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 for the fiscal year ended May 31, 1999 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from ______ to ______
Commission file number 0-8773
CRESTED CORP.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Colorado 84-0608126
- --------------------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West
Riverton, WY 82501
- --------------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (307) 856-9271
----------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
------------------------------
(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 August 26, 1999 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
$1,583,231.
Class Outstanding at August 26, 1999
- ------------------------------------------ -----------------------------------
Common Stock, $0.001 par value 10,349,664 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:
1999 Annual Meeting Proxy Statement for the fiscal year ended May 31,
1999, 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. [ ]
1
<PAGE>
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") and its parent U.S. Energy
Corp.("USE") are in the business of acquiring, exploring, developing and/or
selling or leasing mineral properties, and the mining and marketing of minerals.
Crested is now engaged in two principal mineral sectors: uranium and gold, both
of which are currently in the care and maintenance mode. 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 63% USECC owned subsidiary. Interests are held in
other mineral properties (principally molybdenum), but are either non-operating
interests or undeveloped claims. Crested and 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 Colorado 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
2
<PAGE>
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.
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 2000, USE and Crested intend to seek the financing necessary
to re-commence 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. (a newly
privatized government entity, see USEC Inc. below) 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, when the
financing becomes available. Permitting costs for the Lincoln Project will 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.
3
<PAGE>
(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.
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,
1999 1998 1997
-------- -------- --------
Minerals 3% 11% 6%
Commercial Operations 14% 19% 29%
Crested received $43,800 in revenues from the sale of uranium in fiscal
1999. 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 and the molybdenum royalty. 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.
4
<PAGE>
(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:
GREEN MOUNTAIN
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.
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 had 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.
5
<PAGE>
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 December 21, 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.
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.
Yellow Stone Fuels Corp.("YSFC"), was organized on February 17, 1997 in
Ontario, Canada. As of February 17, 1997, YSFC acquired all the outstanding
shares of Common Stock of Yellow Stone Fuels, Inc. (a Wyoming corporation which
was organized on June 3,1996), in exchange for YSFC issuing the same number of
shares of YSFC Stock to the former shareholders of Yellow Stone Fuels, Inc.
("YFI"). YSFC and its wholly-owned subsidiary Yellow Stone Fuels, Inc. are
herein collectively referred to as YSFC.
YSFC has 11,851,500 shares of common stock issued and outstanding,
including 2,700,250 shares (22.8%) issued to USE and 1,568,750 shares (13.2%)
issued to Crested.
In order to concentrate the efforts of USECC on conventional uranium
mining using the Shootaring Canyon and Sweetwater Mills, USECC decided to take a
minority position in YSFC 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 to the ore body, causing the uranium
contained in the ore to dissolve. The resulting solution is pumped to the
surface where it is further processed to uranium oxide which is shipped to
conversion facilities for eventual sale. Generally, the ISL process is more cost
effective and environmentally benign compared to conventional mining techniques.
In addition, less time may be required to bring an ISL mine into operation than
to permit and build a conventional mine and mill.
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.
6
<PAGE>
THE PROPERTY INTERESTS OF USE AND CRESTED IN UTAH THROUGH PLATEAU RESOURCES LTD.
("PLATEAU") ARE:
Plateau Resources Ltd. is a wholly-owned subsidiary of USE, however,
Crested owns an interest in Plateau. See "Plateau Shootaring Canyon Mill" below.
The Tony M Mine and the Frank M properties, underground uranium deposits
in San Juan County, Utah are 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 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.
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. For detailed explanation of the GMMV agreement, please see
Crested Corp.'s 1998 Annual Report on Form 10-K at pages 6 and 7.
7
<PAGE>
The GMMV Management Committee has three Kennecott representatives and
two USECC representatives, acts by majority vote, and appoints and supervises
the project manager. In fiscal 1993, Kennecott became the GMMV project manager
and has continued as project manager through May 31, 1998. USECC has continued
work on a contract basis at Kennecott's request through May 31, 1999.
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 1999,
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, the GMMV had 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 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. For
detailed explanation, please see Crested Corp. 1998 Annual Report on Form 10-K
and Note F in the consolidated financial statements.
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.
8
<PAGE>
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 Item 3, "Legal Proceedings") and improved uranium prices.
PROPERTIES AND MINE PLAN.
The GMMV 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 formerly owned solely by USE,
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 mineralized 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 in the Round Park deposits, is about 2,300 feet vertically
down from the surface of Green Mountain.
SWEETWATER MILL. In fiscal 1993, the 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.
The Sweetwater 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, 1999").
9
<PAGE>
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. On March 8, 1999,
Kennecott exchanged four surety bonds from St. Paul Fire and Marine Insurance
Company in the total amount of $19,777,079 to replace the Morgan Guaranty letter
of credit. This was approved by the WDEQ. 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
surety bonds and other surety appear to be within the $24,330,000 of 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 January 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 January 1, 2001
and before mill production resumes, then up to $8,000,000 (escalated) of that
amount would be advanced in a loan from UNOCAL payable out of production from
the mill, 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.
10
<PAGE>
Kennecott has made an application to the Wyoming DEQ for a third five year
interim stabilization plan on the Sweetwater Pit where uranium mineralized
material was mined and processed through the mill. The Wyoming Environmental
Quality Council is currently reviewing the application and a decision is
expected in September 1999.
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 initiated discussions and made filings with the NRC regarding
amendments to the Source Material License to resume ore processing at the
Sweetwater Mill. On August 25, 1999, the Company was advised that the NRC issued
the Operating Permit for the mill.
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.
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. 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. For detailed explanation of the
transaction, please see Crested Corp.'s 1998 Annual Report on Form 10-K at page
13.
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,
11
<PAGE>
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 $2,390,900 of government securities
available for further bonding needs.
In fiscal 1998 and 1999, in anticipation of resuming milling operations,
Plateau significantly performed a reactivation and rehabilitation program at the
Mill. Plateau obtained approval of a water control permit for the tailings
facility from the State of Utah Water Control Division and is awaiting the NRC's
review of the operating license conditions so Plateau can continue with the
construction of tailings facilities.
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 are developing the
Townsite and selling homes and mobile home sites.
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 Wyoming, YSFC has staked and/or holds 243 unpatented mining claims
and has entered into four State leases covering a total of 8,700 acres located
in the Powder River Basin and Red Desert uranium districts. In New Mexico, YSFC
has staked and holds 39 unpatented mining claims (approximately 780 acres) in
the Grants uranium region of New Mexico.
12
<PAGE>
In fiscal 1997, USE, USECC and the GMMV 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 for $2,000 per
month and a sublease for 1,000 square feet of office space and use of various
office equipment for $1,500 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.
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 (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
13
<PAGE>
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. As of October 30, 1998, USE
and USECC owned 98 unpatented lode mining claims and a 644 acre adjoining State
Mineral Lease in the Crooks Gap area.
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. 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.
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.
URANIUM SPOT MARKET. Uranium spot prices averaged $10.41/lb. U3O8 on
June 30, 1999, a decrease of 4% from $10.80 at the end of the first calendar
quarter. Although spot demand from utilities and producers was stronger than
last year, sellers were concluding sales by offering lower prices as the quarter
came to a close. During the quarter, total spot market volume was approximately
5 million pounds U3O8 bringing the year-to-date total to more than 13 million
pounds, a significant improvement over the 4 million pounds sold in the first
half of 1998. Currently, the restricted spot price for U3O8 was reported in the
$10.10 to $10.60/lb. range.
URANIUM LONG-TERM MARKET. The long-term market continued to be
relatively quiet in the second calendar quarter with the long-term uranium price
indicator declining marginally to $10.65/lb. U3O8 from $11.75 at the end of the
previous quarter. Demand in the long-term market is expected to increase over
the remainder of the year as utilities move to cover future needs and volume for
the year is expected to exceed the 1998 estimated level of 50 million pounds
U3O8.
For a detailed analysis of past uranium market developments, please see
Crested Corp.'s 1998 Annual Report on Form 10-K pages 18 - 23.
14
<PAGE>
GOLD
SUTTER GOLD MINE (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"). The Lincoln Project has been renamed the Sutter
Gold Mine ("SGM").
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) were 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 does not have any class of its securities registered with the
Commission, and none of its securities are traded in the United States or
Canada.
Due to the depressed gold price and lack of available funding, SGMC has
deferred the start of construction of the 1,000 ton-per-day gold mill complex
and development of the underground mine, but is exploring plans to develop the
mine into a visitor's center to generate positive cash flow while the gold
prices remain depressed.
During fiscal 1998, SGMC amended its 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 built the entrance road to the mine. In fiscal 1999,
preparation of the mill and office site started and the engineering firm has
finished construction drawings for the mill. 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.
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 own
a $10,000,000 Contingent Stock Purchase Warrant (the "USECC Warrant") which 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
15
<PAGE>
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. In fiscal 1999, the Company issued
89,059 shares of its common stock in exchange for 207,500 Special Warrants from
SGMC shareholders increasing the Company's ownership of SGMC by 4%.
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), 240 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.
Surface and mineral rights holding costs will aggregate approximately
$225,000 from June 1, 1999 through May 31, 2000. Property taxes for fiscal 2000
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
16
<PAGE>
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.
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. In August and September 1998, the Amador County Board of Supervisors
certified the Final Subsequent Environmental Impact Report ("FSEIR") and
approved all of the amendments requested by SGMC. 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. The certification and
decision has been challenged in a lawsuit filed by a local citizens' group, see
"Legal Proceedings." Since SGMC already has a valid CUP, SGMC believes it may be
able to move forward on certain parts of the development of the
mine/mill/visitor center. In any event, SGMC does not expect the appeal process
to materially impact the current development plan or schedule.
VISITOR'S CENTER. SGMC is evaluating the possibility of developing the
tourist potential of Sutter Gold Mine, while it waits for the price of gold to
rebound. Demographics indicate, that within 150 mile radius of SGM's operation,
there is a total market population of 19.4 million people with 9.0 million
tourists visiting the area each year. The Sutter Gold Mine/Museum attraction
would be located along scenic Highway 49 (known as the Gold Road) between the
historic gold mining towns of Sutter Creek and Amador City, Amador County,
California. The Amador County Chamber of Commerce estimates that 2.5 million
people drive by SGM's entrance each year. SGMC's initial studies indicates that
the number of tourists could approximate 2,000 per day. Facilities would include
a Visitor's Center with a gift shop and museum, a self-guided tour of modern
mining activities, visitor gallery/museum attached to the mill building (when
built), hiking trails, picnic areas and a special gold panning area. Revenues
would come from admission tickets, gold value-added products and other
appropriate merchandise. The early 19th century architecture, combined with
expansion of underground tourist displays, rides and exhibits should allow SGMC
to continually upgrade and generate new and renewed interest in the visitor
attractions.
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.
17
<PAGE>
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. 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
(one-half to each) 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.
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. In a recent announcement, Asarco is proposing to acquire
Cyprus Amax through a merger forming Asarco Cyprus Inc. which would be the
largest publicly traded copper company. More recently, Phelps Dodge made a
buyout offer of Cyprus Amax and Asarco. This would further concentrate these
companies' copper production capabilities and add molybdenum reserves to the
surviving companies. It is too early to evaluate the affect of the merger and
acquisition may have on USECC's molybdenum interest at Mt. Emmons, Co.
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.
18
<PAGE>
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
operation at the Lustre Oil Field on the Ft. Peck Indian Reservation in
north-eastern Montana. Until December 1998, four wells were producing, but were
shut in pending an increase in oil prices. Recently, 2 of the wells were again
placed in production. USECC receives 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.
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.
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 semi-developed lots on 26.8 acres and 63
acres of undeveloped land 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
19
<PAGE>
operation. In the interim, USE and Crested are selling lots at Jeffrey City and
made sales aggregating $5,600, $38,400 and $21,150 during fiscal 1999, 1998 and
1997, respectively.
COLORADO PROPERTIES. In connection with the AMAX transaction for the Mt.
Emmons molybdenum properties near Crested Butte, Colorado, USECC acquired an
option from AMAX (now Cyprus Amax) to purchase approximately 57 acres for
$200,000 in Mountain Meadows Business Park, Gunnison, Colorado. See "Minerals -
Molybdenum" above. The property is zoned commercial and industrial, and is
adjacent to Western State College. In fiscal 1995, USECC and Cyprus Amax agreed
to exercise the option by USE and Crested agreeing to forego six quarters of
advance royalties from Cyprus Amax (the option purchase price was $200,000),
plus payment of certain expenses i.e. real property taxes from 1987 and other
expenses amounting to $19,358. Thereafter, USE (together with Crested) signed
option agreements with Pangolin Corporation, a Park City, Utah developer, for
sale of the 57 acres, and a separate parcel owned in Gunnison County, Colorado.
Although the initial payments on the option agreements were received,
thereafter the developer 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.
20
<PAGE>
RESEARCH AND DEVELOPMENT
Crested has incurred no research and development expenditures, either on
its own account or sponsored by customers, during the past three fiscal years.
ENVIRONMENTAL
GENERAL. Crested'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 Crested earnings could be adversely affected.
CROOKS GAP. An inoperative ion exchange facility at Crooks Gap currently
holds a NRC license for possession of uranium operations byproducts. USE has
applied to the NRC for permission to decommission and decontaminate the plant,
dispose low level waste into the Sweetwater Mill tailings cell, and keep intact
such of the facility as does not require dismantling.
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. Crested
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
Crested'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 82 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
21
<PAGE>
the county in which the claim is located and with the BLM. If the statutes and
regulations for the location of a mining claim are complied with, the locator
obtains a valid possessory right to the contained minerals. To preserve an
otherwise valid claim, a claimant must also annually pay certain rental fees to
the federal government (currently $100 per claim) and make certain additional
filings with the county and the BLM. Failure to pay such fees or make the
required filings may render the mining claim void or voidable. Because mining
claims are self-initiated and self-maintained, they possess some unique
vulnerabilities not associated with other types of property interests. It is
impossible to ascertain the validity of unpatented mining claims solely from
public real estate records and it can be difficult or impossible to confirm that
all of the requisite steps have been followed for location and maintenance of a
claim. If the validity of an unpatented mining claim is challenged by the
government, the claimant has the burden of proving the present economic
feasibility of mining minerals located thereon. Thus, it is conceivable that
during times of falling metal prices, claims which were valid when located could
become invalid if challenged. Disputes can also arise with adjoining property
owners for encroachment or under the doctrine of extralateral rights (see Item
3, "Legal Proceedings - BGBI Litigation").
PROPOSED FEDERAL LEGISLATION. The U.S. Congress has, in legislative
sessions in recent years, actively considered several proposals for major
revision of the General Mining Law, which governs mining claims and related
activities on federal public lands. If any of the recent proposals become law,
it could result in the imposition of a royalty upon production of minerals from
federal lands and new requirements for mined land reclamation and other
environmental control measures. It remains unclear whether the current Congress
will pass such legislation and, if passed, the extent such new legislation will
affect existing mining claims and operations. The effect of any revision of the
General Mining Law on the Company's operations cannot be determined conclusively
until such revision is enacted; however, such legislation could materially
increase the carrying costs of the Green Mountain mineral properties, the SMP
properties and some of Plateau's mineral properties which are located on federal
unpatented mining claims, and could increase both the capital and operating
costs for such projects and impair the Company's ability to hold or develop such
properties, as well as other mineral prospects on federal unpatented mining
claims.
ITEM 3. LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
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.
22
<PAGE>
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. For more details
of the litigation, please see Item 3 of Crested's 1998 Form 10-K at pages 33-34
and Footnote K to the Financial Statements in the Annual Report.
A three judge panel of the 10th CCA issued an Order and Judgment in the
Nukem/CRIC arbitration/litigation matter on October 22, 1998, which unanimously
affirmed the Federal District Court Second Amended Judgment without
modification. The ruling of the 10th CCA affirmed (i) the imposition of a
constructive trust in favor of SMP on Nukem's rights to purchase CIS uranium,
the uranium acquired pursuant to those rights, and the profits therefrom; and
(ii) the damage award against Nukem/CRIC. As a result of the ruling of the 10th
CCA, USE and Crested received an additional $6,077,264 (including interest and
court costs) from Nukem in February 1999 for a total net monetary award of
$15,468,625 in the arbitration/litigation, and equitable relief in the form of
USE's and Crested's interest in SMP, which holds the constructive trust over the
CIS contracts. Nukem/CRIC filed motions for entry of final satisfaction of
Judgment. The U.S. District Court denied both motions, the last one on July 16,
1999 and on August 16, 1999, Nukem filed a Notice of Appeal to the 10th CCA.
USECC intends to vigorously oppose the appeal and seek Judicial intervention to
enforce the Constructive Trust.
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 extra-lateral 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.
A partial or bifurcated trial to the Court of the extra-lateral rights
issues was held on December 11 and 12, 1995, to determine whether the Bullfrog
orebody is a vein apexing on Parador's Claims. 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 the trial, the
Court found against the parties on their respective claims. BGBI and Parador,
and USE/Crested all appealed the decision to the Nevada Supreme Court. BGBI
filed its brief on appeal and Parador and USECC have until August 31, 1999 to
file their answer and opening brief.
23
<PAGE>
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").
The plaintiffs have asked the Court to declare that (in) 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 DOE filed a
motion to dismiss the complaint claiming that the U.S. Congress withdrew its
consent to be sued in connection with the USEC Inc. privatization and that USEC
Inc. must be joined as an indispensable party. The State of Wyoming moved to
join in the litigation on behalf of the plaintiffs. A hearing was held on the
motions on January 8, 1999 before the U.S. District Court in Cheyenne, Wyoming.
The Court took the motions under advisement and as of August 18, 1999, had not
entered a decision.
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") and the original developer Pangolin Corporation, seeking compensatory
and consequential damages of more than $1.3 million from the defendants for
dealings in real estate owned by USE and Crested in Gunnison, Colorado.
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 and added additional parties as defendants.
See "Business - Commercial Operations - Real Estate and Other Commercial
Operations - Colorado Properties" above.
As of the date of this Annual Report, the parties are negotiating for a
settlement, however, no final settlement has been reached.
24
<PAGE>
SGMC LITIGATION
In 1993, Amador County issued a conditional use permit ("CUP") to allow
SGMC to develop the SGM near the town of Sutter Creek, Amador County,
California. A number of conditions were attached to the original CUP which
accommodated local citizen and government agency concerns about noise, waste
disposal, traffic and other aspects of the proposed mining operation.
In 1997 and 1998, SGMC proposed amendments to the CUP for a new design
of the SGM which would lower its environmental impact by reducing traffic,
potentially eliminating the use of cyanide on-site, and removing two large
tailings dams which would have been built to hold mine and mill waste. The new
design also would significantly reduce capital and operating costs for the
mine/mill complex, but cover more land for waste disposal and other purposes.
The certification and approval by the Amador County Planning Commission of the
Final Subsequent Environmental Impact Report ("FSEIR") and CUP amendments on
July 14, 1998 was appealed (by another local citizens project opposition group)
to the Amador County Board of Supervisors. In August and September 1998, the
Board of Supervisors certified the FSEIR and approved the amendments to the CUP.
On September 28, 1998 a lawsuit was filed in Amador County Superior
Court, California (Case No. 98 CV 3298) by Concerned Citizens of Amador County
as plaintiffs, against the County of Amador and the Amador County Board of
Supervisors, and against SGMC as a real party in interest. The lawsuit
challenges the actions of Amador County and its Board of Supervisors in
certifying the FSEIR and approving the amended CUP. A hearing was held on June
7, 1999 and the Court took the matter under advisement. Under California Law,
the Court has 90 days from the hearing date to enter its decision.
DENNIS SELLEY ET AL VS U.S. ENERGY CORP., CRESTED CORP. ET AL. On May
14, 1999, Dennis Selley personally and as personal representative of the Estate
of Hannah Selley and his wife Mary B. Selley, filed a Civil Action No. 30869 in
the Ninth Judicial District Court of Fremont County, Wyoming against U.S. Energy
Corp. and Crested Corp., Plateau Resources Limited and USECC the joint venture,
alleging that the defendants were negligent as a landlord in renting a
doublewide trailer converted to a bunkhouse near Ticaboo, Utah to plaintiffs'
daughter Hannah Selley and seek various unspecified damages. Hannah Selley was
employed by U.S. Energy Corp. ("USE") at the Ticaboo Lodge in June 1998. Because
no housing was available for employees, she and five other USE employees rented
rooms in the bunk house provided by USE, located about 1/2 mile from the Ticaboo
Lodge. In the late evening of June 5, 1998 and early the next morning, the
occupants built a bonfire near the bunkhouse and had guests over for a party. At
about 4:00 a.m. the morning of June 6, 1998, a fire started in the bunkhouse.
All occupants were awakened and left the living quarters during the fire except
Ms. Selley who perished in the fire. Plaintiffs allege inter alia that
defendants were negligent in providing faulty living quarters and that
defendants submitted a false filing with the Utah Workers Compensation Fund.
Defendants deny negligence in providing the living facility and assert various
defenses including plaintiffs' complaint is barred by the Workers Compensation
statutory immunity as well as the defense of an intervening clause. Discovery is
underway.
25
<PAGE>
DECLARATORY JUDGMENT ACTION. The Workers Compensation Fund of Utah has
filed a complaint for declaratory relief on or about July 26, 1999 against U.S.
Energy Corp., Crested Corp., Plateau Resources Limited, Dennis and Mary Selley
and others in Civil Action No. 99090 7500 before the Utah Third Judicial Court
of Salt Lake County, Utah. The suit is to determine its obligation to defend and
indemnify U.S. Energy Corp. and its affiliates in the above Hannah Selley case.
U.S. Energy Corp., Crested Corp. and affiliates have not yet responded to the
complaint in the case.
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 48, has been the 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.
26
<PAGE>
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.
Fiscal year ended May 31, 1999 High Low
------------------------------ ---- ---
Fourth quarter ended 5/31/99 $0.52 $0.31
Third quarter ended 2/28/99 0.39 0.218
Second quarter ended 11/30/98 0.42 0.15
First quarter ended 8/31/98 0.35 0.16
Fiscal year ended May 31, 1998
------------------------------
Fourth quarter ended 5/31/98 $0.45 $0.22
Third quarter ended 2/28/98 0.46875 0.25
Second quarter ended 11/30/97 0.71875 0.4375
First quarter ended 8/31/97 0.8125 0.34375
(b) Holders.
(b)(1) At August 20, 1999 there were approximately 1,801 stockholders of
record for Crested common stock.
(b)(2) Not applicable.
(c) Crested has not paid any cash dividends with respect to its common stock.
There are no contractual restrictions on Crested's present or future ability to
pay cash dividends, however, Crested intends to retain any earnings in the near
future for operations.
(d) During the year ended May 31, 1999, Crested issued 46,970 shares of its
Common Stock to its Outside Directors for services rendered.
27
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
May 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current assets $ 5,605,700 $ 4,809,300 $ 1,049,500 $ 596,200 $ 512,600
Current liabilities 9,451,000 9,282,300 6,592,400 6,848,300 5,518,500
Working capital (3,845,300) (4,473,000) (5,542,900) (6,252,100) (5,005,900)
Total assets 8,415,000 10,211,400 6,285,700 8,132,500 8,097,800
Long-term obligations(1) 742,600 768,000 741,700 725,900 853,700
Shareholders' equity/(deficit) (1,822,500) 117,200 (1,092,300) 521,900 1,690,800
<FN>
(1) Includes $725,900, $725,900, $725,900, $725,900 and $847,800 of
accrued reclamation costs on uranium properties for fiscal 1999, 1998,
1997, 1996 and 1995, respectively.
</FN>
</TABLE>
<TABLE>
<CAPTION>
For Years Ended May 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $4,416,600 $4,659,900 $ 1,703,500 $ 2,509,200 $ 1,160,200
(Loss) income before
equity in loss of
affiliates and
income taxes (291,900) 1,581,700 (862,400) (811,000) (1,031,100)
Equity in loss of
affiliates (1,659,800) (372,200) (807,900) (357,900) (415,900)
---------- -------- --------- -------- ---------
Net (loss) income $(1,951,700) $ 1,209,500 $(1,670,300) $(1,168,900) $(1,447,000)
========== ========== ========== ========== ==========
Net (loss) income
per share $ (.19) $ .12 $ (.16) $ (.12) $ (.14)
========= ========== =========== ========= ==========
Cash dividends per share -0- -0- -0- -0- -0-
</TABLE>
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is Management's Discussion and Analysis of those
significant factors which have affected the Company's liquidity, capital
resources and results of operations during the periods covered in the Company's
Consolidated Financial Statements filed with this Report.
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 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, 1999
During fiscal 1999, cash and cash equivalents increased by $2,496,300 to
a balance of $3,509,000 at May 31, 1999. Cash increases came primarily as a
result of the receipt of cash from the settlement of various Sheep Mountain
Partners ("SMP") arbitration/litigation issues, the collection of accounts and
notes receivable and the sale of certain assets. Cash was provided from
operations and financing activities of $2,039,900 and $470,400, respectively.
Cash of $14,000 was used in investing activities.
The Company received two payments as partial settlement of various
disputes existing between the partners of SMP. The first payment of $2,513,000,
which was recorded as an account receivable at May 31, 1998, represented matters
which the partners of SMP agreed to settle based on the April 18, 1996 Order and
Award which was rendered by the Arbitration Panel and confirmed by the U.S.
District Court of Colorado. The Company received an additional payment of
$3,038,600 after a decision was reached by the 10th Circuit Court of Appeals,
which affirmed the Second Amended Judgment of the U.S. District Court of
Colorado without modification.
During the twelve months ended May 31, 1999, accounts receivable from
related parties increased by $935,400. This increase came primarily as a result
of increased accounts receivable from Plateau Resources Limited ("Plateau") by
$1,177,900. This increase was offset by a reduction of the receivable from the
Green Mountain Mining Venture ("GMMV") of $273,000.
Cash was used to reduce accounts payable and accrued expenses by
$327,100; reduce debt by $137,000; purchase and renovate assets, $135,600; and
to fund continuing operations. During fiscal 1999, proceeds from long term debt
were $100,500.
29
<PAGE>
CAPITAL RESOURCES
GENERAL: The primary source of the Company's capital resources for
fiscal 2000 will be cash on hand at May 31, 1999, possible equity financing and
the expected settlement resolution of the SMP arbitration. The Company will also
continue to offer for sale various other assets such as real estate holdings in
Wyoming, Colorado and Utah and various mineral interests. Advance royalties,
interest, rentals of real estate holdings and equipment, aircraft chartering and
aviation fuel sales will also provide cash.
LINE OF CREDIT: The Company and its majority shareholder U.S. Energy
Corp. ("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.
FINANCING: Equity financings are dependent on the market price of
uranium, among other things. Currently the price for uranium is depressed and it
is not known when it will recover. Management believes, based on its analysis of
independent projections, that the market price for uranium will improve in the
future. No assurance can be given that the price will improve during fiscal
2000. If the price does not improve, the ability of the Company to raise equity
financing will be impaired.
The Company believes that cash on hand, its line of credit and cash
projected to be received from operations, along with potential cut backs in
capital development, general and administrative and operating expenses, will be
adequate to fund working capital requirements through fiscal 2000. These capital
resources are not sufficient to provide the funding for major capital
expenditures for the Company's mineral properties and, accordingly, the
Company's development plans may be either temporarily or permanently impacted.
During fiscal 1999, debt to USE increased by $506,900 to $7,054,000.
This debt is a result of USE funding various operations on behalf of the
Company. USE has not made demand for payment of the debt and has not indicated
that it will do so during fiscal 2000. The Company is obligated to repay this
debt and will continue to negotiate the terms of the debt with USE until such
time as adequate resources are available to retire the debt. In the event that
the Company is not able to pay the debt to USE with cash it may be required to
negotiate payment by issuance of its common stock to USE.
The Company's working capital deficit decreased during fiscal 1999 by
$627,700 to $3,845,300 at May 31, 1999. This decrease was primarily due to the
partial settlements of the SMP arbitration/litigation issues. It is anticipated
that this working capital, along with the line of credit and cash received from
operations, along with reductions in capital, general and administrative
expenses and operational costs, will be adequate to fund the working capital
needs of the Company during fiscal 2000. Until either the remaining SMP
arbitration issue is resolved or equity financing is raised, the Company plans
to curtail major development projects on its mineral properties, general and
administrative expenses and commercial operations.
30
<PAGE>
CAPITAL REQUIREMENTS
GENERAL: The primary requirements for the Company's working capital
during fiscal 2000 are expected to be associated with corporate general and
administrative and care and maintenance costs of the Plateau and SMP mineral
properties. The Company will also be responsible for the purchase of uranium for
its portion of a delivery pursuant to the one utility contract that was assigned
to the Company as a result of the partial settlement agreement reached with
Nukem, Inc.
in the SMP arbitration.
SUTTER GOLD MINING COMPANY ("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 affiliations with USE, however, the Company will assist
in the efforts to secure financing necessary to place the SGMC gold properties
into production.
SMP: The Company and USE are responsible for care and maintenance costs
of the SMP properties. During fiscal 1999, these costs averaged $56,900 per
month. One half of these costs are the obligation of the Company and the
remaining 50% is the obligation of USE. There are no current plans to mine the
SMP Crooks Gap uranium properties during fiscal 2000. However, the Company will
continue to preserve the mineral properties and evaluate concepts to reduce care
and maintenance costs.
All matters in the SMP arbitration have been settled with the exception
of the resolution of the Constructive Trust which was impressed by the
arbitration panel on several supply contracts with three republics of the former
Soviet Union. The existence of a Constructive Trust on the contracts was
confirmed by the U. S. District Court of Colorado and affirmed by the 10th
Circuit Court of Appeals. Management believes that the resolution of the
Constructive Trust issue will occur during fiscal 2000. However, no assurance of
the resolution or its ultimate impact on the financial condition or earnings of
the Company can be predicted.
GMMV: Pursuant to an Acquisition Agreement that was signed on June 23,
1997, Kennecott paid the Company $2 million upon execution of the Agreement,
which became non-refundable upon the satisfaction of certain terms. Due to
continued depressed market prices for uranium concentrates The Company and USE
were unsuccessful in obtaining financing which would have allowed the Company
and USE to purchase Kennecott's interest in the GMMV. The $2 million advanced at
closing is classified as a deferred purchase option and will be offset against
any future cash commitments the Company may incur on the GMMV properties.
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.
During fiscal 1999, the Company and USE elected under the original GMMV
agreement to become non-participating partners in the budgets of the GMMV. This
decision by the Company will have a dilutive effect on its ownership in the
GMMV. The Company can buy back any dilution it may suffer in its ownership under
certain conditions of the GMMV contract. The Company believes that due to
significantly reduced annual care and maintenance costs, the dilution of its
interest will be minor in the short term.
31
<PAGE>
As a result of continued depressed uranium prices, the decision to
curtain development activities on the GMMV mineral properties and lack of
funding, GMMV took an impairment against its mineral assets. This impairment
does not affect the Company's carrying value of its investment in GMMV or its
results of operations.
PLATEAU: Although the Company does not directly own any of the
outstanding stock of Plateau, it has a revenue and cost sharing agreement on the
operations of Plateau. Under the terms of this agreement the Company shares
equally in all cash flows with USE, which owns all the outstanding stock of
Plateau. In addition to maintaining the mill and mine properties, Plateau owns
and operates the Ticaboo townsite, motel, convenience store and restaurant.
Operations in fiscal 1999 resulted in a loss of $708,500, a $100,000 decrease
from fiscal 1998. In addition to commercial operations, Plateau is involved in
real estate sales including the sale of developed home and trailer sites as well
as constructed homes.
The Company and USE are currently working to obtain the necessary
permits from the NRC and State of Utah to place Plateau's Shootaring mill
located in southern Utah into production. The Company is seeking debt or equity
financing of between $6,000,000 to $9,000,000 to put the mill and Tony M. Mine
into production. Until such time as the market price for uranium concentrates
reaches economic levels, financing is obtained and profitable contracts are
secured, the Company will not put the properties into production. Plateau is
also evaluating alternate uses for its mill site including a disposal site for
low level radioactive material.
TERM DEBT AND OTHER OBLIGATIONS: Debt is primarily due to USE, with the
remaining balance representing obligations for the purchase of various
equipment. The debt bears various 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.
RECLAMATION OBLIGATIONS: It is not anticipated that the Company's
working capital will be used in fiscal 2000 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 Company's mining properties will enter the reclamation phase
prior to May 31, 2000. At May 31, 1999, all reclamation obligations of the
Company were fully covered by cash, bonds, the pledge of real estate assets, or
in the case of GMMV, surety bonds posted by Kennecott. The Company evaluates all
reclamation liabilities annually with the responsible regulatory agency. When
increases are required, provisions are made in the cash deposits or bonding.
OTHER: The Company is 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 does
not have properties which require current remediation. The Company 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, 1994 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
32
<PAGE>
May 31, 1995 and 1996. No assurance of the outcome of the appeal can be given.
However, management of the Company believes that the results of the appeal will
not have a material affect on the financial position of the Company.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
Although the Company experienced positive cash flows during fiscal 1999,
operations resulted in a net loss after taxes of $1,951,700 or $0.19 per share
as compared to a income of $1,209,500 or $0.12 per share in fiscal 1998.
REVENUES: Mineral sales decreased by $415,700 during fiscal 1999. This
decrease resulted from no revenues being recognized during fiscal 1999 from a
SMP base escalated uranium delivery contract which generated revenues of
$429,300 during fiscal 1998 from the final delivery under the contract. There
were reduced revenues from the advance royalty from Cyprus Amax of $30,200, due
to reduced market prices for molybdenum. These decreases in mineral sales
revenue were slightly offset by net profits received from one of the SMP
purchase contracts of $43,800 during fiscal 1999 while no such revenues were
recorded in fiscal 1998.
Commercial operations revenues decreased by $273,500. This decrease
occurred primarily as a result of reduced equipment rentals to the GMMV. The
GMMV properties were on a standby basis during most of fiscal 1999 due to
reduced uranium prices. This decrease of equipment rental of $375,600 was offset
by increased fuel sales.
Oil sales decreased by $43,400 as a result of temporarily closing down
oil production due to continued depressed market prices for crude oil and a
continuing decline in the production of the oil wells. Subsequent to May 31,
1999 the Company began producing two of the oil wells. The Company will continue
to evaluate production of the wells as estimated production rates change and
market prices for crude oil change.
Management fees and other revenues decreased by $268,100 primarily
because of reduced contract work performed at the GMMV properties and management
services at the SMP properties. The fee is based on a percentage of all costs at
the GMMV properties for services provided. During fiscal 1999, operations were
significantly reduced at the GMMV properties which reduced the related
management fees. Upon receiving the SMP mining properties in a partial
settlement of the SMP arbitration issues, the Company was no longer entitled to
a management fee on the SMP properties.
COSTS AND EXPENSES: Mineral operations increased from $832,400 during
fiscal 1998 to $1,121,500 during fiscal 1999. This increase of $289,100
primarily relates to the care and maintenance costs associated with the SMP
properties. The Company became responsible for 100% of these costs at the
beginning of fiscal 1999 due to a partial settlement of the SMP
arbitration/litigation issues which conveyed ownership of the SMP mining
properties to the Company.
33
<PAGE>
General and Administrative expenses increased from $1,370,300 during
fiscal 1998 by $403,400 to $1,773,700 during fiscal 1999. This increase was as a
result of labor expenses no longer being billed directly to GMMV and SMP.
Significant portions of labor costs were billable either directly or on a
allocation basis to GMMV and SMP during fiscal 1998. As a result of the Company
and USE receiving the SMP properties in partial settlement of the
arbitration/litigation issues and the curtailment of activities at GMMV, these
same labor costs are charged to General and Administrative expense.
The largest increases in costs and expenses were the write off of a
contingent stock warrant and provision for doubtful accounts. During fiscal
1999, the Company wrote off a contingent stock warrant from SGMC in the amount
of $651,000. The write off of the contingent stock warrant does not affect the
ownership of the SGMC properties.
The Company also recognized non-cash expenses in the form of a provision
for doubtful accounts of $182,500. The provision for doubtful accounts is a
result of the continual inability of a third party to pay amounts due the
Company on real estate sold in prior years. The Company will pursue collection
of this amount.
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.
34
<PAGE>
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.
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 impairments of mineral assets. The Company is in the process of holding its
investments in gold and uranium properties that are currently not generating any
operating revenues. These properties require expenditures for items such as
permitting, care and maintenance, holding fees, corporate overhead and
administrative expenses. Success in the minerals industry is dependant on the
price that a company can receive for the minerals produced. The Company cannot
predict what the long term price for gold and uranium will be and therefore
cannot predict when, or if, the Company will generate net income from
operations. The Company has sufficient capital resources to maintain its mineral
properties on a stand by basis through fiscal 2000. Development activities of
the mineral properties and expansion of commercial operations are dependant on
the Company obtaining equity financing or commercial loans.
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 by the Arbitration
Panel and confirmed by the Federal Courts have compounded the Company's
operating and cash flow position in the past. The Company believes that the SMP
arbitration/litigation will be resolved during fiscal 2000.
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 computers and operating systems and has consulted with its
vendors of the computer software which is being used by the Company and its
affiliates. The vendors have confirmed to the Company that all of the Company's
software and information systems are Year 2000 compliant. The Company therefore
does not believe that significant expenditures will be required for the Year
2000 event. In the event that the Company experiences technical problems because
of the Year 2000 problem it will change software vendors. Such a change would
not have a material affect on the Company's results of operations or financial
position.
35
<PAGE>
EFFECTS OF CHANGES IN PRICES
Mining operations and the acquisition, development and sale of mineral
properties are significantly affected by changes in commodity prices. As prices
for a particular mineral increase, prices for prospects for that mineral also
increase, making acquisitions of such properties costly, and sales advantageous.
Conversely, a price decline facilitates acquisitions of properties containing
that mineral, but makes sales of such properties more difficult. Operational
impacts of changes in mineral commodity prices are common in the mining
industry.
URANIUM. Changes in the prices of uranium affect the Company to the
greatest extent. Currently uranium is at historical low prices. The Company is
continually evaluating market trends and data. The Company does not plan to go
forward with any additional development of its mineral properties until the
market price for gold and uranium obtain and remain at higher levels which will
make the operations profitable.
MOLYBDENUM AND OIL. Changes in prices of molybdenum and petroleum are
not expected to materially affect the Company with respect to either its
molybdenum advance royalties or its fees associated with oil production. A
significant and sustained increase in demand for molybdenum would be required
for the development of the Mt. Emmons properties by Cyprus Amax since Cyprus
Amax has other producing mines.
ITEM 8. FINANCIAL STATEMENTS.
Financial statements for the Company follow immediately.
36
<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, 1999 and 1998, and the related
consolidated statements of operations, shareholders' (deficit) equity and cash
flows for each of the three years in the period ended May 31, 1999. 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 represented that it 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, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended May 31, 1999, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
August 26, 1999.
37
<PAGE>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
May 31,
----------------------------
1999 1998
---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 3,509,000 $ 1,012,700
Accounts receivable
Trade, net of allowance for doubtful
accounts of $1,600 and $1,400, respectively 72,200 89,500
Affiliates 1,875,300 939,900
SMP settlement receivable, net -- 2,513,000
Current portion of long-term notes receivable
Related parties 115,000 227,800
Inventory and other 34,200 26,400
------------ ------------
Total current assets 5,605,700 4,809,300
LONG-TERM NOTES RECEIVABLE
Related parties 10,200 116,500
Real estate sales -- 182,500
INVESTMENTS IN AFFILIATES 126,000 1,643,300
INVESTMENT IN CONTINGENT
STOCK PURCHASE WARRANT -- 651,000
PROPERTIES AND EQUIPMENT:
Land 397,400 397,400
Buildings and improvements 2,224,800 2,185,000
Aircraft and other equipment 2,428,600 2,393,300
Developed oil properties, full cost method 886,800 886,800
Mineral properties 14,200 14,200
------------ ------------
5,951,800 5,876,700
Less accumulated depreciation,
depletion and amortization (3,437,400) (3,221,700)
------------ ------------
2,514,400 2,655,000
OTHER ASSETS 158,700 153,800
------------ ------------
$ 8,415,000 $ 10,211,400
============ ============
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
</FN>
</TABLE>
38
<PAGE>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
May 31,
-----------------------------
1999 1998
---- ----
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable and accrued expenses $ 371,700 $ 698,800
Deferred GMMV purchase option 2,000,000 2,000,000
Current portion of long-term debt
Affiliate 7,054,000 6,547,100
Others 25,300 36,400
------------ ------------
Total current liabilities 9,451,000 9,282,300
LONG-TERM DEBT 16,700 42,100
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
Preferred stock, $.001 par value;
100,000 shares authorized;
none issued or outstanding -- --
Common stock, $.001 par value;
20,000,000 shares authorized;
10,284,664 and 10,237,694 shares
issued and outstanding 10,300 10,200
Additional paid-in capital 6,387,300 6,375,400
Accumulated deficit (8,220,100) (6,268,400)
------------ ------------
Total shareholders' (deficit) equity (1,822,500) 117,200
------------ ------------
$ 8,415,000 $ 10,211,400
============ ============
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
</FN>
</TABLE>
39
<PAGE>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
REVENUES:
<S> <C> <C> <C>
Mineral revenues $ 119,100 $ 534,800 $ 103,600
Commercial operations 607,400 880,900 488,300
Interest 160,700 141,500 38,500
SMP litigation settlements, net 3,038,600 2,295,000 501,900
Oil sales 41,700 85,100 82,300
Management fees and other 453,700 721,800 460,000
(Loss)gain on sale of assets (4,600) 800 28,900
------------ ------------ ------------
4,416,600 4,659,900 1,703,500
COSTS AND EXPENSES:
Mineral operations 1,121,500 832,400 421,500
Abandoned mineral claims -- -- 71,500
Provision for doubtful accounts 182,500 -- 570,800
Commercial operations 929,200 814,100 873,500
General and administrative 1,773,700 1,370,300 549,300
Write-off of investment in contingent
stock warrant 651,000 -- --
Oil Production 32,300 34,000 48,400
Interest 18,300 27,400 30,900
------------ ------------ ------------
4,708,500 3,078,200 2,565,900
------------ ------------ ------------
(LOSS) INCOME BEFORE
EQUITY IN LOSS OF AFFILIATES
AND INCOME TAXES (291,900) 1,581,700 (862,400)
EQUITY IN LOSS OF AFFILIATES (1,659,800) (372,200) (807,900)
------------ ------------ ------------
(LOSS) INCOME BEFORE
INCOME TAXES (1,951,700) 1,209,500 (1,670,300)
INCOME TAXES -- -- --
------------ ------------ ------------
NET (LOSS) INCOME $ (1,951,700) $ 1,209,500 $ (1,670,300)
NET (LOSS) INCOME
PER SHARE, BASIC AND DILUTED $ (0.19) $ 0.12 $ (0.16)
============ ============ ============
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 10,315,091 10,237,694 10,165,931
============ ============ ============
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 10,315,091 10,302,694 10,165,931
============ ============ ============
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
40
<PAGE>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<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, 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
Issuance of stock to
outside directors 46,970 100 11,900 -- 12,000
Net loss -- (1,951,700) (1,951,700) --
----------- ----------- ----------- ----------- -----------
Balance, May 31, 1999 10,284,664 $ 10,300 $ 6,387,400 $(8,220,100) $(1,822,500)
=========== =========== =========== =========== ===========
<FN>
Shareholders' Equity at May 31, 1999 does not include 65,000 shares currently
issued but forfeitable if certain conditions are not met by the recipients.
However, the Basic and Diluted Weighted Average Shares Outstanding on the
Consolidated Statements of Operations include the forfeitable shares.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
41
<PAGE>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended May 31,
------------------------------------------
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $(1,951,700) $ 1,209,500 $(1,670,300)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation, depletion, and amortization 221,600 214,600 183,600
Equity in loss of affiliates 1,659,800 372,200 807,900
Write-off of investment in
contingent stock warrant 651,000 -- --
Provision for doubtful accounts 182,500 -- 574,600
Non-cash compensation 12,000 -- 76,300
Gain on sale of assets 4,600 (800) (28,900)
SMP settlement receivable, net 2,513,000 (2,513,000) (501,900)
Abandoned mineral claims -- -- 71,500
Net changes in:
Accounts and notes receivable (918,100) (369,300) (457,900)
Inventory and other (7,700) 21,900 (14,700)
Accounts payable and accrued expenses (327,100) 142,200 256,600
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 2,039,900 (922,700) (703,200)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred GMMV purchase option -- 2,000,000 --
Decrease (Increase) in long-term receivables 81,600 251,800 (668,400)
(Investments in) proceeds from affiliates (5,000) (218,700) 1,891,400
Purchases of property and equipment (135,600) (707,200) (64,500)
Proceeds from sale of property and equipment 50,000 2,000 30,000
Increase in other assets (5,000) (3,600) (4,100)
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (14,000) 1,324,300 1,184,400
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from third party debt 100,500 153,900 28,200
Activity from line of credit, net -- -- (88,000)
Payment on long-term debt (137,000) (103,600) --
Net activity on long-term debt to affiliates 506,900 523,700 (436,900)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 470,400 574,000 (496,700)
----------- ----------- -----------
(continued)
<FN>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</FN>
</TABLE>
42
<PAGE>
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,496,300 975,600 (15,500)
CASH AND CASH EQUIVALENTS, Beginning of year 1,012,700 37,100 52,600
---------- ------------- ----------
CASH AND CASH EQUIVALENTS, End of year $3,509,000 $ 1,012,700 $ 37,100
========== ============= ==========
SUPPLEMENTAL DISCLOSURES:
Payment of note receivable - affiliates
with stock from affiliate $ 137,500 $ -- $ --
========== ============= ==========
Interest paid $ 18,300 $ 27,400 $ 30,900
========== ============= ==========
Income taxes paid $ 7,900 $ -- $ --
========== ============= ==========
Noncash investing and financing activities:
Exchange of affiliate shares for contingent
stock purchase warrant $ -- $ -- $ 651,000
========== ============= ==========
<FN>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</FN>
</TABLE>
43
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
A. BUSINESS ORGANIZATION AND OPERATIONS:
Crested Corp. (the "Company" or "Crested") was incorporated in the State
of Colorado on September 18, 1970. It engages in the acquisition, exploration,
sale and/or development of mineral properties, mining and marketing of minerals.
Principal mineral interests are in uranium, gold and molybdenum. However, none
are producing at the present time. Currently, the Company holds various real
properties used in commercial operations and engages in the exploration,
development and production of petroleum. Most of these activities are conducted
through the joint venture discussed below and in Note B.
The Company and U.S. Energy Corp. ("USE"), an approximate 52%
shareholder of the Company, 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"). SMP is currently involved in significant legal
proceedings between its partners (see Note K). In fiscal 1998, the Company and
USE entered into an Agreement with Kennecott whereby they had the opportunity to
purchase Kennecott's interest in the GMMV if certain conditions were met (see
Note F). During fiscal 1995, the Company and USE formed a new Wyoming
corporation, Sutter Gold Mining Company, ("SGMC"). SGMC was formed to
consolidate and operate the interests of the Company and USE in the Sutter Gold
Mining Properties.
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. After a confirmation of the arbitration Order and Award the Company
received $3,038,600 in February 1999 from Nukem as partial settlement of the SMP
claims. Additionally, the Company received $2,513,000 during the first quarter
of 1999 as a partial settlement from Nukem. Final resolution of the SMP
Arbitration Order and Award is pending before the U.S. Federal Court in
Colorado. For accounting purposes, the Company first applied the proceeds
against their recorded investment in SMP with the remaining balance of
$3,038,600 and $2,295,000 in 1999 and 1998, respectively, after cost recovery,
being recognized as income and included in the accompanying Consolidated
Statements of Operations as SMP litigation settlements, net. Improvement in the
Company's liquidity position is 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, 1999, the
Company owed USE $7,054,000.
44
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(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 for 1998 (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.
INVENTORY
Inventories consist primarily of aviation fuel, associated aircraft
parts and mining supplies. 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 forty-five years.
45
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
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 incurred
to maintain production will be amortized using a 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.
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
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 to the carrying amount of the
asset. Changes in significant assumptions underlying future cash flow estimates
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, or an inability to obtain financing necessary to develop the mineral
interests may result in asset impairment. As of May 31, 1999, management
believes, other than the impairment taken during fiscal 1999 on the Sutter Gold
contingent stock purchase warrant (see Note F), 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.
46
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
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. Oil and gas revenue is recognized at the time of
production.
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 carry forwards.
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, if deemed
necessary, by a valuation allowance for any tax benefits which, based on current
circumstances, are not expected to be realized.
NET (LOSS) INCOME 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. The statement
replaces "primary earnings per share" with "basic earnings per share" and
replaces "fully diluted earnings per share" with "diluted earnings per share."
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
adoption of SFAS 130, in the first quarter of fiscal 1999, had no impact to the
Company.
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 was
adopted by the Company in fiscal 1999 (see Note I).
47
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
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.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1998 and 1997 financial
statements to conform with the 1999 presentation.
C. RELATED-PARTY TRANSACTIONS:
The Company does not have employees, but utilizes USE's employees and
pays for one-half of these 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 1999, 1998
and 1997, the Board of Directors of USE contributed 89,600, 49,470 and 24,069
shares of USE stock to the ESOP at prices of $4.00, $6.57 and $8.87 per share,
respectively. The Company is responsible for one-half of the value of these
contributions or $179,200, $162,300 and $106,800 in fiscal 1999, 1998 and 1997,
respectively.
As of May 31, 1999, the Company had notes receivable due from certain
officers, employees and related parties of the Company and USE totaling $125,200
which bear interest at 10% per annum and are due in November 1999. The Company
also has advances to affiliates of $637,117.
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 $399,024, $552,775 and $329,900 in fiscal
1999, 1998 and 1997, 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 13.2% and 22.7% of YSFC respectively. The convertible note bore interest at
10% and was due on December 31, 1998. The Company and USE extended the note to
March 31, 1999. YSFC exercised its option to either fully satisfy the debt with
cash or the issuance of its common stock by paying $200,000 and issuing 137,500
shares of its common stock.
48
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
D. USECC JOINT VENTURE:
USECC operates the Glen L. Larsen office complex; an aircraft hangar
with a fixed base operation, office space, and certain aircraft; holds interests
in various mineral operations including SMP and the GMMV; conducts oil and gas
operations; and transacts all operating and payroll expenses, except for
specific expenses which are allocated directly to each venturer.
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:
CONDENSED BALANCE SHEETS - USECC
May 31,
----------------------------
1999 1998
---- ----
Current assets $ 10,887,900 $ 9,098,700
Properties and equipment 9,399,000 9,248,800
Mineral properties 28,500 28,500
Accumulated depreciation (4,463,000) (4,031,600)
Other long-term assets 1,311,000 2,095,000
------------ ------------
$ 17,163,400 $ 16,439,400
============ ============
Current liabilities $ 798,100 $ 1,474,900
Reclamation liability 1,451,800 1,451,900
Other liabilities 33,300 84,300
Deferred income 4,000,000 4,000,000
Venturers' capital 10,880,200 9,428,300
------------ ------------
$ 17,448,700 $ 16,439,400
============ ============
CONDENSED STATEMENTS OF OPERATIONS - USECC
Year Ended May 31,
------------------------------------------
1999 1998 1997
---- ---- ----
Revenues $ 8,659,700 $ 8,778,200 $ 3,043,600
Costs and expenses (7,597,600) (6,164,300) (3,963,500)
----------- ----------- -----------
Net income (loss) $ 1,062,100 $ 2,613,900 $ (919,900)
=========== =========== ===========
49
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
E. INVESTMENTS IN AFFILIATES:
The Company's investments in affiliates are as follows:
Carrying Value at May 31,
-------------------------
Ownership 1999 1998
--------- ---- ----
Equity Method Investments:
GMMV 25% $ 116,300 $ 116,300
SGMC 4% (85,500) 403,600
ENERGX Ltd. 45% 63,000 62,900
YSFC 13.2% (130,100) (192,200)
USE (Note B) 8% 147,700 1,243,600
Others various 14,600 9,100
----------- -----------
$ 126,000 $ 1,643,300
=========== ===========
Equity loss from investments accounted for by the equity method is as
follows:
Year Ended May 31,
------------------------------------------
1999 1998 1997
---- ---- ----
GMMV $ -- $ -- $ --
SGMC (489,100) (13,000) (121,800)
ENERGX, LTD -- -- (27,400)
YSFC (75,400) (69,300) (122,400)
USE (1,095,300) (73,100) (271,400)
----------- ----------- -----------
$(1,659,800) $ (155,400) $ (543,000)
=========== =========== ===========
There are currently litigation and arbitration proceedings with the
Company's partner in the SMP partnership, as discussed further in Note K.
50
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
CONDENSED COMBINED BALANCE SHEETS:
EQUITY INVESTEES
1999 1998
---- ----
Current assets $ 15,187,900 $ 18,434,400
Non-current assets 23,455,200 118,550,300
------------- -------------
$ 38,643,100 $ 136,984,700
============= =============
Current liabilities $ 3,523,300 $ 9,351,900
Reclamation and other liabilities 52,017,700 61,281,400
Excess in assets (16,897,900) 66,351,400
------------- -------------
$ 38,643,100 $ 136,984,700
============= =============
CONDENSED COMBINED STATEMENTS OF OPERATIONS:
EQUITY INVESTEES
1999 1998 1997
---- ---- ----
Revenues $ 11,058,800 $ 11,695,900 $ 5,766,000
Costs and expenses (97,836,400) (13,273,900) (12,213,500)
------------ ------------ ------------
Net loss $(86,777,600 $ (1,578,000) $ (6,447,500)
============ ============ ============
SMP entered into various market related and base price escalated uranium
sales contracts with certain utilities. Deliveries under the base escalated
contracts have been completed as of May 31, 1999. The Company and USE are
responsible for one remaining market related contract which will require
approximately 696,000 pounds of uranium concentrates to be delivered from 2000
through 2004 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 final 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
1999 and 1998, deliveries under this arrangement resulted in revenues to the
Company of $43,800 and $429,300, 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. As a result of a partial settlement in
June of 1998, the Company and USE were assigned one of the SMP utility
contracts. This contract calls for deliveries of 198,000, 81,000, 125,000,
84,000 and 208,000 pounds of uranium concentrate in calendar 2000, 2001, 2002,
2003 and 2004. These deliveries are to be made at an average of the three month
market price preceding the delivery. The utility has the option of increasing or
decreasing the quantity by plus or minus thirty percent.
51
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
Due to the litigation and arbitration proceedings, financial statements
for SMP are not available. 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 1999. The Company's direct loss
generated from its investment in SMP was $216,800 and $264,900 for the years
ended May 31, 1998 and 1997, 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 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 continued the development of the proposed Jackpot Mine and
nearby Big Eagle Mine, and worked with Kennecott in preparing the Sweetwater
Mill for renewed operations. Such work was funded from the $16,000,000 loaned to
the GMMV by Kennecott. Kennecott received 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.
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, the GMMV halted development
activities at
52
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
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 development of the mine will
start again or if USECC will be able to conclude the financing necessary to buy
Kennecott's interest.
USECC was able to satisfy the terms of the Acquisition Agreement to the
point that the $4,000,000 signing bonus paid by Kennecott is nonrefundable. As a
result of the continuing depressed uranium market, the Company and USE were not
able to close the acquisition agreement. The signing payment will be applied
against any further reimbursable costs and contributions the Company and USE may
become obligated to make to the GMMV.
USE, USECC and Kennecott continue to own their respective 50% interests
in the GMMV, and Kennecott's obligation to repay the $16,000,000 loaned by
Kennecott shall remain its obligation, without any adverse effect on the 50%
interest in GMMV held by USE and USECC. Kennecott funded $14,458,200 of the
$16,000,000 loan obligation. The balance of the loan, $1,541,800, is available
when development work is resumed. As a result of the funds advanced under the
loan and the signing bonus, which gave Kennecott a 2 for 1 credit against its
$50 million work commitment, the $50 million work commitment under the 1990 GMMV
Agreement is fully satisfied. The Company and USE have elected to have their
interests diluted by becoming non participating on the work plans and budgets.
Kennecott is obligated to fund the annual plans and budgets. If the Company's
and USE's participating interests drop below 10% their interests will be
automatically converted to a 1% to 3% gross proceeds royalty. It is not
anticipated that such dilution will occur in the near term.
Primarily as a result of sustained depressed uranium prices, GMMV
evaluated the carrying value of its mineral assets for impairment. GMMV
determined the carrying value of its assets exceeded the future cash flows.
Accordingly, in Fiscal 1999, GMMV recorded an impairment in the amount of
$59,545,150 related to its mineral assets. This impairment does not affect the
Company's carrying value of its investment in GMMV or its results of operations.
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 eight years. See Notes E and K for a
description of the investment and a discussion of the related
litigation/arbitration.
53
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
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, 1999.
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 $75,300, $105,500 and $103,600 of revenue
from the advance royalty payments in fiscal 1999, 1998, and 1997, 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. 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, 1999, the
promissory notes were in default and are fully reserved. 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, 1999, due to the
decline in the spot price for
54
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
gold and the lack of adequate financing, 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 expired in November 1998. At the
underwriter's request, the initial investors (including USE and Crested) agreed
to have the amount of their common shares owned reduced by 50 percent. The
investors in the $3.00 per share private placement discussed above were not
affected as those shares were sold in contemplation of the 1 for 2 reverse
split.
In connection with the second offering, the Company and USE accepted a
Contingent 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 Contingent 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 Contingent Stock Purchase
Warrant is only exercisable to the extent proven and probable ore reserves, as
defined in the Contingent 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 Contingent 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. As a
result of continued depressed market prices for gold and the inability of SGMC
to raise sufficient capital to place the properties into production, SGMC took a
$10,718,300 impairment allowance against its mineral properties. As a result of
this impairment, the Company wrote off its investment in the SGMC contingent
stock warrant in the amount of $651,000 during fiscal 1999. SGMC still owns the
mineral properties and management is optimistic that the property will be placed
into production in the future. At such time as the property should go into
production the Company would receive all its benefits pursuant to the terms of
the contingent stock purchase warrants.
Management is considering alternate uses of the Sutter properties until
such time as the price for gold increases. Options that management has
considered include the development of a visitor's center.
55
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
On March 31, 1998, USE purchased 889,900 Special Warrant units from
certain Canadian investors. The units were purchased with 488,895 of the USE's
common stock. In addition, the Company sold 170,000 shares of common stock to
the Canadian investors at the then market price of $7.00 per share. As a result
of this purchase, the Company and USE's combined ownership interest in SGMC
reached 59%. Therefore, as of April 1, 1998 the Company began consolidating
SGMC's results of operations.
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, 1999, Plateau had a cash security in the amount of $7,584,000 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 equally in the 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. Commercial revenues are being generated
from the townsite assets which include a motel, C-store, lounge/restaurant, boat
storage facility and housing.
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, Energx abandoned certain of its leases and as a
result wrote off $164,500 of related capitalized costs. During fiscal 1999, the
oil production from oil wells on the Fort Peck Indian Reservation was stopped
due to depressed oil prices and declining production. Production will resume
once the market price for crude oil increases to the level where the wells are
again profitable.
56
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(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 (8.75% as of May 31,
1999). The weighted average interest rate for 1999 and 1998 was 9.5%. No amounts
were outstanding under this facility at May 31, 1999 or 1998. This line of
credit is secured by a share of the net proceeds of fees from production of oil
wells and certain assets of USECC.
Debt of the Company consists primarily of a note to USE bearing interest
at 6% per annum and due on October 1, 1999. The debt is due to U.S. Energy for
funding all of the operations of USECC of which 50% is the responsibility of the
Company. All debt due to USE is classified as current as of May 31, 1999 and
1998 as a result of USE's unilateral ability to modify the repayment terms under
the promissory note agreement. The Company signed a two year promissory note as
of May 31, 1997 to USE for the full amount of its indebtedness reserving the
right to pay all or part of the note through the issuance of Crested common
stock.
May 31,
------------------------
1999 1998
---- ----
Notes payable - U.S. Energy, 6% interest
balance payable in full on
demand (see Note A) $7,054,000 $6,547,100
Note payable to bank, 8.75% interest,
balance due July 1, 1999 42,000 78,500
---------- ----------
Total 7,096,000 6,625,600
Less - current portion 7,079,300 6,583,500
---------- ----------
$ 16,700 $ 42,100
========== ==========
57
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
H. INCOME TAXES:
The components of deferred taxes as of May 31, 1999 and 1998 are as
follows:
May 31,
--------------------------
1999 1998
---- ----
Deferred tax assets:
Deferred compensation $ 87,800 $ 50,000
Deferred gains 106,100 106,100
Litigation settlements 135,700 135,700
Net operating loss carryforwards 2,835,000 3,126,100
Tax credits 15,000 9,000
Tax basis in excess of book 1,138,300 1,013,000
----------- -----------
Total deferred tax assets 4,317,900 4,439,900
Deferred tax liabilities:
Development and exploration costs (51,800) (48,800)
----------- -----------
Total deferred tax liabilities (51,800) (48,800)
----------- -----------
Net deferred tax assets - all non-current 4,266,100 4,391,100
Valuation Allowance (4,266,100) (4,391,100)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
At May 31, 1999, the Company had available, for federal income tax
purposes, net operating loss carryforwards of approximately $8,338,000 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.
58
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
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:
Year Ended May 31,
------------------------------------
1999 1998 1997
---- ---- ----
Expected federal income tax benefit $(663,600) $ 450,800 $ 453,700
Losses from subsidiaries not consolidated
for tax purposes, and other 788,600 (555,200) (52,600)
Valuation allowance (125,000) 104,400 506,300
--------- --------- ---------
Income taxes $ -- $ -- $ --
========= ========= =========
There were no taxes payable as of May 31, 1999, 1998 or 1997.
The Internal Revenue Service ("IRS") has audited the Company's and
USECC's tax returns through the year ended May 31, 1996. The audit is completed
as of the date of the accompanying financial statements and the Company has
requested an appeals hearing. 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.
59
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
I. SEGMENTS AND MAJOR CUSTOMERS:
The Company's primary business activity is the sale of minerals and the
acquisition, exploration, holding, development and sale of mineral bearing
properties although the Company has no producing mines. Other reportable
industry segments include commercial operations, primarily real estate
activities, an airport fixed base operation, and construction activities. The
following is information related to these industry segments:
<TABLE>
<CAPTION>
Year Ended May 31, 1999
------------------------------------------
Commercial
Minerals Operations Consolidated
-------- ---------- ------------
<S> <C> <C> <C>
Revenues $ 119,100 $ 607,400 $ 726,500
=========== =========== ===========
Interest and other revenues 3,690,100
-----------
Total revenues $ 4,416,600
===========
Operating loss $(1,002,400) $ (321,800) $(1,324,200)
=========== ===========
Interest and other revenues 3,690,100
General corporate and other expenses (2,657,800)
Equity loss in affiliates (1,659,800)
-----------
Loss before income taxes $(1,951,700)
===========
Identifiable net assets at May 31, 1999 $ 14,200 $ 2,511,800 $ 2,526,000
=========== ===========
Investments in affiliates 126,000
Corporate assets 5,763,000
-----------
Total assets at May 31, 1999 $ 8,415,000
===========
Capital expenditures $ 51,300 $ 219,900
=========== ===========
Depreciation, depletion and
amortization $ 230,600 $ 212,500
=========== ===========
</TABLE>
60
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(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)
------------
Loss 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>
61
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended May 31, 1997
------------------------------------------
Commercial
Minerals Operations Consolidated
-------- ---------- ------------
<S> <C> <C> <C>
Revenues $ 103,600 $ 488,300 $ 591,900
=========== ===========
Interest and other revenues 1,111,600
-----------
Total revenues $ 1,703,500
===========
Operating loss $ (317,900) $ (385,200) $ (703,100)
=========== ===========
Interest and other revenues 1,111,600
General corporate and other expenses (1,270,900)
Equity loss in affiliates (807,900)
-----------
Loss before income taxes $(1,670,300)
Identifiable net assets at May 31, 1997 $ 24,600 $ 2,139,000 2,163,600
=========== ===========
Investments in affiliates 1,796,800
Corporate assets 2,325,300
-----------
Total assets at May 31, 1997 $ 6,285,700
===========
Capital expenditures $ -- $ 64,500
=========== ===========
Depreciation, depletion and
amortization $ -- $ 184,900
=========== ===========
</TABLE>
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 year ended May 31, 1999, the Company did not recognize
compensation expense resulting from these influences. For the years ended May
31, 1998 and 1997 the Company recognized compensation expense of $27,300 and
$76,300, respectively, resulting from these issuances. A schedule of forfeitable
shares for both Crested and USE is set forth in the following table:
62
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
Issue Number Issue Total
Date of Shares Price Compensation
---- --------- ----- ------------
June 1990 25,000 $1.06 $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, 1999 and 1998 65,000 $43,900
====== =======
No shares were earned in fiscal 1999 or 1998. Also included in the
forfeitable common stock are 15,000 shares to directors which are vesting at 20%
a year beginning in November 1992, of which 9,000 are earned but not released as
of May 31, 1999.
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 U.S. Energy Corp. ("USE") and Crested
Corp.("Crested") d/b/a USECC. CRIC claimed that USECC violated the partnership
agreement forming Sheep Mountain Partners ("SMP"), a Colorado general
partnership in which USECC owned 50% and Nukem, Inc. through its subsidiary CRIC
owned the other 50%. On July 3, 1991, USECC filed a civil action in the U. S.
District Court of Colorado against Nukem, CRIC, their affiliates and others
alleging Nukem/CRIC fraudulently misrepresented facts and concealed information
from USECC to induce its entry into the agreements forming SMP and sought
rescission, damages and other relief. Certain of Nukem's affiliates (excluding
CRIC) and others were thereafter dismissed from the lawsuit. The U. S. District
Court granted the motion of USECC to stay the 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 in Wyoming. On May 11, 1993, the Denver District Court stayed all
proceedings until the case pending in the U.S. District Court for Colorado was
resolved. In February 1994, USECC and Nukem/CRIC, agreed that the majority of
the issues raised in the litigation subsequent to the formation of SMP on
December 21,
63
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
1988, would be handled through consensual binding arbitration with the American
Arbitration Association ("AAA").
The arbitration hearing commenced on June 27, 1994 before a three member
AAA arbitration panel (the "Panel"), and the parties rested their cases on May
31, 1995 after 73 hearing days. The Panel entered its Order and Award on April
18, 1996 but refused to dissolve the SMP Partnership. Nukem appealed the Award
by filing motions with the U.S. District Court for remand of various issues to
the Panel alleging inter alia there was a material miscalculation and a double
recovery. The U.S. District Court remanded the matter to the Panel to consider
Nukem's motions. On July 3, 1996, the Panel entered its Order finding there was
no double recovery and clarified its April 18, 1996 Order and Award regarding
the impression of a Constructive Trust in favor of SMP on the CIS contracts
Nukem entered into with CIS republics using SMP uranium sales contracts.
On November 4, 1996, the United States District Court granted USECC's
motions for confirmation and issued a Judgment and Order confirming the
Arbitration Panel's Orders and Award. Later in November 1996, USECC received
$4,300,000 from the SMP escrow bank accounts as partial payment of the monetary
award of the Panel and confirmed by the District Court. This $4,300,000 was
accounted for under the cost recovery method of accounting, and it was applied
to outstanding amounts due USECC. The balance of $1,003,800 was recognized as
income. After considering a series of motions, the Federal Court issued a Second
Amended Judgment on June 27, 1997, which confirmed the monetary award of the
Panel and clarified the equitable award impressing the CIS contracts in
Constructive Trust in favor of SMP. Nukem/CRIC filed notices of appeal to the
Tenth Circuit Court of Appeals ("10th CCA") and posted a $8,613,600 supersedeas
bond covering the monetary portion of the Judgment. Nukem/CRIC's appeal was
based on claims that the District Court erred in confirming the Panel's Orders
and Award on double recovery and impressing Nukem's uranium purchase contracts
with the CIS republics in constructive trust with SMP.
On June 1, 1998, USECC and Nukem/CRIC entered into a partial Settlement
Agreement of the various issues. USECC received $5,026,000 as a partial
settlement of the Second Amended Judgment. USECC also received the Sheep
Mountain uranium mines and certain other properties from SMP plus one uranium
supply contract along with a 50% interest in another uranium supply contract.
This settlement did not in any way affect the issues then pending on appeal
before the 10th CCA.
A hearing on the appeal was held before a three judge panel of the 10th
CCA on September 24, 1998. On October 22, 1998, the 10th CCA issued its Order
and Judgment affirming the U.S. District Court's Second Amended Judgment
(without modification) (the "Judgment"). The Judgment ordered that the contracts
Nukem entered into to purchase uranium from CIS republics
64
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
including the purchase rights, the uranium acquired pursuant to those rights and
the profits therefrom were impressed with a constructive trust in favor of SMP.
On November 13, 1998, Nukem/CRIC filed motions for entry of full
satisfaction of the Judgment if Nukem/CRIC paid only the balance remaining due
on the monetary portion of the Judgment. USECC responded denying the motions and
requesting payment of the balance of the monetary award. On February 8, 1999,
the District Court denied the motion of Nukem/CRIC for entry of final
satisfaction of the Judgment and ordered Nukem/CRIC to forthwith pay USECC the
balance of $5,971,596 plus interest of $105,604. Nukem/CRIC made the payment to
USECC on February 9, 1999.
On April 28, 1999, USECC filed a petition in the U.S. District Court to
dissolve SMP and for an accounting. Nukem/CRIC responded that the District Court
did not have jurisdiction and again filed a motion seeking entry of final
satisfaction of the Judgment. On July 16, 1999, the U.S. District Court again
denied the motion of Nukem/CRIC for entry of final satisfaction of judgment and
denied USECC's petition for dissolution because neither USECC nor Nukem/CRIC
petitioned the Court for dissolution of SMP before the Court entered its Second
Amended Judgment. On August 2, 1999, Nukem/CRIC filed a Notice of Appeal to the
10th Circuit Court of Appeals of the July 16, 1999 Order. USECC opposes the
appeal and will seek judicial intervention to receive an accounting and profits
from the CIS contracts impressed in Constructive Trust with SMP.
ILLINOIS POWER COMPANY LITIGATION. Illinois Power Company ("IPC"), one
of the utilities with whom SMP had a long-term uranium supply contract,
unilaterally sought to terminate the contract. On October 28, 1993, IPC filed
suit in the Federal District Court, Danville, Illinois, against SMP, USECC, CRIC
et al. seeking a declaratory judgment that the contract with SMP was void and
for other relief. After various negotiating sessions, the parties reached an
agreement in June 1995 to settle the case by amending to the original uranium
sales agreement to provide for 3 more deliveries of uranium concentrates (U3O8)
totaling 486,443 lbs. The final delivery was made in May 1997 and on June 13,
1997, USECC received $858,700 as a distribution of profits from the last
delivery to IPC of U3O8 under this SMP contract.
SELLEY ET AL VS U.S. ENERGY CORP., CRESTED CORP. ET AL. On May 14, 1999,
Dennis Selley personally and as personal representative of the Estate of Hannah
Selley and his wife Mary B. Selley, filed a Civil Action No. 30869 in the Ninth
Judicial District Court of Fremont County, Wyoming against U.S. Energy Corp. and
Crested Corp., Plateau Resources Limited and USECC the joint venture, alleging
that the defendants were negligent as a landlord in renting a doublewide trailer
converted to a bunkhouse near Ticaboo, Utah to plaintiffs' daughter Hannah
Selley and seek various unspecified damages. Hannah Selley was employed by U.S.
Energy Corp. ("USE") at the Ticaboo Lodge in June 1998. Because no housing was
available for employees, she and five other USE employees rented rooms in the
bunk house provided by USE, located about 1/2 mile from the
65
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
Ticaboo Lodge. In the late evening of June 5, 1998 and early the next morning,
the occupants built a bonfire near the bunkhouse and had guests over for a
party. At about 4:00 a.m. the morning of June 6, 1998, a fire started in the
bunkhouse. All occupants were awakened and left the living quarters during the
fire except Ms. Selley who perished in the fire. Plaintiffs allege inter alia
that defendants were negligent in providing faulty living quarters and that
defendants submitted a false filing with the Utah Workers Compensation Fund.
Defendants deny negligence in providing the living facility and assert various
defenses including plaintiffs' complaint is barred by the Workers Compensation
statutory immunity as well as the defense of an intervening clause. Discovery is
underway.
DECLARATORY JUDGMENT ACTION. The Workers Compensation Fund of Utah has
filed a complaint for declaratory relief on or about July 26, 1999 against U.S.
Energy Corp., Crested Corp., Plateau Resources Limited, Dennis and Mary Selley
and others in Civil Action No. 99090 7500 before the Utah Third Judicial Court
of Salt Lake County, Utah. The suit is to determine its obligation to defend and
indemnify U.S. Energy Corp. and its affiliates in the above Hannah Selley case.
U.S. Energy Corp., Crested Corp. and affiliates have not yet responded to the
complaint in the case.
PARADOR MINING CO., 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
Mining Co., Inc.("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 in and adjacent to
plaintiff's Bullfrog gold mine near Beatty, NV. The Claims were initially leased
to a predecessor of BGBI and subsequently, a portion of the residuals of that
lease were assigned and leased by Parador to USECC. A bifurcated bench trial was
held on December 11-12, 1995, before the District Court for the Fifth Judicial
District Nye County, Nevada 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 an issue in the trial. On December 26,
1995, the District Court issued a ruling denying that an apex of a vein existed
on Parador's Claims and thus no extra-lateral royalties were due to Parador and
USECC. All other remaining claims and counterclaims were considered by the Court
in another bench trial on January 26-28, 1999. Following the presentation of
evidence, the Court entered judgment against the plaintiff BGBI and the
defendants Parador and USECC on certain of their respective 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 reached. BGBI filed its opening brief on appeal and USECC and Parador have
until the end of August 1999 to file their answer brief as respondents and brief
as cross-appellants in the appeal.
66
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
TICABOO TOWNSITE LITIGATION. In fiscal 1998, two individuals and their
corporation, Dejavue, Inc., who were contract operators of the restaurant and
lounge facility, the lodge and convenience store in Ticaboo, Utah (owned by
Canyon Homesteads, Inc.), sued USE, Crested and others in Utah State Court. All
defendants except USE were dismissed from the suit. The plaintiffs' corporation
Dejavue, Inc. was awarded $156,000 in damages by a jury and attorney fees of
$91,700 by the Court against USE. This was recorded in fiscal 1998. The
plaintiffs appealed and filed an opening brief with the Utah Court of Appeals
arguing that the Trial Court erred in not awarding interest on the judgment.
U.S. Energy appealed and filed its opening and answer brief in July 1999 also
contending that the Trial Court erred in various other ways. The case is pending
on appeal.
DEPARTMENT OF ENERGY LITIGATION. On July 20, 1998, eight uranium mining
companies with operations in the United States (including USE, Crested, Yellow
Stone Fuel Corporation) and the Uranium Producers of America, a trade
organization, filed a complaint against the United States Department of Energy
(the "DOE") and its acting secretary in a lawsuit (file no. 98 CV 1775) in the
United States District Court, Cheyenne, Wyoming. The complaint seeks a
declaratory judgment and injunctive relief. The plaintiffs allege that the DOE
violated the USEC Privatization Act of 1996 (the "Act"), 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. USEC
became a publicly traded corporation in July 1998.
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. The DOE filed a motion
to dismiss and a hearing was held on January 8, 1999 before the U.S. District
Court. The Court took the motion under advisement and the case is pending.
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. (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 USE' and Crested's Gunnison properties, and is in default on the
promissory notes delivered to pay for the Gunnison properties. USE also alleges
a pattern of fraud, interference with contractual relation, breach of fiduciary
duty, conversion of USE's security for payment of the promissory notes and
unjust enrichment in Contour's dealings with USE and Crested regarding such real
estate. Contour answered denying all allegations of wrongdoing, asserting
certain counterclaims, which USE has
67
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
denied, and claiming that USE's and Crested's refusal to consent to a requested
transfer of one of the properties excuses Contour from paying the balances due
on the promissory notes. Three of the defendants also filed motions to dismiss
seeking relief from USE's notice of lis pendens. That motion has not been
decided pending settlement discussions that were terminated by USE on July 15,
1999. Litigation is expected to resume against all defendants other than
Gunnison Center Properties, L.L.C. which has voluntarily petitioned for
protection under Chapter 11 of the Bankruptcy Code. The remaining defendants own
other property which USE believes has sufficient value to satisfy any judgment
that USE may obtain.
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 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,
68
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
the near term reclamation obligations are not expected to have a significant
impact on the Company's liquidity.
As of May 31, 1999 and 1998, 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, USE and the regulatory authorities during fiscal 1999 and the
balance in the reclamation liability account at May 31, 1999 ($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 its 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.
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
69
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
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 January 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. On March 8, 1999, Kennecott Uranium Company
exchanged four surety bonds in the total amount of $19,777,079 issued by St.
Paul Fire and Marine Insurance Company, for the Morgan Guaranty letter of
credit. These surety bonds will 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. These costs are not expected to increase materially if the
mill is not put into full operation. 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 January 1, 2001
and before Mill production resumes), which would be recoverable only out of
future mill production (see above). Additionally, the payment of the GMMV
reclamation and environmental liabilities related to the mill is guaranteed by
Kennecott Corporation, parent of Kennecott Uranium Company. GMMV will also set
aside a portion of operating revenues to fund reclamation and environmental
liabilities should mining and milling commence. Kennecott
70
<PAGE>
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999
(CONTINUED)
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.
SUTTER GOLD MINING COMPANY
SGMC is currently owned 59% by the USE, 4% by Crested and 37% 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 a
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, 1999.
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. In fiscal 1999, Plateau increased the bond
amount to $6,866,000 in order to reflect the increase in the consumer price
index.
EXECUTIVE COMPENSATION
The Company and USE are committed to pay the estates of certain of their
officers in amounts 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.
71
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
And Financial Disclosure
Not applicable.
PART III
In the event a definitive proxy statement containing the information
being incorporated by reference into this Part III is not filed within 120 days
of May 31, 1999 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 1999 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 1999 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 1999 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 1999 Annual Meeting of Shareholders.
72
<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..............................37
Consolidated Balance Sheets - May 31, 1999 and 1998................38-39
Consolidated Statements of Operations
for the Years Ended May 31, 1999, 1998 and 1997 ......................40
Consolidated Statements of Shareholders'
Equity for the Years Ended May 31, 1999, 1998 and 1997................41
Consolidated Statements of Cash Flows
for the Years Ended May 31, 1999, 1998 and 1997....................42-43
Notes to Consolidated Financial
Statements.........................................................44-71
(2) N/A
(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.............................[11]
73
<PAGE>
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]
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]
74
<PAGE>
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 Exhibis.............................................[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]
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]
75
<PAGE>
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.
[4] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form 10-Q for the period ended February 28, 1991.
76
<PAGE>
[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.
[11] Incorporated by reference from the like- numbered exhibits of the
Registrant's Form 10- K for the year ended May 31, 1998.
(b) Reports filed on Form 8-K.
During the fourth quarter of the fiscal year ended on May 31, 1999,
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).
77
<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: August 27, 1999 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: August 27, 1999 By: /s/ John L. Larsen
-----------------------------
JOHN L. LARSEN, Director
Date: August 27, 1999 By: /s/ Max T. Evans
-----------------------------
MAX T. EVANS, Director
Date: August 27, 1999 By: /s/ Daniel P. Svilar
-----------------------------
DANIEL P. SVILAR, Director
Date: August 27, 1999 By: /s/ Michael D. Zwickl
-----------------------------
MICHAEL D. ZWICKL, Director
Date: August 27, 1999 By: /s/ Kathleen R. Martin
-----------------------------
KATHLEEN R. MARTIN, Director
Date: August 27, 1999 By: /s/ Robert Scott Lorimer
-----------------------------
ROBERT SCOTT LORIMER,
Principal Financial Officer
and Chief Accounting Officer
78
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CRESTED CORP.
FORM 10-K FOR THE YEAR ENDED MAY 31, 1999 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-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 3,509,000
<SECURITIES> 0
<RECEIVABLES> 1,949,100
<ALLOWANCES> (1,600)
<INVENTORY> 34,200
<CURRENT-ASSETS> 5,605,700
<PP&E> 5,951,800
<DEPRECIATION> 3,437,400
<TOTAL-ASSETS> 8,415,000
<CURRENT-LIABILITIES> 9,451,000
<BONDS> 0
0
0
<COMMON> 10,300
<OTHER-SE> (1,832,800)
<TOTAL-LIABILITY-AND-EQUITY> 8,415,000
<SALES> 768,200
<TOTAL-REVENUES> 4,416,600
<CGS> 0
<TOTAL-COSTS> 2,083,000
<OTHER-EXPENSES> 4,267,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,300
<INCOME-PRETAX> (1,951,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,951,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,951,700)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
