ITEM 1 AND ITEM 2.
ITEM 3. LEGAL PROCEEDINGS
Material pending proceedings are summarized below. Certain of the Company's affiliates are involved in ordinary routine litigation incidental to their business. Other proceedings which were pending during the year ended December 31, 2003 have been settled or otherwise finally resolved.
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
In 1991, disputes arose between Crested and USE d/b/a/ USECC, and Nukem, Inc. and its subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation and operation of their equally owned Sheep Mountain Partners (SMP) partnership. Arbitration proceedings were initiated by CRIC in June 1991 and in July 1991, USECC filed a lawsuit against Nukem, CRIC and others in the U.S. District Court of Colorado in Civil No. 91B1153. The Federal Court stayed the arbitration proceedings and discovery proceeded. In February 1994, all of the parties agreed to consensual and binding arbitration of all of their disputes over SMP before an arbitration panel (the "Panel").
After 73 hearing days, the Panel entered an Order and Award on April 18, 1996 and clarified the Order on July 3, 1996, finding generally in favor of Crested and USE on certain of their claims and imposed a constructive trust in favor of Sheep Mountain Partners on uranium contracts Nukem entered into to purchase uranium from CIS republics. The Panel also awarded SMP damages of $31,355,070 against Nukem. USECC filed a petition for confirmation of the Order and on June 27, 1997, the U.S. District Court confirmed the Panel's Orders in its Second Amended Judgment.
Thereafter, Nukem/CRIC appealed the Judgment to the 10th Circuit Court Of Appeals ("CCA"). On October 22, 1998, the 10th CCA issued an Order and Judgment affirming the U.S. District Court's Second Amended Judgment without modification. The ruling affirmed (i) the imposition of a constructive trust in favor of SMP on Nukem's rights to purchase CIS uranium, the uranium acquired pursuant to those rights, and the profits therefrom; and (ii) the damage award in favor of SMP against Nukem. The 10th CCA held that the Panel's Awards "clearly retains both a constructive trust and a damage award," and the --- Arbitration Awards and the Second Amended Judgment were "clear and unambiguous."
On February 8, 1999, the U.S. District Court ordered Nukem to pay USECC the balance of the damage award. Nukem did so, but then moved for a satisfaction of judgment without accounting for the monies earned in the Constructive Trust. The District Court denied Nukem's motion and Nukem filed its second appeal to the 10th CCA. On October 16, 2000, the 10th CCA again affirmed the order of the District Court. The 10th CCA held that Nukem had not "provided an accounting of the partnership assets," finding that "the district court order presented for our review does not decide which CIS contracts are covered by the constructive trust."
On November 3, 2000, USECC filed a motion for a further accounting of the Constructive Trust. On February 15, 2001, the District Court entered an Order of Reference appointing a Special Master to "conduct an accounting" of the Constructive Trust. The accounting was conducted and on May 1, 2003, the Special Master filed his Report with the District Court. Both parties filed objections to the Report. On July 30, 2003, the U.S. District Court adopted the Report in part and rejected it in part. Judgment was then entered by the Court on August 1, 2003 in favor of USECC and against Nukem in the amount of $20,044,183.
On August 15, 2003, Nukem filed a "Motion to Remand to the Arbitration Panel or in the Alternative, to Alter, Amend and/or Correct the Court's August 1, 2003 Judgment and July 30, 2003 Order," and a "Motion to Correct Certain Findings or Statements in the Court's Order of July 30, 2003." On the same day,
USECC filed a motion under Fed.R.Civ.P. 52(b) and 59(e) to alter or amend the July 30, 2003 Order and the August 1, 2003 Judgment. The District Court denied the parties' motions on September 10 and 11, 2003, respectively. Nukem's appeal and USECC's cross-appeal followed. Nukem's opening brief was filed on January 16, 2004 and on February 24, 2004, USECC filed an opening brief in its cross-appeal and an answer to Nukem's brief. Nukem has until March 29, 2004 or any extension thereof to file an answer to USECC's opening brief. USECC may then file a reply brief 14 days after service of Nukem's answer. Management believes that the ultimate outcome of this matter will not have an adverse effect on the Company's financial condition or result of operations.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE and Crested filed a lawsuit in the U. S. District Court of Colorado in Case No. 98WM1630, against Contour Development Company, L.L.C. and entities and persons associated with Contour Development Company, L.L.C. (together, "Contour") seeking compensatory and consequential damages of more than $1.3 million from the defendants for dealings in real estate owned by USE and Crested in Gunnison, Colorado. The Contour defendants asserted a counterclaim asking for payment of attorneys fee and costs. The parties settled the litigation in 2004. In the settlement, USE and Crested received $25,000 in cash; two lots in the City of Gunnison, Colorado (one of which has been sold for a net of $65,326 and the other lot is under contract to sell for $180,000), and an additional five development lots covering 175 acres north of Gunnison, Colorado.
PHELPS DODGE LITIGATION
Crested and USE, d/b/a USECC, were served with a lawsuit on June 19, 2002, filed in the U.S. District Court of Colorado (Case No. 02-B-0796(PAC)) by Phelps Dodge Corporation (PD) and its subsidiary, Mt. Emmons Mining Company (MEMCO), over contractual obligations in USECC's agreement with PD's predecessor companies, concerning mining properties on Mt. Emmons, near Crested Butte, Colorado.
The litigation stems from agreements that date back to 1974 when Crested and USE leased the mining claims from AMAX Inc., PD's predecessor company. The mining claims cover one of the world's largest and richest deposits of molybdenum discovered by AMAX. AMAX reportedly spent over $200 million on the acquisition, exploration and mine planning activities on the Mt. Emmons properties.
The complaint filed by PD and MEMCO seeks a determination that PD's acquisition of Cyprus Amax was not a sale. Under a 1986 agreement between USECC and AMAX, if AMAX sold MEMCO or its interest in the mining properties, Crested and USE would receive 15% (7.5% each) of the first $25 million of the purchase price ($3.75 million). In 1991, Cyprus Minerals Company acquired AMAX to form Cyprus Amax Minerals Co. USECC's counter and cross-claims allege that in 1999, PD formed a wholly-owned subsidiary CAV Corporation, for the purpose of purchasing the controlling interest of Cyprus Amax and its subsidiaries (including MEMCO) at an estimated value in cash and PD stock exceeding $1 billion and making Cyprus Amax a subsidiary of PD. Therefore, USECC asserts the acquisition of Cyprus Amax by PD was a sale of MEMCO and the properties that triggers the obligation of Cyprus Amax to pay USECC the $3.75 million plus interest.
The other issue in the litigation is whether USECC must, under terms of a 1987 Royalty Deed, accept PD's and MEMCO's conveyance of the Mt. Emmons properties back to USECC, which properties now include a plant to treat mine water, costing in excess of $1 million a year to operate in compliance with State of Colorado regulations. PD's and MEMCO's claim seek to obligate USECC to assume the operating costs of the water treatment plant. USECC refuses to have the water treatment plant included in the return of the
properties because, the USECC counterclaim argues, the properties must be in the same condition as when they were acquired by AMAX before the water treatment plant was constructed by AMAX.
As added counterclaims, USECC seeks (i) damages for PD's breach of covenants of good faith and fair dealing; (ii) damages for PD's failure to develop the Mt. Emmons properties and not protecting USECC's rights as a revisionary owner of the mining rights to the properties, (iii) damages for unjust enrichment of PD; (iv) damages for breach of the PD's fiduciary duties owed to USECC as revisionary owner of the property, and for neglecting to maintain the mining rights and interests in the properties.
On March 17, 2003, PD filed additional motions for partial summary judgment on various claims. On January 22, 2004, the District Court heard the motions and responses of USECC and additional briefs were thereafter filed with the Court. The Court is considering the motions. Management believes that the ultimate outcome of this matter will not have an adverse affect on the Company's financial condition or result of operations.
ROCKY MOUNTAIN GAS, INC. (RMG)
LITIGATION INVOLVING LEASES ON COALBED METHANE PROPERTIES IN MONTANA
On or about April 1, 2001, RMG was served with a Second Amended Complaint wherein the Northern Plains Resource Council had filed suit in the U.S. District Court of Montana, Billings Division in Case No. CV-01-96-BLG-RWA against the United States Bureau of Land Management ("BLM"), RMG, certain of its affiliates (including Crested and USE) some 20 other defendants. The plaintiff is seeking to cancel oil and gas leases issued to RMG et. al. by the BLM in the Powder River Basin of Montana and for other relief.
The basis for the complaint appears to be that the BLM's regulations require the BLM to respond to objections filed by persons owning land or lease rights adjacent to the coalbed properties which the BLM is offering to lease to the public. The argument of plaintiff appears to be that if objections are not responded to by the BLM prior to issuing CBM leases, the leases are invalid. Based on this argument, the plaintiff appears to have been successful in forcing cancellation of some CBM leases granted to others in the Powder River Basin of Montana, because the BLM did not respond to some objecting adjacent landowners. However, all of the BLM leases in Montana held by RMG (none are held by U.S. Energy Corp. or Crested Corp. in their own corporate names) are at least four years old, and there is no record of any objections being made to the issue of those leases.
Based on filings in the case to date, it appears that the BLM is taking the initiative in responding to the plaintiff. We believe RMG's leases were validly issued in compliance with BLM procedures, and do not believe the plaintiff's lawsuit will adversely affect any of RMG's Montana BLM leases.
LAWSUITS CHALLENGING BLM'S RECORDS OF DECISIONS
Three lawsuits are currently pending in the Montana Federal District Court challenging BLM's Records of Decisions for the Powder River Basin Oil and Gas EIS (PRB-EIS) for the Wyoming portion of the basin, and the Statewide Oil and Gas EIS and Proposed Amendment for the Powder River and billings Resource Management Plans in Montana. Neither the Company, nor RMG is a party to any of these lawsuits.
LITIGATION INVOLVING DRILLING ON A COALBED METHANE LEASE
A drilling company, Eagle Energy Services, LLC filed a lien on RMG's leasehold in southwestern Wyoming for drilling services performed at RMG's Oyster Ridge Property and filed a lawsuit foreclosing the lien. Eagle Energy's bank, Community First National Bank of Sheridan, Wyoming, filed a similar suit for the same amount on an assignment from Eagle Energy against RMG, Eagle Energy Services, LLC and others who guaranteed a loan to Eagle Energy in Civil Action No. C02-9-328 in the 4th Judicial District of Sheridan County, Wyoming. Eagle Energy's claim is for a contract to drill a well for coalbed methane. RMG terminated the agreement because of the dangerous conditions of Eagle Energy's equipment and other reasons. The claim against RMG is for approximately $49,300. Negotiations to settle the lien and lawsuits are pending. Management believes that the ultimate outcome of this matter will not have a material affect on the Company's financial condition or result of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 6, 2003, the annual meeting of shareholders was held and the only issue considered was the re-election of the three directors: John L. Larsen, Daniel P. Svilar and Michael D. Zwickl. These directors were reelected for a term expiring at the next succeeding annual meeting and until their successors are duly elected or appointed and qualified. With respect to the re-election of the three directors, the votes cast were as follows:
Name of Director For Abstain ------------------ --- -------
John L. Larsen 15,584,751 19,550 Daniel P. Svilar 15,584,201 21,100 Michael D. Zwickl 15,587,301 17,000
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.
(b) Holders.
(b)(1) At March 23, 2004 there were 1,716 stockholders of record for ---------------- Crested common stock.
(b)(2) Not applicable.
(c) Crested has not paid any cash dividends with respect to its common stock. There are no contractual restrictions on Crested's present or future ability to pay cash dividends, however, Crested intends to retain any earnings in the near future for operations.
(d) During the year ended December 31, 2003, Crested issued 18,822 shares of its Common Stock to its outside directors for services rendered.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following tables show certain selected historical financial data for Crested for the year ended December 31, 2003, the seven months ended December 31, 2002 and December 31, 2001 and the four fiscal years ended May 31, 2002. The selected financial data is derived from and should be read with the financial statements for Crested.
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 which have affected the Company's liquidity, capital resources and results of operations during the periods included in the accompanying financial statements. The discussion contains forward-looking statements that involve risks and uncertainties. Due to uncertainties in the minerals business, the Company's actual results may differ materially from the results discussed in any such forward-looking statements.
GENERAL OVERVIEW
The Company historically has been involved in the acquisition, exploration, development and production of properties prospective for hard rock minerals including lead, zinc, silver, molybdenum, gold, uranium, oil and gas and commercial real estate properties. The Company participates in all these ventures with U.S. Energy Corp. ("USE") which now owns approximately 71.5% of the Company's common stock, through a non consolidated affiliate, USECC Joint Venture ("USECC"). The Company and USE have entered into partnerships through which they either joint venture or lease properties with non-related parties for the development and production of certain of their mineral properties. Due to either depressed metal market prices or disputes in certain of the partnerships, all mineral properties have either been sold, reclaimed or are held in a care and maintenance status. See Item 3 above. The Company has had no production from any of its mineral properties during the periods from May 31, 2001 through December 31, 2003 except coalbed methane.
The Company and USE formed Rocky Mountain Gas, Inc. ("RMG") to enter into the coalbed methane (CBM) business in 1999. The acquisition of leases and acreage for the exploration, development and production of coalbed methane has become the primary business focus of the Company. At December 31, 2003, the Company, on a consolidated basis, owned 39.8% of RMG. RMG has purchased or leased acreage for CBM exploration and development. RMG has entered into various agreements and joint operating agreements to develop and produce CBM from these properties. Management of the Company plan to create value in RMG by growing RMG into an industry recognized producer of CBM. Management believes that the fundamentals of natural gas supply and demand are, and will remain favorable well into the future. Management further believes that the investments the Company has made in RMG will provide a solid base of cash flows into the future.
The price that RMG receives for its CBM production is based on the Colorado Interstate Gas Index ("CIG") for the Northern Rockies. Historically the highest prices realized on the CIG over a twelve month period are during the months of December and January and the lowest prices realized are in the months of late summer or early fall. Calendar 2003 did not follow this trend as gas prices rose from a low of $3.14 per mcf (thousand cubic feet) in January 2003 to a high of $5.01 per mcf in March 2003. The following table represents a summary of historical CIG prices:
Although management believes that gas prices will increase over the long term from present levels, no assurance can be given that will happen. Gas prices are directly affected by 1) weather conditions which impact heating and cooling requirements; 2) electrical generation needs and 3) the amount of gas being produced by companies in the gas production business. May of the Company's industry competitors are very large international companies that are well funded. All of these factors are variable and cannot be accurately predicted.
A major component of the Company's future cash flow projections is the ultimate resolution of litigation with Nukem, Inc. ("Nukem") over issues relating to Sheep Mountain Partners ("SMP") assets. On August 1, 2003, the U.S. District Court of Colorado entered a Judgment in favor of the Company and USE against Nukem in the amount of $20,044,183. Nukem has appealed this Judgment to the 10th Circuit Court of Appeals ("CCA"). The Company and USE have filed a cross-appeal and answer to Nukem's appeal. See Item 3 above. Should the 10th CCA affirm the District Court's Order and Judgment and or grant the additional claims made by the Company and USE, the liquidity of the Company will be significantly impacted as it is entitled to 50% of any award received. Although no assurance can be given as to the outcome of the appeal, Nukem was required to post a supersedeas bond in the full amount of the Judgment with interest.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied on its major shareholder USE, to fund its portion of operations and working capital requirements for the periods covered by this Report. As of December 31, 2003 the Company had a very nominal amount of cash on hand, had incurred a shareholders' deficit of $6.3 million and had a working capital deficit of $9.4 million. The principal component of this working capital deficit was an account payable to USE of $9.4 million. During prior periods, the Company has negotiated reductions of the amount due USE by issuing shares of its common stock as payment. USE has agreed not to call the note during the next 14 months. Should the Nukem litigation be resolved in favor of the Company and USE, a significant portion of the Company's receipts would be applied to the USE debt. The litigation may or may not be finally resolved in 2004.
CAPITAL RESOURCES
A major component of capital resources in the near future is the settlement of the litigation with Nukem. Should the 10th CCA affirm the Judgment (without modification) of the U.S. District Court of Colorado, the net award to the Company would be approximately $10 million.
The Company holds interests in RMG and the investments that RMG has made. Currently it is not management's position to sell these interests but should the need arise to reduce debt or should other investments become available, management may monetize the RMG investments and apply the proceeds to debt reduction or alternate investments.
The Company, jointly with USE, has a $750,000 line of credit with a commercial bank. The line of credit is secured by certain real estate holdings and equipment jointly owned with USE. At December 31, 2003, the full line of credit was available to the Company and USE. The line of credit could be used for short term working capital needs associated with operations.
The capital resources at December 31, 2003, are not sufficient to satisfy all the capital requirements of the Company. To provide the capital resources needed for the next fiscal year, the Company will need to (1) continue to successfully negotiate the terms of its debt with USE, (2) collect accounts receivable which are held jointly with USE that are not consolidated but in which the Company benefits when the cash is collected, (3) assist RMG in its development of coalbed methane properties including the funding of that development, and (4) successfully resolve the Nukem litigation.
CAPITAL REQUIREMENTS
The direct capital requirements of the Company during 2004 remain its General and Administrative costs and expenses. The general and administrative cash requirements during the year ended December 31, 2003 were $162,900. The cash requirements for the seven months ended December 31, 2002 and the year ended May 31, 2002 were $100,300 and $163,600, respectively. Management does not anticipate entering into any business ventures which will increase the general and administrative expenses until sufficient capital resources are available.
The Company also is required to fund its portion of operations of USECC. Due to reduced operations, these expenses have decreased during the past several years. The amount of cash required for the Company's portion of USECC's capital requirements during the year ended December 31, 2003, the seven months ended December 31, 2002, and the fiscal years ended May 31, 2002 and 2001 was $611,800, $892,900, $1,656,800 and $2,360,300, respectively. The capital resources for the USECC operations continue to be provided by USE. It is anticipated that the requirement during calendar 2004 will approximate the amount spent in calendar 2003.
The Company's cash requirements for funding USE operations include general and administrative costs and stand-by costs for mining properties. The Company also participates in all cash flows generated by the Sheep Mountain uranium Properties, the Plateau Resources uranium properties and the Sutter Gold properties.
MAINTAINING URANIUM PROPERTIES ------------------------------
SMP URANIUM PROPERTIES
The care and maintenance costs associated with the Sheep Mountain uranium mineral properties (of which the Company is responsible for 50%) decreased by $11,500 during the year ended December 31, 2003 to approximately $16,500 per month. Included in the average monthly cost during the year ended December 31, 2003 is ongoing reclamation work on the SMP properties. It is anticipated that a total of $125,000 in reclamation costs will be conducted during 2004.
PLATEAU RESOURCES URANIUM PROPERTIES
We are contractually obligated to fund 50% of the cash requirements of Plateau and also share in 50% of any cash receipts of Plateau. USE is responsible for the other 50%. Plateau owned the Ticaboo townsite, motel, convenience store, boat storage, restaurant and lounge. During the year ended December 31, 2003, the Company and USE sold their interests in the townsite operations to a non-affiliated entity, The Cactus Group ("Cactus"). As a result of the sale of the townsite, USE received a promissory note from Cactus in the amount of $3,120,700. USE is to receive $203,000 in payments from Cactus during calendar 2004. All of these payments will be applied to interest only and the Company will receive 50% of the benefit of the receipt of them. (See Note E)
Additionally, Plateau owns and maintains the Tony M uranium mine and Shootaring Canyon Uranium Mill (the "Shootaring Mill"). During the year ended December 31, 2003, Plateau requested a change in the status of the Shootaring Mill from active to reclamation from the NRC. The NRC granted the change in license status which generated a surplus in the cash bond account of approximately $2.9 million which was released to Plateau. The Company received the benefit of this release of cash.
During the year ended December 31, 2003, Plateau performed approximately $209,600 in reclamation on the Velvet and Tony M mines and the Shootaring Mill. It is estimated that the Company and USE will incur approximately $500,000 in reclamation related costs during calendar 2004. The Company is responsible for one half of these expenditures. Although reclamation has been initiated on the Plateau properties, management of the Company and USE continue to evaluate the future of the properties as a result of the significant increases in the market price for uranium to approximately $17 per pound U3O8 in March 2004 from approximately $10.10 in March 2003.
The cash costs per month, including reclamation costs, at the Plateau properties during calendar 2003 were approximately $100,000 per month. These costs are projected to decrease to $50,000 to $75,000 per month during the year ending December 31, 2004. The Company and USE share these costs equally.
SUTTER GOLD MINING COMPANY (SGMC)PROPERTIES
Because of the recent increase in the price of gold, management of Sutter Gold has decided to place the properties controlled by it into production. No extensive development work or mill construction will be initiated until such time as funding from either debt or equity sources is in place. The goal of the Company's management is to have the SGMC properties be self supporting and thereby not requiring any capital resource commitment from the Company or USE. Until such time as Sutter is able to raise its own capital, the Company and USE will continue to fund SGMC on a one eighth - seven eighths basis. Management projects that the total cash costs to be incurred in getting Sutter funded will not exceed $120,000, one eighth of which will be the obligation of the Company. (See Note J)
DEVELOPMENT OF COALBED METHANE PROPERTIES ---------------------------------------------
The majority of the costs during the year ended December 31, 2003 for the development of RMG's coalbed methane properties was funded through an agreement that RMG entered into with CCBM, Inc. ("CCBM") a subsidiary of Carrizo Oil and Gas of Houston, Texas. At December 31, 2003 the balance remaining for the benefit of RMG's portion only under this arrangement was $305,100. After this drilling commitment is completed by CCBM, RMG will have to fund its working interest amount on wells drilled.
During the year ended December 31, 2003, RMG and CCBM entered into a Subscription and Contribution Agreement with Credit Suisse First Boston Private Equity parties ("CSFB") to form Pinnacle Gas Resources, Inc. ("Pinnacle") As a result of the formation RMG and CCBM contributed certain undeveloped and producing coalbed methane properties to Pinnacle. RMG has the opportunity to increase its ownership in Pinnacle by advancing cash to purchase common stock in Pinnacle through the exercise of options, but that increase would be offset to the extent other parties contribute additional capital to Pinnacle. See Part I "Transaction with Pinnacle Gas Resources, Inc." Management of the Company does not anticipate exercising these options during calendar 2004 unless surplus capital resources are received. RMG has no capital commitments on the properties contributed to Pinnacle. (See Note E)
RMG continues to pursue other investment and production opportunities in the CBM business. On January 30, 2004, RMG purchased the assets of a non-affiliated entity which included both producing and
non-producing properties. The purchase of these CBM assets was accomplished by the issuance of common stock and warrants of both RMG and USE and cash, the majority of which was borrowed as a result of mezzanine financing through Petrobridge Investment Management, LLC. (See Part I "Acquisition of Producing and Non-Producing Properties from Hi-Pro Production, LLC" and Note N to the financial statements in this Annual Report).
Management of the Company believes that RMG's recent investment as well as the development of its unproven properties will be financed through cash that RMG has on hand as well as equity and industry partner financings. None of the Company's capital resources should be needed therefore to fund operations or development work of RMG during 2004.
All cash flows from gas production on the Hi-Pro properties are pledged to pay the acquisition debt. See Note N to the financial statements in this Annual Report and Part I, Acquisition of Producing and Non-Producing Properties from Hi-Pro Production, LLC. The acquisition debt also requires minimum net production volumes through June 30, 2006 and maintenance of financial ratios. The Hi-Pro properties are held by RMG I, LLC, a wholly-owned subsidiary of RMG and are the sole collateral for the debt.
In addition, we don't expect the lenders under the mezzanine credit facility to fund more than the drilling and completion of five wells on proved undeveloped locations on the properties. Future equity financing by RMG, or industry financings, will be needed for RMG I, LLC to drill and complete wells on the substantial undeveloped acreage acquired from Hi-Pro. New production from this acreage could be needed to service the acquisition debt to offset the impact of declining production from the producing properties and/or low gas prices.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED MAY 31, 2002 - ---------------------------------------------------------------------------
The Company continued to have no revenues from operations as its mineral properties are all on a care and maintenance status. The real estate properties and other ventures that the Company participates in are not consolidated but are reported as equity losses from affiliates.
Effective January 1, 2003, the Company adopted SFAS 143 "Accounting for Asset Retirement Obligations." As a result of adopting SFAS 143, the Company recorded $90,900 of accretion in relation to its reclamation liability on the SMP uranium properties which was netted against the Company's cash expended on SMP reclamation of $70,700 for a net expense of $11,200. The Company also recognized a $293,800 cumulative effect as a result of the adoption of SFAS 143. The Company did not have similar expenses or cumulative effects during the fiscal year ended May 31, 2002.
The Company recognized equity losses of $2,114,600 from affiliates during the year ended December 31, 2003. The reason for the increase of $290,700 over the twelve months ended May 31, 2002 is the increased activities in RMG during the year ended December 31, 2003. The equity loss recorded for the year ended December 31, 2003 compared to the seven months ended December 31, 2002 and the fiscal years ended May 31, 2002 and 2001 is as follows:
Effective January 1, 2003 the Company adopted SFAS 143 "Accounting for Asset Retirement Obligations" which requires the Company to record the fair value of the reclamation liability on its shut down mining and gas properties as of the date that the liability is incurred. The Company is further required to accrete the total liability for the full value of the future liability. As a result of adopting this new accounting policy the Company recorded a cumulative effect of accounting change of $293,800.
The Company recorded a net loss of $2,671,700 or $0.16 per share during the year ended December 31, 2003 as compared to a loss of $1,998,900 or $0.12 per share during the fiscal year ended May 31, 2002
SEVEN MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THE SEVEN MONTHS ENDED DECEMBER - -------------------------------------------------------------------------------- 31, 2001 - ---------
The Company had no revenues during the seven month periods ended December 31, 2002 and 2001.
Costs and expenses during the seven month period ended December 31, 2002 decreased by $14,600 to $102,400 from the amount of costs and expenses incurred during the seven month period ended December 31, 2001. This decrease was primarily as a result of reductions in overhead relative to government filings and the funding of the USE Employee Stock Option Plan for the employees that the Company uses to conduct its business. These reductions in costs and expenses were offset by a small increase in contract services.
During the seven months ended December 31, 2002 the Company recognized an equity loss from affiliates of $1,055,000. This equity loss was realized from USECC and RMG in the amounts of $897,300 and $157,700, respectively. The increase during the seven months ended December 31, 2002 of $56,800 from the equity loss recognized during the seven months ended December 31, 2001 was as a result of an increase of the work performed in the natural gas business.
The Company recognized a loss of $1,157,400 for the seven months ended December 31, 2002 as compared to the loss of $1,115,200 for the seven months ended December 31, 2001 for the same reasons mentioned above.
FISCAL 2002 COMPARED TO FISCAL 2001 - ----------------------------------------
The Company had no revenues during the fiscal year ended May 31, 2002. Mineral Revenues decreased $60,300 from revenues for the previous year. This decrease was a result of Phelps Dodge suspending the payment of advance royalties on the Mt. Emmons molybdenum property. The Company and USE are involved in a legal action with Phelps Dodge to reinstate the advance royalty payments. See Item 3 above.
During fiscal 2001, the Company recognized $3,566,400 in litigation settlement revenues. These revenues came as a result of a settlement of litigation with Kennecott Energy on the Green Mountain Mining Venture. Of this amount, $2,000,000 was a non-cash recognition of a deferred purchase option for cash received in a prior period. No litigation settlement revenues were recognized during fiscal 2002.
Costs and expenses decreased by $14,100 during fiscal 2002 from fiscal 2001. This decrease was as a result of reductions in the workforce of the Company and USE. The reduction in workforce reduced the Company's obligation to fund retirement benefits. The Company recorded an equity loss from USECC and RMG in the amounts of $1,823,900 and $2,496,700 for fiscal 2002 and 2001, respectively.
Operations for fiscal 2002, resulted in a loss of $1,998,800 compared to net earnings of $1,205,700 for fiscal 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The statement requires entities to record the fair value of a liability for legal obligations associated with the retirement of obligations of tangible long-lived assets in the period in which it is incurred. When the liability is initially recorded, the entity increases the carrying amount of the related long-lived asset. Accretion of the liability is recognized each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company implemented the pronouncement effective January 1, 2003.
The Company has reviewed other current outstanding statements from the Financial Accounting Standards Board and does not believe that any of those statements will have a material adverse affect on the financial statements of the Company when adopted.
EFFECTS OF CHANGES IN PRICES - --------------------------------
Mineral operations are significantly affected by changes in commodity prices. As prices for a particular mineral increase, prices for prospects for that mineral also increase, making acquisitions of such properties more costly, and sales advantageous. Conversely, a price decline facilitates acquisitions of properties containing that mineral, but makes sales of such properties more difficult. Operational impacts of changes in mineral commodity prices are common in the mining industry.
NATURAL GAS AND OIL. Our decisions to expand into the coalbed methane industry were predicated on the projections for natural gas prices. We believe that the energy demands of the United States of America will sustain higher natural prices. The recent increase in price of oil will not materially affect our operations for fiscal 2004.
URANIUM AND GOLD. Changes in the prices of uranium and gold will affect our operational decisions the most. Currently, both gold and uranium have experienced an increase in price. We continually evaluate market trends and data and are seeking financing or a joint venture to place the Company's gold and uranium properties in production. We are currently evaluating our gold and uranium properties as market prices have increased to the level that these properties could produce profitably. Management is evaluating how long this trend will continue and at what level market prices for gold and uranium will settle at for the long term.
MOLYBDENUM. Changes in prices of molybdenum are not expected to materially affect our operations during fiscal 2004.
CONTRACTUAL OBLIGATIONS. The Company had two contractual obligations as of December 31, 2003: Debt to USE of $9,408,300, which is due upon demand, and asset retirement obligations of $1,053,300 which will be paid over a period of five to seven years.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
Financial statements meeting the requirements of Regulation S-X for the Company follow immediately.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------------------------
Crested Corp. Board of Directors
We have audited the accompanying balance sheets of Crested Corp. as of December 31, 2003 and 2002 and May 31, 2002 and the related statements of operations, shareholders' deficit and cash flows for the year ended December 31, 2003, the seven months ended December 31, 2002 and the fiscal years ended May 31, 2002 and 2001. 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 auditing standards generally accepted in the United States of America. 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. as of December 31, 2003, and 2002, and May 31, 2002 and the results of their operations and their cash flows for the year ended December 31, 2003, the seven months ended December 31, 2002 and the fiscal years ended May 31, 2002 and 2001, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note A to the financial statements effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143 Accounting for Asset Retirement Obligations, and changed its method of accounting for asset retirement obligations.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company has experienced significant losses from operations. In addition, the Company has a working capital deficit of $9,405,000 as of December 31, 2003, the substantial portion of which is owed to an affiliated entity. These factors raise substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regards to these matters are also described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
GRANT THORNTON LLP
Oklahoma City, Oklahoma, February 27, 2004
CRESTED CORP. BALANCE SHEET ASSETS
The accompanying notes are an integral part of these statements.
CRESTED CORP. STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these statements.
CRESTED CORP. STATEMENT OF SHAREHOLDERS' DEFICIT
The accompanying notes are an integral part of this statement.
CRESTED CORP. STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these statements.
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001
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 and coalbed methane gas properties, the production of petroleum properties and marketing of minerals and/or methane gas primarily through equity investees. Principal mineral interests are in coalbed methane, uranium, gold and molybdenum. Only coalbed methane was producing during the year ended December 31, 2003. The Company also holds various real estate properties. These properties are managed through a non consolidated joint venture discussed below and in Note B.
The Company and U.S. Energy Corp. ("USE"), an approximate 71.5% shareholder of the Company, were engaged in the standby and maintenance of two uranium properties, one a joint venture with Kennecott Uranium Company ("Kennecott") known as the Green Mountain Mining Venture ("GMMV"), and the second known as Sheep Mountain Partners ("SMP"). Both of these ventures have been involved in significant litigation (see Note J). Sutter Gold Mining Company ("SGMC"), a Wyoming corporation, manages the Company's and USE's interest in gold properties. Rocky Mountain Gas, Inc. ("RMG"), was formed in fiscal 2000 to consolidate all coalbed methane gas operations of the Company and USE. The Company owns and controls approximately 39.8% of RMG as of December 31, 2003.
The Company changed its year end to December 31 from May 31 effective December 31, 2002.
MANAGEMENTS PLAN
The Company has generated significant net losses prior to and including the year ended December 31, 2003 resulting in an accumulated deficit of $18,122,200 at December 31, 2003. The Company also has a working capital deficit of $9,405,000 at December 31, 2003 that includes $9,408,300 due to USE. The Company experienced negative cash flows from operations of $242,600, $100,300 and $163,000 for the year ended December 31, 2003, the seven months ended December 31, 2002 and the fiscal year ended May 31, 2002, respectively. The Company had positive cash flows from operations during the fiscal year ended May 31, 2001 of $1,712,000. At December 31, 2003, the Company does not have sufficient cash or cash flows from operations to meet its obligations. All of these factors raise substantial doubt about the Company's ability to continue as a going concern during the upcoming year.
The Company has historically relied on, and continues to rely on, advances from USE to fund its current operating requirements. It is uncertain whether this funding will continue. The Company has certain assets that are unencumbered that could be sold to generate cash. However, there can be no assurances that any funds generated from the sale of assets will be sufficient to meet the Company's obligations.
In order to improve the liquidity of the Company, management intends to do the following:
x Collect amounts due under the terms of certain notes receivable that it shares the cash proceeds of with USE and their subsidiaries. These notes receivable are as a result of the sale of certain coalbed methane interests and real estate interests to non-affiliated entities.
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
x Assist RMG in obtaining financing for the development of its coalbed methane properties and the acquisition of additional developed and undeveloped coalbed methane properties. x Raise equity funds through private placements of RMG common stock. x Concluding the litigation with Nukem, Inc. ("Nukem") at December 31, 2003, the Company and USE were awarded a $20 million plus judgment against Nukem and its affiliates. Nukem has appealed this judgment to the Tenth Circuit Court of Appeals.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INVESTMENTS
Investments in joint ventures and 20% to 50% owned companies are accounted for using the equity method. The Company accounts for its 3.7% investment in USE using the equity method because the Company is controlled by USE. The Company's investment in SGMC, RMG and USECC Joint Venture ("USECC") are accounted for using the equity method (see Note E).
CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
PROPERTIES AND EQUIPMENT
The Company capitalizes all costs related to the acquisition, exploration and development of mineral properties. Capitalized costs are charged to operations when the properties are determined to have declined in value or have been abandoned. The Company currently has no net capitalized costs associated with mineral properties.
Oil and gas properties are accounted for using the full cost method. Capitalized costs plus any future development costs are amortized by the units-of-production method using proved reserves. Capitalized costs are subject to an impairment test which limits capitalized costs less accumulated amortization and related deferred income taxes to the present value of future net revenues using current prices and operating costs discounted at 10%.
Depreciation of vehicles, machinery and equipment was provided by the straight-line method over the estimated useful lives of the related assets. All such vehicles, machinery and equipment have been fully depreciated.
LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amount may not be recoverable. If the sum of estimated future cash flows on an undiscounted basis is less than the carrying amount of the related asset, an asset impairment is considered to exist. The related impairment loss is measured by comparing estimated future cash flows on a discounted basis to the carrying amount of the asset. Changes in significant assumptions underlying future cash flow estimates may have a material effect on the Company's financial position and results of operations. An uneconomic commodity market price, if sustained for an extended period of time, or an inability to obtain
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
financing necessary to develop the mineral interests may result in asset impairment. As of December 31, 2003, management believes no impairment of the Company's long-lived assets exists.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents and other current assets approximates fair value because of the short term nature of those instruments. It is not practicable to determine fair value of debt to affiliate carried at $9,408,300 and $8,553,900 respectively at December 31, 2003 and 2002.
REVENUE RECOGNITION
Advance royalties which are repayable only from future production or which are non-refundable are recognized as revenue when received. Non-refundable option deposits are recognized as revenue when the option expires.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". This statement requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets, liabilities and carry forwards.
SFAS 109 requires recognition of deferred tax assets for the expected future effects of all deductible temporary differences, loss carry-forwards and tax credit carry-forwards. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for any tax benefits which, based on current circumstances, are not expected to be realized.
NET (LOSS) INCOME PER SHARE
The Company reports net (loss) income per share pursuant to Statement of Financial Accounting Standards No. 128 ("SFAS 128"). SFAS 128 specifies the computation, presentation and disclosure requirements for earnings per share. Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock, if dilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 143 Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligation." The statement requires the Company to record the fair value of the reclamation liability on its shut down mining and gas properties as of the date that the liability is incurred. The statement further requires that the Company review the liability each quarter and determine if a change in estimate is required as well as accrete the total liability on a quarterly basis for the future liability.
The Company will also deduct any actual funds expended for reclamation during the quarter in which it occurs. As a result of the Company taking impairment allowances in prior periods on its shut down mining properties, it has no remaining book value for these properties.
The following is a reconciliation of the total liability for asset retirement obligations
Balance December 31, 2002 $ 748,400 Impact of adoption of SFAS No. 143 293,800 Addition to Liability -- Liability Settled (79,800) Accretion Expense 90,900 --------------- Balance December 31, 2003 $ 1,053,300 ===============
The following table shows the Company's net income (loss) and net income (loss) per share on a pro forma basis as if the provisions of SFAS No. 143 had been applied retroactively in all periods presented.
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
C. RELATED-PARTY TRANSACTIONS:
The Company does not have employees, but utilizes USE's employees and pays for one-half of these costs under the USECC Joint Venture 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. As of December 31, 2003, December 31, 2002 and May 31, 2002 and 2001, the Board of Directors of USE contributed 76,294, 43,867, 70,075 and 53,837shares of USE stock to the ESOP at prices of $3.10, $3.08, $3.29 and $5.35 per share, respectively. The Company is responsible for one-half of the value of these contributions or $118,300, $67,600, $118,400 and $144,000 for the year ended December 31, 2003 and the seven months ended December 31, 2002 and the years ended May 31, 2002 and 2001, respectively, which was advanced through debt to affiliate. As of December 31, 2003, all shares of USE stock that have been contributed to the ESOP have been allocated. The estimated fair value of shares that are not vested is approximately $84,800.
D. INVESTMENTS IN AFFILIATES:
The Company's investments in affiliates are as follows:
At December 31, 2003 and 2002 and May 31, 2002, investments of $4,373,800, $5,876,600 and $6,038,700, respectively, are presented as investments in affiliates in the accompanying balance sheets. A liability of $215,600 has been presented as a commitment to fund equity investees as of December 31, 2003, 2002 and May 31, 2002 for these investments in affiliates that the Company must fund.
Equity (loss) gain from investments accounted for by the equity method is as follows:
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
CONDENSED COMBINED BALANCE SHEETS: EQUITY INVESTEES
CONDENSED COMBINED STATEMENTS OF OPERATIONS: EQUITY INVESTEES
Condensed combined balance sheets and statements of operations of the Company's equity investees include USECC, RMG, SGMC, YSFC and USE.
E. 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. During the life of the venture, the parties entered into various amendments to the GMMV Agreement.
As a result of sustained depressed uranium prices, the GMMV properties were maintained on a shut down basis. During fiscal 2000, certain differences arose in the GMMV and Kennecott sued the Company and USE. On September 11, 2000, the parties settled all disputes and Kennecott paid the Company and USE $3.25 million and assumed reclamation liability for the Sweetwater Mill, Jackpot and Big Eagle Mine properties. (See Note J).
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
SMP
During fiscal 1989, Crested and USE, through USECC, entered into an agreement to sell a 50% interest in their Sheep Mountain properties to a subsidiary of Nukem Inc., CRIC. USECC and CRIC immediately contributed their 50% interests in the properties to a newly-formed partnership, SMP. SMP was established to further develop and mine the uranium claims on Sheep Mountain, acquire uranium supply contracts and market uranium. Certain disputes arose among USECC, CRIC and its parent Nukem, Inc. over the operation of SMP. These disputes have been in litigation/arbitration for the past thirteen years. See Note J for the status of the related litigation/arbitration.
Due to the litigation and arbitration proceedings involving SMP, the Company has expensed all of its costs related to SMP and has no carrying value of its investment in SMP at December 31, 2003, December 31, 2002 and May 31, 2002. (See Note J).
PHELPS DODGE
During prior years, the Company and USE conveyed interests in mining claims to AMAX Inc. ("AMAX") in exchange for cash, royalties, and other consideration. AMAX merged with Cyprus Minerals ("Cyprus Amax") which was purchased by Phelps Dodge Mining Company ("Phelps Dodge") in December 1999. The properties have not been placed into production as of December 31, 2003.
Amax and later Cyprus Amax paid the Company and USE an annual advance royalty of 50,000 (25,000 lbs. each) pounds of molybdenum (or its cash equivalent). During fiscal 2000, Phelps Dodge assumed this obligation and made its first advance royalty payment to the Company and USE during the first quarter of 2001. Phelps Dodge is entitled to a partial credit against future royalties for any advance royalty payments made, but such royalties are not refundable if the properties are not placed into production. The Company recognized $60,300 of revenue from the advance royalty payments during the fiscal year ended May 31, 2001. If Phelps Dodge formally decides to place the properties into production, it is obligated to pay $2,000,000 to the Company and USE.
Per the contract with AMAX, the Company and USE are to receive 15% of the first $25,000,000, or $3,750,000, if the properties are sold, which the Company and USE believe occurred when Phelps Dodge purchased Cyprus Amax. Phelps Dodge filed suit against the Company and USE on June 19, 2002 regarding these matters. (See Note J).
SUTTER GOLD MINING COMPANY
Sutter Gold Mining Company ("SGMC") was established in 1990 to conduct operations on mining leases and to produce gold from the Lincoln Project in California.
SGMC has not generated any significant revenue and has no assurance of future revenue. All acquisition and mine development costs since inception were capitalized. Due to the decline in the spot price for gold and the lack of adequate financing, SGMC has put the property on a shut down status and has taken an impairment on the associated assets.
During fiscal 2000, a visitor's center was developed and became operational. SGMC has leased the visitor's center to partially cover stand-by costs of the property. At December 31, 2003, the spot market price for gold had attained levels that management believes will allow SGMC to produce gold from the property on
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
an economic basis. This conclusion is based on engineering analysis completed on the property. Management of SGMC is therefore pursuing the equity capital market and non-affiliated investors to obtain sufficient capital to complete the development of the mine, construct a mill and place the property into production. However, there can be no assurance that any funds will be obtained and the development of the mine will occur. (See Note N).
PLATEAU RESOURCES LIMITED
During fiscal 1994, USE entered into an agreement with Consumers Power Company to acquire all the issued and outstanding common stock of Plateau Resources Limited ("Plateau"), a Utah corporation. Plateau owns a uranium processing mill and support facilities and certain other real estate assets through its wholly-owned subsidiary, Canyon Homesteads, Inc., in southeastern Utah. USE paid nominal cash consideration for the Plateau stock and agreed to assume all environmental liabilities and reclamation bonding obligations. At December 31, 2003, Plateau has a cash security in the amount of $6.8 million to cover reclamation and annual licensing of the properties (see Note J). Although the Company has no ownership in Plateau, Directors of the Company and USE have agreed to divide equally a portion of certain reclamation obligations above a defined amount, and will share equally in the cash flows derived from operations.
The Company and USE are currently evaluating the best utilization of Plateau's assets. Evaluations are ongoing to determine when, or if, the mine and mill properties should be placed into production. The primary factor in these evaluations relates to uranium market prices.
Due to uranium market conditions in 2002, Plateau decided to change the license status from operational back to reclamation and filed a new reclamation plan. The Nuclear Regulatory Commission (NRC) reviewed the revised reclamation and decommissioning plan and agreed to a $6.1 million reclamation plan. Therefore, Plateau received about $2.9 million of excess reclamation bond funds on the Shootaring Canyon Uranium Mill. During the year ended December 31, 2003, management of Plateau determined that the mine and mill properties should be reclaimed.
On August 1, 2003, the Company and USE sold interests in the Ticaboo Townsite in southern Utah as a result of Plateau entering into a Stock Purchase Agreement to sell all the outstanding shares of Canyon Homesteads, Inc. ("Canyon") to The Cactus Group LLC, a newly formed Colorado limited liability company. The Cactus Group purchased all of the outstanding stock of Canyon for $3,370,000. Of that amount, $349,300 was paid in cash at closing and the balance of $3,120,700 is to be paid under the terms of a promissory note.
Pursuant to the note agreement, the Company and USE are to receive $5,000 per month for the months of November 2003 to March 2004 and $10,000 for the months of November 2004 to March 2005 and $24,000 per month for the months of April to October 2004 and $24,000 per month on a monthly basis after March of 2005 from The Cactus Group until August of 2008, at which time, a balloon payment of $2.8 million is due. The note is secured with all the assets of The Cactus Group and Canyon along with personal guarantees by the six principals of The Cactus Group. As additional consideration for the sale, the Company will also receive the first $210,000 in gross proceeds from the sale of either single family or mobile home lots in Ticaboo. The Company shares these cash flows on a 50-50 basis with USE.
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
ROCKY MOUNTAIN GAS, INC.
During fiscal 2000, the Company and USE organized Rocky Mountain Gas, Inc. ("RMG") to enter into the coalbed methane gas/natural gas business. RMG is engaged in the acquisition of coalbed methane gas properties and the future exploration, development and production of methane gas from those properties. At December 31, 2003, RMG is owned 39.8% by the Company and 47.5% by USE.
On January 3, 2000, RMG entered into an agreement with Quantum Energy, L.L.C. (Quantum formed a subsidiary "Quaneco" to conduct its business with RMG)) to purchase a 50% working interest and 40% net revenue interest in approximately 185,000 acres of unproven leasehold interests in the Powder River Basin of southeastern Montana. RMG also acquired a 100% working interest (82% revenue interest) in 65,247 net mineral acres in southwest Wyoming during the year ended May, 31, 2000
CCBM - ----
On July 10, 2001, RMG completed a sale of gas properties to CCBM, Inc., a Delaware corporation, which is wholly-owned by Carrizo Oil & Gas, Inc., Houston, Texas (NMS "CRZO"). The agreement between CCBM and RMG is to finance the further development of coalbed methane acreage currently owned by RMG in Montana and Wyoming, and to acquire and develop more acreage in Wyoming and the Powder River Basin of Montana.
RMG is the designated operator under a Joint Operating Agreement ("JOA") between RMG and CCBM, which will govern all operations on the properties subject to a Purchase and Sale Agreement between RMG and CCBM, subject to pre-existing JOA's with other entities, and operations or properties in the area of mutual interest ("AMI"). CCBM has the right to participate in other properties RMG may acquire under the area of mutual interest ("AMI").
RMG assigned CCBM an undivided 50% interest in all of RMG's existing coalbed methane properties (with the exception of Castle Rock of which only a 6.25% working interest was assigned) for a sales price of $7,500,000 in the form of a non-recourse promissory note payable in principal amounts of $125,000 per month plus interest at an annual rate of 8% over 41 months (starting July 31, 2001) with a balloon payment due on the forty-second month. This note is accounted for on a cash basis because it is non-recourse with its principal payments reducing the natural gas properties in accordance with the full cost method of accounting. The balance due under the note at December 31, 2003 is $863,200 due to a principal reduction of approximately $1.5 million. (See Pinnacle below) The properties sold to CCBM consisted of the Kirby, Oyster Ridge, Clearmont, Sussex, Finley, Baggs North, and Gillette North properties. CCBM's 50% undivided interest is pledged back to RMG to collateralize the promissory note.
To start development, and as part of the consideration for the acquisition, CCBM agreed to pay $5,000,000 to drill and complete from 30 to 60 wells on the coalbed properties. RMG is "carried" for its 50% interest in these wells, and will not be required to pay any of such costs. After the initial $5,000,000 has been spent, RMG and CCBM each will pay for their 50% share of costs in subsequent wells, and also will pay for their 50% share of operating costs for the wells drilled and completed in this drilling program. Without CCBM's consent, none of the drilling funds can be used for operations associated with water disposal wells, gas compression beyond 100 PSIG, or for facilities downstream of compression beyond 100 PSIG. CCBM will earn a 50% working interest in each well location (80 acres) and gas production therefrom, regardless of the status of payments on the promissory note. The balance under the work commitment at December 31,
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
2003 was $305,100. In 2003, a portion of these interests were exchanged for common stock of Pinnacle Gas Resources (See Pinnacle below).
Bobcat - ------
On April 12, 2002, RMG signed an agreement to purchase working interests in approximately 1,940 gross acres of coalbed methane properties in the Powder River Basin of Wyoming. The contract closed on June 4, 2002. RMG paid the seller $500,000 cash and another $150,000 by having USE issue 37,500 shares of its restricted common stock to the seller; CCBM paid $500,000 cash to the seller and CRZO issued its restricted shares of common stock valued at $150,000. The properties are located approximately 25 miles north of Gillette, in Campbell County, Wyoming. In 2003, these interests were exchanged for common stock of Pinnacle Gas Resources (see Pinnacle below).
Pinnacle - --------
On June 23, 2003, a Subscription and Contribution Agreement was executed by RMG, CCBM, and the seven affiliates of Credit Suisse First Boston Private Equity ("CSFB Parties"). Under the Agreement, RMG and CCBM contributed certain of their respective interests, having an estimated fair value of approximately $7.5 million each, carried on RMG's books at a cost of $922,600, comprised of (1) leases in the Clearmont, Kirby, Arvada and Bobcat CBM project areas and (2) oil and gas reserves in the Bobcat project area, to a newly formed entity, Pinnacle Gas Resources, Inc., a Delaware corporation ("Pinnacle"). In exchange for the contribution of these assets, RMG and CCBM each received 37.5% of the common stock of Pinnacle ("Pinnacle Common Stock") as of the closing date and options to purchase Pinnacle Common Stock ("Pinnacle Stock Options"). The CFSB contributed $5.0 million for 25% of the common stock of Pinnacle.
CSFB also contributed approximately $13.0 million of cash to Pinnacle in return for the Redeemable Preferred Stock of Pinnacle ("Pinnacle Preferred Stock"), and warrants to purchase Pinnacle Common Stock ("Pinnacle Warrants"). The CSFB Parties also agreed to contribute additional cash, under certain circumstances, of up to approximately $11.8 million to Pinnacle to fund future drilling, development and acquisitions. The CSFB Parties currently have greater than 50% of the voting power of the Pinnacle capital stock through their ownership of Pinnacle Common Stock and Pinnacle Preferred Stock.
Currently, on a fully diluted basis, assuming that all parties exercised their Pinnacle Warrants and Pinnacle Options, the CSFB Parties, RMG and CCBM would have ownership interests of approximately 46.2%, 26.9% and 26.9%, respectively. On a fully-diluted basis, assuming the additional $11.8 million of cash was contributed by the CSFB Parties and all Pinnacle Warrants and Pinnacle Options were exercised by all parties, the CSFB Parties would own 54.6% of Pinnacle and RMG and CCBM would each own 22.7% of Pinnacle.
Prior to and in connection with its contribution of assets to Pinnacle, CCBM paid RMG approximately $1.8 million in cash as part of its outstanding purchase obligation on the coalbed methane property interests CCBM previously acquired from RMG. CCBM was also given a credit of $1,250,000 against the note payable pursuant to the original Purchase and Sale Agreement which allowed CCBM to recover $1,250,000 from 20% of RMG's net revenue interest from any production from the properties contributed to Pinnacle. After these payments and credits, there was a balance of approximate $1.2 million remaining on the note receivable from CCBM to RMG. At December 31, 2003, the balance on the note
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
receivable for CCBM was $863,200. The principal reductions to the note receivable from CCBM reduced the monthly principal payments to $53,000. The receipt of payments from CCBM on the note receivable are accounted for on a cash basis because it is non-recourse.
Pinnacle is a private corporation. Only such information about Pinnacle as its board of directors elects to release is available to the public. All other information about Pinnacle is subject to confidentiality agreements between Pinnacle, RMG, and the other parties to the June 2003 transaction.
F. OIL AND GAS INFORMATION:
Costs related to the oil and gas activities of the Company were incurred as follows:
The Company had the following aggregate capitalized costs relating to the Company's oil and gas activities as follows:
No depreciation, depletion or amortization expense was recorded for the year ended December 31, 2003, the seven months ended December 31, 2002 and the fiscal years ended May 31, 2002 and 2001 respectively.
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
G. DEBT:
Obligations of the Company consist of advances payable to USE, which are due upon demand. The obligation is due to U.S. Energy for funding a majority of the operations of USECC, of which 50% is the responsibility of the Company. All advances payable to USE are classified as current as of December 31, 2003, December 31, 2002 and May 31, 2002 as a result of USE's unilateral ability to modify the repayment terms.
H. INCOME TAXES:
The components of deferred taxes as of December 31, 2003 and 2002 and May 31, 2002 are as follows:
At December 31, 2003, the Company had available, for federal income tax purposes, net operating loss carry-forwards of approximately $14,959,000 which expire from 2006 through 2022. The Company has
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
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 carry-forwards. In addition, the use of the NOL carry-forwards may be limited by Internal Revenue Service provisions governing significant change in company ownership.
The valuation allowance increased $322,500 for the year ended December 31, 2003, increased $522,900 for the seven months ended December 31, 2002 and increased (decreased) $255,900 and $(1,490,000) for the years ended May 31, 2002 and 2001, respectively.
The income tax provision is different from the amounts computed by applying the statutory federal income tax rate to income before taxes. The reasons for these differences are as follows:
I. SHAREHOLDERS' EQUITY:
The Boards of Directors of the Company from time to time, issued stock bonuses to certain directors, employees and third parties. These shares are forfeitable to the Company until earned. The Company is responsible for the compensation expense related to these issuances. For the year ended December 31, 2003, the seven months ended December 31, 2002 and the years ended May 31, 2002 and 2001, the Company did not recognize compensation expense resulting from these issuances. A schedule of forfeitable shares for Crested is set forth in the following table:
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
Issue Number Issue Total Date of Shares Price Compensation ----- --------- ----- ------------
June 1990 25,000 $1.06 $ 26,562 December 1990 7,500 .50 3,750 January 1993 6,500 .22 1,430 January 1994 6,500 .28 1,828 January 1995 6,500 .19 1,230 January 1996 5,000 .3125 1,600 January 1997 8,000 .9375 7,500 Release of Earned Shares (50,000) (33,800) -------- ----------- Balance at December 31, 2003 15,000 $ 10,100 ========= ============
J. COMMITMENTS, CONTINGENCIES AND OTHER:
LEGAL PROCEEDINGS
Material pending proceedings are summarized below. Certain of the Company's affiliates are involved in ordinary routine litigation incidental to their business. Other proceedings which were pending during the year ended December 31, 2003 have been settled or otherwise finally resolved.
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
In 1991, disputes arose between the Crested and USE d/b/a/ USECC, and Nukem, Inc. and its subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation and operation of their equally owned Sheep Mountain Partners (SMP) partnership. Arbitration proceedings were initiated by CRIC in June 1991 and in July 1991, USECC filed a lawsuit against Nukem, CRIC and others in the U.S. District Court of Colorado in Civil No. 91B1153. The Federal Court stayed the arbitration proceedings and discovery proceeded. In February 1994, all of the parties agreed to consensual and binding arbitration of all of their disputes over SMP before an arbitration panel (the "Panel").
After 73 hearing days, the Panel entered an Order and Award on April 18, 1996 and clarified the Order on July 3, 1996, finding generally in favor of Crested and USE on certain of their claims and imposed a constructive trust in favor of Sheep Mountain Partners on uranium contracts Nukem entered into to purchase uranium from CIS republics. The Panel also awarded SMP damages of $31,355,070 against Nukem. USECC filed a petition for confirmation of the Order and on June 27, 1997, the U.S. District Court confirmed the Panel's Orders in its Second Amended Judgment.
Thereafter, Nukem/CRIC appealed the Judgment to the 10th Circuit Court of Appeals ("CCA"). On October 22, 1998, the 10th CCA issued an Order and Judgment affirming the U.S. District Court's Second Amended Judgment without modification. The ruling affirmed (i) the imposition of a constructive trust in favor of SMP on Nukem's rights to purchase CIS uranium, the uranium acquired pursuant to those rights, and the profits therefrom; and (ii) the damage award in favor of SMP against Nukem. The 10th CCA held that the Panel's Awards "clearly retains both a constructive trust and a damage award," and the --- Arbitration Awards and the Second Amended Judgment were "clear and unambiguous."
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
On February 8, 1999, the U.S. District Court ordered Nukem to pay USECC the balance of the damage award. Nukem did so, but then moved for a satisfaction of judgment without accounting for the monies earned in the Constructive Trust. The District Court denied Nukem's motion and Nukem filed its second appeal to the 10th CCA. On October 16, 2000, the 10th CCA again affirmed the order of the District Court. The 10th CCA held that Nukem had not "provided an accounting of the partnership assets," finding that "the district court order presented for our review does not decide which CIS contracts are covered by the constructive trust."
On November 3, 2000, USECC filed a motion for a further accounting of the Constructive Trust. On February 15, 2001, the District Court entered an Order of Reference appointing a Special Master to "conduct an accounting" of the Constructive Trust. The accounting was conducted and on May 1, 2003, the Special Master filed his Report with the District Court. Both parties filed objections to the Report. On July 30, 2003, the U.S. District Court adopted the Report in part and rejected it in part. Judgment was then entered by the Court on August 1, 2003 in favor of USECC and against Nukem in the amount of $20,044,183.
On August 15, 2003, Nukem filed a "Motion to Remand to the Arbitration Panel or in the Alternative, to Alter, Amend and/or Correct the Court's August 1, 2003 Judgment and July 30, 2003 Order," and a "Motion to Correct Certain Findings or Statements in the Court's Order of July 30, 2003." On the same day, USECC filed a motion under Fed.R.Civ.P. 52(b) and 59(e) to alter or amend the July 30, 2003 Order and the August 1, 2003 Judgment. The District Court denied the parties' motions on September 10 and 11, 2003, respectively. Nukem's appeal and USECC's cross-appeal followed. Nukem's opening brief was filed on January 16, 2004 and on February 24, 2004, USECC filed an opening brief in its cross-appeal and an answer to Nukem's brief. Nukem has until March 29, 2004 or any extensions thereof to file an answer to USECC's opening brief. USECC may then file a reply brief 14 days after service of Nukem's answer. Management believes that the ultimate outcome of this matter will not have an adverse affect on the Company's financial condition or result of operations.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE and Crested filed a lawsuit in the U. S. District Court of Colorado in Case No. 98WM1630, against Contour Development Company, L.L.C. and entities and persons associated with Contour Development Company, L.L.C. (together, "Contour") seeking compensatory and consequential damages of more than $1.3 million from the defendants for dealings in real estate owned by USE and Crested in Gunnison, Colorado. The Contour defendants asserted a counterclaim asking for payment of attorneys fee and costs. The parties settled the litigation in 2004. In the settlement, USE and Crested received $25,000 in cash; two lots in the City of Gunnison, Colorado (one of which has been sold for a net of $65,326 and the other lot is under contract to sell for $180,000), and an additional five development lots covering 175 acres north of Gunnison, Colorado.
See "Business - Commercial Operations - Real Estate and Other Commercial Operations - Colorado Properties" above.
PHELPS DODGE LITIGATION
Crested and USE, d/b/a USECC, were served with a lawsuit on June 19, 2002, filed in the U.S. District Court of Colorado (Case No. 02-B-0796(PAC)) by Phelps Dodge Corporation (PD) and its subsidiary, Mt. Emmons Mining Company (MEMCO), over contractual obligations in USECC's agreement
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
with PD's predecessor companies, concerning mining properties on Mt. Emmons, near Crested Butte, Colorado.
The litigation stems from agreements that date back to 1974 when Crested and USE leased the mining claims from AMAX Inc., PD's predecessor company. The mining claims cover one of the world's largest and richest deposits of molybdenum discovered by AMAX. AMAX reportedly spent over $200 million on the acquisition, exploration and mine planning activities on the Mt. Emmons properties.
The complaint filed by PD and MEMCO seeks a determination that PD's acquisition of Cyprus Amax was not a sale. Under a 1986 agreement between USECC and AMAX, if AMAX sold MEMCO or its interest in the mining properties, Crested and USE would receive 15% (7.5% each) of the first $25 million of the purchase price ($3.75 million). In 1991, Cyprus Minerals Company acquired AMAX to form Cyprus Amax Minerals Co. USECC's counter and cross-claims allege that in 1999, PD formed a wholly-owned subsidiary CAV Corporation, for the purpose of purchasing the controlling interest of Cyprus Amax and its subsidiaries (including MEMCO) at an estimated value in cash and PD stock exceeding $1 billion and making Cyprus Amax a subsidiary of PD. Therefore, USECC asserts the acquisition of Cyprus Amax by PD was a sale of MEMCO and the properties that triggers the obligation of Cyprus Amax to pay USECC the $3.75 million plus interest.
The other issue in the litigation is whether USECC must, under terms of a 1987 Royalty Deed, accept PD's and MEMCO's conveyance of the Mt. Emmons properties back to USECC, which properties now include a plant to treat mine water, costing in excess of $1 million a year to operate in compliance with State of Colorado regulations. PD's and MEMCO's claim seek to obligate USECC to assume the operating costs of the water treatment plant. USECC refuses to have the water treatment plant included in the return of the properties because, the USECC counterclaim argues, the properties must be in the same condition as when they were acquired by AMAX before the water treatment plant was constructed by AMAX.
As added counterclaims, USECC seeks (i) damages for PD's breach of covenants of good faith and fair dealing; (ii) damages for PD's failure to develop the Mt. Emmons properties and not protecting USECC's rights as a reversionary owner of the mining rights to the properties, (iii) damages for unjust enrichment of PD; (iv) damages for breach of the PD's fiduciary duties owed to USECC as reversionary owner of the property, and for neglecting to maintain the mining rights and interests in the properties.
On March 17, 2003, PD filed additional motions for partial summary judgment on various claims. On January 22, 2004, the District Court heard the motions and responses of USECC and additional briefs were thereafter filed with the Court. The Court is considering the motions. Management believes that the ultimate outcome of this matter will not have an adverse affect on the Company's financial condition or result of operations.
ROCKY MOUNTAIN GAS, INC. (RMG)
LITIGATION INVOLVING LEASES ON COALBED METHANE PROPERTIES IN MONTANA
On or about April 1, 2001, RMG was served with a Second Amended Complaint wherein the Northern Plains Resource Council had filed suit in the U.S. District Court of Montana, Billings Division in Case No. CV-01-96-BLG-RWA against the United States Bureau of Land Management ("BLM"), RMG, certain of its affiliates (including Crested and USE) and some 20 other defendants. The plaintiff is seeking to
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
cancel oil and gas leases issued to RMG et. al. by the BLM in the Powder River Basin of Montana and for other relief.
The basis for the complaint appears to be that the BLM's regulations require the BLM to respond to objections filed by persons owning land or lease rights adjacent to the coalbed properties which the BLM is offering to lease to the public. The argument of plaintiff appears to be that if objections are not responded to by the BLM prior to issuing CBM leases, the leases are invalid. Based on this argument, the plaintiff appears to have been successful in forcing cancellation of some CBM leases granted to others in the Powder River Basin of Montana, because the BLM did not respond to some objecting adjacent landowners. However, all of the BLM leases in Montana held by RMG (none are held by USE or Crested in their own corporate names) are at least four years old, and there is no record of any objections being made to the issue of those leases.
Based on filings in the case to date, it appears that the BLM is taking the initiative in responding to the plaintiff. We believe RMG's leases were validly issued in compliance with BLM procedures, and do not believe the plaintiff's lawsuit will adversely affect any of RMG's Montana BLM leases.
LAWSUITS CHALLENGING BLM'S RECORDS OF DECISIONS
Three lawsuits are currently pending in the Montana Federal District Court challenging BLM's Records of Decisions for the Powder River Basin Oil and Gas EIS (PRB-EIS) for the Wyoming portion of the basin, and the Statewide Oil and Gas EIS and Proposed Amendment for the Powder River and billings Resource Management Plans in Montana. Neither the Company, nor RMG is a party to any of these lawsuits.
LITIGATION INVOLVING DRILLING ON A COALBED METHANE LEASE
A drilling company, Eagle Energy Services, LLC filed a lien on RMG's leasehold in southwestern Wyoming for drilling services performed at RMG's Oyster Ridge Property and filed a lawsuit foreclosing the lien. Eagle Energy's bank, Community First National Bank of Sheridan, Wyoming, filed a similar suit for the same amount on an assignment from Eagle Energy against RMG, Eagle Energy Services, LLC and others who guaranteed a loan to Eagle Energy in Civil Action No. C02-9-328 in the 4th Judicial District of Sheridan County, Wyoming. Eagle Energy's claim is for a contract to drill a well for coalbed methane. RMG terminated the agreement because of the dangerous conditions of Eagle Energy's equipment and other reasons. The claim against RMG is for $49,309. Negotiations to settle the lien and lawsuits are pending. Management believes that the ultimate outcome of the matters will not have a material effect on the Company's financial condition or result of operations.
RECLAMATION AND ENVIRONMENTAL LIABILITIES
Most of the Company's and USE's exploration activities are subject to federal and state regulations that require the Company and USE to protect the environment. The Company and USE conduct their operations in accordance with these regulations. The Company's and USE's current estimates of their reclamation obligations and their current level of expenditures to perform ongoing reclamation may change in the future. At the present time, however, the Company and USE cannot predict the outcome of future regulation or impact on costs. Nonetheless, the Company and USE have recorded their best estimate of future reclamation and closure costs based on currently available facts, technology and enacted laws and regulations. Certain regulatory agencies, such as the Nuclear Regulatory Commission ("NRC"), the Bureau of Land Management ("BLM") and the Wyoming Department of Environmental Quality ("WDEQ") review the
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
Company's and USE's reclamation, environmental and decommissioning liabilities. The Company and USE believe the recorded amounts are consistent with those reviews and related bonding requirements. To the extent that production on their properties is delayed, interrupted or discontinued because of regulation or the economics of the properties, the future earnings of the Company and USE would be adversely affected. The Company and USE believe they have accrued all necessary reclamation costs and there are no additional contingent losses or unasserted claims to be disclosed or recorded.
The majority of the Company's and USE's environmental obligations relate to former mining properties acquired by the Company and USE. Since the Company and USE currently do not have properties in production, the Company's and USE's policy of providing for future reclamation and mine closure costs on a unit-of-production basis has not resulted in any significant annual expenditures or costs. For the obligations recorded on acquired properties, including site-restoration, closure and monitoring costs, actual expenditures for reclamation will occur over several years in the future. The Company and USE also do 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 December 31, 2003, estimated reclamation obligations related to the above mentioned mining properties total $7,264,700. Crested's portion of this obligation is $1,053,300, which is reflected on the balance sheet of the Company. The remaining balance of $6,211,400 is an obligation of USE and its other affiliates, (excluding Crested). The Company is obligated for 50% of any reclamation costs in excess of current estimated reclamation obligations. The Company, however, does not expect that estimated reclamation costs will be exceeded.
The Company and USE currently have three properties or investments that account for most of their environmental obligations, SMP, Plateau and SGMC. The environmental obligations and the nature and extent of cost sharing arrangements with other potentially responsible parties, as well as any uncertainties with respect to joint and several liability of each are discussed in the following paragraphs:
SMP ---
The Company and USE are equally responsible for the reclamation obligations, environmental liabilities and liabilities for injuries to employees in mining operations with respect to the Sheep Mountain properties. The reclamation obligations, which are established by regulatory authorities, were reviewed by the Company, USE and the regulatory authorities during the year ended December 31, 2003 and the balance in the reclamation liability account at December 31, 2003 of $2,106,600 (2 accrued by Crested) is believed by management to be adequate. The Company and USE are self bonded for this obligation by mortgaging certain of their real estate assets, including the Glen L. Larsen building, and by posting cash bonds.
GMMV ----
During fiscal 1991, the Company and USE acquired mineral properties on Green Mountain known as the Big Eagle Property. The GMMV also acquired a uranium mill known as the Sweetwater Mill. As part of the settlement of the GMMV litigation with Kennecott in September 2000, the Company was released from any and all reclamation and environmental obligations related to the GMMV except the Ion Exchange Plant. During fiscal 2002, the Company and USE completed the required reclamation on the Ion Exchange Plant. A final reclamation report has been submitted to the regulatory agencies. Although this report has not been audited by the regulatory agency, no further reclamation cost is anticipated.
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
SUTTER GOLD MINING COMPANY -----------------------------
SGMC's mineral properties are currently in a shut down status and have never been in production. SGMC has recorded a reclamation liability as of December 31, 2003 that is covered by a $27,400 reclamation cash bond.
PLATEAU RESOURCES, LIMITED ----------------------------
The environmental and reclamation obligations acquired with the acquisition of Plateau include obligations relating to the Shootaring Mill. As of December 31, 2003, the reclamation liability on the Plateau properties was $5,364,000. Plateau held a cash deposit for reclamation in the amount of $6,778,700.
EXECUTIVE COMPENSATION
The Company and USE are committed to pay the surviving spouse or dependant children of certain of their officers one years' salary and an amount to be determined by the Boards of Directors, for a period of up to five years thereafter. This commitment applies only in the event of the death or total disability of those officers who are full-time employees of the Company at the time of total disability or death. Certain officers and employees have employment agreements with the Company and USE. The maximum compensation due under these agreements for the officers covered by the agreement for the first year after their deaths, should they die in the same year, is $311,400 at December 31, 2003.
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
K. TRANSITION PERIOD COMPARATIVE DATA
The following table presents certain financial information for the seven months ended December 31, 2002 and 2001, respectively:
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
M. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
CRESTED CORP. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND MAY 31, 2002, 2001 (Continued)
N. SUBSEQUENT EVENT
ROCKY MOUNTAIN GAS, INC.
On January 30, 2004, the Company's affiliate, RMG, acquired Wyoming coalbed methane (CBM) properties from a non-affiliated party. The purchase price of $6.8 million was paid with $5.0 million of cash, $500,000 in a 30 day secured note, $600,000 in restricted USE stock and $700,000 in restricted RMG stock. RMG financed $3.7 million of the cash component from a recently established $25 million credit facility arranged by Petrobridge Investment Management, LLC (Petrobridge), a mezzanine lender headquartered in Houston, TX. As defined by the agreement, terms under the credit facility include the following: (1) Advances under the credit facility are subject to lenders approval; (2) All revenues from oil and gas properties securing the credit facility will be paid to a lock box controlled by the lender. All disbursements for lease operating costs, revenue distributions and operating expenses will require approval by the lender before distributions are made; and (3) The Company must maintain certain financial ratios and production volume, among other things.
The properties acquired include 247 completed wells of which 138 wells were producing at the time of the acquisition, approximately 6.0 million cubic feet of gas per day (Mmcfd) (approximately 3.2 Mmcfd net to RMG) and 40,120 undeveloped fee acres, of which RMG owns 100%. RMG will operate 89% of the wells and owns an average 58% working interest in the producing wells and a 100% working interest in all of the undeveloped acreage. The properties purchased serve as the sole collateral for the credit facility. With the acquisition, RMG's gross and net acreage holdings increase to approximately 264,300 and 128,200, respectively.
SUTTER GOLD MINING CO.
On January 5, 2004, the Company and USE through Sutter entered into a Letter of Intent to merge, via a reverse takeover, with Globemin Resources, Inc. a public company headquartered in Vancouver, Canada. Pursuant to the Letter of Intent, after the reverse takeover is closed, Sutter plans on raising equity funds and begin further exploration work on the properties and the construction of a new secondary access raise to comply with US Mine Safety Health Administration regulations and improve ventilation as well as to better define known mineralization. The exploration work will be run through the Comet mineralized zone as soon as funds are made available through equity or debt financing. The current resource production plan is to produce initially, a stockpile of mineralized material sufficient to operate a mill at 300 tons-per-day (tpd) while the mill is being built. The second stage of development will be to construct a conventional 300 tpd mill on site, which will be designed so that it can easily be expanded to accommodate the planned production of 500 tpd. Closing of the reverse takeover is subject to negotiation and approval of the share exchange agreement by the Directors and Shareholders of both companies, and approval by Canadian regulatory authorities.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's Principal Executive Officer and Principal Financial Officer have reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 240.13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Principal Executive Officer and the Principal Financial Officer have concluded that the Company's current disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There was no change in the Company's internal controls that occurred during the fourth quarter of the period covered by this report that has materially affected, or is reasonably likely to affect, the Company's internal controls over financial reporting.
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 December 31, 2003, we 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 our Proxy Statement for the Meeting of Shareholders to be held in June 2004, under the captions "Proposal 1: Election of Directors," Filing of Reports Under Section 16(a)," and "Business Experience and Other Directorships of Directors and Nominees." The information regarding the remaining executive officers follows:
The company has adopted a Code of Ethics. A copy of the Code of Ethics will be provided to any person, without charge, upon written request addressed to Daniel P. Svilar, Secretary, 877 N. 8th W., Riverton, WY 82501.
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 is not also a director.
ROBERT SCOTT LORIMER, age 53, has been the Chief Accounting Officer for both USE and Crested for more than the past five years. Mr. Lorimer also has been Chief Financial Officer for both of these companies since May 25, 1991, their Treasurer since December 15, 1990, and Vice President Finance since April 1998. He serves at the will of each board of directors. There are no understandings between Mr. Lorimer and any other person, pursuant to which he was named as an officer, and he has no family relationship with any of the other executive officers or directors of Use or Crested. During the past five years, he has not been involved in any Reg. S-K Item 401(f) listed proceeding.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference to the Proxy Statement for the Meeting of Shareholders to be held in June 2004, under the caption "Director's Fees and Other Compensation."
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 Proxy Statement for the Meeting of Shareholders to be held in June 2004, under the caption "Principal Holders of Voting Securities."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by reference to the Proxy Statement for the Meeting of Shareholders to be held in June 2004, under the caption "Certain Relationships and Related Transactions."
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
(1) - (4) Grant Thornton LLP billed us as follows for the year ended December 31, 2003 and the seven months ended December 31, 2002:
Year Ended Seven Months Ended December 31, 2003 Ended December 31, 2002
Audit Fees(a) $ 27,600 $ 24,100
Audit-Related Fees(b) $ -- $ --
Tax Fees(c) $ 5,500 $ 2,800
All Other Fees(d): $ -- $ --
(a) Includes fees for audit of the annual financial statements and review of quarterly financial information filed with the Securities and Exchange Commission ("SEC").
(b) For assurance and related services that were reasonably related to the performance of the audit or review of the financial statements, which fees are not included in the Audit Fees category. The Company had no Audit-Related Fees for the periods ended December 31, 2003, and 2002, respectively.
(c) For tax compliance, tax advice, and tax planning services, relating to any and all federal and state tax returns as necessary for the periods ended December 31, 2003 and 2002, respectively.
(d) For services in respect of any and all other reports as required by the SEC and other governing agencies.
(5)(i) Our audit committee approves the terms of engagement before we engage Grant Thornton for audit and non-audit services, except as to engagements for services outside the scope of the original terms, in which instances the services have been provided pursuant to pre-approval policies and procedures, established by the audit committee. These pre-approval policies and procedures are detailed as to the category of service and the audit committee is kept informed of each service provided. These policies and procedures, and the work performed pursuant thereto, do not include delegation any delegation to management of the audit committees responsibilities under the Securities Exchange Act of 1934.
(5)(ii) The percentage of services provided for Audit-Related Fees, Tax Fees and All Other Fees, which services were delivered pursuant to pre-approval policies and procedures established by the audit committee, in 2003 (and the seven months ended December 31, 2002) were: Audit-Related Fees 83% (90%); Tax Fees 17% (10%); and All Other Fees 0% (0%).
PART IV
ITEM 15.
ITEM 15. 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 Grant Thornton LLP . . . . . . . . . . . . . . . . . . . . . . . . .45
Balance Sheets - December 31, 2003 and 2002 May 31, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . .46
Statements of Operations for the Year ended December 31, 2003, the seven months ended December 31, 2002 and the Years Ended May 31, 2002 and 2001. . . . . .47
Statements of Shareholders' Deficit for the Year ended December 31, 2003, the seven months ended December 31, 2002 and the Years Ended May 31, 2002 and 2001. . . . . .48
Statements of Cash Flows for the Year ended December 31, 2003, the seven months ended December 31, 2002 and the Years Ended May 31, 2002 and 2001. . . . . .49
Notes to Financial Statements. . . . . . . . . . . . . . . . . .50-71
(2) All other schedules have been omitted because the required information is inapplicable or is shown in the notes to financial statements.
(3) Exhibits Required to be Filed.
Exhibit Sequential No. Title of Exhibit Page No. ------ ------------------ ----------
3.1 Restated Articles of Incorporation. . . . . . . . . . . . . .[1]
3.1(a) Articles of Amendment to the Articles of Incorporation of Rocky Mountain Gas, Inc. (to establish Series A Preferred Stock in March 2004). . . . . .*
3.2-3.3 [intentionally left blank]
3.4 By-Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . .[2]
4.1 USE 1998 Incentive Stock Option Plan and Form of Stock Option Agreement. . . . . . . . . . . .[6]
4.2 Form of Stock Option Agreement and Schedule, Options granted 1992. . . . . . . . . . . . . . .[4]
4.3 Form of Stock Option Agreement and Schedule, Options granted 1/96. . . . . . . . . . . . . . .[4]
4.4 USE Restricted Stock Bonus Plan as Amended through 2/94). . . . . . . . . . . . . . . . . .[4]
4.5 Amendment to USE 1998 Incentive Stock Option Plan (To Include Family Transferability of Options Under SEC Rule 16b)). . . . . . . . . . . . . . . . . . . .[9]
4.6 Form of Stock Option Agreement and Schedule, Options granted January 10, 2001). . . . . . . .[9]
4.7 USE 1996 Stock Award Program (Plan)). . . . . . . . . . .[5]
4.8 USE Restated 1996 Stock Award Plan and Amendment to USE 1990 Restricted Stock Bonus Plan). . . . . . . . .[5]
4.9 USE 2001 Stock Award Plan). . . . . . . . . . . . . . . .[10]
10.1 Promissory Note from Crested to USE (5/31/97)). . . . . .[5]
10.2 Management Agreement - USE - CC). . . . . . . . . . . . .[3]
10.3 Joint Venture Agreement - Registrant and USE). . . . . . .[2]
10.4-10.58 [intentionally left blank]
10.59 Closing Agreement - Addendum to Agreement for Purchase and Sale of Assets (see Exhibit 10.60). . . . . .[9]
10.60 Agreement for Purchase and Sale of Assets (Rocky Mountain Gas, Inc. and Quantum Energy LLC)). . . . . .[7]
10.61 Purchase and Sale Agreement CCBM, Inc. (subsidiary of Carrizo Oil & Gas, Inc.) and Rocky Mountain Gas, Inc.) . . . . . . . . . . . . . .[10]
10.62-10.66 [intentionally left blank]
10.67 Contribution and Subscription Agreement (to which RMG, Pinnacle Gas Resources and others are parties). . . . . [22]
10.68 Purchase and Sale Agreement, with three amendments (for purchase of Hi-Pro assets). . . . . . . . . . . . . . . [24]
10.69 Credit Agreement (mezzanine credit facility with Petrobridge Investment Management). . . . . . . . . . . . . .[24]
14.0 Code of Ethics. . . . . . . . . . . . . . . . . . . . . . . . .*
21 Subsidiaries of Registrant). . . . . . . . . . . . . . . . . [9]
23.0 Consent of Netherland, Sewell & Associates, Inc., independent petroleum engineers. . . . . . . . . . . . . . . . . . . . . .*
31.1 Certification under Rule 13a-14(a) John L. Larsen . . . . . . .*
31.2 Certification under Rule 13a-14(a) Robert Scott Lorimer . . . .*
32.1 Certification under Rule 13a-14(b) John L. Larsen . . . . . . .*
32.2 Certification under Rule 13a-14(b) Robert Scott Lorimer. . . . *
* Filed herewith
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 exhibits of the Registrant's Form 10-K for the year ended May 31, 1996.
[5] Incorporated by reference from the like-numbered exhibits of the Registrant's Form 10-K for the year ended May 31, 1997.
[6] Incorporated by reference from the like-numbered exhibits of the Registrant's Form 10-K for the year ended May 31, 1998.
[7] Incorporated by reference from the like-number exhibit of the Registrant's Form 10-K for the year ended May 31, 2000.
[8] [intentionally left blank]
[9] Incorporated by reference from the like-number exhibit of the Registrant's Form 10-K for the year ended May 31, 2001.
[10] Incorporated by reference from the like-number exhibit of the Registrant's Form 10-K for the year ended May 31, 2002.
[11]-[21] [intentionally left blank]
[22] Incorporated by reference from the exhibit filed with the Registrant's Form 8-K, filed July 22, 2003
[23] [intentionally left blank]
[24] Incorporated by reference from the exhibit filed with the Registrant's Form 8-K, filed February 17, 2004.
(b) Reports filed on Form 8-K.
During the fourth quarter ended December 31, 2003, the Registrant filed one report on Form 8-K dated December 24, 2003.
(c) Required exhibits follow the signature page and are listed above under Item 15 (a)(3).
(d) Required financial statement of significant 50% or less owned investee will be filed by an amendment.
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: March 26, 2004 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: March 26, 2004 By: /s/ John L. Larsen --------------------------- JOHN L. LARSEN, Director
Date: March 26, 2004 By: /s/ Daniel P. Svilar --------------------------- DANIEL P. SVILAR, Director
Date: March 26, 2004 By: /s/ Michael D. Zwickl --------------------------- MICHAEL D. ZWICKL, Director
Date: March 26, 2004 By: /s/ Robert Scott Lorimer --------------------------- ROBERT SCOTT LORIMER, Principal Financial Officer and Chief Accounting Officer