Item 1 and Item 2.
ITEM 3. Legal Proceedings
Material proceedings pending at December 31, 2004, and developments in those proceedings from that date to the date this Annual Report is filed, are summarized below. Other proceedings which were pending during the year have been settled or otherwise finally resolved.
Sheep Mountain Partners Arbitration/Litigation
In 1991, disputes arose between Crested/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 Action 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").
The Panel entered an Order and Award in 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, and also awarded SMP damages of $31,355,070 against Nukem. Further legal proceedings ensued. On appeal, the 10th Circuit Court of Appeals ("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.
As a result of further proceedings, the U.S. District Court appointed a Special Master to conduct an accounting of the constructive trust. The U.S. District Court adopted the Special Master’s report in part and rejected it in part, and entered judgment on August 1, 2003 in favor of USECC and against Nukem for $20,044,183. In early 2004, the parties appealed this judgment to the CCA
On February 24, 2005, a three judge panel of the CCA vacated the judgment of the U.S. District Court and remanded the case to the Panel for clarification of the 1996 Order and Award. In remanding this case, the CCA stated: "The arbitration award in this case is silent as to the definition of 'purchase rights' and the 'profits therefrom,' including the valuation of either. Also unstated in the award is the duration of the constructive trust and whether and what costs should be deducted when computing the value of the constructive trust. Further, the arbitration panel failed to address whether prejudgment interest should be awarded on the value of the constructive trust. As a result, the district court's valuation of the constructive trust was based upon extensive guesswork. Therefore, a remand to the arbitration panel for clarification is necessary, despite the long and tortured procedural history of this case."
The timing and ultimate outcome of this litigation is not predicted. We believe that the ultimate outcome will not have an adverse affect on our financial condition or results of operations.
Contour Development Litigation
On July 8, 1998, Crested and USE 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. for substantial damages from the defendants for dealings in real estate owned by Crested and USE in Gunnison, Colorado. This litigation was settled in 2004 with Crested and USE receiving nominal cash and seven real estate lots in and near Gunnison. Two lots have been sold and five are for sale.
Phelps Dodge Litigation
Crested and USE 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 relates to agreements from 1974 when Crested and USE leased the mining claims to AMAX Inc., PD’s predecessor company. The mining claims cover one of the world’s largest and richest deposits of molybdenum, which was discovered by AMAX.
The June 19, 2002 complaint filed by PD and MEMCO sought 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 Mineral Co. USECC’s counter and cross-claims alleged that in 1999, PD formed a wholly-owned subsidiary CAV Corporation, for the purpose of purchasing the controlling interest in Cyprus Amax and its subsidiaries (including MEMCO) and making Cyprus Amax a subsidiary of PD. Therefore, USECC asserted that the acquisition of Cyprus Amax by PD was a sale of MEMCO and the properties that triggered the obligation of Cyprus Amax to pay USECC the $3.75 million plus interest.
The other issues in the litigation were 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 sought to obligate USECC to assume the operating costs of the water treatment plant. USECC asserted counterclaims against the defendants, including a claim for nonpayment of advance royalties.
On July 28, 2004, the Court entered an Order granting certain of PD's motions and denying USECC's counterclaims and cross-claims. The case was tried in late 2004.
On February 4, 2005, the Court entered Findings and Fact and Conclusions of Law and ordered that the conveyance of the Mt. Emmons properties under Paragraph 8 of the 1987 Agreement includes the transfer of ownership and operational responsibility for the Water Treatment Plant, and that PD does not owe USECC any advanced royalty payments. However, the Order did not address the NPDES permit.
NPDES permits are administered and regulated by the Colorado Department of Public Health and the Environment (“CDPHE”). The timing and scope of responsibilities for maintaining and operating the plant will be addressed by the CDPHE later in 2005.
USECC has filed a motion with the Court to amend the Order to determine that the decreed water rights from the Colorado Supreme Court opinion (decided in 2002, finding that the predecessor owners of the Mt. Emmons property had rights to water to develop a mine), and any other appurtenant water rights, be conveyed to USECC. The motion is pending.
Rocky Mountain Gas, Inc. (RMG)
Litigation involving leases on coalbed methane properties in Montana
In April 2001, RMG was served with a Second Amended Complaint, in which the Northern Plains Resource Council ("NPRC") had filed suit in the U. S. District Court of Montana, Billings Division (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 cancel oil and gas leases issued to RMG et. al. by the BLM in the Powder River Basin of Montana and for other relief.
In December 2003, Federal District Court Judge Anderson granted BLM’s and the other defendants Motion for Summary Judgment and ruled that BLM did not have to consider environmental impacts in an Environmental Impact Statement (“EIS”) prior to leasing because the 1994 Resource Management Plan (“RMP”) limited lease right to exploration and small scale development. On August 30, 2004, the Ninth Circuit Court of Appeals affirmed the District Court decision and held that the six-year statue of limitations precluded challenging the 1994 RMP and EIS. On February 10, 2005, NRPC's petition for rehearing or in the alternative petition for en banc hearing was denied by the Ninth Circuit Court of Appeals.
All of RMG's BLM Montana leases are held by RMG and are at least four years old. There is no record of any objections being made to the issue of those leases. 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 BLM leases in Montana.
Lawsuits challenging BLM's Records of Decisions
There is a lawsuit currently pending in the Montana Federal District Court challenging BLM's Records of Decisions for the Powder River Basin Oil and Gas 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:
In April of 2003 NPRC and the Northern Cheyenne Tribe and Native Action (the “Tribe”) filed a suit against BLM challenging the April 2003 decision by BLM approving the Final Statewide Oil and Gas Environmental Impact Statement (FEIS) and proposed amendments to the RMP. On February 25, 2005 Federal District Court Judge Anderson dismissed all counts with the exception of the allegation that the FEIS is inadequate because it failed to consider any alternatives to full-field development and ruled that BLM’s failure to analyze a phased development alternative renders the FEIS inadequate. BLM will now be required to perform a Supplemental EIS (“SEIS”) examining a phased development alternative, which could take 18 months to complete.
On April 5, 2005 Federal District Court Judge Anderson rejected the Tribe’s request for a complete moratorium on CBM drilling in Montana and instead accepted BLM’s proposal that limited the number of Federal APDs issued by BLM to maximum of 500 wells per year, including federal, state and fee wells within a certain defined geographic area. The decision will prohibit BLM from issuing Federal wells in RMG’s Castle Rock property until the SEIS is completed, because it is not located with the defined geographic area. However, the decision does not limit the number of fee and state wells that can be approved in the Castle Rock property by the State of Montana. RMG will request BLM to extend the expiration date of the Federal leases for the period of the delay.
Neither the Company nor RMG is a party to this lawsuit. However, further permitting for federal CBM wells in Montana could be impacted until the issues have been resolved.
Litigation involving drilling
A drilling company, Eagle Energy Services, LLC filed a lawsuit against RMG for drilling services claiming $49,309.50 for non-payment in Civil Action No. C02-9-341. 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 in Civil Action No. CO2-9-328 in the 4th Judicial District of Sheridan County, Wyoming. In February 2005 RMG and Community First reached a full and complete settlement of Civil Action No. C02-9-328 and a Joint Motion to Dismiss with Prejudice is currently pending with the Court. RMG has also requested Eagle Energy to join in a Motion to Dismiss in Civil Action No. C02-9-341 because the claim was settled as noted above. 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.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
On September 2, 2004, the annual meeting of shareholders was held and four matters were voted upon.
1. Re-election of five directors: Daniel P. Svilar, Michael D. Zwickl, Harold F. Herron, Keith G. Larsen and John L. Larsen. 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 five directors, the votes cast were as follows:
Name of Director
For
Abstain
Daniel P. Svilar
15,515,043
134,431
Michael D. Zwickl(1)
15,514,248
135,226
Herrold F. Herron
15,515,118
134,356
Keith G. Larsen
15,516,018
133,456
John L. Larsen
15,519,218
130,256
(1) Mr. Zwickl resigned in 2005.
2. Amendment of the articles of incorporation to increase the number of shares of common stock authorized to be issued (from 20,000,000) to 100,000,000 - approved.
Votes For
Votes Against
Abstain *
15,411,539
228,444
20,491
3. Amend the articles of incorporation to provide that directors may only be removed by vote of the shareholders for cause - approved.
Votes For
Votes Against
Abstain *
13,098,618
226,204
15,826
4. Adopt a qualified incentive stock option plan and reserve 2,000,000 shares of common stock for issuance on exercise of options which may be granted, provided that at such time as options may be outstanding for 2,000,000 shares, the number of reserved shares shall be automatically increased to always equal not more than 20% of the issued and outstanding shares of the Company - approved.
Votes For
Votes Against
Abstain *
13,113,133
203,674
18,641
* Includes broker non-votes.
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.
(a) Holders
(b)(1) At March 31, 2005 there were 1,710 stockholders of record for Crested common stock.
(b)(2) Not applicable.
(b) 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.
(c) During the year ended December 31, 2004, Crested issued 19,200 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, 2004 and December 31, 2003, the seven months ended December 31, 2002 and December 31, 2001 and the three fiscal years ended May 31, 2002, 2001 and 2000. The selected financial data is derived from and should be read with the financial statement 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”) through a non consolidated affiliate, USECC Joint Venture (“USECC”). USE owns 70.1% of the Company’s common stock on a consolidated basis. 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 jointly owned mineral properties. Due to either historically 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. The Company had no production from any of its mineral properties during the periods from May 31, 2002 through December 31, 2004 except coalbed methane through its non-consolidated affiliate Rocky Mountain Gas, Inc. (“RMG”) of which it owns 39.8%.
The Company and USE formed 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 became the primary business focus of the Company. 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. 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. Many 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.
On February 22, 2005, the Company, USE, and RMG signed a letter of intent with Enterra Energy Trust (the “Enterra Trust,” an Alberta, Canada trust, whose trust units are traded on the Toronto Stock Exchange and the Nasdaq National Market), for the proposed acquisition by Enterra of RMG for cash, exchangeable shares of Enterra Energy Corp. (“Enterra”). In the event that the sale of RMG is concluded, Enterra will assume the existing RMG debt of approximately $3.5 million. Starting twelve months after closing of the transaction, the shares of Enterra would be exchangeable for units of the Enterra Trust; the exchangeable shares are not traded on either the Toronto Stock Exchange or the Nasdaq National Market, however the units of Enterra Trust are traded on the Toronto Stock Exchange.
During the last six months of the year ended December 31, 2004 and the first quarter of 2005 uranium, gold and molybdenum market prices have experienced significant increases. Due to these increased market price conditions and industry projected prices over the foreseeable future, the Company and USE are in the process of re-evaluating their mineral properties for these metals. Management of the Company and USE are developing plans to maximize the value of existing properties and are in the process of acquiring and in some cases re-acquiring uranium properties.
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 appealed this Judgment to the 10th Circuit Court of Appeals (“10th CCA”) and USECC cross appealed. Oral Arguments were heard by the 10th CCA on September 28, 2004.
On February 24, 2005, a three judge panel of the 10th CCA vacated the judgment of the U.S. District Court and remanded the case to the Panel for clarification of the 1996 Order and Award. In remanding this case, the 10th CCA stated: "The arbitration award in this case is silent as to the definition of 'purchase rights' and the 'profits therefrom,' including the valuation of either. Also unstated in the award is the duration of the constructive trust and whether and what costs should be deducted when computing the value of the constructive trust. Further, the arbitration panel failed to address whether prejudgment interest should be awarded on the value of the constructive trust. As a result, the district court's valuation of the constructive trust was based upon extensive guesswork. Therefore, a remand to the arbitration panel for clarification is necessary, despite the long and tortured procedural history of this case."
Management is not able to predict the timing and ultimate outcome of the Nukem litigation. We do however believe that the ultimate outcome will not have an adverse affect on our financial condition or results of operations.
On February 4, 2005, the U.S. District Court of Colorado entered Findings of Fact and Conclusions of Law in a case involving the Company, USE and Phelps Dodge Corporation authorizing the return of the Mt. Emmons molybdenum properties and associated water treatment plant to the Company and USE. USECC has filed a motion with the Court to amend the Order to determine that the decreed water rights be conveyed to USECC. The motion is pending. The ultimate impact of this decision on the financial statements of the Company in management’s opinion will not be measurable until such time as the final decisions are reached and the property actually transferred to USECC.
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, 2004 the Company had a very nominal amount of cash on hand, had incurred a shareholders’ deficit of $8.1 million and had a working capital deficit of $9.7 million. The principal component of this working capital deficit was an account payable to USE of $9.7 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 and or the Enterra sale of RMG consummated, a significant portion of the Company’s receipts would be applied to the USE debt.
Capital Resources
As of April 11, 2005, the company and its subsidiary Rocky Mountain Gas, Inc. (“RMG”) has entered into a binding agreement with Enterra Energy Trust (“Enterra”) for the acquisition of RMG by Enterra in consideration of $20,000,000, payable pro rata to the RMG shareholders in the amounts of $6,000,000 in cash and $14,000,000 in exchangeable shares of one of the subsidiary companies of Enterra. The shares will be exchangeable for units of Enterra twelve months after closing of the transaction. The Enterra units are traded on the Toronto Stock Exchange and on Nasdaq; the exchangeable shares will not be traded. RMG will be acquired with approximately $3,500,000 of debt owed to its mezzanine lenders.
Two major components of anticipated future capital resources are the settlement of the litigation with Nukem and the sale of RMG to Enterra. Should the sale of RMG common stock to Enterra be concluded the Company will receive cash and trust units of Enterra which would be marketable in 12 months after the closing of the transaction. Management believes both these transactions will be concluded favorably, however, the ultimate outcome of the Nukem litigation and the Enterra transaction are not certain.
The Company, jointly with USE, have 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 by USE. At December 31, 2004, the full line of credit was available to the Company and USE and has been renewed by the bank through June 30, 2005. This line credit is used for short term working capital needs associated with operations.
The capital resources at December 31, 2004, are not sufficient to satisfy all the capital requirements of the Company. To provide the capital resources needed for the next calendar 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 the sale of or the development of its 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 2005 remain its General and Administrative costs and expenses. The General and Administrative cash requirements during the year ended December 31, 2004 were $198,600. The cash requirements for the year ended December 31, 2003, seven months ended December 31, 2002 and the year ended May 31, 2002 were $242,600, $100,300 and $163,600, respectively. Management does not anticipate entering into any business ventures which will materially 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 for operations and debt retirement during the years ended December 31, 2004, 2003, the seven months ended December 31, 2002, and the fiscal year ended May 31, 2002 was $1,744,800, $1,895,400, $956,800 and $1,967,900, respectively. The capital resources for the USECC operations continue to be provided by USE. It is anticipated that the requirement during calendar 2005 will approximate the amount spent in calendar 2004.
Maintaining Uranium Properties
The Company’s cash requirements for funding USECC 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 in Wyoming; the Plateau Resources Limited uranium properties in Utah, and the Sutter Gold properties in California.
SMP Uranium Properties
The average monthly care and maintenance costs associated with the Sheep Mountain uranium mineral properties (of which the Company is responsible for 50%) was $23,100 during the year ended December 31, 2004. Included in the average monthly cost during the year ended December 31, 2004 is ongoing reclamation work on the former SMP properties. It is anticipated that a total of $192,700 in reclamation expenditures will be conducted during 2005. The Company's portion of this obligation is $96,400.
On December 8, 2004, the Company and USE d/b/a USECC entered into a Purchase and Sale Agreement (the “agreement”) with Bell Coast Capital Corp. now named Uranium Power Corp. ("UPC"), a British Columbia corporation (TSX-V “UPC-V") for the sale to UPC of an undivided 50% interest in the former SMP uranium properties. The initial purchase price for the 50% interest in the properties is $4,050,000 and 4,000,000 shares of common stock of UPC, payable by installments. All amounts are stated in US dollars.
The Company, USE and UPC, will each be responsible for paying 50% of (i) current and future Sheep Mountain reclamation costs in excess of $1,600,000, and (ii) all costs to maintain and hold the properties.
UPC has agreed to contribute $10,000,000 to the joint venture (at $500,000 for each of 20 exploration projects that are approved). The Company, USE and UPC, each will be responsible for 50% of costs on each project in excess of $500,000. (See Note E)
On April 11, 2005, USECC and UPC signed a Mining Venture Agreement. See Items 2 and 3 above.
Plateau Resources Limited 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, USECC received a promissory note from Cactus in the amount of $3,120,700. USE received $166,000 in cash payments and $44,000 in room credits from Cactus during calendar 2004. The Company will receive 50% of the benefit of the receipt of them.
Additionally, Plateau owns and maintains the 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 years ended December 31, 2004 and 2003, Plateau performed approximately $262,500 $209,600, respectively in reclamation on mining properties and the Shootaring Mill. Due to increases in the market price for uranium during the last six months of the year ended December 31, 2004 and the first quarter of 2005, the Company and USE reconsidered their prior decision to reclaim the Shootaring Mill property. In March 2005, Plateau filed an application with the State of Utah to restart the Mill. Therefore, the Company and USE will not expend any capital resources in the reclamation of the Mill during calendar 2005.
The cash costs per month, including reclamation costs, at the Plateau properties during calendar 2004 were approximately $32,600 per month. These costs are projected to increase to $75,000 to $100,000 per month during the year ending December 31, 2005 due to increased activity in the uranium business. 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. On December 29, 2004, SGMC merged with Globemin Resources, Inc., a Canadian company, and changed its name to Sutter Gold Mining Inc. (“SGMI”). SGMI is traded on the TSX Venture Exchange. SGMI has sufficient capital to pay for the anticipated work which will be done on the properties during calendar 2005. Additional financing is being sought by SGMI. (see Note E)
Development of Coalbed Methane Properties
A portion of the costs during the year ended December 31, 2004 for the development of RMG’s coalbed methane properties were 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, CCBM had completely satisfied its cash and drilling commitments to RMG.
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 2005 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 Hi-Pro Production, LLC 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 E to the financial statements in this Annual Report.
All cash flows from gas production on the Hi-Pro properties are pledged to pay the acquisition debt. See Note E to the financial statements in this Annual Report and Part I, Acquisition of Producing and Non-Producing Properties form 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.
At December 31, 2004, RMG I was not in compliance with five of the financial covenants under the Petrobridge agreement. A revocable waiver was granted through January 31, 2006 by the lender. As the wavier is conditional, the entire debt is classified as current. Management of RMG I continues to seek solutions in the production of coalbed methane gas to bring the project into compliance. Due to lower than projected sales volumes, the Hi-Pro field will remain out of compliance unless (1) higher prices are realized, (2) costs are reduced and (3) the debt is paid down. Because it is probable that RMG I will not be in compliance with these ratios for the next reporting period the entire $3,214,800 is classified as current debt. Should the lender declare the note in default, the only asset available for recourse is the Hi-Pro property owned by RMG I. See Note E.
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.
As of April 11, 2005, the Company, USE, and RMG signed a binding agreement for the acquisition of RMG by Enterra. See Capital Resources above.
If the proposed transaction with Enterra is not consummated, management of the Company believes that the development of RMG's unproven properties will be financed through cash that RMG and USE have on hand as well as venture with industry partners. None of the Company’s capital resources should be needed therefore to fund operations or development work of RMG during 2005.
Results of Operations
Year ended December 31, 2004 Compared to Year ended December 31, 2003
The Company continues 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.
Costs and expenses for the year ended December 31, 2004 increased by $56,700 over the costs and expenses recorded during the year ended December 31, 2003. This increase came as a result of increased fees associated with professional services and a charge to earnings due to funds being expended on reclamation projects.
The Company recorded an equity loss from USECC of $1,447,500 during the year ended December 31, 2004 as compared to equity losses of $1,667,100 from USECC and $447,500 from RMG or a total of $2,114,600 during the year December 31, 2003. The primary reason for the decrease in the equity losses was as a result of the discontinuation of the recognition of RMG’s equity losses due to no value remaining on the books of the Company for its investment in RMG. The equity losses recognized by the Company during the years ended December 31, 2004, 2003, the seven months ended December 31, 2002 and the year ended May 31, 2002 are as follows:
The Company recorded $293,800 as the cumulative effect of accounting change as a result of the adoption of SFAS 143 during the year ended December 31, 2003. No similar item was recognized during the year ended December 31, 2004.
The Company recorded a net loss of $1,767,500 or $0.10 per share during the year ended December 31, 2004, as compared to a net loss of $2,671,700 or $0.16 per share during the year ended December 31, 2003. The decrease of $904,200 was primarily a result of the reduction of the loss recorded from equity affiliates as a result of a zero book basis in RMG as explained above during the year ended December 31, 2004 and the recording of the effect of the adoptation of FASB 143 during the year ended December 31, 2003.
Year ended December 31, 2003 Compared to Year ended May 31, 2002
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 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 ending 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 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 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.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued FASB No. 123(R), Accounting for Stock-Based Compensation, which replaces FASB 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. The Company will be required to implement FASB 123(R) on the quarterly report for the quarter ended September 30, 2005. Under the terms of FASB 123(R) the Company will be required to expense the fair value of stock options issued to employees. The fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock, the expected dividends on it, and the risk-free interest rate over the expected life of the option. The fair value of an option estimated at the grant date is not subsequently adjusted for changes in the price of the underlying stock or its volatility, life of the option, dividends on the stock, or the risk-free interest rate.
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. The Company has no remaining book value for these properties.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for how the Company will classify and measure certain financial instruments with characteristics of both liabilities and equity. It requires that the Company classify a financial instrument within its scope as a liability. Some of the provisions of this Statement are consistent with the current definition of liabilities in FASB Concepts Statement No. 6, "Elements of Financial Statements." The remaining provisions of this Statement are consistent with the FASB's proposal to revise that definition to encompass certain obligations that a reporting entity can or must settle by issuing its own equity shares, depending on the nature of the relationship established between the holder and the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 had no material impact on the Company's financial position or results of operations.
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 decision 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. As a result of RMG’s hedging activities, the price of gas will not materially affect our operations for fiscal 2005.
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. The price of Molybdenum at December 31, 2004 was at a 20 year high of $34 per pound. Since the U.S. District Court ruled in favor of those claims brought by Phelps Dodge, the Company and USE believes they will receive the Mt. Emmons molybdenum property near Crested Butte, Colorado back. If the properties are received, the Company and USE will seek financing or a joint venture partner to place the Mt. Emmons property into production. The Mt. Emmons property will have a very long life and changes in prices of molybdenum would affect the revenues from that property. The Mt. Emmons property will not be placed into production during 2005 or the near term.
Contractual Obligations. The Company had two contractual obligations as of December 31, 2004: Debt to USE of $9,650,900 and asset retirement obligations of $1,169,900 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 Registered Public Accounting Firm
Crested Corp. Board of Directors
We have audited the accompanying balance sheet of Crested Corp. as of December 31, 2004 and the related statements of operations, shareholders’ deficit and cash flows for the year ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion of these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audit provides 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, 2004 and the results of its operations and cash flows for the year ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
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 $9,743,500 as of December 31, 2004, the substantial portion of the obligations 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.
/s/EPSTEIN, WEBER & CONOVER, PLC
Scottsdale, Arizona
March 9, 2005, except for Note M,
as to which is April 11, 2005
Report of Independent Registered Public Accounting Firm
Crested Corp. Board of Directors
We audited the accompanying balance sheet of Crested Corp. as of December 31, 2003, 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 year ended May 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion of these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion of the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 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 year ended May 31, 2002, 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. The Company has experienced significant losses from operations and 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 doubts about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/GRANT THORNTON LLP
Oklahoma City, Oklahoma
February 27, 2004
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
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 being produced during the year ended December 31, 2004. The production of coalbed methane was through a non consolidated affiliate of the Company, which was formed in fiscal 2000 to consolidate all coalbed methane gas operations, Rocky Mountain Gas, Inc. ("RMG"). The Company owned 39.8% of the common stock of RMG at December 31, 2004. The Company also holds various real estate properties. These properties are managed through a non consolidated joint venture USECB joint venture ("USECB" or "USECC") discussed below and in Note B. Although not consolidated, the majority of the Company's assets and operations are recorded on the books and records of USECB which is accounted for using the equity method of accounting. Due to the fact that the Company's interest in assets and operations are reported by USECB, the USECB financial statements are attached hereto.
The Company and U. S. Energy Corp. (“USE”), an approximate 70.1% shareholder of the Company, are engaged in the standby and maintenance of two uranium properties, one in southern Utah known as the Shootaring Uranium Mill, which is owned by Plateau Resources Limited, a 100% owned subsidiary of USE, and the second known as Sheep Mountain Partners (“SMP”). SMP has been involved in significant litigation (see Note J). Sutter Gold Mining Inc. (“SGMI”), a Wyoming corporation, manages the Company’s and USE’s interest in gold properties. At December 31, 2004, the Company owned 1.2% of SGMI and 50% of SMP.
The Company changed its year end to December 31 from May 31 effective December 31, 2002.
Management Plan
The Company has generated significant net losses prior to and including the year ended December 31, 2004 resulting in an accumulated deficit of $19,889,700 at December 31, 2004. The Company also has a working capital deficit of $9,743,500 at December 31, 2004 that includes $9,650,900 due to USE. The Company experienced negative cash flows from operations of $198,600, $242,600, $100,300 and $163,600 for the years ended December 31, 2004, 2003, the seven months ended December 31, 2002 and the fiscal year ended May 31, 2002, respectively. At December 31, 2004, the Company does not have sufficient cash or cash flows from operations to meet its obligations. All of these factors raise substantial doubt 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.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
In order to improve the liquidity of the Company, management intends to do the following:
· 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 real estate interests to non-affiliated entities.
· Assist RMG in obtaining financing for the development of its coalbed methane properties and the acquisition of additional developed and undeveloped coalbed methane properties.
· Concluding the litigation with Nukem, Inc. (“Nukem”). (See Note J)
· Conclude the initial phase of the BCCC agreement on the Sheep Mountain uranium properties. (See Note E)
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 3.4% investment in USE using the equity method because the Company is controlled by USE. The Company’s investment in SGMI, RMG and USECC Joint Venture (“USECC”) are accounted for using the equity method (see Note D).
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents in bank deposit accounts which may exceed federally insured limits. At December 31, 2004, the Company and USECC had all of their cash and cash equivalents with one financial institution. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Properties and Equipment
The Company capitalized 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 proven reserves. All oil and gas properties are fully amortized.
Depreciation of vehicles, machinery and equipment, owned by USECC, is 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 financing necessary to develop the mineral interests may result in asset impairment. As of December 31, 2004, the Company had no long-lived assets.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
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 the fair value of debt to affiliate carried at $9,650,900 and $9,408,300 at December 31, 2004 and 2003, respectively.
Stock Based Compensation
On September 2, 2004, the Company's shareholders adopted an Incentive Stock Option Plan ("ISOP") for employees of the Company and USE. 2,000,000 shares of common stock were initially reserved for the ISOP. At such time as options have been granted to purchase 2,000,000 shares, the number of shares available for issuance under the ISOP will automatically be increased to 20% of the issued and outstanding common shares of the Company. At December 31, 2004, no options had been granted under the ISOP. As a result of no options outstanding under the plan, there was no financial impact at December 31, 2004.
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 specified 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.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued FASB No. 123(R), Accounting for Stock-Based Compensation, which replaces FASB 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. The Company will be required to implement FASB 123(R) on the quarterly report for the quarter ending September 30, 2005. Under the terms of FASB 123(R) the Company will be required to expense the fair value of stock options issued to employees. The fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock, the expected dividends on it, and the risk-free interest rate over the expected life of the option. The fair value of an option estimated at the grant date is not subsequently adjusted for changes in the price of the underlying stock or its volatility, life of the option, dividends on the stock, or the risk-free interest rate.
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. The Company has no remaining book value for these properties.
The following is a reconciliation of the total liability for asset retirement obligations:
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
The following table shows the Company’s net loss per share on a pro forma basis as if the provisions of SFAS No. 143 had been applied retroactively in all periods presented.
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for how the Company will classify and measure certain financial instruments with characteristics of both liabilities and equity. It requires that the Company classify a financial instrument within its scope as a liability. Some of the provisions of this Statement are consistent with the current definition of liabilities in FASB Concepts Statement No. 6, "Elements of Financial Statements." The remaining provisions of this Statement are consistent with the FASB's proposal to revise that definition to encompass certain obligations that a reporting entity can or must settle by issuing its own equity shares, depending on the nature of the relationship established between the holder and the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 had no material impact on the Company's financial position or results of operations.
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.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
C. RELATED-PARTY TRANSACTIONS:
The Company does not have employees, but utilized 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, 2004, December 31, 2003, December 31, 2002 and May 31, 2002, the Board of Directors of USE contributed 70,439, 76,294, 43,867 and 70,075 shares of USE stock to the ESOP at prices of $2.96, $3.10, $3.08 and $3.29 per share, respectively. The Company is responsible for one-half of the value of these contributions or $104,200, $118,300, $67,600 and $115,300 for the year ended December 31, 2004, December 31, 2003 and the seven months ended December 31, 2002 and the year ended May 31, 2002, respectively, which was advanced through debt to affiliate. As of December 31, 2004, 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 $85,500.
D. INVESTMENTS IN AFFILIATES:
At December 31, 2004 and 2003 investments of $2,979,400 $4,373,800 and $5,876,600, 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, 2004 and 2003 for these investments in affiliates that the Company must fund. The Company's commitment to fund the losses of SGMI and YSFC is limited to $215,600 by mutual agreement of the parties.
USECC is an entity established primarily to provide management and administrative services to the Company and its affiliates. Commercial operations of USECC with unaffiliated entities is limited.
The difference of the Company's recorded investment in USECC and the Company's capital account on USECC's balance sheet of $668,300 consists of prior year establishment and changes of the asset retirement obligation for the Company.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
E. MINERAL TRANSACTIONS AND MINING PROPERTIES:
PHELPS DODGE
During prior years, the Company and USE conveyed interest 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, 2004.
Amax and later Cyprus Amax paid the Company and USE an annual advance royalty of 50,000 (25,000 lbs. to each) pounds of molybdenum (or its cash equivalent). During fiscal 2000, Phelps Dodge assumed this obligation.
Phelps Dodge filed suit against the Company and USE on June 19, 2002 regarding these matters. On February 4, 2005, the U.S. District Court of Colorado entered Findings of Fact and Conclusions of Law in a case involving the Company, USE and Phelps Dodge Corporation authorizing the return of the Mt. Emmons molybdenum properties and associated water treatment plant to the Company and USE. USECC has filed a motion with the Court to amend the Order to determine that the decreed water rights be conveyed to USECC. The motion is pending. The ultimate impact of this decision on the financial statements of the Company in management’s opinion will not be measurable until such time as the final decisions are reached and the property actually transferred to USECC. (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. All acquisition and mine development costs since inception were capitalized. SGMC put the property on a shut down status and took an impairment on the associated assets due to the decline in the spot price for gold and the lack of adequate financing in prior periods. 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, 2004, the spot market price for gold had attained levels that management believes will allow SGMC to produce gold from the property on 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.
On December 29, 2004, a majority of SGMC was acquired by Sutter Gold Mining Inc. ("SGMI") (formerly Globemin Resources, Inc.) of Vancouver, B.C. SGMI is traded on the TSX Venture Exchange. Approximately 90% of SGMI's common stock was exchanged for 40,190,647 shares of SGMI common stock. At December 31, 2004, the Company owned 1.2% of the common stock of SGMI.
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. The SMP Partnership 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 fourteen years. See Note J for the status of the related litigation/arbitration.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
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, 2004, December 31, 2003.
On December 8, 2004, the Company and USE entered into a Purchase and Sale Agreement (the “agreement”) with Bell Coast Capital Corp., now named Uranium Power Corp. (“UPC”), a British Columbia corporation (TSX-V “UPC-V) for the sale to UPC of an undivided 50% interest in the SMP uranium properties. A summary of certain provisions in the agreement follows.
The initial purchase price for the 50% interest in the properties is $4,050,000 and 4,000,000 shares of common stock of UPC, payable by installments. All amounts are stated in US dollars.
Initial cash and equity purchase price:
October 29, 2004
$
175,000
Non-refundable deposit against execution of the definitive agreement.
November 29, 2004
$
175,000
Released from escrow on January 27, 2005 which was five days after TSX-V approval of the agreement.
June 29, 2005
$
500,000
and 1,000,000 common shares of UPC stock subject to TSX-V regulations.
June 29, 2006
$
800,000
and 750,000 common shares of UPC stock subject to TSX-V regulations.
December 29, 2006
$
800,000
and 750,000 common shares of UPC stock subject to TSX-V regulations.
June 29, 2007
$
800,000
and 750,000 common shares of UPC stock subject to TSX-V regulations.
December 29, 2007
$
800,000
and 750,000 common shares of UPC stock subject to TSX-V regulations
Total
$
4,050,000
4,000,000 common shares of UPC
Upward adjustment to initial cash purchase price:
The cash portion of the initial purchase price will be increased by $3,000,000 (in two $1,500,000 installments) after the uranium oxide price (long term indicator) is at or exceeds $30.00/lb for four consecutive weeks (the “price benchmark”). If the price benchmark is attained on or before April 29, 2006, the first installment will be due six months after price attainment (but not before April 29, 2006). If the price benchmark is attained after April 29, 2006, the first installment will be due six months after attainment. In either event, the second installment will be due six months after the first installment is due. These payment obligations will survive closing of the purchase of the 50% interest in the properties; if the installments are not timely paid, UPC will forfeit all of its 50% interest in the properties, and in the joint venture to be formed.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
The Company, USE and UPC, will each be responsible for paying 50% of (i) current and future Sheep Mountain reclamation costs in excess of $1,600,000, and (ii) all costs to maintain and hold the properties.
Closing of the agreement is required on or before December 29, 2007, with UPC’s last payment of the initial purchase price (plus, if applicable, the increase in the cash portion). At the closing, UPC will contribute its 50% interest in the properties, and the Company and USE will contribute their aggregate 50% interest in the properties, to a joint venture, wherein UPC and U.S. Energy/Crested each will hold a 50% interest. The joint venture generally will cover uranium properties in Wyoming and other properties identified in The Company and USE’s uranium property data base, but excluding the Green Mountain area and Kennecott’s Sweetwater uranium mill, the Shootaring Canyon uranium mill in southeast Utah (and properties within ten miles of that mill), and properties acquired in connection with a future joint venture involving that mill.
UPC will contribute $10,000,000 to the joint venture (at $500,000 for each of 20 exploration projects). The Company, USE and UPC, each will be responsible for 50% of costs on each project in excess of $500,000.
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 Pleateau stock and agreed to assume all environmental liabilities and reclamation bonding obligations. At December 31, 2004, 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 the cash flows derived from operations and a portion of certain reclamation obligations.
On August 1, 2003, the Company and USE sold interest in the Ticaboo Townsite in southern Utah as a result of Pleateau 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, which bears interest at 7.5%.
Pursuant to the note agreement, the Company and USE received $166,000 in payments on the note receivable and $44,000 in room credits. At December 31, 2004, the note was current. The Company and USE are to receive $10,000 per month for the months of January through March 2005 and $24,000 per month on a monthly basis after March of 2005 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.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
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.
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, 2004, RMG is owned 39.8% by the Company and 49.3% by USE. At December 31, 2004, RMG owns 237,206 gross acres and 128,668 net acres.
CCBM
RMG sold an interest in its coalbed methane properties to CCBM, Inc. ("CCBM"), 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. At December 31, 2004, CCBM had completed its funding and drilling commitments. RMG assigned a 25% undivided interest in its Oyster Ridge property and a 6.25% undivided interest in its Castle Rock properties to CCBM. RMG also assigned varying interests in other properties to CCBM which were later contributed to Pinnacle Gas Resources, Inc. ("Pinnacle") see discussion below on Pinnacle.
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 operation 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”).
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 $957,600, 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.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
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.
At December 31, 2004 RMG and CCBM each owned 16.7% of Pinnacle and the CSFRB parties owned 66.6%.
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.
RMG I - HI-PRO
On January 30, 2004, RMG, through its wholly owned subsidiary RMG I, purchased the producing, and non-producing properties of Hi-Pro Production LLC ("Hi-Pro"), a company in the Powder River Basin of Wyoming. The terms of the purchase were as follows:
•
$776,700
cash paid by RMG I, $75,000
•
$588,300
net revenues from November 1, 2003 to December 31, 2003, which were retained by Hi-Pro. (1)
•
$500,000
by USE’s 30 day promissory note (secured by 166,667 restricted shares of USE common stock, valued at $3.00 per share). (2)
•
$600,000
by 200,000 restricted shares of USE common stock (valued at $3.00 per share).
•
$700,000
by 233,333 restricted shares of RMG common stock (valued at $3.00 per share). (3)
•
$3,635,000
cash, loaned to RMG I under the credit facility agreement.
•
$6,800,000
Reverse net revenues from November 1, 2003 to December 31, 2003, which
(588,300)
were retained by Hi-Pro.
$6,211,700
_________________________
(1) RMG I paid all January operating costs at closing. Net revenues from the purchased properties for January 2004 were credited to RMG I's obligations under the credit facility agreement. These net revenues were considered by the parties to be a reduction in the purchase price which RMG I otherwise would have paid at the January 30, 2004 closing.
(2) Pursuant to the terms of the promissory note, USE issued 166,667 shares as payment in full of this obligation during the first quarter of 2004.
(3) The RMG shares were convertible at Hi-Pro's sole election into restricted shares of common stock of USE. The number of USE shares to be issued were based upon (A) the number of RMG shares to be converted, multiplied by $3.00 per share, divided by (B) the average closing sale price of the shares of USE for the 10 trading days prior to notice of conversion. During the quarter ended June 30, 2004, all of these shares were converted into 312,221 shares of the Company's common stock. The Company has filed a resale registration statement with the Securities and Exchange Commission to cover public resale of these shares.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
RMG I purchased these properties to continue its entry into the coalbed methane gas business and accounted for as a purchase transaction with the estimated fair value of assets and liabilities assumed in the acquisition as follows:
RMG I financed $3.6 million of the cash component from a $25 million credit facility arranged by Petrobridge Investment Management, LLC (Petrobridge), a mezzanine lender headquartered in Houston, TX. The properties acquired from Hi-Pro serve as the sole collateral for the credit facility. As defined by the agreement, terms under the credit facility include the following: (1) advances under the credit facility are subject to lender's 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 expense require approval by the lender before distributions are made; and (3) RMG I must maintain certain financial ratios and production volumes, among other requirements.
At December 31, 2004, RMG I was not in compliance with five of the financial covenants under the Petrobridge agreement. The ratios and production figures that RMG I is not in compliance with are:
Terms of Loan
Actual at 12-31-04
Total Debt to EBITDA
No greater than 2 to 1
5.7 to 1
EBITDA to interest and rents
Not less than 3 to 1
1.3 to 1
Current Ratio
Not less than 1 to 1
.3 to 1
NPV of proved developed
Producing reserves to debt
Not less than 1 to 1
.9 to 1
Sales Volumes
230 mmcf per quarter
182.2 mmcf
A revocable waiver was granted through January 31, 2006 by the lender. As the wavier is conditional, the entire debt is classified by RMG as current. Management of RMG I continues to seek solutions in the production of coalbed methane gas to bring the project into compliance. Due to lower than projected sales volumes, the Hi-Pro field will remain out of compliance unless (1) higher prices are realized, (2) costs are reduced and (3) the debt is paid down. It is probable that RMG I will not be in compliance with these ratios for the next reporting period. Should the lender declare the note in default, the only asset available for recourse is the Hi-Pro property owned by RMG I.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
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, 2004, December 31, 2003, the seven months ended December 31, 2002 and the fiscal year ended May 31, 2002 respectively.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(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, 2004 and December 31, 2003 as a result of USE’s unilateral ability to modify the repayment terms.
As of December 31, 2004, the Company and USE had a $750,000 line of credit with a commercial bank. The line of credit bore interest at a variable rate (6.25% as of December 31, 2004). The weighted average interest rate for the year ended December 31, 2004 was 5.34%. As of December 31, 2004, there was no outstanding balance due under the line of credit. The line of credit expired on December 31, 2004 and has been renewed for 6 months to June 30, 2005. This line of credit is secured by a share of the net proceeds of fees from production of oil wells and certain assets of USECC.
H. INCOME TAXES:
The components of deferred taxes as of December 31, 2004 and 2003 are as follows:
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
At December 31, 2004 the Company had available, for federal income tax purposes, net operating loss carry-forwards of approximately $16,715,700 which expire from 2006 through 2022. The Company has established a valuation allowance for the full amount of the net deferred tax assets due to the recurring losses of the Company and the uncertainty of the Company’s ability to generate future taxable income to utilize the NOL 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 $363,100 for the years ended December 31, 2004 and increased $322,500 for year ended December 31, 2003.
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:
There were no taxes payable as of December 31, 2004, 2003, 2002 or May 31, 2002.
I. SHAREHOLDERS’ EQUITY:
The Board of Directors of the Company from time to time, issued stock compensation 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 years ended December 31, 2004, 2003, the seven months ended December 31, 2002 and the year ended May 31, 2002, 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, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
J. COMMITMENTS, CONTINGENCIES AND OTHER:
Material proceedings pending at December 31, 2004, and developments in those proceedings from that date to the date this Annual Report is filed, are summarized below. Other proceedings which were pending during the year have been settled or otherwise finally resolved.
Sheep Mountain Partners Arbitration/Litigation
In 1991, disputes arose between Crested/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 Action 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").
The Panel entered an Order and Award in 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, and also awarded SMP damages of $31,355,070 against Nukem. Further legal proceedings ensued. On appeal, the 10th Circuit Court of Appeals ("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.
As a result of further proceedings, the U.S. District Court appointed a Special Master to conduct an accounting of the constructive trust. The U.S. District Court adopted the Special Master’s report in part and rejected it in part, and entered judgment on August 1, 2003 in favor of USECC and against Nukem for $20,044,183. In early 2004, the parties appealed this judgment to the CCA.
On February 24, 2005, a three judge panel of the CCA vacated the judgment of the U.S. District Court and remanded the case to the Panel for clarification of the 1996 Order and Award. In remanding this case, the CCA stated: "The arbitration award in this case is silent as to the definition of 'purchase rights' and the 'profits therefrom,' including the valuation of either. Also unstated in the award is the duration of the constructive trust and whether and what costs should be deducted when computing the value of the constructive trust. Further, the arbitration panel failed to address whether prejudgment interest should be awarded on the value of the constructive trust. As a result, the district court's valuation of the constructive trust was based upon extensive guesswork. Therefore, a remand to the arbitration panel for clarification is necessary, despite the long and tortured procedural history of this case."
The timing and ultimate outcome of this litigation is not predicted. We believe that the ultimate outcome will not have an adverse affect on our financial condition or results of operations.
Contour Development Litigation
On July 8, 1998, Crested and USE 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. for substantial damages from the defendants for dealings in real estate owned by Crested and USE in Gunnison, Colorado. This litigation was settled in 2004 with Crested and USE receiving nominal cash and seven real estate lots in and near Gunnison. Two lots have been sold and five are for sale.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
Phelps Dodge Litigation
Crested and USE 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 relates to agreements from 1974 when Crested and USE leased the mining claims to AMAX Inc., PD’s predecessor company. The mining claims cover one of the world’s largest and richest deposits of molybdenum, which was discovered by AMAX.
The June 19, 2002 complaint filed by PD and MEMCO sought 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, USE and Crested 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 Mineral Co. USECC’s counter and cross-claims alleged that in 1999, PD formed a wholly-owned subsidiary CAV Corporation, for the purpose of purchasing the controlling interest in 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 asserted that the acquisition of Cyprus Amax by PD was a sale of MEMCO and the properties that triggered the obligation of Cyprus Amax to pay USECC the $3.75 million plus interest.
The other issues in the litigation were 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 sought to obligate USECC to assume the operating costs of the water treatment plant. USECC asserted counterclaims against the defendants, including a claim for nonpayment of advance royalties.
On July 28, 2004, the Court entered an Order granting certain of PD's motions and denying USECC's counterclaims and cross-claims. The case was tried in late 2004.
On February 4, 2005, the Court entered Findings and Fact and Conclusions of Law and ordered that the conveyance of the Mt. Emmons properties under Paragraph 8 of the 1987 Agreement includes the transfer of ownership and operational responsibility for the Water Treatment Plant, and that PD does not owe USECC any advanced royalty payments. However, the Order did not address the NPDES permit. NPDES permits are administered and regulated by the Colorado Department of Public Health and the Environment (“CDPHE”). The timing and scope of responsibilities for maintaining and operating the plant will be addressed by the CDPHE later in 2005.
USECC has filed a motion with the Court to amend the Order to determine that the decreed water rights from the Colorado Supreme Court opinion (decided in 2002, finding that the predecessor owners of the Mt. Emmons property had rights to water to develop a mine), and any other appurtenant water rights, be conveyed to USECC. The motion is pending.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
Rocky Mountain Gas, Inc. (RMG)
Litigation involving leases on coalbed methane properties in Montana
In April 2001, RMG was served with a Second Amended Complaint, in which the Northern Plains Resource Council ("NPRC") had filed suit in the U. S. District Court of Montana, Billings Division (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 was 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.
In December 2003, Federal District Court Judge Anderson granted BLM’s and the other defendants Motion for Summary Judgment and ruled that BLM did not have to consider environmental impacts in an Environmental Impact Statement (“EIS”) prior to leasing because the 1994 Resource Management Plan (“RMP”) limited lease right to exploration and small scale development. On August 30, 2004, the Ninth Circuit Court of Appeals affirmed the District Court decision and held that the six-year statue of limitations precluded challenging the 1994 RMP and EIS. On February 10, 2005, NRPC's petition for rehearing or in the alternative petition for en banc was denied by the Ninth Circuit Court of Appeals.
All of RMG's BLM Montana leases are held by RMG and are at least four years old. There is no record of any objections being made to the issue of those leases. 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 BLM leases in Montana.
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 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.
In April of 2003 NRPC and the Northern Cheyenne Tribe and Native Action (the “Tribe”) filed a suit against BLM challenging the April 2003 decision by BLM approving the Final Statewide Oil and Gas Environmental Impact Statement (FEIS) and proposed amendments to the RMP. On February 25, 2005 Federal District Court Judge Anderson dismissed all counts with the exception of the allegation that the FEIS is inadequate because it failed to consider any alternatives to full-field development and ruled that BLM’s failure to analyze a phased development alternative renders the FEIS inadequate. BLM will now be required to perform a Supplemental EIS (“SEIS”) examining a phased development alternative, which could take 18 months to complete.
On April 5, 2005 Federal District Court Judge Anderson rejected the Tribe’s request for a complete moratorium on CBM drilling in Montana and instead accepted BLM’s proposal that limited the number of Federal APDs issued by BLM to maximum of 500 wells per year, including federal, state and fee wells within a certain defined geographic area. The decision will prohibit BLM from issuing Federal wells in RMG’s Castle Rock property until the SEIS is completed, because it is not located with the defined geographic area. However, the decision does not limit the number of fee and state wells that can be approved in the Castle Rock property by the State of Montana. RMG will request BLM to extend the expiration date of the Federal leases for the period of the delay.
Neither the Company, nor RMG is a party to these lawsuits.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
Litigation involving drilling
A drilling company, Eagle Energy Services, LLC filed a lawsuit against RMG for drilling services claiming $49,309.50 for non-payment in Civil Action No. C02-9-341. 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 in Civil Action No. CO2-9-328 in the 4th Judicial District of Sheridan County, Wyoming. In February 2005 RMG and Community First reached a full and complete settlement of Civil Action No. C02-9-328 and a Joint Motion to Dismiss with Prejudice is currently pending with the Court. RMG has also requested Eagle Energy to join in a Motion to Dismiss in Civil Action No. C02-9-341 because the claim was settled as noted above. 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 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 an 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.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
As of December 31, 2004, estimated reclamation obligations related to the above mentioned mining properties total $7.4 million. Crested’s position of this obligation is $1.2 million, which is reflected on the balance sheet of the Company. The remaining balance of $6.3 million 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 SGMI. 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, 2004 and the balance in the reclamation liability account at December 31, 2004 of $2.3 million (½ 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.
Sutter Gold Mining Inc.
SGMI’s mineral properties are currently in a shut down status and have never been in production. SGMI has recorded a reclamation liability as of December 31, 2004 that is covered by a $28,200 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, 2004, the reclamation liability on the Plateau properties was $5.2 million. Plateau held a cash deposit for reclamation in the amount of $6.8 million.
Executive Compensation
The Company and USE are committed to pay the surviving spouse or dependant children of certain of the 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. 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, 2004. Certain officers and employees have employment agreements with the Company and USE.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(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, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
L. SELECTED QUARTERLY FINANCIAL DATA (Unaudited):
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
M. SUBSEQUENT EVENT
Enterra Energy Trust
As of April 11, 2005, the company and its subsidiary Rocky Mountain Gas, Inc. (“RMG”) has entered into a binding agreement with Enterra Energy Trust (“Enterra”) for the acquisition of RMG by Enterra in consideration of $20,000,000, payable pro rata to the RMG shareholders in the amounts of $6,000,000 in cash and $14,000,000 in exchangeable shares of one of the subsidiary companies of Enterra. The shares will be exchangeable for units of Enterra twelve months after closing of the transaction. The Enterra units are traded on the Toronto Stock Exchange and on Nasdaq; the exchangeable shares will not be traded. RMG will be acquired with approximately $3,500,000 of debt owed to its mezzanine lenders.
Closing of the transaction is subject to approval of the RMG shareholders; U.S. Energy Corp. and Crested Corp., the principal shareholders of RMG, have agreed to vote in favor of the acquisition. Closing is further subject to completion of due diligence by Enterra, and to obtaining regulatory and stock exchange approvals.
RMG’s minority equity ownership of Pinnacle Gas Resources, Inc. will not be included in the transaction with Enterra, which has resulted in a decrease in the consideration to be paid by Enterra from the previously-announced $30,000,000, to the $20,000,000 in the definitive agreement signed as of April 11, 2005. However, Enterra will be entitled to be paid up to (but not more than) $2,000,000 if proceeds from a future disposition of the minority equity interest in Pinnacle exceed $10,000,000.
Uranium Power Corp.
As of April 11, 2005, U.S. Energy Corp. and Crested Corp. (as the USECC Joint Venture) signed a Mining Venture Agreement with Uranium Power Corp. (“UPC,” formerly Bell Coast Capital Corp.) to establish a joint venture, with a term of 30 years, to explore, develop and mine the properties being purchased by UPC under the Purchase and Sale Agreement (see the Form 8-K Report filed December 13, 2004), and acquire, explore and develop additional uranium properties. The joint venture generally covers uranium properties in Wyoming and other properties identified in the USECC Joint Venture uranium property data base, but excluding the Green Mountain area and Kennecott’s Sweetwater uranium mill, the Shootaring Canyon uranium mill in southeast Utah (and properties within ten miles of that mill), and properties acquired in connection with a future joint venture involving that mill. The Shootaring Canyon mill is owned by Plateau Resources Limited, a subsidiary of U.S. Energy Corp.; Crested Corp. has a 50% interest in Plateau’s cashflows.
The initial participating interests in the joint venture (profits, losses and capital calls) are 50% for the USECC Joint Venture and 50% for UPC, based on their contributions of the Sheep Mountain properties. Operations will be funded by cash capital contributions of the parties; failure by a party to fund a capital call may result in a reduction or the elimination of its participating interest. In addition, a failure by UPC to pay for its 50% interest in the Sheep Mountain properties may result in a reduction or the elimination of UPC’s participating interest. A budget of $567,842 for the seven months ending December 31, 2005 has been approved, relating to reclamation work at the Sheep Mountain properties, exploration drilling, geological and engineering work, and other costs. A substantial portion of this work will be performed by (and be paid to) to the USECC Joint Venture as manager.
CRESTED CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002(Continued)
The manager of the joint venture is the USECC Joint Venture; the manager will implement the decisions of the management committee and operate the business of the joint venture. UPC and the USECC Joint Venture each have two representatives on the four person management committee, subject to change if the participating interests of the parties are adjusted. The manager is entitled to a management fee from the joint venture equal to a minimum of 10% of the manager’s costs to provide services and materials to the joint venture (excluding capital costs) for field work and personnel, office overhead and general and administrative expenses, and 2% of capital costs. The manager may be replaced if its participating interest becomes less than 50%.
Report of Independent Registered Public Accounting Firm
To Board of Directors U.S. Energy Corp. and Crested Corp.:
We have audited the accompanying balance sheet of USECB Joint Venture ("Partnership") as of December 31, 2004, and the related statements of operations, changes in partners' capital and cash flows for the year ended December 31, 2004. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material respects, the financial position of USECB Joint Venture as of December 31, 2004, and the results of its operations and its cash flows for the year ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Partnership will continue as a going concern. As discussed in Note A to the financial statements, the Partnership has experienced significant losses from operations during three of the periods presented. These factors raise substantial doubt about the ability of the partnership 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.
/s/EPSTEIN, WEBER & CONOVER, PLC
Scottsdale, Arizona
March 9, 2005
Report of Independent Registered Public Accounting Firm
Crested Corp. and U.S. Energy Corp. Board of Directors
We audited the accompanying balance sheets of USECB Joint Venture (a Wyoming Joint Venture) as of December 31, 2003 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 year ended May 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion of these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion of the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 USECB Joint Venture as of December 31, 2003 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 year ended May 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has experienced significant losses from operations and these issues raise substantial doubt about the ability of the partnership to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/GRANT THORNTON LLP
Oklahoma City, Oklahoma
February 27, 2004
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
USECB JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002 and MAY 31, 2002
A. BUSINESS ORGANIZATION AND OPERATIONS:
USECB Joint Venture was formed in the State of Wyoming on August 1, 1981. USECB (the "Partnership" or "USECB") is equally owned by U. S. Energy Corp. (“USE”) and its subsidiary Crested Corp. (“Crested”). As such, it manages the acquisition, exploration, holding, sale and/or development of mineral, the production of petroleum properties and marketing of minerals. Principal mineral interests held by USE and Crested are in uranium, gold and molybdenum. The uranium and gold properties are currently all in a shut down status. USE and Crested also hold various real and personal properties used in commercial activities.
The Partnership has generated significant net losses prior to and including the year ended December 31, 2004. The Partnership experienced negative cash flows from operations of $3,039,100, $3,208,800, $1,548,700 and $2,848,000 for the years ended December 31, 2004 and 2003, the seven months ended December 31, 2002 and the fiscal year ended May 31, 2002, respectively. At December 31, 2004, the Partnership does not have sufficient cash or cash flows from operations to meet its obligations. All of these factors raise substantial doubt about the Partnership's ability to continue as a going concern during the upcoming year.
The Partnership has historically relied on, and continues to rely on, contributions from USE and Crested to fund its current operating requirements. It is uncertain whether this funding will continue. The Partnership 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 Partnership's obligations.
The year end for USECB was changed to December 31 effective December 31, 2002.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
The Partnership considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Partnership maintains its cash and cash equivalents in bank deposit accounts which exceed federally insured limits. At December 31, 2004, the Partnership had its cash and cash equivalents with one financial institution. The Partnership has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Restricted Cash
Under its health insurance plan for employees, the partnership deposits cash in a restricted account to fund the payment of potential insurance claim obligations.
Accounts Receivable
The Partnership's accounts receivable are due from various third parties. The Partnership determines any required allowance by considering a number of factors including length of time accounts receivable are past due and the Partnership's previous loss history. The Partnership writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
USECB JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002 and MAY 31, 2002
Inventories
Inventories consist of aviation fuel and gold and silver bullion. Inventories are stated at lower of cost or market using the average cost method.
Property and Equipment
Land, buildings, improvements, machinery and equipment are carried at cost. Depreciation of buildings, improvements, machinery and equipment is provided principally by the straight-line method over estimated useful lives ranging from 3 to 45 years. Following is a breakdown of the lives over which assets are depreciated.
Long-Lived Assets
The Partnership 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, 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 Partnership's financial position and results of operations.
Fair Value of Financial Instruments
The carrying amount of cash equivalents, receivables, other current assets, accounts payable and accrued expenses approximates fair value because of the short-term nature of those instruments. The recorded amounts for short-term and long-term debt, approximate fair market value due to the variable nature of the interest rates on the short term debt, and the fact that interest rates remain generally unchanged from issuance of the long term debt.
Revenue Recognition
Revenues from real estate operations are from the rental of office space in office buildings in Riverton, Wyoming. These revenues are reported on a gross revenue basis and are recorded at the time the service is provided.
USECB JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002 and MAY 31, 2002
Management fees are recorded as a percentage of actual costs for services provided for affiliated entities for which the Partnership provides management services. The Partnership is also paid a management fee for overseeing oil production on the Fort Peck Reservation in Montana. Management fees are recorded when the service is provided.
Income Taxes
No provision for income taxes is recorded in the financial statements of the Partnership due to the fact that it is a joint venture and, therefore, not subject to income tax. The tax effects of the Partnership's operations accrue to the members.
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.
Recent Accounting Pronouncements
The Partnership has reviewed 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 Partnership.
C. RELATED PARTY TRANSACTIONS:
The Partnership provides management and administrative services for affiliates under the terms of various management agreements. The Partnership operates the Glen L. Larsen office complex; holds interests in various mineral operations; conducts oil and gas operations; and transacts all operating and payroll expenses for USE and Crested and their subsidiaries. The partnership recognized $197,200 and $282,200 in management fees during the years ended December 31, 2004 and 2003, respectively.
At December 31, 2004 and 2003, the partnership was owed $3,465,500 and $5,756,100 respectively, from related parties, by common ownership, for services the partnership had provided.
D. DEBT:
Lines of Credit
As of December 31, 2004, USE and Crested had a $750,000 line of credit with a commercial bank. The line of credit bore interest at a variable rate (6.25% as of December 31, 2004). The weighted average interest rate for the year ended December 31, 2004 was 5.34%. As of December 31, 2004, there was no outstanding balance due under the line of credit. The line of credit expired on December 31, 2004 and has been renewed for 6 months to June 30, 2005. This line of credit is secured by a share of the net proceeds of fees from production of oil wells and certain assets.
USECB JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002 and MAY 31, 2002
Long-term Debt-Continued
The components of long-term debt as of December 31, 2004 and 2003 are as follows:
Principal requirements on long-term debt are $176,600; $136,800; $864,900; $12,400 and $1,600 for the years ended December 31, 2005 through 2009, respectively.
E. OPERATING LEASES:
The Company is the lessor of a portion if its office building and building improvements. The Company occupies the rest of the building. The leases are accounted for as operating leases and provide for minimum monthly receipts of $7,600 through December, 2006. All of the Company's leases are for two years or less.
The cost of the office building and building improvements amounted to $3,734,700 as of December 31, 2004 and 2003 and accumulated depreciation amounted to $1,911,600 and $1,829,700 as of December 31, 2004 and 2003, respectively. Rental income under the agreements was $91,300, $103,700, $94,000 and $231,100, for the years ended December 31, 2004 and 2003, the seven months ended December 31, 2002 and the fiscal year ended May 31, 2002.
Future minimum receipts for noncancellable operating leases are as follows:
Years Ending
December 31, Amount
$91,000
$91,000
F. COMMITMENTS, CONTINGENCIES AND OTHER:
Sheep Mountain Partners Arbitration/Litigation
In 1991, disputes arose between Crested/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 Action 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").
USECB JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002 and MAY 31, 2002
The Panel entered an Order and Award in 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, and also awarded SMP damages of $31,355,070 against Nukem. Further legal proceedings ensued. On appeal, the 10th Circuit Court of Appeals ("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.
As a result of further proceedings, the U.S. District Court appointed a Special Master to conduct an accounting of the constructive trust. The U.S. District Court adopted the Special Master’s report in part and rejected it in part, and entered judgment on August 1, 2003 in favor of USECC and against Nukem for $20,044,183. In early 2004, the parties appealed this judgment to the CCA.
On February 24, 2005, a three judge panel of the CCA vacated the judgment of the U.S. District Court and remanded the case to the Panel for clarification of the 1996 Order and Award. In remanding this case, the CCA stated: "The arbitration award in this case is silent as to the definition of 'purchase rights' and the 'profits therefrom,' including the valuation of either. Also unstated in the award is the duration of the constructive trust and whether and what costs should be deducted when computing the value of the constructive trust. Further, the arbitration panel failed to address whether prejudgment interest should be awarded on the value of the constructive trust. As a result, the district court's valuation of the constructive trust was based upon extensive guesswork. Therefore, a remand to the arbitration panel for clarification is necessary, despite the long and tortured procedural history of this case."
The timing and ultimate outcome of this litigation is not predicted. We believe that the ultimate outcome will not have an adverse affect on our financial condition or results of operations.
G. DISCONTINUED OPERATIONS:
During the third quarter of the fiscal year ended May 31, 2002, USECB made the decision to discontinue its drilling/construction segment. The assets associated with this business segment were sold and or converted for use elsewhere by USECB.
H. TRANSITION PERIOD COMPARATIVE DATA:
USECB JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002 and MAY 31, 2002
I. SELECTED QUARTERLY FINANCIAL DATA (Unaudited):
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.
ITEM 9B.
ITEM 9B. Other Information
None
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, 2004, 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 North 8th West, Riverton, WY 92501.
Information Concerning Executive Officers Who Are Not Directors.
The following information is provided pursuant to Instruction 2, Item 401 of Reg. S-K, regarding certain of the executive officers of Crested who is not also a director.
Robert Scott Lorimer, age 54, 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 Fee 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, 2004, 2003 and the seven months ended December 31, 2002:
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, 2004, 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, 2004, 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 services 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 committee’s responsibilities under the Securities Exchange Act of 1934.
(5)(ii) The percentage of services provided by 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 2004, 2003 and the seven months ended December 31, 2002 were: Audit-Related Fees 75%, 83% and 90%; Tax Fees 25%, 17% and 10%; and All Other Fees 0%, 0% and 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 Statement
Registrant and Affiliate
Report of Independent Registered Public Accounting Firm Epstein, Weber & Conover
Report of (former) Independent Registered Public Accounting Firm Grant Thornton, LLP
Balance Sheets - December 31, 2004 and 2003
Statements of Operations for the Years ended December 31, 2004 and 2003, the seven months ended December 31, 2002 and the Year Ended May 31, 2002
Statements of Shareholders’ Deficit for the Years ended December 31, 2004 and 2003, the seven months ended December 31, 2002 and the Year Ended May 31, 2002
Statements of Cash Flows For the Years ended December 31, 2004 and 2003, the seven months ended December 31, 2002 and the Year Ended May 31, 2002
Notes to Financial Statements
53-77
Report of Independent Registered Public Accounting Firm Epstein, Weber & Conover
Report of (former) Independent Registered Public Accounting Firm Grant Thornton, LLP
USECB Joint Venture Balance Sheets December 31, 2004 and 2003
80-81
USECB Joint Venture Statements of Operations for the Years ended December 31, 2004 and 2003, the seven months ended December 31, 2002 and the year Ended May 31, 2002
USECB Joint Venture Statements of Changes in Partners' Capital from May 31, 2000 to December 31, 2003
USECB Joint Venture Statements of Cash Flows for the Years ended December 31, 2004 and 2003, the seven months ended December 31, 2002 and the year Ended May 31, 2002
84-85
USECB Joint Venture Notes to Financial Statements
86-91
(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.
* 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 exhibit to the Registrant's Form 10-K, filed March 30, 2004.
[5]-[8]
[intentionally left blank]
[9]
Incorporated by reference from the like-numbered exhibit to the Registrant's Form 10-K for the year ended May 31, 2001.
[10]-[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, 2004, the Registrant filed two reports on Form 8-K (December 13, 2004 - Purchase and Sale Agreement with Bell Coast Capital; and December 22, 2004 (change of accountants).
(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 an undersigned, thereunto duly authorized.
CRESTED CORP.
(Registrant)
Date: April 15, 2005
By:
/s/John L. Larsen
JOHN L. LARSEN,
CHAIRMAN and CEO
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: April 15, 2005
By:
/s/ John L. Larsen
JOHN L. LARSEN, Director
Date: April 15, 2005
By:
/s/ Daniel P. Svilar
DANIEL P. SVILAR, Director
Date: April 15, 2005
BY:
/s/ Harold F. Herron
HAROLD F. HERRON, Director
Date: April 15, 2005
BY:
/s/ Keith G. Larsen
KEITH G. LARSEN, Director
Date: April 15, 2005
By:
/s/ Robert Scott Lorimer
ROBERT SCOTT LORIMER
Principal Financial Officer and
Chief Accounting Officer