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, 1998 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
[No Fee Required] for the transition period from ______ to ______
Commission file number 0-8773
CRESTED CORP.
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(Exact Name of Registrant as Specified in its Charter)
Colorado 84-0608126
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West
Riverton, WY 82501
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (307) 856-9271
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of September 5, 1998 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 $600,000.
Class Outstanding at September 4, 1998
- --------------------------------------- -----------------------------------
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:
1998 Annual Meeting Proxy Statement for the fiscal year ended May 31,
1998, into Items 10-13 of Part III of the filing.
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
fact included in this Report, including without limitation the statements under
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the disclosures about the Green Mountain Mining Venture development
schedule for the Wyoming properties, the projected operating status of Plateau
Resources Limited's Shootaring Canyon uranium mill in Utah, future market prices
for uranium oxide, possible utility contracts for uranium oxide, and the plan of
operations for Yellow Stone Fuels Corp. and Sutter Gold Mining Company
(subsidiaries of Crested), are forward-looking statements. In addition, when
words like "expect," "anticipate" or "believe" are used, Crested is making
forward-looking statements.
Although Crested believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from such expectations are disclosed in this
Annual Report. The forward-looking statements should be carefully considered in
the context of all the information set forth in this Annual Report.
PART I
ITEM 1 AND ITEM 2. BUSINESS AND PROPERTIES
(A) GENERAL.
Crested Corp. ("Crested" or the "Registrant") is in the business of
acquiring, exploring, developing and/or selling or leasing mineral properties,
and the mining and marketing of minerals. USE is now engaged in two principal
mineral sectors: uranium and gold, both of which are in the development stage.
The most significant uranium properties are located on Green Mountain and Sheep
Mountain in Wyoming, and in southeast Utah. USE's gold operations are conducted
through Sutter Gold Mining Company ("SGMC"), a 59% USE owned subsidiary.
Interests are held in other mineral properties (principally molybdenum), but are
either non-operating interests or undeveloped claims. Crested and its parent
U.S. Energy Corp. ("USE") also carry on small oil and gas operations in Montana
and Wyoming. Other Crested business segments are commercial operations (real
estate and general aviation). Crested has a May 31 fiscal year.
Crested was incorporated in Wyoming in 1970. All of its operations are
in the United States. Principal executive offices are located in the Glen L.
Larsen building at 877 North 8th Street West, Riverton, Wyoming 82501, telephone
(307) 856-9271.
Most of Crested's operations are conducted through a joint venture with
USE, which owns a majority of Crested's Common Stock, and various jointly owned
subsidiaries of USE and Crested. The joint venture with USE is referred to in
this Report as "USECC". Construction operations are carried on primarily through
USE's subsidiary Four Nines Gold, Inc. ("FNG"). Oil and gas operations are
carried out through Energx, Ltd., a subsidiary of USE and Crested. USE and
Crested originally were independent companies, with two common affiliates (John
L. Larsen and Max T. Evans). In 1980, USE and Crested formed a joint venture to
do business together (unless one or the other elected not to pursue an
individual project). As a result of USE funding certain of Crested's obligations
from time to time (due to Crested's lack of cash on hand), and later payment of
the debts by Crested issuing common stock to USE, Crested became a majority
owned subsidiary of USE in fiscal 1993. See Part III of this Report.
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In fiscal 1998, USE and USECC signed an agreement with Kennecott Uranium
Company ("Kennecott"), for the purchase of Kennecott's interest in the Green
Mountain Mining Venture ("GMMV") (the "Acquisition Agreement"). Please see
"Minerals-Uranium-The Green Mountain Mining Project-June 23, 1997 Acquisition
Agreement with Kennecott Uranium Company" below.
In fiscal 1998, USE and Crested continued the development of the GMMV
uranium mines and the upgrade of the GMMV's Sweetwater uranium mill and the
Shootaring Canyon uranium mill in southeast Utah (owned by Plateau Resources
Ltd., a wholly-owned USE subsidiary) In addition, USE intends to implement plans
for it and Crested to consolidate their uranium assets into a single subsidiary
and finance the startup of its mines and mill operations, subject to obtaining
the necessary debt or equity funding. There is no assurance such financing can
be obtained.
For fiscal 1999, USE and Crested intend to seek the financing necessary
to continue development work at the Jackpot Mine. In late July 1998, USE,
Crested and Kennecott made a business decision to temporarily cease development
work at the jackpot Mine because of the expected negative impact on uranium
prices due to the amount of uranium inventory which USEC Inc. announced was held
in its inventory and could be sold into the market. However, other factors are
affecting the uranium market (reductions in current and planned production),
such that the resumption of development work and putting the Utah uranium
properties into production in the near-term may be warranted. See "Uranium
Market Information." USE and Crested are in discussions with various sources of
capital for this purpose, however, no funding agreements have been reached as of
the date of this Report and there is no assurance any such funding would be
received. Such funding would also finance USE's and Crested's purchase of
Kennecott's interest in the GMMV. See "June 23, 1997 Acquisition Agreement with
Kennecott Uranium Company" below.
USE also will be refining the mine and mill plan for the Lincoln Project
in California (held by Sutter Gold Mining Company, a majority-owned subsidiary
of USE and a minority owned subsidiary of Crested), with the objective of
continuing mine development, building a gold mill and producing gold in late
fiscal 1999 or early fiscal 2000. Capital and operating costs for the Lincoln
Project may be funded internally by Sutter Gold Mining Company, as supplemented
by additional funding from USE and/or third parties. However, there are no
outside funding agreements as of the date of this Report and there is no
assurance needed funding will be received. See "Gold" below.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Registrant operates in two business segments: (i) minerals and (ii)
commercial operations. The Registrant engages in other miscellaneous activities
such as oil and gas exploration, development and production. The principal
products of the operating units within each of the reportable industry segments
are:
INDUSTRY SEGMENTS PRINCIPAL PRODUCTS
----------------- ------------------
Minerals Sales and leases of mineral-bearing
properties and, from time to time, the
production and/or marketing of uranium,
gold and molybdenum.
Commercial Operations Operation of a motel and
rental of real estate, operation of an
aircraft fixed base operation (aircraft
fuel sales, flight instruction and
aircraft maintenance), and provision of
various contract services, including
managerial services for subsidiary
companies.
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Percentage of Net Revenue contributions by the two segments in the last three
fiscal years were:
Percentage of Net Revenues During the Year Ended
------------------------------------------------
May 31, May 31, May 31,
1998 1997 1996
-------- -------- ------
Minerals 11% 6% 62%
Commercial Operations 19% 29% 16%
Crested received $429,300 in revenues from the sale of uranium in fiscal
1998. During fiscal 1996, 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. During fiscal 1997, there were no
revenues from mineral sales (except for molybdenum royalty interest) in part due
to the arbitration proceedings involving SMP (see Item 3, "Legal Proceedings -
Sheep Mountain Partners Arbitration/Litigation"). Additional mineral revenue was
generated by Crested's molybdenum interest.
(C) NARRATIVE DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT
(INCLUDING ITEM 2 - PROPERTIES DISCLOSURE).
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 in areas which produced
significant amounts of uranium in the 1970s and 1980s. Crested and USE plan to
develop and operate these properties (directly or through a subsidiary company
or a joint venture) to produce uranium concentrates ("U3O8") for sale to public
utilities that operate nuclear powered electricity generating plants. In
addition, other uranium-bearing properties in New Mexico and Wyoming are held by
Yellow Stone Fuels Corp. (a minority joint subsidiary of USE and Crested).
The property interests of Crested in Wyoming are:
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Green Mountain
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521 unpatented lode mining claims (the "Green Mountain Claims") on Green
Mountain in Fremont County, Wyoming, including 105 claims on which the Round
Park (Jackpot) uranium deposit is located, and the Sweetwater Mill,
(approximately 23 miles south of the proposed Jackpot Mine). These assets are
held by the Green Mountain Mining Venture ("GMMV"), owned 50 percent by USE and
USECC (the "USE Parties"), and 50 percent by Kennecott Uranium Company ("KUC" or
"Kennecott"), a subsidiary of Kennecott Energy and Coal Company of Gillette, WY.
Kennecott Energy and Coal Company and Kennecott Corporation of Salt Lake City,
UT are subsidiaries of Rio Tinto plc, formerly RTZ PLC of London. Rio Tinto plc
is one of the world's leading natural resource companies and owns 69% of Rossing
Uranium Corp.'s operations in Namibia in southwest Africa. Rossing currently
produces about 6,000,000 lbs. of U3O8 out of its 10,000,000 lb. annual capacity.
Rio Tinto has delayed indefinitely the construction of its 4,000,000 lb. U3O8
per year Kintyre uranium project in Western Australia. Kennecott Corporation
owns and operates several mines including the Bingham Canyon, Utah open pit
copper mine which opened in 1906.
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All of the GMMV mining claims are accessible by county, private and/or
United States Bureau of Land Management ("BLM") access roads. Exploration and
delineation of the principal uranium resources in the proposed Jackpot Mine have
been substantially 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.
Sheep Mountain
--------------
Unpatented lode mining claims, underground and open pit uranium mines
and mining equipment in the Crooks Gap area are located on Sheep Mountain in
Fremont County, Wyoming and are adjacent to and west of the GMMV mining claims.
From 1988 to June 1, 1998, these assets were held by SMP. On June 1, 1998, USECC
received back from SMP all of the Sheep Mountain mineral properties and
equipment, in partial settlement of disputes with Nukem and CRIC. The
disposition of SMP cash and the CIS uranium supply contracts, remain in dispute.
See Item 3, "Legal Proceedings." The 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.
Yellow Stone Fuels Corp.
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Approximately 10,825 acres of properties are held by 437 unpatented lode
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 collectively or individually referred to as "YSFC"). 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 12.7% of
YSFC.
The property interests of USE and Crested in Utah through
Plateau Resources Ltd. are:
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The Tony M Mine and the Frank M properties, 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 lessee of the Tony M Mine and portions of the Frank M
properties and has posted a bond securing Plateau's obligations to reclaim these
properties. The Tony M mine was originally developed by Plateau at the time
Plateau was owned by Consumers Power Company ("CPC"), a Michigan public utility.
Significant areas of uranium mineralization have been accessed and delineated by
the prior owner's underground workings. When the Tony M Mine was in production
(while Plateau was owned by CPC), it produced ore containing from three to eight
pounds of uranium concentrates per ton. Some of this ore was processed at the
Shootaring Mill. In addition, low grade uranium ore was stockpiled at the Tony M
Mine and at the Shootaring Mill.
Plateau also acquired the Velvet Mine and the nearby Woods Complex in
the Lisbon Valley area in southeastern Utah. The Velvet Mine was fully developed
and permitted by its prior owner and is located approximately 178 miles by road
from the Shootaring Mill. The Woods Complex was formerly an operating uranium
mine with a remaining undeveloped resource. Access to this resource would be by
extending a drift approximately 2,500 feet from the former Wood Mine. The Wood
Mine property is not permitted, but USE
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and Crested do not expect difficulty in obtaining a new permit because the
surface facilities would occupy the site that has been disturbed from previous
operations.
Plateau Resources Ltd. is a wholly-owned subsidiary of USE, however,
Crested owns an interest in Plateau. See "Plateau Shootaring Canyon Mill" below.
THE GREEN MOUNTAIN MINING VENTURE ("GMMV") PROJECT
GMMV. In fiscal 1998, USE and USECC signed the Acquisition Agreement to
acquire Kennecott Uranium Company's interest in the GMMV. The following is a
description of the formation of GMMV and certain of its terms, which have been
modified as a result of the Acquisition Agreement and related transactions, as
set forth under the "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 (USE's share of the proceeds was
$12,600,000, and the balance was Crested's) and a commitment by Kennecott to
fund the first $50,000,000 of GMMV expenditures pursuant to Management Committee
budgets. At the same time, USE and USECC ("USE Parties") and Kennecott formed
the GMMV to develop, mine and mill uranium ore from the Green Mountain Claims,
and market U3O8.
After the first $50,000,000 of GMMV expenditures advanced by Kennecott
is spent (which has been completed as of the date of this 10-K Report (see
"Properties and Mine Plan" below)), the GMMV expenses are to be shared by the
parties generally in accordance with their participating interests (50 percent
Kennecott, 50 percent USE Parties). The agreement also provides that Kennecott
will pay a disproportionate share (up to an additional $45,000,000) of GMMV
operating expenses, but only out of cash operating margins from sales of
processed uranium at more than $24.00/lb (for $30,000,000 of such operating
expenses), and from sales of processed uranium at more than $27.00/lb (for the
next $15,000,000 of such operating expenses).
Pursuant to the GMMV 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.
Assuming Kennecott's interest is not acquired by the USE Parties (see
below), 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. This sharing ratio
will change if Kennecott's interest is acquired by USE and Crested. See "June
23, 1997 Acquisition Agreement with Kennecott Uranium Company." 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), which were previously owned by USE and
Crested together, will be shared equally by USE and Crested. GMMV expenditures
from such properties will be shared 25 percent each by USE and Crested, and 50
percent by Kennecott. Such latter properties are expected to be developed after
the Round Park (Jackpot)
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deposit is placed into production and the uranium deposits on these properties
may be accessed through the proposed tunnels at the Jackpot Mine. Development
work at the Jackpot Mine was temporarily halted in late July 1998, see "USEC
Inc." below.
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, 1998. USECC has continued
work on a contract basis at Kennecott's request through May 31, 1998.
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. USE and Crested have completed the construction
of additional mining support facilities at the Jackpot Mine in fiscal 1998,
including; the installation of natural gas lines and phone services;
construction of a new shop building containing offices, a dry-change room,
emergency generators, air compressors and mechanical repair base; upgrading the
ore haul road; and installation of a conveyor and stacker and other incidental
mine activities, while maintaining all permits and licenses at the Jackpot Mine
and Sweetwater Mill. For underground mine development work, as of the date of
this 10-K Report, the GMMV has driven twin decline tunnels 18 feet wide and 12
feet high on a -17 percent grade approximately 2,000 feet each into Green
Mountain with 1,000 feet of cross cuts between the declines. All of these
development costs in fiscal 1998 and to date in fiscal 1999 have been funded
through the $16,000,000 loan in connection with Kennecott's $50,000,000 work
commitment (for its 50 percent interest).
JUNE 23, 1997 ACQUISITION AGREEMENT WITH KENNECOTT URANIUM COMPANY
On June 23, 1997, USE and USECC signed an Acquisition Agreement with
Kennecott, for the right to acquire Kennecott's interest in the GMMV for
$15,000,000 and other consideration. Kennecott paid USE and USECC $4,000,000 as
a signing payment, 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 was performed
by USECC as lessee of all the GMMV mineral properties under a Mineral Lease
Agreement between the GMMV and USECC (the "Mineral Lease"), and as an
independent contractor under a Contract Services Agreement (the "Mill Contract")
between Kennecott (as manager of the GMMV) and USECC. Both the Mineral Lease and
the Mill Contract, as well as a Fourth Amendment to the GMMV Mining Venture
Agreement among Kennecott, USE and USECC (the "Fourth Amendment to the GMMV
Agreement"), were executed simultaneously with the Acquisition Agreement.
The $16,000,000 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 in April 1999 until paid in full. As of the date of this Report
approximately $14,000,000 of the $16,000,000 loan has been spent. If the
Acquisition Agreement closes, the Note converts to become a debt of the GMMV or
its successors, and would be 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 by GMMV or its successors (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"). At closing of the Acquisition
Agreement, USE,
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USECC and their assignee (if such is assigned) will assume the Note, and the
assets of the GMMV will be subject to the Mortgage.
Pursuant to the Mineral Lease and the Mill Contract included in 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 was funded from the
$16,000,000 loan provided to the GMMV by Kennecott. Under the Fourth Amendment
to the GMMV Agreement, Kennecott is 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. These credits satisfied 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, USECC submits
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 general and administrative 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 also charges the
GMMV rental expense for equipment owned or leased 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 made by the GMMV against
budgets under the Mineral Lease and Mill Contract. Also included in reimbursable
costs will be the amounts required to cover all reclamation activities that will
result from operations conducted on the mining properties pursuant to the Mill
Contract and the Mineral Lease (USE and USECC will be required to put such
reclamation cost amounts aside in a sinking fund to pay for the reclamation work
when production commences).
Kennecott provided 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 up until the closing date.
Also pursuant to the Mineral Lease, USECC pays the GMMV a monthly lease
fee of $3,363. 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 (this
condition has not yet been met and may not be met by the deadline); (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 closing date for the
Acquisition Agreement may be postponed not later than October 30, 1998 (see
"USEC
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Inc. " below). 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. If the Acquisition Agreement is closed, USE and
Crested would each own 50% of the GMMV, and Crested will thereby own the right
to 25% of the revenues from the Round Park (Jackpot Mine) deposit, because
Crested will have acquired one-half of Kennecott's 50% interest in the GMMV
(which includes the Round Park deposit).
Crested estimates that at least $40,000,000 will be needed to close the
Acquisition Agreement transactions ($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). USE and Crested presently are
negotiating with investment banking firms to raise up to $100 million in debt or
a combination of debt and equity financing to close the Acquisition Agreement
and put the uranium assets into production. Such negotiations have not been
finalized as of the date of this Report. There is no assurance this financing
can be obtained by October 30, 1998 in light of current prices in the uranium
oxide market.
If the Acquisition Agreement is not closed, USE, USECC and Kennecott,
shall retain 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 the GMMV held by
USE and USECC. However, the Jackpot Mine development work and Sweetwater Mill
upgrade work funded by the $16,000,000 loan will have benefitted all parties to
the GMMV. Further, if the Acquisition Agreement is not closed, the GMMV parties
will remain in the GMMV, and the development, mining and milling costs will be
paid for by such parties. If one of the parties does not pay its share, its
percentage in the GMMV is reduced if the other party pays instead. In the event
the Acquisition Agreement is not closed, Kennecott may not wish to participate
further in the project. If USE and USECC have the funding to pay for all costs
to continue the development of the Jackpot Mine and the upgrade work at the
Sweetwater Mill (but no the funds to purchase Kennecott's interest directly),
and USE and USECC make the decision to continue the project, then Kennecott's
interest would be reduced. Thus, it is possible that USE and Crested could
indirectly purchase Kennecott's interest through funding the project through the
GMMV.
USEC INC. In 1992, Congress enacted the "Energy Policy Act of 1992"
creating the U.S. Enrichment Corporation ("USEC") to operate the U.S. Department
of Energy's ("DOE") uranium enrichment program. Congress later enacted the "USEC
Privatization Act of 1996" to privatize USEC and allowed the DOE to transfer
various forms of uranium to USEC. The DOE has transferred approximately 75
million pounds of uranium and uranium equivalents to USEC. On July 22, 1998,
USEC Inc. became a publicly traded company. Because of the anticipated negative
impact of USEC Inc.'s sales of new uranium inventory in the market (see
"Marketing - U.S. Enrichment Corporation," below) on uranium oxide prices, on
July 31, 1998, Kennecott and USE and Crested made a business decision to
temporarily place the Jackpot Mine on standby, which resulted in the lay off of
approximately 45 employees. Resumption of development work with funding from
GMMV provided by Kennecott will depend on resolution of the USEC Inc. uranium
inventory sales issue (see "U.S. Enrichment Corporation" below and Item 13,
"Legal Proceedings") and improved uranium prices. However, it is possible that
third party financing will be obtained, in which event the development work
would resume and the Acquisition Agreement would be closed. The anticipated
negative impact of the USEC Inc. inventory on the uranium market may be
mitigated by other factors. Crested believes the GMMV's decision to place the
development of the Jackpot Mine on standby, should be viewed as an interim
event, because anticipated improved uranium prices based on supply and demand
projections, or even continued level prices, could lead to a decision to resume
development work on the Jackpot Mine. See "Uranium Market Information" below.
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As a result of the current uncertainty surrounding the uranium market,
and the July 31, 1998 suspension of development work on the Jackpot Mine, USE
and Crested anticipate that certain provisions of the Acquisition Agreement will
be modified after discussions with Kennecott. Such changes may include an
extension of the deadline for purchase of Kennecott's interest in the GMMV; the
$200 million market capitalization requirement; provisions for funding GMMV's
standby maintenance costs; and other items. However, as of the date of this
Report, no such modifications had been finalized with Kennecott.
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 satisfactory to support mine development.
The GMMV also owns the Big Eagle Properties on Green Mountain, which
contain substantial uranium mineralization, and are adjacent to the other GMMV
mining claims. The Big Eagle Properties contain two open-pit mines, as well as
related roads, utilities, buildings, structures, equipment and a stockpile of
500,000 tons of uranium material with a grade of approximately .05% U3O8. The
assets include two buildings (38,000 square feet and 8,000 square feet) formerly
used by Pathfinder Mines Corporation ("PMC") in mining operations. Also included
are three ore-hauling vehicles, each having a 100-ton capacity. Permits
transferred to the GMMV for the properties include: a permit to mine, an air
quality permit, and water discharge and water quality permits. The GMMV owns the
mineral rights to the underlying unpatented lode mining claims.
The Round Park (Jackpot) mining claims contain deposits of uranium which
have been estimated to contain 52,000,000 pounds of U3O8; the grade averages 4.6
pounds of U3O8 per ton of mineralized material. The GMMV plans to mine this
mineralize material from two decline tunnels (-17 percent slope) in the Jackpot
Mine, which are being driven underground from the south side of Green Mountain.
The first of several mineralized horizons is about 2,300 feet vertically down
from the top of Green Mountain.
The declines will ultimately extend up to 12,300 feet in length to
access the different zones of the deposit; one decline will be used for
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. The Big Eagle Mine facilities located about three miles
west of the Jackpot Mine site will be utilized. As many as 250 workers will be
required during mining full operations. To the date of this Report, USE has run
approximately 2,000 feet of tunnel in each decline.
The USE Parties expect the Jackpot Mine development costs will not
exceed an additional $10,000,000 to reach the "B" zone to continue the
development in the ore at the Round Park deposit. However, cost estimates may
change as the development progresses. Pursuant to the GMMV agreement, Kennecott
agreed to fund the initial $50,000,000 in development costs including
reclamation costs. To April 30, 1997, such expenditures totaled approximately
$20,355,142. In fiscal 1998, approximately $10,160,896 of additional GMMV costs
had been funded by the $16,000,000 loan. With the 2 for 1 credit provision in
the Acquisition Agreement which also applied to the $4,000,000 signing bonus,
Kennecott had completed its $50,000,000 commitment. Since June 1997, Kennecott
has advanced approximately $14,000,000 of the $16,000,000 to the GMMV, leaving a
balance of $2,000,000. Whether this $2,000,000 will be made available by
Kennecott for the GMMV to keep the Jackpot Mine on standby status has not been
determined as of the date of this Report.
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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 a subsidiary of
Union Oil Company of California ("UNOCAL"), primarily in consideration of
Kennecott and the GMMV assuming environmental liabilities, and decommissioning
and reclamation obligations.
Kennecott is manager and operator 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 the 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 the Consolidated Financial
Statements (see "Notes F and K to the Consolidated Financial Statements for
fiscal year ended May 31, 1998").
The reclamation and environmental liabilities assumed by the 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 cleanup after the mill is
decommissioned, USECC believes it is unlikely USECC would have to pay for such
costs directly. First, based on current estimates of cleanup and reclamation
costs (reviewed annually by the oversight agencies), such costs covered by the
letters of credit or other surety appear to be within the $24,330,000 of
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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 (escalated according to the Consumer Price Index
to current dollars, from 1993) of such expenditures. Any reimbursement for the
loan may only be recovered by UNOCAL from 20% of future cash flows from sale of
uranium concentrates processed through the Sweetwater Mill. Third, payment of
reclamation and environmental liabilities related to the Mill is guaranteed by
Kennecott. 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 to the
GMMV (see the "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 (escalated) 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. The WDEQ issued a mine permit for the Jackpot
Mine on June 26, 1996. This Permit allows the GMMV to proceed with construction
of mine surface facilities, further underground mine development and eventual
mining of the Round Park (Jackpot) Deposit.
The Jackpot Mine Plan of Operations and a combination of the
alternatives analyzed in the EIS will allow for the disposal of mine waste rock
in the Big Eagle Mine pits some three miles from the Jackpot declines, the
upgrading of existing roads, and the construction of new haul road segments to
transport ore to the Sweetwater Mill. These roads will be subject to
modification in alignment necessary to minimize or avoid adverse impacts to
riparian and cultural resources.
Kennecott has initiated discussions and made filings with the NRC
regarding amendments to the Source Material License to resume ore processing at
the Sweetwater Mill. The NRC has advised that the Operating Permit should be
issued in September 1998.
Crested believes all of the uranium operations in which it owns an
interest are in compliance with these rules. There ultimately will be an effect
on 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.
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PLATEAU'S SHOOTARING CANYON MILL
ACQUISITION OF PLATEAU RESOURCES, LIMITED ("PLATEAU"). In August 1993,
USE purchased from Consumers Power Company ("CPC"), all of the outstanding stock
of Plateau which owns the Shootaring Canyon uranium processing mill and support
facilities in southeastern Utah (the "Shootaring Mill") for a nominal cash
consideration. The Shootaring Mill holds a source materials license from the
NRC. USE agreed:
(a) to perform all studies, remedial or other response actions or other
activities necessary from time to time for Plateau to comply with environmental
monitoring and other provisions of (i) federal and state environmental laws
relating to hazardous or toxic substances, and (ii) the Uranium Mill Tailings
Radiation Control Act, the Atomic Energy Act of 1954, and administrative orders
and licenses relating to nuclear or radioactive substances or materials on the
property of, or produced or released by, Plateau; and
(b) to indemnify CPC from all liabilities and costs related to the
presence of hazardous substances or radioactive materials on Plateau property,
and to any future violation of laws and administrative orders and licenses
relating to the environment or to nuclear or radioactive substances.
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
decommissioning costs of Shootaring Mill as directed by the NRC. The amount
transferred to the trust is the minimum amount now required by the NRC as
financial assurance reclamation of the Shootaring Mill.
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, 1998).
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.
Subsequent to closing, USE and Crested agreed that after Plateau's
unencumbered cash had been depleted, USE and Crested each would 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 and occupies 19 acres of a 265 acre plant site. The mill was
designed to process 750 tpd, but only operated on a trial basis for two months
in mid-summer 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. 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 1998, in anticipation of resuming milling operations, Plateau
has significantly performed a reactivation and rehabilitation program at the
Mill. Plateau is awaiting approval of the water control permit for the tailings
facility from the State of Utah Water Control Division.
TICABOO TOWNSITE
Plateau owns all of the outstanding stock of Canyon Homesteads, Inc.
("Canyon"), a Utah corporation, which developed the Ticaboo, Utah townsite 3.5
miles south of the Shootaring Mill. The Ticaboo site includes a motel,
restaurant, lounge, convenience store and single family, mobile home and
recreational vehicle sites (all with utility access). The townsite is located on
a State of Utah lease near Lake Powell and is being operated as a commercial
enterprise. An amendment was entered into on April 1, 1997 on the Utah State
lease covering the Ticaboo townsite whereby the State deeded portions of the
Townsite to Canyon on a sliding scale basis. USE and Crested may develop the
townsite to sell home and mobile home sites as the nearby Shootaring Canyon
uranium mill commences operations.
YELLOW STONE FUELS CORP.
Yellow Stone Fuels Corp., was organized on February 17, 1997 in Ontario,
Canada. As of February 17, 1997, YSFC acquired all the outstanding shares of
Common Stock of Yellow Stone Fuels, Inc. (a Wyoming corporation which was
organized on June 3,1996), in exchange for YSFC issuing the same number of
shares of YSFC Stock to the former shareholders of Yellow Stone Fuels, Inc.
("YFI"). YSFC and its wholly-owned subsidiary Yellow Stone Fuels, Inc. are
herein collectively referred to as YSFC.
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 the right of first refusal with
respect to any uranium ore bodies YSFC discovers which are amenable to
conventional mining and milling and YSFC will have the right of first refusal
with respect to ore bodies discovered by USECC amenable to the ISL process. In
the ISL process, groundwater fortified with oxidizing agents is pumped in 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.
In Wyoming, YSFC has staked and/or holds 356 unpatented mining claims
and has entered into four State leases covering a total of 9,040 acres located
in the Powder River Basin and Red Desert uranium districts. Three State leases
have a 10 year term expiring October 1, 2006; one State lease has a 10 year term
expiring October 1, 2008; each 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; plus 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, YSFC owns or leases a total of 113 unpatented mining
claims in the Powder River Uranium District. One group of 63 claims is located
approximately 20 miles northwest of the producing Rio Algom's Smith Ranch Mine.
These 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 (approximately 945 acres) in the Grants
uranium region of New Mexico. The 8 unpatented mining claims (covering 165
acres) are held by a 5 year renewable lease ($500 monthly rental, and a 5% gross
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royalty on revenues from uranium sold from the property). Other claims in the
immediate area were 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.
In fiscal 1997, USE, USECC and the GMMV have 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
access 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 and
use of various office equipment for $3,000 per month; and a Ratification of
Understanding by which USECC will offer to YSFC (with a reserved royalty in
amounts to be agreed on later) any uranium properties amenable to in-situ
production which USECC acquires or has the right to acquire. In return, YSFC
will offer to USECC ( with a reserve royalty in amounts to be agreed on later)
uranium properties amenable to conventional mining methods which YSFC acquires
or has the right to acquire. USECC also will make its library of geological
information and related materials available to YSFC. YSFC also has a Storage
Agreement with GMMV by which YSFC stores used low-level contaminated mining
equipment at the Sweetwater Mill.
YSFC has 11,764,000 shares of Common Stock issued and outstanding,
including 3,000,000 shares 25.4%) 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 Crested will have voting control of more than 50% of the
outstanding shares of YSFC. See Part III of this Report.
SHEEP MOUNTAIN PARTNERS ("SMP")
PARTNERSHIP. In February 1988, USE and Crested acquired uranium mines,
mining equipment and mineralized properties (Sheep Mountain Mines) at Crooks Gap
in south-central Fremont County, Wyoming, from Western Nuclear, Inc. These
Crooks Gap mining properties are adjacent to the Green Mountain uranium
properties. SMP mined and sold uranium ore from one of the underground Sheep
Mines during fiscal 1988 and 1989. Production ceased in fiscal 1989, because
uranium could be purchased from the spot market at prices below the mining and
milling costs of SMP. In December 1988, USE and Crested sold 50 percent of their
interests in the Crooks Gap properties to Nukem's subsidiary CRIC for cash. The
parties thereafter contributed the properties to and formed Sheep Mountain
Partners ("SMP"), in which USECC received an undivided 50 percent interest. SMP
is a Colorado general partnership formed on December 21, 1988, between USECC and
Nukem, Inc. of Stamford, CT ("Nukem") through its wholly-owned subsidiary Cycle
Resource Investment Corporation ("CRIC"). 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. Nukem is a uranium brokerage
and trading concern.
SMP was directed by a management committee, with three members appointed
by USECC, and three members appointed by Nukem/CRIC. The committee has not met
since 1991 as a result of the SMP arbitration/litigation. During fiscal 1991,
certain disputes arose between the partners of SMP. These disputes resulted in
arbitration/litigation and subsequent consensual arbitration from which an Order
and Award was issued on April 18, 1996. USE and Crested filed petitions for
confirmation of the Order and Award with the
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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. Some of the claims have been resolved and the rest are to be determined
by the 10th Circuit Court of Appeals ("CCA"), which is expected to occur in
fiscal 1999 (see "Legal Proceedings - Sheep Mountain Partners
Arbitration/Litigation").
PROPERTIES. Until June 1, 1998, SMP owned 80 unpatented lode mining
claims on the Crooks Gap properties, including two open-pit and five underground
uranium mines and an inventory of uranium ore. In connection with a partial
settlement of litigation/arbitration between USE/Crested and Nukem/CRIC, SMP
conveyed these mineral properties and equipment to USECC. See "Item 3."
Production from the properties is subject to sliding-scale royalties payable to
Western Nuclear, with rates ranging from one to four percent on recovered
uranium concentrates.
Various structures and equipment are located on the properties including
three operating and three non-operating mine headframes with hoists, maintenance
shops, offices, and other buildings, equipment and supplies. An ion-exchange
plant is located on the properties.
Of the claims, which contain a previously-mined open-pit uranium mine
and three underground mines, Pathfinder Mines Corporation ("PMC") has the right
to mine a portion (the Congo area), by open-pit or in-situ techniques to certain
depths, without royalty or other obligations to USECC. 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 USECC. Conversely, USECC 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.
The ion exchange plant on the properties was used to remove natural
soluble uranium from mine water. USE, on behalf of USECC, has submitted a plan
to the NRC to decommission this facility and obtained a three year extension for
timeliness of decommissioning. Management is reviewing the economics of
relicensing this facility as part of a potential in-situ leach uranium mining
operation.
PROPERTY MAINTENANCE. As operating manager for SMP, USECC was
responsible for exploration, mining, and care and maintenance of the 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. 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 a domestic
utility that was awarded to SMP by the Arbitration Panel (three of these
contracts remained in SMP until the partial settlement on June 1, 1998). The
contracts all were for sales of
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uranium originally to eight domestic utilities. SMP's uranium supply contracts
were 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 a
delivery of 130,000 pounds of uranium concentrates on May 15, 1997 which was
made, completing that contract. The fourth contract of SMP (which has been
transferred to USECC) is a market-related contract, and calls for delivery of
unspecified quantities of U3O8 totaling approximately 1,000,000 lbs. U3O8
(depending on the number of reactors this utility is operating and their
consumption levels). This contract may be completed in calendar 2000.
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.
Through fiscal 1997 and for prior years, 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. In fiscal 1998,
$429,300 in revenues was received representing Crested's portion of revenues for
a delivery made in late fiscal 1997 by Nukem. See "Legal Proceedings - Sheep
Mountain Partners Arbitration/Litigation."
PERMITS. Permits to operate existing mines on the Crooks Gap properties
have been issued by the State of Wyoming. Amendments are needed to open new
mines within the permit area. As a condition to issuance of the permits, a NPDES
water discharge permit under the Clean Water Act has been obtained. Monitoring
and treatment of water removed from the mines and discharged in nearby Crooks
Creek is generally required. During the past two years, SMP did not discharge
wastewater into Crooks Creek, and the mine water is presently being discharged
into the McIntosh Pit.
URANIUM MARKET INFORMATION.
There are currently nine producers of uranium in the United States,
which collectively produced 5,800,000 pounds of U3O8 during calendar 1997 and
produced approximately 6,300,000 pounds in calendar 1996. Production in the U.S.
for 1998 is estimated at 5,000,000 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 Rio Tinto's Rossing unit), and Europe, which collectively
produced about 78,000,000 pounds of U3O8 during calendar year 1997 and are
expected to produce approximately the same amount in calendar 1998. 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 to generate electricity. According to the Uranium Institute based in
London, England, nuclear plants generated approximately 17% of the world's
electricity in 1996, up from less than 2% in 1970. According to the Uranium
Institute, 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 1997, 437 nuclear power plants were operating and 28 were under
construction worldwide, according to the Uranium Institute. Uranium consumption
by world commercial reactors has increased from about 60,000,000 pounds in 1981
to approximately 165,000,000 pounds in 1997.
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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 U3O8. 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 U3O8 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, uranium demand
in the Western World has exceeded Western World production by over 400,000,000
pounds. In 1995, uranium demand in the Western World was 129,000,000 pounds,
nearly double the production of 66,000,000 pounds by Western World producers. In
1997, total world demand rose to an estimated 165,000,000 pounds, while world
mine supply increased only to an estimated 93,000,000 pounds (including the
78,000,000 pounds produced in North America, Australia, Africa and Europe, see
above). Accordingly, by the end of 1997, excess inventory levels in the Western
World (inventory in excess of preferred levels) had been reduced to less than
1.5 years of forward reactor requirements, and the excess inventories in the
U.S. had been reduced to less than one year of projected forward requirements.
This trend is expected to continue in calendar 1998.
Countering the drawdown of Western World inventories and contributing
directly to the downturn of market prices was the importation of uranium from
the CIS republics, and to a lesser extent, from Eastern Europe and mainland
China starting in 1989. As the result of an anti-dumping suit filed in the U.S.
("CIS Anti-dumping Suit") in 1991 against republics of the CIS, suspension
agreements were signed by six CIS republics (Russia, Ukraine, Kazakhstan,
Uzbekistan, Kyrgyzstan and Tajikistan) in October 1992. These Suspension
Agreements applied price related volume quotas to CIS uranium permitted to be
imported into the U.S, so that to rectify prior damage to domestic United States
uranium producers from dumping sales of U3O8, all spot sales of U3O8 delivered
into the U.S. now reflect quota restrictions on U3O8 imports from the CIS.
Exceptions are allowed by 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").
The Suspension Agreement with Russia 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. DOC 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. production rates increase, additional imports from
Uzbekistan are allowed.
Although these amendments to three of the Suspension Agreements may
increase the supply of uranium to the U.S. market, they also 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
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uranium ("LEU") suitable for use in nuclear power plants. At a projected maximum
conversion rate for HEU to LEU, approximately 24,000,000 pounds of U3O8 per year
will be available to Western World markets.
In 1996, the U.S. Congress passed legislation in compliance with the
Suspension Agreements, which allows the converted Russian HEU material to be
sold in the U.S. market 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 165,000,000 pounds U3O8 through 2001. USE
management estimates that between 30,000,000 and 40,000,000 pounds U3O8 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 (78,000,000 pounds in 1998) 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 1998 production
levels, USE believes that higher prices will be needed to support the required
investment by other uranium producers in new higher cost production facilities
as lower cost production reserves are depleted.
Overall, Crested believes that adequate supply of U3O8 material to meet
firm demand (i.e. to supply future long term contracts with utilities) 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 new production combine will not equal consumption even if the new
production comes on stream as planned.
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 secured for relatively
long periods. 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.
U.S. ENRICHMENT CORPORATION. The United States Enrichment Corporation
("USEC") was created by the United States Congress as part of the Energy Policy
Act of 1992. USEC began operations in July 1993 when the United States
Department of Energy ("DOE") transferred the DOE's uranium enrichment facilities
to USEC. USEC enriches uranium at two gaseous diffusion process plants (at
Paducah, Kentucky and near Portsmouth, Ohio) as part of the process to transform
natural uranium into fuel for commercial power plants. USEC has a substantial
share of the world market for enrichment services, and dominates the North
American market for enrichment services. In 1996, Congress enacted the "USEC
Privatization Act of 1996" to privatize USEC and allowed the DOE to transfer
certain amounts of various forms of uranium to USEC.
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In July 1998, USEC became a wholly-owned subsidiary of USEC Inc. (herein
"USEC") when it completed its privatization through a $1.4 billion public
offering. USEC represented in filings with the Securities and Exchange
Commission that it now holds or intends to acquire 95 metric tons enriched
uranium (50 tons highly enriched, 45 tons low enriched) and 10,800 tons of
natural uranium (uranium oxide as produced from uranium milling, prior to
concentration). USEC has represented its intention to supplement uranium
enrichment services revenues through sales of natural uranium.
Based upon the amounts of uranium USEC purportedly has, or will be
acquiring in shipments from DOE, USEC may be seeking to sell up to 75 million
pounds of uranium or uranium equivalents through the year 2005. On an annual
basis, such sales would adversely impact the domestic uranium market for
producers such as USE and Crested, because USEC's sales would amount to more on
an annual basis than all domestic producers (including USE and Crested) will
produce and plan to sell combined.
USE and Crested believe that a substantial portion of the uranium (45
metric tons of low enriched uranium and 7,000 tons of natural uranium) which
USEC has acquired and will acquire from the DOE, in fact was transferred and
will be transferred by DOE in violation of the USEC Privatization Act of 1996.
USE and Crested have joined with other uranium producers and the Uranium
Producers of America ("UPA") in the filing of a lawsuit for declaratory judgment
and injunctive relief against the Department of Energy, with respect to the
excess transfers, in an attempt to prevent USEC from enjoying a market advantage
over the domestic uranium producers which is prohibited by law. See "Legal
Proceedings" below.
MARKET SUMMARY - IMPLICATIONS FOR FUTURE URANIUM PRICES. With the
privatization of USEC and the prospect of natural uranium coming to the market
from USEC inventories, uranium prices may not rise significantly over the next
12 months, as previously had been anticipated in reports by industry analysts
and by Crested management. Nevertheless, Crested believes that uranium prices
eventually will be determined and moved up significantly by the fundamentals of
the market, because all excess inventories built up in the 1980s will eventually
be consumed. In addition, USEC has stated that USEC would sell its uranium in a
rational and responsible manner indicating (in the opinion of Crested
management) that USEC may keep its market sales at levels which would not drive
down uranium prices.
As detailed below, many projects have been delayed or postponed since
mid-1997 for various reasons, which will have a significant impact on future
supply/demand fundamentals. If, as it appears to be the case, the possible
introduction of the new USEC inventories currently has a depressing effect on
the price of uranium concentrates, then new planned uranium production will be
curtailed more than indicated below.
Delay/Loss of
Annual
Production Potential
Date The Events Reported lbs. of U3O8
---- ------------------- ------------
July 1997 Former Soviet Union production 5 million
delcines 27% (1992-1996)
July 28, 1997 Russia announces it may require 30-50% of 6-10 million
the HEU feed for internal use
August 11, 1997 Kazakhs annul World Wide Contract at 1-2 million
Tselinney Project, Kazakhstan
September 1, 1997 Rio Tinto suspends development at Kintyre 3-4 million
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September 1, 1997 McClean Lake, Can., schedule slips 6 million
from 1997 to 1998
November 3, 1997 Rio Algom begins product at Smith Ranch, 1-2 million
Wyo. behind schedule
November 10, 1997 Midwest and Cigar Lake, Can., timing delayed 18 million
from 1999 to 2001
November 24, 1997 Aborigines veto ERA's plan to truck ore 6 million
to Ranger Mill, Aust.
July 1998 U.S. Energy/Crested Corp. suspend operations 2-4 million
at Green Mountain, Wyoming
August 1998 World Wide Minerals puts the Dornod project in 1-2 million
Mongolia on standby citing market conditions
August 1998 Cogema will put Cluff Lake, Can., Mine on 2-3 million
standby on Dec. 31, 2000. -----------
Total 51-62 million
With these delays, postponements, and possible further delays or
cancellations of planned uranium production projects, Crested believes that it
is possible that the market price for uranium may increase substantially in mid
- - to late 1999, in spite of possible sales from the USEC inventory. The
fundamentals for higher uranium prices are ascertainable. Currently, all nuclear
reactors worldwide consume approximately 160 million lbs. of natural uranium per
year and by most estimates, will continue at that rate for at least the next 20
years. Total world production for 1997 was approximately 90 million lbs. Over
the next four years, three mines located in Canada (Key Lake, Cluff Lake and
Rabbit Lake) will have exhausted their reserves and will be shut down. Three new
Canadian mines (McArthur River, McClean Lake/Midwest and Cigar Lake) are
scheduled to produce approximately 40 million lbs. of U3O8 annually when they
are in full production.
Crested management believes that other delays and cancellations of
projects may be imminent and that eventually all inventories (government and
public) will be consumed. New significant production will be needed to fuel
existing and planned reactors into the 21st century. USE management believes
that prices must rise significantly from current levels of $10.50/lb., and
possibly up to the $18.00/lb. range over the next 2-3 years, to motivate
existing and new mines to move forward as planned. In addition, no new mine/mill
construction would be justifiable for selling into only the spot market. At
least 80 percent of a uranium producer's production has to be sold to long term
contracts, because only with long term contracts can the mine/ mill process over
the life of the mine be planned and financed.
In contrast to finding, developing and mining new properties and
building new mills, USE's uranium properties are believed to contain well
defined uranium deposits delineated by others which do not require further
exploration work prior to beginning production. Development work is
significantly advanced at both the principal Wyoming site (the Jackpot Mine) and
the Utah mines. The uranium mills in Wyoming and Utah were acquired fully built
at no cost to USE and Crested, and the remaining work required to put the mills
into operating status will not consume significant amounts of capital. For these
reasons, Crested believes that its uranium properties will be low cost uranium
producers compared to some of the other uranium mines now in operation, and also
compared to the costs to develop new properties and build new uranium mills.
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<PAGE>
Nonetheless, the decision by USE and Crested to put any mine into
production, and the commitment of funds necessary to implement that commitment,
must be made well in advance of the time when revenues from the mined resource
are received. Price fluctuations between the time the production commitment is
made, and the time when production and sales occur, can significantly impact the
economics of the mine. If the sales revenues fall below production costs for a
substantial period of time, it is possible that USE and Crested could determine
that it is not then economically feasible to continue production operations.
Taking into account all of the relevant factors discussed above, Crested intends
throughout fiscal 1999 to seek the financing to put the uranium properties into
production, and in the meantime to seek long term utility contracts to take the
uranium production, with the ultimate goal of being in full production in
Wyoming in April 2000, and milling the stockpiled uranium in Utah in late fiscal
1999 or early fiscal 2000. There is no assurance such financing will be
obtained, nor is there assurance prices will not decrease, which would make
obtaining such financing more expensive or impossible.
NUEXCO EXCHANGE VALUE. The market related contracts to sell uranium
oxide to utilities usually are based on an average of the Nuexco Exchange Value
("NEV") or some other market quotes for 2, 3 or more months before the uranium
delivery. The high and low NEV reported on U3O8 sales during USE's past seven
fiscal years are shown below. NUEXCO Exchange Values are now reported weekly by
TradeTech and represents its judgment of the price at which spot and near term
transactions for significant quantities could be concluded. NEVs for fiscal 1993
are higher for U.S. transactions, due to the impact of CIS import restrictions
since late 1992. These prices ("US NEV") were reported by NUEXCO for spot sales
in the restricted U.S. market.
NUEXCO EXCHANGE VALUE
US $/pound of U3O8
Years Ended ------------------
May 31, High Low
------------- ---- ---
1992 $ 9.05 $ 7.75
1993 10.05 7.75
1994 9.60 9.05
1995 12.20 9.65
1996 16.50 13.00
1997 14.25 10.20
1998* 12.05 10.50
* Through August 10, 1998 when it was $10.50/lb.
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.
The foregoing prices represent the "spot" market only, and indicate
transactions primarily by utilities purchasing to cover short positions.
Long-term supply contracts, which cover up to 10 to 15 percent of the uranium
sold from year to year, carry prices which are in excess of the spot market.
This price premium is paid by the utilities to assure long term price stability;
the producer demands the premium to compensate for future price increases which
could (but may not) exceed the premium. Utilities keep their long term contract
provisions confidential, so it is difficult to assess any one utility company's
long term contract plans or needs. The amount of the price premium will vary
from time to time.
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<PAGE>
GOLD
LINCOLN PROJECT (CALIFORNIA)
SUTTER GOLD MINING COMPANY. In fiscal 1991, USE acquired an interest in
the Lincoln Project (including the underground Lincoln Mine 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 totaling a net of
US$7,115,400 ($1,272,000 through a private placement conducted in the United
States by RAF Financial Corporation ("RAF"), and $5,843,400 through a private
placement conducted in Toronto, Ontario, Canada by C.M. Oliver & Company
Limited). The net proceeds of $6,511,200 from these financings (after deduction
of commissions and offering costs) are being applied to pre-production mine
development, mill design, and property holding and acquisition cost. Additional
financing of up to $15,000,000 will be sought to fund the development and
construction of the mine/mill. SGMC's properties contain an estimated amount of
proven reserves (see below). Because the properties are not yet in production
and the needed funding is not yet available to do so (gold is at $290 per ounce,
which has hampered efforts to raise capital), the recorded value of SGMC's
mineral properties has been reduced as of May 31, 1998. See "Item 7,
Management's Discussion and Analysis Financial Condition and Results of
Operations." If such financing is not available by the end of fiscal 1999, or if
gold prices do not improve, the value of Crested's investment in SGMC could be
deemed further impaired and more of such investment written off during fiscal
1999. SGMC intends to fund the development and construction of the project
through private or public debt and/or equity financing. At Report date SGMC is
in discussions with certain investment banks, however, no agreements for
financing have been reached, and there is no assurance any agreements will be
reached.
In fiscal 1998, due to the depressed gold price and gold equity market,
SGMC suspended the start of construction of the 1,000 ton-per-day gold mill
complex and development of the underground mine. SGMC initially anticipated
production mining would commence in mid-calendar 1998 and by that time,
construction of a 1,000 ton per day gold mill would have been completed. Once a
decision to commence production is made, from that date, it is estimated it will
take approximately 18 months to complete the mill complex construction and pour
the first bar of gold. During fiscal 1998, SGMC pursued amendments to its
approved 1993 Conditional Use Permit (see "Permits and Future Plans"), finalized
the process flow of the mill, entered into the final design engineering contract
with the engineering firm of Lockwood Greene of Dallas, Texas and started to
build the entrance road to the mine.
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, USE and Crested
each own the following securities of SGMC:
(a) Together, a majority (after the April 1998 transaction, discussed
below) of the outstanding shares of SGMC Common Stock, which would be reduced in
the event outstanding warrants held by the remaining Canadian investors to
purchase 564,900 more shares of Common Stock are exercised at Cdn$6.00 per share
18 months from the date of closing of the private offerings (which were
completed in May 1997) 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 does not reflect SGMC shares that may
be acquired by USE and Crested pursuant to the USECC $10,000,000 Contingent
Stock Purchase Warrant (described below) issued as consideration for the
voluntary reductions in the ownership of SGMC shares by
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<PAGE>
USE and Crested. One reorganization of the capital structure was made in
contemplation of its private placement of SGMC shares, and a second
reorganization was made in contemplation of 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 for the Canadian private placement. The USECC Warrant is owned 88.9% by USE
and 11.1% by Crested. The USECC Warrant provides that for each ounce of gold
over 300,000 ounces added to the proven and probable category of SGMC's reserves
(up to a maximum of 400,000 additional ounces), using a cut-off grade of 0.10
ounces of gold per ton (at a minimum vein thickness of 4 feet), USE and Crested
will be entitled to cash or additional shares of Common Stock from SGMC (without
paying additional consideration) at SGMC's election. The number of additional
shares issuable for each new ounce of gold reserves will be determined by
dividing US$25 by the greater of $5.00 or the weighted average closing price of
the Common Stock for the 20 trading days before exercise of the USECC Warrant.
The USECC Warrant is exercisable semi-annually. If SGMC decides against the
exercise of the USECC Warrant, it can 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.
APRIL 1998 TRANSACTION FOR CASH AND SGMC SPECIAL WARRANTS. As of April
7, 1998, USE entered into four separate Stock Purchase Agreements with four
Canadian investment funds, for the issuance of 658,895 shares of Common Stock of
USE, in consideration of the funds' payment to USE of $1,190,000 in cash and the
delivery to USE of 888,900 Special Warrants of SGMC. The funds had paid SGMC a
total of Cdn$4,888,950 in May 1997, pursuant to a private offering in Canada, to
purchase the Special Warrants from SGMC. Each Special Warrant entitles the
holder to acquire from SGMC, at no further cost, one share of Common Stock of
SGMC, and one Purchase Warrant; each Purchase Warrant entitles the holder to
purchase one share of Common Stock of SGMC, at a price of Cdn$6.00 per whole
share (the "Purchase Warrants"), through November 13, 1998. For further
information on this transaction, reference is made to USE's Annual Report on
Form 10-K for fiscal year ended May 31, 1998.
USECC MANAGEMENT AGREEMENT WITH 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. USECC is
reimbursed for actual costs incurred, plus an extra 10% during the exploration
and development phases; 2% during the construction phase; and 2.5% during the
mining phase (such 2.5% charge to be replaced with a fixed sum which the parties
will negotiate at the end of two years starting when the mining phase begins).
The Management Agreement replaces a prior agreement by which USECC provided
administrative services to SGMC.
PROPERTIES. SGMC (through its subsidiary USECC Gold) holds approximately
14 acres of surface and mineral rights (owned), 55 acres of surface rights
(owned), 436 acres of surface rights (leased), 158 acres of mineral rights
(leased), and 380 acres of mineral rights (owned), all on patented mining claims
near Sutter Creek, Amador County, California. The properties are located in the
western Sierra Nevada Mountains at from 1,000 to 1,500 feet in elevation; year
round climate is temperate. Access is by California State Highway 16 from
Sacramento to California State Highway 49, then by paved county road
approximately .4 miles outside of Sutter Creek.
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
24
<PAGE>
for the Surface Fill Unit and the 32 Acre Property provides the land necessary
for access and utility easements to Hwy 49.
Surface and mineral rights holding costs will aggregate approximately
$225,000 from June 1, 1998 through May 31, 1999. Property taxes for fiscal 1998
are estimated to be $30,000.
The leases are for varying terms, and require rental fees, advance
production royalties, real property taxes and insurance. The lease that was to
expire in February 1998 has been extended through its force majeure clause due
to the low price of gold. Leases expiring before 2010 will generally be extended
automatically, so long as minerals are continuously produced from the property
that is subject to the lease or minimum payments are made . Other leases may be
extended for various periods on terms similar to those contained in the original
leases. Production royalties are from 2.5% to 6% (most are 4%). The various
leases have different methods of calculating royalty payments (net smelter
return and gross proceeds).
A separate holder of four of the properties that were assembled 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, 1998, an estimated $21,000,000 was spent on the Lincoln
Project by Meridian, USECC Gold and other of 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 1998 fiscal year was approximately $1,410,800 ($572,700
in 1997).
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 (and updated the study in 1997). 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 0.15 ounces of gold per ton in place, PAH
estimates the Lincoln Project contains approximately 350,000 tons of proven and
probable reserves grading approximately 0.4 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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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. On July 14, 1998 the Amador County Planning Commission certified the
Final Subsequent Environmental Impact Report ("FSEIR:) and approved all of the
amendments requested by SGMC. The decision by the Planning Commission has been
appealed to the Amador County Board of Supervisors by a local citizens' group
and will be heard by the Board of Supervisors in August 1998; further appeal
would be available to the Amador County Superior Court if the opposition lost at
the Board of Supervisors level. The appeal deals only with the adequacy of the
FSEIR; since SGMC already has a valid CUP, SGMC could continue to move forward
on certain parts of the development of the mine/mill. In any event, SGMC does
not expect the appeal process to materially impact the development plan or
schedule. Amendments to the CUP will remove two tailings dams, eliminate the
need to use cyanide on-site, and eliminate mine related traffic on two county
roads.
PROPOSED MINE PLAN
In 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 (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 at startup is expected to increase up to 500 tons per day ("tpd")
during the first six months of mining operations. Ore will be conveyed to the
surface through an off shoot portal from the 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 1,000 tpd in approximately the third year of operation.
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
There are three stages of milling and processing the ore. The first
stage involves wet grinding of the ore to the size of fine sand in a
semi-autogenous grinding ("SAG") mill. The resulting finely-milled ore is
treated in a gravity separator which employs centrifugal force to separate the
heavier free gold particles from the lighter rock particles. Next, the gold
concentrate is run across a set of cleaning tables to upgrade the gold
concentrate. The second stage takes the middlings and tails from the first and
again involves wet grinding in a ball mill to a finer size particle. This ground
ore is again treated in a similar gravity separator which is tuned for this
finer size particle and the gold concentrate is run across a different set of
cleaning tables. The third stage separates the remaining gold by flotation
wherein minute quantities of non-toxic chemicals are added to the ground ore
which makes the gold bearing particles attach to air bubbles. The gold bearing
particles are then separated from the ground ore into a flotation concentrate.
At this stage, the flotation concentrate is either reground and processed with a
dilute solution of sodium cyanide or shipped offsite. SGMC is planning on
shipping the flotation concentrate offsite, even though its CUP allows
processing with sodium cyanide. The mill is designed to produce several
gold-bearing products: a high-grade gravity concentrate; a flotation concentrate
or a gold precipitate if the cyanide process is used. These gold-bearing
products will be smelted to dore bullion for shipment to a precious metal
refinery. During processing, 95 to 97% of the processed ore
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will be removed. Of this material, approximately 65% will be placed underground
as structural fill and 35% will be placed into the Surface Fill Unit.
MOLYBDENUM
As holders of royalty, reversionary and certain other interests in
properties located at Mt. Emmons near Crested Butte, Colorado, USE and Crested
are entitled to receive annual advance royalties of 50,000 pounds of molybdenum,
or cash equivalent (one-half to each). AMAX Inc. (which was acquired by Cyprus
Minerals Company and was renamed Cyprus Amax Minerals Company in November 1993)
delineated a deposit of molybdenum containing approximately 146,000,000 tons of
mineralization averaging 0.43% molybdenum disulfide on the properties of USE and
Crested.
Advance royalties are paid in equal quarterly installments, until: (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 USE and Crested. USECC did not receive any advance royalties during fiscal
1996 because of an arrangement with Cyprus Amax described below. 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.
In fiscal 1995, 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. Crested recognized $105,500
and $103,600 of revenues in fiscal 1998 and 1997, respectively related to this
royalty interest.
MOLYBDENUM MARKET INFORMATION
Molybdenum is a metallic element with applications in both metallurgy
and chemistry. Principal consumers include the steel industry, which uses
molybdenum alloying agents to enhance strength and other characteristics of its
products, and the chemical, super-alloy and electronics industries, which
purchase molybdenum in upgraded product forms.
The molybdenum market is cyclical with prices influenced by production
costs and the rate of production of foreign and domestic primary and by-product
producers, world-wide economic conditions particularly in the steel industry,
the U.S. dollar exchange rate, and other factors such as the rate of consumption
of molybdenum in end-use products. When molybdenum prices rose dramatically in
the late 1970s, for example, steel alloys were modified to reduce reliance on
molybdenum. AMAX and Cyprus Minerals Company were the two major primary
producers of molybdenum in the United States until November 1993, when AMAX was
acquired by Cyprus.
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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 1999.
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 were in the $4.00 to
$4.40 per pound range in September 1997 and $3.75 in July 1998.
PARADOR MINING (NEVADA)
USE and Crested are sublessees and assignees from Parador Mining Co.,
Inc. ("Parador"), of certain rights under two patented mining claims located in
the Bullfrog Mining District of Nye County, Nevada. The claims are immediately
adjacent to and part of a gold mine operated by Bond Gold Bullfrog, Inc.
("BGBI"), a non-affiliated third party (now known as Barrick Bullfrog, Inc.).
USE and Crested have also been assigned certain extralateral rights associated
with the claims and certain royalty rights relating to a prior lease on those
properties. The lease to USE and Crested is for a ten year primary term, is
subject to a prior lease to BGBI on the properties, and allows USE and Crested
to explore for, develop and mine minerals from the claims. If USE and Crested
conduct activities on the claims, they are entitled to recover costs out of
revenues from extracted minerals. After recovering any such costs, USE and
Crested will pay Parador a production royalty of 50 percent of the net value of
production sold from the claims.
USE, Crested and Parador presently are in litigation concerning this
property. See Item 3, "Legal Proceedings - BGBI Litigation."
OIL AND GAS.
FORT PECK LUSTRE FIELD (MONTANA). USECC conducts a small oil production
operations at the Lustre Oil Field on the Ft. Peck Indian Reservation in
north-eastern Montana; 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 Fort Peck (Montana) Assiniboine
and Sioux Tribes, had certain rights to explore Montana properties for shallow
natural gas. Exploration efforts were unsuccessful prior to 1998, and Energx was
released from the property agreements in 1998. Other Energx projects have also
been unsuccessful. Accordingly, in fiscal 1998 Energx decided to cease all
operations pending evaluation of future options.
REAL ESTATE AND OTHER COMMERCIAL OPERATIONS
Crested 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 and other subsidiaries
in the business sectors include ownership and management of a commercial office
building, the townsite of Jeffrey City, Wyoming and the townsite, motel,
convenience store and other commercial facilities in Ticaboo, Utah.
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WYOMING PROPERTIES. USECC owns a 14-acre tract in Riverton, Wyoming,
with a two-story 30,400 square foot office building (including underground
parking). The first floor is rented to affiliates, nonaffiliates and government
agencies; the second floor is occupied by USE and Crested and is adequate for
their executive offices. The property is mortgaged to the WDEQ as security for
future reclamation work on the SMP Crooks Gap uranium properties.
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. WEA owns and
operates an aircraft fixed base operation with fuel sales, flight instruction
services and aircraft maintenance in Riverton, Wyoming.
USE and Crested also own 18 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 are selling lots at Jeffrey City and
made sales aggregating $38,400 and $21,150 during fiscal 1998 and 1997,
respectively.
USE owns five city lots and a 20-acre tract with improvements including
two smaller office buildings and three other buildings with 19,000 square feet
of office facilities, 5,000 square feet of laboratory space and repair and
maintenance shops containing 8,000 square feet, all in Riverton, Wyoming.
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. USE 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
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development. The sale was accounted for as an installment sale and thus the gain
on sale was deferred, to be recorded as the notes were paid. Both notes required
annual interest payments.
In fiscal 1997, USE and Crested agreed with Pangolin to restructure the
remaining obligations of Pangolin. Under the restructuring, Contour Development
Company LLC gave USE and Crested two recourse, secured promissory notes: the
first note for $454,894 due January 26, 1998, the second note for $872,508. The
notes are secured by Contour's 73% interest in Tenderfoot Properties LLC ( a
Colorado limited liability company affiliated with Contour). 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 plus interest). Also, the first note
($454,894) was not paid in January 1998. In July 1998, USE and Crested filed a
lawsuit against Contour and associated parties to seek recovery of the balance
owing on the promissory notes and contracts. See Item 3, "Legal Proceedings."
UTAH PROPERTIES. Canyon Homesteads, Inc. (a Plateau subsidiary) owns a
majority interest in a joint venture which holds the Ticaboo Townsite in
Ticaboo, Utah (see "Minerals - Uranium-Shootaring Canyon Mill - Ticaboo
Townsite" above). In fiscal 1995, USE acquired the minority interest in the
joint venture from a nonaffiliate. Revenues from sale of homesites and operation
of the motel were nominal in 1998.
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 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
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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.
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
approximately 120 full-time employees as of the date of this Report. Payroll
expense has been shared by USE and Crested since 1981.
MINING CLAIM HOLDINGS
TITLE TO PROPERTIES. Nearly all the uranium mining properties held by
GMMV, USE and Plateau are on federal unpatented claims. Unpatented claims are
located upon federal public land pursuant to procedure established by the
General Mining Law. Requirements for the location of a valid mining claim on
public land depend on the type of claim being staked, but generally include
discovery of valuable minerals, erecting a discovery monument and posting
thereon a location notice, marking the boundaries of the claim with monuments,
and filing a certificate of location with the county in which the claim is
located and with the BLM. If the statutes and regulations for the location of a
mining claim are complied with, the locator obtains a valid possessory right to
the contained minerals. To preserve an otherwise valid claim, a claimant must
also 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.
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ITEM 3. LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
In 1991, disputes arose between USE/Crested, and Nukem, Inc. and its
subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation
and operation of the Sheep Mountain Partners partnership for uranium mining and
marketing, and activities of the parties outside SMP. Arbitration proceedings
were initiated by CRIC in June 1991 and in July 1991, USECC filed a lawsuit
against Nukem, CRIC and others in the U.S. District Court (District of
Colorado). Later, USECC filed another suit for the standby costs at the SMP
mines against SMP in the Colorado State Court. The Federal Court stayed the
arbitration proceedings and the State Court case was also stayed. In fiscal
1994, all of the parties agreed to exclusive and binding arbitration of the
disputes before the American Arbitration Association, for which the legal claims
made by both sides included fraud and misrepresentation, breach of contract,
breach of duties owed to the SMP partnership, and other claims.
Following 73 hearing days and various submissions by the parties, the
arbitration panel (the "Panel") entered an Order and Award (the "Order") in
April 1996 finding generally in favor of USE and Crested on certain of their
claims (including the claims for reimbursement for standby maintenance expenses
and profits denied SMP in Nukem's trading of uranium), and in favor of
Nukem/CRIC and against USE and Crested on certain other claims.
Approximately $18 million of SMP cash had been placed in escrow and a
bank account by agreement of the parties pending resolution of the disputes.
The April 1996 Order awarded USE and Crested monetary damages of
approximately $7,800,000 with interest (after deduction of monetary damages
which the Arbitration panel awarded in favor of Nukem/CRIC and against USE and
Crested). An additional amount of approximately $4,300,000 was awarded by the
Panel to USE and Crested, to be paid out of the escrowed $18 million and SMP
cash. This $4,300,000 was USE and Crested's share of SMP profits from selling
uranium to utilities and advances to purchase uranium for SMP. The Panel also
ordered that one utility supply contract which had been in dispute belonged to
SMP, not Nukem, and that Nukem was to assign that contract to SMP. The Panel
further ordered that certain contracts which Nukem had obtained for the purchase
of uranium from countries in the CIS (former Soviet republics) belonged to SMP.
After motions and further proceedings in the Federal District Court, and
a reaffirmation Order by the Panel in July 1996, the U.S. District Court
confirmed the Panel's Order and Award. In November 1996, USECC received the
$4,367,000 of the damage award out of the SMP escrowed funds and a separate SMP
bank account. In confirming the Panel's Order, the Court ordered Nukem to assign
a utility contract to SMP; to pay USECC a net amount of approximately $8,465,000
in monetary damages; and impressed a constructive trust in favor of SMP on
Nukem's rights to purchase CIS uranium, the uranium acquired pursuant to those
rights, and profits therefrom. Nukem/CRIC posted a supersedeas bond for
$8,613,600 and the Court stayed execution on the judgment. The bond did not
cover the value of the CIS contracts at issue because the Panel's Order did not
value such contracts.
Nukem/CRIC appealed the District Court's Judgment to the 10th Circuit
Court of Appeals, and the matter is set for oral argument on September 24, 1998
in Oklahoma City, Oklahoma. The issues to be decided are: whether the U.S.
District Court, in confirming the Panel's Order, provided for a double recovery
to USE and Crested (i.e., awarding both $8,465,000 in monetary damages and
one-half of the profits SMP has made on uranium contracts); and whether the
constructive trust on the CIS contracts covers only an amount of profits
necessary to secure Nukem/CRIC's payment of the $8,645,000 monetary award in
favor of USE and Crested. USE's positions on these issues are that there is no
double recovery; and that the constructive trust of SMP on
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the CIS contracts extends to all such contracts and profits therefrom, because
Nukem obtained the contracts for its own account outside of and hence in
violation of Nukem's fiduciary obligations to SMP as a general partner.
During the fourth quarter of fiscal 1998, USE and Crested entered into a
partial settlement with Nukem and CRIC on certain of the claims not on appeal.
Under the partial settlement, USECC received (i) from SMP an assignment of all
of the mining claims and equipment which had been held by SMP (USECC remains
responsible for the reclamation liabilities associated with the claims as had
always been the case when the properties were in SMP); (ii) from Nukem and CRIC,
$484,361 which settled USE and Crested's claim to their share of the past and
future profits on a utility contract which Nukem had wrongfully kept outside of
SMP (and Nukem was allowed to keep this contract as part of the settlement);
(iii) from Nukem and CRIC, $4,540,000 to settle all claims by USE against Nukem,
CRIC and SMP (including Nukem/CRIC's one-half share of the SMP mine maintenance
costs); (iv) from SMP, a contract to sell 1,076,842 pounds of uranium oxide to a
utility; and (v) from SMP, a contract to purchase 600,000 pounds of uranium
oxide from another producer in North America (200,000 pounds annually through
2000). In connection with the partial settlement, the parties agreed to the
dismissal with prejudice of the Colorado and Wyoming State Court proceedings
(for reimbursement of SMP mine maintenance costs), and all claims in the Federal
District Court and the arbitration, except for the issues pending before the
10th Circuit Court of Appeals. The cash settlement portion under (iii) above is
in addition to the $4,367,000 received by USECC in November 1996 out of the SMP
escrowed funds. USECC is negotiating to sell the purchase contract under (v) to
Nukem.
TICABOO TOWNSITE LITIGATION. In fiscal 1998, a prior contract operator of the
Ticaboo restaurant and lounge, and two employees supervising the motel and
convenience store in Utah (owned by Canyon Homesteads, Inc.) sued USE, Crested
and others in Utah State Court. After a five day trial, a jury denied the claims
of two of three plaintiffs but awarded the third plaintiff $156,000 in damages
against USE. USE is appealing the award.
BGBI LITIGATION
USE and Crested are defendants and counter- or cross-claimants in
certain litigation in the District Court of the Fifth Judicial District of Nye
County, Nevada, brought by Bond Gold Bullfrog Inc. ("BGBI") on July 30, 1991.
BGBI (now known as Barrick Bullfrog, Inc.) is an affiliate of Barrick Corp., a
large international gold producer headquartered in Toronto, Canada. The
litigation primarily concerns extralateral rights associated with two patented
mining claims owned by Parador Mining Company Inc. ("Parador") and initially
leased to a predecessor of BGBI, which claims are in and adjacent to BGBI's
Bullfrog open pit and underground mine. USE and Crested assert certain interests
in the claims under an April 1991 assignment and lease with Parador, which is
subject to the lease to BGBI's predecessor.
BGBI seeks to quiet title to its leasehold interest in the subject
claims, 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 other claims and 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.
A partial or bifurcated trial to the Court of the extralateral rights
issues was held on December 11 and 12, 1995, 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 warrant application of the doctrine of extralateral
rights as set forth in such statute. The Court found that Parador had failed to
meet its burden of proof and therefore Parador, USE and Crested have no right,
title and interest in the minerals lying beneath the claims of Layne pursuant to
extralateral rights. The partial trial did not address the issues of breach of
contract by the defendants and BGBI for specific performance and they were tried
before the Court commencing on January 26, 1998. After
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the trial, the Court found against the parties on their respective claims, and
the plaintiff and these defendants filed a Notice of Cross-Appeal and Notice of
Appeal, respectively to the Nevada Supreme Court. The record on appeal has been
filed with the Nevada Supreme Court and the appeals process is underway.
DEPARTMENT OF ENERGY LITIGATION
On July 20, 1998, eight uranium mining companies with operations in the
United States (including USE, Crested, YSFC) and the Uranium Producers of
America (a trade organization) filed a complaint against the United States
Department of Energy (the "DOE") in a lawsuit (file no. 98 CV 1775) in the
United States District Court, Cheyenne, Wyoming. The complaint seeks declaratory
judgment and injunctive relief. The plaintiffs allege that the DOE violated the
USEC Privatization Act of 1996, when the DOE transferred 45 metric tons of low
enriched uranium and 3,800 metric tons of natural uranium to United States
Enrichment Corp. ("USEC"). See Item 1, "Business, Uranium Marketing - U.S.
Enrichment Corporation" above.
Specifically, the plaintiffs allege that the USEC Privatization Act
authorizes the DOE to transfer to USEC "without charge" an initial 50 metric
tons of highly enriched uranium and 7,000 metric tons of natural uranium. The
Act authorizes the DOE to sell (not merely transfer) additional quantities of
uranium out of the DOE stockpile, but only upon payment of fair market value for
the uranium and then only upon specific finding by the DOE that such a sale
would not have an adverse material impact on the domestic uranium, mining,
conversion or enrichment industry, taking into account sales under the Russian
HEU Agreement and the Suspension Agreement.
The plaintiffs have asked the Court to declare that (i) the DOE violated
its statutory authority by transferring uranium to USEC in excess of statutory
limits on volume; (ii) the excess amounts were not "sold" by the DOE to USEC for
fair value, as required by the Act, and mandated findings by the DOE concerning
possible adverse impacts were not supported in fact; and (iii) the DOE be
enjoined from future transfers in violation of the Act.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the United States District
Court, Denver, Colorado against Contour Development Company, L.L.C. and entities
and persons associated with Contour Development Company, L.L.C. (together,
"Contour") seeking compensatory and consequential damages of more than $1.3
million from the defendants for dealings in certain real estate.
Specifically, USE (which is the assignee of Crested's rights and
interests in certain of the promissory notes, contracts and agreements) alleges
that Contour has breached contracts for the sale of USE's and Crested's Gunnison
properties, and is in default on the promissory notes delivered to pay for the
Gunnison properties. USE has further alleged that Contour fraudulently induced
USE and Crested to enter into restructuring agreements for the original
transactions between the parties in such properties; and further, that Contour
has breached the duties of good faith, honesty, full disclosure and fair dealing
which were owed to USE and Crested by Contour in the course of the transactions.
USE has made additional claims against Contour for unjust enrichment and
conversion of the real estate assets. See Item 1, "Business - Commercial
Operations - Real Estate and Other Commercial Operations - Colorado Properties"
above.
As of the date of this Report, Contour has not filed an answer to the
complaint.
34
<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 USE who are not
also directors.
ROBERT SCOTT LORIMER, age 47, has been Controller and Chief Accounting
Officer for both USE and Crested for more than the past five years. Mr. Lorimer
also has been Chief Financial Officer for both these companies since May 25,
1991, their Treasurer since December 14, 1990, and Vice President Finance since
April 1998. He serves at the will of each board of directors. There are no
understandings between Mr. Lorimer and any other person, pursuant to which he
was named as an officer, and he has no family relationship with any of the other
executive officers or directors of USE or Crested. During the past five years,
he has not been involved in any Reg. S-K Item 401(f) listed proceeding.
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, 1998
------------------------------
Fourth quarter ended 5/31/98 $0.45 $0.22
Third quarter ended 2/29/98 0.46875 0.25
Second quarter ended 11/30/97 0.71875 0.4375
First quarter ended 8/31/97 0.8125 0.34375
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
(b) Holders.
(b)(1) At September 3, 1998 there were approximately 1,900 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, 1998, Crested did not issue any shares of its
Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
May 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current assets $ 4,809,300 $ 1,049,500 $ 596,200 $ 512,600 $ 282,800
Current liabilities 9,282,300 6,592,400 6,848,300 5,518,500 555,000
Working capital (4,473,000) (5,542,900) (6,252,100) (5,005,900) (272,200)
Total assets 10,211,400 6,285,700 8,132,500 8,097,800 8,092,900
Long-term obligations(1) 768,000 741,700 725,900 853,700 4,688,700
Shareholders' equity/(deficit) 117,200 (1,092,300) 521,900 1,690,800 2,849,200
<FN>
(1) Includes $725,900, $725,900, $725,900, $847,800 and $847,800 of
accrued reclamation costs on uranium properties for fiscal 1997, 1996,
1995, 1994 and 1993, respectively.
</FN>
</TABLE>
<TABLE>
<CAPTION>
For Years Ended May 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $4,659,900 $1,703,500 $ 2,509,200 $ 1,160,200 $ 2,870,000
Income (loss) before
equity in loss of
affiliates and
income taxes 1,581,700 (862,400) (811,000) (1,031,100) (1,297,600)
Equity in loss of
affiliates (372,200) (807,900) (357,900) (415,900) (657,600)
---------- ---------- ----------- ---------- -----------
Net income (loss) 1,209,500 (1,670,300) (1,168,900) (1,447,000) (1,955,200)
=========== ========== =========== ========== ===========
Net income (loss)
per share $ .12 $ (.16) $ (.12) $ (.14) $ (.19)
========== ========== =========== ========== ===========
Cash dividends per share -0- -0- -0- -0- -0-
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following is Management's Discussion and Analysis of significant
factors that have affected the Company's liquidity, capital resources and
results of operations during the periods included in the accompanying
consolidated financial statements.
Some of the statements in this Management's Discussion and Analysis
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or
36
<PAGE>
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking
statements.
LIQUIDITY AND CAPITAL RESOURCES AT MAY 31, 1998
WORKING CAPITAL COMPONENTS
Net cash used in operating activities was $922,700 for the year ended
May 31, 1998. Cash provided by investing activities and financing activities
during fiscal 1998 was $675,800 and $574,000, respectively. For the year, these
activities resulted in a net increase of $975,600 in cash. At May 31, 1998, the
Company had a working capital deficit of $4,473,000 as compared to a working
capital deficit of $5,542,900 at May 31, 1997.
The decrease in the working capital deficit of $1,069,900 is the result
of increases in accounts receivable of $2,882,300. This decrease in the working
capital deficit was offset by reductions in the current portion of long-term
receivables of $76,200 and inventory and other assets of $21,900. The decrease
in the working capital deficit was further offset by increases in a deferred
purchase option related to GMMV, accounts payable, debt to affiliate, and long
term debt of $2,000,000, $142,200, $523,700 and $24,000, respectively.
Accounts receivable from affiliates increased by $343,700 primarily as a
result of increased amounts due from USECC as a result of increased activity on
the GMMV properties. These amounts were paid after May 31, 1998.
In June 1998, the Company and USE signed an agreement with Nukem/CRIC as
partial satisfaction of the monetary damages awarded by the Arbitration Panel.
The Company received $2,513,000 as a result of this settlement which occurred in
the fourth quarter of fiscal 1998. The Company eliminated its investment in SMP
and recognized the balance as income of which the Company's portion was
$2,295,000.
Cash provided by financing activities resulted from a net increase in
debt to affiliates of $523,700 as the Company's parent, U.S. Energy Corp.
("USE") advanced the Company's portion of operating and capital costs for the
various mining and commercial ventures in which the Company participates.
Cash provided by investing activities was due to $707,200 of purchases
of Property, Plant and Equipment. This increase was partially offset by an
increase in long-term receivables of $251,800 and $218,700 invested in
affiliates.
CAPITAL RESOURCES
GENERAL: The primary source of the Company's capital resources for
fiscal 1999 will be cash on hand at May 31, 1998, possible equity financing from
affiliated companies, proceeds under the line of credit discussed below, and
loans from USE. Additionally, the Company and USE will continue to offer for
sale various non-core equipment assets such as lots and homes in Ticaboo, real
estate holdings in Wyoming, Colorado and Utah and mineral interests. Interest,
rentals of real estate holdings and equipment, aircraft chartering and aviation
fuel sales, also will provide cash.
LINE OF CREDIT: The Company and USE have a $1,000,000 line of credit
with a commercial bank. The line of credit is secured by various real estate
holdings and equipment belonging to the Company and USE. This facility is
currently available to the Company and USE. It is anticipated that this line of
credit may be used to finance working capital needs as well as the purchase of
uranium in the open market to fulfill the delivery of an SMP contract the
Company and USE received in partial settlement of certain of the SMP arbitration
matters.
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<PAGE>
FINANCING: Equity financing for Sutter Gold Mining Company ("SGMC") and
Plateau Resources ("Plateau") are dependent on the market price of gold and
uranium among other things. At May 31, 1998, the prices for these metals were
depressed and it is not known when or if they will recover. No assurance can be
given that prices will improve during fiscal 1999. If the prices do not recover,
the ability of the Company and USE to raise equity financing for these
subsidiaries will be impaired.
SUMMARY: The Company believes that cash on hand and proceeds from its
line of credit, if needed, will be adequate to fund working capital requirements
through fiscal 1999. However, these capital resources will not be sufficient to
provide the funding for major capital expansions of the Company's mineral
properties.
CAPITAL REQUIREMENTS
GENERAL: The primary requirements for the Company's working capital
during fiscal 1999 are expected to be the costs associated with development
activities of Plateau, care and maintenance costs of the former SMP mineral
properties, payments of holding fees for mining claims, purchases of uranium for
delivery to the utility contract that was received by the Company and USE as a
result of the settlement agreement reached regarding the SMP arbitration, the
Company's portion of the costs associated with the GMMV properties and corporate
general and administrative expenses.
SGMC: The Company owns 4% of the outstanding stock of SGMC. As such, it
is not directly responsible for the administrative and capital obligations of
bringing the SGMC gold properties into production. Through its affiliation with
USE, however, the Company assists in the securing of financing to place these
gold mineralized properties into production.
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. It is the intent of the Company and USE to complete the
necessary financing in fiscal 1999 to develop the reserves of SGMC. Management
believes that if adequate funding is obtained, production will begin in fiscal
2000. SGMC is currently attempting to negotiate financing with an investment
firm with a proposed plan for the necessary financing intended to be completed
in fiscal 1999. Management of SGMC believes sufficient capital resources are
available to SGMC to continue its permitting efforts as well as the raising of
capital.
SMP: As part of a settlement agreement reached during the fourth quarter
of fiscal 1998, the SMP mines and associated properties were transferred to the
Company and USE. All past holding costs of the SMP mines have been resolved and
the future cost of standby as well as reclamation are the obligation of the
Company and USE. These costs are estimated at approximately $85,000 per month.
There are no current plans to mine the SMP Crooks Gap properties during fiscal
1999. However, the Company and USE will continue to preserve the mineral
properties and develop concepts to reduce care and maintenance costs.
All matters in the SMP arbitration have been settled with the exception
of two issues that are currently before the 10th Circuit Court of Appeals. Oral
arguments are scheduled on these issues for September 24, 1998. Management of
the Company cannot predict the timing or ultimate outcome of this hearing but
believes that the issues will be resolved during fiscal 1999 unless Nukem and
CRIC elect to appeal the decision further to the U.S. Supreme Court and that
court determines to hear the appeal.
GMMV: On June 23, 1997, USE and USECC, a joint venture between the
Company and USE, signed an Acquisition Agreement with Kennecott for the right to
acquire Kennecott's interest in the GMMV for $15,000,000 and other
consideration. As discussed in Note F to the financial statements, Kennecott
paid the Company and USE $4 million upon execution of the Agreement, which
became nonrefundable upon the satisfaction of certain terms. One half of the $4
million was treated by the Company as deferred income pending the satisfaction
of the nonrefundability
38
<PAGE>
terms, all of which were satisfied by November 30, 1998 at which time the $2
million was classified as a deferred purchase option, since it will be recorded
as a reduction of the Company's purchase price if the Acquisition Agreement
closes.
During July 1998, the GMMV Management Committee unanimously agreed to
place the Jackpot Mine and Sweetwater Mill on active standby status. This
decision was made as a result of uncertainties in the short term uranium market.
These same uncertainties have made the financing of the acquisition of
Kennecott's interest in GMMV difficult. The Company and USE continue in their
financing activities in an effort to raise sufficient capital to acquire the
Kennecott interest in the GMMV. It is believed that such financing efforts may
not be concluded by the terms of the Acquisition Agreement with Kennecott.
Kennecott continues to work with the Company in its efforts to successfully
close the purchase of Kennecott's interest.
The standby costs of the GMMV mine, associated property and mill will
eventually become the responsibility of the individual partners on a percentage
ownership basis. Currently, the partners in the GMMV are discussing how to
operate and fund the operations of the properties. Budgets have not been
finalized but it is projected the annual holding costs of the mine and mill will
be approximately $2,000,000. The Company and USE will be obligated to pay their
share of these costs once the obligations of Kennecott are completely satisfied.
Due to the unpredictability of the uranium market, the Company is unable to
predict when the GMMV properties will again be put on an active basis or when it
will be able to purchase Kennecott's interest in the GMMV, if at all.
PLATEAU: Plateau owns and operates the Ticaboo townsite, motel,
convenience store and restaurant. These operations of Plateau generated a loss
of $800,000 in fiscal 1998, which were absorbed by the Company and USE. The
Company and USE continue to work on methods of increasing revenues and reducing
costs. There has been an annual growth in sales since the Company and USE have
owned Plateau.
The Company and USE are currently working to obtain the necessary
permits from the NRC and State of Utah to place the Shootaring mill which is
owned by Plateau and located in southern Utah into production. The Company and
USE are seeking debt or equity financing of between $6,000,000 and $9,000,000 to
put the mill and Tony M. Mine into production. Until such time as the financing
is obtained and profitable contracts are obtained, the Company and USE will not
put the properties into production.
YELLOW STONE FUELS CORP. ("YSFC"): In Management's opinion, YSFC has
sufficient cash to complete its projected 1999 exploration program on its
in-situ uranium properties. At May 31, 1998 YSFC owed the Company and USE
$400,000 on a convertible promissory note plus $40,000 in interest for a total
of $440,000. The note bears interest at 10% per annum and is due in December
1998. YSFC also owed the Company and USE $161,700 for miscellaneous payroll and
operating expenses. YSFC has indicated its desire to pay the total indebtedness
in cash but it is not certain that a cash payment will occur as YSFC may elect,
at its option, to pay the promissory note with shares of its common stock.
TERM DEBT AND OTHER OBLIGATIONS: Debt to non-related parties at May 31,
1998 was $78,500 which was primarily for property and equipment purchased by
USECC. The debt bears different interest rates and is due under various payment
terms. It is anticipated that all debt payments will be able to be made in the
normal course of the Company's business.
As of May 31, 1998, the Company was in debt to USE in the amount of
$6,547,100 of which $6,023,400 was in the form of a promissory note bearing
interest at 6% per annum with a maturity date of October 1, 1999. USE has not
indicated that it will call the promissory note when due. The Company will need
to either retire the note with shares of its common stock or negotiate with USE
to extend the note by rolling the interest and adding the additional principle.
39
<PAGE>
RECLAMATION OBLIGATIONS: It is not anticipated that any of the Company's
working capital will be used in fiscal 1999 for the reclamation of any of its
mineral properties. The reclamation costs are long term and are either bonded
through the use of cash bonds or the pledge of assets. It is not anticipated
that any of the mining properties will enter the reclamation phase prior to May
31, 1999.
Prior to fiscal 1996, the Company 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 as well as the SGMC properties. The reclamation
obligations, which are established by government agencies, were most recently
set at $1,451,800 for the SMP properties and $27,000 for the SGMC properties.
The amount of accruals for environmental liabilities for each site are
determined by estimating costs associated with current or expected reclamation
and remediation plans. These plans include detailed descriptions of the work to
be performed, and in many cases involve the work of third party consultants. The
plans are submitted annually to the government agencies who review them and set
the bond amounts.
To assure the reclamation work will be performed, regulatory agencies
require posting of a bond or other security. The Company and USE satisfied this
requirement with respect to SMP properties by mortgaging their executive office
building in Riverton, Wyoming.
Reclamation obligations on the GMMV 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 with the exception of an open pit mine next to the mill. As
uranium is processed through the mill, a reclamation reserve will be funded on
the unit of production basis. Up to $8,000,000 (in 1990 dollars) in any
reclamation costs on the Sweetwater mill and associated properties which may be
incurred prior to commencement of production or 2001 will be loaned by UNOCAL to
the GMMV and must be repaid out of production.
Reclamation obligations of Plateau are covered by a $7,270,400 cash bond
at May 31, 1998 to the U.S. Nuclear Regulatory Commission and a $1,561,600 cash
deposit as of May 31, 1998 for the resolution of any environmental or nuclear
claims.
OTHER: The Company and USE currently are not in production on any
mineral properties, and development work continues on several of their major
investments. The Company and USE are not using hazardous substances or 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, the
Company and USE do not have properties which require current remediation. The
Company 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, 1992 are closed after audit by the IRS.
The Company currently has filed a request for an appeal hearing on an IRS
agent's findings for the years ended May 31, 1994 and 1993. Although all
indicators are that the findings of the IRS audit for 1994 and 1993 will not
result in additional tax, the findings of the audit could affect the tax net
operating loss of the Company. Management of the Company believes that it will
prevail on the majority of the issues. No assurance of the outcome of the appeal
can be given. The tax years ended May 31, 1996 and 1995 are also currently being
audited by the IRS. No determination on these audits can be made as they are not
yet completed.
40
<PAGE>
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues for the twelve months ended May 31, 1998 totaled $4,659,900 as
compared to revenues of $1,703,500 for the fiscal year ended May 31, 1997. This
increase in revenues of $2,956,400 is primarily the result of the litigation
settlement, increased mineral revenues, commercial operations, management fees
and interest revenues. The litigation revenues of $2,295,000 are the result of
the signing of an partial settlement agreement in the SMP
litigation/arbitration. The increase in mineral revenues of $431,200 is the
result of the receipt by the Company of its portion of the net proceeds from a
delivery of U3O8 under a SMP contract, which was the final delivery under this
contract.
Commercial operations revenues increased $392,600 as compared to fiscal
year 1997. These revenues increased as a result of increased equipment rental to
the GMMV. Management fees and other revenues increased $261,800 over fiscal year
1997 primarily as a result of increased activity at GMMV and Plateau. These
increases were partially offset by a decrease in revenues from the sale of
assets of $28,100.
During the fiscal year ended May 31, 1998, operating costs and expenses
increased $512,300 compared to fiscal year ended May 31, 1997. Increases in
mineral operations and general and administrative expenses were partially offset
by decreases in commercial operations and interest expenses. The increases in
mineral operations of $410,900 and general and administrative of $821,000 were
primarily the result of increased operating expenses at the GMMV and Plateau
uranium properties. The increases in general and administrative expenses were
primarily due to increased compensation.
Expenses in commercial operations and interest expense decreased by
$59,400 and $3,500, respectively . These expenses were reduced as a result of
reduced activity on the properties and as a result of the Company and USE not
using their commercial bank line of credit during the twelve months ended May
31, 1998.
Operations resulted in net income of $1,209,500 or $.12 per share in
fiscal 1998 as compared to a net loss of $1,670,300 or $.16 per share in fiscal
1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues for the twelve months ended May 31, 1997 totaled $1,703,500 as
compared to revenues for the year ended May 31, 1996 of $2,509,200. This
decrease in revenues of $805,700 is primarily the result of no revenues being
recognized from mineral sales from SMP during fiscal 1997 (decrease of
$1,558,400). 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 operations, $79,300; advance royalties from Cyprus Amax,
$103,600; partial distribution of SMP funds, $501,900; and increased management
fees and other revenues, $297,300.
With the exception of mineral operations, the provision for doubtful
accounts and abandoned mineral claims, 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. The
provision for doubtful accounts increased by $570,800 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 $450,000. This increase
was the result of increases in the equity losses in USE, SGMC, YSFC, and SMP.
41
<PAGE>
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.
FUTURE OPERATIONS:
The Company has generated losses in two of the last three years, as a
result of holding costs and permitting activities in the mineral segment along
with impairment allowances of mining claims and investments in subsidiaries that
are involved in the minerals business 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.
These properties require expenditures for permitting, development, care and
maintenance, holding fees, corporate overhead and administrative expenses.
Success in the minerals industry is dependent on the price that a company can
receive for the minerals produced. The Company can not predict what the long
term price for gold and uranium will be.
In addition, legal expenses associated with the litigation and
arbitration surrounding the SMP Partnership and the inability of the Company to
utilize all the funds that have been awarded to the Company and Crested by the
Arbitration Panel and confirmed by the Federal Court have compounded the
Company's operating and cash flow position in the past. The Company believes
that the SMP arbitration will be conclusively resolved during fiscal 1999. The
Company believes that it will meet its obligations in fiscal 1999 as well as be
able to secure financing to further the development of its mineral properties
and place them into production.
YEAR 2000 ISSUE
Computer programs written in the past utilize a two digit format to
identify the applicable year. Any date sensitive software beyond December 31,
1999 could fail, if not modified. The result could be, among other
possibilities, disruptions to operations and the inability to process financial
transactions. The Company has evaluated the operating systems on all headquarter
and field office systems and has consulted with various vendors of the computer
software which is being used by the Company and affiliates. The vendors have
confirmed to the Company that the Company's software and information systems are
Year 2000 compliant. Therefore, the Company does not anticipate any significant
expenditures will be required for the Year 2000 event.
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 Company 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 Company when the spot market price for uranium
42
<PAGE>
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 Company, as the uranium to fill them can be readily obtained at favorable
prices. Although such contracts benefit the Company 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 Company. Crested believes SGMC's Lincoln Mine will be
profitable with gold prices over $290 per ounce.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements meeting the requirements of Regulation S-X for the
Company follow immediately. Financial statements of GMMV are included as
schedules and immediately follow the index at Item 14(a)(2).
43
<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, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity/(deficit) and cash
flows for each of the three years in the period ended May 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended May 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
September 11, 1998.
44
<PAGE>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
May 31,
-------------------------------
1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,012,700 $ 37,100
Accounts receivable
Trade, net of allowance for doubtful
accounts of $1,400 and $3,200,
respectively 89,500 63,900
Affiliates 939,900 596,200
Current portion of long-term receivables
Related parties 227,800 304,000
SMP settlement receivable 2,513,000 --
Inventory and other 26,400 48,300
----------- ----------
Total current assets 4,809,300 1,049,500
LONG-TERM RECEIVABLES:
Related parties 116,500 292,100
Real estate sales, net of valuation
allowance of $882,900 182,500 182,500
INVESTMENTS IN AFFILIATES 1,643,300 1,796,800
INVESTMENT IN SGMC CONTINGENT
STOCK PURCHASE WARRANT 651,000 651,000
PROPERTIES AND EQUIPMENT:
Land and mobile home park 397,400 397,400
Buildings and improvements 2,185,000 2,243,200
Aircraft and other equipment 2,393,300 1,640,000
Developed oil properties, full cost method 886,800 886,800
Mineral properties 14,200 13,900
----------- ----------
5,876,700 5,181,300
Less accumulated depreciation,
depletion and amortization (3,221,700) (3,017,700)
----------- ----------
2,655,000 2,163,600
OTHER ASSETS 153,800 150,200
----------- ----------
$10,211,400 $6,285,700
=========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
</TABLE>
45
<PAGE>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
<TABLE>
<CAPTION>
May 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 698,800 $ 556,600
Deferred GMMV purchase option 2,000,000 --
Current portion of long-term debt
Affiliate 6,547,100 6,023,400
Other 36,400 12,400
----------- ----------
Total current liabilities 9,282,300 6,592,400
LONG-TERM DEBT 42,100 15,800
RECLAMATION LIABILITY 725,900 725,900
COMMITMENTS AND CONTINGENCIES (Note K)
FORFEITABLE COMMON STOCK, $.001 par value;
65,000 shares issued, forfeitable until earned 43,900 43,900
SHAREHOLDERS' EQUITY/(DEFICIT):
Preferred stock, $.001 par value;
100,000 shares authorized;
none issued or outstanding -- --
Common stock, $.001 par value;
20,000,000 shares authorized;
10,237,694 shares issued and outstanding 10,200 10,200
Additional paid-in capital 6,375,400 6,375,400
Accumulated deficit (6,268,400) (7,477,900)
----------- -----------
Total shareholders' equity/(deficit) 117,200 (1,092,300)
----------- ----------
$10,211,400 $6,285,700
=========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
</TABLE>
46
<PAGE>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Mineral revenues $ 534,800 $ 103,600 $ 1,558,400
Commercial operations 880,900 488,300 409,000
Interest 141,500 38,500 97,300
SMP litigation settlements, net 2,295,000 501,900 --
Oil sales 85,100 82,300 105,100
Management fees and other 721,800 460,000 162,700
Gain on sale of assets 800 28,900 176,700
----------- ----------- -----------
4,659,900 1,703,500 2,509,200
----------- ----------- -----------
COSTS AND EXPENSES:
Mineral operations 832,400 421,500 1,786,100
Abandoned mineral claims -- 71,500 --
Provision for doubtful accounts -- 570,800 --
Commercial operations 814,100 873,500 806,900
General and administrative 1,370,300 549,300 642,200
Oil production 34,000 48,400 36,300
Interest 27,400 30,900 48,700
----------- ----------- -----------
3,078,200 2,565,900 3,320,200
----------- ----------- -----------
INCOME (LOSS ) BEFORE EQUITY IN LOSS
OF AFFILIATES AND INCOME TAXES 1,581,700 (862,400) (811,000)
EQUITY IN LOSS OF AFFILIATES (372,200) (807,900) (357,900)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 1,209,500 (1,670,300) (1,168,900)
INCOME TAXES -- -- --
----------- ----------- ------
NET INCOME (LOSS) $ 1,209,500 $(1,670,300) $(1,168,900)
=========== =========== ===========
NET INCOME (LOSS) PER SHARE,
BASIC AND DILUTED $ .12 $ (.16) $ (.12)
=========== =========== ===========
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 10,237,694 10,165,931 10,156,094
=========== =========== ===========
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 10,302,694 10,165,931 10,156,094
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
47
<PAGE>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity/(Deficit)
------ ------ ------- ------- ----------------
<S> <C> <C> <C> <C> <C>
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)
Net income -- -- -- 1,209,500 1,209,500
---------- -------- ------------ ------------ ------------
Balance, May 31, 1998 10,237,694 $ 10,200 $ 6,375,400 $ (6,268,400) $ 117,200
=========== ========= ============= ============ ============
Shareholders' Equity at May 31, 1998 does not include 65,000 shares currently
issued but forfeitable if certain conditions are not met by the recipients.
However, the shares deemed to be outstanding on the accompanying Balance Sheet
include the forfeitable shares.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
48
<PAGE>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended May 31,
------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,209,500 $(1,670,300) $(1,168,900)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation, depletion, and amortization 214,600 183,600 252,400
Equity in loss of affiliates 372,200 807,900 357,900
Provision for doubtful accounts -- 574,600 --
Non-cash compensation -- 76,300 1,600
Gain on sale of assets (800) (28,900) (176,700)
SMP settlement receivable (2,513,000) (501,900) --
Abandonment of mineral claims -- 71,500 --
Net changes in:
Accounts and notes receivable (369,300) (457,900) (34,500)
Inventory and other 21,900 (14,700) 21,700
Accounts payable and accrued expenses 142,200 256,600 (629,100)
----------- ----------- -----------
NET CASH USED IN
OPERATING ACTIVITIES (922,700) (703,200) (1,375,600)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred GMMV purchase option 2,000,000 -- --
Reversal of deferred gain on sale of assets -- -- (127,800)
Decrease (increase) in long-term receivables 251,800 (668,400) (73,900)
(Investments in) proceeds from affiliates (218,700) 1,891,400 (575,400)
Purchases of property and equipment (707,200) (64,500) (127,100)
Proceeds from sale of assets 2,000 30,000 437,100
Increase in other assets (3,600) (4,100) (88,000)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 1,324,300 1,184,400 (555,100)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit, net -- (88,000) (392,000)
Payment on long-term debt (103,600) -- --
Increase in long-term debt 153,900 28,200 2,421,500
Net activity on long-term debt to affiliates 523,700 (436,900) (70,600)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 574,000 (496,700) 1,958,900
----------- ----------- -----------
(continued)
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
49
<PAGE>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended May 31,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 975,600 (15,500) 28,200
CASH AND CASH EQUIVALENTS, Beginning of year 37,100 52,600 24,400
----------- --------- ---------
CASH AND CASH EQUIVALENTS, End of year $ 1,012,700 $ 37,100 $ 52,600
=========== ========= =========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 27,400 $ 30,900 $ 116,300
=========== ========= =========
Income taxes paid $ -- $ -- $ --
=========== ========= =========
Noncash investing and financing activities:
Issuance of common stock to officers
and directors for services rendered $ -- $ 63,600 $ 1,600
=========== ========= =========
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>
50
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
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. The Company also holds various real
properties used in commercial operations. 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"). In fiscal 1998, 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 F). 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 ("SGMC").
LIQUIDITY AND OPERATING LOSSES
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. During fiscal 1998, the Company received $429,300 for a delivery made
on an SMP contract. During the fourth quarter of fiscal 1998, a settlement
agreement was reached whereby the Company and USE received $2,513,000 as partial
payment of the monetary resolution of the American Arbitration Association's
order and award for a portion of the SMP arbitration/litigation ("SMP
litigation") that was finalized in fiscal 1998. For accounting purposes, the
Company first applied the proceeds against their recorded investment with the
remaining balance of $2,295,000, after cost recovery, being recognized as income
and included in the accompanying Consolidated Statement of Operations. 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 amount was first applied to the Company's
investment in SMP. After cost recovery, a total of $501,900 was recognized as
income by the Company. 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, 1998, the
Company owes USE $6,547,100.
51
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(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
With the exception of SMP (see Notes F and K), 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. Investments in other companies
of less than 20% are accounted for by the cost method, except for SGMC, which is
accounted for under the equity method due to its status as a subsidiary of USE
(see Note E). All material intercompany profits, transactions and balances have
been eliminated.
INVENTORIES
Inventories consist primarily of aviation fuel, associated aircraft
parts, mining supplies, stockpiled uranium and gold ore stockpiles. Retail
inventories are stated using the average cost method. Other inventory is stated
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 cost.
Depreciation of buildings, improvements, aircraft and other equipment is
provided principally by the straight-line method over estimated useful lives
ranging from three to 45 years.
The Company capitalizes all costs incidental to the acquisition and
development of mineral properties as incurred. Mineral exploration costs are
expensed as incurred. The costs of mine development are deferred until
production begins as these costs will be recovered through future mining
operations. Once commercial production begins, mine development costs will be
amortized using the units-of-production method over the estimated useful life of
the ore-body. Costs are charged to operations if the Company determines that an
ore body is no longer economic. Costs and expenses related to general corporate
overhead are expensed as incurred.
52
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
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. Certain of these assets are owned by
various ventures in which the Company is either a partner or venturer. The
market 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).
LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment when events
or changes in circumstances indicate that the related carrying amount may not be
recoverable. If the sum of estimated future cash flows on an undiscounted basis
or the fair value is less than the carrying amount of the related asset, an
asset impairment is considered to exist. The related impairment loss is measured
by comparing estimated future cash flows on a discounted basis or the fair value
of the asset to the carrying amount of the asset. Changes in significant
assumptions underlying future cash flow estimates or fair values may have a
material effect on the Company's financial position and results of operations. A
low commodity price market, if sustained for an extended period of time, may
result in asset impairment. As of May 31, 1998, 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 short-term and long-term debt, receivables,
other current assets, and accounts payable and accrued expenses approximate fair
value.
REVENUE RECOGNITION
Advance royalties which are payable only from future production or which
are non-refundable are recognized as revenue when received (see Note F).
Non-refundable option deposits are recognized as revenue when the option
expires.
Revenues from uranium sales are recognized upon delivery. Revenues are
recognized from the rental of certain assets ratably over the related lease
terms. Revenues from commercial operations, which represents primarily real
estate activity, and an airport fixed base operation, are recognized as goods
and services are delivered.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109 ("SFAS 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 carryforwards.
SFAS 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,
53
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
if deemed necessary, by a valuation allowance for any tax benefits which, based
on current circumstances, are not expected to be realized.
NET INCOME (LOSS) PER SHARE
In February 1997, Statement of Financial Accounting Standards No. 128
"Earnings per Share," ("SFAS 128") was issued and specifies the computation,
presentation and disclosure requirements for earnings per share. SFAS 128 is
effective for periods ended after December 15, 1997 and requires retroactive
restatement of prior period earnings per share. The statement replaces "primary
earnings per share" with "basic earnings per share" and replaces "fully diluted
earnings per share" with "diluted earnings per share." Adoption of SFAS 128
required restatement of 1996 earnings per share as forfeitable shares were
included in the calculation of primary earnings per share. For the year ended
May 31, 1996, the loss per share was $.11 prior to restatement.
RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1997, SFAS No. 130 "Reporting Comprehensive Income" ("SFAS
130") was issued and establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. In addition
to net income, comprehensive income includes all changes in equity during a
period, except those resulting from investments by and distributions to owners.
The Company will adopt SFAS 130, which is effective for fiscal years beginning
after December 15, 1997, in the first quarter of fiscal 1999. Management does
not expect the adoption of this pronouncement to have a material impact on its
consolidated financial statements.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131") was issued and establishes standards for
reporting information about operating segments in annual and interim financial
statements. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 is
effective for fiscal years beginning after December 15, 1997, and will be
adopted in fiscal 1999. Reporting and disclosures under SFAS 131 are not
expected to be materially different than those disclosures in Note I.
In February 1998, SFAS No. 132 "Employers' Disclosures about Pensions
and Other Post Retirement Benefits" ("SFAS 132") was issued and standardizes
disclosure requirements for pension and other post retirement benefit plans.
Adoption of this standard is required for fiscal years beginning after December
15, 1997, and restatement of prior period comparative disclosures is required.
The Company will adopt SFAS 132 in fiscal 1999. The adoption of SFAS 132 is not
expected to have a material effect on prior period amounts.
USE OF 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.
54
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform with the 1998 presentation.
C. RELATED-PARTY TRANSACTIONS:
The Company does not have employees, but utilizes USE's employees and
pays for one-half of the costs 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 1998, 1997 and 1996, the
Board of Directors of USE contributed 49,470, 24,069 and 10,089 shares of USE
stock to the ESOP at prices of $6.57, $8.87 and $8.65 per share, respectively.
The Company is responsible for one-half of the value of these contributions or
$162,300, $106,800 and $43,700 in fiscal 1998, 1997 and 1996, respectively.
As of May 31, 1998, the Company had notes receivable due from certain
officers, employees and related parties of the Company and USE totaling $94,543
which bear interest at 10% per annum and are due in November 1998. The Company
also has advances to affiliates of $803,858.
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 $552,775, $329,900 and $116,500 in fiscal
1998, 1997 and 1996, respectively.
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 12.7% 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.
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; 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) and
recognized a gain of $252,600 on this sale of which 50%, or $126,300, was
Crested's portion.
The joint venture agreement also provides for the allocation of certain
operating expenses to other affiliates. Condensed financial information of
USECC, which is 50% proportionately consolidated by the Company, follows:
55
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
CONDENSED BALANCE SHEETS - USECC
<TABLE>
<CAPTION>
May 31,
--------------------------------
1998 1997
---- ----
<S> <C> <C>
Current assets $ 9,098,700 $ 1,468,100
Properties and equipment 9,248,800 7,858,300
Mineral properties 28,500 27,900
Accumulated depreciation (4,031,600) (3,623,600)
Other long-term assets 2,095,000 2,583,500
------------ -----------
$ 16,439,400 $ 8,314,200
============= ===========
Current liabilities $ 1,474,900 $ 1,139,400
Reclamation liability 1,451,900 1,451,900
Other liabilities 84,300 31,500
Deferred income 4,000,000 --
Venturers' capital 9,428,300 5,691,400
------------ -----------
$ 16,439,400 $ 8,314,200
============ ===========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS - USECC
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $ 8,778,200 $ 3,043,600 $ 4,855,500
Costs and expenses (6,164,300) (3,963,500) (6,789,300)
------------ ------------ ------------
Net income (loss) $ 2,613,900 $ (919,900) $ (1,933,800)
============ ============ ============
</TABLE>
E. INVESTMENTS IN AFFILIATES:
The Company's investments in affiliates are as follows:
<TABLE>
<CAPTION>
Carrying Value at May 31,
-----------------------------------------
Ownership 1998 1997
--------- ---- ----
Equity Method Investments:
<S> <C> <C> <C>
GMMV 25% $ 116,300 $ 116,300
SGMC 3.2% 403,600 417,800
ENERGX Ltd. 45% 62,900 62,900
YSFC 12.7% (192,200) (122,400)
USE (Note B) 8% 1,243,600 1,316,700
Others various 9,100 5,500
---------- ----------
$1,643,300 $1,796,800
========== ==========
</TABLE>
56
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
Equity in income (loss) from investments accounted for by the equity method
is as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
YSFC $ (69,300) $ (122,400) $ --
GMMV -- -- --
SGMC (13,000) (121,800) (39,700)
ENERGX, LTD. -- (27,400) (180,400)
USE (73,100) (271,400) 73,500
--------- ---------- ----------
$(155,400) $ (543,000) $ (146,600)
========= ========== ==========
</TABLE>
There are currently litigation and arbitration proceedings with the
Company's partner in the SMP partnership, as discussed further in Note K.
CONDENSED COMBINED BALANCE SHEETS:
EQUITY INVESTEES
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current assets $ 18,434,400 $ 10,155,700
Non-current assets 118,550,300 104,447,100
------------- -------------
$ 136,984,700 $ 114,602,800
============= =============
Current liabilities $ 9,351,900 $ 1,993,800
Reclamation and other liabilities 61,281,400 45,692,700
Excess in assets 66,351,400 66,916,300
------------- -------------
$ 136,984,700 $ 114,602,800
============= =============
</TABLE>
CONDENSED COMBINED STATEMENTS OF OPERATIONS:
EQUITY INVESTEES
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $ 11,695,900 $ 5,766,000 $ 9,053,100
Discontinued operations -- -- 2,604,600
Costs and expenses (13,273,900) (12,213,500) (12,685,600)
------------ ------------ ------------
Net loss $ (1,578,000) $ (6,447,500) $ (1,027,900)
============ ============ ============
</TABLE>
SMP entered into various market related and base price escalated uranium
sales contracts with certain 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 by the utilities. As discussed in Note K, SMP has been
the subject of significant litigation and arbitration proceedings between the
SMP partners since 1991, portions of which are currently still in progress.
Pending the resolution of the remaining proceedings, the partners in SMP agreed
to fulfill certain of the SMP's uranium sales contracts outside of the
partnership by each partner delivering a mutually- agreed portion of the
delivery commitments on an individual basis. In 1998 and 1996, deliveries under
this
57
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
arrangement resulted in revenues to the Company of $429,300 and $1,383,400,
respectively (no such revenues were recognized in 1997). Revenues from these
transactions have been included in the accompanying Consolidated Statements of
Operations as Mineral revenues, which would normally have been sales of SMP.
Due to the litigation and arbitration proceedings, audited financial
statements for SMP are not obtainable. Accordingly, the Company has recorded
only its direct investment in, and results of operations from the partnership.
The Company had no carrying value of its investment in SMP for either 1998 or
1997. The Company's direct loss generated from its investment in SMP was
$(216,800), $(264,900) and $(211,300) for the years ended May 31, 1998, 1997 and
1996, respectively. No amounts attributable to SMP are included in the Condensed
Combined Balance Sheets or Condensed Combined Statements of Operations of the
Company's equity investees presented above.
F. MINERAL TRANSACTIONS AND MINING PROPERTIES:
GMMV
During fiscal 1990, the Company and USE entered into an agreement with
Kennecott, a wholly-owned, indirect subsidiary of The RTZ Corporation PLC, for
Kennecott to acquire a 50% interest in certain uranium mineral properties in
Wyoming known as the Green Mountain Properties. The purchase price was
$15,000,000 and a commitment to fund the first $50 million of development and
operating costs. Kennecott committed to fund 100% of the first $50 million of
capital contributions to the GMMV. Kennecott also committed to pay additional
amounts if certain future operating margins were 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 the GMMV.
On June 23, 1997, USE and USECC signed an Acquisition Agreement with
Kennecott for the right to acquire Kennecott's interest in the GMMV for
$15,000,000 and other consideration. Kennecott paid USE and USECC $4,000,000 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.
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 being loaned 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 out of the $16,000,000 loaned 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 fully
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
58
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
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 Note and the
Mortgage) from and after the closing. Under very limited circumstances, the
scheduled closing date may be postponed to not later than October 30, 1998.
USECC satisfied the terms of the Acquisition Agreement to the point that
the $4,000,000 signing payment paid by Kennecott is nonrefundable and will serve
to reduce USE's and Crested's ultimate $15,000,000 purchase obligation. If the
acquisition is unsuccessful, the signing payment will be applied against any
future reimbursable costs and contributions due the GMMV. After such costs and
remaining obligations are satisfied, the remainder, if any, will be recognized
as income.
In 1996, the U.S. Government adopted the "USEC Privatization Act of
1996" to privatize the U.S. Enrichment Corp. In July 1998, in a filing with the
U.S. Securities and Exchange Commission, USEC Inc. ("USEC") disclosed its
planned sale of significant quantities of uranium in the U.S. marketplace.
Accordingly, forecasted demand for uranium and forecasted uranium sales prices
have decreased in the short-term. As a result, in July 1998, GMMV halted
development activities at the Jackpot Mine on July 31, 1998 and has placed the
facility on active standby. This action required the layoff of mine workers. Due
to the uncertainty of the uranium market it is not known when the mine will
operate again or if USECC will be able to conclude the financing necessary to
buy Kennecott's interest.
If the Acquisition Agreement is not closed, USE, 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 and will fully satisfy Kennecott's original $50,000,000
funding obligation to GMMV.
SMP
During fiscal 1989, USE and Crested, through USECC, entered into an
agreement to sell a 50% interest in their Sheep Mountain properties to Nukem's
subsidiary CRIC. USECC and CRIC immediately contributed their 50% interests in
the properties to a newly-formed partnership, SMP. SMP was established to
further develop and mine the uranium claims on Sheep Mountain, acquire uranium
supply contracts and market uranium. Certain disputes arose among USECC, CRIC
and its parent Nukem, Inc. over the operation of SMP. These disputes have been
in litigation/arbitration for the past seven years. See Notes E and K for a
description of the investment and a discussion of the related
litigation/arbitration.
CYPRUS AMAX
During prior years, the Company and USE conveyed interests in mining
claims to AMAX Inc. ("AMAX") in exchange for cash, royalties, and other
consideration. AMAX and its successor Cyprus Amax Minerals, Inc. ("Cyprus Amax")
have not placed the properties into production as of May 31, 1998.
59
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
Cyprus Amax now pays the Company and USE 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 $105,500, $103,600 and $-0- of revenue from
the advance royalty payments in fiscal 1998, 1997, and 1996, respectively.
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. If Cyprus Amax sells the properties, the Company and USE will
receive 15% of the first $25 million received by Cyprus Amax.
The Company and USE also held an option to purchase certain real estate
located in Gunnison, Colorado 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. Accordingly, 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 ("Pangolin"), a Park City, Utah
developer, for sale of the land owned in Gunnison County, Colorado. Pangolin
made a cash payment and signed promissory notes for the purchase of the
properties. As of May 31, 1998, the promissory notes were in default and are
adequately reserved for. USECC is endeavoring to resolve the default and filed a
legal action to protect its interest (see Note K).
SGMC
Sutter Gold Mining Company ("SGMC") was established in 1990 to conduct
operations on mining leases and to produce gold from the Lincoln Project in
California.
SGMC is in the development stage and additional development is required
prior to the commencement of commercial production. SGMC has not generated any
significant revenue and has no assurance of future revenue. All acquisition and
mine development costs since inception have been capitalized. Since test
production in 1992, SGMC has focused its efforts on obtaining a reserve study,
developing a mine plan and pursuing a partner to assist in the financing of its
mineral development and ultimate production. As of May 31, 1998, due to the
decline in the spot price for gold, SGMC has put the development of the mine on
hold. Until the time when development begins, SGMC does not expect to require
capital contributions from USE, Crested or other sources of financing to
maintain its current activities. SGMC will continue to be considered in the
development stage until the time it generates significant revenue from its
principal operations.
During the first and second quarters of fiscal 1997, SGMC sold shares of
its common stock in a private placement. These shares were sold for $3.00 per
share. SGMC received approximately $1,100,000 in net proceeds from this equity
placement. During the fourth quarter of fiscal 1997, an additional offering of
shares of SGMC's special warrant units was completed and raised approximately
$5,400,000 in net cash proceeds. Each special warrant unit is convertible into
one share of SGMC common stock for no additional compensation and one stock
purchase warrant. The warrant allows the holder to purchase an additional share
of SGMC common stock for CDN$6.00. The warrant expires in November 1998. At the
underwriter's request, the initial investors (including USE and Crested) agreed
to have the amount of their common shares
60
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
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 the second offering, 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 (US). 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.
However, 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. In addition, SGMC has the right to
satisfy the exercise of all or any portion of the Stock Purchase 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 up to a maximum of 700,000 ounces.
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. The Stock Purchase Warrant benefits the Company and USE on
the basis of 11.1% and 88.9%, respectively.
PLATEAU RESOURCES LIMITED
During fiscal 1994, 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. in southeastern
Utah. USE paid nominal cash consideration for the Plateau stock and agreed to
assume all environmental liabilities and reclamation bonding obligations. At May
31, 1998, Plateau had a cash security in the amount of $7,270,408 to cover
reclamation of the properties (see Note K). Although the Company has no
ownership in Plateau, Directors of the Company and USE have agreed to divide
equally a portion of certain reclamation obligations above a defined amount, and
will share in a portion of cash flows derived from operations.
USECC is currently evaluating the best utilization of Plateau's assets.
Evaluations are ongoing to determine when, or if, the mine and mill properties
should be placed into production. The primary factor in these evaluations
relates to the current depressed uranium market. Alternative uses of the
properties are also being evaluated.
ENERGX, LTD.
Energx is engaged 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 1997 and 1996, Energx abandoned certain of its leases and
as a result wrote off $164,500 and $328,700, respectively, of related
capitalized costs.
61
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
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,
1998). The weighted average interest rate for 1998 and 1997 was 10.25%. No
amounts were outstanding under this facility at May 31, 1998 or 1997. 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 due on October 1, 1999. The debt is primarily due to USE 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, 1998 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.
<TABLE>
<CAPTION>
May 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Notes payable - USE, 6% interest
balance payable in full on
demand (see Note A) $ 6,547,100 $ 6,023,400
Note payable to bank, 8.75% interest,
balance due July 1, 1999 78,500 28,200
------------- -----------
Total $ 6,625,600 $ 6,051,600
Less - current portion 6,583,500 6,035,800
------------- -----------
$ 42,100 $ 15,800
============= ===========
</TABLE>
62
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
H. INCOME TAXES:
The components of deferred taxes as of May 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
May 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 50,000 $ 86,300
Deferred gains 106,100 476,200
Litigation settlements 135,700 179,300
Net operating loss carryforwards 3,126,100 3,814,200
Tax credits 9,000 83,000
Capital loss carryforwards 1,013,000 --
----------- -----------
Total deferred tax assets 4,439,900 4,639,000
Deferred tax liabilities:
Book basis in excess of tax -- (309,600)
Development and exploration costs (48,800) (42,700)
----------- -----------
Total deferred tax liabilities (48,800) (352,300)
----------- -----------
Net deferred tax assets - all non-current 4,391,100 4,286,700
Valuation Allowance (4,391,100) (4,286,700)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
</TABLE>
At May 31, 1998, the Company had available, for federal income tax
purposes, net operating loss carryforwards of approximately $9,200,000 which
expire in 2006 through 2012. 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 1998, 1997 and 1996, 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:
63
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended May 31,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected federal income tax
provision (benefit) $ 450,800 $(453,700) $(397,400)
Tax basis not previously
recognized and other (555,200) (52,600) (204,500)
Valuation allowance 104,400 506,300 601,900
--------- --------- ---------
Income taxes $ -- $ -- $ --
</TABLE>
========= ========= =========
There were no taxes payable as of May 31, 1998, 1997 or 1996.
The Internal Revenue Service ("IRS") is currently auditing the Company's
and USECC's tax returns for the fiscal years ended May 31, 1996 and 1995. The
audit is not completed as of the date of the accompanying financial statements.
However, the Company does not expect that the resolution of the audits will have
a material effect on the Company's financial position or results of operations.
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
the operations of an airport fixed base operation located in Riverton, Wyoming.
The following is information related to industry segments:
64
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended May 31, 1998
--------------------------------------------
Commercial
Minerals Operations Consolidated
-------- ---------- ------------
<S> <C> <C> <C>
Revenues $ 534,800 $ 880,900 $ 1,415,700
========== ==========
Interest and other revenues 3,244,200
------------
Total revenues $ 4,659,900
============
Operating (loss) income $ (297,600) $ 66,800 $ (230,800)
========== ==========
Interest and other revenues 3,244,200
General corporate and other expenses (1,431,700)
Equity loss in affiliates (255,800)
------------
Income before income taxes $ 1,325,900
============
Identifiable net assets at May 31, 1998 $ 14,200 $2,648,600 $ 2,662,800
========== ==========
Investments in affiliates 1,799,300
Corporate assets 5,905,300
------------
Total assets at May 31, 1998 $ 10,367,400
============
Capital expenditures $ 587,500 $ 119,700
========== ==========
Depreciation, depletion and
amortization $ 118,700 $ 95,900
</TABLE>
========== ==========
65
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(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, 1996 $ 24,600 $2,139,000 2,163,600
========== ==========
Investments in affiliates 1,796,800
Corporate assets 2,325,300
-----------
Total assets at May 31, 1996 $ 6,285,700
===========
Capital expenditures $ -- $ 64,500
========== ==========
Depreciation, depletion and
amortization $ -- $ 184,900
========== ==========
</TABLE>
66
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(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, 1995 $ 96,100 $2,294,900 $ 2,391,000
=========== ==========
Investments in affiliates 4,344,700
Corporate assets 1,396,800
------------
Total assets at May 31, 1995 $ 8,132,500
============
Capital expenditures $ -- $ 127,100
=========== ==========
Depreciation, depletion and
amortization $ -- $ 249,100
=========== ==========
</TABLE>
Sales of uranium accounted for 80% and 89% of mineral revenue for the
years ended May 31, 1998 and 1996. There were no mineral sales in fiscal 1997.
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. These
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, 1998, 1997 and 1996 the Company
recognized compensation expense of $27,300, $76,300 and $59,800, respectively,
resulting from these issuances. A schedule of forfeitable shares for both
Crested and USE is set forth in the following table:
67
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
<TABLE>
<CAPTION>
Issue Number Issue Total
Date of Shares Price Compensation
---- --------- ----- ------------
<S> <C> <C> <C>
June 1990 25,000 $1.0625 $26,562
December 1990 7,500 .50 3,750
January 1993 6,500 .22 1,430
January 1994 6,500 .28 1,828
January 1995 6,500 .19 1,230
January 1996 5,000 .3125 1,600
January 1997 8,000 .9375 7,500
======= ========
Balance at
May 31, 1998 and 1997 65,000 $43,900
====== =======
</TABLE>
No shares were earned in fiscal 1998 or 1997. Also included in the
forfeitable common stock are 15,000 shares to directors which are vesting at 20%
per year beginning in November 1992, of which 9,000 are earned but not released
as of May 31, 1997.
K. COMMITMENTS, CONTINGENCIES AND OTHER:
LEGAL PROCEEDINGS
ARBITRATION/LITIGATION PROCEEDINGS CONCERNING SMP. In June 1991, Nukem's
wholly-owned subsidiary Cycle Resource Investment Corporation ("CRIC")
instituted arbitration proceedings against the Company and Crested. CRIC claimed
that the Company and USE violated the Sheep Mountain Partners ("SMP")
partnership agreement. On July 3, 1991, the Company and USE, through USECC,
filed a civil action in the U. S. District Court of Colorado against Nukem, CRIC
and their affiliates, alleging Nukem/CRIC fraudulently misrepresented facts and
concealed information from the Company and USE to induce their entry into the
agreements forming the SMP partnership and sought rescission, damages and other
relief. 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.
On September 16, 1991, USECC filed another 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. On May 11, 1993, the Denver District Court stayed all
proceedings in state court until the case in the U.S. District Court for
Colorado case was resolved. Thereafter in February 1994, USECC, Nukem and CRIC,
agreed that the majority of the litigation subsequent to the formation of SMP on
December 21, 1988, would be handled through consensual arbitration before a
three member panel of the American Arbitration Association (the "Panel"). The
arbitration hearing consumed 73 hearing days commencing on June 27, 1994 and
concluded on May 31, 1995. The Panel entered its Order and Award on April 18,
1996. Nukem filed two motions with the district court indicating there was a
material miscalculation and a double recovery. The District Court remanded the
matter to the Arbitration Panel to consider Nukem's motions. On July 3, 1996,
the Panel found there was no double recovery and approved the Order and Award,
which awarded Crested and USE $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 Panel's Order and Award.
68
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
In November 1996, USE and Crested received $4,300,000 from the SMP
escrow bank accounts as partial payment of the monetary award of the Panel. This
$4,300,000 was accounted for under the cost recovery method of accounting,
wherein it was applied to outstanding amounts due USECC and USE and the balance
of $1,003,800 was recognized as income. Nukem/CRIC filed a motion asking for
limited remand and on June 27, 1997 the Federal Court reviewed the motion and
issued a Second Amended Judgment which confirmed the monetary award of the Panel
and clarified the equitable damages due USECC from Nukem/CRIC. Nukem filed a
notice of appeal with the Tenth Circuit Court of Appeals and posted a $8,613,600
supersedeas bond on the monetary portion of the Award. Nukem's appeal is based
on two issues, the District Court erred in confirming the double recovery
finding in the Panel's Order and Award and that the Order placing Nukem's
uranium purchase contracts with the CIS republics in constructive trust with
SMP. During the fourth quarter of fiscal 1998, a settlement agreement was
reached whereby U.S. Energy and Crested received $5,024,000 as a partial
settlement and, in addition, USECC received the Sheep Mountain Uranium Mines and
certain other properties from SMP and one uranium delivery contract along with a
50% interest in a uranium supply contract. This settlement does not in any way
affect issues presently on appeal and pending before the 10th Circuit Court of
Appeal ("CCA"). A hearing is currently scheduled before a three judge panel on
September 24, 1998 in Oklahoma City, Oklahoma.
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 in the U.S. Federal
District Court, Danville, Illinois, against the Company, Crested, et al. seeking
a declaratory judgment that IPC's contract with SMP was void. After various
negotiating sessions the parties reached agreement in June 1995 to settle the
case by entering into an amendment to the original supply contract to provide
for 3 deliveries totaling 486,443 lbs. U3O8. The final delivery was made in May
1997. On June 13, 1997, USE and Crested received $838,500 as a distribution of
profits from the final delivery under this SMP contract.
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. as
defendants. The complaint primarily concerns extra lateral 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. 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 extra lateral rights. Other
claims between the parties were bifurcated by the Court and were not at issue at
the trial. On December 26, 1995, the district court issued a ruling denying apex
rights and extra lateral royalties to Parador, the Company and USE. The partial
trial did not address the other issues pending in the litigation but limited the
trial to those issues required to decide the question of extra lateral rights.
All other remaining claims and counterclaims were considered by the Court on
January 26-28, 1998 in a bench trial and the Court entered judgment against the
plaintiff and the defendants on their claims. BGBI, USECC and Parador appealed
this judgment to the Nevada Supreme Court. On June 23, 1998, a mandatory
Settlement Conference was held in Reno, NV but no settlement was achieved. The
Settlement Mediator referred the case to the Nevada Supreme Court for an
expedited hearing and the appeal is currently pending.
69
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
TICABOO TOWNSITE LITIGATION. In fiscal 1998, the prior contract operator
of the restaurant and lounge and two of its employees who operated the motel and
convenience store at Ticaboo (owned by Canyon Homesteads, Inc.) sued USE,
Crested and Plateau Resources Ltd., et al in Utah State Court. After a five day
trial, the jury found against the two plaintiff employees but found for the
third plaintiff and a judgment was entered for $153,371 in damages against USE,
which was recorded in fiscal 1998. USE intends to vigorously appeal the award.
DEPARTMENT OF ENERGY LITIGATION. On July 20, 1998, eight uranium mining
companies with operations in the United States (including USE, Crested, YSFC)
and the Uranium Producers of America, a trade organization, filed a complaint
against the United States Department of Energy (the "DOE") and the acting
secretary in a lawsuit (file no. 98 CV 1775) in the U.S. District Court,
Cheyenne, Wyoming. The complaint seeks declaratory judgment and injunctive
relief. The plaintiffs allege that the DOE violated the USEC Privatization Act
of 1996, when the DOE transferred 45 metric tons of low enriched uranium and
3,800 metric tons of natural uranium to the United States Enrichment Corp.
("USEC") in May 1998.
The plaintiffs have asked the Court among other claims to declare that
(i) the DOE violated its statutory authority by transferring uranium to USEC in
excess of statutory limits on volume; (ii) the excess amounts were not sold by
the DOE to USEC for fair value, as required by the Act, and mandated findings by
the DOE concerning possible adverse impacts were not supported in fact; and
(iii) the DOE be enjoined from future transfers in violation of the Act. The
defendants have not yet responded to the complaint.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the U.S. District Court,
Denver, Colorado against Contour Development Company, L.L.C. and entities and
persons associated with Contour Development Company, L.L.C. (collectively,
"Contour") seeking compensatory and consequential damages from the defendants
for dealings in certain real estate. Specifically, USE alleges that Contour has
breached contracts for the sale of the Gunnison properties of USE and Crested,
and is in default on the contracts and promissory notes delivered to pay for the
Gunnison properties.
As of the filing date of this Report, Contour and the other defendants
have not filed an answer to the complaint but negotiations are underway to
settle the issues.
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 in accordance with these regulations, but the rules 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, technology and enacted laws and regulations. Certain regulatory
agencies, such as the Nuclear Regulatory Commission ("NRC"), the Bureau of Land
Management ("BLM") and the Wyoming Department of Environmental Quality ("WDEQ")
review the Company's reclamation, environmental and decommissioning
70
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
liabilities, and the Company believes its recorded amounts are consistent with
those reviews and related bonding requirements. To the extent that planned
production on its properties is delayed, interrupted or discontinued because of
regulation or the economics of the properties, the future earnings of the
Company would be adversely 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. 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 or costs. For the obligations
recorded on acquired properties, including site-restoration, closure and
monitoring costs, actual expenditures for reclamation will occur over several
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, 1998 and 1997, the Company has recorded estimated
reclamation obligations, including standby costs, of $725,900 which is included
in Reclamation and Other Long-term Liabilities in the accompanying Consolidated
Balance Sheets. In addition, the GMMV, in which the Company is a 50% owner, has
recorded a $23,620,000 liability for future reclamation and closure costs. 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 currently has four mineral properties or investments that
account for most of its environmental obligations, SMP, GMMV, 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:
SMP
The Company and USE are responsible for the reclamation obligations,
environmental liabilities and liabilities for injuries to employees in mining
operations with respect to the Crooks Gap properties. The reclamation
obligations, which are established by regulatory authorities, were reviewed by
the Company and the regulatory authorities during fiscal 1998 and the balance in
the reclamation liability account at May 31, 1998 ($725,900 or 50% of which is
recorded in the accompanying balance sheet) is believed by management 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 assets and by holding
certificates of deposits. A portion of the funds for the reclamation of SMP's
properties will be provided by a sinking fund of up to $.50 per pound of uranium
for reclamation work as the uranium is produced from the properties.
71
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
GMMV
During fiscal 1991, the Company and USE acquired developed mineral
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 to Kennecott, with Kennecott, the Company and USE
contributing the Big Eagle properties to GMMV, which assumed the reclamation and
other environmental liabilities. Kennecott holds 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. 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 for
the first $8,000,000 of such expenditures. Any reimbursement may be recovered by
UNOCAL from 20% of future cash flows from the sale of uranium concentrates
processed through the Mill.
On June 18, 1996, Kennecott had a letter of credit in the amount of
approximately $19,767,000 issued to the WDEQ for minesite matters (executing
EPA-delegated jurisdiction to administer the Clean Water Act and the Clean Air
Act, and directly administering Wyoming statutes on mined land reclamation), and
$5,400,000 issued to the NRC for decontamination and cleanup of the Mill and
related 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 minesite and a performance bond by St. Paul Insurance
Company was obtained for 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 commences.
Although USE 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, USE believes it is unlikely it will have to pay for
such costs directly. First, based on current estimates of cleanup and
reclamation costs (reviewed annually by the oversight agencies), these costs may
be within the $50,000,000 development commitment and related $16,000,000 loan of
Kennecott Uranium Company for the GMMV. 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 UNOCAL's ownership, UNOCAL
has agreed to fund up to $8,000,000 of costs (provided these 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 should mining and milling commence.
72
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998
(CONTINUED)
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 established
from GMMV operating revenues). In addition, if and to the extent these
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 Corporation would be required to pay on its guarantee. Accordingly,
although the extent of any ultimate USE 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 established out of GMMV
operating revenues and c) payments are not available from UNOCAL.
Sutter Gold Mining Company
SGMC is currently owned 55% by USE, 4% by Crested and 41% by private
investors. SGMC owns gold mineral properties in California. Currently, these
properties are in development and costs consist of drilling, permitting, holding
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. The Company's policy is to provide reclamation on the
unit-of-production basis. Currently, reclamation obligations are covered by a
$27,000 reclamation bond which SGMC has recorded as a reclamation liability as
of May 31, 1998.
Plateau Resources, Limited
The environmental and reclamation obligations acquired with the
acquisition of Plateau include 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 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.
EXECUTIVE COMPENSATION
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 up to five
years thereafter.
73
<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, 1998 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 1998 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 1998 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 1998 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 1998 Annual Meeting of Shareholders.
74
<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...........................44
Consolidated Balance Sheets - May 31, 1998 and 1997.............45-46
Consolidated Statements of Operations
for the Years Ended May 31, 1998, 1997 and 1996 ...................47
Consolidated Statements of Shareholders'
Equity for the Years Ended May 31, 1998, 1997 and 1996.............48
Consolidated Statements of Cash Flows
for the Years Ended May 31, 1998, 1997 and 1996.................49-50
Notes to Consolidated Financial
Statements......................................................51-73
(ii)Affiliate Financials as Schedules
(a) Green Mountain Mining Venture
Report of Independent Public Accountants...................82
Balance Sheet - December 31, 1997 and 1996.................83
Statement of Operations for the Period
from June 1, 1990 (Date of Inception)
through December 31, 1997..................................84
Statement of Changes in Partners'
Capital for the Period from
June 1, 1990 (Date of Inception)
through December 31, 1997..................................85
Statement of Cash Flows for the
Period from June 1, 1990
(Date of Inception) through December 31, 1997..............86
Notes to Financial Statements...........................87-92
(b) Sheep Mountain Partners
75
<PAGE>
Due to the litigation and arbitration proceedings, audited
financial statements for SMP are not obtainable. They are
therefore not included as an Exhibit to the Registrant's Form
10-K.
All other schedules have been omitted because the information is not
applicable or because the information is included in the financial
statements.
(3) Exhibits Required to be Filed.
Exhibit Sequential
No. Title of Exhibit Page No.
--- ---------------- --------
3.1 Restated Articles of Incorporation..........................[1]
3.2 [intentionally left blank]
3.3 [intentionally left blank]
3.4 By-Laws.....................................................[2]
4.1 USE 1998 Incentive Stock Option Plan
and Form of Stock Option Agreement.......................93-103
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...............................[10]
4.6 Amendment to USE 1989 Incentive
Stock Option Plan (12/13/96)...............................[10]
4.7 USE 1996 Stock Award Program (Plan)........................[10]
4.8 USE Restated 1996 Stock Award Plan and Amendment
to USE 1990 Restricted Stock Bonus Plan....................[10]
10.1 Promissory Note from Crested to USE (5/31/97)..............[10]
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]
76
<PAGE>
10.7 Executive Officer Death Benefit Plan........................[2]
10.8 [intentionally left blank]
10.9 Big Eagle Acquisition Agreement with PMC....................[4]
10.10 Ft. Peck Agreement - Drilling and Production Services.......[3]
10.11-10.16 [intentionally left blank]
10.17 Sweetwater Mill Acquisition Agreement.......................[3]
10.18 Self Bond Agreement - Crooks Gap Properties.................[1]
10.19 [intentionally left blank]
10.20 [intentionally left blank]
10.21 Master Agreement - Mt. Emmons/AMAX Inc......................[5]
10.22 [intentionally left blank]
10.23 Crooks Gap Property Acquisition Agreement...................[6]
10.24 [intentionally left blank]
10.25 [intentionally left blank]
10.26 Memorandum of Partnership Agreement - GMMV..................[2]
10.27 Mineral Properties Agreement - Congo Area - PMC.............[2]
10.28 [intentionally left blank]
10.29 Memorandum of Partnership Agreement - SMP...................[1]
10.30 Plateau Acquisition - Stock Purchase
Agreement and Related Exhibits..............................[7]
10.31-10.40 [intentionally left blank]
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]
77
<PAGE>
10.46 Operating Agreement with First-N-Last.......................[9]
10.47 [intentionally left blank]
10.48 [intentionally left blank]
10.49 Acquisition Agreement between
Kennecott Uranium Company,
USE and USECC regarding GMMV (6/23/97)....................[10]
10.50 Exhibit A to Acquisition Agreement (see 10.49)
Promissory Note from Kennecott Uranium Company
to Kennecott Energy Company regarding GMMV ...............[10]
10.51 Exhibit B to Acquisition Agreement (see 10.49)
Mortgage, Security Agreement, Financing Statement
and Assignment of Proceeds, Rents and Leases..............[10]
10.52 Exhibit G to Acquisition Agreement
(see 10.49) - Contract Services Agreement
for the Sweetwater Uranium Mill Facility..................[10]
10.53 Exhibit H to Acquisition Agreement
(see 10.49) - Mineral Lease Agreement ....................[10]
10.54 Exhibit I to Acquisition Agreement
(see 10.49) - Fourth Amendment of
Mining Venture Agreement among
Kennecott Uranium Company, USE and USECC..................[10]
10.55 Master Resolution Agreement regarding
Gunnison Properties.......................................[10]
10.56 Membership Pledge Agreement
regarding Gunnison Properties.............................[10]
10.57 Management Agreement between SGMC and USECC...............[10]
10.58 Outsourcing and Lease Agreement
between YSFC and USECC....................................[10]
10.59 Convertible Promissory Note from YSFC to USECC............[10]
21 Subsidiaries of Registrant................................[10]
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.
78
<PAGE>
[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.
[10] Incorporated by reference from the like- numbered exhibits of the
Registrant's Form 10-K for the year ended May 31, 1997.
(b) Reports filed on Form 8-K.
During the fourth quarter of the fiscal year ended on May 31, 1998,
the Registrant filed no reports on Form 8-K.
(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).
79
<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 11, 1998 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 11, 1998 By: /s/ John L. Larsen
------------------------------
JOHN L. LARSEN, Director
Date: September 11, 1998 By: /s/ Max T. Evans
------------------------------
MAX T. EVANS, Director
Date: September 11, 1998 By: /s/ Daniel P. Svilar
------------------------------
DANIEL P. SVILAR, Director
Date: September 11, 1998 By: /s/ Michael D. Zwickl
------------------------------
MICHAEL D. ZWICKL, Director
Date: September 11, 1998 By: /s/ Kathleen R. Martin
------------------------------
KATHLEEN R. MARTIN, Director
Date: September 11, 1998 By: /s/ Robert Scott Lorimer
------------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer and
Chief Accounting Officer
80
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
Report on Audits of Financial Statements
as of December 31, 1997 and 1996 and for the
years ended December 31, 1997, 1996 and 1995,
and the period from inception
(June 1, 1990) to December 31, 1997
81
<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, 1997 and 1996, and
the related statements of operations, changes in Venture partners' capital, and
cash flows for the years ended December 31, 1997, 1996 and 1995, and the period
from inception (June 1, 1990) to December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for the years ended December 31, 1997, 1996 and 1995, and the period from
inception (June 1, 1990) to December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Salt Lake City, Utah
April 3, 1998
82
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
BALANCE SHEET
------
<TABLE>
<CAPTION>
As of December 31,
---------------------------------
1997 1996
---- ----
ASSETS
<S> <C> <C>
Assets:
Cash and cash equivalents $ 95,778 $ -
Property and equipment (Note 3):
Mineral properties and mine development costs 27,725,252 22,812,077
Buildings 24,815,009 24,815,009
Mining equipment 403,000 403,000
------------ ------------
52,943,261 48,030,086
------------ ------------
Total assets $ 53,039,039 $ 48,030,086
============ ============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accounts payable - related parties $ 924,019 $ 469,032
Reclamation liabilities (Note 3) 23,620,000 23,620,000
------------ ------------
Total liabilities 24,544,019 24,089,032
------------ ------------
Commitments and contingencies (Notes 3 and 4)
Partners' capital:
Kennecott Uranium Company 14,247,510 11,970,527
USECC 14,247,510 11,970,527
------------ ------------
28,495,020 23,941,054
------------ ------------
Total liabilities and partners' capital $ 53,039,039 $ 48,030,086
============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements
83
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF OPERATIONS
------
<TABLE>
<CAPTION>
Period from
inception
(June 1, 1990)
Year ended December 31, to December 31,
-------------------------------------------- ---------------
1997 1996 1995 1997
---------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Cost and expenses:
Maintenance and holding costs $3,065,432 $ 1,838,820 $ 1,697,234 $ 12,523,268
Marketing costs - - - 247,598
---------- ----------- ----------- -------------
Total costs and expenses 3,065,432 1,838,820 1,697,234 12,770,866
Other income 14,618 - - 14,618
---------- ----------- ----------- -------------
Net loss $3,050,814 $ 1,838,820 $ 1,697,234 $ 12,756,248
========== =========== =========== =============
</TABLE>
The accompanying notes are an integral
part of these financial statements
84
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF CHANGES IN VENTURE PARTNERS CAPITAL
------
<TABLE>
<CAPTION>
Period from
inception
(June 1, 1990)
Year ended December 31, to December 31,
---------------------------------------------- ----------------
1997 1996 1995 1997
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Balance at beginning of period
Kennecott Uranium Company $11,970,527 $11,819,763 $11,510,240 $ -
USECC 11,970,527 11,819,763 11,510,240 -
----------- ----------- ----------- --------------
23,941,054 23,639,526 23,020,480 -
----------- ----------- ----------- --------------
Capital Contributions (Note 1):
Kennecott Uranium Company 3,802,390 1,070,174 1,158,140 20,625,634
USECC 3,802,390 1,070,174 1,158,140 20,625,634
----------- ----------- ----------- --------------
7,604,780 2,140,348 2,316,280 41,251,268
----------- ----------- ------------ --------------
Net loss:
Kennecott Uranium Company (1,525,407) (919,410) (848,617) (6,378,124)
USECC (1,525,407) (919,410) (848,617) (6,378,124)
----------- ----------- ----------- --------------
(3,050,814) (1,838,820) (1,697,234) (12,756,248)
----------- ----------- ----------- --------------
Balance at end of period:
Kennecott Uranium Company $14,247,510 $11,970,527 $11,819,763 $ 14,247,510
USECC 14,247,510 11,970,527 11,819,763 14,247,510
----------- ----------- ----------- --------------
$28,495,020 $23,941,054 $23,639,526 $ 28,495,020
=========== =========== =========== ==============
</TABLE>
The accompanying notes are an integral
part of these financial statements
85
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
STATEMENT OF CASH FLOWS
------
<TABLE>
<CAPTION>
Period from
inception
Year ended December 31, (June 1, 1990)
--------------------------------------------- to December 31,
1997 1996 1995 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,050,814) $(1,838,820) $(1,697,234) $(12,756,248)
Increase (decrease) in accounts payable -
related parties 318,491 329,171 (47,889) 616,938
----------- ----------- ----------- ------------
Net cash used in operating activities (2,732,323) (1,509,649) (1,745,123) (12,139,310)
----------- ----------- ----------- ------------
Cash flows from investing activities:
Additions to buildings, mineral properties mine
development and mining equipment (4,913,175) (771,772) (555,448) (13,596,261)
Increase (decrease) in accounts payable -
related parties 136,496 141,073 (15,709) 307,081
----------- ----------- ----------- -----------
Net cash used in investing activities (4,776,679) (630,699) (571,157) (13,289,180)
----------- ----------- ----------- ------------
Cash flows from financing activities:
Capital contributions 7,604,780 2,140,348 2,316,280 25,524,268
----------- ----------- ----------- ------------
Net cash provided by financing activities 7,604,780 2,140,348 2,316,280 25,524,268
----------- ----------- ----------- ------------
Net increase in cash and cash equivalents 95,778 - - 95,778
Cash and cash equivalents:
At beginning of period - - - -
----------- ----------- ----------- ------------
At end of period $ 95,778 $ - $ - $ 95,778
=========== =========== =========== ============
Supplemental schedule of non-cash investing and financing activities:
During 1990 and 1992 the Venture acquired mineral properties and 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
</TABLE>
The accompanying notes are an integral
part of these financial statements
86
<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
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.
Kennecott also agreed to pay a disproportionate share (up to an
additional $45 million) of GMMV operating expenses, but only out of cash
operating margins from sales of processed uranium at more than $24.00/lb
(for $30 million of such operating expenses), and from sales of
processed uranium at more than $27.00/lb (for the next $15 million of
such operating expenses).
Effective October 29, 1992, Kennecott replaced USECC as manager of the
Venture. Kennecott contracts with USECC to perform work on behalf of the
Venture.
On June 23, 1997, Kennecott and USECC signed an Acquisition Agreement
wherein USECC agreed to purchase Kennecott's interest in GMMV for $15
million plus the assumption of Kennecott's share of various reclamation
and other liabilities. Kennecott paid $4 million to USECC on signing the
Acquisition Agreement and under the terms of the Acquisition Agreement
is required to provide a line of credit to GMMV of up to $16 million for
payment of costs related to the Jackpot mine development and Sweetwater
mill preparation work. Amounts advanced under this line of credit bear
interest at 10.5% with repayment based upon the cash flow and earnings
of GMMV. Any unpaid balance is payable in full no later than June 23,
2010 as long as USECC or its affiliate purchases Kennecott's interest in
the GMMV. The line of credit is collateralized by a first mortgage lien
against Kennecott's 50% interest in GMMV. Closing of the Acquisition
Agreement is subject to several conditions and governmental approvals
and must occur by October 1998. Kennecott is entitled to a credit
against their original $50 million commitment of two dollars for each
dollar provided under the line of credit and the $4 million paid on
signing. As of December 31, 1997, Kennecott has approximately $10.8
million remaining to contribute to the Venture for operating and
development expenses.
Continued
87
<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, 1997, 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 agree
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:
All highly liquid securities with a maturity of three months or less are
considered to be cash equivalents.
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 will be 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 will be charged to operations on the units-of-production
method over the estimated reserves to be recovered. Amortization of
mineral 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
88
<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 capitalized 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 method over the estimated reserves to be recovered
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.
Certain amounts in 1996 have been reclassified for comparability to 1997
amounts.
Continued
89
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
------
3. Property and Equipment:
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, 1997
Kennecott had reimbursed USECC for substantially all development costs
incurred.
The cost of building, mineral properties and mine development and mining
equipment incurred by each of the Venture partners are as follows:
<TABLE>
<CAPTION>
Period from
inception
( June 1, 1990)
Year ended December 31, to December 31,
--------------------------------------------- ---------------
1997 1996 1995 1997
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
USECC $ 4,913,175 $ 740,175 $ 511,822 $ 10,864,080
Kennecott - 31,597 43,626 2,732,181
----------- ------------ ------------ --------------
Total $ 4,913,175 $ 771,772 $ 555,448 $ 13,596,261
============ ============ ============ ==============
</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, or 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 these unpatented mining
claims have been paid to the state of Wyoming as of December 31, 1997.
Continued
90
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
------
3. Property and Equipment, Continued:
At December 31, 1997 and 1996, costs capitalized as property and
equipment are composed of the following:
<TABLE>
<CAPTION>
1997 1996
------------- --------
<S> <C> <C>
Acquisition costs $ 39,347,000 $ 39,347,000
Development costs 13,596,261 8,683,086
------------- ------------
$ 52,943,261 $ 48,030,086
============= ============
</TABLE>
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
alleged that when Kennecott entered into the Green Mountain Mining
Venture with USE on June 1, 1990, 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 were 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. On August 22,
1997 the trial court granted Kennecott's motion for summary judgement
and dismissed the claims of Nukem and Cycle. Following the motion, the
parties agreed to settle the case, and in February 1998 a settlement
agreement was signed which resulted in both parties agreeing to suspend
all litigation and claims against each other.
Continued
91
<PAGE>
GREEN MOUNTAIN MINING VENTURE
(A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
------
5. Subsequent Events:
In 1996, the U.S. government adopted the "USEC Privatization Act of
1996" to privatize the U.S. Enrichment Corp. In July 1998, in a S-1
Registration Statement filed with U.S. Securities and Exchange
Commission, USEC Inc. disclosed its planned sale of significant
quantities of uranium in the U.S. marketplace. Accordingly, forecasted
demand for uranium and forecasted uranium sales prices have decreased in
the short-term. As a result, GMMV has halted development activities at
the Jackpot Mine, and has placed the facility on active standby.
92
<PAGE>
EXHIBIT 4.1
U.S. ENERGY CORP.
1998 STOCK OPTION PLAN
As adopted by the Board of Directors on June 15, 1998 and constituting
a restatement of the 1989 Stock Option Plan,
which was Amended September 1, 1992, September 3, 1993, January 6,
1994, December 22, 1995, and December 13, 1996.
1. Purpose. Restrictions on Amount Available Under the Plan. This 1998
Stock Option Plan (the "Plan") is intended to encourage stock ownership by
employees, consultants and directors of U.S. Energy Corp. (the "Corporation"),
its divisions and Subsidiary Corporations, so that they may acquire or increase
their proprietary interest in the Corporation, and to encourage such employees
and directors to remain in the employ of the Corporation and to put forth
maximum efforts for the success of the business. It is further intended that
options granted by the Committee pursuant to Section 6 of this Plan shall
constitute "incentive stock options" ("Incentive Stock Options") within the
meaning of Section 422A of the Internal Revenue Code of 1986 and the regulations
issued thereunder (the "Code"), and options granted by the Committee pursuant to
Section 7 of this Plan shall constitute "nonqualified stock options"
("Nonqualified Stock Options").
2. Definitions. As used in this Plan, the following words and phrases
shall have the meanings indicated:
(a) "Disability" shall mean an Optionee's inability to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment that can be expected to result in death or that has lasted or
can be expected to last for a continuous period of not less than 12 months.
(b) "Fair Market Value" per share as of a particular date shall mean
the last sale price of the Corporation's Common Stock as reported on a national
securities exchange or on the NASDAQ National Market System or, if last sale
reporting quotation is not available for the Corporation's Common Stock, the
average of the bid and asked prices of the Corporation's Common Stock as
reported by NASDAQ or in the National Quotation Bureau, Inc.'s "Pink Sheets" or,
if such quotations are unavailable, the value determined by the Committee (as
hereinafter defined) in accordance with their discretion in making a bona fide,
good faith determination of fair market value.
(c) "Parent Corporation" shall mean any corporation (other than the
employer corporation) in an unbroken chain of corporations ending with the
employer corporation if, at the time of granting an Option, each of the
corporations other than the employer corporation owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
(d) "Subsidiary Corporation" shall mean any corporation (other than
the employer corporation) in an unbroken chain of corporations beginning with
the employer corporation if, at the time of granting an Option, each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
93
<PAGE>
3. Administration. The Plan shall be administered by a committee (the
"Committee"), consisting of not less than two members of the Board of Directors
of the Corporation (the "Board"). The members of the Committee, who shall be
selected at a duly convened meeting of the Board of Directors, shall be persons
who have not been granted or awarded equity securities of the Corporation under
the Plan or any other plan of the Employer or its affiliates, during the year
prior to awards of securities under the Plan by the Committee. It is the intent
of this Plan that the Committee members shall be "disinterested administrators"
as that term is used in Rule 16b-3(c)(2)(i) promulgated by the Securities and
Exchange Commission. The members of the Committee shall have all powers, subject
to compliance with the Plan, to select officers and directors for participation
in the Plan, and to make all decisions concerning the timing, pricing and amount
of a grant or award under the Plan.
The Committee shall have the authority in its discretion, subject to and
not inconsistent with the express provisions of the Plan, to administer the Plan
and to exercise all the powers and authorities either specifically granted to it
under the Plan or necessary or advisable in the administration of the Plan,
including, without limitation, the authority to grant Options; to determine
which Options shall constitute Incentive Stock Options and which Options shall
constitute Nonqualified Stock Options; to determine the purchase price of the
shares of Common Stock covered by each Option (the "Option Price"); to determine
the persons to whom, and the time or times at which, Options shall be granted;
to determine the number of shares to be covered by each Option; to interpret the
Plan; to prescribe, amend and rescind rules and regulations relating to the
Plan; to determine the terms and provisions of the Option Agreements (which need
not be identical) entered into in connection with Options granted under the
Plan; and to make all other determinations deemed necessary or advisable for the
administration of the Plan. The Committee may delegate to one or more of its
members or to one or more agents such administrative duties as it may deem
advisable, and the Committee or any person to whom it has delegated duties as
aforesaid may employ one or more persons to render advice with respect to any
responsibility the Committee or such person may have under the Plan.
The Board shall fill all vacancies, however caused, in the Committee. The
Board may from time to time appoint additional members to the Committee, and may
at any time remove one or more Committee members and substitute others. One
member of the Committee shall be selected by the Board as chairman. The
Committee shall hold its meetings at such times and places as it shall deem
advisable. All determinations of the Committee shall be made by a majority of
its members either present in person or participating by conference telephone at
a meeting or by written consent. The Committee may appoint a secretary and make
such rules and regulations for the conduct of its business as it shall deem
advisable, and shall keep minutes of its meetings.
No member of the Board or Committee shall be liable for any action taken
or determination made in good faith with respect to the Plan or any Option
granted hereunder.
4. Eligibility. Subject to certain limitations hereinafter set forth,
Options may be granted to employees of (including officers) and consultants to
and directors of (whether or not they are employees) the Corporation or its
present or future divisions and Subsidiary Corporations. In determining the
persons to whom Options shall be granted and the number of shares to be covered
by each Option, the Committee shall take into account the duties of the
respective persons, their present and potential contributions to the success of
the Corporation and such other factors as the Committee shall deem relevant in
connection with accomplishing the purpose of the Plan. A person to whom an
Option has been granted hereunder is sometimes referred to herein as an
"Optionee." An Optionee shall be eligible to receive more than one grant of an
Option during the term of the Plan, but only on the terms and subject to the
restrictions hereinafter set forth.
5. Stock. The stock subject to Options hereunder shall be shares of the
Corporation's Common Stock, $.01 par value per share ("Common Stock"). Such
shares may, in whole or in part, be authorized but unissued shares or shares
that shall have been or that may be reacquired by the Corporation. The aggregate
94
<PAGE>
number of shares of Common Stock as to which Options may be granted from time to
time under the Plan shall not exceed 2,750,000. The limitations established by
the preceding sentences shall be subject to adjustment as provided in Section
8(i) hereof.
In the event that any outstanding Option under the Plan for any reason
expires or is terminated without having been exercised in full the shares of
Common Stock allocable to the unexercised portion of such Option (unless the
Plan shall have been terminated) shall become available for subsequent grants of
options under the Plan.
6. Incentive Stock Options. Options granted pursuant to this Section 6 are
intended to constitute Incentive Stock Options and shall be subject to the
following special terms and conditions, in addition to the general terms and
conditions specified in Section 8 hereof. Consultants and directors who are not
employees of the Corporation shall not be entitled to receive Options pursuant
to this Section 6.
The aggregate Fair Market Value (determined as of the date the Incentive
Stock Option is granted) of the shares of Common Stock with respect to which
Options are exercisable for the first time by an Optionee during any calendar
year may not exceed $100,000.00. If more than $100,000 of shares is subject to
Options held by an Optionee, the Corporation shall cause (A)the maximum number
of Options to be designated ISOs and the balance to be designated nonqualified
stock options; or (B) different share certificates to be issued on first
exercise, such that one certificate shall be issued for the shares which are
issued under the ISOs, and another certificate shall be issued for the
nonqualified stock options.
Incentive Stock Options granted under this Plan are intended to satisfy
all requirements for incentive stock options under the Code and, notwithstanding
any other provision of this Plan, the Plan and all Incentive Stock Options
granted under it shall be so construed, and all contrary provisions shall be so
limited in scope and effect and, to the extent they cannot be so limited, they
shall be void.
7. Nonqualified Stock Options. Options granted pursuant to this Section 7
are intended to constitute Nonqualified Stock Options and shall be subject only
to the general terms and conditions specified in Section 8 hereof.
8. Terms and Conditions of Options. Each Option granted pursuant to the
Plan shall be evidenced by a written Option Agreement between the Corporation
and the Optionee, which agreement shall comply with and be subject to the
following terms and conditions:
(a) Number of Shares. Each Option Agreement shall state the number
of shares of Common Stock to which the Option relates.
(b) Type of Option. Each Option Agreement shall specifically
identify the portion, if any, of the Option which constitutes an Incentive Stock
Option and the portion, if any, which constitutes a Nonqualified Stock Option.
(c) Option Price. Each Option Agreement shall state the Option
Price, which shall be not less than 100% of the Fair Market Value of the shares
of Common Stock of the Corporation on the date of grant of the Option except
that any option granted under the Plan to a person owning more than ten percent
of the total combined voting power of the Common Stock shall be at a price of
110% of such fair market value and shall be for a term of no more than five
years, in the case of Incentive Stock Options, and not less than 80% of the Fair
Market Value of the shares of Common Stock of the Corporation on the date of
grant of the Option in the case of Non- Qualified Stock Options. The Option
Price shall be subject to adjustment as provided in Section 8(i) hereof. The
date on which the Committee adopts a resolution expressly granting an Option
shall be considered the day on which such Option is granted.
95
<PAGE>
(d) Method of Exercise and Medium and Time of Payment. Each exercise
of an Option granted hereunder, whether in whole or in part, shall be by written
notice to the Secretary of the Corporation designating the number of shares as
to which the Option is exercised, and shall be accompanied by payment in full of
the Option Price (in cash, shares or property) for the number of shares so
designated, together with any written statements required by any applicable
securities laws. The Option Price shall be paid in cash, in shares of Common
Stock having a Fair Market Value equal to such Option Price or in property or in
a combination of cash, shares and property, and may be effected in whole or in
part (i) with monies received from the Corporation at the time of exercise as a
compensatory cash payment, or (ii) with monies borrowed from the Corporation
pursuant to repayment terms and conditions as shall be determined from time to
time by the Committee, in its discretion, separately with respect to each
exercise of Options and each Optionee; provided, however, that each such method
and time for payment and each such borrowing and terms and conditions of
repayment shall be permitted by and be in compliance with applicable law. The
Board of Directors shall have the sole and absolute discretion to determine
whether or not property other than cash or Common Stock may be used to purchase
the shares of Common Stock hereunder and, if so, to determine the value of the
property received.
(e) Term and Exercise of Options. Options shall be exercisable over
the exercise period as and at the times the Committee may determine, as
reflected in the Option Agreement; provided, however, that the Committee shall
have the authority to accelerate the exercisability of any outstanding Option at
such time and under such circumstances as it, in its sole discretion, deems
appropriate. The exercise period shall be determined by the Committee; provided,
however, that such exercise period shall not exceed ten years from the date of
grant of the Option. The exercise period shall be subject to earlier termination
as provided in Sections 8(f) and 8(g) hereof. An Option may be exercised, as to
any or all full shares of Common Stock as to which the Option has become
exercisable; provided, however, that an Option may not be exercised at any one
time as to fewer than 100 shares (or such number of shares as to which the
Option is then exercisable if such number of shares is less than 100).
(f) Termination. Except as provided in this Section 8(f) and in
Section 8(g) hereof, an Option may not be exercised unless the Optionee is then
an employee or director of or consultant to the Corporation or a division or
Subsidiary Corporation thereof (or a corporation or a Parent or Subsidiary
Corporation of such corporation issuing or assuming the option in a transaction
to which Section 425(a) of the Code applies), and unless the Optionee has
remained continuously as an employee or director of or consultant to the
Corporation since the date of grant of the Option. In the event that the
Optionee ceases to be an employee or director of or consultant to the
Corporation (other than by reason of death, Disability or retirement), all
Options of such Optionee that are exercisable at the time of such cessation may,
unless earlier terminated in accordance with their terms, be exercised within
three months after such cessation; provided, however, that if the employment or
consulting relationship of an Optionee shall terminate, or if a director shall
be removed, for cause, all Options theretofore granted to such Optionee shall,
to the extent not theretofore exercised, terminate forthwith. Nothing in the
Plan or in any Option granted pursuant hereto shall confer upon an individual
any right to continue in the employ of the Corporation or any of its divisions
or Subsidiary Corporations or interfere in any way with the right of the
Corporation or its shareholders or any such division or Subsidiary Corporation
to terminate such employment or other relationship between the individual and
the Corporation or any of its divisions and subsidiary corporations.
(g) Death Disability or Retirement of Optionee. If an Optionee shall
die while a director of, or employed by, or a consultant to, the Corporation or
a Subsidiary Corporation thereof, or within three months after the termination
of such Optionee's employment or directorship or consulting relationship, other
than termination for cause, or if the Optionee's employment or directorship or
consulting relationship, shall terminate by reason of disability or retirement,
all Options theretofore granted to such Optionee (whether or not otherwise
exercisable) may, unless earlier terminated in accordance with their terms, be
exercised by the Optionee or by the Optionee's estate or by a person who
acquired the right to exercise such Option by bequest
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<PAGE>
or inheritance or otherwise by reason of the death or Disability of the
Optionee, at any time within one year after the date of death, Disability or
retirement of the Optionee.
(h) Nontransferability. Options granted under the Plan shall not be
transferable other than by will or by the laws of descent and distribution, and
Options may be exercised, during the lifetime of the Optionee, only by the
Optionee or by his guardian or legal representative.
Any attempted sale, pledge, assignment, hypothecation or other
transfer of an option contrary to the provisions hereof and the levy of any
execution, attachment or similar process upon an option shall be null and void
and without force or effect.
As a condition to the transfer of any shares of Common Stock issued
under this Plan, the Corporation may require an opinion of counsel, satisfactory
to the Corporation, to the effect that such transfer will not be in violation of
the Securities Act of 1933 or any other applicable securities laws or that such
transfer has been registered under federal and all applicable state securities
laws. Further, the Corporation shall be authorized to refrain from delivering or
transferring shares of Common Stock issued under this Plan until the Board of
Directors determines that such delivery or transfer will not violate applicable
securities laws and the Optionee has tendered to the Corporation any federal,
state or local tax owed by the Optionee as a result of exercising the Option, or
disposing of any Common Stock, when the Corporation has a legal liability to
satisfy such tax. The Corporation shall not be liable for damages due to delay
in the delivery or issuance of any stock certificate for any reason whatsoever,
including, but not limited to, a delay caused by listing requirements of any
securities exchange or any registration requirements under the Securities Act of
1933, the Securities Exchange Act of 1934, or under any other state or federal
law, rule or regulation. The Corporation is under no obligation to take any
action or incur any expense in order to register or qualify the delivery or
transfer of shares of Common Stock under applicable securities laws or to
perfect any exemption from such registration or qualification. Furthermore, the
Corporation will have no liability to any Optionee for refusing to deliver or
transfer shares of Common Stock if such refusal is based upon the foregoing
provisions of this Paragraph.
(i) Effect of Certain Changes.
(1) If there is any change in the number of shares of Common
Stock through the declaration of stock dividends, or through recapitalization
resulting in stock splits, or combinations or exchanges of such shares, the
number of shares of Common Stock available for Options, the number of such
shares covered by outstanding Options, and the price per share of such Options,
shall be proportionately adjusted by the Committee to reflect any increase or
decrease in the number of issued shares of Common Stock; provided, however, that
any fractional shares resulting from such adjustment shall be eliminated.
(2) In the event of the proposed dissolution or liquidation of
the Corporation, in the event of any corporate separation or division,
including, but not limited to, split-up, split-off or spin-off, or in the event
of a merger or consolidation of the Corporation with another corporation, the
Committee may provide that the holder of each Option then exercisable shall have
the right to exercise such Option (at its then Option Price) solely for the kind
and amount of shares of stock and other securities, property, cash or any
combination thereof receivable upon such dissolution, liquidation, or corporate
separation or division, or merger or consolidation by a holder of the number of
shares of Common Stock for which such Option might have been exercised
immediately prior to such dissolution, liquidation, or corporate separation or
division, merger or consolidation; or the Committee may provide, in the
alternative, that each Option granted under the Plan shall terminate as of a
date to be fixed by the Committee; provided, however, that not less than 30
days' written notice of the date so fixed shall be given to each Optionee, who
shall have the right, during the period of 30 days preceding such termination,
to exercise the Options as to all or any part of the shares of Common Stock
covered thereby, including shares as to which such Options would not otherwise
be exercisable.
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<PAGE>
(3) Paragraph (2) of this Section 8(i) shall not apply to a
merger or consolidation in which the Corporation is the surviving corporation
and shares of Common Stock are not converted into or exchanged for stock,
securities of any other corporation, cash or any other thing of value.
Notwithstanding the preceding sentence, in case of any consolidation or merger
of another corporation into the Corporation in which the Corporation is the
surviving corporation and in which there is a reclassification or change
(including a change to the right to receive cash or other property) of the
shares of Common Stock (other than a change in par value, or from par value to
no par value, or as a result of a subdivision or combination, but including any
change in such shares into two or more classes or series of shares), the
Committee may provide that the holder of each Option then exercisable shall have
the right to exercise such Option solely for the kind and amount of shares of
stock and other securities (including those of any new direct or indirect parent
of the Corporation), property, cash or any combination thereof receivable upon
such reclassification, change, consolidation or merger by the holder of the
number of shares of Common Stock for which such Option might have been
exercised.
(4) In the event of a change in the Common Stock of the
Corporation as presently constituted, which is limited to a change of all of its
authorized shares with par value into the same number of shares with a different
par value or without par value, the shares resulting from any such change shall
be deemed to be the Common Stock within the meaning of the Plan.
(5) To the extent that the foregoing adjustments relate to
stock or securities of the Corporation, such adjustments shall be made by the
Committee, whose determination in that respect shall be final, binding and
conclusive, provided that each Incentive Stock Option granted pursuant to this
Plan shall not be adjusted in a manner that causes such option to fail to
continue to qualify as an Incentive Stock Option within the meaning of Section
422A of the Code.
(6) Except as hereinbefore expressly provided in this Section
8(i), this Optionee shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class or the payment of any stock
dividend or any other increase or decrease in the number of shares of stock of
any class or by reason of any dissolution, liquidation, merger, or consolidation
or spin- off of assets or stock of another corporation; and any issue by the
Corporation of shares of stock of any class, or securities convertible into
shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares of Common
Stock subject to the Option. The grant of an Option pursuant to the Plan shall
not affect in any way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structures or to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or part of its business or assets.
(j) Rights as Shareholder - Non-Distributive Intent. Neither a
person to whom an Option is granted, nor such person's legal representative,
heir, legatee or distributee, shall be deemed to be the holder of, or to have
any rights of a holder with respect to, any shares subject to such Option, until
after the Option is exercised and the shares are issued to the person exercising
such Options. Upon exercise of an Option at a time when there is no registration
statement in effect under the Securities Act of 1933 relating to the shares
issuable upon exercise and available for delivery of a prospectus meeting the
requirements of Section 10(a)(3) of said Act, shares may be issued to the
Optionee only if the Optionee represents and warrants in writing to the
Corporation that the shares purchased are being acquired for investment and not
with a view to the distribution thereof. No shares shall be issued upon the
exercise of an Option unless and until there shall have been compliance with any
then applicable requirements of the Securities and Exchange Commission, or any
other regulatory agencies having jurisdiction over the Corporation. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distribution or other rights for which
the record date is prior to the date such stock certificate is issued, except as
provided in Section 8(i) hereof.
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<PAGE>
(k) Other Provisions. The Option Agreements authorized under the
Plan shall contain such other provisions, including, without limitation, (i) the
imposition of restrictions upon the exercise of an Option, and (ii) in the case
of an Incentive Stock Option, the inclusion of any condition not inconsistent
with such Option qualifying as an Incentive Stock Option, as the Committee shall
deem advisable.
(l) Forfeiture Provisions: All shares of Common Stock purchased on
exercise of all Nonqualified Options granted after the date of this Plan
Amendment (and all shares of Common Stock purchased on exercise of all
Nonqualified Options granted prior to such date provided that the holder
consents), shall be subject to forfeiture back to the Corporation in the event
of termination of employee, director or consultant status with the Corporation
on or before January 5 of the second calendar year after exercise. For example,
Common Stock purchased on September 1, 1993 by exercise of a Nonqualified
Option, will be subject to forfeiture through January 5, 1995. Provided, that
upon exercise of a Nonqualified Option at a time when there is a registration
statement in effect under the Securities Act of 1933 relating to the shares
issuable upon exercise, the preceding forfeiture provisions of this paragraph
shall immediately terminate.
9. Agreement by Optionee Regarding Withholding Taxes. If the Committee
shall so require, as a condition of exercise, each Optionee shall agree that:
(a) No later than the date of exercise of any Option granted
hereunder, the Optionee will pay to the Corporation or make arrangements
satisfactory to the Committee regarding payment of any federal, state or local
taxes of any kind required by law to be withheld upon the exercise of such
Option; and
(b) The Corporation shall, to the extent permitted or required by
law, have the right to deduct federal, state and local taxes of any kind
required by law to be withheld upon the exercise of such Option from any payment
of any kind otherwise due to the Optionee.
The Corporation shall not be obligated to advise any Optionee of the
existence of any such tax or the amount which the Corporation will be so
required to withhold.
10. Term of Plan. Options may be granted pursuant to the Plan from time to
time within a period of ten years from the date the Plan is adopted by the
Board, or the date the Plan is approved by the shareholders of the Corporation,
whichever is earlier.
11. Amendment and Termination of the Plan. The Board at any time and from
time to time may suspend, terminate, modify or amend the Plan; provided,
however, that any amendment that would materially increase the aggregate number
of shares of Common Stock as to which Options may be granted under the Plan or
materially increase the benefits accruing to participants under the Plan or
materially modify the requirements as to eligibility for participation in the
Plan shall be subject to the approval of the holders of a majority of the Common
Stock issued and outstanding, except that any such increase or modification that
may result from adjustments authorized by Section 8(i) hereof shall not require
such approval. Except as provided in Section 8 hereof, no suspension,
termination, modification or amendment of the Plan may adversely affect any
Option previously granted, unless the written consent of the Optionee is
obtained.
12. Approval of Shareholders. The Plan shall take effect upon its adoption
by the Board but shall be subject to the approval of the holders of a majority
of the issued and outstanding shares of Common Stock of the Corporation, which
approval must occur within 12 months after the date the Plan is adopted by the
Board.
13. Assumption. The terms and conditions of any outstanding Options
granted pursuant to this Plan shall be assumed by, be binding upon and inure to
the benefit of any successor corporation to the
99
<PAGE>
Corporation and shall continue to be governed by, to the extent applicable, the
terms and conditions of this Plan. Such successor corporation shall not
otherwise be obligated to assume this Plan.
14. Termination of Right of Action. Every right of action arising out of
or in connection with the Plan by or on behalf of the Corporation or of any
Subsidiary, or by any shareholder of the Corporation or of any Subsidiary
against any past, present or future member of the Board, or against any
employee, or by an employee (past, present or future) against the Corporation or
any Subsidiary, will, irrespective of the place where an action may be brought
and irrespective of the place of residence of any such shareholder, director or
employee, cease and be barred by the expiration of three years from the date of
the act or omission in respect of which such right of action is alleged to have
risen.
15. Tax Litigation. The Corporation shall have the right, but not the
obligation, to contest, at its expense, any tax ruling or decision,
administrative or judicial, on any issue which is related to the Plan and which
the Board believes to be important to holders of Options issued under the Plan
and to conduct any such contest or any litigation arising therefrom to a final
decision.
IN WITNESS WHEREOF, the foregoing is the 1998 Stock Option Plan of U.S.
Energy Corp., as amended at September 1, 1992, September 3, 1993, January 6,
1994, December 22, 1995, December 13, 1996 and June 15, 1998, and as such, this
1998 Stock Option Plan constitutes a restatement of the 1989 Stock Option Plan.
This 1998 Stock Option Plan is to be submitted to the shareholders of the
Corporation for approval at the 1998 Annual Meeting of Shareholders.
U.S. ENERGY CORP.
By: /s/ Max T. Evans
----------------------------
MAX T. EVANS, Secretary
100
<PAGE>
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT made as of this ______ day of ____________, ______
between U.S. Energy Corp., a Wyoming corporation (the "Corporation").
In accordance with its 1998 Stock Option Plan (the "Plan") as now or
hereafter amended, a copy of which is attached hereto and incorporated herein by
reference, the Corporation desires, in connection with the services of the
Optionee, to provide the Optionee with an opportunity to acquire $.01 pare value
common stock (the "Common Stock") of the Corporation on favorable terms and
thereby increase the Optionee's proprietary interest in the continue progress
and success of the business of the Corporation.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
herein set forth and other good and valuable consideration, the Corporation and
the Optionee agree as follows:
1. Confirmation of Grant of Option. Pursuant to a determination of the
Directors of the Corporation (the "Board") on __________, ______, _______ the
Corporation, subject to the terms of the Plan and of this Agreement, confirms
that the Optionee has been irrevocably granted on ____________, ______ (the
"Date of Grant"), as a matter of separate inducement and agreement, and in
addition to and not in lieu of salary or other compensation for services, a
(Qualified) (Non-Qualified) Stock Option pursuant to Section _______ of the Plan
(the "Option") to purchase an aggregate of ___________ shares of Common Stock on
the terms and conditions herein set forth subject to adjustment as provided in
Section 8 hereof.
2. Purchase Price. The purchase price of shares of Common Stock covered by
the Option will be $________ per share (the "Option Price") subject to
adjustment as provided in Section 8 hereof.
3. Exercise of Option. Except as otherwise provided in Section 8 of the
Plan, the Option may be exercised in whole or part at any time during the term
of the Option, provided, however, no Option shall be exercisable after the
expiration of the term thereof, and no Option shall be exercisable unless the
holder shall at the time of exercise have been an employee or director of or a
consultant to the corporation or of any subsidiary of the Corporation for a
period of at least three months. The Option may be exercised only as to whole
shares in increments of 100 shares.
The Option may be exercised, as provided in this Section 3, by notice and
payment to the Corporation as provided in Section 10 hereof and Section 8(d) of
the Plan.
4. Term of Option. The term of the Option will be through ______________,
_____, subject to earlier termination or cancellation as provided in this
Agreement. Except as otherwise provided in Section 7 hereof, the Option will not
be exercisable unless the Optionee shall, at the time of exercise, be an
employee or director of or consultant to the Corporation or of a subsidiary. As
used
101
<PAGE>
in this Agreement, the term "subsidiary" refers to and includes each "subsidiary
corporation" as defined in the Plan.
The holder of the Option will not have any rights to dividends or any
other rights of a shareholder with respect to any shares of Common Stock subject
to the Option until such shares shall have been issued to him (as evidenced by
the appropriate transfer agent of the Corporation) upon purchase of such shares
through exercise of the Option.
5. Nontransferability of Option. The Option may not be assigned,
transferred (except as provided in the next preceding sentence) or otherwise
disposed of, or pledged or hypothecated in any way (whether by operation of law
or otherwise) otherwise than by will or the laws of descent and distribution,
and shall not be subject to execution, attachment, or other process. Any
assignment, transfer, pledge, hypothecation or other disposition of the Option
or any attempt to make any such levy of execution, attachment or other process
will cause the Option to terminate immediately upon the happening of any such
event, provided, however, that any such termination of the Option under the
foregoing provisions of this Section 5 will not prejudice any rights or remedies
with the Corporation or any subsidiary may have under this Agreement or
otherwise.
6. Exercise Upon Termination. The Optionee's rights to exercise this
Option upon termination of employment or cessation as a director or consultant
shall be as set forth in Section 8(f) of the Plan.
7. Death, Disability or Retirement of Optionee. The Optionee's rights to
exercise this Option upon the death, disability or retirement of the Optionee
shall be as set forth in Section 8(g) of the Plan.
8. Adjustments. The Option shall be subject to adjustment upon the
occurrence of certain events as set forth in Section 8(i) of the Plan.
9. No Registration. The Optionee understands that neither the Option nor
the shares of Common Stock subject thereto and issuable upon the exercise
thereof are registered under the Securities Act of 1933, as amended. The
Optionee represents that the Option is being acquired by him and that such
shares of Common Stock will be acquired by him for investment and all
certificates for the shares issued upon exercise of the Option will bear the
following legend:
102
<PAGE>
The shares represented by this Certificate have not been registered under
the Securities Act of 1933 (the "Act"), and are "restricted securities" as
that term is defined in Rule 144 under the Act. The shares may not be
offered for sale, sold or otherwise transferred except pursuant to an
effective registration statement under the Act, the availability of which
is to be established to the satisfaction of the Company.
10. Notices. Each notice relating to this Agreement will be in writing and
delivered in person or by certified mail to the proper address. All notices to
the Corporation shall be addressed to it at its office at Glen L. Larsen
Building, 877 North 8th West, Riverton, WY 82501. All notices to the Optionee or
other person or persons then entitled to exercise the Option shall be addressed
to the Optionee or such other person or persons at the Optionee's address below
specified. Anyone to whom a notice may be given under this Agreement may
designate a new address by notice to that effect.
11. Approval of Counsel. The exercise of the Option and the issuance and
delivery of shares of Common Stock pursuant thereto shall be subject to approval
by the Corporations' counsel of all legal matters in connection therewith,
including compliance with the requirements of the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended, applicable state
securities laws, the rules and regulations thereunder, and the requirements of
any stock exchange upon which the Common Stock may then be listed.
12. Benefits of Agreement. This Agreement will inure to the benefit of and
be binding upon each successor and assign of the Company. All obligations
imposed upon the Optionee and all rights granted to the Corporation under this
Agreement will be binding upon the Optionee's heirs, legal representatives and
successors.
13. Governmental and Other Regulations. The exercise of the Option and the
Corporation's obligation to sell and deliver shares upon the exercise of rights
to purchase shares is subject to all applicable federal and state laws, rules
and regulations, and to such approvals by any regulatory or governmental agency
which may, in the opinion of counsel for the Corporation, be required.
14. Incorporation of the Plan. The Plan is attached hereto and
incorporated herein by reference. In the event that any provision in this
Agreement conflicts with a provision in the Plan, the Plan shall govern.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed in its name by its President or a Vice President and it corporate seal
to be hereunto affixed and attested by its Secretary or its Assistant Secretary
and the Optionee has hereunto set his hand and seal all as of the date first
above written.
U.S. ENERGY CORP.
(Seal)
By:
-------------------------------
JOHN L. LARSEN, President
ATTEST:
- ----------------------------------
MAX T. EVANS, Secretary
The undersigned Optionee understands the terms of this Option Agreement
and the attached Plan and hereby agrees to comply therewith.
Date , 19
------------------------------------
------------------------------------
(Address of Optionee)
103
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF FINANCIAL CONDITION AT JUNE 30, 1998 (UNAUDITED) AND THE
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
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-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 1,012,700
<SECURITIES> 0
<RECEIVABLES> 3,771,600
<ALLOWANCES> (1,400)
<INVENTORY> 26,400
<CURRENT-ASSETS> 4,809,300
<PP&E> 5,876,700
<DEPRECIATION> 3,221,700
<TOTAL-ASSETS> 10,211,400
<CURRENT-LIABILITIES> 9,282,300
<BONDS> 0
0
0
<COMMON> 10,200
<OTHER-SE> 107,000
<TOTAL-LIABILITY-AND-EQUITY> 10,211,400
<SALES> 1,501,600
<TOTAL-REVENUES> 4,659,900
<CGS> 848,100
<TOTAL-COSTS> 2,202,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,400
<INCOME-PRETAX> 1,209,500
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,209,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,209,500
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
