ITEM 1 AND ITEM 2.
ITEM 3. LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
In 1991, disputes arose between USE/Crested, and Nukem, Inc. and its subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation and operation of the Sheep Mountain Partners partnership for uranium mining and marketing, and activities of the parties outside SMP. Arbitration proceedings were initiated by CRIC in June 1991 and in July 1991, USECC filed a lawsuit against Nukem, CRIC and others in the U.S. District Court (District of Colorado). Later, USECC filed another suit for the standby costs at the SMP mines against SMP in the Colorado State Court. The Federal Court stayed the arbitration proceedings and the State Court case was also stayed. In fiscal 1994, all of the parties agreed to exclusive and binding arbitration of the disputes before the American Arbitration Association, for which the legal claims made by both sides included fraud and misrepresentation, breach of contract, breach of duties owed to the SMP partnership, and other claims.
Following 73 hearing days and various submissions by the parties, the arbitration panel (the "Panel") entered an Order and Award (the "Order") in April 1996 finding generally in favor of USE and Crested on certain of their claims (including the claims for reimbursement for standby maintenance expenses and profits denied SMP in Nukem's trading of uranium), and in favor of Nukem/CRIC and against USE and Crested on certain other claims.
Approximately $18 million of SMP cash had been placed in escrow and a bank account by agreement of the parties pending resolution of the disputes.
The April 1996 Order awarded USE and Crested monetary damages of approximately $7,800,000 with interest (after deduction of monetary damages which the Arbitration panel awarded in favor of Nukem/CRIC and against USE and Crested). An additional amount of approximately $4,300,000 was awarded by the Panel to USE and Crested, to be paid out of the escrowed $18 million and SMP cash. This $4,300,000 was USE and Crested's share of SMP profits from selling uranium to utilities and advances to purchase uranium for SMP. The Panel also ordered that one utility supply contract which had been in dispute belonged to SMP, not Nukem, and that Nukem was to assign that contract to SMP. The Panel further ordered that certain contracts which Nukem had obtained for the purchase of uranium from countries in the CIS (former Soviet republics) belonged to SMP.
After motions and further proceedings in the Federal District Court, and a reaffirmation Order by the Panel in July 1996, the U.S. District Court confirmed the Panel's Order and Award. In November 1996, USECC received the $4,367,000 of the damage award out of the SMP escrowed funds and a separate SMP bank account. In confirming the Panel's Order, the Court ordered Nukem to assign a utility contract to SMP; to pay USECC a net amount of approximately $8,465,000 in monetary damages; and impressed a constructive trust in favor of SMP on Nukem's rights to purchase CIS uranium, the uranium acquired pursuant to those rights, and profits therefrom. Nukem/CRIC posted a supersedeas bond for $8,613,600 and the Court stayed execution on the judgment. The bond did not cover the value of the CIS contracts at issue because the Panel's Order did not value such contracts.
Nukem/CRIC appealed the District Court's Judgment to the 10th Circuit Court of Appeals, and the matter is set for oral argument on September 24, 1998 in Oklahoma City, Oklahoma. The issues to be decided are: whether the U.S. District Court, in confirming the Panel's Order, provided for a double recovery to USE and Crested (i.e., awarding both $8,465,000 in monetary damages and one-half of the profits SMP has made on uranium contracts); and whether the constructive trust on the CIS contracts covers only an amount of profits necessary to secure Nukem/CRIC's payment of the $8,645,000 monetary award in favor of USE and Crested. USE's positions on these issues are that there is no double recovery; and that the constructive trust of SMP on
the CIS contracts extends to all such contracts and profits therefrom, because Nukem obtained the contracts for its own account outside of and hence in violation of Nukem's fiduciary obligations to SMP as a general partner.
During the fourth quarter of fiscal 1998, USE and Crested entered into a partial settlement with Nukem and CRIC on certain of the claims not on appeal. Under the partial settlement, USECC received (i) from SMP an assignment of all of the mining claims and equipment which had been held by SMP (USECC remains responsible for the reclamation liabilities associated with the claims as had always been the case when the properties were in SMP); (ii) from Nukem and CRIC, $484,361 which settled USE and Crested's claim to their share of the past and future profits on a utility contract which Nukem had wrongfully kept outside of SMP (and Nukem was allowed to keep this contract as part of the settlement); (iii) from Nukem and CRIC, $4,540,000 to settle all claims by USE against Nukem, CRIC and SMP (including Nukem/CRIC's one-half share of the SMP mine maintenance costs); (iv) from SMP, a contract to sell 1,076,842 pounds of uranium oxide to a utility; and (v) from SMP, a contract to purchase 600,000 pounds of uranium oxide from another producer in North America (200,000 pounds annually through 2000). In connection with the partial settlement, the parties agreed to the dismissal with prejudice of the Colorado and Wyoming State Court proceedings (for reimbursement of SMP mine maintenance costs), and all claims in the Federal District Court and the arbitration, except for the issues pending before the 10th Circuit Court of Appeals. The cash settlement portion under (iii) above is in addition to the $4,367,000 received by USECC in November 1996 out of the SMP escrowed funds. USECC is negotiating to sell the purchase contract under (v) to Nukem.
TICABOO TOWNSITE LITIGATION. In fiscal 1998, a prior contract operator of the Ticaboo restaurant and lounge, and two employees supervising the motel and convenience store in Utah (owned by Canyon Homesteads, Inc.) sued USE, Crested and others in Utah State Court. After a five day trial, a jury denied the claims of two of three plaintiffs but awarded the third plaintiff $156,000 in damages against USE. USE is appealing the award.
BGBI LITIGATION
USE and Crested are defendants and counter- or cross-claimants in certain litigation in the District Court of the Fifth Judicial District of Nye County, Nevada, brought by Bond Gold Bullfrog Inc. ("BGBI") on July 30, 1991. BGBI (now known as Barrick Bullfrog, Inc.) is an affiliate of Barrick Corp., a large international gold producer headquartered in Toronto, Canada. The litigation primarily concerns extralateral rights associated with two patented mining claims owned by Parador Mining Company Inc. ("Parador") and initially leased to a predecessor of BGBI, which claims are in and adjacent to BGBI's Bullfrog open pit and underground mine. USE and Crested assert certain interests in the claims under an April 1991 assignment and lease with Parador, which is subject to the lease to BGBI's predecessor.
BGBI seeks to quiet title to its leasehold interest in the subject claims, a determination that USE and Crested have no rights in the claims, and an order enjoining USE and Crested from asserting any interest in them. BGBI further asserts other claims and that, in attempting to lease an interest in the subject claims to USE and Crested, Parador breached the provisions of its lease to BGBI, and that Parador is responsible for the legal fees and costs incurred by BGBI in the quiet title action, which may be offset against royalties.
A partial or bifurcated trial to the Court of the extralateral rights issues was held on December 11 and 12, 1995, to determine whether the Bullfrog orebody is a "vein, lode or ledge" as described in the General Mining Law and, if so, whether the facts warrant application of the doctrine of extralateral rights as set forth in such statute. The Court found that Parador had failed to meet its burden of proof and therefore Parador, USE and Crested have no right, title and interest in the minerals lying beneath the claims of Layne pursuant to extralateral rights. The partial trial did not address the issues of breach of contract by the defendants and BGBI for specific performance and they were tried before the Court commencing on January 26, 1998. After
the trial, the Court found against the parties on their respective claims, and the plaintiff and these defendants filed a Notice of Cross-Appeal and Notice of Appeal, respectively to the Nevada Supreme Court. The record on appeal has been filed with the Nevada Supreme Court and the appeals process is underway.
DEPARTMENT OF ENERGY LITIGATION
On July 20, 1998, eight uranium mining companies with operations in the United States (including USE, Crested, YSFC) and the Uranium Producers of America (a trade organization) filed a complaint against the United States Department of Energy (the "DOE") in a lawsuit (file no. 98 CV 1775) in the United States District Court, Cheyenne, Wyoming. The complaint seeks declaratory judgment and injunctive relief. The plaintiffs allege that the DOE violated the USEC Privatization Act of 1996, when the DOE transferred 45 metric tons of low enriched uranium and 3,800 metric tons of natural uranium to United States Enrichment Corp. ("USEC"). See Item 1, "Business, Uranium Marketing - U.S. Enrichment Corporation" above.
Specifically, the plaintiffs allege that the USEC Privatization Act authorizes the DOE to transfer to USEC "without charge" an initial 50 metric tons of highly enriched uranium and 7,000 metric tons of natural uranium. The Act authorizes the DOE to sell (not merely transfer) additional quantities of uranium out of the DOE stockpile, but only upon payment of fair market value for the uranium and then only upon specific finding by the DOE that such a sale would not have an adverse material impact on the domestic uranium, mining, conversion or enrichment industry, taking into account sales under the Russian HEU Agreement and the Suspension Agreement.
The plaintiffs have asked the Court to declare that (i) the DOE violated its statutory authority by transferring uranium to USEC in excess of statutory limits on volume; (ii) the excess amounts were not "sold" by the DOE to USEC for fair value, as required by the Act, and mandated findings by the DOE concerning possible adverse impacts were not supported in fact; and (iii) the DOE be enjoined from future transfers in violation of the Act.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the United States District Court, Denver, Colorado against Contour Development Company, L.L.C. and entities and persons associated with Contour Development Company, L.L.C. (together, "Contour") seeking compensatory and consequential damages of more than $1.3 million from the defendants for dealings in certain real estate.
Specifically, USE (which is the assignee of Crested's rights and interests in certain of the promissory notes, contracts and agreements) alleges that Contour has breached contracts for the sale of USE's and Crested's Gunnison properties, and is in default on the promissory notes delivered to pay for the Gunnison properties. USE has further alleged that Contour fraudulently induced USE and Crested to enter into restructuring agreements for the original transactions between the parties in such properties; and further, that Contour has breached the duties of good faith, honesty, full disclosure and fair dealing which were owed to USE and Crested by Contour in the course of the transactions. USE has made additional claims against Contour for unjust enrichment and conversion of the real estate assets. See Item 1, "Business - Commercial Operations - Real Estate and Other Commercial Operations - Colorado Properties" above.
As of the date of this Report, Contour has not filed an answer to the complaint.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
INFORMATION CONCERNING EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS.
The following information is provided pursuant to Instruction 3, Item 401 of Reg. S-K, regarding certain of the executive officers of USE who are not also directors.
ROBERT SCOTT LORIMER, age 47, has been Controller and Chief Accounting Officer for both USE and Crested for more than the past five years. Mr. Lorimer also has been Chief Financial Officer for both these companies since May 25, 1991, their Treasurer since December 14, 1990, and Vice President Finance since April 1998. He serves at the will of each board of directors. There are no understandings between Mr. Lorimer and any other person, pursuant to which he was named as an officer, and he has no family relationship with any of the other executive officers or directors of USE or Crested. During the past five years, he has not been involved in any Reg. S-K Item 401(f) listed proceeding.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(A) MARKET INFORMATION.
The principal trading market for the Registrant's Common Stock, $.001 par value, is the over-the-counter market. Prices are reported by the National Quotation Bureau on Pink Sheets. The range of high and low bid quotations for the Common Stock is set forth below for each quarter in the two most recently completed fiscal years. Retail markup or markdown, or commissions, are not reflected.
High Low ---- --- Fiscal year ended May 31, 1998 ------------------------------ Fourth quarter ended 5/31/98 $0.45 $0.22 Third quarter ended 2/29/98 0.46875 0.25 Second quarter ended 11/30/97 0.71875 0.4375 First quarter ended 8/31/97 0.8125 0.34375
Fiscal year ended May 31, 1997 ------------------------------ Fourth quarter ended 5/31/97 $0.7187 $0.3437 Third quarter ended 2/28/97 0.9375 0.625 Second quarter ended 11/30/96 1.4375 0.875 First quarter ended 8/31/96 1.50 0.191
(b) Holders.
(b)(1) At September 3, 1998 there were approximately 1,900 stockholders of record for Crested common stock.
(b)(2) Not applicable.
(c) Crested has not paid any cash dividends with respect to its common stock. There are no contractual restrictions on Crested's present or future ability to pay cash dividends, however, Crested intends to retain any earnings in the near future for operations.
(d) During the year ended May 31, 1998, Crested did not issue any shares of its Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following is Management's Discussion and Analysis of significant factors that have affected the Company's liquidity, capital resources and results of operations during the periods included in the accompanying consolidated financial statements.
Some of the statements in this Management's Discussion and Analysis constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or
achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES AT MAY 31, 1998
WORKING CAPITAL COMPONENTS
Net cash used in operating activities was $922,700 for the year ended May 31, 1998. Cash provided by investing activities and financing activities during fiscal 1998 was $675,800 and $574,000, respectively. For the year, these activities resulted in a net increase of $975,600 in cash. At May 31, 1998, the Company had a working capital deficit of $4,473,000 as compared to a working capital deficit of $5,542,900 at May 31, 1997.
The decrease in the working capital deficit of $1,069,900 is the result of increases in accounts receivable of $2,882,300. This decrease in the working capital deficit was offset by reductions in the current portion of long-term receivables of $76,200 and inventory and other assets of $21,900. The decrease in the working capital deficit was further offset by increases in a deferred purchase option related to GMMV, accounts payable, debt to affiliate, and long term debt of $2,000,000, $142,200, $523,700 and $24,000, respectively.
Accounts receivable from affiliates increased by $343,700 primarily as a result of increased amounts due from USECC as a result of increased activity on the GMMV properties. These amounts were paid after May 31, 1998.
In June 1998, the Company and USE signed an agreement with Nukem/CRIC as partial satisfaction of the monetary damages awarded by the Arbitration Panel. The Company received $2,513,000 as a result of this settlement which occurred in the fourth quarter of fiscal 1998. The Company eliminated its investment in SMP and recognized the balance as income of which the Company's portion was $2,295,000.
Cash provided by financing activities resulted from a net increase in debt to affiliates of $523,700 as the Company's parent, U.S. Energy Corp. ("USE") advanced the Company's portion of operating and capital costs for the various mining and commercial ventures in which the Company participates.
Cash provided by investing activities was due to $707,200 of purchases of Property, Plant and Equipment. This increase was partially offset by an increase in long-term receivables of $251,800 and $218,700 invested in affiliates.
CAPITAL RESOURCES
GENERAL: The primary source of the Company's capital resources for fiscal 1999 will be cash on hand at May 31, 1998, possible equity financing from affiliated companies, proceeds under the line of credit discussed below, and loans from USE. Additionally, the Company and USE will continue to offer for sale various non-core equipment assets such as lots and homes in Ticaboo, real estate holdings in Wyoming, Colorado and Utah and mineral interests. Interest, rentals of real estate holdings and equipment, aircraft chartering and aviation fuel sales, also will provide cash.
LINE OF CREDIT: The Company and USE have a $1,000,000 line of credit with a commercial bank. The line of credit is secured by various real estate holdings and equipment belonging to the Company and USE. This facility is currently available to the Company and USE. It is anticipated that this line of credit may be used to finance working capital needs as well as the purchase of uranium in the open market to fulfill the delivery of an SMP contract the Company and USE received in partial settlement of certain of the SMP arbitration matters.
FINANCING: Equity financing for Sutter Gold Mining Company ("SGMC") and Plateau Resources ("Plateau") are dependent on the market price of gold and uranium among other things. At May 31, 1998, the prices for these metals were depressed and it is not known when or if they will recover. No assurance can be given that prices will improve during fiscal 1999. If the prices do not recover, the ability of the Company and USE to raise equity financing for these subsidiaries will be impaired.
SUMMARY: The Company believes that cash on hand and proceeds from its line of credit, if needed, will be adequate to fund working capital requirements through fiscal 1999. However, these capital resources will not be sufficient to provide the funding for major capital expansions of the Company's mineral properties.
CAPITAL REQUIREMENTS
GENERAL: The primary requirements for the Company's working capital during fiscal 1999 are expected to be the costs associated with development activities of Plateau, care and maintenance costs of the former SMP mineral properties, payments of holding fees for mining claims, purchases of uranium for delivery to the utility contract that was received by the Company and USE as a result of the settlement agreement reached regarding the SMP arbitration, the Company's portion of the costs associated with the GMMV properties and corporate general and administrative expenses.
SGMC: The Company owns 4% of the outstanding stock of SGMC. As such, it is not directly responsible for the administrative and capital obligations of bringing the SGMC gold properties into production. Through its affiliation with USE, however, the Company assists in the securing of financing to place these gold mineralized properties into production.
SGMC's properties contain reserves of gold. Preliminary estimates are that a 500 ton per day ("tpd") mine/mill operation using a cyanide-flotation process, will require up to $15,000,000 to place the proposed mine and mill into full operation. It is the intent of the Company and USE to complete the necessary financing in fiscal 1999 to develop the reserves of SGMC. Management believes that if adequate funding is obtained, production will begin in fiscal 2000. SGMC is currently attempting to negotiate financing with an investment firm with a proposed plan for the necessary financing intended to be completed in fiscal 1999. Management of SGMC believes sufficient capital resources are available to SGMC to continue its permitting efforts as well as the raising of capital.
SMP: As part of a settlement agreement reached during the fourth quarter of fiscal 1998, the SMP mines and associated properties were transferred to the Company and USE. All past holding costs of the SMP mines have been resolved and the future cost of standby as well as reclamation are the obligation of the Company and USE. These costs are estimated at approximately $85,000 per month. There are no current plans to mine the SMP Crooks Gap properties during fiscal 1999. However, the Company and USE will continue to preserve the mineral properties and develop concepts to reduce care and maintenance costs.
All matters in the SMP arbitration have been settled with the exception of two issues that are currently before the 10th Circuit Court of Appeals. Oral arguments are scheduled on these issues for September 24, 1998. Management of the Company cannot predict the timing or ultimate outcome of this hearing but believes that the issues will be resolved during fiscal 1999 unless Nukem and CRIC elect to appeal the decision further to the U.S. Supreme Court and that court determines to hear the appeal.
GMMV: On June 23, 1997, USE and USECC, a joint venture between the Company and USE, signed an Acquisition Agreement with Kennecott for the right to acquire Kennecott's interest in the GMMV for $15,000,000 and other consideration. As discussed in Note F to the financial statements, Kennecott paid the Company and USE $4 million upon execution of the Agreement, which became nonrefundable upon the satisfaction of certain terms. One half of the $4 million was treated by the Company as deferred income pending the satisfaction of the nonrefundability
terms, all of which were satisfied by November 30, 1998 at which time the $2 million was classified as a deferred purchase option, since it will be recorded as a reduction of the Company's purchase price if the Acquisition Agreement closes.
During July 1998, the GMMV Management Committee unanimously agreed to place the Jackpot Mine and Sweetwater Mill on active standby status. This decision was made as a result of uncertainties in the short term uranium market. These same uncertainties have made the financing of the acquisition of Kennecott's interest in GMMV difficult. The Company and USE continue in their financing activities in an effort to raise sufficient capital to acquire the Kennecott interest in the GMMV. It is believed that such financing efforts may not be concluded by the terms of the Acquisition Agreement with Kennecott. Kennecott continues to work with the Company in its efforts to successfully close the purchase of Kennecott's interest.
The standby costs of the GMMV mine, associated property and mill will eventually become the responsibility of the individual partners on a percentage ownership basis. Currently, the partners in the GMMV are discussing how to operate and fund the operations of the properties. Budgets have not been finalized but it is projected the annual holding costs of the mine and mill will be approximately $2,000,000. The Company and USE will be obligated to pay their share of these costs once the obligations of Kennecott are completely satisfied. Due to the unpredictability of the uranium market, the Company is unable to predict when the GMMV properties will again be put on an active basis or when it will be able to purchase Kennecott's interest in the GMMV, if at all.
PLATEAU: Plateau owns and operates the Ticaboo townsite, motel, convenience store and restaurant. These operations of Plateau generated a loss of $800,000 in fiscal 1998, which were absorbed by the Company and USE. The Company and USE continue to work on methods of increasing revenues and reducing costs. There has been an annual growth in sales since the Company and USE have owned Plateau.
The Company and USE are currently working to obtain the necessary permits from the NRC and State of Utah to place the Shootaring mill which is owned by Plateau and located in southern Utah into production. The Company and USE are seeking debt or equity financing of between $6,000,000 and $9,000,000 to put the mill and Tony M. Mine into production. Until such time as the financing is obtained and profitable contracts are obtained, the Company and USE will not put the properties into production.
YELLOW STONE FUELS CORP. ("YSFC"): In Management's opinion, YSFC has sufficient cash to complete its projected 1999 exploration program on its in-situ uranium properties. At May 31, 1998 YSFC owed the Company and USE $400,000 on a convertible promissory note plus $40,000 in interest for a total of $440,000. The note bears interest at 10% per annum and is due in December 1998. YSFC also owed the Company and USE $161,700 for miscellaneous payroll and operating expenses. YSFC has indicated its desire to pay the total indebtedness in cash but it is not certain that a cash payment will occur as YSFC may elect, at its option, to pay the promissory note with shares of its common stock.
TERM DEBT AND OTHER OBLIGATIONS: Debt to non-related parties at May 31, 1998 was $78,500 which was primarily for property and equipment purchased by USECC. The debt bears different interest rates and is due under various payment terms. It is anticipated that all debt payments will be able to be made in the normal course of the Company's business.
As of May 31, 1998, the Company was in debt to USE in the amount of $6,547,100 of which $6,023,400 was in the form of a promissory note bearing interest at 6% per annum with a maturity date of October 1, 1999. USE has not indicated that it will call the promissory note when due. The Company will need to either retire the note with shares of its common stock or negotiate with USE to extend the note by rolling the interest and adding the additional principle.
RECLAMATION OBLIGATIONS: It is not anticipated that any of the Company's working capital will be used in fiscal 1999 for the reclamation of any of its mineral properties. The reclamation costs are long term and are either bonded through the use of cash bonds or the pledge of assets. It is not anticipated that any of the mining properties will enter the reclamation phase prior to May 31, 1999.
Prior to fiscal 1996, the Company and USE assumed the reclamation obligations, environmental liabilities and contingent liabilities for employee injuries, from mining the Crooks Gap and other properties in the Sheep and Green Mountain Mining Districts as well as the SGMC properties. The reclamation obligations, which are established by government agencies, were most recently set at $1,451,800 for the SMP properties and $27,000 for the SGMC properties. The amount of accruals for environmental liabilities for each site are determined by estimating costs associated with current or expected reclamation and remediation plans. These plans include detailed descriptions of the work to be performed, and in many cases involve the work of third party consultants. The plans are submitted annually to the government agencies who review them and set the bond amounts.
To assure the reclamation work will be performed, regulatory agencies require posting of a bond or other security. The Company and USE satisfied this requirement with respect to SMP properties by mortgaging their executive office building in Riverton, Wyoming.
Reclamation obligations on the GMMV Big Eagle properties and the Sweetwater Mill, estimated at approximately $23,620,000, have been assumed by the GMMV venturers, and secured by a bank letter of credit provided by Kennecott. The reclamation and environmental costs associated with the Sweetwater Mill will not commence prior to conclusion of mining activities on Green Mountain with the exception of an open pit mine next to the mill. As uranium is processed through the mill, a reclamation reserve will be funded on the unit of production basis. Up to $8,000,000 (in 1990 dollars) in any reclamation costs on the Sweetwater mill and associated properties which may be incurred prior to commencement of production or 2001 will be loaned by UNOCAL to the GMMV and must be repaid out of production.
Reclamation obligations of Plateau are covered by a $7,270,400 cash bond at May 31, 1998 to the U.S. Nuclear Regulatory Commission and a $1,561,600 cash deposit as of May 31, 1998 for the resolution of any environmental or nuclear claims.
OTHER: The Company and USE currently are not in production on any mineral properties, and development work continues on several of their major investments. The Company and USE are not using hazardous substances or known pollutants to any great degree in these activities. Consequently, recurring costs for managing hazardous substances, and capital expenditures for monitoring hazardous substances or pollutants have not been significant. Likewise, the Company and USE do not have properties which require current remediation. The Company and USE are also not aware of any claims for personal injury or property damages that need to be accrued or funded.
The tax years through May 31, 1992 are closed after audit by the IRS. The Company currently has filed a request for an appeal hearing on an IRS agent's findings for the years ended May 31, 1994 and 1993. Although all indicators are that the findings of the IRS audit for 1994 and 1993 will not result in additional tax, the findings of the audit could affect the tax net operating loss of the Company. Management of the Company believes that it will prevail on the majority of the issues. No assurance of the outcome of the appeal can be given. The tax years ended May 31, 1996 and 1995 are also currently being audited by the IRS. No determination on these audits can be made as they are not yet completed.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues for the twelve months ended May 31, 1998 totaled $4,659,900 as compared to revenues of $1,703,500 for the fiscal year ended May 31, 1997. This increase in revenues of $2,956,400 is primarily the result of the litigation settlement, increased mineral revenues, commercial operations, management fees and interest revenues. The litigation revenues of $2,295,000 are the result of the signing of an partial settlement agreement in the SMP litigation/arbitration. The increase in mineral revenues of $431,200 is the result of the receipt by the Company of its portion of the net proceeds from a delivery of U3O8 under a SMP contract, which was the final delivery under this contract.
Commercial operations revenues increased $392,600 as compared to fiscal year 1997. These revenues increased as a result of increased equipment rental to the GMMV. Management fees and other revenues increased $261,800 over fiscal year 1997 primarily as a result of increased activity at GMMV and Plateau. These increases were partially offset by a decrease in revenues from the sale of assets of $28,100.
During the fiscal year ended May 31, 1998, operating costs and expenses increased $512,300 compared to fiscal year ended May 31, 1997. Increases in mineral operations and general and administrative expenses were partially offset by decreases in commercial operations and interest expenses. The increases in mineral operations of $410,900 and general and administrative of $821,000 were primarily the result of increased operating expenses at the GMMV and Plateau uranium properties. The increases in general and administrative expenses were primarily due to increased compensation.
Expenses in commercial operations and interest expense decreased by $59,400 and $3,500, respectively . These expenses were reduced as a result of reduced activity on the properties and as a result of the Company and USE not using their commercial bank line of credit during the twelve months ended May 31, 1998.
Operations resulted in net income of $1,209,500 or $.12 per share in fiscal 1998 as compared to a net loss of $1,670,300 or $.16 per share in fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues for the twelve months ended May 31, 1997 totaled $1,703,500 as compared to revenues for the year ended May 31, 1996 of $2,509,200. This decrease in revenues of $805,700 is primarily the result of no revenues being recognized from mineral sales from SMP during fiscal 1997 (decrease of $1,558,400). Other decreases in revenues were oil sales, $22,800; sales of assets, $147,800, and interest, $58,800. These decreases in revenues were offset by increased commercial operations, $79,300; advance royalties from Cyprus Amax, $103,600; partial distribution of SMP funds, $501,900; and increased management fees and other revenues, $297,300.
With the exception of mineral operations, the provision for doubtful accounts and abandoned mineral claims, costs and expenses remained the same as they had been in 1996. Mineral operations declined by $1,364,600 primarily as a result of Crested and USE not delivering any U3O8 under the SMP contracts. The provision for doubtful accounts increased by $570,800 as a result of a third party defaulting on a note payable on certain real estate that Crested sold in a prior year. Crested also wrote off an investment of $71,500 in a mining property that was abandoned. The increases in general and administrative expenses were reduced by overhead and direct charges to GMMV, SMP and SGMC.
Equity losses recognized by Crested increased by $450,000. This increase was the result of increases in the equity losses in USE, SGMC, YSFC, and SMP.
Operations resulted in a net loss of $1,670,300 or $.16 per share in 1997 as compared to a net loss of $1,168,900 or $.12 in 1996.
FUTURE OPERATIONS:
The Company has generated losses in two of the last three years, as a result of holding costs and permitting activities in the mineral segment along with impairment allowances of mining claims and investments in subsidiaries that are involved in the minerals business and from certain commercial operations. The Company is in the process of developing and/or holding investments in gold and uranium properties that are currently not generating any operating revenues. These properties require expenditures for permitting, development, care and maintenance, holding fees, corporate overhead and administrative expenses. Success in the minerals industry is dependent on the price that a company can receive for the minerals produced. The Company can not predict what the long term price for gold and uranium will be.
In addition, legal expenses associated with the litigation and arbitration surrounding the SMP Partnership and the inability of the Company to utilize all the funds that have been awarded to the Company and Crested by the Arbitration Panel and confirmed by the Federal Court have compounded the Company's operating and cash flow position in the past. The Company believes that the SMP arbitration will be conclusively resolved during fiscal 1999. The Company believes that it will meet its obligations in fiscal 1999 as well as be able to secure financing to further the development of its mineral properties and place them into production.
YEAR 2000 ISSUE
Computer programs written in the past utilize a two digit format to identify the applicable year. Any date sensitive software beyond December 31, 1999 could fail, if not modified. The result could be, among other possibilities, disruptions to operations and the inability to process financial transactions. The Company has evaluated the operating systems on all headquarter and field office systems and has consulted with various vendors of the computer software which is being used by the Company and affiliates. The vendors have confirmed to the Company that the Company's software and information systems are Year 2000 compliant. Therefore, the Company does not anticipate any significant expenditures will be required for the Year 2000 event.
EFFECTS OF CHANGES IN PRICES
Mining operations and the acquisition, development and disposition of mineral properties are significantly affected by changes in mineral commodity prices. As prices for a particular mineral increase, prices for prospects for that mineral also increase, making acquisitions of such properties more costly and difficult, and dispositions advantageous and easier. Conversely, a mineral commodity price decline facilitates acquisitions of properties for that mineral, but makes sales of such properties more difficult and less attractive. Operational impacts of changes in mineral commodity prices are common in the mining industry.
URANIUM AND GOLD.
Changes in the prices of uranium and gold affect the Company to the greatest extent, as its principal holdings are of prospects for those minerals. When uranium prices were relatively high in fiscal 1988, USE and Crested acquired the Crooks Gap properties, and thereafter put the properties into production. When uranium prices fell sharply during fiscal 1989-1991, USECC suspended mining operations for SMP, because uranium could be purchased at prices less than the costs of producing uranium. Uranium production in the United States reportedly fell by 25% to 33% in 1990, due to the lowest prices for uranium since the market developed in the 1960s.
Changes in uranium prices directly affect the profitability of SMP's uranium supply agreements with electric utilities. Certain of those agreements become advantageous to the Company when the spot market price for uranium
falls significantly below the price which a utility has agreed to pay. Some of the supply agreements of SMP were acquired before the fall of uranium spot market prices during fiscal 1989-1991. Those fixed-price contracts, which have contract prices exceeding current spot market rates, are currently advantageous to the Company, as the uranium to fill them can be readily obtained at favorable prices. Although such contracts benefit the Company in a falling market, a corresponding adverse impact would not be anticipated in the event of substantially increased prices. SMP would produce uranium from its Crooks Gap properties to fill those contracts, in the event of a prolonged increase in the spot market price above the contract prices.
With the acquisition of its interest in SGMC and its Lincoln Mine, gold prices directly affect the Company. Crested believes SGMC's Lincoln Mine will be profitable with gold prices over $290 per ounce.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements meeting the requirements of Regulation S-X for the Company follow immediately. Financial statements of GMMV are included as schedules and immediately follow the index at Item 14(a)(2).
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Crested Corp.:
We have audited the accompanying consolidated balance sheets of CRESTED CORP. (a Colorado corporation) AND AFFILIATE as of May 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity/(deficit) and cash flows for each of the three years in the period ended May 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note G, the note payable to U.S. Energy is currently due on October 1, 1999. However, U.S. Energy may unilaterally accelerate the due date of this note given its majority control over the Company, even though management of U.S. Energy has no current intentions to do so. Crested's current projections indicate that there may not be sufficient cash flow from operations to fund that obligation when due and it continues to rely on advances from U.S. Energy to fund its current operating requirements. If Crested is unable to generate sufficient funds from operations or other sources, it may be required to sell certain assets in order to satisfy such obligations to U.S. Energy.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Crested Corp. and affiliate as of May 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado, September 11, 1998.
CRESTED CORP. AND AFFILIATE
CONSOLIDATED BALANCE SHEETS
ASSETS
CRESTED CORP. AND AFFILIATE
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF OPERATIONS
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF CASH FLOWS
CRESTED CORP. AND AFFILIATE
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998
A. BUSINESS ORGANIZATION AND OPERATIONS:
Crested Corp. (the "Company" or "Crested") was incorporated in the State of Colorado on September 18, 1970. It engages in the acquisition, exploration, sale and/or development of mineral properties, mining and marketing of minerals. Principal mineral interests are in uranium, gold and molybdenum. However, none are producing at the present time. The Company also holds various real properties used in commercial operations. Most of these activities are conducted through the joint venture discussed below and in Note B.
The Company and U.S. Energy Corp. ("USE"), an approximate 52% shareholder of the Company (see Note J), are engaged in two ventures to develop certain uranium properties, one a joint venture with Kennecott Uranium Company ("Kennecott") known as the Green Mountain Mining Venture ("GMMV"), and the second a partnership with Nukem, Inc. ("Nukem") through its wholly owned subsidiary Cycle Resource Investment Corporation ("CRIC") known as Sheep Mountain Partners ("SMP"). In fiscal 1998, the Company and USE entered into an Agreement with Kennecott whereby they may purchase Kennecott's interest in the GMMV if certain conditions are met (see Note F). During fiscal 1991, the Company and USE formed USECC Gold Limited Liability Company ("USECC Gold"), and with Seine River Resources Inc. ("SRRI") operated Sutter Gold Venture ("SGV") to develop certain gold properties. USECC Gold acquired SRRI's remaining interest in SGV during fiscal 1994 and then owned 100% of SGV. During fiscal 1995, SGV was terminated when USE and Crested formed a new Wyoming corporation, Sutter Gold Mining Company, and exchanged their interests in USECC Gold for common stock of Sutter Gold Mining Company ("SGMC").
LIQUIDITY AND OPERATING LOSSES
The Company has a significant working capital deficit which has been impacted by the litigation/arbitration with Nukem and CRIC, which is discussed in Note K. During fiscal 1998, the Company received $429,300 for a delivery made on an SMP contract. During the fourth quarter of fiscal 1998, a settlement agreement was reached whereby the Company and USE received $2,513,000 as partial payment of the monetary resolution of the American Arbitration Association's order and award for a portion of the SMP arbitration/litigation ("SMP litigation") that was finalized in fiscal 1998. For accounting purposes, the Company first applied the proceeds against their recorded investment with the remaining balance of $2,295,000, after cost recovery, being recognized as income and included in the accompanying Consolidated Statement of Operations. In November 1996, the Company and USE received $4,367,000 (of which one-half was attributable to the Company) as partial resolution of the monetary damages in the SMP arbitration/litigation. This amount was first applied to the Company's investment in SMP. After cost recovery, a total of $501,900 was recognized as income by the Company. Recovery of the Company's advances and improvement in its liquidity position are dependent on the ultimate outcome of this litigation/arbitration. This matter has also impacted the Company's ability to pay its obligations to its affiliates, primarily USE. As of May 31, 1998, the Company owes USE $6,547,100.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Crested and affiliate (USECC Joint Venture ("USECC")) include the accounts of the Company and one-half of the account balances of USECC, a joint venture through which the Company and its controlling shareholder, USE, conduct the bulk of their operations. USECC has interests in uranium mining ventures (see Notes E and F), and owns real estate and other equipment (see Note D). USECC is owned equally by the Company and USE.
INVESTMENTS
With the exception of SMP (see Notes F and K), investments in other joint ventures and 20% to 50% owned companies are accounted for by the equity method. The Company accounts for its 8% investment in USE using the equity method because the Company is controlled by USE. Investments in other companies of less than 20% are accounted for by the cost method, except for SGMC, which is accounted for under the equity method due to its status as a subsidiary of USE (see Note E). All material intercompany profits, transactions and balances have been eliminated.
INVENTORIES
Inventories consist primarily of aviation fuel, associated aircraft parts, mining supplies, stockpiled uranium and gold ore stockpiles. Retail inventories are stated using the average cost method. Other inventory is stated at the lower of cost or market.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying amount of cash equivalents approximates fair value because of the short maturity of those instruments.
PROPERTIES AND EQUIPMENT
Land, buildings, improvements and other equipment are carried at cost.
Depreciation of buildings, improvements, aircraft and other equipment is provided principally by the straight-line method over estimated useful lives ranging from three to 45 years.
The Company capitalizes all costs incidental to the acquisition and development of mineral properties as incurred. Mineral exploration costs are expensed as incurred. The costs of mine development are deferred until production begins as these costs will be recovered through future mining operations. Once commercial production begins, mine development costs will be amortized using the units-of-production method over the estimated useful life of the ore-body. Costs are charged to operations if the Company determines that an ore body is no longer economic. Costs and expenses related to general corporate overhead are expensed as incurred.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
The Company and USE have acquired substantial mining property assets and associated facilities at minimal cash cost, primarily through the assumption of reclamation and environmental liabilities. Certain of these assets are owned by various ventures in which the Company is either a partner or venturer. The market value of these assets and most of the reclamation and environmental liabilities associated with them are not reflected in the accompanying consolidated balance sheets (see Note K).
LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amount may not be recoverable. If the sum of estimated future cash flows on an undiscounted basis or the fair value is less than the carrying amount of the related asset, an asset impairment is considered to exist. The related impairment loss is measured by comparing estimated future cash flows on a discounted basis or the fair value of the asset to the carrying amount of the asset. Changes in significant assumptions underlying future cash flow estimates or fair values may have a material effect on the Company's financial position and results of operations. A low commodity price market, if sustained for an extended period of time, may result in asset impairment. As of May 31, 1998, management believes that there has not been any impairment of the Company's long-lived assets or other identifiable intangibles.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts for short-term and long-term debt, receivables, other current assets, and accounts payable and accrued expenses approximate fair value.
REVENUE RECOGNITION
Advance royalties which are payable only from future production or which are non-refundable are recognized as revenue when received (see Note F). Non-refundable option deposits are recognized as revenue when the option expires.
Revenues from uranium sales are recognized upon delivery. Revenues are recognized from the rental of certain assets ratably over the related lease terms. Revenues from commercial operations, which represents primarily real estate activity, and an airport fixed base operation, are recognized as goods and services are delivered.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". This statement requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets, liabilities and carryforwards.
SFAS 109 requires recognition of deferred tax assets for the expected future effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are then reduced,
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
if deemed necessary, by a valuation allowance for any tax benefits which, based on current circumstances, are not expected to be realized.
NET INCOME (LOSS) PER SHARE
In February 1997, Statement of Financial Accounting Standards No. 128 "Earnings per Share," ("SFAS 128") was issued and specifies the computation, presentation and disclosure requirements for earnings per share. SFAS 128 is effective for periods ended after December 15, 1997 and requires retroactive restatement of prior period earnings per share. The statement replaces "primary earnings per share" with "basic earnings per share" and replaces "fully diluted earnings per share" with "diluted earnings per share." Adoption of SFAS 128 required restatement of 1996 earnings per share as forfeitable shares were included in the calculation of primary earnings per share. For the year ended May 31, 1996, the loss per share was $.11 prior to restatement.
RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1997, SFAS No. 130 "Reporting Comprehensive Income" ("SFAS 130") was issued and establishes standards for reporting and displaying comprehensive income and its components in the financial statements. In addition to net income, comprehensive income includes all changes in equity during a period, except those resulting from investments by and distributions to owners. The Company will adopt SFAS 130, which is effective for fiscal years beginning after December 15, 1997, in the first quarter of fiscal 1999. Management does not expect the adoption of this pronouncement to have a material impact on its consolidated financial statements.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") was issued and establishes standards for reporting information about operating segments in annual and interim financial statements. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 is effective for fiscal years beginning after December 15, 1997, and will be adopted in fiscal 1999. Reporting and disclosures under SFAS 131 are not expected to be materially different than those disclosures in Note I.
In February 1998, SFAS No. 132 "Employers' Disclosures about Pensions and Other Post Retirement Benefits" ("SFAS 132") was issued and standardizes disclosure requirements for pension and other post retirement benefit plans. Adoption of this standard is required for fiscal years beginning after December 15, 1997, and restatement of prior period comparative disclosures is required. The Company will adopt SFAS 132 in fiscal 1999. The adoption of SFAS 132 is not expected to have a material effect on prior period amounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 financial statements to conform with the 1998 presentation.
C. RELATED-PARTY TRANSACTIONS:
The Company does not have employees, but utilizes USE's employees and pays for one-half of the costs under the USECC Agreement. The Board of Directors of USE adopted the U.S. Energy Corp. 1989 Employee Stock Ownership Plan ("ESOP") in 1989, for the benefit of USE's employees. In fiscal 1998, 1997 and 1996, the Board of Directors of USE contributed 49,470, 24,069 and 10,089 shares of USE stock to the ESOP at prices of $6.57, $8.87 and $8.65 per share, respectively. The Company is responsible for one-half of the value of these contributions or $162,300, $106,800 and $43,700 in fiscal 1998, 1997 and 1996, respectively.
As of May 31, 1998, the Company had notes receivable due from certain officers, employees and related parties of the Company and USE totaling $94,543 which bear interest at 10% per annum and are due in November 1998. The Company also has advances to affiliates of $803,858.
The Company and USE provide management and administrative services for affiliates under the terms of various management agreements. Revenues from these services provided by the Company were $552,775, $329,900 and $116,500 in fiscal 1998, 1997 and 1996, respectively.
On May 15, 1997, the Company and USE entered into a convertible promissory note with Yellow Stone Fuels Corp. ("YSFC"). The Company and USE each own 12.7% of YSFC. The convertible note bears interest at 10% and is due on December 31, 1998. YSFC can, at its option, either repay the debt with cash or its common stock. However, if YSFC defaults in paying the note on December 31, 1998, the note is convertible into a number of shares which will give USE and Crested a combined 51% ownership interest in YSFC.
D. USECC JOINT VENTURE:
USECC operates the Glen L. Larsen office complex; an aircraft hangar with a fixed base operation and office space; certain aircraft; holds interests in various minerals operations including SMP and the GMMV; and transacts all operating and payroll expenses, except for specific expenses which are allocated directly to each venturer. In addition, through April 1996 USECC operated Wind River Estates ("Wind River"), a 100 unit mobile home park. During 1996, USECC sold Wind River (which had a net book value of approximately $512,700) and recognized a gain of $252,600 on this sale of which 50%, or $126,300, was Crested's portion.
The joint venture agreement also provides for the allocation of certain operating expenses to other affiliates. Condensed financial information of USECC, which is 50% proportionately consolidated by the Company, follows:
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
CONDENSED BALANCE SHEETS - USECC
CONDENSED STATEMENTS OF OPERATIONS - USECC
E. INVESTMENTS IN AFFILIATES:
The Company's investments in affiliates are as follows:
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
Equity in income (loss) from investments accounted for by the equity method is as follows:
There are currently litigation and arbitration proceedings with the Company's partner in the SMP partnership, as discussed further in Note K.
CONDENSED COMBINED BALANCE SHEETS: EQUITY INVESTEES
CONDENSED COMBINED STATEMENTS OF OPERATIONS: EQUITY INVESTEES
SMP entered into various market related and base price escalated uranium sales contracts with certain utilities which require approximately 1,500,000 pounds of uranium concentrates to be delivered from 1997 through 2000 depending on utility requirements. These contracts also allow for the quantities to be substantially increased by the utilities. As discussed in Note K, SMP has been the subject of significant litigation and arbitration proceedings between the SMP partners since 1991, portions of which are currently still in progress. Pending the resolution of the remaining proceedings, the partners in SMP agreed to fulfill certain of the SMP's uranium sales contracts outside of the partnership by each partner delivering a mutually- agreed portion of the delivery commitments on an individual basis. In 1998 and 1996, deliveries under this
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
arrangement resulted in revenues to the Company of $429,300 and $1,383,400, respectively (no such revenues were recognized in 1997). Revenues from these transactions have been included in the accompanying Consolidated Statements of Operations as Mineral revenues, which would normally have been sales of SMP.
Due to the litigation and arbitration proceedings, audited financial statements for SMP are not obtainable. Accordingly, the Company has recorded only its direct investment in, and results of operations from the partnership. The Company had no carrying value of its investment in SMP for either 1998 or 1997. The Company's direct loss generated from its investment in SMP was $(216,800), $(264,900) and $(211,300) for the years ended May 31, 1998, 1997 and 1996, respectively. No amounts attributable to SMP are included in the Condensed Combined Balance Sheets or Condensed Combined Statements of Operations of the Company's equity investees presented above.
F. MINERAL TRANSACTIONS AND MINING PROPERTIES:
GMMV
During fiscal 1990, the Company and USE entered into an agreement with Kennecott, a wholly-owned, indirect subsidiary of The RTZ Corporation PLC, for Kennecott to acquire a 50% interest in certain uranium mineral properties in Wyoming known as the Green Mountain Properties. The purchase price was $15,000,000 and a commitment to fund the first $50 million of development and operating costs. Kennecott committed to fund 100% of the first $50 million of capital contributions to the GMMV. Kennecott also committed to pay additional amounts if certain future operating margins were achieved. USE and USECC participate in cash flows of the GMMV in accordance with their ownership of the mining claims prior to the formation of the GMMV.
On June 23, 1997, USE and USECC signed an Acquisition Agreement with Kennecott for the right to acquire Kennecott's interest in the GMMV for $15,000,000 and other consideration. Kennecott paid USE and USECC $4,000,000 on signing, and committed to loan the GMMV up to $16,000,000 for payment of reimbursable costs incurred by USECC in developing the proposed underground Jackpot Uranium Mine for production and in changing the status of the Sweetwater Mill from standby to operational.
Pursuant to the Acquisition Agreement, the Mineral Lease, and the Mill Contract, USECC is to develop the proposed Jackpot Mine and nearby Big Eagle Mine, and work with Kennecott in preparing the Sweetwater Mill for renewed operations. Such work will be funded from the $16,000,000 being loaned to the GMMV by Kennecott. Kennecott will be entitled to a credit against Kennecott's original $50,000,000 commitment to fund the GMMV, in the amount of two dollars of credit for each one dollar of such funds out of the $16,000,000 loaned by Kennecott to the GMMV, plus the $4,000,000 paid to USE and USECC on signing of the Acquisition Agreement. It is anticipated that such credits will fully satisfy the balance of Kennecott's initial funding commitment to the GMMV.
Closing of the Acquisition Agreement is subject to USE and USECC satisfying several conditions, including: (i) the acquiring entity (which may be USE, USECC, or an entity formed by USE and USECC to acquire Kennecott's interest in the GMMV) must have a market capitalization of at least $200,000,000; (ii) the parties to the Acquisition Agreement must have received all authorizations, consents, permits and approvals of government agencies required to transfer Kennecott's interest in the GMMV to the acquiring
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
entity; (iii) USE and USECC shall have replaced, or caused the replacement of, approximately $25,000,000 of reclamation bonds, in addition to other guarantees, indemnification and suretyship agreements posted by Kennecott on behalf of the GMMV; and (iv) USE and USECC, or the acquiring entity, must pay $15,000,000 cash to Kennecott at closing and assume all obligations and liabilities of Kennecott with respect to the GMMV (including repayment of the $16,000,000 Note and the Mortgage) from and after the closing. Under very limited circumstances, the scheduled closing date may be postponed to not later than October 30, 1998.
USECC satisfied the terms of the Acquisition Agreement to the point that the $4,000,000 signing payment paid by Kennecott is nonrefundable and will serve to reduce USE's and Crested's ultimate $15,000,000 purchase obligation. If the acquisition is unsuccessful, the signing payment will be applied against any future reimbursable costs and contributions due the GMMV. After such costs and remaining obligations are satisfied, the remainder, if any, will be recognized as income.
In 1996, the U.S. Government adopted the "USEC Privatization Act of 1996" to privatize the U.S. Enrichment Corp. In July 1998, in a filing with the U.S. Securities and Exchange Commission, USEC Inc. ("USEC") disclosed its planned sale of significant quantities of uranium in the U.S. marketplace. Accordingly, forecasted demand for uranium and forecasted uranium sales prices have decreased in the short-term. As a result, in July 1998, GMMV halted development activities at the Jackpot Mine on July 31, 1998 and has placed the facility on active standby. This action required the layoff of mine workers. Due to the uncertainty of the uranium market it is not known when the mine will operate again or if USECC will be able to conclude the financing necessary to buy Kennecott's interest.
If the Acquisition Agreement is not closed, USE, USECC and Kennecott shall continue to own their respective 50% interests in the GMMV, and Kennecott's obligation to repay the $16,000,000 loaned by KEC shall remain Kennecott's obligation, without any adverse effect on the 50% interest in GMMV held by USE and USECC. However, the Jackpot Mine development work and Sweetwater Mill upgrade work funded by the $16,000,000 advance will have benefitted all parties to the GMMV and will fully satisfy Kennecott's original $50,000,000 funding obligation to GMMV.
SMP
During fiscal 1989, USE and Crested, through USECC, entered into an agreement to sell a 50% interest in their Sheep Mountain properties to Nukem's subsidiary CRIC. USECC and CRIC immediately contributed their 50% interests in the properties to a newly-formed partnership, SMP. SMP was established to further develop and mine the uranium claims on Sheep Mountain, acquire uranium supply contracts and market uranium. Certain disputes arose among USECC, CRIC and its parent Nukem, Inc. over the operation of SMP. These disputes have been in litigation/arbitration for the past seven years. See Notes E and K for a description of the investment and a discussion of the related litigation/arbitration.
CYPRUS AMAX
During prior years, the Company and USE conveyed interests in mining claims to AMAX Inc. ("AMAX") in exchange for cash, royalties, and other consideration. AMAX and its successor Cyprus Amax Minerals, Inc. ("Cyprus Amax") have not placed the properties into production as of May 31, 1998.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
Cyprus Amax now pays the Company and USE an annual advance royalty of 50,000 pounds of molybdenum (or its cash equivalent). Cyprus Amax is entitled to a partial credit against future royalties for any advance royalty payments made, but such royalties are not refundable if the properties are not placed into production. The Company recognized $105,500, $103,600 and $-0- of revenue from the advance royalty payments in fiscal 1998, 1997, and 1996, respectively.
Cyprus Amax may elect to return the properties to the Company and USE, which would cancel the advance royalty obligation. If Cyprus Amax formally decides to place the properties into production, it will pay $2,000,000 to the Company and USE. If Cyprus Amax sells the properties, the Company and USE will receive 15% of the first $25 million received by Cyprus Amax.
The Company and USE also held an option to purchase certain real estate located in Gunnison, Colorado owned by Cyprus Amax. During fiscal 1995, USE and Crested reached an agreement with Cyprus Amax whereby USE and Crested would forego six quarters of advance royalties as payment of this option exercise price. Accordingly, USE and Crested received no advance royalties during 1996 as a result of this agreement. Thereafter, USE (together with Crested) signed two option agreements with Pangolin Corporation ("Pangolin"), a Park City, Utah developer, for sale of the land owned in Gunnison County, Colorado. Pangolin made a cash payment and signed promissory notes for the purchase of the properties. As of May 31, 1998, the promissory notes were in default and are adequately reserved for. USECC is endeavoring to resolve the default and filed a legal action to protect its interest (see Note K).
SGMC
Sutter Gold Mining Company ("SGMC") was established in 1990 to conduct operations on mining leases and to produce gold from the Lincoln Project in California.
SGMC is in the development stage and additional development is required prior to the commencement of commercial production. SGMC has not generated any significant revenue and has no assurance of future revenue. All acquisition and mine development costs since inception have been capitalized. Since test production in 1992, SGMC has focused its efforts on obtaining a reserve study, developing a mine plan and pursuing a partner to assist in the financing of its mineral development and ultimate production. As of May 31, 1998, due to the decline in the spot price for gold, SGMC has put the development of the mine on hold. Until the time when development begins, SGMC does not expect to require capital contributions from USE, Crested or other sources of financing to maintain its current activities. SGMC will continue to be considered in the development stage until the time it generates significant revenue from its principal operations.
During the first and second quarters of fiscal 1997, SGMC sold shares of its common stock in a private placement. These shares were sold for $3.00 per share. SGMC received approximately $1,100,000 in net proceeds from this equity placement. During the fourth quarter of fiscal 1997, an additional offering of shares of SGMC's special warrant units was completed and raised approximately $5,400,000 in net cash proceeds. Each special warrant unit is convertible into one share of SGMC common stock for no additional compensation and one stock purchase warrant. The warrant allows the holder to purchase an additional share of SGMC common stock for CDN$6.00. The warrant expires in November 1998. At the underwriter's request, the initial investors (including USE and Crested) agreed to have the amount of their common shares
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
owned reduced by 50 percent. The investors in the $3.00 per share private placement discussed above were not affected as those shares were sold in contemplation of the 1 for 2 reverse split.
In connection with the second offering, the Company and USE accepted a Stock Purchase Warrant dated March 21, 1997 which provides the Company and USE the right to acquire, for no additional consideration, common shares of SGMC's $.001 par value common stock having an aggregate value of $10,000,000 (US). The Stock Purchase Warrant has a term of ten years extending to March 21, 2007, and is exercisable partially or in total, semi-annually beginning on June 30, 1997. However, the Stock Purchase Warrant is only exercisable to the extent proven and probable ore reserves, as defined in the Stock Purchase Warrant, in excess of 300,000 ounces are added to SGMC's reserves. In addition, SGMC has the right to satisfy the exercise of all or any portion of the Stock Purchase Warrant with the net cash flows, as defined, at $25.00 (US) for each new ounce of proven and probable ore in excess of 300,000 ounces up to a maximum of 700,000 ounces. Accordingly, the Company has allocated the carrying value of SGMC shares exchanged for the Contingent Stock Purchase Warrant to its investment in such contingent warrants. The Stock Purchase Warrant benefits the Company and USE on the basis of 11.1% and 88.9%, respectively.
PLATEAU RESOURCES LIMITED
During fiscal 1994, USE entered into an agreement with Consumers Power Company to acquire all the issued and outstanding common stock of Plateau Resources Limited ("Plateau"), a Utah corporation. Plateau owns a uranium processing mill and support facilities and certain other real estate assets through its wholly-owned subsidiary Canyon Homesteads, Inc. in southeastern Utah. USE paid nominal cash consideration for the Plateau stock and agreed to assume all environmental liabilities and reclamation bonding obligations. At May 31, 1998, Plateau had a cash security in the amount of $7,270,408 to cover reclamation of the properties (see Note K). Although the Company has no ownership in Plateau, Directors of the Company and USE have agreed to divide equally a portion of certain reclamation obligations above a defined amount, and will share in a portion of cash flows derived from operations.
USECC is currently evaluating the best utilization of Plateau's assets. Evaluations are ongoing to determine when, or if, the mine and mill properties should be placed into production. The primary factor in these evaluations relates to the current depressed uranium market. Alternative uses of the properties are also being evaluated.
ENERGX, LTD.
Energx is engaged in the exploration, development and operation of natural gas properties. Energx currently has leased properties in Wyoming and on the Fort Peck Indian Reservation, Montana. Energx is owned by USE (45%), Crested (45%) and the Assiniboine and Sioux Tribes (10%).
During fiscal 1997 and 1996, Energx abandoned certain of its leases and as a result wrote off $164,500 and $328,700, respectively, of related capitalized costs.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
G. DEBT:
The Company and USE have a $1,000,000 line of credit with a commercial bank. The line of credit bears interest at a variable rate (10.25% as of May 31, 1998). The weighted average interest rate for 1998 and 1997 was 10.25%. No amounts were outstanding under this facility at May 31, 1998 or 1997. This line of credit is secured by a share of the net proceeds of fees from production of oil wells and certain assets of USECC.
Debt of the Company consists primarily of a note to USE bearing interest at 6% per annum due on October 1, 1999. The debt is primarily due to USE for funding all of the operations of USECC of which 50% is the responsibility of the Company. All debt is classified as current as of May 31, 1998 and 1997 as a result of USE's unilateral ability to modify the repayment terms under the promissory note agreement. The Company signed a two year promissory note as of May 31, 1997 to USE for the full amount of its indebtedness reserving the right to pay all or part of the note through the issuance of Crested common stock.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
H. INCOME TAXES:
The components of deferred taxes as of May 31, 1998 and 1997 are as follows:
At May 31, 1998, the Company had available, for federal income tax purposes, net operating loss carryforwards of approximately $9,200,000 which expire in 2006 through 2012. The Company has established a valuation allowance for the full amount of the net deferred tax assets due to the recurring losses of the Company and the uncertainty of the Company's ability to generate future taxable income to utilize the NOL carryforwards.
For fiscal years 1998, 1997 and 1996, the Company incurred losses for both book and tax purposes. The income tax provision is different from the amounts computed by applying the statutory federal income tax rate to income before taxes. The reasons for these differences are as follows:
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
========= ========= =========
There were no taxes payable as of May 31, 1998, 1997 or 1996.
The Internal Revenue Service ("IRS") is currently auditing the Company's and USECC's tax returns for the fiscal years ended May 31, 1996 and 1995. The audit is not completed as of the date of the accompanying financial statements. However, the Company does not expect that the resolution of the audits will have a material effect on the Company's financial position or results of operations.
I. SEGMENTS AND MAJOR CUSTOMERS:
The Company's primary business activities include the sales of minerals and the acquisition exploration, holding, development and sale of mineral bearing properties. No properties are currently producing. The second reportable industry segment is commercial operations, primarily real estate activities and the operations of an airport fixed base operation located in Riverton, Wyoming. The following is information related to industry segments:
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
========== ==========
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
Sales of uranium accounted for 80% and 89% of mineral revenue for the years ended May 31, 1998 and 1996. There were no mineral sales in fiscal 1997.
Commercial revenues in the statements of operations consist of mining equipment, office and other real property rentals, charter flights and fuel sales.
J. SHAREHOLDERS' EQUITY:
The Boards of Directors of both the Company and USE, from time to time, issued stock bonuses to certain directors, employees and third parties. These shares are forfeitable to the Company and USE until earned. The Company is responsible for one-half of the compensation expense related to these issuances (see Note C). For the years ending May 31, 1998, 1997 and 1996 the Company recognized compensation expense of $27,300, $76,300 and $59,800, respectively, resulting from these issuances. A schedule of forfeitable shares for both Crested and USE is set forth in the following table:
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
No shares were earned in fiscal 1998 or 1997. Also included in the forfeitable common stock are 15,000 shares to directors which are vesting at 20% per year beginning in November 1992, of which 9,000 are earned but not released as of May 31, 1997.
K. COMMITMENTS, CONTINGENCIES AND OTHER:
LEGAL PROCEEDINGS
ARBITRATION/LITIGATION PROCEEDINGS CONCERNING SMP. In June 1991, Nukem's wholly-owned subsidiary Cycle Resource Investment Corporation ("CRIC") instituted arbitration proceedings against the Company and Crested. CRIC claimed that the Company and USE violated the Sheep Mountain Partners ("SMP") partnership agreement. On July 3, 1991, the Company and USE, through USECC, filed a civil action in the U. S. District Court of Colorado against Nukem, CRIC and their affiliates, alleging Nukem/CRIC fraudulently misrepresented facts and concealed information from the Company and USE to induce their entry into the agreements forming the SMP partnership and sought rescission, damages and other relief. Certain of Nukem's affiliates (excluding CRIC) were thereafter dismissed from the lawsuit. The U. S. District Court granted the motion of the Company and USE to stay the above arbitration initiated by CRIC.
On September 16, 1991, USECC filed another civil action in the Denver District Court against SMP seeking reimbursement of $85,000 per month since the spring of 1991 for the care and maintenance of the SMP underground uranium mines and properties. On May 11, 1993, the Denver District Court stayed all proceedings in state court until the case in the U.S. District Court for Colorado case was resolved. Thereafter in February 1994, USECC, Nukem and CRIC, agreed that the majority of the litigation subsequent to the formation of SMP on December 21, 1988, would be handled through consensual arbitration before a three member panel of the American Arbitration Association (the "Panel"). The arbitration hearing consumed 73 hearing days commencing on June 27, 1994 and concluded on May 31, 1995. The Panel entered its Order and Award on April 18, 1996. Nukem filed two motions with the district court indicating there was a material miscalculation and a double recovery. The District Court remanded the matter to the Arbitration Panel to consider Nukem's motions. On July 3, 1996, the Panel found there was no double recovery and approved the Order and Award, which awarded Crested and USE $12,500,000 and Nukem/CRIC $7,100,000 through March 31, 1996. On November 4, 1996 the United States District Court issued a Judgment and Order confirming the Panel's Order and Award.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
In November 1996, USE and Crested received $4,300,000 from the SMP escrow bank accounts as partial payment of the monetary award of the Panel. This $4,300,000 was accounted for under the cost recovery method of accounting, wherein it was applied to outstanding amounts due USECC and USE and the balance of $1,003,800 was recognized as income. Nukem/CRIC filed a motion asking for limited remand and on June 27, 1997 the Federal Court reviewed the motion and issued a Second Amended Judgment which confirmed the monetary award of the Panel and clarified the equitable damages due USECC from Nukem/CRIC. Nukem filed a notice of appeal with the Tenth Circuit Court of Appeals and posted a $8,613,600 supersedeas bond on the monetary portion of the Award. Nukem's appeal is based on two issues, the District Court erred in confirming the double recovery finding in the Panel's Order and Award and that the Order placing Nukem's uranium purchase contracts with the CIS republics in constructive trust with SMP. During the fourth quarter of fiscal 1998, a settlement agreement was reached whereby U.S. Energy and Crested received $5,024,000 as a partial settlement and, in addition, USECC received the Sheep Mountain Uranium Mines and certain other properties from SMP and one uranium delivery contract along with a 50% interest in a uranium supply contract. This settlement does not in any way affect issues presently on appeal and pending before the 10th Circuit Court of Appeal ("CCA"). A hearing is currently scheduled before a three judge panel on September 24, 1998 in Oklahoma City, Oklahoma.
ILLINOIS POWER. Illinois Power Company ("IPC"), one of the utilities with whom SMP has a long-term uranium supply contract, unilaterally sought to terminate the contract on October 28, 1993 and filed suit in the U.S. Federal District Court, Danville, Illinois, against the Company, Crested, et al. seeking a declaratory judgment that IPC's contract with SMP was void. After various negotiating sessions the parties reached agreement in June 1995 to settle the case by entering into an amendment to the original supply contract to provide for 3 deliveries totaling 486,443 lbs. U3O8. The final delivery was made in May 1997. On June 13, 1997, USE and Crested received $838,500 as a distribution of profits from the final delivery under this SMP contract.
PARADOR MINING COMPANY, INC. ("PARADOR")
On July 30, 1991, Bond Gold Bullfrog, Inc. ("BGBI") filed Civil Action No. 11877 in the District Court of the Fifth Judicial District, Nye County, Nevada naming USE, Crested, Parador and H.B. Layne Contractor, Inc. as defendants. The complaint primarily concerns extra lateral rights associated with two patented lode mining claims (the "Claims") owned by Parador which were initially leased to a predecessor of BGBI and subsequently, the residuals of that lease were assigned and leased by Parador to USE and Crested. A bifurcated trial was held on December 11-12, 1995 before the District Court for the Fifth Judicial District for the State of Nevada, County of Nye, at which time the parties presented evidence relative to the issue of extra lateral rights. Other claims between the parties were bifurcated by the Court and were not at issue at the trial. On December 26, 1995, the district court issued a ruling denying apex rights and extra lateral royalties to Parador, the Company and USE. The partial trial did not address the other issues pending in the litigation but limited the trial to those issues required to decide the question of extra lateral rights. All other remaining claims and counterclaims were considered by the Court on January 26-28, 1998 in a bench trial and the Court entered judgment against the plaintiff and the defendants on their claims. BGBI, USECC and Parador appealed this judgment to the Nevada Supreme Court. On June 23, 1998, a mandatory Settlement Conference was held in Reno, NV but no settlement was achieved. The Settlement Mediator referred the case to the Nevada Supreme Court for an expedited hearing and the appeal is currently pending.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
TICABOO TOWNSITE LITIGATION. In fiscal 1998, the prior contract operator of the restaurant and lounge and two of its employees who operated the motel and convenience store at Ticaboo (owned by Canyon Homesteads, Inc.) sued USE, Crested and Plateau Resources Ltd., et al in Utah State Court. After a five day trial, the jury found against the two plaintiff employees but found for the third plaintiff and a judgment was entered for $153,371 in damages against USE, which was recorded in fiscal 1998. USE intends to vigorously appeal the award.
DEPARTMENT OF ENERGY LITIGATION. On July 20, 1998, eight uranium mining companies with operations in the United States (including USE, Crested, YSFC) and the Uranium Producers of America, a trade organization, filed a complaint against the United States Department of Energy (the "DOE") and the acting secretary in a lawsuit (file no. 98 CV 1775) in the U.S. District Court, Cheyenne, Wyoming. The complaint seeks declaratory judgment and injunctive relief. The plaintiffs allege that the DOE violated the USEC Privatization Act of 1996, when the DOE transferred 45 metric tons of low enriched uranium and 3,800 metric tons of natural uranium to the United States Enrichment Corp. ("USEC") in May 1998.
The plaintiffs have asked the Court among other claims to declare that (i) the DOE violated its statutory authority by transferring uranium to USEC in excess of statutory limits on volume; (ii) the excess amounts were not sold by the DOE to USEC for fair value, as required by the Act, and mandated findings by the DOE concerning possible adverse impacts were not supported in fact; and (iii) the DOE be enjoined from future transfers in violation of the Act. The defendants have not yet responded to the complaint.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the U.S. District Court, Denver, Colorado against Contour Development Company, L.L.C. and entities and persons associated with Contour Development Company, L.L.C. (collectively, "Contour") seeking compensatory and consequential damages from the defendants for dealings in certain real estate. Specifically, USE alleges that Contour has breached contracts for the sale of the Gunnison properties of USE and Crested, and is in default on the contracts and promissory notes delivered to pay for the Gunnison properties.
As of the filing date of this Report, Contour and the other defendants have not filed an answer to the complaint but negotiations are underway to settle the issues.
RECLAMATION AND ENVIRONMENTAL LIABILITIES
Most of the Company's mine development, exploration and operating activities are subject to federal and state regulations that require the Company to protect the environment. The Company attempts to conduct its mining operations in accordance with these regulations, but the rules are continually changing and generally becoming more restrictive. Consequently, the Company's current estimates of its reclamation obligations and its current level of expenditures to perform ongoing reclamation may change in the future. At the present time, however, the Company cannot predict the outcome of future regulation or its impact on costs. Nonetheless, the Company has recorded its best estimate of future reclamation and closure costs based on currently available facts, technology and enacted laws and regulations. Certain regulatory agencies, such as the Nuclear Regulatory Commission ("NRC"), the Bureau of Land Management ("BLM") and the Wyoming Department of Environmental Quality ("WDEQ") review the Company's reclamation, environmental and decommissioning
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
liabilities, and the Company believes its recorded amounts are consistent with those reviews and related bonding requirements. To the extent that planned production on its properties is delayed, interrupted or discontinued because of regulation or the economics of the properties, the future earnings of the Company would be adversely affected. The Company believes it has accrued all necessary reclamation costs and there are no additional contingent losses or unasserted claims to be disclosed or recorded. The Company has not disposed of any properties for which it has a commitment or is liable for any known environmental liabilities.
The majority of the Company's environmental obligations relate to former mining properties acquired by the Company. Since the Company currently does not have properties in production, the Company's policy of providing for future reclamation and mine closure costs on a unit-of-production basis has not resulted in any significant annual expenditures or costs. For the obligations recorded on acquired properties, including site-restoration, closure and monitoring costs, actual expenditures for reclamation will occur over several years, and since these properties are all considered future production properties, those expenditures, particularly the closure costs, may not be incurred for many years. The Company also does not believe that any significant capital expenditures to monitor or reduce hazardous substances or other environmental impacts are currently required. As a result, the near term reclamation obligations are not expected to have a significant impact on the Company's liquidity.
As of May 31, 1998 and 1997, the Company has recorded estimated reclamation obligations, including standby costs, of $725,900 which is included in Reclamation and Other Long-term Liabilities in the accompanying Consolidated Balance Sheets. In addition, the GMMV, in which the Company is a 50% owner, has recorded a $23,620,000 liability for future reclamation and closure costs. None of these liabilities have been discounted, and the Company has not recorded any potential offsetting recoveries from other responsible parties or from any insurance companies.
The Company currently has four mineral properties or investments that account for most of its environmental obligations, SMP, GMMV, Plateau and SGMC. The environmental obligations and the nature and extent of cost sharing arrangements with other potentially responsible parties, as well as any uncertainties with respect to joint and several liability of each are discussed in the following paragraphs:
SMP
The Company and USE are responsible for the reclamation obligations, environmental liabilities and liabilities for injuries to employees in mining operations with respect to the Crooks Gap properties. The reclamation obligations, which are established by regulatory authorities, were reviewed by the Company and the regulatory authorities during fiscal 1998 and the balance in the reclamation liability account at May 31, 1998 ($725,900 or 50% of which is recorded in the accompanying balance sheet) is believed by management to be adequate. The obligation will be satisfied over the life of the mining project which is estimated to be at least 20 years. The Company and USE self bonded this obligation by mortgaging certain of their real estate assets and by holding certificates of deposits. A portion of the funds for the reclamation of SMP's properties will be provided by a sinking fund of up to $.50 per pound of uranium for reclamation work as the uranium is produced from the properties.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
GMMV
During fiscal 1991, the Company and USE acquired developed mineral properties on Green Mountain known as the Big Eagle Property. In connection with that acquisition, the Company and USE agreed to assume reclamation and other environmental liabilities associated with the property. Reclamation obligations imposed by regulatory authorities were established at $7,300,000 at the time of acquisition. Immediately after the acquisition, the Company and USE transferred a one-half interest to Kennecott, with Kennecott, the Company and USE contributing the Big Eagle properties to GMMV, which assumed the reclamation and other environmental liabilities. Kennecott holds a commercial bank letter of credit as security for the performance of the reclamation obligations for the benefit of GMMV.
During fiscal 1993, GMMV entered into an agreement to acquire the Sweetwater uranium mill and related properties from UNOCAL. GMMV's consideration for the acquisition of the Sweetwater Mill Property was the assumption of all environmental liabilities and reclamation bonding obligations. The environmental obligations of GMMV are guaranteed by Kennecott. However, UNOCAL also agreed that if GMMV incurs expenditures for environmental liabilities prior to the earlier of commercial production by GMMV or February 1, 2001 (which liabilities are not due solely to the operations of GMMV), UNOCAL will reimburse GMMV for the first $8,000,000 of such expenditures. Any reimbursement may be recovered by UNOCAL from 20% of future cash flows from the sale of uranium concentrates processed through the Mill.
On June 18, 1996, Kennecott had a letter of credit in the amount of approximately $19,767,000 issued to the WDEQ for minesite matters (executing EPA-delegated jurisdiction to administer the Clean Water Act and the Clean Air Act, and directly administering Wyoming statutes on mined land reclamation), and $5,400,000 issued to the NRC for decontamination and cleanup of the Mill and related tailings cells. An irrevocable letter of credit has been provided by the Morgan Guaranty Trust Company of New York in lieu of a surety bond to cover the reclamation costs for the minesite and a performance bond by St. Paul Insurance Company was obtained for the Mill. The letter of credit was obtained by Kennecott Uranium Company to cover all reclamation costs related to mining and drilling operations in the State of Wyoming. The EPA has continuing jurisdiction under the Resource Conservation and Recovery Act pertaining to any hazardous materials which may be on site when cleanup work commences.
Although USE and the other GMMV parties are liable for all reclamation and environmental compliance costs associated with Mill and site maintenance, as well as Mill decontamination and cleanup and site reclamation and cleanup after the Mill is decommissioned, USE believes it is unlikely it will have to pay for such costs directly. First, based on current estimates of cleanup and reclamation costs (reviewed annually by the oversight agencies), these costs may be within the $50,000,000 development commitment and related $16,000,000 loan of Kennecott Uranium Company for the GMMV. These costs are not expected to increase materially if the mill is not put into full operation. Second, to the extent GMMV is required to spend money on reclamation and environmental liabilities related to previous mill and site operations during UNOCAL's ownership, UNOCAL has agreed to fund up to $8,000,000 of costs (provided these costs are incurred before February 1, 2001 and before Mill production resumes), which would be recoverable only out of future mill production (see above). Third, payment of the GMMV reclamation and environmental liabilities related to the mill is guaranteed by Kennecott Corporation, parent of Kennecott Uranium Company. Last, GMMV will set aside a portion of operating revenues to fund reclamation and environmental liabilities should mining and milling commence.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 (CONTINUED)
Kennecott will be entitled to contribution from the USE Parties in proportion to their participation interests in GMMV if Kennecott is required to pay mill cleanup costs directly pursuant to its guarantee. Such payments by Kennecott only would be reimbursed if the liabilities cannot be satisfied within the initial $50,000,000 expenditure commitment, and then only to the extent there are insufficient funds from the reclamation reserve (to be established from GMMV operating revenues). In addition, if and to the extent these liabilities resulted from UNOCAL's mill operations, and payment of the liabilities was required before February 1, 2001 and before mill production resumes, then up to $8,000,000 of that amount would be paid by UNOCAL before Kennecott Corporation would be required to pay on its guarantee. Accordingly, although the extent of any ultimate USE liability for contribution to mill cleanup costs cannot be predicted, USE and Crested will only be required to pay its proportional share of mill cleanup if a) the liabilities cannot be satisfied with the initial $50,000,000 expenditure commitment from Kennecott, b) there are insufficient funds from the reclamation reserve to be established out of GMMV operating revenues and c) payments are not available from UNOCAL.
Sutter Gold Mining Company
SGMC is currently owned 55% by USE, 4% by Crested and 41% by private investors. SGMC owns gold mineral properties in California. Currently, these properties are in development and costs consist of drilling, permitting, holding and administrative costs. No substantial mining has been completed, although a 2,800 foot decline through the identified ore zones for an underground mine was acquired in the purchase. The Company's policy is to provide reclamation on the unit-of-production basis. Currently, reclamation obligations are covered by a $27,000 reclamation bond which SGMC has recorded as a reclamation liability as of May 31, 1998.
Plateau Resources, Limited
The environmental and reclamation obligations acquired with the acquisition of Plateau include obligations relating to the Shootaring mill. Based on the bonding requirements, Plateau transferred $2,500,000 to a trust account as financial surety to pay future costs of mill decommissioning, site reclamation and long-term site surveillance. In fiscal 1997, Plateau increased the NRC surety to a cash bond of $6,784,000 in order to have its standby license changed by the NRC to operational.
EXECUTIVE COMPENSATION
The Company and USE are committed to pay the estates of certain of their officers an amount equal to one year's salary for one year after their death and reduced amounts, to be set by the Board of Directors, for a period up to five years thereafter.
PART III
In the event a definitive proxy statement containing the information being incorporated by reference into this Part III is not filed within 120 days of May 31, 1998 the Registrant will file such information under cover of a Form 10-K/A.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 with respect to directors and certain executive officers is incorporated herein by reference to Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders. The information regarding the remaining executive officer is contained in Part I of this report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference to the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated herein by reference to the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by reference to the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, REPORTS AND FORM 8-K.
(a) The following financial statements are filed as a part of this Report as Item 8:
Page No. -------- (1) Financial Statements
Registrant and Affiliate
Report of Independent Public Accountants...........................44
Consolidated Balance Sheets - May 31, 1998 and 1997.............45-46
Consolidated Statements of Operations for the Years Ended May 31, 1998, 1997 and 1996 ...................47
Consolidated Statements of Shareholders' Equity for the Years Ended May 31, 1998, 1997 and 1996.............48
Consolidated Statements of Cash Flows for the Years Ended May 31, 1998, 1997 and 1996.................49-50
Notes to Consolidated Financial Statements......................................................51-73
(ii)Affiliate Financials as Schedules
(a) Green Mountain Mining Venture
Report of Independent Public Accountants...................82
Balance Sheet - December 31, 1997 and 1996.................83
Statement of Operations for the Period from June 1, 1990 (Date of Inception) through December 31, 1997..................................84
Statement of Changes in Partners' Capital for the Period from June 1, 1990 (Date of Inception) through December 31, 1997..................................85
Statement of Cash Flows for the Period from June 1, 1990 (Date of Inception) through December 31, 1997..............86
Notes to Financial Statements...........................87-92
(b) Sheep Mountain Partners
Due to the litigation and arbitration proceedings, audited financial statements for SMP are not obtainable. They are therefore not included as an Exhibit to the Registrant's Form 10-K.
All other schedules have been omitted because the information is not applicable or because the information is included in the financial statements.
(3) Exhibits Required to be Filed.
Exhibit Sequential No. Title of Exhibit Page No. --- ---------------- --------
3.1 Restated Articles of Incorporation..........................[1]
3.2 [intentionally left blank]
3.3 [intentionally left blank]
3.4 By-Laws.....................................................[2]
4.1 USE 1998 Incentive Stock Option Plan and Form of Stock Option Agreement.......................93-103
4.2 Form of Stock Option Agreement and Schedule, Options issued 1992 ..............................[9]
4.3 Form of Stock Option Agreement and Schedule, Options issued 1/96...............................[9]
4.4 USE Restricted Stock Bonus Plan as Amended through 2/94.....................................[9]
4.5 Amendment to Warrant to Purchase 200,000 Common Shares of USE...............................[10]
4.6 Amendment to USE 1989 Incentive Stock Option Plan (12/13/96)...............................[10]
4.7 USE 1996 Stock Award Program (Plan)........................[10]
4.8 USE Restated 1996 Stock Award Plan and Amendment to USE 1990 Restricted Stock Bonus Plan....................[10]
10.1 Promissory Note from Crested to USE (5/31/97)..............[10]
10.2 Management Agreement - USE - CC.............................[3]
10.3 Joint Venture Agreement - Registrant and USE................[2]
10.4 U.S. Energy Corp. Employee Stock Ownership Plan.............[2]
10.5 Assignment and Lease - Parador..............................[3]
10.6 Employment Agreement - Daniel P. Svilar.....................[2]
10.7 Executive Officer Death Benefit Plan........................[2]
10.8 [intentionally left blank]
10.9 Big Eagle Acquisition Agreement with PMC....................[4]
10.10 Ft. Peck Agreement - Drilling and Production Services.......[3]
10.11-10.16 [intentionally left blank]
10.17 Sweetwater Mill Acquisition Agreement.......................[3]
10.18 Self Bond Agreement - Crooks Gap Properties.................[1]
10.19 [intentionally left blank]
10.20 [intentionally left blank]
10.21 Master Agreement - Mt. Emmons/AMAX Inc......................[5]
10.22 [intentionally left blank]
10.23 Crooks Gap Property Acquisition Agreement...................[6]
10.24 [intentionally left blank]
10.25 [intentionally left blank]
10.26 Memorandum of Partnership Agreement - GMMV..................[2]
10.27 Mineral Properties Agreement - Congo Area - PMC.............[2]
10.28 [intentionally left blank]
10.29 Memorandum of Partnership Agreement - SMP...................[1]
10.30 Plateau Acquisition - Stock Purchase Agreement and Related Exhibits..............................[7]
10.31-10.40 [intentionally left blank]
10.41 Option and Sales Agreements - Gunnison Property Parcel A..................................[8]
10.42 Option and Sales Agreements - Gunnison Property Parcel B..................................[8]
10.43 Contract for Sale of Wind River Estates to Arrowstar................................................[9]
10.44 Contract for sale of Jeffrey City Six-Plex to Tag Development, Inc.....................................[9]
10.45 Development Agreement with First-N-Last.....................[9]
10.46 Operating Agreement with First-N-Last.......................[9]
10.47 [intentionally left blank]
10.48 [intentionally left blank]
10.49 Acquisition Agreement between Kennecott Uranium Company, USE and USECC regarding GMMV (6/23/97)....................[10]
10.50 Exhibit A to Acquisition Agreement (see 10.49) Promissory Note from Kennecott Uranium Company to Kennecott Energy Company regarding GMMV ...............[10]
10.51 Exhibit B to Acquisition Agreement (see 10.49) Mortgage, Security Agreement, Financing Statement and Assignment of Proceeds, Rents and Leases..............[10]
10.52 Exhibit G to Acquisition Agreement (see 10.49) - Contract Services Agreement for the Sweetwater Uranium Mill Facility..................[10]
10.53 Exhibit H to Acquisition Agreement (see 10.49) - Mineral Lease Agreement ....................[10]
10.54 Exhibit I to Acquisition Agreement (see 10.49) - Fourth Amendment of Mining Venture Agreement among Kennecott Uranium Company, USE and USECC..................[10]
10.55 Master Resolution Agreement regarding Gunnison Properties.......................................[10]
10.56 Membership Pledge Agreement regarding Gunnison Properties.............................[10]
10.57 Management Agreement between SGMC and USECC...............[10]
10.58 Outsourcing and Lease Agreement between YSFC and USECC....................................[10]
10.59 Convertible Promissory Note from YSFC to USECC............[10]
21 Subsidiaries of Registrant................................[10]
By Reference
[1] Incorporated by reference from the like-numbered exhibits to the Registrant's Form 10-K for the year ended May 31, 1989.
[2] Incorporated by reference from the like-numbered exhibits to the Registrant's Form 10-K for the year ended May 31, 1990.
[3] Incorporated by reference from the like-numbered exhibits to the Registrant's Form 10-K for the year ended May 31, 1991.
[4] Incorporated by reference from the like-numbered exhibit to the Registrant's Form 10-Q for the period ended February 28, 1991.
[5] Incorporated by reference from the like-numbered exhibits of AMAX's Schedule 13D filed on or about August 3, 1987.
[6] Incorporated by reference from the like-numbered exhibits of Registrant's Form 10-K for the year ended May 31, 1988.
[7] Incorporated by reference from exhibit A to the U.S. Energy Corp. Form 8-K reporting an event of August 11, 1993.
[8] Incorporated by reference from the like- numbered exhibits of the Registrant's Form 10-K for the year ended May 31, 1995.
[9] Incorporated by reference from the like- numbered exhibits of the Registrant's Form 10-K for the year ended May 31, 1996.
[10] Incorporated by reference from the like- numbered exhibits of the Registrant's Form 10-K for the year ended May 31, 1997.
(b) Reports filed on Form 8-K.
During the fourth quarter of the fiscal year ended on May 31, 1998, the Registrant filed no reports on Form 8-K.
(c) Required exhibits follow the signature page and are listed above under Item 14 (a)(3).
(d) Required financial statement schedules are listed and attached hereto in Item 14(a)(2).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CRESTED CORP. (Registrant)
Date: September 11, 1998 By: /s/ John L. Larsen ------------------------------ JOHN L. LARSEN, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: September 11, 1998 By: /s/ John L. Larsen ------------------------------ JOHN L. LARSEN, Director
Date: September 11, 1998 By: /s/ Max T. Evans ------------------------------ MAX T. EVANS, Director
Date: September 11, 1998 By: /s/ Daniel P. Svilar ------------------------------ DANIEL P. SVILAR, Director
Date: September 11, 1998 By: /s/ Michael D. Zwickl ------------------------------ MICHAEL D. ZWICKL, Director
Date: September 11, 1998 By: /s/ Kathleen R. Martin ------------------------------ KATHLEEN R. MARTIN, Director
Date: September 11, 1998 By: /s/ Robert Scott Lorimer ------------------------------ ROBERT SCOTT LORIMER, Principal Financial Officer and Chief Accounting Officer
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
Report on Audits of Financial Statements as of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995, and the period from inception (June 1, 1990) to December 31, 1997
Report of Independent Accountants
To the Members of the Management Committee of Green Mountain Mining Venture Riverton, Wyoming
We have audited the accompanying balance sheet of Green Mountain Mining Venture (A Joint Venture in the Development Stage) as of December 31, 1997 and 1996, and the related statements of operations, changes in Venture partners' capital, and cash flows for the years ended December 31, 1997, 1996 and 1995, and the period from inception (June 1, 1990) to December 31, 1997. These financial statements are the responsibility of the Venture's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Green Mountain Mining Venture as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years ended December 31, 1997, 1996 and 1995, and the period from inception (June 1, 1990) to December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Salt Lake City, Utah April 3, 1998
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
BALANCE SHEET ------
The accompanying notes are an integral part of these financial statements
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
STATEMENT OF OPERATIONS ------
The accompanying notes are an integral part of these financial statements
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
STATEMENT OF CHANGES IN VENTURE PARTNERS CAPITAL ------
The accompanying notes are an integral part of these financial statements
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
STATEMENT OF CASH FLOWS ------
The accompanying notes are an integral part of these financial statements
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS ------
1. Organization of the Joint Venture:
Green Mountain Mining Venture ("GMMV" or the "Venture") is a joint venture with a 30 year life, formed by U.S. Energy Corp. ("USE"), Crested Corp. ("Crested") and Kennecott Uranium Company ("Kennecott"), the Venture partners, to explore for, evaluate, develop, mine and market the mineral resources from the Green Mountain properties located in south-central Wyoming. Kennecott has a 50% interest in GMMV, and USE and Crested ("USECC") collectively have a 50% interest. GMMV was formed June 1, 1990, with each partner contributing its portion of the Green Mountain properties. Kennecott acquired its portion of the Green Mountain properties from USECC in 1990 for a cash payment of $15 million. Thereafter, the partners are required to contribute funds based upon their respective participating interests, subject to certain provisions as provided for in the joint venture agreement.
Kennecott has agreed to contribute the first $50 million of operating and development expenses pursuant to Management Committee budgets. Kennecott also agreed to pay a disproportionate share (up to an additional $45 million) of GMMV operating expenses, but only out of cash operating margins from sales of processed uranium at more than $24.00/lb (for $30 million of such operating expenses), and from sales of processed uranium at more than $27.00/lb (for the next $15 million of such operating expenses).
Effective October 29, 1992, Kennecott replaced USECC as manager of the Venture. Kennecott contracts with USECC to perform work on behalf of the Venture.
On June 23, 1997, Kennecott and USECC signed an Acquisition Agreement wherein USECC agreed to purchase Kennecott's interest in GMMV for $15 million plus the assumption of Kennecott's share of various reclamation and other liabilities. Kennecott paid $4 million to USECC on signing the Acquisition Agreement and under the terms of the Acquisition Agreement is required to provide a line of credit to GMMV of up to $16 million for payment of costs related to the Jackpot mine development and Sweetwater mill preparation work. Amounts advanced under this line of credit bear interest at 10.5% with repayment based upon the cash flow and earnings of GMMV. Any unpaid balance is payable in full no later than June 23, 2010 as long as USECC or its affiliate purchases Kennecott's interest in the GMMV. The line of credit is collateralized by a first mortgage lien against Kennecott's 50% interest in GMMV. Closing of the Acquisition Agreement is subject to several conditions and governmental approvals and must occur by October 1998. Kennecott is entitled to a credit against their original $50 million commitment of two dollars for each dollar provided under the line of credit and the $4 million paid on signing. As of December 31, 1997, Kennecott has approximately $10.8 million remaining to contribute to the Venture for operating and development expenses.
Continued
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued ------
1. Organization of the Joint Venture, Continued:
Through December 31, 1997, the activities of the Venture have consisted primarily of the development and maintenance of the Green Mountain properties. While these activities are expected to continue in the future, additional development at substantially higher annual levels is required prior to the commencement of commercial production. Such commencement is not expected to occur until the venture partners agree that all economic and other conditions justify such commencement. Therefore, the Venture is considered to be in the development stage as defined in Statement of Financial Accounting Standards No. 7.
2. Summary of Significant Accounting Policies:
All highly liquid securities with a maturity of three months or less are considered to be cash equivalents.
Mineral properties contributed to the Venture were recorded at the partners' historical cost at the date of contribution. Costs incurred in the acquisition of mineral properties are capitalized and will be either charged to operations on the units-of-production method over the estimated reserves to be recovered or charged to operations at the time the property is sold or abandoned. Mine development costs incurred either to expand the capacity of operating mines, develop new ore bodies or develop mine areas substantially in advance of production are capitalized and will be charged to operations on the units-of-production method over the estimated reserves to be recovered. Amortization of mineral properties and development costs will commence when mining operations start. Mine development costs incurred to maintain production are included in operating costs and expenses. Maintenance and holding costs are expensed as incurred.
The cost of mining equipment, less estimated salvage value, will be depreciated on the units-of- production method over the estimated reserves to be recovered or on the straight-line method over the estimated life of the equipment, whichever is shorter. The cost of buildings will be depreciated on the straight-line method. Depreciation of mining equipment and buildings will commence when mining operations start. Costs of repairs and maintenance are expensed as incurred. Expenditures that substantially extend the useful lives of assets are capitalized. When assets are retired or otherwise disposed of, all applicable costs and accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized currently.
Continued
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued ------
2. Summary of Significant Accounting Policies, Continued:
The Venture evaluates the recoverability of capitalized acquisition and development costs based on the expected undiscounted future net revenues from the related mining properties. An impairment loss will be recorded if the unamortized costs exceed the expected undiscounted future net revenues. The recorded loss will be based on the difference between the unamortized costs and the expected discounted future net revenues from the related mining properties. The Venture believes that uranium prices will reach levels sufficient to justify commencement of commercial production in the future. The Venture also believes the expected undiscounted future net revenues from the Green Mountain properties will be sufficient to allow recoverability of these capitalized costs, assuming commencement of commercial production.
The estimated net future costs of dismantling, restoring and reclaiming operating mines which result from future mining operations will be accrued during such operations. The provision will be made using the units-of-production method over the estimated reserves to be recovered and estimated costs at the balance sheet date. The effect of changes in estimated costs and production will be recognized on a prospective basis.
No provision has been made for federal, state and local income taxes, credits, or benefits since tax liabilities are the responsibility of the individual partners.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain amounts in 1996 have been reclassified for comparability to 1997 amounts.
Continued
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued ------
3. Property and Equipment:
USECC conducts operations at the mine site on behalf of the Venture. All accounts payable are due to USECC for costs incurred by USECC in the normal course of business on behalf of GMMV. Through December 31, 1997 Kennecott had reimbursed USECC for substantially all development costs incurred.
The cost of building, mineral properties and mine development and mining equipment incurred by each of the Venture partners are as follows:
In December 1990, GMMV acquired additional mineral properties in exchange for the assumption of reclamation liabilities associated with those properties of $7.3 million. In 1992, GMMV acquired an established uranium processing mill (the Sweetwater Mill) in exchange for the assumption of reclamation liabilities associated with this property of $16.3 million. Such amounts represent the estimated costs at the acquisition date to reclaim these properties. Kennecott, on behalf of GMMV, is self-bonded in the amount of $24.3 million, which is payable to the Wyoming Department of Environmental Quality ("WDEQ") and the U.S. Nuclear Regulatory Commission in the event GMMV does not properly reclaim the above properties or violates the Wyoming Environmental Quality Act. Before the earlier of January 1, 2001, or resumption of production, if the GMMV is required to incur reclamation or environmental costs, the seller of the mill will be liable for the first $8 million of these costs at the Sweetwater Mill.
The Venture properties include state leases which will expire in May 2001 and October 2006. All fees required to hold these unpatented mining claims have been paid to the state of Wyoming as of December 31, 1997.
Continued
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued ------
3. Property and Equipment, Continued:
At December 31, 1997 and 1996, costs capitalized as property and equipment are composed of the following:
Acquisition costs include the partners' initial contribution of mineral properties and buildings recorded at the contributing partners' historical cost of $15,727,000 and mineral properties and buildings acquired in exchange for the assumption of reclamation liabilities totaling $23,620,000.
4. Contingencies:
In June 1994, Kennecott was served with a complaint filed by Nukem Inc. (Nukem) and Cycle Resource Investment Corporation (Cycle). The complaint alleged that when Kennecott entered into the Green Mountain Mining Venture with USE on June 1, 1990, Kennecott interfered with a Uranium Marketing Agreement (UMA) between Nukem and USE and the Sheep Mountain Partners Partnership Agreement (SMPA) between USE and Cycle. Nukem and Cycle were each seeking damages in excess of $14 million and punitive damages.
The case was stayed pending the conclusion of an arbitration proceeding between Cycle, Nukem and USE. The arbitration panel entered its order in April 1996, and the stay in this case was lifted. The arbitration panel held against Nukem in material respects stating that, even if the UMA had been breached, Nukem suffered no damages thereby. The panel denied the relief that Cycle sought for alleged breach of the SMPA. Accordingly, on January 6, 1997, Kennecott filed a motion for summary judgment contending, among other things, that the arbitration findings collaterally estop all claims asserted by Nukem and Cycle. On August 22, 1997 the trial court granted Kennecott's motion for summary judgement and dismissed the claims of Nukem and Cycle. Following the motion, the parties agreed to settle the case, and in February 1998 a settlement agreement was signed which resulted in both parties agreeing to suspend all litigation and claims against each other.
Continued
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued ------
5. Subsequent Events:
In 1996, the U.S. government adopted the "USEC Privatization Act of 1996" to privatize the U.S. Enrichment Corp. In July 1998, in a S-1 Registration Statement filed with U.S. Securities and Exchange Commission, USEC Inc. disclosed its planned sale of significant quantities of uranium in the U.S. marketplace. Accordingly, forecasted demand for uranium and forecasted uranium sales prices have decreased in the short-term. As a result, GMMV has halted development activities at the Jackpot Mine, and has placed the facility on active standby.