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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
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, 1997 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.
(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 5, 1997 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 $2,785,272.
Class Outstanding at September 5, 1997
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Common Stock, $0.001 par value 10,302,694 shares
Documents incorporated by reference: Portions of the documents listed below have
been incorporated by reference into the indicated parts of this report as
specified in the responses to the item numbers involved:
1997 Annual Meeting Proxy Statement for the fiscal year ended
May 31, 1997, 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. [ ]
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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K/A includes "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1937, as
amended (the "Exchange Act"). All statements other than statements of historical
fact included in this Report, including without limitation the statements under
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the disclosures concerning future prices in the uranium market, and
disclosures about the Green Mountain Mining Venture development schedule for the
Wyoming properties, the plan of operations for Yellow Stone Fuels Corp. and
Sutter Gold Mining Company (subsidiaries of Crested Corp.) and the projected
operating status for Plateau Resources Limited's Shootaring Canyon uranium mill
in Utah, a wholly-owned subsidiary of U.S. Energy Corp. (Crested Corp.'s
parent), are forward-looking statements.
Although Crested Corp. believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from such expectations are disclosed in this
Annual Report. The forward-looking statements should be carefully considered in
the context of all the information set forth in this Annual Report.
PART I
ITEM 1 AND ITEM 2. BUSINESS AND PROPERTIES
(A) GENERAL.
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.
Subsequent to May 31, 1997, USE and USECC (see below) signed an
Acquisition Agreement with Kennecott Uranium Company ("Kennecott"), for the
purchase of Kennecott's interest in the Green Mountain Mining Venture ("GMMV").
In general terms, as a consequence of the Acquisition Agreement and the various
transactions associated therewith, USE and USECC received $4,000,000 as a bonus
for signing the Acquisition Agreement. In addition, pending closing of the
Acquisition Agreement, USECC has been provided the opportunity to move the GMMV
project forward, as follows: USECC has leased the mineral properties from GMMV
in order to develop the Jackpot Mine for production mining, and has been
appointed an independent contractor to ready the Sweetwater uranium mill (owned
by the GMMV)
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for changeover to operational processing status. Kennecott is to provide a line
of Credit to the GMMV of up to $16,000,000 for the mine development and mill
work being conducted by USECC. Closing of the Acquisition Agreement will require
payment to Kennecott of $15,000,000 cash and the assumption of various
reclamation and other liabilities. For the details of this fiscal 1998
transaction, please see "Minerals-Uranium-The Green Mountain Mining Project-June
23, 1997 Acquisition Agreement with Kennecott Uranium Company" below.
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.
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,
1997 1996 1995
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Minerals 6% 62% 4%
Commercial Operations 29% 16% 35%
Crested did not receive revenues from the mining of either uranium or
gold in the three fiscal years ended May 31, 1997. During fiscal 1996, 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 of uranium
and receiving net sales proceeds therefrom, with profits deposited in SMP
accounts. For fiscal 1997 and 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
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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
1998. When USE acquired 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."
(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 is
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. In addition, in fiscal 1997, additional
properties were acquired in New Mexico and Wyoming by Yellow Stone Fuels Corp.
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 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 Rio Tinto plc, formerly RTZ PLC of London. RTZ (now part of the
RTZ-CRA Group) is one of the world's leading natural resource companies.
Kennecott Corporation owns and operates several mines including the Bingham
Canyon, Utah open pit copper mine which started in 1906.
KUC is also referred to in this report as Kennecott. All mining 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
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is required for GMMV to develop the underground Jackpot Mine and mine the
uranium deposits. 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.
Unpatented lode mining claims, underground and open pit uranium mines
and mining equipment in the Crooks Gap area are located on Sheep Mountain in
Fremont County, Wyoming and are adjacent to and west of the Big Eagle mining
claims held by the GMMV. These assets 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"). The SMP Sheep Mountain Mines 1 and 2
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.
Approximately 10,825 acres of properties are held by 437 unpatented
mining claims which have been staked by, plus four leases (including three state
leases) held by Yellow Stone Fuels Corp. (an Ontario, Canada corporation, or by
its wholly-owned subsidiary Yellow Stone Fuels, Inc., a Wyoming corporation,
hereafter "YSFC" including the subsidiary). The properties are located in
Wyoming and New Mexico, and are believed to be prospective of uranium and
suitable for in-situ leaching. USE and Crested each own 14.3% of YSFC.
Electric power to all the above Wyoming properties is furnished by
either Pacific Power & Light or the 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.
Plateau is the owner of the Tony M mine and portions of the Frank M
properties and has posted a bond securing Plateau's obligations to reclaim these
properties. The Tony M mine was originally developed by Plateau at the time
Plateau was owned by Consumers Power Company ("CPC"), a Michigan public utility.
Significant areas of uranium mineralization have been accessed and delineated by
the prior owner's underground workings. When the Tony M Mine was in production
(while Plateau was owned by CPC) it produced ore containing from three to eight
pounds of uranium concentrates per ton. Some of this ore was processed at the
Shootaring Mill 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 from 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.
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THE GREEN MOUNTAIN MINING VENTURE PROJECT
GMMV. Subsequent to May 31, 1997, USE and USECC signed an Acquisition
Agreement for the acquisition from Kennecott Uranium Company of its interest in
the GMMV. The following is a description of the formation of GMMV and certain of
its terms, which terms have been modified as a result of the Acquisition
Agreement and related transactions, as set forth under "June 23, 1997
Acquisition Agreement with Kennecott Uranium Company" below.
In fiscal 1991, USE and USECC entered into an agreement to sell 50
percent of their interests in the Green Mountain uranium claims, and certain
other rights to Kennecott for $15,000,000 cash (USE's share of the proceeds was
$12,600,000, and the balance was Crested's) and a commitment by Kennecott to
fund the first $50,000,000 of GMMV expenditures. 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
the 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 the 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 the GMMV operations, proportionate to its interest
before reduction.
The 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 the 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. The 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.
The GMMV Management Committee has three Kennecott representatives and
two USECC representatives, acts by majority vote, and appoints and supervises
the project manager. In fiscal 1993, Kennecott became the GMMV project manager
and has continued as project manager through May 31, 1997. USECC has continued
work on a contract basis at Kennecott's request through May 31, 1997.
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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 commenced
mine pre-development work necessary to put the GMMV properties into production,
see "June 23, 1997 Acquisition Agreement with Kennecott Uranium Company" and
"Permitting Activities" below.
JUNE 23, 1997 ACQUISITION AGREEMENT WITH KENNECOTT URANIUM COMPANY
Subsequent to May 31, 1997, USE and USECC signed an Acquisition
Agreement with Kennecott Uranium Company, a Delaware corporation ("Kennecott"),
for the right to acquire Kennecott's interest in the Green Mountain Mining
Venture ("GMMV") for $15,000,000 and other consideration. Kennecott paid USE and
USECC $4,000,000 on signing, and committed to provide the GMMV up to $16,000,000
for payment of reimbursable costs incurred by USECC in developing the proposed
underground Jackpot Uranium Mine for production and in changing the status of
the Sweetwater Mill from standby to operational. The work to develop the
proposed Jackpot Mine and ready the Sweetwater Mill for operations will be
undertaken, prior to closing of the terms of the Acquisition Agreement scheduled
for July 31, 1998, by USECC, as lessee of all the GMMV mineral properties under
a Mineral Lease Agreement between the GMMV and USECC (the "Mineral Lease"), and
as an independent contractor under a Contract Services Agreement (the "Mill
Contract") between Kennecott (as manager of the GMMV) and USECC. Both the
Mineral Lease and the Mill Contract, as well as a Fourth Amendment of the GMMV
Mining Venture Agreement among Kennecott, USE and USECC (the "Fourth Amendment
of the GMMV Agreement"), were executed simultaneously with the Acquisition
Agreement.
The $16,000,000 being provided by Kennecott to the GMMV was advanced to
Kennecott by an affiliate, Kennecott Energy Company ("KEC") under a secured
recourse Promissory Note (the "Note") bearing interest at 10.5% per annum
starting April 1999 until paid in full. The Note is payable quarterly out of 20%
of cash flow from the GMMV properties, but not more than 50% of the earnings for
such quarter from the GMMV operations, before interest, income tax, depreciation
and amortization. However, the Note is payable (i) in full on June 23, 2010
regardless of cash flow and earnings of the GMMV, or (ii) sooner (on December
31, 2005) if an economically viable uranium mine has not been placed into
production by such date. The Note is secured by a first mortgage lien against
Kennecott's 50% interest in the GMMV pursuant to a Mortgage, Security Agreement,
Financing Statement and Assignment of Proceeds, Rents and Leases granted by
Kennecott to KEC (the "Mortgage"). USE and USECC will assume the Note, and the
assets of the GMMV will be subject to the Mortgage, at closing of the
Acquisition Agreement.
Pursuant to the Mineral Lease and the Mill Contract of the Acquisition
Agreement, USECC is to expend funds to develop the proposed Jackpot Mine and
nearby Big Eagle Mine, and work with Kennecott in preparing the Sweetwater Mill
for renewed operations. Such work will be funded from the $16,000,000 being
provided to the GMMV by Kennecott. Under the Fourth Amendment of the GMMV
Agreement, Kennecott will be entitled to a credit against Kennecott's original
$50,000,000 commitment to fund the GMMV, in the amount of two dollars of credit
for each one dollar of such funds out of the $16,000,000 provided by Kennecott
to the GMMV, plus the $4,000,000 paid to USE and USECC on signing of the
Acquisition Agreement. It is anticipated that such credits will satisfy the
balance of Kennecott's initial funding commitment to acquire a 50% interest in
the GMMV.
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Pursuant to the Fourth Amendment to the GMMV Agreement, Kennecott
initially advanced $1,000,000 to the GMMV, which the GMMV has advanced to USECC
pursuant to the Mineral Lease and the Mill Contract, to allow USECC to establish
a working capital account. On a monthly basis, USECC is to submit detailed
invoices for reimbursable costs, defined in the Mineral Lease and Mill Contract
to include USECC's labor and equipment costs (maintenance and rental),
environmental compliance costs, direct office costs of USECC staff incurred in
monitoring and invoicing project costs and expenditures and associated
engineering costs and expenditures, and an additional amount equal to 10% of all
the preceding costs and expenditures as an administrative charge (the same 10%
as previously allowed in the GMMV Agreement). USECC is permitted to charge the
GMMV rental expense for equipment owned by USECC. The reimbursable cost
allocations for each phase of the development of the Jackpot Mine and upgrade of
the Sweetwater Mill to operating status are set forth in budgets of the Mineral
Lease and Mill Contract. Also included in reimbursable costs will be the amounts
required to cover all reclamation activities that will result from operations
conducted on the mining properties pursuant to the Mill Contract and the Mineral
Lease (USE and USECC will be required to put such reclamation cost amounts aside
in a sinking fund to pay for the reclamation work when production commences).
Kennecott has agreed to provide funds to the GMMV each month in an
amount adequate to reimburse USECC for invoiced costs and restore the USECC
working account balance to $1,000,000. Payment by GMMV of the monthly invoiced
costs is subject to Kennecott's confirmation that such costs conform to the
Mineral Lease and Mill Contract budgets. Subject to and at the closing of the
Acquisition Agreement, Kennecott will advance to the GMMV cash equal to any
difference between (i) the $16,000,000 commitment and (ii) amounts advanced to
pay reimbursable costs and maintain the working capital account.
Also pursuant to the Mineral Lease, USECC is to pay the GMMV a monthly
lease fee of $3,363, starting July 1, 1997. Separately and pursuant to the
Mineral Lease, USE and USECC are required to pay all rental, leasehold, property
and other payments relating to the mining properties, and all utility and other
payments, taxes and assessments that may be assessed against such properties
during the term of the Mineral Lease.
Closing of the Acquisition Agreement is subject to USE and USECC
satisfying several conditions, including: (i) the acquiring entity (which may be
USE, USECC, or an entity formed by USE and USECC to acquire Kennecott's interest
in the GMMV) must have a market capitalization of at least $200,000,000; (ii)
the parties to the Acquisition Agreement must have received all authorizations,
consents, permits and approvals of government agencies required to transfer
Kennecott's interest in the GMMV to the acquiring entity; (iii) USE and USECC
shall have replaced, or caused the replacement of, approximately $25,000,000 of
reclamation bonds, in addition to other guarantees, indemnification and
suretyship agreements posted by Kennecott on behalf of the GMMV; and (iv) USE
and USECC, or the acquiring entity, must pay $15,000,000 in cash to Kennecott at
closing and assume all obligations and liabilities of Kennecott with respect to
the GMMV (including repayment of the $16,000,000 Note and the Mortgage) from and
after the closing. Under very limited circumstances, the scheduled closing date
may be postponed to another date no later than October 30, 1998. The parties to
the Acquisition Agreement also executed a mutual General Release with respect to
any and all claims that they may have with respect to any prior disputes
concerning the GMMV, which General Release would be delivered to all such
parties at closing of the Acquisition Agreement. Upon closing of the Acquisition
Agreement, the Mineral Lease and the Mill Contract will be terminated and USE,
USECC or the acquiring entity will own Kennecott's 50% of the GMMV, although its
properties will remain subject to the Mortgage until the Note is paid in full.
The current 50% interest in GMMV held by USE and USECC will not change when the
Acquisition Agreement is closed.
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If the Acquisition Agreement is not closed by December 1, 1997, then USE
and USECC (or an entity formed by them to acquire the GMMV interest owned by
Kennecott) are to provide to Kennecott a commitment letter from a recognized
national investment banking firm to complete an underwritten public offering of
the securities of USE (or an entity formed or introduced to acquire Kennecott's
GMMV interest (the "Acquiring Entity")), in amount sufficient to close the
Acquisition Agreement transactions. Such amount is estimated by USE to be
approximately $40,000,000, (for the $15,000,000 closing cash purchase price to
Kennecott, plus $25,000,000 to assume or cause the replacement of reclamation
bonds, guarantees, indemnification agreements and suretyship agreements related
to the GMMV properties and the Sweetwater Mill. Alternatively, USE, USECC or the
Acquiring Entity must provide evidence to Kennecott of a commitment letter from
a bank, other financial institution or industry entity to provide private or
joint venture financing in such approximate amount. Failure to provide evidence
of such financial commitment by December 1, 1997 would entitle Kennecott to
terminate the Acquisition Agreement, the Mineral Lease and the Mill Contract.
Subject to providing evidence of adequate financial resources to close
the Acquisition Agreement with funds from a public financing or otherwise, the
$4,000,000 signing bonus paid by Kennecott is nonrefundable.
If the Acquisition Agreement is not closed, USE and USECC, and
Kennecott, shall own their respective 50% interest in the GMMV, and Kennecott's
obligation to repay the $16,000,000 loaned by KEC shall remain Kennecott's
obligation, without any adverse effect on the 50% interest in the GMMV held by
USE and USECC. However, the Jackpot Mine development work and Sweetwater Mill
upgrade work funded by the $16,000,000 advance, will have benefitted all parties
to the GMMV.
PROPERTIES AND MINE PLAN. The 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.
The 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 a
38,000 and an 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 52,000,000 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 two
tunnels in 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
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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 three miles west of
the Jackpot Mine site. As many as 250 workers will be required during full
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 had agreed to fund the initial $50,000,000 in development
costs including reclamation costs. To May 31, 1997, such expenditures totaled
approximately $20,416,400. Additional costs would be funded by the $16,000,000
loan, operations and/or by cash advance by 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 have been
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 Notes F and K to USE Consolidated Financial Statements
for fiscal year ended May 31, 1997).
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
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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 requirements 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, USECC believes it is unlikely USECC would have to pay for such
costs directly. First, based on current estimates of cleanup and reclamation
costs (reviewed annually by the oversight agencies), such costs covered by the
letters of credit or other surety appear to be within the $24,330,000
reclamation bonds posted by Kennecott for GMMV. These costs are not expected to
increase materially if the mill is not put into operation. Second, UNOCAL has
agreed that if the GMMV incurs expenditures for environmental liabilities prior
to the earlier of commercial production by GMMV or February 1, 2001, (which
liabilities are not due solely to the operations of GMMV), then UNOCAL will loan
the GMMV the first $8,000,000 of such expenditures. Any reimbursement for the
loan may only be recovered by UNOCAL from 20% of future cash flows from sale of
uranium concentrates processed through the Sweetwater Mill. Third, payment of
reclamation and environmental liabilities related to the Mill is guaranteed by
Kennecott. 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 participating interests in the GMMV, if Kennecott is
required to pay mill cleanup costs directly pursuant to its guarantee. Such
contributions would be required only if the liabilities cannot be satisfied by
Kennecott within the balance of any development commitment as provided by the
Acquisition Agreement after the credits provided by the Fourth Amendment of the
GMMV (see "June 23, 1997 Acquisition Agreement with Kennecott" above). 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 USECC
liability for contribution to mill cleanup costs cannot be predicted.
PERMITTING AND ACTIVITIES. In March 1993, the GMMV applied to the WDEQ
for a Permit to Mine the Round Park deposit through the Jackpot Mine. 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 the GMMV
to proceed with construction of mine surface facilities, further underground
mine development and eventual mining of the Round Park (Jackpot) Deposit.
General activity increased at the Jackpot mine site during fiscal 1997
and to the date of this Report, in anticipation of increased uranium prices.
Some of the principle activities were: a major portion of the access/haulroad
from the Jackpot Mine to the Big Eagle Mine was widened to a 40 foot running
surface eliminating various curves to accommodate the GMMV's 100 ton haul
trucks; permits and
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approvals were obtained for construction of Jackpot Reservoirs No. 2 and 3 and
construction was started and completed except for installing liners, and Jackpot
Reservoir No. 1 was completed and is operational (catch basin for sediment and
runoff). The GMMV is in compliance with all permit conditions. Significant
progress is being made in preparing for and running the double declines into the
Round Park (Jackpot) deposit, pursuant to the pre-development operations plan
agreed to between USECC and Kennecott. Two shifts are currently working
underground with a third shift being assembled.
The Jackpot Mine Plan of Operations and a combination of the
alternatives analyzed in the EIS will allow for the disposal of mine waste rock
in the Big Eagle Mine pits some three miles from the Jackpot declines, the
upgrading of existing roads, and the construction of new haul road segments to
transport ore to the Sweetwater Mill. These roads will be subject to
modification in alignment necessary to minimize or avoid adverse impacts to
riparian and cultural resources.
The maximum area of new disturbance required for the project will be 289
acres. This disturbance will include approximately 118 acres for mine site
development and approximately 171 acres for transportation corridor construction
and/or improvement. When uranium reserves have been depleted, the mine portals
will be plugged; the ground surface recontoured and reclaimed to blend with the
natural landscape; 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 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. Although this could result in a cost
savings to the GMMV, a new 40 acre tailings cell has been designed by an outside
engineering firm and is scheduled to be constructed.
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. The GMMV may need to
install venting at the mine site, and must monitor radon emissions at the mines,
as well as wind speed, direction and other conditions. USE believes all of the
uranium operations in which it owns an interest are in compliance with these
rules.
There ultimately will be an effect on the earnings of USE and Crested
from environmental compliance expenditures by the GMMV, since the GMMV
operations will be accounted for by the equity method if the acquisition of
Kennecott's interest in the GMMV pursuant to the Acquisition Agreement does not
close. GMMV's expenses for compliance with environmental laws (as well as other
matters) are not expected to materially affect the cash flow of USE and Crested
during the next two years. Out of Kennecott's initial $50,000,000 commitment,
Kennecott has funded about $20,416,400 through May 31, 1997. Nevertheless,
advances to the GMMV made pursuant to the Acquisition Agreement will reduce
Kennecott's development commitment by two dollars for each dollar advanced
pursuant to the Fourth Amendment to the GMMV Agreement.
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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 USE Consolidated Financial
Statements for fiscal year ended May 31, 1997).
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 further 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, USE and Crested agreed that after Plateau's
unencumbered cash has been depleted, USE and Crested each will assume one-half
of Plateau's obligations, and share equally in Plateau's operating cash flows,
pursuant to the USECC Joint Venture.
SHOOTARING MILL AND FACILITIES. The Shootaring Mill is located in
south-eastern Utah, approximately 13 miles north of Lake Powell, and 50 miles
south of Hanksville, Utah via State Highway
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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.
Plateau also owns approximately 90,000 tons of uranium mineralized
material stockpiled at the mill site and approximately 172,000 tons of
mineralized material stockpiled at the Tony M Mine. Included with mill assets
are tailings cells, laboratory facilities, equipment shop and inventory. The NRC
issued a license to Plateau authorizing production of uranium concentrates,
however, since the mill was shut down, only maintenance and required safety and
environmental inspection activities were performed and the source materials
license with the NRC was for standby operations only. 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, which
postponement enabled Plateau to upgrade the source materials license to
operational status. Plateau applied to the NRC to convert the source materials
license from standby to operational and upon increasing the reclamation bond to
$6,700,000, the NRC issued the new license on May 2, 1997. Plateau has an
additional $1,600,000 of government securities available for further bonding
needs.
In fiscal 1997 and into fiscal 1998, in anticipation of resuming milling
operations, Plateau commenced a complete reactivation and rehabilitation program
at the Mill (updating the control systems and testing gauges, relining wooden
acid leach tanks, etc.)
TICABOO TOWNSITE
Plateau owns all of the outstanding stock of Canyon Homesteads, Inc.
("Canyon"), a Utah corporation, which developed the Ticaboo, Utah townsite 3.5
miles south of the Shootaring Mill. The Ticaboo site includes a 66 room motel,
convenience store, 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. An amendment was entered into on April 1, 1997 on the Utah State
lease covering the Ticaboo Townsite whereby the State deeded portions of the
Townsite to Canyon Homesteads, Inc. on a sliding scale basis. USE and Crested
plan to further develop the townsite, and have been seeking financial partners
for this purpose. Interim funding for limited improvements on the commercial
operations were provided by a private corporation controlled by family members
of the Chairman of the Board, President and Chief Executive Officer of USE. See
Part III, Item 12 "Certain Relationships and Related Transactions - Transactions
with Arrowstar Investments, Inc.". USE now operates all commercial facilities
including the motel, restaurant, convenience store, mobile home/RV park and boat
storage as the renovation of the nearby Shootaring Canyon uranium mill is under
way.
YELLOW STONE FUELS CORP.
Yellow Stone Fuels Corp., hereafter ("YSFC") was organized on February
17, 1997 in Ontario, Canada. As of February 17, 1997, YSFC acquired all the
outstanding shares of Common Stock of Yellow Stone Fuels, Inc. (a Wyoming
corporation which was organized on June 3,1996), in exchange for YSFC issuing
the same number of shares of YSFC Stock to the former shareholders of Yellow
Stone Fuels, Inc. ("YFI"). YSFC and its wholly-owned subsidiary Yellow Stone
Fuels, Inc. will hereafter be referred to collectively as YSFC.
In order to concentrate the efforts of USECC on conventional uranium
mining using the Shootaring and Sweetwater Mills, USECC decided to take a
minority position in Yellow Stone Fuels, Inc. and not be directly involved in
properties believed suitable for the production of uranium through the in-
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situ leach ("ISL") mining process. USECC will have first call on any uranium ore
bodies YSFC discovers which are amenable to conventional mining and milling and
YSFC will have a call on ore bodies discovered by USECC amenable to the ISL
process. In the ISL process, groundwater fortified with oxidizing agents is
pumped into the ore body, causing the uranium contained into the ore to
dissolve. The resulting solution is pumped to the surface where it is further
processed to a dried form of uranium which is shipped to conversion facilities
for eventual sale. Generally, the ISL process is more cost effective and
environmentally benign compared to conventional underground mining techniques.
In addition, less time may be required to bring an ISL mine into operation than
to permit and build a conventional mine.
As of May 31, 1997, YSFC had 10,495,000 shares of Common Stock issued
and outstanding, including 3,000,000 shares (28.5%) issued to USE and Crested.
Most of the funds used by YSFC have been provided by USECC under a $400,000 loan
facility. As part consideration for the loan, USE and Crested entered into a
Voting Trust Agreement having an initial term of 24 months with two principal
shareholders of YSFC, whereby USE and CC will have voting control of more than
50% of the outstanding shares of YSFC. Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The majority of
the other outstanding YSFC shares are owned by affiliates of USE and Crested.
See Part III, Item 13, "Certain Relationships and Related Transactions."
In Wyoming, YSFC has staked and/or holds 304 unpatented mining claims
and has entered into three State leases covering a total of 9,280 acres located
in the Powder River Basin uranium district. The State leases have a 10 year term
expiring October 1, 2006; require annual rental of $1.00 per acre for five
years, then $2.00 for the second five years, or sooner upon the discovery of
commercial quantities of minerals; and a 5% gross royalty of the value of
uranium bearing ore mined from the leased properties is payable to the State of
Wyoming.
Also in Wyoming, the Peterson claim group includes 50 unpatented mining
claims covering approximately 1,000 acres in the southern part of the power
River Basin uranium district. In addition to owning the Peterson claim group,
YSFC has leased the surface rights to the mineral properties for five years, at
$4.00 per acre annual rent per year plus a production royalty of $0.50 per pound
of uranium concentrates (U3O8) sold at or for less than $22.00 per pound (the
royalty increases to $0.75 per pound for uranium sold at more than $30.00 per
pound). The Low claim group, covering 63 unpatented lode mining claims covering
approximately 1,260 acres, is also located in the southern part of the Powder
River Basin uranium district, approximately 20 miles northwest of the producing
Rio Algom's Smith Ranch Mine. The Low claims may be similar in geology and
hydrology to the Smith Ranch and Cameco's Highland ISL operations.
In New Mexico, YSFC has staked and holds 39 unpatented mining claims and
has leased 8 patented mining claims. These properties in the aggregate cover
approximately 945 acres located in the Grants uranium region of New Mexico. The
8 unpatented mining claims (covering 165.44 acres) are held by a 5 year
renewable lease from Parador Mining Company, requiring $500 monthly rental
payments to Parador Mining Company, which has retained a 5% gross royalty on
revenues from uranium sold from the property. The Parador area was mined for up
to 600,000 pounds U3O8 at a grade of 0.24% by other companies in the 1970s. The
extent of further mineral resources on the properties is presently unknown.
The geological and geophysical data acquired with the Pioneer Nuclear,
Inc. ("PNI") library may assist YSFC in evaluating the viability of the various
uranium claims to in-situ processing. This library of information was assembled
in the 1970s by PNI in its uranium exploration program, and the library was
acquired from a person in exchange for shares of YSFC common stock.
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As of the date of this Annual Report on Form 10-K, YSFC is negotiating
to acquire additional properties in Converse, Fremont and Sweetwater Counties,
Wyoming which in some instances will include certain tangible assets. However,
there are no contracts or agreements in principle for such acquisitions at this
report date.
YSFC will require additional funding to maintain its property
acquisition program, conduct the geological and engineering studies on
properties to evaluate their suitability to in-situ recovery methods, and to
build and operate in-situ recovery facilities on suitable properties. YSFC is
currently seeking additional funding, but there is no assurance adequate funding
will be obtained.
In fiscal 1997, USE and USECC entered into several agreements with YSFC,
including a Milling Agreement through Plateau Resources. The Shootaring Canyon
mill facilities will be available to YSFC to transport uranium concentrate
slurry and loaded resin to the mill and process it into uranium concentrate
("yellowcake"), for which Plateau will be paid its direct costs plus 10%. Other
agreements include a Drill Rig Lease Agreement for YSFC to have access to USE
drilling rigs at the prevailing market rates; an Outsourcing and Lease Agreement
for assistance from USECC accounting and technical personnel on a cost plus 10%
basis and a sublease for 1,000 square feet of office space for $1,000 per month;
and a Ratification of Understanding by which USECC will offer to YSFC (with a
reserved royalty in amounts to be agreed on later) any uranium properties
amenable to in-situ production which USECC acquires or has the right to acquire.
In return, YSFC will offer to USECC ( with a reserve royalty in amounts to be
agreed on later) uranium properties amenable to conventional mining methods
which YSFC acquires or has the right to acquire. USECC also will make its
library of geological information and related materials available to YSFC . YSFC
also has a Storage Agreement with GMMV by which YSFC stores used low-level
contaminated mining equipment purchased from a third party at GMMV's Sweetwater
Mill; YSFC is responsible for any bonding and handling obligations for the
stored equipment, and pays GMMV nominal rent for the storage.
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 between the partners of SMP. These disputes resulted in
arbitration/litigation and subsequent consensual arbitration from which an Order
and Award was issued on April 18, 1996. USE and Crested filed petitions for
confirmation of the Order and Award with the U.S. District Court of Colorado and
the Court has entered a Second Amended Judgment confirming the monetary and
equitable provisions of the Order and Award. 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 USECC 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
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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 as a result of the SMP arbitration/litigation.
PROPERTIES. SMP owns 80 unpatented lode mining claims on the Crooks Gap
properties, including two open-pit and five underground uranium mines and an
inventory of uranium ore. 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. Thirty-eight claims were
conveyed by PMC to SMP in August 1996, see below.
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 held by USECC and not SMP.
Until recently, SMP also had interests in 59 an additional 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 SMP 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 had 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 the vicinity.
An ion exchange plant on the SMP properties is owned by USECC and was
used to remove natural soluble uranium from mine water. USE, on behalf of USECC,
has submitted a plan to the NRC to decommission this facility and obtained a
three year extension for timeliness of decommissioning. Management is reviewing
the economics of relicensing this facility as part of a potential in-situ leach
uranium mining operation. 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. See Item 3,
Legal Proceedings Sheep Mountain Partners Arbitration/Litigation - Stipulated
Arbitration." Currently, USECC has a maintenance staff on site to care for and
maintain the mines and pump mine water to prevent flooding of
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the mines, which could destroy equipment and the concrete lined vertical shafts
accessing the various levels of uranium mineralization.
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.
Nukem was 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 (four of these contracts remain) for
sales of uranium originally to eight 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 at a future date). 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. Two of the base priced
contracts have been fulfilled and the third base-price escalated contract of
SMP, required delivery of 130,000 pounds of uranium concentrates in 1997 which
was made, completing that contract. The fourth contract calls for delivery of
750,000 lbs. U3O8 through 2001. 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 based on estimated prices at which a willing seller would
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 900,000 pounds of U3O8 annually from 1997 to 2000, which amounts may be
increased or decreased by specified percentages.
Through fiscal 1997, USECC and its affiliates have 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 of the Arbitration Panel. 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 5,800,000 pounds of
U3O8 during calendar 1995 and produced approximately 6,300,000 pounds in
calendar 1996. Production in the U.S. for 1997 is estimated at 7,000,000 pounds.
In addition, there 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 66,000,000 pounds of U3O8 during
calendar year 1996 and are expected to produce approximately 73,000,000 pounds
in calendar 1997. Several members of the Commonwealth of Independent States
("CIS"), also export uranium into the western markets although the amount of
such exports to the United States and European markets are currently limited.
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Uranium is primarily used in nuclear reactors to heat water which drive
turbines and generators generating electricity. According to the Uranium
Institute based in London, England ("UI"), nuclear plants generated
approximately 17% of the world's electricity in 1996, up from less than 2% in
1970. According to the UI, through the year 2000, nuclear generating capacity is
expected to grow at 1 % per annum primarily as a result of new reactor
construction outside the United States and increased efficiencies of existing
reactors.
In 1996, 442 nuclear power plants were operating and 36 were under
construction worldwide, according to the International Atomic Energy Agency. The
plants combined to generate more than 23 trillion kilowatt hours of electricity
last year. Five plants totaling 5,717 megawatts - including Tennessee Valley
Authority's Watts Bar 1 - began commercial operation in 1996. Uranium
consumption by Western World commercial reactors has increased from about
60,000,000 pounds in 1981 to approximately 142,000,000 pounds in 1996.
SUPPLY AND DEMAND
From the early 1970s through 1980, the Western World uranium industry
was characterized by increasing uranium production fueled by overly optimistic
projections of nuclear power growth. From 1970 to 1985, production exceeded
consumption by approximately 500,000,000 pounds. By the end of 1985 enough
inventory had been amassed to fuel Western World reactor needs for over five
years. In response, sales of excess inventory followed and prices plummeted from
highs above $40 per pound in 1979 to below $8 per pound in 1992. As prices fell,
Western World production declined dramatically from a high of 115,000,000 pounds
in 1980 to a low of 57,000,000 pounds by 1994. Since 1985, consumption of
uranium in the Western World has exceeded Western World production by over
400,000,000 pounds. In 1995, consumption of uranium in the Western World was
129,000,000 pounds, nearly double the production of 66,000,000 pounds by Western
World producers. In 1996, Western World consumption rose to an estimated
142,000,000 pounds, while production increased only to an estimated 74,000,000
pounds. Accordingly, by the end of 1995, excess inventory levels in the Western
World (inventory in excess of preferred levels) had been reduced to less than
two years of forward reactor requirements, and excess inventories in the U.S.
had been reduced to less than one year of projected forward requirements. This
trend continued in 1996 and 1997.
Countering the drawdown of Western World inventories and contributing
directly to the downturn of market prices was the importation, starting in 1989,
of uranium from the CIS republics, and to a lesser extent, from Eastern Europe
and mainland China. As the result of an anti-dumping suit in 1991 filed in the
U.S. ("CIS Anti-dumping Suit") against republics of the CIS, suspension
agreements were signed by six CIS republics (Russia, Ukraine, Kazakhstan,
Uzbekistan, Kyrgstan and Tajikistan) in October 1992, which applied price
related volume quotas to CIS uranium permitted to be imported into the U.S.
The Russian Suspension Agreement was amended in March 1994 allowing for
up to 43,000,000 pounds of Russian uranium to be imported into the U.S. over the
10 years beginning March 1994, but only if it is matched with an equal volume of
new U.S. production. Based on U.S. consumption for the 1994-2003 period (as
reported or projected by the Department of Energy), the matched volumes could
account for up to 18% of the supply to the U.S. market during this period.
In 1995, the Republics of Kazakhstan and Uzbekistan concluded
negotiations with the U.S. Department of Commerce to amend their respective
suspension agreements. Both amendments lowered initial prices relating to their
respective import quotas allowing imports to occur. Additionally, the amendments
require that uranium mined in those Republics and enriched in another country
for importation in the U.S. will count against their respective quotas. The
Uzbekistan amendment replaces
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the price-tied quota system with one based upon U.S. production rates after
October 1997. As U.S. rates increase, additional imports from Uzbekistan are
allowed.
Although these amendments to the suspension agreements may increase the
supply of uranium to the U.S. market, they provide increased predictability
concerning CIS imports into the U.S. Due to declining production levels in the
CIS republics, uranium from these sources has recently been difficult to obtain.
Consequently, the market impact of CIS primary production may be diminishing.
In January 1994, the U.S. and Russia entered into an agreement (the
Russian HEU Agreement") to convert highly enriched uranium ("HEU"), derived from
dismantling nuclear weapons to low enriched uranium ("LEU") suitable for use in
nuclear power plants. At a projected maximum conversion rate for HEU and LEU,
approximately 18,000,000 pounds of U3O8 will be available to Western World
markets.
In 1996, the U.S. Congress passed legislation in compliance with the
suspension agreements which allows the converted HEU material to be sold in the
U.S. marketplace at an annual rate not to exceed 2,000,000 pounds in 1998,
increasing gradually to 20,000,000 pounds in 2009. At this maximum rate, HEU
material could supply approximately 40% of annual U.S. reactor requirements
projected for 2009. However, the Russians may require much of the material for
its own internal use and the amounts which may be imported into the U.S. cannot
be predicted. In addition, an uncertain amount of HEU material is allowed to be
used in the U.S. for overfeeding of enrichment facilities and as a source of
Russian uranium for matching sales.
Industry analysts expect annual Western World consumption to be at
levels between 135,000,000 and 150,000,000 pounds U3O8 through 2001. The Company
estimates that between 30,000,000 and 40,000,000 pounds of this demand could be
filled by a combination of government stockpiles (including converted Russian
and U.S. HEU) and imports from CIS republics and former Eastern Bloc countries.
To achieve market equilibrium by 2001 primary production in the Western World
will need to supply between 95,000,000 and 120,000,000 pounds U3O8 on an annual
basis subject to some adjustment for any remaining inventory drawdown and
limited uranium reprocessing. Production from existing facilities in the Western
World, however, is projected to decline from current levels to approximately
57,000,000 pounds U3O8 by 2001 as reserves are depleted. New production
therefore will have to be brought on line to fill a potential annual gap of
between 38,000,000 and 63,000,000 pounds U3O8. While current price levels may
sustain 1996 production levels, USECC believes that higher prices will be needed
to support the required investment in new higher cost production as lower cost
production reserves are depleted.
1996 was also a transition year in the industry as the spot price for
U3O8 concentrates rose to a high of $16.60 per pound in July 1996 following a
surge in spot buying activity. Since then the spot price has declined to $10.30
per pound. And, while the spot price has eroded to 1995 levels, USECC believes
that it is only a reflection of a near term equilibrium of supply and demand
that was fueled by utilities exercising option flexibilities of up to an
additional 50% of contracted volumes of material as the spot price climbed
during 1996. On the contrary, utilities have also likely exercised downward
flexibilities of up to 50% of contracted volumes as the spot price has declined
to levels below contracted prices and are planning to buy materials at a lower
price.
Overall, USECC believes that adequate supply of U3O8 material to meet
firm demand cannot be sustained at spot price levels below $15.00 per pound.
And, while production remains at levels just above 50% of consumption in the
Western World, existing and planned production will not sufficiently meet supply
either, even if new production comes on stream as planned.
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<PAGE>
In the near term, USECC believes that the spot price for U3O8 will rise
to mid teen levels and remain there for a period before trending upwards to the
low $20s for a sustained period of time. If there is any disruption in HEU
supply or new planned capacity, USE believes the price will increase to much
higher levels.
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").
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 USE's past
five fiscal years are shown below. NUEXCO Exchange Values are reported monthly
and represent NUEXCO's judgment of the price at which spot and near term
transactions for significant quantities could be concluded. NEVs for fiscal 1993
are higher for U.S. transactions, due to the impact of CIS import restrictions
since late 1992. These prices ("US NEV") were reported by NUEXCO for spot sales
in the restricted U.S. market.
NUEXCO EXCHANGE VALUE
Years Ended US $/POUND OF U3O8
------------------
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 16.60 13.00
1997* 14.80 10.30
* Through September 1, 1997.
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.
GOLD
LINCOLN PROJECT (CALIFORNIA)
SUTTER GOLD MINING COMPANY. In fiscal 1991, USE acquired an interest in
the Lincoln Project (including the underground Lincoln Mine and the 2,800 foot
Stringbean Alley decline) in the Mother Lode
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Mining District of Amador County, California, held by 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, which is a
subsidiary of Sutter Gold Mining Company, a Wyoming corporation ("SGMC").
In fiscal 1997, SGMC completed private financings totalling a net of
$7,115,100 ($1,271,600 through a private placement conducted in the United
States by RAF Financial Corporation, and $5,843,500 through a private placement
conducted in Toronto, Ontario, Canada by C.M. Oliver & Company Limited). The net
proceeds of $6,411,816 from these financings (after deduction of commissions and
offering costs) are being applied to pre-production mine development, mill
design, and property holding and acquisition cost. SGMC anticipates production
mining will commence in mid- calendar 1998 and that by that time, construction
of a 500 ton per day gold mill will have been completed. Additional financing
will be sought in 1998 to complete mill construction and start production
mining.
As of the date of this Annual Report on Form 10-K, SGMC is preparing to
apply for listing on the Toronto Stock Exchange. SGMC does not have any class of
its securities registered with the Securities and Exchange Commission, and none
of its securities are traded in the United States.
After completion of the two private financings, and taking into account
a restructuring of the ownership of USE and Crested in SGMC (and additional
issue of 75,000 shares to settle a dispute with Amador United, see below), USE
and Crested each own the following securities of SGMC:
(a) 30.7% and 3.2% of the outstanding shares of Common Stock which would
be reduced to 23.5% and 2.5%, respectively, in the event outstanding warrants
held by the Canadian investors to purchase 1,454,800 more shares of Common Stock
are exercised at Cdn$6.00 per share 18 months from the date of closing of the
Offering and the outstanding warrants held by C.M. Oliver to purchase 145,480
more shares of Common Stock are exercised at Cdn$5.50 per share, before May 13,
1999. The preceding percentages of SGMC Common Stock do not reflect 345,200
warrants that may be sold in the Offering or shares that may be acquired by USE
and Crested pursuant to the $10,000,000 USECC Contingent Stock Purchase Warrant
(described below) issued as consideration for the voluntary reductions in the
ownership of SGMC shares by USE and Crested. One reorganization of the capital
structure of SGMC was required by RAF Financial Corporation in connection with
its private placement of SGMC shares, and the other was required by C.M. Oliver
& Company Limited in the Canadian private placement.
(b) A $10,000,000 Contingent Stock Purchase Warrant (the "USECC
Warrant") was issued to USE and Crested in connection with the restructuring of
SGMC. The USECC Warrant is owned 88.9% by USE and 11.1% by Crested. The USECC
Warrant provides that for each ounce of gold over 300,000 ounces added to the
proven and probable category of SGMC's reserves (up to a maximum of 400,000
additional ounces), using a cut-off grade of 0.10 ounces of gold per ton (at
minimum vein thickness of 4 feet), USE and Crested will be entitled to acquire
additional shares of Common Stock from SGMC (without paying additional
consideration). The number of additional shares issuable for each new ounce of
gold reserves will be determined by dividing US$25 by the greater of $5.00 or
the weighted average closing price of the Common Stock for the 20 trading days
before exercise of the USECC Warrant. The USECC Warrant is to be exercised
semi-annually. However, as an alternative to exercise of the USECC Warrant, SGMC
has the right to pay USE and Crested US$25 in cash for each new ounce of gold
(payable out of a maximum of 60% of net cash-flow from SGMC's mining
operations). Additions to reserves will be determined by an independent
geologist agreed upon by the parties.
In fiscal 1997, SGMC issued 75,000 shares of Common Stock to Amador
United Gold Mines to settle certain disputes between such company and SGMC, USE
and Crested (see "Properties" below).
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In addition, SGMC bought about one-third of the outstanding shares of Keystone
Mining Company owned by The Salvation Army. The Keystone Mining Company owns
property in the Lincoln Project leased to SGMC.
Effective June 1, 1996, SGMC entered into a Management Agreement (dated
as of May 22, 1996) with USE under which USECC provides administrative staff and
services to SGMC. USE is reimbursed for actual costs incurred, plus an extra 10%
during the exploration and development phases; 2% during the construction phase;
and 2.5% during the mining phase (such 2.5% charge to be replaced with a fixed
sum which with parties will negotiate at the end of two years starting when the
mining phase begins). The Management Agreement replaces a prior agreement by
which USE provided administrative services to SGMC.
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 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.
On October 1, 1996, SGMC entered into three letter agreements (the
"Lincoln Letter Agreements") with the property owners of 185 acres ("185 Acre
Property") on the west side of California State Highway 49 ("Hwy 49") and 32.58
acres ("32 Acre Property") of minerals which include 20.5 acres of surface on
the east side of Hwy 49 adjacent to the Stringbean Decline. The 185 Acre
Property is the proposed new location for the Surface Fill Unit and the 32 Acre
Property provides the land necessary for access and utility easements to Hwy 49.
Formal agreements have been submitted for execution but are awaiting approval of
the probate court of an estate of a deceased who owned an interest in the
properties.
The 185 Acre Property, which includes the surface and mineral rights, is
being purchased for $2,000 per acre (or $370,000) plus a 2% net smelter royalty
on any precious metals produced from this property. SGMC also agreed to purchase
for $185,000 the rights to the certified Environmental Impact Report ("EIR") on
the 185 Acre Property. The EIR saves SGMC approximately six to nine months of
permitting time. Payments for the 185 Acre Property and the EIR are monthly with
the final payments to be made before the construction of a surface fill unit for
the property (the "Surface Fill Unit"). The purchase of the 185 Acre Property
and EIR is contingent on SGMC obtaining an amendment to the Conditional USE
Permit to allow the placement of processed ore in to the Surface Fill Unit on
this property.
The transaction contemplated with respect to the 32 Acre property
contains two separate components. The first is the purchase of the road access
and utility easements and the second is a lease of the mineral rights on this
property. The purchase price of the easements is $15,000 which is to be made in
three equal payments. SGMC is obligated to spend up to $15,000 to quiet title
both the surface and mineral rights. Upon successful quiet title, SGMC is
obligated to complete a two year exploration program of mapping and core
drilling of at least 1,000 feet or in lieu of drilling make a $5,000 payment. If
an ore reserve can be developed on the 32 Acre property (in SGMC's sole
judgment) then SGMC will enter into a lease with the owners and pay up to a 4%
net smelter royalty on minerals extracted from the 32 Acre Property with a
minimum annual payment of $2,500 tied to the Gross Domestic Product Implicit
Price Index ("GDPIP") (base year shall be the year the quiet title on the 32
Acre property is obtained). Lease payments will be offset by the earned
royalties in excess of $15,000 escalated by the GDPIP.
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Surface and mineral rights total holding costs will be approximately
$225,000 from April 1, 1997 through May 31, 1998, including $45,000 for payments
on two parcels (9.1 acres) bought in 1994; an estimated $30,000 for one-time
costs to acquire surface easements on the 32 Acre property to access the mill
site from California State Highway 49; and property taxes of approximately
$35,000 for the year ended 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. Estimated acquisition costs for the 185 Acre Property and the EIR on
the 185 Acre Property will be approximately $600,000.
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. In fiscal 1997, Amador United sold all of its rights
in the Lincoln Project to SGMC, in consideration of SGMC issuing 75,000 shares
of Common Stock to Amador United.
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 equal to 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.
Through May 31, 1997, there has been an estimated $20,000,000 of
spending in the Lincoln Project by Meridian, USECC Gold and their predecessors
to acquire the Lincoln Project and for mine development, mining and processing
bulk samples of mineralization, exploration, feasibility studies, permitting
costs, holding costs, and related general and administrative costs. The amount
of such expenditures during the 1997 fiscal year was approximately $572,700
($637,300 in 1996). Certain of the expenditures have been expensed and the rest
have been capitalized as assets.
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
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<PAGE>
increased. Historical data (underground maps and production records) from
historic (now closed) mines within the Lincoln Project boundaries indicate
certain areas of those mines were not "mined out", such that additional
mineralized resources may exist on the property.
The geology within the Lincoln Project is typical of the historic Mother
Lode region of California, with a steeply dipping to vertical sequence of
metavolcanic and metasedimentary rocks hosting the gold- bearing veins.
Depending on location along the strike length on the vein systems, the
gold-bearing veins are slate, metavolcanic greenstone, or an interbedded unit of
slates and volcanics. The Lincoln Project covers over 11,000 feet of strike
length along the Mother Lode vein systems.
PERMITS AND FUTURE PLANS. In August 1993, the Amador County Board of
Supervisors issued a Conditional Use Permit ("CUP") allowing mining of the
Lincoln Mine and milling of production, subject to conditions relating to land
use, environmental and public safety issues, road construction and 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.
PROPOSED MINE PLAN
General. SGMC is evaluating different mine plans for properties within
the Lincoln Project. The mine plan summarized below is allowed by the CUP.
Different plans will require an amendment to the CUP, which may add several
months to the time required to obtain final approvals to commence operations on
the properties affected. It should be noted that the mine workings actually
developed may vary substantially from the plan adopted, depending on the
different conditions and grades of mineralization that are encountered.
SGMC proposes to mine the Lincoln and Comet Zones initially by access
through the existing Stringbean Alley decline. Production will be by overhand
cut-and-fill and open sub-level stoping techniques. Screened tailings from the
mill's flotation circuit (support fill) will be used to back fill the stopes,
which will stabilize the hanging and foot wall vein rocks, and greatly reduce
the volume of processed ore going into the Surface Fill Unit.
Mining (ore extraction) is anticipated to start by mid-1998, at a rate
increasing up to 500 tons per day ("tpd") during the first six months of mining
operations. Ore initially will be taken to surface with ore trucks through the
existing Stringbean Alley decline. A new underground level is planned to be
driven at 1,000 feet above sea level, (approximately 120 feet below surface)
during the next six months. Mining will coincide with development of additional
stopes and may allow an increase in mine production up to 1,00 tpd in
approximately the third year of operation. After the first 18 months of
operations, which is a condition in the Conditional Use Permit, it is
anticipated that the Lincoln decline connecting the Stringbean Alley decline and
the surface of the approved mill site will have been completed, running
underground from near underneath the location of the mill site to the mine's
1,000-foot level. The Lincoln decline would run for 1,850 feet at an inclination
of minus 19% (cross section 12 feet by 12 feet), and will be used for access of
personnel and supplies to the underground workings as well as for ore haulage up
the decline by conveyor thus eliminating ore haulage on the surface from the
portal of the mine to the mill.
SGMC has applied to amend the CUP to relocate the mill to eliminate the
need to drive the Lincoln decline and to minimize haulage to the mill and other
operating costs. It is anticipated that the land acquisition costs for such
relocation would be significantly less than the added capital costs and
operating costs to drive and operate the Lincoln decline. However, such
application has not yet been approved.
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Pre-Production Development. Current access to the mine is through the
Stringbean Alley decline, the portal of which is 1,183 feet above sea level
leading to the bottom of the decline at 835 feet above sea level. This decline
was driven to access the Lincoln and Comet Zones, both of which were originally
core drilled from the surface, with the Comet Zone thereafter core drilled from
underground. Raises have been started in the "M" vein of the Comet Zone section
on 200-foot centers to establish stoping areas to access ore. The raises will
provide access, ventilation, fill access and escape ways for initial stopes.
Further crosscuts will be driven for more stopes as the Stringbean Alley decline
is extended and levels driven out horizontally.
Underground mine water seepage into the Stringbean Alley decline is
approximately 5 to 15 gallons per minute, depending on the season. Accumulated
water in the decline is now being pumped through a treatment plant located
underground in the Stringbean Alley decline. The plant removes arsenic and other
naturally occurring minerals, and the treated water is discharged by spray
evaporation at the surface. This plant will continue treating mine seepage water
as the mine goes into production. The treated water not used underground in
operations will be pumped to the surface for mill operations as needed.
Production. All veins will be drifted on the first floor above the
crosscuts, which will serve as the bottom floor of the stopes. Raises will be
driven to the level above for ventilation and access for fill. Initially, in the
Comet Zone, these raises will be driven on 200-foot centers and, assuming
continuity of ore, will be two steps, one on either side of the raise. Ore will
be mined out of stopes with the overhand cut and fill open sub-level stoping
methods, with each layer of stope filled back in with mill tailings which have
been recycled from the surface mill facility. Broken ore will be loaded onto
15-ton underground trucks and hauled over to the underground crushing station,
then either transported to the surface via truck up the Stringbean Alley decline
or, if the Lincoln decline is driven, via the ore conveyor belt.
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.
MILL PLAN
General. The proposed mill process essentially involves three stages:
first, wet grinding of the ore into fine particles in a semi-autogenous grinder
("SAG") mill, with the resulting finely-milled ore run through a gravity process
to remove free particles of gold through gravity; second, ore containing gold
which was not captured in the first gravity process will be fed to a ball mill
for more grinding. The resulting finely-ground material is run through a second
gravity recovery circuit into flotation cells for mixing with non-toxic
chemicals and water to further remove gold from the ore (referred to as the
flotation stage); and third, processing the flotation concentrate with dilute
sodium cyanide to chemically remove most of the remaining gold. The mill is
designed to produce three gold-bearing products: free gold; a high-grade gravity
concentrate, and a Merrill-Crowe precipitate. All three will be smelted to a
dore' bullion for shipment to a precious metal refinery. SGMC is also
considering selling the flotation concentrate rather than installing a
Merrill-Crowe circuit to precipitate gold. An economic analysis of this
alternative is being completed by SGMC.
In fiscal 1992, SGMC's predecessors mined 8,000 tons of material,
including waste rock and low grade mineralization, out of drifts and raises off
the Stringbean Alley decline, which were processed through a nearby mell in a
bulk sampling program to test mining techniques and mill recoveries. Milling
results indicated at least 94% of the gold in the ore should be recoverable with
a combination of gravity, flotation and cyanidation milling circuits.
Approximately 1,400 ounces of gold were recovered in this program. PAH believes
the mill recovery rate should be between 93% and 95% using the proposed
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gravity, flotation and cyanidation milling circuits. In its prefeasibility
study, PAH used a 90% mill recovery rate because in its study, the mill was
designed to recover gold in only a single stage gravity circuit. Since the PAH
prefeasibility study, Lookewood Greene Engineers, Inc. of Dallas, Texas has
designed a new mill circuit to recover 95% of the gold.
The central mill building (exclusive of attached lab and other support
facilities) will cover up to approximately 20,000 square feet. If warranted,
mill capacity may be increased beyond 500 tpd in the second year of operations,
since the CUP allows for up to 1,000 tpd mining and milling operations.
Possible Alternative Mill and Waste Management Sites. SGMC presently is
evaluating a possible relocation of the waste management unit (or Surface Fill
Unit) site and the mill site. Although this relocation would require the
purchase of additional properties, and an amendment to the CUP, management of
SGMC believes the cost will be more than offset and would be recovered in
approximately five years by dropping the land surface leases for which the waste
management sit is currently approved. Net capital savings could be significant
if the new approach is adopted. The proposed new mill site also is anticipated
to significantly reduce operating costs through reductions in hauling distance;
elimination of the need for constructing the Lincoln decline; and the need to
build large dams, and the hauling costs of importing clay for pond liners.
MOLYBDENUM
As holders of royalty, reversionary and certain other interests in
properties located at Mt. Emmons near Crested Butte, Colorado, USE and Crested
are entitled to receive annual advance royalties of 50,000 pounds of molybdenum,
or cash equivalent (one-half to each). AMAX Inc. (which was acquired by Cyprus
Minerals Company and was renamed Cyprus Amax Minerals Company in November 1993)
delineated a deposit of molybdenum containing approximately 146,000,000 tons of
mineralization averaging 0.43% molybdenum disulfide on the properties.
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. USE did not receive any advance royalties during fiscal
1996 because of an arrangement with Cyprus Amax described below. During fiscal
1995, USE 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 USE Consolidated Financial Statements. The advance royalty payments
reduce the operating royalties (six percent of gross production proceeds) which
would otherwise be due from Cyprus Amax from production. There is no obligation
to repay the advance royalties if the property is not placed in production.
The Agreement with AMAX also provides that USE and Crested are to
receive $2,000,000 (one-half to each), at such time as the Mt. Emmons properties
are put into production and, in the event AMAX sells its interest in the
properties, USE and Crested would receive 15 percent of the first $25,000,000
received by AMAX. USE and Crested have asserted that the acquisition of AMAX by
Cyprus Minerals Company was a sale of AMAX's interest in the properties which
would entitle USE and Crested to such payment. Cyprus Amax has rejected such
assertion and USE and Crested are considering their remedies.
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
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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 fiscal 1997. In fiscal 1997, $207,300 was
received by USECC from advance royalty payments.
MOLYBDENUM MARKET INFORMATION
Molybdenum is a metallic element with applications in both metallurgy
and chemistry. Principal consumers include the steel industry, which uses
molybdenum alloying agents to enhance strength and other characteristics of its
products, and the chemical, super-alloy and electronics industries, which
purchase molybdenum in upgraded product forms.
The molybdenum market is cyclical with prices influenced by production
costs and the rate of production of foreign and domestic primary and by-product
producers, world-wide economic conditions particularly in the steel industry,
the U.S. dollar exchange rate, and other factors such as the rate of consumption
of molybdenum in end-use products. When molybdenum prices rose dramatically in
the late 1970s, for example, steel alloys were modified to reduce reliance on
molybdenum. AMAX and Cyprus Minerals Company were the two major primary
producers of molybdenum in the United States until November 1993, when AMAX was
acquired by Cyprus.
Worldwide demand for molybdic oxide in calendar 1996 was reported at
approximately 230,000,000 pounds, its highest level ever. Production for that
period was about 225,000,000 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 1998.
Molybdenum prices on the open spot market increased substantially, from
$3.35 per pound of technical grade molybdic oxide (the principal product) in
September 1994, to $15.50 - $17.50 per pound in February 1995. However, by May
31, 1996, prices declined to $3.00 - $3.35 per pound but are in the $4.00 to
$4.40 per pound range in September 1997.
PARADOR MINING (NEVADA)
USE and Crested are sublessees and assignees from Parador Mining Co.,
Inc. ("Parador"), on certain rights under two patented mining claims located in
the Bullfrog Mining District of Nye County, Nevada. The claims are immediately
adjacent to and part of a gold mine operated by Bond Gold Bullfrog, Inc.
("BGBI"), a non-affiliated third party (now known as Barrick Bullfrog, Inc.).
USE and Crested have also been assigned certain extralateral rights associated
with the claims and certain royalty rights relating to a prior lease on those
properties. The lease to USE and Crested is for a ten year primary term, is
subject to a prior lease to BGBI on the properties, and allows USE and Crested
to explore for, develop and mine minerals from the claims. If USE and Crested
conduct activities on the claims, they are entitled to recover costs out of
revenues from extracted minerals. After recovering any such costs, USE and
Crested will pay Parador a production royalty of 50 percent of the net value of
production sold from the claims.
USE, Crested and Parador 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
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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 Parador, USE and Crested have no right,
title or interest in the adjacent BGBI claims. Parador, USE and Crested filed an
appeal of this ruling as erroneous as a matter of law but the appellate court
dismissed the appeal as being premature. The remaining issues have not been
considered or set for trial. See Item 3, "Legal Proceedings - BBGI 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
(see below). Energx (and NuGas) drilled five more exploratory wells during the
fall of 1996. All five of these wells were dry holes. All eight dry holes were
funded by NuGas in accordance with the provisions of the Agreement. Due to the
fact that all eight holes were dry, NuGas has no further obligations to drill
under the Agreement. Since the fall of 1996 there has been no other exploration
or drilling activities performed by Energx or NuGas under this Agreement.
Reclamation of the dry hole bores began in 1997. Energx may terminate or farmout
the Fort Peck Gas Project if further exploration work does not appear to be
warranted.
NUGAS RESOURCES (U.S.) INC. AGREEMENT. By the Joint Venture Agreement
("JVA") with Energx dated July 18, 1994, NuGas was 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 was extended to July
1, 1997, to earn a one-half interest in Energx' rights under the Fort Peck
Shallow Gas Agreement.
NuGas 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 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.
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
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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 in fiscal
1996.
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 private financing
and industry participation. However, equity financing as well as industry
participation of natural and coalbed methane gas projects may be difficult to
obtain. Accordingly, in fiscal 1998 Energx will continue to monitor its Fort
Peck positions to evaluate whether to continue to seek to find gas on the tribal
lands.
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
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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 USE and Crested sold 9 and 19 lots for an aggregate of
$21,150 and $46,000 during fiscal 1997 and 1996, respectively.
COLORADO PROPERTIES. In connection with the AMAX transaction for the Mt.
Emmons molybdenum properties near Crested Butte, Colorado, USECC acquired an
option from AMAX (now Cyprus Amax) to purchase approximately 57 acres for
$200,000 in Mountain Meadows Business Park, Gunnison, Colorado. See "Minerals -
Molybdenum" above. The property is zoned commercial and industrial, and is
adjacent to Western State College. In fiscal 1995, USECC and Cyprus Amax agreed
to exercise the option by USE and Crested agreeing to forego six quarters of
advance royalties from Cyprus Amax (the option purchase price was $200,000),
plus payment of certain expenses i.e. real property taxes from 1987 and other
expenses amounting to $19,358. Thereafter, USE (together with Crested) signed
option agreements with Pangolin Corporation, a Park City, Utah developer, for
sale of the 57 acres, and a separate parcel owned in Gunnison County, Colorado.
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 carried interest at 7.5%
per annum.
The second option covered 472.5 acres of ranch land owned by Crested
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 Registrant did not receive the $35,000 as
scheduled. At closing, 22.19 acres were deeded to Pangolin; different parcels of
the remaining acreage secured the notes, and were to be released for principal
payments in the course of development. The sale was accounted for as an
installment sale and thus the gain on sale was deferred, to be recorded as the
notes are paid.
Both notes ($145,500 and $630,870) required annual payments of accrued
interest: the larger note accrued 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).
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In fiscal 1997, USE and Crested agreed with Pangolin, and entities
affiliated with Pangolin, to restructure the remaining obligations of Pangolin
and entities affiliated with Pangolin, with respect to the land parcels in and
near Gunnison, Colorado (which had been covered by the original two purchase
options). Under the restructuring, Contour Development Company LLC (a Colorado
limited liability company, hereafter "Contour") gave USE and Crested two
recourse, secured promissory notes: the first note is for $454,894 of principal,
due January 26, 1998, the second note is for $872,508 of principal. The notes
are secured by Contour's 73% interest in Tenderfoot Properties LLC ( a Colorado
limited liability company affiliated with Contour, hereafter "Tenderfoot"). USE
and Crested conveyed a key lot in the Gunnison parcel to Tenderfoot, upon which
Contour and Tenderfoot were to construct an apartment building with HUD
construction loan financing to be obtained by Contour and Tenderfoot. USE and
Crested had intended the restructuring to result in a faster recovery by USE and
Crested of their investments in the land, than would have been realized under
the terms of the original Pangolin obligations.
Although the initial payments on the two new notes were paid when due in
January 1997, thereafter, on May 30, 1997, Contour defaulted in making a payment
to Crested of $164,439 (principal of $128,138 plus accrued interest of $36,301
at 8.39% per year from December 1, 1996). As of the filing date of this Annual
Report on Form 10-K, USE and Crested are re-evaluating all of the circumstances
of the negotiations which led to the restructuring in late calendar 1996,
including representations made to USE and Crested by affiliates of Pangolin and
Contour regarding the value of the Tenderfoot interests owned by Contour which
secure the new notes, Contour's intentions of paying the new notes when due
according to their terms, and other matters. As of the date of this Report, USE
and Crested have not determined what types of legal remedies will be pursued to
enforce their rights and recover the value of their investments in the land and
the original transaction with Pangolin.
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.
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
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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.
The Company's management believes it is currently in compliance in all
material respects with existing environmental regulations. To the extent that
production by SMP, GMMV or SGMC is delayed, interrupted or discontinued due to
need to satisfy existing or new provisions which relate to environmental
protection, future USE earnings could be adversely affected.
CROOKS GAP. An inoperative ion exchange facility at Crooks Gap currently
holds a NRC license for possession of uranium operations byproducts. USE has
applied to the NRC for permission to decommission and decontaminate the plant,
dispose low level waste into the Sweetwater Mill tailings cell, and keep intact
such of the facility as does not require dismantling. 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 had
110 full-time employees as of September 5, 1997. Payroll expense has been shared
by USE and Crested since 1981.
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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.
ITEM 3. Legal Proceedings
Sheep Mountain Partners Arbitration/Litigation
Arbitration. On June 26, 1991, CRIC submitted certain disputed matters
concerning SMP to arbitration before the American Arbitration Association in
Denver, Colorado, to which USE and Crested filed a responsive pleading and
counterclaims alleging violations of contracts and duties by CRIC related to
SMP. CRIC asserted that USE and Crested, d/b/a/ USECC, were in default under the
SMP partnership agreement ("SMP Agreement"). Prior to initiation of arbitration
proceedings, USE and Crested had notified CRIC it was in default under the SMP
Agreement. The issues raised in the arbitration proceedings were generally
incorporated in the Federal proceedings (see below), wherein the U.S. District
Court of Colorado stayed further proceedings in arbitration. See also
"Stipulated Arbitration", below.
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Federal Proceedings. On July 3, 1991, USE and Crested ("plaintiffs")
filed Civil Action No. 91- B-1153 in the United States District Court for the
District of Colorado against CRIC, Nukem and various affiliates of CRIC and
Nukem (together, the "defendants"), alleging that CRIC and Nukem misrepresented
material facts to and concealed material information from the plaintiffs to
induce their entry into SMP Agreement and various related agreements. Plaintiffs
also claimed CRIC and Nukem have wrongfully pursued a plan to obtain ownership
of the USE-Crested interests in SMP through various means, including
overcharging SMP for uranium "sold" to SMP by defendants. Plaintiffs further
alleged that defendants refused to provide a complete accounting with respect to
dealings in uranium with and on behalf of SMP, and that certain defendants
misappropriated SMP property and engaged in other wrongful acts relating to the
acquisition of uranium by SMP.
Plaintiffs requested that the court order rescission of the SMP
Agreement and related contracts, and asked the court to determine the amounts
payable to CRIC by USECC as a result of any such rescission order to place the
parties in status quo. USE and Crested also requested that the court order
defendants to make a complete accounting to them concerning the matters alleged
in the Amended Complaint. They requested an award of damages (including
punitive, exemplary and treble damages, interest, costs and attorneys' fees) in
an amount to be determined at trial. Plaintiffs further requested imposition of
a constructive trust on all property of SMP held by defendants, and on profits
wrongfully realized by defendants on transactions with SMP.
The defendants filed various motions, including an application to stay
judicial process and compel arbitration and to dismiss certain of plaintiff's
claims. The defendants also filed an answer and counterclaims against
plaintiffs, claiming plaintiffs breached the SMP Agreement and misappropriated a
partnership opportunity by providing certain information about SMP to Kennecott
and entering into the GMMV with Kennecott involving the Green Mountain uranium
properties. The defendants also claim that plaintiffs wrongfully sold an
interest in SMP to Kennecott through the GMMV without CRIC's consent and without
providing CRIC a right of first refusal to purchase such interests; that USE
breached the uranium marketing agreement between CRIC and SMP, which had been
assigned by CRIC to Nukem, by agreeing with Kennecott in the GMMV that Kennecott
could market all the uranium from Green Mountain, thereby depriving Nukem of
commissions to be earned under such marketing agreement; that Registrant and
Crested interfered with certain SMP supply contracts, costing CRIC legal fees
and costs; that CRIC and Nukem are entitled to be indemnified for purchases of
uranium made on behalf of SMP; that USE and Crested failed to perform their
obligations under an Operating Agreement with SMP in a proper manner, resulting
in additional costs to SMP; that Registrant and Crested overcharged SMP for
certain services under the SMP Partnership Agreement and refused to allow SMP to
pay certain marketing fees to Nukem under the Uranium Marketing Agreement; that
USE and Crested breached the SMP Partnership Agreement by failing to maintain a
toll milling agreement with Pathfinder Mines Corporation, thereby rendering
SMP's uranium resources worthless; and that USE and Crested have engaged in
vexatious litigation against CRIC and Nukem. Defendants also requested damages
(including punitive, exemplary and treble damages under RICO, interest costs and
attorney fees).
Stipulated Arbitration. In fiscal 1994, the plaintiffs and defendants
agreed to proceed with exclusive, binding arbitration before a panel of three
arbitrators (the "Panel") with respect to any and all post-December 21, 1988
disputes, claims and controversies (including those brought in the 1991
arbitration proceedings, the U.S. District Court proceeding and the Colorado
State Court proceeding described below), that any party may assert against the
other. All pre-December 21, 1988 claims, disputes and controversies pending
before the U.S. District Court have been stayed by stipulation between the
parties, until the Panel enters an order and award in the arbitration
proceeding.
35
<PAGE>
In connection with agreeing to proceed to arbitration as stated above,
USE and Crested affirmed the Sheep Mountain Partners partnership, and proceeded
on common law damages and other claims in the arbitration. Approximately
$18,000,000 cash, comprising part of the damages claimed by plaintiffs, was
placed in escrow by agreement of the parties pending resolution of the disputes.
The arbitration evidentiary proceedings were completed on May 31, 1995,
following which the parties filed with the arbitrators proposed findings of fact
and conclusions of law and proposed order, award, briefs of law and responses to
the other party's submittals. NUKEM and CRIC sought damages against USECC in the
amount of $47,122,535. For its claims, USECC sought damages of approximately
$258,000,000 from Nukem and CRIC, which amount USECC requested be trebled under
the Racketeer Influenced and Corrupt Organizations Act ("RICO") and similar
state law provisions.
On April 18, 1996, the Arbitration Panel entered an Order and Award (the
"Order"). The Panel found generally in favor of USE and Crested on certain
claims made by USE and Crested (including the claims for reimbursement of
standby maintenance expense and other expenses on the SMP mines), and in favor
of Nukem/CRIC and against USE and Crested on certain other claims.
USE and Crested were awarded monetary damages of approximately
$7,800,000 with interest, which amount is after deduction of monetary damages
which the Panel awarded in favor of Nukem/CRIC and against USE and Crested. An
additional amount of approximately $4,800,000 was awarded by the Panel to USE
and Crested, to be paid out of cash funds held in SMP bank accounts, which
accounts have been accruing operating funds from SMP since the
arbitration/litigation proceedings were commenced.
The Panel ordered that one utility supply contract for 980,000 pounds of
uranium oxide held by Nukem/CRIC belonged to SMP, and ordered such contract
assigned to SMP. The contract expires in 2000.
The fraud and RICO claims of USE and Crested against Nukem and CRIC were
dismissed.
The timing and assurance of payment by Nukem/CRIC to USE and Crested of
the $7,800,000 monetary damages with interest is presently uncertain. On April
30, 1996 Nukem/CRIC filed with the Panel two motions (the "Nukem Motions")
requesting correction of the Order, claiming to have discovered errors and
inconsistencies in two of the 36 claims addressed in the Order that they allege
improperly increased the damages awarded to USE and Crested by an aggregate
amount exceeding $16,000,000.
On May 15, 1996, USE and Crested filed the Order (under seal with
respect to certain portions containing commercially sensitive information) with
the United States District Court for the District of Colorado (the "Court") and
a petition for confirmation of the Order. At a hearing on May 24, 1996 the Court
remanded the Order to the Panel for limited review of the Nukem Motions, without
taking further evidence. The petition for confirmation of the Order and motions
filed by USE and Crested for dissolution of SMP, for the appointment of a
receiver to oversee the obligations of SMP to make delivery of uranium
concentrates to utilities and supervise the formal dissolution of SMP, and for
an order directing distribution of the escrowed proceeds, were stayed by the
Court pending a ruling by the Panel on the Nukem Motions.
USE and Crested filed their opposition to the Nukem Motions with the
Panel on June 14, 1996. On July 3, 1996, the Panel entered an Order in
response to the Nukem motions and reaffirmed its April
18, 1996 Order and Award.
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<PAGE>
After a series of motions by the parties, the District Court entered
orders and a judgment on November 5, 1996 confirming the Panel's Order and
Award. In November 1996, USECC received the additional $4,367,000 awarded by the
Arbitration Panel out of SMP escrowed funds and its bank account per the Court's
November 5, 1996 Judgment. Thereafter, Nukem filed a motion to modify and/or
vacate portions of the Judgment and USECC filed a motion to modify one paragraph
of the Judgment deducting $265,213 from the amounts Nukem and CRIC claimed to
have advanced to purchase uranium for SMP. In December 1996, Nukem and CRIC
filed a notice with the 10th Circuit Court of Appeals ("CCA") appealing the
Court's November 5, 1996 Judgment. However, the 10th CCA held that appeal in
abeyance pending the issuance of the U. S. District Court's final judgment.
Following the hearing on USECC's motion to correct the Court's November
5, 1996 Order and Judgment and motions to enter a final judgment, on March 7,
1997, Judge Lewis T. Babcock of the U. S. District Court of Colorado entered an
"Order for Entry of Amended Judgment as Final," and an Amended Judgment as of
March 7, 1997. The Amended Judgment further confirmed the Order and Award of the
Panel but did not include equitable portion of the Award in favor of SMP.
In the March 7, 1997 Amended Judgment, which included rulings on some 12
monetary claims of the parties, Judge Babcock ordered Nukem to pay USECC a net
of approximately $8,465,000 as monetary damages. The Amended Judgment did not
contain the equitable relief granted in the Panel's Order and Award, so USE and
Crested filed another motion with the U.S. District Court to correct clerical
omissions. Nukem/CRIC opposed the motion but on June 30, 1997, the Court entered
its Second Amended Judgment ordering Nukem to assign the PSE&G contract to SMP
and impressing a constructive trust in favor of SMP on Nukem's rights to
purchase CIS uranium, the uranium acquired pursuant to those rights and the
profits therefrom. The District court also stayed USECC's right to execute on
the judgment against Nukem/CRIC when Nukem/CRIC posted a supersedeas bond in the
amount of $8,613,600. Thereafter, Nukem/CRIC filed a motion for clarification
and/or limited remand of the Second Amended Judgment. On August 13, 1997, the
U.S. District Court denied the motion so Nukem and CRIC now have until September
12, 1997 to file a notice of appeal with the Tenth Circuit Court of Appeals of
the June 30, 1997 Second Amended Judgment.
Colorado State Court Proceeding. On September 16, 1991, USE and Crested
filed Civil Action No. 91CV7082 in Denver District Court against SMP, seeking
reimbursement of $85,000 per month from the spring of 1991 for maintaining the
SMP underground uranium mines at Crooks Gap on a standby basis. On behalf of
SMP, CRIC filed an answer, affirmative defenses and a counterclaim against
plaintiffs. Plaintiffs filed a motion for summary judgment; the court denied the
motion and stayed all proceedings pending resolution of the Federal proceeding,
which in turn have been stayed through arbitration (see "Stipulated Arbitration"
above).
On July 17, 1997, USECC filed a lien on Nukem/CRIC's interest in the
mining claims subject of the SMP partnership for $523,553 being the standby
costs from March 31, 1996 to June 1, 1997 and $35,620 per month thereafter.
These are the amounts of Nukem/CRIC's share of the monies SMP owes USECC for the
expenses of care and maintenance of SMP's properties in Wyoming. USECC have six
months within which to foreclose the lien through a civil lawsuit.
BGBI Litigation
USE and Crested are defendants and counter- or cross-claimants in
certain litigation in the District Court of the Fifth Judicial District of Nye
County, Nevada, brought by Bond Gold Bullfrog Inc. ("BGBI") on July 30, 1991.
BGBI (now known as Barrick Bullfrog, Inc.) is an affiliate of Barrick Corp., a
large international gold producer headquartered in Toronto, Canada. The
litigation primarily concerns
37
<PAGE>
extralateral rights associated with two patented mining claims owned by Parador
Mining Company Inc. ("Parador") and initially leased to a predecessor of BGBI,
which claims are in and adjacent to BGBI's Bullfrog open pit and underground
mine. USE and Crested assert certain interests in the claims under an April 1991
assignment and lease with Parador, which is subject to the lease to BGBI's
predecessor.
Parador, USE and Crested had previously advised BGBI that they are
entitled to royalty payments with respect to extralateral rights of the subject
claims on minerals produced at the Bullfrog Mine, claiming that the lode or vein
containing the gold mineralization apexes on the Parador claims and dips under
the claims leased to BGBI by a third party.
BGBI seeks to quiet title to its leasehold interest in the subject
claims, alleging that Parador's lease thereof to USE and Crested is adverse to
the interest claimed by BGBI, and that the assertions by USE and Crested of an
interest in the claims have no foundation. BGBI seeks a determination that USE
and Crested have no rights in the claims and an order enjoining USE and Crested
from asserting any interest in them. BGBI further asserts that, in attempting to
lease an interest in the subject claims to USE and Crested, Parador breached the
provisions of its lease to BGBI, and that Parador is responsible for the legal
fees and costs incurred by BGBI in the quiet title action, which may be offset
against royalties. Under an arrangement to pay certain legal expenses of
Parador, USE and Crested may be responsible for any such amounts.
BGBI alleges that by entering into the Assignment and Lease of Mining
Claims with Parador, USE and Crested disrupted the contractual relationship
between BGBI and Parador. In addition, BGBI claims that the USECC-Parador
agreement slanders BGBI's title to the claims. BGBI seeks compensatory damages
from Parador, USE, and Crested; punitive damages from USE and Crested; and costs
and other appropriate relief from Parador, USE and Crested, all in amounts to be
determined.
A partial or bifurcated trial to the court of the extralateral rights
issues was held on December 11 and 12, 1995. The purpose of the hearing was to
determine whether the Bullfrog orebody is a "vein, lode or ledge" as described
in the General Mining Law and, if so, whether the facts of the case warrant the
application of the doctrine of extralateral rights as set forth in such statute.
Although the Court sat as both the finder of fact and law with respect to such
issues, the Court concluded that the questions are ultimately one of law which
must be decided based on the testimony and exhibits introduced at the trial
concerning the description of the orebody. USE, Crested and Parador presented
five experts in the field of geology, including the person who was responsible
for the discovery of the gold deposit at the mine. All five experts opined that
the deposit was a lode and it apexed on a portion of Parador's two mining
claims. The defendant H.B. Layne Contractor, Inc. ("Layne") presented a single
witness who testified that there was no apex within the Parador claims. The
Court nevertheless found that Parador had failed to meet its burden of proof and
therefore Parador, USE and Crested have no right, title and interest in the
minerals lying beneath the claims of Layne pursuant to extralateral rights. The
Court entered a partial judgment in favor of Layne and ordered that Parador pay
Court costs to Layne. Parador, USE and Crested filed an appeal of the Court's
ruling as erroneous as a matter of law and the Supreme Court of Nevada dismissed
the appeal as premature. The partial trial did not address any of the issues
pending in the litigation other than those required to decide the question of
whether the doctrine of extralateral rights is applicable to this case. All
other claims and counterclaims remain pending before the Court. The parties
intend to seek permission of the trial court to again appeal and/or try the
remaining issues in the case.
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<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 46, has been Controller and Chief Accounting
Officer for USE and Crested for more than the past five years. Mr. Lorimer also
has been Chief Financial Officer for both these companies since May 25, 1991,
and their Treasurer since December 14, 1990. He serves at the will of the Boards
of Directors. There are no understandings between Mr. Lorimer and any other
person, pursuant to which he was named as an officer, and he has no family
relationship with any of the other executive officers or directors of USE or
Crested. During the past five years, he has not been involved in any Reg. S-K
Item 401(f) listed proceeding.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
(a) Market information.
The principal trading market for the Registrant's Common Stock, $.001
par value, is the over-the-counter market. Prices are reported by the National
Quotation Bureau on Pink Sheets. The range of high and low bid quotations for
the Common Stock is set forth below for each quarter in the two most recently
completed fiscal years. Retail markup or markdown, or commissions, are not
reflected.
High Low
---- ---
Fiscal year ended May 31, 1997
------------------------------
Fourth quarter ended 5/31/97 $0.7187 $0.3437
Third quarter ended 2/28/97 0.9375 0.625
Second quarter ended 11/30/96 1.4375 0.875
First quarter ended 8/31/96 1.50 0.191
Fiscal year ended May 31, 1996
------------------------------
Fourth quarter ended 5/31/96 $1.94 $1.07
Third quarter ended 2/29/96 .16 1.75
Second quarter ended 11/30/95 .22 .19
First quarter ended 8/31/95 .38 .22
(b) Holders.
(b)(1) At September 3, 1997 there were 1,867 stockholders of record for
Crested common stock.
(b)(2) Not applicable.
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<PAGE>
(c) Crested has not paid any cash dividends with respect to its common stock.
There are no contractual restrictions on Crested's present or future ability to
pay cash dividends, however, Crested intends to retain any earnings in the near
future for operations.
(d) During the year ended May 31, 1997, Crested recorded the issuance of 81,600
shares of Common Stock for issue to non-employee directors, as compensation for
services. Such shares were issued in fact in fiscal 1998. In addition, 8,000
shares of Common Stock were issued to employees, as compensation for services.
No underwriter was involved in the transactions. All shares were issued as
restricted securities, in reliance on Sec. 4(2) exemption from registration
under the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
May 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current assets $1,049,500 $ 596,200 $ 512,600 $ 282,800 $ 432,500
Current liabilities 6,592,400 6,848,300 5,518,500 555,000 1,573,100
Working capital (5,542,900) (6,252,100) (5,005,900) (272,200) (1,140,600)
Total assets 6,285,700 8,132,500 8,097,800 8,092,900 7,398,200
Long-term obligations(1) 741,700 725,900 853,700 4,688,700 1,169,400
Shareholders' equity (1,092,300) 521,900 1,690,800 2,849,200 4,527,900
</TABLE>
(1) Includes $725,900, $725,900, $725,900, $847,800 and $847,800 of
accrued reclamation costs on uranium properties for fiscal 1997, 1996,
1995, 1994 and 1993, respectively.
<TABLE>
<CAPTION>
For Years Ended May 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $1,703,500 $2,509,200 $ 1,160,200 $ 2,870,000 $ 3,164,600
Income (loss) before
equity in loss of
affiliates, provision
for income taxes and
extraordinary item (862,400) (811,000) (1,031,100) (1,297,600) 41,300
Equity in (loss) of
affiliates (807,900) (357,900) (415,900) (657,600) (324,500)
Net income (loss) (1,670,300) (1,168,900) (1,447,000) (1,955,200) (283,200)
Income per share before
extraordinary item $(.16) $(.12) $(.14) $(.19) $ (.03)
Extraordinary item -- -- -- -- --
Net income (loss)
per share $(.16) $(.12) $(.14) $(.19) $ (.03)
Cash dividends per share -0- -0- -0- -0- -0-
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following is Management's Discussion and Analysis of significant
factors that have affected the Crested's liquidity, capital resources and
results of operations during the periods included in the accompanying financial
statements.
The Company has generated losses in the last three years, as a result of
holding costs and permitting activities in the mineral segment and gas
operations and from certain commercial operations. The Company is in the process
of developing and/or holding investments in gold and uranium properties that are
currently not generating any operating revenues, but for which the Company has
high expectations. These properties require expenditures for permitting,
development, care and maintenance, holding fees, corporate overhead and
administrative expenses, etc. In addition, legal expenses associated with the
litigation and arbitration surrounding the SMP Partnership and the inability of
the Company to utilize funds that have been awarded to the Company and USE by
the Arbitration Panel and confirmed by the Federal Court have compounded the
Company's operating and cash flow situation. Nevertheless, the Company believes
that it will meet its obligations in the coming year, as further discussed
below.
Liquidity and Capital Resources at May 31, 1997
Working Capital Components. Cash used in operating and financing
activities was $703,200 and $496,700, respectively for the year ended May 31,
1997. Cash provided by investing activities during fiscal 1997 was $1,184,400.
For the year, these activities resulted in a net decrease of $15,500 in cash. At
May 31, 1997, the Company had a working capital deficit of $5,542,900 as
compared to a working capital deficit of $6,252,100 at May 31, 1996.
The change in working capital of $709,200 is as a result of increases in
accounts receivable, inventory and other assets and a reductions of the line of
credit and debt to affiliates of $460,300, $14,700, $88,000 and $436,900
respectively. These increases in working capital were offset by reductions in
long-term receivables of $6,200 and increases in accounts payable of $256,600
and current portion of long-term debt of $12,400.
Accounts receivable affiliates increased by $454,600 primarily as a
result of increased amounts due to USECC from GMMV, $406,100 and SGMC of
$56,000. These amounts were paid after May 31, 1997. At May 31, 1996, the
Company owed $88,000 on the line of credit of $1,000,000 that the Company and
USE have. During fiscal 1997, this amount was paid off and at May 31, 1997 a
total of $1,000,000 remained available to the Company and USE on the line of
credit.
Cash used in financing resulted in a net decrease in debt to affiliates
of $436,900 and the line of credit of $88,000. Increased long-term debt payable
to non-affiliates of $28,200 is as a result of the Company financing various
prepaid working capital items.
Cash generated from investing activities were principally from proceeds
of a distribution of SMP and a reduction in the Company's ownership of Sutter
Gold Mining Company. In November 1996, the Company and USE received $4,300,000
from the SMP escrow accounts as partial satisfaction of the monetary damages
awarded by the Arbitration Panel. These funds were applied first to the amounts
due the Company and USE for standby costs. This reduced the Company's investment
in SMP by $1,384,000. The balance was recorded as income of which Crested's
portion was $501,900. The other major reduction in investments was as a result
of the Company and USE accepting contingent warrants
41
<PAGE>
from Sutter Gold Mining Company. The acceptance of these contingent warrants
reduced the investment in SGMC by $589,900 while at the same time $651,000 was
recorded as an investment in a contingent warrant.
Capital Requirements - General: The primary requirements for Crested's
working capital during fiscal 1997 are expected to be the costs associated with
development activities of Plateau (see "Capital Requirements - Plateau"), care
and maintenance costs of SMP, payments of holding fees for mining claims,
purchase of uranium for delivery to utility customers of SMP, overhead expenses
of Energx and corporate general and administrative expenses, including costs
associated with continuing litigation and arbitration.
Capital Requirements - SGMC: SGMC's properties contain reserves of gold.
Preliminary estimates are that a 500 ton per day ("tpd") mine/mill operation
using a cyanide-flotation process, will require up to $15,000,000 to place the
proposed mine and mill into full operation.
During the first and second quarters of fiscal 1997 SGMC sold 424,000
shares of its common stock in a private placement. These shares were sold for
$3.00 per share. SGMC received $1,106,600 in net proceeds after deducting
commissions and offering costs.
During the fourth quarter of fiscal 1997, as a result of a planned
equity offering, the initial investors of SGMC agreed to a 1 for 2 reverse stock
split, exclusive of the 424,000 private placement shares discussed above. In
addition to the reduction of the shares owned by founders and insiders, the
Company and USE agreed to have their holdings reduced from 870,469 common shares
and 6,964,531 common shares to 172,258 common shares and 1,503,060 common
shares, respectively.
In consideration of this reduction in their common shares owned, the
Company and USE accepted a Stock Purchase Warrant dated March 21, 1997 which
provides the Company and USE the right to acquire for no additional
consideration common shares of SGMC's $.001 par value common stock having an
aggregate value of $10,000,000. The Stock Purchase Warrant is only exercisable
to the extent proven and probable ore reserves, as defined in the Stock Purchase
Warrant, in excess of 300,000 ounces are added to SGMC's reserves based on $25
per ounce of proven reserves added to SGMC's reserves between 300,000 and
700,000 ounces. The number of shares issuable are based on the greater of $4.07
per share for the fair market value of SGMC's common stock (as defined). The
Stock Purchase Warrant has a term of ten years extending to March 21, 2007, and
is exercisable partially or in total, semi-annually beginning on June 30, 1997.
SGMC has the right to satisfy the exercise of all or any portion of the Stock
Purchase Warrant with net cash flows, as defined, at $25 for each new ounce of
proven and probable ore in excess of 300,000 ounces. The Stock Purchase Warrant
benefits the Company and USE on a basis of 11.1% and 88.9%, respectively.
It is anticipated that SGMC will sell an additional $10,000,000 in
equity during fiscal 1998. There can be no assurance that the IPO will be
successfully completed. If the offering is successful, no additional financing
will be needed to place the SGMC properties into production. If SGMC is not
successful in its offering of equity, other sources of capital will be required
to complete the mine and mill design and construction.
Capital Requirements - SMP: There are no current plans to mine the SMP
Crooks Gap properties during fiscal 1998, however, Crested and USE will continue
to preserve the ore bodies and develop concepts to reduce care and maintenance
costs, including driving a decline to reduce pumping costs (which also would
reduce future mining costs by reducing hoisting costs). Although funds are
42
<PAGE>
available in SMP's bank account of approximately $15,600,000 as of May 31, 1997,
these funds are restricted and have not been made available to pay standby
costs.
Notwithstanding disputes between the SMP partners, Crested and USE have
delivered an agreed-upon portion of the uranium concentrates required to fill
contract delivery requirements on certain long-term U3O8 contracts since July 1,
1991. During 1997 all of the deliveries to fill the SMP contracts were made by
Nukem. It is uncertain what protocol with Nukem will be in place for 1998 and
thereafter. If the SMP partners are unable to agree on how to separately effect
contract performance for the various SMP customers, resulting delivery delays
and/or incomplete deliveries could adversely affect the contracts, and therefore
Crested. Further, the Company and USE are awaiting Nukem's response to the
Federal Courts confirmation of the Arbitration panel's Award. Nukem has until
September 12, 1997 to file a notice of appeal with the Tenth Circuit Court of
Appeals. No assurance can be given on the outcome of a potential appeal.
Capital Requirements - GMMV: Operations of GMMV are not requiring
Crested's capital resources. On June 23, 1997, USE and USECC signed an
Acquisition Agreement with Kennecott for the right to acquire Kennecott's
interest in the Green Mountain Mining Venture ("GMMV") for $15,000,000 and other
consideration. Kennecott paid USE and USECC a $4,000,000 bonus on signing, and
committed to provide the GMMV up to $16,000,000 for payment of reimbursable
costs incurred by USECC in developing the proposed underground Jackpot Uranium
Mine for production and in changing the status of the Sweetwater Mill from
standby to operational.
The $16,000,000 loan being provided by Kennecott to the GMMV was
advanced to Kennecott by an affiliate, Kennecott Energy Company ("KEC") under a
secured recourse Promissory Note (the "Note") bearing interest at 10.5% per
annum starting April 1999 until paid in full. The Note is payable quarterly out
of 20% of cash flow from the GMMV properties, but not more than 50% of the
earnings for such quarter from the GMMV operations, before interest, income tax,
depreciation and amortization; however, the Note is payable (i) in full on June
23, 2010 regardless of cash flow and earnings of the GMMV, or (ii) sooner (on
December 31, 2005) if an economically viable uranium mine has not been placed
into production by such date. The Note is secured by a first mortgage lien
against Kennecott's 50% interest in the GMMV pursuant to a Mortgage, Security
Agreement, Financing Statement and Assignment of Proceeds, Rents and Leases
granted by Kennecott to KEC (the "Mortgage"). USE and USECC will assume the
Note, and the assets of the GMMV will be subject to the Mortgage, at closing of
the acquisition.
Pursuant to the Acquisition Agreement, the Mineral Lease, and the Mill
Contract, USECC is to develop the proposed Jackpot Mine and nearby Big Eagle
Mine, and work with Kennecott in preparing the Sweetwater Mill for renewed
operations. Such work will be funded from the $16,000,000 loan being provided to
the GMMV by Kennecott. Kennecott will be entitled to a credit against
Kennecott's original $50,000,000 commitment to fund the GMMV, in the amount of
two dollars of credit for each one dollar of such funds advanced under the
$16,000,000 loan to be provided by Kennecott to the GMMV, plus the $4,000,000
paid to USE and USECC on signing of the Acquisition Agreement. It is anticipated
that such credits will satisfy the balance of Kennecott's initial funding
commitment to the GMMV.
Closing of the Acquisition Agreement is subject to USE and USECC
satisfying several conditions, including: (i) the acquiring entity (which may be
USE, USECC, or an entity formed by USE and USECC to acquire Kennecott's interest
in the GMMV) must have a market capitalization of at least $200,000,000; (ii)
the parties to the Acquisition Agreement must have received all authorizations,
consents, permits and approvals of government agencies required to transfer
Kennecott's interest in the GMMV to the acquiring entity; (iii) USE and USECC
shall have replaced, or caused the replacement of, approximately
43
<PAGE>
$25,000,000 of reclamation bonds, in addition to other guarantees,
indemnification and suretyship agreements posted by Kennecott on behalf of the
GMMV; and (iv) USE and USECC, or the acquiring entity, must pay $15,000,000 cash
to Kennecott at closing and assume all obligations and liabilities of Kennecott
with respect to the GMMV (including repayment of the $16,000,000 loan and the
Mortgage) from and after the closing. Under very limited circumstances, the
scheduled closing date may be postponed to another date not later than October
30, 1998.
If the Acquisition Agreement is not closed by December 1, 1997, then USE
and USECC (or an entity formed by them to acquire the GMMV interest owned by
Kennecott) are to provide to Kennecott a commitment letter from a recognized
national investment banking firm to complete an underwritten public offering of
the securities of USE (or the entity formed to acquire Kennecott's interest), in
amount sufficient to close the Acquisition Agreement transactions. Such amount
is estimated by USE to be approximately $40,000,000 (for the $15,000,000 closing
cash purchase price to Kennecott, plus $25,000,000 to assume or cause the
replacement of reclamation bonds, guarantees, indemnification agreements and
suretyship agreements related to the GMMV properties and the Sweetwater Mill.
Alternatively, USE and USECC (or the acquiring entity) may provide evidence to
Kennecott of a commitment letter from a bank or other institutional or industry
entity to provide private or joint venture financing in such approximate amount.
Failure to provide evidence of such financial commitment by December 1, 1997
will terminate the Acquisition Agreement, the Mineral Lease and the Mill
Contract.
Subject to providing evidence of adequate financial resources to close
the Acquisition Agreement with funds from a public financing or otherwise, the
$4,000,000 signing bonus paid by Kennecott is nonrefundable.
If the Acquisition Agreement is not closed, USE and USECC, and
Kennecott, shall continue to own their respective 50% interests in the GMMV, and
Kennecott's obligation to repay the $16,000,000 loaned by KEC shall remain
Kennecott's obligation, without any adverse effect on the 50% interest in GMMV
held by USE and USECC. However, the Jackpot Mine development work and Sweetwater
Mill upgrade work funded by the $16,000,000 advance will have benefitted all
parties to the GMMV.
Capital Requirements - Plateau: On August 11, 1993, USE purchased all
the outstanding shares of Plateau Resources, Limited ("Plateau"). Plateau owns
various real estate developments in and around Ticaboo, Utah and the Shootaring
Uranium Mill. Although Crested has no ownership in Plateau, the Directors of
Crested and USE have agreed to divide equally one-half of the obligations
incurred in excess of the total $14.2 million which was held by Plateau at the
time of the USE acquisition. Management of Crested and USE are currently in the
process of having the Shootaring Mill license changed to operational. At such
time as the mill is licensed to operate, significant amounts of capital will be
required to place the mill and mines into operation. It is expected that these
funds will either be provided by cash received as a result of the SMP
arbitration, equity financing on the Plateau U3O8 assets or a joint venture
partner.
Capital Requirements - Energx: Another requirement of Crested's and
USE's working capital is the continued funding of Energx overhead expenses.
Energx held several gas leases and participated in one gas venture (on the Fort
Peck Indian reservation in Montana) with NuGas, a Canadian firm; the gas venture
required NuGas to fund the drilling of the first eight wells. The eight gas
wells were drilled and no economic production of gas was found. Energx does not
currently have any plans for future exploration or development drilling.
Capital Requirements - Yellow Stone Fuels Corp. ("YSFC"): In June 1996,
the Company and USE assisted YSFC in organizing and funded certain
administrative costs. The Company and USE each
44
<PAGE>
own 14% of YSFC. The president and vice president of YSFC are the son and
son-in-law, respectively, of Company's Chairman. On May 15, 1997, the Company
and USE signed a $400,000 convertible promissory note with YSFC which bears
interest at 10% and is due December 1998. The debt is repayable at YSFC's option
in cash or its common stock.
Long-Term Debt and Other Obligations: Debt at May 31, 1997 was
$6,035,800. Of the debt, $6,023,400 is due to USE as a result of advances that
USE made on behalf of Crested in the various mining operations in which the
companies participate jointly. It is not anticipated that USE will demand
payment on any of this debt in fiscal 1998 unless funds are received from the
arbitration proceedings. At May 31, 1997, Crested signed a promissory note in
favor of USE in the amount of $6,023,407. The note bears interest at 6% and is
due on October 1, 1999.
Reclamation Costs. Prior to fiscal 1996, Crested and USE assumed the
reclamation obligations, environmental liabilities and contingent liabilities
for employee injuries, from mining the Crooks Gap and other properties in the
Sheep and Green Mountain Mining Districts. The reclamation obligations, which
are established by governmental regulators, were most recently set at
$1,451,800, one half of which amount, $725,900, is shown on Crested's balance
sheet as a long-term obligation.
To assure the reclamation work will be performed, regulatory agencies
require posting of a bond or other security. Crested and USE satisfied this
requirement with respect to SMP properties by mortgaging their executive office
building in Riverton, Wyoming. Crested and USE have also posted a cash bond in
the amount of $176,000 for this reclamation bond. Crested and USE are
negotiating with government agencies to decrease the $176,000 cash bond and
either forego the additional collateral or take other real estate and
improvements with equal value. A portion of the funds for the reclamation of
SMP's properties was to have been provided by SMP, which agreed to pay up to
$.50 per pound of uranium produced from its properties to Crested and USE for
reclamation work. The status of this commitment could be impacted by the
ultimate resolution of the litigation with SMP.
Reclamation obligations on the contiguous Big Eagle properties and the
Sweetwater Mill, estimated at approximately $23,620,000, have been assumed by
the GMMV venturers, and secured by a bank letter of credit provided by
Kennecott. The reclamation and environmental costs associated with the
Sweetwater Mill will not commence prior to conclusion of mining activities on
Green Mountain. As uranium is processed through the Mill, a reclamation reserve
will be funded on a per unit of production basis. Up to $8,000,000 (in 1990
dollars) in any reclamation costs which may be incurred prior to commencement of
production or 2001 will be paid for by UNOCAL.
Reclamation obligations of Plateau are covered by a $6,883,500 cash bond
at May 31, 1997 to the U.S. Nuclear Regulatory Commission and a $1,622,800 cash
deposit as of May 31, 1997 for the resolution of any environmental or nuclear
claims.
Reclamation work on any of the above properties need not be fully
completed until a decision is made to abandon the properties, or as otherwise
required by regulatory agencies. Reclamation and environmental costs associated
with any of these properties are not expected to require Crested funding in
fiscal 1998, because such costs are not anticipated to be incurred for many
years.
See Note K to the Crested consolidated financial statements regarding
reclamation and environmental costs, and the funding thereof.
Capital Resources: The primary source of Crested capital resources for
fiscal 1998 will be cash on hand, advances from USE, equity financing for
affiliated companies, the resolution of the
45
<PAGE>
arbitration/litigation with Nukem and commercial debt. Additionally, Crested and
USE will continue to offer for sale various non-core assets such as lots and
homes in Ticaboo, real estate holdings in Wyoming, Colorado and Utah and mineral
interests. Fees from oil production (Ft. Peck Lustre Field, Montana), rentals of
real estate holdings and equipment, aircraft chartering and aviation fuel sales,
also will provide cash.
Additional sources of capital will be needed to develop and build the
mine and mill complex for the Lincoln Project, for which capital costs SGMC
presently is seeking equity financing. There is no certainty as to the outcome
of these efforts. Continued funding of such costs could cause Crested and USE to
incur short term working capital deficiencies and increase the Company's working
capital deficit.
Funding of SMP care and maintenance costs may require additional
capital, depending on the outcome of the SMP arbitration/litigation. Although
management is of the opinion that the SMP arbitration/litigation will be
resolved in favor of Crested and USE during fiscal 1998, which will result in
funds being available to fund projects, this outcome is not assured. In any
event, further delays in resolution of the arbitration are expected, and may
exacerbate short term liquidity requirements.
Crested believes available working capital excluding the debt to
affiliates, operating revenues and anticipated financing will continue to be
adequate to fund working capital requirements. However, Crested may require
continued support from USE and additional sources of funding to continue the
development of and investment in its various mineral ventures, as stated above.
Although Crested and USE currently are not in production on any mineral
properties, development work continues on several of their major investments.
Crested and USE are not using hazardous substances and known pollutants to any
great degree in these activities. Consequently, recurring costs for managing
hazardous substances, and capital expenditures for monitoring hazardous
substances or pollutants have not been significant. Likewise, Crested and USE do
not have properties which require current remediation. Crested and USE are also
not aware of any claims for personal injury or property damages that need to be
accrued or funded.
The tax years through May 31, 1991 are closed after audit by the IRS.
Crested currently has filed a request for an appeal hearing on an IRS agent's
findings for the years ended May 31, 1993 and 1994. Although the findings of the
IRS audit for 1993 and 1994 will not cause any additional tax to become due to
the Government, the findings of the audit could affect the tax net operating los
of the Company. Management of Crested feels confident that they will prevail on
the majority of the issues. No assurance of the outcome of the appeal can be
given.
Results of Operations
Fiscal 1997 Compared to Fiscal 1996
Revenues for the twelve months ended May 31, 1997 totaled $1,703,500 as
compared to revenues at May 31, 1996 of $2,509,200. This decrease in revenues of
$805,700 is primarily as a result of no revenues being recognized from mineral
sales in fiscal 1997 (decrease of $1,558,400). During the prior year Crested and
USE had made certain deliveries of U3O8 for SMP. Other decreases in revenues
were oil sales, $22,800; sales of assets, $147,800, and interest, $58,800. These
decreases in revenues were offset by increased commercial sales, $79,300;
advance royalties from Climax, $103,600; partial distribution of SMP funds,
$501,900, and increased management fees and other revenues, $297,300.
46
<PAGE>
With the exception of mineral operations and bad debt expense, costs and
expenses remained the same as they had been in 1996. Mineral operations declined
by $1,364,600 primarily as a result of Crested and USE not delivering any U3O8
under the SMP contracts. Bad debt expense increased as a result of a provision
for doubtful accounts of $570,800 which was taken as a result of a third party
defaulting on a note payable on certain real estate that Crested sold in a prior
year. Crested also wrote off an investment of $71,500 in a mining property that
was abandoned. The increases in general and administrative expenses were reduced
by overhead and direct charges to GMMV, SMP and SGMC.
Equity losses recognized by Crested increased by $450,100. This increase
was as a result of increases of the equity losses in SGMC, YSFC, and SMP. These
increases in equity losses were offset by a reduction in equity losses in
Energx. Additionally, there was no equity income recognized from USE in fiscal
1997 while there was equity income of $73,500 in fiscal 1996.
Operations resulted in a net loss of $1,670,300 or $(.16) per share in
1997 as compared to a net loss of $1,168,900 or $(.12) in 1996.
Fiscal 1996 Compared to Fiscal 1995
Revenues increased by $1,349,000 to $2,509,200 for the year ended May
31, 1996. This increase was primarily due to an increase of $1,558,400 in
mineral sales and option (primarily as a result of U3O8 deliveries made in
fiscal 1996 to two of the utilities who have contracts with SMP). No deliveries
were made by Crested or USE during the year ended May 31, 1995. Due to the
litigation/arbitration between Crested, USE and Nukem/CRIC, virtually all SMP
deliveries have been in dispute. Certain deliveries are made 100% by either
partner, while others are delivered on agreed to percentages. Crested and USE
have turned over any profits they have made on these deliveries to SMP. Due to
the difficulties between Crested, USE and Nukem/CRIC.
The gain in mineral sales revenue during fiscal 1996 was offset in part
by a reduction of $318,300 in gain on sale of assets. This decrease was a result
of large gains recognized on the sale of real estate in Colorado in fiscal 1995.
No comparable sales took place during fiscal 1996 except for the sale of
Crested's and USE's mobile home park on which a gain of $126,300 was recognized.
Expenses from mineral operations increased by $958,900 to $1,786,000.
This increase is directly a result of the cost of U3O8 sold during fiscal 1996,
as no U3O8 was sold during fiscal 1995 due to disputes between the SMP partners
relating to contract deliveries. This increase was partially offset by a
reduction mineral operations expense associated with mining properties.
General and administrative costs and expenses increased by $204,400 to
$642,200 primarily as a result of costs associated with the SMP litigation. The
increased costs are related to amounts paid to lawyers, expert witnesses and the
Arbitrators.
Operations resulted in a before tax and equity loss in affiliates of
$811,000 for fiscal 1996 as compared to a loss of $1,031,100 for fiscal 1995.
This reduction in the operating loss is due to the increased mineral sales and
option revenues and reduced mine property holding costs and expenses.
Equity losses in affiliates have been recorded using the equity method.
Please refer to Notes A and E to the consolidated financial statements. After
accounting for equity losses of $357,900 and $415,900 for fiscal 1996 and 1995,
respectively, operations resulted in losses of $1,168,900, $.12 per share, and
$1,447,000, $.14 per share, for the fiscal years ended May 31, 1996 and 1995,
respectively.
47
<PAGE>
EFFECTS OF CHANGES IN PRICES
Mining operations and the acquisition, development and disposition of
mineral properties are significantly affected by changes in mineral commodity
prices. As prices for a particular mineral increase, prices for prospects for
that mineral also increase, making acquisitions of such properties more costly
and difficult, and dispositions advantageous and easier. Conversely, a mineral
commodity price decline facilitates acquisitions of properties for that mineral,
but makes sales of such properties more difficult and less attractive.
Operational impacts of changes in mineral commodity prices are common in the
mining industry.
Uranium and Gold.
Changes in the prices of uranium and gold affect the Registrant to the
greatest extent, as its principal holdings are of prospects for those minerals.
When uranium prices were relatively high in fiscal 1988, USE and Crested
acquired the Crooks Gap properties, and thereafter put the properties into
production. When uranium prices fell sharply during fiscal 1989-1991, USECC
suspended mining operations for SMP, because uranium could be purchased at
prices less than the costs of producing uranium. Uranium production in the
United States reportedly fell by 25% to 33% in 1990, due to the lowest prices
for uranium since the market developed in the 1960s.
Changes in uranium prices directly affect the profitability of SMP's
uranium supply agreements with electric utilities. Certain of those agreements
become advantageous to the Registrant when the spot market price for uranium
falls significantly below the price which a utility has agreed to pay. Some of
the supply agreements of SMP were acquired before the fall of uranium spot
market prices during fiscal 1989-1991. Those fixed-price contracts, which have
contract prices exceeding current spot market rates, are currently advantageous
to the Registrant, as the uranium to fill them can be readily obtained at
favorable prices. Although such contracts benefit SMP and the Registrant in a
falling market, a corresponding adverse impact would not be anticipated in the
event of substantially increased prices. SMP would produce uranium from its
Crooks Gap properties to fill those contracts, in the event of a prolonged
increase in the spot market price above the contract prices.
With the acquisition of its interest in SGMC and its Lincoln Mine, gold
prices directly affect the Registrant. Crested believes SGMC's Lincoln Mine will
be profitable with gold prices over $290 per ounce. The price of gold has
remained relatively stable over the past year between $370 and $390 per ounce.
Molybdenum and Oil.
Changes in prices of molybdenum and petroleum are not expected to
materially affect the Registrant with respect to either its molybdenum advance
royalties or its fees associated with oil production. A significant and
sustained increase in the price of molybdenum would be required for the
development of the Mt. Emmons properties by Cyprus Amax.
ITEM 8. 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).
48
<PAGE>
Report of Independent Public Accountants
To Crested Corp.:
We have audited the accompanying consolidated balance sheets of CRESTED CORP. (a
Colorado corporation), AND AFFILIATE as of May 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended May 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note G, the note payable to U.S. Energy is currently due on
October 1, 1999. However, U.S. Energy may unilaterally accelerate the due date
of this note given its majority control over the Company, even though management
of U.S. Energy has no current intentions to do so. Crested's current projections
indicate that there may not be sufficient cash flow from operations to fund that
obligation when due and it continues to rely on advances from U.S. Energy to
fund its current operating requirements. If Crested is unable to generate
sufficient funds from operations or other sources, it may be required to sell
certain assets in order to satisfy such obligations to U.S. Energy.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Crested Corp. and affiliate as
of May 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended May 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
August 15, 1997.
49
<PAGE>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED BALANCE SHEETS
<TABLE>
ASSETS
<CAPTION>
May 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 37,100 $ 52,600
Accounts receivable
Trade, net of allowance for doubtful
accounts of $3,200 and $7,000,
respectively 63,900 58,200
Affiliates 596,200 141,600
Current portion of long-term receivables (Note C)
Related parties 304,000 210,100
Other -- 100,100
Inventory and other 48,300 33,600
----------- ----------
TOTAL CURRENT ASSETS 1,049,500 596,200
LONG-TERM RECEIVABLES (Note F):
Related parties 292,100 --
Real estate sales, net of valuation
allowance of $882,900 182,500 689,200
INVESTMENTS IN AFFILIATES,
(Notes B and E): 1,796,800 4,344,700
INVESTMENT IN CONTINGENT
STOCK PURCHASE WARRANT 651,000 --
PROPERTIES AND EQUIPMENT (Notes B, C, D and F):
Land and mobile home park 397,400 397,400
Buildings and improvements 2,243,200 2,185,100
Aircraft and related equipment 1,640,000 1,634,700
Developed oil properties, full cost method 886,800 886,800
Undeveloped mining properties 13,900 85,400
----------- ----------
5,181,300 5,189,400
Less accumulated depreciation,
depletion and amortization (3,017,700) (2,832,800)
----------- ----------
2,163,600 2,356,600
OTHER ASSETS 150,200 145,800
----------- ----------
$ 6,285,700 $8,132,500
=========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
</TABLE>
50
<PAGE>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED BALANCE SHEETS
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
May 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 556,600 $ 300,000
Line of credit (Note G) -- 88,000
Current portion of long-term debt 12,400 --
Debt to affiliates (Note G) 6,023,400 6,460,300
----------- ---------
TOTAL CURRENT LIABILITIES 6,592,400 6,848,300
LONG-TERM NOTE PAYABLE 15,800 --
ACCRUED RECLAMATION COSTS (Note K) 725,900 725,900
COMMITMENTS AND CONTINGENCIES (Note K)
FORFEITABLE COMMON STOCK, $.001 par value;
issued 65,000 and 57,000 shares, respectively,
forfeitable until earned (Note J) 43,900 36,400
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;
10,237,694 and 10,156,094 shares
issued and outstanding, respectively 10,200 10,100
Additional paid-in capital 6,375,400 6,319,400
Accumulated deficit (7,477,900) (5,807,600)
----------- ---------
Total shareholders' equity (1,092,300) 521,900
----------- ---------
$ 6,285,700 $ 8,132,500
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
</TABLE>
51
<PAGE>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Mineral sales and option (Note E) $ -- $ 1,558,400 $ --
Commercial operations 488,300 409,000 407,900
Oil sales 82,300 105,100 97,300
Royalties from mineral properties
agreements (Note F) 103,600 -- 42,700
Gain on sale of assets (Notes D and F) 28,900 176,700 495,000
Interest 38,500 97,300 18,100
Distribution from affiliate in excess
of cost basis 501,900 -- --
Management fees and other (Note C) 460,000 162,700 99,200
----------- ----------- -----------
1,703,500 2,509,200 1,160,200
----------- ----------- -----------
COSTS AND EXPENSES:
Mineral operations 421,500 1,786,100 827,200
Abandoned mineral claims 71,500 -- --
Provision for doubtful accounts 570,800 -- --
Commercial operations 873,500 806,900 828,200
Oil production 48,400 36,300 39,000
Interest 30,900 48,700 59,100
General and administrative 549,300 642,200 437,800
----------- ----------- -----------
2,565,900 3,320,200 2,191,300
----------- ----------- -----------
LOSS BEFORE EQUITY IN LOSS
OF AFFILIATES AND INCOME TAXES (862,400) (811,000) (1,031,100)
EQUITY IN LOSS OF AFFILIATES (Note E) (807,900) (357,900) (415,900)
----------- ----------- -----------
LOSS BEFORE INCOME TAXES (1,670,300) (1,168,900) (1,447,000)
INCOME TAXES (Note H) -- -- --
----------- ----------- -----------
NET LOSS $(1,670,300) $(1,168,900) $(1,447,000)
=========== =========== ===========
PER SHARE AMOUNTS:
NET LOSS PER SHARE $ (.16) $ (.12) $ (.14)
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 10,266,109 10,156,094 10,156,094
=========== ========== ==========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
52
<PAGE>
CRESTED CORP. AND AFFILIATE
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(As Restated (Notes B and J))
<CAPTION>
Additional Total
Common Stock Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
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
Issuance of stock to
outside directors 81,600 100 56,000 -- 56,100
Net loss -- -- -- (1,670,300) (1,670,300)
---------- --------- ------------- ------------ ------------
Balance, May 31, 1997 10,237,694 $ 10,200 $ 6,375,400 $ (7,477,900) $ (1,092,300)
========== ========= ============= ============ ============
Shareholders' Equity at May 31, 1997 does not include 65,000 shares currently
issued but forfeitable if certain conditions are not met by the recipients.
However, both the "Outstanding Shares at September 11, 1997" on the cover page
and the "Weighted Average Shares Outstanding" on the consolidated Statement of
Operations include the forfeitable shares.
</TABLE>
53
<PAGE>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,670,300) $(1,168,900) $(1,447,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, depletion, and amortization 183,600 252,400 259,100
Equity in loss of affiliates 807,900 357,900 415,900
Provision for doubtful accounts 574,600 -- --
Non-cash compensation 76,300 1,600 135,200
Gain on sale of assets (28,900) (176,700) (495,000)
Distribution from affiliate in
excess of cost basis (501,900) -- --
Loss on sale of investments -- -- 8,700
Abandonment of mineral claims 71,500 -- --
Net changes in:
Accounts and notes receivable (457,900) (34,500) (31,300)
Inventory and other assets (14,700) 21,700 (8,800)
Accounts payable and accrued expenses 256,600 (629,100) 1,024,200
----------- ----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (703,200) (1,375,600) (139,000)
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)
Decrease (increase) in long-term receivables (668,400) (73,900) 3,800
Development of mining claims -- -- (1,700)
Proceeds from sale of property and equipment 30,000 437,100 190,900
Purchases of property and equipment (64,500) (127,100) (16,100)
Proceeds from (investments in) affiliates 1,891,400 (575,400) (600,800)
Increase in other assets (4,100) (88,000) --
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 1,184,400 (555,100) (402,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from third party debt -- 77,600 68,900
(Payments) proceeds on/from line of credit, net (88,000) (392,000) 480,000
Increase in long-term debt 28,200 2,343,900 --
Proceeds from non-affiliated debt -- -- 75,100
Payments on long-term debt to affiliates (436,900) (70,600) (160,900)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (496,700) 1,958,900 463,100
(continued)
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
54
<PAGE>
CRESTED CORP. AND AFFILIATE
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<CAPTION>
Year Ended May 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (15,500) 28,200 (77,900)
CASH AND CASH EQUIVALENTS, Beginning of year 52,600 24,400 102,300
--------- ---------- -----------
CASH AND CASH EQUIVALENTS, End of year $ 37,100 $ 52,600 $ 24,400
========= ========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 30,900 $ 116,300 $ 49,700
========= =========== ===========
Income taxes paid $ -- $ -- $ --
========= =========== ===========
Noncash investing and financing activities:
Issuance of common stock to officers
and directors for services rendered $ 63,600 $ 1,600 $ 1,200
========= =========== ===========
Note receivable on sale of property $ -- $ -- $ 1,125,100
========= =========== ===========
Offset of account receivable from related
party against payable to parent $ -- $ -- $ 434,000
========= =========== ===========
Exchange of affiliate shares for contingent
stock purchase warrant $ 651,000 $ -- $ --
========= =========== ===========
Issuance of stock to outside directors $ 56,100 $ -- $ --
========= =========== ===========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
55
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
A. BUSINESS ORGANIZATION AND OPERATIONS:
Crested Corp. (the "Company" or "Crested") was incorporated in the State
of Colorado on September 18, 1970. It engages in the acquisition, exploration,
sale and/or development of mineral properties, mining and marketing of minerals.
Principal mineral interests are in uranium, gold and molybdenum. However, none
are producing at the present time. Currently, the Company holds various real
properties used in commercial operations and engages in the exploration,
development and production of petroleum. Most of these activities are conducted
through the joint venture discussed below and in Note B.
The Company and U.S. Energy Corp. ("USE"), an approximate 52%
shareholder of the Company (see Note J), are engaged in two ventures to develop
certain uranium properties, one a joint venture with Kennecott Uranium Company
("Kennecott") known as the Green Mountain Mining Venture ("GMMV"), and the
second a partnership with Nukem, Inc. ("Nukem") through its wholly owned
subsidiary Cycle Resource Investment Corporation ("CRIC") known as Sheep
Mountain Partners ("SMP"). Subsequent to May 31, 1997, the Company and USE
entered into an Agreement with Kennecott whereby they may purchase Kennecott's
interest in the GMMV if certain conditions are met (see Note L). During fiscal
1991, the Company and USE formed USECC Gold Limited Liability Company ("USECC
Gold"), and with Seine River Resources Inc. ("SRRI") operated Sutter Gold
Venture ("SGV") to develop certain gold properties. USECC Gold acquired SRRI's
remaining interest in SGV during fiscal 1994 and then owned 100% of SGV. During
fiscal 1995, SGV was terminated when USE and Crested formed a new Wyoming
corporation, Sutter Gold Mining Company, and exchanged their interests in USECC
Gold for common stock of Sutter Gold Mining Company (hereafter, "SGMC"). During
fiscal 1997, SGMC sold shares in two private placements and the Company and USE
accepted contingent stock purchase warrants in exchange for certain shares
previously held in SGMC. These activities combined reduced the Company's share
ownership interest in SGMC to approximately 3.2% (see Notes E and F).
The Company has a significant working capital deficit which has been
impacted by the litigation/arbitration with Nukem and CRIC, which is discussed
in Note K. Expenditures made on behalf of SMP are recorded as an investment in
SMP. In November 1996, the Company and USE received $4,367,000 (of which
one-half was attributable to the Company) as partial resolution of the monetary
damages in the SMP arbitration/litigation. This entire amount was applied to the
Company's investment in SMP. After cost recovery, a total of $501,900 was
recognized as income by the Company (see Note E). Recovery of the Company's
advances and improvement in its liquidity position are dependent on the ultimate
outcome of this litigation/arbitration. This matter has also impacted the
Company's ability to pay its obligations to its affiliates, primarily USE. As of
May 31, 1997, the Company owes USE $6,023,400.
56
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements of Crested and affiliate (USECC
Joint Venture ("USECC")) include the accounts of the Company and one-half of the
account balances of USECC, a joint venture through which the Company and its
controlling shareholder USE, conduct the bulk of their operations. USECC has
interests in uranium mining ventures (see Notes E and F), and owns real estate
and other equipment (see Note D). USECC is owned equally by the Company and USE.
Investments
Investments in other joint ventures and 20% to 50% owned companies are
accounted for by the equity method. The Company accounts for its 8% investment
in USE using the equity method because the Company is controlled by USE (52%
shareholder). Investments in other companies of less than 20% are accounted for
by the cost method (see Note E). All material intercompany profits, transactions
and balances have been eliminated.
Inventory
Inventory consists of aviation fuel and associated aircraft supplies.
The inventory is carried at the lower of cost or market.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The carrying amount
of cash equivalents approximates fair value because of the short maturity of
those instruments.
Properties and Equipment
Land, buildings, improvements and other equipment are carried at the
Company's share of cost.
Depreciation of buildings, improvements and other equipment is provided
by the straight-line and declining-balance methods over the estimated useful
lives of three to forty-five years.
The Company capitalizes all costs associated with the acquisition,
exploration and development of mineral properties as incurred. Capitalized costs
are charged to operations at the time the Company determines that no economic
ore bodies exist on such properties. Costs and expenses related to general
corporate overhead are expensed as incurred.
The Company and USE have acquired substantial mining property assets and
associated facilities at minimal cash cost, primarily through the assumption of
reclamation and environmental liabilities. These assets are owned by various
ventures accounted for by the equity method. Accordingly, the market
57
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
value of these assets and most of the reclamation and environmental liabilities
associated with them are not reflected in the accompanying consolidated balance
sheets (see Note K).
Proceeds from the sale of undeveloped mineral properties are treated as
a recovery of cost with any excess of proceeds over cost recognized as gain.
The Company follows the full-cost method of accounting for oil and gas
properties whereby all costs incurred in the acquisition, exploration and
development of the properties, including unproductive wells, are capitalized,
limited to the present value of the estimated proved reserves, and the lower of
cost or estimated fair value of unproved properties.
Depreciation, depletion and amortization of oil and gas properties are
provided by the units of production method based on the estimated recoverable
reserves. All oil and gas properties were fully amortized at May 31, 1997.
Long-lived Assets - The Company evaluates potential impairment of
long-lived assets and long-lived assets to be disposed of in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121"). SFAS No. 121 establishes procedures for review of
recoverability, and measurement of impairment if necessary, of long-lived assets
and certain identifiable intangibles held and used by the entity. SFAS No. 121
requires that those assets be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be fully
recoverable. SFAS No.121 also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less estimated selling costs. As of May 31, 1997,
management believes that there has not been any impairment of the Company's
long-lived assets or other identifiable intangibles.
Fair Value of Financial Instruments - The recorded amounts for cash and
cash equivalents, receivables, other current assets, and accounts payable and
accrued expenses approximate fair value due to the short-term nature of these
financial instruments.
Revenue Recognition
Advance royalties which are payable only from future production or which
are non-refundable are recognized as revenue when received. Revenue from
commercial operations are recognized as goods and services are delivered. Oil
and gas sales revenue is recognized as the products are produced (see Notes D
and F).
Net Loss Per Share
Net loss per share is computed using the weighted average of common
shares outstanding during each period. Stock options outstanding are deemed to
be common stock equivalents but have been excluded because they are
antidilutive. Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
which established standards for computing and presenting earnings per share, is
effective for years
58
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
ending after December 15, 1997. Management does not believe the adoption of SFAS
128 will materially affect reported earnings per share.
Income Taxes
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for
Income Taxes". This statement requires recognition of deferred income tax assets
and liabilities for the expected future income tax consequences, based on
enacted tax laws, of temporary differences between the financial reporting and
tax bases of assets, liabilities and carry forwards.
SFAS No. 109 requires recognition of deferred tax assets for the
expected future effects of all deductible temporary differences, loss
carryforwards and tax credit carryforwards. Deferred tax assets are then
reduced, if deemed necessary, by a valuation allowance for any tax benefits
which, based on current circumstances, are not expected to be realized.
Reclassifications
Certain reclassifications have been made in the 1996 and 1995 financial
statements to conform to the classifications used in 1997.
Management's Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period.
Actual results could differ from those estimates.
C. RELATED-PARTY TRANSACTIONS:
The Company does not have employees, but utilizes USE's employees and
pays for one-half of the costs of these employees under the USECC Agreement. The
Board of Directors of USE adopted the U.S. Energy Corp. 1989 Employee Stock
Ownership Plan ("ESOP") in 1989, for the benefit of USE's employees. In fiscal
1997, 1996 and 1995, the Board of Directors of USE contributed 24,069, 10,089
and 37,204 shares of USE stock to the ESOP at prices of $8.87, $8.65 and $5.38
per share, respectively. The Company is responsible for one-half of the value of
these contributions or $106,800, $43,700 and $100,000 in fiscal 1997, 1996 and
1995, respectively.
As of May 31, 1997, the Company had notes receivable due from certain
officers and employees of the Company and USE totaling $290,000 which bear
interest at 10% per annum and are due in fiscal 1998. A portion of these notes
receivable are collateralized by 160,000 shares of USE stock which are owned by
a director of the Company. In addition, the Company has receivables from certain
other employees of $76,600. The Company also has advances to affiliates of
$825,700.
59
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
The Company and USE provide management and administrative services for
affiliates under the terms of various management agreements. Revenues from these
services provided by the Company were $329,900, $116,500 and $99,200 in fiscal
1997, 1996 and 1995, respectively.
In November 1992, the Company entered into a sale agreement, and sold
certain machinery and equipment to an affiliate. This machinery and equipment
was being rented from the affiliate on a month- to month basis for $6,800 per
month and was charged to commercial operations in the accompanying consolidated
statement of operations. The Company had deferred the gain of $127,800 on this
sale. In fiscal 1996, the affiliate was sold and USE and Crested repurchased the
same equipment from the buyer. The deferred gain offset Crested's portion of the
purchase price of the assets.
On May 15, 1997, the Company and USE entered into a convertible
promissory note with Yellow Stone Fuels Corp. ("YSFC"). The Company and USE each
own 14.3% of YSFC. The convertible note bears interest at 10% and is due on
December 31, 1998. YSFC can at its option either repay the debt with cash or its
common stock. However, if YSFC defaults in paying the note on December 31, 1998,
the note is convertible into a number of shares which will give USE and Crested
a combined 51% ownership interest in YSFC.
See Note J with respect to stock grants to employees of USE who provide
services to the Company.
D. USECC JOINT VENTURE:
USECC operates the Glen L. Larsen office complex; an aircraft hangar
with a fixed base operation and office space; certain aircraft; holds interests
in various minerals operations including SMP and the GMMV; conducts oil and gas
operations; and transacts all operating and payroll expenses, except for
specific expenses which are allocated directly to each venturer. In addition,
through April 1996 USECC operated Wind River Estates ("Wind River"), a 100 unit
mobile home park. During 1996, USECC sold Wind River (which had a net book value
of approximately $512,700) to Arrowstar Investment, Inc. ("Arrowstar"), an
entity which is owned by family members of the Company's chairman. USECC
recognized a gain of $252,600 on this sale of Wind River of which 50% or
$126,300 is Crested's portion and is reflected as a gain on sale of assets in
the accompanying statements of operations. The Company received consideration of
$765,300 for Wind River. The $765,300 was comprised of the following:
Cash $ 500,000
Note receivable 56,000
Debt forgiven 47,900
50% interest in First-N-Last LLC 161,400
----------
$ 765,300
==========
60
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
The debt forgiven was an amount due to Arrowstar from USECC.
First-N-Last LLC owns and operates a convenience store near Lake Powell in Utah.
Subsequently, USECC then transferred its acquired 50% ownership in First-N-Last
LLC to Plateau Resources Limited, a 100% owned subsidiary of USE.
The joint venture agreement also provides for the allocation of certain
operating expenses to other affiliates. Condensed financial information of
USECC, of which 50% is proportionately consolidated by the Company, follows.
CONDENSED BALANCE SHEETS - USECC
May 31,
-------------------------------
1997 1996
---- ----
Current assets $ 1,468,100 $ 735,200
Properties and equipment 7,858,300 7,731,500
Undeveloped mineral properties 27,900 27,900
Accumulated depreciation (3,623,600) (3,253,700)
Other long-term assets 2,583,500 4,514,700
----------- -----------
$ 8,314,200 $ 9,755,600
=========== ===========
Current liabilities $ 1,139,400 $ 704,900
Reclamation liability 1,451,900 1,451,900
Other liabilities 31,500 75,000
Venturers' capital 5,691,400 7,523,800
----------- -----------
$ 8,314,200 $ 9,755,600
=========== ===========
CONDENSED STATEMENTS OF OPERATIONS - USECC
Year Ended May 31,
----------------------------------------------
1997 1996 1995
---- ---- ----
Revenues $ 3,043,600 $ 4,855,500 $ 2,225,600
Costs and expenses (3,963,500) (6,789,300) (4,453,600)
------------ ------------ ------------
Net loss $ (919,900) $ (1,933,800) $ (2,228,000)
============ ============ ============
61
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
E. INVESTMENTS IN AFFILIATES:
The Company's investments in affiliates are as follows:
Carrying Value at May 31,
----------------------------------------
Ownership 1997 1996
--------- ---- ----
Equity Method Investments:
GMMV 25% $ 116,300 $ 116,300
SGMC* 3.2% 417,800 1,190,600
SMP (Notes F and K) 25% -- 1,383,900
ENERGX Ltd. 45% 62,900 90,300
YFI (YSFC) 14% (122,400) --
USE (Note B) 8% 1,316,700 1,558,100
Others various 5,500 5,500
---------- -----------
$1,796,800 $ 4,344,700
========== ===========
*Approximately 9% in 1996.
Equity in income (loss) from investments accounted for by the equity method
is as follows:
Year Ended May 31,
-----------------------------------------
1997 1996 1995
---- ---- ----
YFI (YSFC) $(122,400) $ -- $ --
GMMV -- -- --
SGMC (121,800) (39,700) (37,500)
SMP (Note F) (264,900) (211,300) (219,600)
ENERGX, LTD. (27,400) (180,400) (5,000)
USE (271,400) 73,500 (153,800)
--------- ---------- ----------
$(807,900) $ (357,900) $ (415,900)
========= ========== ==========
There are currently litigation and arbitration proceedings with the
Company's partner in the SMP partnership, as discussed further in Note K.
Because of the litigation and arbitration, the Company has been required to
advance funds to SMP for standby mine care and maintenance, the rental of
certain mining equipment and administrative costs.
SMP has entered into various market related and base price escalated
uranium sales contracts with certain domestic utilities which require
approximately 1,500,000 pounds of uranium concentrates to be delivered from 1997
through 2000 depending on utility requirements. These contracts also allow for
the quantities to be substantially increased or decreased by the utilities.
Until the disputes between the SMP partners are resolved, the Company and USE
are arranging for the purchase and delivery of their portion of some of the
contracts or are allowing Nukem and CRIC to make the balance of the deliveries.
The deliveries will be satisfied either by purchases in the spot market,
existing purchase contracts, uranium inventories or by producing from SMP
properties, if and when a mill becomes available. Most market
62
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
related sales contracts can be settled through spot market purchases. The last
delivery under the remaining base price sales contract was made in May 1996 and
exceeded the spot market price as of May 31, 1996. Revenues from such uranium
sales of $1,383,400 have been included in the accompanying consolidated
statements of operations for the year ended May 31, 1996, which would normally
have been sales of SMP. All sales contracts were filled by Nukem in 1997 and
1995, and as a result, no revenues from uranium sales were recognized during
1997 and 1995. The cash from uranium sales is accumulating in SMP's bank
accounts and is subject to the Order and Award of the arbitration proceedings
with Nukem/CRIC discussed in Note F.
Condensed combined financial statements of the Company's equity
investees include the GMMV, SMP, Energx, Ltd., SGMC and USE for fiscal 1997,
1996 and 1995. GMMV and SGMC are in the development stage and have not commenced
operations. GMMV expenses certain general and administrative, maintenance and
holding costs. However, the Company has not recognized equity losses in GMMV
because Kennecott was committed to fund 100% of the first $50 million of
development and operating costs of this joint venture. Subsequent to May 31,
1997, the Company and USE entered into an agreement with Kennecott whereby they
may be able to purchase Kennecott's interest in the GMMV (see Note L). The
Company's investment in GMMV of $116,300 in the accompanying consolidated
balance sheets is substantially lower than its equity basis in GMMV. SGMC is
considered an equity investment because of the combined control exerted by USE
and the Company.
CONDENSED COMBINED BALANCE SHEETS:
EQUITY INVESTEES
1997 1996
---- ----
Current assets $ 25,904,200 $ 11,292,700
Non-current assets 106,624,800 91,884,400
------------- -------------
$ 132,529,000 $ 103,177,100
============= =============
Current liabilities $ 24,363,500 $ 9,952,200
Reclamation and other liabilities 45,694,300 48,928,000
Excess in assets 62,471,200 44,296,900
------------- -------------
$ 132,529,000 $ 103,177,100
============= =============
CONDENSED COMBINED STATEMENTS OF OPERATIONS:
EQUITY INVESTEES
1997 1996 1995
---- ---- ----
Revenues $ 6,648,200 $ 10,195,400 $ 5,163,800
Discontinued operations -- 2,604,600 296,200
Costs and expenses (13,188,200) (13,901,100) (8,902,400)
------------ ------------ ------------
Net loss $ (6,540,000) $ (1,101,100) $ (3,442,400)
============ ============ ============
63
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
F. MINERAL TRANSACTIONS AND MINING PROPERTIES:
GMMV
During fiscal 1991, the Company and USE entered into an agreement with
Kennecott, a wholly-owned, indirect subsidiary of The RTZ Corporation PLC, for
Kennecott to acquire a 50% interest in certain uranium mineral properties in
Wyoming known as the Green Mountain Properties. The purchase price was
$15,000,000 and a commitment to fund the first $50,000,000 of development and
operating costs. Before the mineral properties were contributed to the GMMV, a
portion of the Green Mountain Properties was owned by USE and the remainder was
owned by USECC.
The Boards of Directors of the Company and USE adopted a method of
apportioning the initial consideration of $15,000,000, on a ratio of 16% to the
Company and 84% to USE. This division was based on analyses of the projected
cash flows from the properties contributed by USE and USECC and other criteria.
Kennecott committed to fund 100% of the first $50,000,000 of development
costs and operating expenses of the GMMV joint venture. Kennecott also committed
to pay additional amounts if certain future operating margins are achieved. USE
and USECC participate in cash flows of the GMMV in accordance with their
ownership of the mining claims prior to the formation of GMMV. Because USE owned
all of the claims on that portion of the Green Mountain Properties where the
Round Park (Jackpot) uranium deposit was delineated, the Company has no interest
in GMMV's cash flow from the ore produced in mining operations on the Round Park
properties, which have been scheduled for initial development.
GMMV has incurred approximately $20,416,400 in the development and
operations of the above uranium mineral properties through May 31, 1997. This
was funded by Kennecott out of the $50,000,000 funding commitment. As previously
mentioned, the Company's carrying value of its investment in GMMV is $116,300 at
May 31, 1997, which is substantially lower than its equity basis in GMMV.
Reclamation obligations of GMMV are discussed in Note K. Development of the
properties and pursuit of mining permits continues in anticipation of future
uranium price increases.
On June 23, 1997, USE and USECC signed an Acquisition Agreement with
Kennecott for the right to acquire Kennecott's interest in the Green Mountain
Mining Venture ("GMMV") for $15,000,000 and other consideration. Kennecott paid
USE and USECC a $4,000,000 bonus on signing, and committed to loan the GMMV up
to $16,000,000 for payment of reimbursable costs incurred by USECC in developing
the proposed underground Jackpot Uranium Mine for production and in changing the
status of the Sweetwater Mill from standby to operational.
The $16,000,000 loan being provided by Kennecott to the GMMV was
advanced to Kennecott by an affiliate, Kennecott Energy Company ("KEC") under a
secured recourse Promissory Note (the "Note") bearing interest at 10.5% per
annum starting April 1999 until paid in full. The Note is payable quarterly out
of 20% of cash flow from the GMMV properties, but not more than 50% of the
earnings for such quarter from the GMMV operations, before interest, income tax,
depreciation and amortization;
64
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
however, the Note is payable (i) in full on June 23, 2010 regardless of cash
flow and earnings of the GMMV, or (ii) sooner (on December 31, 2005) if an
economically viable uranium mine has not been placed into production by such
date. The Note is secured by a first mortgage lien against Kennecott's 50%
interest in the GMMV pursuant to a Mortgage, Security Agreement, Financing
Statement and Assignment of Proceeds, Rents and Leases granted by Kennecott to
KEC (the "Mortgage"). USE and USECC will assume the Note, and the assets of the
GMMV will be subject to the Mortgage, at closing of the acquisition.
Pursuant to the Mineral Lease and the Mill Contract of the Acquisition
Agreement, USECC is to expend the funds in developing the proposed Jackpot Mine
and nearby Big Eagle Mine, and work with Kennecott in preparing the Sweetwater
Mill for renewed operations. Such work will be funded from the $16,000,000 loan
being provided to the GMMV by Kennecott. Kennecott will be entitled to a credit
against Kennecott's original $50,000,000 commitment to fund the GMMV, in the
amount of two dollars of credit for each one dollar of such funds advanced under
the $16,000,000 loan to be provided by Kennecott to the GMMV, plus the
$4,000,000 paid to USE and USECC on signing of the Acquisition Agreement. It is
anticipated that such credits will satisfy the balance of Kennecott's initial
funding commitment to the GMMV.
Closing of the Acquisition Agreement is subject to USE and USECC
satisfying several conditions, including: (i) the acquiring entity (which may be
USE, USECC, or an entity formed by USE and USECC to acquire Kennecott's interest
in the GMMV) must have a market capitalization of at least $200,000,000; (ii)
the parties to the Acquisition Agreement must have received all authorizations,
consents, permits and approvals of government agencies required to transfer
Kennecott's interest in the GMMV to the acquiring entity; (iii) USE and USECC
shall have replaced, or caused the replacement of, approximately $25,000,000 of
reclamation bonds, in addition to other guarantees, indemnification and
suretyship agreements posted by Kennecott on behalf of the GMMV; and (iv) USE
and USECC, or the acquiring entity, must pay $15,000,000 cash to Kennecott at
closing and assume all obligations and liabilities of Kennecott with respect to
the GMMV (including repayment of the $16,000,000 loan and the Mortgage) from and
after the closing. Under very limited circumstances, the scheduled closing date
may be postponed to another date not later than October 30, 1998.
If the Acquisition Agreement is not closed by December 1, 1997, then USE
and USECC (or an entity formed by them to acquire the GMMV interest owned by
Kennecott) are to provide to Kennecott a commitment letter from a recognized
national investment banking firm to complete an underwritten public offering of
the securities of USE (or the entity formed to acquire Kennecott's interest), in
amount sufficient to close the Acquisition Agreement transactions. Such amount
is estimated by USE to be approximately $40,000,000 (for the $15,000,000 closing
cash purchase price to Kennecott, plus $25,000,000 to assume or cause the
replacement of reclamation bonds, guarantees, indemnification agreements and
suretyship agreements related to the GMMV properties and the Sweetwater Mill).
Alternatively, USE and USECC (or the acquiring entity) may provide evidence to
Kennecott of a commitment letter from a bank or other institutional or industry
entity to provide private or joint venture financing in such approximate amount.
Failure to provide evidence of such financial commitment by December 1, 1997
will terminate the Acquisition Agreement, the Mineral Lease and the Mill
Contract.
65
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
Subject to providing evidence of adequate financial resources to close
the Acquisition Agreement with funds from a public financing or otherwise, the
$4,000,000 signing bonus paid by Kennecott is nonrefundable and will serve to
reduce USE and Crested's ultimate $15,000,000 purchase obligation.
If the Acquisition Agreement is not closed, USE and USECC, and
Kennecott, shall continue to own their respective interests in the GMMV, and
Kennecott's obligation to repay the $16,000,000 loaned by KEC shall remain
Kennecott's obligation, without any adverse effect on the interest in GMMV held
by USE and USECC. However, the Jackpot Mine development work and Sweetwater Mill
upgrade work funded by the $16,000,000 advance will have benefitted all parties
to the GMMV and will fully satisfy Kennecott's original $50,000,000 funding
obligation to GMMV.
SMP
During fiscal 1989, USE and the Company, through USECC, entered into an
agreement to sell a 50% interest in their Sheep Mountain properties, to Nukem
through its wholly-owned subsidiary Cycle Resource Investment Corporation
("CRIC"). USECC and CRIC each contributed their 50% interests in the properties
to a newly formed Colorado partnership, Sheep Mountain Partners. SMP was
established to further develop and mine the uranium claims on Sheep Mountain, to
market uranium and acquire additional uranium sales contracts. Certain disputes
have arisen between USECC and CRIC and its parent Nukem, Inc. over the formation
and operation of SMP. These disputes have been in litigation/arbitration for the
past six years. In the arbitration, the American Arbitration Association Panel
issued its Order and Award during fiscal 1996. On June 27, 1997, the United
States District Court entered its Second Amended Judgment confirming the Order
and Award and including the equitable portion of the Order and Award. Nukem/CRIC
filed a motion for clarification and/or limited remand. The Court denied the
motion and Nukem has until September 12, 1997 to determine if it will appeal the
Second Amended Judgment to the Tenth Circuit Court of Appeals. See Notes E and K
for a description of the investment and a discussion of the related
litigation/arbitration.
AMAX Transactions
During prior years, the Company and USE conveyed interests in mining
claims to AMAX Inc. ("AMAX") in exchange for cash, advance and production
royalties, and other consideration including interest-free loans, due in 2010.
In connection with a renegotiation of various rights and duties of the parties,
AMAX agreed to amortize the principal amount of those loans. The loans were
completely amortized in fiscal 1994. AMAX was acquired by Cyprus Minerals
Corporation in November 1993 and is now doing business as Cyprus Amax Minerals
Company ("Cyprus Amax"). AMAX and its successor Cyprus Amax have not placed the
properties into production as of May 31, 1997.
Cyprus Amax may elect to return the properties to the Company and USE,
which would cancel the advance royalty obligation. If Cyprus Amax formally
decides to place the properties into production, it will pay $2,000,000 to the
Company and USE. Under the terms of the initial agreement with AMAX, if AMAX
sells the properties, the Company and USE will receive 15% of the first
$25,000,000 received by AMAX.
66
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
In addition, Cyprus Amax now pays the Company and USE jointly an annual
advance royalty of 50,000 pounds of molybdenum (or its cash equivalent). Cyprus
Amax is entitled to a partial credit against future royalties for any advance
royalty payments made, but such royalties are not refundable if the properties
are not placed into production. The Company recognized $103,600, $-0- and
$42,700 of revenues from the advance royalty payments in fiscal 1997, 1996 and
1995, respectively.
USE and Crested held an option to purchase certain real estate located
in Gunnison owned by Cyprus Amax. During fiscal 1995, USE and Crested reached an
agreement with Cyprus Amax whereby USE and Crested would forego six quarters of
advance royalties as payment of this option exercise price. USE and Crested
received no advance royalties during 1996 as a result of this agreement.
Thereafter, USE (together with Crested) signed two option agreements with
Pangolin Corporation, a Park City, Utah developer, for sale of the 57 acres, and
a separate parcel owned in Gunnison County, Colorado.
The first option (exercised by Gunnison Center Properties LLC in January
1995) was for 57 commercial and noncommercial zoned acres in the City of
Gunnison, Colorado; the net purchase price was $970,300. This resulted in a gain
for the Company of $491,100. Pangolin paid $345,000 cash and $625,300 in
nonrecourse promissory notes. The first note for $137,900 was paid in fiscal
1995. The second note for $487,366 was a three year promissory note, bearing
interest at 7.5% per year and calling for interest only payments in January 1996
and 1997 with the balance due in January 1998, of which $0 and $35,600 was
received during fiscal 1997 and 1996, respectively. Effective December 1, 1996 a
replacement promissory note was given to USE and Crested by Contour Development
Company LLC in the principal amount of $454,900 payable January 1998, bearing
interest at the rate of 7.5% per annum, and secured by Contour's 73% interest in
a limited liability company owning a 2.93 acre subdivided lot in the City of
Gunnison currently approved for development of an 87 unit apartment project. As
of May 31, 1997 the second note had an outstanding principal balance of
$451,865, of which Crested's 50% portion, or $225,932, is reflected in the
accompanying consolidated balance sheet, before a valuation allowance of
$43,400.
The second option covered 472.5 acres of ranch land northwest of the
City of Gunnison, Colorado and was exercised by Castle Mountain Ranches LLC in
May 1995 (purchase price $822,460). Pangolin paid $10,000 for the option; on
option exercise and closing, Pangolin paid $36,090 in cash for 22 acres and gave
Crested two nonrecourse promissory notes totalling $776,370, each due May 30,
1998, and secured by the remaining acreage. One note for $145,500 bore interest
at the rate of 7.5% per annum until August 28, 1995 and thereafter at the rate
of 12% per annum until paid. A principal payment in the amount of $35,000 was
due on May 30, 1996 but was not paid. The second note for $630,873 bore interest
at the rate of 7.5% per annum with interest only payments due May 30, 1996 and
May 30, 1997 and principal and interest due at maturity. Effective December 1,
1996 a replacement note from Contour Development Company LLC was given to
Crested in the principal amount of $872,508 bearing interest at the rate of
8.39% per annum until May 30, 1997, at which time a principal payment of
$128,138, together with accrued interest, was due, but was not paid. As a result
of Contour's default in the payment due May 30, 1997, Crested has declared the
entire principal balance of this note to be due and payable and has declared a
default in the pledge of Contour's 73% interest in the limited liability company
building the apartment project in the City of Gunnison. Crested recorded a bad
debt expense of $527,300 and a reversal of deferred gain of $312,100 as a result
of Contour's default and has established a
67
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
corresponding valuation allowance against the receivable in the amount of
$839,500. Crested and USE are currently evaluating their potential remedies
against Contour (which may include litigation).
Sutter Gold Mining Company
Sutter Gold Mining Company ("SGMC") acquired indirect ownership of the
Sutter Gold Venture ("SGV") a joint venture between USE and SRRI formed to
acquire, hold and develop mineral leases and mining claims in Amador County,
California (the "Lincoln Project"). On December 14, 1990, Crested purchased
one-ninth of USE's beneficial interest in the SGV Properties hereinafter fully
described, for $500,000 and the commitment to fund one-ninth of the future costs
and liabilities. USE and Crested formed USECC Gold Limited Liability Company
("USECC Gold") which became the joint venturer with SRRI on the Lincoln Project.
USECC Gold was owned 88.89% by USE and 11.11% by Crested. SGMC was established
to conduct operations on mining leases and to produce gold from the Lincoln
Project.
USE (i) funded $4,500,000 of the $5,000,000 purchase price of SGV's
properties; (ii) agreed to initially fund SRRI's share of holding and
development costs totaling $500,000; and (iii) agreed to provide its share of
the holding costs and assessments of SGV. SRRI, the second venture partner,
through a subsidiary, funded $500,000 of the property purchase price, and agreed
to pay $2,000,000 to USE to equalize the investments so that USE and SRRI would
each initially hold 50% interests in SGV. USE was to recover the $500,000 of
predecessor holding costs and SGV's initial development costs paid by them, out
of SGV's initial cash flows.
SRRI issued a $2,000,000 note to USE, bearing interest at 10% per annum.
The note provided that $500,000 of principal and accrued interest was due April
12, 1991, and the balance of $1,500,000 with interest was due October 12, 1991.
In February 1991, USE and Crested formed USECC Gold and transferred their
respective interests in the Lincoln Project to USECC Gold. When the installments
on the $2,000,000 note to USE were not paid when due, the interests of USECC
Gold and SRRI in SGV were adjusted to equal the percentage of the $5,000,000
purchase price of SGV's properties that each of them provided. On July 16, 1991,
the 50% interest of SRRI in SGV was reduced to 40%, with a corresponding
increase in the USECC Gold interest to 60%. On October 12, 1991, SRRI's interest
was further reduced to 10% and USECC Gold's interest increased to 90%. On May
23, 1994, SRRI released its remaining 10% interest and issued 400,000 shares of
SRRI common stock to USE in exchange for the release of all SRRI's liabilities
relating to SGV and USECC Gold. Accordingly, SRRI's capital investment of
$257,900 and all liabilities of SGV to USE and its affiliates on behalf of SRRI
totaling $1,550,600 were transferred to USECC Gold's capital investment. In
addition, SGV released SRRI of its obligation to SGV totaling $1,970,500, which
included accrued but unrecorded interest of approximately $579,800.
SGMC was incorporated in Wyoming in January 1994 and on August 5, 1994,
USE, Crested and SGMC entered into an agreement whereby USE and Crested each
conveyed their eight-ninths and one-ninth interest, respectively, in USECC Gold
in exchange for common shares of SGMC. USE and Crested ultimately received
approximately 100% of the outstanding shares of SGMC's common stock, for their
eight-ninths and one-ninth interest, respectively, in USECC Gold.
68
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
SGMC is in the development stage and additional development is required
prior to the commencement of commercial production. SGMC has yet to generate any
significant revenue and has no assurance of future revenue. During fiscal 1992,
SGV shipped a bulk sample of gold ore mined during development operations to an
independent mill to determine mill availability and assay information.
Approximately 1,400 ounces of gold were recovered and sold. The related mining
costs were recognized. All acquisition and other mine development costs since
inception have been capitalized. Since test production in 1992, SGV and SGMC
have focused their efforts on obtaining a reserve study, developing a mine plan,
acquiring permits, seeking financing and pursuing a partner to assist in the
financing of its mineral development and ultimate production. SGMC will continue
to be considered in the development stage until such time as it generates
significant revenue from its principal operations.
Since inception, the Company and USE have funded approximately
$7,858,900 in development and holding costs. These costs were funded by the
Company and USE on a one-ninth/eight-ninths basis, respectively. As of May 31,
1997, the Company's total investment in SGMC had a carrying value of $1,068,800.
During May 1996, SGMC issued shares of its common stock to certain
individuals, including a related party for total proceeds of $98,600. Such
shares were authorized to be sold by SGMC in October 1995 to raise funds to pay
for legal and other costs of a possible future equity financing. Subsequent to
the above issuance of shares, USE and Crested owned 74% and 9%, respectively, of
SGMC.
During the first and second quarters of fiscal 1997, SGMC sold
additional shares of its common stock in a private placement. These shares were
sold for $3.00 per share. SGMC received $1,106,600 in net proceeds from this
equity placement.
During the fourth quarter of fiscal 1997, management of SGMC entered
into an Engagement Letter with a different underwriter in Toronto to complete an
offering of additional shares of SGMC's common stock, which closed in May, 1997
raising approximately $5,404,500 in net cash proceeds. At the underwriter's
request, the initial investors (including USE and the Company) agreed to have
the amount of their common shares owned reduced by 50 percent. The investors in
the $3.00 per share private placement discussed above were not affected as those
shares were sold in contemplation of the 1 for 2 reverse split.
In connection with this offering, USE and Crested accepted a Contingent
Stock Purchase Warrant ("USECC Warrant") dated March 21, 1997 which provides USE
and Crested the right to acquire for no additional consideration common shares
of SGMC's $.001 par value common stock having an aggregate value of $10,000,000
(US), valued at the greater of $4.07 per share or the then market value as
defined.. The USECC Warrant has a term of ten years extending to March 21, 2007,
and is exercisable partially or in total, semi-annually beginning on June 30,
1997. However, the USECC Warrant is only exercisable to the extent proven and
probable ore reserves, as defined in the USECC Warrant, in excess of 300,000
ounces are added to SGMC's reserves. In addition, SGMC shall have the right to
satisfy the exercise of all or any portion of the USECC Warrant with the net
cash flows, as defined, at $25.00 (US) for each new ounce of proven and probable
ore in excess of 300,000 ounces (limited to a maximum of 700,000 ounces). The
USECC Warrant benefits USE and Crested on a basis of 88.9% and 11.1%,
respectively.
69
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
Accordingly, the Company has allocated the carrying value of SGMC shares
exchanged for the Contingent Stock Purchase Warrant to its investment in such
contingent warrants.
Plateau Resources Limited
Effective August 11, 1993, USE entered into an agreement with Consumers
Power Company to acquire all the issued and outstanding common stock of Plateau
Resources Limited ("Plateau"), a Utah corporation. Plateau owns a uranium
processing mill and support facilities and certain other real estate assets
through its wholly-owned subsidiary Canyon Homesteads, Inc. "(CHI") in
southeastern Utah. USE paid nominal cash consideration for the Plateau stock and
agreed to assume all environmental liabilities and reclamation bonding
obligations. Prior to closing the agreement, Plateau transferred $2,500,000 cash
to fund the NRC Surety Trust Agreement to pay future costs of mill
decommissioning, site reclamation and long-term site surveillance. Plateau also
transferred $4,800,000 cash to an Agency Agreement to indemnify the seller
against possible environmental or nuclear claims. At the date of acquisition,
Plateau held an additional $6,900,000 of unencumbered cash to be used for care
and maintenance costs on the mill and other assets acquired. As of May 31, 1997,
most of the unencumbered cash has been used for care and maintenance costs or
was loaned to USE for development of certain properties held by USE and the
Company. Although the Company has no ownership in Plateau, Directors of the
Company and USE have agreed to divide equally one-half of the obligations
incurred in excess of the total $14,200,000 described above and will share in
one-half of all cash flows derived from operations of these assets.
On August 25, 1994, Plateau Resources Limited, a wholly-owned subsidiary
of USE, signed a letter of intent with a third party to sell part interest in
Canyon Homesteads, Inc. ("CHI"), a wholly-owned subsidiary of Plateau, and to
develop the Ticaboo Townsite, in south central Utah and other resort properties
near Lake Powell. The purchaser later defaulted and the $100,000 earnest money
deposit was recognized as income in fiscal 1995 by Plateau.
CHI entered into a joint venture, First-N-Last LLC, with Arrowstar
Investments, Inc. ("Arrowstar") to develop on a 50/50 basis, certain properties
at the Ticaboo Townsite. Arrowstar is owned by certain shareholders of the
Company. During 1996, Arrowstar gave its 50% interest in First- N-Last LLC to
USECC as part of the consideration for Wind River (see Note D). USECC then
transferred its 50% ownership in First-N-Last LLC to Plateau. As of May 31,
1997, Plateau/CHI owns 100% of First-N-Last, LLC.
Energx, Ltd.
During fiscal 1994, USE and Crested formed Energx to engage in the
exploration, development and operation of natural gas properties. Energx
currently has leased properties in Wyoming and on the Fort Peck Indian
Reservation, Montana. Energx is owned by USE (45%), Crested (45%) and the
Assiniboine and Sioux Tribes (10%).
During fiscal 1995, Energx sold a 50% interest in the leases on the Fort
Peck Indian Reservation for the sum of $200,000 plus $100,000 to be used only
for the acquisition and consolidation of additional
70
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
leases, and for committing to drill 8 exploratory wells. Eight exploratory wells
were drilled. No further activity is planned for this project.
During 1997 and 1996, Energx abandoned certain of its leases and as a
result wrote off $164,500 and $328,700, respectively, of costs capitalized
associated with these leases.
G. DEBT:
The Company and USE have a $1,000,000 line of credit with a commercial
bank. The line of credit bears interest at a variable rate (10.25% as of May 31,
1997). The weighted average interest rate for 1997 and 1996 was 10.25%. The line
of credit had an outstanding balance for the Company and USE jointly of $-0- and
$176,000 as of May 31, 1997 and 1996, respectively, of which Crested's 50%
portion is $-0- and $88,000. This line of credit is secured by a share of the
net proceeds of fees from production of oil wells and certain assets of USECC.
Debt of the Company consists primarily of a note to USE bearing interest
at 6% per annum and due on October 1, 1999. The debt is primarily due to U.S.
Energy for funding all of the operations of USECC of which 50% is the
responsibility of the Company. All debt is classified as current as of May 31,
1996 and 1997 as a result of USE's unilateral ability to modify the repayment
terms under the promissory note agreement. The Company signed a two year
promissory note as of May 31, 1997 to USE for the full amount of its
indebtedness reserving the right to pay all or part of the note through the
issuance of Crested common stock.
May 31,
------------------------------
1997 1996
---- ----
Notes payable - U.S. Energy, 6% interest
balance payable in full on
demand (see Note A) $ 6,023,400 $ 6,460,300
Note payable to bank, 8.75% interest,
balance due July 1, 1999 28,200 --
------------- -----------
Total $ 6,051,600 $ 6,460,300
Less - current portion 6,035,800 6,460,300
------------- -----------
$ 15,800 $ --
============= ===========
71
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
H. INCOME TAXES:
The components of deferred taxes as of May 31, 1997 and 1196 are as
follows:
<TABLE>
<CAPTION>
May 31,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 86,300 $ 20,300
Deferred gains 476,200 106,100
Litigation settlements 179,300 --
Net operating loss carryforwards 3,814,200 3,756,900
Tax credits 83,000 83,000
Capital loss carryforwards -- 297,100
------------ ------------
Total deferred tax assets 4,639,000 4,263,400
Deferred tax liabilities:
Accelerated depreciation for tax (309,600) (447,500)
Development and exploration costs (42,700) (35,500)
------------ ------------
Total deferred tax liabilities (352,300) (483,000)
------------ ------------
Net deferred tax assets - all non-current 4,286,700 3,780,400
Valuation Allowance (4,286,700) (3,780,400)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
</TABLE>
At May 31, 1997, the Company had available, for federal income tax
purposes, net operating loss carryforwards of approximately $11,200,000 which
expire in 2006 through 2012 and investment tax credit carryforwards of
approximately $83,000 which, if not used, will begin to expire in 1998. The
Company has established a valuation allowance for the full amount of the net
deferred tax assets due to the recurring losses of the Company and the
uncertainty of the Company's ability to generate future taxable income to
utilize the NOL carryforwards.
For fiscal years 1997, 1996 and 1995, the Company incurred losses for
both book and tax purposes. The income tax provision is different from the
amounts computed by applying the statutory federal income tax rate to income
before taxes. The reasons for these differences are as follows:
72
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected federal income tax benefit $(453,700) $(397,400) $(491,900)
Capital loss carryforward -- -- (269,900)
Other (52,600) (204,500) (37,900)
Valuation allowance 506,300 601,900 799,700
--------- --------- ---------
Income taxes $ -- $ -- $ --
========= ========= =========
</TABLE>
There were no taxes payable as of May 31, 1997, 1996 or 1995.
The Internal Revenue Service ("IRS") is currently auditing the Company's
and USECC's tax returns for the fiscal years ended May 31, 1995 and 1996. The
audit is not completed as of the date of the accompanying financial statements.
I. SEGMENTS AND MAJOR CUSTOMERS:
The Company's primary business activities include the sales of minerals
and the acquisition exploration, holding, development and sale of mineral
bearing properties. No properties are currently producing. The second reportable
industry segment is commercial operations, primarily real estate activities and
operations of an airport fixed base operation. The following is information
related to industry segments:
73
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
<TABLE>
<CAPTION>
Year Ended May 31, 1997
--------------------------------------------
Commercial
Minerals Operations Consolidated
-------- ---------- ------------
<S> <C> <C> <C>
Revenues $ 103,600 $ 488,300 $ 591,900
========== ==========
Interest and other revenues 1,111,600
------------
Total revenues $ 1,703,500
============
Operating loss $ (317,900) $ (385,200) $ (703,100)
========== ==========
Interest and other revenues 1,111,600
General corporate and other expenses (1,270,900)
Equity loss in affiliates (807,900)
------------
Loss before income taxes $ (1,670,300)
============
Identifiable net assets at May 31, 1997 $ 24,600 $2,139,000 $ 2,163,600
========== ==========
Investments in affiliates 1,798,800
Corporate assets 2,323,300
------------
Total assets at May 31, 1997 $ 6,285,700
============
Capital expenditures $ -- $ 64,500
========== ==========
Depreciation, depletion and
amortization $ -- $ 184,900
========== ==========
</TABLE>
74
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(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 net 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>
75
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(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 net 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>
During fiscal 1996, 89% of mineral revenue were from sales of minerals.
There were no mineral sales in fiscal 1997 or 1995.
Commercial revenues in the statements of operations consist of mining
equipment, office and other real property rentals, charter flights and fuel
sales.
J. SHAREHOLDERS' EQUITY:
The Boards of Directors of both the Company and USE, from time to time,
issued stock bonuses to certain directors, employees and third parties. Such
shares are forfeitable to the Company and USE until earned. The Company is
responsible for one-half of the compensation expense related to these issuances
(see Note C). For the years ending May 31, 1997, 1996 and 1995, the Company
recognized compensation expense of $76,300, $59,800 and $35,300, respectively,
resulting from these issuances. A schedule of forfeitable shares for both
Crested and USE is set forth in the following table.
76
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
Issue Number Issue Total
Date of Shares Issuer Price Compensation
---- --------- ------ ----- ------------
May 1990 40,300 USE $ 9.75 $392,925
June 1990 66,300 USE 11.00 729,300
November 1990
(stock dividend) 10,660 USE N.A. N.A.
June 1990 25,000 Crested 1.06 26,562
December 1990 7,500 Crested .50 3,750
January 1993 18,520 USE 3.00 55,560
January 1993 6,500 Crested .22 1,430
January 1994 18,520 USE 4.00 74,080
January 1994 6,500 Crested .28 1,828
January 1995 18,520 USE 3.75 69,450
January 1995 6,500 Crested .19 1,219
January 1996 7,700 USE 15.125 116,462
January 1996 5,000 Crested .3125 1,562
January 1997 36,832 USE 11.02 405,830
January 1997 8,000 Crested .9375 7,500
No shares were earned out in fiscal 1997 or 1996. During fiscal 1993,
the Company's Board of Directors amended the stock bonus plan. As a result, the
earn out dates of certain individuals were extended until retirement, which is
the earn out date of the amended stock bonus plan. The amended plan grants a
stock-bonus of 20% of the previous plan per year for five years.
In April 1993, the Board of Directors of the Company authorized the
Company to issue 160,000 shares of its common stock at $.27 per share to an
affiliate for cash in an effort to increase the Company's operating capital. The
Company also granted this affiliate options for 300,000 common shares at $.40
per share. These options are exercisable over a five year period. During 1996
this affiliate was sold to an unrelated third party, but the shares and options
were transferred to other affiliated entities, SGMC and Plateau Resources
Limited.
In May 1996, the Board of Directors of U.S. Energy approved an annual
incentive compensation arrangement for its CEO and four other officers of U.S.
Energy payable in shares of U.S. Energy common stock. The arrangement was
subject to approval of the formal 1996 Stock Award Program by the Company's
shareholders in December 1996. The shares are to be issued annually, starting
January 15, 1997, as long as each officer is employed by USE, provided the
Company has been profitable in the preceding fiscal year. The officers will
receive up to an aggregate total of 67,000 shares per year for the years 1997
through 2002. One-half of the compensation under the 1996 Stock Award Program is
the responsibility of Crested. The number of shares awarded each year out of
such 67,000 shares aggregate annual limit will be based on earnings per share of
Common Stock to be determined in the plan, and in addition is subject to
approval by the shareholders of the Company for each award each year. In fiscal
1997, 14,158 share were authorized for issuance by shareholder approval to five
officers of USE. The Stock Award Program was modified to reflect the intent of
the directors of USE which was to provide
77
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
incentive to the officers of the Company and USE to remain with the Companies.
The shares under the plan therefore became forfeitable until retirement, death
or disability of the officer. The shares are held in trust by the Company's
treasurer and are voted by the non-employee directors of USE. Additionally, the
modified plan delegates the responsibility of determining the number of shares
to be issued to USE's Compensation Committee and eliminates the previously
required vote of shareholders to approve the issuance. All such modifications to
the 1996 Stock Award Program will be voted on by the shareholders of USE at the
1997 Annual Meeting.
K. COMMITMENTS, CONTINGENCIES AND OTHER:
Legal Proceedings
Sheep Mountain Partners (SMP)
Arbitration Proceedings Concerning SMP. In June 1991, Nukem's
wholly-owned subsidiary Cycle Resource Investment Corporation ("CRIC")
instituted arbitration proceedings against the Company and USE. CRIC claimed
that the Company and USE violated the Sheep Mountain Partners ("SMP")
partnership agreement by assigning to the Green Mountain Mining Venture (GMMV)
the amounts equal to any SMP cash distributions to USECC derived from sales of
uranium under SMP supply contracts. CRIC also asserted that by entering into the
GMMV agreement, the Company and USE misappropriated a business opportunity of
SMP. CRIC sought damages and certain equitable remedies from the Company and USE
and sought to expel the Company and USE from the SMP Partnership.
Federal Court Action Concerning SMP. On July 3, 1991, the Company and
USE d/b/a USECC filed a civil action in the U. S. District Court of Colorado
against Nukem, CRIC and their affiliates, alleging that Nukem, CRIC and their
affiliates fraudulently misrepresented facts and concealed information from the
Company and USE to induce their entry into the agreements forming SMP and seek
rescission, damages and other relief. The Company and USE further alleged that
Nukem and CRIC have refused to provide information about transactions by CRIC
and its affiliates with SMP, and that the defendants had engaged in various
wrongful acts relating to financing and acquisition of uranium for SMP. Nukem
and CRIC filed an answer and a variety of counterclaims against the Company and
USE. Certain of Nukem's affiliates (excluding CRIC) were thereafter dismissed
from the lawsuit. The U. S. District Court granted the motion of the Company and
USE to stay the above arbitration initiated by CRIC and also ordered the Company
and USE to amend their complaint. On April 6, 1992, the Company and USE filed an
amended complaint against Nukem and CRIC setting out the alleged fraud with
particularity, and Nukem and CRIC filed answers and counterclaims to the amended
complaint.
State Court Action Concerning SMP. On September 16, 1991, USECC filed a
civil action in the Denver District Court against SMP seeking reimbursement of
$85,000 per month since the spring of 1991 for the care and maintenance of the
SMP underground uranium mines and properties in south-central Wyoming. On May
11, 1993, the Denver District Court stayed all proceedings until the U.S.
District Court for Colorado case is resolved.
78
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
Summary. The discovery stage in the case filed by the Company and USE on
July 3, 1991 in the U. S. District Court of Colorado against Nukem, CRIC et al
has been protracted and vigorously contested by all parties. On November 6,
1993, the remaining parties in that suit, Nukem and CRIC, agreed with the
Company and USE that the majority of the litigation post the formation of SMP on
December 21, 1988, would be handled through consensual arbitration with the
American Arbitration Association ("AAA"). The agreement to arbitrate was finally
reduced to writing and executed on February 7, 1994. The arbitration hearing
commenced on June 27, 1994 before a three member AAA arbitration panel. After 73
hearing days and some 15,000 pages of testimony, the parties rested their cases
on May 31, 1995. Per order of the Panel, the parties filed their proposed
Findings of Fact and Conclusions of Law, Award and a brief of the law on August
7, 1995. Each side submitted responsive proposed findings of fact and
conclusions of law, responsive proposed award and reply briefs by September 21,
1995.
The Panel entered its Order and Award on April 18, 1996 but did not
dissolve the Partnership. Nukem objected to the Award by filing two motions
indicating there was a material miscalculation and a double recovery. The U.S.
District Court remanded the matter to the Arbitration Panel to consider Nukem's
motions. On July 3, 1996, the Panel found there was not double recovery and
confirmed the Order and Award, which awarded Crested and USE approximately
$12,500,000 and Nukem/CRIC $7,100,000 through March 31, 1996. On November 4,
1996 the United States District Court issued a Judgment and Order confirming the
Arbitration Panel's Order and Award during fiscal 1997. The Company and USE
received a total of $4,300,000 as a result of this Order and Award. That balance
of the Award due the Company and USE is due from Nukem and CRIC. On June 27,
1997 the Federal Court issued a Second Amended Judgment which confirmed the
monetary award of the Arbitration Panel and clarified the equitable damages due
USECC from Nukem/CRIC. Nukem/CRIC filed a motion for clarification and/or
limited remand and the Court denied the motion of August 13, 1997. Nukem has
until September 12, 1997 to file a notice of appeal with the Tenth Circuit Court
of Appeals. Nukem has posted a $8,600,000 supersedeas bond on the monetary
portion of the Award. If Nukem seeks to appeal the equitable portion of the
Award, the Company and USE will ask that the supersedeas bond be raised to
$111,000,000.
Illinois Power. Illinois Power Company ("IPC"), one of the utilities
with whom SMP has a long-term uranium supply contract, unilaterally sought to
terminate the contract on October 28, 1993 and filed suit contemporaneously in
the Federal District Court, Danville, Illinois, against the Company, USE, CRIC,
SMP, Nukem Luxembourg GmbH ("NULUX") and the Dresdner Bank, seeking a
declaratory judgment that the contract with USECC, which was assigned to SMP and
thereafter to NULUX, had been breached by USECC filing a Motion for Appointment
of Receiver in the SMP litigation. The Dresdner Bank was dismissed from the
case, and the remaining defendants filed answers denying IPC's allegations and
filed counterclaims for damages due under the IPC contract. These defendants
also filed Motions for Summary Judgment and a hearing was held on the motions on
May 27, 1994. On September 1, 1994, the U. S. District Court for the Central
District of Illinois granted the defendants' motions for summary judgment
against IPC dismissing IPC's complaint, and further granted those defendant's
counterclaims against IPC for breach of contract by IPC. After various
negotiating sessions the parties reached agreement in June 1995 to settle the
case by entering into an amendment to the original agreement to increase the
price per pound of U3O8 delivered to IPC and provide for 3 deliveries totalling
486,443 lbs.
79
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
U3O8 in 1995, 1996 and 1997. The first delivery of 226,443 lbs. U3O8 was made on
June 30, 1995 by Nukem on behalf of SMP. A delivery of 130,000 lbs. U3O8 was
made during fiscal 1996 and the last delivery of 130,000 lbs. U3O8 under the
contract was made in May 1997. The Company and USE received a distribution from
SMP of the profits for the last delivery to IPC on June 13, 1997 of $838,500.
Parador Mining Company, Inc. ("Parador")
On July 30, 1991, Bond Gold Bullfrog, Inc. ("BGBI") filed Civil Action
No. 11877 in the District Court of the Fifth Judicial District, Nye County,
Nevada naming USE, Crested, Parador and H.B. Layne Contractor, Inc. (Layne) as
defendants. The complaint primarily concerns extralateral rights associated with
two patented lode mining claims (the "Claims") owned by Parador which were
initially leased to a predecessor of BGBI and subsequently, the residuals of
that lease were assigned and leased by Parador to USE and Crested. Parador, USE
and Crested answered the complaint, filed a counterclaim against the Plaintiff
and a cross claim against Layne. A bifurcated trial was held on December 11-12,
1995 before the District Court for the Fifth Judicial District for the State of
Nevada, County of Nye, at which time the parties presented evidence relative to
the issue of extralateral rights. Other claims between the parties were
bifurcated by the Court and were not at issue at the trial. Parador, USE and
Crested submitted expert testimony by five renowned geologists opining that a
gold lode apexed on Parador's Sunset No. 1 patented lode mining claim, from
which apex the lode extended in a continuous downward direction outside the
surface boundaries of that claim and under the surface boundaries of a claim
owned by an adjacent property owner. No contrary testimony was submitted by the
other parties.
The District Court took the matter under advisement at the conclusion of
the evidentiary proceedings, and on December 26, 1995, issued a written ruling
denying apex rights and extralateral royalties to Parador, USE and Crested. It
is the belief of Parador, USE and Crested that the trial court's ruling is
erroneous as a matter of law and, consequentially, on February 2, 1996, an
appeal was lodged with the appellate court asking that Court to reverse the
trial court's ruling. The Appellate Court dismissed the appeal pending a
resolution of all claims before the District Court. Parador, USE and Crested
intend to proceed with the litigation.
Reclamation and Environmental Liabilities
Most of the Company's mine development, exploration and operating
activities are subject to federal and state regulations that require the Company
to protect the environment. The Company attempts to conduct its mining
operations so as to comply with these regulations, but they are continually
changing and generally becoming more restrictive. Consequently, the Company's
current estimates of its reclamation obligations and its current level of
expenditures to perform ongoing reclamation may change in the future. At the
present time, however, the Company cannot predict the outcome of future
regulation or its impact on costs. Nonetheless, the Company has recorded its
best estimate of future reclamation and closure costs based on currently
available facts and technology and enacted laws and regulations. Certain
regulatory agencies, such as the Nuclear Regulatory Commission, the Bureau of
Land Management and the Wyoming Department of Environmental Quality review the
Company's reclamation, environmental and decommissioning liabilities, and the
Company believes its recorded amounts are consistent with those reviews and
related bonding requirements. To the extent that planned production on its
properties is
80
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
delayed, interrupted or discontinued because of regulation or the economics of
the properties, the future earnings of the Company would be adversely affected.
The Company believes it has accrued all necessary reclamation costs and there
are no additional contingent losses or unasserted claims to be disclosed or
recorded in the reclamation liability. The Company has not disposed of any
properties for which it has a commitment or is liable for any known
environmental liabilities.
The majority of the Company's environmental obligations relate to former
mining properties acquired by the Company. Since the Company currently does not
have properties in production, the Company's policy of providing for future
reclamation and mine closure costs on a unit-of-production basis has not
resulted in any significant annual expenditures. For the obligations recorded on
acquired properties, including site-restoration, closure and monitoring costs,
actual expenditures for reclamation will occur over a number of years, and since
these properties are all considered future production properties, those
expenditures, particularly the closure costs, may not be incurred for many
years. The Company also does not believe that any significant capital
expenditures to monitor or reduce hazardous substances or other environmental
impacts are currently required. As a result, the near term reclamation
obligations are not expected to have a significant impact on the Company's
liquidity.
As of May 31, 1997 and 1996, the Company has recorded estimated
reclamation obligations, including standby costs, of $725,900, as reflected in
reclamation and other long-term, liabilities in the accompanying financial
statements. In addition, the GMMV, in which the Company is a 25% equity
investor, has recorded a $23,620,000 liability for future reclamation and
closure costs. See GMMV discussion below for likelihood of liabilities being
incurred by the Company. None of these liabilities have been discounted, and the
Company has not recorded any potential offsetting recoveries from other
responsible parties or from any insurance companies.
The Company and USE currently have four mineral properties or
investments that account for most of its environmental obligations. The Company
is a partner in SMP, a joint venturer in the GMMV, and owns an interest in
Plateau and SGMC. The environmental obligations and the nature and extent of
cost sharing arrangements with other potentially responsible parties, as well as
any uncertainties with respect to joint and several liability of each are
discussed in the following paragraphs:
Sheep Mountain Partners ("SMP")
The Company and USE agreed to assume the reclamation obligations,
environmental liabilities and liabilities for injuries to employees in mining
operations with respect to the Crooks Gap properties, which are part of SMP. The
reclamation obligations, which are established by regulatory authorities, were
reviewed by the Company and the regulatory authorities during fiscal 1995 and
the balance in the reclamation liability account at May 31, 1997 of $1,451,800,
($725,900 or 50% of which is recorded in the accompanying balance sheet), was
determined by the Company and the regulatory authorities to be adequate. The
obligation will be satisfied over the life of the mining project which is
estimated to be at least 20 years. The Company and USE self bonded this
obligation by mortgaging certain of their real estate holdings. A portion of the
funds for the reclamation of SMP's properties is expected to be provided by SMP
which has agreed to pay up to $.50 per pound of uranium to the Company and USE
for
81
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
reclamation work, as the uranium is produced from the properties. The final
outcome of the arbitration proceedings with Nukem and CRIC could result in
changes to these agreements between the parties.
Green Mountain Mining Venture ("GMMV")
During fiscal 1991, the Company and USE acquired developed minerals
properties on Green Mountain known as the Big Eagle Property. In connection with
that acquisition, the Company and USE agreed to assume reclamation and other
environmental liabilities associated with the property. Reclamation obligations
imposed by regulatory authorities were established at $7,300,000 at the time of
acquisition. Immediately after the acquisition, the Company and USE transferred
a one-half interest in them to Kennecott, and Kennecott, the Company and USE
contributed the Big Eagle properties to GMMV, which assumed the reclamation and
other environmental liabilities. Kennecott obtained a commercial bank letter of
credit as security for the performance of the reclamation obligations for the
benefit of GMMV.
During fiscal 1993, GMMV entered into an agreement to acquire the
Sweetwater uranium mill and related properties from UNOCAL. GMMV's consideration
for the acquisition of the Sweetwater Mill Property was the assumption of all
environmental liabilities and reclamation bonding obligations. The environmental
obligations of GMMV are guaranteed by Kennecott Corporation (parent of Kennecott
Uranium Company, the other joint venture partner). However, UNOCAL also agreed
that if GMMV incurs expenditures for environmental liabilities prior to the
earlier of commercial production by GMMV or February 1, 2001 (which liabilities
are not due solely to the operations of GMMV), UNOCAL will reimburse GMMV the
first $8,000,000 of such expenditures. Any such reimbursement may be recovered
by UNOCAL from 20% of future cash flows from sale of uranium concentrates
processed through the mill. In any event, until such time as environmental and
reclamation undertakings are liquidated against Kennecott Corporation, such
costs are not deemed expenditures under Kennecott's $50,000,000 development
commitment (although bond costs may be charged against this development
commitment).
The reclamation and environmental liabilities assumed by GMMV concern
two categories: (1) cleanup of an inactive open pit mine site near the Mill,
including water (heavy metals and other contaminants) and tailings (heavy metals
and other dust contaminant abatement and erosion control) associated with the
pit, and (2) decontamination and cleanup and disposal of the Mill building and
equipment and tailings cells after Mill decommissioning. Current liabilities for
such efforts have been established at approximately $19,767,000 by the Wyoming
Department of Environmental Quality for mine pit site matters (exercising
EPA-delegated jurisdiction to administer the Clean Water Act and the Clean Air
Act, and directly administering Wyoming statutes on mined land reclamation), and
by the NRC for decontamination and cleanup of the Mill and Mill tailings cells.
An irrevocable letter of credit has been provided by the Morgan Guaranty Trust
Company of New York in lieu of a surety bond to cover the reclamation costs for
the open pit mine site and the mill. The letter of credit was obtained by
Kennecott Uranium Company to cover all reclamation costs related to mining and
drilling operations in the State of Wyoming. The EPA has continuing jurisdiction
under the Resource Conservation and Recovery Act, pertaining to any hazardous
materials which may be on site when cleanup work is started.
82
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
Although Crested and the other GMMV parties are liable for all
reclamation and environmental compliance costs associated with Mill and site
maintenance, as well as Mill decontamination and cleanup and site reclamation
and cleanup after the Mill is decommissioned, Crested believes it is unlikely
Crested will have to pay for such costs directly. First, based on current
estimates of cleanup and reclamation costs (reviewed annually by the oversight
agencies), such costs may be within the $50,000,000 development commitment of
Kennecott Uranium Company for GMMV subject to the provisions of the Acquisition
Agreement. These costs are not expected to increase materially, if the Mill is
not put into full operation. Second, to the extent GMMV is required to spend
money on reclamation and environmental liabilities related to previous Mill and
site operations during ownership by Minerals Exploration Company (a UNOCAL
subsidiary), UNOCAL has agreed to fund up to $8,000,000 of such costs (provided
such costs are incurred before February 1, 2001 and before Mill production
resumes), which would be recoverable only out of future Mill production (see
above). Third, payment of the GMMV reclamation and environmental liabilities
related to the mill is guaranteed by Kennecott Corporation, parent of Kennecott
Uranium Company. Last, GMMV will set aside a portion of operating revenues to
fund reclamation and environmental liabilities once mining and milling
commences. To date, ongoing Mill maintenance expense is funded by Kennecott as
part of its development commitment.
Kennecott will be entitled to contribution from the USE parties in
proportion to their participation interests in GMMV, if Kennecott is required to
pay Mill cleanup costs directly pursuant to its guarantee. Such payments by
Kennecott only would be reimbursed if the liabilities cannot be satisfied within
the initial $50,000,000 expenditure commitment, and then only to the extent
there are insufficient funds from the reclamation reserve (to be built up out of
GMMV operating revenues). In addition, if and to the extent such liabilities
resulted from UNOCAL's Mill operations, and payment of the liabilities was
required before February 1, 2001 and before Mill production resumes, then up to
$8,000,000 of that amount would be paid by UNOCAL, before Kennecott would be
required to pay on its guarantee. Accordingly, although the extent of any
ultimate Crested liability for contribution to Mill cleanup costs cannot be
predicted, USE and Crested will only be required to pay its proportional share
of Mill cleanup if a) the liabilities cannot be satisfied with the initial
$50,000,000 expenditure commitment from Kennecott, b) there are insufficient
funds from the reclamation reserve to be built up out of GMMV operating revenues
and c) payments are not available from UNOCAL. As of June 1997, the obligation
to continue to hold the mill in a standby mode to protect certain tax benefits
sold by Consumers Power expired and the Company and USE are no longer under this
obligation.
Sutter Gold Mining Company ("SGMC")
SGMC which is currently owned 3.2% by the Company, 30.7% by USE and
66.1% by other investors, owns interests in gold mineral properties in
California. Currently, the property is in development and costs consist of
drilling, permitting, holding costs and administrative costs. No substantial
mining has been completed, although a 2,800 foot decline through the identified
ore zones for an underground mine was acquired in the purchase. SGMC's policy is
to provide reclamation reserves as ore is produced on a unit-of-production
basis. Current reclamation obligations are covered by a $27,000 reclamation
bond, which SGMC has recorded as a reclamation liability as of May 31, 1997.
83
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997, 1996 and 1995
(continued)
Plateau Resources Limited ("Plateau")
The environmental obligations acquired with the acquisition of Plateau
include all environmental and reclamation obligations relating to the Shootaring
Mill. Based on the bonding requirements, Plateau transferred $2,500,000 to a
trust account as financial surety to pay future costs of mill decommissioning,
site reclamation and long-term site surveillance. In addition, Plateau has
recorded additional obligations for the estimated holding and maintenance costs
needed until the mill is placed in service or decommissioning begins. In fiscal
1997, Plateau increased the NRC surety to a cash bond of $6,784,000 in order to
have its standby license changed by the NRC to operational. As of June 1997, the
obligation to continue to hold the Shootaring Canyon Mill in a standby mode to
protect certain tax benefits associated with the Mill and sold by Consumers
Power expired. The Company and USE used the funds held for this purpose to
increase the NRC surety cash bond.
Executive Benefits
The Company and USE are committed to pay the estates of certain of their
officers an amount equal to one year's salary for one year after their death,
and reduced amounts to be set by the Board of Directors, for a period of up to
five years thereafter.
84
<PAGE>
PART III
In the event a definitive proxy statement containing the information
being incorporated by reference into this Part III is not filed within 120 days
of May 31, 1997, the Registrant will file such information under cover of a Form
10-K/A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 with respect to directors and
certain executive officers is incorporated herein by reference to Registrant's
Proxy Statement for the 1997 Annual Meeting of Shareholders. The information
regarding the remaining executive officer is contained in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference
to the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by Item 12 is incorporated herein by reference
to the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by reference
to the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders.
85
<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................................49
Consolidated Balance Sheets - May 31, 1997 and 1996..................50-51
Consolidated Statements of Operations
for the Years Ended May 31, 1997, 1996 and 1995 ........................52
Consolidated Statements of Shareholders'
Equity for the Years Ended May 31, 1997, 1996 and 1995..................53
Consolidated Statements of Cash Flows
for the Years Ended May 31, 1997, 1996 and 1995......................54-55
Notes to Consolidated Financial
Statements...........................................................56-84
(ii) Affiliate Financials as Schedules
(a) Green Mountain Mining Venture
Report of Independent Public Accountants........................93
Balance Sheet - December 31, 1996 and 1995......................94
Statement of Operations for the Period
from June 1, 1990 (Date of Inception)
through December 31, 1996.......................................95
Statement of Changes in Partners' Capital
for the Period from June 1, 1990 (Date of
Inception) through December 31, 1996............................96
Statement of Cash Flows for the Period
from June 1, 1990 (Date of Inception)
through December 31, 1996.......................................97
Notes to Financial Statements...............................98-103
(b) Sheep Mountain Partners
86
<PAGE>
The Registrant's partner in SMP, Nukem/CRIC, have refused to provide
certain information concerning SMP to SMP's independent public
accountants. The information requested concerns partnership costs
for uranium purchases. USECC and Nukem/CRIC disagree as to whether
uranium costs of the partnership means: (i) the price at which
Nukem/CRIC pays for purchases of uranium for SMP; or (ii) the price
which CRIC charges SMP for the uranium.
As a result, the independent public accountants have informed the
Registrant and USE that they have been unable to complete their
audit of SMP, and are unable to render a report on SMP's financial
statements. The Registrant and SMP's independent public accountants
are seeking to resolve these uncertainties so that SMP's financial
statements may be finalized and filed. When these matters are
resolved, the SMP financial statements will be filed under cover of
a Form 10-K/A.
Balance Sheets - May 31, 1997 and 1996........................*
Statements of Operations - Years Ended
May 31, 1976, 1996 and 1995...................................*
Statements of Changes in Partners' Capital - Years Ended
May 31, 1997, 1996 and 1995...................................*
Statements of Cash Flows - Years Ended
May 31, 1997, 1996 and 1995...................................*
Notes to the Financial Statements.............................*
*To be filed under cover of a Form 10-K/A.
All other schedules have been omitted because the information is not
applicable or because the information is included in the financial
statements.
87
<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....................................[9]
4.2 Form of Stock Option Agreement and
Schedule, Options issued 1992...............................[9]
4.3 Form of Stock Option Agreement and
Schedule, Options issued 1/96...............................[9]
4.4 USE Restricted Stock Bonus Plan
as Amended through 2/94.....................................[9]
4.5 Amendment to Warrant to Purchase 200,000
Common Shares of USE.......................................104
4.6 Amendment to USE 1989 Incentive Stock
Option Plan (12/13/96).....................................105
4.7 USE 1996 Stock Award Program (Plan)....................106-107
4.8 USE Restated 1996 Stock Award Plan and Amendment to
USE 1990 Restricted Stock Bonus Plan...................108-111
10.1 Promissory Note from Crested to USE (5/31/97)..........112-113
10.2 Management Agreement - USE - CC.............................[3]
10.3 Joint Venture Agreement - Registrant and USE................[2]
10.4 U.S. Energy Corp. Employee Stock Ownership Plan.............[2]
10.5 Assignment and Lease - Parador..............................[3]
10.6 Employment Agreement - Daniel P. Svilar.....................[2]
10.7 Executive Officer Death Benefit Plan........................[2]
10.9 Big Eagle Acquisition Agreement with PMC....................[4]
10.10 Ft. Peck Agreement - Drilling and Production Services.......[3]
10.17 Sweetwater Mill Acquisition Agreement.......................[3]
88
<PAGE>
10.18 Self Bond Agreement - Crooks Gap Properties....................[1]
10.21 Master Agreement - Mt. Emmons/AMAX Inc.........................[5]
10.23 Crooks Gap Property Acquisition Agreement......................[6]
10.26 Memorandum of Partnership Agreement - GMMV.....................[2]
10.27 Mineral Properties Agreement - Congo Area - PMC................[2]
10.29 Memorandum of Partnership Agreement - SMP......................[1]
10.30 Plateau Acquisition - Stock Purchase Agreement
and Related Exhibits...........................................[7]
10.41 Option and Sales Agreements -
Gunnison Property Parcel A.....................................[8]
10.42 Option and Sales Agreements -
Gunnison Property Parcel B.....................................[8]
10.43 Contract for Sale of Wind River Estates
to Arrowstar...................................................[9]
10.44 Contract for sale of Jeffrey City Six-Plex
to Tag Development, Inc........................................[9]
10.45 Development Agreement with First-N-Last........................[9]
10.46 Operating Agreement with First-N-Last..........................[9]
10.49 Acquisition Agreement between
Kennecott Uranium Company,
USE and USECC regarding GMMV (6/23/97).....................114-148
10.50 Exhibit A to Acquisition Agreement (see 10.49)
Promissory Note from Kennecott Uranium Company to
Kennecott Energy Company regarding GMMV ...................149-153
10.51 Exhibit B to Acquisition Agreement (see 10.49)
Mortgage, Security Agreement, Financing Statement and
Assignment of Proceeds, Rents and Leases...................154-183
10.52 Exhibit G to Acquisition Agreement
(see 10.49) - Contract Services Agreement
for the Sweetwater Uranium Mill Facility...................184-217
10.53 Exhibit H to Acquisition Agreement
(see 10.49) - Mineral Lease Agreement .....................218-245
10.54 Exhibit I to Acquisition Agreement (see 10.49) - Fourth
Amendment of Mining Venture Agreement among
Kennecott Uranium Company, USE and USECC...................246-257
10.55 Master Resolution Agreement
regarding Gunnison Properties..............................258-262
89
<PAGE>
10.56 Membership Pledge Agreement
regarding Gunnison Properties..............................263-269
10.57 Management Agreement between SGMC and USECC................270-286
10.58 Outsourcing and Lease Agreement between YSFC and USECC.....287-290
10.59 Convertible Promissory Note from YSFC to USECC.............291-293
21 Subsidiaries of Registrant.....................................294
By Reference
[1] Incorporated by reference from the like-numbered exhibits to the
Registrant's Form 10-K for the year ended May 31, 1989.
[2] Incorporated by reference from the like-numbered exhibits to the
Registrant's Form 10-K for the year ended May 31, 1990.
[3] Incorporated by reference from the like-numbered exhibits to the
Registrant's Form 10-K for the year ended May 31, 1991.
[4] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form 10-Q for the period ended February 28, 1991.
[5] Incorporated by reference from the like-numbered exhibits of AMAX's
Schedule 13D filed on or about August 3, 1987.
[6] Incorporated by reference from the like-numbered exhibits of
Registrant's Form 10-K for the year ended May 31, 1988.
[7] Incorporated by reference from exhibit A to the U.S. Energy Corp.
Form 8-K reporting an event of August 11, 1993.
[8] Incorporated by reference from the like- numbered exhibits of the
Registrant's Form 10-K for the year ended May 31, 1995.
[9] Incorporated by reference from the like- numbered exhibits of the
Registrant's Form 10-K for the year ended May 31, 1996.
(b) Reports filed on Form 8-K.
During the fourth quarter of the fiscal year ended on May 31, 1997,
the Registrant filed one report on Form 8-K under Item 5, Other Events,
reporting an event of March 6, 1997.
(c) Required exhibits follow the signature page and are listed above under Item
14 (a)(3).
(d) Required financial statement schedules are listed and attached hereto in
Item 14(a)(2).
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<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: October 14, 1997 By: /S/ JOHN L. LARSEN
----------------------------------
JOHN L. LARSEN,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: October 14, 1997 By: /S/ JOHN L. LARSEN
----------------------------------
JOHN L. LARSEN, Director
Date: October 13, 1997 By: /S/ MAX T. EVANS
----------------------------------
MAX T. EVANS, Director
Date: October 14, 1997 By: /S/ DANIEL P. SVILAR
----------------------------------
DANIEL P. SVILAR, Director
Date: October 14, 1997 By: /S/ MICHAEL D. ZWICKL
----------------------------------
MICHAEL D. ZWICKL, Director
Date: October ___, 1997 By:
----------------------------------
KATHLEEN R. MARTIN, Director
Date: October 14, 1997 By: /S/ ROBERT SCOTT LORIMER
----------------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer and
Chief Accounting Officer
91
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
Report on Audits of Financial Statements
as of December 31, 1996 and 1995 and for the
years ended December 31, 1996, 1995 and 1994,
and the period from inception
(June 1, 1990) to December 31, 1996
92
<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, 1996 and 1995, and
the related statements of operations, changes in Venture partners' capital, and
cash flows for the years ended December 31, 1996, 1995 and 1994, and the period
from inception (June 1, 1990) to December 31, 1996. These financial statements
are the responsibility of the Venture's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Green Mountain Mining Venture
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years ended December 31, 1996, 1995 and 1994, and the period from
inception (June 1, 1990) to December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Salt Lake City, Utah
May 6, 1997, except for Note 5, as
to which the date is June 17, 1997
93
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
<TABLE>
BALANCE SHEET
------
<CAPTION>
AS OF DECEMBER 31,
1996 1995
ASSETS
<S> <C> <C>
Assets:
Due from USECC $ - $ 1,212
Property and equipment (Note 3):
Mineral properties and mine development costs 22,812,077 22,443,305
Buildings 24,815,009 24,815,009
Machinery and equipment 403,000 -
-------------- --------------
48,030,086 47,258,314
-------------- --------------
Total assets $ 48,030,086 $ 47,259,526
============== ==============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Due to USECC $ 469,032 $ -
Reclamation liabilities (Note 3) 23,620,000 23,620,000
-------------- --------------
Total liabilities 24,089,032 23,620,000
-------------- --------------
Commitments and contingencies (Notes 3 and 4)
Partners' capital:
Kennecott Uranium Company 11,970,527 11,819,763
USECC 11,970,527 11,819,763
-------------- --------------
23,941,054 23,639,526
-------------- --------------
Total liabilities and partners' capital $ 48,030,086 $ 47,259,526
============== ==============
<FN>
The accompanying notes are an integral
part of these financial statements
</FN>
</TABLE>
94
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
<TABLE>
STATEMENT OF OPERATIONS
-------
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 1, 1990)
YEAR ENDED DECEMBER 31, TO DECEMBER 31,
------------------------------------------- ---------------
1996 1995 1994 1996
------------ ------------ -------------- ---------------
<S> <C> <C> <C> <C>
Cost and expenses:
Maintenance and holding costs $ 1,838,820 $ 1,697,234 $ 1,877,528 $ 9,457,836
Marketing costs - - 85,676 247,598
------------ ------------ -------------- --------------
Net loss $ 1,838,820 $ 1,697,234 $ 1,963,204 $ 9,705,434
============ ============ ============== ==============
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
95
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
<TABLE>
STATEMENT OF CHANGES IN VENTURE PARTNERS CAPITAL
-----
<CAPTION>
Period from
inception
(June 1, 1990)
YEAR ENDED DECEMBER 31, TO DECEMBER 31,
---------------------------------------------- ---------------
1996 1995 1994 1996
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 11,819,763 $ 11,510,240 $ 11,348,745 $ -
Kennecott Uranium Company 11,819,763 11,510,240 11,348,745
Capital Contributions (Note 1):
Kennecott Uranium Company 1,070,174 1,158,140 1,143,097 16,823,244
USECC 1,070,174 1,158,140 1,143,097 16,823,244
Net loss:
Kennecott Uranium Company (919,410) (848,617) (981,602) (4,852,717)
USECC (919,410) (848,617) (981,602) (4,852,717)
Balance at end of period:
Kennecott Uranium Company $ 11,970,527 $ 11,819,763 $ 11,510,240 $ 11,970,527
USECC $ 11,970,527 $ 11,819,763 $ 11,510,240 $ 11,970,527
<FN>
The accompanying notes are an integral
part of these financial statements
</FN>
</TABLE>
96
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
<TABLE>
STATEMENT OF CASH FLOWS
-----
PERIOD FROM
<CAPTION>
INCEPTION
(JUNE 1, 1990)
YEAR ENDED DECEMBER 31, TO DECEMBER 31,
--------------------------------------------- ---------------
1996 1995 1994 1996
------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,838,820) $(1,697,234) $(1,963,204) $ (9,705,434)
Increase (decrease) in due to and due from
USECC 329,171 (47,889) (34,782) 298,447
------------ ----------- ----------- -------------
Net cash used in operating activities (1,509,649) (1,745,123) (1,997,986) (9,406,987)
------------ ----------- ----------- -------------
Cash flows from investing activities:
Cost of buildings, mineral properties mine
development, and machinery and equipment (771,772) (555,448) (283,194) (8,683,086)
Increase (decrease i due to and due from
USECC 141,073 (15,709) (5,014) 170,585
------------ ----------- ----------- -------------
Net cash used in investing activities (630,699) (571,157) (288,208) (8,512,501)
------------ ----------- ----------- -------------
Cash flows from financing activities:
Capital contributions 2,140,348 2,316,280 2,286,194 17,919,488
------------ ----------- ----------- -------------
Net change in cash and cash equivalents $ - $ - $ - $ -
=========== =========== =========== =============
Cash and cash equivalents:
At beginning of period $ - $ - $ - $ -
At end of period - - - -
Supplemental schedule of non-cash activities:
During 1990 and 1992 the Venture acquired
mineral properties an an established
uranium processing milling exchange
for the assumption of reclamation
liabilities associated with the
properties. $ 23,620,000
In 1990 the Venture partners contributed mineral
properties and buildings which were recorded
at the contributing partners' historical cost. $ 15,727,000
<FN>
The accompanying notes are an integral
part of these financial statements
</FN>
</TABLE>
97
<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 explore for, evaluate, develop, mine and market
the mineral resources from the Green Mountain properties located in
south-central Wyoming. Kennecott has a 50% interest in GMMV, and USE and
Crested ("USECC") collectively have a 50% interest. GMMV was formed June
1, 1990, with each partner contributing its portion of the Green
Mountain properties. Kennecott acquired its portion of the Green
Mountain properties from USECC in 1990 for a cash payment of $15.0
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
May 6, 1997, the Management Committee has not approved a budget for the
year ending December 31, 1997. 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, 1996, Kennecott has contributed $17,919,488 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.
Continued
98
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
1. ORGANIZATION OF THE JOINT VENTURE, Continued:
Through December 31, 1996, the activities of the Venture have consisted
primarily of the development and maintenance of the Green Mountain
properties. While these activities are expected to continue in the
future, additional development at substantially higher annual levels is
required prior to the commencement of commercial production. Such
commencement is not expected to occur until the venture partners have
agreed that all economic and other conditions justify such commencement.
Therefore, the Venture is considered to be in the development stage as
defined in Statement of Financial Accounting Standards No. 7.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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. Amortization of mine
properties and development costs will commence when mining operations
start. Mine development costs incurred to maintain production are
included in operating costs and expenses. Maintenance and holding costs
are expensed as incurred.
The cost of mining equipment, less estimated salvage value, will be
depreciated on the units-of-production method over the estimated
reserves to be recovered or on the straight-line method over the
estimated life of the equipment, whichever is shorter. The cost of
buildings will be depreciated on the straight-line method. Depreciation
of mining equipment and buildings will commence when mining operations
start. Costs of repairs and maintenance are expensed as incurred.
Expenditures that substantially extend the useful lives of assets are
capitalized. When assets are retired or otherwise disposed of, all
applicable costs and accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized currently.
Continued
99
<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.
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, 1996
Kennecott had reimbursed USECC for substantially all development costs
incurred.
Continued
100
<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, Continued:
Building, mineral property and mine development costs incurred by each
of the Venture partners are as follows:
<TABLE>
<CAPTION>
Period from
inception
(June 1, 1990)
YEAR ENDED DECEMBER 31, TO DECEMBER 31,
--------------------------------------------- ---------------
1996 1995 1994 1996
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Kennecott 31,597 43,626 137,482 2,732,181
------------ ------------ ------------ --------------
Total $ 771,772 $ 555,448 $ 283,194 $ 8,683,086
============ ============ ============ ==============
</TABLE>
In December 1990, GMMV acquired additional mineral properties in
exchange for the assumption of reclamation liabilities associated with
those properties of $7.3 million. In 1992, GMMV acquired an established
uranium processing mill (the Sweetwater Mill) in exchange for the
assumption of reclamation liabilities associated with this property of
$16.3 million. Such amounts represent the estimated costs at the
acquisition date to reclaim these properties. Kennecott, on behalf of
GMMV, is self-bonded in the amount of $24.3 million, which is payable to
the Wyoming Department of Environmental Quality ("WDEQ") and the U.S.
Nuclear Regulatory Commission in the event GMMV does not properly
reclaim the above properties or violates the Wyoming Environmental
Quality Act. Before the earlier of January 1, 2001, and resumption of
production, if the GMMV is required to incur reclamation or
environmental costs, the seller of the mill will be liable for the first
$8 million of these costs at the Sweetwater Mill.
The Venture properties include state leases which will expire in May
2001 and October 2006. All fees required to hold the unpatented mining
claims have been paid to the state of Wyoming as of December 31, 1996.
Continued
101
<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, Continued:
At December 31, 1996 and 1995, costs capitalized as property and
equipment are composed of the following:
1996 1995
-------------- -------------
Acquisition costs $ 39,347,000 $ 39,347,000
Development costs 8,683,086 7,911,314
-------------- -------------
$ 48,030,086 $ 47,258,314
============== =============
Acquisition costs include the partners' initial contribution of mineral
properties and buildings recorded at the contributing partners'
historical cost of $15,727,000 and mineral properties and buildings
acquired in exchange for the assumption of reclamation liabilities
totaling $23,620,000.
4. CONTINGENCIES:
In June 1994, Kennecott was served with a complaint filed by Nukem Inc.
(Nukem) and Cycle Resource Investment Corporation (Cycle). The complaint
alleges that when Kennecott entered into the Green Mountain Mining
Venture with USE on June 1, 1990, that Kennecott interfered with a
Uranium Marketing Agreement (UMA) between Nukem and USE and the Sheep
Mountain Partners Partnership Agreement (SMPA) between USE and Cycle.
Nukem and Cycle are each seeking damages in excess of $14 million and
punitive damages.
The case was stayed pending the conclusion of an arbitration proceeding
between Cycle, Nukem and USE. The arbitration panel entered its order in
April 1996, and the stay in this case was lifted. The arbitration panel
held against Nukem in material respects stating that, even if the UMA
had been breached, Nukem suffered no damages thereby. The panel denied
the relief that Cycle sought for alleged breach of the SMPA.
Accordingly, on January 6, 1997, Kennecott filed a motion for summary
judgment contending, among other things, that the arbitration findings
collaterally estop all claims asserted by Nukem and Cycle. The motion is
currently pending. If the motion is denied,
Continued
102
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
4. CONTINGENCIES, Continued:
the case will proceed to trial scheduled in 1997. Kennecott intends to
vigorously prosecute the summary judgment motion, and to vigorously
defend the litigation in the event the motion is denied.
Although the Venture is not a party to the complaint filed by Nukem and
Cycle, the ultimate resolution of this contingency could have an impact
on the properties held by the Venture.
5. SUBSEQUENT EVENT:
Subsequent to year end, Kennecott and USECC continued negotiations
whereby the parties are attempting to extract Kennecott from the GMMV.
These negotiations contemplate USECC buying out the Kennecott interest
in GMMV. No assurance can be given that the negotiations will be
successfully concluded.
Continued
103
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CRESTED CORP. FORM 10-K FOR THE YEAR ENDED MAY 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000025657
<NAME> CRESTED CORP.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 37,100
<SECURITIES> 0
<RECEIVABLES> 663,300
<ALLOWANCES> 3,200
<INVENTORY> 48,300
<CURRENT-ASSETS> 1,049,500
<PP&E> 5,181,300
<DEPRECIATION> 3,017,700
<TOTAL-ASSETS> 6,285,700
<CURRENT-LIABILITIES> 6,592,400
<BONDS> 0
0
0
<COMMON> 10,200
<OTHER-SE> (824,700)
<TOTAL-LIABILITY-AND-EQUITY> 6,285,700
<SALES> 82,300
<TOTAL-REVENUES> 1,703,500
<CGS> 48,400
<TOTAL-COSTS> 48,400
<OTHER-EXPENSES> 2,517,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,900
<INCOME-PRETAX> (1,670,300)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,670,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,670,300)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
