entire Agreement between the parties, and no
amendment to the terms of this Agreement shall be binding unless
reduced to writing, and signed by all the parties hereto.
<PAGE>
USE/Arrowstar
April 26, 1996
Page 6
12. Binding Effect: This Agreement shall inure to and be binding
upon the Parties hereto, their successors and permitted assigns.
13. Assignment: For a period of two years from the date of this
Agreement, Arrowstar shall not assign its interest in this
Agreement without the prior written consent of both Sellers,
provided however Arrowstar may sell any and all items of personal
property included in this Agreement.
14. Sellers' Representations: Sellers represent and warrant to
Arrowstar that (i) Sellers are duly organized and validly existing
under and by virtue of the laws of the States of Wyoming and
Colorado as shown above; (ii) Sellers have full power, authority
and right to enter into this Agreement and to convey the Premises
free and clear of any option, lien, commitment, restriction or
other encumbrance except taxes and occupancy leases and rights
identified in Paragraph 7; (iii) To Sellers' knowledge, there is no
pending or threatened condemnation of any part of the Premises; and
(iv) to Seller's knowledge there are no material environmental
hazards on or affecting the Premises.
15. Arrowstar's Representations: Arrowstar represents and
warrants to Sellers that (i) Arrowstar is duly organized and
validly existing under any by virtue of the law of the State of
Wyoming; (ii) Arrowstar has full power, authority and right to
enter into this Agreement and to perform its obligations under this
Agreement in the manner contemplated herein; (iii) L. L. C. is duly
organized and in good standing as a limited liability company in
the State of Utah and is qualified to do business in the State of
Utah; (iv) no default exists under the L. L. C. Operating Agreement
on the date hereof and Arrowstar has full power, authority and
right to assign and transfer its entire interest in L. L. C. upon
delivery of CHI's written consent and waiver of preemptive rights
under the Operating Agreement for L. L. C..
16. Notice: Any notice to be given pursuant to this Agreement
shall be sufficient if in writing and mailed by registered or
certified mail, postage prepaid, or delivered in person or by
express delivery service to the following addresses:
(i) If to Sellers: U.S. Energy Corp. and USECC
877 North 8th West
Riverton, WY 82501
(ii) If to Arrowstar: Arrowstar Investment Inc.
877 North 8th West
Riverton, WY 82501
Either party may by notice given as aforesaid change the
address for notices to it.
<PAGE>
USE/Arrowstar
April 26, 1996
Page 7
17. Sellers' Option: Sellers (and each of them) shall have an
option to repurchase the real property included in the Premises and
the remaining Personal Property for a cash purchase price equal to
the fair market value of the Premises as of the date that is within
sixty days prior to or after the date Sellers exercise of their
option under this paragraph 17. Fair market value shall be
determined by appraisal conducted by any independent appraiser
licensed in Wyoming selected by Sellers (or either of them) and
reasonably acceptable to Arrowstar. Sellers (or either of them)
may exercise this option by giving written notice to Arrowstar at
any time prior to the 2nd anniversary of the Closing. Upon receipt
of such notice, Sellers and Arrowstar shall mutually determine a
time and place for closing such repurchase, which shall take place
not more than 60 days following Sellers giving such notice of
exercise. The provisions of this paragraph 17 shall survive the
Closing and delivery of the Deeds and Bill of Sale to Arrowstar
pursuant to paragraph 3.
IN WITNESS WHEREOF, the parties hereto have set their hands
and seals the day and year first above written.
ATTEST: U.S. ENERGY CORP.
s/ Max T. Evans By s/ Harold F. Herron
- ------------------------------ -------------------------
Secretary
USECC JOINT VENTURE
By U.S. ENERGY CORP.
s/ Max T. Evans By s/ Harold F. Herron
- ------------------------------ -------------------------
Secretary
ATTEST: By CRESTED CORP.
s/ Daniel P. Svilar By s/ Max T. Evans
- ------------------------------ -------------------------
Secretary
ATTEST: ARROWSTAR INVESTMENTS, INC.
s/ Keith G. Larsen By s/ Mark J. Larsen
- ------------------------------ -------------------------
Secretary
EXHIBIT 10.44
AGREEMENT
THIS AGREEMENT is made and entered into at Riverton, WY on the
25th day of April, 1996 by and between TAG Development, Inc., a
Delaware corporation licensed to do business in Wyoming, of P.O.
Box 604, Saratoga, WY 82331 (the "COMPANY") and U.S. Energy Corp.
a Wyoming corporation and Crested Corp. a Colorado corporation
licensed to do business in Wyoming both of 877 North 8th West,
Riverton, WY 82501 (the "SELLERS).
RECITALS
WHEREAS, SELLERS own 10 six-plex townhouses located on Block
19 of the Jeffrey City Townsite in Jeffrey City, Wyoming more fully
described in Exhibit A attached hereto; and
WHEREAS, the COMPANY is in the business of financing and
developing residential and commercial real estate interests; and
WHEREAS, SELLERS desire to sell the Property and the COMPANY
desires to purchase the Property from SELLERS.
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants and
conditions set forth in this Agreement, and for other good and
valuable consideration the receipt and sufficiency of which is
hereby acknowledged, the Parties hereby agree as follows:
1. The SELLERS agree to sell to the COMPANY and the COMPANY
agrees to buy from the SELLERS the Property identified in Exhibit
"A" of this Agreement,
2. The COMPANY agrees to pay SELLERS Five Hundred Thousand
Dollars ($500,000) the "Purchase Price" conditioned upon the
COMPANY obtaining financing within 60 days of the execution of this
Agreement, either through conventional or private loans, sale of
equity or otherwise.
3. The term of this Agreement shall be for 60 days or upon
closing of this Agreement if Closing is extended by mutual consent.
"Closing" shall mean the date on which all documents are exchanged
and payment of the $500,000 is paid to SELLERS.
4. In the event the Company moves any of the townhouses from the
Property, the COMPANY shall remove all debris from the townhouse
site and the COMPANY shall be responsible for reclamation of the
land where the townhouse was located. If necessary, SELLERS at
their expense, agree to provide fill dirt to the site of each
townhouse upon its removal.
<PAGE>
5. Upon the execution of this Agreement, the COMPANY may inspect
each townhouse for structural integrity, electric wiring, plumbing,
fixture, the presence of radon gas, or any other kind of hazardous
material. The COMPANY is purchasing the Property in an "AS IS"
condition.
6. SELLERS and the COMPANY shall each pay one-half of the escrow
fee. SELLERS shall pay all real estate taxes to the date of
Closing as hereinafter described. Taxes for the current year, rent
and interest shall be prorated to the date of Closing. The SELLERS
agree to transfer full real estate title to COMPANY at Closing.
7. Title to the Property shall be delivered by a Quit Claim Deed
at Closing. Monetary encumbrances not assumed by the COMPANY shall
be paid by the SELLERS on or before Closing.
8. Closing shall be within 15 days after the COMPANY has
inspected and is satisfied with the Property, but no later than
June 25, 1996, which shall also be the termination date of this
Agreement, if not Closed before or mutually extended in writing.
Closing shall be with Riverton Title Service, a qualified Escrow
Agent. Closing either earlier or later than the above dates shall
be by mutual consent in a written agreement of the Parties.
"Closing" shall mean the date on which all documents are exchanged
and the $500,000 is paid to the SELLERS. The Parties agree that
there shall be satisfactory compliance if on the Closing date, all
documents are executed and all required funds are deposited in
escrow for SELLERS or available to SELLERS from the COMPANY's
lender upon delivery of the Proper Title.
9. The COMPANY shall be entitled to possession of the Property
after Closing. All rental revenues acquired from the townhouses
subsequent to the day of Closing, shall be deposited in TAG
Development. Inc.'s or TAG affiliate's designated bank account.
10. In the event the COMPANY removes all of the townhouses, the
COMPANY agrees to sell, assign and convey all right, title and
interest in the Real Property where the removed townhouses were
located by quit claim deed to SELLERS for the full consideration of
$10.00. The deed shall be delivered to SELLERS within 60 days
after removal of the last building, it being understood that all
real property taxes and assessments shall be pro-rated to the date
of the deed by COMPANY with SELLERS assuming such obligations upon
receiving the deed. The COMPANY agrees to pay all utility charges
(including unbilled charges) real property taxes and assessments to
the day of delivery of the deed to the SELLERS and the SELLERS
agree to pay all utility charges, real property taxes and
assessments thereafter. This paragraph 10 shall survive the
Closing of the Agreement.
<PAGE>
11. The COMPANY may assign this Agreement and rights hereunder,
without SELLERS' prior written consent, provided however that any
assignment shall not relieve the COMPANY from any obligation
contained in this Agreement.
12. Unless otherwise specified in this Agreement, any and all
notices required or permitted to be given under this Agreement must
be given in writing. Notices shall be deemed to be given when
delivered to the Parties at the following addresses and if by mail,
the notice shall be deemed delivered 5 days after posting by or at
the office of the COMPANY.
If to SELLERS:
U.S. Energy Corp./Crested Corp.
877 North 8th West
Riverton, WY 82501
If to COMPANY:
TAG Development, Inc.
PO Box 604
Saratoga, WY 82331
13. Unless otherwise expressly specified herein, any period of
time specified in this Agreement shall expire at midnight of the
last calendar day of the specified period of time, unless the last
day is Saturday, Sunday, or a legal holiday, in which event the
specified period of time shall expire at midnight of the next
business day. Any specified period of five day or less shall
include business days only.
14. Facsimile transmission of any signed original document, and
re-transmission of any signed facsimile transmission, shall be the
same as delivery of an original. At the request of either party,
the parties shall confirm facsimile transmitted signatures by
signing an original document, and mailing first class, certified or
registered mail to the other party.
15. TIME IS OF THE ESSENCE. There are no verbal agreements which
modify this Agreement. This Agreement constitutes the full
understanding between SELLERS, and the COMPANY. The COMPANY is
responsible to inspect the Property and reach its own conclusions
as to the adequacy and acceptability of the Property based upon
such personal inspection
16. This Agreement shall be interpreted under the laws of the
State of Wyoming:
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized
representative as of the date and year first above written.
"SELLERS"
U.S. ENERGY CORP., CRESTED CORP.,
a Wyoming corporation a Colorado corporation
By: Max T. Evans By: Max T. Evans
------------------------- --------------------------
Print Name Print Name
s/ Max T. Evans s/ Max t. Evans
------------------------- --------------------------
Signature Signature
Secretary President
------------------------- --------------------------
Title Title
"COMPANY"
TAG DEVELOPMENT, INC.,
a Delaware corporation
By: s/ RandaL. Wagoner
-------------------------
Randal L. Wagoner
President
By: s/ William C. Van Duyne
-------------------------
William C. Van Duyne
C.E.O.
<PAGE>
EXHIBIT "A".
Townhouse D; Townhouse E; Townhouse F;
Townhouse G; Townhouse H; Townhouse I;
Townhouse K; Townhouse L; Townhouse M and;
Townhouse N.
LOCATED ON BLOCK 19,
Jeffrey City Townsite, Fremont County, Wyoming
EXHIBIT 10.45
Agreement to Develop
The Ticaboo Convenience Store Service Station
And
Boat Storage Operation
THIS AGREEMENT is entered into at Riverton, Wyoming and
effective as of the 5th day of April, 1995 by and between Canyon
Homesteads, Inc. ("CHI"), a Utah corporation with executive offices
at 877 North 8th West, Riverton, Wyoming 82501 and Arrowstar
Investments, Inc. ("Arrowstar") a Wyoming corporation, with
executive offices at 877 North 8th West, Riverton, Wyoming 82501.
Recitals
WHEREAS, CHI leases (in its name as trustee for the Ticaboo
Townsite Joint Venture, hereafter "TTJV") land from the State of
Utah in Garfield County, Utah pursuant to "Special Use Lease
Agreement No. 399" dated July 3, 1978 (hereafter, "Special Use
Lease"), and pursuant to Development Leases and Base Leases issued
by the State Of Utah covering land under the Special Use Lease,
whereon buildings and other improvements more fully described below
(hereafter, such assets are referred to as the "Townsite"); and
WHEREAS, CHI is responsible for the development of the Ticaboo
Townsite and the day to day management of the Ticaboo Townsite
which incudes a motel, restaurant/lounge, RV park, mobile home
park, home sites and other businesses; and
WHEREAS, CHI believes that in order to attract a developer(s)
to promote and develop the Ticaboo Townsite, it was necessary to
establish a recreational base; and
WHEREAS, In 1994, CHI reopened the motel, built a swimming
pool and leased the restaurant to a third party and after the 1994
tourist season (March through October), it became apparent that
additional services were needed to make the Ticaboo Townsite
profitable and more desirable to attract potential developers to
finance, construct, and establish the recreation resort townsite;
and
WHEREAS, CHI has spent over a year, seeking individuals or
company who would be interested in developing a convenient store
service station and boat storage site; and
WHEREAS, because of the business risks and seasonal tourist
trade, CHI has been unsuccessful in finding a company or individual
willing to risk an investment that may be abandoned after one to
two years of testing the seasonal tourist trade; and
WHEREAS, CHI and Arrowstar are willing to assume the business
risks of a recreational development business; and
WHEREAS, CHI and Arrowstar desire to incorporate an Utah
limited liability company (name if available First-N-Last, LLC) on
a 50/50 basis to finance and develop the Ticaboo Service Station
and Boat Storage Operation to service the emerging destination
recreation resort townsite of Ticaboo; and
WHEREAS, CHI has applied to the State of Utah School and
Institutional Trust Land Administration ("Utah SITLA") for approval
of the assignments of an interest in related Development Leases and
Base Lease, in accordance with this Agreement, and the Utah SITLA
has indicated to CHI that the application will be approved.
NOW THEREFORE, in consideration of the mutual promises set
forth herein and for other good and valuable consideration, the
receipt, sufficiency and legal adequacy of which are hereby
acknowledged, the Parties agree as follows:
1. FORMATION OF LLC.
CHI shall contribute its equity interest in the Ticaboo
Convenience Store Service Station and Boat Storage Site and
Operation ("Certain Ticaboo Townsite Assets"), more particularly
described on Exhibit A attached hereto, and made a part of this
Agreement and Arrowstar shall contribute cash of One Hundred Fifty
Thousand Dollars ($150,000.00). The formation of the Utah limited
liability company (name if available First-N-Last, LLC) ("LLC")
shall be completed within 10 working days by CHI upon the signing
of this Agreement. The LLC will also have the sole and exclusive
right to establish a convenient store in the Ticaboo Hotel.
2. MEMBERSHIP INTERESTS.
(a) General. Each party initially shall have a 50
percent membership interest in the LLC, subject to: (i) a special
allocation to Arrowstar of 90 percent of distributed cash from
operations until the "First" Working Capital Arrowstar contributed
and accrued interest has been paid and then 75 percent of
distributed cash profits from operations until $215,000.00 has been
paid; (ii) reduction in Arrowstar's interest for failure to pay or
arrange for the initial working capital pursuant to paragraph
3.(a); and (iii) reduction of either party's interest for failure
to make additional cash contributions to when called by Management
Committee, or the admission of additional member, provided that the
special allocation under (i) shall not be changed without
Arrowstar's prior consent.
(b) Transfer and Right of First Refusal. The proposed
sale or other transfer of any outstanding membership interests in
the LLC shall be subject to the nontransferring party's right of
first refusal to purchase the subject interest (for the same
consideration, or if for non-cash consideration, then a reasonably
equivalent amount of cash consideration). Notice shall be given
(by the party proposing transfer) to the nontransferring party, at
least 30 days prior to proposed transfer, describing the amount of
membership interest, purchase price (including terms), and the
proposed transferee (including financial ability to meet the
responsibilities of membership).
Exercise of right of first refusal shall be first by the
nontransferring party giving response notice of intent to exercise
the right to the party giving original notice, on or before the
close of business on the thirtieth day after original notice is
received. The membership interest must be purchased on or before
the close of business on the thirtieth day after original notice is
received. If either the response notice of intent to exercise is
not given, or is given but the membership interest is not purchased
within the time provided, there shall be no right of first refusal
for the nontransferring party to purchase the subject interest
(however, all subsequent transfers of such, and other, membership
interests shall be subject to such right of first refusal).
Transfers of membership interests to party affiliates shall not be
subject to this subparagraph (b).
(c) CHI's right to purchase Arrowstar's Membership
Interest. Notwithstanding any other provision of this Agreement,
if CHI needs to purchase Arrowstar's Membership Interest for any
reason, Arrowstar agrees to sell its Membership Interest for the
fair market value. For purposes of this Agreement fair market
value shall be determined by an appraiser acceptable to Arrowstar
and said appraisal shall be paid for by CHI. In no event shall the
fair market value be less than Arrowstar's initial Capital Account
until such time as Arrowstar has received $215,000.00 in profits.
(d) Qualification of Transferees. In addition to the
restriction of subparagraph (b), no outstanding membership interest
in the LLC may be sold or otherwise transferred to a third party
without consent of the nontransferring party (if they hold a
majority of the membership interests), in which event the
transferee shall not become a member but shall receive an interest
in profits or other compensation by way of income and right to the
return of contributions to which the transferring member otherwise
would be entitled.
3. WORKING CAPITAL.
(a) First $50,000.00. Arrowstar shall contribute or
arrange for the loan of up to $50,000.00 to the LLC (the loan may
be secured with the LLC's assets) to fund the initial program and
budget.
(b) Cash Calls. After amounts available under (a) are
spent, the Operating Manager of the LLC shall submit (before the
last day of each month) a billing for estimated cash requirements
for the next month, based on the current adopted program and
budger. Within 10 days after recipt of each bill, each each Member
of the LLC shall advance its proportionate share of the estivmated
amount.
4. MANAGEMENT COMMITTEE.
(a) General. The LLC shall be managed by an Operating
Manager selected by the Management Committee according to the
Operating Agreement. Initially, the Operating Manager shall be
CHI. The management committee for the LLC will be responsible for
setting the goals, objectives and policies, formulating the
business strategy and establishing the annual budget (including a
minimum 3 year forecast). The Operating Manager, subject to the
overall direction and ultimate authority of the Management
Committee, will be responsible for daily operations (including
without limitation supervision of architects and building and
landscape contractors, insurance and security, management and
marketing and commercial operations). CHI shall prepare monthly or
quarterly reports, as directed by the Management Committee, showing
status of and budgets and such other information requested by the
Management Committee.
(b) Representation. CHI and Arrowstar shall have equal
representation (two seats each) on the Management Committee, for so
long as CHI and Arrowstar have equal membership interests in the
LLC. The initial committee members are as follows:
(i) Arrowstar's committee members will be Keith Larsen
and Mark Larsen; and
(ii) CHI's committee members will be Al Dearth and Scott
Lorimer.
In the event a part's membership interest in the LLC
becomes less than 40 percent, that party shall be entitled to one
seat on the Management Committee; if its membership interest
becomes less than 20 percent, that party shall be entitled to no
seat on the Management Committee. The 75 percent special
allocation to Arrowstar shall not be taken into account for
purposes of representation.
5. ARROWSTAR AND CONFLICT OF INTEREST.
Arrowstar is owned by Jack Larsen, Chairman and President of
U.S. Energy Corp. ("USE") and Chairman of Plateau Resources, Ltd.,
and his sons Richard Larsen, Keith Larsen and Mark Larsen all
employees of USE. Plateau Resources, Ltd. is a wholly owned
subsidiary of U.S. Energy Corp. Therefore, there is the
possibility for a conflict of interest or the appearance of a
conflict of interest to exist between Arrowstar, USE, Plateau and
CHI. However, given the facts that at this time Arrowstar is the
only company willing to invest in the Ticaboo Service Station and
Boat Storage business, time is of the essence because development
must be completed by no later than May 1995 (beginning of 1995
tourist season) and CHI does not wish to invest in this
development; CHI believes any potential conflict is manageable and
CHI should enter into an agreement with Arrowstar to develop
Ticaboo Service Station and Boat Storage Sties.
6. REPRESENTATIONS AND WARRANTIES.
(a) Of CHI. This Agreement has been duly authorized by
the directors and shareholder of CHI, a Utah corporation in good
standing. TTJV is sole lessee or owner of the Townsite assets.
CHI is sole owner of TTJV. CHI has not received any notice of
default of provisions of the Special Use Lease, or Development
Leases or Base Leases thereunder, or other agreements under which
Townsite assets are leased or used. Subject to approval by the
Utah SITLA of the assignment of the Special Use Lease and related
Development Leases and Base Leases, Canyon has full authority to
convey certain Townsite assets under Section 1 of this Agreement,
and all such assets are free and clear of any encumbrance (except
taxes for prior periods which are not delinquent). There are no
pending or threatened actions, suits, claims or proceedings by any
person (including environmental and other public administrative
agencies) with respect to the certain Townsite assets.
(b) Of Arrowstar. Execution, delivery and performance
of this Agreement has been duly authorized by the directors and
shareholders of Arrowstar, a Wyoming corporation in good standing.
Arrowstar acknowledges having been provided the opportunity to
inspect the Certain Ticaboo Townsite Assets and review all files of
CHI regarding the Certain Ticaboo Townsite Assets. Arrowstar
understands that the profitable development of the Certain Ticaboo
Townsite Assets is not assured, whether due to unanticipated
construction costs, lack of market, or other factors.
7. FIDUCIARY DUTIES OF THE PARTIES. Each party hereto, and
the affiliates of each party, agrees that fiduciary duties are owed
to the LLC and its members, such that all Parties and affiliates
will act on behalf of the LLC for benefit of that entity, and
further agree that all profits that can be derived from dealings by
the Parties and their affiliates with the LLC and/or its assets,
shall be made only in and through the LLC for the benefit of its
members. No party or its affiliates shall make profits for their
own accounts from doing any kind of business with the LLC and/or
its assets, without the knowledge and consent of the other party.
Notwithstanding the preceding, pursuant to Section 48-2b-125(l) of
the Utah Limited Liability Company Act, only the Operating Manager
shall have the right to bind the LLC.
8. OPERATING AGREEMENT TO CONTROL. In the event of any
conflict between this Agreement and the Operating Agreement, the
Operating Agreement shall control.
9. NO PARTNERSHIP OR AGENCY. CHI and Arrowstar acknowledge
that, by virtue of this Agreement and the transactions contemplated
hereby, CHI and Arrowstar are not the agents or partners of each
other, and nothing contained in this Agreement shall be construed
to create between CHI and Arrowstar the relationship of principal
and agent, joint venturers, co-partners or any other similar
relationship, the existence of which is hereby expressly disclaimed
by the Parties here to. Neither Party shall have the authority to
act for or assume any obligation or responsibility on behalf of the
other Party, except as expressly set forth herein. Each Party
shall indemnify, defend and hold harmless the other Party, its
directors, officers, employees, and agents from and against any and
all losses, claims, damages or liabilities, including reasonable
attorney's fees, arising out of any act of any assumption of
liability by the indemnifying Party or any of its directors,
officers, employees, and agents done or undertaken, or apparently
done or undertaken, on behalf of the other Party, except pursuant
to authority expressly granted herein or as otherwise agreed upon
in writing between the Parties.
10. GENERAL PROVISIONS.
(i) Binding Agreement. This Agreement shall be binding
upon and shall inure to the benefit of the heirs, legal
representative, successors and assigns, as applicable, of the
respective Parties hereto, and any entities resulting from the
reorganization, consolidation or merger of any Party hereto.
(ii) Headings. The headings used in this Agreement are
inserted for reference purposes only and shall not be deemed to
limit or affect in any way the meaning or interpretation of any of
the terms or provisions of the Agreement.
(iii) Time of the Essence. Time is of the essence of
this Agreement. Any deadline hereunder which falls on a weekend
day or holiday shall instead fall on the next following business
day.
(iv) Severability. The provisions of this Agreement are
severable, and should any provision hereof be found to be void,
voidable or unenforceable, such void, voidable or unenforceable
provision shall not affect any other portion or provision of this
Agreement.
(v) Waiver. Any waiver by any Party hereto of any
breach of any kind or character whatsoever by any other party,
whether such waiver be direct or implied, shall not be construed as
a continuing waiver or consent to any subsequent breach of this
Agreement on the part of the other party.
(vi) Modification. This Agreement may not be modified
except by an instrument in writing signed by the Parties hereto.
(vii) Governing Law. This Agreement shall be
interpreted, construed and enforced according to the laws of the
State of Utah.
(viii) Attorney's Fees. In the event any action or
proceeding is brought by either Party against the other under this
Agreement, the prevailing Party shall be entitled to recover
attorney's fees and costs in such amount as the court may adjudge
reasonable, whether incurred before, during or after such
proceeding is commenced and conducted. Notwithstanding the
preceding, the collecting attorney must be able to swim the mighty
Colorado, across the widest and deepest point, with cement line
boots and hands tied behind his or her back or in the alternative
the attorneys must get the Parties to work together to resolve
their differences.
(ix) Notices. Any notice, consent, request, objection or
communication to be given by either Party to this Agreement shall
be in writing and shall be either delivered personally, by
certified mail or by Airborne, Federal Express or other commercial
overnight delivery service addressed as follows:
If to CHI: Canyon Homesteads, Inc..
877 North 8th West
Riverton, Wyoming 82501
If to Arrowstar: Arrowstar Investments, Inc.
877 North 8th West
Riverton, Wyoming 82501
(x) Counterparts. This Agreement may be executed in any
number of counterparts, each of which, when executed and delivered,
shall be deemed an original, but all of which shall together
constitute one and the same instrument.
IN WITNESS WHEREOF, this Agreement is executed to be effective as
of the date first stated above.
CANYON HOMESTEADS INC.
s/ A. E. Dearth
- ----------------------------------
A. E. DEARTH, President
ARROWSTAR INVESTMENTS, INC.
s/ Mark J. Larsen
- ----------------------------------
MARK J. LARSEN, President
EXHIBIT 10.46
OPERATING AGREEMENT
FOR
FIRST-N-LAST L.L.C.,
A UTAH LIMITED LIABILITY COMPANY
Article I
Definitions
In this Operating Agreement, the following terms shall have
the meanings defined below, unless another meaning is stated in the
text of the Operating Agreement.
"Articles of Organization" are the Articles of Organization
for First-N-Last Limited Company filed with the Utah Division of
Corporations and Commercial Code of the Department of Commerce on
or about the 20th of April, 1995.
"Capital Account" at any time shall be the Capital
Contribution to the Company by a Member, as adjusted under Article
VIII.
"Capital Contribution" is any Member's contribution to Company
capital, in cash or property.
"Initial Capital Contribution" is any Member's contribution to
Company capital, in cash or property.
"Capital Interest" is the proportion (expressed as a
percentage) which a Member's positive Capital Account bears to the
aggregate of all positive Capital Accounts of all Members with
positive balances.
"Code" is the Internal Revenue Code of 1986, as amended.
"Act" or "Utah Act" is the Utah Limited Liability Company Act.
"Company" is First-N-Last L.L.C.
"Deficit Capital Account" is any deficit balance in a Member's
Capital Account as of the end of the taxable year, after giving
effect to the following adjustments:
1. credit to such Capital Account any amount which such
Member is obligated to restore under Sec. 1.704-1(b)(ii)(c) of the
Treasury Regulations, as well as any addition thereto pursuant to
the next to last sentence of Sections 1.704-2(g)(1) and (i)(5) of
such Regulations, after taking into account thereunder any changes
during such year in partnership minimum gain (as determined in
accordance with Section 1.704-2(d) of such Regulations) and in the
minimum gain attributable to any partner nonrecourse debt (as
determined under Section 1.704-2(i)(3) of such Regulations; and
2. debit to such Capital Account the items described in
Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Treasury
Regulations.
The foregoing Deficit Capital Account is intended to comply
with Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and 1.704-2
and shall be interpreted in conformity therewith.
"Distributable Cash" is all cash, revenues and funds received
by the Company, less the sum of the following to the extent paid or
set aside by the Company: (i) all principal and interest payments
on Company debt, and all other sums paid to lenders; (ii) all cash
expenditures incurred in connection with regular Company business;
and (iii) such Reserves as the Manager deems prudent to proper
operation of the Company business.
"Economic Interest" is a Member's or Economic Interest Owner's
share of Company Net Profits or Net Losses or distributions of
assets, or any combination of such, pursuant to this Operating
Agreement and the Act, but shall not include any right to
participate in management of Company business or affairs, or the
right to vote on, consent to or otherwise participate in an
decision of Members.
"Economic Interest Owner" is the owner of an Economic
Interest, who is not also a Member.
"Entity" is any general of limited partnership, limited
liability company, corporation, joint venture, trust, business
trust, cooperative, or other form of domestic or foreign business
organization.
"Fiscal Year" is the Company's fiscal year, which shall be the
12 months ending May 31.
"Gifting Member" is a Member or Economic Interest Owner who
gifts or otherwise transfers without consideration (by operation of
law or otherwise, except with respect to bankruptcy) all or any
part of a Membership Interest or Economic Interest.
"Majority Interest" is the Interest(s) of Member(s) which
exceeds 50 percent of the aggregate of all Capital Interests.
"Member" is each party who executes this Operating Agreement
as a Member, and each of the parties who thereafter become Members.
To the extent the Operating Manager has purchased Membership
Interests in the Company, it shall have all rights of a Member with
respect to such Membership Interests. If a Person is a Member
immediately prior to acquisition by such Person of an Economic
Interest, such rights as a Member shall extend to the acquired
Interest.
"Net Profits" and "Net Losses" are Company income, gain, loss,
deductions and credits, determined in accordance with generally
accepted accounting principles under the accrual method of
accounting, determined as of the close of each fiscal year on the
Company informational tax return filed for federal income tax
purposes.
"Operating Manager" initially under this Agreement shall refer
to Canyon Homesteads, Inc. ("CHI"), a Utah corporation, or any
other person(s) who succeeds it in such capacity.
"Person" is an individual or Entity, and his or her heirs,
executors, or administrators, and his or her or its successors and
assigns.
"Reserves" are such amounts of funds, determined with respect
to an appropriate fiscal period, which have been set aside or
allocated during the period for Company working capital, taxes,
insurance, service of debt and other costs and expenses incident to
the business of the Company.
"Selling Member" is a Member or Economic Interest Owner who
sells, assigns or otherwise transfers for consideration all or a
portion of such Interest.
"Transferring Member" includes a Selling Member and a Gifting
Member.
"Treasury Regulations" include all proposed, temporary and
final regulations under the Code, whenever promulgated.
ARTICLE II
Formation
2.1 Formation. On or about April 20, 1995 the Company was
organized under Utah law.
2.2 Name. The name of the Company is First-N-Last L.L.C.
2.3 Principal Place of Business. The principal place of
Company business in Utah is in Ticaboo, Garfield County, Utah which
location (and the registered office of the Company) may be changed
by the Members from time to time.
2.4 Registered Office and Registered Agent. The Company's
initial registered office and registered agent are as stated in the
Articles of Organization.
2.5 Term. The term of Company existence shall be perpetual,
unless the Company is sooner dissolved under this Agreement or the
Act.
ARTICLE III
Business
3.1 Permitted Business. The business of the Company shall be
any lawful business, including but not limited to the holding and
development of a convenience store service station and boat storage
operation at Ticaboo.
ARTICLE IV
Members
The names and addresses of the initial two Members at
execution date of the original Operating Agreement are:
Canyon Homesteads, Inc. Arrowstar Investments Inc.
877 North 8th West 877 North 8th West
Riverton, Wyoming 82501 Riverton, Wyoming 82501
The Initial Capital contributions, are set forth in Article
VII.
ARTICLE V
Rights and Duties of Management Committee and the Operating Manager
5.1 Management Committee. The business and affairs of the
Company shall be managed overall by its Management Committee, which
shall have the ultimate authority to determine the goals,
objectives and polices for the Company; formulate the development
and overall business strategy for the Company; and establish the
annual budget for Company business (including a minimum 3 year
forecast). For so long as the initial Members have equal
Membership Interests (50 percent each) from the two initial
Members; if a representative cannot attend a meeting, an alternate
may serve. The special allocation to Arrowstar Investments Inc.
("Arrowstar") of 75 percent of profits and losses under Article
VIII shall be disregarded in determining the initial Members'
representation rights.
If a Member's Membership Interest becomes less than 40
percent, that Member shall be entitled to one representative on the
Management Committee; if the Membership Interest becomes less than
20 percent, that Member shall be entitled to no representative and
shall become an Economic Interest Owner. The preceding changes in
representation rights shall become effective immediately on change
in Membership Interest owned.
All decisions of the Management Committee shall be decided by
majority vote of the representatives.
The Management Committee shall hold regular meetings at least
quarterly in Riverton, Wyoming or other mutually agreed places, on
10 days notice of such regular meetings. Additionally, either
Member may call a special meeting on five days' notice to the other
Member(s). If an emergency situation, reasonable notice will be
sufficient for a special meeting. If only one Member's
representatives are present, the meeting shall be rescheduled, but
at a rescheduled meeting a quorum will exist if one Member is
represented.
Every notice of a meeting shall include an itemized agenda
prepared by the Operating Manager in case of a regular meeting, or
by the calling Member in case of a special meeting, but any matter
may be considered at any meeting if deliberation on such ex-agenda
matter is consented to by the Members.
Minutes of each meeting shall be prepared by the Operating
Manager, who shall distribute drafts within 10 days after each
meeting. The minutes, when signed by all Members, shall be the
official record of proceedings for that meeting and of decisions
made by the Management Committee, and shall be binding on the
Operating Manager. Reasonable meeting attendance costs for Member
representatives shall be paid by the Company.
If necessary under the circumstances, a telephone conference
wherein all representatives can participate may be held in lieu of
an actual meeting, provided all decisions are reduced to writing
and confirmed by all Members.
The authority of the Management Committee shall be delegated
to the Operating Manager. The Management Committee shall provide
overall direction and guidance to the Operating Manager, who will
be responsible for implementing approved courses of action and
budgets for the Company and its business, including without
limitation the specific duties set forth in Section 5.2. The
Operating Manager may be replaced by majority vote of the
Management Committee.
5.2 Operating Manager Duties and Powers. The Operating
Manager shall conduct all duties and activities on behalf of the
Company in good faith and in the best interests of the Company.
Subject to this Operating Agreement and the general oversight and
direction of the Management Committee, the Operating Manager shall
have the full authority to carry out the day-to-day management of
the Company and conduct all operations, including (without
limitation) the following powers and duties to:
(a) Supervise the preparation of all plans for
construction of improvements to the convenience store service
station and boat storage site at Ticaboo.
(b) Supervise the day-to-day activities of the
convenience store service station and boat storage operations at
Ticaboo.
(c) Prepare and submit all reports to Utah regulatory
agencies and other authorities, as required by State of Utah leases
and otherwise.
(d) Monitor all construction of improvements, to the
extent necessary to conform operations to budget and contracts with
general contractors, and to the extent possible keep all Company
assets free and clear of all liens and encumbrances, except those
existing when particular assets are acquired. The Operating
Manager shall release or discharge mechanic's or materialmen's
liens in a diligent manner.
(e) Obtain and maintain all insurance policies as
directed by the Management Committee and regulatory agencies.
(f) Purchase or otherwise acquire all inventories,
materials, supplies, equipment, utility and transportation services
required for Company operations in all phases, such purchases and
acquisitions to be made on the best terms available, taking into
account all circumstances.
(g) Make or arrange for all payments required by leases
(including the Special Use Lease and Base Lease), licenses,
permits, contracts and other agreements related to Company assets;
pay all taxes, assessments and like charges on operating activities
and assets (except taxes for which Members are sole responsible);
apply for all necessary permits, licenses and approvals; and comply
with applicable federal, state and local laws and regulations (and
notify the Management Committee of substantial alleged violations
thereof).
(h) If authorized by the Management Committee, contest
in the courts or other forums the validity or amount of any taxes,
assessments, charges or levied fines, if deemed by the Operating
Manager to be unlawful, unjust, unequal or excessive, or otherwise
take steps it deems reasonable to procure a cancellation,
reduction, or adjustment thereof. However, the Operating Manager
shall not permit or allow title to any Company assets to be lost as
a result of nonpayment of taxes, assessments or like charges.
(i) Sell or otherwise dispose of Company assets in the
ordinary course of business as approved by the Management
Committee, and pay all just bills for goods and services provided
to Company when due, but without prior authorization of the
Management Committee, all checks for more than $5,000.00 shall
require the signature of a representative of each Member.
(j) Keep and maintain all required accounting and
financial records pursuant to the Accounting Procedure attached to
this Operating Agreement, in accordance with customary accounting
methods used in the service industry.
(k) Keep the Management Committee advised of all
operations by submitting in writing to the Management Committee:
(1) monthly progress reports, including statements of expenditures
and comparisons of such expenditures to the budget for the period;
(2) periodic summaries of all data acquired in the course of
operations (results of marketing surveys and any other kind of
information potentially useful in measuring the success of any
operations or evaluating a business strategy); (3) copies of
routine reports concerning operations; (4) within 60 days after
completion of any budget or particular program, a detailed final
report with comparisons between actual and budget expenditures, and
comparisons between objectives and results of the programs; and (6)
any other reports reasonably requested by the Management Committee.
(l) Except as required otherwise by the above, conduct
all operations and incur all expenses and acquire all assets, only
pursuant to approved programs and budgets, to be prepared and
submitted by the Operating Manager in reasonable detail as to
scope, direction and nature (with fiscal basis) to the Management
Committee. The initial program and budget shall be submitted
within 60 days of formation of the Company; thereafter an annual
program and budget shall be submitted by July 30 of each year (the
Company fiscal year ends May 31), with the first annual budget to
be submitted by July 30, 1995.
The Management Committee will evaluate and decide whether
to adopt the proposed program and budget, or determine to amend the
proposal, within 30 days of submission. The Management Committee
shall determine the final Program and Budget, and notify all
Members of such. Each Member shall have the opportunity to
contribute to the Program and Budget capital requirements, in
proportion to their Membership Interest (disregarding the 90 and 75
percent special allocations to Arrowstar), or in a lesser amount,
or not at all, in which cases its Membership Interest shall be
recalculated as provided herein. However, if a Member fails to
notify the Management Committee of its election, such Member shall
be deemed to have elected to contribute in full proportion to is
Membership Interest as of the beginning of the period covered by
the program and budget.
In the event of a material departure from an adopted
program and budget, the Operating Manger shall notify the
Management Committee. If the capital expenditures in an approved
budget are exceeded by more than 20 percent, then the excess over
20 percent (unless directly caused by an emergency or unexpected
but warranted expenditure, or unless otherwise authorized by the
Management Committee and incorporated into an amended program and
budget) shall be borne by and for the sole account of the Operating
Manger. Budget overruns of 20 percent or less shall be borne by
Members according to their Membership Interests as of the date when
the overrun occurs.
(m) The Operating Manager shall undertake all other
activities reasonably necessary to fulfill the foregoing.
5.3 Resignation. Upon one month notice to the Management
Committee, the Operating Manager may resign, in which event the
other Member may elect to become the new Operating Manager. If
there are then more than two Members, then the nonresigning Members
shall decide amongst themselves who shall take the position,
according to majority vote by percentage Membership Interest. In
addition, if any of the following occur, the Operating Manager
shall be deemed to have offered to resign, which offer shall be
effective if accepted by the other Member(s) within 90 days of the
offer:
(a) The Operating Manger fails to perform a material
obligation imposed upon it under this Agreement, and fails to cure
same within 30 days after notice from the other Member(s) or the
Operating Committee.
(b) A receiver, liquidator or trustee for a substantial
part of the Operating Manager's assets is appointed and not made
ineffective or discharged within 60 days thereafter.
(c) The Operating Manager commences a voluntary case
under any applicable bankruptcy, insolvency or similar law, or
consents to the entry of an order for relief in an involuntary case
under any such law, or to the appointment of or taking possession
by a receiver or similar official of any substantial part of its
assets; or makes a general assignment for the benefit of creditors.
5.4 Liability for Certain Acts. The Operating Manager shall
perform its duties in good faith, in a manner reasonably believed
to be in the best interest of the Company, with such care as an
ordinarily prudent person would use in similar circumstances. The
Operating Manager shall not be liable to the Company or any Member
for loss or damage, unless due to fraud, deceit, gross negligence
or willful conduct, or breach of this Operating Agreement by the
Manger.
5.5 No Exclusive Responsibilities to Company; No
Profiteering. The Operating Manger is not required to devote full
time to Company business, and may engage in other business
interests, provided such do not compete with the Company directly
or indirectly. No Member is entitled to share in a Manager's or
another Member's business by virtue of this Operating Agreement,
provided, that the preceding shall not ever be construed to allow
the Operating Manager to make any profits for its or its
affiliates' accounts from doing any kind of business with the
Company or its assets, unless such profits are made with the prior
consent of all Members.
5.6 Indemnity. To the full extent allowed by the Act, the
Company shall indemnify the Operating Manager.
5.7 Manager Compensation. The Operating Manager shall be
compensated for its services and reimbursed for its costs hereunder
in accordance with the Accounting Procedure attached to and
incorporated by reference into their Operating Agreement.
ARTICLE VI
Rights and Obligations of Members
6.1 Limitation of Liability. The liability of each Member
shall be limited as set forth in this Operating Agreement and the
Act.
6.2 Company Debt Liability. A Member shall not be personally
liable for any debts or losses of the Company beyond or in addition
to its respective Capital Contributions, except under Section 6.7
or as otherwise required by law.
6.3 List of Members. The Manger shall provide any Member a
list of names, addresses and Membership and Economic Interests for
all Members, on written request.
6.4 Approval of Sale of All Assets. The Members have the
right, by affirmative vote of Members holding a majority of all
Membership Interests, to approve the sale, exchange or other
disposition of all, or substantially all, of the Company's assets
(other than in the ordinary course of business) which is to occur
as part of a single transaction or plan.
6.5 Company Books. In accordance with Section 11.10, the
Manager shall maintain and preserve, during the term of the Company
and for five years thereafter, all accounts, books, and other
documents of the Company. On reasonable request, each Member and
Economic Interest Owner shall have the right, during ordinary
business hours, to inspect and copy such Company documents at the
expense of the requestor. Further, each Member shall have the
right to inspect the books and records of each Member as they
relate to business conducted by each Member with the Company in any
manner.
6.6 Priority and Return of Capital. Except as may be
expressly provided in Article IX, no Member or Economic Interest
Owner shall have priority over any other Member or Economic
Interest Owner, either as to the return of Capital Contributions or
as to Net Profits, Net Losses or distributions; provided that this
Section shall not apply to loans (as distinguished from Capital
Contributions) which a Member or Economic Interest Owner has made
to the Company.
6.7 Liability of a Member to the Company.
(a) If a Member has received the return of any part of
its contribution without violation of this Agreement or the Act, it
is liable to the Company thereafter for the amount of the returned
contribution, plus interest, but only to the extent necessary to
discharge the Company's liability to creditors who extended credit
or whose claims arose before the return of the capital
contribution.
(b) A Member holds as trustee for the Company any money
or other property wrongfully paid or conveyed to the Member on
account of its capital contribution.
ARTICLE VII
Contributions to the Company and Capital Accounts
7.1 Members' Capital Contributions.
(a) Initial Capital Contributions. On formation of the
Company, the Members have each contributed the following: CHI
contributes its equity interest in the Ticaboo Service Station and
Boat Storage Operation and Arrowstar shall contribute cash or cash
equivalent of One Hundred Fifty Thousand Dollars ($150,000). For
purposes of this subparagraph only, the value of each such
contribution is agreed to be $150,000.00.
(b) Cash Working Capital.
(1) First $50,000.00. Member Arrowstar, if
necessary, shall contribute or arrange for the loan of up to
$50,000.00 to the Company (the loan may be secured with Company
assets), as determined by the Management Committee, to fund the
initial program and budget.
(2) Cash Calls. After amounts available under (1)
are spent, the Operating Manager shall submit (before the last day
of each month) a billing for estimated cash requirements for the
next month, based on the current adopted program and budget.
Within 10 days after receipt of each billing, each Member shall
advance its proportionate share of the estimated amount. Time is
of the essence for paying such billings. If the amount billed for
estimated cash requirements was less than the actual amounts spent
during that month, the Operating Manager may bill Members for the
difference (so long as less than allowed under the 20 percent
overrun test of Section 5.2(l), and Members shall pay their share
of the difference within 10 days of receipt of billing. All
advances, and all expenditures, shall be made from the one banking
account to be maintained by the Company, unless and until
additional banking accounts are authorized by the Operating
Committee.
(3) Failure to Meet Cash Calls. A Member that
fails to meet cash calls in the amount and at the times specified
by (2) above, shall be in default, and the amounts of the defaulted
cash call shall bear interest from the date due at an annual rate
equal to two percentage points over the Chaser Manhattan prime
rate. The non-defaulting Member shall have the rights, remedies
and elections specified under Article VIII.
7.2 Capital Accounts.
(a) A separate Capital Account will be maintained for
each Member, which will be increased by (1) the amount of money
contributed by such Member to the Company; (2) the fair market
value of property contributed by such Member to the Company (net of
liabilities secured by such contributed property that the Company
is considered to assume or take subject to under Code Section 752);
(3) allocations to such Member of Net Profits; and (4) allocations
to such Member of income described in Code Section 705(a)(1)(B).
Each Member's Capital Account will be decreased by (1) the amount
of money distributed to such Member by the Company; (2) the fair
market value of property distributed to such Member (net of
liabilities secured by such property, that such Member is
considered to assume or take subject to); (3) allocations to such
Member of expenditures described in Code Section 705(a)(2)(B); and
(4) allocations to the Member's account of Net Losses.
(b) In the event of a permitted sale or exchange of a
Membership Interest or an Economic Interest in the Company, the
Capital Account of the transferor shall become the Capital Account
of the transferee to the extent it relates to the transferred
Membership Interest or Economic Interest in accordance with
Treasury Regulations Section 1.704-1(b)(2)(iv).
(c) The Manner in which Capital Accounts are to be
maintained pursuant to this Section, is intended to comply with the
requirements of Code Section 704(b) and accompanying Treasury
Regulations. If the Company's accountants believe the manner in
which capital Accounts are to be maintained should be modified in
order to comply with the Code and Treasury Regulations, then the
Capital Accounts accounting shall be modified, provided that no
such change shall materially alter the economic agreement among the
Members.
(d) On liquidation of the Company (or any Member's
membership Interest or Economic Interest Owner's Economic
Interest), liquidating distributions will be made in accordance
with the positive Capital Account balances of the members and
Economic Interest Owners, as determined after taking into account
all Capital Account adjustments for the Company's taxable year
during which the liquidations occurs. Liquidations proceeds will
be paid within 60 days of the end of the taxable year (or if later,
within 120 days after the date of the liquidation). The Company
may offset damages for breach of the Operating Agreement by a
Member or Economic Interest Owner whose interest is liquidated,
against the amount otherwise distributable to such Member.
(e) Except as otherwise required in the Utah Act, and
subject to the provisions of this Agreement, no Member or Economic
Interest Owner shall have any liability to restore all or any
portion of a deficit balance in its Capital Account.
7.3 Withdrawal or Reduction of Contributions to Capital.
(a) A Member shall not receive out of the Company's
property any part of its Capital Contribution until all Company
liabilities, except liabilities to Members on account of Capital
Contributions, have been paid or sufficient property remains in the
Company to pay them.
(b) A Member, irrespective of the nature of its Capital
Contribution, only has the right to demand and receive cash in
return for its Capital Contribution.
7.4 Distributions. Except for liquidating distributions
under Section 7.2(d), all distributions of cash shall be made to
Members pro rata in proportion to their respective Membership
Interest. Distributable Cash shall be distributed by the Operating
Manager, provided, that with respect to determining Distributable
Cash available for distribution during the period that the special
allocation of operating profits to Arrowstar under Section 8.1 is
in effect, the Members agree that the Operating Manager shall only
hold back such funds for Reserves as can be demonstrated as needed
for Reserves, as defined under Article I of this Agreement.
7.5 Limitation on Distributions. No distribution shall be
paid unless, after the distribution, the assets of the Company
exceed all liabilities, except liabilities to Members on account of
their contributions.
ARTICLE VIII
Membership Interests
8.1 Initial Membership Interest; Allocation of Profits and
Losses from Operations. The Members shall have the following
Membership Interests, to which Company net profits and net losses
for each fiscal year will be allocated: Canyon Homesteads, Inc. 50
percent, Arrowstar Investments, Inc. 50 percent, subject to a
special allocation to Arrowstar of 90 percent of profits and losses
from Company operations until Arrowstar receives cash equal to the
amount of the First Cash Working Capital Arrowstar contributed and
accrued interest pursuant to Subparagraph 7.1(b)(1) and then 75
percent of profits and losses from Company operations until
Arrowstar receives cash equal to $215,000.00.
8.2 Special Allocations to Capital Accounts. Notwithstanding
Section 8.1:
(a) No allocations of loss, deduction and/or
expenditures described in Section 705(a)(2)(B) of the Code shall be
charged to the Capital Accounts of any Member is such allocation
would cause such Member to have a Deficit Capital Account. The
amount of such a loss, deduction and/or Code Section 705(a)(2)(b)
expenditure shall instead be allocated to any Members which would
not have a Deficit Capital Account as a result of the allocation,
in proportion to their respective Capital Contributions, or, if no
such Members exist, then to the Members in accordance with their
interests in Company profits pursuant to Section 8.1.
(b) In the event any Member unexpectedly receives any
adjustments, allocations, or distributions described in Sections
1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Treasury Regulations,
which create or increase a Deficit Capital Account of such Member,
then items of Company income and gain (consisting of a pro rata
portion of each item of Company income, including gross income, and
gain for such year, and if necessary, for subsequent years) shall
be specially allocated to such Member in an amount and manner
sufficient to eliminate, to the extent required by the Treasury
Regulations, the Deficit Capital Account so created as quickly as
possible. It is intended that this subsection be interpreted to
comply with the alternate test for economic effect in Section
1.704-1(b)(2)(ii)(d) of the Treasury Regulations.
(c) If a Member would have a Deficit Capital Account at
the end of any Company taxable year which is in excess of the sum
of any amount that such Member is obligated to restore to the
Company under Section 1.704-1(b)(2)(ii)(c) and such Member's share
of minimum gain as defined in Section 1.704-2(g)(1) (which is also
treated as an obligation to restore under 1.704-1(b)(2)(ii)(d)),
the Capital Account of such Member shall be specially credited with
items of Membership income (including gross income) and gain in the
amount of such excess as quickly as possible.
(d) Notwithstanding any other provision of this Section
8.2, if there is a net decrease in the Company's minimum gain per
Section 1.704-2(d) of the Treasury Regulations in a taxable year,
then the Capital Accounts of each Member shall be allocated items
of income (including gross income) and gain for such year (and if
necessary for subsequent years) equal to that Member's share of the
net decrease in Company minimum gain. This subsection is intended
to comply with the minimum gain chargeback requirement of Section
1.704-2 and shall be interpreted consistently therewith. If in any
taxable year that the Company has a net decrease in the Company's
minimum gain, if the minimum gain chargeback requirement would
cause a distortion in the economic arrangement among the Members
and it is not expected that the Company will have sufficient other
income to correct that distortion, the Operating Manager may (and
shall if directed by the Management Committee) seek to have the
Internal Revenue Service waive the minimum gain chargeback
requirement in accordance with Section 1.704-2(f)(4).
8.3 Changes to Membership Interests. A Member's Membership
Interest shall be changed as follows:
(a) On a Member's election under Article VII to
contribute less to an adopted program and budget than the
percentage reflected by its Membership Interest, as follows: The
Membership Interest shall be recalculated at the time of such
election, by dividing (1) the sum of (a) the value of the Initial
Capital Contribution, plus (b) the total of all further Capital
Contributions, plus (c) the amount (if any) the Member elects to
contribute to the current adopted program budget; by (2) the sum of
(a), (b) and (c) for all Members; then multiplying the result by
100. The Membership Interests of the other Members then becomes
the difference between 100 percent and the recalculated Membership
Interest of the subject Member.
(b) On a Member's default in making its agreed-upon
contribution to an adopted program and budget, followed by an
election by the other Member, as follows: If a Member defaults in
paying a contribution or cash call required by an approved program
and budget, or otherwise, the Member shall be in default. If the
default is not cured within 10 days of receipt of a default notice
from the non-defaulting member, the non-defaulting Member may elect
from the following remedies:
(1) The non-defaulting Member may advance the
defaulted contribution on behalf of the defaulting Member, and
treat the same as a demand loan with interest at two points over
prime at Chase Manhattan Bank, secured by a lien on the defaulting
Member's Membership Interest for the amount of the loan with
interest (plus reasonable attorney's fees and other costs of
collection). The defaulting Member shall execute such document
loan will be due on or before the thirtieth day after demand is
made.
(2) The non-defaulting Member may elect by giving
notice to the defaulting Member, to have the defaulting Member's
Membership Interest reduced, by dividing (a) all the Member's
Capital Contributions, by (b) Capital Contributions by all Members,
including any amount contributed by the non-defaulting Member's
Membership Interest by 50 percent (or such other number as
represents the Membership Interest if it has been, prior to the
current default, recalculated due to defaults). The Membership
Interest of the non-defaulting Member shall thereupon become the
difference between 100 percent and the defaulting Member's
recalculated Membership Interest. Provided, that the defaulting
Member can cure the default by paying the full amount, plus annual
interest at two points above Chase Manhattan Bank prime, plus
attorney's fees and other reasonable costs, in 30 days after
default notice is given, without recalculation of its Membership
Interest. If cure is between 30 and 60 days after notice, the
curing defaulting Member's Membership Interest shall be 90 percent
of the pre-default amount; if cure is between 61 and 90 days, such
Interest shall be 75 percent of the pre-default amount; and if cure
is between 91 and 120 days, such Interest shall be 60 percent of
the pre-default amount. All other rights at law or equity of the
non-defaulting Member shall be unaffected by proceedings under this
subsection (2).
(3) If a Member defaults by failure to perform an
obligation other than involving the payment of money (a "non-
monetary default"), and the defaulting Member fails to cure or
being and finish curative actions within 30 days after notice from
the non-defaulting Member, the non-defaulting Member may: (a)
terminate this Agreement; (b) purchase the defaulting Member's
Membership for 75 percent of fair market value determined by an
independent appraiser selected by the Management Committee,
notwithstanding any thing to the contrary in this Operating
Agreement, in the case of Arrowstar in no event shall 75 percent of
the fair market value be less than Arrowstar's initial Capital
Account until such time as Arrowstar has received $215,000.00 in
profits; or (c) cure the default and charge the cure cost to the
defaulting Member's Capital Account and credit such cost to the
non-defaulting Member's Capital Account, in which event the
defaulting Member's Membership Interest shall be recalculated in
the same manner as under Section 8.3(a). Any exercise of the
preceding rights shall not limit or affect the non-defaulting
Member's rights at law and equity. All remedies shall be
cumulative. Election of one or more remedies shall not cause
waiver of any other remedies available.
(4) Transfer of less than all a Member's Membership
Interest.
ARTICLE IX
Dissolution and Termination
9.1 Dissolution. The Company shall be dissolved upon
occurrence of any of the following events:
(a) By unanimous written consent of Members;
(b) At such time that more than 79 percent of the
Capital Interests and interests in Company profits are owned by
Economic Interest Owners; or
(c) Upon the death, retirement, resignation, expulsion,
bankruptcy or dissolution of a Member or occurrence of any other
event which terminates the continued membership of a Member in the
Company (a "Withdrawal Event"), unless the business of the Company
is continued by consent of all the remaining Members within 90 days
after the Withdrawal Event, and there are at that time, at least
two other Members.
Notwithstanding anything to the contrary in this
Operating Agreement, if a Member or Members owning Capital
Interests in the aggregate constituting not less than two-thirds of
such Interest vote to dissolve the Company at a meeting of the
Management Committee, then all the Members shall agree in writing
to dissolve the Company as soon as possible thereafter. Upon
dissolution according to any of the preceding subparagraphs, and
upon filing of necessary documents of intent to dissolve the
Company with the Utah Secretary of State, the Company shall cease
to carry on its business except as necessary to wind it up, but its
separate existence shall continue until formal dissolution is
effected by issue of certificate therefor by the Secretary of State
or by court order.
9.2 Winding up, Liquidation and Distribution of Assets.
(a) Upon dissolution, an accounting shall be made by the
Company's independent accountants of the Company accounts, assets,
liabilities and operations, from the date of the last accounting
until dissolution date. The Operating Manger shall immediately
proceed to wind up the Company's affairs.
(b) If the Company is dissolved and its affairs are to
be would up, the Operating Manager shall:
(1) Sell or otherwise liquidate all Company assets
as promptly as practicable (unless assets should be distributed in
kind to Members);
(2) Allocate any profit or loss resulting from
sales to Capital Accounts of Members and Economic Interest Owners;
(3) Discharge all Company liabilities, including
liabilities to Members and Economic Interest Owners who are
creditors, to the extent otherwise permitted by law, other than
liabilities to Members and Economic Interest Owners for
distributions, and establish such Reserves as may be reasonably
necessary to provide for contingent or fixed liabilities of the
Company and such Reserves shall be deemed Company expenses, for
purposes of Capital Accounts calculations); and
(4) Distribute the remaining assets in the
following order:
(i) If any assets are to be distributed in
kind, the net fair market value shall be determined by independent
appraisal or by Members' agreement. Such assets shall be deemed to
have been sold as of the date of dissolution for fair market value,
and the Capital Accounts shall be adjusted to reflect a deemed
sale, so as to comply with the deemed sale and related provisions
of the Code.
(ii) The positive balance (if any) of each
Member's and Economic Interest Owner's Capital Account (after
taking into account all Capital Account adjustments for the taxable
year when the liquidation occurs) shall be distributed to Members,
in cash or in kind, with in kind assets being valued at fair market
value. Such distributions to Members in respect of Capital
Accounts, shall be made in accordance with the time requirements
stated by the Treasury Regulations.
(c) Notwithstanding anything to the contrary in this
Operating Agreement, upon a liquidation within the meaning of
Treasury Regulation Section 1.704-1(b)(2)(ii)(g), if any Member has
a Deficit Capital Account (after giving effect to all
contributions, distributions, allocations and other Capital Account
adjustments for all taxable years, including the year when the
liquidation occurs), such Member shall have no obligation to make
any Capital Contribution, and the negative balance of such Member's
Capital Account shall not be considered a debt owed by such Member
to the Company or any other Person whatsoever.
(d) Upon completion of the winding up, liquidation and
distribution of the assets, the Company shall be deemed terminated,
and thereafter necessary documents shall be prepared and filed with
the Utah Secretary of State to cause the Company to cease to exist.
ARTICLE X
Additional Members and Transfers
10.1 Additional Members. So long as the Membership Interests
of the initial two Members are both 50 percent, no additional
Members shall be admitted without the consent of both Members, and
otherwise new Members may be admitted upon vote of the Management
Committee.
10.2 Transferability. Except as specifically provided
herein, neither a Member nor an Economic Interest owner shall have
the right to (i) sell, assign, pledge, hypothecate, transfer,
exchange or otherwise transfer for consideration (hereafter,
"sell"), or (ii) gift or otherwise transfer for no consideration
(whether or not by operation of law, except in the case of
bankruptcy), all or any part of its Membership Interest or Economic
Interest:
(a) Right of First Refusal. A Member which desires to
sell all or any part of its Membership Interest or Economic
Interest to a third party purchaser, shall give 30 days prior
written notice to the nontransferring Member(s) of its (their)
right of first refusal to purchase such Interest for the same
consideration and on the same terms as offered a third party, and
describe the amount of Interest to be sold and the identify the
proposed transferee (including financial ability to meet the
responsibilities of ownership). Exercise of the right of first
refusal shall be first by the nontransferring members giving
response notice of intent to exercise the right to the member
giving original notice, on or before the close of business on the
thirtieth day after original notice is received. The Interest must
be purchased on or before the close of business on the thirtieth
day after original notice is received. If either the response
notice of intent to exercise is not given, or is given but the
Interest is not purchased within the time provided, there shall be
no right of first refusal for the nontransferring party to purchase
the Interest (however, all subsequent transfers of such, and other,
Interest shall be subject to such right of first refusal).
Transfers of Interests to Member affiliates shall not be subject to
this subparagraph.
(b) CHI's right to purchase Arrowstar's Membership
Interest. Notwithstanding any other provision of the Operating
Agreement, if CHI needs to purchase Arrowstar's Membership Interest
for any reason, Arrowstar agrees to sell its Membership Interest
for the fair market value. For purposes of this Agreement fair
market value shall be determined by an appraiser acceptable to
Arrowstar and said appraisal shall be paid for by CHI. In no event
shall the fair market value be less than Arrowstar's initial
Capital Account until such time as Arrowstar has received
$215,000.00 in profits.
(c) No Transferee a Member Without Unanimous Consent.
Notwithstanding any other provision of the Operating Agreement, if
all remaining Members do not approve by unanimous written consent
of the proposed sale of gift of a transferring Member's Membership
Interest or Economic Interest to a transferee or donee which is not
a Member immediately prior to proposed date of sale or gift, then
the transferee or donee shall have no right to participate in
management of the Company or to become a Member. Instead, such
transferee or donee shall be an Economic Interest Owner.
ARTICLE XI
Miscellaneous
11.1 Binding Agreement. This Operating Agreement shall be
binding upon and shall inure to the benefit of the heirs, legal
representative, successors and assigns, as applicable, of the
respective Parties hereto, and any entities resulting from the
reorganization, consolidation or merger of any Party hereto.
11.2 Headings. The headings used in this Operating Agreement
are inserted for reference purposes only and shall not be deemed to
limit or affect in any way the meaning or interpretation of any of
the terms or provisions of the Operating Agreement.
11.3 Severability. The provisions of this Operating Agreement
are severable, and should any provision hereof be found to be void,
voidable or unenforceable, such void, voidable or unenforceable
provision shall not affect any other portion or provision of this
Operating Agreement.
11.4 Waiver. Any waiver by any Party hereto of any breach of
any kind or character whatsoever by any other party, whether such
waiver be direct or implied, shall not be construed as a continuing
waiver or consent to any subsequent breach of this Operating
Agreement on the part of the other party.
11.5 Amendments. This Operating Agreement only can be
amended in writing signed by all Members.
11.6 Governing Law. This Operating Agreement shall be
interpreted, construed and enforced according to the laws of the
State of Utah.
11.7 Attorney's Fees. In the event any action or proceeding
is brought by either Party against the other under this Operating
Agreement, the prevailing Party shall be entitled to recover
attorney's fees and costs in such amount as the court may adjudge
reasonable, whether incurred before, during or after such
proceeding is commenced and conducted. Notwithstanding the
preceding, the collecting attorney must be able to swim the mighty
Colorado, across the widest and deepest point, with cement line
boots and hands tied behind his or her back or in the alternative
the attorneys must get the Parties to work together to resolve
their differences.
11.8 Counterparts. This Operating Agreement may be executed
in any number of counterparts, each of which, when executed and
delivered, shall be deemed an original, but all of which shall
together constitute one and the same instrument.
11.9 Notices. Any notice, consent, request, objection or
communication to be given by either Party to this Operating
Agreement shall be in writing and shall be either delivered
personally, by certified mail or by Airborne, Federal Express or
other commercial overnight delivery service to the address of the
Members as appearing on the books of the Company.
11.10 Books and Records. Accounting records shall be kept in
accordance with the Accounting Procedure attached to this Operating
Agreement. Books and records required by Utah Act Section 48-2b-
119 shall be kept by the Operating Manger.
IN WITNESS WHEREOF, this Operating Agreement is executed in
Riverton, Wyoming on April 20, 1995. Counterpart execution is
permitted.
CANYON HOMESTEADS INC.
s/ A. E. Dearth
- ----------------------------------
A. E. DEARTH, President
ARROWSTAR INVESTMENTS, INC.
s/ Mark J. Larsen
- ----------------------------------
MARK J. LARSEN, President
Company
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE AUDITED FINANCIAL STATEMENTS OF MAY 31, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> CRESTED CORP.
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