US ENERGY CORP - Annual Report: 2006 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
|
X
|
Annual
report pursuant to section 13 or 15(d) of the Securities Exchange
Act of
1934 for the fiscal year Ended December 31, 2006
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|
|
Transition
report pursuant to section 13 or 15(d) of the Securities Exchange
Act of
1934 for the
|
|
transition
period from ___________
to
___________
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Commission
file number 000-6814
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U.S.
ENERGY CORP.
|
|
(Exact
Name of Company as Specified in its
Charter)
|
|
Wyoming
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83-0205516
|
|
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(State
or other jurisdiction of
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(I.R.S.
Employer
|
|
|
incorporation
or organization)
|
Identification
No.)
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|
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877
North 8th West, Riverton, WY
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82501
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|
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(Address
of principal executive offices)
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(Zip
Code)
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|
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Registrant's
telephone number, including area code:
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(307)
856-9271
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Securities
registered pursuant to Section 12(b) of the Act:
None
|
|
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.01 par value
|
(Title
of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. YES
NO
X
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES
NO
X
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Company was required
to
file such reports), and (2) has been subject to such filing requirements for
the
past 90 days. YES
X NO
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer Accelerated
filer Non-accelerated
filer X
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES
NO
X
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
last sold, or the average bid and ask price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter (June 30, 2006) $
72,418,828.
|
Class
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Outstanding
at March 30, 2007
|
|
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Common
stock, $.01 par value
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20,056,411
Shares
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Documents
incorporated by reference:
Portions of the documents listed below have been incorporated by reference
into
the indicated parts of this report
Proxy
Statement for the Meeting of Shareholders to be held in June 2007, into PART
III
of the filing.
Indicate
by check mark if disclosure of delinquent filers, pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best
of
the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K .
-2-
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K includes "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements other than statements of historical fact are
forward-looking statements, including without limitation the statements under
Management's Discussion and Analysis of Financial Condition and Results of
Operations; the disclosures about U.S Energy Corp.’s (“USE” or the “Company”)
possible exploration, development and operation of our molybdenum and uranium
properties; the disclosures about Sutter Gold Mining Inc. (“SGMI”), formerly
Globemin Resources Inc., and plans for its gold properties in California and
Mexico; disclosures about the possible closing of the Asset Purchase Agreement
with sxr Uranium One Inc.; disclosure about the possible closing of the Plan
and
Agreement of Merger for USE to acquire the common stock of Crested Corp. not
already owned; and future business plans. Whenever words like "expect,"
"anticipate" or "believe" are used, we are making forward-looking
statements.
Although
we believe that our forward-looking statements are reasonable, we don't know
if
our expectations will prove to be correct. Where we express an expectation
or
belief as to future events or results, such expectation or belief is expressed
in good faith and believed to have a reasonable basis. However, our
forward-looking statements are subject to risks and uncertainties, which could
cause actual results to differ materially from future results expressed,
projected or implied by those forward-looking statements.
The
forward-looking statements should be considered in the context of all the
information in this Annual Report, including the statements in ITEM 1A, RISK
FACTORS below.
-3-
DISCLOSURE
REGARDING MINERAL RESOURCES UNDER SEC AND
CANADIAN
REGULATIONS
USE
is a
joint venture partner with Uranium Power Corp. (“UPC”), is a major shareholder
of SGMI, and has entered into agreements with Kobex Resources Ltd. (“KBX”) and
sxr Uranium One Inc. (“Uranium One”). The common stock of these Canadian
corporations, are traded on the TSX-V (and for Uranium One, on the TSE) and
are
subject to the reporting requirements of Canadian securities regulatory
authorities. Harold F. Herron, Senior Vice President and Director of USE and
Co-Chairman, Director and President of Crested Corp., serves on the board of
directors of SGMI and is also SGMI’s Chairman, President and CEO.
From
time
to time, UPC, SGMI, Uranium One, and KBX make public disclosures in compliance
with National Instrument (“NI”) 43-101, “Standards of Disclosure for Mineral
Properties.” NI 43-101 establishes procedures and standards for determining the
existence of, and the reporting of, Mineral Resources and Mineral Reserves.
Mineral Resources are classified in ascending categories of geological
confidence, as Inferred, Indicated, and Measured. Each definition relates to
a
resource that is determined to be of “such a grade or quality that it has
reasonable prospects for economic extraction.” Mineral Reserves are classified
as Proven or Probable.
The
U.S.
Securities and Exchange Commission (“SEC”) allows public disclosure of the
extent and grade of mineral deposits, and, under SEC Industry Guide 7,
“Description of Property by Issuers Engaged or to be Engaged in Significant
Mining Operations, of Proven (Measured) Reserves and Probable (Indicated)
Reserves. In contrast to NI 43-101, the SEC does not allow public disclosure
of
Inferred, Indicated, or Measured Resources. In addition, there are some
significant differences in the standards allowed, and the procedures required
to
be followed by the SEC for public disclosure of the SEC’s Proven (Measured)
Reserves and Probable (Indicated) Reserves, as compared to NI 43-101 for Proven
and Probable Mineral Reserves.
United
States residents, who obtain information about our molybdenum property, our
uranium properties and about SGMI’s gold properties, which are reported upon by
KBX, UPC and SGMI to the TSX-V in accordance with NI 43-101, are cautioned
that
such information may be materially different from what would be permitted under
SEC rules for United States companies. Information obtained about Uranium One
which it reports to the TSE (concerning our uranium properties which are under
contract to be sold to Uranium One), also may be materially different.
-4-
PART
I
ITEM
1. BUSINESS
GENERAL
U.S.
Energy Corp. (“USE”) is a Wyoming corporation (formed in 1966) in the business
of acquiring, exploring, developing and/or selling or leasing mineral and other
properties. USE and Crested Corp. ("Crested") originally were independent
companies with two common affiliates, John L. Larsen and Max T. Evans, both
of
whom have passed away. In 1980, USE and Crested formed a joint venture ("USECC")
to do business together (unless one or the other elected not to pursue an
individual project). From time to time, USE has funded many of Crested's
obligations because Crested did not have the funds to pay its share of the
obligations. Crested has paid a portion of this debt by issuing common stock
to
USE. At December 31, 2006, Crested owed $13,277,200 to USE, and was owned 70.9%
by USE.
In
this
Annual Report, "we," or the "Company" refer to USE, including Crested and other
subsidiaries unless otherwise specifically noted. The Company’s fiscal year ends
December 31.
Historically,
our business strategy has been and will continue to be acquiring undeveloped
and/or developed mineral properties at low acquisition costs then operating,
selling, leasing or joint venturing the properties, or selling the companies
we
set up to other companies in the mineral sector at a profit. We also intend
to
acquire and develop real estate for multi-unit housing, initially with a focus
on meeting the housing demand resulting from expansion of the energy sector
in
Wyoming.
Typically,
projects initially are acquired, financed and operated by the Company in their
joint venture, USECC. From time to time, some of the projects are then
transferred to separate companies organized for that purpose, with the objective
of raising capital from an outside source for further development and/or joint
venturing with other companies. An example of this strategy is Sutter Gold
Mining Inc. (“SGMI”) for gold. Additional subsidiaries have been organized by
the Company and include U.S. Moly Corp. (“USMC”) for molybdenum and InterWest,
Inc. for real estate. Initial ownership of these subsidiaries would be by the
Company, with additional stock (plus options) held by their officers, directors
and employees.
From
2002
through mid-2005, the Company’s primary focus was in the coalbed methane gas
business conducted through Rocky Mountain Gas, Inc. (“RMG”). RMG was sold to
Enterra Energy Trust (“Enterra”) on June 1, 2005, and the Company’s shares in
Pinnacle Gas Resources, Inc. were sold in 2006. During recent years, commodity
prices for the minerals in our other properties have increased significantly,
creating valuable opportunities for the Company.
Management’s
strategy is to generate a return on investment by demonstrating prospective
value in the mineral properties sufficient to support substantial investments
by
investment groups, financial institutions and/or industry partners, and then
bring long term development expertise to move the properties into production.
The principal drivers to achieve the business strategy are the quantity and
quality of the minerals in the ground, development and mining costs and
international commodity prices. In the alternative, we might sell one or more
of
our properties or subsidiaries which hold the properties as we did with RMG
in
2005; and the proposed sale of the uranium properties to Uranium One in
2007.
To
demonstrate prospective value and raise the necessary capital for development
of
the mineral projects, management may consider having feasibility studies
conducted on the some of our mineral properties. However, it is possible that
we
may be able to raise capital for or bring an industry partner into a property
without having a feasibility study prepared.
-5-
The
principal executive offices of the Company are located in the Glen L. Larsen
building at 877 North 8th West, Riverton, Wyoming 82501, telephone 307-856-9271.
SGMI has an office in Sutter Creek, California and Vancouver, B.C., Canada.
USMC
has an office in Gunnison, Colorado.
The
Company files annual reports, quarterly reports and current reports, proxy
statements and other information with the U.S. Securities and Exchange
Commission (the “SEC”). You may read and copy any document we file at the SEC’s
Public Reference Room at Room 1024, 450 Fifth Street, NW, Washington, D.C.
20549. Please call the SEC at 1-800-SEC-3300 for information on the Public
Reference Room. The SEC maintains a Web site that contains annual, quarterly
and
current reports, proxy statements and other information that issuers (including
USE) file electronically with the SEC. The SEC’s Web site is
http://www.sec.gov.
The
Company’s Web site is http://www.usnrg.com. The Company makes available free of
charge through its internet site, via a link to the SEC’s Web site at
http://www.sec.gov, its annual reports on Form 10-K; quarterly reports on Form
10-Q; current reports on Form 8-K; proxy statements; and Forms 3, 4 and 5 for
stock ownership by directors and executive officers.
SUMMARY
INFORMATION ABOUT THE SUBSIDIARIES
Most
operations are conducted through the Company’s subsidiaries or the USECC Joint
Venture between USE and Crested. The table below presents the Company’s
consolidated ownership which includes the ownership percentages of Crested,
Plateau and Sutter.
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Percent
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Primary
|
|
|
Subsidiary
|
Owned
by USE
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Business
Conducted
|
|
Plateau
Resources Limited, Inc.
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100%
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Uranium
(Utah) - standby mill - shut down, application filed to reopen and
operate, unpatented mining claims, exploration
activities
|
|
Crested
Corp.
|
70.9%
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Uranium
and molybdenum (limited reactivation in uranium and molybdenum planned
for
2007), and gold (through Sutter Gold Mining Inc., being reactivated
on a
limited basis).
|
|
Sutter
Gold Mining Inc.
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49.6%
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Gold
(California) - being reactivated on a limited basis (permitting and
exploration)
|
|
USECC
Joint Venture
|
100.0%
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Uranium
and molybdenum (inactive with limited reactivation in uranium and
molybdenum planned for 2007), and gold (through Sutter Gold Mining
Inc.,
being reactivated on a limited basis). Limited real estate.
|
|
U.S.
Moly Corp.
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90%
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Molybdenum
(Colorado) - limited reactivation ( operation of water treatment
plant,
permitting)
|
|
InterWest,
Inc.
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90%
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Real
Estate - inactive, working on properties prospective for
development
|
The
table
does not show ownership of subsidiaries which have been formed but not yet
active.
-6-
Potential
Merger of Crested with USE
On
January 23, 2007, U.S. Energy Corp. (“USE”) and its majority owned
(approximately 71% owned by USE) subsidiary Crested Corp. (“Crested”) signed a
plan and agreement of merger (the “merger agreement”) for the proposed
acquisition of the minority shares of Crested (approximately 29% not owned
by
USE), and the subsequent merger of Crested into USE pursuant to Wyoming and
Colorado law (USE and Crested are Wyoming and Colorado corporations,
respectively). The merger agreement was approved by all directors of both
companies. The exchange ratio of 1 USE share for each 2 Crested shares (not
owned by USE) was negotiated between the special committees of independent
directors of both companies, and approved by the full boards of both companies,
on December 20, 2006. See the Forms 8-K filed October 13 and December 26, 2006.
The exchange ratio represents an approximate 12% premium to the relative stock
prices between the two companies for the 30 days ended December 18, 2006.
Pursuant
to the merger agreement, USE will issue a total of approximately 2,802,481
shares
of common stock to the minority holders of Crested common stock, including
the
shares equal to the equity value of options to buy Crested common stock
underlying 1,700,000 options (exercise price of $1.71 per share) issued to
employees, officers and directors of USE (Crested has no employees itself),
pursuant to the Crested incentive stock option plan (the “ISOP”) adopted by
Crested and approved by its shareholders in 2004. The ISOP will be amended
to
allow for exercise of options by cashless exercise, and if the merger is to
be
consummated, immediately prior to that date, the Crested options will be so
exercised, and the holders of the resulting Crested stock will be entitled
to
participate in the merger on the same exchange ratio basis as the current
Crested minority shareholders.
USE
and
its officers and directors have signed an agreement to vote their Crested shares
in line with the vote of the holders of a majority of the Crested minority
shares. The affirmative vote of the holders of a majority of the Crested
outstanding shares is required to consummate the merger. USE will not seek
USE
shareholder approval of the merger.
USE
may
decline to consummate the merger, even after approval by the holders of a
majority of the minority Crested shares, if the holders of more than 200,000
Crested shares perfect their rights to dissent from the merger under Colorado
law. In addition, USE or Crested may decline to consummate the merger if the
ratio of the closing stock price of either company is 20% greater or less than
the exchange ratio for two or more consecutive trading days, even if the merger
has been approved by the holders of a majority of the minority Crested
shares.
Consummation
of the merger also is subject to (i) USE delivering to the Crested minority
shareholders a proxy statement/prospectus (following declaration of
effectiveness by the SEC of a Form S-4 to be filed by USE) for a special meeting
of the Crested shareholders to vote on the merger agreement; and (ii)
satisfaction of customary representations and warranties in the merger
agreement.
Navigant
Capital Advisors, LLC is acting as financial advisor to the USE special
committee, and Neidiger Tucker Bruner Inc. is acting as financial advisor to
the
Crested special committee. These firms have delivered opinions to USE and
Crested, to the effects that the exchange ratio is fair to the USE shareholders
and to the Crested minority shareholders, respectively.
The
merger and voting agreements are filed as exhibits to this Report.
-7-
Industry
Segments/Principal Products
The
Company had no operating segments during the twelve months ended December
31,
2006. The Company however did continue to maintain mineral and commercial
assets
on either a stand by or leased out basis. Minimal revenues were generated
from
these operations.
Minerals:
The Company is primarily involved in the acquisition of mineral properties,
the
exploration and development of those properties, and from time to time the
sale
and lease of mineral-bearing properties and production and/or marketing of
minerals. The Company currently owns an undeveloped molybdenum property,
a
non-operating uranium mill and a number of undeveloped uranium properties,
and
an interest in a gold property through its subsidiary, SGMI. All of the mineral
properties now are in various stages of reactivation.
Commercial:
The motel in Utah was sold in 2003, but reacquired from the buyer through
foreclosure in 2006. Real estate rental and various contract services continue,
including management services for subsidiary companies. During the year ended
December 31, 2006 this property was managed by a third party.
In
2006,
the Company and Crested started up activities in real estate development
through
their newly formed company, InterWest, Inc. No revenues were recognized from
these activities during the twelve months ended December 31,
2006
Minerals
- Molybdenum (Inactive and Permitting)
On
February 28, 2006, the Company re-acquired the Lucky Jack molybdenum property,
(formerly the Mount Emmons molybdenum property), located near Crested Butte,
Colorado. The property was returned to the Company by Phelps Dodge Corporation
(“PD”) in accordance with a 1987 Amended Royalty Deed and Agreement between the
Company and Amax Inc. (“Amax”). The Lucky Jack property includes 25 patented
mining claims and approximately 520 unpatented mining claims, which together
approximate 5,400 acres. For further information on the Lucky Jack property
see
PART I, ITEM 2, PROPERTY / Molybdenum of this Annual Report.
In
light
of increased molybdic oxide prices, the Company has decided to pursue permitting
and development of the Lucky Jack property. Development of the property for
mining will require extensive capital and long term planning and permitting
activities. Capital through equity financing and/or a joint venture or other
arrangement will need to be obtained.
· Markets
Molybdic
oxide is an alloy used primarily in specialty steel products for enhanced
corrosion resistance, metal strengthening and heat resistance. Molybdenum
chemicals are used in a number of diverse applications such as lubricants,
additives for water treatment, feedstock for the production of pure molybdenum
metal and catalysts used for petroleum refining. Pure molybdenum metal powder
products are used in a number of diverse applications, such as lighting,
electronics and specialty steel alloys.
-8-
The
metallurgical market for molybdenum is characterized by cyclical and volatile
prices, little product differentiation and strong competition. In the market,
prices are influenced by production costs of domestic and foreign competitors,
worldwide economic conditions, world supply/demand balances, inventory levels,
the U.S. Dollar exchange rate and other factors. Molybdenum prices also are
affected by the demand for end-use products in, for example, the construction,
transportation and durable goods markets. A substantial portion the of world’s
molybdenum supply is produced as a by-product of copper mining. Today,
by-product production is estimated to account for approximately 60% of global
molybdenum production.
Annual
Metal Week Dealer Oxide mean prices averaged $25.55 per pound in 2006 compared
with $32.94 per pound in 2005, $16.41 per pound in 2004, $5.32 in 2003 and
$3.77
in 2002. Continued strong demand has outpaced supply over the past several
years
(deficit market conditions) and has reduced inventory levels throughout the
industry. See Platts Metals Week, Ryan’s Notes or Metal Bulletin for more
information on molybdenum prices.
· Kobex
Resources Ltd. Agreement
On
October 6, 2006, the Company and USMC on the one hand, and Kobex Resources
Ltd.
(“KBX”) (a British Columbia company traded on the TSX Venture Exchange under the
symbol “KBX”), on the other hand, signed a letter agreement (the “Letter
Agreement”) providing KBX an option to acquire up to a 65% interest in certain
patented and unpatented claims held by the Company at the Lucky Jack molybdenum
property (“Property”). The Letter Agreement was amended on December 7, 2006,
with an effective date of December 5, 2006.
The
total
cost to KBX over an estimated period of five years to exercise the full option
will be $50 million in option payments and property expenditures including
the
costs to prepare a bankable feasibility study on the Property and with a cash
differential payment if this total is less than $50 million.
KBX
paid
the Company $50,000 as a due diligence fee, which will not be credited against
future payments and expenditures by KBX.
The
parties are negotiating a formal operating agreement. If the parties are unable
to negotiate and execute a formal agreement, they nonetheless shall continue
to
be bound by the terms of the Letter Agreement and Form 5A (“Exploration,
Development and Mine Operating Agreement”) of the Rocky Mountain Mineral
Foundation.
The
company will deliver executed transfer forms to an independent escrow agent,
for
the agent’s subsequent delivery to KBX of a 15% undivided interest, and a
further 35% undivided interest, in the Property, when KBX has exercised each
of
the stages of the Option (see below). If the Company requests KBX to take the
65% Election (see below), the Company will deliver to escrow a further transfer
form for an additional 15% of the Property, for delivery to KBX when it earns
the additional interest.
-9-
The
Letter Agreement entitles KBX with an exclusive option (the “Option”) to
acquire, in two stages, up to an undivided 65% interest in the Property, by
paying all of the Option Payments to the Company and also paying for permitting,
engineering, exploring, operating (including water treatment plant expenses)
and
all other property-related costs and expenses (“Expenditures”), until a bankable
feasibility study is provided to the Company. Option Payments may be made in
cash or KBX common stock, at KBX’s election. The Expenditures will be paid in
cash. KBX also will have to pay an additional cash amount if the total of all
Option Payments and Expenditures is less than $50 million at the time a bankable
feasibility study is delivered to the Company (see below).
|
Date
or
|
Option
|
|||
|
Anniversary(1)
|
Payment
|
Expenditures
|
||
|
10
business days
|
||||
|
after
Effective Date(2)
|
$
750,000
|
-0-
|
||
|
By
first anniversary(3)
|
$
500,000/1,200,000
|
$
3,500,000/4,200,000
|
||
|
By
second anniversary
|
$
500,000
|
$
5,000,000
|
||
|
By
third anniversary
|
$
500,000
|
$
5,000,000
|
||
|
By
fourth anniversary
|
$
500,000
|
$
2,500,000
|
||
|
By
fifth anniversary
|
$
500,000
|
|||
|
$
30,000,000(4)
|
||||
|
$
3,950,000
|
$
46,000,000
|
|
(1)
|
Anniversary
of Effective Date.
|
|
(2)
|
If
paid in KBX stock, 10 business days after Canadian regulatory and
stock
exchange approval which has not yet occurred.
|
|
(3)
|
Of
this amount, $700,000 is payable by the first anniversary of the
Effective
Date, either by KBX paying an additional like amount in Expenditures,
in
the first year; or increasing the first anniversary option payment
by a
like amount (payable in cash or KBX common stock); or a combination
of the
preceding.
|
|
(4)
|
Delivery
of a bankable feasibility study (“BFS”) on the Property. If the total
Option Payments and Expenditures and costs to prepare the BFS are
less
than $50 million, KBX will pay the Company the difference in cash.
If the
total is more than $50 million before the BFS is completed, the Company
and KBX each will pay 50% of the balance needed to complete the
BFS.
|
Except
for the first Expenditures of $3.5 million and the first Option Payment of
$750,000 (both of which must be paid by KBX), all other Option Payments and
Expenditures are at KBX’s discretion. However, if KBX fails to make any other
Option Payments and Expenditures by the due dates and applicable grace periods,
the Letter Agreement (or definitive agreement, if any) will be terminated and
all rights and interests will revert to the Company.
When
KBX
has paid $15 million in Expenditures, it will have earned a 15% interest in
the
Property. When all remaining Option Payments, and all of the Expenditures over
$15 million, have been paid, KBX will have earned an additional 35% interest
(or
a 50% total interest). However, when the BFS is delivered, if the total of
all
Option Payments, Expenditures, and BFS costs are less than $50 million, earning
this additional 35% interest also will be subject to KBX paying the Company
(in
cash) the difference between the actual Option payments and Expenditures paid
to
date, and $50 million.
-10-
USE
and
Crested each hold a 3% gross overriding royalty interest in the Property and
this will be reserved for their separate benefit when the Property is
transferred to KBX. If KBX earns a 15% interest in the Property, the royalty
will be reduced to 2.55% each; if KBX earns a 50% interest, the royalty will
be
reduced to 1.5% each. For one year after the final reduction, KBX will have
the
option to terminate 1% (.5% of each 1.5%) by paying $10 million in cash or
KBX
common stock (at the Company’s sole discretion), with one-half paid to each USE
and Crested.
At
such
time as KBX has earned a 50% interest, KBX will have the right to form a joint
venture with the Company for the Property on a 50%-50% basis. Alternatively,
within four months of earning a 50% interest, KBX may offer the Company a one
time only election to (i) elect to remain in the 50%/50% joint venture; or
(ii)
to allow KBX to acquire an additional 15% interest in the Property for a total
of 65% interest in the Property (the “65% Election”), whereby the Company would
revert to a 35% interest, which change in ownership will require KBX to have
arranged all future property financing on optimal terms; or (iii) have KBX
acquire all of the Company’s interest on an agreed upon valuation basis (but the
KBX shares issued cannot be less than 50% for KBX and not more than 50% for
the
Company’s interest).
Until
KBX
earns its 50% interest, KBX will manage all programs on the Property, but a
Management Committee (with two representatives from each of KBX and the Company)
will approve all programs and budgets for Expenditures. If there is a tie vote,
the KBX representative would cast the deciding vote. A Technical Committee
will
also be formed to operate the venture; each of KBX and the Company will have
two
representatives. The Technical Committee will report to the management
committee. If voting is equal and there is a tie vote, KBX will have the right
to cast the deciding vote.
KBX
may
terminate the Letter Agreement or the formal agreement at any time, subject
to
KBX paying the Company the initial $1.45 million Option Payment (in cash or
KBX
stock), and KBX having paid the minimum initial $3.5 million of Expenditures.
Further, if and to the extent the initial minimum $1.45 million Option Payment
and $3.5 million in Expenditures have not been met, termination by KBX will
be
subject to its paying to the Company $700,000 in cash or KBX stock and the
difference between $4.2 million and the total Expenditures actually made by
the
date of termination.
If
KBX
pays a broker or finder’s fee in connection with the transaction, the Company
will reimburse KBX up to 50% of the fee (but the reimbursable amount will not
exceed Cdn $400,000), in cash or common stock of the Company (at the Company’s
election), in four equal annual installments. The reimbursement obligation
would
terminate if the Letter Agreement or the formal agreement is terminated before
it is fully paid.
The
parties shall use their best efforts to complete and execute the formal
agreement for the transaction by March 31, 2007.
Minerals
- Uranium (Inactive, Standby, Exploration; Under Contract to
Sale)
The
Company currently owns a uranium processing mill in southeastern Utah
(“Shootaring Canyon uranium mill”), holds approximately 40,000 acres of mineral
claims and leases, and owns historical libraries/data covering several mines
and
exploration areas in Utah, Wyoming, Colorado and Arizona. The uranium properties
range from exploration to pre-production status. For further information on
the
uranium properties, see PART I, ITEM 2. PROPERTIES/Uranium in this Annual
Report.
The
Company has decided to pursue permitting and development of its uranium
properties in light of the significant increase in uranium prices during the
last few years. Development of the Shootaring Canyon uranium mill and the
development of our uranium properties for mining and production will require
extensive capital and considerable time to plan, permit and develop. Capital
through equity financing and/or a joint venture or other arrangement will need
to be obtained.
-11-
| · |
Markets
|
The
only
significant commercial use for uranium is to fuel nuclear power plants for
the
generation of electricity. In recent years, nuclear plants generated
approximately 16% of the world’s electricity. The major stages in the production
of nuclear fuel are uranium exploration, mining and milling, refining and
conversion, enrichment and fuel fabrication. Once a commercial uranium deposit
is discovered and reserves delineated, regulatory approval to mine is sought.
Following regulatory approval, the mine is developed and ore is extracted and
upgraded at a mill to produce uranium concentrates. Uranium concentrates are
sold to nuclear electricity generating companies around the world on the basis
of the U3O8
contained in the concentrates. These utilities then contract with converters,
enrichers and fuel fabricators to produce the required reactor
fuel.
The
nuclear industry is experiencing stable growth in the form of capacity factor
improvements, refurbishments, life extensions and in Asia and other parts of
the
world, aggressive new-build programs. It is difficult to determine which factors
will dominate the outlook for nuclear in the long term. However, the demand
for
nuclear power is expected to grow even more significantly as increasing
electricity demand, the need for non-greenhouse gas emitting base load energy
increases and security of supply begin to take hold globally. Overall, these
indicators are expected to support a stable demand trend for uranium and
conversion services in the next 10 years with the potential for accelerated
growth if nuclear energy continues to gain broader acceptance in the
world.
The
uranium market supply and demand fundamentals continued to remain strong in
2006, indicating a need for more primary mine production over the coming decade.
During the past 20 years, uranium consumption has exceeded mine production
by a
wide margin, with the difference being made up by secondary supply sources
such
as various types of inventory and recycled products. While there are still
inventories, they have been considerably reduced and may be classified as
strategic rather than excess. The continued strong demand, which has outpaced
supply over the past several years (deficit market conditions), has reduced
inventory levels throughout the industry.
Uranium
oxide prices were $72.00 per pound on December 31, 2006, compared with $36.25
per pound in December 2005, $20.75 per pound in December 2004 and $14.50 per
pound in December 2003.
Contract
to Sell Uranium Assets to Uranium One - Uranium
On
February 22, 2007, USE and Crested, and certain of their private subsidiary
companies, signed an Asset Purchase Agreement (the “APA”) with sxr Uranium One
Inc. (“Uranium One,” headquartered in Toronto, Canada with offices in South
Africa and Australia (Toronto Stock Exchange and Johannesburg Stock Exchange,
“SXR”)), and certain of its private subsidiary companies.
The
following is only a summary of the APA, and is qualified by reference to the
complete agreement filed as an exhibit to this Report.
At
closing of the APA, USE and Crested will sell substantially all of their uranium
assets (the Shootaring Canyon uranium mill in Utah, unpatented uranium claims
in
Wyoming, Colorado, Arizona and Utah (and geological library information related
to the claims), and USE’s and Crested’s contractual rights with Uranium Power
Corp.), to subsidiaries of Uranium One, for consideration (purchase price)
comprised of:
| · |
$750,000
cash (paid in advance on July 13, 2006 after the parties signed the
Exclusivity Agreement).
|
-12-
| · |
6,607,605
Uranium One common shares, at
closing.
|
| · |
Approximately
$5,000,000 at closing, as a UPC-Related payment. On January 31, 2007,
USE
and Crested, and Uranium Power Corp. (“UPC), amended their purchase and
sale agreement for UPC to buy a 50% interest in certain of USE and
Crested’s mining properties (as well as the mining venture agreement
between USE and Crested, and UPC, to acquire and develop additional
properties, and other agreements), to grant USE and Crested the right
to
transfer several UPC agreements, including the right to receive all
future
payments there under from UPC ($4,100,000 cash plus 1,500,000 UPC
common
shares), to Uranium One. For information about the agreements with
UPC,
see below.
|
At
closing of the APA, Uranium One will acquire USE’s and Crested’s agreements with
UPC (excluding those agreements related to Green River South, which will be
retained by UPC), for which Uranium One will pay USE the UPC-Related payment
in
amount equal to a 5.25% annual discount rate applied to the sum of (i)
$4,100,000 plus (ii) 1,500,000 multiplied by the volume weighted average closing
price of UPC’s shares for the 10 trading days ending five days before the APA is
closed.
| · |
Approximately
$1,400,000, at closing, to reimburse USE and Crested for uranium
property
exploration and acquisition expenditures from July 10, 2006 to the
closing
of the APA. These reimbursable costs relate to USE’s and Crested’s
expenditures on the properties being sold to Uranium One since the
signing
of the Exclusivity Agreement.
|
| · |
Additional
consideration, if and when certain events occur as
follows:
|
| · |
$20,000,000
cash when commercial production occurs at the Shootaring Canyon Mill
(when
the Shootaring Canyon Mill has been operating at 60% or more of its
design
capacity of 750 short tons per day for 60 consecutive
days).
|
| · |
$7,500,000
cash on the first delivery (after commercial production has occurred)
of
mineralized material from any of the properties being sold to Uranium
One
under the APA (excluding existing ore stockpiles on the
properties).
|
| · |
From
and after commercial production occurs at the Shootaring Canyon Mill,
a
production royalty (up to but not more than $12,500,000) equal to
five
percent of (i) the gross value of uranium and vanadium products produced
at and sold from the mill; or (ii) mill fees received by Uranium
One from
third parties for custom milling or tolling arrangements, as applicable.
If production is sold to a Uranium One affiliate, partner, or joint
venturer, gross value shall be determined by reference to mining
industry
publications or data.
|
| · |
Assumption
of assumed liabilities: Uranium One will assume certain specific
liabilities associated with the assets to be sold, including (but
not
limited to) those future reclamation liabilities associated with
the
Shootaring Canyon Mill in Utah, and the Sheep Mountain properties
in
Wyoming. Subject to regulatory approval of replacement bonds issued
by a
Uranium One subsidiary as the responsible party, cash bonds in the
approximate amount of $6,883,300 on the Shootaring Canyon Mill and
other
reclamation cash bonds in the approximate amount of $413,400 will
be
released and the cash will be returned to USE by the regulatory
authorities. Receipt of these amounts is expected to follow closing
of the
APA.
|
-13-
All
consideration will be paid to USE, for itself and as agent for Crested and
the
several private subsidiaries of USE and Crested that are parties to the APA.
As
of the date of this Report, USE and Crested have not finalized the allocation
of
the consideration as between USE and Crested and the subsidiaries.
Closing
of the APA is subject to satisfaction of closing conditions customary to
transactions of this nature, including (i) approval by the Toronto Stock
Exchange of the issuance of the Uranium One common shares; (ii) approval by
the
State of Utah of the transfer to a Uranium One subsidiary of ownership of the
Utah Department of Environmental Quality, Division of Radiation Control
Radioactive Material License related to the Shootaring Canyon Mill; and (iii)
the termination of the review period and receipt of a favorable ruling
(following an ‘Exon-Florio’ filing to be made by the parties under the APA) that
the transactions contemplated by the APA would not threaten the national
security of the United States.
USE’s
and
Crested’s joint venture holds a 4% net profits interest on Rio Tinto’s Jackpot
uranium property located on Green Mountain in Wyoming. This interest is not
included in the APA.
The
APA
also provides that USE, Crested and Uranium One will enter into a “strategic
alliance” agreement at closing under which, for a period of two years, Uranium
One will have the first opportunity to earn into or fund uranium property
interests which may in the future be owned or acquired by the Company and
Crested outside the five mile area surrounding the purchased
properties.
· UPC
Purchase and Sale Agreement
As
of
January 31, 2007, USE and Crested, and UPC, signed an Amendment to Agreements
(filed as an exhibit to this Report) to allow USE and Crested to transfer to
Uranium One all of their rights, responsibilities and obligations under the
Purchase and Sale Agreement, and the Mining Venture Agreement, which relate
to
uranium properties. In the Amendment to Agreements, USE and Crested relinquished
all their rights to the Green River South property in favor of UPC, and those
specific rights therefore will be excluded from the transfer. All other rights
will be transferred to Uranium One when the APA is closed. The following
summarizes the agreements with UPC which are the subject of the Amendment to
Agreements.
On
December 8, 2004, the Company 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 “UCP-V”) for the sale to UPC of
an undivided 50% interest in the Sheep Mountain properties located in
Wyoming.
The
Agreement was amended on January 13, 2006. A summary of certain provisions
follows: The purchase price for the properties is $7,050,000 plus 4 million
shares of UPC common stock. At December 31, 2006, $2,950,000 has been paid
and
2.5 million UPC shares have been received. An additional $4.1 million and 1.5
million shares are required to pay the full purchase price as follows: $1.0
million cash on April 29, 2007 and $1.5 million cash on October 29, 2007
(provided that UPC is required to pay 50% of all money it raises after January
13, 2006, which would be applied against the two cash payments); and two
additional payments each of $800,000 cash and 750,000 UPC shares on June 29,
2007 and December 29, 2007, respectively (total $1,600,000 cash and 1,500,000
UPC shares).
UPC
will
contribute up to $10,000,000 to the joint venture (at $500,000 for each of
20
exploration projects). The Company and UPC will then be each responsible for
50%
of costs on each project in excess of $500,000. The Company and UPC will also
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.
-14-
UPC
may
terminate the agreement before closing, in which event UPC (i) would forfeit
all
payments made to termination date; (ii) lose all of its interest in the
properties to be contributed by the Company under the agreement; (iii) lose
all
rights to additional properties acquired in the joint venture as well as forfeit
all cash contributions to the joint venture, and (iv) be relieved of its share
of reclamation liabilities existing at December 8, 2004.
If
the
Uranium One contract is not closed, then closing of the UPC Purchase and Sale
Agreement is required on or before December 29, 2007, with UPC’s last payment of
the purchase price. At the closing, UPC will contribute its 50% interest in
the
properties, and the Company will contribute their aggregate 50% interest in
the
properties, to the joint venture, wherein UPC and the Company will each hold
a
50% interest. If the installments are not timely paid, UPC will forfeit all
of
the 50% interest it is to earn in the properties and the joint venture to be
formed.
· UPC
Mining Venture Agreement
As
of
April 11, 2005, the Company signed a Mining Venture Agreement with UPC 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,
and
acquire, explore and develop additional uranium properties. An area of mutual
interest (“AMI”) was revised by the January 31, 2007 Amendment to Agreements and
generally covers uranium properties within one mile of the properties subject
to
the joint venture.
In
2005 -
2006, the Company and UPC added the Burro Canyon project (in Colorado), the
Breccia Pipes project (in Arizona) and the Green River North and South (Utah)
projects to their joint venture under the Mining Venture Agreement. Payments
by
UPC related to these additional uranium properties are separate from the
payments required for UPC to acquire its 50% interest in the Sheep Mountain
properties. UPC’s ownership of the 50% interest in the Burro Canyon and Breccia
Pipes project is subject to UPC’s timely completion of all its payment
obligations under the Agreement.
In
2006,
the Company and UPC signed an agreement for the Company to earn one-half of
UPC’s rights to earn up to a 85% interest in the Green River South project (also
known as the Sahara Property) held by Uranium Group (“UG”). For its one-half
interest, the Company would pay $1,475,000 in option payments and work on the
properties, plus pay to UPC (in cash or in USE stock) an amount equal to
one-half of the lesser of the value of the UPC stock issued to UG when issued,
and Cdn$1.00 per share. The project would be held and developed in the Mining
Venture Agreement
If
the
contract with Uranium One is closed, the Company will assign to UPC all of
the
Company’s rights in the Green River South project, and receive from Uranium One
about $441,000 for the Company’s expenditures on the project from July 10, 2006
to February 22, 2007. Uranium One would have no interest in the
project. If
the
contract is not closed, the Company may or may not continue to participate
in
the project.
Minerals
- Gold (Permitting and Exploration)
In
fiscal
1991, USE acquired an interest in gold properties located in the Mother Lode
Mining District of Amador County, California. The entire Lincoln Project (which
is the name we use for the properties) was owned by Sutter Gold Mining Company,
a Wyoming corporation ("SGMC"). SGMC was acquired by Globemin Resources Inc.,
a
British Columbia corporation which is traded on the TSX Venture Exchange
(“TSX-V) under its new name, Sutter Gold Mining Inc. (“SGMI”).
-15-
In
2005,
SGMI received approval of their Waste Discharge Permit application from the
California Central Valley Regional Water Quality Control Board. Approval of
the
Waste Discharge Permit will allow Sutter Gold to construct waste piles, use
mill
tailings for mine back fill and expand its mining operations. The Amador County
Board of Supervisors previously issued a Conditional Use Permit ("CUP") in
October 1998 allowing mining and milling of up to 1,000 tons per day, subject
to
conditions relating to land use, environmental and public safety issues, road
construction and improvement, and site reclamation.
The
profitable mining and processing of gold will depend on many factors, including
receipt of permits and keeping in compliance with permit conditions; delineation
through extensive drilling and sampling of sufficient volumes of mineralized
material with sufficient grades to make mining and processing economic over
time; continued sustained high prices for gold, and obtaining the capital
required to initiate and sustain mining operations and to build and operate
a
gold processing mill. A feasibility study likely will be required to obtain
the
capital necessary to put the mine into production and to build and operate
a
gold processing mill.
In
December 2006, SGMI paid $13,300 to acquire an option to acquire the Santa
Teresa concession in Baja California el Norte, Mexico from the Alamo Group,
Inc.
The property consists of one concession from the Mexican government covering
183
hectares. Evaluation and planning for the possible development of this property
are underway.
· Gold
Market
Gold
has
two main categories of use: product fabrication and investment. Fabricated
gold
has a variety of end uses, including jewelry, electronics, dentistry, industrial
and decorative uses, medals, medallions and official coins.
The
worldwide supply of gold consists of a combination of new production from mining
and the draw-down of existing stocks of bullion and fabricated gold held by
governments, financial institutions, industrial organizations and private
individuals. In recent years, mine production has accounted for 60% to 70%
of
the total annual supply of gold.
Changes
in the market price of gold will significantly affect SGMI’s potential
profitability and cash flow. Gold prices can fluctuate widely due to numerous
factors, such as demand, forward selling by producers, central bank sales,
purchases and lending, investor sentiment, the strength of the U.S. dollar
and
global mine production levels.
According
to Kitco and Reuters, the average price for gold expressed in U.S. dollars
per
ounce on the London Bullion exchange was $603 in 2006, $445 in 2005, $410 in
2004, $363 in 2003 and $310 in 2002.
Real
Estate
The
Company owns a motel, restaurant and lounge, convenience store, recreational
boat storage and service facility, and improved residential and mobile home
lots
in Ticaboo, Utah near Lake Powell. The Company also owns various real estate
rentals and other real estate properties, and continues to perform contract
and
management services for subsidiary companies.
-16-
The
Company plans to develop and acquire additional real estate assets, initially
in
Wyoming. USE made a secured convertible loan of $500,000 to P.E.G. Development,
LLC (“PEG”) (a full service private real estate development company) in
connection with the potential purchase and development of undeveloped land
in
Rock Springs, Wyoming. Subsequent to the initial investment of $500,000, USE
determined that it would not convert its debt to equity. On March 2, 2007,
the
note was retired by the receipt of $500,000 in principal plus $50,000 for an
agreed upon loan commitment fee and $18,800 in interest.
On
January 8, 2007 InterWest, Inc. (“InterWest”), through its wholly owned limited
liability company, Remington Village, LLC, signed a Contract to Buy and Sell
Real Estate to purchase approximately 10.15 acres of land located in Gillette,
Wyoming. The purchase price was $1,268,800 payable as follows: $25,000
earnest money deposit and $1,243,800 payable at closing. InterWest has a sixty
day due diligence period and if the final plat and other conditions are not
satisfied, InterWest is not obligated to purchase the property. InterWest also
signed a Development Agreement with PEG to assist in the evaluation of the
property and to obtain the entitlements, engineering and architecture necessary
to construct multifamily housing on the property. The cost to obtain
entitlements, engineering and architecture is estimated to be approximately
$698,000 and the construction cost of the 216 rental units is estimated to
be
between $22 and $25 million.
The
Board
of Directors has directed the management of InterWest to pursue a commercial
loan to finance the investment, seek and evaluate other business partners in
this project, continue due diligence and evaluation of the project in
cooperation with an investment committee of the Board of Directors to determine
its economic viability, and prior to committing construction of the multifamily
housing, InterWest shall obtain approval of the Boards of Directors of USE
and
Crested. The Board of Directors has also directed that InterWest should attempt
to invest no more than 20% equity into the project should it go forward and
that
the balance of the funds must come from lenders.
Local
demographics suggest Gillette’s population will increase from 26,000 to 50,000
by 2015 because of increased coal and coalbed methane production in Campbell
County, as well as the construction of three new coal fired power plants nearby.
There is significant unmet demand for rental units (none now available and
long
wait lists). InterWest is now in negotiations with local large employers to
pre-lease 80% or more of the InterWest complex for an extended period of
time.
If
InterWest is successful in obtaining entitlements and financing for the project,
the land will be purchased in April 2007 and construction would commence in
second quarter 2007, with completion expected in second or third quarter 2008.
Total purchase and construction costs are estimated at $22 - $25 million
(approximately $4.5 million cash equity, and the balance in bank financing).
If
the Uranium One contract is not closed, InterWest may sell the property with
the
planning permit, instead of constructing the 216 unit complex.
InterWest
has engaged PEG to manage and develop the Gillette project. PEG has considerable
development experience including 10 projects in the inter-Rocky Mountain region.
PEG has a one time option to convert portions of its fees into a 15% equity
position should the project be constructed.
InterWest
intends to expand operations in the multi-family housing sector, with focus
on
the energy basins of Wyoming, Utah, and Colorado where housing demand is
expected to remain strong.
-17-
CAPITAL
ACTIVITIES IN 2006
Sale
of Equity Interests Related to Coalbed Methane. In
2006,
the Company completed its exit from the coalbed methane sector by selling
securities in the following companies (the securities had been obtained from
a
prior sale of a subsidiary and the earlier reorganization of a portion of that
subsidiary’s assets).
Liquidation
of Enterra Units (part of 2005 sale of RMG). As
of
December 31, 2006, the Company had sold 682,345 units of Enterra Energy Trust
(“Enterra”) and held through its consolidated subsidiary, YSFI, 15,616 units
valued at $123,400. These units were received in June, 2006 as an automatic
conversion of its shares of Enterra Acquisition, which shares were received
as
partial consideration for the June 2005 sale of RMG to Enterra. The Company
and
Crested received $5,313,300 and $2,991,000, respectively, from sale of the
Enterra units for consolidated cash receipts for USE of $8,304,300.
Sale
of Pinnacle Gas Resources, Inc. Stock. From
2002
through mid-2005, USE's primary business focus was in the CBM business conducted
through RMG (formed in 1999 by USE and Crested). In 2001, RMG entered into
a CBM
property acquisition and development arrangement with a subsidiary of Carrizo
Oil & Gas, a public Houston-based company. In 2003, RMG and the Carrizo
subsidiary contributed CBM properties to a new corporation, Pinnacle Gas
Resources, Inc. (“Pinnacle”) in exchange for Pinnacle common stock issued to USE
and Crested, and Carrizo. At the same time, Pinnacle received financing from
funds affiliated with DLJ Merchant Banking.
The
Pinnacle shares (which had been owned by RMG, but were not sold as part of
the
2005 Enterra transaction) were transferred to USE and Crested in 2005. The
transaction with Enterra required USE and Crested to pay Enterra if the Pinnacle
shares were later sold for more than $10 million; the payment (allowed to be
by
either cash or USE stock) would be the difference between $10 million and
proceeds of sale (but not more than $2 million). In September 2006, USE and
Crested sold their Pinnacle shares in a private transaction for $13.8 million
cash, of which Crested received $4,830,000 and USE received $8,970,000. As
a
result of the sale of the Pinnacle shares, Crested and USE became obligated
to
pay Enterra $2.0 million in either cash or stock of USE. The Company and Crested
paid Enterra with 506,395 shares (valued at $3.95 per share at the time) of
USE
common stock (with a market value of $2 million) already owned by Crested.
Exercise
of Warrants and Options
In
2006,
USE issued a total of 226,015 shares of its common stock pursuant to the
exercise of warrants; 220,022 net shares from the exercise of employee options;
57,500 shares pursuant to the 2001 stock compensation plan as compensation
to
officers; 3,140 shares to outside directors; 70,756 shares for the annual
funding of USE’s Employee Stock Ownership Plan, 69,930 shares for a financing
with Cornell Capital which was later cancelled and 41,894 shares pursuant to
dilution provisions of prior stock issuances.
Sutter
Gold Mining Inc. - Gold
In
2006,
SGMI raised $3,171,500 of net proceeds from two private placements of its common
stock and $242,300 from the exercise of options and warrants. Proceeds have
funded general and administrative expenses, a combined underground and surface
diamond drill program and will also be used to prepare a pre-feasibility study
on the property.
-18-
RESEARCH
AND DEVELOPMENT
No
research and development expenditures have been incurred, either on the
Company’s account or sponsored by a customer of the Company, during the past
three fiscal years.
ENVIRONMENTAL
General
Operations
are subject to various federal, state and local laws and regulations regarding
the discharge of materials into the environment or otherwise relating to the
protection of the environment, including the Clean Air Act, the Clean Water
Act,
the Resource Conservation and Recovery Act ("RCRA"), and the Comprehensive
Environmental Response Compensation Liability Act ("CERCLA"). With respect
to
mining operations conducted in Wyoming and Colorado, their mine permitting
statutes, Abandoned Mine Reclamation Act and industrial development and sitting
laws and regulations also impact us. Similar laws and regulations in California
affect SGMI operations and Utah laws and regulations effect Plateau's
operations. Management believes the Company complies in all material respects
with existing environmental regulations.
For
information on the approximate reclamation costs (decommissioning,
decontamination and other reclamation efforts for which we are primarily
responsible or potentially responsible), see the consolidated financial
statements included in PART III of this Annual Report.
Other
Environmental Costs
Actual
costs for compliance with environmental laws may vary considerably from
estimates, depending upon such factors as changes in environmental law and
regulations (e.g., the new Clean Air Act), and conditions encountered in
minerals exploration and mining. We do not anticipate that expenditures to
comply with law regulating the discharge of materials into the environment,
or
which are otherwise designed to protect the environment, will have any
substantial adverse impact on our competitive position. Environmental regulatory
programs create potential liability for our operations and may result in
requirements to perform environmental investigations or corrective actions
under
federal and state laws and federal and state Superfund
requirements.
EMPLOYEES
As
of
March 15, 2007, USE had 26 full-time employees. The expenses associated with
USE's employees, including payroll taxes, fringe benefits and retirement plans
are shared with Crested for all ventures in which it participates on a
percentage ownership basis. Crested uses approximately 50 percent of the time
of
most, but not all USE employees, and reimburses USE on a cost reimbursement
basis for their wages, payroll taxes, benefits, health insurance and ESOP
contributions.
MINING
CLAIM HOLDINGS
Title
Nearly
all of the uranium mineral properties held by the Company are on federal
unpatented claims. Approximately 25 of the Lucky Jack Project mining claims
which USE received back from PD are patented claims; however the majority of
the
mining claims there are unpatented. Some of our holdings are also in the form
of
State mineral leases.
-19-
Unpatented
claims are located upon federal and public land pursuant to procedures
established by the General Mining Law. Requirements for the location of a valid
mining claim on public land depend on the type of claim being staked, but
generally include discovery of valuable minerals, erecting a discovery monument
and posting thereon a location notice, marking the boundaries of the claim
with
monuments, and filing a certificate of location with the county in which the
claim is located and with the BLM. If the statutes and regulations for the
location of a mining claim are complied with, the locator obtains a valid
possessory right to the contained minerals. To preserve an otherwise valid
claim, a claimant must also pay certain rental fees annually to the federal
government and make certain additional filings with the county and the BLM.
Failure to pay such fees or make the required filing may render the mining
claim
void or voidable. Because mining claims are self-initiated and self-maintained,
they possess some unique vulnerability not associated with other types of
property interests. It is impossible to ascertain the validity of unpatented
mining claims solely from public real estate records and it can be difficult
or
impossible to confirm that all of the requisite steps have been followed for
location and maintenance of a claim. If the validity of an unpatented mining
claim is challenged by the government, the claimant has the burden of proving
the economic feasibility of mining minerals located thereon.
PROPOSED
FEDERAL LEGISLATION
The
U.S.
Congress from time to time has considered proposed revisions to the General
Mining Law, which governs mining claims and related activities on federal public
lands. If these proposed revisions were enacted, payment of royalties on
production of minerals from federal lands could be required as well as new
requirements for reclamation of mined land and other environmental control
measures. The effect of any revision of the General Mining Law on operations
cannot be determined until enactment, however, it is possible that revisions
would materially increase the carrying and operating costs of mineral properties
located on federal unpatented mining claims.
-20-
ITEM
1. A RISK FACTORS
THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED IN EVALUATING
THE
INFORMATION IN THIS FORM 10-K
The
Company has a history of operating losses.
At
December 31, 2006, USE had $39,101,900 of accumulated deficit ($40,154,100
at
December 31, 2005). For the year ended December 31, 2006, USE recorded a
loss
before a benefit from income taxes of $14,279,400 and a net gain after benefit
from income taxes of $1,052,200. For the year ended December 31, 2005, USE
recorded a loss from continuing operations of $6,066,900, but (due primarily
to
the sale of RMG in June 2005) recorded net income of $8,841,500.
Working
capital at December 31, 2006 was $31,730,000. Historically, working capital
needs primarily have been met from receipt of funds from liquidating
investments, selling partial interests in mineral properties and selling
equity.
These sources of capital may not be sufficient to develop USE’s mineral
properties as additional exploration work may need to be done as well as
all
development work and capital expenditures related to equipment and plant
construction need to be funded.
Proceeds
from closing the proposed sale of uranium assets to Uranium One would greatly
increase working capital, but additional capital still might be needed to
fully
fund new business opportunities, and/or develop the molybdenum
property.
Concerning
the Contract with Uranium One.
If we
close the sale of uranium assets to Uranium One, the principal component of
the
purchase price to be received at closing will be common stock of Uranium One.
Trading in Uranium One stock has been volatile and the amounts we may realize
from selling the stock can not be predicted. We will be looking to these
proceeds as the source of a significant portion of our capital resources going
forward. A reduction in expected proceeds could result in our having to seek
equity capital to develop our other mineral properties and/or explore other
business opportunities.
No
recurring business revenues and uncertainties associated with transaction-based
revenues.
Presently
we don’t have an operating business with recurring revenues. Receipt of funds
from selling interests in mineral properties, or liquidating investments in
mineral properties (or the subsidiaries which hold properties) is unpredictable
as to timing, structure, and profitability.
For
example, we began activities in the coalbed methane sector in 2000 by starting
up RMG. RMG used, rather than provided, capital until it was sold to Enterra
in
June 2005. In 2003, we acquired stock in Pinnacle by RMG’s contribution of
properties into Pinnacle, but we did not realize a return on the transaction
until September 2006.
Working
capital on hand is expected to be sufficient to fund general and administrative
expenses, and conduct exploration and a limited amount of development work
on
the mineral properties, through 2007. Capital for developing the molybdenum
property in Colorado could be available through KBX. Capital also could be
available for acquiring and developing other mineral properties if the contract
with Uranium One is closed. However, funding from these sources is not assured.
-21-
Putting
mineral properties into production (constructing and operating mines and
processing facilities) requires substantial amounts of capital. With particular
reference to the molybdenum property, a retained property interest under the
arrangement with KBX will not generate recurring revenues for several years,
if
at all, and still will depend on obtaining substantial capital from industry
partners (or a sale to a large company) to mine and process the minerals. In
addition, the mine plan of Phelps Dodge Corporation (from whom USE and Crested
received back the property) and its predecessor companies encountered opposition
from local and environmental groups. That opposition likely will
continue.
Uncertainties
in the value of the mineral properties.
While
we believe that our mineral properties are valuable, substantial work and
capital will be needed to establish whether they are valuable in fact. The
uncertainties described below regarding the uranium properties assume the
contract with Uranium One is not closed.
The
profitable mining and processing of uranium and possibly vanadium at and in
the
vicinity of Plateau Resource Limited’s properties in Utah, will depend on many
factors: Obtaining properties in close proximity of the Shootaring Canyon
uranium mill to keep transportation costs economic; delineation through
extensive drilling and sampling of sufficient volumes of mineralized material
with sufficient grades to make mining and processing economic over time;
continued sustained high prices for uranium oxide and vanadium; obtaining the
capital required to upgrade the Shootaring Canyon uranium mill, and/or possibly
add a vanadium circuit, and obtaining and continued compliance with operating
permits.
Profitable
mining at the Sheep Mountain uranium properties in Wyoming will depend on:
Evaluations of existing and future drilling data to delineate sufficient volumes
and grades of mineralized material to make mining and processing economic over
time; continued sustained high prices for uranium oxide, and Uranium Power
Corp.
(“UPC,” a joint owner of these properties) and USE having sufficient capital. In
addition, there is no operating mill near the Sheep Mountain properties,
although the Sweetwater Mill (now on standby status, and owned by an
international mining company) is located 30 miles south of Sheep Mountain.
If
the
contract with Uranium One is closed, we would not be funding exploration and
mining of the properties but the ultimate value of our equity stake in Uranium
One could still be somewhat dependent on the viability of the Sheep Mountain
properties and Shootaring Canyon mill as part of Uranium One’s minerals
portfolio.
The
profitable mining and processing of gold by SGMI will depend on many factors,
including: Receipt of permits and keeping in compliance with permit conditions;
delineation through extensive drilling and sampling of sufficient volumes of
mineralized material with sufficient grades to make mining and processing
economic over time; continued sustained high prices for gold, and obtaining
the
capital required to initiate and sustain mining operations and build and operate
a gold processing mill.
The
Lucky
Jack molybdenum property has had extensive work conducted by prior owners.
This
data will have to be updated to the level of a current feasibility study to
determine the viability of starting mining operations. Obtaining mining and
other permits to begin mining the molybdenum property may be difficult, even
with the assistance of KBX. Like any mining operation, capital requirements
for
a molybdenum mine and processing facility will be substantial.
-22-
We
have
not yet obtained final (“bankable”) feasibility studies on any of our mineral
properties. These studies would establish the economic viability, or not, of
the
different properties based on extensive drilling and sampling; the design and
costs to build and operate mills; the cost of capital, and other factors.
Feasibility studies can take many months to complete. These studies are
conducted by professional third party consulting and engineering firms, and
will
have to be completed, at considerable cost, to determine if the deposits contain
proved reserves (amounts of minerals in sufficient grades that can be extracted
profitably under current pricing assumptions for development and operating
costs
and commodity prices). A feasibility study usually (but not always) must be
completed in order to raise the substantial capital needed to put a mineral
property into production. We have not established any reserves (economic
deposits of mineralized materials) on any of the properties, and future studies
may indicate that some or all of the properties will not be economic to put
into
production.
Compliance
with environmental regulations may be costly.
The
minerals business is intensely regulated by government agencies. Permits are
required to explore for minerals, operate mines, build and operate processing
plants. The regulations under which permits are issued change from time to
time
to reflect changes in public policy or scientific understanding of issues.
If
the economics of a project cannot withstand the cost of complying with changed
regulations, we might decide not to move forward with the project.
We
must
comply with numerous environmental regulations on a continuous basis, to comply
with the United States Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act ("RCRA"), and the Comprehensive Environmental
Response Compensation Liability Act ("CERCLA"). For example, water and dust
discharged from mines and tailings from prior mining or milling operations
must
be monitored and contained and reports filed with federal, state and county
regulatory authorities. Additional monitoring and reporting is required by
the
Utah Division of Radiation Control for uranium mills even if not currently
operating (like the Shootaring Canyon uranium mill). The Abandoned Mine
Reclamation Act in Wyoming and similar laws in other states impose reclamation
obligations on abandoned mining properties, in addition to or in conjunction
with federal statutes. Environmental regulatory programs create potential
liability for operations, and may result in requirements to perform
environmental investigations or corrective actions under federal and state
laws
and federal and state Superfund requirements.
Failure
to comply with these regulations could result in substantial fines,
environmental remediation orders and/or potential shut down of the project
until
compliance is achieved. Failure to timely obtain required permits to start
operations at a project could cause delay and/or the failure of the project
resulting in a potential write-off of the investments therein.
We
depend on key personnel.
USE has
a very limited staff and executive group. These persons are knowledgeable of
our
mineral properties and have experience in dealing with the exploration of
mineral properties as well as the financing of them. The loss of key employees
would adversely impact our business, as finding replacements is difficult
because of competition for experienced personnel in the minerals
industry.
We
will seek additional business activities if the uranium assets are sold to
Uranium One.
If the
uranium assets are sold, we will not own any other significant mineral assets
other than our interest in the SGMI gold property and the long-term molybdenum
property under joint development with KBX. With proceeds from sale of the
Uranium One stock and other cash to be received at (or closely following)
closing of the Uranium One contract, plus working capital now on hand, we intend
to acquire other mineral interests, and pursue other business activities such
as
real estate development through our subsidiary InterWest). Other than real
estate investment opportunities, we don’t currently have any agreements in place
for other business opportunities.
-23-
We
may issue shares of preferred stock with greater rights than the common stock.
Although
it has no current plans, arrangements, understandings or agreements to do so,
USE’s articles of incorporation authorize USE’s board of directors to issue one
or more series of preferred stock and set the terms of the stock without seeking
approval from holders of the common stock. Preferred stock that is issued may
rank ahead of USE’s common stock, in terms of dividends, liquidation rights and
voting rights.
Future
equity transactions, including exercise of options or warrants, could result
in
dilution.
From
time to time, USE has sold restricted stock and warrants, and convertible debt
(or stock in subsidiary companies, convertible to stock), to investors in
private placements conducted by broker-dealers, or in negotiated transactions.
Because the stock was issued as restricted, the stock was sold at a discount
to
market prices, and the exercise price of the warrants sometimes (and/or the
conversion price for stock in subsidiaries) was at or lower than market prices.
These transactions caused dilution to existing shareholders. Also, from time
to
time, options are issued to employees, directors and third parties as
incentives, with exercise prices equal to market. Exercise of in-the-money
options and warrants will result in dilution to existing shareholders; the
amount of dilution will depend on the spread between market and exercise price,
and the number of shares involved.
Whether
or not the Uranium One contract is closed, USE may continue to raise capital
from the equity markets using private placements at discounted prices. Indirect
dilution would occur if institutional financing is raised for a subsidiary
company. In this scenario, the percentage of the subsidiary held by us would
be
diluted. In addition, USE will continue to grant options to employees and
directors.
USE
does not expect to pay dividends on its common stock.
USE does
not expect to pay any dividends, in cash or otherwise, on its common stock
in
the foreseeable future. USE intends to retain any earnings for use in its
business.
USE’s
poison pill could discourage some advantageous
transactions.
USE
adopted a shareholder rights plan, also known as a poison pill. The plan is
designed to discourage a takeover of USE at an unfair price. However, it is
possible that the board of directors and the takeover acquirer would not agree
on a higher share price, in which case the takeover might be abandoned, even
though the takeover price was at a significant premium to market prices.
Therefore, as a result of the mere existence of the plan, shareholders would
not
receive the premium price.
ITEM
2. PROPERTY
Molybdenum
- Lucky Jack Molybdenum Property
The
Company re-acquired the Lucky Jack Project (formerly the Mount Emmons molybdenum
property) located near Crested Butte, Colorado on February 28, 2006. The
property was returned to the Company by Phelps Dodge Corporation (“PD”) in
accordance with a 1987 Amended Royalty Deed and Agreement between Company and
Amax Inc. (“Amax”). The Lucky Jack Project includes a total of 25 patented and
approximately 520 unpatented mining claims, which together approximate 5,400
acres, or over 8 square miles of mining claims.
Kobex
Resources Ltd. has an option to acquire up to 65% of the Lucky Jack Project.
See
Part I above.
-24-
Conveyance
of the property to the Company also included the transfer of ownership and
operational responsibility of the mine water treatment plant located on the
properties. The water treatment permit issued under the Colorado Discharge
Permit System (“CDPS”) was assigned to the Company by the Colorado Department of
Health and Environment. Operating costs for the water treatment plant are
expected to approximate $1 million annually. The Company has hired a contractor
to operate the water treatment plant. The Company will also evaluate the
potential use of the water treatment plant in the milling
operations.
The
Company leased various patented and unpatented mining claims on the Lucky Jack
molybdenum property to Amax in 1974. In the late 1970s, Amax delineated a large
deposit of molybdenum on the properties, reportedly containing approximately
155
million tons of mineralized material averaging 0.44% molybdenum disulfide
(MoS2). In 1980, Amax constructed a water treatment plant at the Lucky Jack
molybdenum property to treat water flowing from old mine workings and for
potential use in milling operations. By 1983, Amax had reportedly spent an
estimated $150 million in the acquisition of the property, securing water
rights, extensive exploration, ore body delineation, mine planning,
metallurgical testing and other activities involving the mineral deposit. Amax
was merged into Cyprus Minerals in 1992 to form Cyprus Amax. PD then acquired
the Lucky Jack molybdenum property Project in 1999 through its acquisition
of
Cyprus Amax. Thereafter, PD acquired additional water rights and patents to
certain claims to mine and mill the deposit.
In
its
1992 patent application to the Bureau of Land Management of the United States
Department of the Interior (“BLM”), Amax stated that the size and grade of the
Mount Emmons deposit was determined to approximate 220 million tons grading
0.366% molybdenite. In a letter dated April 2, 2004, BLM estimated that there
were about 23 million tons of mineable reserves containing 0.689% molybdenite,
and that about 267 million pounds of molybdenum trioxide was recoverable. This
letter covered only the high-grade mineralization which is only a portion of
the
total mineral deposit delineated to date. The BLM relied on a mineral report
prepared by Western Mine Engineering (WME) for the U.S. Forest Service, which
directed and administered the WME contract. WME’s analysis was based upon a
price of $4.61 per pound for molybdic oxide and was used by BLM in determining
that nine claims satisfied the patenting requirement that the mining claims
contain a valuable mineral that could be mined profitably. WME consulted a
variety of sources in preparation of its report, including a study prepared
in
1990 by American Mine Services, Inc. and a pre-feasibility report prepared
by
Behre Dolbear & Company, Inc. of Denver, CO in 1998.
Uranium
- Mining Properties
The
Company owns the Shootaring Canyon uranium mill in southeastern Utah, holds
approximately 40,000 acres of mineral claims and leases, and own historical
libraries/data covering several mines and exploration areas in Arizona,
Colorado, Utah, and Wyoming. These properties range from exploration to
pre-production status. The property locations include the historic producing
areas in Lisbon Valley, San Juan County, Utah; Crooks Gap, Fremont County,
Wyoming; the Uravan Mineral belt of Colorado, and the Arizona Strip area of
Mohave and Coconino Counties, Arizona. The Arizona Strip area hosts higher
grade
“Breccia Pipe” uranium mines operated in the early 1980s. Extensive and highly
prospective land holdings have also been acquired in the Henry Mountains area,
Garfield County, Utah, within 20 - 40 miles of the Shootaring Canyon uranium
mill.
-25-
| · |
Utah
|
In
August
1993, USE purchased from Consumers Power Company ("CPC") all of the outstanding
stock of Plateau, which owns the Shootaring Canyon uranium mill, a uranium
processing mill in southeastern Utah for nominal cash consideration and the
assumption of various reclamation obligations. Crested does not own stock in
Plateau, but Crested has a 50% interest in Plateau’s cash flow. The Shootaring
Canyon uranium mill is one of only four remaining licensed uranium mills in
the
United States. The mill holds a source materials license from the State of
Utah,
Division of Radiation Control.
The
Shootaring Canyon uranium mill occupies 19 acres of a 265 fee acre plant site.
The mill was the last uranium mill built (in 1982) in the United States. It
was
designed to process 750 tons of material per day (“tpd”), but only operated four
months on a trial basis in mid-summer of 1982. In 1984, Plateau placed the
mill
on standby because CPC had canceled the construction of an additional nuclear
energy plant. Plateau also owns approximately 94,200 tons of uranium mineralized
material stockpiled at the mill site with an average grade of about 0.12%
U3O8.
USE
has
signed a Memorandum of Agreement (MOA) between the Utah Division of Radiation
Control and USE’s subsidiary, Plateau Resources Limited, Inc. (Plateau). The MOA
allows the State of Utah to allocate staff and consultants to complete the
review process requested by Plateau in March 2005 to change the Shootaring
Canyon uranium mill license from “reclamation” to “full operational” status.
In
2003
and 2004, reclamation work on uranium properties (the Tony M and Velvet, then
held by Plateau in San Juan County, Utah) was completed. Plateau had
relinquished these properties in 2003 and 2004, respectively, but has
subsequently acquired the Velvet from a third party who staked unpatented mining
claims on the property (see below). As a result of the Company’s filings to
bring the mill licenses and permits to “operational status, the Company expended
limited amounts of capital for standby operations of the Shootaring Canyon
uranium mill in 2006.
The
mill
should be capable of operating at 1,000 tpd, once the operation license is
issued and refurbishing is completed. Depending on the grade of material fed
to
the mill, it is anticipated that it will have the capacity to produce 1.5
million pounds of uranium concentrates annually.
An
independent Technical Review and Valuation of the mill was completed in July
2005 by Behre Dolbear & Company (USA), Inc. of Denver, Colorado (“BDC”),
which concluded that the then current replacement cost value was $80.5 million.
Further, BDC estimated capital expenditures to upgrade the mill and tailings
facility for uranium processing to be $31.2 million before production could
begin. BDC also estimated that the costs to add a vanadium circuit that could
produce an estimated 3.9 million pounds of vanadium (V2O6)
annually to be $18.8 million. In order to fund the refurbishment of the mill
and
acquire additional uranium properties from which to produce uranium bearing
ores, we would seek joint venture partners or equity participants.
Green
River North and South Projects, Utah
The
Green
River North project consists of 10 lode mining claims owned by the Company.
These claims cover the Deeper Gold deposit with an historic estimate of
approximately 650,000 pounds U3O8
with an
average grade of 0.23% U3O8
per
ton
of mineralized material. This estimate was originally developed in December
1985. The Deeper Gold deposit is approximately 110 miles by paved road from
the
Shootaring Canyon uranium mill.
-26-
Included
in the Green River South Project is the Sahara Mine, (See Part I, Industry
Segments/Principle Products, Minerals - uranium / UPC Mining Venture Agreement
above) which has an historic estimate of approximately 500,000 pounds of uranium
oxide (U3O8)
with an
average grade of 0.23% U3O8
per ton
of mineralized material. The Sahara Mine is approximately 90 miles by paved
road
from the Shootaring Canyon uranium mill. The Sahara Mine was in minimal
production before it was shut down. The material and grade estimate was reported
by the previous operator of the property, Energy Fuels Inc. Approximately 450
holes were drilled on the deposit, delineating the first 1,800 feet of the
trend. All the logs for this drilling are in the possession of the Company.
Historic
exploration drilling on the Green River South property indicates that a
substantial number of targets have already been developed and are available
for
follow-up drilling, and that the potential for additional discoveries is
significant. However, if the Uranium One contract is closed, the Company’s
interest will be transferred to UPC; if the contract is not closed, the Company
may relinquish its rights (see above).
Twenty
boreholes were drilled in late 2006 with five confirming historic drilling
at
the Sahara deposit. Two hundred ten feet of core were taken from these holes
to
test chemical versus radiometric grade equilibrium. The remainder of the holes
was exploration to test the extension of mineralization and hosting sand
channels east of the known Sahara Deposit. A total of 10,940 feet was
drilled.
Lisbon
Valley, Utah
An
extensive review of regional data included in the USE library has led to the
development of a depositional model for uranium mineralization in the Cutler
formation. This model is well supported by hard geologic data, and indicates
that there is excellent potential to develop new resources on the project lands.
Several months in 2006 were spent refining the depositional model through
studying published reports and in house reports, analyzing old drilling data,
and doing field work through an outcrop mapping program. Our findings resulted
in an additional 145 claims being staked in the project area.
A
first
phase drill program to test the model has been designed and
permitted.
Henry
Mountains, Utah
An
extensive review of regional data included in the USE library has led to the
development of a depositional model for uranium mineralization in the Morrison
formation north of the Shootaring Canyon uranium mill. This model is well
supported by hard data, and indicates excellent potential to develop new
resources in the area. Several months in 2006 were spent refining the
depositional model through studying historic drilling, published and in-house
reports. Field mapping of the mineralized horizon has been
completed.
A
drilling program has been developed and submitted to the BLM for
permitting.
· Wyoming
In
February 1988, the Company acquired from Western Nuclear, Inc. unpatented lode
uranium mines, mining equipment and mineralized properties (including
underground and open pit mines) at Crooks Gap in south-central Fremont County,
Wyoming. The mines were operated by Western Nuclear in the 1970s. The Company
mined and milled uranium ore from one of the underground Sheep Mines in 1988
and
1989.
-27-
At
the
filing date of this Annual Report, the Company owns 286 unpatented lode mining
claims (approximately 5,909 acres) and a 644 acre Wyoming State Mineral Lease
on
Sheep Mountain in Crooks Gap, Wyoming and adjacent areas. Production from 57
of
these claims and the leases which together comprise the core Sheep Mountain
properties is subject to royalty interests held by third parties ranging from
1%
to 4% of the NUEXCO monthly exchange value per pound of uranium oxide (a sliding
rate of 1% per pound if the price is $27.99 or less, up to 4% if the price
is at
or above $44.00). Additional royalties of from $0.50 per pound, to 5% of gross
sales price (less haulage and development allowances) of uranium oxide, burden
some of these same properties.
The
Sheep
Mountain property reportedly produced over 17 million pounds of uranium
concentrates prior to being idled by depressed market conditions in the 1980s.
The Company is utilizing its extensive uranium data library of drill, mine,
and
property information to identify exploration targets on this property. The
deeper zones have not been systematically tested nor have they been included
in
any historical resource estimation. Current interpretations of the historical
data indicate the potential to expand mineralized areas believed to exist on
the
Sheep Mountain property. All of the uranium mining properties at Sheep Mountain
are currently shut down with limited reclamation activities. Monitoring and
reporting work continues to keep the permits current.
There
is
no operating uranium mill near Sheep Mountain, but Rio Tinto owns the Sweetwater
Mill (which is on standby) some 30 miles south of Sheep Mountain. The ultimate
economics of mining the Sheep Mountain properties through underground working
will depend on access to a mill.
Over
a
period of at least 24 months, substantial work would be required to put the
Sheep Mountain uranium mines into production, including permitting, cleaning
rock and other debris from shafts and tunnels, pumping water out of the mines,
extending shafts and tunnels, and further drill sampling to ascertain whether
a
commercially viable ore body exists on any of the properties.
We
have
recorded reclamation liabilities for the Sheep Mountain properties (see note
K
to the consolidated financial statements). No historical costs from the Sheep
Mountain properties are on the balance sheet of USE at December 31, 2006.
Current permits are in place for standby maintenance and reclamation of the
mines.
· Arizona
On
August
22, 2005, the Company and UPC signed an agreement to add two more uranium
projects to their joint venture (Burro Canyon in Colorado and Breccia Pipes
located in Arizona). The latter project involves properties in the Arizona
Strip, in northern Arizona. This property consists of 54 lode mining claims
(Star and Java claims) on BLM land in Mohave and Coconino counties, Arizona.
The
exploration targets on these properties are known as Breccia Pipes uranium
deposits.
These
properties were acquired by the Company pursuant to an agreement with Nu Star
Exploration, LLC. Under the terms of the agreement between the Company and
UPC,
UPC will earn a 50% interest in the project by contributing the first $500,000
in acquisition and exploration expenses for the project (but still, UPC will
have to complete its payments under the Purchase and Sale Agreement generally,
to hold the 50% interest in the project). Additionally, UPC will issue up to
500,000 common shares of UPC stock to the Company, subject to regulations of
the
TSX Venture Exchange, within six months of the date drilling results outline
an
inferred mineral resource on the Breccia Pipes Project as follows: 1) 250,000
common shares for the first 500,000 lbs. of contained U3O8
identified
and 2) an additional 250,000 common shares for the second 500,000 lbs. of
contained U3O8
identified.
Inferred mineral resource is an estimation category which UPC is allowed to
disclose under Canadian NI 43-101. SEC regulations do not permit the Company
to
make such disclosures.
-28-
The
Arizona Strip was the site of a major uranium staking rush in the early 1980s.
Uranium-bearing Breccia Pipes were first located in the Hack Canyon area of
Mohave County and the mineralized material was typically of a higher grade
than
other uranium deposits located in surrounding areas of the Colorado Plateau.
Historic mining in the Arizona Strip has produced uranium with an average grade
of up to 0.80% U3O8.
Production from individual mines in this district has ranged from about
1,000,000 lbs to 7,000,000 lbs U3O8.
The
Star
claims are near the partially mined Arizona I mine. The area is located within
a
short distance to the south of the Hack Canyon mining area. Mapping on the
Star
claims indicates the presence of 23 potential pipes, with the potential for
4
additional targets on the Java claims. If any of the targets are developed
to a
mining stage, the Shootaring Canyon uranium mill would be the likely location
for ore processing.
Shallow
drilling on previously mapped breccia pipe targets was completed in January
2006. Thirty six total boreholes were drilled for a total of 8,094 feet. Seven
targets were evaluated with this program resulting in the location of two
collapsed cones. Identifying the collapsed cones allows geologists to focus
the
location of deeper exploration drilling designed to possibly discover uranium
mineralization.
· Colorado
191
unpatented mining claims consisting of approximately 3,853 acres were acquired
in Colorado in the Sage Plains and Burro Canyon areas. At the Burro Canyon
area,
78 claims were acquired from a third party with a production royalty of
2.56%.
Drilling
took place at the Burro Canyon Project in February and March of 2006. Seventeen
boreholes totaling 20,293 feet were drilled along trends established by past
mining in the Burro and Sunday Mines. Nine of these boreholes penetrated uranium
mineralization. This mineralization confirms that ore horizons mined from
surrounding properties continues on claims controlled by Plateau Resources
Limited, Inc.
Gold
- Sutter Gold Mining Inc. (Active Exploration)
SGMI
holds approximately 535 acres of surface and mineral rights near Sutter Creek,
Amador County, California, approximately 45 miles east-southeast of Sacramento,
CA, in the central part of the 121-mile-long Mother Lode gold belt. The Sutter
Gold Project is located in the western Sierra Nevada Mountains at 1,000 to
1,500
feet in elevation. The year round climate is temperate. Access is by California
State Highway 16 from Sacramento to California State Highway 49, then by paved
county road approximately .4 miles outside of Sutter Creek.
A
Conditional Use Permit is being kept current to allow for planned mining
activities on the properties in the future.
Surface
and mineral rights holding costs, and property taxes were $823,300 in 2006.
Additionally, SGMI expended $471,324 in a drilling program and the maintenance
of equipment. The leases are for varying terms and require rental fees, annual
royalty payments and payment of real property taxes and insurance. A tourist
visitor’s center and gift shop has been set up and leased to a third party for
$1,500 per month plus a 4% gross royalty on revenues. These revenues offset
a
portion of costs for holding the SGMI properties.
-29-
A
review
of documentation of historic gold production from properties to the north and
south of the Sutter Gold Project shows that between 1857 and 1951, a total
of
2,350,096 ounces of gold were produced from the Project.
Production
was halted in most of the producing mines because of the Second World War,
not
because they ran out of ore. The report indicates that these very productive
mines chased gold bearing mineralized veins to seven times the depth of SGMI’s
present workings.
The
areas
of large historic gold production are found at the north and south ends of
the
Sutter Gold Project area, bracketing a one-mile long portion of the Mother
Lode
Belt with no historic gold production, and which hosts Sutter Gold’s Lincoln and
Comet Zones. The Lincoln and Comet Zones were blind discoveries that did not
outcrop at surface and which represent the first significant new gold
discoveries made along the Mother Lode Belt in the last 50 years that are
unrelated to past-producing mines. SGMI believes there is significant potential
for continued new discoveries within the area of the Lincoln and Comet Zones,
both near the surface and at depth as 90% of the property has not been
explored.
The
property has been the subject of considerable modern exploration activity,
most
of it centering on the Lincoln and Comet zones, which are adjacent to each
other. A total of 85,085 feet of drilling has been accomplished in prior years,
with 190 diamond drill holes, and modern underground development consists of
a
2,850-foot declined ramp with 2,400 feet of crosscuts plus five
raises.
To
further delineate the resource size and connect the Lincoln and Comet blocks,
an
underground and surface drilling program was executed in the latter part of
2006
and continued into 2007. During 2006, 8,718 feet of underground core drilling
in
32 holes and 1,931 feet of surface core in 2 holes were completed. Assay results
have been received for 14 of the holes. Notable intercepts in those holes
included 24 feet of 0.21 ounces gold per ton in hole 0164 and 9.3 feet of 1.26
ounces gold per ton in hole 0165.
Other
Properties
· Fort
Peck
Lustre Field (Montana)
The
Company operated a small oil production facility (two wells) at the Lustre
Oil
Field on the Ft. Peck Indian Reservation in northeastern Montana, for a fee
based on oil produced. The wells were shut in during April 2006 and negotiations
began to return the wells to the Ft. Peck Tribes. Negotiations resulted in
an
agreement, not yet signed, whereby the Tribes would assume all reclamation
obligations on the wells and USE and its co-participants in the wells would
deed
over to the tribes all tanks, pump equipment and down hole equipment to the
Tribes. A final distribution of residual funds from production and the
conveyance of the property is pending.
· Wyoming
The
Company owns a 14-acre tract in Riverton, Wyoming, with a two-story 30,400
square foot office building. The first floor is rented to non-affiliates and
government agencies; the second floor is occupied by the Company. The property
is mortgaged to the WDEQ as security for future reclamation work on the Sheep
Mountain Crooks Gap uranium properties. If the Uranium One contract is closed,
the mortgage will be released. The Company also owns a 10,000 square foot
aircraft hangar on land leased from the City of Riverton; 7,000 square feet
of
associated offices and facilities; three vacant lots covering 16 acres in
Fremont County, Wyoming, and two city lots and improvements including one small
office building.
-30-
· Utah
On
February 27, 2006, Plateau re-acquired by Foreclosure Sale the Ticaboo, Utah
properties. The properties include: a motel, restaurant and lounge, convenience
store, recreational boat storage and service facility, and improved residential
and mobile home lots. Most of these properties were acquired when the Shootaring
Canyon uranium mill was acquired in the early 1990s.
On
April
12, 2006, the Company signed a contract with ARAMARK Sports and Entertainment
Services, Inc., a subsidiary of ARAMARK (NYSE: “RMK”), for the management and
operation of all commercial services at the Ticaboo town site. The initial
term
of the contract is for three years, with one three-year extension option to
be
exercised upon the mutual agreement of USE and ARAMARK. Under the terms of
the
contract, ARAMARK will manage the Ticaboo town site’s 70-room motel, convenience
store, mobile home park, boat storage facility, restaurant and lounge. ARAMARK
will also add Ticaboo to its nationwide reservation center and website. Per
terms of the agreement, ARAMARK will receive a management fee and will invest
in
a marketing program designed to maximize future revenues.
ITEM
3. LEGAL PROCEEDING
Material
legal proceedings pending at December 31, 2006, and developments in those
proceedings from that date to the date this Annual Report is filed, are
summarized below. Legal proceedings which were not material to the Company
were
concluded in the fourth quarter 2006.
Phelps
Dodge - Lucky Jack Molybdenum Property
On
September 26, 2006, the Company signed a Settlement Agreement and Release
with
Phelps Dodge Corporation (“PD”) resulting in a $7,000,000 payment to PD as part
of the final agreement. This settlement resulted in a cash savings of $538,300
from the $7,538,300 awarded to PD by the U.S. Federal District Court of Colorado
on July 26, 2006.
Patent
Claims Litigation - Lucky Jack Molybdenum Property
The
only
pending legal proceeding to which USE and Crested are parties relates to a
challenge to the validity of title to the patented claims included in the
molybdenum property.
On
April
2, 2004, the United States Bureau of Land Management (“BLM”) issued patents on
nine additional mining claims for the Lucky Jack molybdenum property (previously
known as Mount Emmons), for a total of 25 patented claims which consists of
approximately 350 patented or “fee” acres. A lawsuit was filed by local
governmental entities and environmentalists (“Appellants”) in U.S. District
Court of Colorado challenging BLM’s issuance of the nine additional mining
patents and alleging BLM violated the 1872 Mining Law, applicable regulations,
and the Administrative Procedures Act by overruling their protests to Mt. Emmons
Mining Company’s mineral patent application, by awarding the patents, and by
conveying the land to Mt. Emmons Mining Company (a subsidiary of Phelps Dodge
Corporation). The case was High
Country Citizen’s Alliance, Town of Crested Butte, Colorado, and The Board of
County Commissioners of the County of Gunnison, Colorado v. Kathleen Clarke,
Director of the Bureau of Land Management et. al., Gale Norton, Secretary of
Interior, U.S. Department of the Interior; Phelps Dodge Corporation; Mt. Emmons
Mining Company.
-31-
On
January 12, 2005, U.S. District Court dismissed the Appellants’ appeal holding:
(i) that they had no right of appeal from a decision to issue a mineral patent,
because the 1872 Mining Law created no private cause of action for unrelated
parties to challenge the issuance of a mineral patent, and (ii) because the
1872
Mining Law implicitly precludes unrelated third parties from challenging mineral
patent by judicial action, the Administrative Procedures Act does not constitute
a waiver of sovereign immunity for purposes of the action. Appellants filed
an
appeal of the U.S. District Court’s decision to the United States Tenth Circuit
Court of Appeals (10th
CAA”).
The 10th
CCA case
number is D.C. No. 04-MK-749PAC and No. 05-1085.
On
February 28, 2006, the property was transferred to USE and
Crested by Phelps Dodge Corporation (“PD”) and Mt. Emmons Mining Company. On
July 21, 2006, the 10th
CAA
affirmed the January 12, 2005 dismissal by the U.S. District Court of challenges
to the issuance of nine additional mining patents on the molybdenum property.
On
September 5, 2006, the Appellants filed a Petition for Rehearing En Banc of
the
July 21, 2006, decision before the entire 10th
CCA. On
September 8, 2006, USE and Crested were admitted as substitute parties for
Phelps Dodge Corporation and Mt. Emmons Mining Company (following USE’s and
Crested’s filing of a Motion to Substitute Parties.
On
October 27, 2006, the entire 10th
CCA
affirmed and upheld the July 21, 2006, decision by the 10th
CCA
panel, thereby denying the Appellants’ Petition of Rehearing En Banc and their
challenges to the issuance of the patents.
On
February 26, 2007, the Appellants filed a petition for certiorari with the
United States Supreme Court again arguing that they were improperly denied
judicial review of the decision by BLM to issue the patents. The BLM and
USE/Crested must file any opposition briefs on or before March 28, 2007.
Management is not able to predict the outcome or the ultimate effect, if any,
this litigation will have on the Company.
Quiet
Title Litigation - Sutter Gold Mining Inc.
In
2004,
USECC Gold Limited Liability Company (a predecessor of SGMI) as plaintiff filed
an action (USECC
Gold Limited Liability Company vs. Nevada-Wabash Mining Company, et
al,
Case
No. 04CV3419) in Superior Court of California, County of Amador) seeking to
quiet title as vested in plaintiff to two patented mining claims at the Sutter
Gold project. All but one of the approximately 54 defendants (dissolved private
corporations and other entities, their stockholders and/or estates of deceased
stockholders) have defaulted. Plaintiff and the remaining defendant have had
settlement discussions, and a settlement conference is scheduled for mid-April
2007; if a settlement is not obtained, trial is scheduled for May 8 and 9,
2007.
Management
is confident that plaintiff would prevail on the merits in the event of trial.
The subject property includes a portion of the existing decline prior to
intercepting the mineralized resource at the Sutter Gold project. The remaining
defendant claims a one-sixth interest in one of the two patented mining claims.
If settlement discussions are not successful, and if plaintiff does not prevail
at trial, defendant may be entitled to seek remedies related to the property,
possibly including filing a partition action. The outcome of such post-trial
proceedings (if commenced by defendant following an outcome adverse to plaintiff
at trial) after filing a petition action cannot be predicted, but management
does not expect any outcome to ultimately adversely affect SGMI’s plan of
operations or financial condition.
-32-
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On
July
23, 2006, the annual meeting of shareholders was held and
four matters were voted upon.
1. The
re-election of two directors: Keith G. Larsen and John L. Larsen. These
directors were re-elected for a term expiring on the third succeeding Annual
Meeting of Shareholders and until their successors are duly elected or appointed
and qualified. With respect to the re-election of the two directors, the votes
cast were:
|
Name
of Director
|
For
|
Abstain*
|
||
|
Keith
G. Larsen
|
15,923,436
|
1,280,607
|
||
|
John
L. Larsen
|
15,922,591
|
1,581,452
|
2. To
Amend
the Articles of Incorporation to allow shareholders to remove directors only
for
cause. With respect to the amendment to the Articles of Incorporation the votes
cast were:
|
For
|
Against
|
Abstain*
|
|
5,822,094
|
1,768,550
|
26,428
|
3. To
comply
with Nasdaq Marketplace Rule 4350(i)(1)(D), approve the issuance shares of
common stock in connection with a transaction with Cornell Capital Partners,
LP
(“Cornell”). The votes cast were:
|
For
|
Against
|
Abstain*
|
|
5,805,671
|
1,713,100
|
98,301
|
4. To
ratify
the appointment of Epstein, Weber & Conover PLC as independent auditors for
the current fiscal year, the votes cast were:
|
For
|
Against
|
Abstain*
|
|
16,609,830
|
575,764
|
18,449
|
*
Includes Broker non-vote
-33-
PART
II
ITEM
5. Market for Registrant's common equity, related Stockholder Matters and Issuer
Purchases of Equity Securities
(a) Market
Information
Shares
of
USE common stock are traded on the over-the-counter market, and prices are
reported on a "last sale" basis on the Nasdaq Capital Market of the National
Association of Securities Dealers Automated Quotation System ("Nasdaq"). The
range by quarter of high and low sales prices was:
|
High
|
Low
|
||||||
|
Calendar
year ended December 31, 2006
|
|||||||
|
First
quarter ended 03/31/06
|
$
|
7.20
|
$
|
4.61
|
|||
|
Second
quarter ended 06/30/06
|
7.16
|
3.32
|
|||||
|
Third
quarter ended 09/30/06
|
4.55
|
3.42
|
|||||
|
Fourth
quarter ended 12/31/06
|
5.98
|
3.88
|
|||||
|
Calendar
year ended December 31, 2005
|
|||||||
|
First
quarter ended 03/31/05
|
$
|
7.65
|
$
|
2.75
|
|||
|
Second
quarter ended 06/30/05
|
5.95
|
3.52
|
|||||
|
Third
quarter ended 09/30/05
|
4.55
|
3.44
|
|||||
|
Fourth
quarter ended 12/31/05
|
4.96
|
3.68
|
|||||
(b) Holders
(1) At
March
14, 2007 the closing market price was $5.18 per share and there were
approximately 604 shareholders of record, with 19,991,611 shares of common
stock
issued and outstanding, including shares owned by our subsidiaries and shares
in
officers' and directors' names that are subject to forfeiture.
(2) Not
applicable.
(c) We
have
not paid any cash dividends with respect to common stock. There are no
contractual restrictions on our present or future ability to pay cash dividends;
however, we intend to retain any earnings in the near future for
operations.
-34-
(d) Equity
Plan Compensation Information - Information about Compensation Plans as of
December 31, 2006:
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options
|
Weighted
average exercise price of outstanding options
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
|
|
1998
USE ISOP 1,162,867 shares of common stock on exercise of outstanding
options
|
1,162,867
|
$2.21
|
-0-
|
|
2001
USE ISOP 3,931,918 shares of common stock on exercise of outstanding
options
|
2,765,013
|
$3.14
|
1,166,905
|
|
Equity
compensation plans not approved by security holders
|
|
|
|
|
None
|
--
|
--
|
--
|
|
Total
|
3,927,880
|
$2.83
|
1,166,905
|
Sales
of Unregistered Securities in 2006
During
the twelve months ended December 31, 2006, pursuant to the shareholder-approved
2001 Stock Compensation Plan, 57,500 shares were issued to officers of the
Company at the rate of 10,000 shares each to: Keith G. Larsen, Mark J. Larsen,
Harold F. Herron, Robert Scott Lorimer, and Daniel P. Svilar and 7,500 to John
L. Larsen. The shares were issued at the closing market price of $4.62, $7.01,
$4.35 and $4.09 as of January 3, 2006, April 1, 2006, July 3, 2006 and October
2, 2006.
In
2006,
the Company issued 3,140 shares of its common stock to outside directors as
partial compensation for serving on the board of directors. The Company also
issued common shares for the following: 220,022 net shares for the exercise
of
employee options; 226,015 shares for the exercise of warrants by third parties;
69,930 shares to Cornell Capital for a $50 million equity line of credit which
also cancelled during 2006 as it was no longer needed; 41,894 shares to warrant
and share holders as a result of anti-dilution provisions, and 70,756 shares
to
fund the Employee Stock Ownership Plan for 2006. As a result of the death of
John L. Larsen on September 4, 2006 the Company also released 145,200
forfeitable shares to his estate. These forfeitable shares, which were issued
in
Mr. Larsen’s name in the early 1990’s, had been held by the Company Treasurer
and were forfeitable in the event that Mr. Larsen terminated his employment
prior to his retirement, death or total disability.
-35-
ITEM
6. Selected Financial Data
The
selected financial data is derived from and should be read with the financial
statements included in this Report.
|
December
31,
|
||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
Current
assets
|
$43,325,200
|
$7,840,600
|
$5,421,500
|
$5,191,400
|
$4,755,300
|
|||||||||||
|
Current
liabilities
|
11,595,200
|
1,232,200
|
6,355,900
|
1,909,700
|
2,044,400
|
|||||||||||
|
Working
capital (deficit)
|
31,730,000
|
6,608,400
|
(934,400)
|
3,281,700
|
2,710,900
|
|||||||||||
|
Total
assets
|
51,901,400
|
38,106,700
|
30,703,700
|
23,929,700
|
28,190,600
|
|||||||||||
|
Long-term
obligations(1)
|
882,000
|
7,949,800
|
13,317,400
|
12,036,600
|
14,047,300
|
|||||||||||
|
Shareholders'
equity
|
32,977,400
|
24,558,200
|
6,281,300
|
6,760,800
|
8,501,600
|
|||||||||||
|
(1)Includes
$124,400, of accrued reclamation costs on properties at December
31,
2006, $5,669,000 December 31, 2005,
$7,882,400 at December 31, 2004, $7,264,700 at December 31, 2003,
and
$8,906,800 at
December 31, 2002.
See
Note K of Notes to Consolidated Financial
Statements.
|
||||||||||||||||
|
|
||||||||||||||||
|
|
|
Year
Ended
|
|
Seven
Months
Ended
|
|
|||||||||||
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Operating
revenues
|
$
|
813,400
|
$
|
849,500
|
$
|
815,600
|
$
|
513,500
|
$
|
673,000
|
||||||
|
Loss
from
|
||||||||||||||||
|
continuing
operations
|
(16,670,700
|
)
|
(6,066,900
|
)
|
(4,983,100
|
)
|
(5,066,800
|
)
|
(3,524,900
|
)
|
||||||
|
Other
income & expenses
|
2,302,700
|
(484,000
|
)
|
465,100
|
(311,500
|
)
|
(387,100
|
)
|
||||||||
|
(Loss)
income before minority
|
||||||||||||||||
|
interest,
equity in income (loss)
|
||||||||||||||||
|
of
affiliates, income taxes,
|
||||||||||||||||
|
discontinued
operations,
|
||||||||||||||||
|
and
cumulative effect of
|
||||||||||||||||
|
accounting
change
|
(14,368,000
|
)
|
(6,550,900
|
)
|
(4,518,000
|
)
|
(5,378,300
|
)
|
(3,912,000
|
)
|
||||||
-36-
|
Seven
|
||||||||||||||||
|
Year
Ended
|
Months
Ended
|
|||||||||||||||
|
December
31,
|
December
31,
|
December
31,
|
December
31,
|
December
31,
|
||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
Minority
interest in loss (income)
|
||||||||||||||||
|
of
consolidated subsidiaries
|
88,600
|
185,000
|
207,800
|
13,000
|
54,800
|
|||||||||||
|
Benefit
income taxes
|
15,331,600
|
--
|
--
|
--
|
--
|
|||||||||||
|
Discontinued
operations, net of tax
|
--
|
15,207,400
|
(1,938,500
|
)
|
(2,060,400
|
)
|
17,100
|
|||||||||
|
Cumulative
effect of
|
||||||||||||||||
|
accounting
change
|
--
|
--
|
--
|
1,615,600
|
--
|
|||||||||||
|
Preferred
stock dividends
|
--
|
--
|
--
|
--
|
--
|
|||||||||||
|
Net
income (loss)
|
||||||||||||||||
|
to
common shareholders
|
$
|
1,052,200
|
$
|
8,841,500
|
$
|
(6,248,700
|
)
|
$
|
(5,810,100
|
)
|
$
|
(3,840,100
|
)
|
|||
|
Per
share financial data
|
||||||||||||||||
|
Operating
revenues
|
$
|
0.04
|
$
|
0.05
|
$
|
0.05
|
$
|
0.05
|
$
|
0.06
|
||||||
|
Loss
from
|
||||||||||||||||
|
continuing
operations
|
(0.88
|
)
|
(0.38
|
)
|
(0.38
|
)
|
(0.44
|
)
|
(0.33
|
)
|
||||||
|
Other
income & expenses
|
0.12
|
(0.03
|
)
|
0.04
|
(0.03
|
)
|
(0.03
|
)
|
||||||||
|
(Loss)
income before minority
|
||||||||||||||||
|
interest,
equity in income (loss)
|
||||||||||||||||
|
of
affiliates, income taxes,
|
||||||||||||||||
|
discontinued
operations,
|
||||||||||||||||
|
and
cumulative effect of
|
||||||||||||||||
|
accounting
change
|
(0.76
|
)
|
(0.39
|
)
|
(0.34
|
)
|
(0.48
|
)
|
(0.36
|
)
|
||||||
-37-
|
Seven
|
||||||||||||||||
|
Year
Ended
|
Months
Ended
|
|||||||||||||||
|
December
31,
|
December
31,
|
December
31,
|
December
31,
|
December
31,
|
||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
Minority
interest in loss (income)
|
||||||||||||||||
|
of
consolidated subsidiaries
|
--
|
--
|
0.02
|
0.00
|
--
|
|||||||||||
|
Benefit
income taxes
|
0.81
|
--
|
--
|
--
|
--
|
|||||||||||
|
Discontinued
operations, net of tax
|
--
|
0.94
|
(0.15
|
)
|
(0.18
|
)
|
--
|
|||||||||
|
Cumulative
effect of
|
||||||||||||||||
|
accounting
change
|
--
|
--
|
--
|
0.14
|
--
|
|||||||||||
|
Preferred
stock dividends
|
--
|
--
|
--
|
--
|
--
|
|||||||||||
|
Net
(loss) income
|
||||||||||||||||
|
per
share, basic
|
$
|
0.06
|
$
|
0.55
|
$
|
(0.48
|
)
|
$
|
(0.52
|
)
|
$
|
(0.36
|
)
|
|||
|
Net
(loss) income
|
||||||||||||||||
|
per
share, diluted
|
$
|
0.05
|
$
|
0.55
|
$
|
(0.48
|
)
|
$
|
(0.52
|
)
|
$
|
(0.36
|
)
|
|||
-38-
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 calendar years ended December 31, 2006, 2005 and
2004. The discussion contains forward-looking statements that involve
risks and uncertainties.
General
Overview
U.S.
Energy Corp. ("USE" or the "Company") and its subsidiaries historically have
been involved in the acquisition, exploration, development and production of
properties prospective for hard rock minerals including lead, zinc, silver,
molybdenum, gold, uranium, and oil and gas. The Company also has been engaged
in
the past in commercial real estate on a limited basis, and generally only in
connection with acquiring mineral properties which included commercial real
estate. Going forward, the Company intends to expand commercial real estate
operations. Initially the Company will target multifamily housing in communities
located in the Rocky Mountain area that are being impacted by the energy
development.
The
Company manages its operations through a joint venture, USECC Joint Venture
("USECC"), with one of its subsidiary companies, Crested Corp. ("Crested")
of
which it owns a consolidated 70.9%. The narrative discussion of this MD&A
refers only to the Company but includes the consolidated financial statements
of
Crested, Plateau Resources Limited, Inc. ("Plateau"), USECC and other
subsidiaries. The Company has entered into partnerships through which it either
joint ventured or leased properties with non-related parties for the development
and production of certain of its mineral properties. The Company had no
production from any of its mineral properties during the year ended December
31,
2006.
Prior
filings for previous periods, including the year ended December 31, 2004,
included the consolidated financial statements of Rocky Mountain Gas, Inc.
(“RMG”). On June 1, 2005, all of the outstanding stock of RMG was sold to
Enterra US Acquisitions Inc. (“Acquisitions”), a privately-held Washington
corporation organized by Enterra Energy Trust (“Enterra”), for $20 million in
cash and securities. Financial statements in this Annual Report for the years
ended December 31, 2006, 2005 and 2004 therefore do not include the balances
of
RMG, as all prior reported balances of RMG are eliminated and reported as
discontinued operations.
During
the years ended December 31, 2003 and 2004, the Company’s uranium and gold
properties were shut down due to depressed metals prices. During 2005, the
market prices for gold and uranium increased to levels which may allow the
Company to place these properties into production or sell part or all of them
to
industry participants. Exploration work was resumed on the uranium properties
in
2005 and new uranium properties were acquired during 2006.
Uranium
- The
price of uranium concentrate has increased from a five year low of $7.25 per
pound in January 2001 to a five year high of $72 per pound in December 2006.
During the first quarter of 2007 the price increase continued ($91 at March
12,
2007).
Gold
- The
five year low for gold was in 2001 when it hit $256 per ounce. The market price
for gold has risen in subsequent years with the average annual price for gold
at
$603 in 2006, $445 in 2005, $410 in 2004, $363 in 2003 and $310 in
2004.
-39-
Molybdenum
- Annual
Metal Week Dealer Oxide mean prices averaged $25.55 per pound in 2006 compared
with $32.94 per pound in 2005, $16.41 per pound in 2004, $5.32 in 2003 and
$3.77
in 2002. Continued strong demand has outpaced supply over the past several
years
(deficit market conditions) and has reduced inventory levels throughout the
industry. At March 9, 2007, the price was $28.25 per pound.
The
rebound in the above commodity prices present opportunities. The Company holds
what we consider to be significant mineral and related properties in gold and
uranium, and received a significant molybdenum property from Phelps Dodge
Corporation (“PD”) on February 28, 2006. In contrast to the prior five years, we
now have cash on hand sufficient for general and administrative expenses, the
continuation of our uranium property acquisition and exploration plan, and
operation of the water treatment plant on the molybdenum property. Kobex
Resources Ltd. is expected to pay the Lucky Jack molybdenum property permitting
expenses and water treatment plan operating costs, and if the Uranium One
contract is closed, additional cash will be available to acquire new mineral
properties and pursue other business opportunities.
Management’s
strategy to generate a return on shareholder capital is first, to demonstrate
prospective value in the mineral properties sufficient to support substantial
investments by large industry partners and second, to structure these
investments to bring capital and long term development expertise to move the
properties into production. There are uncertainties associated with this
strategy. Please see the risk factors in this report.
Forward
Looking Statements
This
Report includes "forward-looking statements" within the meaning of Section
21E
of the Securities Exchange Act of 1934, as amended ("the Exchange Act"). All
statements other than statements of historical fact included in this Report
are
forward-looking statements. In addition, whenever words like "expect",
"anticipate”, or "believe" are used, we are making forward looking statements.
Actual results may vary materially from the forward-looking statements and
there
is no assurance that the assumptions used will be realized in fact.
Critical
Accounting Policies
Principles
of Consolidation
- The
consolidated financial statements of USE and subsidiaries include the accounts
of the Company, the accounts of its majority-owned or controlled subsidiaries
Plateau (100%), Crested (70.9%), Four Nines Gold, Inc. ("FNG") (50.9%), Sutter
Gold Mining Inc. (“SGMI”) (49.6%), Yellow Stone Fuels, Inc. (“YSFI”) (49.1%),
and the USECC Joint Venture ("USECC"), a consolidated joint venture which is
equally owned by USE and Crested, through which the bulk of their operations
are
conducted. Additional subsidiaries have been organized by the Company and
include U.S. Moly Corp. (“USMC”) for molybdenum and InterWest, Inc.
(“InterWest”) for real estate. The Company on a consolidated basis owns 90% of
these subsidiaries with the remaining 10% being owned by employees, officers
and
directors of the Company.
Investments
in joint ventures and 20% to 50% owned companies are accounted for using the
equity method. Because of management control and debt to the Company which
may
be converted to equity, SGMI and YSFI are consolidated into the financial
statements of the Company. Investments of less than 20% are accounted for by
the
cost method. All material inter-company profits, transactions and balances
have
been eliminated.
-40-
Marketable
Securities -
The
Company accounts for its marketable securities (1) as trading, (2)
available-for-sale or (3) held-to-maturity. Based on the Company's intent to
sell the securities, its equity securities are reported as a trading security.
The Company's available-for-sale securities are carried at fair value with
net
unrealized gain or (loss) recorded as a separate component of shareholders'
equity. If a decline in fair value of held-to-maturity securities is determined
to be other than temporary, the investment is written down to fair
value.
Mineral
Claims
- We
follow the full cost method of accounting for mineral properties. Accordingly,
all costs associated with acquisition, development and capital equipment as
well
as construction of plant relating to mineral properties are capitalized and
are
subject to ceiling tests to ensure the carrying value does not exceed the fair
market value. All associated general and administrative as well as exploration
costs and expenses associated with mineral properties are expensed when
incurred.
All
capitalized costs of mineral properties subject to amortization and the
estimated future costs to develop proved reserves, are amortized by applying
the
unit-of-production method using estimates of proved reserves. Investments in
unproven properties and major construction and development projects are not
amortized until proven reserves associated with the projects can be determined
or until impairment occurs.
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 mineral
interests, may result in asset impairment. If the results of an assessment
indicate that the properties are impaired, the capitalized cost of the property
is expensed.
Asset
Impairments
- We
assess the impairment of property and equipment whenever events or circumstances
indicate that the carrying value may not be recoverable.
Asset
Retirement Obligations
- The
Company records the fair value of the reclamation liability on its shut down
mining properties as of the date that the liability is incurred. The Company
reviews the liability each quarter and determines if a change in estimate is
required as well as accretes the total liability on a quarterly basis for the
future liability. Final determinations are made during the fourth quarter of
each year. The Company deducts any actual funds expended for reclamation during
the quarter in which it occurs.
Assets
and Liabilities Held for Sale
- Long
lived assets and liabilities that will be sold within one year of the financial
statements are classified as current. At December 31, 2006 the Company believed
that its uranium assets in Wyoming, Utah, Colorado and Arizona would be sold
within a twelve month period. All capitalized asset balances associated with
these assets, including cash bonds pledged as collateral for reclamation
liabilities, were therefore classified as Assets Held for Sale as of December
31, 2006. Likewise all asset retirement obligations as well as any other
liability associated with these properties was classified as current Liabilities
Held for Sale at December 31, 2006. In the event that these assets and
liabilities are not sold, they will be re-evaluated to insure that no impairment
has taken place and re-classified as long term assets and
liabilities.
Real
Estate Held for Sale
- The
Company classifies Real Estate Held for Sale as assets that are not in
production and management has made the decision to dispose of the
assets.
-41-
The
Company re-acquired by Foreclosure Sale the Ticaboo town site (“Ticaboo”)
located in southern Utah near Lake Powell during 2006. Ticaboo includes a motel,
restaurant and lounge, convenience store, recreational boat storage and service
facility, and improved residential and mobile home lots. Most of these
properties had been acquired when the Shootaring Mill was acquired in
1993.
The
Company has classified Ticaboo as Real Estate Held for Sale. The value of $1.8
million is the cost basis of the asset after the re-acquisition and the write
off of the corresponding note receivable. Management believes that the fair
value of the assets received in foreclosure approximates the carrying value
of
the note receivable.
Revenue
Recognition
-
Revenues are reported on a gross revenue basis and are recorded at the time
services are provided or the commodity is sold. Sales of proved and unproved
properties are accounted for as adjustments of capitalized costs with no gain
or
loss recognized, unless such adjustments would significantly alter the
relationship between capitalized costs and proved reserves, in which case the
gain or loss is recognized in income.
Income
Taxes
- The
Company recognizes 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 basis of assets, liabilities
and carry forwards. The Company recognizes 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 reduced, if deemed necessary,
by a valuation allowance for any tax benefits which, based on current
circumstances, are not expected to be realized. We recognized an income tax
benefit of $15,096,600 by reducing the valuation allowance on the deferred
income tax assets based upon our assessment that we will generate taxable income
as a result of the transaction with sxr Uranium One Inc. for the sale of uranium
assets (the Shootaring Canyon uranium mill in Utah, and unpatented uranium
claims in Wyoming, Colorado, Arizona and Utah).
Use
of Accounting Estimates
- The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Recent
Accounting Pronouncements
FIN
48 In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes,” (“FIN 48”) an interpretation of FASB Statement No. 109,
“Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. FIN 48 requires
that the Company recognize in its financial statements, the impact of a tax
position, if that position is more likely than not of being sustained on audit,
based on the technical merits of the position. FIN 48 also provides guidance
on
derecognition, classification, interest and penalties, accounting in interim
periods and disclosure. The provisions of FIN 48 are effective beginning January
1, 2007 with the cumulative effect of the change in accounting principle
recorded as an adjustment to the opening balance of retained earnings, goodwill,
deferred income taxes and income taxes payable in the Consolidated Balance
Sheets. The Company does not expect that the adoption of FIN 48 will have a
significant impact on the financial statements of the Company.
-42-
FAS
157
In
September 2006, the FASB issued FASB Statement No. 157, “Fair Value
Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. The provisions for FAS 157
are effective for the Company’s fiscal year beginning January 1, 2008. The
Company is currently evaluating the impact that the adoption of this statement
will have on the Company’s consolidated financial position, results of
operations or cash flows.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (“SAB
108”). SAB 108 provides guidance on consideration of the effects of prior year
misstatements in quantifying current year misstatements for the purpose of
a
materiality assessment. SAB 108 is effective for fiscal years ending after
November 15, 2006. The adoption of SAB 108 did not have an impact on our
consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(“SFAS
159”) which permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be measured
at fair value. SFAS 159 will be effective for us on January 1, 2008. We are
currently evaluating the impact of adopting SFAS 159 on our financial position,
cash flows, and 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.
Liquidity
and Capital Resources
The
Company continues to maintain a strong cash position. As of the year ended
December 31, 2006 we had cash on hand of $16,973,500 which is an increase of
$9,974,800 from the cash position at December 31, 2005 of $6,998,700. During
the
twelve months ended December 31, 2006 investing activities generated
$13,833,200, financing activities generated $4,273,600 and operating activities
consumed $8,132,000.
The
Company sold 682,345 units of the Enterra Energy Trust (“Enterra”) units that
were converted from the Enterra Acquisitions Class D (“Acquisitions”) shares on
June 6, 2006. During the third quarter of 2006, these units were sold and
resulted in the receipt of $8,304,300 in cash and a net loss of $900,500. As
of
December 31, 2006, the Company, through a consolidated subsidiary, YSFI, owned
15,616 shares of Enterra which were valued at $123,400. The Company also sold
all of its consolidated minority interest in Pinnacle Gas Resources, Inc.
(“Pinnacle”) for $13.8 million, resulting in a net gain of $10,815,600.
Although
the Company’s cash position increased significantly during the year ended
December 31, 2006, management intends to continue to seek industry partners
or
equity financing to fund mine exploration and development costs and also fund
reclamation and general and administrative expenses.
On
September 26, 2006, the Company signed a Settlement Agreement and Release with
Phelps Dodge Corporation (“PD”) resulting in a $7,000,000 payment to PD as part
of the final agreement. This settlement resulted in a cash savings of $538,300
from the $7,538,300 awarded to PD by the U.S. Federal District Court of Colorado
on July 26, 2006. Funding for this settlement was derived from cash on hand
which was provided by investing and financing activities.
-43-
The
Company recorded a net loss before benefit from income taxes of $14,279,400,
of
which $8,608,500 consisted of non-cash transactions. The largest of these
non-cash transactions were: depreciation, $510,900; accretion of asset
retirement obligations relating to the Company’s mining properties, $766,500;
loss on the valuation of the Enterra Acquisition units of $3,845,800; loss
on
valuation of the imbedded derivative associated with the Enterra Acquisitions
D
shares, $630,900; non-cash compensation relating to the 2001 stock award plan,
expensing of employee options, accrual of executive retirement benefits and
the
accrual of the Employee Stock Ownership Plan, $1,328,600, and the expense
associated with the extension and revaluation of warrants and the issuance
of
common stock for the payment of services for a total non cash services expense
of $1,525,800.
These
non-cash costs and expenses for the twelve months ended December 31, 2006 were
offset by a gain of $3,063,600 on the sale of assets and a gain on the sale
of
the equity interest in Pinnacle of $10,815,600. The sale of assets represents
primarily the cash and stock receipts from Uranium Power Corp. (“UPC”) for its
payments toward the purchase of a 50% undivided interest in certain of our
uranium properties.
During
the year ended December 31, 2006, the Company received $8,304,300 from the
sale
of Enterra units; $13.8 million from the sale of the Pinnacle shares, $398,100
from the sale of the UPC shares and $60,300 from the sale of Dynasty shares
which were shares of a non-affiliated company owned by SGMI. The Company also
received $2,410,600 in proceeds from the sale of property and equipment. The
cash proceeds from the sale of property and equipment relate primarily to the
sale of miscellaneous equipment which was no longer needed and the cash received
from UPC pursuant to its agreement. During the twelve months ended December
31,
2006, the Company purchased equipment to manage the Lucky Jack molybdenum
property. The assets purchased consisted of a loader, vehicles and miscellaneous
other smaller equipment. The net cash used in these purchases was $649,300.
The
acquisition and development drilling on mining claims during the year ended
December 31, 2006 consumed $1.6 million. Of this amount $775,300 was expended
by
SGMI on its properties and the remainder was expended on the uranium properties
which are subject to the sale of all the uranium assets to Uranium
One.
Cash
flows from financing activities were primarily as a result of the issuance
of
the Company’s common stock as a result of the exercise of stock warrants and
options, $1,020,300; the issuance of SGMI common stock in private placements,
$3,413,800 and proceeds from long term debt of $297,300 for the financing of
the
purchase of equipment and the financing of liability insurance premiums. These
sources of cash from financing activities were off set by payments made on
long
term debt in the amount of $457,800.
The
Company believes that the current market prices for gold, uranium and molybdenum
are at levels that warrant further exploration and development of the Company’s
mineral properties. Management of the Company anticipates these metals prices
will remain at levels which will allow the properties to be produced
economically. Management of the Company therefore believes that sufficient
capital will be available to develop its mineral properties from strategic
industry partners, debt financing, and the sale of equity or a combination
of
the three. Successful development and production of these properties could
greatly enhance the liquidity and financial position of the
Company.
-44-
Although
the Company has sufficient liquidity due to the sale of its Enterra units and
Pinnacle shares to fund limited exploration, development and reclamation
projects on its mineral properties as well as general and administrative costs
and expenses, it may need to continue to attract equity investors or industry
partners to fully develop its mineral properties. During the quarter ended
June
30, 2006, the Company entered into a three year financing agreement with Cornell
Capital Partners, L.P., (“Cornell”), to establish a $50 million equity line of
credit (the “Standby Equity Distribution Agreement or SEDA”). The Company issued
69,930 shares of its common stock and 100,000 warrants with an exercise price
of
$7.15 per share expiring in June 2009. As a result of the issuance of these
shares and warrants the Company recorded a $727,300 non cash charge to earnings.
Due to the Company’s sale of the Enterra units and Pinnacle shares, management
of the Company determined that this type of financing was no longer needed.
Effective October 31, 2006, the SEDA with Cornell was terminated.
Potential
Merger of Crested with USE
On
January 23, 2007, the Company and Crested signed a plan and agreement of merger
(the “merger agreement”) for the proposed acquisition of the minority shares of
Crested (approximately 29.1% is not owned by USE and approximately 70.9% is
owned by USE), and the subsequent merger of Crested into the Company. The merger
agreement was approved by all directors of both companies. The exchange ratio
of
1 of the Company’s shares for each 2 Crested shares (not owned by the Company)
was negotiated between the special committees of independent directors of both
companies, and approved by the full boards of both companies, on December 20,
2006. The exchange ratio represents an approximate 12% premium to the relative
stock prices between the two companies for the 30 days ended December 18,
2006.
Pursuant
to the merger agreement, the Company will issue a total of approximately
2,802,481 shares of common stock to the minority holders of Crested common
stock, including the shares equal to the equity value of options to buy Crested
common stock underlying 1,700,000 options (exercise price of $1.71 per share)
issued to employees, officers and directors of the Company (Crested has no
employees itself), pursuant to the Crested incentive stock option plan (the
“ISOP”) adopted by Crested and approved by its shareholders in 2004. The ISOP
will be amended to allow for exercise of options by cashless exercise, and
if
the merger is to be consummated, immediately prior to that date, the Crested
options will be so exercised, and the holders of the resulting Crested stock
will be entitled to participate in the merger on the same exchange ratio basis
as the current Crested minority shareholders.
The
Company and its officers and directors have signed an agreement to vote their
Crested shares in line with the vote of the holders of a majority of the Crested
minority shares. The affirmative vote of the holders of a majority of the
Crested outstanding shares is required to consummate the merger. The Company
will not seek shareholder approval of the merger.
The
Company may decline to consummate the merger, even after approval by the holders
of a majority of the minority Crested shares, if the holders of more than
200,000 Crested shares perfect their rights to dissent from the merger under
Colorado law. In addition, the Company or Crested may decline to consummate
the
merger if the ratio of the closing stock price of either company is 20% greater
or less than the exchange ratio for two or more consecutive trading days, even
if the merger has been approved by the holders of a majority of the minority
Crested shares.
Consummation
of the merger also is subject to (i) the Company delivering to the Crested
minority shareholders a proxy statement/prospectus (following declaration of
effectiveness by the SEC of a Form S-4 to be filed by the Company) for a special
meeting of the Crested shareholders to vote on the merger agreement; and (ii)
satisfaction of customary representations and warranties in the merger
agreement.
-45-
Navigant
Capital Advisors, LLC is acting as financial advisor to the Company’s special
committee, and Neidiger Tucker Bruner Inc. is acting as financial advisor to
the
Crested special committee. These firms have delivered opinions to the Company
and Crested, to the effects that the exchange ratio is fair to the Company’s
shareholders and to the Crested minority shareholders,
respectively.
Management
believes that the merger of Crested into the Company will enhance shareholder
value due to consolidation of assets, simplification of reporting requirements
and the application of all resources to one company.
Capital
Resources
Contract
to Sell Uranium Assets to Uranium One and
the UPC Agreement
On
February 22, 2007, the Company signed an asset purchase agreement with sxr
Uranium One Inc. (“Uranium One”), and certain of its private subsidiary
companies. If this agreement is closed, Uranium One will buy all the uranium
assets and take over the Company’s rights in the UPC purchase and mining
venture. These proceeds will substantially enhance liquidity, and with respect
to UPC, the receipt of approximately $5 million from Uranium One for UPC’s
future obligations under its purchase agreement with the Company will eliminate
the uncertainty associated with UPC making those payments under the UPC purchase
agreement (UPC would be paying Uranium One following the closing of the asset
purchase agreement).
Kobex
Resources Ltd. Agreement
On
October 6, 2006, the Company signed an agreement (amended December 7, 2006)
giving Kobex Resources Ltd. (“KBX”) an option to acquire up to a 65% interest in
the Lucky Jack molybdenum property. The principal financial benefit to be
realized in 2007 and thereafter by the Company of Kobex performance under the
agreement, is that Kobex will fund substantial costs and expenses which
otherwise may have to be funded by the Company (including paying for the water
treatment plant, obtain necessary permits, and have performed a bankable
feasibility study preparatory to mining or selling the property). See “Lucky
Jack Molybdenum Property” below.
Sutter
Gold
During
the second quarter of 2006, SGMI raised $3,171,500 of net proceeds from two
private placements of its common stock. SGMI also received and additional
$242,300 from the exercise of options and warrants. Proceeds from these private
placements were used to fund a combined underground and surface diamond drill
program during 2006 and the first quarter of 2007. As of December 31, 2006
SGMI
had $1,618,300 on hand. The results of the drilling program are still being
reviewed and studied. If warranted, a feasibility study on the SGMI property,
which is an advanced stage gold project in the historic Mother Lode district
located about 50 miles southeast of Sacramento, California, will be conducted.
Line
of Credit
The
Company has a $500,000 line of credit with a commercial bank. The line of credit
is secured by certain real estate holdings and equipment. This line of credit
is
used for short term working capital needs associated with operations. At
December 31, 2006, the entire amount of $500,000 under the line of credit was
available to the Company.
-46-
Cash
on Hand
As
discussed above the Company has monetized certain of its assets which have
provided cash that will continue to be used to fund general and administrative
expenses, limited exploration, development and required remedial work on its
mineral properties and the maintenance of those properties and associated
facilities such as the water treatment plant at the Lucky Jack property until
such time as an industry partner is secured to develop the properties or they
are sold.
Capital
Requirements
The
direct capital requirements of the Company during 2007 remain its general and
administrative costs, exploration and drilling costs, the holding costs of
the
Sheep Mountain uranium properties in Wyoming, required reclamation work on
the
Sheep Mountain properties, the Shootaring Canyon uranium mill (“Shootaring”) in
Utah, other uranium properties in southern Utah, Colorado and Arizona, the
operation of a water treatment plant at the Lucky Jack molybdenum property
and
the maintenance and projected acquisition and development of real estate in
the
form of raw land and multifamily rental units.
Maintaining
Mineral Properties
Uranium
Properties
The
average care and maintenance costs associated with the Sheep Mountain uranium
mineral properties in Wyoming is approximately $200,000 per year of which UPC
is
required to pay 50% annually. In addition, UPC, as disclosed under Capital
Resources, is responsible for the funding of the majority of the proposed
exploration and drilling costs associated with the Company’s uranium properties
during the year. Further, these uranium properties are subject to the sale
agreement with Uranium One discussed above. In the event that the Uranium One
agreement is successfully closed, Uranium One has agreed to reimburse the
Company for any pre-approved costs associated with the properties from July
10,
2006 to date of closing. It is therefore projected that although the Company
will pay the holding costs associated with the uranium properties until the
time
of the closing with Uranium One there will be no net consumption of cash for
these properties during 2007 if the transaction with Uranium One
closes.
Lucky
Jack Molybdenum Property
The
Company re-acquired the Lucky Jack molybdenum property from Phelps Dodge
Corporation (“PD”) on February 28, 2006. The property was returned to the
Company by PD in accordance with a 1987 Amended Royalty Deed and Agreement
between the Company and Amax Inc. PD became the successor owner of the property
in 1999. On September 26, 2006, the Company paid PD $7,000,000 as the final
settlement of the July 26, 2006 Judgment of $7,538,300 awarded by the U.S.
Federal District Court of Colorado to PD.
Conveyance
of the property by PD to the Company also included the transfer of ownership
and
operational responsibility of the mine water treatment plant located on the
properties. Operating costs for the water treatment plant are expected to
approximate $1.5 million annually. In an effort to assure continued compliance,
the Company has retained the technical expert and the contractor hired by PD
on
January 2, 2006 to operate the water treatment plant.
-47-
On
October 6, 2006 the Company entered into an agreement with KBX to potentially
pay the standby and water treatment costs associated with the Lucky Jack
property. See discussion above under Capital Resources. Until such time as
the
Company is able to find an industry partner to participate in the Lucky Jack
property it will be responsible for one half of the costs of holding the
property which will be significant
Sutter
Gold Mining Inc. Properties
SGMI
initiated an 18,000 foot underground and surface drilling program during the
second quarter 2006, to further delineate and define potential resources at
the
property. The 2006 drill program included both underground and surface holes.
As
of September 30, 2006, 15 out of the 24 planned underground step-out and infill
drill holes have been completed, which represents approximately 3,000 feet
of
the overall 18,000 foot surface and underground drill program. On September
14,
2006, Sutter announced that it intersected three new mineralized zones plus
significant extensions to four shoots hosting previously reported mineral
resources. The 9 to 12 hole surface drill program is to grid test an area
containing what may be another significant mineralized zone in the K5 Vein,
historically mined on Sutter's property at the South Spring Hill Mine.
Capital
to fund these projects was obtained from private placements of SGMI’s common
stock. See Capital Resources above. SGMI is seeking additional funding for
its
drilling operations as well as engineering and geologic studies which are needed
to raise sufficient capital to place the property into production.
Debt
Payments
Debt
to
non-related parties at December 31, 2006 was $1,232,100 of which $937,200 will
become payable during the year ending December 31, 2007. The largest component
of the current debt payable is related to one of the Company’s aircraft. The
balance of the debt consists of debt related to the purchase of vehicles,
equipment and the financing of insurance policy premiums.
Reclamation
Costs
The
asset
retirement obligation on the Plateau uranium mineral properties and the
Shootaring mill in Utah at December 31, 2006 is $4,117,400. This liability
is
fully collateralized by restricted cash investments of $6,883,200. It is
currently anticipated that the reclamation of the Plateau uranium mill will
not
commence until 2033.
The
asset
retirement obligation of the Sheep Mountain uranium properties in Wyoming at
December 31, 2006 is $2,409,800 and is collateralized by a reclamation bond
which is secured by a pledge of certain real estate assets of the Company and
cash bonds in the amount of $575,000.
In
the
event that the proposed transaction with Uranium One is successfully closed,
the
asset retirement obligations associated with the Shootaring mill and the Sheep
Mountain uranium properties will be assumed by Uranium One. As a result of
the
assumption of those asset retirement obligations, the government agencies which
hold various assets pledged against these obligations, would return those assets
to the Company. Specifically, the pledge of the Company’s corporate headquarters
office building would be released and the building would be owned free and
clear
of any debt or obligation, and the $6.8 million cash bond pledged for the
Shootaring Canyon Mill would be released to the Company. The release of these
assets to the Company is dependent on the closing of the transaction with
Uranium One.
-48-
The
Company accounts for long lived assets and liabilities held for sale pursuant
to
FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Due
to the Uranium One agreement to purchase the uranium assets, discussed above
under Capital Resources, and Management’s belief that the actual sale of these
assets will occur within calendar 2007, the long term assets and liabilities
associated with these properties are classified as current assets and
liabilities. (See Notes B, E and K to the financial statements).
The
asset
retirement obligation for Sutter at December 31, 2006 is $22,400 which is
covered by a cash bond. It is not anticipated that any cash resources will
be
used for asset retirement obligations at Sutter during the year ending December
31, 2007.
As
a
result or the re-acquisition of the Lucky Jack molybdenum property during the
six months ended June 30, 2006, the Company recorded an asset retirement
obligation of $88,100. An additional $13,900 in asset retirement obligation
liability was accreted during the year ended December 31, 2006 resulting in
a
total reclamation liability at the Lucky Jack project of $102,000 as of December
31, 2006. It is not anticipated that this reclamation work will occur in the
near term.
InterWest
On
January 8, 2007, InterWest, Inc., through its wholly owned limited liability
company, Remington Village, LLC, signed a Contract to Buy and Sell Real Estate
to purchase approximately 10.15 acres of land located in Gillette, Wyoming
for
$1,268,800. Subject to satisfaction of conditions, contract closing is expected
in March 2007. InterWest also signed a Development Agreement with P.E.G.
Development, LLC to assist in the evaluation of the property and to obtain
the
entitlements, engineering and architecture (estimated at $698,000) necessary
to
construct multifamily housing on the property; construction would commence
in
second quarter 2007. The cost to obtain entitlements, engineering and
architecture is estimated to be approximately $698,000. Total land purchase
and
construction costs are estimated to be between $22 and $25 million.
A
substantial part of total costs may be funded with commercial loans, and the
Company may seek private investors to offset the equity component (estimated
at
20% of total costs). If the Uranium One contract is not closed, InterWest may
sell the property with the planning permit, instead of building the
complex.
Other
The
employees of the Company are not given raises on a regular basis. In
consideration of this and in appreciation of their work, the board of directors
from time to time has accepted the recommendation of the Compensation Committee
to grant a bonus to employees and directors when major transactions are
closed.
Results
of Operations
During
the years ended December 31, 2005 and December 31, 2004 the Company discontinued
certain operations. Reclassifications to previously published financial
statements have therefore been made to reflect ongoing operations and the effect
of the discontinued operations.
-49-
Year
Ended December 31, 2006 Compared with the Year Ended December 31,
2005
Operating
revenues were reduced by $36,100 to $813,400 at December 31, 2006 from $849,500
at December 31, 2005. Components of this reduction of revenues were reductions
in real estate operations of $68,300 which was offset by an increase in
management fees of $32,200. Revenues from real estate operations decreased
primarily as a result of the Company selling one of its office buildings which
was no longer needed. Management fees increased due to billable services under
the Uranium One and KBX agreements. Mineral property holding costs increased
by
$936,500 during the year ended December 31, 2006 to $2,312,800 as compared
to
$1,376,300 during the year ended December 31, 2005. The increase in mineral
property holding costs is due to the increased geological and engineering
activity on the Company’s mineral properties and the holding costs associated
with the Lucky Jack molybdenum property and associated water treatment plant.
The water treatment plant and other Lucky Jack property costs were approximately
$125,000 per month. These costs will now be paid by KBX as their capital
contributions under the agreement. If the KBX transaction does not continue,
the
Company will remain responsible for these holding costs.
General
and Administrative expenses increased by $7,064,000 during the year ended
December 31, 2006 over those recorded during the prior year. This increase
in
General and Administrative expenses is as a result of (1) the payment of a
$3
million bonus distributed amongst all employees of the Company (2) the
settlement of other litigation, $395,000 (3) maintenance for the Company’s
airplane $353,700 (4) an increase of general and administration costs at Sutter
of $302,000 due to the drilling program and associated increased number of
employees as well as non-cash expenditures of: (a) the expensing of employee
options pursuant to SFAS 123(R) which vested in 2006, $273,600; (b) accrual
of
the executive retirement benefits adopted in October 2005, $419,400, and (c)
increased professional services paid for through the issuance of common stock
and the extension of warrants, $347,900.
During
the December 31, 2006, the Company recognized $3,063,600 from the sale of assets
while during the year ended December 31, 2005 the Company recognized $1,311,200
from the sale of assets. This increase of $1,752,400 was primarily due to cash
and common stock payments from UPC along with the sale of a no longer needed
office building, $126,500, and the sale of miscellaneous equipment.
During
calendar 2006, the Company recognized a non-cash loss of $630,900 from the
valuation of the imbedded derivative associated with the Acquisitions Class
D
shares discussed above under Capital Resources. Further, the Company recorded
a
non-cash loss of $3,845,800 due to the depressed price of the Enterra units
at
the time that the Acquisitions Class D shares were exchanged for units of
Enterra along with management’s decision to sell the Enterra units during the
third quarter of 2006. During the year ended December 31, 2005, the Company
recorded a non-cash gain from the valuation of the imbedded derivative of
$630,900.
The
Company recorded a net gain of $10,815,600 on the sale of its equity ownership
in Pinnacle during the year ended December 31, 2006 The Company received $13.8
million in cash as a result of the sale. From that amount, the Company deducted
$2.0 million due to Enterra and its cost basis in Pinnacle of $957,700 for
the
net gain of $10,815,600. No similar gain was recorded during 2005.
-50-
Interest
revenues increased by $327,100 during the twelve months ended December 31,
2006
over those amounts of interest revenues recorded during calendar 2005. The
reason for the increase in interest revenues is larger sums of cash being
invested for longer periods of time during 2006. Interest expense decreased
during the year ended December 31, 2006 by $3,919,600 from the amount of
interest expense recorded during 2005. The reason for the decrease in interest
expense is that there were no major financing activities with prepaid interest
and attached warrants during the year ended December 31, 2006 while there were
such financings during the year ended December 31, 2005. Dividend income
increased during the year ended December 31, 2006 over those recognized during
the year ended December 31, 2005 due to dividends being paid on the units of
Enterra that the Company owned prior to them being sold.
The
Company recognized a loss before benefit from income taxes of $14,279,400 or
$0.77 per share during the year ended December 31, 2006. The Company recorded
a
benefit from income taxes as a result of the accounting for the valuation
allowance and deferred tax assets of $15,096,600 and a current benefit from
income taxes of $235,000 do to the refund of prior year taxes paid. (See Note
H
to financial statements.) The Company therefore recorded a net gain of
$1,052,200 or $0.06 per share for the twelve months ended December 31, 2006
as
compared to a gain of $8,841,500 or $0.55 per share during the year ended
December 31, 2005. Operations for year ended December 31, 2005 resulted in
a
gain as a result of the sale of RMG. The payment of the $7.0 million settlement
to PD was the single largest contributor of the loss incurred during the year
ended December 31, 2006. This settlement was a one time charge to
earnings.
Although
operations resulted in losses during the year ended December 31, 2006; the
Company recorded a net increase of cash of $9,974,800 or $0.54 per share. This
increase in cash is net of the $7.0 million payment to PD and is a result of
the
sale of the Enterra units and the equity ownership of Pinnacle.
Management
of the Company continues to seek industry partners to either purchase its equity
position in mineral properties or to participate in the development of those
properties. The Company has several major mineral properties and assets. The
projected sale of the uranium related properties to Uranium One will produce
not
only positive cash flow to the Company during the year ended December 31, 2007
but also significant net income. The transaction with KBX on the Lucky Jack
molybdenum property will likewise provide capital to put the property into
production and will relieve the Company of ongoing care and maintenance costs
of
the Lucky Jack Property.
Management
plans to take the proceeds from the Uranium One and KBX transactions and invest
in real estate developments as well as acquire additional mineral properties
and
other profitable ventures. Management believes that it has positioned itself
for
long term positive growth through such asset acquisition, enhancement through
competent management and ultimate disposal.
Year
Ended December 31, 2005 Compared with the Year Ended December 31,
2004
During
the years ended December 31, 2005 and 2004, the only operating revenues recorded
by the Company were from real estate operations and management fees charged
for
management services provided for various subsidiary companies and fees
associated with the management of three oil wells in Montana which are owned
by
the Assiniboine and Sioux tribes. Real estate revenues increased $29,900 during
the year ended December 31, 2005 over those revenues from real estate recognized
during the year ended December 31, 2004. Management fee revenue increased by
$4,000 during the year ended December 31, 2005 as compared to the year ended
December 31, 2004. The increase in real estate revenues is a as a result of
increased rental rates on the Company’s rental properties. The increase in
management fees is a result of accounting and managerial services provided
to
RMG after the acquisition by Enterra.
-51-
Operating
costs and expenses incurred in operations during the year ended December 31,
2005 increased $1,117,700 over those costs and expenses recognized from
operations during the prior year. Expenses from real estate operations remained
constant during the year ended December 31, 2005 when compared with those
expenses incurred during the year ended December 31, 2004. Mineral holding
costs
increased during the year ended December 31, 2005 over those cost recorded
during the previous year by $256,300. The increase in mine holding costs were
as
a result of increased activity on the properties that the Company holds for
the
development of uranium and gold as well as work done on the molybdenum property
returned by PD.
General
and administrative costs and expenses increased by $2,985,500 during the year
ended December 31, 2005 when compared with the general and administrative costs
and expenses recognized during the year ended December 31, 2004. The primary
reasons for these increases were: increased labor costs associated with
additional professional staff to evaluate the Company and Crested’s mineral
properties and a bonus associated with the sale of RMG; increased professional
services associated with the Nukem arbitration hearing as well the litigation
with PD; costs associated with the adoption of Sarbanes Oxley; and work
performed on the SGMI property evaluations and associated increased general
and
administrative expenses of SGMI.
One
outside director of RMG was paid a bonus of $10,000 and another RMG director
was
paid a bonus of $5,000 for their work on the development of RMG, and the four
outside directors of USE were paid $5,000 each for a total bonus to the
directors of $35,000. The employees were paid a total bonus of $435,800 at
the
close of the sale of RMG. All employees of the Company participated in the
bonus
which was paid at the close of the sale of RMG. The bonus was paid in
consideration for the dedicated work put forth by the employees in the
development of RMG and due to the fact that many of the employees have not
received increases in compensation for a number of years.
Officers
of the Company, USE and RMG received the following bonuses: Mark Larsen,
President of RMG $140,000, officers of the Company and USE - Keith Larsen and
Scott Lorimer $40,000 each, and John L. Larsen, Daniel P. Svilar and Harold
F.
Herron $20,000 each. In addition to these officers, Mr. Steve Youngbauer who
serves as Assistant General Counsel to Mr. Svilar, received a bonus of $40,000.
There were two additional members of John L. Larsen’s family who received
bonuses for a total compensation amount of bonuses to Mr. Larsen’s family of
$226,000. The total amount paid in bonuses to the directors, officers and
employees for work in closing the Enterra purchase of RMG was $470,800 which
represents 2.5% of the total consideration received by the Company and its
affiliates from the sale of RMG to Enterra.
As
a
result of increased market prices for uranium the reclamation of these
properties was moved further out into the future which resulted in $2,075,900
being reversed out of asset retirement obligation expense. This reversal of
cost
was offset against the amount of reclamation liability accreted during the
year
ended December 31, 2005 which resulted in a net cost and expense reduction
of
$1,709,200.
During
the year ended December 31, 2005, other income and expenses resulted in a loss
of $484,000 while other income and expenses recognized during the year ended
December 31, 2004 resulted in income of $465,100. The primary changes in other
income during the year ended December 31, 2005 were (1) a gain of $1,311,200
recognized on the sale of assets, (2) a gain of $1,038,500 from the sale of
marketable securities, (3) a decrease of $538,600 in the revenues recorded
from
the sale of investments (4) gain on the valuation of the derivative associated
with the Acquisitions Class D shares of $630,900 discussed above (5) dividend
income of $44,700 (6) an increase of $69,400 in interest income over interest
income recognized during the previous year. These increases in other income
were
offset by a significant increase in interest expense of $3,458,900 over the
interest expense recognized during the previous year to a total of $4,032,200
in
interest expense during the year ended December 31, 2005.
-52-
The
increase in sale of assets during the year ended December 31, 2005 was as a
result of a cash payment of $500,000 and the receipt of 1,000,000 shares of
UPC
common stock valued at $337,800 received from UPC to enter into an agreement
described above in Capital Resources and the settlement of a claim on a real
estate property in Colorado. The gain on the sale of marketable securities
was
as a result of the Company and Crested selling 165,600 shares and 91,029 shares,
respectively of Enterra Initial Units. The decrease in of $538,600 in revenues
from the sale of investments is as a result of the Company selling fewer shares
of Ruby Mining Company (“Ruby”) shares which it holds as an investment. The
Company sold its interest in Ruby several years ago but still retains a portion
of the common stock. As of December 31, 2005 there was no book basis in the
shares.
Interest
expense increased from $573,300 during the twelve months ended December 31,
2004
by $3,458,900 to $4,032,200 during the twelve months ended December 31, 2005.
The reason for the increase in interest expense is related directly to the
senior convertible debentures which were issued in February 2005 in the amount
of $4,000,000 with $720,000 of prepaid interest (please see Capital Resources
above), and the debt to Geddes. Both of these debt instruments were retired
in
full during 2005. The Company recognized $164,600 in interest expense, paid
with
cash, and the amortization of $273,000 of the remaining discount taken on the
Geddes loan for total interest related to the Geddes loan of $437,600. The
senior convertible debentures had prepaid interest of $720,000 and a discount
on
the note of $1,029,800 due to the issue of warrants to the holder of the note
and a beneficial conversion factor of $1,669,500 for total interest expense
of
$3,419,300. The remaining interest of $175,300, which was paid during the year
ended December 31, 2005, was on various notes for equipment and the Company’s
aircraft.
Discontinued
operations, net of taxes, during the year ended December 31, 2005 was
$15,207,400. Actual consolidated income recognized by the Company for the sale
of RMG was $15,768,500 less a provision for income taxes of $235,000 and a
loss
from discontinued operations of $326,100. Of the pre tax net income, net of
the
loss from discontinued operations of $15,533,500, the Company recorded a gain
of
$10,177,600; Crested recorded $5,716,700, and YSFI recorded a loss on the
transaction of $360,800. These amounts are derived by the receipt of $500,000
cash and the Enterra Initial Units and the Class D shares of Acquisitions
discussed above under Liquidity and Capital Resources less the Company and
its
affiliates’ basis in the RMG ownership and less the closing costs of the RMG
sale.
All
previously reported operations of RMG are reported on this filing as
discontinued operations. During the year ended December 31, 2005, the Company
recorded a net loss of $326,100 from the discontinued RMG operations in
comparison to a net loss of $1,938,500 from the RMG operations during the year
ended December 31, 2004.
After
a
provision of alternative minimum taxes due on income recognized during the
year
ended December 31, 2005, the Company recognized a net gain of $8,841,500 or
$0.55 basic per share as compared to a net loss of $6,248,700 or a loss of
$0.48
basic per share for the Year ended December 31, 2004.
Future
Operations
Management
intends to take advantage of the opportunities presented by the recent and
future projected market prices for all the minerals with which it is involved.
If the Uranium One contract is closed, we intend to acquire new mineral
properties and pursue new business opportunities, including real estate
development in the communities impacted by significant energy development in
the
Rocky Mountain region. Long term, we intend to be prepared to pay our share
holding and development costs associated with the Lucky Jack property after
Kobex Resources Ltd. completes its option payments and property expenditure
obligations.
-53-
Accordingly,
even if the Uranium One contract is closed, future property acquisitions and
development work may require large amounts of cash, of which the Company may
have to obtain from industry or equity partners.
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 costly and sales advantageous.
Conversely, a price decline facilitates acquisitions of properties containing
that mineral, but makes sales of such properties more difficult. Operational
impacts of changes in mineral commodity prices are common in the mining
industry.
Uranium
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.
Molybdenum.
The mean
price of molybdenum at December 31, 2006 was $25.125 per pound (Metal
Prices.com). Production from the Lucky Jack project will have a very long life
and changes in prices of molybdenum would affect the revenues from that
property. We anticipate that a significant decrease in price would have to
occur
for the Lucky Jack project to be unprofitable. However, we can’t predict how
long the permitting process for this project will be, or if the process
ultimately will be successful.
Contractual
Obligations
We
had
two divisions of contractual obligations at December 31, 2006: Debt to third
parties of $1,232,100 and asset retirement obligations of $124,400. The debt
will be paid over a period of five years and the retirement obligations will
be
retired during the next 34 years. The following table shows the scheduled debt
payment and expenditures for budgeted asset retirement obligations:
|
Payments
due by period
|
||||||||||||||||
|
|
|
Less
|
|
One
to
|
|
Three
to
|
|
More
than
|
|
|||||||
|
|
|
|
|
than
one
|
|
Three
|
|
Five
|
|
Five
|
|
|||||
|
|
|
Total
|
|
Year
|
|
Years
|
|
Years
|
|
Years
|
||||||
|
Long-term
debt obligations
|
$
|
1,232,100
|
$
|
937,200
|
$
|
265,100
|
$
|
29,800
|
--
|
|||||||
|
Other
long-term liabilities
|
124,400
|
--
|
--
|
--
|
124,400
|
|||||||||||
|
Totals
|
$
|
1,356,500
|
$
|
937,200
|
$
|
265,100
|
$
|
29,800
|
$
|
124,400
|
||||||
ITEM
8. Financial Statements
Financial
statements meeting the requirements of Regulation S-X for the Company follow
immediately.
-54-
Report
of Independent Registered Public Accounting Firm
U.S.
Energy Corp. Board of Directors
We
have
audited the accompanying consolidated balance sheet of U.S. Energy Corp.
and
subsidiaries (the “Company”) as of December 31, 2006, and the related
consolidated statements of income, stockholders’ equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our 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. 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 on 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 audit provides a
reasonable basis for our opinion.
In
our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of U.S. Energy Corp. and subsidiaries at
December 31, 2006, and the results of their operations and their cash flows
for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America.
As
described in Note B to the consolidated financial statements, the Company
adopted a new principle of accounting for share-based payments in accordance
with Financial Accounting Standards Board Statement No. 123R, Share-Based
Payment.
/s/
Moss
Adams LLP
Scottsdale,
Arizona
March
30, 2007
-55-
Report
of Independent Registered Public Accounting Firm
U.S.
Energy Corp. Board of Directors
We
have
audited the accompanying consolidated balance sheet of U.S. Energy Corp.
and
subsidiaries as of December 31, 2005 and the related consolidated statements
of
operations, shareholders’ equity and cash flows for each of the two years in the
period ended December 31, 2005. 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of U.S. Energy Corp. and subsidiaries
as of December 31, 2005 and the results of their operations and their cash
flows
for each of the two years in the period ended December 31, 2005, in conformity
with accounting principles generally accepted in the United States of
America.
/s/
EPSTEIN WEBER & CONOVER, PLC
Scottsdale,
Arizona
March
3,
2006
-56-
|
U.S.
ENERGY CORP. AND SUBSIDIARIES
|
|||||||
|
CONSOLIDATED
BALANCE SHEETS
|
|||||||
|
ASSETS
|
|||||||
|
December
31,
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
CURRENT
ASSETS:
|
|||||||
|
Cash
and cash equivalents
|
$
|
16,973,500
|
$
|
6,998,700
|
|||
|
Marketable
securities
|
|||||||
|
Trading
securities
|
123,400
|
--
|
|||||
|
Available
for sale securities
|
1,148,500
|
328,700
|
|||||
|
Accounts
receivable
|
|||||||
|
Trade,
net of allowance
|
|||||||
|
of
$0 and $32,300, respectfully
|
156,000
|
251,400
|
|||||
|
Affiliates
|
188,900
|
14,100
|
|||||
|
Note
receivable
|
560,500
|
--
|
|||||
|
Assets
held for sale
|
9,686,300
|
--
|
|||||
|
Deferred
tax assets
|
14,321,600
|
--
|
|||||
|
Inventories
|
33,700
|
32,700
|
|||||
|
Prepaid
expenses and other current assets
|
132,800
|
215,000
|
|||||
|
Total
current assets
|
43,325,200
|
7,840,600
|
|||||
|
INVESTMENTS:
|
|||||||
|
Non-affiliated
companies
|
--
|
14,760,800
|
|||||
|
Marketable
securities, held-to-maturity
|
--
|
6,761,200
|
|||||
|
Other
|
27,000
|
54,900
|
|||||
|
Total
investments
|
27,000
|
21,576,900
|
|||||
|
PROPERTIES
AND EQUIPMENT:
|
|||||||
|
Land
|
711,300
|
716,600
|
|||||
|
Undeveloped
mining claims
|
788,600
|
739,400
|
|||||
|
Buildings
and improvements
|
4,869,600
|
5,941,100
|
|||||
|
Machinery
and equipment
|
5,194,000
|
4,676,900
|
|||||
|
Proved
oil and gas properties, full cost method
|
--
|
1,773,600
|
|||||
|
Total
properties and equipment
|
11,563,500
|
13,847,600
|
|||||
|
Less
accumulated depreciation,
|
|||||||
|
depletion
and amortization
|
(5,454,200
|
)
|
(7,481,800
|
)
|
|||
|
Net
properties and equipment
|
6,109,300
|
6,365,800
|
|||||
|
OTHER
ASSETS:
|
|||||||
|
Note
receivable trade
|
10,000
|
20,800
|
|||||
|
Deferred
tax assets
|
610,200
|
--
|
|||||
|
Real
estate held for resale
|
1,819,700
|
1,819,700
|
|||||
|
Deposits
and other
|
--
|
482,900
|
|||||
|
Total
other assets
|
2,439,900
|
2,323,400
|
|||||
|
Total
assets
|
$
|
51,901,400
|
$
|
38,106,700
|
|||
The
accompanying notes are an integral part of these statements.
-57-
|
U.S.
ENERGY CORP. AND SUBSIDIARIES
|
|||||||
|
CONSOLIDATED
BALANCE SHEETS
|
|||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
December
31,
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
CURRENT
LIABILITIES:
|
|||||||
|
Accounts
payable
|
$
|
1,115,000
|
$
|
433,000
|
|||
|
Accrued
compensation expense
|
1,190,200
|
177,100
|
|||||
|
Current
portion of asset retirement obligations
|
--
|
233,200
|
|||||
|
Current
portion of long-term debt
|
937,200
|
156,500
|
|||||
|
Refundable
deposits
|
800,000
|
--
|
|||||
|
Liabilities
held for sale
|
7,375,800
|
--
|
|||||
|
Other
current liabilities
|
177,000
|
232,400
|
|||||
|
Total
current liabilities
|
11,595,200
|
1,232,200
|
|||||
|
LONG-TERM
DEBT, net of current portion
|
294,900
|
880,300
|
|||||
|
ASSET
RETIREMENT OBLIGATIONS,
|
|||||||
|
net
of current portion
|
124,400
|
5,669,000
|
|||||
|
OTHER
ACCRUED LIABILITIES
|
462,700
|
1,400,500
|
|||||
|
MINORITY
INTERESTS
|
4,700,200
|
1,767,500
|
|||||
|
COMMITMENTS
AND CONTINGENCIES
|
|||||||
|
FORFEITABLE
COMMON STOCK, $.01 par value
|
|||||||
|
297,540
and 442,740 shares issued, respectively
|
|||||||
|
forfeitable
until earned
|
1,746,600
|
2,599,000
|
|||||
|
PREFERRED
STOCK,
|
|||||||
|
$.01
par value; 100,000 shares authorized
|
|||||||
|
No
shares issued or outstanding
|
--
|
--
|
|||||
|
SHAREHOLDERS'
EQUITY:
|
|||||||
|
Common
stock, $.01 par value;
|
|||||||
|
unlimited
shares authorized; 19,659,591
|
|||||||
|
and
18,825,134 shares issued net of
|
|||||||
|
treasury
stock, respectively
|
196,600
|
188,200
|
|||||
|
Additional
paid-in capital
|
72,990,700
|
68,005,600
|
|||||
|
Accumulated
deficit
|
(39,101,900
|
)
|
(40,154,100
|
)
|
|||
|
Treasury
stock at cost,
|
|||||||
|
497,845
and 999,174 shares respectively
|
(923,500
|
)
|
(2,892,900
|
)
|
|||
|
Unrealized
gain (loss) on marketable securities
|
306,000
|
(98,100
|
)
|
||||
|
Unallocated
ESOP contribution
|
(490,500
|
)
|
(490,500
|
)
|
|||
|
Total
shareholders' equity
|
32,977,400
|
24,558,200
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
51,901,400
|
$
|
38,106,700
|
|||
The
accompanying notes are an integral part of these statements.
-58-
|
U.S.
ENERGY CORP. AND SUBSIDIARIES
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||
|
Year
ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
OPERATING
REVENUES:
|
||||||||||
|
Real
estate operations
|
$
|
217,700
|
$
|
286,000
|
$
|
256,100
|
||||
|
Management
fees and other
|
595,700
|
563,500
|
559,500
|
|||||||
|
813,400
|
849,500
|
815,600
|
||||||||
|
OPERATING
COSTS AND EXPENSES:
|
||||||||||
|
Real
estate operations
|
309,700
|
306,300
|
295,500
|
|||||||
|
Mineral
holding costs
|
2,312,800
|
1,376,300
|
1,120,000
|
|||||||
|
Asset
retirement obligations
|
854,600
|
(1,709,200
|
)
|
346,700
|
||||||
|
General
and administrative
|
14,007,000
|
6,943,000
|
3,957,500
|
|||||||
|
Provision
for doubtful accounts
|
--
|
--
|
79,000
|
|||||||
|
17,484,100
|
6,916,400
|
5,798,700
|
||||||||
|
LOSS
BEFORE INVESTMENT AND PROPERTY TRANSACTIONS:
|
(16,670,700
|
)
|
(6,066,900
|
)
|
(4,983,100
|
)
|
||||
|
OTHER
INCOME & (EXPENSES):
|
||||||||||
|
Gain
on sales of assets
|
3,063,600
|
1,311,200
|
46,300
|
|||||||
|
(Loss)
gain on sale of marketable securities
|
(867,300
|
)
|
1,038,500
|
--
|
||||||
|
Gain
on sale of investments
|
10,815,600
|
117,700
|
656,300
|
|||||||
|
(Loss)
gain from valuation of derivatives
|
(630,900
|
)
|
630,900
|
--
|
||||||
|
Loss
from Enterra share exchange
|
(3,845,800
|
)
|
--
|
--
|
||||||
|
Settlement
of litigation
|
(7,000,000
|
)
|
--
|
--
|
||||||
|
Dividends
|
147,800
|
44,700
|
--
|
|||||||
|
Interest
income
|
732,300
|
405,200
|
335,800
|
|||||||
|
Interest
expense
|
(112,600
|
)
|
(4,032,200
|
)
|
(573,300
|
)
|
||||
|
2,302,700
|
(484,000
|
)
|
465,100
|
|||||||
|
LOSS
BEFORE MINORITY INTEREST,
|
||||||||||
|
DISCONTINUED
OPERATIONS
|
||||||||||
|
AND
INCOME TAXES
|
(14,368,000
|
)
|
(6,550,900
|
)
|
(4,518,000
|
)
|
||||
|
MINORITY
INTEREST IN LOSS OF
|
||||||||||
|
CONSOLIDATED
SUBSIDIARIES
|
88,600
|
185,000
|
207,800
|
|||||||
|
LOSS
BEFORE DISCONTINUED
|
||||||||||
|
OPERATIONS
AND
|
||||||||||
|
INCOME
TAXES
|
(14,279,400
|
)
|
(6,365,900
|
)
|
(4,310,200
|
)
|
||||
|
DISCONTINUED
OPERATIONS, net of taxes
|
||||||||||
|
Gain
on sale of discontinued segment
|
--
|
15,533,500
|
--
|
|||||||
|
Loss
from discontinued operations
|
--
|
(326,100
|
)
|
(1,938,500
|
)
|
|||||
|
--
|
15,207,400
|
(1,938,500
|
)
|
|||||||
|
(LOSS)
INCOME BEFORE
|
||||||||||
|
INCOME
TAXES
|
(14,279,400
|
)
|
8,841,500
|
(6,248,700
|
)
|
|||||
The
accompanying notes are an integral part of these statements.
-59-
|
U.S.
ENERGY CORP. AND SUBSIDIARIES
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||
|
(continued)
|
||||||||||
|
Year
ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
INCOME
TAXES:
|
||||||||||
|
Current
benefit
|
235,000
|
--
|
--
|
|||||||
|
Deferred
benefit
|
15,096,600
|
--
|
--
|
|||||||
|
15,331,600
|
--
|
--
|
||||||||
|
NET
INCOME (LOSS)
|
$
|
1,052,200
|
$
|
8,841,500
|
$
|
(6,248,700
|
)
|
|||
|
PER
SHARE DATA
|
||||||||||
|
Basic
earnings per share
|
||||||||||
|
Income
(loss) from continuing operations
|
$
|
0.06
|
$
|
(0.39
|
)
|
$
|
(0.33
|
)
|
||
|
Income
(loss) from discontinued operations
|
--
|
0.94
|
(0.15
|
)
|
||||||
|
$
|
0.06
|
$
|
0.55
|
$
|
(0.48
|
)
|
||||
|
Diluted
earnings per share
|
||||||||||
|
Income
(loss) from continuing operations
|
$
|
0.05
|
$
|
(0.39
|
)
|
$
|
(0.33
|
)
|
||
|
Income
(loss) from discontinued operations
|
--
|
0.94
|
(0.15
|
)
|
||||||
|
$
|
0.05
|
$
|
0.55
|
$
|
(0.48
|
)
|
||||
|
BASIC
WEIGHTED AVERAGE
|
||||||||||
|
SHARES
OUTSTANDING
|
18,461,885
|
16,177,383
|
13,182,421
|
|||||||
|
DILUTED
WEIGHTED AVERAGE
|
||||||||||
|
SHARES
OUTSTANDING
|
21,131,786
|
16,177,383
|
13,182,421
|
|||||||
The
accompanying notes are an integral part of these statements.
-60-
|
U.S.
ENERGY & AFFILIATES
|
||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENT OF SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||
|
Unrealized
|
||||||||||||||||||||||||||||
|
Additional
|
Loss
on
|
Unallocated
|
Total
|
|||||||||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Accumulated
|
Hedging
|
Treasury
Stock
|
ESOP
|
Shareholders'
|
||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Activities
|
Shares
|
Amount
|
Contribution
|
Equity
|
||||||||||||||||||||
|
Balance
December 31, 2003
|
12,824,698
|
$
|
128,200
|
$
|
52,961,200
|
$
|
(43,073,000
|
)
|
$
|
--
|
966,306
|
$
|
(2,765,100
|
)
|
$
|
(490,500
|
)
|
$
|
6,760,800
|
|||||||||
|
Net
loss
|
--
|
--
|
--
|
(6,248,700
|
)
|
--
|
--
|
--
|
--
|
(6,248,700
|
)
|
|||||||||||||||||
|
Unrealized
loss on
|
||||||||||||||||||||||||||||
|
hedging
activities
|
--
|
--
|
--
|
--
|
(436,000
|
)
|
--
|
--
|
--
|
(436,000
|
)
|
|||||||||||||||||
|
Comprehensive
income
|
(6,684,700
|
)
|
||||||||||||||||||||||||||
|
Funding
of ESOP
|
70,439
|
700
|
207,800
|
--
|
--
|
--
|
--
|
--
|
208,500
|
|||||||||||||||||||
|
Release
of forfeitable stock
|
23,140
|
200
|
121,700
|
--
|
--
|
1,000
|
5,700
|
--
|
127,600
|
|||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||
|
from
stock warrants
|
125,000
|
1,300
|
249,800
|
--
|
--
|
--
|
--
|
--
|
251,100
|
|||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||
|
in
stock compensation plan
|
50,000
|
500
|
127,900
|
--
|
--
|
--
|
--
|
--
|
128,400
|
|||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||
|
to
retire debt
|
476,833
|
4,700
|
1,068,200
|
--
|
--
|
--
|
--
|
--
|
1,072,900
|
|||||||||||||||||||
|
Treasury
stock from payment
|
||||||||||||||||||||||||||||
|
on
balance of note receivable
|
--
|
--
|
--
|
--
|
--
|
5,000
|
(20,500
|
)
|
--
|
(20,500
|
)
|
|||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||
|
to
RMG investors
|
882,239
|
8,900
|
1,803,700
|
--
|
--
|
--
|
--
|
--
|
1,812,600
|
|||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||
|
warrants
to RMG investors
|
--
|
--
|
291,500
|
--
|
--
|
--
|
--
|
--
|
291,500
|
|||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||
|
to
purchase property
|
678,888
|
6,800
|
1,976,300
|
--
|
--
|
--
|
--
|
--
|
1,983,100
|
|||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||
|
in
a private placement
|
100,000
|
1,000
|
349,000
|
--
|
--
|
--
|
--
|
--
|
350,000
|
|||||||||||||||||||
|
Balance
December 31, 2004(1)
|
15,231,237
|
$
|
152,300
|
$
|
59,157,100
|
$
|
(49,321,700
|
)
|
$
|
(436,000
|
)
|
972,306
|
$
|
(2,779,900
|
)
|
$
|
(490,500
|
)
|
$
|
6,281,300
|
||||||||
|
(1)Total
Shareholders' Equity at December 31, 2004 does not include 442,740
shares
currently issued but forfeitable if certain conditions are not
met by the
recipients. "Basic and
Diluted Weighted Average Shares Outstanding" also includes 814,496
shares
of common stock held by majority-owned subsidiaries, which, in
consolidation, are treated
as treasury shares.
|
||||||||||||||||||||||||||||
The
accompanying notes are an integral part of these statements.
-61-
|
U.S.
ENERGY & AFFILIATES
|
|||||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENT OF SHAREHOLDERS' EQUITY
|
|||||||||||||||||||||||||||||||
|
(continued)
|
|||||||||||||||||||||||||||||||
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||||||||||
|
Additional
|
Loss
on
|
Loss
on
|
Unallocated
|
Total
|
|||||||||||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Accumulated
|
Marketable
|
Hedging
|
Treasury
Stock
|
ESOP
|
Shareholders'
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Securitis
|
Activities
|
Shares
|
Amount
|
Contribution
|
Equity
|
||||||||||||||||||||||
|
Balance
December 31, 2004
|
15,231,237
|
$
|
152,300
|
$
|
59,157,100
|
$
|
(49,321,700
|
)
|
$
|
--
|
$
|
(436,000
|
)
|
972,306
|
$
|
(2,779,900
|
)
|
$
|
(490,500
|
)
|
$
|
6,281,300
|
|||||||||
|
Net
income
|
--
|
--
|
--
|
8,841,500
|
--
|
--
|
--
|
--
|
--
|
8,841,500
|
|||||||||||||||||||||
|
Unrealized
loss on
|
|||||||||||||||||||||||||||||||
|
on
marketable securities
|
--
|
--
|
--
|
--
|
(98,100
|
)
|
--
|
--
|
--
|
--
|
(98,100
|
)
|
|||||||||||||||||||
|
Unrealized
gain on
|
|||||||||||||||||||||||||||||||
|
hedging
activities
|
--
|
--
|
--
|
--
|
--
|
436,000
|
--
|
--
|
--
|
436,000
|
|||||||||||||||||||||
|
Comprehensive
income
|
9,179,400
|
||||||||||||||||||||||||||||||
|
Funding
of ESOP
|
56,494
|
500
|
262,100
|
--
|
--
|
--
|
--
|
--
|
--
|
262,600
|
|||||||||||||||||||||
|
Sale
of Rocky Mountain Gas
|
--
|
--
|
(4,132,300
|
)
|
326,100
|
--
|
--
|
--
|
--
|
--
|
(3,806,200
|
)
|
|||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
to
outside directors
|
11,475
|
100
|
35,500
|
--
|
--
|
--
|
--
|
--
|
--
|
35,600
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
from
stock warrants
|
910,362
|
9,100
|
3,309,300
|
--
|
--
|
--
|
--
|
--
|
--
|
3,318,400
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
in
stock compensation plan
|
60,000
|
600
|
254,100
|
--
|
--
|
--
|
--
|
--
|
--
|
254,700
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
to
retire debt
|
1,942,387
|
19,500
|
4,700,600
|
--
|
--
|
--
|
--
|
--
|
--
|
4,720,100
|
|||||||||||||||||||||
|
Treasury
stock from the sale
|
|||||||||||||||||||||||||||||||
|
of
Rocky Mountain Gas
|
--
|
--
|
--
|
--
|
--
|
--
|
21,868
|
(92,500
|
)
|
--
|
(92,500
|
)
|
|||||||||||||||||||
|
Treasury
stock from payment
|
|||||||||||||||||||||||||||||||
|
on
balance of note receivable
|
--
|
--
|
--
|
--
|
--
|
--
|
5,000
|
(20,500
|
)
|
--
|
(20,500
|
)
|
|||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
to
RMG investors
|
331,538
|
3,300
|
1,162,300
|
--
|
--
|
--
|
--
|
--
|
--
|
1,165,600
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
attached
to company debt
|
--
|
--
|
2,895,700
|
--
|
--
|
--
|
--
|
--
|
--
|
2,895,700
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
from
employee stock options
|
281,641
|
2,800
|
170,900
|
--
|
--
|
--
|
--
|
--
|
--
|
173,700
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
warrants
for services
|
--
|
--
|
190,300
|
--
|
--
|
--
|
--
|
--
|
--
|
190,300
|
|||||||||||||||||||||
|
Balance
December 31, 2005(1)
|
$
|
18,825,134
|
$
|
188,200
|
$
|
68,005,600
|
$
|
(40,154,100
|
)
|
$
|
(98,100
|
)
|
$
|
--
|
$
|
999,174
|
$
|
(2,892,900
|
)
|
$
|
(490,500
|
)
|
$
|
24,558,200
|
|||||||
|
(1)Total
Shareholders' Equity at December 31, 2005 does not include 442,740
shares
currently issued but forfeitable if certain conditions are not
met by the
recipients. "Basic and
Diluted Weighted Average Shares Outstanding" also includes 834,783
shares
of common stock held by majority-owned subsidiaries, which, in
consolidation, are treated
as treasury shares.
|
|||||||||||||||||||||||||||||||
The
accompanying notes are an integral part of these statements.
-62-
|
U.S.
ENERGY & AFFILIATES
|
||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENT OF SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||
|
(continued)
|
||||||||||||||||||||||||||||
|
Unrealized
|
||||||||||||||||||||||||||||
|
Additional
|
Gain
(Loss) on
|
Unallocated
|
Total
|
|||||||||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Accumulated
|
Marketable
|
Treasury
Stock
|
ESOP
|
Shareholders'
|
||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Securities
|
Shares
|
Amount
|
Contribution
|
Equity
|
||||||||||||||||||||
|
Balance
December 31, 2005
|
18,825,134
|
$
|
188,200
|
$
|
68,005,600
|
$
|
(40,154,100
|
)
|
$
|
(98,100
|
)
|
999,174
|
$
|
(2,892,900
|
)
|
$
|
(490,500
|
)
|
$
|
24,558,200
|
||||||||
|
Net
income
|
--
|
--
|
--
|
1,052,200
|
--
|
--
|
--
|
--
|
1,052,200
|
|||||||||||||||||||
|
Unrealized
gain on
|
||||||||||||||||||||||||||||
|
marketable
securities
|
--
|
--
|
--
|
404,100
|
--
|
--
|
--
|
404,100
|
||||||||||||||||||||
|
Comprehensive
income
|
1,456,300
|
|||||||||||||||||||||||||||
|
Funding
of ESOP
|
70,756
|
700
|
351,600
|
--
|
--
|
--
|
--
|
--
|
352,300
|
|||||||||||||||||||
|
Release
of forfeitable stock
|
145,200
|
1,500
|
850,900
|
--
|
--
|
--
|
--
|
--
|
852,400
|
|||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||
|
to
outside directors
|
3,140
|
--
|
18,000
|
--
|
--
|
--
|
--
|
--
|
18,000
|
|||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||
|
from
employee stock options
|
220,022
|
2,200
|
195,900
|
--
|
--
|
--
|
--
|
--
|
198,100
|
|||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||
|
from
stock warrants
|
226,015
|
2,300
|
819,900
|
--
|
--
|
--
|
--
|
--
|
822,200
|
|||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||
|
in
stock compensation plan
|
57,500
|
600
|
290,200
|
--
|
--
|
--
|
--
|
--
|
290,800
|
|||||||||||||||||||
|
Sale
of Treasury Stock to
|
||||||||||||||||||||||||||||
|
Enterra
Energy Trust
|
--
|
--
|
--
|
--
|
--
|
(506,329
|
)
|
2,000,000
|
--
|
2,000,000
|
||||||||||||||||||
|
Treasury
stock from payment
|
||||||||||||||||||||||||||||
|
on
balance of note receivable
|
--
|
--
|
--
|
--
|
--
|
5,000
|
(30,600
|
)
|
--
|
(30,600
|
)
|
|||||||||||||||||
|
Vesting
of stock options
|
||||||||||||||||||||||||||||
|
issed
to employees
|
--
|
--
|
273,600
|
--
|
--
|
--
|
--
|
--
|
273,600
|
|||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||
|
warrants
for services
|
--
|
--
|
743,200
|
--
|
--
|
--
|
--
|
--
|
743,200
|
|||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||
|
for
services
|
111,824
|
1,100
|
635,300
|
--
|
--
|
--
|
--
|
--
|
636,400
|
|||||||||||||||||||
|
Changes
in minority interest
|
--
|
--
|
806,500
|
--
|
--
|
--
|
--
|
--
|
806,500
|
|||||||||||||||||||
|
Balance
December 31, 2006(1)
|
19,659,591
|
$
|
196,600
|
$
|
72,990,700
|
$
|
(39,101,900
|
)
|
$
|
306,000
|
497,845
|
$
|
(923,500
|
)
|
$
|
(490,500
|
)
|
$
|
32,977,400
|
|||||||||
|
(1)Total
Shareholders' Equity at December 31, 2006 does not include 297,540
shares
currently issued but forfeitable if certain conditions are not
met by the
recipients. "Basic and
Diluted Weighted Average Shares Outstanding" also includes 322,424
shares
of common stock held by majority-owned subsidiaries, which, in
consolidation, are treated
as treasury shares.
|
||||||||||||||||||||||||||||
The
accompanying notes are an integral part of these statements.
-63-
|
U.S.
ENERGY CORP. AND SUBSIDIARIES
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||
|
Year
ended December 31,
|
||||||||||
|
2006
|
|
|
2005
|
|
|
2004
|
||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||
|
Net
income (loss)
|
$
|
1,052,200
|
$
|
8,841,500
|
$
|
(6,248,700
|
)
|
|||
|
Adjustments
to reconcile net (loss) gain
|
||||||||||
|
to
net cash used in operating activities:
|
||||||||||
|
Minority
interest in loss of
|
||||||||||
|
consolidated
subsidiaries
|
(88,600
|
)
|
(185,000
|
)
|
(397,700
|
)
|
||||
|
Amortization
of deferred charge
|
--
|
--
|
343,400
|
|||||||
|
Depreciation
|
510,900
|
386,300
|
381,700
|
|||||||
|
Accretion
of asset
|
||||||||||
|
retirement
obligations
|
766,500
|
366,700
|
346,700
|
|||||||
|
Subsequent
recognition and measurement
|
||||||||||
|
of
asset retirement obligations
|
(105,200
|
)
|
(2,075,900
|
)
|
--
|
|||||
|
Amortization
of debt discount
|
--
|
3,168,700
|
263,700
|
|||||||
|
Noncash
interest expense
|
--
|
720,000
|
--
|
|||||||
|
Provision
for doubtful accounts
|
--
|
--
|
79,000
|
|||||||
|
Recognition
of deferred gain
|
--
|
--
|
(16,700
|
)
|
||||||
|
Gain
on sale of assets
|
(3,063,600
|
)
|
(1,311,200
|
)
|
(19,300
|
)
|
||||
|
Gain
on sale of investments
|
(10,815,600
|
)
|
--
|
--
|
||||||
|
Loss
from Enterra share exchange
|
3,845,800
|
--
|
--
|
|||||||
|
Loss
(gain) from valuation of derivatives
|
630,900
|
(630,900
|
)
|
--
|
||||||
|
Gain
on sale of discontinued segment
|
--
|
(15,533,500
|
)
|
--
|
||||||
|
Loss
(gain) on sale of marketable securities
|
867,300
|
(1,038,500
|
)
|
(656,300
|
)
|
|||||
|
Proceeds
from the sale of trading securities
|
8,304,300
|
--
|
--
|
|||||||
|
Benefit
from deferred tax assets
|
(15,096,600
|
)
|
--
|
--
|
||||||
|
Noncash
compensation
|
1,328,600
|
688,500
|
336,900
|
|||||||
|
Noncash
services
|
1,525,800
|
125,900
|
50,400
|
|||||||
|
Net
changes in assets and liabilities:
|
||||||||||
|
Accounts
receivable
|
(79,400
|
)
|
(166,000
|
)
|
(16,400
|
)
|
||||
|
Other
assets
|
(153,900
|
)
|
183,700
|
(83,100
|
)
|
|||||
|
Accounts
payable
|
682,000
|
(700
|
)
|
(67,800
|
)
|
|||||
|
Accrued
compensation expense
|
1,013,100
|
(4,600
|
)
|
1,700
|
||||||
|
Refundable
deposits
|
800,000
|
--
|
--
|
|||||||
|
Reclamation
and other liabilities
|
(56,500
|
) |
407,300
|
(179,800
|
)
|
|||||
|
NET
CASH USED IN
|
||||||||||
|
OPERATING
ACTIVITIES
|
(8,132,000
|
)
|
(6,057,700
|
)
|
(5,882,300
|
)
|
||||
The
accompanying notes are an integral part of these statements.
-64-
|
U.S.
ENERGY CORP. AND SUBSIDIARIES
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||
|
(continued)
|
||||||||||
|
Year
ended December 31,
|
||||||||||
|
2006
|
|
2005
|
|
2004
|
||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||
|
Proceeds
from sale of marketable securities
|
$
|
551,000
|
$
|
5,916,600
|
$
|
--
|
||||
|
Sale
of RMG
|
--
|
(270,000
|
)
|
--
|
||||||
|
Proceeds
from sale investments
|
13,800,000
|
--
|
656,300
|
|||||||
|
Acquisition
of unproved mining claims
|
(1,604,700
|
)
|
(710,900
|
)
|
--
|
|||||
|
Proceeds
on sale of property and equipment
|
2,410,600
|
1,087,400
|
21,400
|
|||||||
|
Purchase
of property and equipment
|
(649,300
|
)
|
(376,000
|
)
|
(93,400
|
)
|
||||
|
Investment
in note receivable
|
(560,500
|
)
|
--
|
--
|
||||||
|
Net
change in restricted investments
|
(94,100
|
)
|
13,600
|
21,900
|
||||||
|
Net
change in notes receivable
|
(19,800
|
)
|
53,600
|
11,300
|
||||||
|
Net
change in investments in affiliates
|
--
|
--
|
(64,500
|
)
|
||||||
|
NET
CASH PROVIDED
|
||||||||||
|
BY
INVESTING ACTIVITIES
|
13,833,200
|
5,714,300
|
553,000
|
|||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||
|
Issuance
of common stock
|
1,020,300
|
3,492,100
|
601,100
|
|||||||
|
Issuance
of subsidiary stock
|
3,413,800
|
--
|
856,000
|
|||||||
|
Proceeds
from long term debt
|
297,300
|
4,064,900
|
3,311,600
|
|||||||
|
Repayments
of long term debt
|
(457,800
|
)
|
(3,380,400
|
)
|
(512,500
|
)
|
||||
|
NET
CASH PROVIDED BY
|
||||||||||
|
FINANCING
ACTIVITIES
|
4,273,600
|
4,176,600
|
4,256,200
|
|||||||
|
Net
cash used in operating activities of
|
||||||||||
|
discontinued
operations
|
--
|
(453,500
|
)
|
1,330,700
|
||||||
|
Net
cash used in investing activities of
|
||||||||||
|
discontinued
operations
|
--
|
(215,000
|
)
|
(5,628,500
|
)
|
|||||
|
Net
cash used in financing activities of
|
||||||||||
|
discontinued
operations
|
--
|
(8,500
|
)
|
5,128,600
|
||||||
|
NET
INCREASE (DECREASE) IN
|
||||||||||
|
CASH
AND CASH EQUIVALENTS
|
9,974,800
|
3,156,200
|
(242,300
|
)
|
||||||
|
CASH
AND CASH EQUIVALENTS
|
||||||||||
|
AT
BEGINNING OF PERIOD
|
6,998,700
|
3,842,500
|
4,084,800
|
|||||||
|
CASH
AND CASH EQUIVALENTS
|
||||||||||
|
AT
END OF PERIOD
|
$
|
16,973,500
|
$
|
6,998,700
|
$
|
3,842,500
|
||||
|
SUPPLEMENTAL
DISCLOSURES:
|
||||||||||
|
Income
tax paid
|
$
|
--
|
$
|
235,000
|
$
|
--
|
||||
|
Interest
paid
|
$
|
112,600
|
$
|
257,900
|
$
|
1,065,400
|
||||
The
accompanying notes are an integral part of these statements.
-65-
|
U.S.
ENERGY CORP. AND SUBSIDIARIES
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||
|
(continued)
|
||||||||||
|
Year
ended December 31,
|
||||||||||
|
2006
|
|
|
2005
|
|
|
2005
|
||||
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
||||||||||
|
Conversion
of Enterra shares
|
||||||||||
|
to
tradable units
|
$
|
13,880,100
|
$
|
--
|
$
|
--
|
||||
|
Issuance
of stock warrants in
|
||||||||||
|
conjunction
with agreements
|
$
|
727,300
|
$
|
--
|
$
|
--
|
||||
|
Acquisition
of assets
|
||||||||||
|
through
issuance of debt
|
$
|
355,800
|
$
|
113,400
|
$
|
--
|
||||
|
Unrealized
loss/gain
|
$
|
557,000
|
$
|
--
|
$
|
--
|
||||
|
Satisfaction
of receivable - employee
|
||||||||||
|
with
stock in company
|
$
|
30,600
|
$
|
20,500
|
$
|
20,500
|
||||
|
Issuance
of stock warrants in
|
||||||||||
|
conjunction
with debt
|
$
|
--
|
$
|
2,781,200
|
$
|
291,500
|
||||
|
Issuance
of stock as conversion of
|
||||||||||
|
subsidiary
stock
|
$
|
--
|
$
|
1,165,600
|
$
|
--
|
||||
|
Issuance
of stock for services
|
$
|
--
|
$
|
100,000
|
$
|
--
|
||||
|
Issuance
of stock to satisfy debt
|
$
|
--
|
$
|
4,000,000
|
$
|
1,072,900
|
||||
|
Foreclosure
of note receivable Cactus Group
|
$
|
--
|
$
|
2,926,400
|
$
|
--
|
||||
The
accompanying notes are an integral part of these statements.
-66-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
A. BUSINESS
ORGANIZATION AND OPERATIONS:
U.S.
Energy Corp. was incorporated in the State of Wyoming on January 26, 1966.
U.S.
Energy Corp. and subsidiaries (the "Company" or "USE") engages in the
acquisition, exploration, holding, sale and/or development of mineral properties
and through April 2006 - the production of petroleum properties and marketing
of
minerals. Principal mineral interests are in uranium, gold and molybdenum.
The
Company is pursuing various financing opportunities to put its uranium and
gold
properties, which are all in a shut down status, into production. The Company
also historically participated in the development and production of coalbed
methane gas through a non consolidated investee, Rocky Mountain Gas, Inc.
(“RMG”), which was sold during the year ended December 31, 2005. (See Note L)
The Company holds various real and personal properties used in commercial
activities. Most of the Company's activities are conducted through subsidiaries
and through the USECC Joint Venture (“USECC”) discussed below and in Note
D.
The
Company is engaged in the maintenance of two uranium properties, one in southern
Utah, and a second group consisting of mining claims in Wyoming and a state
lease known as the Sheep Mountain uranium properties. The property in southern
Utah includes a uranium processing mill known as the Shootaring Canyon Mill
(“Shootaring” or “Shootaring Mill”). Sutter Gold Mining, Inc. ("SGMI"), a
Canadian corporation owned 49.6% by the Company at December 31, 2006, manages
the Company's interest in gold properties. The Company also owns 100% of the
outstanding stock of Plateau Resources Limited (“Plateau”), which was on standby
at December 31, 2006. The Company has applied with the State of Utah to change
the status of the permit on the mill from standby to operational.
Sutter
Gold Mining Inc. (“SGMI”), a Canadian corporation owned 49.6% by the Company at
December 31, 2006, manages the Company’s interest in gold properties. Additional
subsidiary companies organized during 2006 include U.S. Moly Corp. (“USMC”) for
the management of the molybdenum business and InterWest, Inc. (“InterWest”) for
the prospective real estate business. The Company holds a consolidated 90%
ownership of these new companies while the remaining 10% is owned by employees,
officers and directors of the Company.
Management's
Plan
The
Company recorded a net loss before a benefit from income taxes of $14,279,400
and had working capital of $31,730,000 at December 31, 2006.
The
Company plans on the following activities to increase its cash position and
improve earnings:
| · |
Continue
working with Uranium Power Corp. (“UPC”) to explore and develop jointly
held uranium properties along with seeking a joint venture partner.
(See
Note F)
|
| · |
Continue
to work to close the sale of its uranium assets, including the Shootaring
Canyon Uranium mill (“Shootaring”) in southern Utah to sxr Uranium One
(“Uranium One”) (See Note F)
|
| · |
Continue
working to finalize an operating agreement with Kobex Resources Ltd.
(“KBX”) which will fund the initial exploration, permitting and
development of the Lucky Jack molybdenum property (“Lucky Jack”) in
Colorado. (See Note F)
|
-67-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004 (continued)
| · |
Seek
additional investment opportunities through the acquisition of operating
companies or the development of entities such as real
estate.
|
| · |
Seek
joint venture partners on other mineral properties which the Company
owns
an interest in.
|
| · |
Seek
additional funding through either sale of equity or joint venture
partner
to place SGMI and other mineral properties into production or sell
the
properties to industry partners.
|
Budgetary
projections made by the Company for calendar 2007 indicate that if these efforts
are successful and cost cutting procedures continue to be implemented, the
Company will have ample cash resources to fund its operations and commitments
in
2007.
B. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
Principles
of Consolidation
The
consolidated financial statements of USE and subsidiaries include the accounts
of the Company, the accounts of its majority-owned or controlled subsidiaries
Plateau (100%), Crested (70.9%), Four Nines Gold, Inc. ("FNG") (50.9%), SGMI
(49.6%), Yellow Stone Fuels, Inc. (“YSFI”) (49.1%), and the USECC Joint Venture
("USECC"), a consolidated joint venture which is equally owned by USE and
Crested, through which the bulk of their operations are conducted.
Investments
in joint ventures and 20 to 50% owned companies are accounted for using the
equity method. Because of management control and indebtedness to the Company
which may be converted to equity, SGMI and YSFI are consolidated into the
financial statements of the Company. The Company’s ownership interest in SGMI
below 50% was temporary. At December 31, 2006 Sutter owed the Company
$2,025,700. During March 2007, the Company acquired additional equity interest
providing for greater than 50% ownership of SGMI. Officers of the Company also
serve as the management of Sutter and YSFI. Investments of less than 20% are
accounted for by the cost method. All material inter-company profits,
transactions and balances have been eliminated.
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 exceed federally insured limits.
At December 31, 2006, the Company had all of its cash and cash equivalents
with
several 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. The Company is currently seeking a relationship
with
an investment banker to assist in the management of cash reserves as well as
the
financing of acquisitions and on going operations.
Accounts
and Notes Receivable
The
majority of the Company's accounts receivable are due from industry partners
for
exploratory drilling programs, real estate rentals and management fees. The
Company determines any required allowance by considering a number of factors
including length of time trade accounts receivable are past due and the
Company's previous loss history. The Company provides reserves for account
and
note receivable balances when they become uncollectible, and payments
subsequently received on such receivables and notes are credited to the
allowance for doubtful accounts. At December 31, 2006 there were no provisions
of doubtful accounts for either receivable or note balances.
-68-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
Inventories
Inventories
consist of aviation fuel. Inventories are stated at lower of cost or market
using the average cost method.
Marketable
Securities
The
Company accounts for its marketable securities under Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities , which requires certain securities to be categorized
as either trading, available-for-sale or held-to-maturity. Based on the
Company's intent to invest in the securities at least through the minimum
holding period, the Company's available-for-sale securities are carried at
fair
value with net unrealized gain or (loss) recorded as a separate component of
shareholders' equity. Held-to-maturity securities are valued at amortized cost.
If a decline in fair value of held-to-maturity securities is determined to
be
other than temporary, the investment is written down to fair value.
The
Company, on a consolidated basis, held marketable securities, 693,276 shares
of
Enterra Series D Common Stock, as of the year ended December 31, 2005 in the
amount of $14,730,800. Of these, 682,342 shares were sold during the year ended
December 31, 2006. The Company, on a consolidated basis received $8,304,300
in
cash proceeds and recognized a loss of $867,300 from the sale of marketable
securities. Due to the short period that these securities were held they are
classified as trading securities.
Properties
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.
|
Machinery
and equipment
|
||
|
Office
Equipment
|
3
to 5 years
|
|
|
Planes
|
10
years
|
|
|
Field
Tools and Hand Equipment
|
5
to 7 years
|
|
|
Vehicles
and Trucks
|
3
to 7 years
|
|
|
Heavy
Equipment
|
7
to 10 years
|
|
|
Buildings
and improvements
|
||
|
Service
Buildings
|
20
years
|
|
|
Corporate
Headquarters' Building
|
45
years
|
|
-69-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
Mineral
Properties
The
Company capitalizes all costs incidental to the acquisition of mineral
properties. Mineral exploration costs are expensed as incurred. When exploration
work indicates that a mineral property can be economically developed as a result
of establishing proved and probable reserves, costs for the development of
the
mineral property as well as capital purchases and capital construction are
capitalized and amortized using units of production over the estimated
recoverable proved and probable reserves. Costs and expenses related to general
corporate overhead are expensed as incurred. All capitalized costs are charged
to operations if the Company subsequently determines that the property is not
economical due to permanent decreases in market prices of commodities, too
high
of production costs or depletion of the mineral resource.
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
depleted.
The
Company has acquired substantial mineral properties and associated facilities
at
minimal cash cost, primarily through the assumption of reclamation and
environmental liabilities. Certain of these properties are owned by various
ventures in which the Company is either a partner or venturer. (See Note
F).
Real
Estate Held for Sale
The
Company classifies Real Estate Held for Sale as assets that are not in
production and management has made the decision to dispose of the
assets.
The
Company re-acquired by Foreclosure Sale the Ticaboo town site (“Ticaboo”)
located in southern Utah near Lake Powell during 2006. Ticaboo includes a motel,
restaurant and lounge, convenience store, recreational boat storage and service
facility, and improved residential and mobile home lots. Most of these
properties had been acquired when the Shootaring Mill was acquired in
1993.
The
Company has classified Ticaboo as Real Estate Held for Sale. The value of $1.8
million is the cost basis of the asset after the re-acquisition and the write
off of the corresponding note receivable. Management believes that the fair
value of the assets received in foreclosure approximates the carrying value
of
the note receivable.
Assets
and Liabilities Held for Sale
Long
lived assets and liabilities that will be sold within one year of the financial
statements are classified as current. At December 31, 2006 the Company believed
that its uranium assets in Wyoming, Utah, Colorado and Arizona would be sold
within a twelve month period. All capitalized asset balances associated with
these assets, including cash bonds pledged as collateral for reclamation
liabilities, were therefore classified as Assets Held for Sale as of December
31, 2006. Likewise all asset retirement obligations as well as any other
liability associated with these properties was classified as current Liabilities
Held for Sale at December 31, 2006. In the event that these assets and
liabilities are not sold, they will be re-evaluated to insure that no impairment
has taken place and re-classified as long term assets and
liabilities.
-70-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
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 mineral
interests, may result in asset impairment. At December 31, 2006 no impairment
existed on the assets of the Company or its consolidated
subsidiaries.
The
Company accounts for long lived assets and liabilities held for sale pursuant
to
FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. On
July 10, 2006 the Company and USE signed and Exclusivity Agreement to sell
its
uranium properties. On February 22, 2007 the Company and USE signed an Asset
Purchase Agreement for the sale of these uranium assets. As the terms of the
agreement dictate that the actual sale of these assets will occur within
calendar 2007, the long term assets and liabilities associated with these
properties are classified as a current assets and liabilities. (See Notes F
and
N) The following table sets forth the long lived assets and liabilities which
have been classified as assets or liabilities held for sale:
|
Assets
held for sale
|
|||||||
|
Marketable
securities, held to maturity
|
(1
|
)
|
$
|
6,883,300
|
|||
|
Mining
Claims
|
1,535,500
|
||||||
|
Property
Plant and Equipment
|
918,200
|
||||||
|
Less
Accumulated Depreciation
|
(225,700
|
)
|
|||||
|
Other
Assets
|
(2
|
)
|
575,000
|
||||
|
$
|
9,686,300
|
||||||
|
Liabilities
held for sale
|
|||||||
|
Asset
Retirement Obligation - Current
|
$
|
178,400
|
|||||
|
Asset
Retirement Obligation - Long Term
|
6,348,800
|
||||||
|
Other
Accrued Liabilities
|
(3
|
)
|
848,600
|
||||
|
$
|
7,375,800
|
||||||
|
(1)
Cash investments held by a third party trustee for the reclamation
of
the Plateau uranium mill
|
|||||||
|
|
|||||||
|
(2)
Cash
investments held by a third party trustee for the reclamation of
uranium properties in Wyoming, Utah and Arizona
|
|||||||
|
|
|||||||
|
(3)
Accrued holding costs associated with the Plateau uranium mill
at
time of transfer to the Company. This amount has been reduced over
time as the Company paid holding costs associated with the
mill
|
|||||||
The
uranium assets are held in a shut down mode and there are no operations at
them.
-71-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004 (continued)
Fair
Value of Financial Instruments
The
carrying amount of cash equivalents, receivables, other current assets, accounts
payable and accrued expenses approximate 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.
Asset
Retirement Obligations
The
Company accounts for its asset retirement obligations under SFAS No. 143,
"Accounting for Asset Retirement Obligation." The Company records the fair
value
of the reclamation liability on its shut down mining properties as of the date
that the liability is incurred. The Company reviews the liability each quarter
and determines if a change in estimate is required as well as accretes the
total
liability on a quarterly basis for the future liability. Final determinations
are made during the fourth quarter of each year. The Company deducts any actual
funds expended for reclamation during the quarter in which it occurs.
The
following is a reconciliation of the total liability for asset retirement
obligations:
|
Year
ending Decemberr 31,
|
|||||||
|
2006
|
|
2005
|
|||||
|
Balance
December 31, 2005
|
$
|
5,902,200
|
$
|
8,075,100
|
|||
|
Addition
to Liability
|
88,100
|
--
|
|||||
|
Subsequent
recognition and
|
|||||||
|
measurement
|
(105,200
|
)
|
(2,075,900
|
)
|
|||
|
Liability
settled
|
--
|
(463,700
|
)
|
||||
|
Accretion
Expense
|
766,500
|
366,700
|
|||||
|
Reclassification
to
|
|||||||
|
liabilities
held for sale
|
(6,527,200
|
)
|
--
|
||||
|
Balance
December 31, 2006
|
$
|
124,400
|
$
|
5,902,200
|
|||
Revenue
Recognition
Revenues
from real estate operations are from the rental of office space in Riverton,
Wyoming. All these revenues are reported on a gross revenue basis and are
recorded at the time the service is provided.
Management
fees are for operating and overseeing oil production on the Fort Peck
Reservation in Montana and charges for services performed on mineral properties
subject to the UPC and KBX agreements for overhead charges. Management fees
are
recorded when the service is provided.
-72-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
Stock
Based Compensation
SFAS
123,
"Accounting for Stock-Based Compensation," ("SFAS 123") defines a fair value
based method of accounting for employee stock options or similar equity
instruments. SFAS 123 allowed the continued measurement of compensation cost
for
such plans using the intrinsic value based method prescribed by APB Opinion
No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), provided that pro
forma disclosures are made to net income or loss and net income or loss per
share, assuming the fair value based method of SFAS 123 had been applied. The
Company has elected to account for its stock-based compensation plans under
APB25 through 2005. Effective January 1, 2006, the Company adopted Statement
of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment
(“SFAS 123R”), which requires the Company to measure the cost of employee
services received in exchange for all equity awards granted including stock
options based on the fair market value of the award as of the grant date. SFAS
123R supersedes Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (“SFAS 123”) and Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). The Company
has adopted SFAS 123R using the modified prospective method. Accordingly, prior
period amounts have not been restated. Under the modified prospective method,
stock options awards that are granted, modified or settled after December 31,
2005 will be valued at fair value in accordance with provisions of SFAS 123R
and
recognized on a straight line basis over the service period of the entire award.
The
effect of implementing SFAS No. 123(R) was an increase in compensation cost
recognized in the year ended December 31, 2006 of $273,600.
The
Company has computed the fair values of its options granted using the
Black-Scholes pricing model and the following weighted average
assumptions:
|
Year
Ended
|
|||
|
|
December
31,
|
||
|
|
2006
|
2005
|
2004
|
|
Risk-free
interest rate
|
4.53%
|
4.38%
|
4.82%
|
|
Expected
lives (years)
|
4.80
|
6.75
|
7.10
|
|
Expected
volatility
|
71.02%
|
78.10%
|
50.79%
|
|
Expected
dividend yield
|
--
|
--
|
--
|
To
estimate expected lives of options for this valuation, it was assumed options
will be exercised at the end of their expected lives. All options are initially
assumed to vest. Cumulative compensation cost recognized in pro forma net income
or loss with respect to options that are forfeited prior to vesting is adjusted
as a reduction of pro forma compensation expense in the period of
forfeiture.
-73-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
If
the
Company had accounted for its stock-based compensation plans in accordance
with
SFAS 123 during the years ended December 31, 2005 and 2004, the Company's net
gain/(loss) and pro forma net gain/(loss) per common share would have been
reported as follows:
|
Year
Ended
|
|
||||||
|
|
|
December
31,
|
|
||||
|
|
|
2005
|
|
2004
|
|||
|
Net
gain (loss) to common
|
$
|
8,841,500
|
$
|
(6,248,700
|
)
|
||
|
shareholder
as reported
|
|||||||
|
Deduct:
Total stock based
|
|||||||
|
employee
expense
|
|||||||
|
determined
under fair
|
|||||||
|
value
based method
|
|||||||
|
U.S.
Energy employee options
|
(3,617,900
|
)
|
(207,100
|
)
|
|||
|
Subsidiary
employee options
|
(1,013,500
|
)
|
--
|
||||
|
Pro
forma net loss
|
$
|
4,210,100
|
$
|
(6,455,800
|
)
|
||
|
As
reported, Basic
|
$
|
0.55
|
$
|
(0.47
|
)
|
||
|
As
reported, Diluted
|
$
|
0.55
|
$
|
(0.47
|
)
|
||
|
Pro
forma, Basic
|
$
|
0.26
|
$
|
(0.49
|
)
|
||
|
Pro
forma, Diluted
|
$
|
0.25
|
$
|
(0.49
|
)
|
||
| (1) |
Includes
the accelerated vesting of 804,000 employee options which were exercisable
at $2.46 per share and would have vested at the rate of 268,000 shares
each on July 1, 2007, 2008 and 2009. Employees who hold the options
have a
21.7 year weighted average employment history with the Company and
do not
plan to retire. The options would not have been forfeited had they
not
been accelerated.
|
| (2) |
On
September 2, 2004, the Board of Directors of Crested adopted (and
the
shareholders approved) the 2004 Incentive Stock Option Plan (the
"2004
ISOP") for the benefit of Crested’s key employees. The 2004 ISOP reserves
for issuance shares of the Company’s common stock equal to 20% of the
Company’s shares of common stock issued and outstanding at any time and
has a term of 10 years. During the year ended December 31, 2005,
Crested
issued 1,700,000 options under this plan to employees of USE. These
options were valued for purposes of this footnote using a 4.38% Risk-free
interest rate, expected lives of 9.4 years and an expected volatility
of
107%.
|
-74-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
Weighted
average shares used to calculate pro forma net loss per share were determined
as
described in Note B, except in applying the treasury stock method to outstanding
options, net proceeds assumed received upon exercise were increased by the
amount of compensation cost attributable to future service periods and not
yet
recognized as pro forma expense.
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 reduced, if deemed necessary, by a valuation
allowance for any tax benefits which, based on current circumstances, are not
expected to be realized.
Net
Gain (Loss) Per Share
The
Company reports net gain (loss) per share pursuant to Statement of Financial
Accounting Standards No. 128 ("SFAS 128"). SFAS 128 specifies the computation,
presentation and disclosure requirements for earnings per share. Basic earnings
per share are computed based on the weighted average number of common shares
outstanding. Common shares held by the ESOP are included in the computation
of
earnings per share. Total shares held by the ESOP at December 31, 2006
were 525,881 shares which are allocated to participant accounts and 155,811
shares held as collateral for loans to the Company. 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. Using the treasury stock method there were
2,372,361 potential shares relating to forfeitable shares, options and warrants
that are included in the diluted earnings per share for 2006. Potential common
shares relating to options and warrants are excluded from the computation of
diluted loss per share, because they were antidilutive, totaled 5,928,102 and
5,628,820 at December 31, 2005, and 2004, respectively.
|
Diluted
Earnings Per Share
|
||||||||||
|
2006
|
||||||||||
|
Income
|
Shares
|
Per
Share
|
||||||||
|
Basic
earning per share
|
$
|
1,052,200
|
18,461,885
|
$
|
0.06
|
|||||
|
Effect
of dilutive securities:
|
||||||||||
|
Forfeitable
shares
|
297,540
|
|||||||||
|
Outstanding
options
|
1,780,005
|
|||||||||
|
Outstanding
warrants
|
592,356
|
|||||||||
|
2,669,901
|
||||||||||
|
Diluted
earning per share:
|
$
|
1,052,200
|
21,131,786
|
$
|
0.05
|
|||||
-75-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the USA requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements, and the reported amounts of revenues
and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain
reclassifications have been made in the prior years financial statements in
order to conform to the presentation for the current year.
Recent
Accounting Pronouncements
FIN
48 In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes,” (“FIN 48”) an interpretation of FASB Statement No. 109,
“Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. FIN 48 requires
that the Company recognize in its financial statements, the impact of a tax
position, if that position is more likely than not of being sustained on audit,
based on the technical merits of the position. FIN 48 also provides guidance
on
derecognition, classification, interest and penalties, accounting in interim
periods and disclosure. The provisions of FIN 48 are effective beginning January
1, 2007 with the cumulative effect of the change in accounting principle
recorded as an adjustment to the opening balance of retained earnings, goodwill,
deferred income taxes and income taxes payable in the Consolidated Balance
Sheets. The Company does not expect that the adoption of FIN 48 will have a
significant impact on the financial statements of the Company.
FAS
157
In
September 2006, the FASB issued FASB Statement No. 157, “Fair Value
Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. The provisions for FAS 157
are effective for the Company’s fiscal year beginning January 1, 2008. The
Company is currently evaluating the impact that the adoption of this statement
will have on the Company’s consolidated financial position, results of
operations or cash flows.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (“SAB
108”). SAB 108 provides guidance on consideration of the effects of prior year
misstatements in quantifying current year misstatements for the purpose of
a
materiality assessment. SAB 108 is effective for fiscal years ending after
November 15, 2006. The adoption of SAB 108 did not have an impact on our
consolidated financial statements.
-76-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(“SFAS
159”) which permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be measured
at fair value. SFAS 159 will be effective for us on January 1, 2008. We are
currently evaluating the impact of adopting SFAS 159 on our financial position,
cash flows, and 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.
C. RELATED-PARTY
TRANSACTIONS:
On
October 13, 2006, the Company notified the board of directors of Crested that
the Company had established a Special Committee to evaluate: whether; if so
how;
at what price, or what other terms might be appropriate that the Company might
offer to acquire the 29.1% of common stock of Crested not owned by the Company
(the Company now owns 70.9% of Crested). The Special Committee is comprised
of
independent directors. The Special Committee retained Navigant Capital Advisors,
LLC as its financial advisor to provide an opinion on the fairness, to the
Company, of such offer as the Company may make to Crested.
Crested
also established a Special Committee of independent directors to determine:
if
an offer is made; whether the terms of such an offer by the Company (when and
if
made), would be fair to the Crested minority shareholders. Crested’s Special
Committee retained Neidiger Tucker Bruner Inc. as its financial advisor to
provide an opinion on the fairness, to the Crested minority
shareholders.
Following
extensive discussions between the two Special Committees, the Company’s Special
Committee proposed a merger of Crested into the Company by means of an offer
to
acquire the minority shares of Crested, based on an exchange ratio of one share
of common stock of the Company for every two shares of Crested common stock
not
held by the Company.
The
offer
also provided that: (i) the Company would vote in line with the vote of a
majority of the holders of the Crested minority shares; (ii) the Company may
decline to consummate the merger, even after approval by the holders of a
majority of the minority Crested shares, if the holders of more than 200,000
Crested shares perfect their rights to dissent from the merger under Colorado
law and (iii) Crested shares of common stock issuable under options held by
officers, directors, and employees of the Company would participate in the
offer
on the same exchange ratio basis as the Crested minority shareholders (the
number of Crested option shares would be determined by the extent to which
Crested’s market price exceeds the $1.71 option exercise price).
The
Crested Special Committee accepted the offer. Thereafter, the Special Committees
recommended to their respective full boards that the merger offer be approved.
On December 20, 2006, the full boards of directors of the Company and Crested
voted to approve the merger offer. On January 23, 2007, USE and Crested approved
and signed the Merger Agreement. Navigant Capital Advisors, LLC and Neidiger
Tucker Bruner Inc. have delivered opinions to the Company and Crested
respectively, to the effects that the exchange ratio is fair to the shareholders
of the Company and to the Crested minority shareholders.
-77-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
Consummation
of the merger is subject to execution of definitive documents; delivery to
the
Crested minority shareholders a proxy statement/prospectus (following
declaration of effectiveness by the SEC of a Form S-4 to be filed by the Company
with the SEC) for a special meeting of the Crested shareholders, to be held
during the second quarter of 2007; approval of the merger by the holders of
a
majority of the minority Crested shares, and satisfaction of customary
representations and warranties to be contained in the definitive documents.
The
board of directors of Crested is recommending that approval of the merger
agreement be given by the shareholders of Crested. The
Company will not seek shareholder approval of the merger.
D. USECC
JOINT VENTURE:
The
Company operates the Glen L. Larsen office complex; holds interests in various
mineral operations; and transacts all operating and payroll expenses through
a
joint venture with Crested, the USECC Joint Venture.
E. MARKETABLE
SECURITIES:
The
Company’s investments in available for sale securities consist of shares of
Uranium Power Corporation (“UPC’) and units of Enterra, at December 31, 2005,
and are reported at their fair values. Unrealized gains and losses are
accumulated as a separate component of shareholders’ equity and are reported as
comprehensive losses.
The
Company's restricted securities are collateral for various decommissioning,
reclamation and holding costs. These assets are included in assets held for
sale
on the accompanying consolidated balance sheet based on the impending Uranium
One transaction (See Note F). Investments are comprised of debt securities
issued by the U.S. Treasury that mature at varying times from three months
to
one year from the original purchase date. As of December 31, 2006 and 2005,
the
cost of debt securities was a reasonable approximation of fair market
value.
-78-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
|
Investments
in marketable securities consists of the following at December
31.
|
|||||||||||||
|
Trading
securities
|
|||||||||||||
| 2006 |
Market
Value
|
||||||||||||
|
Enterra
units
|
$
|
123,400
|
|||||||||||
|
Available-for-sale
|
|||||||||||||
|
|
Unrealized
|
||||||||||||
| 2006 |
Cost
|
Market
Value
|
Gain
|
||||||||||
|
UPC
shares
|
$
|
677,700
|
$
|
1,148,500
|
$
|
470,800
|
|||||||
|
Total
|
$
|
677,700
|
$
|
1,148,500
|
$
|
470,800
|
|||||||
|
Unrealized
|
|||||||||||||
| 2005 |
Cost
|
Market
Value
|
Loss
|
||||||||||
|
UPC
shares
|
$
|
337,800
|
$
|
251,700
|
$
|
(86,100
|
)
|
||||||
|
Enterra
units
|
$
|
89,000
|
$
|
77,000
|
$
|
(12,000
|
)
|
||||||
|
Total
|
$
|
426,800
|
$
|
328,700
|
$
|
(98,100
|
)
|
||||||
The
Company received $8,855,300 during 2006 from the sale of Enterra units, UPC
shares and Dynasty shares resulting in a realized loss of $867,100.
During the year ended December 31, 2005, the Company received $5,916,000 and
recognized a gain of $1,038,500 from the sale of Enterra units.
|
Restricted
|
|||||||
|
Amortized
|
Market
|
||||||
|
Cost
|
Value
|
||||||
|
2006
|
$
|
--
|
$
|
--
|
|||
|
2005
|
$
|
6,761,200
|
$
|
6,761,200
|
|||
|
Interest
income amounted to $132,400, $278,500 and $108,200 for the years
ended
December
31, 2006, 2005 and 2004, respectively.
|
|||||||
-79-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
In
2005,
the Company received 693,276 shares of Enterra Series D Common Stock as partial
consideration for the sale of RMG. These securities were restricted until May
31, 2006 and at that time were converted to marketable Enterra Units. During
the
year ended December 31, 2006, 682,345 of these units were sold. During the
year
ended December 31, 2005 the Company recognized a gain of $630,900 from the
valuation of a derivative associated with the conversion rights of these shares
of Enterra Series D common stock. During the year ended December 31, 2006 the
Company recorded a loss from the valuation of the derivative of $630,900 and
a
loss of $3,845,800 when the Enterra Series D common shares were converted to
shares of Enterra Energy Trust. Upon the disposal of the Enterra Energy Trust
common shares the Company recorded a loss of $867,100 and received cash proceeds
of $8,304,300.
F. MINERAL
CLAIMS TRANSACTIONS:
Lucky
Jack Molybdenum Properties
The
Company and Crested re-acquired the Lucky Jack Project (formerly the Mount
Emmons molybdenum property) located near Crested Butte, Colorado on February
28,
2006. The property was returned to the Company and Crested by Phelps Dodge
Corporation (“PD”) in accordance with a 1987 Amended Royalty Deed and Agreement
between the Company, Crested and Amax Inc. (“Amax”). The Lucky Jack Project
includes a total of 25 patented and approximately 520 unpatented mining claims,
which together approximate 5,400 acres, or over 8 square miles of mining claims.
Pursuant to a court order the Company and Crested paid PD $7,000,000, one half
each, for prior holding and operating costs of the property and water treatment
plant as well as litigation expenses when the properties were transferred from
PD to the Company and Crested.
Conveyance
of the property also included the transfer of ownership and operational
responsibility of the mine water treatment plant located on the properties.
The
water treatment permit issued under the Colorado Discharge Permit System
(“CDPS”) was assigned to the Company and Crested by the Colorado Department of
Health and Environment. Operating costs for the water treatment plant are
expected to approximate $1 million annually. The Company and Crested have hired
a contractor to operate the water treatment plant. The Company will also
evaluate the potential use of the water treatment plant in the milling
operations.
On
October 6, 2006, the Company, Crested and USMC on the one hand, and Kobex
Resources Ltd. (“KBX”) (a British Columbia company traded on the TSX Venture
Exchange under the symbol “KBX”), on the other hand, signed a letter agreement
(the “Letter Agreement”) providing KBX an option to acquire up to a 65% interest
in certain patented and unpatented claims held by the Company and Crested at
the
Lucky Jack molybdenum property (“Property”). The Letter Agreement was amended on
December 7, 2006, with an effective date of December 5, 2006.
The
total
cost to KBX over an estimated period of five years to exercise the full option
will be $50 million in option payments and property expenditures, including
the
costs to prepare a bankable feasibility study on the Property and with a cash
differential payment if this total is less than $50 million.
-80-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
The
Letter Agreement entitles KBX with an exclusive option (the “Option”) to
acquire, in two stages, up to an undivided 65% interest in the Property, by
paying all of the Option Payments to the Company and also paying for permitting,
engineering, exploring, operating (including water treatment plant expenses)
and
all other property-related costs and expenses (“Expenditures”), until a bankable
feasibility study is provided to the Company. Option Payments may be made in
cash or KBX common stock, at KBX’s election. The Expenditures will be paid in
cash. KBX also will have to pay an additional cash amount if the total of all
Option Payments and Expenditures is less than $50 million at the time a bankable
feasibility study is delivered to the Company (see below).
|
Date
or
|
Option
|
|||
|
Anniversary(1)
|
Payment
|
Expenditures
|
||
|
10
business days
|
||||
|
after
Effective Date(2)
|
$
750,000
|
-0-
|
||
|
By
first anniversary(3)
|
$500,000/1,200,000
|
$
3,500,000/4,200,000
|
||
|
By
second anniversary
|
$
500,000
|
$
5,000,000
|
||
|
By
third anniversary
|
$
500,000
|
$
5,000,000
|
||
|
By
fourth anniversary
|
$
500,000
|
$
2,500,000
|
||
|
By
fifth anniversary
|
$
500,000
|
|||
|
$
30,000,000(4)
|
||||
|
$
3,950,000
|
$
46,000,000
|
|
(1)
|
Anniversary
of Effective Date.
|
|
(2)
|
If
paid in KBX stock, 10 business days after Canadian regulatory and
stock
exchange approval which has not yet occurred.
|
|
(3)
|
Of
this amount, $700,000 is payable by the first anniversary of the
Effective
Date, either by KBX paying an additional like amount in Expenditures,
in
the first year; or increasing the first anniversary option payment
by a
like amount (payable in cash or KBX common stock); or a combination
of the
preceding.
|
|
(4)
|
Delivery
of a bankable feasibility study (“BFS”) on the Property. If the total
Option Payments and Expenditures and costs to prepare the BFS are
less
than $50 million, KBX will pay the Company the difference in cash.
If the
total is more than $50 million before the BFS is completed, the Company
and KBX each will pay 50% of the balance needed to complete the
BFS.
|
Except
for the first Expenditures of $3.5 million and the first Option Payment of
$750,000 (both of which must be paid by KBX), all other Option Payments and
Expenditures are at KBX’s discretion. However, if KBX fails to make any other
Option Payments and Expenditures by the due dates (and applicable grace periods,
the Letter Agreement (or definitive agreement, if any) will be terminated and
all rights and interests will revert to the Company.
-81-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
When
KBX
has paid $15 million in Expenditures, it will have earned a 15% interest in
the
Property. When all remaining option payments, and all of the expenditures over
$15 million, have been paid, KBX will have earned an additional 35% interest
(or
a 50% total interest). However, when the BFS is delivered, if the total of
all
option payments, expenditures, and BFS costs are less than $50 million, earning
this additional 35% interest also will be subject to KBX paying the Company
(in
cash) the difference between the actual Option payments and Expenditures paid
to
date, and $50 million.
The
Company and Crested each hold a 3% gross overriding royalty interest in the
property and this will be reserved for their separate benefit when the property
is transferred to KBX. If KBX earns a 15% interest in the property, the royalty
will be reduced to 2.55% each; if KBX earns a 50% interest, the royalty will
be
reduced to 1.5% each. For one year after the final reduction, KBX will have
the
option to terminate 1% (.5% of each 1.5%) by paying $10 million in cash or
KBX
common stock (at the Company’s sole discretion), with one-half paid to each the
Company and Crested.
At
such
time as KBX has earned a 50% interest, KBX will have the right to form a joint
venture with the Company for the property on a 50%-50% basis. Alternatively,
within four months of earning a 50% interest, KBX may offer the Company a one
time only election to (i) elect to remain in the 50%/50% joint venture; or
(ii)
to allow KBX to acquire an additional 15% interest in the property for a total
of 65% interest in the property (the “65% Election”), whereby the Company would
revert to a 35% interest (which change in ownership will require KBX to have
arranged all future property financing on optimal terms; or (iii) have KBX
acquire all of the Company’s interest for KBX common stock on an agreed upon
valuation basis (but the KBX shares issued cannot be less than 50% for KBX
and
not more than 50% for the Company’s interest).
Until
KBX
earns its 50% interest, KBX will manage all programs on the property, but a
management committee (with two representatives from each of KBX and the Company)
will approve all programs and budgets for Expenditures. If there is a tie vote,
the KBX representative would cast the deciding vote. A technical committee
will
also be formed to operate the venture; each of KBX and the Company will have
two
representatives. The Technical Committee will report to the management
committee.
KBX
may
terminate the Letter Agreement or the formal agreement at any time, subject
to
KBX paying the Company the initial $1.45 million Option Payment (in cash or
KBX
stock), and KBX having paid the minimum initial $3.5 million of Expenditures.
Further, if and to the extent the initial minimum $1.45 million Option Payment
and $3.5 million in Expenditures have not been met, termination by KBX will
be
subject to its paying to the Company $700,000 in cash or KBX stock and the
difference between $4.2 million and the total Expenditures actually made by
the
date of termination.
If
KBX
pays a broker or finder’s fee in connection with the transaction, the Company
will reimburse KBX up to 50% of the fee (but the reimbursable amount will not
exceed Cdn $400,000), in cash or common stock of the Company (at the Company’s
election), in four equal annual installments. The reimbursement obligation
would
terminate if the Letter Agreement or the formal agreement is terminated before
it is fully paid.
-82-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
Contract
to Sell Uranium Assets to Uranium One - Uranium
On
July
10, 2006, the Company and Crested signed an Exclusivity Agreement with sxr
Uranium One Inc. (“Uranium One” or “SXR”), which is headquartered in Toronto,
Canada with offices in South Africa and Australia (TSE and JSE “SXR”). Upon
signing the Exclusivity Agreement, the Term Sheet (signed by Uranium One and
by
the Company and Crested on June 22, 2006) became effective. The Term Sheet
sets
forth the indicative terms of a proposed sale of the majority of the Company
and
Crested’s uranium assets to Uranium One.
Under
the
terms of the Exclusivity Agreement, Uranium One paid to the Company and Crested
$750,000 cash (nonrefundable, except for material breach of the Exclusivity
Agreement) for the exclusive right to purchase their uranium assets, including
the Shootaring Canyon uranium mill in southeast Utah (and all geological
libraries and other intellectual property related to the acquired assets and
the
mill), for a period of up to 270 days (an initial six month period, plus an
optional three month extension) during which time Uranium One was to conduct
their due diligence. (See Subsequent Event at Note N) The $750,000 payment
from
Uranium One is reported as a refundable deposit as of December 31,
2006.
UPC
Purchase and Sale Agreement
As
of
January 31, 2007, the Company, Crested and UPC, signed an Amendment to
Agreements (filed as an exhibit to this Report) to allow the Company and Crested
to transfer to Uranium One all of their rights, responsibilities and obligations
under the Purchase and Sale Agreement, and the Mining Venture Agreement, which
relate to uranium properties. In the Amendment to Agreements, the Company and
Crested relinquished all their rights to the Green River South property in
favor
of UPC, and those specific rights therefore will be excluded from the transfer.
All other rights will be transferred to Uranium One when the APA is closed.
The
following summarizes the agreements with UPC which are the subject of the
Amendment to Agreements.
On
December 8, 2004, the Company and Crested 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 “UCP-V”) for the sale
to UPC of an undivided 50% interest in the Sheep Mountain properties located
in
Wyoming.
The
Agreement was amended on January 13, 2006. A summary of certain provisions
follows: The purchase price for the properties is $7,050,000 plus 4 million
shares of UPC common stock. During the year ended December 31, 2006, UPC paid
$2,100,000 and delivered 1,500,000 shares of their stock to the Company. At
December 31, 2006, UPC had therefore, on a cumulative basis, paid the Company
$2,950,000 and delivered 2.5 million UPC shares to the Company. An additional
$4.1 million and 1.5 million shares are required to pay the full purchase price
as follows: $1.0 million cash on April 29, 2007 and $1.5 million cash on October
29, 2007 (provided that UPC is required to pay 50% of all money it raises after
January 13, 2006, which would be applied against the two cash payments); and
two
additional payments each of $800,000 cash and 750,000 UPC shares on June 29,
2007 and December 29, 2007, respectively (total $1,600,000 cash and 1,500,000
UPC shares).
UPC
will
contribute up to $10,000,000 to the joint venture (at $500,000 for each of
20
exploration projects). The Company and Crested on the one hand and UPC on the
other will then be responsible for 50% of costs on each project in excess of
$500,000. USECC and UPC will also 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.
-83-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
UPC
may
terminate the agreement before closing, in which event UPC (i) would forfeit
all
payments made to termination date; (ii) lose all of its interest in the
properties to be contributed by the Company under the agreement; (iii) lose
all
rights to additional properties acquired in the joint venture as well as forfeit
all cash contributions to the joint venture, and (iv) be relieved of its share
of reclamation liabilities existing at December 8, 2004.
If
the
Uranium One contract is not closed, then closing of the UPC Purchase and Sale
Agreement is required on or before December 29, 2007, with UPC’s last payment of
the purchase price. At the closing, UPC will contribute its 50% interest in
the
properties, and the Company and Crested will contribute their aggregate 50%
interest in the properties, to the joint venture, wherein UPC and USECC will
each hold a 50% interest. If the installments are not timely paid, UPC will
forfeit all of the 50% interest it is to earn in the properties and the joint
venture to be formed.
· UPC
Mining Venture Agreement
As
of
April 11, 2005, the Company and Crested signed a Mining Venture Agreement with
UPC 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, and acquire, explore and develop additional uranium properties.
An
area of mutual interest (“AMI”) was revised by the January 31, 2007 Amendment to
Agreements and generally covers uranium properties within one mile of the
properties subject to the joint venture.
In
2005 -
2006, the Company, Crested and UPC added the Burro Canyon project (in Colorado),
the Breccia Pipes project (in Arizona) and the Green River North and South
(Utah) projects to their joint venture under the Mining Venture Agreement.
Payments by UPC related to these additional uranium properties are separate
from
the payments required for UPC to acquire its 50% interest in the Sheep Mountain
properties. UPC’s ownership of the 50% interest in the Burro Canyon and Breccia
Pipes project is subject to UPC’s timely completion of all its payment
obligations under the Agreement.
In
2006,
the Company, Crested and UPC signed an agreement for the Company to earn
one-half of UPC’s rights to earn up to a 85% interest in the Green River South
project (also known as the Sahara Property) held by Uranium Group (“UG”). For
its one-half interest, the Company and Crested would pay $1,475,000 in option
payments and work on the properties, plus pay to UPC (in cash or in USE stock)
an amount equal to one-half of the lesser of the value of the UPC stock issued
to UG when issued, and Cdn$1.00 per share. The project would be held and
developed in the Mining Venture Agreement
If
the
contract with Uranium One is closed, the Company will assign to UPC all of
the
Company’s rights in the Green River South project, and receive from Uranium One
about $441,000 for the Company’s expenditures on the project from July 10, 2006
to February 22, 2007. Uranium One would have no interest in the
project. If
the
contract is not closed, the Company may or may not continue to participate
in
the project.
-84-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
Plateau
Resources Limited
During
fiscal 1994, the Company 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,
the Shootaring Canyon Uranium Mill (“Shootaring Mill”) and support facilities
and certain other real estate assets in southeastern Utah. The Company paid
nominal cash consideration for the Plateau stock and agreed to assume all
environmental liabilities and reclamation bonding obligations. At December
31,
2006, Plateau has a cash security in the amount of approximately $6.8 million
to
cover reclamation and annual licensing of the properties (see Note K). The
Shootaring mill is subject to the Uranium One asset purchase
agreement.
During
calendar 2003 the Company sold its interest in the commercial real estate assets
owned by Plateau to a third party. On February 27, 2006 Plateau and the Company
reacquired these assets through a foreclosure proceeding. The assets consist
of
a motel, restaurant, C-store, lounge, boat storage and repair facilities, a
mobile home park and home building sites and homes.
On
April
12, 2006, the Company and Plateau signed of a contract with ARAMARK Sports
and
Entertainment Services, Inc., a subsidiary of ARAMARK (NYSE: “RMK”), for the
management and operation of all commercial services. The initial term of the
contract is for three years, with one three-year extension option to be
exercised upon the mutual agreement of the Company and ARAMARK. Under the terms
of the contract, ARAMARK will manage all of the commercial real estate assets.
ARAMARK will also add the assets to its nationwide reservation center and
website. Per terms of the agreement, ARAMARK will receive a management fee
and
will invest in a marketing program designed to maximize future
revenues.
Sutter
Gold Mining Inc.
Sutter
Gold Mining Company (“SGMC”) was established in 1991 to conduct operations on
mining leases and to produce gold from the Lincoln Project in
California.
SGMC
has
not generated any significant revenue. Impairment was taken in prior years
against all the prior exploration and development costs due to depressed market
prices for gold. 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.
On
December 29, 2004, a majority of SGMC was acquired by SGMI ("SGMI") (formerly
Globemin Resources, Inc.) of Vancouver, B.C. SGMI is traded on the TSX Venture
Exchange. Approximately 90% of SGMC's common stock was exchanged for 40,190,647
shares of SGMI common stock. At December 31, 2006, the Company owned and
controlled 49.6% of the common stock of SGMI.
Although
no economic reserves have been delineated on the property, the spot market
price
for gold has attained and maintained levels that management believes warrants
further exploration that will allow SGMI to produce gold from the property
on an
economic basis. In 2006, SGMI raised $3,171,500 of net proceeds from two private
placements of its common stock. SGMI also received $242,300 from the exercise
of
options and warrants. Proceeds have funded general and administrative
expenses, a combined underground and surface diamond drill program and will
also
be used to prepare a pre-feasibility study on the property.
-85-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
Rocky
Mountain Gas, Inc.
In
1999,
the Company and Crested organized Rocky Mountain Gas, Inc. (“RMG”) to enter into
the coalbed methane gas/natural gas business. RMG was engaged in the acquisition
of coalbed methane gas properties and the future exploration, development and
production of methane gas from those properties.
On
June
1, 2005, Enterra US Acquisitions Inc. (“Acquisitions”) (a privately-held
Washington corporation organized by Enterra Energy Trust (“Enterra”) acquired
all the outstanding stock of RMG, for which Enterra paid $500,000 cash and
issued $5,234,000 of Enterra units (the "Enterra Initial Units"), net of the
$266,000 adjustment for the purchase of overriding royalty interests (effected
May 1, 2005); and Acquisitions issued $14,000,000 of Class D shares of
Acquisitions. The Enterra Initial Units and the Class D shares were issued
pro
rata to the RMG shareholders. USE’s and Crested's participation in the
consideration received was approximately $18,341,600. USE’s consolidated
subsidiary, Yellowstone Fuels, Inc. (“YSFI”) also received approximately
$296,700.
The
Enterra Initial Units received by the Company and Crested were sold during
the
quarter ended September 30, 2005 resulting in a gain of $1,038,500. The carrying
value of the Initial Units received by YSFC are reflected on the Company’s
consolidated balance sheet at December 31, 2005 was $77,100 in marketable
securities and the Class D shares of Acquisitions received by the Company,
Crested and YSFI are carried as $13,803,200 as investments in non-affiliates.
The Company and its subsidiaries converted the Enterra Acquisitions Class D
shares into shares of Enterra Energy Trust which were then saleable on the
Toronto Stock Exchange - Vancouver (“TSX-V”) on a one for one basis during 2006.
The Company and Crested sold 682,345 units during the period ended December
31,
2006 for which they received $8,304,300 in cash proceeds. At December 31, 2006
the Company retained an investment of $123,400 on a consolidated basis as a
result of YSFI not selling any of the shares it received.
For
further discussion of the sale of RMG please see Note L, Discontinued
Operations.
Pinnacle
On
June
23, 2003, a Subscription and Contribution Agreement was executed by RMG, CCBM,
a
wholly owned subsidiary of Carrizo Oil and Gas, Inc. and 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”). CFSB contributed $5.0 million for 25% of the common
stock of Pinnacle and agreed under certain terms to fund additional acquisition
and development programs.
-86-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
The
Pinnacle shares (which had been owned by RMG, but were not sold as part of
the
2005 Enterra transaction) were transferred to the Company and Crested in 2005.
The transaction with Enterra required the Company and Crested to pay Enterra
if
the Pinnacle shares were later sold for more than $10 million; the payment
(allowed to be by either cash or the Company’s common stock) would be the
difference between $10 million and proceeds of sale (but not more than $2
million). In September 2006, the Company and Crested sold their Pinnacle shares
in a private transaction for $13.8 million cash, and recorded a gain on the
transaction of $10,815,600. As a result of the sale of the Pinnacle shares,
the
Company and Crested became obligated to pay Enterra $2.0 million in either
cash
or common stock of the Company. In 2006, the Company and Crested paid the
obligation to Enterra with 506,395 shares (valued at $3.95 per share at the
time) of the Company’s common stock (with a market value of $2 million) owned by
Crested. Crested recorded a payment of $700,000 (35% of the $2.0 million,
representing its share of RMG before it was sold), and a credit on its debt
to
the Company in the amount of $1.3 million.
Crested
also returned 6,030 additional shares it owned to the Company for which it
received an additional credit of $23,800 against its debt to the
Company.
G. DEBT
As
of
December 31, 2006 and 2005 the Company and its subsidiaries had current and
long
term liabilities associated with deferred rents, leases, self funding of
employee health insurance, accrued holding costs of uranium properties and
accrued retirement costs.
|
Other
current liabilities:
|
|||||||
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Employee
health insurance self funding
|
$
|
60,000
|
$
|
101,200
|
|||
|
Deferred
rent
|
28,200
|
25,500
|
|||||
|
Accrued
expenses
|
21,800
|
36,100
|
|||||
|
Mineral
property lease
|
67,000
|
69,700
|
|||||
|
$
|
177,000
|
$
|
232,500
|
||||
|
Other
long term liabilities:
|
|||||||
|
Accrued
retirement costs
|
$
|
462,700
|
$
|
43,300
|
|||
|
Holding
costs of uranium property
|
--
|
1,357,200
|
|||||
|
$
|
462,700
|
$
|
1,400,500
|
||||
|
The
Company has a $500,000 line of credit from a commercial bank. The
line of
credit has a variable interest rate (9.25% as of December 31, 2006).
The
weighted average interest rate for the year ended December 31, 2006
was
8.96%. As of December 31, 2006, none of the line of credit had been
borrowed. The line of credit is collateralized by certain real
property.
|
|||||||
-87-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
During
the quarter ended June 30, 2006, the Company entered into a three year financing
agreement with Cornell Capital Partners, L.P., (“Cornell”), to establish a $50
million equity line of credit (the “Standby Equity Distribution Agreement or
SEDA”). The Company issued 69,930 shares of its common stock and 100,000
warrants with an exercise price of $7.15 per share expiring in June 2009. As
a
result of the issuance of these shares and warrants the Company recorded a
$726,600 non cash charge to earnings. Due to the Company’s sale of the Enterra
units and Pinnacle shares, management of the Company determined that this type
of financing was no longer needed. Effective October 31, 2006, the SEDA with
Cornell was terminated.
|
Long-term
Debt
|
|||||||
|
The
components of long-term debt as of December 31, 2006, and 2005
are as
follows:
|
|||||||
|
December
31,
|
|||||||
|
2006
|
|
|
2005
|
||||
|
USECC
installment notes - collateralized
|
|||||||
|
by
equipment; interest at 5.25%
|
|||||||
|
to
9.0%, matures in 2007-2011
|
$
|
1,227,900
|
$
|
969,000
|
|||
|
SGMC
installment notes - collateralized
|
|||||||
|
by
certain properties, interest at
|
|||||||
|
8.0%
maturity 2009
|
--
|
37,900
|
|||||
|
PLATEAU
installment note - collateralized
|
|||||||
|
by
property, interest at 6.0%
|
4,200
|
29,900
|
|||||
|
1,232,100
|
1,036,800
|
||||||
|
Less
current portion
|
(937,200
|
)
|
(156,500
|
)
|
|||
|
$
|
294,900
|
$
|
880,300
|
||||
|
Principal
requirements on long-term debt are $937,200, $88,700, $87,400,
$89,000
and
$29,800 for the years ended December 31, 2007 through 2011,
respectively.
|
|||||||
-88-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004 (continued)
H. INCOME
TAXES:
The
components of deferred taxes as of December 31, 2006 and 2005 are as
follows:
|
December
31,
|
|||||||
|
|
|
2006
|
|
2005
|
|||
|
Deferred
tax assets:
|
|||||||
|
Deferred
compensation
|
$
|
589,000
|
$
|
60,200
|
|||
|
Accrued
reclamation
|
879,100
|
782,900
|
|||||
|
Allowances
for bad debts
|
-
|
11,000
|
|||||
|
Tax
basis in excess of boon (Pinnacle Stock)
|
-
|
1,799,400
|
|||||
|
Net
operating loss carry forwards
|
14,525,100
|
4,530,200
|
|||||
|
Tax
credits (AMT credit carryover)
|
44,200
|
135,000
|
|||||
|
Non-deductible
reserves and other
|
2,900
|
--
|
|||||
|
Total
deferred tax assets
|
16,040,300
|
7,318,700
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Book
basis in excess of tax basis
|
(179,900
|
)
|
(214,500
|
)
|
|||
|
Accrued
reclamation
|
(926,400
|
)
|
(1,083,600
|
)
|
|||
|
Non-deductible
reserves and other
|
(2,200
|
)
|
--
|
||||
|
Total
deferred tax liabilities
|
(1,108,500
|
)
|
(1,298,100
|
)
|
|||
|
Net
deferred tax assets
|
14,931,800
|
6,020,600
|
|||||
|
Valuation
allowance
|
-
|
(6,020,600
|
)
|
||||
|
Deferred
tax assets net of valuation allowance
|
$
|
14,931,800
|
$
|
--
|
|||
A
valuation allowance for deferred tax assets is required when it is more likely
than not that some portion or all of the deferred tax assets will or will not
be
realized. Pursuant to paragraph 103 of Statement of Financial Accounting
Standards No. 109 it is more likely than not that the net operating loss of
the
Company and the other deferred tax assets will be realized as a result of the
closing of the Uranium One Asset Purchase Agreement. No valuation allowance
is
therefore provided at December 31, 2006 as management of the Company believes
that the deferred tax assets will be utilized in future years.
During
the year ended December 31, 2006, a long term deferred tax asset of $610,200
and
a current deferred tax asset of $14,321,600, net of a deferred tax
liability of $164,800 related to marketable securities, were recorded. The
Company therefore recognized a net tax deferred benefit of $15,096,600.
-89-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
The
income tax provision is different from the amounts computed by applying the
statutory federal income tax rate to income from continuing operations before
taxes. The reasons for these differences are as follows:
|
December
31,
|
||||||||||
|
2006
|
|
2005
|
|
2004
|
||||||
|
Expected
federal income tax expense (benefit)
|
$
|
(4,997,800
|
)
|
$
|
(1,967,100
|
)
|
$
|
(2,133,800
|
)
|
|
|
Dividends
received deduction
|
--
|
(1,700,000
|
)
|
--
|
||||||
|
Net
operating loss utilized
|
--
|
--
|
(1,429,700
|
)
|
||||||
|
Interest
expense adjustment
|
--
|
1,190,400
|
--
|
|||||||
|
Prior
year true-up & rate change
|
(1,214,600
|
)
|
--
|
--
|
||||||
| Permanent differences | 1,225,100 | -- | -- | |||||||
|
Inclusion
of Crested's prior year NOL and AMT credit
|
(4,323,700
|
)
|
--
|
--
|
||||||
|
Increase
(decrease) in valuation allowance
|
(6,020,600
|
)
|
2,476,700
|
3,563,500
|
||||||
|
Deferred
income tax benefit
|
$ |
(15,331,600
|
)
|
$ |
--
|
$ |
--
|
|||
There
were no taxes payable at December 31, 2006 and 2005.
Crested's
NOL and AMT credits were erroneously excluded from the 2005 and 2004
disclosure. The result of that exclusion had no effect on the net deferred
income tax assets or liabilities in those years.
At
December 31, 2006, the Company (together with Crested Corp.) had available,
for
federal income tax purposes, net operating loss carry forwards (“NOL”) of
approximately $41,500,300 which will expire from 2008 to 2026.
The
Internal Revenue Service has audited the Company’s and subsidiaries tax returns
through the year ended May 31, 2000. The Company’s income tax liabilities are
settled through fiscal 2000.
I. SEGMENTS
AND MAJOR CUSTOMERS:
During
the years ended December 31, 2004 and 2003 the Company had business activities
in coalbed methane gas property acquisition, exploration and production. The
Company also had a reportable industry segment in commercial activities through
motel, real estate and airport operations. The Company sold RMG on June 1,
2005
which resulted in only one business segment, commercial activities which during
the year ended December 31, 2006 were all being managed by third parties and
the
Company only recognized management fee revenues. No presentation of business
segments is therefore made at December 31, 2006 as all coalbed methane gas
operations are accounted for as discontinued operations.
-90-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004 (continued)
J. SHAREHOLDERS’
EQUITY:
Treasury
Shares
The
Company had 999,174 shares of treasury shares as of December 31, 2005 recorded
at its cost of $2,892,900. During the twelve months ended December 31, 2006
506,329 of these shares were used to pay a $2,000,000 obligation to Enterra,
payable in either cash or shares of the Company’s common stock, which arose as a
condition of the sale of the Pinnacle shares. The effect of this obligation
was
a reduction of the realized gain on the sale of Pinnacle. The Company also
accepted 5,000 shares of common stock from one of its officers as satisfaction,
as per the terms of a pre-existing note, valued at $30,600. The Company as
a
result of these transactions had 497,845 treasury shares valued at $923,500
at
December 31, 2006.
Sale
of Sutter Gold Shares
During
the second quarter of 2006, SGMI raised $3,171,500 of net proceeds from two
private placements of its common stock. SGMI also received and additional
$242,300 from the exercise of options and warrants. Prior to the private
placements the Company owned a consolidated 65.4% interest in SGMI. As of
December 31, 2006 the Company owned 49.6% of the outstanding shares of SGMI.
Debt payable by SGMI to the Company and its affiliates totaled $2,025,700 at
December 31, 2006. Subsequent to December 31, 2006 the Company and SGMI agreed
to settle this debt by the acceptance of additional shares of SGMI. Please
see
Note N.
Stock
Option Plans
The
Board
of Directors adopted the U.S. Energy Corp. 1989 Stock Option Plan for the
benefit of USE’s key employees. The Option Plan, as amended and renamed the 1998
Incentive Stock Option Plan (“1998 ISOP”), reserved 3,250,000 shares of the
Company’s $.01 par value common stock for issuance under the 1998 ISOP. Options
which expired without exercise were available for reissue until the 1998 ISOP
was replaced by the 2001 ISOP.
-91-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
During
the years ended December 31, 2006, 2005 and 2004 the following activity occurred
under the 1998 ISOP:
|
Year
ended December 31,
|
||||||||||
|
2006
|
|
2005
|
|
2004
|
||||||
|
Grants
|
||||||||||
|
Qualified
|
--
|
--
|
--
|
|||||||
|
Non-Qualified
|
--
|
--
|
--
|
|||||||
|
|
--
|
--
|
--
|
|||||||
|
Price
of Grants
|
||||||||||
|
High
|
--
|
--
|
--
|
|||||||
|
Low
|
--
|
--
|
--
|
|||||||
|
Exercised
|
||||||||||
|
Qualified
|
83,529
|
142,907
|
--
|
|||||||
|
Non-Qualified
|
20,109
|
55,234
|
--
|
|||||||
|
103,638
|
198,141
|
--
|
||||||||
|
Total
Cash Received
|
$
|
--
|
(1) |
$
|
132,600
|
(2) |
$
|
--
|
||
|
Forfeitures/Cancellations
|
||||||||||
|
Qualified
|
--
|
--
|
--
|
|||||||
|
Non-Qualified
|
--
|
--
|
--
|
|||||||
|
|
--
|
--
|
--
|
|||||||
|
(1)
All options were exercised by the exchange of 46,863 shares valued
at
$254,600.
|
||||||||||
|
(2)
In addition to the cash exercise of options shares valued at $389,600
were
exchanged for the exercise of 142,907 of the total shares
exercised.
|
||||||||||
In
December 2001, the Board of Directors adopted (and the shareholders approved)
the U.S. Energy Corp. 2001 Incentive Stock Option Plan (the "2001 ISOP") for
the
benefit of USE's key employees. The 2001 ISOP (amended in 2004 and approved
by
the shareholders) reserves for issuance shares of the Company’s common stock
equal to 20% of the Company’s shares of common stock issued and outstanding at
any time. The 2001 ISOP has a term of 10 years.
-92-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
During
the years ended December 31, 2006, 2005 and 2004 the following activity occurred
under the 2001 ISOP:
|
Year
ended December 31,
|
||||||||||
|
2006
|
|
2005
|
|
2004
|
||||||
|
Grants
|
||||||||||
|
Qualified
|
25,000
|
13,160
|
1,272,000
|
|||||||
|
Non-Qualified
|
--
|
686,840
|
--
|
|||||||
|
25,000
|
700,000
|
1,272,000
|
||||||||
|
Price
ofGrants
|
||||||||||
|
High
|
$
|
4.09
|
$
|
3.86
|
$
|
2.46
|
||||
|
Low
|
$
|
4.09
|
$
|
3.86
|
$
|
2.46
|
||||
|
Exercised
|
||||||||||
|
Qualified
|
169,393
|
225,426
|
--
|
|||||||
|
Non-Qualified
|
79,865
|
79,303
|
--
|
|||||||
|
249,258
|
304,729
|
--
|
||||||||
|
Total
Cash Received
|
$
|
198,100
|
(1) |
$
|
173,700
|
(2) |
$
|
--
|
||
|
Forfeitures/Cancellations
|
||||||||||
|
Qualified
|
--
|
65,000
|
12,000
|
|||||||
|
Non-Qualified
|
--
|
--
|
--
|
|||||||
|
|
--
|
65,000
|
12,000
|
|||||||
|
(1)
In addition to the cash exercise of options there were 132,874
shares
valued at $687,200 exchanged for exercises of 177,952
options.
|
||||||||||
|
(2)
In addition to the cash exercise of options shares valued at $557,300
were
exchanged for the exercise of 240,404 of the total shares
exercised.
|
||||||||||
-93-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
The
2001
ISOP replaces the 1998 ISOP, however, options granted under the 1998 ISOP remain
exercisable until their expiration date under the terms of that
Plan.
The
following table represents the activity in employee options for the periods
covered by the Annual Report for the year ended December 31, 2006 that are
not
in employee stock option plans:
|
Year
ended December 31,
|
||||||||||
|
2006
|
|
2005
|
|
2004
|
||||||
|
Grants
|
||||||||||
|
Qualified
|
--
|
--
|
--
|
|||||||
|
Non-Qualified
|
--
|
--
|
--
|
|||||||
|
|
--
|
--
|
--
|
|||||||
|
Price
of Grants
|
||||||||||
|
High
|
$
|
--
|
$
|
--
|
$
|
--
|
||||
|
Low
|
$
|
--
|
$
|
--
|
$
|
--
|
||||
|
Exercised
|
||||||||||
|
Qualified
|
--
|
--
|
--
|
|||||||
|
Non-Qualified
|
--
|
--
|
--
|
|||||||
|
|
--
|
--
|
--
|
|||||||
|
Total
Cash Received
|
$
|
--
|
$
|
--
|
$
|
--
|
||||
|
Forfeitures/Cancellations
|
||||||||||
|
Qualified
|
--
|
--
|
--
|
|||||||
|
Non-Qualified
|
--
|
--
|
10,000
|
|||||||
|
|
--
|
--
|
10,000
|
|||||||
-94-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
A
summary
of the Employee Stock Option Plans activity in all plans for the year ended
December 31, 2006, 2005 and 2004 is as follows:
|
Year
ended December 31,
|
|||||||||||||||||||
|
2006
|
|
2005
|
|
2004
|
|||||||||||||||
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
||
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding
at beginning
|
|||||||||||||||||||
|
of
the period
|
4,255,776
|
$
|
2.88
|
4,123,646
|
$
|
2.66
|
2,873,646
|
$
|
2.74
|
||||||||||
|
Granted
|
25,000
|
$
|
4.09
|
700,000
|
$
|
3.86
|
1,272,000
|
$
|
2.46
|
||||||||||
|
Forfeited
|
--
|
$
|
--
|
(65,000
|
)
|
$
|
2.46
|
(22,000
|
)
|
$
|
2.66
|
||||||||
|
Exercised
|
(352,896
|
)
|
$
|
2.51
|
(502,870
|
)
|
$
|
2.50
|
--
|
--
|
|||||||||
|
Outstanding
at period end
|
3,927,880
|
$
|
2.92
|
4,255,776
|
$
|
2.88
|
4,123,646
|
$
|
2.66
|
||||||||||
|
Exercisable
at period end
|
3,902,880
|
$
|
2.91
|
4,017,776
|
$
|
2.90
|
2,863,646
|
$
|
2.74
|
||||||||||
|
Weighted
average fair
|
|||||||||||||||||||
|
value
of options
|
|||||||||||||||||||
|
granted
during
|
|||||||||||||||||||
|
the
period
|
$
|
3.38
|
$
|
3.64
|
$
|
1.66
|
|||||||||||||
The
exercise of 352,896 options resulted in the net issuance of 220,022 shares.
The
options were exercised due to the payment of cash for 71,307 shares and cashless
exercise of 281,589 options as a result of the cancellation of 132,874
shares.
No
expense was recognized as a result of the issuance of 25,000 options during
2006
as the options vest over five years and the grant of the options was late in
the
fourth quarter of 2006 so any compensation expense is immaterial. Over the
life
of these options, seven years, the Company will recognize $84,500 in
compensation expense. The option expense will be recognized over the five year
vest period based on the Black Scholes model which utilizes anticipated
forfeiture of Company options as well as volatility in the market price of
the
Company’s common stock.
The
following table summarized information about employee stock options outstanding
and exercisable at December 31, 2006:
-95-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
|
|
|
Weighted
|
|
|
||||||||||||
|
|
Options
|
|
average
|
|
Weighted
|
|
Options
|
|
Weighted
|
|
||||||
|
|
|
outstanding
at
|
|
remaining
|
|
average
|
|
exercisable
at
|
|
average
|
||||||
|
Grant
Price
|
December
31,
|
|
contractual
|
|
exercise
|
|
December
31,
|
|
exercise
|
|||||||
|
Range
|
2006
|
|
life
in years
|
|
price
|
|
2006
|
|
price
|
|||||||
|
$2.00
|
230,981
|
1.74
|
$
|
2.00
|
230,981
|
$
|
2.00
|
|||||||||
|
$2.01
- $2.25
|
415,266
|
4.93
|
$
|
2.25
|
415,266
|
$
|
2.25
|
|||||||||
|
$2.26
- $2.40
|
784,540
|
4.02
|
$
|
2.40
|
784,540
|
$
|
2.40
|
|||||||||
|
$2.41
- $2.46
|
963,051
|
7.50
|
$
|
2.46
|
963,051
|
$
|
2.46
|
|||||||||
|
$2.47
- $2.88
|
147,346
|
1.74
|
$
|
2.88
|
147,346
|
$
|
2.88
|
|||||||||
|
$2.89
- $3.86
|
683,768
|
8.78
|
$
|
3.86
|
683,768
|
$
|
3.86
|
|||||||||
|
$3.87
- $3.90
|
677,928
|
4.93
|
$
|
3.90
|
677,928
|
$
|
3.90
|
|||||||||
|
$3.91
- $4.09
|
25,000
|
9.75
|
$
|
4.09
|
--
|
$
|
--
|
|||||||||
|
|
3,927,880
|
5.77
|
$
|
2.92
|
3,902,880
|
$
|
2.91
|
|||||||||
The
following table sets forth the number of options available for grant as well
as
the intrinsic value of the options outstanding and exercisable:
|
2006
|
|
2005
|
|
2004
|
||||||
|
Available
for future grant
|
1,166,905
|
775,756
|
387,247
|
|||||||
|
Intrinsic
value of option exercised
|
$
|
885,500
|
$
|
1,255,200
|
$
|
-
|
||||
|
Aggregate
intrinsic value of options outstanding
|
$
|
8,378,300
|
$
|
6,399,800
|
$
|
1,916,900
|
||||
|
Aggregate
intrinsic value of options exercisable
|
$
|
8,354,300
|
$
|
5,942,800
|
$
|
1,280,900
|
||||
-96-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
Employee
Stock Ownership Plan
The
Board
of Directors of the Company adopted the U.S. Energy Corp. 1989 Employee Stock
Ownership Plan ("ESOP") in 1989, for the benefit of all the Company’s employees.
Employees become eligible to participate in the ESOP after one year of service
which must consist of at least 1,000 hours worked. After the employee becomes
a
participant in the plan he or she must have a minimum of 1,000 hours of service
in each plan year to be considered for allocations of funding from the Company.
Employees become 20% vested after three years of service and increase their
vesting by 20% each year thereafter until such time as they are fully vested
after eight years of service. An employee’s total compensation paid, which is
subject to federal income tax, up to an annual limit of $220,000, $210,000
and
$201,000 for the years ended December 31, 2006, 2005 and 2004, respectively
is
the basis for computing how much of the total annual funding is contributed
into
his or her personal account. An employee’s compensation divided by the total
compensation paid to all plan participants is the percentage that each
participant receives on an annual basis. The Company funds 10% of all eligible
compensation annually in the form of common stock and may fund up to an
additional 15% to the plan in common stock. As of December 31, 2006, all shares
of the Company’s stock that have been contributed to the ESOP have been
allocated. The estimated fair value of shares that are not vested is
approximately $196,100.
During
the year ended December 31, 2006 the Board of Directors of the Company approved
a contribution of 70,756 shares to the ESOP at the price of $4.98 for a total
expense of $352,300. This compares to contributions to the ESOP during the
year
ended December 31, 2005 and 2004 of 56,494 and 70,439 shares to the ESOP at
prices of $4.65 and $2.96 per share, respectively. The Company has expensed
$352,300 $262,600 and $208,500 during the years ended December 31, 2006, 2005
and 2004 respectively related to these contributions.
During
prior years the Company loaned the ESOP $1,014,300 to purchase 125,000 shares
from the Company and 38,550 shares on the open market. The Company paid the
ESOP
2,350 shares as dividends on the shares the ESOP had purchased. During the
year
ended May 31, 1996, 10,089 of these shares were used to fund the Company's
annual funding commitment and reduce the loan to the Company by $87,300. During
a previous year the loans were also adjusted by $436,500 to reflect their value
at the time. The loans at December 31, 2006 are reflected as unallocated ESOP
contribution of $490,500 in the equity section of the accompanying Consolidated
Balance Sheets and are secured by 155,811 unallocated shares purchased under
the
loan.
-97-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
Warrants
to Others
As
of
December 31, 2006, there were 1,821,323 warrants outstanding to purchase shares
of the Company's common stock. The Company values these warrants using the
Black-Scholes option pricing model and expenses that value over various terms
based on the nature of the award. Activity for the periods ended December 31,
2006 for warrants is represented in the following table:
|
Year
ended December 31,
|
|||||||||||||||||||
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
||||||||
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
||||||
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
||||||
|
|
|
Warrants
|
|
Price
|
|
Warrants
|
|
Price
|
|
Warrants
|
|
Price
|
|||||||
|
Outstanding
at beginning
|
|||||||||||||||||||
|
of
the period
|
1,672,326
|
3.44
|
1,505,174
|
$
|
3.35
|
907,209
|
$
|
3.51
|
|||||||||||
|
Granted
|
425,012
|
4.39
|
1,396,195
|
$
|
3.70
|
868,465
|
2.87
|
||||||||||||
|
Forfeited
|
-
|
(316,968
|
)
|
$
|
3.41
|
(145,500
|
)
|
2.63
|
|||||||||||
|
Expired
|
(50,000
|
)
|
3.63
|
(1,713
|
)
|
$
|
3.00
|
--
|
--
|
||||||||||
|
Exercised
|
(226,015
|
)
|
3.84
|
(910,362
|
)
|
$
|
3.65
|
(125,000
|
)
|
2.01
|
|||||||||
|
Outstanding
at period end
|
1,821,323
|
3.61
|
1,672,326
|
$
|
3.47
|
1,505,174
|
$
|
3.35
|
|||||||||||
|
Exercisable
at period end
|
1,821,323
|
3.61
|
1,642,326
|
$
|
3.49
|
1,044,152
|
$
|
3.43
|
|||||||||||
|
Weighted
average fair
|
|||||||||||||||||||
|
value
of options
|
|||||||||||||||||||
|
granted
during
|
|||||||||||||||||||
|
the
period
|
$
|
1.69
|
$
|
1.37
|
$
|
0.79
|
|||||||||||||
During
the year ended December 31, 2006 the Company issued a total of 425,012 new
warrants to investors and financing entities. 100,000 warrants exercisable
at
$7.15 per share with an expiration date of June 5, 2009, for which a non cash
expense of $251,800 was recognized, were issued to Cornell Capital as a result
of the issuance by Cornell Capital of a $50 million equity line of credit which
was subsequently cancelled. The Company also issued 225,000 warrants to prior
investors to settle various disputes which are exercisable at $3.25 per share
and expire on August 25, 2009. 16,103 warrants were issued as a result of anti
dilution provisions in original warrants issued to four previous investors.
These warrants have exercise prices ranging from $2.87 per share to $3.56 per
share and expire beginning in January 2008 through April 2010. 25,000 warrants
included as new issuance warrants are previously existing warrants which were
re-assigned to a third party by the original investor. These warrants have
a
strike price of $5.48 and expire in February 2008. An additional 58,909 warrants
were extended due to the lapse of registration coverage. These warrants range
in
exercise price from $3.00 to $4.00 per share and expire on October 31, 2007.
A
non cash expense of $484,700 was recognized as a result of the extension of
these warrants.
-98-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
The
following table summarized information about non employee warrants outstanding
and exercisable at December 31, 2006:
|
|
|
Warrants
|
|
Weighted
|
|
|
|
Warrants
|
|
|
|
|||||
|
|
|
Outstanding
|
|
average
|
|
Weighted
|
|
exercisable
|
|
Weighted
|
|
|||||
|
|
|
at
|
|
remaining
|
|
average
|
|
at
|
|
average
|
|
|||||
|
Grant
Price
|
|
December
31,
|
|
contractual
|
|
exercise
|
|
December
31,
|
|
exercise
|
|
|||||
|
Range
|
|
2006
|
|
life
in years
|
|
price
|
|
2006
|
|
price
|
||||||
|
$2.00
- $2.40
|
50,000
|
3.75
|
$
|
2.26
|
50,000
|
$
|
2.26
|
|||||||||
|
$2.46
- $2.88
|
415,418
|
4.40
|
$
|
2.72
|
415,418
|
$
|
2.72
|
|||||||||
|
$3.00
- $3,25
|
321,747
|
2.19
|
$
|
3.22
|
321,747
|
$
|
3.22
|
|||||||||
|
$3.56
- $3.75
|
443,452
|
1.06
|
$
|
3.64
|
443,452
|
$
|
3.64
|
|||||||||
|
$3.81
- $3.90
|
265,000
|
5.62
|
$
|
3.86
|
265,000
|
$
|
3.86
|
|||||||||
|
$4.00
- $4.30
|
225,706
|
1.19
|
$
|
4.16
|
225,706
|
$
|
4.16
|
|||||||||
|
$7.15
|
100,000
|
2.43
|
$
|
7.15
|
100,000
|
$
|
7.15
|
|||||||||
|
1,821,323
|
2.85
|
$
|
3.61
|
1,821,323
|
$
|
3.61
|
||||||||||
These
warrants are held by persons or entities other than employees, officers and
directors of the Company.
Forfeitable
Shares
Certain
of the shares issued to officers, directors, employees and third parties are
forfeitable if certain conditions are not met. Therefore, these shares have
been
reflected outside of the Shareholders' Equity section in the accompanying
Consolidated Balance Sheets until earned. During fiscal 1993, the Company's
Board of Directors amended the stock bonus plan. As a result, the earn-out
dates
of certain individuals were extended until retirement. The Company recorded
$126,100 of compensation expense for the year ended December 31, 2006 compared
to $171,100 and $216,800 for the years ended December 31, 2005 and 2004
respectively. The accompanying balance sheet at December 31, 2006 includes
a
deferred charge of $25,400 which is included in prepaid expenses. A schedule
of
total forfeitable shares for the Company is set forth in the following
table:
|
|
Number
of
|
|
|
Issue
|
|
|
Total
|
|||
|
Issue
Date
|
Shares
|
|
|
Price
|
|
|
Compensation
|
|||
|
Balance
at
|
||||||||||
|
December
31, 2004 and
|
||||||||||
|
December
31, 2005
|
442,740
|
$
|
2,599,000
|
|||||||
|
Shares
earned
|
(145,200
|
)
|
--
|
(852,400
|
)
|
|||||
|
Balance
at
|
||||||||||
|
December
31, 2006
|
297,540
|
$
|
1,746,600
|
|||||||
-99-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
K. COMMITMENTS,
CONTINGENCIES AND OTHER:
LEGAL
PROCEEDINGS
Material
legal proceedings pending at December 31, 2006, and developments in those
proceedings from that date to the date this Annual Report is filed, are
summarized below. Legal proceedings which were not material to the Company
were
concluded in the fourth quarter 2006.
Phelps
Dodge - Lucky Jack Molybdenum Property
On
September 26, 2006, the Company signed a Settlement Agreement and Release with
Phelps Dodge Corporation (“PD”) resulting in a $7,000,000 payment to PD as part
of the final agreement. This settlement resulted in a cash savings of $538,300
from the $7,538,300 awarded to PD by the U.S. Federal District Court of Colorado
on July 26, 2006.
Patent
Claims Litigation - Lucky Jack Molybdenum Property
The
only
pending legal proceeding to which the Company and Crested are parties relates
to
a challenge to the validity of title to the patented claims included in the
molybdenum property.
On
April
2, 2004, the United States Bureau of Land Management (“BLM”) issued patents on
nine additional mining claims for the Lucky Jack molybdenum property (previously
known as Mount Emmons), for a total of 25 patented claims which consists of
approximately 350 patented or “fee” acres. A lawsuit was filed by local
governmental entities and environmentalists (“Appellants”) in U.S. District
Court of Colorado challenging BLM’s issuance of the nine additional mining
patents and alleging BLM violated the 1872 Mining Law, applicable regulations,
and the Administrative Procedures Act by overruling their protests to Mt. Emmons
Mining Company’s mineral patent application, by awarding the patents, and by
conveying the land to Mt. Emmons Mining Company (a subsidiary of Phelps Dodge
Corporation). The case was High
Country Citizen’s Alliance, Town of Crested Butte, Colorado, and The Board of
County Commissioners of the County of Gunnison, Colorado v. Kathleen Clarke,
Director of the Bureau of Land Management et. al., Gale Norton, Secretary of
Interior, U.S. Department of the Interior; Phelps Dodge Corporation; Mt. Emmons
Mining Company.
On
January 12, 2005, U.S. District Court dismissed the Appellants’ appeal holding:
(i) that they had no right of appeal from a decision to issue a mineral patent,
because the 1872 Mining Law created no private cause of action for unrelated
parties to challenge the issuance of a mineral patent, and (ii) because the
1872
Mining Law implicitly precludes unrelated third parties from challenging mineral
patent by judicial action, the Administrative Procedures Act does not constitute
a waiver of sovereign immunity for purposes of the action. Appellants filed
an
appeal of the U.S. District Court’s decision to the United States Tenth Circuit
Court of Appeals (10th
CAA”).
The 10th
CCA case
number is D.C. No. 04-MK-749PAC and No. 05-1085.
-100-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
On
February 28, 2006, the property was transferred to the Company and Crested
by PD
and Mt. Emmons Mining Company. On July 21, 2006, the 10th
CAA
affirmed the January 12, 2005 dismissal by the U.S. District Court of challenges
to the issuance of nine additional mining patents on the molybdenum property.
On
September 5, 2006, the Appellants filed a Petition for Rehearing En Banc of
the
July 21, 2006, decision before the entire 10th
CCA. On
September 8, 2006, the Company and Crested were admitted as substitute parties
for Phelps Dodge Corporation and Mt. Emmons Mining Company (following the
Company’s and Crested’s filing of a Motion to Substitute Parties.
On
October 27, 2006, the entire 10th
CCA
affirmed and upheld the July 21, 2006, decision by the 10th
CCA
panel, thereby denying the Appellants’ Petition of Rehearing En Banc and their
challenges to the issuance of the patents.
On
February 26, 2007, the Appellants filed a petition for certiorari with the
United States Supreme Court again arguing that they were improperly denied
judicial review of the decision by BLM to issue the patents. The BLM and the
Company and Crested must file any opposition briefs on or before March 28,
2007.
Management is not able to predict the outcome or the ultimate effect, if any,
this litigation will have on the Company.
ASSET
RETIREMENT OBLIGATIONS
Sheep
Mountain Uranium Properties
The
Company is responsible for the reclamation obligations, environmental
liabilities and liabilities for injuries to employees in mining operations
with
respect to the Sheep Mountain uranium properties. The reclamation obligations,
which are established by regulatory authorities, were reviewed by the Company
and the regulatory authorities and they jointly determined that the reclamation
liability at December 31, 2006 was $2.5 million. The Company is self bonded
for
this obligation by mortgaging certain of their real estate assets, including
the
Glen L. Larsen building, and by posting cash bonds.
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,
2006, the present value at 8% of the reclamation liability on the Plateau
properties was $4.1 million. Plateau holds a cash deposit for reclamation in
the
amount of approximately $6.9 million.
If
the
sale of the uranium properties to Uranium One closes, (see Note B), the asset
retirement obligation on the Sheep Mountain and Plateau Resources properties
will be transferred to Uranium One. (See Note B, Liabilities Held for
Sale).
Sutter
Gold Mining Inc.
SGMI's
mineral properties are currently on shut down status and have never been in
production. There has been minimal surface disturbance on the Sutter properties.
Reclamation obligations consist of closing the mine entry and removal of a
mine
shop. The reclamation obligation to close the property has been set by the
State
of California at $22,400 which is covered by a cash reclamation bond. This
amount was recorded by SGMI as a reclamation liability as of December 31,
2006.
-101-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
401(K)
PLAN
The
Board
of Directors of USE adopted the U.S. Energy Corp. 401(K) Plan ("401(K)") in
2004, for the benefit of USE employees. The Company matches 50% of an employee’s
salary deferrals up to a maximum Company contribution per employee of $4,000
annually. The Company expensed $62,300 and $52,800 for the years ended December
31, 2006 and 2005, respectively related to these contributions.
EXECUTIVE
OFFICER COMPENSATION
In
December 2001, the Board of Directors adopted (and the shareholders approved)
the 2001 Stock Award Plan to compensate six of its executive officers. Under
the
Plan, 10,000 shares may be issued to each officer each year during his
employment. During the years ended December 31, 2006, 2005 and 2004 the Company
issued 57,500, 60,000 and 50,000 shares of stock to these officers,
respectively. The Officers have agreed not to sell the shares granted under
the
2001 Stock Award Plan and the Company has agreed to pay all taxes due on the
shares granted to the Officers.
The
Company and Crested are committed to pay the surviving spouse or dependant
children of the former Chairman and Founder, who passed away on September 4,
2006, one years’ salary and 50% of that amount annually for an additional four
years thereafter. The maximum compensation due under these agreements for the
first year is $170,000 and $85,000 thereafter. Certain officers and employees
have employment agreements with the Company and Crested.
On
October 20, 2005 the Board of Directors of the Company and Crested adopted
an
Executive Retirement Policy for the Chairman/CEO, Chairman Emeritus,
President/COO, CFO/Treasurer/V.P. Finance, Senior Vice President and General
Counsel. Under the terms of the Retirement Plan, the retired executive will
receive monthly installments in accordance with the normal bi-weekly payroll
practices of the Company in the amount of 50% of the greater of (i) that amount
of compensation the Executive Officer received as base cash pay on his/her
final
regular pay check or (ii) the average annual pay rate, less all bonuses, he/she
received over the last five years of his/her employment with Company. To be
eligible for this benefit, the executive officer must serve in one of the
designated executive offices for 15 years, reach the age of 60 and be an
employee of USE on December 31, 2010. On September 4, 2006 the founder and
former Chairman of the company passed away and General Counsel to the Company
announced that he planned to retire in January of 2007. The Board of Directors
made a one time exception for these two individuals due to their long and
profitable service to the Company and waived the December 31, 2010 requirement.
The compensation expense for the year ended December 31, 2006 was $419,400.
The
total accrued liability at December 31, 2006 for executive reirement was
$467,700. The Company has also established a mandatory retirement age of
65 unless the Board specifically requests the services of an employee officer
beyond that age.
The
employees of the Company are not given raises on a regular basis. In
consideration of this and in appreciation of the work they perform bonuses
are
paid to the employees, officers and directors at the conclusion of major
transactions. The recommendation for bonuses are made by the Chairman and
ratified, first by the Compensation Committee and second by the full board
prior
to being paid. Similar bonuses to those paid during prior years may be paid
in
the future.
-102-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
OPERATING
LEASES
The
Company is the lessor of portions of the office buildings and building
improvements that it owns. The Company occupies the majority of its main office
building. The leases are accounted for as operating leases and expire at various
periods through January, 2007, and provide for minimum monthly receipts of
$16,400 through December, 2006. All of the Company's leases are for two years
or
less.
The
total
costs of the office buildings and building improvements totaled $3,968,400
and
$4,213,000 as of December 31, 2006 and 2005 and accumulated depreciation
amounted to $2,322,900 and $2,464,900 as of December 31, 2006 and 2005,
respectively. Rental income under the agreements was $187,300, $238,200 and
$245,000 for the years ended December 31, 2006, 2005 and 2004,
respectively.
Future
minimum receipts for non-cancelable operating leases are as
follows:
|
Years
Ending
|
||
|
December
31,
|
Amount
|
|
|
2007
|
$92,600
|
|
|
2008
|
46,000
|
L. DISCONTINUED
OPERATIONS:
On
June
1, 2005, the Company and Crested closed on the sale of their interests in RMG
to
Enterra Energy Trust. The sale agreement states that the effective date of
the
sale to Enterra was April 1, 2005. Therefore, the revenues and expenditures
presented for 2005 as discontinued operations are for the three month period
ending March 31, 2005. The financial statements for all of the periods presented
have been revised to present these operations as discontinued.
|
Year
ending December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Gain
on sale of discontinued segment
|
||||||||||
|
Gain
|
$
|
--
|
$
|
15,768,500
|
$
|
--
|
||||
|
Taxes
paid
|
--
|
(235,000
|
)
|
--
|
||||||
|
|
$
|
--
|
$
|
15,533,500
|
$
|
--
|
||||
|
Gain
(loss) from dicontinued operations
|
||||||||||
|
Rocky
Mountain Gas
|
||||||||||
|
Revenues
|
$
|
--
|
$
|
1,110,100
|
$
|
3,826,100
|
||||
|
Expenditures
|
--
|
(1,309,000
|
)
|
(5,502,300
|
)
|
|||||
|
Other
|
--
|
(127,200
|
)
|
(262,300
|
)
|
|||||
|
|
$
|
--
|
$
|
(326,100
|
)
|
$
|
(1,938,500
|
)
|
||
|
Canyon
Homesteads
|
||||||||||
|
Revenues
|
$
|
--
|
$
|
--
|
$
|
--
|
||||
|
Expenditures
|
--
|
--
|
--
|
|||||||
|
Other
|
--
|
--
|
--
|
|||||||
|
|
$
|
--
|
$
|
--
|
$
|
--
|
||||
|
Total
gain (loss) from dicontinued operations
|
$
|
--
|
$
|
15,207,400
|
$
|
(1,938,500
|
)
|
|||
-103-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004 (continued)
M. SELECTED
QUARTERLY FINANCIAL DATA (Unaudited)
|
U.S.
ENERGY CORP.
|
|||||||||||||
|
SELECTED
QUARTERLY FINANCIAL DATA (Unaudited)
|
|||||||||||||
|
Three
Months Ended
|
|||||||||||||
|
December
31,
|
|
September
30,
|
|
June
30,
|
|
March
31,
|
|
||||||
|
|
|
2006
|
|
2006
|
|
2006
|
|
2006
|
|||||
|
Operating
revenues
|
$
|
207,400
|
$
|
281,100
|
$
|
148,300
|
$
|
176,600
|
|||||
|
Operating
loss
|
$
|
(4,283,900
|
)
|
$
|
(6,476,000
|
)
|
$
|
(2,967,400
|
)
|
$
|
(2,943,400
|
)
|
|
|
Loss
from continuing operations
|
$
|
(4,024,400
|
)
|
$
|
(2,933,700
|
)
|
$
|
(6,236,200
|
)
|
$
|
(1,085,100
|
)
|
|
|
Discontinued
operations, net of tax
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
|||||
|
Benefit
from income taxes
|
$
|
15,331,600
|
$
|
--
|
$
|
--
|
$
|
--
|
|||||
|
Net
income (loss)
|
$
|
11,307,200
|
$
|
(2,933,700
|
)
|
$
|
(6,236,200
|
)
|
$
|
(1,085,100
|
)
|
||
|
Gain
(loss) per share, basic
|
|||||||||||||
|
Continuing
operations
|
$
|
0.60
|
$
|
(0.16
|
)
|
$
|
(0.34
|
)
|
$
|
(0.06
|
)
|
||
|
Discontinued
operations
|
--
|
--
|
--
|
--
|
|||||||||
|
$
|
0.60
|
$
|
(0.16
|
)
|
$
|
(0.34
|
)
|
$
|
(0.06
|
)
|
|||
|
Basic
weighted average shares outstanding
|
18,991,008
|
18,367,198
|
18,300,530
|
18,127,158
|
|||||||||
|
Gain
(loss) per share, diluted
|
|||||||||||||
|
Continuing
operations
|
$
|
0.53
|
$
|
(0.16
|
)
|
$
|
(0.34
|
)
|
$
|
(0.06
|
)
|
||
|
Discontinued
operations
|
--
|
--
|
--
|
--
|
|||||||||
|
$
|
0.53
|
$
|
(0.16
|
)
|
$
|
(0.34
|
)
|
$
|
(0.06
|
)
|
|||
|
Diluted
weighted average shares outstanding
|
21,178,257
|
18,367,198
|
18,300,530
|
18,127,158
|
|||||||||
-104-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
|
U.S.
ENERGY CORP.
|
|||||||||||||
|
SELECTED
QUARTERLY FINANCIAL DATA (Unaudited)
|
|||||||||||||
|
Three
Months Ended
|
|
||||||||||||
|
|
|
December
31,
|
|
September
30,
|
|
June
30,
|
|
March
31,
|
|
||||
|
|
|
2005
|
|
2005
|
|
2005
|
|
2005
|
|||||
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|||||||
|
Operating
revenues
|
$
|
157,500
|
$
|
167,100
|
$
|
183,500
|
$
|
341,400
|
|||||
|
Operating
loss
|
$
|
(980,400
|
)
|
$
|
(1,481,600
|
)
|
$
|
(2,420,900
|
)
|
$
|
(1,184,000
|
)
|
|
|
Gain
(loss) from continuing operations
|
$
|
(4,503,000
|
)
|
$
|
1,228,600
|
$
|
(1,819,100
|
)
|
$
|
(1,272,400
|
)
|
||
|
Discontinued
operations, net of tax
|
$
|
--
|
$
|
(188,100
|
)
|
$
|
15,721,600
|
$
|
(326,100
|
)
|
|||
|
Net
gain (loss)
|
$
|
(4,503,000
|
)
|
$
|
1,040,500
|
$
|
13,902,500
|
$
|
(1,598,500
|
)
|
|||
|
Gain
(loss) per share, basic
|
|||||||||||||
|
Continuing
operations
|
$
|
(0.26
|
)
|
$
|
0.06
|
$
|
(0.12
|
)
|
$
|
(0.09
|
)
|
||
|
Discontinued
operations
|
$
|
--
|
$
|
(0.01
|
)
|
$
|
1.02
|
$
|
(0.02
|
)
|
|||
|
$
|
(0.26
|
)
|
$
|
0.06
|
$
|
0.91
|
$
|
(0.11
|
)
|
||||
|
Basic
weighted average
|
|||||||||||||
|
shares
outstanding
|
17,624,085
|
17,229,336
|
15,352,966
|
14,398,093
|
|||||||||
|
Gain
(loss) per share, diluted
|
|||||||||||||
|
Continuing
operations
|
$
|
(0.25
|
)
|
$
|
0.07
|
$
|
(0.12
|
)
|
$
|
(0.09
|
)
|
||
|
Discontinued
operations
|
$
|
--
|
$
|
(0.01
|
)
|
$
|
1.00
|
$
|
(0.02
|
)
|
|||
|
$
|
(0.25
|
)
|
$
|
0.06
|
$
|
0.88
|
$
|
(0.11
|
)
|
||||
|
Diluted
weighted average
|
|||||||||||||
|
shares
outstanding
|
18,066,825
|
17,672,076
|
15,795,706
|
14,398,093
|
|||||||||
-105-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004 (continued)
|
U.S.
ENERGY CORP.
|
|||||||||||||
|
SELECTED
QUARTERLY FINANCIAL DATA (Unaudited)
|
|||||||||||||
|
Three
Months Ended
|
|||||||||||||
|
December
31,
|
|
September
30,
|
|
June
30,
|
|
March
31,
|
|
||||||
|
|
|
2004
|
|
2004
|
|
2004
|
|
2004
|
|||||
|
Operating
revenues
|
$
|
264,500
|
$
|
272,300
|
$
|
141,600
|
$
|
137,200
|
|||||
|
Operating
loss
|
$
|
(1,124,400
|
)
|
$
|
(1,147,500
|
)
|
$
|
(1,273,100
|
)
|
$
|
(1,438,100
|
)
|
|
|
Loss
from continuing operations
|
$
|
(982,800
|
)
|
$
|
(1,164,800
|
)
|
$
|
(863,400
|
)
|
$
|
(1,299,200
|
)
|
|
|
Discontinued
operations, net of tax
|
$
|
(277,600
|
)
|
$
|
(439,300
|
)
|
$
|
(745,800
|
)
|
$
|
(475,800
|
)
|
|
|
Net
loss
|
$
|
(1,260,400
|
)
|
$
|
(1,604,100
|
)
|
$
|
(1,609,200
|
)
|
$
|
(1,775,000
|
)
|
|
|
Loss
per share, basic
|
|||||||||||||
|
Continuing
operations
|
$
|
(0.07
|
)
|
$
|
(0.09
|
)
|
$
|
(0.07
|
)
|
$
|
(0.10
|
)
|
|
|
Discontinued
operations
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
$
|
(0.06
|
)
|
$
|
(0.04
|
)
|
|
|
$
|
(0.09
|
)
|
$
|
(0.12
|
)
|
$
|
(0.13
|
)
|
$
|
(0.14
|
)
|
||
|
Basic
weighted average
|
|||||||||||||
|
shares
outstanding
|
14,023,456
|
13,490,917
|
12,873,194
|
12,319,657
|
|||||||||
|
Loss
per share, diluted
|
|||||||||||||
|
Continuing
operations
|
$
|
(0.07
|
)
|
$
|
(0.09
|
)
|
$
|
(0.07
|
)
|
$
|
(0.11
|
)
|
|
|
Discontinued
operations
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
$
|
(0.06
|
)
|
$
|
(0.04
|
)
|
|
|
$
|
(0.09
|
)
|
$
|
(0.12
|
)
|
$
|
(0.13
|
)
|
$
|
(0.14
|
)
|
||
|
Diluted
weighted average
|
|||||||||||||
|
shares
outstanding
|
14,023,456
|
13,490,917
|
12,873,194
|
12,319,657
|
|||||||||
-106-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004 (continued)
N. SUBSEQUENT
EVENTS
Entry
into a Material Definitive Agreement - Plan and Agreement of Merger for Crested
Corp.
On
January 23, 2007, the Company and Crested signed a plan and agreement of merger
(the “merger agreement”) for the proposed acquisition of the minority shares of
Crested (approximately 29.1%) not owned by the Company, and the subsequent
merger of Crested into the Company pursuant to Wyoming and Colorado law (the
Company is a Wyoming corporation and Crested is a Colorado corporation). The
merger agreement was approved by all directors of both companies. The Company
(and its officers and directors) have signed an agreement to vote its and their
shares of the Crested in line with the vote of the holders of a majority of
the
Crested’s minority shares. The affirmative vote of the holders of a majority of
the Crested’s outstanding shares is required to consummate the merger. The
Company will not seek shareholder approval of the merger. Pursuant to the merger
agreement, the Company will issue a total of approximately 2,802,481 shares
of
common stock to the minority holders of Crested common stock, including the
shares equal to the equity value of options to buy the Crested’s common stock
underlying 1,700,000 options. (See Note C)
Entry
into a Material Definitive Agreement - For Sale of Uranium Assets to sxr Uranium
One Inc.
On
February 22, 2007, the Company and Crested, and certain of their private
subsidiary companies, signed an Asset Purchase Agreement (the “APA”) with sxr
Uranium One Inc. (“Uranium One,” headquartered in Toronto, Canada with offices
in South Africa and Australia (Toronto Stock Exchange and Johannesburg Stock
Exchange, “SXR”)), and certain of its private subsidiary companies.
The
following is only a summary of the APA, and is qualified by reference to the
complete agreement filed as an exhibit to this Report.
At
closing of the APA, the Company and Crested will sell substantially all of
their
uranium assets (the Shootaring Canyon uranium mill in Utah, unpatented uranium
claims in Wyoming, Colorado, Arizona and Utah (and geological library
information related to the claims), and the Company’s and Crested’s contractual
rights with Uranium Power Corp.), to subsidiaries of Uranium One, for
consideration (purchase price) comprised of:
| · |
$750,000
cash (paid in advance on July 13, 2006 after the parties signed the
Exclusivity Agreement).
|
| · |
6,607,605
Uranium One common shares, at
closing.
|
| · |
Approximately
$5,000,000 at closing, as a UPC-Related payment. On January 31, 2007,
the
Company, Crested, and Uranium Power Corp. (“UPC), amended their purchase
and sale agreement for UPC to buy a 50% interest in certain of the
Company’s and Crested’s mining properties (as well as the mining venture
agreement between the Company and Crested, and UPC, to acquire and
develop
additional properties, and other agreements), to grant the Company
and
Crested the right to transfer several UPC agreements, including the
right
to receive all future payments there under from UPC ($4,100,000 cash
plus
1,500,000 UPC common shares), to Uranium One. For information about
the
agreements with UPC, see below.
|
-107-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
At
closing of the APA, Uranium One will acquire the Company’s and Crested’s
agreements with UPC (excluding those agreements related to Green River South,
which will be retained by UPC), for which Uranium One will pay the Company
and
Crested the UPC-Related payment in an amount equal to a 5.25% annual discount
rate applied to the sum of (i) $4,100,000 plus (ii) 1,500,000 multiplied by
the
volume weighted average closing price of UPC’s shares for the 10 trading days
ending five days before the APA is closed.
| · |
Approximately
$1,400,000, at closing, to reimburse the Company and Crested for
uranium
property exploration and acquisition expenditures from July 10, 2006
to
the closing of the APA. These reimbursable costs relate to the Company’s
and Crested’s expenditures on the properties being sold to Uranium One
since the signing of the Exclusivity
Agreement.
|
| · |
Additional
consideration, if and when certain events occur as
follows:
|
| · |
$20,000,000
cash when commercial production occurs at the Shootaring Canyon Mill
(when
the Shootaring Canyon Mill has been operating at 60% or more of its
design
capacity of 750 short tons per day for 60 consecutive
days).
|
| · |
$7,500,000
cash on the first delivery (after commercial production has occurred)
of
mineralized material from any of the properties being sold to Uranium
One
under the APA (excluding existing ore stockpiles on the
properties).
|
| · |
From
and after commercial production occurs at the Shootaring Canyon Mill,
a
production royalty (up to but not more than $12,500,000) equal to
five
percent of (i) the gross value of uranium and vanadium products produced
at and sold from the mill; or (ii) mill fees received by Uranium
One from
third parties for custom milling or tolling arrangements, as applicable.
If production is sold to a Uranium One affiliate, partner, or joint
venturer, gross value shall be determined by reference to mining
industry
publications or data.
|
| · |
Assumption
of assumed liabilities: Uranium One will assume certain specific
liabilities associated with the assets to be sold, including (but
not
limited to) those future reclamation liabilities associated with
the
Shootaring Canyon Mill in Utah, and the Sheep Mountain properties
in
Wyoming. Subject to regulatory approval of replacement bonds issued
by a
Uranium One subsidiary as the responsible party, cash bonds in the
approximate amount of $6,883,300 on the Shootaring Canyon Mill and
other
reclamation cash bonds in the approximate amount of $413,400 will
be
released and the cash will be returned to the Company and Crested
by the
regulatory authorities. Receipt of these amounts is expected to follow
closing of the APA.
|
-108-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
All
consideration will be paid to the Company, for itself and as agent for Crested
and the several private subsidiaries of the Company and Crested that are parties
to the APA. As of the date of this Report, the Company and Crested have not
finalized the allocation of the consideration as between the Company and Crested
and the subsidiaries.
Closing
of the APA is subject to satisfaction of closing conditions customary to
transactions of this nature, including (i) approval by the Toronto Stock
Exchange of the issuance of the Uranium One common shares; (ii) approval by
the
State of Utah of the transfer to a Uranium One subsidiary of ownership of the
Utah Department of Environmental Quality, Division of Radiation Control
Radioactive Material License related to the Shootaring Canyon Mill; and (iii)
the termination of the review period and receipt of a favorable ruling
(following an ‘Exon-Florio’ filing to be made by the parties under the APA) that
the transactions contemplated by the APA would not threaten the national
security of the United States.
USECC
holds a 4% net profits interest on Rio Tinto’s Jackpot uranium property located
on Green Mountain in Wyoming. This interest is not included in the APA.
The
APA
also provides that the Company, Crested and Uranium One will enter into a
“strategic alliance” agreement at closing under which, for a period of two
years, Uranium One will have the first opportunity to earn into or fund uranium
property interests which may in the future be owned or acquired by the Company
and Crested outside the five mile area surrounding the purchased
properties.
InterWest
On
January 8, 2007 InterWest, Inc. signed a Contract to Buy and Sell Real Estate
to
purchase approximately 10.15 acres of land located in Gillette, Wyoming. The
purchase price is $1,268,800 payable as follows: $25,000 earnest money deposit
and $1,243,800 payable at closing. InterWest has a sixty day due diligence
period wherein it is to evaluate the property and obtain entitlements necessary
to construct a 216 unit multifamily housing complex on the property. It is
estimated that the construction cost of these rental units will be between
$22
and $25 million. The Board of Directors has directed the management of InterWest
that they should attempt to invest no more than 20% equity in the project should
it go forward and that the balance of the funds must come from lenders. In
the
event that the entitlements do not prove up InterWest is not obligated to
purchase the property.
SGMI
Debt and Contingent Stock Purchase Warrant
On
March
14, 2007, SGMI reached a Settlement Agreement with USE, Crested and USECC
concerning: 1) an accumulated debt obligation by SGMI of approximately
$2,025,700 for expenditures made by USECC on behalf of SGMI and 2) a Contingent
Stock Purchase Warrant between SGMI, USE and Crested.
Pursuant
to the terms and conditions of the Settlement Agreement, the parties agreed
as
follows:
1. To
settle
the accumulated debt obligation as of December 31, 2006 of $2,025,700, USECC
agreed to accept 7,621,867 shares of SGMI common stock (subject to approval
by
the Toronto Stock Exchange (“Exchange”)). The debt is therefore being paid at
negotiated price of $.26 per share. The price for SMGI stock on March 15, 2007
was $.20 per share.
-109-
U.S.
ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(continued)
2. To
settle
the Contingent Stock Purchase Warrant agreement of approximately $4.6 million,
USE and Crested agreed to accept a 5% net profits interest royalty ("NPIR")
in
exchange for the Contingent Stock Purchase Warrant. Furthermore, USE and Crested
agree that the 5% royalty shall continue until USE and Crested have recouped
the
$4.6 million. Once the $4.6 million is recouped the 5% NPIR shall be converted
to a 1% NPIR thereafter.
3. In
addition, subject to the closing of USE and Crested’s sxr Uranium One
transaction, USE and Crested have agreed to provide a $1 million line of credit
($500,000 each) to SGMI at 12% annual interest, drawable and repayable at
anytime in tranches of $50,000 or more by SGMI. USE and Crested have the sole
option to have SGMI repay the debt in cash or SGMI stock at a 10% discount
to
the 10 day VWAP before payment (subject to Exchange approval).
-110-
ITEM
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Changes
in Registrant’s Certifying Accountant
On
January 19, 2007, the Company received a letter (dated January 10, 2007) from
Epstein, Weber & Conover, PLC (“EWC”), stating that EWC had combined with
Moss Adams LLP, that EWC therefore resigned as the registered independent
accounting firm for the Company, and that the client-auditor relationship had
ceased. EWC has advised that all partners of EWC have become partners of Moss
Adams.
EWC’s
audit reports on the companies’ financial statements for the past two years did
not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
There have not been any disagreements between the Company, and EWC, on any
matter of accounting principles or practices, financial statement disclosure,
or
auditing scope of procedure.
Effective
February 2, 2007, the Company engaged Moss Adams LLP to act as the Company’s
principal independent accountant to audit the company’s financial statements for
the year ended December 31, 2006. The Board of Directors of the Company approved
the decision to engage Moss Adams LLP.
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 further 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. Other Information
None
-111-
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,
2006, we will file such information under cover of a Form 10-K/A.
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The
information required by ITEM 10 with respect to directors and certain executive
officers is incorporated herein by reference to our Proxy Statement for the
Meeting of Shareholders to be held in June 2007, 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
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 Steven
R. Youngbauer, Secretary, 877 North 8th
West,
Riverton, Wyoming 82501.
INFORMATION
CONCERNING EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS.
The
following are the two full time executive officers of USE who are not
directors.
Robert
Scott Lorimer,
age 56,
has been the Chief Accounting Officer for USE for more than the past five years
Mr. Lorimer also has been Chief Financial Officer since May 25, 1991, Treasurer
since December 14, 1990, and Vice President Finance since April 1998. He serves
at the will of each board of directors. There are no understandings between
Mr.
Lorimer and any other person, pursuant to which he was named as an officer,
and
he has no family relationship with any of the other executive officers or
directors of USE. During the past five years, Mr. Lorimer has not been involved
in any Reg. S-K Item 40(f) listed proceeding. Mr. Lorimer is also a director
of
Crested.
Steven
R. Youngbauer,
age 57,
has been General Counsel and Corporate Secretary for USE since January 23,
2007.
He serves at the will of the board of directors. There are no understandings
between Mr. Youngbauer and any other person pursuant to which he was named
an
officer or General Counsel. He has no family relationships with any of the
other
executive officer or directors of USE. During the past five years, Mr.
Youngbauer has not been involved in any Reg. S-K Item 401(f)
proceeding.
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 2007, under the
captions Executive Compensation and Director's Fees and Other
Compensation.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT AND RELATED
MATTERS.
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 2007, under the
caption "Principal Holders of Voting Securities."
-112-
ITEM
13. CERTAIN RELATIONSHIP 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 2007, under the
caption Certain Relationships and Related Transactions.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(1)
- (4)
Epstein, Weber & Conover, PLC billed us as follows for the years ended
December 31, 2005 and 2006 for the audit of the financial statements for those
years and other audit-related work.
|
Year
Ending December 31
|
|
||||||
|
|
|
2006
|
|
2005
|
|||
|
Audit
fees (1)
|
$
|
123,000
|
$
|
125,400
|
|||
|
Audit
related fees (2)
|
$
|
8,400
|
$
|
6,500
|
|||
|
Tax
fees (3)
|
$
|
-
|
$
|
-
|
|||
|
All
other fees
(4)
|
$
|
-
|
$
|
-
|
|||
|
$
|
131,400
|
$
|
131,900
|
||||
(a)
Includes
fees for audit of the annual financial statements and review of quarterly
financial information filed with the Securities and Exchange Commission ("SEC").
These numbers are on a consolidated basis. Of the 2006 amount Crested paid
$30,100.
(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. Crested paid $3,000 of the amount paid in
2006.
(c)
For tax
compliance, tax advice, and tax planning services, relating to federal and
state
tax returns as necessary.
(d)
For
services in respect of other reports required to be filed by the SEC and other
agencies.
(5)(i)
The audit committee approves the terms of engagement before we engage the audit
firm for audit and non-audit services, except as to engagements for services
outside the scope of the original terms, in which instances the services have
been provided pursuant to pre-approval policies and procedures, established
by
the audit committee. These pre-approval policies and procedures are detailed
as
to the category of service and the audit committee is kept informed of each
service provided. These policies and procedures, and the work performed pursuant
thereto, do not include any delegation to management of the audit committee's
responsibilities under the Securities Exchange Act of 1934.
This
approval process was used with respect to the engagement of Epstein Weber &
Conover for the audit of the 2006 financial statements and related services
for
the quarterly reviews in 2006.
(5)(ii)
The percentage of services provided for Audit-Related Fees, Tax Fees and All
Other Fees for 2006 (and 2005), all provided pursuant to the audit committee’s
pre-approval policies and procedures, were: Audit-Related Fees 100% (100%);
Tax
Fees 0% (0%); and All Other Fees 0% (0% ).
-113-
PART
IV
|
ITEM
15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES,
REPORTS
AND
FORMS 8-K.
|
|
|
(a)
Financial Statements and Exhibits
|
|
|
(1)
The following financial statements are filed as a part of the Report
in
Item 8:
|
|
|
Page
|
|
|
No.
|
|
|
Consolidated
Financial Statements U.S. Energy Corp. and Subsidiaries
|
54
|
|
Report
of Independent Registered Public Accounting Firm Moss Adams
LLP
|
55
|
|
Report
of (Former) Independent Registered Public Accounting Firm Epstein,
Weber
& Conover
|
56
|
|
Consolidated
Balance Sheets - December 31, 2006 and December 31, 2005
|
57-58
|
|
Consolidated
Statement of Operations for the Years Ended December 31, 2006, 2005
and
2004
|
59-60
|
|
Consolidated
Statements of Shareholders' Equity for the Years Ended December 31,
2006,
2005 and 2004
|
61-63
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2006, 2005
and
2004
|
64-66
|
|
Notes
to Consolidated Financial Statements
|
67-111
|
|
(2)
All other schedules have been omitted because the required information
in
inapplicable or is shown in the notes to financial
statements.
|
|
-114-
|
(3)
Exhibits Required to be Filed
|
||
|
Exhibit
No.
|
Title
of Exhibit
|
Sequential
Page
No.
|
|
3.1
|
Restated
Articles of Incorporation
|
[2]
|
|
3.1(a)
|
Articles
of Amendment to Restated Articles of Incorporation
|
[4]
|
|
3.1(b)
|
Articles
of Amendment (Second) to Restated Articles of Incorporation (establishing
Series A Convertible Preferred Stock)
|
[9]
|
|
3.1(c)
|
Articles
of Amendment (Third) to Restated Articles of Incorporation (increasing
number of authorized shares)
|
[14]
|
|
3.1(d)
|
Articles
of Amendment to Restated Articles of Incorporation (establishing
Series P
Preferred Stock)
|
[5]
|
|
3.1(e)
|
Articles
of Amendment to Restated Articles of Incorporation (providing that
directors may be removed by the shareholders only for
cause)
|
[3]
|
|
3.2
|
Bylaws,
as amended through October 14, 2005
|
[6]
|
|
4.1
|
Amendment
to 1998 Incentive Stock Option Plan
|
[11]
|
|
4.2
|
2001
Incentive Stock Option Plan (amended in 2003)
|
[7]
|
|
4.3-4.10
|
[intentionally
left blank]
|
|
|
4.11
|
Rights
Agreement dated as of September 19, 2001, amended as of September
30,
2005, between U.S. Energy Corp. and Computershare Trust Company,
Inc. as
Rights Agent. The Articles of Amendment to the Restated Articles
of
Incorporation creating the Series P Preferred Stock are included
as an
exhibit to the Rights Agreement, as well as the form of Right Certificate
and Summary of Rights
|
[12]
|
|
4.12-4.20
|
[intentionally
left blank]
|
|
|
4.21
|
2001
Officers' Stock Compensation Plan
|
[18]
|
|
4.22-4.30
|
[intentionally
left blank]
|
|
|
10.1
|
Asset
Purchase Agreement with sxr Uranium One Inc.
|
[14]
|
|
10.2
|
Form
of Production Payment Royalty Agreement (an exhibit to the Asset
Purchase
Agreement with sxr Uranium One Inc)
|
[14]
|
|
10.3
|
Plan
and Agreement of Merger between U.S. Energy Corp. and Crested
Corp.
|
*
|
|
10.4
|
Voting
Agreement between Crested Corp., U.S. Energy Corp., and certain other
shareholders of Crested Corp.
|
*
|
|
10.5
|
Amendment
to Agreements with UPC (Amendment dated effective January 31,
2007)
|
*
|
-115-
|
10.6
|
Purchase
and Sale Agreement (without exhibits) - Bell Coast Capital, n/k/a/
Uranium
Power Corp. (December 2004)
|
[8]
|
|
10.6(a)
|
Amendment
to Purchase and Sale Agreement with Uranium Power Corp.
|
[13]
|
|
10.7
|
Mining
Venture Agreement (without exhibits) - Uranium Power Corp. (April
2005)
|
[8]
|
|
14.0
|
Code
of Ethics
|
[6]
|
|
16.0
|
Concurrence
letter of former accountants
|
[15]
|
|
21.1
|
Subsidiaries
of Registrant
|
[11]
|
|
31.1
|
Certification
under Rule 13a-14(a) Keith G. Larsen
|
*
|
|
31.2
|
Certification
under Rule 13a-14(a) Robert Scott Lorimer
|
*
|
|
32.1
|
Certification
under Rule 13a-14(b) Keith G. Larsen
|
*
|
|
32.2
|
Certification
under Rule 13a-14(b) Robert Scott Lorimer
|
*
|
|
*
Filed herewith
|
||
-116-
|
By
Reference
|
|
|
[1]
|
Intentionally
left blank.
|
|
[2]
|
Incorporated
by reference from the like-numbered exhibit to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 1990, filed September
14,
1990.
|
|
[3]
|
Incorporated
by reference from exhibit 10.1 to the Registrant’s Form 8-K, filed June
26, 2006.
|
|
[4]
|
Incorporated
by reference from the like-numbered exhibit to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 1992, filed September
14,
1992.
|
|
[5]
|
Incorporated
by reference from the Registrant’s Form S-3 registration statement
(333-75864), filed December 21, 2001.
|
|
[6]
|
Incorporated
by reference from exhibit 14 to the Registrant's Form 10-K, filed
March
30, 2005.
|
|
[7]
|
Incorporated
by reference from exhibit 4.2 to the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2004, filed April 15,
2005.
|
|
[8]
|
Incorporated
by reference from like-numbered to the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2004, filed April 15,
2005.
|
|
[9]
|
Incorporated
by reference from the like-numbered exhibit to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 1998, filed September
14,
1998.
|
|
[10]
|
Incorporated
by reference from exhibit 2 to the Registrant’s Form 8-k, filed June 7,
2005.
|
|
[11]
|
Incorporated
by reference from the like-numbered exhibit to the Registrant's Annual
Report on Form 10-K for the year ended on May 31, 2001, filed August
29,
2001, and amended on June 18, 2002 and September 25,
2002.
|
|
[12]
|
Incorporated
by reference to exhibit number 4.1 to the Registrant's Form 8A/A,
filed
November 17, 2005.
|
|
[13]
|
Incorporated
by reference from exhibit (b) to the Registrant’s Form 8-K filed January
17, 2006.
|
|
[14]
|
Incorporated
by reference from exhibits 10.1 and 10.2 to the Registrant's Form
8-K
filed February 23, 2007.
|
|
[15]
|
Incorporated
by reference from exhibit to the Registrant’s Form 8-K/A filed February 1,
2007.
|
|
[16]-[17]
|
Intentionally
left blank.
|
|
[18]
|
Incorporated
by reference from the like-numbered exhibit to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 2002, filed September
13,
2002.
|
|
[19]-[24]
|
Intentionally
left blank.
|
-117-
|
(b)
|
Reports
on Form 8-K. In the last quarter of 2006, the Registrant filed 8
Reports
on Form 8-K as follows: 1. October 10, 2006 for an Item 1.01 event,
2.
October 19, 2006 for Item 5.02 and 8.01 events, 3. November 2, 2006
for an
Item 1.01 event, 4. November 2, 2006 for an Item 8.01 event, 5. November
9, 2006 for an Item 8.01 event, 6. November 16, 2006 for an Item
7.01
event, 7. December 8, 2006 for an Item 1.01 event, 8. December 26,
2006
for an Item 8.01 event.
|
|
See
paragraph a(3) above for exhibits.
|
|
|
(d)
|
Financial
statement schedules, see above. No other financial statements are
required
to be filed.
|
-118-
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
|
U.S.
ENERGY CORP. (Registrant)
|
|||
|
Date:
April 2, 2007
|
By:
|
/s/
Keith G. Larsen
|
||
|
KEITH
G. LARSEN, Chief Executive Officer
|
||||
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report
has been signed below by the following person on behalf of the Registrant
and in the capacities and on the dates indicated.
|
||||
|
Date:
April 2, 2007
|
By:
|
/s/
Keith G. Larsen
|
||
|
KEITH
G. LARSEN, Director
|
||||
|
Date:
April 2, 2007
|
By:
|
/s/
Robert Scott Lorimer
|
||
|
ROBERT
SCOTT LORIMER
|
||||
|
Principal
Financial Officer/
|
||||
|
Chief
Accounting Officer
|
||||
|
Date:
April 2, 2007
|
By:
|
/s/
Mark J. Larsen
|
||
|
MARK
J. LARSEN, President and Director
|
||||
|
Date:
April 2, 2007
|
By:
|
/s/
Harold F. Herron
|
||
|
HAROLD
F. HERRON, Director
|
||||
|
Date:
April 2, 2007
|
By:
|
/s/
Allen S. Winters
|
||
|
ALLEN
S. WINTERS, Director
|
||||
|
Date:
April 2, 2007
|
By:
|
/s/
H. Russell Fraser
|
||
|
H.
RUSSELL FRASER, Director
|
||||
|
Date:
April 2, 2007
|
By:
|
/s/
Michael T. Anderson
|
||
|
MICHAEL
T. ANDERSON, Director
|
||||
|
Date:
April 2, 2007
|
By:
|
/s/
Michael H. Feinstein
|
||
|
MICHAEL
H. FEINSTEIN, Director
|
||||
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