ITEM 3. Legal Proceedings
Sheep Mountain Partners Arbitration/Litigation
Arbitration. On June 26, 1991, CRIC submitted certain disputed matters concerning SMP to arbitration before the American Arbitration Association in Denver, Colorado, to which USE and Crested filed a responsive pleading and counterclaim alleging violations of contracts and duties by CRIC related to SMP. CRIC asserted that USE and Crested, d/b/a/ USECC, were in default under the SMP partnership agreement ("SMP Agreement"). Prior to initiation of arbitration proceedings, USE and Crested had notified CRIC it was in default under the SMP Agreement. The issues raised in the arbitration proceedings were generally incorporated in the Federal proceedings (see below), wherein the U.S. District Court of Colorado stayed further proceedings in arbitration. See also "Stipulated Arbitration", below.
Federal Proceedings. On July 3, 1991, USE and Crested ("plaintiffs") filed Civil Action No. 91-B-1153 in the United States District Court for the District of Colorado against CRIC, Nukem and various affiliates of CRIC and Nukem (together, the "defendants"), alleging that CRIC and Nukem misrepresented material facts to and concealed material information from the plaintiffs to induce their entry into SMP Agreement and various related agreements. Plaintiffs also claim CRIC and Nukem wrongfully pursued a plan to obtain ownership of the USE-Crested interests in SMP through various means, including overcharging SMP for uranium "sold" to SMP by defendants. Plaintiffs further allege that defendants refused to provide a complete accounting with respect to dealings in uranium with and on behalf of SMP, and that certain defendants misappropriated SMP property and engaged in other wrongful acts relating to the acquisition of uranium by SMP.
Plaintiffs requested that the court order rescission of the SMP Agreement and related contracts, and asked the court to determine the amounts payable to CRIC by USECC as a result of any such rescission order to place the parties in status quo. USE and Crested also requested that the court order defendants to make a complete accounting to them concerning the matters alleged in the Amended Complaint. They requested an award of damages (including punitive, exemplary and treble damages, interest, costs and attorneys' fees) in an amount to be determined at trial. Plaintiffs further requested imposition of a constructive trust on all property of SMP held by defendants, and on profits wrongfully realized by defendants on transactions with SMP.
The defendants filed various motions, including an application to stay judicial process and compel arbitration and to dismiss certain of plaintiff's claims. The defendants also filed answers and counterclaims against plaintiffs, claiming plaintiffs breached the SMP Agreement and misappropriated a partnership opportunity by providing certain information about SMP to Kennecott and entering into the GMMV with Kennecott involving the Green Mountain uranium properties. The defendants also claim that plaintiffs wrongfully sold an interest in SMP to Kennecott through the GMMV without CRIC's consent and without providing CRIC a right of first refusal to purchase such interests; that USE breached the uranium marketing agreement between USE and Nukem, by agreeing with Kennecott in the GMMV that Kennecott could market all the uranium from Green Mountain, thereby depriving Nukem of commissions to be earned under such marketing agreement; that USE and Crested interfered with certain SMP supply contracts, costing CRIC legal fees and costs; that CRIC and Nukem are entitled to be indemnified for purchases of uranium made on behalf of SMP; that USE and Crested failed to perform their obligations under an Operating Agreement with SMP in a proper manner, resulting in additional costs to SMP; that USE and Crested overcharged SMP for certain services under the SMP Partnership Agreement and refused to allow SMP to pay certain marketing fees to Nukem under the Uranium Marketing Agreement; that USE and Crested breached the SMP Partnership Agreement by failing to maintain a toll milling agreement with Pathfinder Mines Corporation, thereby rendering SMP's uranium resources worthless; and that USE and Crested have engaged in vexatious litigation against CRIC and Nukem. Defendants also requested damages (including punitive, exemplary and treble damages under RICO, interest costs and attorney fees).
Stipulated Arbitration. In fiscal 1994, the plaintiffs and defendants agreed to proceed with exclusive, consensual binding arbitration before a panel of three arbitrators (the "Panel") with respect to any and all post-December 21, 1988 disputes, claims and controversies (including those brought in the 1991 arbitration proceedings, the U.S. District Court proceeding and separate Colorado State Court proceeding initiated by USE and Crested to obtain reimbursement for maintaining the SMP mines on a standby basis, that any party may assert against the other. All pre- December 21, 1988 claims, disputes and controversies were stayed by stipulation between the parties, until the Panel entered an order and award in the arbitration proceeding.
In connection with agreeing to proceed to arbitration as stated above, USE and Crested affirmed the Sheep Mountain Partners partnership, and proceeded on common law damages and other claims in the arbitration. Approximately $19.3 million is held in escrow at May 31, 1996, by agreement of the parties pending resolution of the disputes.
The arbitration evidentiary proceedings were completed on May 31, 1995, following which the parties filed with the arbitrators proposed findings of fact and conclusions of law and proposed order, award, briefs of law and responses to the other party's submittals. Nukem and CRIC sought damages against USECC in the amount of $47,122,535. For their claims, USE and Crested sought damages of approximately $258 million from Nukem and CRIC, which amount USE and Crested requested be trebled under the Racketeer Influenced and Corrupt Organizations Act ("RICO") and similar state law provisions.
On April 18, 1996, the Panel entered an Arbitration Order and Award (the "Award"). The Panel found in favor of USE and Crested on certain claims made by USE and Crested (including the claims for reimbursement of standby maintenance expense and other expenses on the SMP mines), and in favor of Nukem/CRIC and against USE and Crested on certain other claims.
USE and Crested were awarded monetary damages of approximately $7.4 million, which amount is after deduction of monetary damages which the Panel awarded in favor of Nukem/CRIC and against USE and Crested. An additional amount of approximately $4.8 million was awarded by the Panel to USE and Crested, to be paid out of cash funds held in SMP bank accounts, which accounts have been accruing operating funds from SMP since the arbitration/litigation proceedings were commenced. It is anticipated that such payment out of the SMP bank accounts will be made in fiscal 1997.
The Panel ordered that one utility supply contract with PSE&G for 980,000 pounds of uranium oxide held by Nukem belonged to SMP, and ordered such contract assigned to SMP. That contract expires in 2000. The Panel further awarded SMP the uranium purchase contracts Nukem entered into with three CIS Republics in constructive trust.
The RICO claims of both parties against the other were either withdrawn (Nukem) or dismissed by the Panel. In its Award the Panel did not order SMP dissolved. The timing and ultimate resolution of the question of SMP dissolution presently is uncertain. Pending such resolution, USE and Crested are hopeful that delivery obligations under the various SMP utility supply contracts can be met through the cooperation of Nukem.
USE and Crested petitioned the U.S. District Court for the District of Colorado (the "Court") for confirmation of the Award. Nukem filed two motions to vacate or modify portions of the Award, alleging that significant portions of the Award were erroneous. On May 24, 1996, the Court remanded the Award to the Panel for consideration of these motions. On July 3, 1996, the Panel entered a new Order essentially affirming its earlier Award. With respect to the principal claim of error alleged in the Nukem motions, concerning the award of more than $15 million of damages and interest to USE and Crested attributable to Nukem's unauthorized use of SMP uranium supply contracts to obtain rights to purchase U3O8 from the Commonwealth of Independent States ("CIS"), the Panel affirmed the amount of its award to USE and Crested. In so doing the Panel stated that, "There was wrongdoing on the part of Nukem when it used what were clearly partnership contracts to obtain financial benefits for itself alone.... Our Award . . . is premised upon wrongdoing by Nukem and a judgment by us that Nukem ought not to be permitted to profit from that wrongful conduct." The Panel affirmed the Award granting SMP the rights to purchase CIS uranium, the uranium acquired pursuant to those rights and the profits therefrom, which are impressed with a constructive trust in favor of SMP. The Panel further stated, "We thus conclude that there is no inconsistency and no double recovery and no subtraction that ought to be made from profits already realized...."
The Panel did correct a portion of the award, to reimburse $137,700 to CRIC for U3O8 it purchased, out of a bank account in Riverton, WY. The Panel also made a correction to have the $136,500 previously awarded to USE and Crested paid out of the First Interstate Bank of Riverton account rather than the Norwest Bank account in Denver, CO. USE and Crested called a mathematical error to the Panel's attention which was made by Nukem after the close of evidence in the amount of $265,313.83. The Panel did not consider that error because it was not directed by the Court to do so and it remains for the Court to resolve that issue.
In addition to the Petition for Confirmation of the Award (which was later amended), USE and Crested also filed with the Court a petition for appointment of a receiver for the SMP partnership and for an order directing distribution of the escrowed proceeds in the SMP bank accounts. Nukem/CRIC filed a petition with the Court to vacate part of the Panel's Award and modify other portions. The U. S. District Court ordered the parties to respond to each others pleadings by August 22 and file replies by September 6, 1996. The Court set a hearing for September 25, 1996 with respect to these matters.
BGBI Litigation
The Company and USE 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.
Parador, USE and Crested had previously advised BGBI that they are entitled to royalty payments with respect to extralateral rights of the subject claims on minerals produced at the Bullfrog Mine, claiming that the lode or vein containing the gold mineralization apexes on the Parador claims and dips under the claims leased to BGBI by a third party.
BGBI seeks to quiet title to its leasehold interest in the subject claims, alleging that Parador's lease thereof to USE and Crested is adverse to the interest claimed by BGBI, and that the assertions by USE and Crested of an interest in the claims have no foundation. BGBI seeks a determination that USE and Crested have no rights in the claims and an order enjoining USE and Crested from asserting any interest in them. BGBI further asserts that, in attempting to lease an interest in the subject claims to USE and Crested, Parador breached the provisions of its lease to BGBI, and that Parador is responsible for the legal fees and costs incurred by BGBI in the quiet title action, which may be offset against royalties. Under an arrangement to pay certain legal expenses of Parador, USE and Crested may be responsible for any such amounts.
BGBI alleges that by entering into the Assignment and Lease of Mining Claims with Parador, USE and Crested disrupted the contractual relationship between BGBI and Parador. In addition, BGBI claims that the USECC-Parador agreement slanders BGBI's title to the claims. BGBI seeks compensatory damages from Parador, USE, and Crested; punitive damages from USE and Crested; and costs and other appropriate relief from Parador, USE and Crested, all in amounts to be determined.
A partial or bifurcated trial to the court of the extralateral rights issues was held on December 11 and 12, 1995. The purpose of the hearing was to determine whether the Bullfrog orebody is a "vein, lode or ledge" as described in the General Mining Law and, if so, whether the facts of the case warrant the application of the doctrine of extralateral rights as set forth in such statute. Although the Court sat as both the finder of fact and law with respect to such issues, the Court concluded that the questions are ultimately one of law which must be decided based on the testimony and exhibits introduced at the trial concerning the description of the orebody. Registrant, USE and Parador presented five experts in the field of geology, including the person who was responsible for the discovery of the gold deposit at the mine. All five experts opined that the deposit was a lode and it apexed on a portion of Parador's two mining claims. The defendant H.B. Layne Contractor, Inc. ("Layne") presented a single witness who testified that there was no apex within the Parador claims. The Court nevertheless found that Parador had failed to meet its burden of proof and therefore Parador, Registrant and USE have no right, title and interest in the minerals lying beneath the claims of Layne pursuant to extralateral rights. The Court entered a partial judgment in favor of Layne and ordered that Parador pay Court costs to Layne. Registrant and USE have filed an appeal of the Court's ruling as erroneous as a matter of law, which is pending.
The partial trial did not address any of the other issues pending in the litigation other than those required to decide the question of whether the doctrine of extralateral rights is applicable to this case. All other claims and counterclaims remain pending before the Court and no hearing date has been set for those issues.
If USE's and Crested's position concerning extralateral rights is ultimately sustained, substantial additional revenues and income may be received by USE and Crested from royalties payable with respect to gold produced from the Bullfrog Mine. If, however, the final decision of the appellate court is adverse to USE and Crested, an award of damages against USE and Crested in a substantial amount could have a significant negative impact on USE and Crested.
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 Crested who are not also directors.
Robert Scott Lorimer, age 45, has been Controller and Chief Accounting Officer for USE and Crested for more than the past five years. Mr. Lorimer also has been Chief Financial Officer for both these companies since May 25, 1991, and their Treasurer since December 14, 1990. He serves at the will of the Boards of Directors. There are no understandings between Mr. Lorimer and any other person, pursuant to which he was named as an officer, and he has no family relationship with any of the other executive officers or directors of USE or Crested. During the past five years, he has not been involved in any Reg. S-K Item 401(f) listed proceeding.
PART II
ITEM 5.

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, 1996 ------------------------------- Fourth quarter ended 5/31/96 $1.94 $1.07 Third quarter ended 2/29/96 .16 1.75 Second quarter ended 11/30/95 .22 .19 First quarter ended 8/31/95 .38 .22
Fiscal year ended May 31, 1995 ------------------------------- Fourth quarter ended 5/31/95 $.46 $.25 Third quarter ended 2/28/95 .28 .12 Second quarter ended 11/30/94 .31 .18 First quarter ended 8/31/94 .41 .34
(b) Holders.
(b)(1) At September 10, 1996, there were 1,912 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.
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 Crested's liquidity, capital resources and results of operations during the periods included in the accompanying financial statements.
The Company has generated significant losses in the last three years, as a result of holding costs and permitting activities in the mineral segment and gas operations and from certain commercial operations. The Company is in the process of developing and/or holding investments in gold, uranium, and gas properties that are currently not generating any operating revenues, but for which the Company has high expectations. These properties require expenditures for permitting, development, care and maintenance, holding fees, corporate overhead and administrative expenses, etc. In addition, legal expenses associated with the litigation and arbitration surrounding the SMP Partnership and the inability of the Company to utilize funds generated by that Partnership have compounded the Company's operating and cash flow situation. Nevertheless, the Company believes that it will meet its obligations in the coming year, as further discussed below.
Liquidity and Capital Resources at May 31, 1996
Working Capital Components. Cash used in operating and investing activities was $1,375,600 and $555,100, respectively for the year ended May 31, 1996. Cash provided by financing activities during fiscal 1996 was $1,958,900. For the year, these activities resulted in a net increase of $28,200 in cash. Working capital decreased during the fiscal year ended May 31, 1996 by $1,246,200 to a working capital deficit of $6,252,100 (from a working capital deficit of $5,005,900 at May 31, 1995). The principal component of the decrease was an increase in debt to its parent USE.
Cash provided from financing resulted from increases in debt to affiliates of $2,343,900 and from third parties of $77,600. Increased debt to affiliates is as a result of Crested's parent, USE, funding operations jointly owned by Crested and USE due to Crested's lack of liquid assets. It is anticipated that the debt to USE at May 31, 1996 of $6,460,300 will be repaid at least in part from funds awarded by the Arbitration Panel in the SMP litigation/arbitration as 50% of the award belongs to Crested. These increases in debt to its parent, USE, and third parties was partially offset by the reduction of debt to third parties of $70,600 and the line of credit of $392,000. Accounts payable and accrued expenses were reduced by $629,100 during the year ended May 31, 1996. The combined effect of these reductions in current liabilities is $1,091,700. The offset of these reductions in current payables against the increase of $2,350,900 in debt to its parent USE result in a change in working capital of $1,259,200.
Cash generated from investing activities were principally from proceeds from the sale of property and equipment of $437,100. The primary source of these funds came from the sale of Wind River Estates, a mobile home park owned by the Crested and USE, to Arrowstar, a corporation owned by Crested's chief executive officer and his sons.
Due to disputes among the SMP partners, Crested and USE have not been reimbursed for care and maintenance costs for the SMP properties since the spring of 1991. As of May 31, 1996 the total amount that SMP owed USECC for standby and maintenance costs was $5,354,000. On April 18, 1996 the Arbitration Panel ordered Nukem/CRIC to pay USECC $2,065,989 in standby costs for the SMP mines plus $446,834 in interest and per diem interest of $616 until paid for their 50% share of SMP expenses. At August 31, 1996, the total amount due USECC from Nukem/CRIC was $2,607,100.
Capital Requirements - General: The primary requirements for Crested's working capital during fiscal 1997 are expected to be the costs associated with development activities of Plateau (see "Capital Requirements - Plateau"), care and maintenance costs of SMP, payments of holding fees for mining claims, purchase of uranium for delivery to utility customers of SMP, drilling and overhead expenses of Energx and corporate general and administrative expenses, including costs associated with continuing litigation and arbitration.
Capital Requirements - SGMC: SGMC's properties contain reserves of gold. Preliminary estimates are that a 500 ton per day ("tpd") mine/mill operation using a cyanide-flotation process, will require up to $15,000,000 to place the proposed mine and mill into full operation.
Although pre-production mine development and underground exploration is substantially complete, capital resources in addition to those currently on hand, will be needed to complete mine development and construct a mill facility. The timing of these expenditures will depend upon internal cash flow or additional financing.
Subsequent to May 31, 1996, SGMC and as of September 6, 1996, SGMC received a net of approximately $842,370 in equity financing which is to be used by SGMC for property holding costs and to further develop the properties.
On May 14, 1996, SGMC entered into a Letter of Intent with RAF Financial Corporation ("RAF") whereby RAF is to assist SGMC in obtaining additional equity financing through an initial public offering ("IPO"). Under the terms of the IPO Letter of Intent, SGMC and RAF are proposing a public offering of 3 million shares of SGMC common stock at an expected price of between $4.00 and $6.00 per common share and up to 3 million Class A warrants at a price of $0.25 per warrant. The Class A warrants are expected to have an exercise price of approximately $7.00 per share and will be exercisable for 3 years following the IPO.
There can be no assurance that the IPO will be successfully completed.
Capital Requirements - SMP: There are no current plans to mine the SMP Crooks Gap properties during fiscal 1997, however, Crested and USE will continue to preserve the ore bodies and develop concepts to reduce care and maintenance costs, including driving a decline to reduce pumping costs (which also would reduce future mining costs by reducing hoisting costs). Although funds are available in SMP's bank account of approximately $19.3 million as of May 31, 1996, these funds are restricted and since early 1991 SMP has not paid Crested and USE the operating costs and fees associated with their services as operating manager of the Crooks Gap properties. As part of the Order and Award on April 18, 1996, the Arbitration Panel awarded USECC $2,065,989 for standby costs through March 1996, plus interest of $446,834 and per diem interest of $616 until paid. The Award was based on $71,241 per month for holding costs. Crested and USE maintain that at least the Award amount of $71,241 per month is due SMP until SMP resolves the ultimate disposition of its mining properties. Nukem disputes the amount of $71,241 per month. It is hoped that this issue will be resolved by the Federal Court.
Notwithstanding disputes between the SMP partners, Crested and USE have delivered an agreed-upon portion of the uranium concentrates required to fill contract delivery requirements on certain long-term U3O8 contracts since July 1, 1991. During 1996, USECC made certain deliveries while during 1995 all of the deliveries to fill the SMP contracts were made by Nukem. It is uncertain what protocol with Nukem will be in place for 1997 and thereafter. If the SMP partners are unable to agree on how to separately effect contract performance for the various SMP customers, resulting delivery delays and/or incomplete deliveries could adversely affect the contracts, and therefore Crested. Further, the SMP partners are awaiting the decision to either confirm the Arbitration Panel's Award or to, as Nukem has requested, vacate a portion of the Award. No assurance can be given on the outcome of the hearing which is scheduled for September 25, 1996 or any further appeal attempts by Nukem/CRIC.
Capital Requirements - GMMV: Operations of GMMV are not requiring Crested's capital resources, as the initial $50,000,000 of expenses on the GMMV properties is being paid by Kennecott. Crested and USE continue to project that the proposed Jackpot Mine can be put into production for less than $25,000,000. However, depending on results of exploration and development projects on the properties, additional expenditures may be required. GMMV expenditures for fiscal 1997 will depend on whether one or both declines for the proposed mine are started. A decision by the Management Committee of GMMV regarding the declines is currently being considered. Nonetheless, GMMV should not require any funding from Crested during fiscal 1997. The Management Committee of GMMV is also considering various financing options which could result in Kennecott being able to monetize all or a portion of its interest in GMMV. This could be accomplished by either acquiring new investors or formation of a new public company to finance the development of the properties.
Capital Requirements - Plateau: On August 11, 1993, USE purchased all the outstanding shares of Plateau Resources, Limited ("Plateau"). Plateau owns various real estate developments in and around Ticaboo, Utah and the Shootaring Uranium Mill. Although Crested has no ownership in Plateau, the Directors of Crested and USE have agreed to divide equally one-half of the obligations incurred in excess of the total $14.2 million which was held by Plateau at the time of the USE acquisition. Management of Crested and USE are currently in the process of having the Shootaring Mill license changed to operational. At such time as the mill is licensed to operate, significant amounts of capital will be required to place the mill and mines into operation. It is expected that these funds will either be provided by cash received as a result of the SMP arbitration, equity financing on the Plateau U3O8 assets or a joint venture partner. For a more detailed discussion of the Plateau transaction please refer to Note F. of the financial statements.
Capital Requirements - Energx: Another requirement of Crested's and USE's working capital is the continued funding of Energx overhead expenses and drilling operations. Energx held several gas leases and participates in one gas venture (on the Fort Peck Indian reservation in Montana) with NuGas, a Canadian firm; the gas venture requires NuGas to fund the drilling of the first eight wells. Therefore, capital expenditures for Energx by Crested on this venture are not anticipated to be significant in 1997. Without access to equity capital no additional expansion of Energx' operations is anticipated. If the discovery wells on the Fort Peck Reservation are successful additional capital will be required and could possibly be satisfied by either equity or commercial debt.
Long-Term Debt and Other Obligations: Debt at May 31, 1996 was $6,548,300, including $88,000 on the Company's line of credit, (see Note G to the Crested Consolidated Financial Statements). Of the debt, $6,460,300 is due to USE as a result of advances that USE made on behalf of Crested in the various mining operations in which the companies participate jointly. It is not anticipated that USE will demand payment on any of this debt in fiscal 1997 unless funds are received from the arbitration proceedings.
Reclamation Costs. Prior to fiscal 1996, Crested and USE assumed the reclamation obligations, environmental liabilities and contingent liabilities for employee injuries, from mining the Crooks Gap and other properties in the Sheep and Green Mountain Mining Districts. The reclamation obligations, which are established by governmental regulators, were most recently set at $1,451,800, one half of which amount, $725,900, is shown on Crested's balance sheet as a long-term obligation.
To assure the reclamation work will be performed, regulatory agencies require posting of a bond or other security. Crested and USE satisfied this requirement with respect to SMP properties by mortgaging their executive office building in Riverton, Wyoming. Crested and USE have also posted a cash bond in the amount of $176,000 for this reclamation bond. Crested and USE are negotiating with government agencies to decrease the $176,000 cash bond and either forego the additional collateral or take other real estate and improvements with equal value. A portion of the funds for the reclamation of SMP's properties was to have been provided by SMP, which agreed to pay up to $.50 per pound of uranium produced from its properties to Crested and USE for reclamation work. The status of this commitment could be impacted by the ultimate resolution of the litigation with SMP.
Reclamation obligations on the contiguous Big Eagle properties and the Sweetwater Mill, estimated at approximately $23,620,000, have been assumed by the GMMV venturers, and secured by a bank letter of credit provided by Kennecott. The reclamation and environmental costs associated with the Sweetwater Mill will not commence prior to conclusion of mining activities on Green Mountain. As uranium is processed through the Mill, a reclamation reserve will be funded on a per unit of production basis. Up to $8,000,000 (in 1990 dollars) in any reclamation costs which may be incurred prior to commencement of production or 2001 will be paid for by UNOCAL.
Reclamation obligations of Plateau are covered by a $2,500,000 cash bond with accrued interest of $385,000 at August 31, 1996 to the U.S. Nuclear Regulatory Commission and a $4,800,000 cash deposit plus accrued interest of $559,400 as of August 31, 1996 for the resolution of any environmental or nuclear claims. See Item 1 - Business-Uranium.
Reclamation work on any of the above properties need not be fully completed until a decision is made to abandon the properties, or as otherwise required by regulatory agencies. Reclamation and environmental costs associated with any of these properties are not expected to require Crested funding in fiscal 1996, because such costs are not anticipated to be incurred for many years.
See Note K to the Crested consolidated financial statements regarding reclamation and environmental costs, and the funding thereof.
Capital Resources: The primary source of Crested capital resources for fiscal 1997 will be advances from USE, equity financing for affiliated companies, the resolution of the arbitration/litigation with Nukem and commercial debt. Additionally, Crested and USE will continue to offer for sale various non-core assets such as lots and homes in Ticaboo, real estate holdings in Wyoming, Colorado and Utah and mineral interests. Fees from oil production (Ft. Peck Lustre Field, Montana), rentals of real estate holdings and equipment, aircraft chartering and aviation fuel sales, also will provide cash.
Additional sources of capital will be needed to develop and build the mine and mill complex for the Lincoln Project, for which capital costs SGMC presently is seeking equity financing. There is no certainty as to the outcome of these efforts. Continued funding of such costs could cause USE to incur short term working capital deficiencies and increase the Company's working capital deficit.
To fund any Energx drilling beyond the eight wells on the Fort Peck Reservation as well as any other locations, Crested and USE plan to seek a joint venture partner or obtain financing through banking institutions or the equity market.
Funding of SMP care and maintenance costs may require additional capital, depending on the outcome of the SMP arbitration/litigation. Although management is of the opinion that the SMP arbitration/litigation will be resolved in favor of Crested and USE during fiscal 1997, which will result in funds being available to repay Crested and USE for advances to SMP, this outcome is not assured. In any event, further delays in resolution of the arbitration are expected, and may exacerbate short term liquidity requirements.
Crested believes available working capital excluding the debt to affiliates, operating revenues and anticipated financing will continue to be adequate to fund working capital requirements. However, with the exceptions of GMMV and Plateau, Crested will require continued support from USE and additional sources of funding to continue the development of and investment in its various mineral ventures, as stated above.
Although Crested and USE currently are not in production on any mineral properties, development work continues on several of their major investments. Crested and USE are not using hazardous substances and known pollutants to any great degree in these activities. Consequently, recurring costs for managing hazardous substances, and capital expenditures for monitoring hazardous substances or pollutants have not been significant. Likewise, Crested and USE do not have properties which require current remediation. Crested and USE are also not aware of any claims for personal injury or property damages that need to be accrued or funded.
Crested received a notification of tax deficiency from the Internal Revenue Service for fiscal years ended May 31, 1989, 1990 and 1991. Crested filed a response to the proposed deficiency, and has requested an administrative appeal of the initial examiner's deficiency finding. After several hearings, Crested received a preliminary indication that a major portion of the findings has been resolved in favor of Crested. No written confirmation has been received as of the date of filing. Nevertheless, Crested is confident the matters will be resolved favorably at the administrative appeals level.
Results of Operations
Fiscal 1996 Compared to Fiscal 1995
Revenues increased by $1,349,000 to $2,509,200 for the year ended May 31, 1996. This increase was primarily due to an increase of $1,558,400 in mineral sales and option (primarily as a result of U3O8 deliveries made in fiscal 1996 to two of the utilities who have contracts with SMP). No deliveries were made by Crested or USE during the year ended May 31, 1995. Due to the litigation/arbitration between Crested, USE and Nukem/CRIC, virtually all SMP deliveries have been in dispute. Certain deliveries are made 100% by either partner, while others are delivered on agreed to percentages. Crested and USE have turned over any profits they have made on these deliveries to SMP. Due to the difficulties between Crested, USE and Nukem/CRIC.
The gain in mineral sales revenue during fiscal 1996 was offset in part by a reduction of $318,300 in gain on sale of assets. This decrease was a result of large gains recognized on the sale of real estate in Colorado in fiscal 1995. No comparable sales took place during fiscal 1996 except for the sale of Crested's and USE's mobile home park on which a gain of $126,300 was recognized.
Expenses from mineral operations increased by $958,900 to $1,786,000. This increase is directly a result of the cost of U3O8 sold during fiscal 1996, as no U3O8 was sold during fiscal 1995 due to disputes between the SMP partners relating to contract deliveries. This increase was partially offset by a reduction mineral operations expense associated with mining properties.
General and administrative costs and expenses increased by $204,400 to $642,200 primarily as a result of costs associated with the SMP litigation. The increased costs are related to amounts paid to lawyers, expert witnesses and the Arbitrators.
Operations resulted in a before tax and equity loss in affiliates of $811,000 for fiscal 1996 as compared to a loss of $1,031,100 for fiscal 1995. This reduction in the operating loss is due to the increased mineral sales and option revenues and reduced mine property holding costs and expenses.
Equity losses in affiliates have been recorded using the equity method. Please refer to Notes A and E to the consolidated financial statements. After accounting for equity losses of $357,900 and $415,900 for fiscal 1996 and 1995, respectively, operations resulted in losses of $1,168,900, $.12 per share, and $1,447,000, $.14 per share, for the fiscal years ended May 31, 1996 and 1995, respectively.
Fiscal 1995 Compared to Fiscal 1994
Revenues for fiscal 1995 declined $1,710,600 to $1,160,200 from fiscal 1994, due to mineral sales revenues of $1,866,300 and to a gain from restructuring mineral properties of $250,000 both recorded in fiscal 1994 with no corresponding revenues in fiscal 1995, and a reduction in the management fees of $80,800. This decline was partially off set by an increase in gain from the sale of assets of $489,700.
There were no mineral sales in fiscal 1995, as a result of the SMP arbitration, to compare with the $1,866,300 in revenues from the sale of U3O8 in fiscal 1994. However, this had no significant effect on the net operating losses because of the corresponding reduction in the cost of sales. During fiscal 1994, USE and Crested made all or a portion (50 percent) of certain of the uranium deliveries required under the SMP contracts. However, during fiscal 1995, USE and Crested have not been allowed to make such deliveries, due to disputes with the other SMP partners; under agreements reached on an interim basis pending the SMP dispute resolution, all deliveries in fiscal 1995 have been made by Nukem and CRIC. Once the arbitration proceedings are concluded, deliveries will be made in accordance with the award. The arbitration outcome cannot be predicted.
In fiscal 1995, $1,069,600 in legal expense was incurred by Crested and USE in connection with the SMP arbitration/litigation of which Crested was obligated for 50% or $534,800. This compared to $576,500 in fiscal 1994 of which Crested's share was $288,250.
The reduction in mineral property transactions is related to the Mt. Emmons molybdenum property, in which USE and Crested have a six percent gross royalty. In addition to the gross royalty, there were promissory notes of $7,500,000 each issued to USE and Crested in 1980, with provision for advance royalties. In 1985, AMAX, USE and Crested agreed to amortize the notes at an annual rate of $1,000,000 each to USE and Crested ($250,000 each, per quarter), in lieu of advance royalties. Advance royalties of 50,000 pounds of molybdic oxide (or its cash equivalent) remains payable. During fiscal 1994, the final $250,000 was amortized on the long term note, so there was consequently no amortization of such debt in fiscal 1995. The remaining component of the decrease in gain from restructuring mining properties agreements, is as a result of the fluctuation of the market price of molybdenum, which is paid in kind by AMAX for the advance royalty.
Gains from the sale of assets increased by $489,700 during fiscal 1995 compared to the corresponding period of the prior year. The increase is due to sales for $495,000 of certain real estate in Colorado. During 1994, there were only sales of miscellaneous equipment for $5,300. As a result of certain of the sales of assets during 1995 being partially financed by USE and Crested, the amount shown on the Statement of Operations exceeds the amount of gain shown on the Statement of Cash Flows. Accounts and notes receivable have been adjusted accordingly.
EFFECTS OF CHANGES IN PRICES
Mining operations and the acquisition, development and disposition of mineral properties are significantly affected by changes in mineral commodity prices. As prices for a particular mineral increase, prices for prospects for that mineral also increase, making acquisitions of such properties more costly and difficult, and dispositions advantageous and easier. Conversely, a mineral commodity price decline facilitates acquisitions of properties for that mineral, but makes sales of such properties more difficult and less attractive. Operational impacts of changes in mineral commodity prices are common in the mining industry.
Uranium and Gold.
Changes in the prices of uranium and gold affect the Registrant to the greatest extent, as its principal holdings are of prospects for those minerals. When uranium prices were relatively high in fiscal 1988, USE and Crested acquired the Crooks Gap properties, and thereafter put the properties into production. When uranium prices fell sharply during fiscal 1989-1991, USECC suspended mining operations for SMP, because uranium could be purchased at prices less than the costs of producing uranium. Uranium production in the United States reportedly fell by 25% to 33% in 1990, due to the lowest prices for uranium since the market developed in the 1960s.
Changes in uranium prices directly affect the profitability of SMP's uranium supply agreements with electric utilities. Certain of those agreements become advantageous to the Registrant when the spot market price for uranium falls significantly below the price which a utility has agreed to pay. Some of the supply agreements of SMP were acquired before the fall of uranium spot market prices during fiscal 1989-1991. Those fixed-price contracts, which have contract prices exceeding current spot market rates, are currently advantageous to the Registrant, as the uranium to fill them can be readily obtained at favorable prices. Although such contracts benefit SMP and the Registrant in a falling market, a corresponding adverse impact would not be anticipated in the event of substantially increased prices. SMP would produce uranium from its Crooks Gap properties to fill those contracts, in the event of a prolonged increase in the spot market price above the contract prices.
With the acquisition of its interest in SGMC and its Lincoln Mine, gold prices directly affect the Registrant. Crested believes SGMC's Lincoln Mine will be profitable with gold prices over $290 per ounce. The price of gold has remained relatively stable over the past year between $370 and $390 per ounce.
Molybdenum and Oil.
Changes in prices of molybdenum and petroleum are not expected to materially affect the Registrant with respect to either its molybdenum advance royalties or its fees associated with oil production. A significant and sustained increase in the price of molybdenum would be required for the development of the Mt. Emmons properties by Cyprus Amax.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements meeting the requirements of Regulation S- X for the Registrant and its affiliate USECC, follow immediately. Financial statements of GMMV are included as schedules and immediately follow the index at Item 14(a)(2).
Report of Independent Public Accountants
To the Board of Directors and Shareholders of Crested Corp.:
We have audited the accompanying consolidated balance sheets of Crested Corp. (the "Company"), a Colorado corporation, and affiliate as of May 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended May 31, 1996 as restated (see Notes B and E). 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.
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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado, August 16, 1996.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994
A. BUSINESS ORGANIZATION AND OPERATIONS:
Crested Corp. (the "Company" or "Crested") was incorporated in the State of Colorado on September 18, 1970. It engages in the acquisition, exploration, sale and/or development of mineral properties, mining and marketing of minerals. Principal mineral interests are in uranium, gold and molybdenum. However, none are producing at the present time. Currently, the Company holds various real properties used in commercial operations and engages in the exploration, development and production of petroleum and methane gas. Most of these activities are conducted through the joint venture discussed below and in Note B.
The Company and U.S. Energy Corp. ("USE"), a 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"). During fiscal 1991, the Company and USE formed USECC Gold Limited Liability Company ("USECC Gold"), and with Seine River Resources Inc. ("SRRI") operated the 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, the SGV was terminated when USE and Crested formed a new Wyoming corporation, Sutter Gold Mining Company, and exchanged their interests in USECC Gold for common stock of Sutter Gold Mining Company (hereafter, "SGMC") (see Note F).
The Company has a significant working capital deficit which has been impacted by the litigation/arbitration with Nukem and CRIC, which is discussed in Note K. Expenditures made on behalf of SMP, a portion of which are unreimbursed by Nukem/CRIC, have increased the Company's advances to SMP to $2,612,000 at May 31, 1996 (see Note E). Recovery of the Company's advances and improvement in its liquidity position are dependent on the ultimate outcome of this litigation/arbitration. This matter has also impacted the Company's ability to pay its obligations to its affiliates, primarily USE. As of May 31, 1996, the Company owes USE $6,460,300, which is payable on demand, and has only $596,200 of current assets. However, USE management has given assurance that they will not demand payment of these advances in fiscal year 1997.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements of Crested and affiliate (USECC Joint Venture ("USECC")) include the accounts of the Company and one-half of the account balances of USECC, a joint venture through which the Company and its controlling shareholder USE, conduct the bulk of their operations. USECC has interests in uranium mining ventures (see Notes E and F), and owns real estate and other equipment (see Note D). USECC is owned equally by the Company and USE.
Investments
Investments in other joint ventures and 20% to 50% owned companies are accounted for by the equity method. Investments in companies of less than 20% are accounted for by the cost method. All material intercompany profits, transactions and balances have been eliminated.
The Company has historically accounted for its 8% investment in USE using the cost method. However, during 1995 the Company adopted SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" and recorded its cost investments at market value. The Company has now restated its previously issued 1995 and 1994 financial statements included herein to reflect the Company's investment in USE using the equity method (see Note E). During fiscal 1996, the Company determined it should use the equity method because the Company is controlled by USE (52% shareholder). The Company's accumulated deficit as of May 31, 1993 was reduced by $596,800 to $1,236,500 as a result of this restatement. In addition, the restatement eliminated the May 31, 1995 unrealized holding gain on investments of $1,434,500 and reduced investments in affiliates as of May 31, 1995 by $1,266,100 to reflect USE on an equity basis. The Company recorded equity in the losses of USE of $153,800 and $274,700, respectively, for fiscal 1995 and 1994 which increased the Company's net loss by a like amount. The net loss per share for fiscal 1995 and 1994 increased by $.01 and $.03 per share to $.14 and $.19, respectively.
Inventory
Inventory consists of aviation fuel and associated aircraft supplies. The inventory is carried at the lower of cost or market.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying amount of cash equivalents approximates fair value because of the short maturity of those instruments.
Properties and Equipment
Land, buildings, improvements and other equipment are carried at the Company's share of cost.
Depreciation of buildings and improvements and other equipment is provided by the straight-line and declining-balance methods over the estimated useful lives of three to forty-five years.
The Company capitalizes all costs associated with the acquisition, exploration and development of mineral properties as incurred. Capitalized costs are charged to operations at the time the Company determines that no economic ore bodies exist on such properties. An impairment allowance is charged to operations when, in the opinion of management, the carrying value of the property exceeds its expected future economic benefit. Costs and expenses related to general corporate overhead are expensed as incurred.
The Company and USE have acquired substantial mining property assets and associated facilities at minimal cash cost, primarily through the assumption of reclamation and environmental liabilities. These assets are owned by various ventures accounted for by the equity method. The market value of these assets and most of the reclamation and environmental liabilities associated with them are not reflected in the accompanying balance sheets (see Note K).
Proceeds from the sale of undeveloped mineral properties are treated as a recovery of cost with any excess of proceeds over cost recognized as gain.
The Company follows the full-cost method of accounting for oil and gas properties whereby all costs incurred in the acquisition, exploration and development of the properties, including unproductive wells, are capitalized, limited to the present value of the estimated proved reserves, and the lower of cost or estimated fair value of unproved properties.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
Depreciation, depletion and amortization of oil and gas properties are provided by the units of production method based on the estimated recoverable reserves.
Financial Accounting Standards No. 121 ("SFAS No. 121") "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of", was issued in March 1995. The provisions of SFAS No. 121 require the Company to evaluate the carrying value of its long-term assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 121 will be adopted by the Company in fiscal 1997. The Company has not yet determined the impact the adoption of SFAS No. 121 will have on the financial position of the Company or its results of operations.
Revenue Recognition
Advance royalties which are payable only from future production or which are non-refundable are recognized as revenue when received. Revenue from commercial operations are recognized as goods and services are delivered. Oil sale revenue is recognized as the oil is produced (see Notes D and F).
Net Loss Per Share
Net loss per share is computed using the weighted average of common shares outstanding during each period. Stock options outstanding have been excluded because they are antidilutive.
Income Taxes
Effective June 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes". This statement requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets, liabilities and carry forwards. There was no cumulative effect on the financial statements for this change because the Company did not recognize any benefit of its net operating loss carryforwards.
SFAS No. 109 requires recognition of deferred tax assets for the expected future effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for any tax benefits which, based on current circumstances, are not expected to be realized.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
Reclassifications
Certain reclassifications have been made in the 1995 and 1994 financial statements to conform to the classifications used in 1996.
Management's Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
C. RELATED-PARTY TRANSACTIONS:
The Company does not have employees, but utilizes USE's employees and pays for one-half of the costs of these employees under the USECC Agreement. The Board of Directors of USE adopted the U.S. Energy Corp. 1989 Employee Stock Ownership Plan ("ESOP") in 1989, for the benefit of USE's employees. In fiscal 1996, 1995 and 1994, the Board of Directors of USE contributed 10,089, 37,204 and 46,332 shares of USE stock to the ESOP at prices of $8.65, $5.38 and $4.00 per share, respectively. The Company is responsible for one-half of these contributions or $43,700, $100,000 and $92,700 in fiscal 1996, 1995 and 1994, respectively.
As of May 31, 1996, the Company had notes receivable due from certain USE officers and employees of $281,800, which bear interest at 10% per annum and come due in fiscal 1998. A portion of these notes receivable are collateralized by 50,000 shares of USE stock which are owned by a director of the Company. In addition, the Company has receivables from employees of $39,200.
As of May 31, 1994, the Company had a long-term receivable from an affiliate of $434,000. This receivable relates to the Company's share of expenditures made by USECC on behalf of the affiliate for capital expenditures and operating costs. In 1995, this receivable was transferred to USE to offset part of the Company's payable to USE (see Note G).
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
The Company and USE provide management and administrative services for affiliates under the terms of various management agreements. Revenues from these services for the Company were $116,500, $99,200 and $180,000 in fiscal 1996, 1995 and 1994, respectively.
In November 1992, the Company entered into a sale agreement, and sold certain machinery and equipment to an affiliate. This machinery and equipment was being rented from the affiliate on a month-to-month basis for $6,800 per month and was charged to commercial operations in the accompanying consolidated statement of operations. The Company had deferred the gain of $127,800 on this sale. In fiscal 1996, the affiliate was sold and USE and Crested repurchased the same equipment from the buyer. The deferred gain offset Crested's portion of the purchase price of the assets.
See Note J with respect to stock grants to employees of USE who provide services to the Company.
D. USECC JOINT VENTURE:
USECC operates the Glen L. Larsen office complex; an aircraft hangar with a fixed base operation and office space; certain aircraft; holds interests in various minerals operations including SMP and the GMMV; conducts oil and gas operations; and transacts all operating and payroll expenses, except for specific expenses which are allocated directly to each venturer. In addition, through April 1996 USECC operated Wind River Estates ("Wind River"), a 100 unit mobile home park. During 1996, USECC sold Wind River (which had a net book value of approximately $512,700) to Arrowstar Investment, Inc. ("Arrowstar"), an entity which is owned by the Company's chairman and his family. USECC recognized a gain of $252,600 on this sale of Wind River of which 50% or $126,300 is Crested's portion and is reflected as a gain on sale of assets in the accompanying statements of operations. The Company received consideration of $765,300 for Wind River. The $765,300 was comprised of the following:
Cash $ 500,000 Note receivable 56,000 Debt forgiven 47,900 50% interest in First-N-Last LLC 161,400 ---------- $ 765,300 ---------- ----------
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
The debt forgiven was an amount due to Arrowstar from USECC. First-N-Last LLC owns and operates a convenience store near Lake Powell in Utah. Subsequently, USECC then transferred its acquired 50% ownership in First-N-Last LLC to Plateau Resources Limited, a 100% owned subsidiary of USE.
The joint venture agreement also provides for the allocation of certain operating expenses to other affiliates. Condensed financial information of USECC, of which 50% is proportionately consolidated by the Company, follows.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
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. Before the mineral properties were contributed to the GMMV, a portion of the Green Mountain Properties was owned by USE and the remainder was owned by USECC.
The Boards of Directors of the Company and USE adopted a method of apportioning the initial consideration of $15,000,000, on a ratio of 16% to the Company and 84% to USE. This division was based on analyses of the projected cash flows from the properties contributed by USE and USECC and other criteria.
Kennecott committed to fund 100% of the first $50 million of development costs and operating expenses of the GMMV joint venture. Kennecott will also pay additional amounts if certain future operating margins are achieved. USE and USECC participate in cash flows of the GMMV in accordance with their ownership of the mining claims prior to the formation of GMMV. Because USE owned all of the claims on that portion of the Green Mountain Properties where the Round Park (Jackpot) uranium deposit was delineated, the Company has no interest in GMMV's cash flow from the ore produced in mining operations on the Round Park properties, which have been scheduled for initial development.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
GMMV has incurred approximately $16,435,800 in the development and operations of the above uranium mineral properties through May 31, 1996. This was funded by Kennecott out of the $50 million funding commitment. As previously mentioned, the Company's carrying value of its investment in GMMV is $116,300 at May 31, 1996, which is substantially lower than its equity basis in GMMV. Reclamation obligations of GMMV are discussed in Note K. Development of the properties and pursuit of mining permits continues in anticipation of future uranium price increases.
SMP
During fiscal 1989, USE and the Company, through USECC, entered into an agreement to sell a 50% interest in their Sheep Mountain properties, to Nukem's wholly-owned subsidiary Cycle Resource Investment Corporation ("CRIC"). USECC and CRIC each contributed their 50% interests in the properties to a newly formed Colorado partnership, Sheep Mountain Partners. SMP was established to further develop and mine the uranium claims on Sheep Mountain, to market uranium and acquire additional uranium sales contracts. Certain disputes have arisen among USECC, CRIC and its parent Nukem, Inc. over the formation and operation of SMP. These disputes have been in litigation/arbitration for the past five years. Certain preliminary decisions were reached in the arbitration during fiscal 1996 which have gone to the court for approval. See Notes E and K for a description of the investment and a discussion of the related litigation/arbitration.
AMAX Transactions
During prior years, the Company and USE conveyed interests in mining claims to AMAX Inc. ("AMAX") in exchange for cash, advance and production royalties, and other consideration including interest-free loans, due in 2010. In connection with a renegotiation of various rights and duties of the parties, AMAX agreed to amortize the principal amount of those loans by $250,000 each quarter, subject to certain conditions and until AMAX put the properties into production, which has not occurred. The last quarterly amortization of $250,000 for a non-interest bearing loan from AMAX, in lieu of advance royalties, was recognized in the first quarter of fiscal 1994.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
AMAX may elect to return the properties to the Company and USE, which would cancel the advance royalty obligation. If AMAX formally decides to place the properties into production, it will pay $2,000,000 to the Company and USE. If AMAX sells the properties, the Company and USE will receive 15% of the first $25 million received by AMAX.
In addition, AMAX pays the Company and USE jointly an annual advance royalty of 50,000 pounds of molybdenum (or its cash equivalent). AMAX is entitled to a 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 $-0-, $42,700 and $63,400 of revenues from the advance royalty payments in fiscal 1996, 1995 and 1994, respectively.
Effective November 1993, AMAX Inc. was acquired by Cyprus Minerals Corporation, hereafter Cyprus Amax. USE and Crested held an option to purchase certain real estate located in Gunnison owned by Cyprus Amax. During fiscal 1995 USE and Crested reached an agreement with Cyprus Amax whereby USE and Crested would forego six quarters of advance royalties as payment of this option exercise price. USE and Crested received no advance royalties during 1996 as a result of this agreement. Thereafter, USE (together with Crested) signed two option agreements with Pangolin Corporation, a Park City, Utah developer, for sale of the 57 acres, and a separate parcel owned in Gunnison County, Colorado.
The first option (exercised by Pangolin in February 1995) was for the 57 commercial and noncommercial zoned acres in the City of Gunnison, Colorado; the purchase price was $970,300. This resulted in a gain for the Company of $491,100. Pangolin paid $345,000 cash and $625,300 in a three year nonrecourse promissory note, of which $35,600 and $137,900 was paid during fiscal 1996 and 1995, respectively. As of May 31, 1996, this note had an outstanding principal balance of $451,800, of which Crested's 50% portion, or $225,900, is reflected in the accompanying balance sheet. 19.25 acres have been deeded to Pangolin; the remaining acreage secures the note, and will be released to the buyer against principal payments on the note as development (mixed commercial and residential) advances. The note bears interest at 7.5% per annum and matures in January 1998.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
The second option covers 472.5 acres of ranch land northwest of the City of Gunnison, Colorado (purchase price $822,460). Pangolin paid $10,000 for the option; on option exercise and closing, Pangolin paid $46,090 in cash and $776,370 by two nonrecourse promissory notes (each with principal and unpaid interest due on the third anniversary of closing except for $35,000 due on the first anniversary). These notes bear interest at rates of 7.5% and 12% and mature in May and June 1998. The Company did not receive the $35,000 payment as scheduled but is negotiating the receipt of it and expects to collect it in the near future. At closing, 22.19 acres were deeded to Pangolin; different parcels of the remaining acreage secure the notes, and will be released for principal payments in the course of development. The sale was accounted for as an installment sale and thus the gain on sale was deferred to be recorded as payments on the notes are received by the Company. The carrying amount of the notes receivable discussed above approximates market due to the conditions and terms of these receivables.
Sutter Gold Mining Company
Sutter Gold Mining Company ("SGMC") was formerly a joint venture between USE and SRRI formed to acquire, hold and develop mineral leases and mining claims in Amador County, California (the "Lincoln Project"). On December 14, 1990, Crested purchased one- ninth of USE's beneficial interest in the SGV Properties hereinafter fully described, for $500,000 and the commitment to fund one-ninth of the future costs and liabilities. USE and Crested formed USECC Gold Limited Liability Company ("USECC Gold") which became the joint venturer with SRRI on the Lincoln Project. USECC Gold was owned 88.89% by USE and 11.11% by Crested. SGMC was established to conduct operations on mining leases and to produce gold from the Lincoln Project.
USE (i) funded $4,500,000 of the $5,000,000 purchase price of SGMC's properties; (ii) agreed to initially fund SRRI's share of holding and development costs totaling $500,000; and (iii) agreed to provide its share of the holding costs and assessments of SGMC. SRRI, the second venture partner, through a subsidiary, funded $500,000 of the property purchase price, and agreed to pay $2,000,000 to USE to equalize the investments so that USE and SRRI would each initially hold 50% interests in SGMC. USE was to recover the $500,000 of predecessor holding costs and SGMC's initial development costs paid by them, out of SGMC's initial cash flows.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
SRRI issued a $2,000,000 note to USE, bearing interest at 10% per annum. The note provided that $500,000 of principal and accrued interest was due April 12, 1991, and the balance of $1,500,000 with interest was due October 12, 1991. In February 1991, USE and Crested formed USECC Gold and transferred their respective interests in the Lincoln Project to USECC Gold. When the installments on the $2,000,000 note to USE were not paid when due, the interests of USECC Gold and SRRI in SGMC were adjusted to equal the percentage of the $5,000,000 purchase price of SGMC's properties that each of them provided. On July 16, 1991, the 50% interest of SRRI in SGMC was reduced to 40%, with a corresponding increase in the USECC Gold interest to 60%. On October 12, 1991, SRRI's interest was further reduced to 10% and USECC Gold's interest increased to 90%. On May 23, 1994, SRRI released its remaining 10% interest and issued 400,000 shares of SRRI common stock to USE in exchange for the release of all SRRI's liabilities relating to SGMC and USECC Gold. Accordingly, SRRI's capital investment of $257,900 and all liabilities of SGMC to USE and its affiliates on behalf of SRRI totaling $1,550,600 were transferred to USECC Gold's capital investment. In addition, SGMC released SRRI of its obligation to SGMC totaling $1,970,500, which includes accrued but unrecorded interest of approximately $579,800.
On August 5, 1994, USE, Crested and SGMC entered into an agreement whereby USE and Crested each conveyed their eight-ninths and one-ninth interest, respectively, in USECC Gold in exchange for common shares of SGMC. USE and Crested ultimately received 6,964,531 and 870,469 shares of SGMC's common stock, respectively, for their eight-ninth and one-ninth interest, respectively in USECC Gold.
SGMC is in the development stage and additional development is required prior to the commencement of commercial production. SGMC has yet to generate any significant revenue and has no assurance of future revenue. During fiscal 1992, SGMC shipped a bulk sample of gold ore mined during development operations to an independent mill to determine mill availability and assay information. Approximately 1,400 ounces of gold recovered and sold. The related mining costs were recognized. All acquisition and other mine development costs since inception have been capitalized. Since test production in 1992, 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. In the interim SGMC will continue 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 such time as it generates significant revenue from its principal operations.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
Since inception, the Company and USE have funded approximately $7,858,900 in development and holding costs. These costs were funded by the Company and USE on a one-ninth/eight-ninths basis, respectively. As of May 31, 1996, the Company's total investment in SGMC had a carrying value of $1,190,600.
SGMC remains in the development stage at May 31, 1996 and is primarily engaged in mine development, exploration and feasibility work, permitting and acquisition of mill equipment.
During May 1996, SGMC issued 896,364 shares of its common stock at $0.11 per share to certain individuals, including a related party for total proceeds of $98,000. Such shares were authorized to be sold by SGMC in October 1995 to raise funds to pay for the legal and other costs of possible equity financing in the future.
Subsequent to the above issuance of shares, USE and Crested own 74% and 9%, respectively, of the SGMC. Subsequent to May 31, 1996 and as of August 16, 1996, SGMC has received approximately $291,600 in equity financing which is to be used by SGMC for property holding costs and to further develop the properties.
On May 14, 1996, SGMC entered into a Letter of Intent with RAF Financial Corporation ("RAF") whereby RAF is to assist SGMC in obtaining additional equity financing through an initial public offering ("IPO"). Under the terms of the IPO Letter of Intent, SGMC and RAF are proposing a public offering of 3 million shares of SGMC common stock at an expected price of between $4.00 and $6.00 per common share and up to 3 million Class A warrants at a price of $0.25 per warrant. The Class A warrants are expected to have an exercise price of approximately $7.00 per share and will be exercisable for 3 years following the IPO. Each purchaser would generally be required to purchase one Class A warrant for every two common shares purchased.
There can be no assurance that the IPO will be successfully completed.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
Plateau Resources Limited
Effective August 11, 1993, USE entered into an agreement 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 in southeastern Utah. At the present time, Plateau has applied to renew and convert its source materials license with the United States Nuclear Regulatory Commission ("NRC") from standby to operational. USE paid nominal cash consideration for the Plateau stock and agreed to assume all environmental liabilities and reclamation bonding obligations. Prior to closing the agreement, Plateau transferred $2,500,000 cash to fund the NRC Surety Trust Agreement to pay future costs of mill decommissioning, site reclamation and long-term site surveillance. Plateau also transferred $4,800,000 cash to an Agency Agreement to indemnify the seller against possible environmental or nuclear claims. At the date of acquisition, Plateau held an additional $6.9 million of unencumbered cash to be used for care and maintenance costs on the mill and other assets acquired. As of May 31, 1996, most of the unencumbered cash has been used for care and maintenance costs or was loaned to USE for development of certain properties held by USE and the Company. Although the Company has no ownership in Plateau, Directors of the Company and USE have agreed to divide equally one-half of the obligations incurred in excess of the total $14.2 million described above and will share in one-half of all cash flows derived from operations of these assets.
On August 25, 1994, Plateau Resources Limited, a wholly owned subsidiary of USE signed a letter of intent with a third party to sell part interest in Canyon Homesteads, Inc. ("CHI"), a wholly- owned subsidiary of Plateau, and to develop the Ticaboo Townsite, in south central Utah and other resort properties near Lake Powell. The purchaser later defaulted and the $100,000 earnest money deposit was recognized as income in fiscal 1995 by Plateau.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
CHI entered into a joint venture, First-N-Last LLC, with Arrowstar Investments, Inc. ("Arrowstar") to develop on a 50/50 basis, certain properties at the Ticaboo Townsite. Arrowstar is owned by certain shareholders of the Company. As of May 31, 1995, the Company had recorded $112,400 related to Arrowstar's initial funding commitment to the joint venture which is included in accounts receivable on the accompanying balance sheet as of May 31, 1995. During 1996, Arrowstar gave its 50% interest in First-N-Last LLC to USECC as part of the consideration for Wind River (see Note D). USECC then transferred its 50% ownership in First-N-Last LLC to Plateau. As of May 31, 1996, Plateau/CHI owns 100% of First-N- Last, LLC.
Energx, Ltd.
During fiscal 1994, USE and Crested formed Energx to engage in the exploration, development and operation of natural gas properties. Energx currently has leased properties in Wyoming and on the Fort Peck Indian Reservation, Montana. Energx is owned by USE (45%), Crested (45%) and the Assiniboine and Sioux Tribes (10%).
During fiscal 1995, Energx sold a 50% interest in the leases on the Fort Peck Indian Reservation for the sum of $200,000 plus $100,000 to be used only for the acquisition and consolidation of additional leases, and for committing to drill 8 exploratory wells. Three exploratory wells have been drilled to date and others are planned for the fall of calendar 1996.
During 1996, Energx abandoned certain of its leases and as a result wroteoff $328,700 of costs capitalized associated with these leases.
G. DEBT:
The Company and USE have a line of credit with a commercial bank. The line of credit bears interest at a variable rate (10.5% as of May 31, 1996). The weighted average interest rate for 1996 was 10.25%. The line of credit had an outstanding balance for the Company and USE jointly of $176,000 and $960,000 as of May 31, 1996 and 1995, respectively, of which Crested's 50% portion is $88,000 and $480,000. This line of credit is due October 9, 1996 and is secured by a share of the net proceeds of fees from production of oil wells and certain assets of USECC.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
Debt of the Company consists primarily of a non-interest bearing note to USE which was the result of a conversion of the accounts payable to USE as of May 31, 1994, to a long-term note. The debt is primarily due to U.S. Energy for funding all of the operations of USECC of which 50% is the responsibility of the Company. All debt is classified as current as of May 31, 1996 and 1995.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
H. INCOME TAXES:
The Company adopted SFAS No. 109 in fiscal 1994. There was no cumulative effect of this change in accounting principle.
The components of deferred taxes as of May 31, 1996 and 1995 are as follows:
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
At May 31, 1996, the Company had available, for federal income tax purposes, net operating loss carryforwards of approximately $11,050,000, which expire in 2006 through 2011 and investment tax credit carryforwards of approximately $83,000 which, if not used, will begin to expire in 1998. The Company has established a valuation allowance for the full amount of the net deferred tax assets due to the recurring losses of the Company and the uncertainty of the Company's ability to generate future taxable income to utilize the NOL carryforwards.
For fiscal years 1996, 1995 and 1994, the Company incurred losses for both book and tax purposes. The income tax provision is different from the amounts computed by applying the federal income tax rate to income before taxes. The reasons for these differences are as follows:
There were no taxes payable as of May 31, 1996, 1995 or 1994.
The Internal Revenue Service ("IRS") has audited the Company's tax returns through fiscal 1986, and its income tax liabilities are settled through that year. The IRS has audited the Company's and USECC's fiscal years 1989, 1990 and 1991 tax returns. The Company has received a deficiency letter for the years 1989 through 1991. The Company has submitted a written appeal to protest the findings of the examining agent. Hearings have been held with the appeals officer assigned to the case and all major issues have been verbally resolved in favor of the Company. Management believes the Company will prevail on the significant issues in dispute, and therefore, believes that no significant liabilities will result from the findings. The years ended May 31, 1993 and 1994 currently are being audited by the IRS. The audit is not completed as of the date of this Report.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
I. SEGMENTS AND MAJOR CUSTOMERS:
The Company's primary business activities include the sales of minerals and the acquisition exploration, holding, development and sale of mineral bearing properties. No properties are currently producing. The second reportable industry segment is commercial operations, primarily real estate activities and operations of an airport fixed base operation. The following is information related to industry segments.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
In fiscal 1994, approximately 14% of mineral revenues was from amortization of the AMAX note and molybdenum advance royalties. During fiscal 1996 and 1994, 89% and 86% of mineral revenue were from sales of minerals. There were no mineral sales in fiscal 1995.
Commercial revenues in the statements of operations consist of mining equipment, office and other real property rentals, charter flights and fuel sales.
J. SHAREHOLDERS' EQUITY:
The Boards of Directors of both the Company and USE, from time to time, issued stock bonuses to certain directors, employees and third parties. Such shares are forfeitable to the Company and USE until earned. During 1996 the Company restated its financial statements to reflect the forfeitable shares outside of the stockholders' equity section of the balance sheet. The restatement resulted in reducing common stock and additional paid in capital by $34,800 as of May 31, 1995. There was no effect on the statement of operations related to this restatement. The Company is responsible for one-half of the compensation expense related to these issuances (see Note C). For the years ending May 31, 1996, 1995 and 1994, the Company had compensation expense of $59,800, $35,300 and $52,300, respectively, resulting from these issuances. A schedule of forfeitable shares for both Crested and USE is set forth in the following table.
Issue Number Issue Total Date of Shares Issuer Price Compensation ---------------- --------- ------ ------- ------------ May 1990 40,300 USE $ 9.75 $392,925 June 1990 66,300 USE 11.00 729,300 November 1990 (stock dividend) 10,660 USE N.A. N.A. June 1990 25,000 Crested 1.06 26,562 December 1990 7,500 Crested .50 3,750 January 1993 18,520 USE 3.00 55,560 January 1993 6,500 Crested .22 1,430 January 1994 18,520 USE 4.00 74,080 January 1994 6,500 Crested .28 1,828 January 1995 18,520 USE 3.75 69,450 January 1995 6,500 Crested .19 1,219 January 1996 7,700 USE 15.125 116,462 January 1996 5,000 Crested .3125 1,562
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
No shares were earned out in fiscal 1996 or 1995; however, 5,000 shares of USE stock were earned out and released to a third party in fiscal 1994. During fiscal 1993, the Company's Board of Directors amended the stock bonus plan. As a result, the earn out dates of certain individuals were extended until retirement, which is the earn out date of the amended stock bonus plan. The amended plan grants a stock-bonus of 20% of the previous plan per year for five years.
In April 1993, the Board of Directors of the Company authorized the Company to issue 160,000 shares of its common stock at $.27 per share to an affiliate for cash in an effort to increase the Company's operating capital. The Company also granted this affiliate options for 300,000 common shares at $.40 per share. These options are exercisable over a five year period. During 1996 this affiliate was sold to an unrelated third party, but the shares and options were transferred to other affiliated entities, SGMC and Plateau Resources Limited.
In May 1996 the Board of Directors of U.S. Energy approved an annual incentive compensation arrangement for its CEO and four other officers of U.S. Energy payable in shares of U.S. Energy common stock. The arrangement is subject to approval of the formal 1996 Stock Award Program by the Company's shareholders in late calendar 1996. The shares will be issued annually on or before January 15 of each year, starting January 15, 1997, as long as each officer is employed by USE, provided the Company has been profitable in the preceding fiscal year. The officers will receive up to an aggregate total of 67,000 shares per year for the years 1997 through 2002. One-half of the compensation under the 1996 Stock Award Program is the responsibility of Crested. The number of shares awarded each year out of such 67,000 shares aggregate annual limit will be based on earning per share of Common Stock to be determined in the formal plan to be adopted, and in addition will be subject to approval by the shareholders of the Company for each award each year.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
K. COMMITMENTS, CONTINGENCIES AND OTHER:
Legal Proceedings
Sheep Mountain Partners (SMP)
Arbitration Proceedings Concerning SMP. In June 1991, Nukem's wholly-owned subsidiary Cycle Resource Investment Corporation ("CRIC") instituted arbitration proceedings against the Company and USE. CRIC claimed that the Company and USE violated the Sheep Mountain Partners ("SMP") partnership agreement by assigning to the Green Mountain Mining Venture (GMMV) the amounts equal to any SMP cash distributions to USECC derived from sales of uranium under SMP supply contracts. CRIC also asserted that by entering into the GMMV agreement, the Company and USE misappropriated a business opportunity of SMP. CRIC seeks damages and certain equitable remedies from the Company and USE and seeks to expel the Company and USE from the SMP Partnership.
Federal Court Action Concerning SMP. On July 3, 1991, the Company and USE d/b/a USECC filed a civil action in the U. S. District Court of Colorado against Nukem, CRIC and their affiliates, alleging that Nukem, CRIC and their affiliates fraudulently misrepresented facts and concealed information from the Company and USE to induce their entry into the agreements forming SMP and seek rescission, damages and other relief. The Company and USE further alleged that Nukem and CRIC have refused to provide information about transactions by CRIC and its affiliates with SMP, and that the defendants had engaged in various wrongful acts relating to financing and acquisition of uranium for SMP. Nukem and CRIC filed an answer and a variety of counterclaims against the Company and USE. Certain of Nukem's affiliates (excluding CRIC) were thereafter dismissed from the lawsuit. The U. S. District Court granted the motion of the Company and USE to stay the above arbitration initiated by CRIC and also ordered the Company and USE to amend their complaint. On April 6, 1992, the Company and USE filed an amended complaint against Nukem and CRIC setting out the alleged fraud with particularity, and Nukem and CRIC filed answers and counterclaims to the amended complaint.
State Court Action Concerning SMP. On September 16, 1991, USECC filed a civil action in the Denver District Court against SMP seeking reimbursement of $85,000 per month since the spring of 1991 for the care and maintenance of the SMP underground uranium mines and properties in south-central Wyoming. On May 11, 1993, the Denver District Court stayed all proceedings until the U.S. District Court for Colorado case is resolved.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
Summary. The discovery stage in the case filed by the Company and USE on July 3, 1991 in the U. S. District Court of Colorado against Nukem, CRIC et al has been protracted and vigorously contested by all parties. On November 6, 1993, the remaining parties in that suit, Nukem and CRIC, agreed with the Company and USE that the majority of the litigation post the formation of SMP on December 21, 1988, would be handled through consensual arbitration with the American Arbitration Association ("AAA"). The agreement to arbitrate was finally reduced to writing and executed on February 7, 1994. The arbitration hearing commenced on June 27, 1994 before a three member AAA arbitration panel. After 73 hearing days and some 15,000 pages of testimony, the parties rested their cases on May 31, 1995. Per order of the Panel, the parties filed their proposed Findings of Fact and Conclusions of Law, Award and a brief of the law on August 7, 1995. Each side submitted responsive proposed findings of fact and conclusions of law, responsive proposed award and reply briefs by September 21, 1995.
The Panel entered its Order and Award on April 18, 1996 but did not dissolve the Partnership. Nukem appealed the Award by filing two motions indicating there was a material miscalculation and a double recovery. The U.S. District Court remanded the matter to the Arbitration Panel to consider Nukem's motions. On July 3, 1996, the Panel found there was not double recovery and confirmed the Order and Award, which awarded Crested and USE $12.5 million and Nukem/CRIC $7.1 million through July 31, 1996. At filing date of this report the Federal Court has before it petitions to confirm the Panel's Order and Award filed by the Company and USE and motions to vacate portions of the Award filed by Nukem/CRIC. The court has set a hearing on the petitions and motions for September 25, 1996 in Denver, CO. As of May 31, 1996, no accounting treatment has been given to the settlement because of the continued uncertainty of the ultimate resolution.
Illinois Power. Illinois Power Company ("IPC"), one of the utilities with whom SMP has a long-term uranium supply contract, unilaterally sought to terminate the contract on October 28, 1993 and filed suit contemporaneously in the Federal District Court, Danville, Illinois, against the Company, USE, CRIC, SMP, Nukem Luxembourg GmbH ("NULUX") and the Dresdner Bank, seeking a declaratory judgment that the contract with USECC, which was assigned to SMP and thereafter to NULUX, had been breached by USECC filing a Motion for Appointment of Receiver in the SMP litigation.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
The Dresdner Bank was dismissed from the case, and the remaining defendants filed answers denying IPC's allegations and filed counterclaims for damages due under the IPC contract. These defendants also filed Motions for Summary Judgment and a hearing was held on the motions on May 27, 1994. On September 1, 1994, the U. S. District Court for the Central District of Illinois granted the defendants' motions for summary judgment against IPC dismissing IPC's complaint, and further granted those defendant's counterclaims against IPC for breach of contract by IPC. After various negotiating sessions the parties reached agreement in June 1995 to settle the case by entering into an amendment to the original agreement to increase the price per pound of U3O8 delivered to IPC and provide for 3 deliveries totalling 486,443 lbs. U3O8 in 1995, 1996 and 1997. The first delivery of 226,443 lbs. U3O8 was made on June 30, 1995 by Nukem on behalf of SMP. A delivery of 130,000 lbs. U3O8 was made during fiscal 1996 and another delivery of 130,000 lbs. U3O8 is scheduled for 1997. This amendment to the IPC contract and the sharing of the revenue from such deliveries is subject to the Federal Court confirming the decision of the Arbitration Panel.
Parador Mining Company, Inc. ("Parador")
On July 30, 1991, Bond Gold Bullfrog, Inc. ("BGBI") filed Civil Action No. 11877 in the District Court of the Fifth Judicial District, Nye County, Nevada naming USE, Crested, Parador and H.B. Layne Contractor, Inc. (Layne) as defendants. The complaint primarily concerns extralateral rights associated with two patented lode mining claims (the "Claims") owned by Parador which were initially leased to a predecessor of BGBI and subsequently, the residuals of that lease were assigned and leased by Parador to USE and Crested. Parador, USE and Crested answered the complaint, filed a counterclaim against the Plaintiff and a cross claim against Layne. A bifurcated trial was held on December 11-12, 1995 before the District Court for the Fifth Judicial District for the State of Nevada, County of Nye, at which time the parties presented evidence relative to the issue of extralateral rights. Other claims between the parties were bifurcated by the Court and were not at issue at the trial. Parador, USE and Crested submitted expert testimony by five renowned geologists opining that a gold lode apexed on Parador's Sunset No. 1 patented lode mining claim, from which apex the lode extended in a continuous downward direction outside the surface boundaries of that claim and under the surface boundaries of a claim owned by an adjacent property owner. No contrary testimony was submitted by the other parties.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
The Trial Court took the matter under advisement at the conclusion of the evidentiary proceedings, and on December 26, 1995, issued a written ruling denying apex rights and extralateral royalties to Parador, USE and Crested. It is the belief of Parador, USE and Crested that the trial court's ruling is erroneous as a matter of law and, consequentially, on February 2, 1996, an appeal was lodged with the appellate court asking that Court to reverse the trial court's ruling. No ruling has been issued by that Court. Management intends to vigorously pursue the appeal and seek to recover the extralateral rights and royalties allegedly due Parador, U.S. Energy and Crested. If, however, the final decision of the appellate court is adverse to USE and Crested, an award of damages against USE and Crested in a substantial amount could have a significant negative impact on USE and Crested. Management further intends to pursue the remaining claims, which involve breaches of the lease between Parador and the operator, and to defend related claims brought by the operator against Parador, USE and Crested before the trial court. The Company is expensing all costs associated with the Parador litigation.
Reclamation and Environmental Liabilities
Most of the Company's mine development, exploration and operating activities are subject to federal and state regulations that require the Company to protect the environment. The Company attempts to conduct its mining operations so as to comply with these regulations, but they are continually changing and generally becoming more restrictive. Consequently, the Company's current estimates of its reclamation obligations and its current level of expenditures to perform ongoing reclamation may change in the future. At the present time, however, the Company cannot predict the outcome of future regulation or its impact on costs. Nonetheless, the Company has recorded its best estimate of future reclamation and closure costs based on currently available facts and technology and enacted laws and regulations. Certain regulatory agencies, such as the Nuclear Regulatory Commission, the Bureau of Land Management and the Wyoming Department of Environmental Quality review the Company's reclamation, environmental and decommissioning liabilities, and the Company believes its recorded amounts are consistent with those reviews and related bonding requirements. To the extent that planned production on its properties is delayed, interrupted or discontinued because of regulation or the economics of the properties, the future earnings of the Company would be adversely
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
affected. The Company believes it has accrued all necessary reclamation costs and there are no additional contingent losses or unasserted claims to be disclosed or recorded in the reclamation liability. The Company has not disposed of any properties for which it has a commitment or is liable for any known environmental liabilities.
The majority of the Company's environmental obligations relate to former mining properties acquired by the Company. Since the Company currently does not have properties in production, the Company's policy of providing for future reclamation and mine closure costs on a unit-of-production basis has not resulted in any significant annual expenditures. For the obligations recorded on acquired properties, including site-restoration, closure and monitoring costs, actual expenditures for reclamation will occur over a number of years, and since these properties are all considered future production properties, those expenditures, particularly the closure costs, may not be incurred for many years. The Company also does not believe that any significant capital expenditures to monitor or reduce hazardous substances or other environmental impacts are currently required. As a result, the near term reclamation obligations are not expected to have a significant impact on the Company's liquidity.
As of May 31, 1996 and 1995, the Company has recorded estimated reclamation obligations, including standby costs, of $725,900, as reflected in reclamation and other long-term, liabilities in the accompanying financial statements. In addition, the GMMV, in which the Company is a 25% equity investor, has recorded a $23,620,000 liability for future reclamation and closure costs. See GMMV discussion below for likelihood of liabilities being incurred by the Company. None of these liabilities have been discounted, and the Company has not recorded any potential offsetting recoveries from other responsible parties or from any insurance companies.
The Company and USE currently have four mineral properties or investments that account for most of its environmental obligations. The Company is a partner in SMP, a joint venturer in GMMV, and owners of SGMC and of Plateau. 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:
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
Sheep Mountain Partners ("SMP")
The Company and USE agreed to assume the reclamation obligations, environmental liabilities and liabilities for injuries to employees in mining operations with respect to the Crooks Gap properties, which are part of SMP. The reclamation obligations, which are established by regulatory authorities, were reviewed by the Company and the regulatory authorities during fiscal 1995 and the balance in the reclamation liability account at May 31, 1996 of $1,451,800, ($725,900 or 50% of which is recorded in the accompanying balance sheet), was determined by the Company to be adequate. The obligation will be satisfied over the life of the mining project which is estimated to be at least 20 years. The Company and USE self bonded this obligation by mortgaging certain of their real estate holdings. A portion of the funds for the reclamation of SMP's properties is expected to be provided by SMP which has agreed to pay up to $.50 per pound of uranium to the Company and USE for reclamation work, as the uranium is produced from the properties. The final outcome of the arbitration proceedings with Nukem and CRIC could result in changes to these agreements between the parties.
Green Mountain Mining Venture ("GMMV")
During fiscal 1991, the Company and USE acquired developed minerals properties on Green Mountain known as the Big Eagle Property. In connection with that acquisition, the Company and USE agreed to assume reclamation and other environmental liabilities associated with the property. Reclamation obligations imposed by regulatory authorities were established at $7,300,000 at the time of acquisition. Immediately after the acquisition, the Company and USE transferred a one-half interest in them to Kennecott, and Kennecott, the Company and USE contributed the Big Eagle properties to GMMV, which assumed the reclamation and other environmental liabilities. Kennecott obtained a commercial bank letter of credit as security for the performance of the reclamation obligations for the benefit of GMMV.
During fiscal 1993, GMMV entered into an agreement to acquire the Sweetwater uranium mill and related properties from UNOCAL. GMMV's consideration for the acquisition of the Sweetwater Mill Property was the assumption of all environmental liabilities and reclamation bonding obligations. The environmental obligations of GMMV are guaranteed by Kennecott Corporation (parent of Kennecott Uranium Company, the other joint venture partner). However, UNOCAL
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
also agreed that if GMMV incurs expenditures for environmental liabilities prior to the earlier of commercial production by GMMV or February 1, 2001 (which liabilities are not due solely to the operations of GMMV), UNOCAL will reimburse GMMV the first $8,000,000 of such expenditures. Any such reimbursement may be recovered by UNOCAL from 20% of future cash flows from sale of uranium concentrates processed through the mill. In any event, until such time as environmental and reclamation undertakings are liquidated against Kennecott Corporation, such costs are not deemed expenditures under Kennecott's $50,000,000 development commitment (although bond costs may be charged against this development commitment).
The reclamation and environmental liabilities assumed by GMMV concern two categories: (1) cleanup of an inactive open pit mine site near the Mill, including water (heavy metals and other contaminants) and tailings (heavy metals and other dust contaminant abatement and erosion control) associated with the pit, and (2) decontamination and cleanup and disposal of the Mill building and equipment and tailings cells after Mill decommissioning. Current liabilities for such efforts have been established at approximately $19,767,000 by the Wyoming Department of Environmental Quality for mine pit site matters (exercising EPA-delegated jurisdiction to administer the Clean Water Act and the Clean Air Act, and directly administering Wyoming statutes on mined land reclamation), and by the NRC for decontamination and cleanup of the Mill and Mill tailings cells. An irrevocable letter of credit has been provided by the Morgan Guaranty Trust Company of New York in lieu of a surety bond to cover the reclamation costs for the open pit mine site and the mill. The letter of credit was obtained by Kennecott Uranium Company to cover all reclamation costs related to mining and drilling operations in the State of Wyoming. The EPA has continuing jurisdiction under the Resource Conservation and Recovery Act, pertaining to any hazardous materials which may be on site when cleanup work is started.
Although Crested and the other GMMV parties are liable for all reclamation and environmental compliance costs associated with Mill and site maintenance, as well as Mill decontamination and cleanup and site reclamation and cleanup after the Mill is decommissioned, Crested believes it is unlikely Crested will have to pay for such costs directly. First, based on current estimates of cleanup and reclamation costs (reviewed annually by the oversight agencies), such costs may be within the $50,000,000 development commitment of Kennecott Uranium Company for GMMV. These costs are not expected to increase materially, if the Mill is not put into full operation.
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
Second, to the extent GMMV is required to spend money on reclamation and environmental liabilities related to previous Mill and site operations during ownership by Minerals Exploration Company (a UNOCAL subsidiary), UNOCAL has agreed to fund up to $8,000,000 of such costs (provided such costs are incurred before February 1, 2001 and before Mill production resumes), which would be recoverable only out of future Mill production (see above). Third, payment of the GMMV reclamation and environmental liabilities related to the mill is guaranteed by Kennecott Corporation, parent of Kennecott Uranium Company. Last, GMMV will set aside a portion of operating revenues to fund reclamation and environmental liabilities once mining and milling commences. To date, ongoing Mill maintenance expense is funded by Kennecott as part of its development commitment.
Kennecott will be entitled to contribution from the USE parties in proportion to their participation interests in GMMV, if Kennecott is required to pay Mill cleanup costs directly pursuant to its guarantee. Such payments by Kennecott only would be reimbursed if the liabilities cannot be satisfied within the initial $50,000,000 expenditure commitment, and then only to the extent there are insufficient funds from the reclamation reserve (to be built up out of GMMV operating revenues). In addition, if and to the extent such liabilities resulted from UNOCAL's Mill operations, and payment of the liabilities was required before February 1, 2001 and before Mill production resumes, then up to $8,000,000 of that amount would be paid by UNOCAL, before Kennecott would be required to pay on its guarantee. Accordingly, although the extent of any ultimate Crested liability for contribution to Mill cleanup costs cannot be predicted, USE and Crested will only be required to pay its proportional share of Mill cleanup if a) the liabilities cannot be satisfied with the initial $50,000,000 expenditure commitment from Kennecott, b) there are insufficient funds from the reclamation reserve to be built up out of GMMV operating revenues and c) payments are not available from UNOCAL.
Sutter Gold Mining Company ("SGMC")
SGMC which is currently owned 9% by the Company, 74% by USE and 17% by private investors, owns gold mineral properties in California. Currently, the property is in development and costs consist of drilling, permitting, holding costs and administrative costs. No substantial mining has been completed, although a 2,800 foot decline through the identified ore zones for an underground
CRESTED CORP. AND AFFILIATE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996, 1995 AND 1994 (continued)
mine was acquired in the purchase. The Company's policy is to provide reclamation reserves as ore is produced on a unit-of- production basis. Current reclamation obligations are covered by a $27,000 reclamation bond, which SGMC has recorded as a reclamation liability as of May 31, 1996.
Plateau Resources, Limited ("Plateau")
The environmental obligations acquired with the acquisition of Plateau include all environmental and reclamation obligations relating to the Shootaring Mill. Based on the bonding requirements, Plateau transferred $2,500,000 to a trust account to pay future costs of mill decommissioning, site reclamation and long-term site surveillance. In addition, Plateau has recorded additional obligations for the estimated holding and maintenance costs needed until the mill is placed in service or decommissioning begins. The estimated future Shootaring Mill decommissioning and site reclamation costs noted above as required by the NRC and the Utah Department of Natural Resources were determining factors in the consideration paid by the Company.
Executive Benefits
The Company and USE are committed to pay the estates of certain of their officers an amount equal to one year's salary for one year after their death, and reduced amounts to be set by the Board of Directors, for a period of up to five years thereafter.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
In the event a definitive proxy statement containing the information being incorporated by reference into this Part III is not filed within 120 days of May 31, 1996, 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 1996 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 1996 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 1996 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 1996 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 . . . . . . . . . . . . . 39
Consolidated Balance Sheets - May 31, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . .40-41
Consolidated Statements of Operations for the Years Ended May 31, 1996, 1995 and 1994 . . . . . . . . . 42
Consolidated Statements of Shareholders' Equity for the Years Ended May 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . . 43
Consolidated Statements of Cash Flows for the Years Ended May 31, 1996, 1995 and 1994. . . . . . . . .44-45 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . .46-71
(ii) Affiliate Financials as Schedules
(a) Green Mountain Mining Venture
Report of Independent Public Accountants . . . . . . . . . 78
Balance Sheet - December 31, 1995 and 1994 . . . . . . . . 79
Statement of Operations for the Period from June 1, 1990 (Date of Inception) through December 31, 1995. . . . . . . . . . . . . . . . . 80
Statement of Changes in Partners' Capital for the Period from June 1, 1990 (Date of Inception) through December 31, 1995. . . . . . . 81
Statement of Cash Flows for the Period from June 1, 1990 (Date of Inception) through December 31, 1995. . . . . . . . . . . . . . . . . 82
Notes to Financial Statements. . . . . . . . . . . . . .83-87
(b) Sheep Mountain Partners
The Registrant's partner in SMP, Nukem/CRIC, have refused to provide certain information concerning SMP to SMP's independent public accountants. The information requested concerns partnership costs for uranium purchases. USECC and Nukem/CRIC disagree as to whether uranium costs of the partnership means: (i) the price at which Nukem/CRIC pays for purchases of uranium for SMP; or (ii) the price which CRIC charges SMP for the uranium.
As a result, the independent public accountants have informed the Registrant and USE that they have been unable to complete their audit of SMP, and are unable to render a report on SMP's financial statements. The Registrant and SMP's independent public accountants are seeking to resolve these uncertainties so that SMP's financial statements may be finalized and filed. When these matters are resolved, the SMP financial statements will be filed under cover of a Form 10-K/A.
Balance Sheets - May 31, 1996 and 1995 . . . . . . . . . . .*
Statements of Operations - Years Ended May 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . .*
Statements of Changes in Partners' Capital - Years Ended May 31, 1996, 1995 and 1994. . . . . . . . . .*
Statements of Cash Flows - Years Ended May 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . .*
Notes to the Financial Statements. . . . . . . . . . . . . .*
*To be filed under cover of a Form 10-K/A.
All other schedules have been omitted because the information is not applicable or because the information is included in the financial statements.
(3) Exhibits Required to be Filed.
Exhibit Sequential No. Title of Exhibit Page No. - ------- ---------------- ----------
3.1 Restated Articles of Incorporation. . . . . . . . . . . . .[1]
3.4 By-Laws . . . . . . . . . . . . . . . . . . . . . . . . . .[2]
4.1 USE 1989 Incentive Stock Option Plan as Amended through 12/95. . . . . . . . . . . . . . . . . . 88
4.2 Form of Stock Option Agreement and Schedule, Options issued 1992 . . . . . . . . . . . . . . . 97
4.3 Form of Stock Option Agreement and Schedule, Options issued 1/96 . . . . . . . . . . . . . . .102
4.4 USE Restricted Stock Bonus Plan as Amended through 2/94 . . . . . . . . . . . . . . . . . .108
10.2 Management Agreement - USE - CC . . . . . . . . . . . . . .[3]
10.3 Joint Venture Agreement - Registrant and USE. . . . . . . .[2]
10.4 U.S. Energy Corp. Employee Stock Ownership Plan . . . . . .[2]
10.5 Assignment and Lease - Parador. . . . . . . . . . . . . . .[3]
10.6 Employment Agreement - Daniel P. Svilar . . . . . . . . . .[2]
10.7 Executive Officer Death Benefit Plan. . . . . . . . . . . .[2]
10.9 Big Eagle Acquisition Agreement with PMC. . . . . . . . . .[4]
10.10 Ft. Peck Agreement - Drilling and Production Services . . . . . . . . . . . . . . . . . .[3]
10.17 Sweetwater Mill Acquisition Agreement . . . . . . . . . . .[3]
10.18 Self Bond Agreement - Crooks Gap Properties . . . . . . . .[1]
10.21 Master Agreement - Mt. Emmons/AMAX Inc. . . . . . . . . . .[5]
10.23 Crooks Gap Property Acquisition Agreement . . . . . . . . .[6]
10.26 Memorandum of Partnership Agreement - GMMV. . . . . . . . .[2]
10.27 Mineral Properties Agreement - Congo Area - PMC . . . . . .[2]
10.29 Memorandum of Partnership Agreement - SMP . . . . . . . . .[1]
10.30 Plateau Acquisition - Stock Purchase Agreement and Related Exhibits. . . . . . . . . . . . . . .[7]
10.41 Option and Sales Agreements - Gunnison Property Parcel A. . . . . . . . . . . . . . . . .[8]
10.42 Option and Sales Agreements - Gunnison Property Parcel B. . . . . . . . . . . . . . . . .[8]
10.43 Contract for Sale of Wind River Estates to Arrowstar. . . . . . . . . . . . . . . . . . . . . . . .110
10.44 Contract for sale of Jeffrey City Six-Plex to Tag Development, Inc. . . . . . . . . . . . . .117
10.45 Development Agreement with First-N-Last . . . . . . . . . .122
10.46 Operating Agreement with First-N-Last . . . . . . . . . . .129
21 Subsidiaries of Registrant. . . . . . . . . . . . . . . . .[9]
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.
(b) Reports filed on Form 8-K.
During the fourth quarter of the fiscal year ended on May 31, 1996, the Registrant filed one report on Form 8-K under Item 5, Other Events, reporting an event of April 18, 1996.
(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 12, 1996 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 12, 1996 By: s/ John L. Larsen ------------------------------ JOHN L. LARSEN, Director
Date: September 13, 1996 By: s/ Max T. Evans ------------------------------ MAX T. EVANS, Director
Date: September 13, 1996 By: s/ Daniel P. Svilar ------------------------------ DANIEL P. SVILAR, Director
Date: September , 1996 By: ------------------------------ MICHAEL D. ZWICKL, Director
Date: September 13, 1996 By: s/ Kathleen R. Martin ------------------------------ KATHLEEN R. MARTIN, Director
Date: September 13, 1996 By: s/ Robert Scott Lorimer ------------------------------ ROBERT SCOTT LORIMER, Principal Financial Officer and Chief Accounting Officer
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, 1995 and 1994, and the related statements of operations, changes in Venture partners' capital, and cash flows for the years ended December 31, 1995, 1994 and 1993, and the period from inception (June 1, 1990) to December 31, 1995. 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, 1995 and 1994, and the results of its operations and its cash flows for the years ended December 31, 1995, 1994 and 1993, and the period from inception (June 1, 1990) to December 31, 1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Salt Lake City, Utah April 29, 1996
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
BALANCE SHEET --------
As of December 31, -------------------------- 1995 1994 ---- ---- Assets: Due from USECC $ 1,212 $ - ----------- ----------- Property and equipment (Note 3): Mineral properties and mine development costs 22,443,305 21,887,857 Buildings 24,815,009 24,815,009 ----------- ----------- 47,258,314 46,702,866 ----------- ----------- Total assets $47,259,526 $46,702,866 ----------- ----------- ----------- ----------- Liabilities and Partners' Capital:
Due to USECC $ - $ 62,386
Reclamation liabilities (Note 3) 23,620,000 23,620,000 ----------- ----------- Total liabilities 23,620,000 23,682,386 ----------- ----------- Commitments and contingencies (Notes 3 and 5)
Partners' capital: Kennecott Uranium Company 11,819,763 11,510,240 USECC 11,819,763 11,510,240 ----------- ----------- 23,639,526 23,020,480 ----------- ----------- Total liabilities and partners' capital $47,259,526 $46,702,866 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
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)
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 develop mining claims and produce uranium from the Green Mountain properties located in south-central Wyoming. Kennecott has a 50% interest in GMMV, and USE and Crested ("USECC") collectively have a 50% interest. GMMV was formed June 1, 1990, with each partner contributing its portion of the Green Mountain properties. Kennecott acquired its portion of the Green Mountain properties from USECC in 1990 for a cash payment of $15.0 million. Thereafter, the partners are required to contribute funds based upon their respective participating interests, subject to certain provisions as provided for in the joint venture agreement.
Kennecott has agreed to contribute the first $50 million of operating and development expenses pursuant to Management Committee budgets. As of April 29, 1996, the Management Committee has not approved a budget for the year ending December 31, 1996. Kennecott has also agreed to pay a disproportionate share (up to an additional $45,000,000) of GMMV operating expenses, but only out of cash operating margins from sales of processed uranium at more than $24.00/lb (for $30,000,000 of such operating expenses), and from sales of processed uranium at more than $27.00/lb (for the next $15,000,000 of such operating expenses).
Through December 31, 1995, Kennecott has contributed $15,779,140 to the Venture for operating and development expenses. During this period, 50% of the capital contributions made by Kennecott have been allocated to USECC. Income or loss and the cash flows from the Venture will be allocated 50% to Kennecott and 50% to USECC. The allocation of the USECC portion of cash flows will be determined by the ownership interests of USE and Crested in the various GMMV properties.
Effective October 29, 1992, Kennecott replaced USECC as manager of the Venture. Kennecott contracts with USECC to perform work on behalf of the Venture.
Through December 31, 1995, the activities of the Venture have consisted primarily of the development and maintenance of the Green Mountain properties. Additional development is required prior to the commencement of commercial production. Such commencement is not expected to occur until the Venture partners have reached agreement that all economic and other conditions justify such commencement.
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
1. Organization of the Joint Venture, Continued:
Therefore, the Venture is considered to be in the development stage as defined in Statement of Financial Accounting Standards No. 7.
2. Summary of Significant Accounting Policies:
Mineral properties contributed to the Venture were recorded at the partners' historical cost at the date of contribution. Costs incurred in the acquisition of mineral properties are capitalized and either charged to operations on the units-of-production method over the estimated reserves to be recovered or charged to operations at the time the property is sold or abandoned. Mine development costs incurred either to expand the capacity of operating mines, develop new ore bodies or develop mine areas substantially in advance of production are capitalized and charged to operations on the units-of-production method over the estimated reserves to be recovered. 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.
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
2. Summary of Significant Accounting Policies, Continued:
The Venture evaluates the recoverability of capitalized acquisition and development costs based on the expected undiscounted future net revenues from the related mining properties. An impairment loss will be recorded if the unamortized costs exceed the expected undiscounted future net revenues. The recorded loss will be based on the difference between the unamortized costs and the expected discounted future net revenues from the related mining properties. The Venture believes that uranium prices will reach levels sufficient to justify commencement of commercial production in the future. The Venture also believes the expected undiscounted future net revenues from the Green Mountain properties will be sufficient to allow recoverability of these costs assuming commencement of commercial production.
The estimated net future costs of dismantling, restoring and reclaiming operating mines which result from future mining operations will be accrued during such operations. The provision will be made using the units of production sold method on the basis proven and probable ore reserves and estimated costs at the balance sheet date. The effect of changes in estimated costs and production will be recognized on a prospective basis.
No provision has been made for federal, state and local income taxes, credits, or benefits since tax liabilities are the responsibility of the individual partners.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
3. Buildings, Mineral Properties and Mine Development Costs:
USECC conducts operations at the mine site on behalf of the Venture. All accounts payable are due to USECC for costs incurred by USECC in the normal course of business on behalf of GMMV. Through December 31, 1995 Kennecott had reimbursed USECC for substantially all development costs incurred.
Building, mineral property and mine development costs incurred on behalf of each of the Venture partners are as follows:
Period from inception Year ended December 31, (June 1, 1990) ------------------------------------- to December 31, 1995 1994 1993 1995 ----------- ---------- ---------- --------------- USECC $ 511,822 $ 145,712 $ 296,869 $ 5,210,730 Kennecott 43,626 137,482 370,106 2,700,584 ---------- ---------- ---------- ------------ Total $ 555,448 $ 283,194 $ 666,975 $ 7,911,314 ---------- ---------- ---------- ------------ ---------- ---------- ---------- ------------
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. Provided such costs are incurred before February 1, 2001 and before mill production resumes, the seller is liable for the first $8 million of the reclamation costs at the Sweetwater Mill.
The Venture properties include state leases which will expire in August 1996 and May 2001. The Venture intends to renew the state leases expiring in August 1996. All fees required to hold the unpatented mining claims have been paid to the state of Wyoming as of December 31, 1995.
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
At December 31, 1995 and 1994, costs capitalized as property and equipment are composed of the following:
1995 1994 ----------- ----------- Acquisition costs $39,347,000 $39,347,000 Development costs 7,911,314 7,355,866 ----------- ----------- $47,258,314 $46,702,866 ----------- ----------- ----------- -----------
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 totalling $23,620,000.
GREEN MOUNTAIN MINING VENTURE (A Joint Venture in the Development Stage)
NOTES TO FINANCIAL STATEMENTS, Continued
--------
4. Subsequent Event:
On April 24, 1996, the Bureau of Land Management signed the Record of Decision approving the Jackpot Mine Plan of Operations. As of April 29, 1996, the Venture had applied for but not yet received the necessary operating permit for the Jackpot Mine from the WDEQ. Until this permit is granted by the WDEQ, no further construction of mine facilities is allowed, no further underground mine development can occur, and the Jackpot deposit cannot be mined.
5. Contingencies:
In June 1994, Kennecott was served with a complaint filed by Nukem Inc. (Nukem) and Cycle Resource Investment Corporation (Cycle). The complaint alleges that when Kennecott entered into the Green Mountain Mining Venture with USE on June 1, 1990, that Kennecott interfered with a Uranium Marketing Agreement between Nukem and USE and the Sheep Mountain Mining Venture (between USE and Cycle). Nukem and Cycle are each seeking damages in excess of $14 million and punitive damages. The proceeding has been stayed pending the conclusion of an arbitration proceeding between Cycle, Nukem and USE addressing issues pertinent to the outcome of the proceeding against Kennecott. The arbitration proceeding was concluded on April 19, 1996; however, the stay has yet to be lifted. Once the stay is lifted, Kennecott intends to vigorously defend this litigation.
Although the Venture is not a party to the complaint filed by Nukem and Cycle, the ultimate resolution of this contingency could have an impact on the properties held by the Venture.