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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934
[Fee Required] for the fiscal year ended May 31, 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
- ---------------------------------------- -----------------------------------
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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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) 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:
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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 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.
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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 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.
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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.
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.
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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.
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
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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.
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
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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.
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.
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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 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.
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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 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
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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 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.
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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.
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
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(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 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.
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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- 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."
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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.
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
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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 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.
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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 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.
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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.
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.
18
<PAGE>
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 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.
19
<PAGE>
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.
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.
20
<PAGE>
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 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.
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<PAGE>
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). 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
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<PAGE>
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.
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
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<PAGE>
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
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.
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<PAGE>
Permits and Future Plans. In August 1993, the Amador County Board of
Supervisors issued a Conditional Use Permit ("CUP") allowing mining of the
Lincoln Mine and milling of production, subject to conditions relating to land
use, environmental and public safety issues, road construction and improvement,
and site reclamation. The permit will allow construction of the mine and mill
facilities in stages as the project gets underway, thereby reducing initial
capital outlays. Additional permits (for road work, dust control and
construction of mill and other surface improvements) need to be applied for in
due course.
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.
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.
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<PAGE>
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 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.
26
<PAGE>
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 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.
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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 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
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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 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
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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 presently $1,180 adjusted annually to reflect changes in the
Consumer Price Index), plus a $0.02 fee per gallon of fuel sold.
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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).
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
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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 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
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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.
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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) Incudes $725,900, $725,900, $725,900, $847,800 and $847,800 of
accrued reclamation costs on uranium properties for fiscal 1997, 1996,
1995, 1994 and 1993, respectively.
<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, 1996
Working Capital Components. Cash used in operating and financing
activities was $703,200 and $496,700, respectively for the year ended May 31,
1997. Cash provided by investing activities during fiscal 1997 was $1,184,400.
For the year, these activities resulted in a net decrease of $15,500 in cash. At
May 31, 1997, the Company had a working capital deficit of $5,542,900 as
compared to a working capital deficit of $6,252,100 at May 31, 1996.
The change in working capital of $709,200 is as a result of increases in
accounts receivable, inventory and other assets and a reductions of the line of
credit and debt to affiliates of $460,300, $14,700, $88,000 and $436,900
respectively. These increases in working capital were offset by reductions in
long-term receivables of $6,200 and increases in accounts payable of $256,600
and current portion of long-term debt of $12,400.
Accounts receivable affiliates increased by $454,600 primarily as a
result of increased amounts to due USECC from GMMV, $406,100 and SGMC of
$56,000. These amounts were paid after May 31, 1997. At May 31, 1996, the
Company owed $88,000 on the line of credit of $1,000,000 that the Company and
USE have. During fiscal 1997, this amount was paid off and at May 31, 1997 a
total of $1,000,000 remained available to the Company and USE on the line of
credit.
Cash used in financing resulted in a net decrease in debt to affiliates
of $436,900 and the line of credit of $88,000. Increased long-term debt payable
to non-affiliates of $28,200 is as a result of the Company financing various
prepaid working capital items.
Cash generated from investing activities were principally from proceeds
of a distribution of SMP and a reduction in the Company's ownership of Sutter
Gold Mining Company. In November 1996, the Company and USE received $4,300,000
from the SMP escrow accounts as partial satisfaction of the monetary damages
awarded by the Arbitration Panel. These funds were applied first to the amounts
due the Company and USE for standby costs. This reduced the Company's investment
in SMP by $1,384,000. The balance was recorded as income of which Crested's
portion was $501,900. The other major reduction in investments was as a result
of the Company and USE accepting contingent warrants
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 1996, because such costs are not anticipated to be incurred for many
years.
See Note K to the Crested consolidated financial statements regarding
reclamation and environmental costs, and the funding thereof.
Capital Resources: The primary source of Crested capital resources for
fiscal 1998 will be cash on hand, advances from USE, equity financing for
affiliated companies, the resolution of the
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: September 10, 1997 By: /S/ JOHN L. LARSEN
----------------------------------
JOHN L. LARSEN,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: September 10, 1997 By: /S/ JOHN L. LARSEN
----------------------------------
JOHN L. LARSEN, Director
Date: September 10, 1997 By: /S/ MAX T. EVANS
----------------------------------
MAX T. EVANS, Director
Date: September 10, 1997 By: /S/ DANIEL P. SVILAR
----------------------------------
DANIEL P. SVILAR, Director
Date: September 12, 1997 By: /S/ MICHAEL D. ZWICKL
----------------------------------
MICHAEL D. ZWICKL, Director
Date: September ___, 1997 By:
----------------------------------
KATHLEEN R. MARTIN, Director
Date: September 12, 1997 By: /S/ ROBERT SCOTT LORIMER
----------------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer and
Chief Accounting Officer
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>
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>
<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>
EXHIBIT 4.5
AMENDMENT TO
WARRANT TO PURCHASE 200,000 COMMOM SHARES
U.S. ENERGY CORP.
WHEREAS, SHAMROCK PARTNERS, LTD. of 111 Veterans Square, Media, PA
19063 ("Holder") was granted a warrant to purchase 200,000 common shares of
U.S. Energy Corp. $.01 par value common stock on January 9, 1996 (the
"Warrant"), with an Expiration Date of January 9, 1997.
NOW THEREFORE, U.S. Energy Corp. hereby extends the Expiration Date of
the Warrant to July 9, 1997.
DATED, nunc pro tunc January 8, 1997.
U.S. ENERGY CORP.
By: /s/ John L. Larsen
--------------------------
JOHN L. LARSEN, President
<PAGE>
EXHIBIT 4.6
AMENDMENT TO 1989 STOCK OPTION PLAN
EFFECTIVE DECEMBER 13, 1996
RESOLUTION
WHEREAS, on December 22, 1995 the Board of Directors of U.S.
Energy Corp. ("USE" or the "Company") adopted an amendment to the U.S.
Energy Corp. 1989 Stock Option Plan (the "Plan") whereby the number of
shares available for issuance under the Plan was increased to 925,000
shares; and
WHEREAS, the Compensation Committee advised the Board, and the
Board agreed that it was in the best interest of the Company to request
shareholder ratification of the Board's decision to amend the Plan to
increase the number of options issuable to 925,000, which would permit
conversion of all outstanding non-qualified options to qualified options
without any other change in the terms of such options (as to exercise
price, conditions of employment and terms of exercise); and
WHEREAS, ratification of the December 22, 1995 Amendment to the
Plan was submitted to shareholders for vote at the 1996 Annual Meeting
of Shareholders on December 13, 1996; and
WHEREAS, the shareholders of U.S. Energy Corp. by majority vote
at the 1996 Annual Meeting of Shareholders ratified the December 22,
1995 Amendment to the 1989 Stock Option Plan increasing the number of
shares available for issuance to 925,000.
NOW THEREFORE BE IT RESOLVED, that the Board of Directors of U.S.
Energy does hereby convert all outstanding non-qualified stock options
as of December 13, 1996, granted under the 1989 Stock Option Plan to
qualified options. All other terms and conditions of the Stock Option
Agreements shall remain in full force and effect.
<PAGE>
EXHIBIT 4.7
U.S. ENERGY CORP.
1996 STOCK AWARD PROGRAM
DECEMBER 13, 1996
U.S. Energy Corp. ("USE"), a Wyoming corporation with executive
offices at 877 North 8th West, Riverton, Wyoming 82501, adopts this 1996
Stock Award Plan effective as of December 13, 1996.
WHEREAS, the Board of Directors of USE agreed to provide an
annual incentive compensation in the form of its common stock to certain
officers of USE and such compensation arrangement was approved by the
shareholders of USE at its 1996 Annual Meeting on December 13, 1996.
NOW THEREFORE, U.S. Energy Corp. adopts the following 1996 Stock
Award Program:
1. An aggregate of 67,000 shares per year for the years 1997
through 2002 is available to be issued to certain officers of USE
provided USE is profitable and the officer is employed by USE on the
date of the grant.
2. If fewer than 67,000 shares is issued during in any year the
unissued balance of the 67,000 share maximum will be available for issue
in subsequent years.
3. The number of shares to be awarded each year out of such
67,000 shares aggregate limit will be determined by the Compensation
Committee of the USE Board of Directors, and will be based on the USE's
earnings per share of Common Stock for the prior fiscal year. Other
factors bearing on the prior year's profitability may be taken into
consideration by the USE Compensation Committee in determining the
number of shares to be issued.
4. The actual number of shares recommended by the Compensation
Committee to be awarded to the officers will be submitted for approval
by the USE shareholders at the USE Annual Meeting held subsequent to the
end of the fiscal year.
5. The total number of shares issued will be divided among the
officers based on the following percentages:
John L. Larsen 29.85%
Daniel P. Svilar 22.39%
Max T. Evans 17.91%
Harold F. Herron 14.93%
R. Scott Lorimer 14.93%
<PAGE>
EXHIBIT 4.7
U.S. Energy Corp.
1996 Stock Award Program
December 13, 1996
Page 2
6. Such shares shall be issued annually on or before January 15
of each applicable year as long as each officer is employed by USE.
However, the Board of Directors reserves the right to defer
authorization to issue the shares at a later date during the same
calendar year. One half of said compensation shall be paid by USE's
subsidiary Crested Corp.
7. Such shares shall be registered under the Securities and
Exchange Act of 1933, as amended, under a Form S-8 registration
statement.
/s/ Max T. Evans
--------------------------
MAX T. EVANS, Secretary
<PAGE>
EXHIBIT 4.8
RESTATED U.S. ENERGY CORP. 1996 STOCK AWARD PLAN
AND
AMENDMENT TO U.S. ENERGY CORP. 1990 STOCK BONUS PLAN
AUGUST 19, 1997
RESOLUTION
WHEREAS, the 14,158 common shares of U.S. Energy Corp. ("USE" or
the "Company") authorized by the shareholders for 1997 issuance under
the 1996 Stock Award Plan, have not been issued; and
WHEREAS, the intent of the Board in authorizing the 1996 Stock
Award Plan was to provide an incentive for such officers constituting
management personnel to remain with the Company and Crested Corp.; and
WHEREAS, the board of directors deem it in the best interests of
the Company to modify the Company's 1996 Stock Award Plan and to further
modify the 1990 Stock Bonus Plan as amended.
NOW, THEREFORE, BE IT RESOLVED, that the 1996 Stock Award Plan
("Plan"), as originally approved by the shareholders of USE at the
December 13, 1996 Annual Meeting, is hereby modified to (i) lower the
annual expense of the Company as reflected on its financial statements,
of issuing the shares, and (ii) provide an incentive for such management
personnel to remain with the Company and Crested Corp. until retirement;
that in connection therewith, the Plan is modified and restated as
follows:
RESTATED 1996 STOCK AWARD PLAN
1. 67,000 shares of Common Stock of the Company shall be available
each year, for an aggregate total of 402,000 shares being
available for issue in the name of certain officers of USE.
14,158 shares have already been approved for issue to five
officers of the Company for the grant year 1997 under the 1996
Stock Award Plan (the "Plan"), of which 8,452 shares have been
recorded on the books of the Company as of May 31, 1997. All
provisions of this Restated 1996 Stock Award Plan (the "Restated
Plan") shall apply to all of those 14,158 shares, as if approved
for original issue hereunder and that the Company's stock
transfer agent be instructed and directed to issue the 14,158
shares to the five officers pursuant to the Resolution approved
by the shareholders at the December 13, 1996 shareholders'
meeting and deliver the shares to the USE Treasurer.
1
<PAGE>
EXHIBIT 4.8
2. The number of shares to be awarded each year out of the 67,000
shares available each year (plus any unissued shares from prior
grant years) shall be determined by the Compensation Committee of
the board of directors of the Company, based upon (i) the
earnings per share of Common Stock for the prior fiscal year (the
first fiscal year to be considered shall be the year ended May
31, 1996, with respect to the first grant year, 1997); and (ii)
other factors bearing on the prior fiscal year's goals and the
achievement of such goals.
3. The total number of shares to be issued shall be allocated among
the officers based on the following percentages:
OFFICER PERCENTAGE
John L. Larsen 29.85%
Daniel P. Svilar 22.39%
Max T. Evans 17.91%
Harold F. Herron 14.93%
R. Scott Lorimer 14.93%
4. The shares shall be issued in the name of the officer, but the
shares and the certificates therefor shall be held in trust by
the Treasurer of the Company. Such shares shall be deemed
outstanding and entitled to vote, however, all voting rights
shall be held and exercised by non-employee directors of the
Company in their sole discretion. All dividends on the shares,
whether in stock, cash or distributions from subsidiary
corporation stock, shall be held in trust by the Treasurer for
the benefit of the officer entitled to such dividends.
5. Shares issued in the name of the officer shall not become
available to or come under the control of the officer in whose
name the shares were issued until termination of employment of
the officer by retirement from the uranium production business,
death or disability. Upon termination of employment, the shares
and certificates shall be released to the officer, subject to the
6 month period (or portion thereof) hold provision which may be
applicable pursuant to paragraph 11 of this Resolution.
6. In the event of an officer terminating his employment prior to
his retirement from the uranium production business (no sooner
than age 55), death or disability, all unallocated shares issued
in his name shall be forfeited to the U.S. Energy Corp. treasury.
The Board of Directors of USE and Crested Corp. can override this
provision if they so deem appropriate.
2
<PAGE>
EXHIBIT 4.8
7. For financial reporting purposes (i) the cost of the stock will
be split with Crested Corp.; (ii) the cost will be amortized on
the books of the Company at 20% per year, and (iii) upon
termination of the officer's employment, the Company will report
the release of the shares (in the fiscal year of termination) on
the Company's books as an expense for the Company in an amount
equal to the closing price of the shares reported on NASDAQ or
such successor market on the termination date less the original
cost booked at time of issuance. No deduction for tax purposes
will be taken until such time as the shares are released and
delivered to the officer or his heirs or estate.
8. In the event there is a change in control of the Company as the
result of a hostile takeover or the Company being acquired by
another entity, and as a further result, the officer's employment
is terminated within 3 years of the change in control, then the
number of shares which have been held in trust in the name of the
officer under this Restated Plan shall be automatically doubled
without further action of the Company and released to such
officer.
9. A registration statement on Form S-8 shall be filed with the
Securities and Exchange Commission for this Restated Plan, to
permit the issuance of shares hereunder as unrestricted except
for such restrictions as may apply because of the affiliation of
the recipients with the Company. This Restated Plan shall be
filed as an exhibit to the Form S-8, and the Company shall not be
required to file a "reoffer prospectus" for resale of any shares
issued under this Restated Plan to any officer of the Company,
until after his retirement, death or disability.
10. For purposes of the reporting obligations of the officers under
Section 16(a) of the Securities Exchange Act of 1934, and the
liability provisions of Section 16(b) of the Act, the receipt by
an officer of shares pursuant to this Restated Plan shall be
reported on Form 4 filed with the SEC by the officer (i) as the
acquisition of securities in the name of the officer (not the
Treasurer); (ii) on Table I of Form 4 (with the price subcolumn
in Column 4 blank); (iii) in Column 6 of Form 4 as directly owned
by the officer, using Transaction Code A pursuant to SEC Rule
16b-3(d); and (iv) all the shares issued shall be reported on the
Form 4, disregarding the vesting provisions for reporting
purposes (however, the vesting mechanism shall be noted by
footnote on the Form 4).
3
<PAGE>
EXHIBIT4.8
11. In order to preserve the exemption from the liability provisions
of Section 16(b) provided by SEC Rule 16b-3(d)(3), under no
circumstances shall any officer dispose of any shares which have
been acquired under this Restated Plan until at least 6 months
after the date of acquisition of the shares (which shall be the
date of award in any grant year). The board of directors
recognizes that generally such 6 month hold provision will not be
applicable, due to the provisions of paragraph 5 of this
Resolution.
RESTATED 1990 STOCK BONUS PLAN
FURTHER RESOLVED, that the Company's 1990 Stock Bonus Plan as
amended, shall be modified by adding the following provisions:
1. None of the shares issued above shall become available to or come
under the control of the officer in whose name the certificates
were issued until termination of employment of the officer by
retirement from the uranium production business, death or
disability. Upon termination of employment, the shares and
certificates shall be released to the officer, subject to the 6
month period (or portion thereof) hold provision which may be
applicable pursuant to the following provision.
(a) In order to preserve the exemption from the liability
provisions of Section 16(b) provided by SEC Rule
16b-3(d)(3), under no circumstances shall any officer
dispose of any shares which have been acquired under this
Restated 1990 Stock Bonus Plan until at least 6 months
after the date of acquisition of the shares (which shall
be the date of award in any grant year).
2. All other provisions of the 1990 Stock Bonus Plan remain and are
in full force and effect.
BE IT FURTHER RESOLVED, that the modifications to the 1996 Stock
Award Plan and the 1990 Stock Bonus Plan shall as required by the
Company's SEC Counsel, be submitted to the Company's shareholders at the
1998 Annual Meeting of Shareholders.
4
<PAGE>
EXHIBIT 10.1
Debtor: CRESTED CORP.
Document defined as the "Note"
PROMISSORY NOTE
$6,023,407.35 Issued as of the 31st day of
- ------------- May, 1997 at Riverton, Wyoming
FOR VALUE RECEIVED, CRESTED CORP., a Colorado corporation in good standing in
Wyoming (Debtor), hereby promises to pay to the order of U.S. ENERGY CORP., a
Wyoming Corporation ("Creditor") (in lawful money of the United States of
America, or with equal value as otherwise expressly permitted herein) at the
office of Creditor located at 877 North 8th West, Riverton, Wyoming, 82501., or
at such other place as Creditor or a future holder hereof (Creditor or such
other holder being sometimes referenced herein as ("HOLDER")) may from time to
time designate in writing, the principal sum of SIX MILLION, TWENTY THREE
THOUSAND, FOUR HUNDRED SEVEN dollars and THIRTY FIVE cents ($6,023,407.35), as
specified below.
This Promissory Note ("Note") has been issued pursuant to the Resolution adopted
by the Boards of Directors of U.S. Energy Corp. and Crested Corp. on April 17,
1997, to transfer amounts owed by Crested Corp. to U.S. Energy Corp. which have
been recorded as accounts receivable to long-term note receivables.
1. PAYMENTS OF PRINCIPAL AND INTEREST
1.1 INTEREST RATE AND MATURITY DATE During the term hereof, the principal amount
hereof, from time to time outstanding, shall bear interest at the rate of six
(6%) percent per annum on the unpaid balance and shall be paid in full on or
before October 1, 1999 (the "Maturity Date").
Payment by Debtor to Creditor on the Maturity Date shall be in an amount equal
to the unpaid balance on this Note.
1.2 PREPAYMENT The indebtedness hereunder may be prepaid in whole or in part
any time, at the election of Debtor.
1.3 PAYMENT IN COMMON STOCK OF DEBTOR. The Debtor reserves the right to pay this
Note either in cash or by issuance of its common shares to Creditor based on the
closing price of Debtor's common stock on the Bulletin Board market or the
average between the bid and asked price on the date payment is made.
2. MISCELLANEOUS PROVISIONS
2.1 ATTORNEYS' FEES Should suit be brought to enforce, interpret or collect any
part of this Note, the prevailing party shall be entitled to recover, as an
element of the costs of suit and not as damages, reasonable attorneys' fees and
other costs of enforcement and collection.
2.2 CHOICE OF LAW AND FORUM THIS NOTE SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF WYOMING, U.S.A., INCLUDING,
WITHOUT LIMITATION, ANY WYOMING LAWS GOVERNING USURY OR PERMISSIBLE RATES OF
INTEREST. EXCEPT AS SET FORTH BELOW, DEBTOR HEREBY AGREES THAT ANY SUIT TO
ENFORCE ANY PROVISION OF, OR TO COLLECT THIS NOTE SHALL BE BROUGHT IN THE
DISTRICT COURT FOR THE COUNTY OF FREMONT-NINTH JUDICIAL DISTRICT, WYOMING,
U.S.A. EACH PARTY HEREBY AGREES THAT SUCH COURT SHALL HAVE EXCLUSIVE IN PERSONAM
JURISDICTION AND VENUE WITH RESPECT TO SUCH PARTY, AND EACH PARTY HEREBY SUBMITS
TO THE EXCLUSIVE IN PERSONAM JURISDICTION AND VENUE OF SUCH COURT. IN ADDITION
TO THE FOREGOING, CREDITOR OR A HOLDER, AT ITS SOLE OPTION, MAY COMMENCE ANY
SUCH SUIT IN ANY JURISDICTION IN WHICH DEBTOR HAS ITS OFFICES OR WHERE ANY
COLLATERAL SECURING THIS NOTE IS LOCATED.
Page 1 of 2
<PAGE>
EXHIBIT 10.1
2.3 DEBTOR'S WAIVERS Except as expressly provided to the contrary herein, Debtor
(and all guarantors, endorsers and other parties now or hereafter becoming
liable for the payment of this Note) hereby waive diligence, presentment,
protest, demand of payment, notice of protest, dishonor and nonpayment, and
waive the legal effect of Holder's failure to give all notices not expressly
provided for herein. Debtor expressly agrees that, without in any way affecting
the liability of Debtor hereunder, the Holder may extend the Maturity Date or
the time for payment of any amount due hereunder. Debtor further waives, to the
full extent permitted by law, the right to plead any and all statutes of
limitation as a defense to any demand on this Note, or on any agreement now or
hereafter securing this Note.
ATTEST: DEBTOR: CRESTED CORP.
/s/ Daniel P. Svilar BY: /s/ Max T. Evans
- ---------------------------------- ------------------------------
Secretary MAX T. EVANS, President
ACKNOWLEDGEMENT
STATE OF WYOMING )
)ss.
COUNTY OF FREMONT )
On this 5TH day of June, 1997, personally appeared before me MAX T.
EVANS who being by me duly sworn did say that he is the PRESIDENT of Crested
Corp. and duly acknowledged that said instrument was signed on behalf of said
company by authority of its bylaws or a resolution of its board of directors and
said MAX T. EVANS duly acknowledged to me that said company executed the same.
My Commission Expires: May 10, 2001 /s/ Bryon G. Mowry
-----------------------------
Notary Public
(NOTARY SEAL)
Page 2 of 2
<PAGE>
EXHIBIT 10.49
ACQUISITION AGREEMENT
BETWEEN
KENNECOTT URANIUM COMPANY
as Seller
AND
U. S. ENERGY CORP.
and a Joint Venture between
U.S. ENERGY CORP.
AND
CRESTED CORP.
as Buyers
EXHIBIT 10.49
June 23, 1997
<PAGE>
EXHIBIT 10.49
PAGE
1. Definitions and Construction..................................1
a. Definitions in Annex...................................1
b. Use of ................................................1
c. Headings...............................................1
d. References.............................................1
e. Incorporation of Exhibits, Annexes, and Schedules......1
f. $......................................................1
2. Purchase and Sale of GMMV Interest............................2
a. Basic Transaction......................................2
b. Assumption of Liabilities..............................2
c. Cash Price.............................................2
d. Assumption and Payment of KEC Note.....................2
e. The Closing............................................2
f. Deliveries at the Closing..............................2
g. Allocation.............................................3
3. Representations and Warranties Concerning the Transaction.....3
a. Representations and Warranties of the Seller...........3
b. Representations and Warranties of the Buyers...........4
4. Representations and Warranties Concerning the GMMV............5
a. Acquired Assets........................................5
b. Financial Statements...................................5
c. Events Subsequent to Most Recent Fiscal Month End......6
d. Tax Matters............................................6
e. Litigation.............................................6
f. Environmental Law Violation............................6
5. Pre-Closing Covenants.........................................6
a. General................................................6
b. Notices and Consents...................................7
c. Full Access............................................7
d. Sweetwater Mill........................................7
e. Mineral Lease Agreement................................7
f. Amendment of GMMV Agreement............................7
g. Commitment to Underwriting.............................7
h. Signing Bonus..........................................8
<PAGE>
EXHIBIT 10.49
TABLE OF CONTENTS
(CONTINUED)
PAGE
6. Other Covenants..............................................8
a. General...............................................8
b. Litigation Support....................................8
c. Other Acquisition Agreements..........................8
d. Taxes.................................................8
e. Reclamation Sinking Fund.............................10
f. Employees............................................10
7. Conditions to Obligation to Close...........................10
a. Conditions to Obligation of the Buyers...............10
b. Conditions to Obligation of the Seller...............11
8. Remedies for Breaches of This Agreement.....................12
a. Survival of Representations and Warranties...........12
b. Indemnification Provisions for Benefit of the Buyers.12
c. Indemnification Provisions for Benefit of the Seller.13
d. Matters Involving Third Parties......................14
e. Determination of Adverse Consequences................15
f. Other Indemnification Provisions.....................15
9. Termination.................................................15
a. Termination of Agreement.............................15
b. Effect of Termination................................16
10. Use of Information......................................... 16
a. Confidentiality......................................16
c. Accuracy.............................................17
d. Use at Own Risk......................................17
11. Miscellaneous...............................................18
a. Press Releases and Public Announcements..............18
b. No Third-Party Beneficiaries.........................18
c. Entire Agreement.....................................18
d. Succession and Assignment............................18
e. Counterparts.........................................18
<PAGE>
EXHIBIT 10.49
TABLE OF CONTENTS
(CONTINUED)
PAGE
f. Disclaimer of Other Representations and Warranties....18
g. Notices...............................................19
h. Governing Law.........................................19
i. Waiver of Jury Trial..................................20
j. Amendments and Waivers................................20
k. Severability..........................................20
l. Expenses..............................................20
m. Joint and Several Obligations.........................20
n. Final Termination.....................................20
o. Specific Performance..................................20
<PAGE>
EXHIBIT 10.49
TABLE OF CONTENTS
(CONTINUED)
PAGE
Exhibit "A" Copy of KEC Note
Exhibit "B" Copy of KEC Mortgage
Exhibit "C" Intentionally Omitted
Exhibits"D-1"
through "D-4" Forms of Transfer, Assignment and Assumption Documents
Exhibit "E" Form of Assumption of KEC Note
Exhibit "F" Financial Statements
Exhibit "G" Form of Contract Service Agreement (with Work Plan and
Budget attached)
Exhibit "H" Form of Mineral Lease Agreement (with Work Plan and Budget
attached)
Exhibit "I" Form of Amendment to GMMV Agreement
Exhibit "J" Form of Confidentiality and Release Agreement
Exhibit "K" Form of Officer's and Secretary's Certificates to be
Delivered at Closing
Annex I Exceptions to the Seller's Representations and
Warranties; Bonds to be Replaced
Annex II Exceptions to the Buyers' Representations and Warranties
Concerning the Transaction
Annex III Definitions
<PAGE>
EXHIBIT 10.49
ACQUISITION AGREEMENT
This Agreement is entered into as of June 23, 1997, by and among U.S.
Energy Corp., a Wyoming corporation ("USE"), a joint venture between USE and
Crested Corp., a Colorado corporation ("CRESTED") (the joint venture being
referred to herein as "USE/CC" and USE and USE/CC being collectively referred to
herein as the "BUYERS"), and Kennecott Uranium Company, a Delaware corporation
(the "SELLER"). The Buyers and the Seller are referred to collectively herein as
the "PARTIES."
The parties entered into a Mining Venture Agreement dated June 1, 1990
for the formation and operation of the Green Mountain Mining Venture (the
"GMMV") which is currently conducted under the "GMMV Agreement" (as defined in
Annex III).
The Seller desires to sell its interest in the GMMV and certain other
assets, as hereinafter set forth, to the Buyers, and the Buyers desire to
purchase such interests and assets.
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows.
1. Definitions and Construction.
a. DEFINITIONS IN ANNEX. Capitalized terms used herein shall have
the respective meanings assigned to them in Annex III attached hereto.
b. USE OF "SS.". Except where the context otherwise implies, the
use of "ss." without further reference means a reference to a section or other
subdivision of this Agreement.
c. HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
d. REFERENCES. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
e. INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES. The
Exhibits, Annexes, and Schedules identified in this Agreement are incorporated
herein by reference and made a part hereof.
f. "$". The symbol "$" refers to United States currency in
dollars.
2. PURCHASE AND SALE OF GMMV INTEREST.
a. BASIC TRANSACTION. On and subject to the terms and conditions
of this Agreement and in consideration of the payment by Seller of $4,000,000
(the "SIGNING BONUS")
<PAGE>
EXHIBIT 10.49
to Buyers on execution and delivery of this Agreement, the receipt of which is
hereby acknowledged, the Buyers agree to purchase from the Seller, and the
Seller agrees to sell and transfer, convey and deliver to the Buyers, at the
Closing, the GMMV Interest together with all of the Acquired Assets, for the
consideration specified in this ss. 2.
b. ASSUMPTION OF LIABILITIES. On and subject to the terms and
conditions of this Agreement, the Buyers agree to jointly and severally assume
and become responsible for all of the Assumed Liabilities at the Closing. The
Buyers will not assume or have any responsibility, however, with respect to any
obligation or liability of the Seller not included within the definition of
Assumed Liabilities.
c. CASH PRICE. The Buyers agree to pay to the Seller at the
Closing $15,000,000 (the "CASH PRICE") by delivery of cash payable by wire
transfer or delivery of other immediately available funds.
d. ASSUMPTION AND PAYMENT OF KEC NOTE. Buyers understand and
agree that immediately prior to the delivery of this Agreement, Kennecott Energy
Company ("KEC"), an Affiliate of Seller, loaned the sum of $16,000,000 to Seller
as evidenced by a promissory note of even date herewith (the "KEC NOTE") a copy
of which is attached as Exhibit "A" hereto. The KEC Note is secured by a Deed of
Trust, Mortgage, Security Agreement, Financing Statement and Assignment of
Proceeds, Rents and Leases of even date herewith (the "KEC MORTGAGE"), a copy of
which is attached as Exhibit "B," encumbering, among other things, the GMMV
Interest and all of the Acquired Assets. The KEC Note (including all unpaid
principal, interest and other amounts) shall be assumed by the Buyers, at
Closing, under the Assumption Agreement attached hereto as Exhibit "E".
e. THE CLOSING. The closing of the transactions contemplated by
this Agreement (the "CLOSING") shall take place at the offices of Parsons, Behle
& Latimer in Salt Lake City, Utah commencing at 11:00 a.m. local time on or
before the fifth (5th) business day following the satisfaction or waiver of all
conditions to the obligations of the Parties to consummate the transactions
contemplated hereby (other than conditions with respect to actions the
respective Parties will take at Closing itself), or such other date as the
Buyers and Seller may mutually determine (the "CLOSING DATE"). The Parties agree
that Closing shall occur no later than the Extended Closing Date.
f. DELIVERIES AT THE CLOSING. At the Closing, (i) the Seller will
deliver to the Buyers the various certificates, instruments, and documents
referred to in ss. 7(a) below, (ii) the Buyers will deliver to the Seller the
various certificates, instruments, and documents referred to in ss. 7(b) below,
(iii) the Seller will execute, acknowledge (if appropriate) and deliver to the
Buyers the transfer, assignment and assumption documents in the forms attached
hereto as Exhibit "D-1" through "D-4"; (iv) the Buyers will execute, acknowledge
and deliver to the Seller an assumption of the KEC Note in the form attached
hereto as Exhibit "E"; and (v) the Buyers will deliver to the Seller the
consideration specified in ss. 2(c) above. Any delivery made, at any time, by
Seller to USE shall constitute delivery to the Buyers, and after any such
delivery, Seller shall have no further obligation, duty or liability to USE/CC
in connection therewith.
2
<PAGE>
EXHIBIT 10.49
g. ALLOCATION. The Parties shall mutually agree to the allocation
of the Cash Price (and all other capitalizable costs arising under this
Agreement) at the Closing Date among the GMMV Interest and the Acquired Assets
for all purposes (including financial accounting and tax purposes). In the event
the Parties cannot reach such agreement, the allocation of the Cash Price (and
all other capitalizable costs arising under this Agreement) to the GMMV Interest
and Acquired Assets will be made in accordance with an appraisal of said assets
performed by one of the "big six" accounting firms not including the independent
auditors of Kennecott or the Buyers. Such accounting firm shall be selected
based on the lowest bid for such appraisal. Costs of such appraisal shall be
equally borne by Buyers and Seller.
3. REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTION.
a. REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller
represents and warrants to the Buyers that the statements contained in this ss.
3(a) are correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date (as though made then and as though
the Closing Date were substituted for the date of this Agreement throughout this
ss. 3(a)).
i. ORGANIZATION OF SELLER. The Seller is a corporation duly
organized, validly existing, and in good standing under the laws of the
State of Delaware.
ii. AUTHORIZATION OF TRANSACTION. The Seller has full power
and authority (including full corporate power and authority) to execute and
deliver this Agreement and to perform its obligations hereunder. This
Agreement constitutes the valid and legally binding obligation of the
Seller, enforceable in accordance with its terms and conditions. Except as
set forth in Annex I attached hereto, the Seller need not give any notice
to, make any filing with, or obtain any authorization, consent, or approval
of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement.
iii. NONCONTRAVENTION. Except as set forth in Annex I
attached hereto, neither the execution and the delivery of this Agreement,
nor the consummation of the transactions contemplated hereby, will violate
any constitution, statute, regulation, rule, injunction, judgment, order,
decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which the Seller is subject or any
provision of its charter or bylaws.
iv. BROKERS' FEES. The Seller has not retained any broker,
finder, or agent or incurred any liability or obligation to pay any fees or
commissions to any broker, finder or agent, with respect to the
transactions contemplated by this Agreement for which the Buyers could
become liable or obligated.
v. BANKRUPTCY INSOLVENCY. No filing of any petition or
commencement of any case or proceeding by or against Seller under any
federal or state law relating to insolvency, bankruptcy, or reorganization,
has occurred or been threatened; no adjudication that Seller is insolvent
or bankruptcy has been made; no order for relief under the United States
Bankruptcy Code with respect to Seller has been entered; and no
3
<PAGE>
EXHIBIT 10.49
appointment of or taking of possession by a custodian, trustee or
receiver for all or any assets of Seller has occurred. Seller has
neither executed an assignment for the benefit of creditors, nor
convened a meeting of its creditors, or any class thereof, for the
purposes of effecting a moratorium upon or extension or composition of
its debts; nor has Seller admitted in writing its inability to pay its
debts generally and is generally paying its debts.
vi. GMMV INTEREST. Seller has not assigned, transferred or
encumbered the GMMV Interest (except as set forth in the GMMV Agreement or
this Agreement or the Exhibits hereto).
b. REPRESENTATIONS AND WARRANTIES OF THE BUYERS. Each of the
Buyers represent and warrant to the Seller that the statements contained in this
ss. 3(b) are correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date (as though made then and as though
the Closing Date were substituted for the date of this Agreement throughout this
ss. 3(b)); and will be correct and complete as of the date of assignment and as
of the Closing Date with respect to the Acquiring Person (as though made on such
dates and as though the Acquiring Person were substituted for Buyers and such
dates were substituted for the date of this Agreement throughout this ss. 3(b)).
i. ORGANIZATION OF THE BUYERS. USE is a corporation duly
organized, validly existing, and in good standing under the laws of the
State of Wyoming. Crested is a corporation duly organized, validly existing
and in good standing under the laws of the State of Colorado. USE/CC is a
joint venture currently existing pursuant to an agreement which is the
valid and legally binding obligation of USE and Crested enforceable against
each in accordance with its terms and conditions.
ii. AUTHORIZATION OF TRANSACTION. Each of the Buyers has full
power and authority (including full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding
obligation of each of the Buyers, enforceable against each in accordance
with its terms and conditions. Except as set out in Annex II attached
hereto, neither Buyer need give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement.
iii. NONCONTRAVENTION. Except as set out in Annex II attached
hereto, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order,
decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which either of the Buyers is subject or
any provision of either's articles, bylaws or constituting agreement.
iv. BROKERS' FEES. Neither Buyer has retained any broker,
finder, or agent or incurred any liability or obligation for any fees or
commissions to any broker, finder or agent, with respect to the
transactions contemplated by this Agreement for which Seller could become
liable or obligated.
4
<PAGE>
EXHIBIT 10.49
v. NET WORTH. USE and Crested have a Market Capitalization of
at least $25,000,000, and a positive consolidated tangible net worth
determined under GAAP. No filing of any petition or commencement of any
case or proceeding by or against either Buyer under any federal or state
law relating to insolvency, bankruptcy, or reorganization, has occurred or
been threatened; no adjudication that either Buyer is insolvent or bankrupt
has been made; no order for relief under the United States Bankruptcy Code
with respect to either Buyer has been entered; and no appointment of or
taking of possession by a custodian, trustee or receiver for all or any
assets of either Buyer has occurred. Neither Buyer is insolvent; neither
Buyer has executed an assignment for the benefit of creditors; neither
Buyer has convened a meeting of its creditors, or any class thereof, for
the purposes of effecting a moratorium upon or extension or composition of
its debts; neither Buyer has admitted in writing its inability to pay its
debts generally; and each Buyer is generally paying its respective debts.
4. REPRESENTATIONS AND WARRANTIES CONCERNING THE GMMV. The Seller
represents and warrants to the Buyers that the statements contained in this ss.
4 are correct and complete as of the date of this Agreement and will be correct
and complete as of the Closing Date (as though made then and as though the
Closing Date were substituted for the date of this Agreement throughout this ss.
4) except with respect to matters arising from the acts or omissions of any of
the Buyers.
a. ACQUIRED ASSETS. The representations and warranties contained
in Exhibits "D-1" through "D-4" concerning the Acquired Assets are incorporated
herein, subject to the exceptions, qualifications and limitations set forth
therein.
b. FINANCIAL STATEMENTS. Attached hereto as Exhibit "F" are the
following GMMV financial statements (collectively the "FINANCIAL STATEMENTS"):
(i) audited consolidated balance sheets and statements of income (loss), changes
in participants' equity, and cash flow as of and for the fiscal year ended
December 31, 1996, and (ii) unaudited consolidated balance sheets and statements
of income (loss), changes in participants' equity, and cash flow as of and for
the four months ended April 30, 1997 (the "MOST RECENT FISCAL MONTH END"). The
Financial Statements have been prepared in accordance with GAAP applied on a
consistent basis throughout the periods covered thereby and present fairly the
financial condition of the GMMV as of such dates and the results of operations
of the GMMV for such periods; PROVIDED, HOWEVER, that the Financial Statements
are subject to normal year-end adjustments and lack footnotes and other
presentation items.
c. EVENTS SUBSEQUENT TO MOST RECENT FISCAL MONTH END. Since the
Most Recent Fiscal Month End, there has not been any material adverse change in
the financial condition of the GMMV.
5
<PAGE>
EXHIBIT 10.49
d. TAX MATTERS.
i. For all periods ending on or prior to the Closing Date,
the GMMV has filed all Tax Returns that it was required to file, according
to applicable filing requirements (including extensions) and has paid all
Taxes shown thereon as owing, except where the failure to file Tax Returns
or to pay Taxes would not have a material adverse effect on GMMV.
ii. Any Income Tax allocation or sharing agreement to which
the GMMV is a party will be terminated for the GMMV on or before the
Closing Date.
e. LITIGATION. The GMMV is not (i) subject to any outstanding
injunction or judgment, or (ii) a party to, or to Seller's knowledge threatened,
in writing, to be made a party to, any action, suit, proceeding, hearing, or
investigation of, in, or before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction, except where the
injunction, judgment, order, decree, ruling, action, suit, proceeding, hearing,
or investigation could not be reasonably expected to have a material adverse
effect on GMMV.
f. ENVIRONMENTAL LAW VIOLATION. With respect to those properties
which are both (i) located in Sweetwater County, Wyoming and (ii) subject to the
GMMV Agreement (but not with respect to any other properties), the Seller, after
having made diligent inquiry of its officers and employees (and any officers and
employees of KEC and Kennecott Energy Company) has no knowledge of (w) any
release threatened release, discharge, treatment, storage, disposal or presence
of Hazardous Materials at, upon, about or beneath any such properties, (x) any
release, threatened release or discharge of Hazardous Materials emanating or
migrating or threatening to migrate to, from or across any such properties, (y)
any violation of Environmental Laws pertaining to any property owned and/or
operated by the GMMV, or (z) the treatment, storage, disposal, arrangement for
disposal or transportation of Hazardous Materials originating from such
properties at or to a facility other than any such properties, in each case
prior to the date of this Agreement and except as set forth in Annex I.
5. PRE-CLOSING COVENANTS. The Parties agree as follows with respect
to the period between the execution of this Agreement and the Closing.
a. GENERA. Each of the Parties will use its reasonable efforts to
take all actions and to do all things necessary in order to consummate and make
effective the transactions contemplated by this Agreement (including
satisfaction, but not waiver, of the Closing conditions set forth in ss. 7
below).
b. NOTICES AND CONSENTS. Each of the Parties will give any
notices to, make any filings with, and use its reasonable efforts to obtain any
authorizations, consents, permits, licenses and approvals of governments and
governmental agencies and third parties in connection with the matters referred
to in ss. 3(a)(ii), ss. 3(b)(ii), and ss. 7(b)(vi) hereof.
c. FULL ACCESS. The Seller will permit, and the Seller will cause
the GMMV to permit the Buyers to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of the
GMMV or the seller (i) to all premises,
6
<PAGE>
EXHIBIT 10.49
properties, books, records (including tax records), contracts, and documents
which are owned by the GMMV and (ii) to technical management of the GMMV or the
Seller for the purpose of providing such information as Buyers reasonably deem
appropriate in connection with the underwriting contemplated by ss. 5(g). The
Buyers will treat and hold as such any Confidential Information either receives
from the Seller or the GMMV in the course of the reviews contemplated by this
ss. 5(c), will not use any of the Confidential Information except in connection
with this Agreement, will not disclose any of the Confidential Information
except as permitted in this Agreement, and, if this Agreement is terminated for
any reason whatsoever, will return to the Seller and the GMMV or destroy all
tangible embodiments and all copies of the Confidential Information which are in
the possession of either. Upon request, Buyers will certify to Seller the
destruction of such information.
d. SWEETWATER MIL. Contemporaneously herewith, Buyers shall
enter, and the Parties shall cause the GMMV, acting through Seller, as
permittee, to enter into the Contract Services Agreement (the "MILL CONTRACT")
in the form attached hereto as Exhibit "G."
e. MINERAL LEASE AGREEMENT. Contemporaneously herewith, Buyers
shall enter, and the Parties shall cause the GMMV to enter into a Mineral Lease
Agreement (the "MINERAL LEASE AGREEMENT") in the form set forth in Exhibit "H"
attached hereto.
f. AMENDMENT OF GMMV AGREEMENT. Contemporaneously herewith,
Buyers and Seller are entering into the Amendment of GMMV Agreement (the "GMMV
AMENDMENT") in the form attached hereto as Exhibit "I."
g. COMMITMENT TO UNDERWRITING. Not later than December 1, 1997,
Buyers shall furnish evidence in form reasonably acceptable to Seller of a valid
and legally binding commitment (subject to conditions customarily contained in
such commitment letters, including a "market out" clause), by an established and
nationally recognized underwriter, who regularly engages in similar financing
transactions, to complete an underwritten offering of the securities of the
Buyer or the Acquiring Person not later than Scheduled Closing Date which would
upon completion result in sufficient proceeds to enable the Buyers or the
Acquiring Person to close the transactions herein contemplated. In lieu of such
underwriting commitment, Buyers may furnish evidence, in form reasonably
acceptable to Seller, of a valid and legally binding commitment letter (subject
to conditions customarily contained in such commitment letters) from a bank,
venture capital firm or other Person, in each case reasonably acceptable to
Seller, for a private financing or joint venture involving assets of Buyers
(which may but need not include the GMMV Interest and the Acquired Assets after
Closing), which would upon completion result in sufficient proceeds to enable
the Buyers or the Acquiring Person to close the transactions herein
contemplated. Each of the Buyers will use its best efforts to satisfy and comply
with the terms of such commitment. The Buyers covenant that the contemplated
offering or other financing will be completed, if at all, no later than the
Extended Closing.
h. Signing Bonus. The Signing Bonus is being paid by the Seller
to the Buyers in consideration of their entering into and executing this
Agreement, the GMMV Amendment and the other instruments herein contemplated and
the covenants of Sellers contained herein and therein. The Signing Bonus shall
be nonrefundable if (i) Closing occurs; or (ii) Buyers substantially perform
each of such covenants, other than those set out in the last two sentences of
Section 5(g) hereof.
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EXHIBIT 10.49
6. OTHER COVENANTS. The Parties agree as follows:
a. GENERA. In case at any time after the Closing any further
action is necessary to carry out the purposes of this Agreement, each of the
Parties will take such further action (including the execution and delivery of
such further instruments and documents) as any other Party reasonably may
request, all at the sole cost and expense of the requesting Party (unless the
requesting Party is entitled to indemnification therefor under ss. 8 below).
b. LITIGATION SUPPORT. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction involving
the GMMV and/or Seller, the other Party shall cooperate with it and its counsel
in the defense or contest, make available its personnel, and provide such
testimony and access to their books and records as shall be necessary in
connection with the defense or contest, all at the sole cost and expense of the
contesting or defending Party.
c. OTHER ACQUISITION AGREEMENTS. From and after Closing, Buyers
shall cause GMMV to timely perform all of its obligations under the Other
Acquisition Agreements and Buyers shall timely perform all of the obligations of
Seller and its Affiliates under the Other Acquisition Agreements. Subject to
Buyers' performance under the preceding sentence, Seller agrees that Buyers
shall be entitled to all of the rights of Seller and its Affiliates under the
Other Acquisition Agreements.
d. TAXES.
i. Seller shall prepare and file all Tax Returns of the GMMV
(including any amendments thereto) with respect to any taxable year
(including any short taxable year) ending on or before the Closing Date.
Buyers shall prepare and file all Tax Returns with respect to any taxable
year ending after the Closing Date. Following Seller's request, Buyers
shall promptly provide Seller with all data and information in the
possession of Buyers or the GMMV necessary to allow Seller to prepare all
Tax Returns required to be filed by Seller hereunder.
ii. In order to appropriately apportion any items of income,
gain, loss, deduction or credit of the GMMV attributable to the GMMV
Interest between Buyer and Seller within any taxable period that includes
the Closing Date, the Parties shall elect to perform an interim closing of
the books as of the Closing Date.
iii. After the Closing Date, Seller will be entitled to file
amended Tax Returns for the GMMV for periods ending on or before Closing,
to control the audit of any original or amended Tax Returns for such
periods, including but not limited to extending the applicable statute of
limitations, and settling of litigated claims, and Buyers will cooperate
and cause the GMMV to execute such powers of attorney and other documents
as are necessary to carry out this intent. Any refunds to the partners of
the GMMV for such period(s) covered by the amended tax returns shall be the
property of those partners.
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EXHIBIT 10.49
iv. Buyers and Seller shall furnish or cause to be furnished
to each other, upon request, as promptly as practicable, such information
(including access to books and other records) and assistance as is
reasonably necessary for the filing of any Tax Return of GMMV, for the
preparation for or conduct of any audit, and for the prosecution or defense
of any claim, suit, or proceeding relating to any proposed Tax adjustment.
Buyers and Seller shall cooperate with each other in the conduct of any
audit or other similar proceedings and each shall execute and deliver such
powers of attorney and other documents as are necessary to carry out the
intent of this paragraph.
v. Buyers shall promptly give written notice to Seller of any
examination, audit, inquiry, or proposed or actual assessment of the GMMV
by a federal, state, or local taxing authority covering any taxable period
ending before, or including, the Closing Date. Seller shall have the right
to control any resulting proceedings and to determine whether and when to
settle any such claim, assessment, or dispute to the extent such
proceedings or determinations affect the amount of Taxes for which Seller
may be liable; provided, however, that Buyers are not hereby relieved of
their responsibilities to handle an audit unless expressly assumed by
Seller. Whenever any taxing authority informs Seller of a claim,
assessment, or other dispute concerning any amount of Taxes for which
Buyers are or may be liable, Seller shall promptly inform Buyers in
writing, and Buyers shall have the right to control any resulting claim,
assessment, or dispute to the extent such proceedings or determination
affect the amount of Taxes for which Buyers are liable under this
Agreement. Each party hereto agrees to give the other party the right of
reasonable consultation regarding matters subject to this ss. (6)(d)(v)
which could affect the other.
vi. Effective as of the Closing Date, all liabilities and
obligations between members of Seller's consolidated income tax reporting
group and the GMMV under any tax allocation agreement or similar
arrangement in effect prior to the Closing Date shall be extinguished in
full and any liabilities or rights existing under any such agreement or
arrangement shall terminate and shall no longer be enforceable.
e. RECLAMATION SINKING FUND. Each of the Buyers covenants and
agrees that it will cause the GMMV to maintain an adequate reserve to meet
reclamation costs, including, without limitation the following:
i. The GMMV, its participants and their successors and
assigns shall promptly, fully and in good faith satisfy the obligations
currently set forth in Section 5.4 of the GMMV Agreement which obligations
shall continue unchanged, regardless of the termination of the GMMV or any
amendment of the GMMV Agreement;
ii. The aggregate amount contributed to the Reclamation
Escrow Account after the date hereof shall not, at any time, be less than
the product of $1.00 multiplied by the cumulative weight (expressed in
tons) of ore removed (from the date hereof to such time), from the
properties which are now subject or which may subsequently become subject
to the GMMV Agreement, and processed at the Sweetwater Mill. If the
aggregate amount of the cash reclamation account and the reclamation bond
exceed reclamation liability, Buyers are allowed to reduce the reclamation
account by such excess; and
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EXHIBIT 10.49
iii. Except as provided in (ii) above, the escrow agreement
now in existence governing the Reclamation Escrow Account shall not be
modified, amended, reduced or revoked at any time (whether before or after
Closing) without the prior written consent of the Seller, which shall not
be unreasonably withheld.
f. EMPLOYEES. Following Closing, Buyers shall cause the GMMV to
employ each individual named in the Side Letter (or their replacements) until
the first anniversary of Closing. The rate of compensation shall be not less
than that set out in the Side Letter. The benefits and other terms of employment
provided shall be no less favorable than the benefits generally offered to
employees of Buyers. If, prior to the first anniversary of Closing, the
employment of any such person is terminated by the GMMV for any reason other
than good cause, such individual shall be entitled to full compensation and
benefits through the First Anniversary of Closing.
7. CONDITIONS TO OBLIGATION TO CLOSE.
a. CONDITIONS TO OBLIGATION OF THE BUYERS. The obligations of the
Buyers to consummate the transactions to be performed by them in connection with
the Closing are subject to satisfaction of the following conditions:
i. the representations and warranties set forth in ss. 3(a)
and ss. 4 above shall be true and correct in all material respects at and
as of the Closing Date;
ii. the Seller shall have performed and complied with all of
their covenants hereunder in all material respects through the Closing;
iii. there shall not be any injunction, judgment, order,
decree, ruling, or charge in effect preventing consummation of any of the
transactions contemplated by this Agreement;
iv. the Seller shall have delivered to the Buyers a
certificate to the effect that each of the conditions specified above in
ss. 7(a)(i)-(iii) is satisfied in all respectS in the form of officer's
certificate and secretary's certificate attached as Exhibit K;
v. the Parties and the GMMV shall have received all
authorizations, consents, permits and approvals of governments and
governmental agencies referred to in ss. 3(a)(ii) and ss. 3(b)(ii) above;
and
vi. all actions to be taken by the Seller in connection with
consummation of the transactions contemplated hereby and all certificates,
instruments and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance
to the Buyers.
The Buyers may waive any condition specified in this ss. 7(a) if it executes a
writing so stating at or prior to the Closing.
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EXHIBIT 10.49
b. CONDITIONS TO OBLIGATION OF THE SELLER. The obligation of the
Seller to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction of the following conditions:
i. the representations and warranties set forth in ss. 3(b)
above shall be true and correct in all material respects at and as of the
Closing Date;
ii. the Buyers shall have performed and complied with all of
their covenants hereunder and all of their covenants contained in the
Mineral Lease Agreement and the Mill Contract in all material respects
through the Closing;
iii. there shall not be any injunction, judgment, order,
decree, ruling, or charge in effect preventing consummation of any of the
transactions contemplated by this Agreement;
iv. the Buyers shall have delivered to the Seller a
certificate to the effect that each of the conditions specified above in
ss. 7(b)(i)-(iii) is satisfied in all respectS in the form of officer's
certificate and secretary's certificate attached as Exhibit K;
v. the Parties and the GMMV, shall have received all
authorizations, consents, permits and approvals of governments and
governmental agencies referred to in ss. 3(a)(ii) and ss. 3(b)(ii) above;
vi. On or before Closing, Buyers shall have replaced or
caused to be replaced all bonds, guaranties, indemnification agreements and
suretyship agreements listed on Annex I and any other obligations under
which Seller or any of its Affiliates may have any obligation with respect
to the GMMV or operations conducted on or with respect to the properties
subject to the GMMV Agreement (the "Performance Bonds") and obtained the
release of Seller and its Affiliates from all obligations thereunder;
vii. Buyers or Buyers' permitted assignee, as of the business
day preceding Closing, shall have the $15,000,000 in cash to pay Seller as
required in ss.2(c) above, made arrangements to assume and become
responsible for all of the Assumed Liabilities as required in ss.2(b)
above, and shall have a Market Capitalization of at least $200,000,000, and
a positive consolidated tangible net worth determined under GAAP; and
viii. all actions to be taken by the Buyers in connection
with consummation of the transactions contemplated hereby and all
certificates, instruments and other documents required to effect the
transactions contemplated hereby will be reasonably satisfactory in form
and substance to the Seller.
The Seller may waive any condition specified in this ss. 7(b) if it executes a
writing so stating at or prior to the Closing.
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EXHIBIT 10.49
8. REMEDIES FOR BREACHES OF THIS AGREEMENT.
a. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties of the Seller contained in ss. 4 above shall
survive the Closing. All of the representations and warranties of the Parties
contained in ss. 3 above shall survive the Closing (unless the damaged Party
knew or had reason to know of any misrepresentation or breach of warranty at the
time of Closing) and continue in full force and effect forever thereafter
(subject to any applicable statutes of limitations).
b. INDEMNIFICATION PROVISIONS FOR BENEFIT OF THE BUYERS. In the
event the Seller breaches any of its covenants or representations and warranties
contained herein or in any document delivered at Closing, and, if there is an
applicable survival period pursuant to ss. 8(a) above, provided that the Buyers
make a written claim for indemnification against the Seller pursuant to ss.
11(g) below within such survival period, then the Seller agrees to indemnify the
Buyers from and against the entirety of any Adverse Consequences the Buyers
shall suffer through and after the date of the claim for indemnification (but
EXCLUDING any Adverse Consequences the Buyers shall suffer after the end of any
applicable survival period) caused by the breach.
c. INDEMNIFICATION PROVISIONS FOR BENEFIT OF THE SELLER.
i. In the event any of the Buyers or the Acquiring Person
breach any representations, warranties, and covenants contained herein
or in any documents delivered at Closing, then the Buyers jointly agree
to indemnify the Seller from and against the entirety of any Adverse
Consequences the Seller shall suffer through and after the date of the
claim for indemnification caused by the breach.
ii. The Buyers jointly agree to indemnify the Seller from
and against the entirety of any Adverse Consequences, whether arising
before or after Closing, the Seller shall suffer as the result of (x)
any act or omission of any of the Buyers, or the Acquiring Person, or
any Affiliate of any of them, and the respective officers, directors,
employees, agents, contractors, or professional advisors of any of them,
during the term of, or acting under authority or color of authority of
the Mineral Lease Agreement, or the Mill Contract, or (y) Seller being a
party to the GMMV Agreement or any operations of the GMMV or as the
result of Seller or any of its Affiliates being a party to the Other
Acquisition Agreements, but Buyer's indemnification of Seller under the
foregoing clause (y) shall not be effective for Adverse Consequences
arising out of Seller's acts occurring before Closing.
iii. Each of the Buyers jointly agree to indemnify,
defend, release and hold harmless the Seller and its Affiliates and the
respective officers, directors, employees, agents, contractors, and
professional advisors of each of them, from and against the entirety of
any Adverse Consequences, whether arising before or after Closing, any
of them shall suffer as the result of (w) the release, threatened
release, discharge, treatment, storage, disposal or presence of
Hazardous Materials at, upon, about or beneath any property currently or
formerly owned and/or operated by the GMMV, (x) the release, threatened
release or discharge of Hazardous Materials emanating or
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EXHIBIT 10.49
migrating, or threatening to emanate or migrate to, from or across any
property currently or formerly owned and/or operated by the GMMV, (y)
any violation of Environmental Laws pertaining to any property currently
or formerly operated and/or owned by the GMMV, or (z) the treatment,
storage, disposal, arrangement for disposal, or transportation of
Hazardous Materials at or to a facility other than any property
currently or formerly operated and/or owned by the GMMV, provided,
however, that if the Closing does not occur for any reason, Buyers'
indemnification under this clause (iii) shall be limited to conditions
arising from or attributable to acts or omissions of Buyers during the
term of, or acting under authority or color of authority of the Mineral
Lease Agreement or the Mill Contract.
iv. The Buyers jointly agree to indemnify, defend, release
and hold harmless Seller and its Affiliates and the respective officers,
directors, employees, agents, contractors and professional advisers of
each of them, from and against the entirety of any Adverse Consequences,
whether arising before or after Closing, any of them shall suffer as a
result of an untrue statement of a material fact contained in, any
written document delivered to, or any oral communication made to, any
Person in connection with any private or public offering of any security
of any of the Buyers, the Acquiring Person or any Affiliates of any of
them, or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
v. If the indemnification provided for in ss. 8(c)(iv) is
legally unavailable or insufficient as a result of legal unavailability
to hold harmless an indemnified Person in respect of any Adverse
Consequence referred to therein, then each of the Buyers shall
contribute to the amount paid or payable by such indemnified Person as a
result of such Adverse Consequence in such proportion as is appropriate
to reflect the relative fault of the Buyers on the one hand and the
indemnified Person on the other in connection with the statements or
omission or other action or non-action which resulted in such Adverse
Consequence as well as any other relevant equitable considerations.
d. MATTERS INVOLVING THIRD PARTIES.
i. If any third party shall notify any Party (the
"INDEMNIFIED PARTY") with respect to any matter which may give rise to a
claim for indemnification against any other Party (the "INDEMNIFYING
PARTY") under this ss. 8 (a "THIRD PARTY CLAIM"), then the Indemnified
Party shall promptly notify each Indemnifying Party thereof in writing;
PROVIDED, HOWEVER, that no delay on the part of the Indemnified Party in
notifying any Indemnifying Party shall relieve the Indemnifying Party
from any obligation hereunder unless (and then solely to the extent) the
Indemnifying Party thereby is prejudiced.
ii. Any Indemnifying Party will have the right to defend
the Indemnified Party against the Third Party Claim with counsel of its
choice reasonably satisfactory to the Indemnified Party so long as (A)
the Indemnifying Party notifies the Indemnified Party in writing within
10 business days after the Indemnified Party has given notice of the
Third Party Claim that the Indemnifying Party will indemnify the
Indemnified Party from and against the entirety of any Adverse
Consequences the
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EXHIBIT 10.49
Indemnified Party may suffer resulting from, arising out of, relating
to, in the nature of, or caused by the Third Party Claim, (B) the
Indemnifying Party provides the Indemnified Party with evidence
reasonably acceptable to the Indemnified Party that the Indemnifying
Party will have the financial resources to defend against the Third
Party Claim and fulfill its indemnification obligations hereunder, (C)
the Third Party Claim involves only money damages and does not seek an
injunction or other equitable relief, (D) settlement of, or an adverse
judgment with respect to, the Third Party Claim is not, in the good
faith judgment of the Indemnified Party, likely to establish a
precedential custom or practice materially adverse to the continuing
business interests of the Indemnified Party, and (E) the Indemnifying
Party conducts the defense of the Third Party Claim actively and
diligently.
iii. So long as the Indemnifying Party is conducting the
defense of the Third Party Claim in accordance with ss. 8(d)(ii) above,
(A) the Indemnified Party may retain separate co-counsel at its sole
cost and expense and participate in the defense of the Third Party
Claim,(B) the Indemnified Party will not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party
Claim without the prior written consent of the Indemnifying Party (not
to be withheld unreasonably), and (C) the Indemnifying Party will not
consent to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent of
the Indemnified Party (not to be withheld unreasonably).
iv. In the event any of the conditions in ss. 8(d)(ii)
above is or becomes unsatisfied, however, (A) the Indemnified Party may
defend against, and consent to the entry of any judgment or enter into
any settlement with respect to, the Third Party Claim in any manner it
reasonably may deem appropriate (and the Indemnified Party need not
consult with, or obtain any consent from, any Indemnifying Party in
connection therewith), (B) the Indemnifying Parties will reimburse the
Indemnified Party promptly and periodically for the costs of defending
against the Third Party Claim (including reasonable attorneys' fees and
expenses), and (C) the Indemnifying Parties will remain responsible for
any Adverse Consequences the Indemnified Party may suffer resulting
from, arising out of, relating to, in the nature of, or caused by the
Third Party Claim to the fullest extent provided in this ss. 8.
e. DETERMINATION OF ADVERSE CONSEQUENCES. The Parties shall make
appropriate adjustments for Tax benefits and insurance coverage and take into
account the time cost of money (using 10.5% as the discount rate) in determining
Adverse Consequences for purposes of this ss. 8. All indemnification payments
under this ss. 8 shall be deemed adjustments to the purchase price.
f. OTHER INDEMNIFICATION PROVISIONS. The indemnification
provisions in this ss. 8 are in addition to, and not in derogation of, any
statutory, equitable, or common law remedy any Party may have for breach of
representation, warranty, or covenant provided, however, that the Buyers
acknowledge and agree that the foregoing indemnification provisions in this ss.
8 shall be the exclusive remedy of the Buyers for any breach of the
representations and warranties in ss. 4 above.
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EXHIBIT 10.49
9. TERMINATION.
a. TERMINATION OF AGREEMENT. Certain of the Parties may terminate
this Agreement as provided below:
i. the Buyers and the Seller may terminate this Agreement
by mutual written consent at any time prior to the Closing;
ii. the Buyers may terminate this Agreement by giving
written notice to the Seller at any time prior to the Closing (A) in the
event the Seller has breached any material representation, warranty, or
covenant contained in this Agreement in any material respect, the Buyers
have notified the Seller of the breach, and the breach has continued
without cure for a period of 5 business days after the notice of breach
unless the Seller has commenced to cure the alleged breach to the
Buyers' reasonable satisfaction and thereafter diligently completes this
cure, or (B) if the Closing shall not have occurred on or before the
Extended Closing Date, by reason of the failure of any condition
precedent under ss. 7(a) hereof (unless the failure results primarily
from the Buyers themselves breaching any representation, warranty, or
covenant contained in this Agreement); and
iii. the Seller may terminate this Agreement by giving
written notice to the Buyers at any time prior to the Closing (A) in the
event any of the Buyers or the Acquiring Person has breached any
material representation, warranty, or covenant contained in this
Agreement, the Mineral Lease Agreement or the Mill Contract in any
material respect, the Seller has notified the Buyers of the breach, and
the breach has continued without cure for a period of 5 business days
after the notice of breach unless the Buyers have commenced to cure the
alleged breach to the Seller's reasonable satisfaction and thereafter
diligently complete such cure, or (B) if the Closing shall not have
occurred on or before the Extended Closing Date, by reason of the
failure of any condition precedent under ss. 7(b) hereof (unless the
failure results primarily from the Seller itself breaching any
representation, warranty, or covenant contained in this Agreement).
b. EFFECT OF TERMINATION. If any Party terminates this Agreement
pursuant to ss. 9(a) above, all rights and obligations of the Parties hereunder
shall terminate without any liability of any Party to any other Party hereunder
(except for any liability of any Party then in breach under this Agreement);
PROVIDED, HOWEVER, that the confidentiality provisions contained herein,
including ss. 5(c) and the provisions of ss. 10 below shall survive termination.
The GMMV Amendment shall continue to apply. The Mining Venture Agreement as
amended by the GMMV Amendment, the Mineral Lease Agreement and the Mill Contract
shall continue to apply in accordance with the terms set forth therein
applicable to the period following the termination of this Agreement.
10. USE OF INFORMATION.
a. CONFIDENTIALITY. Both before and after Closing, each of the
Buyers shall maintain all of the Confidential Information in confidence, and
shall not disclose it to, or use it for the benefit of, any Person (except for
use by Buyers solely in connection with this
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EXHIBIT 10.49
Agreement) or permit any Person who receives Confidential Information as Buyers'
representative hereunder to disclose it to or use it for the benefit of any
Person (except that for use by Buyers solely in connection with this Agreement)
except that, subject to the GMMV Agreement, disclosure is permitted on the
following terms and conditions:
i. Buyers may make such limited disclosure of the
Confidential Information as it may determine necessary to allow Buyers
to finance the purchase contemplated herein or to implement the terms
hereof, provided that each person receiving such disclosure has first
executed an agreement substantially in the form of the Confidentiality
and Release Agreement attached hereto as Exhibit "J" providing, among
other things for maintenance of the confidentiality of such information
and releasing claims arising from inaccuracies or omissions in such
information; and
ii. Buyers may make such limited disclosure of the
Confidential Information as is required by or prudent under applicable
law or regulation in connection with a public offering of securities
whose proceeds are dedicated (to the extent necessary) to financing the
purchase contemplated herein. Buyers will furnish only that portion of
the Confidential Information which Buyers are advised by counsel is
legally required or with respect to which failure to disclose would be
imprudent. In addition, Buyers may file with the United States
Securities and Exchange Commission, and any Canadian provincial
securities commission that may require the same in connection with a
public offering of securities of any of the Buyers or the Acquiring
Person, this Agreement (including any Exhibits, Annexes and Schedules
thereto) if Buyers are advised by counsel that such filing is legally
required, or with respect to which failure to file would be imprudent,
to comply with Buyers' obligations under the Securities Act of 1933, the
Securities Exchange Act of 1934 or any such laws and regulations of a
Canadian provincial securities commission having jurisdiction over such
public offering.
iii. In the event that Buyers or any of their
representatives is requested pursuant to, or required by, applicable
law, regulation or legal process to disclose any Confidential
Information, other than pursuant to ss. 10(a)(ii), Buyers will notify
Seller promptly so that Seller may seek a protective order or other
appropriate remedy or, in Seller's sole discretion, waive compliance
with the terms hereof. In the event that no such protective order or
other remedy is obtained, or that Seller waives compliance with the
terms hereof, Buyers will furnish only that portion of the Confidential
Information which Buyers are advised by counsel is legally required and
will exercise all reasonable efforts to obtain reliable assurance that
confidential treatment will be accorded the Confidential Information.
b. ACCURACY. In the event any of the Buyers or one of their
permitted assigns makes a public or private offering to raise sufficient funds
to enable Buyers to close the contemplated transaction, or if any of the Buyers
offers to sell any portion or all of the GMMV Interest or sells, transfers or
assigns any portion or all of the GMMV Interest, and any Confidential
Information or any information, whether or not confidential, obtained hereunder
or under the GMMV Agreement is used in connection therewith (whether orally or
in writing), Buyers covenant and agree not to make or permit to be made any
untrue or misleading statement of a material fact or to omit to state or permit
any omission to state a material fact necessary in order to make the statements
made, in the light of the circumstances under which they were
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EXHIBIT 10.49
made, not misleading. Each of the Buyers further covenant that it will, and will
cause each of its Affiliates to, comply, in all material respects, with the
Securities Act and the Securities Exchange Act.
c. USE AT OWN RISK. The Buyers acknowledge and agree that any
Confidential Information and any other information it receives in connection
herewith will be used entirely at Buyers' own risk. The Seller does not make or
give, and specifically disclaims, any representation or warranty as to the
accuracy, completeness, usefulness or reliability of any such information, and
the Buyers hereby irrevocably waive and release any claims they may have at any
time against Seller which arise as the result of or in connection with any
aspect of the use of such information, including without limitation, any claims
based on inaccuracies, omissions or inadequacies of such information, provided
however, such waiver and release is not applicable to Seller's representations
contained in ss. 3(a) or 4.
11. MISCELLANEOUS.
a. PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No Party shall issue
any press release or make any public announcement relating to the subject matter
of this Agreement without the prior written approval of the Buyers and the
Seller; PROVIDED, HOWEVER, that any Party may make any public disclosure it
believes in good faith is required by applicable law or any listing or trading
agreement concerning its publicly-traded securities (in which case the
disclosing Party will use its reasonable efforts to advise and consult with the
other Parties prior to making the disclosure).
b. NO THIRD-PARTY BENEFICIARIES. Except for the provisions of ss.
8, this Agreement shall not confer any rights or remedies upon any Person other
than the Parties and their respective Affiliates, successors and permitted
assigns.
c. ENTIRE AGREEMENT. This Agreement (including the documents
referred to herein) constitutes the entire agreement among the Parties and
supersedes any prior understandings, agreements, or representations by or among
the Parties, written or oral, to the extent they have related in any way to the
subject matter hereof.
d. SUCCESSION AND ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of the Buyers and the Seller; provided, however, that the Buyers may
assign their right to purchase the GMMV Interest and the Acquired Assets
hereunder at Closing (but not any of its other rights hereunder), if (i) the
assignee assumes all of the obligations of Buyers hereunder and under the
Mineral Lease Agreement, Mill Contract and Assumption Agreement (but Buyers
shall nonetheless remain responsible for the performance of all of its
obligations hereunder and thereunder) and (ii) at the time of such assignment
the assignee has a market capitalization of at least $200,000,000 and a positive
consolidated tangible net worth determined under GAAP.
e. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
17
<PAGE>
EXHIBIT 10.49
f. DISCLAIMER OF OTHER REPRESENTATIONS AND WARRANTIES. Except as
expressly set forth in ss.ss. 3 and 4, the Seller makes no representation or
warranty, express or implied, at law or in equity, in respect of the GMMV or any
of its respective assets, liabilities or operations, including, without
limitation, with respect to merchantability or fitness for any particular
purpose, and any such other representations or warranties are hereby expressly
disclaimed. Buyers acknowledge that as a party to the GMMV Agreement it has
received such information and has such rights to additional information (whether
or not exercised) concerning the assets, liabilities and operation of GMMV as
are necessary or desirable in order for Buyers to determine to enter into this
Agreement and consummate the transactions herein contemplated. Buyers hereby
acknowledge and agree that, except to the extent specifically set forth in
ss.ss. 3 and 4, the Buyers are purchasing hereunder on an "as-is, where-is"
basis and have not relied upon any written or oral statement of any Person,
other than the representations set forth in ss.ss. 3 and 4. Each of the Buyers
has been given full opportunity to conduct, and has in fact conducted, all
inquiries, inspections, examinations and diligence which it desires or which are
necessary for it to enter into this Agreement.
g. NOTICES. Any required notice, payment, or other communication
contemplated by this Agreement shall be in writing and shall be effective with
respect to a Party (i) when personally delivered or delivered by courier at the
Party's address as set out below; (ii) when delivered by electronic
communication at the Party's telecopier number described below or at such other
telecopy number as the Party may designate in writing provided, that in each
case, such electronic communication is followed by a delivery by mail or by
personal service to the Party's address; or (iii) when delivered by mail
deposited in the United States mail, postage prepaid and registered or
certified, with return receipt requested, and addressed to the Party at the
Party's address:
IF TO THE SELLER: COPY TO:
- ----------------- --------
Kennecott Uranium Company Legal Department
Attn: President Kennecott Services Company
Caller Box 3009 8315 West 3595 South
505 South Gillette Avenue P.O. Box 6001
Gillette, WY 82717-3009 Magna, UT 84044-6001
FAX (801) 687-6011 FAX (801) 252-3559
IF TO THE BUYERS: COPY TO:
U.S. Energy Corp. Daniel P. Svilar
Attn: John L. Larsen U.S. Energy/Crested Corp.
877 North 8th West 877 North 8th West
Riverton, Wyoming 82501 Riverton, Wyoming 82501
FAX (307) 857-3050 FAX (307) 857-3050
Either the Seller or Buyers may change its address for future notices by
providing written notice to that effect to the other party. Notice to Buyers as
set forth above constitutes notice to both USE and USE/CC.
18
<PAGE>
EXHIBIT 10.49
h. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the domestic laws of the State of Wyoming without
giving effect to any choice or conflict of law provision or rule (whether of the
State of Wyoming or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Wyoming.
i. WAIVER OF JURY TRIA. Each of the Parties hereto agrees that it
shall not seek a jury trial in any proceeding based upon or arising out of or
otherwise related to this Agreement or any of the other documents and
instruments contemplated hereby and EACH OF THE PARTIES HERETO HEREBY WAIVES ANY
AND ALL RIGHT TO ANY SUCH JURY TRIAL.
j. AMENDMENTS AND WAIVERS. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Buyers and the Seller. No waiver by any Party of any default, misrepresentation,
or breach of warranty or covenant hereunder, whether intentional or not, shall
be deemed to extend to any prior or subsequent default, misrepresentation, or
breach of warranty or covenant hereunder or affect in any way any rights arising
by virtue of any prior or subsequent such occurrence.
k. SEVERABILITY. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
l. EXPENSES. Except as provided in the GMMV Amendment, each of
the Buyers, Seller and the GMMV will bear its own costs and expenses (including
legal fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby.
m. JOINT AND SEVERAL OBLIGATIONS. Each of the representations,
warranties and covenants of the Buyers in this Agreement are joint and several
obligations of the Buyers. This means that each Buyer will be responsible as
provided in ss. 8 above for the entirety of any Adverse Consequences the Seller
may suffer as a result of any breach thereof, though Seller shall be entitled
only to a single recovery. The foregoing applies regardless of whether the
representation, warranty or covenant is made by "each of the Buyers", "the
Buyers" or otherwise.
n. FINAL TERMINATION. This Agreement will, if not previously
terminated, expire and terminate on December 31, 2016.
o. SPECIFIC PERFORMANCE. Each of the Parties acknowledges and
agrees that the other Party would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their specific
terms or otherwise are breached. Accordingly, each of the Parties agrees that
the other party shall be entitled to an injunction or injunctions to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter, in addition to any other remedy to
which it may be entitled, at law or in equity.
19
<PAGE>
EXHIBIT 10.49
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
KENNECOTT URANIUM COMPANY U.S. ENERGY CORP. and
CRESTED CORP. dba
USE/CC JOINT VENTURE
By: /s/ L. R. Cardey-Yates By: U.S. ENERGY CORPORATION
------------------------------------
Title: Director/Assistant Secretary
---------------------------------
U.S. ENERGY CORP. By: /s/ John L. Larsen
------------------------------
Title: President
By: /s/ John L. Larsen
-----------------------------------
Title: President By: CRESTED CORP.
---------------------------------
By: /s/ Max T. Evans
----------------------------
Title: President
----------------------------
20
<PAGE>
EXHIBIT 10.49
ANNEX I
EXCEPTIONS TO THE SELLER'S REPRESENTATIONS AND
WARRANTIES CONCERNING THE TRANSACTION
Not filed with this Form 10-K for the year ended May 31, 1997.
<PAGE>
EXHIBIT 10.49
ANNEX II
EXCEPTIONS TO THE BUYERS' REPRESENTATIONS AND
WARRANTIES CONCERNING THE TRANSACTION
Not filed with this Form 10-K for the year ended May 31, 1997.
<PAGE>
EXHIBIT 10.49
ANNEX III
DEFINITIONS
"ACQUIRED ASSETS" means the assets described as acquired in Exhibits D-1
through D-4 other than the GMMV Interest. Acquired Assets do not include the
excluded assets as set forth in such instruments.
"ACQUIRING PERSON" means the Person acquiring all or part of the GMMV
Interest and Acquired Assets at Closing.
"ADVERSE CONSEQUENCES" means any and all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands, injunctions,
judgments, orders, decrees, rulings, damages (including natural resource
damages), penalties, fines, encumbrances, liens, costs and expenses of defense
of a claim (whether or not such claim is ultimately defeated), good faith
settlements of claims and disputes, costs (including without limitation costs of
investigative, reporting, clean-up, response, removal, remedial, corrective
action and closure activities relating to Hazardous Materials), reclamation
costs, liabilities (including strict liability), obligations, Taxes, losses,
expenses and fees, including consultants' and attorneys' fees and court costs
and expenses.
"AFFILIATE" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"AGREEMENT" means the Acquisition Agreement between Buyers and Seller to
which this Annex III is attached.
"ASSUMED LIABILITIES" means the liabilities described as assumed
liabilities in Exhibits "D- 1" through "D-4." Assumed Liabilities do not include
the excluded liabilities as set forth in such instruments.
"BUYERS" has the meaning set forth in the preface of the Agreement.
"CASH PRICE" has the meaning set forth in ss. 2(c) of the Agreement.
"CLOSING" has the meaning set forth in ss. 2(e) of the Agreement.
"CLOSING DATE" has the meaning set forth in ss. 2(e) of the Agreement.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONFIDENTIAL INFORMATION" means the terms of this Agreement (including any
Exhibits, Annexes and Schedules thereto) any information concerning the
businesses and affairs of the
<PAGE>
EXHIBIT 10.49
GMMV obtained under ss. 5(c), the documents described in the Side Letter and any
documents or communications containing forecasts, estimates or interpretations
of Seller or its Affiliates concerning the reserves or economics of the GMMV.
"CRESTED" has the meaning set forth in the preface of the Agreement.
"DEVELOPMENT COSTS" means expenditures made by the GMMV and approved by
Seller in accordance with the Mill Contract or the Mineral Lease Agreement.
"ENVIRONMENTAL LAWS" means all applicable statutes, treaties, regulations,
rules, ordinances, codes, licenses, permits, orders, approvals, authorizations
and similar items of all federal, state, and local governmental branches,
agencies, departments, commissions, boards, bureaus or instrumentalities,
whether domestic or foreign, having jurisdiction and all applicable judicial and
administrative and regulatory decrees, judgments and orders and all covenants
running with the land that relate to the protection of health or the
environment, including without limitation those that relate to the existence,
handling, manufacture, treatment, storage, disposal, use, generation, release,
threatened release, discharge, refining or recycling of Hazardous Materials or
reclaiming of real property. Without limiting the foregoing, Environmental Laws
include the Hazardous Materials Transportation Act (49 U.S.C. ss.ss. 1801 ET
SEQ.), the Resource Conservation and Recovery Act of 1976, (42 U.S.C. ss.ss.
6901 ET SEQ.), the Clean Air Act (42 U.S.C. ss.ss. 7401 ET SEQ.), the Federal
Water Pollution Control Act (33 U.S.C. ss. 1251), the Safe Drinking Water Act
(42 U.S.C. ss.ss. 300f ET SEQ.), the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (42 U.S.C. ss.ss. 9601 ET SEQ.), the
Toxic Substances Control Act (15 U.S.C. ss.ss. 2601 ET SEQ.), the Emergency
Planning and Community Right to Know Act (42 U.S.C. ss.ss. 11001, ET SEQ.,), the
Occupational Safety and Health Act (26 U.S.C. ss.ss. 651 ET SEQ.), the Pollution
Prevention Act of 1990 (42 U.S.C ss.ss. 13101 ET SEQ.), the Atomic Energy Act of
1954, 68 Stat. 919, the Energy Reorganization Act of 1974, the Mine Safety and
Health Act of 1977, the Uranium Mill Tailings Radiation Control Act (42 U.S.C
ss.ss. 7901 ET SEQ.), and all similar or additional federal, state, local or
foreign statutes, all as amended, and all regulations promulgated thereunder.
"EXTENDED CLOSING DATE" means the Scheduled Closing Date unless extended
for the following causes:
(i) If, on the Scheduled Closing Date an underwriting on behalf
of the Buyers or their permitted assignee is actively in progress, conducted by
an established and nationally recognized underwriter who regularly engages in
similar financing transactions, and such underwriter has made a best efforts or
firmer commitment to raise sufficient funds to enable such Person to close the
contemplated transaction, the Closing Date may be extended until the
underwriting is completed.
<PAGE>
EXHIBIT 10.49
(ii) If an event of force majeure, as that term is defined in
Section 12 of the Mineral Lease Agreement and Section 2.18 of the Mill Contract
occurs the Closing Date may be extended to a date determined in the manner, but
subject to the terms and conditions therein provided.
(iii) If Buyers shall have satisfied or are in position to
satisfy all conditions set out in ss. 7(b) of the Agreement, except for that set
out in ss. 7(b)(vi), by the Scheduled Closing Date and have demonstrated
reasonable diligence in attempting to satisfy the latter condition and have a
reasonable prospect of satisfying such condition on or prior to October 30,
1998, then the Closing Date shall be extended for such time as Seller may
reasonably determine is needed to satisfy such condition.
In no event shall the Extended Closing Date be later than October 30, 1998.
"FINANCIAL STATEMENT" has the meaning set forth in ss. 4(b) of the
Agreement.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"GMMV" has the meaning set forth in the preface of the Agreement.
"GMMV AGREEMENT" means the Mining Venture Agreement dated June 1, 1990
among Seller, Buyers and USE/CC as amended by the following instruments:
(a) Letters dated September 10, 1990 and March 1, 1991 among
Seller, Buyers and USE/CC;
(b) Amendment and Agreement dated September 20, 1991 among
Seller, Buyers, and USE/CC;
(c) Agreement Regarding Sweetwater Mill and Amendment to the
Mining Venture Agreement dated September 20, 1991 among
Seller, Buyers and USE/CC;
(d) Third Amendment dated February 26, 1992 to the Mining
Venture Agreement; and
(e) The GMMV Amendment (when the term GMMV Agreement is used
with respect to times after the effective date of the GMMV
Amendment).
"GMMV AMENDMENT" has the meaning set forth in ss. 5(f) of the Agreement.
<PAGE>
EXHIBIT 10.49
"GMMV INTEREST" means all of the Seller's right, title and interest as a
Participant or Manager (as those terms are used in the GMMV Agreement) under the
GMMV Agreement.
"GREEN MOUNTAIN PROPERTIES" means the property interests subject to the
Mineral Lease Agreement.
"HAZARDOUS MATERIALS" means any substance: (a) the presence of which
requires reporting, investigation, removal or remediation under any
Environmental Laws; (b) that is defined as a "hazardous waste," "hazardous
substance" or "pollutant" or "contaminate" under any Environmental Laws; (c)
that is toxic, explosive, corrosive, flammable, ignitable, infectious,
radioactive, reactive, carcinogenic, mutagenic or otherwise hazardous and is
regulated under any Environmental Laws; (d) the presence of which on a property
causes or threatens to cause a nuisance upon the property or to adjacent
properties or poses or threatens to pose a hazard to the health or safety of
persons on or about the property; (e) that contains gasoline, diesel fuel or
other petroleum hydrocarbons; or (f) that contains PCBs, asbestos or urea
formaldehyde foam insulation.
"INCOME TAX" means any federal, state, local, or foreign income tax,
including any interest, penalty, or addition thereto, whether disputed or not.
"INCOME TAX RETURN" means any return, declaration, report, claim for
refund, or information return or statement relating to Income Taxes, including
any schedule or attachment thereto.
"INDEMNIFIED PARTY" has the meaning set forth in ss. 8(d) of the Agreement.
"INDEMNIFYING PARTY" has the meaning set forth in ss. 8(d) of the
Agreement.
"KEC" has the meaning set forth in ss. 2(d) of the Agreement.
"KEC MORTGAGE" has the meaning set forth in ss. 2(d) of the Agreement.
"KEC NOTE" has the meaning set forth in ss. 2(d) of the Agreement.
"KNOWLEDGE" means actual knowledge without independent investigation.
"MARKET CAPITALIZATION" is the total issued and outstanding shares of a
company, fully diluted (including all warrants, options, purchase plans, etc.),
and multiplied by the average of the closing prices over the previous five
business days.
"MILL CONTRACT" has the meaning set forth in ss. 5(d) of the Agreement.
"MINERAL LEASE AGREEMENT" has the meaning set forth in ss. 5(e) of the
Agreement.
<PAGE>
EXHIBIT 10.49
"MOST RECENT FISCAL MONTH END" has the meaning set forth in ss. 4(b) of the
Agreement.
"OTHER ACQUISITION AGREEMENTS" means:
(1) Sale and Purchase Agreement between Kennecott Corporation,
GMMV, Union Oil Company of California and Minerals
Exploration Company effective June 25, 1991;
(2) Guaranty by Kennecott Corporation in favor of Union Oil
Company of California and Minerals Exploration Company dated
June 23, 1992; and
(3) Guaranty by Union Oil Company of California in favor of KEC,
Buyers and USE/CC dated June 23, 1992.
"ORDINARY COURSE OF BUSINESS" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"PARTY" has the meaning set forth in the preface of the Agreement.
"PERFORMANCE BONDS" has the meaning set forth in ss. 7(b)(vi) of the
Agreement.
"PERSON" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, an unincorporated organization,
or a governmental entity (or any department, agency, or political subdivision
thereof).
"RECLAMATION ESCROW ACCOUNT" means the escrow account maintained pursuant
to Section 5.4 of the GMMV Agreement.
"REPORTABLE EVENT" has the meaning set forth in ERISA ss. 4043.
"SCHEDULED CLOSING DATE" means July 31, 1998.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"SECURITY INTEREST" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable, (c) purchase money
liens and liens securing rental payments under capital lease arrangements, and
(d) other liens arising in the Ordinary Course of Business and not incurred in
connection with the borrowing of money.
"SELLER" has the meaning set forth in the preface of the Agreement.
<PAGE>
EXHIBIT 10.49
"SIDE LETTER" means the letter dated June ___, 1997, from Lynn R.
Cardey-Yates to Daniel P. Svilar.
"SIGNING BONUS" has the meaning set forth in ss. 2(a) of the Agreement.
"SUBSIDIARY" means any corporation with respect to which a specified Person
(or a Subsidiary thereof) owns a majority of the common stock or has the power
to vote or direct the voting of sufficient securities to elect a majority of the
directors, or any partnership, joint venture or other entity with respect to
which such person owns a majority of the capital interests.
"TAX OR TAXES" means any tax or taxes, similar charge, fee, impost, levy or
other assessment (including, without limitation, Income Taxes, severance taxes,
excise taxes, sales taxes, franchise taxes, real estate taxes, transfer taxes or
fees, transfer gain taxes, use taxes, ad valorem taxes, withholding taxes,
payroll taxes, or minimum taxes), together with any related liabilities,
penalties, fines, additions to tax or interest imposed by the United States or
any state, county, local or foreign government or subdivision or agency thereof.
"TAX RETURN OR RETURNS" means all reports, estimates and information
statements relating to, or required to be filed in connection with, any Taxes
pursuant to the statutes, rules and regulations of any foreign, federal, state,
or local government taxing authority.
"THIRD PARTY CLAIM" has the meaning set forth in ss. 8(d) of the Agreement.
"TRANSITION COSTS" means the reasonable costs incurred by the GMMV or
incurred by Seller not reimbursed to Seller by the GMMV in connection with
obtaining consents and approvals, transferring permits, licenses and bonds and
taking other actions reasonably related to the consummation of the transactions
contemplated herein (whether or not such transactions are consummated) not to
exceed $100,000, provided that costs incurred by the Seller or the GMMV in
connection with the offering of securities contemplated hereunder (which the
Parties do not expect to be material) shall not be subject to such cap, nor
shall any costs associated with such offering be counted in determining whether
that cap has been exceeded.
"USE" has the meaning set forth in the preface of the Agreement.
"USE/CC" has the meaning set forth in the preface of the Agreement.
EXHIBIT 10.50
EXHIBIT "A"
PROMISSORY NOTE
$16,000,000 June 23, 1997
For value received, Kennecott Uranium Company, a Delaware corporation
(the "Borrower"), promises to pay to Kennecott Energy Company, a Delaware
corporation (the "Lender"), or its order, at the place designated in writing
from time to time by the Lender, without setoff or deduction, the principal sum
of Sixteen Million Dollars (U.S. $16,000,000.00), together with interest accrued
on all amounts outstanding hereunder.
Interest shall be compounded annually as of the last day of each
calendar year on all amounts outstanding hereunder on that date.
Absent an Event of Default, interest shall begin to accrue twenty-two
(22) months after the date hereof. Such interest shall accrue at the rate of ten
and one-half percent (10.5%) per annum.
Principal and interest are payable by Borrower to the Lender in
quarterly installments in an amount equal to twenty percent (20%) of the Cash
Flow from the GMMV Properties for such quarter (the "Payment"). Notwithstanding
the preceding sentence, in no event shall the Payment exceed fifty percent (50%)
of the EBITDA from the GMMV Properties for the end of the quarter immediately
preceding the Payment due date. Concurrently with each Payment, Borrower shall
deliver to Lender a certificate of its Chief Financial Officer ("CFO")
certifying the accuracy of the calculation of the Payment based upon the
financial statements of Borrower (which shall also be certified by the CFO).
Borrower shall provide to Lender complete copies of such financial statements.
Borrower shall keep adequate records and books of account in accordance with
GAAP to support such financial statements and permit any authorized
representative of Lender to inspect, copy and audit the same upon reasonable
prior notice, at least once in every calendar year. All payments due under this
Note shall be applied first against outstanding costs, expenses and fees due
under this Note, then to accrued but unpaid interest and then against the
outstanding principal amount due under this Note.
Payments for each calendar quarter shall be due on each January 20,
April 20, July 20 and October 20 immediately following such quarter, if there is
both Cash Flow and EBITPA from the GMMV Properties with respect to such quarter.
Notwithstanding Cash Flow, EBITPA or any other provision hereof, the entire
balance of this Note shall be due and payable on June 23, 2010. If any Payment
to be made by Borrower shall become due on a day which is not a Business Day,
such payment shall be made on the next succeeding Business Day and such
extension of time shall be included in computing the interest in such payment.
Borrower shall pay all amounts due under this Note in lawful money of
the United States of America.
Borrower may, at its own election, prepay any unpaid principal and
interest without penalty provided such prepayment equals or exceeds one million
dollars ($1,000,000) and notice of such prepayment election is given to Lender
at least ten (10) days prior to such payment.
<PAGE>
EXHIBIT 10.50
If any Payment is not paid when due, including any acceleration of the
obligations under this Note due to a default by Borrower, the outstanding
principal balance of this Note shall bear interest, from such due date until the
date of such payment, at a rate per annum equal to the lesser of (a) twelve and
one-half percent (12.5%), or (b) the maximum interest rate permitted to be
charged by the laws of the State of Wyoming (the "Default Rate").
Upon an Event of Default, the Borrower has the right to cure any
monetary default within ten (10) days after the due-date thereof without such
event otherwise constituting a default and for any non-monetary default, the
Borrower has the opportunity to cure such default within thirty (30) days after
written notice to Borrower of such Event of Default. A breach or default by the
Borrower of any term or condition of this Note or the Deed of Trust, Mortgage,
Security Agreement, Financing Statement and Assignment of Proceeds, Rents and
Leases, entered into by the Borrower and Lender on even date herewith (the
"Mortgage") securing this Note, shall constitute a default under this Note and
the Mortgage. Each Event of Default herein and the remedies provided to Borrower
for curing of such defaults shall apply to each of the Note and the Mortgage. To
the extent that an Event of Default and the remedies provided in the Note and
the Mortgage are inconsistent, the terms and conditions of this Note shall
apply. The following constitute an Event of Default:
(i) The failure to pay in full, when due, any payment of interest or
principal required hereunder or the failure to provide any documentation
required by this Note.
(i) the occurrence of any Event of Default which is defined in the
Mortgage.
Borrower agrees that upon the occurrence of any Event of Default and the
failure of the Borrower to cure the default as above provided, Lender shall have
the right, in addition to all other rights and remedies available to Lender
under the Mortgage, or by law, to do any or all of the following and in such
order as Lender, at its sole discretion, deems advisable:
(ii) Lender may accelerate the payment of the Note and thereupon the
principal sum then remaining unpaid on the Note and all accrued interest thereon
shall become immediately due and payable.
(iii) Lender may seek the court appointment of a receiver, without
regard to the solvency of Borrower, to prevent waste, and to protect all rights
accruing to Lender by virtue of the Note and Mortgage. All costs and expenses
incurred in connection with the appointment of such receiver, and all costs
incurred by Lender or the receiver in connection with the protection or
preservation of the Collateral shall be charged against Borrower, may be
enforced as a lien against such Collateral and shall be deemed an increase to
and a part of the Note.
Lender shall have the right to enforce any one or more of the remedies
provided hereunder or by law or in equity either successively or concurrently,
and any such action by Lender shall not be deemed an election of remedies or
otherwise prevent Lender from pursuing any further remedy it may have hereunder
or at law or in equity. The rights and remedies of Lender are cumulative.
2
<PAGE>
EXHIBIT 10.50
All sums expended and expenses incurred by Lender in the exercise of the
rights conferred in this Note and the Mortgage shall be deemed to be advanced
and loaned to Borrower hereunder, and payment thereof shall be secured by the
Mortgage, provided, however, that Lender may demand immediate repayment of such
sums and that such sums shall bear interest at the Default Rate.
Borrower shall pay to Lender upon demand all reasonable costs, expenses
and fees (including reasonable attorney's fees), whether suit be instituted or
not, both before and after judgment, and for any judicial proceeding at the
trial court and appellate levels (and if suit is instituted, such fees as shall
be fixed by a judge sitting without a jury) incurred by Lender in protecting or
enforcing its rights hereunder, and under the Mortgage, and all expenses of
taking possession, holding and disposing of the Collateral, including as
incurred in any bankruptcy, insolvency, or arbitration proceeding.
Borrower hereby waives diligence, demand, presentment for payment,
notice of nonpayment, protest, notice of dishonor and notice of protest, and
hereby waives any defense by reason of extension of time for payment or other
indulgence granted by Lender.
No delay or failure of Lender in exercising any right, remedy or
privilege under this Note shall affect such right, remedy or privilege, nor
shall any single or partial exercise thereof or any abandonment or
discontinuance of steps to enforce such a right, remedy or privilege preclude
any further exercise thereof or the exercise of any other right, remedy or
privilege. The rights, remedies and privileges of Lender hereunder are
cumulative and not exclusive of any rights, remedies or privileges which Lender
would otherwise have. Any waiver, permit, consent or approval of any kind or
character on the part of Lender of any breach or default under this Note, or of
any provision or condition of this Note, must be in writing and shall be
effective only to the extent specifically set forth in such writing. No notice
to or demand on Borrower shall entitle Borrower to any other or further notice
or demand in other similar circumstances. A waiver on any one occasion shall not
be construed as a waiver or bar to any right, remedy or privilege on any other
occasion.
All notices, consents or communications required under this Note shall
be in writing and shall be deemed to have been properly given if sent by hand
delivery, overnight courier or certified mail, postage prepaid, addressed to the
parties at the addresses set forth in the Mortgage.
No amendment or modification of any provision of this Note shall be
valid unless the same shall be in writing and signed by the Lender and Borrower.
This Note is to be construed and enforced in all respects in accordance
with the laws of the State of Wyoming, without giving effect to any choice or
conflict of law provision or rule either of the State of Wyoming or any other
jurisdiction which would cause the application of any law other than of the
State of Wyoming.
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EXHIBIT 10.50
Whenever used herein the words "Borrower" and "Lender" shall be deemed
to include, to the extent applicable, the successors and assigns of Borrower and
of Lender. This obligation shall bind Borrower and, to the extent applicable,
its successors and assigns, and the benefits hereof shall inure to Lender and
its successors and assigns.
Capitalized terms which are not defined herein shall have the meanings
subscribed to them by Annex I attached hereto.
Time is of the essence of this Note and of all the obligations
hereunder.
Executed this 23rd day of June, 1997.
KENNECOTT URANIUM COMPANY
By: /s/ L. R. Cardey-Yates
--------------------------------------------
Its: Director/Assitant Corporate Secretary
-------------------------------------------
4
<PAGE>
EXHIBIT 10.50
ANNEX I
Definitions
"ACQUISITION AGREEMENT" means the acquisition agreement by and among
Borrower, U.S. Energy Corp. and the joint venture between U.S. Energy Corp. and
Crested Corp., dated the 23rd day of June, 1997.
"BUSINESS DAY" means any day other than a Saturday, a Sunday, or a
holiday on which national banking associations in the state of Wyoming are
closed.
"CASH FLOW" means cash flow calculated in accordance with GAAP for the
applicable period.
"CLOSING" means the closing of the transactions contemplated by the
Acquisition Agreement.
"COLLATERAL" means Mortgaged Property as defined in the Mortgage.
"EBITDA" means earnings before interest, Income Tax, depreciation and
amortization calculated in accordance with GAAP for the applicable period.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"GMMV PROPERTIES" means the mill and mining properties which, as of the
date hereof, are subject to the GMMV Agreements.
"GMMV AGREEMENTS" means the following agreements among Borrower, U.S.
Energy Corp. and the joint venture between U.S. Energy Corp. and Crested Corp.:
(i) Mining Venture Agreement dated June 1, 1990; (ii) Letters dated September
10, 1990 and March 1, 1991; (iii) Amendment and Agreement dated September 20,
1991; (iv) Agreement Regarding Sweetwater Mill and Amendment to Mining Venture
Agreement dated September 20, 1991; (v) the Third Amendment to Mining Venture
Agreement dated February 26, 1992; and (vi) the Fourth Amendment of Mining
Venture Agreement dated as of June 23, 1997.
"INCOME TAX" means any federal, state, local, or foreign income tax,
including any interest, penalty, or addition thereto, whether disputed or not.
5
EXHIBIT 10.51
KENNECOTT URANIUM COMPANY
Mortgagor
and
KENNECOTT ENERGY COMPANY
Mortgagee
------------------------------
MORTGAGE,
SECURITY AGREEMENT,
FINANCING STATEMENT AND
ASSIGNMENT OF PROCEEDS,
RENTS AND LEASES
------------------------------
Dated as of June 23, 1997
This instrument affects real and personal property situated in the State of
Wyoming, in Fremont and Sweetwater Counties.
A carbon, photographic or other reproduction of this instrument is sufficient as
a financing statement. This instrument contains after-acquired property
provisions. This instrument secures payment of obligations undertaken by the
Mortgagor in a principal amount of U.S.$16,000,000, together with interest
thereon. This instrument covers proceeds of collateral. This instrument covers
minerals and other substances of value which may be extracted from the earth and
which will be financed at the mine portal of the mines located on the properties
described in Exhibit A hereto. This financing statement is to be filed for
record in the real estate records of the county records of Fremont and
Sweetwater Counties. Mortgagor is the record owner of the real estate as set
forth in Exhibit A attached hereto. The Mortgagee is not a seller or purchase
money lender of the collateral covered by this financing statement.
For purposes of recording this instrument as a financing statement, Kennecott
Uranium Company is the Debtor and Kennecott Energy and Coal Company is the
Secured Party.
RECORD AND RETURN TO:
Lawrence R. Barusch, Esq.
Parsons Behle & Latimer
201 South Main Street
Suite 1800
Salt Lake City, Utah 84111
<PAGE>
EXHIBIT 10.51
TABLE OF CONTENTS
PAGE
ARTICLE 1 GRANT OF SECURITY INTERESTS...................................1
1.1 Grant of Security Interests...................................1
1.2 Obligations Secured...........................................3
1.3 Maturity......................................................3
ARTICLE 2 OWNERSHIP CONDITION, ETC. OF MORTGAGED PROPERTY...............4
2.1 [Intentionally omitted].......................................4
2.2 Recordation...................................................4
2.3 Payment of Impositions, etc...................................4
2.4 Maintenance of Existence......................................4
2.5 Compliance with Laws; Permits.................................4
2.6 Adverse Possession............................................5
2.7 Records and Inspection........................................5
2.8 Defense of Title..............................................5
2.9 Liens.........................................................5
2.10 Maintenance of Ownership of Property..........................5
2.11 No Claims Against Mortgagee, etc..............................5
2.12 Assignment of Rents...........................................6
2.13 Acquired Property Subject to Lien.............................6
ARTICLE 3 INSURANCE: DAMAGE, DESTRUCTION OR TAKING, ETC.................7
3.1 Insurance.....................................................7
3.2 Damage, Destruction or Taking; Mortgagor to
Give Notice; Assignment of Awards.............................8
3.3 Application of Proceeds.......................................9
3.4 Total Taking and Total Destruction............................9
3.5 Restoration..................................................10
ARTICLE 4 ENVIRONMENTAL INDEMNIFICATION................................10
4.1 Indemnification..............................................10
4.2 Inspection...................................................11
4.3 Actions by Mortgagee.........................................11
4.4 Intervention.................................................12
4.5 Nonexclusivity...............................................12
ARTICLE 5 EVENTS OF DEFAULT; REMEDIES, ETC.............................12
5.1 Events of Default; Declaration of Note Due...................12
5.2 Legal Proceedings; Foreclosure; Rescission...................14
5.3 Power of Sale................................................14
5.4 Mortgagee Authorized to Execute Deeds, etc...................14
5.5 Purchase of Mortgaged Property by Mortgagee .................15
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EXHIBIT 10.51
5.6 Receipt a Sufficient Discharge to Purchaser..................15
5.7 Waiver of Appraisement, Valuation, etc.......................15
5.8 Sale a Bar Against Mortgagor.................................15
5.9 Note to Become Due on Sale...................................15
5.10 Application of Proceeds of Sale and Other Moneys.............15
5.11 Appointment of Receiver......................................16
5.12 Possession, Management and Income............................16
5.13 Right of Mortgagee to Perform Mortgagor's Covenants, etc.....17
5.14 Remedies, etc., Cumulative...................................17
5.15 Attorneys' Fees etc..........................................17
5.16 Provisions Subject to Applicable Law.........................17
5.17 No Waiver, etc...............................................17
5.18 Compromise of Actions, etc...................................18
ARTICLE 6 MISCELLANEOUS................................................18
6.1 Further Assurances...........................................18
6.2 Additional Security..........................................18
6.3 Release, Partial Release, etc................................18
6.4 Notices, etc.................................................18
6.5 Amendments and Waivers.......................................19
6.6 Expenses.....................................................19
6.7 [Intentionally Omitted] .....................................19
6.8 WAIVER OF JURY TRIAL.........................................20
6.9 Miscellaneous................................................20
ii
<PAGE>
EXHIBIT 10.51
MORTGAGE, SECURITY AGREEMENT,
FINANCING STATEMENT AND
ASSIGNMENT OF PROCEEDS, RENTS AND LEASES
THIS MORTGAGE, SECURITY AGREEMENT, FINANCING STATEMENT AND ASSIGNMENT OF
PROCEEDS, RENTS AND LEASES is entered into and is effective as of the 23rd day
of June, 1997, by and between KENNECOTT URANIUM COMPANY, a Delaware corporation
("Mortgagor"), and KENNECOTT ENERGY COMPANY, a Delaware corporation
("Mortgagee").
IN CONSIDERATION of the matters herein set forth and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Mortgagor hereby covenants and agrees as follows:
ARTICLE 1
Grant of Security Interests
1.1 GRANT OF SECURITY INTERESTS. Mortgagor does hereby grant, mortgage,
pledge, assign, and convey to Mortgagee, and to its successors and assigns, for
the benefit and security of Mortgagee under and subject to the terms and
conditions herein set forth, the following property (the "Mortgaged Property"):
(a) All of Mortgagor's present or hereafter acquired right, title and
interest in and to the following:
(i) the patented and unpatented federal mining claims
(collectively, the "Mining Claims") described on Exhibit A,
(ii) the patented and unpatented federal millsite claims
(collectively, the "Millsite Claims") described on Exhibit A,
(iii) the mining or other leases (collectively, the "Leases")
described on Exhibit A hereto and made a part hereof, together with
(iv) all other unpatented federal mining claims and millsite
claims, mining or other leases, fee simple estates, surface estates,
mineral estates, royalty interests, overriding royalty interests and
net profit or other interests in real property covering, relating to
or affecting property located in Fremont and Sweetwater Counties,
Wyoming, constituting Mortgagor's interest in the Big Eagle and
Jackpot Mines and the Sweetwater Mill located in Fremont and
Sweetwater Counties, Wyoming
(the Mining Claims, the Millsite Claim, the Leases together with such other
property, rights, leases, claims and interests being collectively called the
"Claims"); including, without limitation,
1
<PAGE>
EXHIBIT 10.51
all relocations of, amendments to and patents or land exchanges obtained in lieu
of the Mining Claims and the Millsite Claims (which shall be included in the
definition of "Mining Claims" or "Millsite Claims", as the case may be); all
amendments to and replacements of the Leases (which shall be included in the
definition of "Leases"): all veins, lodes and ledges and all of the dips, spurs,
angles, pits, dumps, ponds, tailings, leach heaps, slag piles and stock piles
situate on the Claims or therein or appurtenant thereto; together with all of
the other minerals, ore, concentrate, core bar and refined metals, including,
without limitation all inventories of minerals, warehouse receipts or documents
of title covering the same (collectively, the "Minerals") in, on or under the
Claims (the Claims and the Minerals being collectively called the "Lands");
together with all surface rights, easements, rights-of-way, and all other rights
of Mortgagor to use, mine, remove and process the Minerals; and all additional
lands, leases, estates, after-acquired titles, mining claims, millsite claims
and access and development rights hereafter acquired by Mortgagor for use in
connection with the Lands;
(b) All of Mortgagor's present or hereafter acquired right, title and
interest in and to the following: (i) (collectively, the "Improvements"): all
buildings, structures, improvements and fixtures and any alterations thereto or
replacements thereof, now or hereafter located in, on or under, affixed or made
appurtenant to or erected on the Lands, and (ii) (collectively, the "Easements")
all easements, licenses, privileges, uses and rights-of-way now or hereafter
appurtenant to the Lands or the Improvements or used in connection therewith or
with the mining of the Minerals, including, without limitation, the easements
and rights of way described on Exhibit B hereto;
(c) All of Mortgagor's present or hereafter acquired right, title and
interest in and to the following (collectively, the "Water Rights"): all water
and water rights, together with all applications for water rights or
applications or permits for the use, transfer or change of water rights, ditch
and ditch rights, well and well rights, reservoir and reservoir rights, stock or
interest in irrigation or ditch companies appurtenant to the Lands and all other
rights to water for use at or in connection with the Lands or the Improvements,
or the mining of the Minerals, including, without limitation, those rights
listed on Exhibit C hereto;
(d) All of Mortgagor's present or hereafter acquired right, title and
interest in and to the following (collectively, the "Equipment"): the surface or
subsurface machinery, equipment, motor vehicles and other rolling stock,
facilities, structures and fixtures (as defined in accordance with applicable
law), supplies, inventory, fittings, appliances, apparatus, material, goods and
other articles of personal property or replacements thereof now or hereafter
located in, on or under, affixed to or installed on the Lands or the
Improvements or used or purchased for use in connection with the locating,
mining, production, treatment, storage, transportation, manufacture or sale of
the Minerals or the use or operation of the items listed above, the Lands or the
Improvements, including, without limitation, those items listed on Exhibit D
hereto;
(e) All of Mortgagor's present or hereafter acquired right, title and
interest in and to the following (collectively, the "Agreements"): (i) leases,
subleases, agreements, contracts, instruments, evidences of title (and any
claims or causes of action under or with respect to such
2
<PAGE>
EXHIBIT 10.51
evidences of title), access, operating, joint venture, mining partnership, or
other agreements relating to the development or operation of the Lands,
including, without limitation, the leases and agreements described on Exhibit E
hereto; and (ii) all permits, bonds and licenses, and all other documents,
accounts, contract rights and general intangibles now or hereafter arising out
of, used in connection with or relating to the locating, mining, production,
treatment, storage, transportation, manufacture or sale of the Minerals or the
use or operation of the Lands or the Improvements (all to the extent a security
interest may be granted therein under the terms thereof and applicable law);
(f) All claims, rights and causes of action in contract, tort or
otherwise in any way relating to or arising out of the acquisition of the
Mortgaged Property by Mortgagor;
(g) All accounts, contract rights, rents, revenues, bonuses,
royalties, payments, profits, issues, incomes, products, documents, instruments,
inventories, general intangibles, accessions, proceeds and other benefits, if
any, arising from any of the Mortgaged Property described in paragraphs (a)
through (f) of this section 1.1 (all to the extent a security interest may be
granted therein under the terms thereof and applicable law); and
(h) All proceeds of the conversion, voluntary or involuntary, of any
of the Mortgaged Property described in paragraphs (a) through (g) of this
section 1.1 into cash or liquidated claims, including, without limitation,
proceeds of insurance and condemnation awards.
Without limiting any of the other provisions of this Mortgage, Mortgagor
further expressly grants to Mortgagee, as secured party, a security interest in
all of those portions of the Mortgaged Property which are or may be subject to
the Wyoming Uniform Commercial Code provisions applicable to secured
transactions.
1.2 OBLIGATIONS SECURED. This Mortgage is executed, acknowledged and
delivered by Mortgagor to secure and enforce the following obligations (the
"Obligations") of Mortgagor:
(a) The obligations of Mortgagor to Mortgagee under the promissory
note, dated the 23rd day of June, 1997 in the principal amount of sixteen
million dollars (U.S.$16,000,000), (the "Note") together with interest thereon
at the rate and upon the terms provided in the Note;
(b) The other obligations of Mortgagor to Mortgagee to perform each
and every term, covenant and condition of the Note, together with the
obligations of Mortgagor to Mortgagee to perform each and every term, covenant
and condition of this Mortgage;
(c) All indebtedness, liabilities and obligations of Mortgagor to
Mortgagee arising pursuant to this Mortgage or the Note (including, without
limitation, all costs and expenses reasonably incurred by Mortgagee, including,
without limitation, all legal, engineering and consulting fees, made and arising
pursuant to this Mortgage or the Note or any part thereof, any renewal,
extension or change of or substitution for such obligations or any part thereof,
or
3
<PAGE>
EXHIBIT 10.51
the acquisition or perfection of the security therefor, whether such advances,
costs and expenses were made and incurred at the request of Mortgagor or
Mortgagee); and
(d) All renewals, extensions, amendments and changes of, or
substitutions for, all or any part of the Obligations described in paragraphs
(a) through (c) of this section 1.2.
1.3 MATURITY. The maturity date of the Note is June 23, 2010.
ARTICLE 2
OWNERSHIP CONDITION, ETC. OF MORTGAGED PROPERTY
2.1 [Intentionally omitted].
2.2 RECORDATION. Mortgagor, at its expense, will at all times cause this
Mortgage and any instruments amendatory hereof or supplemental hereto and any
instruments of assignment hereof or thereof (and any appropriate financing
statements or other instruments and continuations thereof with respect to any
thereof) to be recorded, registered and filed and to be kept recorded,
registered and filed, in such manner and in such places, and will pay all such
recording, registration, filing fees and other charges, and will take all such
further action and will comply with all such statutes and regulations as may be
required by law in order to establish, preserve, perfect and protect the lien of
this Mortgage as a valid and direct mortgage lien on and perfected security
interest in the Mortgaged Property of a priority at least equal to the priority
existing on the date hereof. Mortgagor will pay or cause to be paid, and will
indemnify Mortgagee in respect of, all taxes (including interest and penalties)
at any time payable in connection with the filing and recording of this Mortgage
and any and all supplements and amendments thereto. Mortgagor, at its expense,
will furnish to Mortgagee, upon request, but not more frequently than once in
every twelve month period, an opinion of counsel reasonably satisfactory to
Mortgagee, specifying the action taken by Mortgagor to comply with this section
2.2 since the date of this Mortgage or the last such request hereunder, or
stating that no such action is necessary.
2.3 PAYMENT OF IMPOSITIONS, ETC. Mortgagor also agrees that it will pay
or cause to be paid before the same would become delinquent and before any fine,
penalty, interest or cost may be added for non-payment, all taxes, assessments,
charges, and other governmental levies or payments, of every kind and nature
whatsoever, general and special, ordinary and extraordinary, unforeseen as well
as foreseen, which at any time may be assessed, levied, confirmed, imposed or
which may become a lien upon the Mortgaged Property, or any portion thereof, or
which are payable with respect thereto, or upon the rents, issues, income or
profits thereof, or on the occupancy, operation, use, possession or activities
thereof, whether any or all of the same be levied directly or indirectly or as
excise taxes or as income taxes (collectively, the "Impositions").
2.4 MAINTENANCE OF EXISTENCE. The Mortgagor will at all times preserve
and keep in full force and effect its existence, and rights and franchises
material to its business, and qualify
4
<PAGE>
EXHIBIT 10.51
and remain qualified as a foreign corporation in good standing in each
jurisdiction in which the nature of its activities or the character of the
properties it owns or leases makes such qualification necessary and in which the
failure to so qualify would have a materially adverse effect on the Mortgagor.
2.5 COMPLIANCE WITH LAWS; PERMITS. Mortgagor shall comply in all
material respects with all applicable laws, rules, regulations and orders
(including without limitation, all environmental laws), such compliance to
include, without limitation, paying before the same become delinquent, all taxes
imposed upon it or any of its properties or assets and obtain and keep in full
force and effect all required licenses, permits and approvals.
2.6 ADVERSE POSSESSION. Mortgagor shall take any and all such action as
may be necessary to prevent any third parties from acquiring any material
prescriptive easement upon, over, or across any part of the Mortgaged Property,
or from acquiring any material rights to or against the Mortgaged Property by
virtue of adverse possession.
2.7 RECORDS AND INSPECTION. Mortgagor shall keep adequate records and
books of account, in which complete entries will be made in accordance with
generally accepted accounting principals consistently applied, reflecting all
financial transactions of the Mortgagor. Mortgagor shall keep such additional
records as may be necessary to reflect its ownership and operation of the
Mortgaged Property and its activities thereon. Mortgagor shall permit any
authorized representatives of Mortgagee to inspect such books and records and
the Mortgaged Property and to make copies and to take extracts therefrom all at
such reasonable times and as often may be reasonably requested.
2.8 DEFENSE OF TITLE. Mortgagor shall defend, at its expense, title to
the Mortgaged Property and the lien and interest of Mortgagee thereon and
therein and maintain and preserve such lien and interest and keep this Mortgage
the first lien upon and prior perfected security interest in the Mortgaged
Property.
2.9 LIENS. Mortgagor shall not directly or indirectly create, incur,
assume or permit to exist any lien or encumbrance on or with respect to the
Mortgaged Property or assign or convey any right to receive the production,
proceeds or income therefrom except: (i) liens for taxes, assessments or other
governmental charges if the same shall not at the time be delinquent or
thereafter can be paid without penalty; (ii) statutory liens of landlords,
carriers, warehousemen, mechanics and materialmen incurred in the ordinary
course of business and satisfied or released prior to delinquency; and (iii)
liens incurred or deposits made in the ordinary course of business in connection
with workers' compensation unemployment insurance and other types of social
security or to secure (or to obtain letters of credit or surety or performance
bonds which secure) the performance of statutory obligations for reclamation or
which are required in connection with the obtaining of governmental licenses.
2.10 MAINTENANCE OF OWNERSHIP OF PROPERTY. Mortgagor shall not convey,
transfer, assign or encumber any interest in the Mortgaged Property or create or
allow to exist any interest
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<PAGE>
EXHIBIT 10.51
in the Mortgaged Property held by any person other than the Mortgagor or
Mortgagee, except as provided in the Acquisition Agreement.
2.11 NO CLAIMS AGAINST MORTGAGEE, ETC. Nothing contained in this
Mortgage shall constitute any consent or request by Mortgagee, express or
implied, for the performance of any labor or services or the furnishing of any
materials or other property in respect of the Mortgaged Property or any part
thereof, or be construed to permit the making of any claim against Mortgagee in
respect of labor or services or the furnishing of any materials or other
property or any claim that any lien based on the performance of such labor or
services or the furnishing of any such materials or other property is prior to
the lien of this Mortgage.
2.12 ASSIGNMENT OF RENTS. The assignment of rents, issues, incomes,
products, accessions, proceeds and other benefits contained in section 1.1
(collectively, the "Benefits") shall constitute an absolute and present
assignment, subject, however, to the conditional permission given herein to
Mortgagor to collect and use such Benefits. Upon the occurrence and during the
continuance of an Event of Default, such permission shall be terminated. Such
assignment, including, without limitation, the termination of such conditional
permission upon the occurrence and during the continuance of an Event of
Default, shall be fully operative without any further action on the part of any
of Mortgagor or Mortgagee. All parties (the "Purchasers") producing, purchasing,
receiving or having in their possession any of the Benefits are authorized and
directed to treat and regard Mortgagee as the party entitled in Mortgagor's
place and stead to receive such Benefit; and said parties shall be fully
protected in so treating and regarding Mortgagee and shall be under no
obligation to see to the application by Mortgagee of any such Benefits received
by it. Mortgagee shall apply all of the Benefits received pursuant to this
section 2.12 to satisfaction of the indebtedness secured by this Mortgage.
Notwithstanding the foregoing, so long as a Purchaser shall not have received
notice that an Event of Default shall have occurred and be continuing hereunder,
such Purchaser shall be fully protected and may pay any such Benefit to the
Mortgagor. Mortgagee shall be entitled, at its option, upon the occurrence and
during the continuance of an Event of Default hereunder, to all Benefits from
the Mortgaged Property, whether or not Mortgagee takes possession of the
Mortgaged Property. Mortgagor hereby further grants to Mortgagee the right,
following and during the continuance of an Event of Default, at Mortgagee's
option, to enter upon and take possession of the Mortgaged Property for the
purpose of collecting the Benefits. The assignment of the Benefits and such
grant shall continue in effect until the indebtedness and other sums secured
hereby are paid, the execution of this Mortgage constituting and evidencing the
irrevocable consent of Mortgagor to the entry upon and taking possession of the
Mortgaged Property by Mortgagee pursuant to such grant, whether or not
foreclosure has been instituted.
2.13 ACQUIRED PROPERTY SUBJECT TO LIEN. All property at any time
acquired by Mortgagor and required by section 1.1 of this Mortgage to become
subject to the lien hereof, whether such property is acquired by exchange,
purchase, construction or otherwise, shall forthwith become subject to the lien
of this Mortgage without further action on the part of Mortgagor or Mortgagee.
Mortgagor, at its expense, will execute and deliver to Mortgagee (and will
record and file as provided in section 2.2) an instrument supplemental to this
Mortgage,
6
<PAGE>
EXHIBIT 10.51
reasonably satisfactory in substance and form to Mortgagee, whenever such an
instrument is, in the reasonable opinion of Mortgagee, necessary or desirable
under applicable law to subject to the lien of this Mortgage all right, title
and interest of Mortgagor in and to all property required by this Mortgage to be
subjected to the lien hereof and acquired by Mortgagor since the date of this
Mortgage or the date of the most recent supplemental instrument so subjecting
property to the lien hereof, whichever is later. Mortgagor shall give Mortgagee
written notice of each acquisition of Mining Claims, Millsite Claims (patented
or unpatented) or other real property within 15 days after each such
acquisition.
2.14 NET WORTH. Mortgagor shall maintain a positive consolidated
tangible net worth determined under generally accepted accounting principles as
in effect in the United States from time to time.
ARTICLE 3
INSURANCE: DAMAGE, DESTRUCTION OR TAKING, ETC.
3.1 INSURANCE.
3.1.1 RISKS TO BE INSURED. Mortgagor will, at its expense, maintain or
cause to be maintained with insurers reasonably acceptable to Mortgagee, (a)
all-risk insurance in amounts not less than 100% of the then full insurable
value (cost of repairing, replacing, constructing or reconstructing, whichever
is the least, with comparable materials) of the Improvements, as determined by
Mortgagor in accordance with generally accepted insurance practice reasonably
acceptable to Mortgagee, or, upon the request of Mortgagee, as determined at
Mortgagor's expense by the insurer or insurers or by an expert selected by
Mortgagee, (b) public liability, including bodily and personal injury and
property damage, insurance applicable to the Mortgaged Property in such amounts
as are usually carried by prudent persons operating similar properties in
Wyoming, but in any event not less than the amount of coverage maintained
immediately prior to the execution of this Agreement, (c) worker's compensation
insurance to the full extent required by applicable law for all employees of
Mortgagor engaged in any work on or about the Mortgaged Property and employer's
liability insurance in such amounts as are usually carried by prudent persons
operating similar properties in Wyoming, and (d) such other insurance
(including, without limitation, business interruption insurance) with respect to
the Mortgaged Property as is usually carried by persons operating similar
properties in Wyoming, in such amounts and against such insurable hazards as may
be available and as Mortgagee from time to time may reasonably require by
written notice to Mortgagor.
3.1.2 POLICY PROVISIONS. All insurance maintained by Mortgagor pursuant
to section 3.1.1, shall (a) (except for worker's compensation insurance) name
Mortgagor or its permitted assignee and Mortgagee as insureds, mortgagees and
loss payees as their respective interests may appear; (b) (except for worker's
compensation and public liability insurance) provide that the proceeds for any
losses shall be adjusted with the insurers by Mortgagor subject to the approval
of Mortgagee in the event the claimed loss shall exceed $5,000,000, and shall be
payable to
7
<PAGE>
EXHIBIT 10.51
Mortgagee and Mortgagor, or its permitted assignee, to be held and applied as
provided in section 3.3; (c) include effective waivers by the insurer of all
rights of subrogation against any named insured, the indebtedness secured by
this Mortgage and the Mortgaged Property and all claims for insurance
premiums-against Mortgagee; (d) provide that any losses shall be payable
notwithstanding (i) any act, failure to act or negligence of or violation of
warranties, declarations or conditions contained in such policy by any named
insured, (ii) the occupation or use of the Mortgaged Property for purposes more
hazardous than permitted by the terms thereof, (iii) any foreclosure or other
action or proceeding taken by Mortgagee pursuant to any provision of this
Mortgage, or (i) any change in title or ownership of the Mortgaged Property; (e)
provide that no cancellation, reduction in amount or material change in coverage
thereof shall be effective until at least 30 days after receipt by Mortgagee of
written notice thereof; and (f) be satisfactory in all other respects to
Mortgagee. Any insurance maintained pursuant to this section 3.1 may be
evidenced by blanket insurance policies covering the Mortgaged Property and
other properties or assets of Mortgagor, provided that any such policy shall
specify the portion, if less than all, of the total coverage of such policy that
is allocated to the Mortgaged Property and shall in all other respects comply
with the requirements of this section 3.1.
3.1.3 DELIVERY OF POLICIES, ETC. Mortgagor will deliver to Mortgagee,
promptly upon request, (a) duplicate originals of all policies evidencing all
insurance required to be maintained under section 3.1.1 (or, in the case of
blanket policies, certificates thereof by the insurers together with a
counterpart of each blanket policy), and (b) evidence as to the payment of all
premiums due thereon (with respect to public liability insurance policies, all
installments for the current year due thereon to such date), provided that
Mortgagee shall not be deemed by reason of their custody of such policies to
have knowledge of the contents thereof. Mortgagor will also deliver to
Mortgagee, promptly upon request, but not more frequently than once every twelve
months, Officers' Certificates setting forth the particulars as to all such
insurance policies and certifying that the same comply with the requirements of
this section, that all premiums due thereon have been paid and that the same are
in full force and effect. Mortgagor will also deliver to Mortgagee a new policy
as replacement for any expiring policy at least 30 days prior to the date of
such expiration. In the event Mortgagor shall fail to effect or maintain any
insurance required to be effected or maintained pursuant to the provisions of
this section 3.1, Mortgagor will indemnify Mortgagee against damage, loss or
liability resulting from all risks for which such insurance shall have been
effected or maintained. The obligations of Mortgagor to indemnify Mortgagee in
such a manner shall survive any discharge of this Mortgage and payment in full
of the Note.
3.1.4 SEPARATE INSURANCE. Mortgagor will not take out separate insurance
concurrent in form or contributing in the event of loss with that required to be
maintained pursuant to this section.
3.2 DAMAGE, DESTRUCTION OR TAKING; MORTGAGOR TO GIVE NOTICE; ASSIGNMENT
OF AWARDS. In case of (a) any damage to or destruction of the Mortgaged Property
or any part thereof, or (b) any taking (whether for permanent or temporary use)
of all or any part of the Mortgaged Property or any interest therein or right
accruing thereto, as the result of or in lieu or in anticipation of the exercise
of the right of condemnation or eminent domain, or a change of grade affecting
the
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EXHIBIT 10.51
Mortgaged Property or any part thereof (a "Taking"), or the commencement of any
proceedings or negotiations which might result in any such Taking, Mortgagor
will promptly give written notice thereof to Mortgagee, generally describing the
nature and extent of such damage or destruction or of such Taking or the nature
of such proceedings or negotiations and the nature and extent of the Taking
which might result therefrom, as the case may be. Mortgagee shall be entitled to
all insurance proceeds payable on account of such damage or destruction and to
all awards or payments allocable to the Mortgaged Property on account of such
Taking and Mortgagor hereby irrevocably assigns, transfers and sets over to
Mortgagee all rights of Mortgagor to any such proceeds, award or payment and
irrevocably authorize and empower Mortgagee, at their option, in the name of
Mortgagor or otherwise, to file and prosecute what would otherwise be
Mortgagor's claim for any such proceeds, award or payment and, to collect,
receipt for and retain the same for disposition in accordance with section 3.3
Mortgagor will pay all reasonable costs and expenses incurred by Mortgagee in
connection with any such damage, destruction or Taking and seeking and obtaining
any insurance proceeds, award or payment in respect thereof.
3.3 APPLICATION OF PROCEEDS. Mortgagee shall apply all amounts recovered
under any insurance policy required to be maintained by Mortgagor hereunder, and
all net awards received by it on account of any Taking in the following ways:
(a) so long as no Event of Default shall have occurred and be continuing,
released to Mortgagor for application to the cost of compliance with section
3.5, or (b) if an Event of Default has occurred and is continuing, (i) to
fulfill any of the covenants contained herein as Mortgagee may determine, or
(ii) to be held as additional cash collateral hereunder to be invested in
short-term United States government securities selected by Mortgagor with the
consent of Mortgagee.
3.4 TOTAL TAKING AND TOTAL DESTRUCTION. In case of (a) a Taking of the
entire Mortgaged Property, or (b) a Taking of less than the entire Mortgaged
Property, or any material damage to or destruction of the Mortgaged Property, in
either case which, in the good faith judgment of Mortgagee, renders the
Mortgaged Property remaining after such Taking, damage or destruction, taken as
a whole, unsuitable for restoration for use as property of substantially the
same value, condition, character and general utility as the Mortgaged Property
prior to such Taking, damage or destruction (any such Taking being herein called
a "Total Taking" and any such damage or destruction being herein called a "Total
Destruction"), then the proceeds of insurance and the net awards received by
Mortgagee or Mortgagor on account of such Total Taking or Total Destruction
shall be applied by Mortgagee as follows:
FIRST: to the payment of the costs and expenses of the recovery
of such proceeds or awards (including, without limitation, attorneys'
fees) and any taxes, assessments or charges, prior to the lien of this
Mortgage, which Mortgagee may consider it necessary or desirable to pay;
SECOND: to the payment of any indebtedness secured by this
Mortgage, other than indebtedness with respect to the Note at the time
outstanding, which Mortgagee may consider it necessary or desirable to
pay;
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EXHIBIT 10.51
THIRD: to the payment of all amounts of principal, and interest
at the time outstanding on the Note (whether or not at the time due and
payable by reason of maturity or as an installment of combined principal
and interest or by reason of any prepayment requirement or by
declaration of acceleration or otherwise), including interest at the
rate per annum set forth in the Note for past due amounts (the "Default
Rate") on any overdue principal and (to the extent permitted under
applicable law) on any overdue interest; and in case such moneys shall
be insufficient to pay in full the amounts so due and unpaid upon the
Note at the time outstanding, then, FIRST, to the payment of all amounts
of interest at the time outstanding on the Note, and SECOND, to the
payment of all amounts of principal, at the time outstanding on the
Note.
FOURTH: the balance, if any, held by Mortgagee after payment in
full of all amounts referred to in subdivisions First, Second and Third
above, shall, unless a court of competent jurisdiction may otherwise
direct by final order not subject to appeal, be paid to or upon the
direction of Mortgagor or its permitted assignee.
3.5 RESTORATION. In case of any Taking (other than a Total Taking) or
any damage to or destruction of the Mortgaged Property or any part thereof
(other than a Total Destruction), Mortgagor will (to the extent such Taking,
damage or destruction is susceptible of replacement, repair or restoration)
commence or cause to be commenced, promptly and with due diligence, at its
expense, whether or not the insurance proceeds for such damage or destruction or
the award for such Taking shall be sufficient for such purpose, (a) the
replacement, repair or restoration of the Mortgaged Property as nearly as
practicable (in the case of a Taking, after giving effect to any reduction in
area caused thereby) to the value, condition, character and general utility
thereof immediately prior to such damage, destruction or Taking or (b) the
substitution for such Mortgaged Property or any part thereof of other property
(which shall upon such substitution become a part of the Mortgaged Property) of
at least the same value and general utility of such Mortgaged Property or part
thereof immediately prior to such damage, destruction or Taking.
ARTICLE 4
ENVIRONMENTAL INDEMNIFICATION
4.1 INDEMNIFICATION. Mortgagor shall defend, indemnify and hold
Mortgagee harmless from and against any and all environmental claims directly or
indirectly arising out of or resulting from any Hazardous Substance being
present or released in, on, around or potentially affecting any part of the
Mortgaged Property or the soil, vadose zone, groundwater or soil vapor on or
under the Mortgaged Property, including:
4.1.1 Any claim for such environmental claim asserted by any federal,
state, or local governmental agency, including the United States Environmental
Protection Agency and the Wyoming Department of Environmental Quality and
including any claim that Mortgagee is liable for any such environmental claim
asserted as an "owner" or "operator" of the Mortgaged Property under any law
relating to Hazardous Substances; and
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EXHIBIT 10.51
4.1.2 Any such environmental claim asserted against Mortgagee by any
person other than a governmental agency, including any person who may purchase
or lease all or any portion of the Mortgaged Property from Mortgagor, from
Mortgagee, or from any other purchaser or lessee; any person who may at any time
have any interest in all or any portion of the Mortgaged Property; any person
who may at any time be responsible for any cleanup costs or other environmental
claims relating to the Mortgaged Property; and any person claiming to have been
injured in any way as a result of exposure to any Hazardous Substance from or
located at the Mortgaged Property; and
4.1.3 Any such environmental claims which Mortgagee reasonably believes
at any time may be incurred to comply with any law, judgment, order, regulation
or regulatory directive relating to Hazardous Substances or which Mortgagee
reasonably believes at any time may be incurred to protect the public health or
safety; and
4.1.4 Any such environmental claims resulting from currently existing
conditions in, on, around or potentially affecting the Mortgaged Property,
whether known or unknown by Mortgagor or Mortgagee at the time this Mortgage is
executed, and any such indemnified costs resulting from the activities of
Mortgagor, Mortgagor's tenants, or any other person in, on, around or
potentially affecting the Mortgaged Property.
4.2 INSPECTION. Mortgagee, its contractors, agents and representatives
(hereinafter, "Site Reviewers") shall have the right at any reasonable time and
from time to time, upon prior notice, to enter upon and visit the Mortgaged
Property for the purposes of observing the environmental condition at the
Mortgaged Property, taking and removing soil or groundwater samples, and
conducting tests and/or site assessments on any part of the Mortgaged Property
(collectively, "Site Assessments") for the purpose of determining whether there
exists on the Mortgaged Property any environmental condition that could result
in any liability, cost, or expense to the owner, occupier, or operator of such
Mortgaged Property arising under any Environmental Laws. The Site Reviewers have
no duty, however, to conduct any Site Assessment, and no Site Assessment shall
impose any liability on any Site Reviewer. In no event shall the completion of
any Site Assessment be a representation that Hazardous Substances are or are not
present in, on, under or around the Mortgaged Property, or that there has been
or shall be compliance with any law, regulation or ordinance pertaining to
Hazardous Substances or any other governmental law. Neither Mortgagor nor any
other party is entitled to rely on any Site Assessment conducted by or on behalf
of Mortgagee, which Site Assessment shall be for the sole benefit and use of
Mortgagee. The Site Reviewers owe no duty of care to protect Mortgagor or any
other party against, or to inform Mortgagor or any other party of, any Hazardous
Substances or any other adverse condition affecting the Mortgaged Property.
Mortgagee shall avoid interfering with Mortgagor's use of the Mortgaged Property
in exercising any rights provided in this Section. The Site Reviewers are hereby
authorized to enter upon the Mortgaged Property for the purpose of conducting
Site Assessments. The Site Reviewers are further authorized to perform both
above and below the ground testing for environmental damage or the presence of
Hazardous Substances on the Mortgaged Property and such other tests on the
Mortgaged Property as may be necessary to conduct the site Assessments in the
reasonable
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EXHIBIT 10.51
opinion of the Site Reviewers, provided that in conducting such testing, the
Site Reviewers comply with the requirements of the Federal Mine Safety and
Health Act and all applicable health and safety laws of the State of Wyoming and
local authorities having jurisdiction and Mortgagor's reasonable safety
regulations while on the Mortgaged Property. Mortgagor will supply to the Site
Reviewers such historical and operational information regarding the Mortgaged
Property as may be reasonably requested by the Site Reviewers to facilitate the
Site Assessments and will make available for meetings with the Site Reviewers
appropriate personnel having knowledge of such matters. The cost of performing
such Site Assessments shall be paid by Mortgagor upon demand of Mortgagee if the
need for the Site Assessment arises from or relates to or confirms any release
of Hazardous Substances or noncompliance with or violation of Environmental
Laws. On request, Mortgagee shall make the results of such Site Assessments
fully available to Mortgagor provided that Mortgagor has fully reimbursed
Mortgagee for the cost of such Site Assessments.
4.3 ACTIONS BY MORTGAGEE. Mortgagee shall have the right, but not the
obligation, without in any way limiting Mortgagee's other rights and remedies
under the Note and this Agreement, to enter onto the Mortgaged Property or to
take such other actions as it deems necessary or advisable to clean up, remove,
resolve, or minimize the impact of, or otherwise deal with, any release of
Hazardous Substances on or affecting the Mortgaged Property or any presence of
Hazardous Substances on or affecting the Mortgaged Property that is not in
compliance with or is in violation of applicable Environmental Laws following
receipt of any notice from any person or entity asserting the existence of any
Hazardous Substances pertaining to the Mortgaged Property or any part thereof
that, if true, could result in an claim, order, notice, suit, imposition of a
lien on the Mortgaged Property, or other action and/or that, in Mortgagee's sole
opinion, could jeopardize Mortgagee's security under the Note and this
Agreement, if the Mortgagor, following written notice from Mortgagee shall fail
to promptly take reasonable action to prevent any ongoing or future release or
to remedy the effects of any such release, or to cause the presence of Hazardous
Substances on or affecting the Mortgaged Property to be in compliance with
applicable Environmental Laws, diligently prosecute the same to completion, and
provide satisfactory proof of such preventative or remedial measures. All
reasonable costs and expenses paid or incurred by Mortgagee in the exercise of
any such rights shall be secured by this Agreement and shall be payable by
Mortgagor upon demand.
4.4 INTERVENTION. Mortgagee shall have the right at any time to appear
in and to participate in, as a party if it elects, and be represented by counsel
of its own choice in, any action or proceeding in connection with any
Environmental Law that affects the Mortgaged Property. Upon demand by Mortgagee,
Mortgagor shall defend any investigation, action or proceeding involving any
matter covered by Mortgagor's obligations hereunder which is brought or
commenced against Mortgagee, whether alone or together with Mortgagor or any
other person, all at Mortgagor's own cost and by counsel reasonably acceptable
to Mortgagee in the exercise of its reasonable judgment. In the alternative,
Mortgagee may elect to conduct its own defense at the expense of Mortgagor.
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EXHIBIT 10.51
4.5 NONEXCLUSIVITY. Nothing in this Article shall be construed to limit
any claim or right which Mortgagee may otherwise have at any time against
Mortgagor or any other person arising from any source other than this Article,
including any claim for fraud, misrepresentation, waste, or breach of contract
other than the Note and this Mortgage, and any rights of contribution or
indemnity under federal, state or local environmental law or other applicable
law, regulation or ordinance.
ARTICLE 5
EVENTS OF DEFAULT; REMEDIES, ETC.
5.1 EVENTS OF DEFAULT; DECLARATION OF NOTE DUE.
(a) Events of Default" under the Note shall constitute events of
default hereunder and are herein called "Events of Default". Events of Default
shall also include:
(i) The breach or default by Mortgagor of or under any covenant,
warranty, agreement, representation, performance or requirement herein
contained or contained in the Note which continues at least thirty
(30) days after notice to Mortgagor, provided that if such breach or
default requires more than thirty (30) days to cure and Mortgagee
initiates such cure within such thirty (30) day period and diligently
pursues the same, Mortgagor shall have such additional time as may be
necessary to effect cure, but in no event may such additional time
exceed ninety (90) days.
(ii) The institution of any proceeding against the Mortgagor, the
Mortgaged Property, or any other property interest which is a
co-tenancy or a joint interest in any property which is wholly or
partially subject to the lien created hereunder in which forfeiture,
attachment, or replevin of any material asset of Mortgagor is sought
in the proceeding, unless such proceeding is dismissed within sixty
(60) days following its initiation.
(iii) The admission in writing by Mortgagor that it is unable to
pay its debts as they mature or that it is generally not paying its
debts as they mature.
(iv) The liquidation, termination, or dissolution of Mortgagor
under the laws of the state under which it is organized.
(v) The sale, merger, lease, exchange, conveyance, transfer,
mortgage, assignment, pledge or encumbrance of the Mortgaged Property,
either voluntarily or involuntarily, or the agreement to do so,
contrary to the provisions of the Mortgage without the prior written
consent of the Mortgagee being first obtained.
(vi) The filing of any petition or the commencement of any case or
proceeding by or against Mortgagor under any federal or state law
relating to insolvency, bankruptcy, or reorganization, unless such
petition and the case or proceeding initiated thereby is dismissed
within sixty (60) days from the date of such filing; or an
adjudication that Mortgagor is insolvent
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EXHIBIT 10.51
or bankrupt; or the entry of an order for relief under the United States
Bankruptcy Code with respect to Mortgagor; the filing of an answer by Mortgagor
admitting the allegations of any such petition; or the appointment of or the
taking of possession by a custodian, trustee or receiver for all or any material
assets of Mortgagor, unless such appointment is vacated or dismissed or such
possession is terminated within sixty (60) days from the date of such
appointment or commencement of such possession, but not later than five (5) days
before the proposed sale of any material assets of Mortgagor by such custodian,
trustee, or receiver, other than in the ordinary course of the business of
Mortgagor.
(vii) The insolvency of Borrower; or the execution by Borrower of
an assignment for the benefit of creditors; or the convening by
Borrower of a meeting of its creditors, or any class thereof, for the
purposes of effecting a moratorium upon or extension or composition of
its debts; or the failure of Borrower to generally pay its debts as
they mature.
(viii) The failure to place into production an economically viable
uranium mine on the Mortgaged Property by December 31, 2005.
(b) Upon the occurrence and during the continuance of any of the
Events of Default, and whether or not any amount due under the Note
has been declared due and payable pursuant to the Note, then and in
any such event Mortgagee may declare, by written notice to Mortgagor,
all indebtedness secured hereby, including, indebtedness accelerated
pursuant to the Note, to be due and payable upon the date specified in
such notice, and upon such date the same shall become due and payable,
together with interest accrued thereon, without presentment, demand,
protest, notice or other requirements of any kind, all of which are
hereby waived.
(c) Mortgagor will pay on demand all costs and expenses (including,
without limitation, attorneys' fees and expenses) incurred by or on behalf of
Mortgagee in enforcing this Mortgage or the Note or occasioned by any default or
Event of Default under this Mortgage.
(d) Upon the occurrence and during the continuance of an Event of
Default, interest at the Default Rate shall be due and payable on the principal
of, premium, if any, and (to the extent permitted by law) interest on the Note
at the time outstanding and all other indebtedness secured hereby.
5.2 LEGAL PROCEEDINGS; FORECLOSURE; RESCISSION. If an Event of Default
shall have occurred and be continuing, Mortgagee at any time may, at its
election, proceed at law or in equity or otherwise to enforce the payment of the
Note at the time outstanding in accordance with the terms hereof and thereof and
to foreclose the lien of this Mortgage as against all or any part of the
Mortgaged Property or proceed to take either of such actions, and to have the
same sold under the judgment or decree of a court of competent jurisdiction.
Mortgagee, from time to time before sale, may rescind any notice of breach and
election to sell by executing, delivering and causing to be recorded a written
notice of such rescission. The exercise by Mortgagee of such right of rescission
shall not constitute a waiver of any breach or default then existing or
subsequently occurring, or impair the rights of Mortgagee to execute and
deliver, as above
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EXHIBIT 10.51
provided, other notices of breach and election to sell, nor otherwise affect any
term, covenant or condition hereof or under any obligations secured hereby, or
any of the rights, obligations or remedies of the parties thereunder.
5.3 POWER OF SALE. If an Event of Default shall have occurred and be
continuing, Mortgagee may sell, assign, transfer and deliver the whole or, from
time to time, any part of the Mortgaged Property, or any interest in any part
thereof, for cash, on credit or for other property, for immediate or future
delivery, and for such price or prices and on such terms as Mortgagee in its
reasonable discretion may determine, or as may be required by law. The
provisions of this Mortgage shall be interpreted as broadly as possible to allow
Mortgagee the full advantage of all remedies to which Mortgagors under mortgages
are entitled under Wyoming law. Without in any way limiting the foregoing,
Mortgagor agrees that Mortgagee shall have the right following an Event of
Default hereunder to proceed with either a judicial foreclosure, or foreclosure
by advertisement pursuant to Section 34-4-101, et.seq., of the Wyoming Statutes
Annotated, as amended. In addition, with respect to any portion of the Mortgaged
Property that constitutes personal property governed by the Wyoming Uniform
Commercial Code, this Mortgage shall be construed broadly to give to Mortgagee
all of the rights and remedies to which secured parties are or may be entitled
under the Wyoming Uniform Commercial Code.
5.4 MORTGAGEE AUTHORIZED TO EXECUTE DEEDS, ETC. Mortgagor irrevocably
appoints Mortgagee, collectively, the true and lawful attorney of Mortgagor, in
its name and stead and on its behalf, for the purpose of effectuating any sale,
assignment, transfer or delivery for the enforcement hereof, whether pursuant to
power of sale, foreclosure by advertisement, judicial foreclosure or otherwise,
to execute and deliver all such deeds, bills of sale, assignments and other
instruments as Mortgagee may consider necessary or appropriate, with full power
of substitution, Mortgagor hereby ratifying and confirming all that its said
attorney or any substitute shall lawfully do by virtue hereof. Nevertheless, if
so requested by Mortgagee or any purchaser, Mortgagor will ratify and confirm
any such sale, assignment, transfer or delivery by executing and delivering to
Mortgagee or such purchaser all such proper deeds, bills of sale, assignments,
releases and other instruments as may be designated in any such request. If, in
the judgment of the Mortgagee, time permits, Mortgagee shall give prior notice
to the Mortgagor of the exercise of its powers hereunder, and give the Mortgagor
the opportunity to perform any act authorized hereby. The failure of Mortgagee
to comply with the preceding sentence shall not affect its powers hereunder or
in any way limit or prejudice its rights or remedies hereunder.
5.5 PURCHASE OF MORTGAGED PROPERTY BY MORTGAGEE. The Mortgagee or any
successor holder of the Note may be a purchaser of the Mortgaged Property or of
any part thereof or of any interest therein at any sale thereof, whether
pursuant to power of sale, foreclosure by advertisement, judicial foreclosure or
otherwise, and shall apply upon the purchase price thereof the indebtedness
secured hereby owing to such purchaser, to the extent of such purchaser's
distributive share of the purchase price. Any such purchaser shall, upon any
such purchase, acquire good title to the properties so purchased, free of the
lien of this Mortgage and free of all rights of redemption in Mortgagor.
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EXHIBIT 10.51
5.6 RECEIPT A SUFFICIENT DISCHARGE TO PURCHASER. Upon any sale of the
Mortgaged Property or any part thereof or any interest therein, whether pursuant
to power of sale, foreclosure by advertisement, judicial foreclosure or
otherwise, the receipt of the purchase money by Mortgagee or the officer making
the sale under judicial proceedings shall be a sufficient discharge to the
purchaser for the purchase money, and such purchaser shall not be obliged to see
to the application thereof.
5.7 WAIVER OF APPRAISEMENT, VALUATION, ETC. Mortgagor hereby waives, to
the fullest extent it may lawfully do so, the benefit of all appraisement,
valuation, stay, extension and redemption laws now or hereafter in force and all
rights of marshaling in the event of any sale of the Mortgaged Property or any
part thereof or any interest therein.
5.8 SALE A BAR AGAINST MORTGAGOR. Any sale of the Mortgaged Property or
any part thereof or any interest therein under or by virtue of this Mortgage,
whether pursuant to foreclosure by advertisement, judicial foreclosure or power
of sale or otherwise, shall forever be a perpetual bar against Mortgagor,
provided that nothing contained in this section 5.8 shall limit any rights of
Mortgagor against the Mortgagee resulting from any unlawful sale of the
Mortgaged Property or any part thereof or interest therein.
5.9 NOTE TO BECOME DUE ON SALE. Upon any sale by Mortgagee under or by
virtue of this Mortgage, whether pursuant to judicial foreclosure, foreclosure
by advertisement or power of sale or otherwise, the entire unpaid principal
amount of the Note at the time outstanding shall, if not previously declared due
and payable, immediately become due and payable, together with interest accrued
thereon, and all other indebtedness which this Mortgage by its terms secures.
5.10 APPLICATION OF PROCEEDS OF SALE AND OTHER MONEYS. The proceeds of
any sale of the Mortgaged Property or any part thereof or any interest therein
under or by virtue of this Mortgage, whether pursuant to judicial foreclosure,
foreclosure by advertisement, power of sale, or otherwise, shall, to the extent
allowed by law, be applied as follows:
FIRST: to the payment of all costs and expenses of such sale
(including, without limitation, the cost of evidence of title, the
costs and expenses, if any, of taking possession of, retaining custody
over, repairing, maintaining and preserving the Mortgaged Property or
any part thereof prior to such sale), all costs and expenses of any
receiver of the Mortgaged Property or any part thereof, and any taxes,
assessments, encumbrances, liens or charges, prior to the lien of, or
security interest created by, this Mortgage, which Mortgagee may
consider it necessary or desirable to pay;
SECOND: to the payment of any indebtedness secured by this
Mortgage, other than indebtedness with respect to the Note at the time
outstanding, which Mortgagee may consider it necessary or desirable to
pay;
THIRD: to the payment of all amounts of principal, and interest at
the time due and payable on the Note outstanding (whether due by
reason of maturity or as an installment
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EXHIBIT 10.51
of combined principal and interest or by reason of any prepayment
requirement or by declaration or acceleration or otherwise), including
interest at the Default Rate on any overdue principal and premium, if
any, and (to the extent permitted under applicable law) on any overdue
interest; and in case such moneys shall be insufficient to pay in full
the amounts so due and unpaid upon the Note at the time outstanding,
then, first, to the payment of all amounts of interest at the time due
and payable on the Note, and second, to the payment of all amounts of
principal and premium, if any, at the time due and payable on the Note;
and
FOURTH: the balance, if any, held by Mortgagee after payment in
full of all amounts referred to in subdivisions First, Second and
Third above, shall, unless a court of competent jurisdiction may
otherwise direct, be paid to or upon the direction of Mortgagor or its
permitted assignee.
5.11 APPOINTMENT OF RECEIVER. If an Event of Default shall have occurred
and be continuing, Mortgagee shall, as a matter of right, be entitled to the
appointment of a receiver for all or any part of the Mortgaged Property, whether
such receivership be incidental to a proposed sale of the Mortgaged Property or
otherwise.
5.12 POSSESSION, MANAGEMENT AND INCOME. If an Event of Default shall
have occurred and be continuing, Mortgagee may, but shall be under no obligation
to, immediately enter upon and take possession of the Mortgaged Property or any
part thereof by force, summary proceeding, ejectment or otherwise and may remove
Mortgagor and all other persons and any and all property therefrom and may hold,
operate, maintain, repair, preserve and manage the same and receive all
earnings, income, rents, issues and proceeds accruing with respect thereto or
any part thereof. Mortgagee shall be under no liability to Mortgagor for or by
reason of any such taking of possession, entry, removal or holding, operation or
management, except that any amounts so received by Mortgagee shall be applied to
pay all costs and expenses of so entering upon, taking possession of, holding,
operating, maintaining, repairing, preserving and managing the Mortgaged
Property or any part thereof, and any taxes, assessments or other charges prior
to the lien of this Mortgage which Mortgagee may consider it necessary or
desirable to pay, and any balance of such amounts shall be applied as provided
in section 5.10.
5.13 RIGHT OF MORTGAGEE TO PERFORM MORTGAGOR'S COVENANTS, ETC. If
Mortgagor shall fail to make any payment or perform any act required to be made
or performed hereunder, Mortgagee without notice to or demand upon Mortgagor,
and without waiving or releasing any obligation or default, may but shall be
under no obligation to) at any time thereafter make such payment or perform such
act for the account and at the expense of Mortgagor, and may enter upon the
Mortgaged Property for such purpose and take all such action thereon as, in
Mortgagee's opinion, may be necessary or appropriate therefor. No such entry and
no such action shall-be deemed an eviction of any lessee of the Mortgaged
Property or any part thereof. All sums so paid by Mortgagee and all costs and
expenses (including, without limitation, attorneys' fees and expenses) so
incurred, together with interest thereon at the Default Rate from the date of
payment or incurring, shall constitute additional indebtedness secured by this
Mortgage and shall be paid by
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EXHIBIT 10.51
Mortgagor to Mortgagee on demand. The final two sentences of Section 5.4 shall
apply to the exercise to the rights granted by this Section 5.13.
5.14 REMEDIES, ETC., CUMULATIVE. Each right, power and remedy of
Mortgagee provided for in this Mortgage or now or hereafter existing at law or
in equity or by statute or otherwise shall be cumulative and concurrent and
shall be in addition to every other right, power or remedy provided for in this
Mortgage or now or hereafter existing at law or in equity or by statute or
otherwise, and the exercise or beginning of the exercise by Mortgagee of any one
or more of the rights, powers or remedies provided for in this Mortgage or now
or hereafter existing at law or in equity or by statute or otherwise shall not
preclude the simultaneous or later exercise by Mortgagee of any or all such
other rights, powers or remedies.
5.15 ATTORNEYS' FEES ETC. Mortgagor shall pay to Mortgagee, on demand,
any costs and expenses, including reasonable attorneys' fees and expenses, paid
or incurred by Mortgagee in connection with the collection of any amount payable
by Mortgagor to Mortgagee hereunder or under the Note, whether or not any legal
proceeding is commenced hereunder or thereunder and whether or not any Event of
Default shall have occurred and is continuing, together with interest thereon at
the Default Rate from the date of payment or incurring by Mortgagee until paid
by Mortgagor.
5.16 PROVISIONS SUBJECT TO APPLICABLE LAW. All rights, powers and
remedies provided in this Mortgage may be exercised only to the extent that the
exercise thereof does not violate any applicable provisions of law and are
intended to be limited to the extent necessary so that they will not render this
Mortgage invalid, unenforceable or not entitled to be recorded, registered or
filed under the provisions of any applicable law. If any term of this Mortgage
or any application thereof shall be invalid or unenforceable, the remainder of
this Mortgage and any other application of such term shall not be affected
thereby.
5.17 NO WAIVER, ETC. No failure by Mortgagee to insist upon the strict
performance of any term hereof or thereof, or to exercise any right, power or
remedy consequent upon a breach hereof or thereof, shall constitute a waiver of
any such term or of any such breach. No waiver of any breach shall affect or
alter this Mortgage, which shall continue in full force and effect with respect
to any other then existing or subsequent breach. By accepting payment of any
amount secured hereby after its due date, Mortgagee shall not be deemed to waive
its right either to require prompt payment when due of all other amounts payable
hereunder or to declare a default for failure to effect such prompt payment.
5.18 COMPROMISE OF ACTIONS, ETC. Any action, suit or proceeding brought
by Mortgagee pursuant to any of the terms of this Mortgage or otherwise, and any
claim made by Mortgagee hereunder may be compromised, withdrawn or otherwise
dealt with by Mortgagee without any notice to or approval of Mortgagor.
18
<PAGE>
EXHIBIT 10.51
ARTICLE 6
MISCELLANEOUS
6.1 FURTHER ASSURANCES. Mortgagor, at its expense, will execute,
acknowledge and deliver all such instruments and take all such action as
Mortgagee from time to time may reasonably request for the better assuring to
Mortgagee the properties and rights now or hereafter subjected to the lien
hereof or assigned hereunder or intended so to be. Notwithstanding any other
provision of this Mortgage, Mortgagor hereby agrees that, without notice to or
the consent of Mortgagor, Mortgagee may file with the appropriate public
officials such financing statements or similar documents as are or may become
necessary to perfect and continue the perfection of the security interest
granted by this Mortgage.
6.2 ADDITIONAL SECURITY. Without notice to or consent of Mortgagor, and
without impairment of the lien and rights created by this Mortgage, Mortgagee
may accept (but Mortgagor shall not be obligated to furnish) from Mortgagor or
from any other person additional security for the Note at the time outstanding.
Neither the giving of this Mortgage nor the acceptance of any such additional
security shall prevent Mortgagee from resorting, first, to such additional
security, or, first, to the security created by this Mortgage, or concurrently
to both, in any case without affecting Mortgagee's lien and rights under this
Mortgage.
6.3 RELEASE, PARTIAL RELEASE, ETC. Upon receipt of all sums secured
hereby, Mortgagee shall release without warranty the property then held
hereunder. Mortgagee may, at any time and from time to time, without liability
therefor, release any part of the Mortgaged Property, consent to the making of
any map or plat thereof, grant an easement thereon, grant an extension or
subordinate the lien of this Mortgage, or enter into any other agreement in
connection with the Mortgaged Property.
6.4 NOTICES, ETC. All notices, demands, requests, consents, approvals
and other instruments under this Mortgage shall be in writing (including telex,
telecopy and telegraphic communication) and mailed, telexed, telegraphed or
delivered, at the following addresses or, as to any party, at such address as
shall be designated by such party in a written notice to the other parties.
If to Mortgagor: If to Mortgagee:
Kennecott Uranium Company Kennecott Energy Company
Attn: Gregory H. Boyce Attn: Lynn R. Cardey-Yates
Kennecott Energy Company 8315 West 3595 South
Caller Box 3009 P.O. Box 6001
505 South Gillette Avenue Magna, UT 84044-6001
Gillette, WY 82717-3009 Fax: (801) 252-3559
Fax: (307) 687-6011
19
<PAGE>
EXHIBIT 10.51
With Mortgagee Copy to:
Parsons Behle & Latimer
Lawrence R. Barusch
201 South Main Street, Suite 1800
Salt Lake City, Utah 84111
Fax: (801) 536-6111
All such notices and communications shall, when mailed by registered or
certified mail, or otherwise physically delivered, be effective when received or
delivered, addressed as aforesaid, and, when sent by ordinary mail, be effective
five days after the day on which deposited in the mails, addressed as aforesaid,
and when telexed or telecopied, be effective upon confirmation of transmission.
6.5 AMENDMENTS AND WAIVERS. This Mortgage, the Note, and any term hereof
or thereof may be amended, discharged or terminated and the observance of any
term of this Mortgage or the Note may be waived (either generally or in a
particular instance and either retroactively or prospectively) only by an
instrument in writing signed by Mortgagor and Mortgagee.
6.6 EXPENSES. Mortgagor will pay or cause to be paid (a) the cost of
filing and recording of this Mortgage and Uniform Commercial Code financing
statements and any other documents to be filed or recorded in connection with
the execution and delivery hereof or thereof; and (b) all taxes (including
interest and penalties) at any time payable in connection with the execution and
delivery of this Mortgage and any other instruments or agreements related hereto
or thereto, any amendment or waiver relating hereto or thereto, the issue and
acquisition of the Note and, where applicable, such filing and recording
(Mortgagor agreeing to indemnify Mortgagee in respect of such taxes, interest
and penalties.)
6.7 [Intentionally Omitted.]
6.8 WAIVER OF JURY TRIAL. MORTGAGOR HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY LEGAL OR EQUITABLE
ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS MORTGAGE, THE NOTE
OR ANY TRANSACTION CONTEMPLATED HEREBY OR THEREBY.
6.9 MISCELLANEOUS. All the terms of this Mortgage shall apply to and be
binding upon (and those provisions of this Mortgage explicitly for the benefit
of Mortgagor shall be for the benefit of) the respective successors and assigns
of Mortgagor, and all persons claiming under or through Mortgagor or any such
successor or assign, and shall inure to the benefit of and be enforceable by
Mortgagee and its successors and assigns and any successor holders of any of the
Note at the time outstanding. The headings and table of contents in this
Mortgage are for convenience of reference only and shall not limit or otherwise
affect any of the terms hereof.
20
<PAGE>
EXHIBIT 10.51
This Mortgage shall be construed and enforced in accordance with and governed by
the laws of the State of Wyoming, without giving effect to any choice or
conflict of law provision, either or the State of Wyoming or elsewhere, which
would cause the application of any laws other than of the State of Wyoming.
IN WITNESS WHEREOF, Mortgagor has caused this Mortgage to be duly
executed as of the day and year first above written.
KENNECOTT URANIUM COMPANY
By: /s/ L. R. Cardey-Yates
--------------------------------
Title: Director/Assistant Secretary
Attest: /s/ Shannon Crompton
------------------------------------
Secretary
21
<PAGE>
EXHIBIT 10.51
STATE OF UTAH )
: ss
COUNTY OF SALT LAKE )
The foregoing instrument was acknowledged before me by L. R. Cardey-Yates, the
Director/Asst. Secretary of Kennecott Uranium Company, a Delaware corporation,
who acknowledged to me that Kennecott Uranium Company executed the same on this
23rd day of June, 1997.
Witness my hand and official seal.
/s/ Colleen S. Jones
--------------------------------
Notary Public
My Commission Expires: Residing at:
12-1-98 Salt Lake City, Utah
[Seal]
22
<PAGE>
EXHIBIT 10.51
EXHIBIT A
TO MORTGAGE, SECURITY AGREEMENT, FINANCING STATEMENT AND
ASSIGNMENT OF PROCEEDS, RENTS AND LEASES AMONG KENNECOTT
URANIUM COMPANY, MORTGAGOR AND KENNECOTT ENERGY COMPANY,
MORTGAGEE.
SCHEDULE OF CLAIMS
This Exhibit is not filed with this Form 10-K for the year ended May 31, 1997.
23
<PAGE>
EXHIBIT 10.51
EXHIBIT B
TO MORTGAGE, SECURITY AGREEMENT, FINANCING STATEMENT AND
ASSIGNMENT OF PROCEEDS, RENTS AND LEASES AMONG KENNECOTT
URANIUM COMPANY, MORTGAGOR AND KENNECOTT ENERGY COMPANY,
MORTGAGEE.
SCHEDULE OF IMPROVEMENTS AND EASEMENTS
This Exhibit is not filed with this Form 10-K for the year ended May 31, 1997.
24
<PAGE>
EXHIBIT 10.51
EXHIBIT C
TO MORTGAGE, SECURITY AGREEMENT, FINANCING STATEMENT AND
ASSIGNMENT OF PROCEEDS, RENTS AND LEASES AMONG KENNECOTT
URANIUM COMPANY, MORTGAGOR AND KENNECOTT ENERGY COMPANY,
MORTGAGEE.
SCHEDULE OF WATER RIGHTS
This Exhibit is not filed with this Form 10-K for the year ended May 31, 1997.
25
<PAGE>
EXHIBIT 10.51
EXHIBIT D
TO MORTGAGE, SECURITY AGREEMENT, FINANCING STATEMENT AND
ASSIGNMENT OF PROCEEDS, RENTS AND LEASES AMONG KENNECOTT
URANIUM COMPANY, MORTGAGOR AND KENNECOTT ENERGY COMPANY,
MORTGAGEE.
SCHEDULE OF EQUIPMENT
This Exhibit is not filed with this Form 10-K for the year ended May 31, 1997.
26
<PAGE>
EXHIBIT 10.51
EXHIBIT E
TO MORTGAGE, SECURITY AGREEMENT, FINANCING STATEMENT AND
ASSIGNMENT OF PROCEEDS, RENTS AND LEASES AMONG KENNECOTT
URANIUM COMPANY, MORTGAGOR AND KENNECOTT ENERGY COMPANY,
MORTGAGEE.
SCHEDULE OF AGREEMENTS
This Exhibit is not filed with this Form 10-K for the year ended May 31, 1997.
27
EXHIBIT 10.52
EXHIBIT "G"
CONTRACT
SERVICES AGREEMENT
for
THE SWEETWATER URANIUM MILL FACILITY
between
KENNECOTT URANIUM COMPANY,
as Manager and on behalf of
THE GREEN MOUNTAIN MINING VENTURE,
and
U. S. ENERGY CORP.,
and
CRESTED CORP.
d/b/a
USE/CC
as Contractor
<PAGE>
EXHIBIT 10.52
RECITALS.....................................................................1
AGREEMENT....................................................................1
SECTION ONE..................................................................1
1.1 Definitions..............................................................1
1.2 Headings.................................................................1
1.3 References...............................................................2
1.4 Incorporation of Annexes and Appendices..................................2
1.5 Engagement of Contractor.................................................2
1.6 Payment to Contractor....................................................2
1.7 Independent Contractor...................................................2
1.8 Assignment...............................................................3
1.9 Controlling Law..........................................................3
1.10 Waiver of Jury Trial....................................................3
1.11 Entire Agreement; Severability..........................................3
SECTION TWO..................................................................4
2.1 Laws, Ordinances, Permits and Licenses...................................4
2.2 Qualification to do Business.............................................5
2.3 Performance of Work......................................................6
2.4 Insurance and Bonds......................................................6
2.5 Nonwaiver of Defaults....................................................7
2.6 Strikes or Lockouts......................................................7
2.7 Claims by Contractor.....................................................7
2.8 Site and Document Inspections............................................7
2.9 Contractor's Warranty....................................................8
2.10 Back Charges............................................................9
2.11 Indemnification........................................................10
2.12 Waiver and Release of Liens............................................10
2.13 Owner-Furnished Materials, Tools and Equipment.........................11
2.14 Contractor's Security Responsibilities.................................11
2.15 Inspection of Work.....................................................11
2.16 Cooperation............................................................12
2.17 Progress...............................................................12
2.18 Force Majeure..........................................................12
2.19 Suspension.............................................................13
2.20 Expiration or Termination..............................................14
2.21 Intentionally Omitted..................................................15
2.22 As-Built Drawings and Specifications...................................15
2.23 Pre-Operational Testing................................................15
2.24 Final Inspection and Acceptance........................................15
2.25 Accounting Audit.......................................................15
<PAGE>
EXHIBIT 10.52
SECTION THREE...............................................................16
3.1 Notices.........................................................16
3.2 Insurance.......................................................17
3.3 Liability of Contractor.........................................17
3.4 Payment for Reimbursable Costs..................................18
3.5 Method and Time of Payment......................................18
3.6 Repayment by Contractor.........................................20
3.7 Commencement and Completion of the Work.........................20
ANNEX AND APPENDICES
Annex I: Definitions
Appendix A: Description of the Work
Appendix B: Permits and Bonds
Appendix C: Required Insurance
Appendix D: Reimbursable Costs
<PAGE>
EXHIBIT 10.52
CONTRACT SERVICES AGREEMENT
THIS CONTRACT SERVICES AGREEMENT (the "Agreement"), made as of June 23,
1997 is by and between Kennecott Uranium Company, a Delaware corporation
("KUC"), as Manager and on behalf of the Green Mountain Mining Venture, a joint
venture between Kennecott Uranium Company, U.S. Energy Corp., a Wyoming
corporation ("USE"), and a joint venture between USE and Crested Corp., a
Colorado corporation ("Crested") (the joint venture between USE and Crested is
referred to as "USE/CC") ("Owner"), and USE/CC ("Contractor").
RECITALS
A. Owner owns an uranium ore processing plant and certain related
facilities in Sweetwater County, Wyoming, known as the Sweetwater Mill. The
Sweetwater Mill is currently on standby status.
B. Owner desires to make certain improvements to the Sweetwater Mill so
that the Sweetwater Mill can be placed on operational status in compliance with
the rules and regulations of the Nuclear Regulatory Commission (the "NRC") in
the event that the GMMV makes a decision in the future to operate the mill.
C. Contractor has the skill and expertise to advise Owner with respect
to the improvements and other activities necessary, including the associated
permitting activities, to place the mill on operational status and the skill and
expertise necessary to develop a strategy for, and to supervise and to perform
the design, engineering, permitting, procurement and other work necessary to
complete the improvements desired by Owner and to place the Sweetwater Mill on
operational status by performing the Work as described in Appendix A to this
Agreement. The Work will be performed in two phases. Phase I is the evaluation
phase, the components of which are set out in Appendix A to this Agreement.
Phase II will involve implementation of the detailed plan for placing the
Sweetwater Mill on operational status which will be developed as part of the
evaluations conducted in Phase I.
AGREEMENT
For good and valuable consideration, the receipt and sufficiency of
which are acknowledged by Owner and Contractor, the parties agree as follows:
SECTION ONE
1.1 Definitions.
Capitalized terms used in this Agreement are defined in Annex I.
1.2 Headings.
The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or interpretation
of this Agreement.
1
<PAGE>
EXHIBIT 10.52
1.3 References.
Any reference to any federal, state, local, or foreign statute or law
shall be deemed also to refer to all rules and regulations promulgated
thereunder unless the context requires otherwise.
The word "including" shall mean including without limitation.
1.4 Incorporation of Annexes and Appendices.
The Annexes and Appendices identified in this Agreement are incorporated
by reference and made a part of this Agreement.
1.5 Engagement of Contractor.
Owner engages Contractor to perform the Work at the Sweetwater Mill, and
Contractor agrees to complete the Work to the reasonable satisfaction of Owner,
all in accordance with this Agreement.
1.6 Payment to Contractor.
Owner shall pay Contractor the amount of Reimbursable Costs incurred by
Contractor in performing the Work as full consideration for the performance of
the Work as provided in Section 3.4 of this Agreement. Owner agrees that any
Reimbursable Costs incurred in connection with the Work after May 1, 1997 shall
be reimbursed by Owner.
1.7 Independent Contractor.
(a) Contractor shall perform all activities under this Agreement as an
independent contractor and shall in no way act, or purport to act, as Owner's
agent. Contractor shall be responsible for and shall withhold or pay, or both,
as may be required by law, all taxes pertaining to the employment of its
personnel and/or performance of the Work. All fines, penalties or other charges
imposed or assessed against Contractor by reason of its violation of, or failure
to comply with, any provision of any law, together with all expense of defending
litigation in respect thereto, shall be paid by Contractor and shall not be a
reimbursable cost.
(b) All personnel performing the Work shall be engaged by Contractor or
its subcontractors. Contractor may engage qualified subcontractors to perform
portions of the Work, however, Contractor shall be solely responsible for the
performance of the Work by its employees and the employees of its subcontractors
and shall provide adequate supervision of such employees so as to ensure
compliance with the terms and conditions of this Agreement. Contractor shall
remove any of its employees or any of its subcontractors, or shall cause its
subcontractors to remove their employees, from the Work if Owner considers such
a removal necessary in the interest of Owner and so advises Contractor in
writing.
(c) Except as otherwise expressly provided in this Agreement, Contractor
will provide all consultants, supervisors, tools, services, facilities,
equipment, labor, materials and supplies needed to accomplish and complete the
Work.
2
<PAGE>
EXHIBIT 10.52
1.8 Assignment.
Contractor may not assign this Agreement or any part thereof without the
prior written consent of Owner except that Contractor may engage subcontractors
with respect to the Work so long as Contractor guarantees the performance of
this Agreement in all respects by each such subcontractor and assumes full
responsibility for any and all of their acts or omissions. Contractor will
notify Owner of its intent to engage any subcontractor and the identity of such
subcontractor along with a description of the nature of the portion of the Work
to be performed by the subcontractor and evidence of the subcontractor's ability
to perform such work prior to engaging such subcontractor.
1.9 Controlling Law.
This Agreement shall be governed by and construed in accordance with the
domestic laws of the State of Wyoming without giving effect to any choice or
conflict of law provision or rule (whether of the State of Wyoming or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of Wyoming.
1.10 Waiver of Jury Trial.
Each of the parties hereto agrees that it shall not seek a jury trial in
any proceeding based upon or arising out of or otherwise related to this
Agreement or any of the other documents and instruments contemplated hereby and
EACH OF THE PARTIES HERETO HEREBY WAIVES ANY AND ALL RIGHT TO ANY SUCH JURY
TRIAL.
1.11 Entire Agreement; Severability.
(a) This Agreement contains the entire agreement between the parties and
shall supersede all other writings with respect to the engagement of the
Contractor to perform the Work. The parties shall not be bound by, or be liable
for any statement, representation, promise, inducement or understanding with
respect to performance of the Work not set forth in this Agreement. No
amendments or modifications of any of the terms or conditions shall be valid
unless reduced to writing and signed by both parties.
(b) Any term or provision of this Agreement that is invalid or
unenforceable in any situation in any jurisdiction shall not affect the validity
or enforceability of the remaining terms and provisions hereof or the validity
or enforceability of the offending term or provision in any other situation or
in any other jurisdiction.
3
<PAGE>
EXHIBIT 10.52
SECTION TWO
2.1 Laws, Ordinances, Permits and Licenses.
Contractor shall be aware of and fully informed with respect to, and
shall fully comply with, all present and future laws, ordinances, orders, rules,
regulations, safety plans, and requirements of every duly constituted
governmental authority, agency or instrumentality, shall obtain and pay for, and
take all actions necessary to maintain and renew all required permits and
licenses, certificates and approvals (collectively "permits") required to be
obtained by Contractor in connection with the Work, except as otherwise
expressly provided in this Agreement:
(a) Without limiting the generality of the foregoing, Contractor shall
be aware of and shall fully comply with all Environmental Laws, all employment
and equal opportunity laws (including, without limitation, the Fair Labor
Standards Act of 1938, as amended, the Immigration Reform and Control Act, the
Americans With Disabilities Act of 1990, the Veteran's Readjustment Act of 1974,
and the Rehabilitation Act of 1973 and all orders and regulations promulgated
pursuant to such acts) and all other acts, laws orders and regulations that may
be required of Owner or Contractor with respect to the Work;
(b) Without limiting the generality of the foregoing, Contractor shall
be aware of and fully informed with respect to Contractor's responsibilities
under, and shall fully comply with all MSHA/OSHA laws. Contractor shall apply
for and obtain a contractor identification number as required under the
MSHA/OSHA laws. Contractor shall be responsible for compliance by Contractor and
its subcontractors with all standards, rules, and regulations promulgated under
applicable MSHA/OSHA laws, and shall be responsible for any citations or orders
issued thereunder arising out of work to be performed pursuant to this Contract,
including any assessment levied in connection therewith;
(c) Contractor shall notify Owner immediately of any release or other
incident reportable under SARA Title III or other environmental law or
regulation. If such notice cannot be immediately provided to Owner, Contractor
shall make the requisite notification. Contractor further agrees to notify Owner
promptly upon the discovery of any hazardous substance or contaminant (as
defined by CERCLA), to advise Owner of any hazardous or toxic substance to be
used by Contractor in connection with the Work and to furnish Material Safety
Data Sheets for all such materials;
(d) Contractor agrees to comply with all stipulations, directives,
orders and requirements of any public body or officer having jurisdiction over
entry upon or use of any sites of the Work affecting land, water, air, and the
products thereof, which are now or may become applicable to operations covered
by this Agreement or arising out of performance of the Work. Contractor agrees
to report to Owner as soon as practicable, but not later than 12 hours after,
all accidents or occurrences resulting in actual or threatened damage to the
work site or to the environment;
(e) During the term of this Agreement, Owner will use commercially
reasonable efforts to maintain, or to cause to be maintained, the operating
permits and bonds set out in Appendix B to this Agreement; provided, however,
that Owner does not make any representation
4
<PAGE>
EXHIBIT 10.52
or warranty with respect to its ability to maintain or to cause to be maintained
such permits or bonds, or with respect to the ability of Contractor to conduct
any operations on or with respect to the Sweetwater Mill pursuant to such
permits and bonds nor does Owner represent or warrant that such permits and
bonds are the only permits and bonds required to conduct the Work. For all
permits and bonds that remain in the name of Owner, Owner will make all payments
and provide all notices required with respect to such permits and bonds.
Contractor shall develop and shall recommend to Owner a strategy for negotiation
of all amendments, renewals or other modifications to such permits or bonds as
may be necessary to allow Contractor to complete the Work. Owner will implement
such strategy in cooperation with Contractor unless such strategy is, in Owner's
reasonable judgment, inconsistent with applicable law, regulation or
administrative policy or the terms of this Agreement, such strategy jeopardizes
the continued existence of such permits or bonds, or such strategy will subject
Owner to penalties under such law, regulation, policy, permits or bonds. To the
extent permitted by applicable law, regulation and administrative policy and so
long as such direction is consistent with the preceding sentence, Contractor
will prepare all correspondence, drawings and other documents related to, and
will direct the course of all negotiations with such agencies and businesses
with respect to the terms, conditions, renewals, amendments, extensions,
replacement or transfer of such permits and bonds; provided, however, that Owner
will initiate all contacts with the agencies or businesses involved and will
participate in all meetings and telephone conferences or other conversations
with such agencies and businesses and will approve in advance the form and
content of all correspondence and other documents prepared by Contractor in
connection with such negotiations prior to submission to such agencies and
businesses.
(f) Contractor shall also promptly develop a strategy with respect to,
and advise Owner as to, any additional permit or bond or increase in the amount
of an existing bond that is or will be required with respect to the Work. Within
15 days of receiving notice from Contractor as to any such need, Owner will
determine if it desires to obtain such permit, bond or increase in the amount of
a bond in its own name, in which case the permit or bond will be treated in the
same manner as the permits and bonds set out in Appendix B, or if it desires for
Contractor to secure the permit or bond in its own name, in which case
Contractor shall be solely responsible for the costs, terms and conditions of
such permit, bond or increase in the amount of a bond provided that such permit
or bond cannot be binding on Owner or extend beyond the date of termination of
this Agreement. If requested by Contractor, Owner will participate in, and
cooperate with respect to, negotiation of such permits and bonds.
(g) All costs and expenses incurred by Owner in carrying out the
activities described in this Section 2.1 shall be included in the Transition
Costs as provided in the Acquisition Agreement.
2.2 Qualification to do Business.
Contractor is, and agrees to remain, qualified to do business in the
State of Wyoming and to insure that all subcontractors engaged by Contractor are
qualified to do business in the state.
5
<PAGE>
EXHIBIT 10.52
2.3 Performance of Work.
(a) Except as expressly provided in this Agreement, Contractor shall
perform all consulting, planning, design, engineering, procurement,
coordination, construction, reclamation, permitting and other activities
necessary to accomplish the Work in accordance with this Agreement and in
accordance with the best standard practices used in the industry and in a good
and workmanlike manner.
(b) Contractor shall at all times maintain a safe work place for the
performance of the Work and conduct all operations under this Agreement in a
manner to avoid the risk of bodily harm to persons or risk of damage to any
property. Contractor shall promptly take all precautions which are necessary and
adequate against any conditions which involve a risk of bodily harm to persons
or damage to any property. Contractor shall, at all times, ensure that all work
areas are kept neat, clean, and in safe condition.
(c) Contractor will comply with the highest standards of safety and
accident prevention found in (i) applicable laws, ordinances, building and
construction codes, orders, rules, and regulations, (ii) the latest edition of
the "Manual of Accident Prevention in Construction," as published by the
Associated General Contractors of America Inc. and (iii) the latest edition of
the "Accident Prevention Manual for Industrial Operations" as published by the
National Safety Council, Inc. Contractor shall ensure that hard hats, safety
glasses, steel-toed leather work boots and other appropriate protective
equipment shall be worn at all times by Contractor's and all subcontractors'
personnel while on Owner's property.
(d) Contractor shall ensure, by exercising all reasonable means, that
its agents and employees and those of its subcontractors are neither under the
influence of, nor do they use, possess, consume, transfer, manufacture, or sell
or attempt to sell any form of alcohol, intoxicant, narcotic, depressant,
stimulant, hallucinogen, or illegal drug or mind- or perception-altering
substance (except the taking of prescribed drugs under the direction of a
licensed, qualified physician so long as such drugs do not pose a risk to Owner,
Contractor, any subcontractor, their employees or the public) while on Owner's
property or while performing Work.
(e) Contractor shall provide and maintain adequate first aid facilities
at the job site and arrange for emergency treatment of injuries by doctors in
private practice. Owner will not assume any responsibility, financial or
otherwise, for any hospital, medical, or surgical care or treatment which
Contractor, subcontractors, or their employees may require during the course of
the Work or at any time thereafter.
2.4 Insurance and Bonds.
Contractor shall not commence work until all insurance and bonds to be
furnished by Contractor hereunder have been approved in writing by Owner.
6
<PAGE>
EXHIBIT 10.52
2.5 Nonwaiver of Defaults.
Failure of Owner or Contractor at any time or from time to time to
enforce or require strict observance and performance of any term or condition of
this Agreement will not constitute a waiver of, or affect, or impair such term
or condition in any way; nor will such failure affect the right of either party
to avail itself at any time of such remedies as it may have for any breach or
breaches of such terms or conditions by the other party.
2.6 Strikes or Lockouts.
Owner accepts no responsibility for any expense or delays caused to
Contractor by (a) strikes, slowdowns or other concerted employee
work-interrupting activities by any employee group, including employees of
Contractor, or others, or (b) lockouts by any employer, including Contractor.
2.7 Claims by Contractor.
All claims of Contractor, all questions concerning interpretation or
clarification of this Agreement or the acceptable fulfillment of this Agreement
on the part of Contractor, including drawings and specifications, and all
questions as to compensation and to extension of time shall be submitted in
writing to Owner for determination. All determinations, instructions and
clarifications of Owner shall be final. In particular:
(a) At all times, Contractor shall proceed with the Work in accordance
with the determinations, instructions and clarifications of Owner. Contractor
shall be solely responsible for requesting instructions or interpretations and
shall be solely liable for any cost and expenses arising from its failure to do
so; and
(b) It is specifically agreed by Contractor that any and all claims by
Contractor against Owner arising out of this Agreement or the performance of the
Work shall be waived unless presented in writing to the Owner within the time
limit specified in this Agreement but in no event in excess of 90 calendar days
after occurrence of the event or circumstances giving rise to such claim. All
such claims shall be supported by such information, costs and data in such
detail and specificity as may be required by Owner to justify and substantiate
such claims. It is agreed that under no circumstances shall the Contractor be
compensated or reimbursed for expenses incurred in claim preparation,
presentation, or prosecution unless directed by Owner.
2.8 Site and Document Inspections.
Contractor acknowledges that prior to entering into this Agreement:
(a) Contractor has received and reviewed all drawings, reports and other
documents referred to in this Agreement, including the Appendices, and that
Contractor understands the scope of Work contemplated by this Agreement.
(b) Contractor has visited the Sweetwater Mill and is in the process of
familiarizing itself with the site and the conditions under which Contractor
will perform the Work. Contractor
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EXHIBIT 10.52
further acknowledges that Contractor has familiarized itself with all laws and
regulations applicable to the performance of the Work, including in particular
all laws and regulations pertaining to the NRC that might be applicable to the
Sweetwater Mill and the Work. By execution of this Agreement, Contractor
acknowledges such visit and an understanding of all circumstances and conditions
under which the Work must be accomplished. Contractor shall have the sole
responsibility of satisfying itself concerning the nature and location of the
Work and the general and local conditions.
(c) Any prior work, investigations or studies made by Owner with respect
to the Sweetwater Mill or the Work which are made available to Contractor by
Owner were made by Owner solely with respect to its decision to proceed with the
Work and were made only for the purpose of study and design. The records of such
work, investigations or studies are not a part of this Agreement and are
furnished solely for the convenience of Contractor and Contractor acknowledges
that its agreement to enter into this Agreement is in no way premised upon the
scope, completeness or accuracy of such work, investigations or studies. Owner
makes no warranty, and assumes no responsibility whatsoever, in respect to the
sufficiency or accuracy of the work, investigations or studies thus made.
2.9 Contractor's Warranty.
(a) Contractor warrants and guarantees that the Work shall be performed
with that degree of skill and judgment which is normally exercised by recognized
professional consulting (including environmental consulting), engineering,
procurement and construction management firms performing services of a similar
nature taking into account the oversight responsibilities of the NRC and other
affected agencies with respect to portions of the Work, and shall be free of
faulty planning, consulting, engineering, design, procurement, construction
management and quality assurance, field engineering and other services of
Contractor, and that the Work shall be performed and shall conform to generally
accepted consulting, engineering and construction management standards and
practices.
(b) Contractor's liability for breach of the warranty and guarantee
given in this paragraph or the negligent performance of the Work to be performed
hereunder by Contractor, its subcontractors or their employees shall be as
follows:
(i) Contractor, upon receipt of notice from Owner, shall
promptly remedy the defect or damage identified by Owner
through reperformance of the work and/or repair or
replacement of the facility so identified;
(ii) If Contractor is unable to so remedy the defect or damage
to the satisfaction of Owner promptly, or if Contractor
elects not to perform such remedy, Owner shall have the
right to reperform the work and/or repair or replace the
facility; and
(iii) The cost of any work necessary to remedy the defect or
damage resulting from Contractor's breach of the warranty
and guarantee given in this section or the misconduct,
error or omission or negligent performance of the Work
shall be to Contractor's account, and Contractor shall not
be
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<PAGE>
EXHIBIT 10.52
entitled to any fee, overhead expense, general or
administrative expense in connection with such remedy. For
purposes of calculating KUC's contributions to the Green
Mountain Mining Venture as provided in Section 3 of the
GMMV Amendment, each dollar contributed by KUC will count
against KUC's obligation pursuant to Subsection 3(a) and
each such dollar will be treated as a two dollar
contribution for purposes of Subsection 3(b) of the
amendment; or
(iv) Owner may exercise any of its other rights and remedies
as provided in this Agreement.
2.10 Back Charges.
In addition to the rights and obligations attendant to the Contractor's
warranty in Section 2.9 above, Owner shall have the following rights and
Contractor the following obligations:
(a) In the event any aspect of the Work performed by Contractor or its
subcontractors under this Agreement is found to be defective as to workmanship
or not to be in conformance with plans, specifications or NRC or other agency
requirements, it remains the responsibility of Contractor to promptly correct
any deficiency when so directed.
(b) If upon being notified by Owner of deficient Work and having been
directed to correct the deficient Work by a specific date consistent with the
current project schedule, Contractor states, or by its action indicates to
Owner, its inability or unwillingness to comply, then Owner shall have the right
to suspend further Work by Contractor pursuant to Section 2.19 of this Agreement
and to proceed to have the Work accomplished by the best and/or most expeditious
means available to Owner (as determined by it, in its sole discretion) and back
charge Contractor for the cost of the Work undertaken by Owner. For purposes of
calculating KUC's contributions to the Green Mountain Mining Venture as provided
in Section 3 of the GMMV Amendment, each back charged dollar will count against
KUC's obligation pursuant to Subsection 3(a) and each back charged dollar will
be treated as a two dollar contribution for purposes of Subsection 3(b) of the
amendment.
(c) Before proceeding on such back charge work, Owner will advise
Contractor and forward to Contractor an Authorization of Back Charge for
Contractor's signature. However, failure of Contractor to provide such written
authorization shall not impair Owner's right to proceed to have the work
performed and charge Contractor therefor. Contractor shall pay actual costs
incurred, computed as shown above, or Owner may withhold such sum from funds due
Contractor. The performance of back charge work shall not relieve Contractor of
any of its responsibilities under this Contract, including but not limited to,
express or implied warranties, guarantees, specified standards for quality,
liabilities and indemnification, and the Contract schedule.
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EXHIBIT 10.52
2.11 Indemnification.
Contractor agrees to indemnify, defend, release and hold harmless the
Indemnified Parties from and against the entirety of any and all Adverse
Consequences, whether arising during or after the term of this Agreement, any of
them shall suffer:
(a) As the result of any breach of any obligation, representation,
covenant or warranty of Contractor or its subcontractors as set forth in this
Agreement;
(b) As the result of (i) the release, threatened release, discharge,
storage, treatment, disposal or presence of Hazardous Materials at, upon, about
or beneath the Sweetwater Mill as a result of Contractor's operations; (ii) the
release, threatened release, or discharge of Hazardous Materials emanating or
migrating, or threatening to emanate or migrate to, from or across Owner's
properties arising out of Contractor's or its subcontractors' operations; (iii)
any violation of any Environmental Laws pertaining to the Sweetwater Mill and
the activities thereon; or (iv) the treatment, storage, disposal, arrangement
for disposal, or transportation of Hazardous Materials by Contractor at or to a
facility other than one at the Sweetwater Mill; and
(c) Contractor acknowledges and agrees that it has assumed the sole
obligation and duty to provide a safe place to work for its employees and the
employees of its subcontractors and agrees that Owner has no responsibility
therefor, and that any claim for damages by employees of Contractor or its
subcontractors against Owner alleging that Owner failed to furnish a safe place
to work, shall not be construed as relieving Contractor of its indemnity
obligations to Owner under the terms of this Agreement, except to the extent
such claims for damages arise from a non-apparent pre-existing site condition,
or from Owner's or its agents' (other than Contractor) negligence, willful
misconduct or violation of any representations hereunder.
2.12 Waiver and Release of Liens.
Contractor for itself and its subcontractors and for its and their
materialmen and employees and for all other persons performing any labor or
furnishing any labor or materials for any of the Work hereby waives to the full
extent permitted by law all mechanics', materialmen's or other liens, or payment
bond claims for or on account of the work done or materials furnished hereunder
so that the improvements of structures wherein the same may be incorporated and
the land to which they are appurtenant shall at all times be free and clear of
all such liens and claims. If such liens or claims are placed on Owner's
property by any person performing any labor or furnishing any labor or materials
for any of the Work, Contractor will promptly have such liens or claims removed
at Contractor's expense and Contractor shall indemnify Owner from any
liabilities associated with such lien.
2.13 Owner-Furnished Materials, Tools and Equipment.
In the event Owner furnishes materials or equipment for use on or with
respect to the Work, Contractor shall be solely responsible for inspecting and
using the same and for protection thereof from loss, damage of any kind and for
payment of any demurrage incurred.
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EXHIBIT 10.52
2.14 Contractor's Security Responsibilities.
Contractor shall at all times conduct all operations under this
Agreement in a manner to avoid the risk of loss, theft, or damage by vandalism,
sabotage, or other means to any property.
(a) Contractor shall promptly take all reasonable precautions which are
necessary and adequate against any conditions which involve a risk of a loss,
theft, or damage to property. Contractor shall continuously inspect all work,
materials, equipment, and facilities to discover and determine any such
conditions, and shall be solely responsible for discovery, determination, and
correction of any such conditions;
(b) Contractor shall ensure compliance by the employees of Contractor
and all subcontractors with Owner's security program for this site and all
applicable laws and regulations. Contractor shall cooperate with Owner on all
security matters and shall promptly comply with any project security
requirements established by Owner. In particular, Contractor agrees that all
vehicles that enter upon Owner's property, and all lunch, other containers, and
packages of Contractor, its subcontractors and their employees, shall be subject
to inspection by Owner's security personnel at any time while on Owner's
property;
(c) Owner will accept no responsibility for replacement of, protection
to, or policing of, Contractor's equipment, tools, or materials which are
furnished or used in its work at Owner's property; and
(d) Contractor shall, at its own expense, replace any lost or stolen
property, repair any damage to all property of whatever kind or character,
whether publicly or privately owned, including the property of Owner, which may
result from its operations under this Contract.
2.15 Inspection of Work.
(a) Owner shall at any and all times have access to the Work and to the
premises affected thereby and to all equipment and materials, and to related
books, records, correspondence, instruction plans, drawings, receipts,
facilities, and memoranda of Contractor for inspection purposes including the
utilization at Owner's expense of third-party inspectors; and Contractor shall
provide proper facilities for such access and inspection.
(b) Owner shall at all times remain the primary contact with any
regulatory agency for which Owner is the permittee or licensee and shall have
the sole responsibility for determining through inspection of the Work and
consultation with Contractor when, and under what circumstances, drawings,
specifications, correspondence and the like shall be submitted to such agencies.
Contractor shall not initiate any contact with such agencies except as expressly
provided in this Agreement.
2.16 Cooperation.
Owner may perform work, including the normal operations of Owner, in the
vicinity of or on the premises affected by the Work, and Contractor's work or
use of certain facilities may
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EXHIBIT 10.52
be interfered with as a result of such concurrent activities. Owner will
cooperate with Contractor so that Contractor may perform the Work as required by
this Agreement and Contractor will cooperate in scheduling the Work in such a
manner as will minimize interference with any work being undertaken by Owner.
2.17 Progress.
(a) Contractor will provide to Owner a program, in reasonable detail, of
the operations and activities that Contractor expects to undertake in
progressing to accomplish Phase I of the Work in the ensuing calendar quarter.
The program will be submitted to Owner at least 15 days prior to the
commencement of any such operations or activities. Within 30 days after the end
of each calendar quarter, Contractor will submit to Owner a report, in
reasonable detail, that describes the operations and activities that were
actually undertaken in the calendar quarter and any activities described in the
program that were not undertaken and accomplished.
(b) Contractor will not undertake any operations or activities that
depart from Phase I of the Work or the operations and activities set out in the
program without submitting to Owner a proposed amendment to the program that
describes such amended operations and activities and, if such amendment would
require a modification of Phase I of the Work as described in Appendix A, a
proposed amendment to the Work. Within 20 days of any such proposal, Owner will
notify Contractor of its acceptance or rejection or the proposed amendment,
which acceptance will not be unreasonably withheld so long as the proposed
amendment does not depart from the overall scope of the Work and is consistent
with the other terms and provisions of this Agreement. With respect to any
proposal for modification of the program prepared by Contractor or any proposal
to modify Phase I of the Work that departs from the overall scope of Work as
described in Appendix A, Owner may accept or reject such proposal at Owner's
sole discretion.
(c) Contractor will not undertake any operations or activities with
respect to Phase II of the Work until Contractor has developed, and Owner has
approved, a detailed description of the Work to be accomplished in Phase II.
Upon receipt of Owner's approval, Contractor may commence operation and
activities with respect to Phase II by submitting a program as provided in
Subsection 2.17(a). Owners response to that proposal and any proposed amendments
to Phase II of the Work will be governed by the provisions of Subsections
2.17(a) and 2.17(b).
2.18 Force Majeure.
Except as provided in Subsections 2.18(b) or 2.18(c) below, the failure
to perform or to comply with any of the covenants or conditions contained in
this Agreement, either expressed or implied, on the part of either party shall
not be a ground for cancellation or termination or forfeiture of this Agreement,
and shall not create a liability for the party for failure to perform its
obligations during any period in which performance is prevented, in whole or
part, by causes herein termed "force majeure".
(a) For purposes of this Agreement, the term "force majeure" shall be
limited to substantial and unforeseeable events beyond the control of a party
that cannot be avoided through the diligent actions of a party, including
extreme weather conditions; earthquakes or cave-ins; unforeseeable
unavailability of labor, transportation, materials, machinery, equipment,
supplies,
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EXHIBIT 10.52
utilities, or services even on premium terms; serious accidents; unavoidable
breakdown of major equipment, machinery, or facilities; injunctions issued by
any court; inability to obtain licenses, permits, or other authorizations in
spite of diligent efforts to do so; curtailment or suspension of activities to
remedy or avoid an actual, serious violation of environmental laws; acts of war
or conditions arising out of or attributable to war; riot; civil strife; fire;
explosion; or any similar cause beyond the reasonable control of the party
declaring force majeure.
(b) If either party desires to invoke the provisions of this Section
2.18, the invoking party shall give notice to the other party of the
commencement of the circumstances giving rise to such force majeure. The time
for discharging the party's obligations with respect to the prevented
performance shall be extended for the period of force majeure, provided that the
party invoking force majeure pursues diligent efforts to eliminate the event
that gave rise to the condition of force majeure. The existence of any event of
force majeure shall not relieve a party of the obligation to make any payments
required of a party with respect to maintenance of the Sweetwater Mill and the
permits and bonds associated with the properties in accordance with the terms of
this Agreement, making payments due under Section 3 of this Agreement and
carrying out the indemnities required by Section 2.11, nor shall an event of
force majeure extend the term of this Agreement. If an event of force majeure
prohibits performance by Contractor, but would not prohibit performance by the
Owner, for more than 120 days, Owner may terminate this Agreement for
convenience and will have no further obligation to Contractor hereunder.
(c) Notwithstanding the foregoing, neither party may invoke force
majeure with respect to any event that would otherwise constitute force majeure
if the duration of such event is less than 15 days.
2.19 Suspension.
Owner may, at its sole option, decide to suspend at any time the
performance of all or any portion of the Work if Owner determines that continued
performance by Contractor would or might violate any law or any rule, regulation
or order of any regulatory agency including, in particular, the NRC, would or
might threaten the continued existence of any permit or bond held by Owner, or
otherwise is not in compliance with the terms of this Agreement. In addition,
Owner may suspend the performance of the Work if Contractor has not performed
its obligations as set out in Subsections 2.1(e) and 2.1(f) of this Agreement.
Contractor will be notified of such decision by Owner in writing. During the
period of suspension, Contractor shall use its best efforts to utilize its
facilities, labor and equipment in such a manner as to minimize costs associated
with suspension and to continue to perform such portions of the Work as are not
subject to the suspension. Upon receipt of any such notice, Contractor shall,
unless the notice requires otherwise:
(a) Promptly discontinue the specified portion of the Work on the date
and to the extent specified in the notice;
(b) Place no further orders, contracts or subcontracts for material,
services, or facilities with respect to suspended Work other than to the extent
required in the notice;
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EXHIBIT 10.52
(c) Promptly make every reasonable effort to obtain suspension, upon
terms satisfactory to Owner, of all orders, subcontracts, and rental agreements
to the extent they relate to performance of the Work suspended; and
(d) Continue to protect and maintain the Work including those portions
on which Work has been suspended.
Upon receipt of notice to resume suspended Work, Contractor shall immediately
resume performance of the suspended work to the extent required in the notice.
2.20 Expiration or Termination.
(a) This Agreement will expire on the earlier of (i) the completion of
the Work or (ii) the date that the Acquisition Agreement terminates or expires,
but in no case (notwithstanding Section 2.18 hereof) shall this Agreement extend
beyond October 30, 1998.
(b) In the event Owner determines that Contractor has not complied with
any obligation hereunder, Owner shall notify Contractor in writing setting out
specifically in what respect it is claimed that Contractor has failed to comply
with this Agreement. If the alleged failure is not cured to Owner's reasonable
satisfaction within ten (10) days after written notice is given, or if
Contractor has not within that time either commenced to cure the alleged breach
to the Owner's reasonable satisfaction and does not thereafter diligently
complete such cure, or fails successfully to challenge the legitimacy of the
allegation, Owner may terminate this Agreement by delivering to contractor
notice of such termination or Owner may seek such other remedies as it might
have in equity or at law.
(c) Contractor shall have the right to terminate this Agreement at any
time with respect to all but not less than all of the Work by giving written
notice to Owner. Upon such termination, all right, title, and interest of
Contractor under this Agreement shall terminate and Contractor shall be relieved
of all further obligations set forth in this Agreement which arise out of
Contractor's activities prior to the date of such termination except for the
obligations to correct defective work in Sections 2.9 and 2.10, the
indemnifications provided for in Section 2.11, any other obligation expressly
set forth in this Agreement as a post-expiration or post-termination obligation,
and any reclamation required by applicable law arising from Contractor's
operations.
(d) Upon termination or expiration of this Agreement, Contractor will
relinquish all occupancy of the Sweetwater Mill, free and clear of all
obligations, liens and encumbrances. Contractor will also relinquish possession
of all buildings, structures, facilities, improvements, machinery and equipment
that were acquired by, erected, placed, or became situated at the Sweetwater
Mill in connection with the Work and were paid for pursuant to this Agreement
(collectively, "Fixtures and Personalty"). In connection with the relinquishment
of the Fixtures and Personalty, Contractor will provide appropriate assignments
and bills of sale with respect to the Fixtures and Personalty in which
Contractor will represent that the Fixtures and Personalty are free and clear of
all obligations, liens or encumbrances created by, through or under Contractor.
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EXHIBIT 10.52
(e) Contractor shall, within a period of three months from and after the
termination of this Agreement, remove from the Sweetwater Mill all personal
property that is owned solely by Contractor. If Contractor desires not to remove
any item of its personal property and Owner agrees in writing to allow such
property to remain at the Sweetwater Mill, such property shall become the
property of Owner.
2.21 Intentionally Omitted.
2.22 As-Built Drawings and Specifications.
During construction, Contractor shall maintain for Owner an accurate
record of the Work. Before final payment by Owner, Contractor shall revise any
drawings and specifications so that all such documents shall show the work as
actually installed.
2.23 Pre-Operational Testing.
Contractor will, in conjunction with Owner, conduct all necessary
pre-operational activities to ensure that the materials, equipment, controls and
systems have been tested, adjusted, and checked out to comply with the intent of
the design and to indicate satisfactory operation to Owner. Contractor will hand
over materials, equipment and systems to Owner after pre-operational checkout
for introduction of feed by Owner. Contractor will thereafter maintain adequate
personnel and facilities at the site until final acceptance of the work to
adjust, modify, repair, and otherwise service the facilities and equipment.
2.24 Final Inspection and Acceptance.
When Contractor considers that all Work is complete, Contractor shall so
inform Owner in writing. When the results of inspection and testing satisfy
Owner that all Work is completed and in accordance with the requirements of this
Agreement, Owner will notify Contractor in writing of final acceptance of the
Work.
2.25 Accounting Audit.
Contractor shall keep, and require any subcontractor to keep, a complete
set of records showing actual reimbursable costs in connection with the Work. In
compliance with the foregoing, Contractor will follow instructions which may be
given by Owner:
(a) Contractor shall keep full and accurate records and accounts of all
its activities in connection with this Contract, including without limitation,
reasonable substantiation of all expenses incurred based on actual costs and of
all property acquired or disposed of hereunder. Furthermore, Contractor shall
cause its agents and/or subcontractors to maintain reasonable controls, records
and accounts; and
(b) Owner shall have the right, at all reasonable times, through its own
representatives to examine, inspect, approve or disapprove the purchasing,
receiving, storing and issuance of materials, the auditing and paying of
invoices, timekeeping, preparation of payrolls, accumulation of cost records,
and other accounting functions pertaining to the Reimbursable Costs. Contractor
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EXHIBIT 10.52
and all subcontractors shall preserve, for a period of three years unless Owner
requests additional time, the original documents of all pertinent records and
deliver to Owner those records which Owner may request, except that Owner may be
given a photocopy in lieu of the original of any document reasonably required by
Contractor, or its contractors or subcontractors.
SECTION THREE
3.1 Notices.
Any required notice, payment, or other communication contemplated by
this Agreement shall be in writing and shall be effective with respect to a
party (i) when personally delivered or delivered by courier at the party's
address as set out below; (ii) when delivered by electronic communication at the
party's fax number described below or at such other telecopy or fax number as
the party may designate in writing provided that such electronic communication
is followed by a delivery by mail or by personal service to the party's address;
or (iii) when delivered by mail deposited in the United States mail, postage
prepaid and registered or certified, with return receipt requested, and
addressed to the party at the party's address:
If to Owner: With Copy to:
Kennecott Uranium Company Kennecott Services Company
Attn: President Attn: Legal Department
Caller Box 3009 8315 West 3595 South
505 South Gillette Avenue P. O. Box 6001
Gillette, WY 82717-3009 Magna, UT 84044-6001
FAX (307) 687-6011 FAX (801) 252-3559
If to Contractor: With Copy to:
U.S. Energy Corp./Crested Corp. U.S. Energy Corp.
Attn: John L. Larsen Attn: Daniel P. Svilar
877 North 8th West 877 North 8th West
Riverton, Wyoming 82501 Riverton, Wyoming 82501
Fax: (307) 857-3050 Fax: (307) 857-3050
Either Owner or Contractor may change its address for future notices by
providing written notice to that effect to the other party.
3.2 Insurance.
(a) During the term of this Agreement and all times during performance,
and until completion of the Work, Contractor shall maintain in force the
insurance described in Appendix C to this Agreement, for the benefit of the
parties to this Agreement, all of their personnel and the personnel of all
subcontractors on site with companies satisfactory to Owner. Contractor shall be
responsible for compliance by all subcontractors with these insurance
requirements and shall furnish certificates as provided herein evidencing the
required insurance for the subcontractors.
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EXHIBIT 10.52
(b) Certificates of such insurance shall be made out to Owner and shall
be furnished to Owner promptly and must reflect both the endorsement provisions
requiring 30 days prior written notice to be given before cancellation or
material change, and the additional interest where applicable. Each certificate
shall specify the date when such benefits and insurance expire. Contractor
agrees that such benefits and insurance, as specified above, shall be provided
and maintained until the entire work under this Agreement has been completed and
accepted by Owner. An original copy of each certificate shall be mailed or
delivered to:
Kennecott Uranium Company
Caller Box 3009
505 South Gillette Avenue
Gillette, Wyoming 82717-3009
FAX (307) 687-6011
Owner's approval or failure to disapprove insurance certificates furnished by
Contractor or subcontractors shall not release Contractor or subcontractors from
full responsibility for liability, damage, and accidents as set forth herein.
(c) It shall be a condition of approval that the required insurance must
be arranged with insurance companies authorized to do business in the State of
Wyoming.
(d) If at any time the Contractor-required insurance policies should be
canceled, terminated or modified so that the insurance is not in full force and
effect as required herein, Owner may terminate this Agreement for default or
obtain insurance coverage equal to that required herein and recover costs
therefor from Contractor.
3.3 Liability of Contractor.
(a) Contractor and subcontractors shall bear all risk of loss of or
damage to, and shall, as they deem necessary, carry fire, theft, physical
damage, or other insurance on their own and their employees' tools, equipment,
reusable materials (such as metal forms and metal scaffolding), trailers, any
property of their employees.
(b) The liability of Contractor assumed under this Agreement shall in no
manner be limited by the amount of insurance furnished by Owner or by the amount
of insurance which Contractor has or is required to provide by the terms
thereof.
(c) In addition to Contractor's liability for property damage as set
forth in this Agreement, Contractor shall also be responsible for any damage to
its vehicles and the vehicles of its subcontractors, employees, and agents or
representatives of Contractor or subcontractors while the vehicles are parked or
used on Owner's property.
(d) Contractor shall be responsible for and shall bear any and all risk
of loss or of damage to work in progress.
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EXHIBIT 10.52
3.4 Payment for Reimbursable Costs.
(a) Contractor, as full compensation for the Work, shall be paid for all
Reimbursable Costs and such other costs as may be approved in writing by Owner
as are incurred by Contractor in performance of the Work to the extent and only
to the extent that (i) such costs are expressly authorized in Appendix D to this
Agreement and otherwise or incurred in compliance with this Agreement; and (ii)
the total of such costs, when taken together with the total costs spent by
Contractor pursuant to the Mineral Lease Agreement, amounts expended by the
Green Mountain Mining Venture after January 1, 1997 pursuant to Subsection 3(a)
of the GMMV Amendment, and all Transition Costs (as defined in the Acquisition
Agreement) is not more than $16,000,000.
(b) Contractor shall use all reasonable efforts to obtain any cash,
trade, quantity, freight or other discount or allowance available and refunds of
sales taxes and/or taxes and all such cash, quantity discounts or allowances,
refunds and rebates shall be for Owner's benefit and credited against
Reimbursable Costs or paid directly to Owner. Contractor will exercise its best
efforts to minimize excess materials purchases. Excess materials or scrap
generated by Contractor as a result of its work under this Agreement will remain
the property of Owner. Contractor will stockpile or dispose of such materials as
directed by Owner.
3.5 Method and Time of Payment.
(a) Owner has initially advanced $1,000,000 to the Green Mountain Mining
Venture pursuant to the provisions of Subsection 4(a) of the GMMV Amendment in
order to establish a working capital account (the "Working Capital Account")
which Contractor may draw upon to fund activities associated with the Work and
which will qualify as Reimbursable Costs.
(b) From time to time, but at least once per month, Contractor shall
submit an itemized invoice (the "Invoice") to Owner for all Reimbursable Costs
for Work performed accompanied by such supporting documentation as Owner may
from time to time reasonably request, together with evidence, including executed
lien waiver forms satisfactory to Owner, of the payment and release of all
subcontractor's, mechanics', materialmen's and other liens (collectively , the
"Supporting Documentation"). Supporting Documentation for the Reimbursable Costs
for which Contractor seeks reimbursement shall include, but not be limited to
the following:
(i) Labor costs shall be supported by payroll abstracts which will
identify each employee of Contractor or its subcontractors
engaged in performing the Work, the employee's title, the date
and hours worked, the pay rate and a description of the work
performed;
(ii) Costs for materials, supplies, equipment, tools and other
tangible property shall be supported by invoices and bills of
sale showing ownership of all such materials, supplies,
equipment, tools and other tangible property in Owner's name;
(iii) Billings by Contractor for Owner approved services, expenses and
other costs for outside commitments, of vendors, suppliers and
subcontractors shall be supported
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EXHIBIT 10.52
by copy of such third parties' original invoice and related
supporting documentation and will be attached to an Owner
approved authorization;
(iv) Billings for travel and subsistence expenses shall be supported
by travel expense reports supported by, among other things,
copies of airline tickets and copies of auto rental invoices,
copies of hotel/motel bills and appropriate receipts. All expense
reports will show the business purpose of the travel; and
(v) Billings for all other items for which Contractor seeks
reimbursement shall be supported by documentation in a form
reasonably satisfactory to Owner.
(c) Within 20 days of presentation to and receipt by Owner of the
Invoice and the Supporting Documentation, Owner will (i) provide to Contractor
funds adequate to reimburse Contractor for Reimbursable Costs and to restore the
Working Capital Account to its initial balance; or (ii) Owner will advise
Contractor of any amounts with respect to any Invoice or Supporting
Documentation that Owner believes in good faith are not supported by adequate
explanation or were not spent in compliance with the terms of this Agreement,
together with an explanation, in reasonable detail, of the basis for Owner's
objection to such Invoice or Supporting Documentation, in which case Owner will
provide funds to the extent that it does not contest the Invoice or Supporting
Documentation. Each dollar paid by Owner pursuant to this Amendment shall go
toward satisfaction of Owner's obligation to provide up to $16,000,000 to the
Green Mountain Mining Venture as provided in Section 3 of the GMMV Amendment. At
such time as the balance of Owner's obligation to provide up to $16,000,000 to
the Green Mountain Mining Venture as provided in Section 3 of the GMMV Amendment
has been reduced to less than $1,000,000, its obligation to restore the Working
Capital Account balance shall be reduced to be no more than the amount of the
remaining obligation.
(d) Payment by Owner of Contractor's Invoices shall be without prejudice
to Owner's right to audit Contractor's invoices in accordance with provisions of
this Agreement, and to challenge the correctness of the invoice at any time
thereafter. Payments otherwise due Contractor may be withheld in an amount
sufficient to satisfy any claim which Owner may have against Contractor.
(e) Notwithstanding the foregoing, Owner shall be entitled to withhold
from amounts due Contractor pursuant to this Section 3.5, any amounts necessary
to correct nonconforming, faulty or defective Work.
3.6 Repayment by Contractor.
Contractor shall promptly repay to Owner, within 30 days after receipt
of Owner's request, any overpayment by Owner of any Reimbursable Costs, whether
such overpayment is disclosed by an audit conducted pursuant to Section 2.25 of
this Agreement or otherwise.
19
<PAGE>
EXHIBIT 10.52
3.7 Commencement and Completion of the Work.
Time is of the essence. The dates listed in Appendix A are critical to
the project schedule and are contractual obligations to Contractor. Contractor
shall furnish sufficient forces, facilities and equipment and shall work such
hours, including extra days and shifts to achieve the milestone dates listed.
IN WITNESS WHEREOF, the parties have executed this Agreement the day,
month and year first above written.
KENNECOTT URANIUM COMPANY
By /s/ L. R. Cardey-Yates
-------------------------------------
Its Director/Assistant Secretary
---------------------------------
U.S. ENERGY CORP.
By /s/ John L. Larsen
-------------------------------------
Its President
---------------------------------
U.S. ENERGY CORP. and
CRESTED CORP. dba the
USE/CC JOINT VENTURE
By: U.S. ENERGY CORP.
By /s/ John L. Larsen
-------------------------------------
Its President
---------------------------------
By: CRESTED CORP.
By /s/ Max T. Evans
-------------------------------------
Its President
---------------------------------
20
<PAGE>
EXHIBIT 10.52
ANNEX I: DEFINITIONS
(a) "Contractor" means USE in its individual capacity and not in its
capacity as a participant in, manager of, or a party to the Green
Mountain Mining Venture;
(b) "Reimbursable Costs" means the costs incurred by Contractor in
performing the Work in compliance with the terms of this Agreement as
more particularly provided for in Section 3 of this Agreement;
(c) "Indemnified Parties" means Owner, the Green Mountain Mining
Venture, and the respective officers, directors, employees, agents,
contractors and professional advisors of each of them.
(d) "Owner" means Kennecott Uranium Company, as Manager of the
Sweetwater Mill for and on behalf of the Green Mountain Mining Venture,
the owner of the Sweetwater Mill.
(e) "Work" means the work described in Appendix A to this Agreement.
(f) "GMMV Amendment" means the Amendment of Mining Venture Agreement
dated the same date as this Agreement among Kennecott Uranium Company
and USE and USE/CC.
(g) "Acquisition Agreement" means the Acquisition Agreement dated the
same date as this Agreement among Kennecott Uranium Company and USE and
USE/CC.
(h) "Mineral Lease Agreement" means the Mineral Lease Agreement dated
the same date as this Agreement among Kennecott Uranium Company and
USE.
(i) "MSHA/OSHA laws" shall mean the Federal Occupational Safety and
Health Act of 1970, and the Federal Mine Safety and Health Amendments
Act of 1977 and any similar state safety and health acts, and all
regulations promulgated under said acts.
(j) "Adverse Consequences" means any and all actions, suits,
proceedings, hearings, investigations, charges, complaints, claims,
demands, injunctions, judgments, orders, decrees, rulings, damages
(including natural resource damages), dues, penalties, fines,
encumbrances, liens, costs and expenses of defense of a claim (whether
or not such claim is ultimately defeated), good faith settlements of
claims, judgments and disputes, costs (including without limitation
costs of investigative, reporting, clean-up, response, removal,
remedial, corrective action and closure activities relating to
Hazardous Materials), liabilities (including strict liability),
obligations, taxes, liens, losses, expenses and fees, including
consultants' and attorneys' fees and court costs and expenses.
(k) "Environmental Laws" means all applicable statutes, treaties,
regulations, rules, ordinances, codes, licenses, permits, orders,
approvals, authorizations and similar items of all federal, state, and
local governmental branches, agencies, departments, commissions,
boards, bureaus or instrumentalities, whether domestic or foreign,
having
21
<PAGE>
EXHIBIT 10.52
jurisdiction, and all applicable judicial and administrative and
regulatory decrees, judgments and orders and all covenants running with
the land that relate to the protection of health or the environment,
including without limitation those that relate to the existence,
handling, manufacture, treatment, storage, disposal, use, generation,
release, discharge, refining or recycling of Hazardous Materials or
reclaiming real property. Without limiting the foregoing, Environmental
Laws include the Hazardous Materials Transportation Act (49 U.S.C. "
1801 et seq.), the Resource Conservation and Recovery Act of 1976, (42
U.S.C. " 6901 et seq.), the Clean Air Act (42 U.S.C. " 7401 et seq.),
the Federal Water Pollution Control Act (33 U.S.C. ' 1251), the Safe
Drinking Water Act (42 U.S.C. " 300f et seq.), the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (42
U.S.C. " 9601 et seq.), the Toxic Substances Control Act (15 U.S.C. "
2601 et seq.), the Emergency Planning and Community Right to Know Act
(42 U.S.C. "11001, et seq.), the Occupational Safety and Health Act (26
U.S.C. " 651 et seq.), the Pollution Prevention Act of 1990 (42 U.S.C "
13101 et seq.), the Atomic Energy Act of 1954, 68 Stat. 919, the Energy
Reorganization Act of 1974, the Mine Safety and Health Act of 1977, the
Uranium Mill Tailings Radiation Control Act (42 U.S.C " 7901 et seq.),
and all similar or additional federal, state, local or foreign
statutes, all as amended, and all regulations promulgated thereunder.
(l) "Hazardous Materials" means any substance: (A) the presence of
which requires reporting, investigation, removal or remediation under
any Environmental Laws; (B) that is defined as a "hazardous waste,"
"hazardous substance" or "pollutant" or "contaminant" under any
Environmental Laws; (C) that is toxic, explosive, corrosive, flammable,
ignitable, infectious, radioactive, reactive, carcinogenic, mutagenic
or otherwise hazardous and is regulated under any Environmental Laws;
(D) the presence of which on a property causes or threatens to cause a
nuisance upon the property or to adjacent properties or poses or
threatens to pose a hazard to the health or safety of persons on or
about the property; (E) that contains gasoline, diesel fuel or other
petroleum hydrocarbons; or (F) that contains PCBs, asbestos or urea
formaldehyde foam insulation.
22
<PAGE>
EXHIBIT 10.52
Appendix A
to
Contract Services Agreement
Description of the Work
23
<PAGE>
EXHIBIT 10.52
GREEN MOUNTAIN MINING VENTURE
SWEETWATER MILL
EVALUATION OF MILL
ASSUMPTIONS
Utilize in-house and contract labor to review and evaluate records and process
circuits.
Contract vendors for current equipment availability and prices to place mill in
operational status.
Evaluate holding costs so as to maintain most efficient use of funds.
Holding costs are taken from Kennecott 1997 budget.
Review current Kennecott contractors projects and costs.
24
<PAGE>
EXHIBIT 10.52
GREEN MOUNTAIN MINING VENTURE
SWEETWATER MILL
EVALUATION OF MILL
OBJECTIVE AND ACTIVITIES
Objective:
Evaluate mill components and circuits so as to prepare detailed work plan.
Activities:
Review and expedite preparation of NRC License amendments and other permits and
licenses required to place mill into operational status.
Review milling records and process circuits.
Maintain current status of all permits and licenses while preparing to transfer
operator.
Prepare detailed plan for treating resin from the mine water treatment plant at
the Sweetwater Mill, by September 30, 1997.
Prepare a detailed work for Phase II of the Work, which plan will focus on
placing the Sweetwater Mill on operational status. This work plan will cover
activities after September 30,1997, and will focus on licensing and permitting
and preparation of the mill tailing cells, evaporation ponds, treatment of
resins, and old tailing facility for startup and continuation of current
activities.
No construction or reclamation activities shall be conducted unless:
1. A detailed work plan for Phase II of the Work is prepared and
approved pursuant and a program for its implementation is approved and
pursuant to the Agreement.
2. The work to be undertaken under the Mineral Lease Agreement is
interrupted by an event of force majeure as such term is defined in
Section 12 of the Mineral Lease Agreement; such construction or
reclamation activities is commenced during the existence of such an
event of force majeure, and the nature and scope of the work undertaken
can reasonably be expected to be accomplished during the time period
for which it appears that the condition of force majeure will continue.
After the event of force majeure ceases to exist, Contractor shall
complete the particular work commenced hereunder before resuming work
under the Mineral Lease Agreement, but shall not perform any other
construction or reclamation activities hereunder; and
3. Contractor or Owner has first obtained all governmental or other
permits and licenses needed in connection with performance of such
work.
25
<PAGE>
EXHIBIT 10.52
Green Mountain Mining Venture
Jackpot
Project Schedules
1997 & 1998
This portion of Appendix A to Contract Services Agreement is not filed with this
Form 10-K for the year ended May 31, 1997.
26
<PAGE>
EXHIBIT 10.52
Appendix B
to
Contract Services Agreement
Operating Permits and Bonds
Permits Agency
------- ------
1. Source Material License SUA-1350 NRC
2. Byproduct License No. 49-19005-01 NRC
3. Permit to Mine No. 481 DEQ, LQD
4. Drilling Notification DN-267 DEQ, LQD
5. Radio Station License No. WNRC873 FCC
6. NPDES Permit No. WY-0026689 DEQ, WQD
7. Generator ID No. WYO80372154086F EPA
8. Permit to Construct No. 86-198R DEQ, WQD
9. DOT License No. USDOT 545666 U.S. DOT
10. Large Scale License No. 1030 Wyoming Department of Agriculture
Bonds Amount Agency
----- ------ ------
1. Third Party Corporation Guarantee $5,321,000 NRC
2. Irrevocable Letter of Credit No.S-867737 $19,777,079 DEQ
27
<PAGE>
EXHIBIT 10.52
APPENDIX C: Required Insurance
During the term of this Agreement and all times during performance, and
until completion of the Work, Contractor shall maintain in force the
following insurance for its personnel on site with companies
satisfactory to Owner:
a. Worker's Compensation and Occupational Disease insurance
in compliance with all state and federal regulations in
the jurisdiction where the work and services are to be
performed with the statutory limit required. Contractor
shall require each consultant and subcontractor to carry
Worker's Compensation and Employer's Liability insurance.
b. Commercial General Liability insurance covering all
operations of Contractor in the performance of work,
including contractual liability insurance covering the
liability assumed in this Contract. Said insurance policy
or policies shall provide $2,000,000 combined single
limits for all injuries or death to persons and damages to
property per occurrence.
c. Comprehensive Automobile Liability insurance including all
owned, non owned, and hired vehicles, with the following
limits:
Bodily Injury $1,000,000 each person
$1,000,000 each occurrence
Property Damage $1,000,000 each occurrence
d. All policies of insurance carried by Contractor pursuant
to this Section shall provide that they may not be
canceled or the protection afforded thereby substantially
changed without 30 days prior written notice to Owner.
Upon request, Contractor shall permit Owner to examine any
of the insurance policies specified herein.
e. All policies of insurance carried by Contractor pursuant
to this Section shall be endorsed to include Kennecott
Uranium Company and all subsidiary, associated, and
affiliated companies, as additional insured.
f. All policies of insurance carried by Contractor pursuant
to this Section shall contain endorsements stating that
Contractor's coverage is primary to any coverage Owner may
elect to carry for its own account, or for Contractor.
g. Any and all deductibles specified in the above described
Contractor insurance policies shall be assumed by, for the
account of, and at the sole risk of Contractor.
28
<PAGE>
EXHIBIT 10.52
h. All insurances carried by Contractor pursuant to this
Section shall contain endorsements waiving the insurer's
right to subrogation against Owner, its subsidiaries,
agents, and affiliated companies, and their employees,
officers, and directors.
29
<PAGE>
EXHIBIT 10.52
Appendix D
to
Contract Services Agreement
Reimbursable Cost
This Appendix D is not being filed with this Form 10-K for the year ended May
31, 1997.
30
EXHIBIT 10.53
EXHIBIT "H"
MINERAL LEASE AGREEMENT
BETWEEN
THE GREEN MOUNTAIN MINING VENTURE,
AS LESSOR,
AND
S. ENERGY CORP.
AND
CRESTED CORP.
D/B/A
USE/CC
AS LESSEE
<PAGE>
EXHIBIT 10.53
MINERAL LEASE AGREEMENT
THIS MINERAL LEASE AGREEMENT (the "Agreement") is entered into this 23rd
day of June, 1997 (the "Effective Date"), by and between the GREEN MOUNTAIN
MINING VENTURE (the "GMMV"), a Mining Venture between Kennecott Uranium Company,
a Delaware corporation ("KUC"), U.S. Energy Corp., a Wyoming corporation
("USE"), and a joint venture between USE and Crested Corp., a Colorado
corporation ("Crested") (the joint venture between USE and Crested is referred
to as "USE/CC" and USE, Crested and USE/CC are referred to as the "USE
Parties"), as lessor, and USE/CC, in its separate capacity, as lessee.
RECITALS
A. The GMMV owns or controls certain patented and unpatented mining
claims and other property in Fremont County, Wyoming (the "Mining Properties").
The Mining Properties are more particularly described in Exhibit A to this
Agreement.
B. USE/CC desires to lease the Mining Properties from the GMMV and to
conduct certain operations as more particularly described in Exhibit D to this
Agreement (the "Work") on the Mining Properties pursuant to the terms of this
Agreement. USE/CC has the skill and expertise necessary to develop a strategy
for, and to supervise and to perform the design, engineering, permitting,
procurement, construction and other work necessary to complete the Work.
AGREEMENT
For good and valuable consideration, the receipt and sufficiency of
which are acknowledged by each of the parties, the GMMV and USE/CC agree as
follows:
1. GRANT OF LEASE.
The GMMV leases the Mining Properties to USE/CC and USE/CC leases and
takes the Mining Properties from the GMMV for the purposes and on the terms and
conditions set forth in this Agreement.
2. TERM.
The term of this Agreement commences on the Effective Date and
terminates on the date of termination of the Acquisition Agreement, dated the
same date as this Agreement, between KUC and the USE/CC Parties (the
"Acquisition Agreement"), unless sooner terminated as provided in this
Agreement, provided that in no case shall the term of this Agreement extend
beyond October 30, 1998.
1
<PAGE>
EXHIBIT 10.53
3. USE OF THE MINING PROPERTIES.
USE/CC is granted the following rights with respect to the Mining
Properties insofar as such rights are necessary to perform the Work:
(a) The right of access, ingress and egress to the Mining Properties and
the right to enter upon and occupy the Mining Properties for all purposes
reasonably incident to evaluating the environmental condition and potential for
mineral development of the Mining Properties, including the right to explore
for, to develop, to mine (by underground mining, surface mining, strip mining,
or any other surface or subsurface method), extract, mill, stockpile, store,
process, remove and market all merchantable ores, metals and minerals
(collectively, "Mineral Products") found in the Mining Properties, provided that
USE/CC shall have the right to respond to requests for bids on uranium
concentrates as agent for the GMMV and for Plateau Resources Ltd., provided
USE/CC delivers a copy of each such response to the GMMV in the manner provided
in Section 14 hereof for notices. USE/CC shall not enter into any contracts for
sale of Mineral Products on behalf of the GMMV prior to closing under the
Acquisition Agreement. The Parties agree that no final acceptance or approval of
any contract committing the GMMV will be made prior to closing under the
Acquisition Agreement. The USE Parties covenant and agree that the provisions of
the preceding two sentences shall be disclosed in writing in each bid or
proposed contract contemplated hereunder.
(b) The right to mine and remove Mineral Products existing on or under
the Mining Properties through or by means of portals, shafts, openings, or pits
that presently exist on the Mining Properties or that may be sunk or made upon
the Mining Properties or upon adjoining and nearby property, and the right to
stockpile any Mineral Products produced from the Mining Properties upon grounds
situated upon any such properties;
(c) The right to commingle Mineral Products produced from the Mining
Properties with ores and minerals produced from other properties; provided,
however, that USE/CC shall calculate from representative samples the average
grade of the ores and minerals to be commingled and shall weigh (or calculate by
volume) the ores and minerals from each property before commingling. If
yellowcake or any other concentrates are produced from the commingled ores and
minerals, USE/CC shall also calculate from representative samples the average
recovery percentage for all such concentrates produced during the calendar
quarter and shall allocate a percentage of concentrate production to the Mining
Properties according to such calculations. In obtaining representative samples
and calculating the average grade of the ore and average recovery percentages,
USE/CC shall use procedures generally accepted in the mining and metallurgical
industry;
(d) The right to temporarily or permanently deposit waste rock,
overburden, surface stripping, and all other materials mined from the Mining
Properties on or off the Mining Properties;
(e) The right to beneficiate, concentrate, process, and/or otherwise
treat Mineral Products produced from the Mining Properties by any physical or
chemical method;
2
<PAGE>
EXHIBIT 10.53
(f) The right to use the GMMV's water rights on, about, under, or which
are appurtenant to the Mining Properties in connection with the activities
described in items (a) through (f) above; and
(g) The right to use all rights, improvements, privileges,
hereditaments, and appurtenances belonging or in any way appertaining to the
Mining Properties in connection with the above described activities; provided,
however, that nothing in this Agreement shall be deemed to create any express or
implied right in USE/CC to use the GMMV's Sweetwater Mill with respect to the
activities of USE/CC undertaken pursuant to this Agreement.
4. PERMITS AND BONDS.
(a) During the term of this Agreement, the GMMV will use commercially
reasonable efforts to maintain, or to cause KUC to maintain, the operating
permits and bonds set out in Exhibit B to this Agreement; provided, however,
that the GMMV does not make any representation or warranty with respect to its
ability to maintain or to cause to be maintained such permits or bonds, or with
respect to the ability of USE/CC to conduct any operations on or with respect to
the Mining Properties pursuant to such permits and bonds nor does the GMMV
represent or warrant that such permits and bonds are the only permits and bonds
required to conduct operations on the Mining Properties. For all permits and
bonds that remain in the name of the GMMV or KUC, the GMMV will make all
payments and provide all notices required with respect to such permits and
bonds. USE/CC shall develop and shall recommend to the GMMV a strategy for
negotiation of all amendments, renewals or other modifications to such permits
or bonds as may be necessary to allow USE/CC to complete the Work. The GMMV will
implement such strategy in cooperation with USE/CC unless such strategy is, in
the GMMV's reasonable judgment, inconsistent with applicable law, regulation or
administrative policy or the terms of this Agreement, such strategy jeopardizes
the continued existence of such permits or bonds or such strategy will subject
the GMMV to penalties under such law, regulation, policy, permits or bonds. To
the extent permitted by applicable law, regulation and administrative policy and
so long as such direction is consistent with the preceding sentence, USE/CC will
prepare all correspondence, drawings and other documents related to, and will
direct the course of all negotiations with such agencies and businesses with
respect to the terms, conditions, renewals, amendments, extensions, replacement
or transfer of such permits and bonds; provided that the GMMV will initiate all
contacts with the agencies or businesses involved and will participate in all
meetings and telephone conferences or other conversations with such agencies and
businesses and will approve in advance the form and content of all
correspondence and other documents prepared by USE/CC in connection with such
negotiations prior to submission to such agencies and businesses.
(b) USE/CC shall also promptly develop a strategy with respect to, and
advise the GMMV as to, any additional permit or bond or increase in the amount
of an existing bond that is or will be required with respect to the Work. Within
15 days of receiving notice from USE/CC as to any such need, the GMMV will
determine if it desires to obtain such permit, bond or increase in the amount of
a bond in its own name, in which case the permit or bond will be treated in the
same manner as the permits and bonds set out in Exhibit B, or if it desires for
USE/CC to secure the permit or bond in USE/CC's own name, in which case USE/CC
shall be
3
<PAGE>
EXHIBIT 10.53
solely responsible for the costs, terms and conditions of such permit, bond or
increase in the amount of a bond provided that such permit or bond cannot be
binding on the GMMV or extend beyond the date of termination of this Agreement.
If requested by USE/CC, the GMMV will participate in, and cooperate with respect
to, negotiation of such permits and bonds.
(c) All costs and expenses incurred by the GMMV in carrying out the
activities in this Section 4 shall be included in Transition Costs as defined in
the Acquisition Agreement.
5. PAYMENTS.
(a) In consideration for the lease by the GMMV to USE/CC of the Mining
Properties and for the GMMV's agreement to maintain certain permits and bonds as
provided in Section 4 above, USE/CC agrees to pay to the GMMV a monthly fee of
$3,363. The fee will be due and payable on the first business day of each month
during the term of this Agreement commencing with the first payment which is due
on July 1, 1997.
(b) USE/CC, as full compensation for performance of the Work, shall be
paid for all Reimbursable Costs, and such other costs as may be approved in
writing by the GMMV, as are incurred by USE/CC in performance of the Work to the
extent and only to the extent that (i) such costs are expressly authorized in
Exhibit E to this Agreement and otherwise are incurred in compliance with this
Agreement; and (ii) the total of such costs, when taken together with the total
costs spent by USE/CC pursuant to that certain Contract Services Agreement,
dated as of the same date as this Agreement, between KUC and USE/CC, amounts
expended by the GMMV after May 1, 1997 pursuant to Subsection 3(a) of the GMMV
Amendment (as defined below) and all Transition Costs is not more than
$16,000,000.
(c) USE/CC shall use all reasonable efforts to obtain any cash, trade,
quantity, freight or other discount or allowance available and refunds of sales
taxes and/or taxes and all such cash, quantity discounts or allowances, refunds
and rebates shall be for the GMMV's benefit and credited against Reimbursable
Costs or paid directly to the GMMV. USE/CC will exercise its best efforts to
minimize excess materials purchases. Excess materials or scrap generated by
USE/CC as a result of its work under this Agreement will remain the property of
the GMMV. USE/CC will stockpile or dispose of such materials as directed by the
GMMV.
(d) KUC has initially advanced $1,000,000 to the GMMV pursuant to the
provisions of Subsection 4(a) of the Amendment of Mining Venture Agreement,
dated as of the same date as this Agreement, among KUC and the USE/CC Parties
(the "GMMV Amendment") in order to establish a working capital account (the
"Working Capital Account") which USE/CC may draw upon to fund activities
associated with the Work and which will qualify as Reimbursable Costs.
(e) From time to time, but at least once per month, USE/CC shall submit
an itemized invoice (the "Invoice") to the GMMV for all Reimbursable Costs for
Work performed accompanied by such supporting documentation as the GMMV may from
time to time reasonably request, together with evidence, including lien waiver
forms satisfactory to the GMMV, of the payment and release of all
subcontractor's, mechanics', materialmen's and other liens (collectively,
4
<PAGE>
EXHIBIT 10.53
the "Supporting Documentation"). Supporting Documentation for the Reimbursable
Costs for which USE/CC seeks reimbursement shall include, but not be limited to
the following:
(i) Labor costs shall be supported by payroll abstracts
which will identify each employee of USE/CC or its subcontractors
engaged in performing the Work, the employee's title, the date
and hours worked, the pay rate and a description of the work
performed;
(ii) Costs for materials, supplies, equipment, tools and
other tangible property shall be supported by invoices and bills
of sale showing ownership of all such materials, supplies,
equipment, tools and other tangible property in Owner's name;
(iii) Billings by USE/CC for GMMV approved services,
expenses and other costs for outside commitments, of vendors,
suppliers and subcontractors shall be supported by copy of such
third parties' original invoice and related supporting
documentation and will be attached to a GMMV approved
authorization;
(iv) Billings for travel and subsistence expenses shall be
supported by travel expense reports supported by, among other
things, copies of airline tickets and copies of auto rental
invoices, copies of hotel/motel bills and appropriate receipts.
All expense reports will show the business purpose of the travel;
and
(v) Billings for all other items for which USE/CC seeks
reimbursement shall be supported by documentation in a form
reasonably satisfactory to the GMMV.
(f) Within 20 days of presentation to and receipt by the GMMV of the
Invoice and the Supporting Documentation, the GMMV will (i) provide to USE/CC
funds adequate to reimburse USE/CC for the Reimbursable Costs incurred and to
restore the Working Capital Account to its initial balance; or (ii) the GMMV
will advise USE/CC of any amounts with respect to such Invoice or Supporting
Documentation that the GMMV believes in good faith are not supported by adequate
explanation or were not spent in compliance with the terms of this Agreement,
together with an explanation, in reasonable detail, of the basis for the GMMV's
objection to such Invoice or Supporting Documentation, in which case the GMMV
will provide funds to the extent that it does not contest the Invoice or
Supporting Documentation. Each dollar paid by the GMMV pursuant to this
Agreement shall go toward satisfaction of KUC's obligation to provide up to
$16,000,000 to the Green Mountain Mining Venture as provided in Section 3 of the
GMMV Amendment. At such time as the balance of KUC's obligation to fund
$16,000,000 to the Green Mountain Mining Venture as provided in Section 3 of the
GMMV Amendment has been reduced to less than $1,000,000, its obligation to
restore the Working Capital Account balance shall be reduced to be no more than
the amount of the remaining obligation.
(g) Payment by the GMMV of USE/CC's Invoices shall be without prejudice
to the GMMV's right to audit the invoices in accordance with provisions of this
Agreement, and to challenge the correctness of the invoice at any time
thereafter. Payments otherwise due USE/CC
5
<PAGE>
EXHIBIT 10.53
may be withheld in an amount sufficient to satisfy any claim which the GMMV may
have against USE/CC and any amounts necessary to correct nonconforming, faulty
or defective Work.
6. ACCESS TO INFORMATION.
During the term of this Agreement, the GMMV will make available for
inspection and use by USE/CC all exploration data, assays, logs, maps, including
any mine plan maps, geological, geochemical and geophysical surveys and reports
and records or data relating to production or development that the GMMV has in
its possession relating to the Mining Properties. Upon written request of the
GMMV made after expiration or termination of this Agreement, USE/CC shall return
all information obtained from the GMMV pursuant to this Agreement together with
copies of all data, assays, logs, maps, core and other surveys, studies and
other information generated by or on behalf of USE/CC during the term of this
Agreement pertaining to the Mining Properties.
7. TITLE TO THE MINING PROPERTIES.
(a) The GMMV makes no representation or warranty with respect to title
to the Mining Properties or the other rights and information provided to USE/CC
pursuant to this Agreement, the condition or adequacy of any buildings,
equipment or improvements on or associated with the Mining Properties, or the
completeness or accuracy of any information provided to USE/CC with respect to
the Mining Properties. USE/CC represents and warrants that it has made such
inquiries and investigations as it, in its sole discretion, deems advisable with
respect to the Mining Properties and the other rights, and the buildings and
equipment and improvements and other information provided to USE/CC pursuant to
this Agreement and the condition of such properties and rights, and USE/CC
warrants to the GMMV that it accepts such properties and rights AS IS/WHERE IS,
WITH NO REPRESENTATIONS OR WARRANTIES WHATSOEVER.
(b) In the event the title to all or any part of the Mining Properties
is determined to be defective or in the event that a third party challenges the
title to all or any part of the Mining Properties, the GMMV shall have the
right, but not the obligation, to defend title to the Mining Properties and
USE/CC shall cooperate fully in such defense. The GMMV shall not be liable to
USE/CC if the GMMV is unsuccessful in, withdraws from, or discontinues title
litigation or other curative work. If the GMMV elects not to defend title to all
or any part of the Mining Properties, USE/CC shall have the right to undertake
defense of the GMMV's title at USE/CC's sole cost and expense and the GMMV will
cooperate fully in such defense. Any improvement or perfection of title to the
Mining Properties shall inure to the benefit of the GMMV and USE/CC in the same
manner and to the same extent as if such improvement or perfection has been made
prior to the execution of this Agreement.
(c) Should the GMMV or USE/CC institute any action for adverse
possession, suit to quiet title, or other action aimed at obtaining title to
property, or should the GMMV or USE/CC purchase any undivided interest in the
Mining Properties from any third party during the term of this Agreement, the
property rights so acquired shall inure to the benefit of the GMMV and
6
<PAGE>
EXHIBIT 10.53
USE/CC in the same manner and to the same extent as if such property rights had
been obtained prior to the execution of this Agreement.
8. CLAIM MAINTENANCE.
(a) While this Agreement is in effect, USE/CC agrees to make the mining
claim rental or maintenance fee payments required by federal and state law with
respect to all of the unpatented mining claims included in the Mining Properties
and to file and record such notices or affidavits as are necessary to maintain
said claims. All such costs shall be included in the Reimbursable Costs
reimbursable to USE/CC pursuant to this Agreement. If this Agreement is
terminated or expires between July 31 and September 1 of any year, USE/CC shall
make the payments and perform the filings and recordings required for that year.
If the time for payment of rental or maintenance fees or performance of annual
assessment work, or other annual maintenance requirements, changes to date or
dates different than August 31 or September 1 of each year, then USE/CC shall be
responsible for the satisfaction of any such obligation that must be completed
within 30 days after termination of this Agreement. USE/CC shall be reimbursed
for such payments notwithstanding the prior termination of this Agreement.
(b) If federal assessment work requirements are reinstated, or
independent state assessment work requirements are imposed, at any time during
the term of this Agreement, USE/CC shall perform or cause to be performed such
assessment work as required by law in order to maintain the unpatented mining
claims. With respect to such work, USE/CC shall during the term of this
Agreement record or file with the appropriate county, state and federal agencies
copies of assessment affidavits or notices as may then be required by law within
the time prescribed for such recording or filing. USE/CC shall have the right to
perform the assessment work required hereunder pursuant to a common plan of
exploration, and continued actual occupancy of each claim shall not be required.
USE/CC shall provide evidence to the GMMV that USE/CC has completed or will
complete the assessment work, if required, for that assessment year by the end
of the assessment year.
(c) During the term of this Agreement, if requested by USE/CC, the GMMV
may (i) amend or relocate any unpatented mining claim included within the Mining
Properties, (ii) locate any fractions resulting from such amendment or
relocation, and (iii) apply for mining patents or mining leases or other forms
of mineral tenure for any such unpatented claims.
9. ADDITIONAL OBLIGATIONS OF USE/CC.
In addition to the other obligations of USE/CC set out in this
Agreement:
(a) USE/CC shall perform all of its operations on the Mining Properties
in a good and minerlike manner and in compliance with all applicable federal,
state, and local laws and regulations including environmental protection,
reclamation, and bonding. In particular, USE/CC represents and guarantees that
all Work will conform with that degree of skill and judgment which is normally
exercised by recognized professional consulting (including environmental
consulting), engineering, procurement and construction management firms
performing services of a similar nature taking into account the oversight
responsibilities of affected administrative
7
<PAGE>
EXHIBIT 10.53
agencies with respect to the Work and shall be free of faulty planning,
consulting, engineering design, procurement, construction management and quality
assurance, field engineering and other services of USE/CC and that the Work
shall be performed and shall conform to generally accepted consulting,
engineering and construction management standards and practices. USE/CC will
maintain all existing facilities on the Mining Properties in a condition that is
at least as good as their present conditions, normal wear and tear excepted.
USE/CC shall, if requested by the GMMV, at the conclusion of the activities and
operations undertaken pursuant to this Agreement, conduct such reclamation with
respect to the activities conducted by USE/CC as required by applicable federal,
state and local law;
(b) USE/CC shall keep the Mining Properties free and clear of all liens,
assessments and other encumbrances created by, through or under USE/CC or that
result from USE/CC's control, occupancy of, or operations on, the Mining
Properties during the term of this Agreement; provided that USE/CC shall not be
required to remove any such lien so long as it is contesting the validity or the
amount thereof, or if payment of the amount secured by the lien is not yet due
as in the case of mechanics', suppliers' or similar liens;
(c) USE/CC shall protect the GMMV against any damages arising out of
USE/CC's operations on the Mining Properties and shall indemnify the GMMV
against any and all liability resulting from USE/CC's operations on the Mining
Properties. USE/CC shall establish a sinking fund for all reclamation costs
anticipated to be associated with its activities and operations under this
Agreement. USE/CC will fund such sinking fund at the end of each calendar
quarter with an amount of money reasonably sufficient to cover all reclamation
activities that will result from the operations carried out in the quarter and
all such funds shall constitute Reimbursable Costs reimbursable pursuant to the
terms of this Agreement. USE/CC shall carry liability insurance protecting the
GMMV against damages arising out of USE/CC's operations on the Mining Properties
in the amounts specified in Exhibit C to this Agreement;
(d) USE/CC covenants and agrees to pay promptly before delinquency 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
during the term of this Agreement upon the Mining Properties and USE/CC's
activities upon the Mining Properties regardless of whether such payments, taxes
and assessments arise out of USE/CC's activities on the Mining Properties or
arise out of the GMMV's ownership or control of the properties. USE/CC shall
have the right to contest, in the courts or otherwise, the validity or amount of
any such payments, taxes or assessments, or to take such other steps or
proceedings as it may deem necessary to secure a cancellation, reduction,
re-adjustment, or equalization thereof, before it shall be required to pay such
payments, taxes or assessments. Notwithstanding the foregoing, USE/CC shall not
permit any part of the Mining Properties to be conveyed or for title to be lost
as the result of nonpayment of such payments, taxes and assessments. If
requested by the GMMV, USE/CC shall provide the GMMV with copies of all receipts
evidencing payment of such payments, taxes and assessments. If the GMMV receives
utility, tax bills or claims that are the responsibility of USE/CC pursuant to
this Agreement, the GMMV will promptly forward such bills or claims to USE/CC
for appropriate action;
8
<PAGE>
EXHIBIT 10.53
(e) USE/CC will provide to the GMMV a program, in reasonable detail, of
the operations and activities that USE/CC expects to undertake in progressing to
accomplish the Work in the ensuing calendar quarter. The program will be
submitted to the GMMV at least 15 days prior to the commencement of any such
operations or activities. Within 30 days after the end of each calendar quarter,
USE/CC will submit to the GMMV a report, in reasonable detail, that describes
the operations and activities that were actually undertaken in the calendar
quarter and any activities described in the program that were not undertaken and
accomplished;
(f) USE/CC will not undertake any operations or activities that depart
from the Work or the operations and activities set out in the program without
submitting to the GMMV a proposed amendment to the program to the GMMV that
describes such amended operations and activities and, if such amendment would
require a modification of the Work as described in Exhibit D, a proposed
amendment to the Work. Within 20 days of any such proposal, the GMMV will notify
USE/CC of its acceptance or rejection or the proposed amendment, which
acceptance will not be unreasonably withheld so long as the proposed amendment
does not materially depart from the overall scope of the Work and is consistent
with the other terms and provisions of this Agreement. With respect to any
proposal for modification of the program prepared by USE/CC or any proposal to
modify the Work that departs from the overall scope of Work as described in
Exhibit D, the GMMV may accept or reject such proposal at the GMMV's sole
discretion; and
(g) Upon reasonable advance notice of not less than 24 hours, USE/CC
shall allow the GMMV and its agents and representatives access to the Mining
Properties for the purposes of viewing or inspecting USE/CC's operations. The
GMMV shall conduct such inspections in a manner that does not unreasonably
interfere with USE/CC's operations. All representatives of the GMMV shall be
required to comply with all applicable safety and operational rules of USE/CC.
10. INDEMNIFICATION.
USE/CC agrees to indemnify, defend, release and hold harmless the GMMV,
KUC and KUC's parents, subsidiaries, affiliates, successors and assigns and the
respective officers, directors, employees, agents, contractors and professional
advisors of each of them from and against the entirety of any and all Adverse
Consequences, whether arising during or after the term of this Agreement, any of
them shall suffer:
(a) As the result of any breach of any obligation, representation,
covenant or warranty of USE/CC as set forth in this Agreement; and
(b) As the result of (i) the release, threatened release, discharge,
storage, treatment, disposal or presence of Hazardous Materials at, upon, about
or beneath the Mining Properties as a result of USE/CC's operations; (ii) the
release, threatened release, or discharge of Hazardous Materials emanating or
migrating, or threatening to emanate or migrate to, from or across the Mining
Properties arising out of USE/CC's operations; (iii) any violation of any
Environmental Laws pertaining to the Mining Properties and the activities
thereon; or (iv) the treatment, storage,
9
<PAGE>
EXHIBIT 10.53
disposal, arrangement for disposal, or transportation of Hazardous Materials by
USE/CC at or to a facility other than one on the Mining Properties;
(c) For the purposes of this Agreement:
(i) "Adverse Consequences" means any and all actions, suits,
proceedings, hearings, investigations, charges, complaints, claims,
demands, injunctions, judgments, orders, decrees, rulings, damages
(including natural resource damages), dues, penalties, fines,
encumbrances, liens, costs and expenses of defense of a claim (whether
or not such claim is ultimately defeated), good faith settlements of
claims, judgments and disputes, costs (including without limitation
costs of investigative, reporting, clean-up, response, removal,
remedial, corrective action and closure activities relating to Hazardous
Materials), liabilities (including strict liability), obligations,
taxes, liens, losses, expenses and fees, including consultants' and
attorneys' fees and court costs and expenses;
(ii) "Environmental Laws" means all applicable statutes,
treaties, regulations, rules, ordinances, codes, licenses, permits,
orders, approvals, authorizations and similar items of all federal,
state, and local governmental branches, agencies, departments,
commissions, boards, bureaus or instrumentalities, whether domestic or
foreign, having jurisdiction, and all applicable judicial and
administrative and regulatory decrees, judgments and orders and all
covenants running with the land that relate to the protection of health
or the environment, including without limitation those that relate to
the existence, handling, manufacture, treatment, storage, disposal, use,
generation, release, discharge, refining or recycling of Hazardous
Materials or reclaiming real property. Without limiting the foregoing,
Environmental Laws include the Hazardous Materials Transportation Act
(49 U.S.C. " 1801 ET SEQ.), the Resource Conservation and Recovery Act
of 1976, (42 U.S.C. " 6901 ET SEQ.), the Clean Air Act (42 U.S.C. " 7401
ET SEQ.), the Federal Water Pollution Control Act (33 U.S.C. ' 1251),
the Safe Drinking Water Act (42 U.S.C. " 300f ET SEQ.), the
Comprehensive Environmental Response, Compensation and Liability Act of
1980 (42 U.S.C. " 9601 ET SEQ.), the Toxic Substances Control Act (15
U.S.C. " 2601 ET SEQ.), the Emergency Planning and Community Right to
Know Act (42 U.S.C. "11001, ET SEQ.), the Occupational Safety and Health
Act (26 U.S.C. " 651 ET SEQ.), the Pollution Prevention Act of 1990 (42
U.S.C " 13101 ET SEQ.), the Atomic Energy Act of 1954, 68 Stat. 919, the
Energy Reorganization Act of 1974, the Mine Safety and Health Act of
1977, the Uranium Mill Tailings Radiation Control Act (42 U.S.C " 7901
ET SEQ.), and all similar or additional federal, state, local or foreign
statutes, all as amended, and all regulations promulgated thereunder;
and
(iii) "Hazardous Materials" means any substance: (A) the presence
of which requires reporting, investigation, removal or remediation under
any Environmental Laws; (B) that is defined as a "hazardous waste,"
"hazardous substance" or "pollutant" or "contaminant" under any
Environmental Laws; (C) that is toxic, explosive, corrosive, flammable,
ignitable, infectious, radioactive, reactive, carcinogenic, mutagenic or
otherwise hazardous and is regulated under any Environmental Laws; (D)
the presence of which on a property causes or threatens to cause a
nuisance upon the property or to
10
<PAGE>
EXHIBIT 10.53
adjacent properties or poses or threatens to pose a hazard to the health
or safety of persons on or about the property; (E) that contains
gasoline, diesel fuel or other petroleum hydrocarbons; or (F) that
contains PCBs, asbestos or urea formaldehyde foam insulation.
11. TERMINATION OR EXPIRATION.
(a) This Agreement will terminate as provided in Section 2 above.
(b) In the event the GMMV determines that USE/CC has not complied with
any material obligation hereunder, the GMMV shall notify USE/CC in writing
setting out specifically in what respect it is claimed that USE/CC has failed to
comply with this Agreement. If the alleged failure is not cured to the GMMV's
reasonable satisfaction within ten (10) days after written notice is given, or
if USE/CC has not within that time either commenced to cure the alleged breach
to the GMMV's reasonable satisfaction and does not thereafter diligently
complete such cure, or fails successfully to challenge the legitimacy of the
allegation, the GMMV may terminate this Agreement by delivering to USE/CC notice
of such termination or the GMMV may seek such other remedies, at law or in
equity, to which it is entitled.
(c) USE/CC shall have the right to terminate this Agreement at any time
with respect to all but not less than all of the Mining Properties by giving
written notice to the GMMV. Upon such termination, all right, title, and
interest of USE/CC under this Agreement shall terminate and USE/CC shall be
relieved of all further obligations set forth in this Agreement which arise out
of USE/CC's activities prior to the date of such termination except for the
obligations in Sections 8 and 9, the indemnifications provided for in Section
10, any other obligation expressly set forth in this Agreement as a
post-expiration or post-termination obligation, and any reclamation required by
applicable law arising from USE/CC's operations.
(d) Upon termination or expiration of this Agreement, USE/CC will
relinquish possession of the Mining Properties to the GMMV free and clear of all
obligations, liens and encumbrances. USE/CC will also relinquish possession of
all buildings, structures, facilities, improvements, machinery and equipment
that were on the Mining Properties as of the Effective Date or that were
acquired by, erected, placed, or became situated on the Mining Properties or
were acquired in connection with USE/CC's activities on the Mining Properties
and were paid for by funds provided to USE/CC by the GMMV (collectively,
"Fixtures and Personalty"). In connection with the relinquishment of the Mining
Properties and the Fixtures and Personalty, USE/CC will provide a release, in
recordable form, executed by USE/CC for the benefit of the GMMV in order to
clear title to the Mining Properties and appropriate assignments and bills of
sale with respect to the Fixtures and Personalty. In any such release,
assignments and bills of sale, USE/CC will represent that the Mining Properties,
Fixtures and Personalty are free and clear of all obligations, liens or
encumbrances created by, through or under USE/CC. USE/CC will also transfer
control of the sinking fund established pursuant to Section 9(c) above to the
GMMV.
(e) Upon termination or expiration of this Agreement, USE/CC will
commence and will diligently pursue to completion, reclamation of all
disturbance caused by the USE/CC Parties
11
<PAGE>
EXHIBIT 10.53
in connection with its activities under this Agreement in accordance with
applicable laws, orders and regulations, provided that USE/CC shall leave in
place and not reclaim any foundations or other improvements of a permanent
nature, supports, track, and pipe placed in shafts, drifts, or openings in the
Mining Properties, roads, development work, portals, declines or other workings,
and water wells and piezometers constructed on the Mining Properties unless
otherwise requested by the GMMV. Such reclamation activities will be funded from
the sinking fund created pursuant to Section 9(c) and USE/CC may draw upon such
fund from time-to-time by providing evidence reasonably satisfactory to the GMMV
of the expenditures made by USE/CC in conducting such reclamation activities.
USE/CC shall be solely responsible for completing the reclamation activities
required by this Agreement and the amount of funds in the sinking fund shall in
no way limit USE/CC's obligation to complete the reclamation required by this
Agreement. USE/CC shall, within a period of three months from and after the
termination or expiration of this Agreement, remove from the Mining Properties
all personal property that is owned solely by USE/CC. If USE/CC desires not to
remove any item of its personal property from the Mining Properties and the GMMV
agrees in writing to allow such property to remain on the Mining Properties,
such property shall become the property of the GMMV unless GMMV agrees
otherwise.
12. FORCE MAJEURE.
Except as provided in Subsections 12(b) or 12(c) below, the failure to
perform or to comply with any of the covenants or conditions contained in this
Agreement, either expressed or implied, on the part of either party shall not be
a ground for cancellation or termination or forfeiture of this Agreement, and
shall not create a liability for the party for failure to perform its
obligations during any period in which performance is prevented, in whole or
part, by causes herein termed "force majeure".
(a) For purposes of this Agreement, the term "force majeure" shall be
limited to substantial and unforeseeable events beyond the control of a party
that cannot be avoided through the diligent actions of a party, including
extreme weather conditions; earthquakes or cave-ins; unforeseeable
unavailability of labor, transportation, materials, machinery, equipment,
supplies, utilities, or services even on premium terms; serious accidents;
unavoidable breakdown of major equipment, machinery, or facilities; injunctions
issued by any court; inability to obtain licenses, permits, or other
authorizations in spite of diligent efforts to do so; curtailment or suspension
of activities to remedy or avoid an actual, serious violation of environmental
laws; acts of war or conditions arising out of or attributable to war; riot;
civil strife; fire; explosion; or any similar cause beyond the reasonable
control of the party declaring force majeure.
(b) If either party desires to invoke the provisions of this Section 12,
the invoking party shall give notice to the other party of the commencement of
the circumstances giving rise to such force majeure. The time for discharging
the party's obligations with respect to the prevented performance shall be
extended for the period of force majeure, provided that the party invoking force
majeure pursues diligent efforts to eliminate the event that gave rise to the
condition of force majeure. The existence of any event of force majeure shall
not relieve a party of the obligation to make any payments required of a party
with respect to maintenance of the Mining Properties or the permits and bonds
associated with the properties in accordance with the
12
<PAGE>
EXHIBIT 10.53
terms of this Agreement, making payments due under Section 5, the payments,
filings and recordings due under Sections 8 and 9, and the indemnities required
by Section 10, nor shall an event of force majeure extend the term of this
Agreement.
(c) Notwithstanding the foregoing, neither party may invoke force
majeure with respect to any event that would otherwise constitute force majeure
if the duration of such event is less than 15 days.
13. MINING LAW REVISION.
If any time during the term of this Agreement, the Mining Law of 1872,
30 U.S.C. " 22 et seq., is amended, modified, or repealed and superseded by a
new law providing for the initiation and maintenance of mining rights upon the
public lands, this Agreement shall be deemed to have been amended so as to
include in this Agreement any new rights that are afforded the GMMV in the
Mining Properties that arise from the application of such modified or new law to
the Mining Properties. If any actions are required to be taken by the new law to
maintain rights to the ground encompassed by the Mining Properties hereunder, or
to convert the unpatented mining claims within the Mining Properties to a new
form of right, USE/CC is hereby authorized to take such actions as it may deem
reasonably necessary to maintain the rights of the parties hereto in and to the
lands encompassed within the Mining Properties at the sole cost and expense of
USE/CC. The GMMV covenants and agrees to execute such documents and take such
actions as USE/CC may reasonably require to effectuate the maintenance of the
parties' rights and interest in and to the lands encompassed by the Mining
Properties.
14. NOTICES.
Any required notice, payment, or other communication contemplated by
this Agreement shall be in writing and shall be effective with respect to a
party (i) when personally delivered or delivered by courier at the party's
address as set out below; (ii) when delivered by electronic communication at the
party's telecopier number described below or at such other telecopy number as
the party may designate in writing provided that such electronic communication
is followed by a delivery by mail or by personal service to the party's address;
or (iii) when delivered by mail deposited in the United States mail, postage
prepaid and registered or certified, with return receipt requested, and
addressed to the party at the party's address:
IF TO THE GMMV: COPY TO:
Kennecott Uranium Company Kennecott Corporation
Attn: President Attn: Legal Department
Caller Box 3009 8315 West 3595 South
505 South Gillette Avenue P. O. Box 6001
Gillette, WY 82717-3009 Magna, UT 84044-6001
FAX (307) 687-6011 FAX (801) 252-3559
13
<PAGE>
EXHIBIT 10.53
IF TO USE/CC: COPY TO:
U.S. Energy Corp. U.S. Energy Corp.
Attn: John L. Larsen Attn: D.P. Svilar
877 North 8th West 877 North 8th West
Riverton, Wyoming 82501 Riverton, WY 82501
FAX: (307) 857-3050 FAX: (307) 857-3050
Either the GMMV or USE/CC may change its address for future notices by providing
written notice to that effect to the other party.
15. INTENTIONALLY OMITTED.
16. ASSIGNMENTS AND TRANSFERS OF INTEREST.
During the term of this Agreement, neither USE/CC nor the GMMV shall
transfer, or enter into any agreement to transfer, any interest in the Mining
Properties or in this Agreement without the prior written consent of the other.
17. IMPLIED COVENANTS.
There are no implied covenants in this Agreement except for the
covenants of good faith and fair dealing. Nothing in this Agreement shall impose
any obligation or covenant upon USE/CC, express or implied, to conduct any
exploration, development, or mining operations upon the Mining Properties except
as provided in Exhibit D, it being the intent of the parties that USE/CC shall
otherwise have the sole discretion to determine the economic feasibility, time,
method, manner, and rate of conducting any such operations, except as otherwise
required by this Agreement.
18. MISCELLANEOUS.
(a) As to any provision in this Agreement, the parties do not intend
that there shall be any violation of the Rule Against Perpetuities or any
related Rule. If any violation should inadvertently occur, it is the wish of the
parties that the appropriate court reform such provision so as to approximate
most closely the intent of the parties within the limits permissible under such
Rule.
(b) This Agreement shall be governed by and construed in accordance with
the domestic laws of the State of Wyoming without giving effect to any choice or
conflict of law provision or rule (whether of the State of Wyoming or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of Wyoming.
(c) Each of the parties hereto agrees that it shall not seek a jury
trial in any proceeding based upon or arising out of or otherwise related to
this Agreement or any of the other documents and instruments contemplated hereby
and EACH OF THE PARTIES HERETO HEREBY WAIVES ANY AND ALL RIGHT TO ANY SUCH JURY
TRIAL.
14
<PAGE>
EXHIBIT 10.53
(d) The provisions of this Agreement shall inure to the benefit of and
be binding upon the parties and their respective heirs, executors,
administrators, personal representatives, beneficiaries, successors, and
assigns.
(e) This Agreement shall not be recorded. Upon the request of either
party, the parties shall execute a Memorandum of this Agreement in a recordable
form sufficient under the laws of the State of Wyoming to give notice to third
parties of the rights granted hereunder. Either party shall have the right to
record such Memorandum at any time.
(f) This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, and all of which shall constitute
one and the same instrument.
(g) This Agreement and its Exhibits, all of which are incorporated
herein by reference, constitute the sole understanding and entire agreement of
the parties with respect to the subject matter herein. No modification or
alteration of this Agreement shall be effective unless in writing and executed
by the parties.
(h) The headings appearing in this Agreement are inserted for convenient
reference purposes only, and are not definitive as to the provisions contained
within said Sections in the interpretation and construction of this Agreement.
(i) In the event any of the terms or provisions of this Agreement
conflict with or are inconsistent with the terms or provisions of the
Acquisition Agreement, the terms and conditions of the Acquisition Agreement
shall prevail.
15
<PAGE>
EXHIBIT 10.53
Executed to be effective as of the date first above set forth.
KENNECOTT URANIUM COMPANY
By /s/ L. R. Cardey-Yates
----------------------------------------
Its Director/Assistant Secretary
-------------------------------------
U.S. ENERGY CORP.
By /s/ John L. Larsen
----------------------------------------
Its President
----------------------------------
U.S. ENERGY CORP. and
CRESTED CORP. dba the
USE/CC JOINT VENTURE
By: U.S. ENERGY CORP.
By /s/ John L. Larsen
----------------------------------------
Its President
----------------------------------
By: CRESTED CORP.
By /s/ Max T. Evans.
----------------------------------------
Its President
----------------------------------
16
<PAGE>
EXHIBIT 10.53
EXHIBIT A
Mining Properties.
This Exhibit is not filed with this Form 10-K for the year ended May 31, 1997.
17
<PAGE>
EXHIBIT 10.53
EXHIBIT B
TO MINERAL LEASE AGREEMENT
OPERATING PERMITS AND BONDS
I. JACKPOT MINE
ACTIVE PERMITS & APPROVALS OR PERMITS REQUIRED
TYPE IN NAME OF STATUS (1/28/97)
- ---- ---------- ----------------
DEQ
- ---
Permit to Mine GMMV No. 660
License to Mine GMMV No 660-L1
* Air Quality Permit Engineering
WQD - NPDES Permit USE WY0033952 - Renewal
12/31/97
* WQD - Construct Sewage System Engineering
WQD - Construct Sediment Basin Approved - Completed
* WQD - Construct Treatment Ponds & Plant Engineering
Drill Site 28-86-1 KUC 194DN-DEQ Inspection
* Enhancement Drilling Program GMMV 297DN - To Be Completed
PZ & JP Monitor Holes (various) USE Complete
* Storm Water Permit - Pollution Prevention Plan Engineering
* Permit Amendment for Widening Access Road
STATE ENGINEERS OFFICE
- ----------------------
Appropriate Water From Well USE UW 75407
Appropriate Water From Underground Mine USE/BLM UW 75520
* Construct Water Treatment Ponds Engineering
* Construct Permanent Diversion Ditch Engineering
Sediment Reservoir (Jackpot No. 1) GMMV No. 10090R
PZ & JP Monitor Wells USE Completed No. Issued
BLM
- ---
Power Line Easement PP&L Complete
Access Road - 179LE USE W71827
* To Widen Road to 40' (Jackpot to Big Eagle) Engineering
Haul Road to Mill Engineering Required
* Plan of Operations (approved in conjunction Approved
with Jackpot Mine Permit)
* Anaconda Road KUC 194DN
* ROW Amendment Big Eagle Haul Road GMMV Engineering
18
<PAGE>
EXHIBIT 10.53
U.S. ARMY CORP OF ENGINEERS
- ---------------------------
* Nationwide Permits 14 and 26 (33 CFR Part Approved - NPDES
330, Appendices A(B) 14 and 26) and Section Renewal 4/6/95
404
- Road Crossing
- Headwaters and Isolated Waters Discharge
II. BIG EAGLE MINE
ACTIVE PERMITS
Status
or
TYPE Permit No. Transfer Date In Name Of Expiration
- ---- ---------- ------------- ---------- ----------
DEQ
- ---
* Mine Permit Pt 451 12-31-90 KUC IMS
IMS (Interim Mine Stabilization & Amendment to permit required) 11-2-97
NPDES WY-0025950 12-31-90 GMMV 6-30-98
Air Quality 12-31-90 Engineering
* Industrial Landfill ** Engineering
Wash Evap. Pond 77-427R ** with 451
Septic Tank/Drain Field 77-300R ** with 451
Storm Water Permit WYR000283 Aug. 31, 1997 KUC
STATE ENGINEERS OFFICE
----------------------
Rock Well No. 1 UW 34440 1-11-91 GMMV Complete
Rock Well No. 2 UW 35444 1-11-91 GMMV Complete
GM Diversion Ditch P25671D 1-14-91 GMMV Complete
GM Mine Reservoir P7863R 1-14-91 GMMV 12-31-97
Rock Reservoir P7861R 1-14-91 GMMV 12-31-97
Zenith #1 (shop water) UW 41033 1-11-91 GMMV Complete
Jensen Reservoir P7862R 1-14-91 GMMV Complete
Domino No. 1 UW 42150 1-11-91 GMMV Complete
Stream Gauging Sta-Esmt 1917 12-31-90 GMMV 6-29-77
(granted)
19
<PAGE>
EXHIBIT 10.53
STATE LAND OFFICE
-----------------
LEASES Lease No. Lessor Transfer Date
------ --------- ------ -------------
State Mineral Lease
Sec. 36, T28N,R92W 26528 State of WY 4-3-91 USE 50%, KUC
50% dba GMMV
Exp 5/1/01
FEE SURFACE LANDS SECTION Ownership
----------------- ------- ---------
T27N, R92W Sec. 2, S1/2 GMMV
Sec. 11, N1/2 GMMV
KUC = Kennecott Uranium Company
GMMV = Green Mountain Mining Venture
* Needed for Jackpot Decline Development
** Not Transferred
20
<PAGE>
EXHIBIT 10.53
EXHIBIT C
INSURANCE
(a) During the term of the Agreement and all times during performance,
and until completion of the Work, USE/CC shall maintain in force the insurance
described in this Exhibit C, for the benefit of the parties to the Agreement,
all of their personnel and the personnel of all subcontractors on site with
companies satisfactory to the GMMV. USE/CC shall be responsible for compliance
by all its contractors with these insurance requirements and shall furnish
certificates as provided herein evidencing the required insurance for the
contractors.
(b) Certificates of such insurance shall be made out to the GMMV and
shall be furnished to the GMMV promptly and must reflect both the endorsement
provisions requiring 30 days prior written notice to be given before
cancellation or material change, and the additional interest where applicable.
Each certificate shall specify the date when such benefits and insurance expire.
USE/CC agrees that such benefits and insurance, as specified above, shall be
provided and maintained until the entire work under the Agreement has been
completed and accepted by the GMMV. An original copy of each certificate shall
be mailed or delivered to:
Kennecott Uranium Company
Caller Box 3009
505 South Gillette Avenue
Gillette, Wyoming 82717-3009
FAX (307) 687-6011
The GMMV's approval or failure to disapprove insurance certificates furnished by
USE/CC or subcontractors shall not release USE/CC or its contractors from full
responsibility for liability, damage, and accidents as set forth herein.
(c) It shall be a condition of approval that the required insurance must
be arranged with insurance companies authorized to do business in the State of
Wyoming.
(d) If at any time the USE/CC-required insurance policies should be
canceled, terminated or modified so that the insurance is not in full force and
effect as required herein, the GMMV may terminate the Agreement for default or
obtain insurance coverage equal to that required herein and recover costs
therefor from USE/CC.
(e) USE/CC and contractors shall bear all risk of loss of or damage to,
and shall, as they deem necessary, carry fire, theft, physical damage, or other
insurance on their own and their employees' tools, equipment, reusable materials
(such as metal forms and metal scaffolding), trailers, any property of their
employees.
(f) The liability of USE/CC assumed under the Agreement shall in no
manner be limited by the amount of insurance furnished by GMMV or by the amount
of insurance which Contractor has or is required to provide by the terms
thereof.
21
<PAGE>
EXHIBIT 10.53
(g) In addition to USE/CC's liability for property damage as set forth
in the Agreement, USE/CC shall also be responsible for any damage to its
vehicles and the vehicles of its contractors, employees, and agents or
representatives of USE/CC or contractors while the vehicles are parked or used
on the GMMV's property.
(h) USE/CC shall be responsible for and shall bear any and all risk of
loss or of damage to work in progress.
(i) All policies of insurance carried by USE/CC pursuant to this
Agreement shall:
(i) provide that they may not be canceled or the protection afforded
thereby substantially changed without 30 days prior written notice to
GMMV. Upon request, USE/CC shall permit GMMV to examine any of the
insurance policies specified herein.
(ii) be endorsed to include Kennecott Uranium Company and all
subsidiary, associated, and affiliated companies, as additional insured.
(iii) contain endorsements stating that USE/CC'S coverage is primary to
any coverage GMMV may elect to carry for its own account, or for USE/CC.
(iv) contain endorsements waiving the insurer's right to subrogation
against GMMV, its subsidiaries, agents, and affiliated companies, and
their employees, officers, and directors.
(i) Any and all deductibles specified in the above described USE/CC
insurance policies shall be assumed by, for the account of, and at the
sole risk of USE/CC.
(j) The insurance required hereunder is as follows:
WORKER'S COMPENSATION AND OCCUPATIONAL DISEASE insurance in compliance
with all state and federal regulations in the jurisdiction where the
work and services are to be performed with the statutory limit required.
USE/CC shall require each consultant and contractor to carry Worker's
Compensation and Employer's Liability insurance.
COMMERCIAL GENERAL LIABILITY insurance covering all operations of USE/CC
in the performance of work, including contractual liability insurance
covering the liability assumed in this Contract. Said insurance policy
or policies shall provide $2,000,000 combined single limits for all
injuries or death to persons and damages to property per occurrence.
COMPREHENSIVE AUTOMOBILE LIABILITY insurance including all owned, non
owned, and hired vehicles, with the following limits:
Bodily Injury $1,000,000 each person
$1,000,000 each occurrence
Property Damage $1,000,000 each occurrence
22
<PAGE>
EXHIBIT 10.53
(k) USE/CC shall not commence work at the site until a certificate in
evidence of insurance coverage has been approved by GMMV.
(l) USE/CC shall be responsible for compliance by all contractors with
these insurance requirements and shall furnish certificates as provided herein
evidencing the required insurance for the contractors.
(m) The liability of USE/CC assumed under the Agreement shall in no
manner be limited by the amount of insurance furnished by the GMMV or by the
amount of insurance which USE/CC has or is required to provide by the terms
thereof.
23
<PAGE>
EXHIBIT 10.53
EXHIBIT D
THE WORK
The Work is described in the pages that follow this cover sheet and shall
include the Objectives and Activities described in Exhibit E to the Agreement.
The balance of this Exhibit is not filed with this Form 10-K for the year ended
May 31, 1997.
24
<PAGE>
EXHIBIT 10.53
EXHIBIT E
Reimbursable Costs.
Description and Detail of Reimbursable Costs are not filed with this Form 10-K
for the year ended May 31, 1997. Following are Objectives and Activities.
25
<PAGE>
EXHIBIT 10.53
GREEN MOUNTAIN MINING VENTURE
JACKPOT
OBJECTIVES AND ACTIVITIES
DECLINE DEVELOPMENT
OBJECTIVES:
Complete site preparation.
Develop dual declines into ore zones.
ACTIVITIES:
Site preparation - Completion of site preparation during May and June, which
will allow for the development of dual declines to commence in July.
Excavation for Conveyor - Complete preparation of declines for conveyor system
and install conveyor.
Declines development - Commence development of dual declines at an advancement
of 5 feet per cutting hour utilizing a drum miner. Development schedule will be
two shifts per day seven day per week. As manpower increases programs will be
developed.
Mine water ponds - Upon receiving approval, from the state agencies, construct
two lined treatment ponds and water treatment facility and monitoring station.
Install electric station - This includes labor and supplies to maintain permits
and conditions set forth in the permits and transfer all permits to new owner.
The balance of this Exhibit is not filed with this Form 10-K for the year ended
May 31, 1997.
26
EXHIBIT 10.54
EXHIBIT "I"
FOURTH AMENDMENT
OF
MINING VENTURE AGREEMENT
AMONG
KENNECOTT URANIUM COMPANY,
U.S. ENERGY CORP.,
AND
THE USE/CC JOINT VENTURE
<PAGE>
EXHIBIT 10.54
FOURTH AMENDMENT
OF
MINING VENTURE AGREEMENT
THIS AMENDMENT OF MINING VENTURE AGREEMENT (the "Amendment") made as of
June 23, 1997 is among Kennecott Uranium Company, a Delaware corporation
("Kennecott"), U.S. Energy Corp., a Wyoming corporation ("USE"), and a joint
venture between USE and Crested Corp., a Colorado corporation ("Crested") (the
joint venture between USE and Crested is referred to herein as "USE/CC" and USE,
Crested and USE/CC are collectively referred to herein as the "USE Parties").
RECITALS
A. Kennecott and the USE Parties entered into a Mining Venture Agreement
made as of June 1, 1990 with respect to a mining venture being undertaken by
them (the "Venture") involving certain properties and related property rights
and personal property in Fremont County, Wyoming described in the Mining Venture
Agreement (the "Properties").
B. The Mining Venture Agreement has been amended from time to time
including (without limitation) by letters dated September 10, 1990 and March 1,
1991, an Agreement and Amendment dated September 20, 1991, and an Agreement
Regarding Sweetwater Mill and Amendment to Mining Venture Agreement dated
September 20, 1991 and Amendment dated February 26, 1992 (the Mining Venture
Agreement, as amended, is referred to in this Amendment as the "Mining Venture
Agreement").
C. Contemporaneously with the execution of this Amendment, Kennecott and
the USE Parties are entering into an Acquisition Agreement with respect to the
sale of certain assets of Kennecott (the "Acquisition Agreement"). In connection
with the transactions contemplated by the Acquisition Agreement, Kennecott and
the USE Parties desire to amend the Mining Venture Agreement to provide for,
among other things, (i) the granting of a Mineral Lease Agreement to USE with
respect to the Properties (to the extent the Properties remain subject to the
Mining Venture Agreement) and certain other properties (collectively, the
"Mining Properties", which are more particularly described in Exhibit A to the
Mineral Lease Agreement); (ii) approval of a contract pertaining to certain
improvements and modifications to be undertaken at the Venture's Sweetwater Mill
(the "Mill Contract"); (iii) the accelerated contribution of some or all of
Kennecott's cash contributions to the Venture; and (iv) the granting of a
security interest in the Mining Properties and other properties owned or
controlled by the Venture.
1
<PAGE>
EXHIBIT 10.54
AGREEMENT
For good and valuable consideration and the covenants and agreements
contained in this Amendment, the receipt and sufficiency of which are
acknowledged by Kennecott and each of the USE Parties, the parties agree as
follows:
1. AUTHORIZATION OF THE MINERAL LEASE AGREEMENT AND THE MILL CONTRACT.
Notwithstanding any provision of the Mining Venture Agreement to the
contrary, Kennecott and the USE Parties authorize:
a. The Venture to enter into the Mineral Lease Agreement with
USE/CC on behalf of the Venture and to lease the Mining Properties to USE/CC
pursuant to the terms of the Mineral Lease Agreement; and
b. Kennecott, as Manager of the Venture's Sweetwater Mill, to
enter into the Mill Contract with USE.
2. ACCEPTANCE OF THE MINERAL LEASE AGREEMENT AND THE MILL CONTRACT.
USE/CC agrees to execute the Mineral Lease Agreement and the Mill
Contract and to be bound by the terms of the Mineral Lease Agreement and the
Mill Contract. USE/CC further agrees that, during the respective terms of the
Mineral Lease Agreement and the Mill Contract, all activities undertaken by it
with respect to the Mining Properties and the Sweetwater Mill will be undertaken
solely pursuant to USE/CC's role as lessee and contractor, respectively, and
that USE/CC will undertake no activities on the Mining Properties or with
respect to the Sweetwater Mill in its role as a Manager of the Venture or as a
co-venturer in the Venture. Information obtained in connection with the
performance of the Mineral Lease Agreement or the Mill Contract shall, for
purposes of Article XVI of the Mining Venture Agreement, be treated as obtained
in connection with the performance of the Mining Venture Agreement.
3. ACCELERATION OF KENNECOTT'S ADDITIONAL CASH CONTRIBUTIONS.
a. In lieu of Kennecott's obligations to provide additional cash
contributions to the Venture as provided in Subsection 5.2(a) of the Mining
Venture Agreement. Kennecott has paid to the USE Parties the sum of $4,000,000
upon the execution of the Acquisition Agreement (the "Signing Bonus") and
Kennecott will make available to the Venture a contribution of up to $16,000,000
for the purposes of funding the operations of USE/CC on the Mining Properties
and at the Sweetwater Mill pursuant to the terms and conditions of the Mineral
Lease Agreement and the Mill Contract, respectively (the "Development Costs",
which are further defined in the Acquisition Agreement), and for the payment of
Transition Costs (which are further defined in the Acquisition Agreement).
Development Costs will also include any monies
2
<PAGE>
EXHIBIT 10.54
spent by the GMMV on the Mining Properties and the Sweetwater Mill between May
1, 1997 and the date of this Amendment and such expenditures shall be counted
toward the $16,000,000 obligation described above. Except for funds advanced to
cover costs incurred between May 1, 1997 and the date of this Amendment, which
will be advanced as provided in the Mining Venture Agreement, Kennecott will
advance such funds to the Venture in accordance with the provisions of Sections
4 and 5 below. Kennecott's obligation to make contributions under this
Subsection 3(a) shall expire on the termination of the Acquisition Agreement, or
at any time it is established that the sale of the assets of Kennecott
contemplated thereunder will not be consummated.
b. Each dollar of Development Costs and Transition Costs
contributed to the Venture pursuant to Subsection 3(a) above and each dollar of
the Signing Bonus shall count as the contribution of two dollars against the
remaining amount of Kennecott's obligation to contribute the first $50.0 million
in Dollars of the Day to Programs and Budgets as provided in Subsection 5.2(a)
of the Mining Venture Agreement.
c. In the event that the Acquisition Agreement is terminated, the
transaction contemplated by the Acquisition Agreement is consummated, or it is
established that the sale of the assets of Kennecott contemplated in the
Acquisition Agreement will not be consummated:
i. Kennecott will have no further obligation to make
contributions under Subsection 3(a) hereof, even if it has not contributed the
full $16 million referenced in said Section. Any balance remaining in the
Working Capital Account described in Subsection 4(a) below will be returned to
Kennecott within 15 days of the date that the Acquisition Agreement is
terminated, the transaction contemplated by the Acquisition Agreement is
consummated, or it is established that the sale of the assets of Kennecott
thereunder will not be consummated;
ii. Kennecott's obligation to contribute the first $50.0
million in Dollars of the Day to Programs and Budgets as provided in Subsection
5.2(a) of the Mining Venture Agreement, shall be reduced:
(x) by all contributions made to the Venture by
Kennecott prior to the date hereof, which the parties agree is
$20,355,142,
(y) by the sum of $8,000,000 in consideration of
the Signing Bonus; and
(z) by the two dollar per dollar credit provided
with respect to any amounts contributed to the Venture pursuant
to Subsection 3(a) above.
Any remaining funding to reach Kennecott $50 million initial contribution will
be pursuant to Section 5.2(a) of the GMMV Mining Venture Agreement dated June 1,
1990 on a one to one basis by Kennecott. Once Section 5.2(a) of the GMMV Mining
Venture Agreement is satisfied,
3
<PAGE>
EXHIBIT 10.54
all remaining contributions will be subject to Section 5.3 of the GMMV Mining
Venture Agreement.
iii. If the transaction contemplated by the Acquisition
Agreement is consummated, Kennecott's obligations to make disproportionate
contributions under Subsections 5.2(b)(1) and 5.2(b)(2) shall then be satisfied.
Otherwise, if the transaction is not consummated, Subsections 5.2(b)(1) and
5.2(b)(2) shall remain in effect; and
iv. Upon completion of Kennecott's obligation to
contribute the remaining amount of the first $50.0 million in Dollars of the Day
to Programs and Budgets as provided in Subsection 5(a) of the Mining Venture
Agreement, as such amount has been reduced by all contributions previously made
by Kennecott, which the parties agree is $20,355,142, by the $8,000,000 credit
in consideration of the Signing Bonus, and by the two dollar per dollar credit
provided with respect to any amounts contributed to the Venture pursuant to
Subsection 3(a) above, the second sentence of Subsection 5.2(a) of the Mining
Venture Agreement will be amended to reflect that each Participant's Initial
Contribution is equal to $15.0 million plus one-half of the actual amount of
Kennecott's additional contributions, without taking into account the two dollar
per dollar credit described above.
4. MECHANICS OF THE KENNECOTT CONTRIBUTION.
Kennecott agrees to fund the additional $16,000,000 contribution
(including all Transition Costs incurred or projected to be incurred by the
Kennecott or the Venture pursuant to Section 5 below and all costs incurred
between May 1, 1997 and the date of this Agreement as provided in Subsection
3(a) above) to the Venture for Development Costs as follows:
a. Kennecott will initially advance $1,000,000 to the Venture
which the Venture will, in turn, advance to USE/CC pursuant to the terms of the
Mineral Lease Agreement and the Mill Contract to allow USE/CC to establish a
working capital account (the "Working Capital Account") to fund activities
authorized by those agreements. From time to time, but at least once per month,
USE/CC shall provide to the Venture and the Venture will provide to Kennecott
invoices ("Invoices") for all expenditures actually made by USE/CC pursuant to
the Mineral Lease Agreement and the Mill Contract that are reimbursable to
USE/CC by the Venture pursuant to the terms of those agreements, along with
evidence of the amounts deposited by USE/CC to satisfy the sinking fund
requirements set out in Subsection 9(c) of the Mineral Lease Agreement
("Evidence of Deposit"), together with the supporting documentation required by
the Mineral Lease Agreement and the Mill Contract (the "Supporting
Documentation");
b. Within 20 days of presentation to and receipt by Kennecott of
the Invoices, Supporting Documentation and Evidences of Deposit, Kennecott will
(i) provide to the Venture funds adequate to reimburse USE/CC for its
reimbursable expenditures and to restore the Working Capital Account to its
initial balance, with authorization to the Venture to forward such
4
<PAGE>
EXHIBIT 10.54
funds to USE so that USE is reimbursed and can restore the Working Capital
Account; or (ii) Kennecott will advise the Venture of any amounts with respect
to such Invoices, Supporting Documentation or Evidences of Deposit that
Kennecott believes in good faith are not supported by adequate explanation or
were not spent in compliance with the Mineral Lease Agreement or the Mill
Contract, together with an explanation, in reasonable detail, of the basis for
Kennecott's objection to such Invoices, Supporting Documentation or Evidences of
Deposit, in which case Kennecott will provide funds to the extent that it does
not contest the Invoices, Supporting Documentation or Evidences of Deposit. At
such time as the balance of Kennecott's obligation to fund $16,000,000 has been
reduced to less than $1,000,000, its obligation to restore the Working Capital
Account balance shall be reduced to be no more than the amount of the remaining
obligation.
c. Kennecott shall have the right to conduct audits, at its sole
expense, of all expenditures for which USE/CC seeks reimbursement pursuant to
this Section. Such audits may be conducted at six-month intervals, with a final
audit being conducted within six months after the date of the final request for
reimbursement by USE/CC. If Kennecott determines that a discrepancy exists with
respect to any expenditure, USE/CC shall restore to the Working Capital such
amounts as Kennecott believes in good faith are not supported by adequate
explanation or were not spent in compliance with the Mineral Lease Agreement or
the Mill Contract, within 20 days of Kennecott's written demand therefor. Such
amounts may subsequently be expended by USE/CC pursuant to the terms of the
Mineral Lease Agreement and the Mill Contract or, if not expended by USE/CC,
returned to Kennecott as provided Subsection 3(c)(i) above whether such
restoration and return occurs before or after the termination of the Acquisition
Agreement or the consummation of the transactions contemplated by the agreement.
d. If Kennecott has withheld funding from the Venture with
respect to an Invoice presented under Subsection 4(b) above, or USE/CC has not
made a refund demanded under Subsection 4(c) above, the parties shall meet
within 15 days and seek to resolve the basis for the dispute. If the dispute
cannot be resolved to the parties' mutual satisfaction within 30 days of such
presentation or demand, such dispute may, at the written request of any of the
parties, delivered to each of the other parties not later than 40 days after
such presentation or demand, be submitted to and resolved by binding arbitration
conducted in accordance with the procedures set forth in Exhibit "A" to this
Amendment, which is incorporated herein by reference. The parties acknowledge
and agree that such right to arbitration is the exclusive remedy of the parties,
or any of them, for the failure of Kennecott to satisfy its obligations under
Subsections 3(a), 4(a) and 4(b) or the failure of USE/CC to make refunds under
Subsection 4(c), that none of the parties shall seek any other remedy, whether
statutory, equitable or at common law, with respect thereto, and this Amendment,
including without limitation Subsection 3(c), shall continue to be fully
effective for all purposes regardless of such dispute or its ultimate
resolution.
e. At Closing (but subject to Closing occurring) Kennecott
shall contribute the excess, if any, of the amount required to be contributed to
the Venture by Kennecott under
5
<PAGE>
EXHIBIT 10.54
Section 3(a) hereof over the sum of (i) amounts previously contributed by
Kennecott under this Section 4 and (ii) amounts funded by Kennecott under
Section 5 hereof. The USE Parties covenant that such contribution will be used
exclusively for the purpose of funding the operations of the Venture on the
Mining Properties and Sweetwater Mill.
5. AGREEMENT WITH RESPECT TO THE TRANSITION COSTS.
In connection with the implementation of this Amendment, the Mineral
Lease Agreement, the Mill Contract, the Acquisition Agreement and certain other
documents related to the transactions contemplated by such agreements, Kennecott
and/or the Venture may incur Transition Costs, as defined in the Acquisition
Agreement. Kennecott agrees to fund such costs to the extent they are incurred
by the Venture or to incur such costs directly to the extent Kennecott is
required to participate in activities, the cost of which are Transition Costs,
and provide an account of such costs to USE/CC. All such costs which the parties
agree are Transition Costs, will count toward Kennecott's obligation to provide
up to $16,000,000 to the Venture as provided in Subsection 3(a) above.
6. AUTHORIZATION FOR GRANTING A SECURITY INTEREST IN THE MINING
PROPERTIES.
Immediately prior to the delivery of this Amendment, Kennecott Energy
Company ("KEC"), an affiliate of Kennecott, loaned the sum of $16,000,000 to
Kennecott as evidenced by a promissory note (the "KEC Note"). Notwithstanding
any provision of the Mining Venture Agreement to the contrary, including, in
particular, the restrictions of Subsections 15.2(a) and 15.2(f) of the Mining
Venture Agreement, Kennecott and the USE Parties authorize Kennecott to grant to
KEC a lien, mortgage and security interest in and to all of Kennecott's 50%
interest in and to the Mining Properties and the other properties (including the
Sweetwater Mill) owned by the Venture, but only to the extent of Kennecott's 50%
interest therein, by executing and delivering to KEC a Deed of Trust, Mortgage,
Security Agreement, Financing Statement and Assignment of Proceeds, Rents and
Leases in the form attached to the Acquisition Agreement as Exhibit B (the "KEC
Mortgage"). The KEC Mortgage shall be a first and prior lien to any lien created
in favor of the Manager of the Venture or of the parties to the Venture, but
only to the extent of Kennecott's 50% interest in the Mining Properties and
other properties owned by the Venture, and the Mining Venture Agreement and the
interests of the other participants in the Venture and such properties shall be
subordinate to the KEC Mortgage.
6
<PAGE>
EXHIBIT 10.54
7. COVENANTS WITH RESPECT TO THE SECURITY INTEREST.
Kennecott covenants to and with the USE Parties that, if the sale of the
assets of Kennecott contemplated in the Acquisition Agreement is not
consummated, Kennecott will comply with all of the terms and conditions of, and
make all payments required by, the KEC Note and will take all actions and do all
things necessary to prevent foreclosure of the KEC Mortgage. Kennecott further
agrees to protect, indemnify, hold harmless and defend the USE Parties from all
losses, claims, demands, costs of defense (including reasonable attorneys' fees
and court costs) that the USE Parties, or any of them, may incur as a result of
Kennecott's failure to comply with the covenants given to the USE Parties in
this Section 7.
8. Financing Additional Contributions.
Section 5.3 of the Venture Agreement is amended to read as follows:
"(a) At such time as the USE Parties become obligated to
contribute to Programs and Budgets if, despite the exercise of
its best efforts, the USE Parties are unable to obtain the
financing necessary to contribute to an approved Program and
Budget adopted with respect to (i) the development of the initial
mine on the Properties; (ii) the return of the Sweetwater Mill to
operational status pursuant to the requirements of the Nuclear
Regulatory Commission; or (iii) a major expansion of Operations,
Kennecott agrees to exercise reasonable commercial efforts to
assist the USE Parties in obtaining the financing necessary to
make such contribution. Kennecott's reasonable commercial efforts
shall include consideration of joint project financing. If
Kennecott assists the USE Parties in obtaining financing
necessary to make such contribution or if joint project financing
is arranged pursuant to Kennecott's efforts under this Section
5.3, the USE Parties agree, as a condition of Kennecott's
performance under this Section, to compensate Kennecott for all
costs of obtaining such financing or joint financing, including
but not limited to interest and other costs of funds, that exceed
the cost that would have been incurred by Kennecott if it had
funded its share of the Program and Budget separately.
(b) For purposes of this Section 5.3, a Program and Budget
involving a major expansion of Operations shall be defined as a
Program and Budget for the expansion of the initial mine on the
Properties, expansion of the Sweetwater Mill after its return to
operational status, or development of an additional mine on the
Properties, in each case the cost of which exceeds $25,000,000.
(c) The Participants agree that Kennecott's obligations under
this Section 5.3 shall be solely for the benefit of the USE
Parties and such obligations are not assignable or otherwise
transferable.
7
<PAGE>
EXHIBIT 10.54
9. Further Assurances.
Each party to this Amendment agrees to execute such further documents
and perform such further acts as are necessary to implement fully the terms of
this Amendment.
10. Confirmation of the Mining Venture Agreement.
This Amendment is subject to the terms and provisions of the Mining
Venture Agreement, including the confidentiality provisions of Article XVI.
Except as amended by this Amendment, the Mining Venture Agreement, as previously
amended, shall continue in full force and effect and Kennecott and the USE
parties ratify, confirm and adopt the Mining Venture Agreement as amended.
Kennecott and the USE Parties further confirm and agree as follows:
a. Neither the Mining Venture Agreement nor this Amendment
creates any fiduciary duty, express or implied, among the Participants.
b. Neither the Mining Venture Agreement nor this Amendment
imposes any time limit, express or implied, on Kennecott for making
contributions under Section 5.2(a) hereof or otherwise to take any action to
develop or put into production any asset of the Venture. However, this Section
10(b) does not limit or excuse Kennecott's obligations under Section 3 or
Section 4 of this Amendment.
c. Neither the Mining Venture Agreement nor this Amendment
imposes any obligations, express or implied, on any Participant to undertake any
activity with respect to marketing prior to the time that a decision is made to
develop or put into production any asset of the Venture. No such decision has
ever been made by the Management Committee of the Venture and as of the date
hereof no such decision is contemplated prior to July 31, 1998.
d. Neither the Mining Venture Agreement nor this Amendment,
expressly or by implication, prevents any Participant, any Affiliate (as defined
in the Acquisition Agreement) of any Participant, or any other person from
engaging in any other business or activity whether or not similar to, related
to, or in direct or indirect competition with any business or activity of the
Venture, regardless of the effect any such activity may have on the Venture.
8
<PAGE>
EXHIBIT 10.54
Executed to be effective as of the date first above set forth.
KENNECOTT URANIUM COMPANY
By /S/ L. R. CARDEY-YATES
-----------------------------------
Its DIRECTOR/ASSISTANT SECRETARY
----------------------------------
U.S. ENERGY CORP.
By /S/ JOHN L. LARSEN
-----------------------------------
Its PRESIDENT
----------------------------------
U.S. ENERGY CORP. and
CRESTED CORP. dba the
USE/CC JOINT VENTURE
By: U.S. ENERGY CORP.
By /S/ JOHN L. LARSEN
--------------------------------
Its PRESIDENT
--------------------------------
9
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EXHIBIT 10.54
By: CRESTED CORP.
By /S/ MAX T. EVANS
---------------------
Its PRESIDENT
---------------------
GUARANTY
FOR VALUABLE CONSIDERATION, Kennecott Energy and Coal Company, a
Delaware corporation (the "Guarantor"), guarantees the obligations of Kennecott
under Section 7 of the foregoing Fourth Amendment to Mining Venture Agreement.
KENNECOTT ENERGY AND COAL COMPANY
By: /S/ G. H. BOYCE
--------------------------------------
G.H. Boyce,
President and Chief Executive Officer
By: /S/ K. P. DONE
-------------------------------
K. P. Done
Assistant Treasurer
10
<PAGE>
EXHIBIT 10.54
EXHIBIT "A"
TO
FOURTH AMENDMENT TO MINING VENTURE AGREEMENT
ARBITRATION PROCEDURES
This Exhibit is not filed with this Form 10-K for the year ended May 31, 1997.
11
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EXHIBIT 10-55
MASTER RESOLUTION AGREEMENT
THIS MASTER RESOLUTION AGREEMENT is made this day of November 1996, by
and between U.S. Energy Corp. and Crested Corp. (together "USECC"), Gunnison
Center Properties, L.L.C. ("GCP"), and Contour Development Company, L.L.C.
("Contour"). RECITALS:
A. USECC and GCP entered into Escrow Closing Instructions directed
to Fox Title West, Inc., by letter dated November 28, 1995,
signed by USECC on December 10, 1995, a copy of which is attached
hereto as Exhibit "A". Those Escrow Closing Instructions are
hereinafter referred to as the "Escrow Instruction Letter."
B. GCP previously executed and delivered to USECC a promissory note
in the amount of $487,365.86 dated January 26, 1995 (the "A Note"
a copy of which is attached hereto as Exhibit "B") secured by a
deed of trust dated the same date encumbering real property in
the Gunnison Center/Meadows PUD Phase 1-R in Gunnison, Colorado.
C. Pursuant to the Escrow Instruction Letter, GCP executed and
delivered to Fox Title West, Inc. a substitute deed of trust
dated December 10, 1995, encumbering Lots 11 and 13 of Gunnison
Center/Meadows PUD Phase 1-R to secure the balance due under the
A Note.
D. Further, pursuant to the Escrow Instruction Letter, USECC
executed and delivered to Fox Title West, Inc. a promissory note
in the amount of $263,700 in favor of GCP (the "Lot 17 Note" a
copy of which is attached hereto as Exhibit "C") as partial
payment for Lot 17 of the Gunnison Center/Meadows Subdivision
<PAGE>
EXHIBIT 10-55
Phase 1-R, secured by a lien on the same Lot 17, and GCP executed
and delivered a special warranty deed conveying Lot 17 to U.S.
Energy Corp.
E. Castle Mountain Ranches, L.L.C., has executed and delivered to
Crested Corp. two promissory notes dated May 30, 1995, in the
respective face amounts of $630,873 and $145,500, secured by deed
of trust liens on property owned by Castle Mountain Ranches,
L.L.C., in Gunnison County, Colorado. These promissory notes are
referred to herein as the "B Notes", copies of which are attached
hereto as Exhibit "D".
F. The parties acknowledge that the execution and delivery of the
documents under the Escrow Instruction Letter did not fully
satisfy the parties' obligations under the Escrow Instruction
Letter, and that the parties anticipated further action and
agreements between them, pursuant to the Escrow Instruction
Letter.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and in consideration of the
foregoing recitals, and the following covenants and conditions, the parties
agree as follows:
1. RESOLUTION OF DISPUTES, DISAGREEMENTS AND ESCROW INSTRUCTION LETTER
OBLIGATIONS. Contingent only on Closing, as hereinafter defined, the parties
hereby resolve, waive, discharge and satisfy any and all disputes, disagreements
and obligations between them to the extent arising under the Escrow Instruction
Letter by consummating the transactions contemplated herein. Accordingly, this
Agreement supersedes and novates all executory obligations claimed or existing
2
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EXHIBIT 10-55
under the Escrow Instruction Letter. The parties shall have no further
obligations under the Escrow Instruction Letter following execution, delivery
and full consummation of each covenant under this Agreement, provided, however,
the parties acknowledge the validity of the transactions under the Escrow
Instruction Letter consummated to date.
2. CREATION OF TENDERFOOT PROPERTIES, L.L.C. At Closing, the parties
shall form a Colorado limited liability company to be known as Tenderfoot
Properties, L.L.C., for the purpose of owning and developing Lot 17.
Accordingly, USECC shall contribute to Tenderfoot Properties all of its right,
title and interest in Lot 17, subject to any encumbrances thereon including the
lien securing the Lot 17 Note, for a 27% ownership interest in Tenderfoot
Properties. Contour shall contribute to Tenderfoot Properties all of its right,
title and interest in the engineering, design, financing, plans and existing and
future development expertise involved and invested to date in the apartment
project planned for Lot 17, for a 46% ownership interest in Tenderfoot
Properties. GCP shall contribute to Tenderfoot Properties all of its right,
title and interest in the Lot 17 Note and the Deed of Trust securing the Lot 17
Note, for a 27% ownership interest in Tenderfoot Properties.
3. SALE OF A AND B NOTES AND INTEREST IN TENDERFOOT PROPERTIES. At
Closing, USECC shall assign, sell and transfer to Contour the A Note and all
associated security interests, without recourse, in exchange for a cash payment
of $25,000 and the execution and delivery of a promissory note to USECC by
Contour in the face amount of $454,894.15, in the form of that promissory note
attached hereto as Exhibit "E". In addition at Closing, Crested Corp. shall
3
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EXHIBIT 10-55
assign, sell and transfer to Contour the B Notes and all associated security
interests, without recourse, in exchange for the execution and delivery of a
promissory note to Crested Corp. by Contour in the face amount of $872,508.02,
in the form of that promissory note attached hereto as Exhibit "F". The
promissory notes to be executed and delivered by Contour hereunder are hereafter
referred to as the "New Notes". The New Notes shall be secured by a pledge of
Contour's interest in Tenderfoot Properties, as evidenced in the form of Pledge
Agreement attached hereto as Exhibit "G", to be executed and delivered at
Closing. Further, in consideration for the New Notes and the resolutions and
releases provided in Paragraph 1 above, USECC shall transfer, assign and convey
all of its right, title and interest in Tenderfoot Properties to Contour at
Closing.
4. CLOSING. The parties shall consummate the transactions contemplated
herein, and deliver executed copies of the documents described herein, effective
December 1, 1996, although such deliveries may occur within five (5) business
days before or after that date. The parties shall take all reasonable actions
necessary and requested to consummate these transactions and give all further
assurances reasonably requested, including the execution and delivery of any
additional documents evidencing or perfecting the transactions.
5. AUTHORITY AND DISCLAIMER OF REPRESENTATIONS. Each individual
executing this Agreement and any of the documents to be executed and delivered
pursuant hereto, represents and warrants that he, and the party he acts on
behalf of, have the requisite authority to enter into and consummate this
Agreement. USECC represents that it has not sold and there is no existing
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EXHIBIT 10-55
assignment, or encumbrance of the A Note or the B Notes. Beyond the express
representations made herein, the parties disclaim any and all other
representations, express or implied, concerning the transactions contemplated
hereunder.
IN WITNESS WHEREOF, the parties execute this Master Resolution Agreement
effective the date written above.
U.S. Energy/Crested Corp. Contour Development Company, L.L.C.
By /s/ MAX T. EVANS By /s/ VAL L. OLSEN
---------------------------------- ------------------------------
It SECRETARY/PRESIDENT, RESPECTIVELY Its MANAGING MEMBER
---------------------------------- ------------------------------
Gunnison Center Properties, L.L.C.
By /s/ JEFFREY KUHN
----------------------------------
Its MANAGING MEMBER
5
<PAGE>
EXHIBIT 10.56
MEMBERSHIP PLEDGE AGREEMENT
This Membership Pledge Agreement is made this December 1, 1996, by and
between Contour Development Company, L.L.C., a Colorado limited liability
company, ("DEBTOR") and U.S. ENERGY CORP., a Wyoming corporation, and CRESTED
CORP., a Colorado corporation, (together "USECC") ("SECURED PARTY").
RECITALS
A. Debtor has executed and delivered to Secured Party two promissory
notes in the forms attached hereto as Exhibits "A" and "B" (the "Notes").
B. Debtor desires to give, and Secured Party has requested that Debtor
give, Secured Party a security interest in collateral to secure payment of all
obligations now due or which may become due under the Notes.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing Recitals, the
covenants set forth herein, and subject to the conditions set forth herein, and
for other good and valuable consideration, the sufficiency and receipt of which
is hereby acknowledged, the parties agree as follows.
SECTION ONE
PLEDGE OF MEMBERSHIP INTEREST
To secure the payment and full performance of Debtor's obligations under
the Notes, Debtor hereby assigns, transfers to, and pledges with Secured Party,
all outstanding membership interests of Debtor in Tenderfoot Properties, L.L.C.,
a Colorado limited liability company (the "Company"), whether original issue,
redeemed or reacquired, delivered or to be delivered, and any other property
hereafter added thereto or substituted or exchanged therefor, together with any
and all membership rights, rights to subscribe, voting rights, liquidating
dividends, member distributions, new securities, or other property to which
Debtor is or may hereafter become entitled to receive an account of their
membership interests in the Company (the "MEMBERSHIP INTERESTS"). In the event
that Debtor receives additional property on account of the Membership Interests,
Debtor shall immediately deliver such additional property to Secured Party to be
held by Secured Party hereunder in the same manner as the Membership Interests
originally pledged.
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EXHIBIT 10.56
SECTION TWO
ADVANCES AND COSTS OF SECURED PARTY
Debtor shall pay prior to delinquency all taxes, assessments, and other
charges and liens against the Membership Interests. On the failure of Debtor to
do so, Secured Party, at its option, may pay any of such taxes, assessments,
charges, or liens for Debtor's account. All advances, charges, costs, and
expenses, including reasonable attorneys' fees, incurred or paid by Secured
Party in exercising any rights, powers, or remedies conferred on Secured Party
by this Membership Pledge Agreement, or in the enforcement thereof, shall be
secured hereunder and shall be paid to Secured Party by Debtor immediately and
without demand, and with interest thereon at then highest prevailing interest
rate set forth in the Notes.
SECTION THREE
TITLE TO COLLATERAL
Debtor hereby warrants absolute ownership of the Membership Interests,
free and clear of all liens and encumbrances. Debtor represents and warrants
that following consummation of the Master Resolution Agreement between the
parties, the parties owning membership interests in the Company, and their
percentage ownerships, will be:
Debtor 73%
Gunnison Center Properties, L.L.C. 27%
SECTION FOUR
RISK OF LOSS; REPORTS; INSPECTION
The Membership Interests shall be held by Secured Party at the risk and
expense of Debtor. While this Membership Pledge Agreement continues in effect,
Debtor shall provide quarterly reports to Secured Party setting froth in
reasonable detail the activities and business of the Company during the
preceding calendar quarter and the financial condition of the Company as of the
end of such calendar quarter. Each such report shall be signed by an officer or
Member of Debtor having knowledge of the Debtor's and the Company's activities,
business and financial condition and shall include a statement to the effect
that the Company is not in default under any agreement or obligation relating to
the Company's principal business, i.e., the development of Lot 17 in the
Gunnison Center/Meadows subdivision Phase 1R in Gunnison, Colorado, and Debtor
is not in default of any of the terms, covenants, or conditions of the
Membership Pledge Agreement, or, if any such default exists, specifying the
nature of such default with reasonable particularity sufficient to enable
Secured Party to understand the effect thereof (actual or potential) on the
Company's business, prospects, and financial condition and on the value and
enforceability of the security interest in the Membership Interests and any
additional collateral or other security given to Secured Party pursuant to the
terms of this Pledge Agreement. Secured Party shall have the same right of
inspection as any Member of the Company pursuant to Section 5.2 of the Company's
Operating Agreement as in effect on the date hereof.
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EXHIBIT 10.56
SECTION FIVE
RIGHTS OF SECURED PARTY IN COLLATERAL
In the event that Debtor defaults on its obligations to Secured Party
under either or both of the Notes, at any time, with or without notice, and at
the expense of Debtor, Secured Party, in its name or in the name of its nominee
or in the name of the Debtor, may, but shall not be obligated to,:
1. Collect by legal proceedings or otherwise all dividends, interest,
distributions, principal payments and other sums now or hereafter payable on or
on account of the Membership Interests.
2. Enter into any extension, reorganization, deposit, merger, or
consolidation agreement, or any agreement in any way relating to or affecting
the Membership Interests. In connection therewith, Secured party may deposit or
surrender control of the Membership Interests, accept other property in exchange
for the Membership Interests and do and perform all such acts as Secured Party
may deem proper as may be proper under the law. Any money or other property
received in exchange for the Membership Interests shall be applied to the
indebtedness or thereafter held by Secured Party pursuant to the provisions
hereof.
3. Make any compromise or settlement that Secured Party deems desirable
or proper with reference to the Membership Interests.
4. Insure, protect, and preserve the Membership Interests.
5. Cause the Membership Interests to be transferred into the name of
Secured Party or into the name of its nominee.
6. Exercise as to the Membership Interests all the rights, powers, and
remedies of an owner, including the right to vote the Membership Interests held
by Secured Party pursuant to this Pledge Agreement.
SECTION SIX
RIGHTS OF SECURED PARTY REGARDING INDEBTEDNESS
Debtor authorizes Secured Party, upon default, with notice and demand,
but without affecting the liability of Debtor hereunder, from time to time to:
1. Take and hold security in addition to and other than the Membership
Interests to secure Debtor's obligations to Secured Party, or any part thereof,
and exchange, enforce, waive, and release that additional collateral, the
Membership Interests, or any part thereof or any other such security.
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EXHIBIT 10.56
2. Apply the Membership Interests or other security and direct the order
or manner of sale thereof as Secured Party in its discretion may determine.
3. Release Debtor or any other parties from any obligations due Secured
Party.
SECTION SEVEN
NEGATIVE COVENANTS
For so long as any portion of the obligations due under the Notes
remains due, Debtor shall:
1. Not vote the Membership Interests in favor of any amendment to the
Articles of Organization or the Operating Agreement of the Company in any
material respect that would affect the security interest in the Membership
Interests granted herein;
2. Not vote the Membership Interests in favor of dissolution, merger,
reorganization or insolvency of the Company or take any action which would
render the Company insolvent;
3. Not permit the Company to incur indebtedness for borrowed funds, with
the exception of HUD loan or loans in an amount not to exceed $6,000,000;
4. Not permit the Company to sell or exchange Lot 17 in the Gunnison
Center/Meadows subdivision in Gunnison, Colorado, or any improvements or
structures thereon, except residential leasing in the ordinary course of
business;
5. Not permit the Company to issue new membership interests in the
Company that would result in the dilution of the percentage ownership of Debtor
in the Company, unless (i) such new membership interests are issued to increase
the capital of the Company, and (ii) after such issuance, the Membership
Interests continue to represent a controlling interest in the Company;
6. Not permit the Company to declare or pay and dividend or distribution
to members, unless any such distribution is made ratably to the Membership
Interests and the proceeds therefrom are made subject to the Secured Party's
security interest granted herein; and
7. Not receive any compensation as Manager of the Company, beyond
reimbursement of reasonable expenses incurred in the conduct of Company
business, without ratification by the Secured Party; however, Secured Party
acknowledges that Debtor shall be under contract with the Company to provide
construction management and development services for compensation.
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EXHIBIT 10.56
SECTION EIGHT
DEFAULT
Default hereunder shall occur on the happening of any one or more, of
the following events:
1. Failure of Debtor to keep or perform any of the terms or provisions
of this Membership Pledge Agreement, or any agreement or promissory note between
Debtor and Secured Party.
2. Default by Debtor in the payment of principal or interest when due of
any of the obligations owing to Secured Party under the Notes.
3. Any deterioration or impairment of the Membership Interests or any
part thereof or any decline or depreciation in the value or market price
thereof, whether actual or reasonably anticipated, that causes the Membership
Interests to become unsatisfactory in character or value.
4. Levy of any attachment, execution, or other process against Debtor or
any of the Membership Interests.
5. Dissolution, liquidation, insolvency, failure in business, general
assignment for the benefit of creditors, filing of any petition in bankruptcy or
for relief under the provisions of the U.S. Bankruptcy Code of, by, or against
Debtor or the Company.
SECTION NINE
REMEDIES
On the happening of any default hereunder, Secured Party may then or at
any time thereafter, at its election, apply, setoff, collect, or sell in one or
more sales, with or without any previous demands or demand of performance or
notice or advertisement, the whole or any part of the Membership Interests in
such order as Secured Party may elect, including a sale to itself. Any such sale
may be made either at a public or private sale and may be conducted at the place
of business of Secured Party or elsewhere. Any sale hereunder may be conducted
by an auctioneer or any officer, employee, attorney or agent of Secured Party.
Secured Party may be the purchaser of any or all the Membership Interests.
Secured Party shall have all additional remedies that are conferred on it as a
Secured Party under the Uniform Commercial Code or by other applicable laws of
the State of Colorado. All remedies available to Secured Party are non-exclusive
and may be exercised from time to time and in combination or separately, and the
exercise of any available remedy shall not prejudice or otherwise adversely
affect any other remedy or right of Secured Party, including the right to
realize upon other security now or hereafter held.
Proceeds of the sale of any of the Membership Interests and all sums
received or collected by Secured Party from or on account of the Membership
Interests shall be applied by Secured
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EXHIBIT 10.56
Party to the payment of expenses incurred or paid by Secured Party in connection
with any sale, transfer, or delivery of the Membership Interests, to the payment
of any other cost, charges attorneys' fees, or expenses mentioned herein, and to
the payment or discharge of the obligations of Debtor to Secured Party, or any
part thereof, all in such order and manner as in its discretion Secured Party
may determine. Secured Party may at any time deliver the Membership Interests or
any part thereof to Debtor, and the receipt by Debtor shall be a complete and
full discharge of Secured Party from any claim or obligation for the Membership
Interests so delivered, and Secured Party shall thereafter be discharged from
any liability or responsibility therefor.
SECTION TEN
WAIVER BY SECURED PARTY
The rights, powers, and remedies given to Secured Party by this
Membership Pledge Agreement shall be in addition to all rights, powers, and
remedies given to Secured Party by virtue of the Uniform Commercial Code or any
other law of the State of Colorado. Any forbearance, failure, or delay by
Secured Party in exercising any right, power, or remedy hereunder shall not be
deemed to be a waiver of such right, power, or remedy, and any single or partial
exercise of any right, power, or remedy hereunder shall not preclude the further
exercise thereof. Every right, power, and remedy of Secured Party shall continue
in full force and effect until such right, power, or remedy is specifically
waived by an instrument in writing executed by Secured Party.
SECTION ELEVEN
NOTICES AND DEMANDS
Secured Party shall be under no duty or obligation whatsoever to make or
give any presentments, demands for performance, notices of nonperformance,
protests, notices of protest, or notices of dishonor in connection with any
obligations or evidences of indebtedness held by Secured Party and secured by
the Membership Interests, or in connection with any obligations or evidences of
indebtedness that constitute in whole or in part the obligations of Debtor
secured hereunder.
SECTION TWELVE
TERM OF AGREEMENT
This Membership Pledge Agreement is a continuing agreement, and all the
rights, powers, and remedies hereunder shall apply to all past, present, and
future obligations of Debtor to Secured Party, including any indebtedness
arising under successive transactions that shall either continue the
obligations, increase or decrease them, or from time to time create new
obligations after all or any prior obligations have been satisfied, and
notwithstanding any merger, consolidation, reorganization, liquidation,
dissolution, or bankruptcy of Debtor or Secured Party. Until all indebtedness is
paid in full, the power of sale and all other rights, powers, and remedies
granted to Secured Party by this Agreement shall continue in effect
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EXHIBIT 10.56
until all obligations secured hereby have been satisfied in full or are no
longer otherwise valid.
SECTION THIRTEEN
GOVERNING LAW; ATTORNEYS FEES
This Membership Pledge Agreement shall be governed by and construed
according to the laws of the State of Colorado. Both parties agree that, should
either party default in any of the covenants or agreements herein contained, the
prevailing party in litigation shall be entitled to recover all costs and
expenses, including reasonable attorney's fees, which may arise or accrue from
enforcing this Agreement, any agreement or instrument entered into pursuant
hereto, or in pursuing any remedy provided hereunder or by applicable law,
whether incurred in litigation, nonjudicial proceedings or bankruptcy
proceedings.
SECTION FOURTEEN
FURTHER ASSURANCES; MODIFICATIONS; AND IMPLIED WAIVERS
To further assure the full performance of the obligations set forth
herein, the parties shall, upon the reasonable request of either of them, from
time to time execute and deliver all further instruments or assurances which may
be required or appropriate, such as one or more financing statements or
extensions thereof. No change, addition or erasure of any portion of this
Agreement shall be valid or binding upon either party unless evidenced in a
separate, subsequent document signed by the party charged with such change,
addition or erasure. It is declared by both parties that there are no oral or
other agreements or understandings between them affecting this Agreement except
as may be reduced to writing. The failure of either party at any time to require
performance by the other party of any provision hereof shall in no way affect
the full right to require such performance at any time thereafter. Nor shall the
waiver by either party of a breach of any provision hereof be taken or held to
be a waiver of any succeeding breach of such provision or as a waiver of the
provision itself.
IN WITNESS WHEREOF, the parties have set their hands as of the date
first above written.
Secured Party: Debtor:
U. S. Energy Corp./Crested Corp. Contour Development Company, L.L.C.
By /s/ Max T. Evans By: /s/ Val L. Olsen
---------------------------------- ------------------------------
Its SECRETARY/PRESIDENT, RESPECTIVELY Its: MANAGING MEMBER
7
<PAGE>
EXHIBIT 10.57
MANAGEMENT AGREEMENT
THIS AGREEMENT regarding the Lincoln Project in Amador County,
California is made and entered into effective as of the 22nd day of May, 1996,
by and between U.S. Energy Corp., a Wyoming corporation ("USE") 877 North 8th
West, Riverton, WY 82501 and Sutter Gold Mining Company ("SGMC") P.O. Box 1689,
Sutter Creek, CA 95685.
RECITALS
WHEREAS, on August 4, 1994, USE acquired 78% of the outstanding shares
of SGMC from SGMC for USE's ownership interest in the Lincoln Project
("Project"); and
WHEREAS, SGMC does not have sufficient personnel or expertise to manage
the exploration and development of the Lincoln Project into a operating mine;
and
WHEREAS, it is in the best interest of all parties that USE conduct,
supervise, care for and maintain the operations of the Project (including
assisting SGMC in seeking private placement funds, initial public offering
and/or a joint venture partner); and
WHEREAS, SGMC desires to engage USE for the above purposes pursuant to
the terms of this Management Agreement.
NOW, THEREFORE, IN CONSIDERATION OF THE PROMISES AND MUTUAL COVENANTS
CONTAINED HEREIN, THE PARTIES AGREE AS FOLLOWS:
SECTION ONE
DEFINITIONS
"Accounting Procedure" means the procedures set forth in Exhibit A.
"Assets: means the leased properties, properties held in fee or by
mining claims, products and all other real and personal property, tangible and
intangible, held by or for the benefit of SGMC.
"Cost Account" means the account maintained in accordance with the
Accounting Procedure showing the charges and credits accruing to SGMC.
"Development" or "Development Operation" shall mean the activity,
operations, or work of preparing for the removal of deposits of gold from the
mining properties, including
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EXHIBIT 10.57
without limitation: primary excavations required to expose and/or extract gold
bearing ores, the construction or installation of any improvements to be used
for the mining or handling of ores, and incline, raise, drift, shaft and
cross-cut excavation.
"Exploration" shall mean all activities directed toward ascertaining the
existence, location, quantity, quality, or commercial value of deposits of gold
bearing ores.
"Mining of" or "Mining Operations" or "Operations" shall mean the
activity, operations, development or work of mining, development drilling,
extracting and producing gold and of storing gold ores upon or within the
Properties and all work incident thereto performed in connection with such
mining, processing gold ores at the mill to be built and owned by SGMC.
"Products" means all ores, minerals and mineral resources produced from
the Properties under this Agreement.
"Properties" means the properties owned or leased between the town sites
of Sutter Creek and Amador City, in Amador County, California by SGMC or other
properties that may be acquired for the purpose of mining by SGMC prior to the
termination of this Agreement.
SECTION TWO
TERM
The term of this agreement is from June 1, 1996 to December 31, 1997,
unless extended by the mutual consent of the parties hereto. The Accounting
Procedure's as set forth in Exhibit A shall take affect on June 1, 1996.
SECTION THREE
MANAGEMENT OF THE LINCOLN PROJECT (the "PROJECT")
SGMC hereby appoints USE as the manager to care for and maintain the
Project, with all rights, powers and duties of the manager to maintain and
continue to permit, develop, explore and coordinate efforts with SGMC to find
financing for the Project through December 31, 1997, the term of this Agreement
or any extensions thereof. USE shall have the full authority to take whatever
action necessary in either obtaining authority to develop and operate the
Project, reclaim it, sell all or a portion thereof (private placement), seek an
initial public offering, and/or acquire a joint venture partner(s) to operate
the Project. The intention of the parties is to permit USE to serve as the
manager and operator of the Project and as such, USE shall propose the programs
and budgets, make and collect cash calls, incur expenditures and take any other
actions
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EXHIBIT 10.57
and exercise all other rights and powers in order to manage the Project and
property included therein.
It is understood that SGMC shall prepare and fill all reports required
of SGMC for the various permits, corporate reports, reports to Amador United and
any other royalty holders as may be required.
SECTION FOUR
COMPENSATION FOR MANAGEMENT
For managing the Project, SGMC shall advance moneys as may be required
by USE in sufficient amounts to meet the annual budgets on a monthly basis prior
to the fifth day of each month in advance of the month's expenditures, and for
such other purposes as USE shall deem necessary to carry out the purposes of
this Agreement. Any advance in excess of expenditures will be credited against
the budget amount for subsequent months. Any expenditure in excess of the
monthly advance will be paid by SGMC when invoiced. The materials, services, and
other items for which USE shall charge SGMC are set forth in this Agreement and
in the Accounting Procedure attached hereto and made a part hereof as Exhibit A.
SECTION FIVE
PLACE OF WORK
SGMC will deliver all information necessary for USE to perform the
services required under this Agreement to USE through December 31, 1997. It is
understood that USE will provide its services primarily at its offices listed at
877 North 8th West, Riverton, WY, but USE will, when necessary and upon request,
travel to the Project to perform the services hereunder. USE shall be reimbursed
for all expenses relating to the travel to and from the Project.
SECTION SIX
BUDGETS
USE will submit an annual Budget to SGMC sixty days prior to the end of
each fiscal year. In order to timely submit such a budget SGMC must submit its
mine, mill, development, exploration and construction plans to USE one hundred
(100) days prior to year end. After submittal of plans and then budgets, both
USE and SGMC will give their best effort to resolve areas of conflict. The
Annual Budget shall be approved 15 days prior to the beginning of a new fiscal
year.
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EXHIBIT 10.57
6.1 DEADLOCK ON PROPOSED PROGRAMS AND BUDGETS. If USE and SGMC fail to approve a
Plan and Budget by the beginning of the period to which the proposed Plan and
Budget applies, or if they fail to present a Plan and Budget, a Plan and Budget
comparable to the last adopted Plan and Budget shall automatically be adopted.
6.2 BUDGET OVERRUNS. USE shall immediately notify SGMC of any material departure
from an adopted Plan and Budget.
6.3 EMERGENCY OF UNEXPECTED EXPENDITURES. In case of emergency, USE may take any
action it deems necessary to protect life, limb or property, to protect assets
or to comply with law or government regulation. Also USE may make expenditures
for unexpected events which are beyond its reasonable control and which do not
result from a breach by it of its standard of care. In the case of either an
emergency or unexpected expenditure, USE shall promptly notify SGMC of the
emergency or unexpected expenditure.
6.4 MONTHLY ACCOUNTING. USE shall account monthly in reasonable detail all
expenditures incurred as compared to approved budgeted.
SECTION SEVEN
MATERIALS AND EQUIPMENT
USE shall furnish, at USE's own expense, all data processing equipment
and related materials necessary to carry out the terms of this Agreement.
SECTION EIGHT
EMPLOYMENT OF PERSONNEL
USE shall provide qualified and experienced personnel to perform or aid
in performing the work required under this Agreement, and shall be responsible
for and in full control of the work performed by such personnel.
USE reserves the right to determine which of its personnel shall be
assigned to any particular project and to replace or reassign such personnel
during a project.
USE further reserves the right to subcontract to qualified third persons
any part or all of the performance of the services described in any project
description order hereunder.
USE assumes responsibility for its personnel providing services
hereunder and will make all deductions required of employers by state, federal
and local laws, including deductions for
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social security, income taxes, contributions for unemployment compensation
funds, and shall maintain worker's compensation and liability insurance for all
employees.
SECTION NINE
RELATIONSHIP BETWEEN PARTIES
The parties to this contract intend and agree that the relationship
created by this contract is that of SGMC and USE as an independent contractor.
SGMC is interested only in the results to be achieved under this contract. USE
shall control the means of performing the work required under this contract. USE
is not to be considered an agent or employee of SGMC for any purpose and the
employees of USE are not entitled to any of the benefits provided by SGMC to its
employees, including but not limited to health insurance, worker's compensation
coverage, unemployment insurance and retirement plans.
SECTION TEN
WORK STANDARDS
USE will adhere to industry standards and will perform all services
required under this Agreement in a manner consistent with generally accepted
procedures for payroll and associated services, USE shall reprocess at USE's
expense all work necessary to correct errors directly caused by malfunctions of
USE's machines or mistakes of USE's personnel.
SECTION ELEVEN
LIMITED LIABILITY OF SERVICER
USE shall not be liable for any damages caused by delay in rendering
performance hereunder arising from any cause beyond the reasonable control of
USE, or as a result of strikes, or work stoppage.
USE shall not be liable for breach of warranty, express or implied,
including without limitations any warranties of merchantability or fitness for a
particular purpose in respect to any performance by USE pursuant to this
Agreement. USE shall in no event be liable for any incidental, special or
consequential damages of any nature whatsoever, such as, but not limited to,
loss of anticipated profits or other economic loss in connection with, or
arising out of services provided for in its Agreement, or for specific
performance, unless otherwise expressly agreed to in writing.
Because the failure of USE to fulfill this Agreement would result in
damages or injuries that may not be readily ascertained by any pecuniary
standard, the parties to this contract agree
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to limit USE's liability arising out of or in any way connected to its
performance under this Agreement, including the malfunction of USE's equipment
and defective programs, failure or negligence of USE's employees and agents, to
general money damages in an amount not to exceed the total amount paid by SGMC
for services performed by USE under this Agreement during the period of thirty
(30) days immediately preceding the occurrence giving rise to any claim by SGMC.
SECTION TWELVE
CORRECTION OF ERRORS
USE shall have the right to reprocess SGMC data to correct any errors
for which USE may be responsible in full satisfaction of all SGMC claims,
provided SGMC has notified USE of any claimed error within thirty (30) days
after receipt of service results and furnished supporting documentation of such
claim.
SECTION THIRTEEN
REVIEW OF WORK
SGMC shall review all reports and data submitted by USE within thirty
(30) days following delivery and notify USE of any discrepancies or deficiencies
contained in such material. All services furnished hereunder are deemed
acceptable to SGMC unless proper notice and written proof of claim are made
within that thirty (30) day period after the receipt of the results of services
performed by USE.
SECTION FOURTEEN
CUSTODY OF DATA
USE shall be liable for loss, destruction or damage of SGMC supplied
materials only if due to the negligence of USE, and then only to the extent of
restoring the lost, destroyed, or damaged materials; provided such restoration
can be reasonably performed by USE and SGMC furnishes USE with all source data
necessary for such restoration.
SECTION FIFTEEN
PROPRIETARY RIGHTS
All programs, specifications, applications, routines, subroutines,
techniques, ideas, or formulas utilized or developed by USE in connection with
this Agreement are and shall remain the sole property of USE unless otherwise
provided for in this Agreement.
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EXHIBIT 10.57
SECTION SIXTEEN
INTEGRATION CLAUSE
The entire Agreement between parties with respect to the subject matter
hereunder is contained in this Agreement. Except as herein expressly provided to
the contrary, the provisions of this Agreement are for the benefit of the
parties hereto solely and not for the benefit of any other person, persons, or
legal entities.
SECTION SEVENTEEN
WAIVER OR MODIFICATION INEFFECTIVE UNLESS IN WRITING
No waiver, alteration, or modification of any of the provisions of this
Agreement shall be binding unless in writing and signed by a duly authorized
representative of both parties to this Agreement.
SECTION EIGHTEEN
REPRESENTATIONS AND WARRANTIES
USE makes no representations, warranties, or guaranties, express or
implied, including without limitation any warranties of merchantability or
fitness for intended use, other than the express representations, warranties,
and guaranties contained in this Agreement.
SECTION NINETEEN
WRITTEN NOTICE
All written communications regarding this Agreement should be sent to
USE at the address first above listed, unless notified to the contrary.
Any written notice hereunder shall become effective as of the date of
mailing by registered or certified mail and shall be deemed sufficiently given
if sent to the addressee at the address stated in this Agreement or such other
address as may hereafter be specified by notice in writing.
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EXHIBIT 10.57
SECTION TWENTY
GOVERNING LAW
This Agreement shall be governed by the laws of the State of Wyoming. In
the event any dispute arises between the parties over the meaning of any terms
in this Agreement or performance thereunder, the parties agree to try to resolve
the dispute by discussion, conciliation or third party arbitration or mediation.
In the event it becomes necessary to litigate any dispute not capable of
resolution by alternate means, the prevailing party shall be entitled, in
addition to any other relief obtained, to assess the non-prevailing party court
costs and reasonable attorneys fee.
Dated the day and year first above written.
SUTTER GOLD MINING COMPANY (SGMC)
ATTEST:
By: /S/ MICHAEL E. SWEENEY
-------------------------------
/S/ R. SCOTT LORIMER MICHAEL E. SWEENEY, President
- -----------------------------
U.S. ENERGY CORP.
ATTEST:
By: /S/ JOHN L. LARSEN
-------------------------------
/S/ R. SCOTT LORIMER JOHN L. LARSEN, President
- -----------------------------
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EXHIBIT 10.57
EXHIBIT A
ACCOUNTING PROCEDURE
The financial and accounting procedures to be followed by U.S. Energy
Corp. ("USE") under the Management Agreement ("Agreement") to which this Exhibit
is attached are set forth below. References in this Accounting Procedure to
Sections and Articles are to those located in this Accounting Procedure unless
it is expressly stated that they are references to the Agreement. In the event
of any inconsistencies between the terms of the Agreement and the terms of this
Accounting Procedure, the terms of the Agreement shall control.
ARTICLE I
GENERAL PROVISIONS
GENERAL ACCOUNTING RECORDS. USE shall maintain detailed and comprehensive
accounting records in accordance with this Accounting Procedure, sufficient to
provide a record of expenditures (and any revenues) and periodic statements of
financial position and the results of operations for managerial, tax, regulatory
or other financial reporting purposes. Such records shall be retained for the
duration of the period allowed Sutter Gold Mining Company ("SGMC") for audit or
the period necessary to comply with tax or other regulatory requirements. The
records shall reflect all obligations, advances and credits for SGMC.
1.1(a) AUDITS. USE shall order an audit of the accounting and financial
records for each fiscal year (or other accounting period). All written
exceptions to and claims upon USE for discrepancies disclosed by such audit
shall be made not more than six months after receipt of the audit report.
Failure to make any such exception or claim within the six month period shall
mean the audit is correct and binding upon the Participants. The audits shall be
conducted by a firm of certified public accountants selected by USE, unless
otherwise agreed to by the participants.
1.1(b) OPEN BOOKS. Both USE and USECC will make their books and records
available to SGMC or its auditors during normal business hours at their offices
in Riverton, WY. SGMC will make its books and records available to USE or its
auditors as they pertain to the "Agreement" during normal business hours in
Sutter Creek, CA. Both Parties will arrange for
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working space for such records to be reviewed upon written request and
scheduling. No documents requested if pertinent to the Agreement will be
withheld.
1.2. BANK ACCOUNTS. USE shall maintain separate bank accounts for the
reimbursement of monies from SGMC for the payment of all expenses to USE or its
affiliate USECC and the deposit of all receipts due to SGMC.
ARTICLE II
CHARGES TO COST ACCOUNT
Subject to the limitations hereinafter set forth, USE shall create Cost Accounts
and charge the Cost Accounts with, and be entitled to receive from SGMC (subject
to the Budget in effect) the following:
2.1 RENTALS, ROYALTIES AND OTHER PAYMENTS. Property maintenance costs and
other payments necessary to maintain title to the Properties.
2.2 LABOR AND EMPLOYEE BENEFITS.
(a) Salaries and wages of USE or USECC employees directly engaged in
operations, including salaries or wages of employees who are temporarily
assigned to and directly employed by same.
(b) USE's cost of holiday, vacation, sickness and disability benefits,
and other customary allowances applicable to the salaries and wages chargeable
under Sections 2.2 (a) and 2.9. Those costs may be charged on a "when and as
paid basis" or by "percentage assessment" on the amount of salaries and wages.
If percentage assessment is used, the rate shall be applied to wages or salaries
excluding overtime and bonuses. Such rate shall be based on USE's cost
experience and it shall be periodically adjusted to ensure that the total of
such charges does not exceed the actual cost thereof to USE.
(c) USE's actual cost of established plans for employee's group life
insurance, hospitalization, pension, retirement, stock purchase, thrift, bonus
and other benefit plans of a like nature applicable to salaries and wages
chargeable under Section 2.2 (a) or 2.9, provided that the plans are limited to
the extent feasible to those customary in the industry.
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(d) Cost of governmentally imposed assessments pertaining to salaries
and wages chargeable under Sections 2.2(a) and 2.9, including all penalties
except those resulting from the willful misconduct or gross negligence of USE.
2.3 ASSETS. Cost of all assets purchased or furnished solely for use in
connection with operations on the Properties.
2.4 TRANSPORTATION. Reasonable transportation costs incurred in connection
with the transportation of employees, equipment, material and supplies necessary
for exploration, maintenance and operation of the Assets and Properties.
2.5 SERVICES.
(a) The cost of contract services, outside consultants and utilities
procured from outside sources, other than services described in Section 2.8 and
2.10. If contract services are performed by an affiliate of USE, the cost
charged to the Cost Accounts shall not be greater than that for which comparable
services and utilities are available in the open market.
(b) The direct costs of using and servicing USE's exclusively-owned
facilities as provided in Section 3.5, including any charge for depreciation
thereof.
2.6 INSURANCE PREMIUMS. Premiums paid or accrued for insurance required
pursuant to Exhibit B of the Agreement.
2.7 DAMAGES AND LOSSES. All costs in excess of insurance proceeds
necessary to repair or replace damage or losses to (but not damages or losses
resulting from USE use of) any Assets resulting from any cause other than the
willful misconduct or negligence of USE.
2.8 LEGAL EXPENSE. All legal costs and expenses of litigation in which
SGMC is named as a dependent or in which SGMC initiates legal action. .
2.9 NON-OPERATING EXPENSES. A pro rata portion of (i) the salaries and
expenses of USE's superintendent and other employees serving Operations whose
time is not allocated directly to such Operations, and (ii) the costs of
maintaining and operating any necessary suboffice and (iii) all necessary camps,
including housing facilities for employees, used solely for Operations on the
Properties. The expense of those facilities shall include depreciation or a fair
monthly rental in lieu of depreciation of the investment. Such charges shall be
apportioned for all properties served by the employees and facilities on an
equitable basis consistent with USE's general accounting practice and generally
accepted accounting principles.
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2.10 ADMINISTRATIVE CHARGE. USE shall charge the Cost Account each month a
sum as provided in the annual Budget, which shall reimburse USE for its home
office overhead and general administrative expenses for its conduct of
Operations. The following representative list of items comprising USE's
principal business office expenses are expressly covered by the administrative
charge provided in this Section 2.10.
2.10 (a) Administrative Supervision, which includes services rendered by
officers and directors of USE, except to the extent that such services represent
a direct charge to SGMC.
(i) Accounting, billing and record keeping in accordance with
governmental regulations and the provisions of the Agreement, and preparation of
reports;
(ii) Handling of all tax matters, including any protests, except
any outside professional fees which SGMC may approve as a direct charge.
(iii) Routine legal services by USE's legal staff;
(iv) Records and storage space, telephone service and office
supplies.
(v) Receptionists, secretaries, accountants, accounting and other
clerks, data processing personnel and engineering and geologic support
personnel.
2.10 (b) In the alternative SGMC and USE can adopt a percentage method
during each annual budgeting process. The procedures for general and
administrative expenditures on a percentage basis is as follows:
(i) Each Month USE shall charge SGMC a sum for each phase of
Operations as provided below which shall be a liquidated amount to reimburse USE
for its home office overhead and general and administrative expenses to conduct
each phase of Operations, and which shall be in lieu of any management fee:
(1) EXPLORATION PHASE - ten percent (10%) of Allowable costs'
(2) MAJOR CONSTRUCTION PHASE - two percent (2%) of Allowable
costs; (3) MINING PHASE - two and one-half percent (2 1/2%)
of Allowable Costs;
Provided, however, that the Participants shall negotiate a fixed sum management
fee in lieu of the above stated percentages to be effective two years after the
commencement of the Mining Phase. In the event that the Participants are unable
to agree upon a fixed sum management fee, the above stated percentages will
remain in effect.
(ii) The term "Allowable Costs" as used in this Section for a
particular phase of Operation shall mean all charges to SGMC excluding (1) the
administrative charge referred to
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EXHIBIT 10.57
herein; (2) depreciation, depletion or amortization of tangible or intangible
assets, USE shall attribute such Allowable costs to a particular phase of
Operations by applying the following guidelines:
(1) The "Exploration Phase" shall cover those activities
conducted to ascertain the existence, location, extent or
quality of any deposit of ore or mineral. Such phase shall
cease when a commercially recoverable reserve is determined
to exist.
(2) The "Major Construction Phase" shall cover those activities
conducted to access a commercially feasible ore body or to
extend production of an existing ore body, and to construct
or install related fixed assets, and shall include all
activities involved in the construction of a mine, mill,
smelter or other ore processing facilities.
(3) The "Mining Phase" shall include all other activities not
otherwise covered above, including activities conducted
after mining operations have ceased.
(iii) The following is a representative list of items comprising
USE's principal business office expenses that are expressly covered by the
administrative charge provided in this Section.
(1) Administrative supervision, which includes services
rendered by managers, department supervisors, officers and
directors of Use for Operations, except to the extent that
such services represent a SGMC.
(2) Rentals and other charges for office and records storage
space, telephone service, office equipment and supplies.
2.10 (c ) In the event that USE and SGMC can not agree upon a percentage
for general and administration expenses, section 2.10 (a) will remain in effect.
2.11 AUDIT. Cost of annual audits under Sections 1.1 (a) and 1.1 (b) of
the accounting procedure.
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EXHIBIT 10.57
2.12 TAXES. All taxes of every kind and nature assessed or levied upon or
in connection with the Assets, the production of Products or Operations, which
have been paid by USE for the benefit of SGMC.
2.13 TAX PREPARATION EXPENSES. The services of tax counsel and tax
administration employees for all tax matters, including preparation of the
Federal and State Tax Return and any protests.
2.14 OTHER EXPENDITURES. Any costs not described herein but which are set
forth in the Agreement or Annual Budget as being chargeable to the Cost
Accounts.
ARTICLE III
BASIS OF CHARGES TO COST ACCOUNT
3.1 PURCHASES. Materials, equipment, machinery and supplies (hereafter,
"Material") purchased, and services procured, solely for use in Operations shall
be charged at prices actually paid by USE after deduction of all discounts
actually received. USE shall maintain reasonable inventory levels adequate to
sustain Operations in accordance with the guidelines set by SGMC.
3.2 MATERIAL FURNISHED BY USE. At its discretion USE may furnish Material
from its stocks under the following conditions:
(a) NEW MATERIAL (CONDITION "A"): New Material transferred from the
USE's properties shall be priced f.o.b. the nearest reputable supply store or
railway receiving point, where like Material is available, at current
replacement cost of the same kind of Material (hereafter, "New Price").
(b) USED MATERIAL (CONDITION "B" AND "C"):
(1) Material in sound and serviceable condition and suitable for
reuse without reconditioning shall be classified as Condition
"B" and priced at seventy-five percent (75%) of New Price.
(2) Other used Material as defined hereafter shall be classified as
Condition "C" and priced at fifty percent (50%) of New Price:
(A) Used Material which after reconditioning will be further
serviceable for original function as good secondhand Material, Condition "B",
or:
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EXHIBIT 10.57
(B) Used Material which is serviceable for original function
but not substantially suitable for reconditioning.
(3) Material which cannot be classified as Condition "B" or
Condition "C" shall be priced at a value commensurate with
its use.
(4) Material no longer suitable for is original purpose but
usable for some other purpose shall be priced on a basis
comparable with items normally used for such other purpose.
3.3 PREMIUM PRICE. Whenever Material is not readily obtainable at prices
specified in Section 3.1 and 3.2, USE may charge the Cost Accounts for the
required Material on the basis of USE's direct cost and expenses incurred in
procuring such Material; provided, however, that prior notice of the proposed
charge is given to SGMC, whereupon SGMC shall have the right, by notifying USE
within ten days of the delivery of the notice from USE, to furnish at the usual
receiving point all or part of its share of Material suitable for use and
acceptable to USE. If SGMC so furnishes Material in kind, USE shall make
appropriate credits to its account.
3.4 WARRANTY OF MATERIAL FURNISHED BY USE OR SGMC. Neither USE or SGMC
warrants the Material furnished beyond any dealer's or manufacturer's warranty.
3.5 EXCLUSIVELY-OWNED FACILITIES. The following rates shall apply to
services rendered from equipment or facilities owned exclusively by USE:
(a) Water, fuel, power, compressor and other auxiliary services at
rates currently prevailing in the vicinity;
(b) Equipment at a fair rate sufficient to cover maintenance, repairs,
depreciation and related services, provided that the charges do not exceed those
currently prevailing in the vicinity; and
(c) Laboratory services at a fair rate, provided the charges do not
exceed those of other outside service laboratories for services in the vicinity.
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EXHIBIT 10.57
ARTICLE IV
DISPOSAL OF MATERIAL
4.1 DISPOSITION GENERALLY. USE shall have no obligation to purchase SGMC's
interest in Material. SGMC shall determine the disposition of all Material,
provided USE shall have the right to dispose of normal accumulations of junk and
scrap material either by transfer to SGMC as provided in Section 4.2 or by sale.
USE shall credit SGMC for all Material sold hereunder.
4.2 SALES. Sales of Material to third parties shall be credited to the
Cost Accounts at the net amount received. Any damages or claims by SGMC shall be
charged back to the Cost Accounts if and when paid.
ARTICLE V
INVENTORIES
5.1 PERIODIC INVENTORIES, NOTICE AND REPRESENTATION. At reasonable
intervals, inventories shall be taken by USE, which shall include all such
Material as is ordinarily considered controllable by operators of mining
properties.
5.2 RECONCILIATION AND ADJUSTMENT OF INVENTORIES. Reconciliation of
inventory with charges to the Cost Account shall be made, and a list of overages
and shortages shall be determined by USE. Inventory adjustments shall be made by
USE to the Cost Account for overages and shortages, but USE shall be held
accountable to SGMC only for shortages due to lack of reasonable diligence.
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EXHIBIT B
INSURANCE
U. S. Energy Corp. ("USE") shall, at all times while conducting
Operations, comply fully with the applicable worker's compensation laws and
purchase insurance protection for USE, as well as Sutter Gold Mining Company
("SGMC"), comparable to that provided under standard form insurance policies for
(i) comprehensive public liability and property damage with combined limits of
One Million Dollars for bodily injury and property damage; (ii) automobile
insurance with combined limits of One Million Dollars: and (iii) adequate and
reasonable insurance against risk of fire and other risks ordinarily insured
against in similar operations (Ten Million Dollars). These limits are minimum
limits, and shall not be construed as a limit on USE's liability to SGMC.
<PAGE>
EXHIBIT 10.58
OUT SOURCING & LEASE AGREEMENT
This Agreement is entered into between Yellow Stone Fuels, Inc., (YFI) and US
Energy Corp. and Crested Corp. d/b/a USECC, consistent with the Ratification of
Understanding executed by the parties on December 1, 1996. This Agreement sets
forth the terms, conditions, responsibilities and consideration for specific out
sourcing arrangements, cost sharing, and service exchanges.
RECITALS
WHEREAS, YFI and USECC have entered into a Ratification Of Understanding
wherein USECC, for valuable consideration, including the opportunity to obtain
equity interest in YFI for minimal contribution and for other future business
opportunities through YFI, and;
WHEREAS, USECC desires in consideration of the benefits set forth in the
Ratification of Understanding has agreed to enter into specific out service
arrangements with YFI by providing access to various company managerial services
and expertise, and YFI desires to have access to and pay for the costs of such
services, and;
WHEREAS, USECC desires to lease to YFI office space, furnishings and
general office equipment and YFI desires to lease from USECC certain office
space, furnishings and office equipment and compensate USECC for the same, and;
WHEREAS, USECC desires to make available to YFI certain employees to
perform various accounting, insurance, payroll, secretarial services and other
consulting work, and YFI desires to make available to USECC its employees to
perform certain consulting work, and other expertise, and each party desires to
reimburse the other at a reasonable hourly rate for the costs associated with
any exchange, consulting, services or employee work, and;
WHEREAS, each party believes it will benefit from such reciprocal
exchanges, out sourcing, consultation and reasonable compensation;
NOW, THEREFORE, YFI and USECC, for the mutual benefits and consideration
set forth herein and in the Ratification of Understanding, hereby agrees as
follows:
I. ACCOUNTING
1.1 USECC shall, consistent with its own practices, maintain for YFI detailed
and comprehensive accounting records, all in accordance with generally accepted
accounting practices.
1.2 USECC shall provide the following services and submit an accounting of the
same consistent with the procedures set forth below:
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EXHIBIT 10.58
a. Assume responsibility to maintain all records for payroll for YFI and
make payroll on behalf of YFI employees consistent with and as directed by YFI,
from time to time and consistent with USECC's current practice for its own
employees.
b. Perform all necessary bookkeeping, as directed by YFI and consistent
with USECC's methods, and generally accepted bookkeeping practices.
c. Take all necessary steps to admit any YFI employees so requested to
USECC's health insurance plan and thereafter administer all health insurance
related functions consistent with such program and to accurately record and
document all labor and costs associated with the same for reimbursement by YFI.
d. Provide all necessary secretarial services, data processing, and
expertise necessary to complete all such accounting services and keep accurate
records of all time and costs consumed by such duties.
e. Charge YFI a reasonable fee (not to exceed 10% over actual costs) for
all services performed by USECC employees consistent with this agreement, and
for any and all work required and assigned to them by YFI and maintain a
comprehensive accounting of the same
1.3 YFI shall reimburse USECC for all actual costs relating to all
services and other work performed by USECC employees plus an additional overage
amount to be negotiated by the parties, but not to exceed 10% of the actual
costs. Payment of such charges shall be from time to time, as agreed to by the
parties but, in any event, no less than on a quarterly basis.
1.4 USECC shall prepare and present, on a monthly basis, a full
accounting of all costs associated with the services performed by its employees
for YFI along with similar accounting for services and consulting performed by
YFI employees for USECC.
II. PERSONNEL
2.1 USECC agrees it shall register and otherwise provide coverage for
all YFI employees designated by YFI within the health insurance policies
maintained by USECC.
2.2 USECC shall administer all aspects of the health insurance program
for all YFI employees covered by its policies.
2.3 USECC shall maintain all general personnel records, employee files,
and other related documentation as directed by YFI from time to time.
2.4 YFI shall reimburse USECC for all costs associated with the services
provided pursuant to this section, at a rate not to exceed USECC actual costs
for the same.
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EXHIBIT 10.58
III. LEASE
3.1 USECC agrees to lease to YFI approximately 1,000 sq. ft. of office
space located at its headquarters at Riverton, Wyoming..
3.2 USECC agrees to provide furnishings, office equipment, telephones
and telephone services, general secretarial services, janitorial services, and
other office related matters.
3.3 YFI shall pay USECC a lease payment of $800.00 per month for the
office space and furnishings, and $200.00 per month for all costs associated
with telephone services, janitorial work, and office overhead.
3.4 Such lease arrangements shall be modified from time to time as
agreed to by the parties.
IV. TERM
4.1 This Out Sourcing Agreement shall remain in effect for 3 years from the date
set out below, and thereafter continue from year to year until otherwise
terminated by the parties. After 1 year, each party may terminate this agreement
upon 90 days written notice to the other party.
4.2 Upon termination, a full accounting shall be made and the indebted party
shall have 90 days to balance all outstanding amounts due.
V. RESPONSIBILITIES
5.1 Each party shall use good faith efforts to perform the tasks and obligations
set forth in this Agreement, including taking all necessary steps to make
personnel available in a timely fashion to assist the other party as such needs
arise in the daily operation of the respective businesses, and shall in no way
interfere with or impair the ability of the other party to conduct its business
affairs.
5.2 Neither party or its employees shall disclose information about the business
or business practices of the other without the express written consent of the
other. Each party shall take all reasonable steps to insure the confidentiality
the respective business practices of the other party.
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EXHIBIT 10.58
Dated December 1, 1996.
YELLOW STONE FUELS, INC.
/s/ MARK LARSEN
- -----------------------------
By: Mark Larsen,
President
U.S. ENERGY CORP. CRESTED CORP.
/s/ JOHN L. LARSEN /s/ MAX T. EVANS
- ----------------------------- ------------------------------
By: John L. Larsen, By: Max T. Evans,
President President
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EXHIBIT 10.59
CONVERTIBLE PROMISSORY NOTE
AND
PLEDGE
U.S. $400,000.00 May 15, 1997
FOR VALUE RECEIVED, Yellow Stone Fuels, Corp. an Ontario corporation,
(Borrower or YFC) promises to pay U.S. ENERGY CORP., a Wyoming corporation, and
CRESTED CORP., a Colorado corporation, or order (Note Holder or USECC), the
principal sum of U.S. $400,000.00 with interest on the unpaid principal balance
from the date of this Note until December 31, 1998, at the rate of 10% per
annum. Principal and interest shall be payable at 877 North 8th West, Riverton,
Wyoming 82501, or such other place as Note Holder may designate.
Borrower currently is indebted to USECC in the amount of $249,779.29.
USECC agrees to advance an additional $150,220.71 or a total of $400,000.00.
These advances are subject to the terms of this Promissory Note. Payments
received for application to this Note shall be applied to accrued interest
first, and the balance applied in reduction to the principal amount hereof.
Borrower may prepay in cash, the principal amount and accrued interest
outstanding under this Note, in whole or in part, at any time without penalty.
Any partial prepayment shall be applied against the principal amount outstanding
and shall not postpone the due date of any subsequent payments.
In lieu of paying the Note in cash on or before its maturity date, the
Borrower shall have the following election:
(i) to convert, at any time, all or any outstanding principal
amount of the Note, and interest accrued thereon to date of conversion, into
shares of the Borrower's common stock at the rate of one share for each $1.00 of
such principal and accrued interest;
(ii) PROVIDED HOWEVER, that the Borrower cannot elect such
conversion in paragraph (i) above unless and until it has acquired an amount at
least equal to such aggregate conversion amount either through the sale of
equity or as a result of income from operations; and
(iii) PROVIDED FURTHER, that if such Note and accrued interest
has not been paid in full through either (i) and/or (ii) above by December 31,
1998, such unpaid balance will be automatically converted into that number of
shares of the Borrower's common stock when added to the number of shares of
Borrower's common stock theretofore owned by Holders shall equal 51% of
Borrower's then outstanding common stock.
1
<PAGE>
EXHIBIT 10.59
Borrower and all other makers, sureties, guarantors, and endorsers
hereby waive presentment, notice of dishonor or protest, and they hereby agree
to any extensions of time of payment or partial payments before, at, or after
maturity. This Note shall be the joint and several obligation of Borrower and
all other makers, sureties, guarantors and endorsers, and their successors and
assigns.
Any notice to Borrower provided for in this Note shall be in writing and
shall be given and be effective upon (1) delivery to Borrower or (2) mailing
such notice by first-class U.S. Mail, addressed to Borrower at Borrower's
address stated below, or to such other address as Borrower may designate by
notice to the Note Holder. Any notice to Note Holder shall be in writing and
shall be given and be given and be effective upon (1) delivery to Note Holder or
(2) by mailing such notice by first-class U.S. Mail, to Note Holder at the
address stated in the first paragraph of this Note, or to such other address as
Note Holder may designate by notice to Borrower.
The indebtedness evidenced by this Note is secured by a pledge of
Borrower's ownership interest in Yellow Stone Fuels, Inc., a Wyoming
corporation.
YELLOW STONE FUELS, CORP.
an Ontario corporation
By: /S/ MARK J. LARSEN
---------------------------
Its President
Borrower's Address
877 North 8th West
Riverton, WY 82501
2
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
State or Other Jurisdiction
NAME OF SUBSIDIARY OF INCORPORATION OR ORGANIZATION
- ------------------ --------------------------------
Energx, Ltd. Wyoming
Green Mountain Mining Venture Wyoming
Jeffrey City Homeowners Association, Inc. Wyoming
Sheep Mountain Partners Colorado
Sutter Gold Mining Company Wyoming
USECC Gold Limited Liability Company Wyoming
USECC Joint Venture Wyoming
Western Executive Air, Inc. Wyoming
Yellow Stone Fuels, Inc. Wyoming
ZX, Ltd. Colorado
<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>
