UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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þ
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Annual
report pursuant to section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year Ended December 31, 2008
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¨
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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.
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(Exact
Name of Company as Specified in its
Charter)
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Wyoming
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83-0205516
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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877
North 8th West, Riverton, WY
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82501
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(Address
of principal executive offices)
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(Zip
Code)
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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
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Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.01 par value
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(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
þ
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
þ
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
þ
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
þ
Non-accelerated
filer
¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).YES
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NO
þ
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, 2008) $69,971,930.
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Class
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Outstanding
at March 9, 2009
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Common
stock, $.01 par value
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21,521,329
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Documents incorporated by
reference
: None.
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
¨
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TABLE OF
CONTENT
Page
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DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
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5
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PART
I
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6
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ITEM
1. BUSINESS
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6
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General
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6
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Industry
Segments/Principal Products
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8
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Corporate
Developments in 2008
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9
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Exercise
of Warrants and Options
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11
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Research
and Development
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11
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Environmental
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11
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Employees
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12
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Mining
Claim Holdings
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12
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ITEM
1 A. RISK FACTORS
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13
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Risks
Relating to Our Business
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13
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Risks
Relating to USE Stock
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20
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ITEM
2. PROPERTIES
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21
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ITEM
3. LEGAL PROCEEDINGS
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28
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ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITITY
HOLDERS
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30
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PART
II
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31
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ITEM
5. MARKET FOR REGISTRATION’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
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31
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ITEM
6. SELECTED FINANCIAL DATA
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33
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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 possible exploration, development and
operation of our molybdenum and oil and gas and geothermal properties; 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.
PART
I
ITEM
1 - BUSINESS
General
Business Objective and
Strategy
U.S.
Energy Corp. (“USE” or the “Company”), a Wyoming corporation organized in 1966,
acquires and develops energy-related and other mineral
properties. Our corporate objective is to diversify capital
investments across two sectors (primarily oil and gas and geothermal energy)
while proceeding with development of our molybdenum property in
Colorado. In 2009 and following years, we are seeking to increase
recurring revenues from oil and gas production over a period of up to ten years,
we look to develop our geothermal properties and will be working to develop the
Mount Emmons molybdenum project (“Mount Emmons”) into a major operating mine
with Thompson Creek Metals Company (USA). Geothermal properties are
being acquired for exploration and development and eventual sale or joint
venture or operation; revenues from this investment would not be expected to be
realized until three to five years from date of investment. A
multifamily apartment project serving the residential market in Gillette,
Wyoming was completed by us in 2008 and is generating positive cash
flow. We do not intend to make more investments in the housing
sector.
In
general, with the exception of the one housing complex, our strategy now is to
partner with (or acquire) other companies that have the experience and technical
staff to acquire and explore for oil and gas, mineral or renewable resource
properties and to develop Mount Emmons. We will hire geologists and
engineers as needed. Additionally we may buy field equipment and
assume responsibilities related to operations as we acquire producing
properties. In the interim we will continue to utilize independent
consultants to assist us in evaluations.
All
business is conducted through USE, except for the multifamily apartment project
in Gillette, Wyoming, which is conducted through the wholly-owned subsidiary
Remington Village, LLC.
Traditional
Energy
Oil and
Gas
. In 2008, we initiated investment activities with three
separate industry partners.
·
Two on
shore Gulf Coast wells were drilled with PetroQuest Energy, Inc. (NYSE
“PQ”). One was drilled and successfully completed as an oil and gas
producer, and the second was a dry hole. More wells may be drilled
with PetroQuest in 2009 and subsequent years.
·
A
drilling program for up to ten wells with Texas Land & Petroleum Company,
LLC (a private company) is proposed to begin in first or second quarter 2009 on
acreage located east of Dallas, Texas.
·
A
combination lease acquisition and seismic analysis program with Yuma Exploration
and Production Company, Inc. (also a private company) for acreage located in
South Louisiana is underway with drilling expected to begin in fourth quarter
2009.
The
abrupt oil price decline in 2008 and the lack of liquidity in the capital
markets are presenting opportunities for continued investment in traditional
energy. Land acquisition and exploration costs are expected to
decrease in 2009 and possibly beyond, as major and independent oil and gas
companies in the United States reduce exploration budgets. We intend
to continue screening the many available opportunities, including drilling
programs, production purchases, and possible equity investments in established
companies. Our intent is to build production while entry and
exploration costs are low, anticipating that oil prices will increase when
global consumption returns to the mid-2008 level. Investment
decisions for oil and gas projects are made on the basis of risk-adjusted
expected returns using current commodity prices. Industry accepted
forecasts for commodity prices are also used in our risk assessments for each
project.
Renewable Energy -
Geothermal
On
December 17, 2008, we bought a minority interest (25% for $3,455,000) in
Standard Steam Trust, LLC (“SST”), a Denver, Colorado based private geothermal
resource acquisition and development company. Current capitalization
of SST is $13.8 million (with other partners), which now includes approximately
60,000 acres of BLM, state and fee land in seven prospect areas in three
states. Substantial additional capital is expected to be raised in
2009 through capital calls and/or admission of new
partners. Dilution, but no penalty, would be associated with a
partner’s non-participation in a capital call. SST is managed by
Terra Caliente, LLC (“Terra”), also a private Denver based company, with
oversight by an advisory board (USE is one of three members) as to budgets,
major expenditures, sale or other disposition of prospects, and similar
matters. Terra has substantial cash invested for its own
account. In addition, Terra will receive a substantial back-in
interest (25%), at such time as all other investors (including Terra) receive
cash or securities equal to their investment.
Today,
there are 66 geothermal-powered electrical generation plants in the United
States, providing 2,960 MW of baseload (constant) power to utilities, which
represents less than 1% of the electrical generation
nationwide. Twenty-six states have implemented mandatory renewable
energy portfolio standards, requiring utilities to generate from 5% to 33% of
their power from renewable sources. The deadlines for compliance with
these standards take effect from 2009 to 2025 depending on the
state.
Geothermal
power plants are “zero emission” and thus meet the renewable energy
mandates. The plants use existing technology to circulate hot water
from wells through binary or flash heat exchangers to produce the power to drive
turbines that generate green energy. All the water in the binary system is
injected back into the earth to recharge the resource.
We intend
to advance each individual prospect through the exploration and feasibility
stages before determining whether to: 1) sell a prospect to a utility, 2) bring
an industry partner on a joint venture basis, or 3) pursue further financing
with institutional capital to further advance revenue generating capabilities,
which may include the operation of power plants. The first phase of
the project (through 2009) will be assembling a portfolio of industrial scale
prospects with a total targeted power resource of approximately 2,000 MW;
individual prospects are targeted at 100 to 500 MW. The second phase
consisting of early science of geology, geophysics and temperature gradient
drilling is also expected to be completed in 2009. The third phase of
work is scheduled for 2010 and will consist of production well drilling on one
of the prospects to quantify the geothermal resource present
there. Permitting and construction could follow beginning as early as
the end of 2011.
Energy-Related
Housing
At year
end 2008, we completed construction of a nine building multifamily apartment
complex in Gillette, Wyoming (216 units). Occupancy was 88% at
December 31, 2008 (93% at March 9, 2009). Given the extremely low
interest rates available on U.S. Treasury Bills, we elected to pay off the
construction loan in January 2009 with internal funds ($16.8 million including
interest), instead of obtaining permanent financing with interest in the range
of 6.2% to 6.7%. Additionally, the Company had previously invested
$7.7 million in the project and will also pay $487,700 as its final payment to
the construction contractor. The total all-in cost of the project was
therefore $24.5 million. Pending a possible sale of the project in
the next three to five years, we expect that net rental income will provide an
annual return of up to 8% on the $25 million total investment, assuming current
high occupancy rates continue.
Molybdenum
The
Company owns 100% of a molybdenum property in Colorado – the “Mount Emmons”
property. In March 2008, a prior partner (Kobex Resources, Ltd.)
terminated its agreement to develop the property with U.S. Energy. In
August 2008, the Company signed an agreement with Thompson Creek Metals Company
USA (“TCM”), a major molybdenum mining and refining company, for TCM to earn up
to a 75% interest in the property after TCM spends up to $400 million in
expenditures and option payments. This is expected to be a long-term
(up to 10 years) project.
Industry
Segments/Principal Products
At
December 31, 2008, we have three operating segments: Minerals, oil and gas and
real estate.
Minerals
: We
are involved primarily in the acquisition, exploration and development of
mineral properties, and (in 2008, from oil and gas properties) mineral
production. In third quarter 2008, the Company sold most of its
equity stake in Sutter Gold Mining Inc. for cash, and received an option payment
from TCM related to the Mount Emmons property. In December 2008, we
expanded our involvement in minerals to the acquisition, exploration and
development of geothermal properties.
Oil and
Gas
: In fourth quarter 2008, our first oil and gas revenues
were recorded from ownership of a minority working interest in a U.S. Gulf Coast
region well. Working interests in other prospects are planned to be
acquired, and additional exploratory wells are expected to be drilled in
2009.
Real
Estate
: Rental revenue was received in 2008 from the apartment
complex in Gillette, Wyoming, which is held by Remington Village, LLC., a 100%
owned subsidiary. The Company also holds 13.84 undeveloped acres in
Riverton, Wyoming (adjacent to our corporate headquarters); this property was
acquired in late 2007 for possible commercial development but is now for sale
without development.
Office Location and
Website
Principal
executive offices are located in the Glen L. Larsen building at 877 North 8th
West, Riverton, Wyoming 82501, telephone 307-856-9271.
Our
website is www.usnrg.com. We make available on this website, through
a direct link to the Securities and Exchange Commission’s website at
http://www.sec.gov, free of charge, our 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. You
may also find information related to our corporate governance, board committees
and code of ethics on our website.
Corporate
Developments in 2008
Mount Emmons Project
(molybdenum), formerly known as Lucky Jack - Agreement with Thompson Creek
Mining Company (USA)
In March
2008, Kobex Resources Ltd. terminated its October 2006 agreement with USE to
earn up to a 65% interest in the Mount Emmons Project for option payments and
property expenditures of $65 million. Kobex reported that its
decision was based upon its perception that the Project’s regulatory and legal
uncertainties were incompatible with Kobex’ further investment. The
termination was made without penalty to either party, or any credit to Kobex for
the approximate $8 million it had spent for option payments to USE and property
expenditures. At December 31, 2008, USE owned 267,932 shares of Kobex common
stock which it received as a portion of Kobex’s participation
payments.
On August
19, 2008, USE and Thompson Creek Metals Company USA (“TCM”), a Colorado
corporation headquartered in Englewood, Colorado, entered into an Exploration,
Development and Mine Operating Agreement for USE’s Mount Emmons molybdenum
property. TCM assigned the agreement to Mt. Emmons Moly Company, a
Colorado corporation and wholly owned subsidiary of TCM effective September 11,
2008. Under the terms of the agreement TCM may acquire up to a 75%
interest for $400 million (option payments of $6.5 million and project
expenditures of $393.5 million).
The
Agreement covers two distinct periods of time: The Option Period,
during which TCM may exercise an option (“the Option”) to acquire up to a 50%
interest in Mount Emmons; and the Joint Venture Period, during which TCM will
form a joint venture with USE and also have an option to acquire up to an
additional 25% interest in Mount Emmons.
The Option
Period
:
TCM paid
USE $500,000 at closing (not refundable) and the first $1.0 million option
payment on January 2, 2009. Under the terms of the agreement,
TCM has the option to pay USE an additional five annual payments of
$1.0 million each beginning on January 1, 2010 for the Option.
The
Option is exercisable in two stages:
First Stage - For
15%
. At TCM’s election within 36 months of incurring a minimum
of $15,000,000 in expenditures on or related to Mount Emmons (including the
option payments to USE), TCM may acquire an undivided working interest of 15% in
Mount Emmons and the business of the project. Following is a table of
the options and expenditures due from TCM through 2011:
* Paid
in 2008
** Paid
in 2009
Costs to
operate the water treatment plant at the property will be paid solely by USE
until TCM elects to exercise its option to own an interest in the
property.
Second Stage - For an
Additional 35%
. If by July 31, 2018, TCM has incurred a total
of at least $43,500,000 of expenditures (including amounts during the first
stage) and paid USE the $6,500,000 of option payments (for a total of
$50,000,000), TCM may elect to acquire an additional 35% (for a total of 50%
after it exercised the first stage option for 15%). None of the
interests acquired by TCM will be subject to any overriding royalties to the
Company.
Failure
by TCM to incur the required amount of expenditures by a deadline, or make an
Option Payment to USE, subject to the terms of the Agreement, the Agreement may
be terminated without further obligation to USE from TCM. TCM may
terminate the Agreement at any time, but if earned and elected to accept, TCM
will retain the interest earned and be responsible for that share of all costs
and expenses related to Mount Emmons.
The Joint Venture Period;
Joint Venture Terms
:
Within
six months of TCM’s election to acquire the 50% interest, TCM, in its sole
discretion, shall elect to form a Joint Venture and either: (i) participate on a
50%-50% basis with USE, with each party to bear their own share of expenditures
from formation date; or (ii) acquire up to an additional 25% interest in the
project by paying 100% of all expenditures equal to $350,000,000 (for a total of
$400,000,000, including the $50,000,000 to earn the 50% interest in the second
stage of the Option Period), at which point the participation would be 75% TCM
and 25% USE. Provided however, if TCM makes expenditures of at least
$70 million of the $350 million in expenditures and TCM decides not to fund the
additional $280 million in expenditures, TCM will have earned an additional 2.5%
(for a total of 52.5%). Thereafter, TCM will earn an incremental
added percentage interest for each dollar it spends toward the total
$350,000,000 amount.
At any
time before incurring the entire $350,000,000, TCM in its sole discretion, may
determine to cease funding 100% of expenditures, in which event USE and TCM then
would share expenditures in accordance with their participation interests at
that date, in accordance with the Joint Venture. With certain
exceptions, either party’s interest is subject to dilution in the event of
non-participation in funding the Joint Venture’s budgets.
Management of the
Property
TCM is
the Project Manager of Mount Emmons. A four person Management
Committee governs the projects’ operations, with two representatives each from
USE and TCM. TCM will have the deciding vote in the event of a
committee deadlock.
If and
when Mount Emmons goes into production, TCM will purchase USE’s share of the
molybdic oxide produced at an average price as published in Platt’s Metals
Weekly price less a discount with a cap and a floor. The discount
band will be adjusted every five years based upon the United States’ gross
domestic product.
Sale of Majority Position in
Sutter Gold Mining Inc.
In August
2008, we sold 39,062,720 common shares of Sutter Gold Mining Inc. ("SGMI"),
which until the sale was a majority-owned subsidiary of USE. The
shares (which were sold to RMB Resources Ltd. (“RMB”) as trustee for the
Telluride Investment Trust for Cdn $5.4 million) represented 49.9% of the
outstanding shares of SGMI. The transaction was closed in accordance
with the June 2008 share purchase agreement. We retained an equity
position of 3,550,361 shares.
In
conjunction with the closing, we also participated in a private placement by
SGMI, purchasing 4,545,455 units at Cdn. $0.11 per unit for total Cdn.
$500,000. Each unit was comprised of two shares and a 24-month
warrant (each for one share at Cdn. $0.15). As additional
consideration for participating in the private placement USE received 24 month
warrants to purchase an additional 2,272,728 of SGMI at a exercise price of Cdn
$0.15 per share. As a result of the private placement, USE owns
8,095,816 shares or approximately 8.4% of the outstanding shares of SGMI plus
the warrants. We also have retained a 5% net profits royalty on the
project, which will be reduced to a 1% net profits royalty on the project after
USE receives an additional US $4.6 million from production. This
royalty is limited to the California property, and does not apply to SGMI
properties in Mexico or elsewhere.
SGMI has
exploration properties in California and Mexico. USE owns a minority
equity position in SGMI after it sold its controlling interest to
RMB. USE has no representation on SGMI’s board of
directors. Allen Winters continues to serve as a director of USE and
of SGMI, but Mr. Winters does not represent USE as a director of
SGMI. None of the USE officers or other employees are officers or
employees of SGMI.
Exercise
of Warrants and Options
In 2008,
we issued a total of 364,198 shares of common stock pursuant to the exercise of
warrants; 82,500 shares from the exercise of director options; 85,000 shares
pursuant to the 2001 stock compensation plan as compensation to officers; and
126,878 shares for the annual funding of the Employee Stock Ownership
Plan. We also cancelled 2,160,129 shares purchased through the stock
buyback plan and 155,811 shares held by the ESOP as undistributed
shares.
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
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 National Environmental Policy Act
(“NEPA”), 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 proposed mining operations
at the Mount Emmons property, Colorado’s mine permitting statute, Abandoned Mine
Reclamation Act, and industrial development and siting laws and regulations,
also may affect the project. 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) related to the Mount Emmons project, see
the consolidated financial statements included in PART III of this Annual
Report.
Gas and
oil operations also are subject to various federal, state and local governmental
and environmental regulations, including regulations governing natural gas and
oil production, federal and state regulations for environmental quality and
pollution control, and state limits on allowable rates of production by
well. These regulations may affect the amount of natural gas and
oil available for sale, the availability of adequate pipeline and other
regulated transportation and processing facilities, and other
matters. State and federal regulations generally are intended to
prevent waste of natural gas and oil, protect rights to produce natural gas and
oil between owners in a common reservoir, control the amount produced by
assigning allowable rates of production and control contamination of the
environment. Pipelines are subject to the jurisdiction of various federal, state
and local agencies. From time to time, various proposals are made by
regulatory agencies and legislative bodies. Regulatory changes
can adversely impact the permitting and exploration and development of mineral
and oil and gas properties including the availability of capital.
Although
we own only non-operated oil and gas interests as of the date of this Annual
Report, our activities are still subject to environmental protection
regulations. Operators are required to obtain drilling permits,
restrict substances that can be released into the environment, and require
remedial work to mitigate pollution from operations (such as pollution from
operations), close and cover disposal pits, and plug abandoned
wells. Violations by the operator could result in substantial
liabilities, and we would have to pay our share. Based on the current
regulatory environment in those states where we have current oil and gas
investments, we don’t expect to make any material capital expenditures for
environmental control facilities.
Failure
to comply with these regulations could result in substantial fines,
environmental remediation orders and/or potential shut down of a 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 made.
Employees
As of
March 13, 2008, we had 19 full-time employees.
Mining
Claim Holdings
Title
Approximately
25 of the Mount Emmons mining claims are patented claims; however the majority
of claims are unpatented.
Unpatented
claims are located upon federal and public land pursuant to procedures
established by the General Mining Law, which governs mining claims and related
activities on federal public lands. 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 U.S. Bureau of Land Management
(“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 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. However, we
believe that all of our Mount Emmons mining claims are valid and in good
standing.
Proposed Federal
Legislation
The U.S.
Congress from time to time has considered proposed revisions to the General
Mining Law, including as recently as 2009. If these proposed
revisions are enacted, payment of royalties on production of minerals from
federal lands could be required as well as additional procedural measures, 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.
ITEM
1 A. RISK FACTORS
The
following risk factors should be considered in evaluating the information in
this Annual Report.
Risks
Relating to Our Business
Limited
recurring business revenues may constrain future investments, and earnings will
continue to be influenced by transaction events.
At
December 31, 2008, USE had $17.7 million of retained earnings, a loss from
operations (before investment and property transactions) of $9.5 million, and a
gain on sale of assets (stock in SGMI. and marketable securities) of $5.4
million. For 2007, we had $19.0 million of retained earnings, a loss
before investment and property transactions of $14.5 million from operations,
and a gain on sale of assets (uranium properties, equipment and marketable
securities) of $108.8 million. Historically, significant swings in
earnings from year to year has been the nature of our business model of
acquiring, holding and selling mineral properties, because the process from
acquisition until ultimate sale or joint venture is capital intensive and at
times may take years to complete. Although we are modifying the
business to build an asset base that generates recurring revenues, we do expect
to continue experiencing earnings swings as a portion of our assets still are
mid to long-term projects. Examples would be the acquisition,
exploration and development of oil and gas properties, the multifamily housing
complex in Gillette, Wyoming, the geothermal program, and the Mount Emmons
molybdenum property.
Working
capital at December 31, 2008 and 2007 was $53.2 million and $74.6 million,
respectively. Historically, working capital needs were met primarily
by liquidating investments, selling partial interests in mineral properties, and
selling equity. Our cash on hand as of December 31, 2008 greatly
exceeds the amount of cash on hand during prior years, but we may not have
sufficient cash to fully develop our mineral and oil and gas and geothermal
properties. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” The minerals business offers
the opportunity for significant returns on investment, but the realization of
such returns is subject to many risks, including cash flow risk. As
examples:
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Initial
results from one or more of the oil and gas drilling programs could be
marginal but warrant investing in more wells. Dry holes or over
budget exploration costs or low commodity prices could result in
production revenues below projections, thus adversely impacting cash
expected to be available for continued work in a program, ultimate
projected returns from a program, and a reduction in cash for
investment in other programs.
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We
anticipate further investments of cash into the geothermal program to
maintain our 25% interest, although a return on the investment may not be
realized for three to five years. The cash required to maintain
our interest at the 25% level could be
substantial.
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We
are paying the annual costs to operate and maintain the water treatment
plant, approximately $1.7 million, at the Mount Emmons Project until such
time as Thompson Creek Metals elects to acquire an
interest. Thereafter, we would be responsible for paying our
share of plant costs. Even if Thompson Creek elects to
participate in the Mount Emmons Project at the 75% level, USE would be
responsible for its 25% share of development and operating
costs. See “Corporate Developments in 2008 - Mount Emmons
Project (molybdenum) - Agreement with Thompson Creek Mining Company
(USA).”
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We
believe we have sufficient cash reserves to execute our business plan in 2009
and subsequent years, assuming our various projects generate revenues as
projected. However, adverse developments in one or more programs
would require a reassessment of priorities and therefore potential
re-allocations of capital. If internal cash from current reserves and
projected revenues are insufficient, we may have to obtain investment capital to
maintain the full range of activities.
Our
business may be impacted by adverse commodity prices.
Oil
prices spiked in 2008 to a ten year high spot price of $133.88 per
barrel. At December 31, 2008, the spot price for oil had declined to
$40.88 per barrel. Global markets have caused these large
fluctuations in the price of oil. Natural gas prices are historically
volatile, and reached a ten year high during July 2008 on the City Gate price of
$12.37 per thousand cubic feet of natural gas. As with oil, the City
Gate price for natural gas declined through the balance of 2008 and was $8.16
per Mcf as of December 31, 2008. Molybdenum prices have declined from
a ten year high average price of $34.13 per pound in July 2008 to a
ten year low average price of $10.00 per pound in December 2008. The
global economic recession may cause prices to drop
further. Investments in oil and gas properties generally are
recoverable from production or sale of the properties. Further
significant price declines could decrease anticipated revenues and could impair
the carrying value of our producing properties.
USE
does not have independent reports on the value of some of the mineral
properties.
USE has
not yet obtained a final feasibility study on the Mount Emmons Project or
resource reports for our geothermal properties.
A
feasibility study would establish the potential economic viability of the
molybdenum property based on a reassessment of historical drilling and sampling
data and additional work to be performed; the design and costs to build and
operate a mill; the cost of capital, and other factors. A feasibility
study, conducted by professional consulting and engineering firms, will
determine if the deposits contain proved reserves (i.e., amounts of minerals in
sufficient grades that can be extracted profitably under current commodity
pricing assumptions and estimated development and operating
costs). Geothermal resource reports estimate the energy potential of
geothermal properties in terms of capacity to generate electricity with plants
to be built on the properties in the future.
Oil and
gas reserve reports are prepared internally or by independent consultants to
estimate the quantities of hydrocarbons that can be recovered from proved
producing and proved undeveloped properties, utilizing current commodity prices
and taking into account capital and other expenditures. These reports
also estimate the future net present value of the reserves, and are used for
internal planning purposes and for testing the carrying value of the properties
on our balance sheet.
Potential
industry partners and investors will use such studies and reports to evaluate
doing business with us (for example, continuing or initiating a joint venture
exploration arrangement), and buying or selling our stock.
Reported
information that does not validate the investments already made could alter our
ability to maintain or attract business partners, and depress our stock
price.
The
development of oil and gas properties involves substantial risks that may result
in a total loss of investment.
The
business of exploring for and developing natural gas and oil properties involves
a high degree of business and financial risks, and thus a significant risk of
investment loss that even a combination of experience, knowledge and careful
evaluation may not be able to overcome. The cost of drilling, completing and
operating wells is often uncertain. Factors which can delay or
prevent drilling or production, or otherwise impact expected results include but
are not limited to:
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unexpected
drilling conditions;
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permitting
with State and Federal agencies;
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easements
from land owners;
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adverse
weather conditions; pressure or irregularities in geologic
formations;
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equipment
failures;
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title
problems;
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fires,
explosions, blowouts, cratering, pollution and other environmental risks
or accidents;
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changes
in government regulations;
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reductions
in commodity prices;
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pipeline
ruptures; and
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unavailability
or high cost of equipment and field services and
labor.
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A
productive well may become uneconomic in the event that unusual quantities of
water or other non-commercial substances are encountered in the well bore, which
impair or prevent production. We may participate in wells that are
unproductive or, though productive, won’t produce in economic
quantities.
Our
future use of hedging arrangements in oil and gas production could result in
financial losses or reduce income.
We may
engage in hedging arrangements for a significant part of our production to
reduce exposure to price fluctuations in oil and gas prices. These
arrangements would expose us to risk of financial loss in some circumstances,
including when production is less than expected, the counterparty to the hedging
contract defaults on its contract obligations, or there is a change in the
expected differential between the underlying price in the hedging agreement and
the actual price received. In addition, these hedging arrangements may limit the
benefits we would otherwise receive from increases in prices for oil and natural
gas. At December 31, 2008, no hedges for our oil and gas production
were in place.
We
may incur losses as a result of title deficiencies in oil and gas
leases.
We rely
on the operators of our oil and gas programs to warrant title to the properties
is in order and provide us with ownership of the interest we pay
for. However, consistent with industry practice, operators may not
always retain attorneys to examine title before acquiring leases or mineral
interests. Sometimes, to keep expenses lower, operators may rely on
the judgment of lease brokers or landmen who perform the fieldwork in examining
records. Prior to drilling a well, the operator will obtain a
preliminary title review to ensure there are no obvious title
deficiencies. As a result of such examinations, certain curative work
must be done to correct deficiencies in the marketability of title, and such
curative work may be expensive. In some instances, curative work may
not be possible, because the lease or interest was acquired in error from
someone who is not the owner. In that event, a loss may be incurred
from drilling even a productive well because the operator (and therefore USE)
would not own the interest.
We could lose our investment in
undeveloped oil and gas leases if wells are not drilled and completed in a
timely manner.
Leased
oil and gas properties provide the holder with the right to drill and complete
wells in a timely manner. If a well is drilled and completed, the
lease term continues so long as there is production from the
well. However, renewing leases on undrilled expired acreage may not
be feasible due to increased cost or other reasons. If the operator
is unable to renew leases on undrilled acreage, we would have to write off the
initial acquisition cost.
Oil
and gas operations are subject to environmental regulations that can materially
adversely affect the timing and cost of operations.
Oil and
gas exploration and production are subject to certain federal, state and local
laws and regulations relating to environmental quality and pollution control.
These laws and regulations increase costs and may prevent or delay the
commencement or continuance of operations. Specifically, the industry generally
is subject to legislation regarding the acquisition of permits before drilling,
restrictions on drilling activities in restricted areas, emissions into the
environment, water discharges, and storage and disposition of hazardous
wastes. In addition, legislation has been enacted which requires well
and facility sites to be abandoned and reclaimed to the satisfaction of state
authorities. Such laws and regulations have been frequently changed in the past,
and we are unable to predict the ultimate cost of compliance as a result of
future changes. The adoption or enforcement of stricter regulations could have a
significant impact on our operating costs.
Estimated
reserves are based on many assumptions. Any material inaccuracies in reserve
estimates or underlying assumptions will materially affect the quantities and
present value of the reserves.
This
Annual Report contains estimates of natural gas and oil reserves, and the future
net cash flows attributable to those reserves, prepared by independent petroleum
engineers. There are uncertainties inherent in these estimates, including
factors beyond our control. Reserve engineering is a subjective process of
estimating underground accumulations of natural gas and oil that cannot be
measured in an exact manner. The accuracy of the estimates is a function of: (1)
the available data; (2) the accuracy of assumptions regarding future natural gas
and oil prices and future development and exploitation costs and activities; and
(3) engineering and geological interpretation and judgment.
Reserves
and future cash flows may be subject to material downward or upward revisions in
the future, based upon production history, development activities, and commodity
prices. Actual future production, revenue, taxes, development
expenditures, operating expenses, quantities of recoverable reserves and value
of cash flows from those reserves may vary significantly from the
estimates. Any significant variance from the assumptions used in
making estimates could greatly affect the estimates as well as the
classification of reserves based on risk of recovery.
The
estimated quantities of proved reserves and the discounted present value of
future net cash flows attributable to those reserves included herein were
prepared by engineers in accordance with SEC rules, and are not intended to
represent their fair, or current, market value.
Estimated
discounted future net cash flows from proved reserves are based on commodity
prices and operating and other costs. Actual future net cash flows,
however, also will be affected by factors such as:
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geological
conditions;
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changes
in government regulations and
taxation;
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assumptions
about future prices;
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the
amount and timing of actual
production;
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future
operating costs; and
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the
capital costs to drill new wells, where
applicable.
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The
timing of production, and when development and production costs are incurred,
will affect the timing of actual future net cash flows, and therefore their
present value. In addition, the 10% discount factor may not be the most
appropriate discount based on interest rates in effect from time to
time.
There
are risks associated with the geothermal program.
To
complete our geothermal project business plan through acquisition of land
positions in numerous prospects and establishing the power potential of more
than one prospect through drilling will require substantial
capital. While we intend to continue investing through the
partnership’s capital calls, and may decline any capital call without penalty,
non-participation would dilute our current 25%
interest. Notwithstanding the current increase of interest in
geothermal power generally, SST may be unable to raise sufficient capital from
new investors due to the condition of the global financial
markets. In that event, the project might have less than the optimum
number of prospects and/or be unable to establish prospective value through
drilling. This could result in an increase in the already substantial
risks associated with our investment in the entity or geothermal
prospects.
All the
prospects are undeveloped. Initial value will be established only by
drilling at least three wells, at substantial expense, on each prospect that
demonstrate sufficient water temperature and flow to support a commercial power
plant. Even if the resource is validated as to power potential,
realization of our investment will depend on the sale of equity or an interest
in the properties to a utility, energy company, or other investor, or
construction of a power plant (which will require institutional financing) and
sale of electricity to the utilities.
Compliance
with environmental regulations may be costly.
General
USE’s
business is regulated by government agencies. Permits are required to
explore for minerals, operate mines and build and operate processing plants, and
drill and operate oil and gas wells. 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, USE might
decide not to move forward with the project.
USE must
comply with numerous environmental regulations on a continuous basis, to comply
with United States environmental laws, including the National Environmental
Policy Act (“NEPA”), Clean Air Act, the Clean Water Act, and the Resource
Conservation and Recovery Act (“RCRA”). 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 state and local regulatory agencies. Other
laws 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.
Risks
associated with development of the Mount Emmons Project.
The Mount
Emmons molybdenum property is located on fee property within the boundary of
U.S. Forest Service (“USFS”) land. Although mining of the mineral
resource will occur on the fee property, associated ancillary activities will
occur on USFS land. USE and Thompson Creek Metals expect to submit a
Plan of Operations to the USFS in 2010 for USFS approval, which must be approved
before initiating construction, and mining and processing can
occur. Under the procedures mandated by the National Environmental
Protection Act (“NEPA”), the USFS will prepare an environmental analysis in the
form of an Environmental Assessment and/or and Environmental Impact Statement to
evaluate the predicted environmental and socio-economic impacts of the proposed
development and mining of the property. The NEPA process provides for
public review and comment of the proposed plan.
The USFS
is the lead regulatory agency in the NEPA process, and coordinates with the
various Federal and State agencies in the review and approval of the Plan of
Operations. Various Colorado state agencies will have
primary jurisdiction over certain areas. For example, enforcement of
the Clean Water Act in Colorado is delegated to the Colorado Department of
Public Health and Environment and a water discharge permit under the National
Pollution Discharge Elimination System (“NPDES”) is required before the USFS can
approve the Plan of Operations. We currently have a NPDES Permit from
the State of Colorado for the operation of the water treatment plant, however
this permit may need to be updated.
In
addition, the
Colorado Division of Reclamation, Mining and
Safety
issues mining and reclamation permits for mining
activities, pursuant to the Colorado Mined Land Reclamation Act, and otherwise
exercises supervisory authority over mining in the state. As part of
obtaining a permit to mine, USE and Thompson Creek Metals will be required to
submit a detailed reclamation plan for the eventual mine closure, which must be
reviewed and approved by the agency. In addition, USE and Thompson
Creek Metals will be required to provide financial assurance that the
reclamation plan will be achieved (by bonding and/or insurance) before the
mining permit will be issued.
Obtaining
and maintaining the various permits for the mining operations at the Mount
Emmons Project will be complex, time-consuming, and
expensive. Changes in a mine’s design, production rates, quality of
material mined, and many other matters, often require submission of the proposed
changes for agency approval prior to implementation. In addition,
changes in operating conditions beyond our and Thompson Creek Metals’ control,
or changes in agency policy and Federal and State laws, could further affect the
successful permitting of the mine operations.
Although
we are confident that the Plan of Operations for Mount Emmons will ultimately be
approved by the USFS, the timing and cost, and ultimate success of the mining
operation cannot be predicted.
We
depend on key personnel.
Our
employees have experience in dealing with the exploration and financing of
mineral properties. We have a very limited staff and executive
group. The loss of key employees could adversely impact our business,
as finding replacements is difficult as a result of competition
for experienced personnel in the minerals industry.
We
may be classified as an inadvertent investment company.
We are
not engaged in the business of investing, reinvesting, or trading in securities,
and we do not hold ourselves out as being engaged in those activities. However,
under the federal Investment Company Act of 1940 (“1940 Act”), a company may
fall within the scope of being an “inadvertent investment company” under section
3(a)(1)(C) of the 1940 Act if the value of its investment securities is more
than 40% of its total assets (exclusive of government securities and cash
items).
As a
result of the 2007 sale of uranium assets to Uranium One, we received investment
securities (stock in Uranium One) with a value in excess of 40% of the value of
our total assets. All of this stock was sold in 2007.
An
inadvertent investment company can avoid being classified as an investment
company if it can rely on one of the exclusions under the 1940
Act. One such exclusion, Rule 3a-2 under the 1940 Act, allows an
inadvertent investment company (as a “transient investment company”) a grace
period of one year from the date of classification (in our case, April 30,
2008), to seek to comply with the 40% limit, or with any other available
exclusion. Accordingly, we have taken actions to comply with this 40%
limit. These actions included liquidating investment securities as
necessary to stay within the 40% limit.
Since
Rule 3a-2 is available to a company no more than once every three years, and
assuming no other exclusions were available to us, we would have to keep within
the 40% limit through April 30, 2010. In any event, we do not intend to become
an intentional investment company (i.e. engaging in investment and trading
activities in investment securities), even after April 30, 2010.
Classification
as an investment company under the 1940 Act requires registration with the SEC.
If an investment company fails to register, it would have to stop doing almost
all business, and its contracts would become voidable. Registration is time
consuming and restrictive, and we would be very constrained in the kind of
business we could do as a registered investment company.
Risks
Relating to USE Stock
USE
may issue shares of preferred stock with greater rights than its common
stock.
Although
we have no current plans, arrangements, understandings or agreements to do so,
USE’s articles of incorporation authorize the 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 have preferential rights over the common stock, in terms of
dividends, liquidation rights and voting rights.
Future
equity transactions, including exercise of options or warrants, could result in
dilution; and registration for public resale of the common stock in these
transactions may depress stock prices.
From time
to time, USE has sold restricted stock and warrants and convertible debt 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/or the debt-to-stock conversion
price was at or lower than market. 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 prices. Exercise of in-the-money options and warrants will
result in dilution to existing shareholders.
Although
we do not presently intend to do so, we may seek to raise capital from the
equity markets using private placements at discounted prices. In
addition, we may continue to grant options to employees with exercise prices
equal to market price at grant date, and in the future may sell restricted stock
and warrants, all of which may result in dilution to existing
shareholders.
Dividends
on USE common stock.
We
declared a one time special cash dividend of $0.10 per share on all the common
stock on the record date of July 6, 2007. We may declare dividends in
the future but we expect to retain the majority of earnings and cash to fund
investments and business development.
USE’s
take-over defense mechanisms could discourage some advantageous
transactions.
We have
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 a
potential takeover acquirer would not agree on a higher price, in which case the
takeover might be abandoned, even though the takeover price might be at a
significant premium to market prices. Therefore, as a result of the
mere existence of the plan, shareholders may not receive the premium
price.
Our
stock price likely will continue to be volatile due to several
factors.
In the
two years ended December 31, 2008, USE’s stock has traded as high as $6.79 per
share and as low as $1.52 per share. The principal factors which have
contributed to this volatility have been:
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price
and volume fluctuations in the stock market
generally;
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relatively
small amounts of USE stock trading on any given
day;
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fluctuations
in USE’s financial operating results;
and
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price
swings in the minerals commodities
markets.
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These
factors may continue to be influential on our stock price.
ITEM
2. PROPERTIES
Molybdenum – Mount Emmons
Project
The
Company re-acquired the Mount Emmons (formerly known as the Lucky Jack
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 the Company and Amax Inc. (“Amax”). The Mount Emmons Project
includes a total of 25 patented and approximately 612 unpatented mining and mill
site claims, which together approximate 7,427 acres, or over 8 square miles of
claims.
Thompson
Creek Metals Company (USA) has an option to acquire up to a 75% interest in the
Project. See Part I above.
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
property. The water treatment permit issued under the Colorado
Discharge Permit System was assigned to the Company by the Colorado Department
of Health and Environment. We are responsible for all operating and
maintenance costs until such time as Thompson Creek Metals elects to acquire a
15% interest in the property. Thereafter, costs will be shared
according to USE and Thompson Creek’s participation interests. We
also are evaluating using the plant in milling operations.
USE had
leased various patented and unpatented mining claims on the Mount Emmons
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 Mount Emmons molybdenum property to treat water flowing
from the old Keystone 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 Mount
Emmons in 1999 through its acquisition of Cyprus Amax. Thereafter, PD
acquired additional conditional water rights and patents to certain mineral
claims.
In its
1992 patent application to the BLM, Cyprus 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, the 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 the 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 later prepared by
Behre Dolbear & Company, Inc. in 1998.
Even with
the historical data available, the size, configuration and operations of the
mine plan that may be proposed by TCM have not been finalized. These
factors, as well as the prevailing prices for molybdic oxide when the mine is
active, will determine the economic viability of the project. The
$4.61 price used by WME should not be considered to be a current breakeven price
for Mount Emmons. It is anticipated that a full feasibility study
will be prepared in the future, using current and expected capital costs, and
operating expenses, to estimate the viability of the project.
In
December 2008, an additional 160 acres of fee land in the vicinity of the claims
was purchased for $4 million ($2 million in January 2009, $400,000 annually for
five years). USE and TCM share the purchase cost of this land equally
on a 50 – 50 basis.
Information About Molybdenum
Markets
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.
Molybdenum
price experienced continued stability during 2007 but declined substantially in
the fourth quarter of 2008. It is believed that the overall market
remained in slight deficit during 2008 due to demand continuing to outpace
supply, but the global recession has led to dramatic reductions in steel output
and pricing, and correspondingly in market demand for molybdenum and its
pricing.
Annual
Metal Week Dealer Oxide mean prices averaged $29.71 in 2008 ($17.79 in the
fourth quarter 2008 and $10.00 as of December 31, 2008), compared to a year
average of $30.65 in 2007 ($25.55 in 2006 and $32.94 in 2005).
Oil and
Gas
PetroQuest Energy, Inc. –
Gulf Coast
In 2007,
we entered into an Exploration and Area of Mutual Interest Agreement (the
“E&AMI Agreement”) with PetroQuest Energy, Inc. (“PQ”) relating to three
prospect areas in the Gulf Coast region of the United States. The
E&AMI Agreement provides us with the right, through September 13, 2011, to
acquire a 20% working interest in each lease acquired by PQ within any of the
three prospect areas. The parties also signed an operating agreement
for PQ to be the operator for each prospect. PQ currently owns or
will likely own a majority of the working interest in every area covered by the
E&AMI Agreement.
Through
December 31, 2008, we have paid $3.2 million for our 20% share of lease
acquisition and seismic data reprocessing and reinterpretation costs with
PQ. We have spent an additional $4.2 million in exploration costs.
$2.5 million was spent on the Bluffs well, completed as an oil and gas producer
(see “Reserves” below). Costs were approximately $607,800 more than
anticipated due to drilling and completion cost overruns, some of which were due
to adverse weather conditions. An additional $1.7 million of drilling
expense was incurred for the Highlands well (a dry hole).
We have
not yet committed to the drilling of any wells on other
prospects. While successful Gulf Coast wells can provide favorable
returns on investment, and the initial production from the Bluffs well was
higher than expected, we will continue to assess the viability of participating
in additional wells with PQ. If we should elect not to participate in
any undrilled prospects proposed by PQ where we have paid for lease and seismic
costs, we will attempt to farm out our interest, sell our interest in the
seismic or abandon the prospect. The costs associated with these
undrilled prospects will remain in the full cost pool and be subject to ceiling
tests.
Wells Drilled with
PetroQuest
As of
December 31, 2008, we held working interests in 2,584 gross acres with
PQ. The Bluffs well encountered approximately 85 feet of net pay in
the Cris I – Hollywood I sand, and is producing in the range of 40 barrels of
oil per day and 1,300 Mcf of gas per day, net to our interest. USE’s
working interest is 15% (reduced from 20% due to a third party’s right and
subsequent election to back in for 5% of the leasehold), representing a net
revenue interest of 10.4%. The working and net revenue interests will
be further reduced after payout of our costs, plus 6% annual interest, pursuant
to the Wildes agreement (see below).
The
Highlands well was a dry hole and has been plugged and abandoned.
Reserves
The
reserve estimates for the Bluffs well (one well location with no additional
locations to be drilled), net to our interest at December 31, 2008, was prepared
by Ryder Scott, an independent petroleum engineering firm. Estimates
of reserves are presented in accordance with SEC rules. All reserves
are valued at the total estimated future net cash flows before income taxes,
discounted at 10%. This value is not intended to represent the
current market value of the reserves. Reserve estimates are
inherently imprecise and are continually subject to revision based on production
history, results of additional exploration and development, oil and gas prices,
and other factors.
Estimates
of reserve volumes and future net cash flows use the prices received for
production at December 31, 2008 ($41.41 per barrel of oil and $5.88 per Mcf of
gas). Future estimated production and ad valorem taxes, capital costs
and operating costs are deducted from estimated future cash flows, and the
result is discounted at an annual rate of 10% to determine “present value”
(“PV-10”). Following is a summary of our reserves at December 31,
2008:
PV-10 is
widely used in the oil and gas industry, and is followed by institutional
investors and professional analysts, to compare companies. However,
the PV-10 data is not an alternative to the standardized measure of discounted
future net cash flows calculated under GAAP and in accordance with Statement of
Financial Accounting Standards No. 69, which includes the effects of income
taxes. The following table provides a reconciliation of Estimated
Future Net Revenues Discounted at 10% to the Standardized Measure of Discounted
Future Net Cash Flows as shown in Note F to the company’s Consolidated Financial
Statements.
|
Year
Ended
|
||||
|
December
31,
|
||||
|
2008
|
||||
|
Estimated
future net revenues discounted at 10%
|
$ | 5,311,400 | ||
|
Future
income tax expense
|
(1,992,900 | ) | ||
|
Standardized
measure of discounted future net cash flows
|
$ | 3,318,500 | ||
USE’s oil
and gas production for the year ended December 31, 2008 was 73,635 Mcf gas and
2,330 barrels of oil. The average price per Mcf sold was $6.93 and
$41.85 per barrel of oil sold.
Yuma Exploration and
Production Company, Inc. – South Louisiana
On April
27, 2008, we entered into a four year Joint Exploration Agreement (the “JEA”)
with Yuma Exploration and Production Company, Inc. (“Yuma”), a private company
based in Houston, Texas. Under the JEA, USE has purchased a working
interest in a seismic, lease acquisition and drilling program covering
approximately 138 square miles in South Louisiana. Net acreage
acquired will depend on the terms of leases acquired, but is expected to be in
excess of 50,000 net acres. Yuma holds a 48% working interest and the
balance is held by USE (4.55%) and third parties (approximately
47.45%). For their working interests, the participants (other than
Yuma) are paying 80% of the initial seismic, overhead and some land costs (total
$1,390,000), and Yuma is paying 20%. All land and exploration costs
going forward are to be paid according to the working interest
percentages.
As of
December 31, 2008, approximately 400 miles of reprocessed 2-D seismic data has
been analyzed to prepare for a large 3-D seismic survey expected to be conducted
in first and second quarter 2009. Yuma is expected to utilize the
data to identify prospect areas and likely propose lease acquisition activities
and an initial well in each prospect identified. Participants will
have the opportunity to opt in or out of any prospect leasing program, and also
as to the initial well in each prospect. Each prospect will have a
separate operating agreement with Yuma as operator. It is expected
that the program will yield multiple prospects, with exploration activities
continuing for a number of years. Once the JEA is completed as to the
seismic, acquisition and initial well phases in Phase I, Yuma may decide to
conduct a 3-D seismic survey on another identified area (Phase II) and
participants including USE, will have the option to participate in
the area under the same terms as the JEA.
Through
December 31, 2008, we have paid $801,900 for seismic and land
costs. Our share of seismic, land and exploration costs for 2009 are
expected to be $680,000. Exploration expenses for 2009 will depend on
the number of wells to be proposed by Yuma, which are not presently
known.
The area
has significant pipeline infrastructure for oil and gas, and is believed to be
highly prospective for oil and gas, with potential targets in known producing
formations.
Wildes Exploration
Agreements
In 2007,
we entered into a Management Engagement Agreement (for a term of three years)
with a management company affiliated with Wildes Exploration
(“Wildes”). We are paying Wildes $100,000 annually for consulting and
management services for the prospects under the E&AMI Agreement with
PQ.
Pursuant
to the agreement with Wildes, we also will assign to Wildes a working interest
of 15% of our working interest after we have recovered 100% of our costs plus 6%
interest compounded annually, for each producing well drilled and completed
within a prospect area. This interest will increase to 20% of
our working interest after we have recovered 200% of all our costs
from each producing well within the prospect. This assignment will
cover all wells drilled and completed in the particular
prospect. From the assignment date forward, Wildes will be
responsible for its proportionate share of all of costs associated with the
wells in accordance with the operating agreement with PQ.
In fourth
quarter 2008, we entered into a Participation and Management Agreement (the
“PMA”) with Wildes relating to the Yuma prospects (for a term ending December
31, 2011). This agreement is similar in some respects to the
Management Engagement Agreement covering the PetroQuest
program. Under the PMA, we are paying Wildes $50,000 annually for
consulting and management services in connection with Yuma’s JEA.
In
addition, we will assign to Wildes (after we have recovered 100% of our drilling
and completion costs plus 6% interest compounded annually) a working interest of
12.5% of our working interest in each well that is completed with
Yuma. After assignment, Wildes will be responsible for its
proportionate share of the well’s costs under the operating agreement with
Yuma.
Texas Land & Petroleum
Company, LLC – Northeast Texas
In
October 2008, USE signed an agreement with TLPC Holdings, Ltd, an affiliate of
Texas Land & Petroleum Company, LLC (“TL&P”) a private Texas company for
a moderate risk low gravity oil well drilling program on the Hopkins Prospect in
Wood County, Texas, located about 50 miles east of Dallas. The
prospect is in a semi-rural area.
The
prospect holds 790 gross (280 net) acres, with a 75% net revenue
interest. Up to ten wells could be drilled (20 acre spacing); total
depth to two formations within the Woodbine sand is approximately 6,000
feet. The Upper Cretaceous Sub Clarksville formation also is
targeted. Well recoveries in the immediate vicinity have averaged
100,000 barrels per well.
We have
paid TL&P a $45,000 prospect fee. We will participate in the
first well on a one-third for one quarter basis (33% of drilling and completion
costs, for a 25% working interest (18.75% net revenue
interest)). Upon participation in the first well, USE will own its
share of all the acreage. Subsequent wells will be unpromoted (25% of
costs). TL&P holds 50% of the working interest.
Initial
(promoted) well drilling and completion expense was estimated at $958,620 in
early September 2008 ($362,000 for USE), with dry hole costs of $554,500
($230,000 for USE). However, field costs are expected to decrease in
2009, and it is the intention of the parties to take advantage of lower costs
before starting drilling.
Ridgeland Wyoming,
Inc
.
On
December 23, 2008, we signed a Participation Agreement, (“Participation
Agreement”) with Ridgeland Wyoming, Inc. (“Ridgeland”), a private oil and gas
producer headquartered in Provo, Utah. We paid a $25,000 prospect fee
to Ridgeland for a 50% working interest in the Schuricht Prospect in north east
Wyoming. The first well was spud on January 17, 2009 and was drilled
to a total depth of 6,180 feet. The well was determined to be
unproductive and was subsequently plugged and abandoned on January 30,
2009. Ridgeland was carried for a 1/6
th
interest (on an 8/8
th
basis)
to casing point on the first well. After the first well, the Company
and Ridgeland will drill all subsequent wells on a 50 – 50 basis. All
leases under the Participating Agreement with Ridgeland are to carry an 80% net
revenue interest. Under the terms of the Participation Agreement the
Company agreed to pay $338,800 as its initial expense in the first
well. If any further wells are drilled on this prospect, the Company
may participate in a 50% heads up basis. We earned interest in 80
gross acres (40 net acres) after drilling this first well.
Energy
Housing
Remington Village –
Gillette, Wyoming
. We have completed construction of a nine
building multifamily apartment complex, with 216 units on 10.15 acres (purchased
in 2007) located in Gillette, Wyoming. The apartments are a mix of
one, two, and three bedroom units, with a clubhouse and family amenities for the
complex. This project is held by our wholly-owned subsidiary
Remington Village, LLC. (“Remington”), and was 88% leased at December 31,
2008.
In August
2007, Zions Bank provided secured construction financing (also guaranteed by
USE). The loan was $16.8 million at December 31,
2008. Total cost to buy the land, pay a developer’s fee, obtain
permits and entitlements, site work and construction, was approximately $24.5
million at December 31, 2008. At that date, USE had invested $7.7
million cash equity into the project (including $1.2 million for land
purchase). The interest rate on the loan balance at December 31, 2008
was 2.71% (payable monthly) based on LIBOR. Loan maturity was March
1, 2009. In January 2009, USE paid off the construction financing
($16,831,500) with internal funds.
As of the
date this Annual Report is filed, we are realizing revenues of approximately
$225,000 per month, representing a much higher return on investment
(approximately 8% annually) compared to our Treasury Bills (assuming occupancy
rates continue at current high levels).
Basin
Electric Power Cooperative (“Basin”) is building a $1.345 billion coal fired
power plant about 7 miles north of Gillette. Construction is expected
to last two more years and employ up to 1,100 workers during the peak
period. In 2007, Basin and Remington signed an agreement to pre-lease
apartments from January 2008 through August 2011 to Basin employees and others
associated with the construction. Basin was to pay Remington
approximately $3.24 million in total rent during the period, regardless of
whether the units were occupied.
On
October 15, 2008, Basin terminated its agreement and paid USE the required
$100,000 termination fee. The termination did not impact Zion’s
construction loan or the 20 apartments then occupied by Basin employees and
contractors. Termination had a temporary adverse impact on rent
revenues, as the unleased inventory allocated to Basin was freed from Basin’s
payment obligations. Since October 15, 2008, occupancy has increased
from 62% to 88% at December 31, 2008, and we don’t expect the termination will
have a material long term adverse impact.
The
additional workforce and increased housing needs associated with construction
and operation of the Basin project along with the coal operations and other
capital projects in the Gillette, Wyoming area should favorably impact the local
economy (and the Remington project) for years to come.
Riverton,
Wyoming
. On December 28, 2007, we purchased 13.84 acres of
undeveloped land across the street from USE’s corporate office building for
$500,400 cash, with the intention of developing the land for mixed commercial
and multifamily residential purposes. Our basis in the property and
improvements at December 31, 2008 is $652,800. We may sell the
property in the future without development.
Sold Uranium Properties –
Possible Future Revenues
In 2007,
we sold to sxr Uranium One Inc. (“Uranium One”) all of our uranium assets for
cash and stock in Uranium One. Included in the sold assets were the
Shootaring Canyon uranium mill in Utah and unpatented uranium claims in Wyoming,
Colorado, Arizona and Utah. Pursuant to the asset purchase agreement,
USE may also receive from Uranium One:
|
·
|
$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 claims sold to Uranium One to a
commercial mill (excluding existing ore stockpiles on the
properties).
|
|
·
|
From
and after commercial production occurs at the Shootaring Canyon Mill, a
production payment 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.
|
The
timing of future receipt of funds from any of these contingencies is not
predicted.
Royalty on Uranium
Claims
USE holds
a 4% net profits interest on unpatented mining claims on Rio Tinto’s Jackpot
uranium property located on Green Mountain in Wyoming.
Other
Properties
USE 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. We also own a
10,000 square foot aircraft hangar on land leased from the City of Riverton with
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.
ITEM
3. LEGAL PROCEEDINGS
Material
legal proceedings pending at December 31, 2008, and developments in those
proceedings from that date to the date this Annual Report is filed, are
summarized below.
Water
Rights Litigation –Mount Emmons Molybdenum Property
Prior to
the transfer of the Mount Emmons molybdenum property PD and Mount Emmons Mining
Company (“MEMCO”) to the Company on February 28, 2006, MEMCO filed a number of
Statements of Opposition in the Water Court, Water Division No. 4, State of
Colorado to protect its existing water rights against applications filed by
other parties seeking to appropriate or change water rights or perfect
conditional water rights. Subsequent to transfer of the mine
property, Motions for Substitution of Parties (from MEMCO to the Company) were
filed and approved by the Water Court. In addition, the Company filed
a diligence application to preserve the conditional water rights associated with
Mount Emmons. These cases are as follows:
|
1.
|
Concerning the
Application of the United States of America in the Gunnison River,
Gunnison County
, Case No. 99CW267. This case involves an
application filed by the United States of America to appropriate 0.033
cubic feet per second of water for wildlife use and for incidental
irrigation of riparian vegetation at the Mount Emmons Iron Bog Spring,
located in the vicinity of Mount Emmons. MEMCO filed a
Statement of Opposition to protect proposed mining operations against any
adverse impacts by the water requirements of the Iron Bog on such
operations. This case is pending while the parties attempt to
reach a settlement on the proposed decree terms and
conditions.
|
|
2.
|
Concerning the
Application for Water Rights of the United States of America for
Quantification of Reserved Right for Black Canyon of Gunnison National
Park
, Case No. 01CW05. This case involves an application
filed by the United States of America to make absolute conditional water
rights claimed in the Gunnison River in relation to the Black Canyon of
the Gunnison National Park for, and to quantify in-stream flows for the
protection and reproduction of fish and to preserve the recreational,
scenic and aesthetic conditions. MEMCO and over 350 other
parties filed Statements of Opposition to protect their existing water
rights. The Company and most other Opposers have taken the
position that the flows claimed by the United States should be
subordinated to the historical operations of the federally owned and
operated Aspinall Unit, and are subject to the provisions contained in the
Aspinall Unit Subordination Agreement between the federal government and
water districts which protect junior water users in the Upper Gunnison
River Basin. This case is pending while the parties negotiate
terms and conditions for incorporation into Stipulations among the parties
and into Proposed Decree for presentation to the Water Court for
approval.
|
|
3.
|
Concerning the
Application of U.S. Energy
, Case No. 2008CW81. On July
25, 2008, the Company filed an Application for Finding of Reasonable
Diligence with the Water Court concerning the conditional water rights
associated with Mount Emmons. The conditional water decree
(“Decree”) requires the Company to file its proposed plan of operations
and associated permits (“Plan”) with the Forest Service and BLM within six
years of entry of the 2002 Decree, or within six years of the final
determination in the Applicant’s pending patent application, whichever
occurs later. Although the BLM issued the mineral patents on
April 2, 2004, the patents remained subject to a challenge by High Country
Citizens’ Alliance, the Town of Crested Butte, and the Board of County
Commissioners of Gunnison County (collectively
“Protestors”). The Company vigorously defended this legal
action through the Federal District Court for the District of Colorado and
the Tenth Circuit Court of Appeals. On April 30, 2007, the
United States Supreme Court made a final determination upholding BLM’s
issuance of the mineral patents through denial of
certiorari. The Company believes that the deadline for filing
the Plan specified by the Decree is April 30, 2013 (six years from the
final determination of issuance of the mineral patents by the United
States Supreme Court). The Forest Service has indicated that
the deadline should be April 2, 2010 (six years from the issuance of the
mineral patents by BLM). The United States, on behalf of the
Forest Service and BLM, filed a Statement of Opposition on this specific
issue only. Statements of Opposition were also filed by six
other parties including the City of Gunnison, the State of Colorado, and
High Country Citizens’ Alliance in September for various reasons,
including requesting the Company be put on strict proof as to
demonstrating evidence of reasonable diligence in developing the
conditional water rights. Although, the Company and TCM will be
prepared to file a Plan by the April 2, 2010 proposed deadline, the
Company and TCM will pursue a ruling from the Water Court that the
deadline specified in the Decree requires the filing of the Plan by the
April 30, 2013.
|
Ordinance Related to the
Crested Butte Watershed
On May
19, 2008, the Town Council adopted a revised Watershed Ordinance. The
Company and TCM intend to work with the Town of Crested Butte concerning
activities at Mount Emmons consistent with lawful and applicable rules,
regulations, and statutes. It is possible that unexpected delays,
and/or increased costs, may be encountered in developing a new mine plan for
Mount Emmons as a result of the revised Watershed Ordinance.
Appeal of Approval of Notice
of Intent to Conduct Prospecting for the Mount Emmons Molybdenum
Property
On March
8, 2008, High Country Citizens’ Alliance (‘HCCA”) filed a request for hearing
before the Colorado Land Reclamation Board (“Board”) of the approval of a Notice
of Intent to Conduct Prospecting Notice for the Mount Emmons molybdenum property
(“NOI”), which was approved by the Division of Reclamation, Mining and Safety of
the Colorado Department of Natural Resources (“DRMS”) on January 3,
2008. The NOI as approved provided for continued exploration of the
molybdenum deposit to update, improve and verify, in accordance with current
industry standards and legal requirements, mineralization data that was
collected by Amax in the late 1970’s.
On March
28, 2008, the Company and the Colorado Attorney General’s Office filed
independent Motions to Dismiss alleging among other matters that: (i) HCCA had
no standing to appeal the NOI; (ii) the NOI is not an appealable decision under
Colorado law; (iii) HCCA’s appeal is not timely; and (iv) the appeal is based on
information obtained in violation of Colorado law.
On May
14, 2008, the Board denied HCCA’s Request for Hearing and also denied their
Request for a Declaratory Order. Citing Colorado law, the Board
determined that HCCA did not have standing or the right to appeal DRMS’s
approval of the NOI under Colorado law.
On August
28, 2008, HCCA appealed the Board’s decision in Denver District
Court.
Plaintiff:
High Country Citizen’s Alliance v. Defendants: Colorado Mined Land
Reclamation Board, Colorado Division of Reclamation Mining and Safety and U.S.
Energy Corp.,
Case No.: 08CV6156 (District Court, 2d Jud. Dist., City and
County of Denver). The Board has filed an answer with the
Court. The DRMS and the Company (in conjunction with TCM) have both
filed the responsive pleadings in addition to motions to dismiss the HCCA
complaint.
Water Treatment Facility –
Permit Renewal Protest
The
Company received a NPDES Permit renewal for Mount Emmons from the Colorado
Department of Public Health and Environment – Water Quality Division (“Water
Quality Division”) effective September 1, 2008. The NPDES Permit is
for a five (5) year period (2008 - 2013). On August 28, 2008, the
Town of Crested Butte, Board of County Commissioners for the County of Gunnison
and High Country Citizens’ Alliance (“Petitioners”) filed a Request for
Adjudicatory Hearing before the Water Quality Division to challenge the NPDES
Permit. The Petitioners seek revisions to the Permit that would
require the Company to maintain a prepaid operating contract and provide
additional financial security for long term operation of the
plant. During the permit approval process, the Division rejected
similar permit revisions proposed by the Petitioners as not being required or
authorized by Colorado law. The hearing will be held in early
2009 before an Administrative Law Judge in the Office of Administrative Courts
(“OAC”). The Company will participate in the hearing as an interested
party. The Company expects to work cooperatively with the Water
Quality Division in defending the NPDES Permit.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June
27, 2008, the annual meeting of shareholders was held for the election of three
directors to serve until the terms stated in the Proxy Statement (until the 2011
Annual Meeting of Shareholders and until their successors are elected or
appointed and qualified). With respect to the election of the
directors, the votes cast were as follows:
|
Name
of Director
|
Votes
For
|
Votes
Against
|
|
Abstain
|
||
|
Robert
Scott Lorimer
|
15,135,221
|
1,031,261
|
78,728
|
|||
|
H.
Russell Fraser
|
14,854,004
|
1,359,839
|
31,367
|
|||
|
Michael
Feinstein
|
14,759,875
|
1,400,310
|
85,025
|
The
directors now are Keith G. Larsen, Mark J. Larsen, Robert Scott Lorimer, H.
Russell Fraser, Allen S. Winters, Michael T. Anderson and Michael
Feinstein.
The
shareholders also voted on two additional items:
|
Votes
For
|
Votes
Against
|
Abstain
|
||||
|
Adoption
of the 2008 Stock Option Plan for non-employee directors.
|
5,265,973
|
1,423,482
|
71,735
|
|
Votes
For
|
Votes
Against
|
Abstain
|
||||
|
Ratification
of appointment of Moss Adams LLP as independent auditors for the current
fiscal year.
|
15,607,715
|
615,574
|
21,921
|
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED
STOCKHOLER MATTERS
AND
ISSUER PURCHASE 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").
Quarterly high and low sale prices follow:
|
High
|
Low
|
|||||||
|
Calendar
year ended December 31, 2008
|
||||||||
|
First
quarter ended 03/31/08
|
$ | 4.45 | $ | 3.17 | ||||
|
Second
quarter ended 06/30/08
|
3.30 | 2.42 | ||||||
|
Third
quarter ended 09/30/08
|
3.27 | 1.87 | ||||||
|
Fourth
quarter ended 12/31/08
|
2.60 | 1.52 | ||||||
|
Calendar
year ended December 31, 2007
|
High
|
Low
|
||||||
|
First
quarter ended 03/31/07
|
$ | 6.19 | $ | 4.60 | ||||
|
Second
quarter ended 06/30/07
|
6.79 | 5.28 | ||||||
|
Third
quarter ended 09/30/07
|
5.77 | 4.29 | ||||||
|
Fourth
quarter ended 12/31/07
|
5.74 | 4.17 | ||||||
(b)
Holders
(1)
At March
9, 2009 the closing market price was $1.67 per share. There were
approximately 2,092 shareholders of record, with 21,935,129 shares of common
stock issued and outstanding at December 31, 2008.
(2)
Not
applicable.
|
(c)
|
We
paid a one time special $0.10 per share cash dividend to common
shareholders of record on July 6, 2007. There are no
contractual restrictions on our present or future ability to pay cash
dividends.
|
|
(d)
|
Equity
Plan Compensation Information - Information about Compensation Plans as of
December 31, 2008:
|
Issuance of Securities in
2008
During
the twelve months ended December 31, 2008 USE issued a total of 658,576 shares
and cancelled 2,315,940 shares. A brief discussion of the issuance of
the shares follows:
Registered
Securities
During
the twelve months ended December 31, 2008, we issued 364,198 shares as the
result of the exercise of a stock warrant which had been previously issued to a
consultant and an additional 82,500 shares as a result of the exercise of
warrants which had been issued to a former director.
Unregistered
Securities
We issued
126,878 shares for the 2008 funding of the ESOP established for
employees. The ESOP funding represents the minimum required
amount. We also issued 85,000 shares as per the terms of the 2001
Stock Award Plan to the Executive Officers of the Company.
Cancellation of
Shares
We
cancelled 155,811 held by the Company’s ESOP which had not been distributed to
individual employee accounts and were held as security for a note from the ESOP
to the Company. We also cancelled an additional 2,160,129 shares that
were purchased under the Stock Buyback Plan.
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,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Current
assets
|
$ | 72,767,500 | $ | 82,728,900 | $ | 43,325,200 | $ | 7,840,600 | $ | 5,421,500 | ||||||||||
|
Current
liabilities
|
19,982,000 | 8,093,200 | 11,595,200 | 1,232,200 | 6,355,900 | |||||||||||||||
|
Working
capital (deficit)
|
52,785,500 | 74,635,700 | 31,730,000 | 6,608,400 | (934,400 | ) | ||||||||||||||
|
Total
assets
|
142,630,900 | 131,404,400 | 51,901,400 | 38,106,700 | 30,703,700 | |||||||||||||||
|
Long-term
obligations
(1)
|
1,870,300 | 1,282,500 | 882,000 | 7,949,800 | 13,317,400 | |||||||||||||||
|
Shareholders'
equity
|
111,833,300 | 115,099,900 | 37,467,900 | 26,027,200 | 6,669,200 | |||||||||||||||
|
(1)
Includes
$144,100 of accrued reclamation costs on properties at December 31, 2008,
$133,400 at December 31, 2007,
|
|
$124,400
at December 31, 2006, $5,669,000 at December 31, 2005 and $7,882,400 at
December 31, 2004.
|
|
See
Note K of Notes to Consolidated Financial
Statements.
|
|
Year
ended December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Operating
revenues
|
$ | 2,287,000 | $ | 1,174,100 | $ | 880,200 | $ | 849,500 | $ | 815,600 | ||||||||||
|
Loss
from continuing operations
|
(9,520,900 | ) | (14,538,900 | ) | (14,667,600 | ) | (6,066,900 | ) | (4,983,100 | ) | ||||||||||
|
Other
income & expenses
|
(99,500 | ) | 108,823,900 | 2,118,200 | (484,000 | ) | 465,100 | |||||||||||||
|
Gain
(loss) before minority
|
||||||||||||||||||||
|
interest,
equity in income (loss)
|
||||||||||||||||||||
|
of
affiliates, income taxes,
|
||||||||||||||||||||
|
discontinued
operations,
|
||||||||||||||||||||
|
and
cumulative effect of
|
||||||||||||||||||||
|
accounting
change
|
(9,620,400 | ) | 94,285,000 | (12,549,400 | ) | (6,550,900 | ) | (4,518,000 | ) | |||||||||||
|
Minority
interest in loss (income)
|
-- | (3,551,400 | ) | 88,600 | 185,000 | 207,800 | ||||||||||||||
|
of
consolidated subsidiaries
|
||||||||||||||||||||
|
(Provision
for) benefit from
|
3,325,800 | (32,366,800 | ) | 15,331,600 | -- | -- | ||||||||||||||
|
income
taxes
|
||||||||||||||||||||
|
Discontinued
operations, net of tax
|
4,906,500 | (2,003,600 | ) | (1,818,600 | ) | 15,207,400 | (1,938,500 | ) | ||||||||||||
|
Cumulative
effect of
|
||||||||||||||||||||
|
accounting
change
|
-- | -- | -- | -- | -- | |||||||||||||||
|
Preferred
stock dividends
|
-- | -- | -- | -- | -- | |||||||||||||||
|
Net
income (loss)
|
||||||||||||||||||||
|
to
common shareholders
|
$ | (1,338,100 | ) | $ | 56,363,200 | $ | 1,052,200 | $ | 8,841,500 | $ | (6,248,700 | ) | ||||||||
|
Per
share financial data
|
||||||||||||||||||||
|
Year
ended December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Operating
revenues
|
$ | 0.10 | $ | 0.06 | $ | 0.04 | $ | 0.05 | $ | 0.05 | ||||||||||
|
Loss
from continuing operations
|
(0.41 | ) | (0.71 | ) | (0.88 | ) | (0.38 | ) | (0.38 | ) | ||||||||||
|
Other
income & expenses
|
-- | 5.29 | 0.12 | (0.03 | ) | 0.04 | ||||||||||||||
|
Gain
(loss) before minority
|
||||||||||||||||||||
|
interest,
equity in income (loss)
|
||||||||||||||||||||
|
of
affiliates, income taxes,
|
||||||||||||||||||||
|
discontinued
operations,
|
||||||||||||||||||||
|
and
cumulative effect of
|
||||||||||||||||||||
|
accounting
change
|
(0.41 | ) | 4.61 | (0.76 | ) | (0.39 | ) | (0.34 | ) | |||||||||||
|
Minority
interest in loss (income)
|
-- | (0.17 | ) | -- | -- | 0.02 | ||||||||||||||
|
of
consolidated subsidiaries
|
||||||||||||||||||||
|
(Provision
for) benefit from
|
0.21 | (1.58 | ) | 0.81 | -- | -- | ||||||||||||||
|
income
taxes
|
||||||||||||||||||||
|
Discontinued
operations, net of tax
|
-- | -- | -- | 0.94 | (0.15 | ) | ||||||||||||||
|
Cumulative
effect of
|
||||||||||||||||||||
|
accounting
change
|
-- | -- | -- | -- | -- | |||||||||||||||
|
Preferred
stock dividends
|
-- | -- | -- | -- | -- | |||||||||||||||
|
Net
income (loss)
|
||||||||||||||||||||
|
per
share, basic
|
$ | (0.06 | ) | $ | 2.75 | $ | 0.06 | $ | 0.55 | $ | (0.48 | ) | ||||||||
|
Net
income (loss)
|
||||||||||||||||||||
|
per
share, diluted
|
$ | (0.06 | ) | $ | 2.54 | $ | 0.05 | $ | 0.55 | $ | (0.48 | ) | ||||||||
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULT 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, 2008, 2007 and
2006.
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.
General
Overview
The
Company’s strategy is to enhance value for our shareholders through the
development of a well-balanced portfolio of natural resource-based
assets. The Company is focusing its efforts on projects with varying
time horizons and levels of risk:
|
·
|
Near and
Mid-Term
.
|
Oil and
Gas
Our Gulf
Coast oil and gas assets provide a potentially large inventory of exploration
opportunities. The Company believes that numerous prospects could be
generated, leased and drilled, potentially resulting in $10 to $15 million in
exploration and development expenditures for its working interest over the
course of the next three to five years. The Company is also actively
seeking to enhance its oil and gas revenues through
acquisitions. With the Company’s strong balance sheet, it looks to
add meaningful production during 2009 through purchases of producing assets at
attractive prices. It is our objective to exit the year ending
December 31, 2009 with 7,000 MCFE/D in production although we are not limiting
our corporate objective in this endeavor if larger value opportunities are
found.
Renewable
Energy
In
December 2008, the Company invested $3.4 million in a geothermal venture,
Standard Steam Trust, LLC (“SST”). The investment provided the
Company with a 25% ownership interest in SST. The Company intends to
maintain its 25% ownership interest by continuing to invest in the exploration
and development of SST’s prospects as well as the acquisition of additional
geothermal leases. The forecast for commercial development of the
first geothermal prospects, whereby they could be sold to utilities or joint
ventured with renewable energy industry partners, is three to five
years.
In
addition to our geothermal venture, the Company is evaluating potential
investments in other areas of renewable energy. Sectors being
evaluated are wind and solar power located in the United States. No
investments have been made in these “green power”
generation industries as of the date of this report but the Company
continues to evaluate various projects and may invest in these technologies
under the proper circumstances. We believe that a significant
opportunity exists today to exploit the development of clean energy assets in
the mid-term. Our initial focus lies in geothermal energy and we
believe that it has tremendous potential. It is our goal to develop
and monetize these assets in the mid-term.
Commercial Real
Estate
The
Company constructed and operates a multifamily housing project in Gillette,
Wyoming (“Remington Village”). We view this as a natural resource
based activity as it is related to strong housing demand created by high levels
of employment in natural resource activities, primarily oil and gas development
and coal mining in northeast Wyoming. Management of the Company plans
on operating the property in the near term and either selling or financing it in
a two to three year time frame. The Company determined the best use
of its cash was to pay off the December 31, 2008 $16.8 million construction loan
and save the interest differential between U.S. Treasuries, at less than 2% per
annum, verses the cost of a long term loan of between 6.2% and
6.7%. The Company therefore paid off the construction loan on January
16, 2009.
Our
monthly revenues from Remington Village are now approximately
$230,000. When combined with our oil and gas revenues, our monthly
revenues are now over $500,000 per month. We look to continue to
operate Remington Village in the near term and to eventually sell the property
to access capital for future investments in oil and gas prospects.
|
·
|
Long-Term
|
Mount Emmons Molybdenum
Property
The
Company will continue its efforts to place the Mount Emmons molybdenum property
(“Mount Emmons”) near Crested Butte, Colorado into production. In
August 2008, the Company signed an agreement with Thompson Creek Metals Company
(“TCM”), a major molybdenum mining and refining company, whereby TCM can earn up
to a 75% interest in the property after TCM spends up to $400 million in
expenditures and option payments. The time table for completing the permitting
and construction of the mine and milling facilities is dependent upon several
factors, including State and Federal regulations and availability of capital
which is driven by the market price for molybdenum. The Company
anticipates placing the property into production by 2014 or later.
Historical
records filed by predecessor owners of the Mount Emmons molybdenum property with
the Bureau of Land Management (BLM) in the 1990’s for the application of
patented mineral claims, referenced identification of mineral resources of
approximately 220 million tons of 0.366% molybdic disulfide (MoS
2
)
mineralization. A high grade section of the mineralization containing
roughly 23 million tons at a grade of 0.689% MoS
2
was also
reported. While no assurance can be given that these quantities of
MoS
2
exist, the Company believes that this project has extraordinary
potential. The average market price for MoS
2
at
December 31, 2008 was $10.00 per pound.
Due to
the “World Class” nature of the Mount Emmons deposit, we believe that the
property possesses the potential to deliver long term significant returns to our
shareholders. In the interim between now and the actual permitting
and commencement of mining at Mount Emmons, which cannot be assured, it is our
objective to build revenues, earnings and cash flows for our shareholders
through oil and gas production as well as renewable energy.
Liquidity
and Capital Resources
The
Company, at December 31, 2008, had $8,434,400 in cash and cash equivalents of
$51,152,100 in U.S. Government Treasuries with longer than 90 day maturities
from date of purchase, and $4,929,200 in restricted investments which were also
invested in U.S. Treasuries and pledged on the construction loan for Remington
Village. These balances total $64.5 million or $2.94 per outstanding
common share at December 31, 2008. Working capital (current assets
minus current liabilities), at December 31, 2008, was $52,785,500. As
discussed below in Capital Resources and Capital Requirements, the Company
projects that its capital resources at December 31, 2008 will be sufficient to
fund its operations and capital projects through the balance of 2009 and into
the future.
The
principal factors affecting the Company are commodity prices, the grade of
mineral deposits, permitting and costs associate with exploration and
development of the prospects. As commodity prices fall, management
believes it is typically less expensive for the Company to acquire properties to
hold and advance them until commodity prices rise to levels allowing the
properties to be sold or placed into production through joint venture partners
or by the Company for its own account.
Major
changes in liquidity during the year ended December 31, 2008 were:
Current
Assets
|
·
|
Cash
decreased by $63,857,800 as a result of investing $51,152,100 in
marketable securities, namely U.S. Treasuries, with maturities greater
than three months from the date of purchase. The Company also
used cash in operations, mineral property holding expenses, permitting and
engineering study costs, oil and gas exploration and an investment in a
geothermal company. Please see discussion below regarding cash
flows for the twelve months ended December 31,
2008.
|
|
·
|
Accounts
receivable trade, reimbursable project costs and the dissolution of
subsidiaries decreased $109,900. This reduction was as a result
of the collection of $782,100 paid by the Company on the Mount Emmons
project and reimbursed by Kobex Resources, the collection of $197,600 due
the Company upon the dissolution of its subsidiaries and a reduction of
accounts receivable trade of $83,300. These reductions in
accounts receivable were offset by increases in reimbursable project costs
from TCM of $441,500 relating to Mount Emmons and accounts receivable
trade for the production of oil and gas, $600,000 and Remington Village of
$21,500.
|
|
·
|
During
2008, the Company received $944,900 from the Internal Revenue Service as a
refund of taxes paid in 2007. The loss incurred
during the twelve months ended December 31, 2008 will be carried back
against taxes paid in 2007. This carryback increases the amount
of the account receivable from the Internal Revenue Service to $5,896,400,
resulting in a net change of $4,933,500 in the account receivable for
income taxes.
|
|
·
|
The
Company’s restricted investments, cash held in an interest bearing
account, decreased by $1,794,600 due to the release of funds held in
escrow for a potential tax free real estate exchange at December 31, 2007
which was never consummated. Additionally, $45,600 that was
being held in an escrow account related to the Uranium One transaction in
2007 was released during 2008. The remaining restricted
investments at December 31, 2008 earned $144,700 in interest during the
twelve months then ended.
|
|
·
|
The
asset held for sale at December 31, 2007 with a book value of $1,112,600
was a used corporate aircraft which was sold during the twelve months
ended December 31, 2008.
|
Current
Liabilities
|
·
|
Accounts
payable decreased by $691,900 during the twelve months ended December 31,
2008. The decrease was a result of the Company funding an early
retirement benefit in the amount of $600,000, the payment of $285,100 in
sales taxes due on the purchase of an aircraft, and the payment of accrued
accounts payable. Increases in accounts payable in the amount
of $193,200 are principally related to drilling costs on the Company’s oil
projects and engineering studies on Mount
Emmons.
|
|
·
|
Accrued
compensation expense increased by $407,000 during the twelve months ended
December 31, 2008. This increase reflects a one time bonus
accrued to an officer of the
Company.
|
|
·
|
The
construction loan associated with Remington Village increased by
$11,323,500 to $16,812,500 at December 31,
2008.
|
|
·
|
During
the twelve months ended December 31, 2008 the Company retired all long
term debt of $362,400 relating to various vehicles and
equipment. The Company also jointly purchased a 160 acre parcel
of property near the Mount Emmons property with TCM. At
December 31, 2008 the Company owed $1,875,000 as its portion of the
purchase price.
|
Cash flows during the twelve months
ended December 31, 2008
:
|
·
|
Operations
consumed $6,536,000, Investing Activities consumed $70,557,100 and
Financing Activities provided $8,909,600. For a discussion on
cash consumed in Operations please refer to Results of Operations
below.
|
Investing
Activities
:
Cash
provided by Investing Activities:
|
·
|
Net
proceeds from the sale of a used corporate aircraft and miscellaneous
equipment in the amount of
$1,102,800.
|
|
·
|
Net
proceeds from the release of restricted investments of $1,841,800 consist
of the release of $45,600 held in escrow as a result of the sale of
uranium properties in 2007 and $1,794,600 held at December 31, 2007 for a
potential tax free exchange real estate transaction which was never
consummated.
|
Cash
consumed in investing activities:
|
·
|
The
vast majority of the cash consumed from investing activities, $49,896,800,
was a net investment of cash in Government Treasuries with a maturity of
more than 90 days from purchase date. These Government
Treasuries are not considered cash for accounting purposes but held to
maturity marketable securities.
|
|
·
|
The
Company invested $11,444,700 in Remington Village and $152,400 for
improvements on a property held for development or resale during the
twelve months ended December 31,
2008.
|
|
·
|
The
Company paid $1,149,600 for its portion of oil and gas acquisition costs
related to oil and gas properties in the U.S. gulf coast and paid
$4,203,900 for its proportionate share of drilling costs and expenses on a
well for a total cash investment of
$5,353,500.
|
|
·
|
The
Company invested $2,905,400 net, in its unproven mining properties during
the twelve months ended December 31, 2008. Included in this
increase is the joint purchase (with TCM) of 160 acres near the Mount
Emmons property for $4.0 million of which the Company is obligated for one
half or $2.0 million.
|
The
increase in unproven mining claims was reduced by the receipt of $500,000 from
TCM pursuant to the terms of the Exploration, Development and Mine Operating
Agreement with TCM, the abandonment of certain options on uranium leases and the
cancellation of a finder’s fee on Mount Emmons.
|
·
|
The
Company invested $293,900 in property and equipment which were
improvements at the water treatment plant at Mount Emmons, $195,300
for the purchase of miscellaneous light equipment, and $69,600
and $29,000 of office equipment and furniture,
respectively.
|
|
·
|
The
Company purchased a minority interest, 25%, in Standard Steam Trust, LLC
(“SST”), a private Denver, Colorado based geothermal prospect acquisition
and development company for
$3,455,000.
|
Financing
Activities
:
Cash
provided by Financing Activities:
|
·
|
A
total of $1,527,600 was received as the result of the cash exercise of
446,698 warrants.
|
|
·
|
$11,423,500
in additional funds were drawn against the construction loan for Remington
Village.
|
|
|
Cash
consumed in Financing Activities:
|
|
·
|
Payment
of long term debt of $362,400 relating primarily to the payoff of notes
related to various pieces of
equipment.
|
|
·
|
The
Company is obligated to pay one half of the purchase price of the land
purchase mentioned under Investing Activities. The Company made
a deposit of $125,000 against its obligation of $2.0 million (one half of
the purchase price) and has the obligation to pay an additional $1,875,000
as of December 31, 2008.
|
|
·
|
On
June 22, 2007, the Company announced a stock buyback plan to purchase up
to $5.0 million of its common stock. This plan was amended on
September 19, 2008 increasing the total purchase amount to $8.0
million. During the twelve months ended December 31, 2008, the
Company purchased 2,160,129 shares under the buyback plan for $5,554,100
or an average price of $2.57 per share. From inception of the
stock buyback plan through December 31, 2008, the Company has purchased
2,388,129 shares at an average price per share of $2.76 or
$6,601,800.
|
Capital
Resources
Oil
and Gas Production
The
Company’s short and medium term sources of cash are expected to be provided by
successful oil and gas wells. Production from the first successful
well drilled in the Gulf Coast with PetroQuest, (“PQ”) began in November
2008. Reserve reports indicate that the well will continue to produce
for an additional five years. The following table
represents the Company’s portion of projected production from the well as
calculated by the Company’s reserve engineering firm, Ryder Scott:
|
Oil
Condensate
|
Gas
|
|||
|
Year
|
Barrels
|
MMcf
|
||
|
2009
|
16,773
|
517
|
||
|
2010
|
8,487
|
303
|
||
|
2011
|
3,065
|
120
|
||
|
2012
|
1,216
|
50
|
||
|
2013
|
257
|
11
|
||
|
2014
|
-
|
-
|
The
ultimate amount of cash resources derived from the production of oil and gas
will be determined by the price of oil and gas as well as the cost of
production. The ultimate life of the well will likewise be impacted
by market prices and costs of production. The Company plans on
continuing in the oil and gas exploration business and may also acquire existing
production.
Real
Estate
During
the fourth quarter of 2008, the Company completed the construction of a 216 unit
multifamily housing property in Gillette, Wyoming, known as Remington
Village. At December 31, 2008, the property was 88%
occupied. Revenues during 2008 from the project were $1,531,100 with
offsetting expenses of $839,100. Included in the costs and expenses
was $469,000 of depreciation. The net cash flow from the property
during 2008 was therefore $1,161,000. Revenue projections for
2009 are $238,500 per month or $2.9 million. After cash costs and
expenses it is estimated that the Company will net $1.7 million in cash flow
during the year ended December 31, 2009.
In
December 2008, the Company determined to pay off the balance owing under the
construction loan used to construct Remington Village, (see Capital
Requirements below). The Company will continue to own and operate
Remington Village until it has a need for the invested capital at which time it
will likely monetize the property. Total cost of the property at
December 31, 2008 was $24.5 million. As part of the completion of the
property the Company had the property appraised. The appraisal
indicated that as of December 8, 2008 the property had a value of $27.0
million. No assurance can be given that market conditions at the time
the Company determines to sell the property will be such that it will be able to
recover its cost of construction and realize a profit. The Company
however believes that due to the quality of the property, the need for housing
in Gillette, Wyoming and the continued expansion of energy related properties in
the area, the Company will be able to recoup its investment with a
profit.
Cash
on Hand
The
Company has invested its working capital in interest bearing accounts and the
majority of its cash surplus in short term U.S. Government
Treasuries. Although the Company could benefit from higher interest
bearing investments, it has its cash invested in U.S. Treasuries to preserve the
principal in the current turbulent financial markets and to avoid becoming an
inadvertent investment company.
Commercial
Bank
Line of Credit
- The
Company has a $5.0 million line of credit from a commercial bank. The
full line of credit was available to the Company at December 31, 2008 and when
this report was filed. The line of credit has a variable interest
rate which is tied to a national market rate. At December 31, 2008
the rate on the line of credit was 3.25% per annum. The line of
credit is available until October 1, 2009 at which time it may be renewed
depending on the financial strength and needs of the Company. The
credit line is secured by our corporate headquarters and a corporate
aircraft. To date, no advances have been made on the line of
credit.
Mount
Emmons Molybdenum Property and Thompson Creek Metals Company, USA
On March
31, 2008, Kobex Resources, LLP (“Kobex”) gave notice to the Company that it was
terminating its Exploration, Operating and Mine Development Agreement with the
Company. Through March 31, 2008, Kobex had expended over $8.0 million
on the project.
On August
19, 2008, the Company and TCM entered into an Exploration, Development and Mine
Operating Agreement for the Company’s Mount Emmons molybdenum property in
Gunnison County, Colorado. TCM assigned the agreement to Mt. Emmons
Moly Company, a Colorado corporation and wholly owned subsidiary of TCM
effective September 11, 2008. Under the terms of the agreement TCM is
required to make the following option payments to the Company and expenditures
on Mount Emmons through 2011:
* Paid
in 2008
** Paid
in 2009
The $1.0
million annual option payments are to be paid directly to the Company and may be
used by the Company for any purpose.
Mount
Emmons is expected to provide the Company’s long range source of capital
resources. Historical records filed by predecessor owners of the
Mount Emmons molybdenum property with the Bureau of Land Management (BLM) in the
1990’s for the application of patented mineral claims, referenced identification
of mineral resources of approximately 220 million tons of 0.366% molybdic
disulfide (MoS
2
)
mineralization. A high grade section of the mineralization containing
roughly 23 million tons at a grade of 0.689% MoS
2
was also
reported. No assurance can be given that these quantities of MoS
2
exist or
that the Company will be successful in permitting the property. The
average market price for MoS
2
at
December 31, 2008 was $10.00 per pound.
Future
Receipts of Royalties and Contractual Commitments from Uranium
Properties
We
retained a 4% Net Profits Royalty on a portion of the Green Mountain uranium
property in Wyoming which is owned and operated by Rio Tinto, Inc. No
assurance can be given as to when or if the property will be placed into
production. Any royalty due will be based on the market price of
uranium concentrates and the cost of producing those concentrates.
Pursuant
to the terms of the 2007 Uranium One contract for the sale of our uranium
properties, the Company is entitled to receive $20 million when commercial
production begins at the Utah uranium mill sold to Uranium One; $7.5 million
when the first delivery of ore to any commercial mill, after commercial
production commences, from any of the uranium properties the Company sold to
Uranium One; and a production royalty of up to $12.5 million. No
assurance can be given as to if or when these events and payments will
occur.
Capital
Requirements
The
direct capital requirements of the Company during the balance of 2009 are the
funding of the water treatment plant at the Mount Emmons molybdenum project,
development of the Company’s interest in recently acquired oil and gas
properties and the potential acquisition of additional oil and gas properties,
operations at Remington Village including the retirement of the $16.8 million
construction loan, funding of geothermal operations and the potential
participation in other renewable energy projects, the stock buyback
program and general and administrative costs.
Mount
Emmons Molybdenum Property
Under the
terms of its agreement with TCM, the Company is responsible for all costs
associated with operating the water treatment plant at the Mount Emmons
molybdenum property. Annual operating costs during 2009 are projected
to be approximately $1.7 million. Additionally, the Company has
budgeted $587,500 for capital improvements in the plant which will
improve its efficiency and safety.
The
Company and TCM purchased a 160 acre parcel of property near the Mount Emmons
property. The land was purchased for $4.0 million of which the
Company is responsible for one half. The Company made an initial
payment of $125,000 on this piece of property in December 2008. Under
the terms of the loan agreement, the first payment from the Company for the
balance due is $875,000 due in January 2009 with the remaining $1.0 million to
be paid in five equal payments of $200,000 each beginning in January 2010
through January 2014 with 6% interest per annum on the unpaid
balance. In addition to the retirement of the debt, the Company
will be responsible for one half of the holding and operating costs of the
acreage which are expected to be minimal.
TCM has
prepared its annual budget for the Mount Emmons property. As per the
terms of the agreement with TCM, the Company will not be required to fund any of
the proposed work to be performed on the property during 2009 unless TCM
terminates the agreement. The Company and TCM plan on submitting a
Plan of Operations to the U.S. Forest Service in 2010. All the costs
of developing and submitting this plan will be paid for by TCM as per the
agreement.
The
Company may elect to participate in additional capital acquisition programs with
TCM under unspecified terms.
Oil
and Gas Development
PetroQuest
Energy, Inc. – Gulf Coast
In 2007,
the Company entered into an Exploration and Area of Mutual Interest Agreement
(the “Mutual Agreement”) with PetroQuest Energy, Inc. (“PQ”) relating to three
prospect areas in the Gulf Coast region of the United States. The
Mutual Agreement provides the Company with the right, through September 13,
2011, to acquire a 20% working interest in each lease acquired by PQ within any
of the three prospect areas. PQ is the operator of each
prospect and owns or will likely own a majority of the working interest in the
area covered by the Mutual Agreement.
Through
December 31, 2008, the Company paid $3.2 million for our 20% share of lease
acquisition and seismic data reprocessing and reinterpretation
costs. The Company spent an additional $4.2 million in exploration
costs. $2.5 million was spent on the Bluffs well, completed as an oil and gas
producer. The Company’s working interest is 15% (reduced from 20% due
to a third party’s right and subsequent election to back in for 5% of
the leasehold), representing a net revenue interest of 10.4%. The
working and net revenue interests will be further reduced at payout of the
Company’s costs, plus 6% annual interest, pursuant to the Wildes agreement (see
below). The Company’s portion of the costs were approximately
$607,800 more than anticipated due to drilling and completion cost overruns,
some of which were due to adverse weather conditions. The Company’s
portion of operating costs and expenses for the Bluff well are projected to be
$226,800 during 2009.
Reserves
The
reserve estimates for the Bluffs well (one well location with no additional
locations to be drilled), net to our interest at December 31, 2008, was prepared
by Ryder Scott, an independent petroleum engineering firm. Estimates
of reserves are presented in accordance with SEC rules. All reserves
are valued at the total estimated future net cash flows before income taxes,
discounted at 10%. This value is not intended to represent the
current market value of the reserves. Reserve estimates are
inherently imprecise and are continually subject to revision based on production
history, results of additional exploration and development, oil and gas prices,
and other factors.
Estimates
of reserve volumes and future net cash flows use the prices received for
production at December 31, 2008 ($41.41 per barrel of oil and $5.88 per Mcf of
gas). Future estimated production and ad valorem taxes, capital costs
and operating costs are deducted from estimated future cash flows, and the
result is discounted at an annual rate of 10% to determine “present value”
(“PV-10”). Following is a summary of our reserves at December 31,
2008:
PV-10 is
widely used in the oil and gas industry, and is followed by institutional
investors and professional analysts, to compare companies. However,
the PV-10 data is not an alternative to the standardized measure of discounted
future net cash flows calculated under GAAP and in accordance with Statement of
Financial Accounting Standards No. 69, which includes the effects of income
taxes. The following table provides a reconciliation of Estimated
Future Net Revenues Discounted at 10% to the Standardized Measure of Discounted
Future Net Cash Flows as shown in Note F to the company’s Consolidated Financial
Statements.
|
Year
Ended
|
||||
|
December
31,
|
||||
|
2008
|
||||
|
Estimated
future net revenues discounted at 10%
|
$ | 5,311,400 | ||
|
Future
income tax expense
|
(1,992,900 | ) | ||
|
Standardized
measure of discounted future net cash flows
|
$ | 3,318,500 | ||
USE’s oil
and gas production for the year ended December 31, 2008 was 73,635 Mcf gas and
2,330 barrels of oil. The average price per Mcf sold was $6.93 and
$41.85 per barrel of oil sold.
An
additional $1.7 million of drilling expense was incurred for the Highlands well
(a dry hole).
We have
not yet committed to the drilling of any wells on other
prospects. While successful Gulf Coast wells can provide favorable
returns on investment, and the initial production from the Bluffs well was
higher than expected, we will continue to assess the viability of participating
in additional wells with PQ. If we should elect not to participate in
any undrilled prospects proposed by PQ where we have paid for lease and seismic
costs, we will attempt to farm out our interest, sell our interest in the
seismic or abandon the prospect. The costs associated with these
undrilled prospects will remain in the full cost pool and be subject to ceiling
tests. The Company has budgeted $3.0 in drilling expenses and
$240,000 in leasehold costs under the terms of the agreement with
PQ.
YUMA
Exploration and Production Company Inc.
On April
27, 2008 the Company entered into a four year Joint Exploration Agreement (the
“Exploration Agreement”) with Yuma Exploration and Production Company, Inc.
(“Yuma”), a private exploration and production company based in Houston,
Texas. Under the Exploration Agreement, the Company has purchased a
working interest in a seismic, lease acquisition and drilling program covering
approximately 138 square miles in South Louisiana. Net acreage
acquired will depend on the terms of leases acquired, but is expected to be in
excess of 50,000 net acres. Yuma holds a 48% working interest and the
balance is held by the Company (4.55%) and third parties (approximately
47.45%). For their working interests, the participants (other than
Yuma) are paying 80% of the initial seismic, overhead and some land costs (total
$1,390,000), and Yuma is paying 20%. All land and exploration costs
going forward are to be paid according to the working interest
percentages.
As of
December 31, 2008, approximately 400 miles of reprocessed 2-D seismic data has
been analyzed to prepare for a large 3-D seismic survey expected to be conducted
in first and second quarter 2009. Yuma is expected to utilize the
data to identify prospect areas and propose lease acquisition activities and an
initial well in each prospect identified. The Company has the
opportunity to opt in or out of any prospect leasing program, and also as to the
initial well in each prospect. Each prospect will have a separate
operating agreement with Yuma as operator. It is expected that the
program will yield multiple prospects, with exploration activities continuing
for a number of years. Once the Exploration Agreement is completed as
to the seismic, acquisition and initial well phases, and Yuma decides to conduct
a 3-D seismic survey on another identified area, participants, including USE,
will have the option to participate in the area on the same terms as the
Exploration Agreement.
Through
December 31, 2008, the Company paid $801,900 for seismic and land
costs. The Company’s share of seismic, land and exploration costs for
2009 are expected to be $680,000. Exploration expenses for 2009 will
depend on the number of wells to be proposed by Yuma, which is not known at the
time of this report.
Wildes
Exploration Agreement
In 2007
and 2008, the Company entered into a Management Engagement Agreement (for terms
with a management company affiliated with Wildes Exploration
(“Wildes”). The Company is paying Wildes $100,000 annually for
consulting and management services for the prospects under the Mutual Agreement
with PQ and an additional $50,000 annually for the Exploration Agreement with
Yuma.
In
addition, pursuant to the agreement with Wildes, the Company will assign to
Wildes a working interest of 15% of its working interest after it has
recovered 100% of its costs plus 6% interest compounded annually, for each
producing well drilled and completed within a prospect area with
PQ. This interest will increase to 20% of the
Company’s working interest after it has recovered 200% of all its
costs from each producing well within the prospect. This assignment
will cover all wells drilled and completed in the particular
prospect. From the assignment date forward, Wildes will be
responsible for its proportionate share of all of costs associated with the
wells in accordance with the operating agreement with PQ.
The
Company will assign Wildes (after we have recovered 100% of our drilling and
completion costs plus 6% interest compounded annually) a working interest of
12.5% of its working interest in each well that is completed with
Yuma. After assignment, Wildes will be responsible for its
proportionate share of the well’s costs under the operating agreement with
Yuma
Texas
Land & Petroleum Company, LLC
The
Company paid TLPC Holdings, Ltd, an affiliate of Texas Land & Petroleum
Company, LLC (“TL&P”) a private Texas company, a $45,000 prospect fee and
signed an agreement for a moderate risk low gravity oil well drilling program on
the Hopkins Prospect in Wood County, Texas, located about 50 miles east of
Dallas. The prospect consists of 790 gross (280 net) acres, with a
75% net revenue interest. The Company will participate in the first
well on a one-third for one quarter basis (33% of drilling and completion costs,
for a 25% working interest (18.75% net revenue interest). Upon
participation in the first well, the Company will own its share of all the
acreage. Subsequent wells will be unpromoted (25% of
costs). TL&P holds 50% of the working interest. The
Company has budgeted $2.6 million for the drilling of up to 6 exploratory wells
with TL&P during 2009. After the first well is drilled, the
Company will determine if it will participate in subsequent wells.
Ridgeland
Wyoming, Inc.
On
December 23, 2008, the Company signed a Participation Agreement, (“Participation
Agreement”) with Ridgeland Wyoming, Inc. (“Ridgeland”), a private oil and gas
producer headquartered in Provo, Utah. The Company paid a $25,000
prospect fee to Ridgeland for a 50% working interest in the Schuricht Prospect
in North East Wyoming. Ridgeland is carried for a 1/6
th
interest (on an 8/8
th
basis)
to casing point on the first well. After the first well, the Company
and Ridgeland will drill all subsequent wells on a 50 – 50 basis. All
leases under the Participating Agreement with Ridgeland are to carry an 80% net
revenue interest. Under the terms of the Participation Agreement the
Company agreed to pay $338,800 as its initial expense in the first well was
drilled early January 2009. The well resulted in a dry hole and has
been plugged and abandoned. The Company is evaluating its possible
participation in any further wells with Ridgeland.
Other Oil
and Gas Exploration or Acquisition Opportunities
The
Company will continue looking for opportunities to either explore for or acquire
existing oil and gas production. The Company has budgeted $2.0
million for drilling and exploration during 2009 in addition to those agreements
in place at December 31, 2008 and described above. Additionally, the
Company is actively pursuing acquisition targets of existing oil and gas
producing fields or entities owning oil and gas production. The
Company has initially budgeted $4.2 million for the acquisition of such
production during 2009 but may increase this amount depending on the assets and
inherent value of the acquisition targets at the time of purchase.
Real
Estate
Cash
operating expenses at Remington Village are projected to be $1.1 million for
2009. The Company does not anticipate any major capital expenditures
on the property but determined it would pay off the construction loan of $16.8
million from cash reserves. The decision to pay off the construction
loan was as a result of the Company earning less than 2% per annum on its U.S.
Treasuries while long term financing would likely be 6.2% to 6.7% per
annum. As the Company did not have alternate projects for the $16.8
million, it paid off the construction loan in January 2009. The
general contractor for the construction of Remington Village is due a retainage
amount of $487,600 which is classified as Other Current Liabilities at December
31, 2008 and will be paid in the first quarter of 2009.
Geothermal
and Alternative Energy Projects
On
December 17, 2008 the Company purchased a minority interest (25% for $3,455,000)
in Standard Steam Trust, LLC (“SST”), a private Denver, Colorado based
geothermal prospect acquisition and development company. The Company
plans on maintaining its 25% participating interest. Dilution,
but no penalty, will occur in the event the Company elects not to participate in
a capital call. SST has submitted its budget for 2009 which includes
additional lease acquisitions, lease hold costs, geological and geophysical
analysis, temperature gradient drilling and general and administrative
costs. For the Company to maintain its 25% ownership interest, it is
estimated that we will be required to fund an additional $3.1 million during
2009 if all the contemplated costs are incurred.
The
Company is also evaluating wind and solar sector opportunities. It is
not known what, if any, cost will be incurred by the Company from an investment
standpoint. The Company is continuing its due diligence
regarding an investment in these renewable energy sectors. It is not
known if any will come to fruition.
Stock
Buyback Program
On
September 19, 2008, the Board of Directors amended the previously approved stock
buyback plan of $5.0 million by increasing the total value of shares to be
repurchased to $8.0 million. The buyback program is being
administered exclusively through an individual brokerage firm. During
2007, the Company repurchased 228,000 shares of its common stock for $1.0
million. In 2008, the Company repurchased 2,160,129 shares of its
common stock for $5.6 million leaving an additional $1.4 million available for
the purchase of shares under the plan at December 31, 2008.
Reclamation
Costs
The
Company has two reclamation obligations:
|
·
|
Mount
Emmons molybdenum property –
|
The Mount
Emmons molybdenum property is located on fee property within the boundary of
U.S. Forest Service (“USFS”) land. Although mining of the mineral
resource will occur on the fee property, associated ancillary activities will
occur on USFS land. It is anticipated that TCM and the
Company will be submitting a Plan of Operations to the USFS in 2010 for
USFS review and approval. USFS approval is required before
construction can begin and mining and processing may occur.
Obtaining
and maintaining the various permits for the mining operations at the Mount
Emmons molybdenum property will be complex, time-consuming, and require
significant capital. Changes in a mine’s design, production rates,
quality of material mined, and many other matters, often require submission of
the proposed changes for agency approval prior to implementation. In
addition, changes in operating conditions beyond the Company’s control, or
changes in agency policy and Federal and State law, could further complicate
approval of the mine’s operation. Although the Company is
confident that the Plan of Operations for the Mount Emmons molybdenum property
will ultimately be approved by the USFS, the timing, cost and ultimate success
of the mining operation cannot be predicted.
The asset
retirement obligation for the Mount Emmons molybdenum property at December 31,
2008 is $118,900. As the Mount Emmons project is developed, the
reclamation liability is expected to increase. It is not anticipated that this
reclamation work will occur in the near term. The Company’s
objective, upon closure of the proposed mine at the Mount Emmons property, is to
eliminate long-term liabilities associated with the property.
|
·
|
Gulf
Coast Oil and Gas Wells
|
As of
December 31, 2008, the Company had one producing well which will require
plugging and abandoning costs in the future. The present value of the
Company’s share of the reclamation cost is anticipated to be
$25,200. It is not anticipated that the cost of reclaiming the well
site will occur within the next four years.
Results of
Operations
Year Ended December 31, 2008
Compared with the Year Ended December 31, 2007
During
the twelve months ended December 31, 2008, the Company recorded a loss of
$1,388,100 as compared to a gain of $56,363,200 during 2007. The
decrease in net earnings for 2008 as compared to 2007 is primarily due to a gain
on the sale of uranium assets during 2007 in the amount of $111,728,200. Other
components in the net change to the results of operations were (a) increased
Revenues during 2008 from real estate rentals and the sale of oil and gas, (b)
decreased Operating Costs and Expenses during 2008, (c) reduced Other Income and
Expenses, (d) the elimination of minority interest in the gain of consolidated
subsidiaries, (e) increased gain from discontinued operations during 2008 as a
result of the sale of the Company’s controlling interest in Sutter Gold Mining,
Inc. (“SGMI”) and (f) changes in the provision for and benefit from Income
Taxes.
Operating
Revenues
:
Rental
revenues of $1,531,100 were received from Remington Village, during
2008. There were no revenues from Remington Village in 2007 as there
were no units available for rent during the early construction
period. Other real estate revenues decreased $832,200 during
2008 from those recorded during 2007. The decrease was as a result of
the Company selling lots at its southern Utah real estate property during 2007
while no similar sales occurred during 2008 as the entire property was
ultimately sold during 2007. The Company recorded its first revenues
from its successful well drilled in the Gulf Coast during 2008 of
$571,000. There was no oil or gas production during
2007. The reduction of $157,000 in management fee and other revenues
during the twelve months ended December 31, 2008 is as a result of no management
fees being charged on the uranium properties during 2008 as all the uranium
properties were sold in 2007. Lower management fees were charged
against Mount Emmons as the Company was the operator from March 31, 2008 through
August 19, 2008 during which time there were no management fees
charged. The Company charged management fees for services it provided
under the contract with Kobex to the Mount Emmons property during the twelve
months ended December 31, 2007.
Operating
revenues therefore increased by $1,112,900 for the year ended December 31, 2008
as compared to the year ended December 31, 2007.
Operating Costs and
Expenses
:
Operating
Costs and Expenses decreased by $3,905,100 for the year ended December 31, 2008
as compared to the year ended December 31, 2007. Operating Costs and
Expenses related to other real estate and general and administrative costs were
reduced while expenses associated with the Remington Village project, oil and
gas production and mineral holding costs increased.
Operating
costs for Remington Village during 2008 were $839,100. These costs
consist of contract property management services, maintenance, insurance and
general administration costs and $469,000 of depreciation. There were
no operating costs relating to Remington Village during 2007.
There
were no costs and expenses for the production of oil and gas during
2007. During 2008, the Company recorded expenses of $444,200 for its
portion of the operating costs and expensed for the producing well in the Gulf
Coast.
Mineral
holding costs increased by $1,475,200 during 2008 over the same costs and
expenses during 2007. The increases were for the cost of operating
and maintaining the water treatment plant at Mount Emmons, of $1,461,800 and
$1,106,100 for costs and expenses incurred by the Company for engineering
studies during the time it served as manager of the property. This
increase is as a result of the withdrawal of Kobex from the Mount Emmons
molybdenum property on March 31, 2008. Subsequent to March 31, 2008
the Company paid the holding costs related to the Mount Emmons property while
Kobex paid these costs during 2007. After August 19, 2008, the
Company continued to pay all costs associated with the water treatment plant and
TCM paid all other costs associated with the property.
General
and administrative costs and expenses were reduced primarily as a result of a
bonus which was paid to all employees and directors of the Company 2007 at the
closing of the sale of the Company’s uranium assets to Uranium One and the
payment of an early retirement severance package for one of the Company’s
officers. Although there was no similar bonus paid during 2008,
the Company did pay one half of a $500,000 bonus to one of its officers which
was approved on March 7, 2008. The approved bonus to the officer was
for services rendered over many years, was comparable to a similar bonus paid
two former officers for similar services, is net of taxes and is payable in
eight equal quarterly payments beginning on March 31, 2008 and ending December
31, 2009.
Other Income and
Expenses
:
During
2007, there were transactions relating to gains and losses from the sale of
uranium assets and marketable securities, while there were no similar
transactions during 2008. The combined income recognized from the
sale of the uranium assets and sale of securities during 2007 compared to no
similar activities during 2008 accounted for the majority of the decrease of
other income and expenses of $108,923,400.
During
2008, the Company recorded a net loss of $16,600 on the sale of its used
corporate aircraft and other miscellaneous equipment due to some repairs that
had to be made to the aircraft prior to the sale. The Company netted
$1,079,200 from the sale of the aircraft when it was sold. The loss
recorded during 2008 from the sale of assets is compared to a gain of $2.3
million during 2007. The gain recorded in 2007 was as a result of the
sale of a townsite in southern Utah and the receipt of payments due under the
Mount Emmons agreement with Kobex as well as an agreement related to the uranium
properties which were sold to Uranium One.
Interest
Income – The Company recognized $1,426,000 in interest income during 2008, which
is $1,373,700 less than the interest income received during 2007. The
decrease during 2008 is as a result of lower levels of cash being invested at
significantly lower interest rates. At December 31, 2008, the Company
was earning between .22% and 1.91% on its U.S. Treasury Bills. This
low interest rate is reflective of the condition of global
economics. The Company continues to seek the deployment of surplus
funds into investments and operations which will yield a higher
return.
Interest
Expense during 2008 increased $426,200 over the interest expense recorded during
2007 to $485,800. The increase is as a result of completion of
Remington Village. As each of the nine buildings were completed, the
Company no longer capitalized construction loan interest on that building but
rather expensed it. The interest thus expensed on the construction
loan resulted in the increased interest expense.
During
2007, the Company acquired the minority interest shares of Crested Corp. As a
result of that acquisition and the sale of SGMI, there are no minority interest
in gains and losses of consolidated subsidiaries at December 31,
2008. The Company reported a minority interest in the gain of
consolidated subsidiaries for the year ended December 31, 2007 of
$3,551,400. The minority interest gain in consolidated subsidiaries
recorded during the year ended December, 2007 was primarily the minority
interest gain of $3,555,900 of Crested. This amount was offset by a
net minority loss of $4,500 from two small consolidated
subsidiaries. On a consolidated basis, all previous minority interest
losses of Crested that were absorbed by the Company through consolidation have
been fully reinstated through December 31, 2007.
During
2008, the Company sold its controlling interest in SGMI. The Company
recognized a gain of $5,407,600 on the sale of the shares of SGMI and a loss of
$501,100 from the discontinued operations of SGMI. This results in a
net gain on the sale of the SGMI shares of $4,906,500. As a result of
the Company’s controlling interest in SGMI, the Company has shown the loss from
SGMI which was previously consolidated as a loss from discontinued operations of
$2,003,600 at December 31, 2007.
Due to
the loss recorded during the year ended December 31, 2008, the Company recorded
a net benefit from income taxes during the year then ended of
$3,325,800. During the year ended December 31, 2007 the Company
recorded a provision for income taxes of $32,366,800.
As a
result of the above described changes in revenues, costs and expenses, the
Company recorded a loss of $1,388,100 year ended December 31, 2008, or a loss of
$0.06 per share as compared to a gain of $56,363,200 or $2.75 earnings per share
basic and $2.54 per share diluted during the year ended December 31,
2007.
Year Ended December 31, 2007
Compared with the Year Ended December 31, 2006
The sale
of uranium assets to Uranium One resulted in net income before minority interest
and income taxes of $94,285,000 for the year ended December 31,
2007. This is an increase in earnings before taxes of $106,834,400 as
compared to the reported loss of $12,549,400 for the year ended December 31,
2006. Net earnings after taxes for the year ended December 31, 2007
were $56,363,200 or a gain of $2.75 per share basic and $2.54 diluted per share
as compared to a gain of $1,052,200 or $0.06 per share basic and $0.05 per share
diluted for the year ended December 31, 2006.
Operating
revenues for the year ended December 31, 2007 increased by $293,900 over the
year ended December 31, 2006. The reason for the increase was due to
the Company selling residential lots at the Company’s commercial real estate
property in southern Utah for $613,300 during the year ended December 31, 2007
as compared to $30,400 during 2006. Rental revenues from real estate
holdings and other commercial operations increased by $181,400 during the year
ended December 31, 2007 over those recorded during the year ended December 31,
2006 to $321,200. This increase in rental revenues is due to
increased receipts of cash from operations managed by a third party at the
Company’s southern Utah commercial property which was sold during the fourth
quarter of 2007. Likewise, management fees increased during the year
ended December 31, 2007 to $194,700 from $185,100 during the year ended December
31, 2006. The increase in management fees during 2007 were related to
the Company’s work effort on the Mount Emmons molybdenum property for which the
Company received reimbursement from Kobex at the rate of cost plus
5%.
These
increases in operating revenues were offset by reductions in non-recurring fees
earned from mineral companies for due diligence work which was completed during
the year ended December 31, 2006 of $250,000.
Operating
costs and expenses increased during the year ended December 31, 2007 by $165,200
over those recorded during the year ended December 31, 2006. The
increase came as a result of increased General and Administrative expense which
increased by $1,717,200 primarily as a result of employee
compensation. Components of that compensation are (1) a gross cash
bonus of $4,887,000 to all employees for extraordinary service related to the
April 30, 2007 sale of uranium assets to Uranium One. A bonus was
also paid during the year ended December 31, 2006 for employees work on the sale
of Rocky Mountain Gas, Inc. to Enterra Energy Trust of
$3,013,000, (2) each outside director was paid a onetime bonus of
$40,000 at the closing of the Uranium One sale, and (3) on June 22, 2007, the
shareholders of the Company approved the payment of $624,400 in taxes owed by
officers and employees, upon the release to them of forfeitable shares of the
Company’s common stock. These shares had been issued to individuals
in the early 1990s, and have been recorded at issue dates on the books as
compensation expense, but the stock was held by the Company; recognition of
income by the recipients was deferred pending vesting upon retirement, total
disability or death.
Mineral
holding costs and asset retirement obligation costs and expenses were reduced
$1,660,000 during the year ended December 31, 2007 from the prior
year. These reductions in costs and expenses occurred as a result of
the sale of the Company’s uranium properties and the reclamation obligations of
those properties to Uranium One.
During
the year ended December 31, 2007, the Company recorded $2,338,900 from the gain
on the sale of assets as compared to a gain on the sale of assets of $2,971,000
during the year ended December 31, 2006. This reduction of $632,100
was as a result of a reduction in the payments received from UPC during the 2006
as compared to the same period of the previous year. The reduction in
payments from UPC is as a result of the sale of the uranium assets to Uranium
One. The Company will receive no additional payments in the future
from UPC. Offsets to the reduction of UPC payments were the receipt
of 285,632 shares of Kobex common stock valued at $750,000 and the sale of the
Company’s Ticaboo property, in southern Utah. The Kobex shares were
delivered pursuant to the agreement with Kobex as option payments. As
a result of the signing of the Exploration, Development and Mine Operating
Agreement on April 3, 2007, this option payment of $750,000 and the $50,000 cash
earnest money deposit paid in 2006 were recorded as sale of asset
revenues.
The sale
of the Company’s uranium assets to Uranium One resulted in a net gain before
taxes of $111,728,200 during 2007. The sale of the shares of Uranium
One received as compensation for the sale of the Company’s uranium properties
were recorded at April 30, 2007 at the then market price for Uranium One common
shares of $15.04 per share. The sale of all these shares of Uranium
One (6,607,605 shares) at an average net sales price of $13.68 per share
resulted in a loss of $8,997,700. Included in this net loss are
commissions and a bulk discount of $2,568,800. The balance is due to
a reduction in the market price of the Uranium One shares.
Along
with the sale of the Uranium One common stock, the Company sold its remaining
shares of UPC common stock during the nine months ended September 30,
2007. As a result of the sale of these 1,500,000 shares of common
stock of UPC, the Company recognized a net gain of $774,700. The
Company also recorded a $95,500 loss on the sale of units of Enterra Energy
Trust (“Enterra”) by one of its subsidiaries. The sales of the shares
of Uranium One, UPC and the Enterra units resulted in a net loss from the sale
of marketable securities during the year ended December 30, 2007 of
$8,318,400. Sales of marketable securities during the year ended
December 31, 2006 consisted of the sale of Enterra Energy Trust units and
resulted in a net loss of $867,300.
During
the year ended December 31, 2007 the Company recorded a gain based on foreign
exchange rates of $430,000. This gain was as a result of the sale of
the sale of Uranium One common stock, $321,000; and the receipt of additional
shares of SGMI common stock in payment of debt to the Company,
$109,000.
Interest
income during the twelve months ended December 31, 2007 increased by $2,104,400
over interest income recorded in 2006 to $2,799,700. The increase in interest
income is due to larger amounts of cash invested in interest bearing accounts
and securities.
The
Company reported minority interest in the gain of consolidated subsidiaries for
the year ended December 31, 2007 of $3,551,400. The minority interest
gain in consolidated subsidiaries recorded during the year ended December, 2007
was primarily the minority interest gain of $3,555,900 of
Crested. This amount was offset by a net minority loss of $4,500 from
two small consolidated subsidiaries. On a consolidated basis, all
previous minority interest losses of Crested that were absorbed by the Company
through consolidation have been fully reinstated through December 31,
2007.
During
the year ended December 31, 2006 the Company recognized various other income and
expenses which it did not recognize during 2007. Those items
were:
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·
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Loss
on the valuation of derivatives of $630,900. The Enterra units
were sold prior to 2007 so no loss was recognized during
2007.
|
|
·
|
During
2006 the Company recorded a loss of $3,845,800 on the conversion of
Enterra units to shares of Enterra Energy Trust. During 2007
only those shares owned by a subsidiary company were converted to Enterra
Energy Trust shares resulting in a loss of
$117,600.
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|
·
|
During
2006 the Company recorded a $10,815,600 gain on the sale of all of its
equity ownership in Pinnacle Gas Resources, Inc.
(“Pinnacle”).
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|
·
|
During
2006 the Company paid Phelps Dodge Corporation, (“PD”) a $7,000,000 cash
litigation settlement fee relating to the return of the Mount Emmons
molybdenum property to the Company.
|
The
Company reported a current tax provision of $17,589,200 and a provision from
deferred income taxes of $14,777,600 during the year ended December 31,
2007. This is a significant change from the $235,000 tax provision
and deferred tax benefit of $15,096,600 recorded at December 31,
2006. The change in the tax provision is as a result of the earnings
generated from the sale of the uranium assets to Uranium One and those other
increases in revenues reported above. The Company paid $17,250,000 in
income taxes during the year ended December 31, 2007.
The net
gain of $56,363,200 during the year ended December 31, 2007 resulted in positive
retained earnings for the Company of $19,050,900 from an accumulated deficit at
December 31, 2006 of $39,101,900.
Critical
Accounting Policies
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. Significant estimates include oil
and gas reserves used for depletion and impairment considerations and the cost
of future asset retirement obligations. Due to inherent
uncertainties, including the future prices of oil and gas, these estimates could
change in the near term and such changes could be material.
Principles of Consolidation -
The financial statements of the Company as of December 31, 2008 include only the
accounts of the Company and its wholly owned subsidiary Remington Village, LLC
(“Remington Village”). The consolidated financial statements contained in this
report for the years ended December 31, 2007 and 2006 also include subsidiaries
of the Company which were either merged into the Company or liquidated and
dissolved during 2008 and 2007. These subsidiaries were
majority-owned or controlled subsidiaries: Plateau Resources Limited,
(“Plateau”) (100%), Four Nines Gold, Inc. ("FNG") (50.9%), SGMI (54.4%), Yellow
Stone Fuels, Inc. (“YSFI”) (49.1%), Crested Corp. (“Crested”) (70.9%), and the
USECC Joint Venture ("USECC"), a consolidated joint venture which was equally
owned by the Company and Crested. On December 15, 2008, the Company
purchased a 25% ownership interest in Standard Steam Trust LLC which is
accounted for using the equity method. The Company also
proportionately consolidates its interest in certain property and debt, which is
expected to be contributed to a mining joint venture.
During
the year ended December 31, 2007, the Company acquired the minority shareholder
ownership of Crested Corp. by issuing 2,876,252 shares of its common
stock. The Company also liquidated all of its subsidiaries during the
year ended December 31, 2008 with the exception of SGMI. The Company
sold its majority position, 39,062,720 shares, of SGMI during 2008 while
retaining 3,550,361 shares. The Company also purchased an additional
4,545,455 shares of SGMI through a private placement which resulted in the
Company owning 8,095,816 shares or 8.4% ownership of SGMI. As of
December 31, 2008, this investment is accounted for as a marketable
security.
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, 2008 and 2007, the Company had its
cash and cash equivalents with several financial institutions, primarily
invested in U.S. Treasury Bills. 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.
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 trading, available-for-sale or held-to-maturity. At
December 31, 2008, the Company recorded an impairment in operations of
$1,023,100 on its available for sale marketable securities due to continued
depressed market values of the securities. (See Note D) During prior
years, the Company's available-for-sale securities were carried at fair value
with net unrealized gain or (loss) recorded as a separate component of
shareholders' equity. Future increases or decreases in the fair value
which are considered temporary will be recorded within equity as comprehensive
income or losses. Gains or losses will be recorded in operations when
realized as a result of the sale of the available for sale marketable
security.
Accounts and Notes Receivable -
The Company determines any required allowance by considering a number of
factors including the length of time trade and other 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. Payments subsequently received on such reserved
receivables and notes are credited to the allowance for doubtful
accounts. At December 31, 2008 and 2007, there were no provisions for
doubtful accounts as the Company has historically not experienced significant
bad debts. At December 31, 2008, the Company’s accounts receivable
are due from industry partners for oil and gas production, rents on real estate
properties, reimbursable costs related to Mount Emmons and the Internal Revenue
Service.
Restricted Investments -
The
Company accounts for cash deposits held as collateral for reclamation
obligations, tax deferred real estate sales and as collateral for construction
loan commitments as restricted investments. Maturities or release
dates less than twelve months from the end of the reported accounting period are
reported as current assets while maturities or release dates in excess of twelve
months from report dates are reported as long term assets.
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. In the event that
assets and liabilities are not sold within a twelve month period of the
reporting date, they are re-evaluated to insure that no impairment has taken
place and re-classified as long term assets and liabilities. The
asset held for sale at December 31, 2007 was a used aircraft with a net book
value of $1,112,600.
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.
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, excessive production costs or depletion of the
mineral resource.
Oil and Gas Properties
-
The Company uses the full
cost method of accounting for our oil and gas properties. Under this method, all
acquisition, exploration, development and estimated abandonment costs, including
certain related employee costs and general and administrative costs (less any
reimbursements for such costs), incurred for the purpose of acquiring and
finding oil and gas are capitalized. Unevaluated property costs are excluded
from the amortization base until a determination is made as to the existence of
sufficient proved reserves on the respective property or whether impairment of
the asset carrying cost is required. The Company reviews its unevaluated
properties at the end of each quarter to determine whether the costs should be
reclassified to the full cost pool and thereby subject to
amortization. Sales of oil and gas properties are accounted for as
adjustments to the net full cost pool with no gain or loss recognized, unless
the adjustment would significantly alter the relationship between capitalized
costs and proved reserves.
The
Company amortizes its investment in oil and gas properties using the units of
production method by dividing production volumes for the period by the total
proved reserves as of the beginning of the period, and applying the respective
rate to the net cost of proved oil and gas properties, including future
development costs. The Company may capitalize the portion of salaries, general
and administrative expenses that are attributable to acquisition, exploration
and development activities if significant. No amounts have been
capitalized in the periods presented. Under the full cost method of accounting,
we compare, at the end of each financial reporting period, the present value of
estimated future net cash flows from proved reserves (based on adjusted
commodity prices and excluding cash flows related to estimated abandonment
costs), to the net capitalized costs of proved oil and gas properties, net of
related deferred taxes. This comparison is referred to as a “ceiling test.” If
the net capitalized costs of proved oil and gas properties exceed the estimated
discounted future net cash flows from proved reserves, the Company is required
to write-down the value of its oil and gas properties to the value of the
discounted cash flows.
Long-Lived Assets -
The
Company evaluates its long-lived assets other than oil and gas properties 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. Changes in significant assumptions underlying future cash flow
estimates may have a material effect on the Company's financial position and
results of operations. At December 31, 2008 and 2007, no impairment
existed on the Company’s long lived assets, consisting of property, plant and
equipment including mineral and oil and gas properties.
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 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 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.
Revenue Recognition -
The
Company records natural gas and oil revenue under the sales method of
accounting. Under the sales method, the Company recognizes revenues based on the
amount of natural gas or oil sold to purchasers, which may differ from the
amounts to which the Company is entitled based on its interest in the
properties. Gas balancing obligations as of December 31, 2008 were not
significant.
Revenues
from real estate operations are reported on a gross revenue basis and are
recorded at the time the service is provided.
Management
fees are recorded when the service is provided. Management fees are
for operating and overseeing services performed on mineral properties in which
the Company participates with joint venture or industry partners.
Stock Based Compensation -
The Company accounts for Stock Based Compensation pursuant to
SFAS No. 123(R) “
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.
The
Company recognizes the cost of the equity awards over the period during which an
employee is required to provide service in exchange for the award, usually the
vesting period. As share-based compensation expense is recognized
based on awards ultimately expected to vest, the expense has been reduced for
estimated forfeitures based on historical forfeiture rates.
Income Taxes -
The Company
accounts for income taxes under the provisions of SFAS No. 109 “
Accounting for Income
Taxes”
. This statement requires recognition of deferred income
tax assets and liabilities for the expected future income tax consequences,
based on enacted tax laws, of temporary differences between the financial
reporting and tax bases of assets, liabilities and carry forwards.
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. Management believes it is more likely than
not that such tax benefits will be realized and a valuation allowance has not
been provided.
Net Income (Loss) Per Share -
The Company reports net income (loss) per share pursuant to SFAS No. 128
“
Earnings per Share
”
(“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, 2008, 2007 and 2006 were 606,330, 541,735 and 525,881,
respectively. During the year ended December 31, 2008, 155,811 shares
that had previously been held as collateral for a loan to the Company were
returned to the Company by the ESOP as full satisfaction of the retirement of
the debt. All shares in the ESOP have been allocated to participant
accounts. 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 and warrants to purchase
common stock, if dilutive. Using the treasury stock method potential
common shares relating to options and warrants are excluded from the computation
of diluted loss per share for the years ending December 31, 2008 because they
were anti dilutive. Potential shares relating to options and warrants
were included in the diluted earnings per share for the years ended December 31,
2007 and 2006. Dilutive options and warrants totaled 226,246,
1,719,982 and 2,372,361 at December 31, 2008, 2007 and 2006,
respectively.
Recent
Accounting Pronouncements
SFAS 141(R)
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007),
“
Business
Combinations
”
(“SFAS 141(R)”),
replacing SFAS No. 141, “
Business Combinations
”
(“SFAS 141”). SFAS
141(R) retains the fundamental requirements in SFAS 141 that the acquisition
method of accounting be used for all business combinations and for an acquirer
to be identified for each business combination. SFAS 141(R) defines the acquirer
as the entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control. SFAS 141(R) establishes principles and requirements for how
the acquirer:
|
|
a.
|
Recognizes
and measures in its financial statements the identifiable assets acquired,
the liabilities assumed and any noncontrolling interest in the
acquiree.
|
|
|
b.
|
Recognizes
and measures the goodwill acquired in the business combination or a gain
from a bargain purchase.
|
|
|
c.
|
Determines
what information to disclose to enable users of the financial statements
to evaluate the nature and financial effects of the business
combination.
|
This
statement is effective for business combinations occurring on or after the
beginning of the first annual reporting period beginning after December 15, 2008
with earlier adoption prohibited. This standard will change the
accounting treatment for business combinations on a prospective
basis. At December 31, 2008, the Company had no contemplated business
combinations which would invoke the provisions of this standard.
SFAS 142-3
In April
2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “
Determination of the Useful Life of
Intangible Assets
.” FSP No. FAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
“
Goodwill and Other Intangible
Assets
.” The intent of the position is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair value of
the asset under SFAS 141R, and other U.S. generally accepted accounting
principles. The provisions of FSP No. FAS 142-3 are effective for fiscal years
beginning after December 15, 2008. We will evaluate the impact, if
any, that the adoption of FAS 142-3 could have on our financial
statements.
SFAS 157
In
September 2006, the FASB issued SFAS No. 157 “
Fair Value Measurements
”
(“SFAS 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 Company adopted FAS 157 for the
year beginning January 1, 2008. The adoption of SFAS 157 had no
material impact on the Company’s financial statements.
SFAS 160
In
December 2007, the FASB issued SFAS No. 160, “
Noncontrolling Interests in
Consolidated Financial Statements
”, an Amendment of ARB No. 51 (“SFAS
160”). SFAS 160 establishes accounting and reporting standards for
noncontrolling interests in a subsidiary and for the deconsolidation of a
subsidiary. Minority interests will be recharacterized as noncontrolling
interests and classified as a component of equity. It also
establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary and requires expanded disclosures. This
statement is effective for fiscal years beginning on or after December 15, 2008,
with early adoption prohibited. The Company does not expect the
adoption of this Statement will have a material impact on its financial position
or results of operations.
SFAS 161
In March
2008, the FASB issued SFAS No. 161, “
Disclosures about Derivative
Instruments and Hedging Activities
” - an amendment of FASB Statement No.
133 (“SFAS 161”). SFAS 161 requires additional disclosures about the objectives
of using derivative instruments, the method by which the derivative instruments
and related hedged items are accounted for under Statement No. 133 and its
related interpretations, and the effect of derivative instruments and related
hedged items on financial position, financial performance, and cash flows. SFAS
161 also requires disclosure of the fair values of derivative instruments and
their gains and losses in a tabular format. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, or the Company’s quarter ended March 31, 2009. As this
pronouncement is only disclosure-related and the Company currently has no
investments in derivative instruments, it has not had an impact on the financial
position and results of operations for the year ended December 31,
2008.
The
Company has reviewed other current outstanding statements from the FASB and does
not believe that any of those statements will have a material adverse affect on
the financial statements of the Company when adopted.
Future
Operations
Management
intends to continue seeking opportunities presented by the recent and future
projected market prices for all the minerals with which it is
involved. We intend to acquire new mineral properties and pursue new
business opportunities. Long term, we intend to be prepared to pay
our share of the holding and development costs associated with the Mount Emmons
property should Thompson Creek completes its option payments and property
expenditure obligations. We also intend to be prepared to participate
further in our geothermal investment at 25% ownership of SST.
Effects
of Changes in Prices
Mineral
operations are significantly affected by changes in commodity
prices. As prices for a particular mineral increase, values for
prospects for that mineral typically also increase, making acquisitions of such
properties more costly and sales potentially more
valuable. Conversely, a price decline could enhance acquisitions of
properties containing that mineral, but could make sales of such properties more
difficult. Operational impacts of changes in mineral commodity prices
are common in the mining and oil and gas industries.
At
December 31, 2008, the Company participated in molybdenum, oil and gas and
geothermal development projects. The Company has not had production
from its properties which contain these commodities during the past three years,
except for oil and gas production which commenced in late 2008. The
Company’s multifamily housing could be affected negatively if there was a
sustained down turn in the price of coal, gas and oil. A brief
summary of these mineral prices follows:
Molybdenum
- The ten year
high for dealer molybdenum oxide was $38 per pound in June of 2005 while the ten
year low was $2.05 per pound in November 1998. At December 31, 2008,
the mean price of molybdenum oxide was $10.00 per pound. The price of
molybdenum will have a direct impact on the development of Mount
Emmons. Should the price for molybdenum remain at the December 2008
level or be even further reduced, the development of the Mount Emmons property
could be delayed or permanently put on hold.
Oil and Gas
– The ten year
Cushing, OK WTI spot price for oil reached a high of $133.37 per barrel during
July 2008 and was at $40.88 per barrel at December 31,
2008. The ten year U.S. Natural Gas City Gate Price reached a high of
$12.37 per mcf in July of 2008 and was $7.88 in November 2008. The
corresponding ten year low for oil and gas was $11.35 per barrel in December of
1998 and $2.77 per mcf in March of 1999. The Company had oil and gas
production during the fourth quarter of 2008 but no related revenues during the
prior two years. Higher oil and gas prices should positively impact
our revenues going forward while lower oil and gas prices will have a negative
impact. While the we believe that future oil and gas prospect
investments will take place in 2009, there is no assurance that these
investments will be profitable.
Contractual
Obligations
Contractual
obligations at December 31, 2008 consist of debt to third parties of $16,812,500
for the construction financing of the Gillette, Wyoming multifamily housing
project, a purchase contract including a promissory note for the purchase of
land near the Mount Emmons property of $1,875,000, executive retirement of
$879,100 and asset retirement obligations of $144,100. The
construction loan was retired on January 16, 2009. In January 2009, the Company
paid $875,000 and assumed 50% of a $2 million note payable. The
executive retirement benefits are paid to former executive officers who qualify
under the terms of the plan. Asset retirement obligations will be
satisfied during the next 34 years. The following table shows the
scheduled debt payment and expenditures for budgeted asset retirement
obligations as of December 31, 2008:
|
Payments
due by period
|
||||||||||||||||||||
|
Less
|
One
to
|
Three
to
|
More
than
|
|||||||||||||||||
|
than
one
|
Three
|
Five
|
Five
|
|||||||||||||||||
|
Total
|
Year
|
Years
|
Years
|
Years
|
||||||||||||||||
|
Short-term
debt obligations
|
$ | 16,812,500 | $ | 16,812,500 | $ | -- | $ | -- | $ | -- | ||||||||||
|
Long-term
debt obligations
|
1,875,000 | 875,000 | 600,000 | 400,000 | -- | |||||||||||||||
|
Executive
retirement
|
879,100 | 152,900 | 329,500 | -- | 396,700 | |||||||||||||||
|
Asset
retirement obligations
|
144,100 | -- | -- | -- | 144,100 | |||||||||||||||
|
Totals
|
$ | 19,710,700 | $ | 17,840,400 | $ | 929,500 | $ | 400,000 | $ | 540,800 | ||||||||||
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT
MARKET RISK
None
ITEM
8. FINANCIAL STATEMENTS
Financial
statements meeting the requirements of Regulation S-X are included
below.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders
U.S.
Energy Corp.
We
have audited the consolidated balance sheet of U.S. Energy Corp. and
subsidiaries as of December 31, 2008, and the related consolidated
statement of operations, shareholders’ equity and cash flows for the year ended
December 31, 2008. 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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provided a reasonable basis
for our opinion.
In
our opinion, the consolidated 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, 2008, and the results of their operations
and their cash flows for the year ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles.
We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of U.S. Energy Corp.’s and
subsidiaries’ internal control over financial reporting as of December 31, 2008,
based on criteria established in
Internal
Control
—
Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 13, 2009, expressed an
unqualified opinion on management’s assessment of the effectiveness of U.S.
Energy Corp.’s internal control over financial reporting
.
HEIN
&
ASSOCIATES LLP
Denver,
Colorado
March
13, 2009
Report
of Independent Registered Public Accounting Firm
Board of
Directors and Shareholders ofU.S. Energy Corp.
We have
audited the accompanying consolidated balance sheet of U.S. Energy Corp. and
Subsidiaries (the Company) as of December 31, 2007 and the related consolidated
statements of operations and comprehensive income, stockholders’ equity and cash
flows for each of the years in the two year-period ended December 31, 2007.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with 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, and 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 consolidated financial position of U.S. Energy Corp. and
Subsidiaries, as of December 31, 2007, and the consolidated results of its
operations and its cash flows for each of years in the two-year period ended
December 31, 2007 in conformity with accounting principles generally accepted in
the United States of America.
As
discussed in Note B to the consolidated financial statements, effective January
1, 2007, the Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes – an interpretation of FASB No. 109
, and effective January 1, 2006,
the Company adopted as 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 12,
2008, except as to the reclassification adjustments to reflect discontinued
operations described in Note N as to which the date is March 12,
2009
|
U.S.
ENERGY CORP.
|
||||||||
|
BALANCE
SHEETS
|
||||||||
|
ASSETS
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 8,434,400 | $ | 72,292,200 | ||||
|
Marketable
securities
|
||||||||
|
Held
to maturity - treasuries
|
51,152,100 | -- | ||||||
|
Available
for sale securities
|
575,600 | 480,200 | ||||||
|
Accounts
receivable
|
||||||||
|
Trade
|
600,000 | 171,700 | ||||||
|
Reimbursable
project costs
|
441,500 | 782,100 | ||||||
|
Dissolution
of subsidiaries
|
-- | 197,600 | ||||||
|
Income
taxes
|
5,896,400 | 902,900 | ||||||
|
Restricted
investments
|
4,929,200 | 6,624,700 | ||||||
|
Assets
held for sale
|
-- | 1,112,600 | ||||||
|
Prepaid
expenses and other current assets
|
738,300 | 164,900 | ||||||
|
Total
current assets
|
72,767,500 | 82,728,900 | ||||||
|
INVESTMENT:
|
3,455,000 | -- | ||||||
|
PROPERTIES
AND EQUIPMENT:
|
||||||||
|
Oil
& gas properties under full cost method, net
|
7,906,300 | 2,910,200 | ||||||
|
Undeveloped
mining claims
|
23,949,800 | 21,859,200 | ||||||
|
Commercial
real estate, net
|
23,998,200 | -- | ||||||
|
Construction
in progress
|
-- | 11,770,800 | ||||||
|
Property,
plant and equipment, net
|
9,638,400 | 11,553,300 | ||||||
|
Net
properties and equipment
|
65,492,700 | 48,093,500 | ||||||
|
OTHER
ASSETS:
|
915,700 | 582,000 | ||||||
|
Total
assets
|
$ | 142,630,900 | $ | 131,404,400 | ||||
|
U.S.
ENERGY CORP.
|
||||||||
|
BALANCE
SHEETS
|
||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable
|
$ | 897,700 | $ | 1,589,600 | ||||
|
Accrued
compensation
|
682,200 | 275,200 | ||||||
|
Short
term construction debt
|
16,812,500 | 5,489,000 | ||||||
|
Current
portion of long-term debt
|
875,000 | 71,900 | ||||||
|
Other
current liabilities
|
714,600 | 667,500 | ||||||
|
Total
current liabilities
|
19,982,000 | 8,093,200 | ||||||
|
LONG-TERM
DEBT, net of current portion
|
1,000,000 | 190,500 | ||||||
|
DEFERRED
TAX LIABILITY
|
8,945,300 | 6,928,800 | ||||||
|
ASSET
RETIREMENT OBLIGATIONS
|
144,100 | 133,400 | ||||||
|
OTHER
ACCRUED LIABILITIES
|
726,200 | 958,600 | ||||||
|
SHAREHOLDERS'
EQUITY:
|
||||||||
|
Common
stock, $.01 par value; unlimited shares
|
||||||||
|
authorized;
21,935,129 and 23,592,493
|
||||||||
|
shares
issued, respectively
|
219,400 | 235,900 | ||||||
|
Additional
paid-in capital
|
93,951,100 | 96,560,100 | ||||||
|
Accumulated
surplus
|
17,662,800 | 19,050,900 | ||||||
|
Unrealized
(loss) gain on marketable securities
|
-- | (256,500 | ) | |||||
|
Unallocated
ESOP contribution
|
-- | (490,500 | ) | |||||
|
Total
shareholders' equity
|
111,833,300 | 115,099,900 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 142,630,900 | $ | 131,404,400 | ||||
|
U.S.
ENERGY CORP.
|
||||||||||||
|
STATEMENTS
OF OPERATIONS
|
||||||||||||
|
For
the years ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
MINORITY
INTEREST IN LOSS (INCOME)
|
||||||||||||
|
OF
CONSOLIDATED SUBSIDIARIES
|
-- | (3,551,400 | ) | 88,600 | ||||||||
|
(LOSS)
INCOME BEFORE PROVISION
|
||||||||||||
|
FOR
INCOME TAXES AND
|
||||||||||||
|
DISCONTINUED
OPERATIONS
|
(9,620,400 | ) | 90,733,600 | (12,460,800 | ) | |||||||
|
INCOME
TAXES:
|
||||||||||||
|
Current
benefit from (provision for)
|
4,645,100 | (17,589,200 | ) | 235,000 | ||||||||
|
Deferred
benefit from (provision for)
|
(1,319,300 | ) | (14,777,600 | ) | 15,096,600 | |||||||
| 3,325,800 | (32,366,800 | ) | 15,331,600 | |||||||||
|
(LOSS)
INCOME FROM CONTINUING
|
||||||||||||
|
OPERATIONS
|
(6,294,600 | ) | 58,366,800 | 2,870,800 | ||||||||
|
DISCONTINUED
OPERATIONS
|
||||||||||||
|
Loss
from discontinued operations
|
(501,100 | ) | (2,003,600 | ) | (1,818,600 | ) | ||||||
|
Gain
on sale of discontinued
|
||||||||||||
|
operations
(net of taxes)
|
5,407,600 | -- | -- | |||||||||
| 4,906,500 | (2,003,600 | ) | (1,818,600 | ) | ||||||||
|
NET
(LOSS) INCOME
|
$ | (1,388,100 | ) | $ | 56,363,200 | $ | 1,052,200 | |||||
|
PER
SHARE DATA
|
||||||||||||
|
Basic
(loss) earnings
|
||||||||||||
|
from
continuing operations
|
$ | (0.27 | ) | $ | 2.85 | $ | 0.16 | |||||
|
Basic
earnings (loss)
|
||||||||||||
|
from
discontinued operations
|
0.21 | (0.10 | ) | (0.10 | ) | |||||||
|
Basic
(loss) earnings per share
|
$ | (0.06 | ) | $ | 2.75 | $ | 0.06 | |||||
|
Diluted
(loss) earnings
|
||||||||||||
|
from
continuing operations
|
$ | (0.27 | ) | $ | 2.63 | $ | 0.14 | |||||
|
Diluted
(loss) earnings
|
||||||||||||
|
from
discontinued operations
|
0.21 | (0.09 | ) | (0.09 | ) | |||||||
|
Diluted
(loss) earnings per share
|
$ | (0.06 | ) | $ | 2.54 | $ | 0.05 | |||||
|
BASIC
WEIGHTED AVERAGE
|
||||||||||||
|
SHARES
OUTSTANDING
|
23,274,978 | 20,469,846 | 18,461,885 | |||||||||
|
DILUTED
WEIGHTED AVERAGE
|
||||||||||||
|
SHARES
OUTSTANDING
|
23,274,978 | 22,189,828 | 21,131,786 | |||||||||
|
U.S.
ENERGY CORP. AND SUBSIDIARIES
|
||||||||||||||||||||||||||||||||||||
|
STATEMENT
OF SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||||||||||
|
Unrealized
|
||||||||||||||||||||||||||||||||||||
|
Additional
|
Gain
(Loss) on
|
Unallocated
|
Total
|
|||||||||||||||||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Retained
|
Marketable
|
Treasury
Stock
|
ESOP
|
Shareholders'
|
||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings
|
Securities
|
Shares
|
Amount
|
Contribution
|
Equity
|
||||||||||||||||||||||||||||
|
Balance
December 31, 2006
|
19,659,591 | $ | 196,600 | $ | 77,481,200 | $ | (39,101,900 | ) | $ | 306,000 | 497,845 | $ | (923,500 | ) | $ | (490,500 | ) | $ | 37,467,900 | |||||||||||||||||
|
Net
income
|
-- | -- | -- | 56,363,200 | -- | -- | -- | -- | 56,363,200 | |||||||||||||||||||||||||||
|
Unrealized
loss on
|
||||||||||||||||||||||||||||||||||||
|
marketable
securities
|
-- | -- | -- | (726,000 | ) | -- | -- | -- | (726,000 | ) | ||||||||||||||||||||||||||
|
Unrealized
tax effect on
|
||||||||||||||||||||||||||||||||||||
|
on
the unrealized loss
|
-- | -- | -- | 163,500 | -- | -- | -- | 163,500 | ||||||||||||||||||||||||||||
|
Comprehensive
income
|
55,800,700 | |||||||||||||||||||||||||||||||||||
|
Income
tax benefit from
|
||||||||||||||||||||||||||||||||||||
|
pre
FAS 123R stock options
|
-- | -- | 1,242,100 | -- | -- | -- | -- | -- | 1,242,100 | |||||||||||||||||||||||||||
|
Change
in basis of
|
||||||||||||||||||||||||||||||||||||
|
minority
interests
|
-- | -- | -- | 3,897,900 | -- | -- | -- | -- | 3,897,900 | |||||||||||||||||||||||||||
|
Funding
of ESOP
|
84,995 | 900 | 360,400 | -- | -- | -- | -- | -- | 361,300 | |||||||||||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||||||||||
|
to
outside directors
|
3,812 | -- | 18,000 | -- | -- | -- | -- | -- | 18,000 | |||||||||||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||||||||||
|
in
stock compensation plan
|
62,500 | 600 | 317,900 | -- | -- | -- | -- | -- | 318,500 | |||||||||||||||||||||||||||
|
Vesting
of stock options
|
||||||||||||||||||||||||||||||||||||
|
issued
to employees
|
-- | -- | 607,400 | -- | -- | -- | -- | -- | 607,400 | |||||||||||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||||||||||
|
from
employee stock options
|
1,109,894 | 11,100 | 1,959,400 | -- | -- | -- | -- | -- | 1,970,500 | |||||||||||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||||||||||
|
from
stock warrants
|
359,598 | 3,600 | 1,242,900 | -- | -- | -- | -- | -- | 1,246,500 | |||||||||||||||||||||||||||
|
Payment
of dividend
|
-- | -- | -- | (2,108,300 | ) | -- | -- | -- | -- | (2,108,300 | ) | |||||||||||||||||||||||||
|
Adjustment
to common
|
||||||||||||||||||||||||||||||||||||
|
stock
warrants
|
-- | -- | 123,700 | -- | -- | -- | -- | -- | 123,700 | |||||||||||||||||||||||||||
|
Release
of forfeitable stock
|
292,740 | 2,900 | 1,765,900 | -- | -- | -- | -- | -- | 1,768,800 | |||||||||||||||||||||||||||
|
Purchases
of treasury stock
|
-- | -- | (378,000 | ) | -- | -- | 228,000 | (1,047,300 | ) | -- | (1,425,300 | ) | ||||||||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||||||||||
|
for
the Crested merger
|
2,876,252 | 28,800 | 13,374,500 | -- | -- | 80,000 | (40,800 | ) | -- | 13,362,500 | ||||||||||||||||||||||||||
|
Cancellation
of common stock
|
(856,889 | ) | (8,600 | ) | (2,003,100 | ) | -- | -- | (805,845 | ) | 2,011,600 | -- | (100 | ) | ||||||||||||||||||||||
|
Changes
in minority interest
|
-- | -- | 447,800 | -- | -- | -- | -- | -- | 447,800 | |||||||||||||||||||||||||||
|
Balance
December 31, 2007
|
23,592,493 | $ | 235,900 | $ | 96,560,100 | $ | 19,050,900 | $ | (256,500 | ) | -- | $ | -- | $ | (490,500 | ) | $ | 115,099,900 | ||||||||||||||||||
|
U.S.
ENERGY CORP. AND SUBSIDIARIES
|
||||||||||||||||||||||||||||
|
STATEMENT
OF SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||
|
(continued)
|
||||||||||||||||||||||||||||
|
Unrealized
|
||||||||||||||||||||||||||||
|
Additional
|
Gain
(Loss) on
|
Unallocated
|
Total
|
|||||||||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Retained
|
Marketable
|
ESOP
|
Shareholders'
|
|||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings
|
Securities
|
Contribution
|
Equity
|
||||||||||||||||||||||
|
Balance
December 31, 2007
|
23,592,493 | $ | 235,900 | $ | 96,560,100 | $ | 19,050,900 | $ | (256,500 | ) | $ | (490,500 | ) | $ | 115,099,900 | |||||||||||||
|
Net
loss
|
-- | -- | -- | (1,388,100 | ) | -- | -- | (1,388,100 | ) | |||||||||||||||||||
|
Recognized
impairment on
|
||||||||||||||||||||||||||||
|
marketable
securities
|
-- | -- | -- | -- | 256,500 | -- | 256,500 | |||||||||||||||||||||
|
Unrealized
tax effect on
|
||||||||||||||||||||||||||||
|
on
the unrealized loss
|
-- | -- | -- | -- | -- | -- | -- | |||||||||||||||||||||
|
Comprehensive
(loss)
|
(1,131,600 | ) | ||||||||||||||||||||||||||
|
Funding
of ESOP
|
126,878 | 1,300 | 206,800 | -- | -- | -- | 208,100 | |||||||||||||||||||||
|
Vesting
of stock warrants
|
||||||||||||||||||||||||||||
|
to
outside contractor
|
-- | -- | 29,500 | -- | -- | -- | 29,500 | |||||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||
|
2001
stock compensation plan
|
85,000 | 900 | 283,300 | -- | -- | -- | 284,200 | |||||||||||||||||||||
|
Vesting
of stock options
|
||||||||||||||||||||||||||||
|
issued
to employees
|
-- | -- | 1,151,000 | -- | -- | -- | 1,151,000 | |||||||||||||||||||||
|
Vesting
of stock options
|
||||||||||||||||||||||||||||
|
issued
to outside directors
|
-- | -- | 16,800 | -- | -- | -- | 16,800 | |||||||||||||||||||||
|
Cancellation
of common stock
|
||||||||||||||||||||||||||||
|
from
the ESOP
|
(155,811 | ) | (1,600 | ) | (488,900 | ) | -- | -- | 490,500 | -- | ||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||
|
from
stock warrants
|
446,698 | 4,500 | 1,523,100 | -- | -- | -- | 1,527,600 | |||||||||||||||||||||
|
Deferred
tax on FAS 123R
|
||||||||||||||||||||||||||||
|
compensation
|
-- | -- | 201,900 | -- | -- | -- | 201,900 | |||||||||||||||||||||
|
Common
stock buy back program
|
(2,160,129 | ) | (21,600 | ) | (5,532,500 | ) | -- | -- | -- | (5,554,100 | ) | |||||||||||||||||
|
Balance
December 31, 2008
|
21,935,129 | $ | 219,400 | $ | 93,951,100 | $ | 17,662,800 | $ | - | $ | -- | $ | 111,833,300 | |||||||||||||||
|
U.S.
ENERGY CORP.
|
||||||||||||
|
STATEMENTS
OF CASH FLOWS
|
||||||||||||
|
For
the years ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
(loss) income
|
$ | (1,388,100 | ) | $ | 56,363,200 | $ | 1,052,200 | |||||
|
Gain
on the sale of SGMI stock
|
(5,407,600 | ) | -- | -- | ||||||||
|
Loss
from discontinued operations
|
501,100 | 2,003,600 | 1,818,600 | |||||||||
|
(Loss)
income from continuing operations
|
(6,294,600 | ) | 58,366,800 | 2,870,800 | ||||||||
|
Reconcile
net (loss) income to net cash used in operations
|
||||||||||||
|
Minority
interest in the loss of
|
||||||||||||
|
consolidated
subsidiaries
|
-- | 3,551,400 | (88,600 | ) | ||||||||
|
Depreciation
|
1,425,800 | 437,500 | 453,500 | |||||||||
|
Accretion
of discount on treasury investments
|
(1,255,300 | ) | -- | -- | ||||||||
|
Impairment
of marketable securities
|
1,023,100 | -- | -- | |||||||||
|
Interest
earned on restricted investments
|
(88,100 | ) | -- | -- | ||||||||
|
Accretion
of asset retirement obligations
|
-- | 8,200 | 766,500 | |||||||||
|
Recognition
of asset retirement obligations
|
-- | -- | (105,200 | ) | ||||||||
|
Income
tax receivable
|
(3,808,600 | ) | (902,900 | ) | -- | |||||||
|
Deferred
income taxes
|
1,319,200 | 14,777,600 | (15,096,600 | ) | ||||||||
|
Gain
on sale of Pinnacle Resources
|
-- | -- | (10,815,600 | ) | ||||||||
|
Gain
on sale of assets to Uranium One
|
-- | (111,728,200 | ) | -- | ||||||||
|
Loss
(gain) on sale of assets
|
16,800 | (2,356,200 | ) | (3,043,500 | ) | |||||||
|
Gain
on foreign exchange
|
-- | (430,000 | ) | -- | ||||||||
|
Loss
on sales of marketable securities
|
-- | 8,318,400 | 1,004,100 | |||||||||
|
Loss
on valuation of Enterra units
|
-- | -- | 3,845,800 | |||||||||
|
Loss
on valuation of derivatives
|
-- | -- | 630,900 | |||||||||
|
Proceeds
from the sale of trading securities
|
-- | -- | 8,304,300 | |||||||||
|
Noncash
compensation
|
2,535,700 | 1,283,700 | 1,037,700 | |||||||||
|
Noncash
services
|
46,300 | 141,700 | 1,525,800 | |||||||||
|
Net
changes in assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
(400,200 | ) | (763,300 | ) | (78,400 | ) | ||||||
|
Other
assets
|
-- | (246,000 | ) | (153,900 | ) | |||||||
|
Prepaid
drilling costs
|
(9,000 | ) | -- | -- | ||||||||
|
Accounts
payable
|
(647,500 | ) | 680,400 | 438,400 | ||||||||
|
Accrued
compensation expense
|
(283,500 | ) | (958,000 | ) | 1,013,100 | |||||||
|
Refundable
deposits
|
-- | -- | 800,000 | |||||||||
|
Reclamation
and other liabilities
|
(116,100 | ) | 377,500 | (56,500 | ) | |||||||
|
NET
CASH USED IN OPERATING ACTIVITIES
|
(6,536,000 | ) | (29,441,400 | ) | (6,747,400 | ) | ||||||
|
U.S.
ENERGY CORP.
|
||||||||||||
|
STATEMENTS
OF CASH FLOWS
|
||||||||||||
|
For
the years ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Net
investment in treasury investments
|
$ | (49,896,800 | ) | $ | -- | $ | -- | |||||
|
Acquisition
& development of real estate
|
(11,597,100 | ) | (7,516,600 | ) | -- | |||||||
|
Acquisition
of oil & gas properties
|
(5,353,500 | ) | (2,910,200 | ) | -- | |||||||
|
Acquisition
& development
|
||||||||||||
|
of
unproved mining claims
|
(2,905,400 | ) | (484,900 | ) | (816,100 | ) | ||||||
|
Acquisition
of property and equipment
|
(293,900 | ) | (6,429,000 | ) | (618,200 | ) | ||||||
|
Investment
in Standard Steam
|
(3,455,000 | ) | -- | -- | ||||||||
|
Proceeds
from sale of property and equipment
|
1,102,800 | 3,978,000 | 2,410,600 | |||||||||
|
Proceeds
from sale of marketable securities
|
-- | 92,250,700 | 394,100 | |||||||||
|
Proceeds
from sale of uranium assets
|
-- | 14,022,700 | -- | |||||||||
|
Proceeds
from sale of investments
|
-- | -- | 13,800,000 | |||||||||
|
Investment
in marketable securities
|
-- | -- | (560,500 | ) | ||||||||
|
Release
of restricted investments
|
1,841,800 | -- | -- | |||||||||
|
Net
change in restricted investments
|
-- | (7,000,200 | ) | (94,100 | ) | |||||||
|
Net
change in notes receivable
|
-- | 560,500 | (19,800 | ) | ||||||||
|
Net
change in investments in affiliates
|
-- | 349,400 | (26,000 | ) | ||||||||
|
NET
CASH (USED IN) PROVIDED
|
||||||||||||
|
BY
INVESTING ACTIVITIES
|
(70,557,100 | ) | 86,820,400 | 14,470,000 | ||||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Issuance
of common stock
|
1,527,600 | 3,217,000 | 1,020,300 | |||||||||
|
Issuance
of subsidiary stock
|
-- | 339,600 | -- | |||||||||
|
Payment
of cash dividend
|
-- | (2,108,300 | ) | -- | ||||||||
|
Proceeds
from short term construction debt
|
11,423,500 | -- | -- | |||||||||
|
Deferred
taxes from stock options
|
-- | 1,242,100 | -- | |||||||||
|
Proceeds
from long term debt
|
1,875,000 | 164,100 | 297,300 | |||||||||
|
Repayments
of debt
|
(362,400 | ) | (1,133,800 | ) | (419,900 | ) | ||||||
|
Stock
buyback program
|
(5,554,100 | ) | (1,466,200 | ) | -- | |||||||
|
NET
CASH PROVIDED BY
|
||||||||||||
|
FINANCING
ACTIVITIES
|
8,909,600 | 254,500 | 897,700 | |||||||||
|
U.S.
ENERGY CORP.
|
||||||||||||
|
STATEMENTS
OF CASH FLOWS
|
||||||||||||
|
For
the years ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
cash (used in) operating
|
||||||||||||
|
activities
of discontinued operations
|
(76,500 | ) | (2,259,800 | ) | (1,384,600 | ) | ||||||
|
Net
cash provided by (used in) investing
|
||||||||||||
|
activities
of discontinued operations
|
4,402,200 | (57,400 | ) | (636,800 | ) | |||||||
|
Net
cash (used in) financing
|
||||||||||||
|
activities
of discontinued operations
|
-- | 2,400 | 3,375,900 | |||||||||
|
NET
DECREASE IN
|
||||||||||||
|
CASH
AND CASH EQUIVALENTS
|
(63,857,800 | ) | 55,318,700 | 9,974,800 | ||||||||
|
CASH
AND CASH EQUIVALENTS
|
||||||||||||
|
AT
BEGINNING OF PERIOD
|
72,292,200 | 16,973,500 | 6,998,700 | |||||||||
|
CASH
AND CASH EQUIVALENTS
|
||||||||||||
|
AT
END OF PERIOD
|
$ | 8,434,400 | $ | 72,292,200 | $ | 16,973,500 | ||||||
|
SUPPLEMENTAL
DISCLOSURES:
|
||||||||||||
|
Income
tax (received) paid
|
$ | (944,900 | ) | $ | 17,250,000 | $ | -- | |||||
|
Interest
paid
|
$ | 69,000 | $ | 59,600 | $ | 106,700 | ||||||
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
||||||||||||
|
Development
of assets through issuance of debt
|
$ | 10,944,800 | $ | -- | $ | -- | ||||||
|
Acquisition
of assets through issuance of debt
|
$ | -- | $ | 5,489,000 | $ | 355,800 | ||||||
|
Issuance
of subsidiary stock to acquire
|
||||||||||||
|
mining
claims
|
$ | -- | $ | 33,700 | $ | -- | ||||||
|
Receipt
of marketable securities
|
||||||||||||
|
from
the sale of assets
|
$ | -- | $ | 99,400,600 | $ | -- | ||||||
|
Value
of common stock issued in
|
||||||||||||
|
merger
of Crested Corp.
|
$ | -- | $ | 33,700 | $ | -- | ||||||
|
Cancellation
of treasury stock
|
$ | -- | $ | 1,970,900 | $ | -- | ||||||
|
Conversion
of Enterra shares
|
||||||||||||
|
to
tradable units
|
$ | -- | $ | -- | $ | 13,880,100 | ||||||
|
Issuance
of stock warrants in
|
||||||||||||
|
conjunction
with agreements
|
$ | -- | $ | -- | $ | 727,300 | ||||||
|
Satisfaction
of receivable - employee
|
||||||||||||
|
with
stock in company
|
$ | -- | $ | -- | $ | 30,600 | ||||||
|
Unrealized
loss/gain
|
$ | -- | $ | 562,500 | $ | 557,000 | ||||||
A. BUSINESS
ORGANIZATION AND OPERATIONS
U.S.
Energy Corp. was incorporated in the State of Wyoming on January 26,
1966. U.S. Energy Corp. (the "Company" or "USE") engages in the
acquisition, exploration, holding, sale and/or development of mineral
properties. Principal mineral interests at December 31, 2008 are in molybdenum,
oil, gas and geothermal. Historically the Company also participated
in other base and precious metals. Our uranium and gold assets were
sold during 2007 and 2008. The Company also owns a multifamily real
estate development located in Gillette, Wyoming.
B. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
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. Significant estimates include oil
and gas reserves used for depletion and impairment considerations and the cost
of future asset retirement obligations. Due to inherent
uncertainties, including the future prices of oil and gas, these estimates could
change in the near term and such changes could be material.
Principles
of Consolidation
The
financial statements of the Company as of December 31, 2008 include only the
accounts of the Company and its wholly owned subsidiary Remington Village, LLC
(“Remington Village”). The consolidated financial statements contained in this
report for the years ended December 31, 2007 and 2006 also include subsidiaries
of the Company which were either merged into the Company or liquidated and
dissolved during 2008 and 2007. These subsidiaries were
majority-owned or controlled subsidiaries: Plateau Resources Limited,
(“Plateau”) (100%), Four Nines Gold, Inc. ("FNG") (50.9%), SGMI (54.4%), Yellow
Stone Fuels, Inc. (“YSFI”) (49.1%), Crested Corp. (“Crested”) (70.9%), and the
USECC Joint Venture ("USECC"), a consolidated joint venture which was equally
owned by the Company and Crested. On December 15, 2008, the Company
purchased a 25% ownership interest in Standard Steam Trust LLC which is
accounted for using the equity method. The Company also
proportionately consolidates its interest in certain property and debt, which is
expected to be contributed to a mining joint venture.
During
the year ended December 31, 2007, the Company acquired the minority shareholder
ownership of Crested Corp. by issuing 2,876,252 shares of its common
stock. The Company also liquidated all of its subsidiaries during the
year ended December 31, 2008 with the exception of SGMI. The Company
sold its majority position, 39,062,720 shares, of SGMI during 2008 while
retaining 3,550,361 shares. The Company also purchased an additional
4,545,455 shares of SGMI through a private placement which resulted in the
Company owning 8,095,816 shares or 8.4% ownership of SGMI. As of
December 31, 2008, this investment is accounted for as a marketable
security.
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, 2008 and 2007, the Company had its
cash and cash equivalents with several financial institutions, primarily
invested in U.S. Treasury Bills. 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.
-72-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
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 trading, available-for-sale or held-to-maturity. At
December 31, 2008, the Company recorded an impairment in operations of
$1,023,100 on its available for sale marketable securities due to continued
depressed market values of the securities. (See Note D) During prior
years, the Company's available-for-sale securities were carried at fair value
with net unrealized gain or (loss) recorded as a separate component of
shareholders' equity. Future increases or decreases in the fair value
which are considered temporary will be recorded within equity as comprehensive
income or losses. Gains or losses will be recorded in operations when
realized as a result of the sale of the available for sale marketable
security.
Accounts
and Notes Receivable
The
Company determines any required allowance by considering a number of factors
including the length of time trade and other 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. Payments subsequently received on such reserved
receivables and notes are credited to the allowance for doubtful
accounts. At December 31, 2008 and 2007, there were no provisions for
doubtful accounts as the Company has historically not experienced significant
bad debts. At December 31, 2008, the Company’s accounts receivable
are due from industry partners for oil and gas production, rents on real estate
properties, reimbursable costs related to Mount Emmons and the Internal Revenue
Service.
Restricted
Investments
The
Company accounts for cash deposits held as collateral for reclamation
obligations, tax deferred real estate sales and as collateral for construction
loan commitments as restricted investments. Maturities or release
dates less than twelve months from the end of the reported accounting period are
reported as current assets while maturities or release dates in excess of twelve
months from report dates are reported as long term assets.
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. In the event that assets and
liabilities are not sold within a twelve month period of the reporting date,
they are re-evaluated to insure that no impairment has taken place and
re-classified as long term assets and liabilities. The asset held for
sale at December 31, 2007 was a used aircraft with a net book value of
$1,112,600.
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:
-73-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
Components
of Property and Equipment as of December 31, 2008 and 2007 are as
follows:
|
2008
|
2007
|
|||||||
|
Oil
& Gas properties
|
||||||||
|
Unproved
|
$ | 2,967,600 | $ | 2,910,200 | ||||
|
Proved
|
5,320,700 | -- | ||||||
|
Total
|
8,288,300 | 2,910,200 | ||||||
|
Less
accumulated depreciation, depletion & amortization
|
(382,000 | ) | -- | |||||
|
Total
|
$ | 7,906,300 | $ | 2,910,200 | ||||
|
Mining
properties
|
$ | 23,949,800 | $ | 21,859,200 | ||||
|
Commercial
real estate
|
||||||||
|
Buildings
|
$ | 23,215,500 | $ | -- | ||||
|
Land
|
1,251,700 | 1,251,700 | ||||||
|
Construction
in progress
|
-- | 11,770,800 | ||||||
|
Less
accumulated depreciation, depletion & amortization
|
(469,000 | ) | -- | |||||
|
Total
|
$ | 23,998,200 | $ | 13,022,500 | ||||
|
Property,
plant and equipment
|
||||||||
|
Buildings
|
$ | 4,756,100 | $ | 5,182,400 | ||||
|
Land
|
1,189,000 | 1,211,700 | ||||||
|
Other
plant and equipment
|
8,453,400 | 8,599,200 | ||||||
|
Less
accumulated depreciation, depletion & amortization
|
(4,760,100 | ) | (4,691,700 | ) | ||||
|
Total
|
$ | 9,638,400 | $ | 10,301,600 | ||||
|
Total
Property plant & equipment, net
|
$ | 65,492,700 | $ | 48,093,500 | ||||
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, excessive production costs or depletion of the
mineral resource.
-74-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
Oil
and Gas Properties
The
Company uses the full cost method of accounting for our oil and gas properties.
Under this method, all acquisition, exploration, development and estimated
abandonment costs, including certain related employee costs and general and
administrative costs (less any reimbursements for such costs), incurred for the
purpose of acquiring and finding oil and gas are capitalized. Unevaluated
property costs are excluded from the amortization base until a determination is
made as to the existence of sufficient proved reserves on the respective
property or whether impairment of the asset carrying cost is required. The
Company reviews its unevaluated properties at the end of each quarter to
determine whether the costs should be reclassified to the full cost pool and
thereby subject to amortization. Sales of oil and gas properties are
accounted for as adjustments to the net full cost pool with no gain or loss
recognized, unless the adjustment would significantly alter the relationship
between capitalized costs and proved reserves.
The
Company amortizes its investment in oil and gas properties using the units of
production method by dividing production volumes for the period by the total
proved reserves as of the beginning of the period, and applying the respective
rate to the net cost of proved oil and gas properties, including future
development costs. The Company may capitalize the portion of salaries, general
and administrative expenses that are attributable to acquisition, exploration
and development activities if significant. No amounts have been
capitalized in the periods presented. Under the full cost method of accounting,
we compare, at the end of each financial reporting period, the present value of
estimated future net cash flows from proved reserves (based on adjusted
commodity prices and excluding cash flows related to estimated abandonment
costs), to the net capitalized costs of proved oil and gas properties, net of
related deferred taxes. This comparison is referred to as a “ceiling test.” If
the net capitalized costs of proved oil and gas properties exceed the estimated
discounted future net cash flows from proved reserves, the Company is required
to write-down the value of its oil and gas properties to the value of the
discounted cash flows.
Long-Lived
Assets
The
Company evaluates its long-lived assets other than oil and gas properties 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. Changes in significant assumptions underlying future cash flow
estimates may have a material effect on the Company's financial position and
results of operations. At December 31, 2008 and 2007, no impairment
existed on the Company’s long lived assets, consisting of property, plant and
equipment including mineral and oil and gas properties.
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.
-75-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
Asset
Retirement Obligations
The
Company accounts for its asset retirement obligations under SFAS No. 143, "
Accounting for 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
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:
|
For
the years ending December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Beginning
asset retirement obligation
|
$ | 133,400 | $ | 124,400 | ||||
|
Accretion
of estimated ARO
|
9,400 | 9,000 | ||||||
|
Liabilities
incurred
|
24,600 | -- | ||||||
|
Liabilities
settled
|
(23,300 | ) | -- | |||||
|
Ending
asset retirement obligation
|
$ | 144,100 | $ | 133,400 | ||||
Revenue
Recognition
The
Company records natural gas and oil revenue under the sales method of
accounting. Under the sales method, the Company recognizes revenues based on the
amount of natural gas or oil sold to purchasers, which may differ from the
amounts to which the Company is entitled based on its interest in the
properties. Gas balancing obligations as of December 31, 2008 were not
significant.
Revenues
from real estate operations are reported on a gross revenue basis and are
recorded at the time the service is provided.
Management
fees are recorded when the service is provided. Management fees are
for operating and overseeing services performed on mineral properties in which
the Company participates with joint venture or industry partners.
Stock
Based Compensation
The
Company accounts for Stock Based Compensation pursuant to SFAS No.
123(R) “
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.
-76-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
The
Company has computed the fair values of its options granted to employees using
the Black Scholes pricing model and the following weighted average
assumptions:
|
Year
Ended
|
||||||||||||
|
December
31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Risk-free
interest rate
|
3.23 | % | 4.82 | % | 4.53 | % | ||||||
|
Expected
lives (years)
|
6.00 | 10.00 | 4.80 | |||||||||
|
Expected
volatility
|
56.51 | % | 48.80 | % | 71.02 | % | ||||||
|
Expected
dividend yield
|
-- | -- | -- | |||||||||
The
Company recognizes the cost of the equity awards over the period during which an
employee is required to provide service in exchange for the award, usually the
vesting period. As share-based compensation expense is recognized
based on awards ultimately expected to vest, the expense has been reduced for
estimated forfeitures based on historical forfeiture rates.
Income
Taxes
The
Company accounts for income taxes under the provisions of SFAS No. 109 “
Accounting for Income
Taxes”
. This statement requires recognition of deferred income
tax assets and liabilities for the expected future income tax consequences,
based on enacted tax laws, of temporary differences between the financial
reporting and tax bases of assets, liabilities and carry forwards.
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. Management believes it is more likely than
not that such tax benefits will be realized and a valuation allowance has not
been provided.
Net
Income (Loss) Per Share
The
Company reports net income (loss) per share pursuant to SFAS No. 128 “
Earnings per Share
” (“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, 2008, 2007 and 2006 were 606,330, 541,735 and 525,881,
respectively. During the year ended December 31, 2008, 155,811 shares
that had previously been held as collateral for a loan to the Company were
returned to the Company by the ESOP as full satisfaction of the retirement of
the debt. All shares in the ESOP have been allocated to participant
accounts. 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 and warrants to purchase
common stock, if dilutive. Using the treasury stock method potential
common shares relating to options and warrants are excluded from the computation
of diluted loss per share for the years ending December 31, 2008 because they
were anti dilutive. Potential shares relating to options and warrants
were included in the diluted earnings per share for the years ended December 31,
2007 and 2006. Dilutive options and warrants totaled 226,246,
1,719,982 and 2,372,361 at December 31, 2008, 2007 and 2006,
respectively.
-77-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
Recent
Accounting Pronouncements
SFAS 141(R)
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007),
“
Business
Combinations
”
(“SFAS 141(R)”),
replacing SFAS No. 141, “
Business Combinations
”
(“SFAS 141”). SFAS
141(R) retains the fundamental requirements in SFAS 141 that the
acquisition method of accounting be used for all business combinations and for
an acquirer to be identified for each business combination. SFAS 141(R) defines
the acquirer as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition date as the date that the
acquirer achieves control. SFAS 141(R) establishes principles and requirements
for how the acquirer:
|
|
a.
|
Recognizes
and measures in its financial statements the identifiable assets acquired,
the liabilities assumed and any noncontrolling interest in the
acquiree.
|
|
|
b.
|
Recognizes
and measures the goodwill acquired in the business combination or a gain
from a bargain purchase.
|
|
|
c.
|
Determines
what information to disclose to enable users of the financial statements
to evaluate the nature and financial effects of the business
combination.
|
This
statement is effective for business combinations occurring on or after the
beginning of the first annual reporting period beginning after December 15, 2008
with earlier adoption prohibited. This standard will change the
accounting treatment for business combinations on a prospective
basis. At December 31, 2008, the Company had no contemplated business
combinations which would invoke the provisions of this standard.
SFAS 142-3
In April
2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “
Determination of the Useful Life of
Intangible Assets
.” FSP No. FAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
“
Goodwill and Other Intangible
Assets
.” The intent of the position is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair value of
the asset under SFAS 141R, and other U.S. generally accepted accounting
principles. The provisions of FSP No. FAS 142-3 are effective for fiscal years
beginning after December 15, 2008. We will evaluate the impact, if
any, that the adoption of FAS 142-3 could have on our financial
statements.
SFAS 157
In
September 2006, the FASB issued SFAS No. 157 “
Fair Value Measurements
”
(“SFAS 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 Company adopted FAS 157 for the
year beginning January 1, 2008. The adoption of SFAS 157 had no
material impact on the Company’s financial statements.
SFAS 160
In
December 2007, the FASB issued SFAS No. 160, “
Noncontrolling Interests in
Consolidated Financial Statements
”, an Amendment of ARB No. 51 (“SFAS
160”). SFAS 160 establishes accounting and reporting standards for
noncontrolling interests in a subsidiary and for the deconsolidation of a
subsidiary. Minority interests will be recharacterized as noncontrolling
interests and classified as a component of equity. It also
establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary and requires expanded disclosures. This
statement is effective for fiscal years beginning on or after December 15, 2008,
with early adoption prohibited. The Company does not expect the
adoption of this Statement will have a material impact on its financial position
or results of operations.
-78-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
SFAS 161
In March
2008, the FASB issued SFAS No. 161, “
Disclosures about Derivative
Instruments and Hedging Activities
” - an amendment of FASB Statement No.
133 (“SFAS 161”). SFAS 161 requires additional disclosures about the objectives
of using derivative instruments, the method by which the derivative instruments
and related hedged items are accounted for under Statement No. 133 and its
related interpretations, and the effect of derivative instruments and related
hedged items on financial position, financial performance, and cash flows. SFAS
161 also requires disclosure of the fair values of derivative instruments and
their gains and losses in a tabular format. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, or the Company’s quarter ended March 31, 2009. As this
pronouncement is only disclosure-related and the Company currently has no
investments in derivative instruments, it has not had an impact on the financial
position and results of operations for the year ended December 31,
2008.
The
Company has reviewed other current outstanding statements from the FASB 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
Crested
Corp.
At a
special meeting of shareholders of Crested Corp. (“Crested”) held on November
26, 2007, a majority of the minority shareholders of Crested voted to approve
the merger which was completed on November 27, 2007. The Company
issued 2,876,252 shares of its common stock to all former shareholders of
Crested in an exchange of 1 share of the Company’s common stock for every 2
shares of Crested. Prior to the merger, the Company owned 70.9% of
Crested.
Sutter Gold Mining Company,
Inc.
On March
14, 2007, Sutter Gold Mining Company, Inc. (“SGMI”) reached a Settlement
Agreement with the Company regarding: 1) the cancellation of an accumulated debt
obligation by SGMI of approximately $2,025,700 at December 31, 2006 in exchange
for 7,621,867 shares of SGMI and 2) cancellation of a Contingent
Stock Purchase Warrant between SGMI and the Company in exchange of 5%
royalty in favor of the Company (only on SGMI’s gold property in California)
until the Company has recouped $4.6 million at which time the royalty will be
converted to a 1% royalty thereafter.
The
Company and SGMI entered into another Settlement Agreement on December 21, 2007
to retire the balance of $982,900 under a $1.0 million line of credit which had
been extended by the Company, by SGMI delivering to the Company 225,000 shares
of the Company’s common stock that SGMI owned.
On August
22, 2008, the Company sold 39,062,720 common shares of SGMI that it owned, to
RMB Resources Ltd. (“RMB”), as trustee for the Telluride Investment
Trust. The sale of these shares represented approximately 49.9% of
the outstanding common shares of SGMI for purchase price of
$5,095,600. Under the terms of the agreement, the Company retained an
equity position of approximately 3,550,361 shares and the 5% net profits
interest royalty discussed above. The Company also participated in a
non-brokered private placement by SGMI with the purchase of 4,545,455 units for
total cash consideration of $496,000. As a result of participating in
the private placement the Company also received 24-month warrants to purchase an
additional 2,272,728 common shares of SGMI at a price of Cdn. $0.15 per
share. The warrants issued under the private placement were
initially valued at $177,500 and were impaired by $66,200 at December 31, 2008.
(See Note D)
-79-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
The
Company recorded a gain as discontinued operations of $5,407,600 from the sale
of its controlling interest in SGMI during the year ended December 31,
2008. The Company also recorded losses from discontinued operations
of SGMI of $501,100, $2,003,600 and $1,818,600 for the years ended December 31,
2008, 2007 and 2006, respectively.
Other
During
2007, the Company liquidated all of its subsidiary companies with the exception
of SGMI. Those subsidiaries dissolved, and the Company’s ownership
percentage at time of dissolution, were Plateau (100%), YSFI (49.1%) and FNG
(50.9%). Assets held by the subsidiary companies were liquidated and
distributed to the shareholders of those companies. The Company also
dissolved USECC Joint Venture which was owned jointly with Crested at the time
of the merger of Crested into the Company.
D. MARKETABLE
SECURITIES
Investments
in marketable securities consists of the following at December 31,
|
2008
|
||||||||||||
|
Held
to maturity
|
||||||||||||
|
Amortized
|
Unrealized
|
|||||||||||
|
Cost
|
Market
Value
|
(Loss)/Gain
|
||||||||||
|
Treasuries
|
$ | 51,152,100 | $ | 51,152,100 | $ | -- | ||||||
|
Available-for-sale
|
||||||||||||
|
Unrealized
|
||||||||||||
|
Cost
|
Market
Value
|
(Loss)/Gain
|
||||||||||
|
Kobex
shares
|
$ | 67,800 | $ | 67,800 | $ | -- | ||||||
|
Sutter
Gold shares and warrants
|
507,800 | 507,800 | -- | |||||||||
| $ | 575,600 | $ | 575,600 | $ | -- | |||||||
|
2007
|
||||||||||||
|
Available-for-sale
|
||||||||||||
|
Unrealized
|
||||||||||||
|
Cost
|
Market
Value
|
(Loss)/Gain
|
||||||||||
|
Kobex
shares
|
$ | 703,600 | $ | 235,500 | $ | (468,100 | ) | |||||
|
Premier
shares
|
197,600 | 244,700 | 47,100 | |||||||||
| $ | 901,200 | $ | 480,200 | $ | (421,000 | ) | ||||||
-80-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
During
the year ended December 31, 2008, the Company determined that the shares of
Kobex and SGMI were other than temporarily impaired. The Company
impaired these marketable securities to market value at December 31, 2008 per
SFAS No. 115 “
Accounting for
Certain Investments in Debt and Equity Securities
”. The
following table sets forth the impairment taken:
|
Number
of
|
Impairment
at
|
|||||||
|
Shares/Warrants
|
December
31, 2008
|
|||||||
|
Kobex
Shares
|
267,932 | $ | 635,800 | |||||
|
Sutter
Gold Shares
|
8,095,816 | 321,100 | ||||||
|
Sutter
Gold Warrants
|
2,272,728 | 66,200 | ||||||
| $ | 1,023,100 | |||||||
E. MINERAL
PROPERTY TRANSACTIONS
Mount
Emmons Molybdenum Properties
On
October 6, 2006, the Company and Kobex Resources Ltd. (“Kobex”) (a British
Columbia company traded on the TSX Venture Exchange under the symbol “KBX”)
signed an Exploration, Operating and Mine Development Agreement providing Kobex
an option to acquire up to a 65% interest in certain patented and unpatented
claims held by the Company at the Mount Emmons property. Kobex gave
notice to the Company, effective March 31, 2008, that it was terminating the
agreement. Pursuant to the terms of that agreement, Kobex had
expended over $8.0 million, all of which is non-refundable and went to advancing
the project.
On August
19, 2008, the Company and Thompson Creek Metals Company USA (“TCM”), a Colorado
corporation headquartered in Englewood, Colorado, entered into an Exploration,
Development and Mine Operating Agreement for the Mount Emmons
property. TCM assigned the agreement to Mt. Emmons Moly Company, a
Colorado corporation and wholly owned subsidiary of TCM effective September 11,
2008.
The
Agreement covers two distinct periods of time: The Option Period,
during which TCM may exercise an option to acquire up to a 50% interest in the
Mount Emmons property; and the Joint Venture Period, during which TCM may form a
joint venture with the Company and also have an option to acquire up to an
additional 25% interest in the Property.
The Option
Period
:
TCM paid
$500,000 (non refundable) to the Company at closing which was credited against
the carrying value of the Mount Emmons property. TCM has the option
to pay the Company six annual payments of $1.0 million each beginning on January
1, 2009 for the option to acquire a 50% interest. This option is
exercisable in two stages:
|
1.
|
At
TCM’s election, within 36 months of incurring a minimum of $15 million in
expenditures on or related to Mount Emmons (including the option payments
to the Company), TCM may acquire an undivided working interest of 15% in
the property and the business of the
project.
|
-81-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
Option Payments to the
Company or Expenditure Amount, and Deadlines are represented in the following
Table:
| $ | 500,000 |
Option
Payment
|
Paid
at Closing*
|
|
| $ | 2,000,000 |
Expenditures
|
December
31, 2008*
|
|
| $ | 1,000,000 |
Option
Payment
|
January
1, 2009**
|
|
| $ | 4,000,000 |
Expenditures
|
December
31, 2009
|
|
| $ | 1,000,000 |
Option
Payment
|
January
1, 2010
|
|
| $ | 4,000,000 |
Expenditures
|
December
31, 2010
|
|
| $ | 1,000,000 |
Option
Payment
|
January
1, 2011
|
|
| $ | 1,500,000 |
Expenditures
|
June
30, 2011
|
|
| $ | 15,000,000 |
* Paid
in 2008
** Paid
in 2009
All of
the costs to operate the existing water treatment plant will be paid by the
Company until TCM exercises its option to own a working interest in the
project.
|
2.
|
If,
by July 31, 2018, TCM has incurred a total of at least $43.5 million of
expenditures (including amounts during the first stage) and paid the
Company the $6.5 million of option payments (for a total of $50 million),
TCM may elect to acquire an additional 35% (for a total of 50%)
concurrently or after it exercises its option to acquire a 15% working
interest. None of the interests acquired by TCM will be subject
to any overriding royalty to the
Company.
|
Failure
by TCM to incur the required amount of expenditures by a deadline, or to make an
option payment to USE, subject to the terms of the Agreement, the
Agreement may terminate without further obligation to the Company or
TCM. TCM may terminate the Agreement at any time, but if TCM has
earned and subsequently elected to accept, TCM will retain the earned interest
and be responsible for their share of all costs and expenses related to Mount
Emmons, including the water treatment plant.
The Joint Venture Period;
Joint Venture Terms:
Within
six months of TCM’s election to acquire the 50% interest, TCM, in its sole
discretion, may elect to form a Joint Venture and either: (i) participate on a
50%-50% basis with the Company, each party to bear their own share of
expenditures from formation date; or (ii) acquire up to an additional 25%
interest in the project by paying 100% of all expenditures equal to $350 million
(for a total of $400 million, including the $50 million to earn the 50% interest
in the first and second stage of the Option Period), at which point the
participation would be 75% TCM and 25% the Company. Provided however,
if TCM makes expenditures of at least $70 million of the $350 million in
expenditures and TCM decides not to fund the additional $280 million in
expenditures, TCM will have earned an additional 2.5% (for a total of
52.5%). Thereafter, TCM will earn an incremental added percentage
interest for each dollar it spends toward the total $350 million
amount.
At any
time before incurring the entire $350 million, TCM, in its sole discretion, may
determine to cease funding 100% of expenditures, in which event the Company and
TCM then would share expenditures in accordance with their participation
interests at that date, in accordance with the Joint Venture. With
certain exceptions, either party’s interest is subject to dilution in the event
of non-participation in funding the Joint Venture’s budgets.
-82-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
Management of the
Property
TCM is
the Project Manager of Mount Emmons. A four person Management
Committee will govern the project’s operations, with two representatives each
from the Company and TCM; TCM shall have the deciding vote in the event of a
committee deadlock.
If and
when Mount Emmons goes into production, TCM will purchase the Company’s share of
the molybdic oxide produced from Mount Emmons at an average price as published
in Platt’s Metals Weekly price less a discount with a cap and a floor, such
discount band to be adjusted every 5 years indexed to a GDP
deflator.
Other
On May
19, 2008, the Town Council adopted a revised Watershed Ordinance. The
Company and TCM intend to work with the Town of Crested Butte concerning
activities at Mount Emmons consistent with lawful and applicable rules,
regulations, and statutes. It is possible that unexpected delays,
and/or increased costs, may be encountered in developing a new mine plan for
Mount Emmons as a result of the revised Watershed Ordinance.
Included
on the property is a water treatment plant owned and operated by the
Company. The cost of operating this plant was approximately $1.5
million in 2008 and is expensed in operations.
Oil
and Gas Exploration
PetroQuest Energy, Inc. –
Gulf Coast
In 2007,
the Company entered into an Exploration and Area of Mutual Interest Agreement
(the “Mutual Agreement”) with PetroQuest Energy, Inc. (“PQ”) relating to three
prospect areas in the Gulf Coast region of the United States. The
Mutual Agreement provides the Company with the right, through September 13,
2011, to acquire a 20% working interest in each lease acquired by PQ within any
of the three prospect areas. The parties also signed an operating
agreement for PQ to be the operator for each prospect. PQ currently
owns or will likely own a majority of the working interest in every area covered
by the Mutual Agreement.
Through
December 31, 2008, the Company paid $3.2 million for our 20% share of lease
acquisition and seismic data reprocessing and reinterpretation costs with
PQ. The Company spent an additional $4.2 million in exploration
costs. $2.5 million was spent on the Bluffs well, completed as an oil and gas
producer. The Company’s working interest is 15% (reduced from 20% due
to a third party’s election to back in for 5% of the leasehold), representing a
net revenue interest of 10.4%. The working and net revenue interests
will be further reduced at payout of the Company’s costs, plus 6% annual
interest, pursuant to the Wildes agreement (see below).
An
additional $1.7 million of drilling expense was incurred for the Highlands well
which resulted in a dry hole that has been plugged and
abandoned. The Company is in the process of reviewing future
drilling on these prospects but has not yet committed to the drilling of any
additional wells.
In the
event that the Company elects not to participate in undrilled prospects that it
has an interest in, it will endeavor to farm out its interest to other industry
partners, sell its interest in the seismic or abandon the
prospect. The cost of prospect participation, seismic and lease hold
costs are added to the full cost pool which is subject to ceiling
tests.
-83-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
Sales of
the Company’s oil and gas production for the year ended December 31, 2008 was
entirely from the successful well drilled with PetroQuest.
Yuma Exploration and
Production Company, Inc. – South Louisiana
On April
27, 2008, the Company entered into a four year Joint Exploration Agreement (the
“Exploration Agreement”) with Yuma Exploration and Production Company, Inc., a
private exploration and production company (“Yuma”) based in Houston,
Texas. Under the Exploration Agreement, the Company has purchased a
working interest in a seismic, lease acquisition and drilling program covering
approximately 138 square miles in South Louisiana. Net acreage
acquired will depend on the terms of leases acquired, but is expected to be in
excess of 50,000 net acres. Yuma holds a 48% working interest and the
balance is held by the Company (4.55%) and third parties (approximately
47.45%). For their working interests, the participants (other than
Yuma) are paying 80% of the initial seismic, overhead and some land costs (total
$1,390,000), and Yuma is paying 20%. All land and exploration costs
going forward are to be paid according to the working interest
percentages. Through December 31, 2008, the Company paid $801,900 for
seismic and land costs.
Wildes Exploration
Agreement
In 2007
and 2008, the Company entered into a Management Engagement Agreement (for terms
of three years each) with a management company affiliated with Wildes
Exploration (“Wildes”). The Company is paying Wildes $100,000
annually for consulting and management services for the prospects under the
Mutual Agreement with PQ and an additional $50,000 for the Exploration Agreement
with Yuma.
In
addition, pursuant to the agreement with Wildes, the Company will assign to
Wildes a working interest of 15% of its working interest after it has
recovered 100% of its costs plus 6% interest compounded annually, for each
producing well drilled and completed within a prospect area with
PQ. This interest will increase to 20% of the
Company’s working interest after it has recovered 200% of all its
costs from each producing well within the prospect. This assignment
will cover all wells drilled and completed in the particular
prospect. From the assignment date forward, Wildes will be
responsible for its proportionate share of all of costs associated with the
wells in accordance with the operating agreement with PQ.
The
Company will assign Wildes (after we have recovered 100% of our drilling and
completion costs plus 6% interest compounded annually) a working interest of
12.5% of its working interest in each well that is completed with
Yuma. After assignment, Wildes will be responsible for its
proportionate share of the well’s costs under the operating agreement with
Yuma.
Texas Land & Petroleum
Company, LLC – Northeast Texas
The
Company paid TLPC Holdings, Ltd, an affiliate of Texas Land & Petroleum
Company, LLC (“TL&P”) a private Texas company, a $45,000 prospect fee and
signed an agreement for an oil well drilling program on the Hopkins Prospect in
Wood County, Texas, located about 50 miles east of
Dallas. The Company will participate in the first well on
a one-third for one quarter basis (33% of drilling and completion costs, for a
25% working interest (18.75% net revenue interest)). Upon
participation in the first well, the Company will own its share of all the
acreage. Subsequent wells will be unpromoted (25% of
costs). TL&P holds 50% of the working interest.
-84-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
Ridgeland Wyoming,
Inc
.
On
December 23, 2008, the Company signed a Participation Agreement, (“Participation
Agreement”) with Ridgeland Wyoming, Inc. (“Ridgeland”), a private oil and gas
producer headquartered in Provo, Utah. The Company paid a $25,000
prospect fee to Ridgeland for a 50% working interest in the Schuricht Prospect
in North East Wyoming. Ridgeland is carried for a 1/6
th
interest (on an 8/8
th
basis)
to casing point on the first well. After the first well, the Company
and Ridgeland will drill all subsequent wells on a 50 – 50 basis. All
leases under the Participating Agreement with Ridgeland are to carry an 80% net
revenue interest. Under the terms of the Participation Agreement the
Company agreed to pay $338,800 as its initial expense in the first well to be
drilled early January 2009. (See Note P, Subsequent
Event)
Sale
of Mineral Interests
Uranium One Asset Purchase
Agreement
(“Uranium
One”)
-
Uranium
On April
30, 2007, the Company and certain of its then subsidiary companies, completed
the sale of uranium assets, including a uranium mill in Utah and unpatented
mining claims in Wyoming, Colorado, Arizona and Utah and certain contractual
rights the Company had with a third party for the development of uranium
properties. The uranium assets were sold to sxr Uranium One
Inc. (“Uranium One,”) headquartered in Toronto, Canada with offices in South
Africa and Australia (Toronto Stock Exchange and Johannesburg Stock Exchange,
“UUU”), and certain of its private subsidiary companies. Uranium One assumed
liabilities associated with the uranium assets it acquired, including (but not
limited to) those future reclamation liabilities associated with the uranium
mill in Utah, and the mining claims.
Net cash
paid to the Company by Uranium One at closing was $6,602,700. After
closing the Company also received an additional $7,420,000 from the release of
cash reclamation bonds which were assumed by Uranium One at
closing. The Company also received 6,607,605 Uranium One common
shares all of which were sold during 2007 for $90,724,000. The
Company recorded a gain of $111,728,200 as a result of the sale of the uranium
assets during the year ended December 31, 2007.
The
Company may also receive future payments pursuant to the terms of the sales
contract with Uranium One as follows:
|
·
|
$20,000,000
cash when commercial production occurs at the uranium mill sold to Uranium
One which is defined as the point that the 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 claims sold to Uranium One on April
30, 2007 (excluding existing ore stockpiles on the
properties).
|
|
·
|
From
and after the initiation of commercial production at the uranium mill, a
production payment 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.
|
-85-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
The
Company holds a 4% net profits interest on Rio Tinto’s Jackpot uranium property
located on Green Mountain in Wyoming. This interest was not included
in the sale of uranium assets to Uranium One.
On
October 29, 2007, Uranium One purchased a commercial property associated with
uranium assets it had previously purchased from the Company, for
$2,700,000. Cash proceeds from the sale of the property were
$2,635,400. The Company recorded a gain on the sale of assets from
the sale of the property of $472,300.
Pinnacle
Gas Resources, Inc.
On June
23, 2003, Rocky Mountain Gas, Inc. (“RMG”), Carrizo Oil and Gas, Inc. and seven
affiliates of Credit Suisse First Boston Private Equity formed Pinnacle Gas
Resources, Inc. (“Pinnacle”). RMG was a former majority-owned
subsidiary of the Company, which was sold in 2005. In exchange for
the contribution of coal bed methane properties, RMG received 37.5% of the
common stock of Pinnacle common stock as of the closing date and options to
purchase Pinnacle common stock. In September 2006, the Company
sold its Pinnacle shares in a private transaction for $13.8 million cash, and
recorded a gain on the transaction of $10.8 million.
F. SUPPLEMENTAL
FINANCIAL INFORMATION ON OIL AND NATURAL GAS EXPLORATION, DEVELOPMENT AND
PRODUCTION ACTIVITIES
Capitalized
Costs
The
following table presents information regarding the Company’s net costs incurred
in the purchase of proved and unproved properties, and in exploration and
development activities:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Unproved
oil and gas properties
|
$ | 2,967,600 | $ | 2,910,200 | $ | -- | ||||||
|
Proved
oil and gas properties
|
5,320,700 | -- | -- | |||||||||
|
Total
capitalized costs
|
$ | 8,288,300 | $ | 2,910,200 | $ | -- | ||||||
|
Accumulated
depreciation, depletion and amortization (DD&A)
|
(382,000 | ) | -- | -- | ||||||||
|
Net
capitalized costs
|
$ | 7,906,300 | $ | 2,910,200 | $ | -- | ||||||
The
Company’s DD&A per equivalent Mcf was $4.20 in 2008.
Undeveloped
properties as of December 31, 2008 include only acquisition costs incurred in
the following years:
|
2007
|
$ | 1,897,800 | ||
|
2008
|
1,069,800 | |||
| $ | 2,967,600 | |||
-86-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
Costs
Incurred
Costs
incurred in oil and natural gas property acquisition, exploration and
development activities are summarized below:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Property
acquisition costs:
|
||||||||||||
|
Proved
|
$ | -- | $ | -- | $ | -- | ||||||
|
Unproved
|
1,184,300 | 2,910,200 | -- | |||||||||
|
Exploration
costs
|
4,193,800 | -- | -- | |||||||||
|
Development
costs
|
-- | -- | -- | |||||||||
|
Total
costs incurred
|
$ | 5,378,100 | $ | 2,910,200 | $ | -- | ||||||
Results
of Operations
Results
of operations from oil and natural gas producing activities are presented
below:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Oil
and natural gas revenues
|
$ | 571,000 | $ | -- | $ | -- | ||||||
|
Less:
|
||||||||||||
|
Oil
and natural gas operating costs
|
62,200 | -- | -- | |||||||||
|
Depreciation
and amortization
|
382,000 | -- | -- | |||||||||
|
Accretion
expense
|
-- | -- | -- | |||||||||
|
Income
tax expense
|
-- | -- | -- | |||||||||
| 444,200 | -- | -- | ||||||||||
|
Results
of operations from oil and natural gas
|
$ | 126,800 | $ | -- | $ | -- | ||||||
Oil
and Natural Gas Reserves (Unaudited)
Proved
reserves are estimated quantities of oil and natural gas which geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are reserves that can
reasonably be expected to be recovered through existing wells with existing
equipment and operating methods.
Proved
oil and natural gas reserve quantities at December 31, 2008 and the related
discounted future net cash flows before income taxes are based on the estimates
prepared by Ryder Scott Company Petroleum Engineers. There were no reserves
prior to December 31, 2008. Such estimates have been prepared in
accordance with guidelines established by the Securities and Exchange
Commission.
-87-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
The
Company’s net ownership interests in estimated quantities of proved oil and
natural gas reserves and changes in net proved reserves, all of which are
located in the continental United States, are summarized below:
|
December
31, 2008
|
Oil
(BBLS)
|
Gas
(MCF)
|
||||||
|
Beginning
of year
|
-- | -- | ||||||
|
Revisions
of previous quantity estimates
|
-- | -- | ||||||
|
Extensions,
discoveries and improved recoveries
|
32,128 | 1,073,635 | ||||||
|
Sales
of reserves in place
|
-- | -- | ||||||
|
Production
|
(2,330 | ) | (73,635 | ) | ||||
|
End
of Year
|
29,798 | 1,000,000 | ||||||
|
Proved
developed reserves at end of year
|
29,798 | 1,000,000 | ||||||
Standardized
Measure (Unaudited)
The
standardized measure of discounted future net cash flows relating to the
Company’s ownership interests in proved oil and natural gas reserves as of
year-end is shown below:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Future
cash inflows
|
$ | 7,112,100 | $ | -- | $ | -- | ||||||
|
Future
costs:
|
||||||||||||
|
Production
|
(1,154,200 | ) | -- | -- | ||||||||
|
Development
|
(63,800 | ) | -- | -- | ||||||||
|
Future
income tax expense
|
(1,992,900 | ) | -- | -- | ||||||||
|
Future
net cash flows
|
3,901,200 | -- | -- | |||||||||
|
10%
discount factor
|
(582,700 | ) | ||||||||||
|
Standardized
measure of discounted fuure net cash flows
|
$ | 3,318,500 | $ | -- | $ | -- | ||||||
Future
cash flows are computed by applying year-end prices of oil and natural gas to
year-end quantities of proved oil and natural gas reserves. Average
prices used in computing year end 2008 future cash flows were $41.41/barrel for
oil and $5.88/Mcf for natural gas. Future operating expenses and
development costs are computed primarily by the Company’s petroleum engineers by
estimating the expenditures to be incurred in developing and producing the
Company’s proved oil and natural gas reserves at the end of the year, based on
year end costs and assuming continuation of existing economic
conditions.
Future
income taxes are based on year-end statutory rates, adjusted for the tax basis
of oil and gas properties and available applicable tax assets. A
discount factor of 10% was used to reflect the timing of future net cash
flows. The standardized measure of discounted future net cash flows
is not intended to represent the replacement cost or fair market value of the
Company’s oil and natural gas properties. An estimate of fair value
would also take into account, among other things, the recovery of reserves not
presently classified as proved, anticipated future changes in prices and costs,
and a discount factor more representative of the time value of money and the
risks inherent in reserve estimates.
-88-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
Change
in Standardized Measure (Unaudited)
Changes
in standardized measure of future net cash flows relating to proved oil and
natural gas reserves are summarized below:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Balance
at beginning of period
|
$ | -- | $ | -- | $ | -- | ||||||
|
Sales
of oil and gas, net of production costs
|
(508,800 | ) | -- | -- | ||||||||
|
Net
change in prices and production costs
|
-- | -- | -- | |||||||||
|
Net
change in future development costs
|
-- | -- | -- | |||||||||
|
Extensions
and discoveries
|
5,820,200 | -- | -- | |||||||||
|
Revisions
of previous quantity estimates
|
-- | -- | -- | |||||||||
|
Previously
estimated development costs incurred
|
-- | -- | -- | |||||||||
|
Net
change in income taxes
|
(1,992,900 | ) | -- | -- | ||||||||
|
Accretion
of discount
|
-- | -- | -- | |||||||||
|
Other
|
-- | -- | -- | |||||||||
|
Balance
at end of period
|
$ | 3,318,500 | $ | -- | $ | -- | ||||||
Sales of
oil and natural gas, net of oil and natural gas operating expenses, are based on
historical pretax results. Sales of oil and natural gas properties,
extensions and discoveries, purchases of minerals in place and the changes due
to revisions in standardized variables are reported on a pretax discounted
basis.
G. GEOTHERMAL
On
December 17, 2009, the Company purchased a minority interest (25% for
$3,455,000) in Standard Steam Trust, LLC (“SST”), a Denver, Colorado based
private geothermal resource acquisition and development
company. Substantial additional capital is expected to be raised in
2009 through capital calls and/or admission of new
partners. Dilution, but no penalty, would be associated with a
partner’s non-participation in a capital call. SST is managed by
Terra Caliente, LLC (“Terra”), also a private Denver based company, with
oversight by an advisory board (USE is one of three members) as to budgets,
major expenditures, sale or other disposition of prospects, and similar
matters. In addition, Terra will receive a substantial back-in
interest (25%), at such time as all other investors (including Terra) receive
cash or securities equal to their investment.
H. ENERGY
SECTOR HOUSING
Remington Village –
Gillette, Wyoming
.
During
2008, the Company completed construction of a nine building multifamily
apartment complex, with 216 units on 10.15 acres located in Gillette,
Wyoming.
-89-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
In August
2007, Zions Bank provided secured construction financing (also guaranteed by
USE). The amount due under the construction loan was $16.8 million at
December 31, 2008. Total cost to buy the land, pay a developer’s fee,
obtain permits and entitlements, site work and construction, was approximately
$24.5 million. The Company had invested a total of $7.7 million cash
equity into the project and had borrowed $16.8 million net under the
construction line of credit as of December 31, 2008. The interest
rate on the loan balance at December 31, 2008 was 2.71% (payable monthly) based
on LIBOR. Loan maturity was March 1, 2009 (extendable to September 1,
2009 at our election). (See Note P, Subsequent Event.
I. OTHER
LIABILITIES AND DEBT
As of
December 31, 2008 and 2007, the Company had current and long term liabilities
associated with the following funding commitments:
|
Other
liabilities
|
||||||||
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Retainage
on construction in progress
|
$ | 487,700 | $ | 517,300 | ||||
|
Employee
health insurance self funding
|
23,100 | 48,200 | ||||||
|
Deferred
rent
|
29,400 | 29,500 | ||||||
|
Security
deposits
|
102,800 | 2,800 | ||||||
|
Accrued
expenses
|
71,600 | 2,700 | ||||||
|
Mineral
property lease
|
-- | 67,000 | ||||||
| $ | 714,600 | $ | 667,500 | |||||
|
Other
long term liabilities:
|
||||||||
|
Accrued
retirement costs
|
$ | 726,200 | $ | 774,100 | ||||
|
Accrued
expenses
|
-- | 184,500 | ||||||
| $ | 726,200 | $ | 958,600 | |||||
|
Debt
|
||||||||
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Short
term Debt
|
||||||||
|
Construction
note - collateralized by
|
||||||||
|
property,
interest at 2.71% and 6.88%
|
$ | 16,812,500 | $ | 5,489,000 | ||||
|
Long
term Debt
|
||||||||
|
Real
estate note - collateralized by
|
||||||||
|
property,
interest at 6%
|
$ | 1,875,000 | $ | -- | ||||
|
Installment
notes - collateralized by
|
||||||||
|
equipment;
interest at 5.25% to 9.00%
|
||||||||
|
maturing
in 2008-2011
|
-- | 262,400 | ||||||
|
Less
current portion
|
(875,000 | ) | (71,900 | ) | ||||
|
Totals
|
$ | 1,000,000 | $ | 190,500 | ||||
-90-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
In
December 2008, the Company and TCM purchased land for $4 million ($2 million in
January 2009, $400,000 annually for five years). The Company is
responsible for one-half the purchase price. The Company paid $125,000 against
this debt in December 2008. The remaining principal requirements
under the terms of the debt for the Company’s portion are $875,000
due in January 2009 and $200,000 per year during 2010 through 2014.
The
Company has a $5,000,000 line of credit from a commercial bank. The
line of credit has a variable interest rate (3.25% as of December 31, 2008). As
of December 31, 2008, none of the line of credit had been drawn
down. The line of credit is collateralized by certain real property
and a corporate aircraft.
J. INCOME
TAXES
The
income tax provision differs 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:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Book
income before income taxes
|
$ | (4,714,000 | ) | $ | 88,730,000 | $ | (14,279,400 | ) | ||||
|
Equity
income from non consolidated tax subsidiary
|
-- | 3,551,400 | (88,600 | ) | ||||||||
|
Add
back losses from non consolidated tax subsidiaries
|
-- | 2,009,700 | 1,962,900 | |||||||||
|
Prior
year true-up and rate change
|
(171,400 | ) | (265,100 | ) | (3,470,000 | ) | ||||||
|
Increase
(decrease) in valuation allowances
|
-- | -- | (17,201,700 | ) | ||||||||
|
Crested
prior year NOL and AMT credit
|
-- | -- | (12,353,300 | ) | ||||||||
|
Reverse
income from discontinued operations
|
(4,906,500 | ) | -- | - | ||||||||
|
Tax
impact of change in asset classification
|
(549,300 | ) | -- | - | ||||||||
|
Permanent
differences
|
1,105,800 | (2,549,300 | ) | 1,625,600 | ||||||||
|
Taxable
income before temporary differences
|
$ | (9,235,400 | ) | $ | 91,476,700 | $ | (43,804,500 | ) | ||||
|
Expected
federal income tax expense (benefit) 35%
|
$ | (3,232,400 | ) | $ | 32,016,800 | $ | (15,331,600 | ) | ||||
|
Federal
deferred income tax expense (benefit)
|
$ | 1,319,200 | $ | 14,777,600 | $ | (15,096,600 | ) | |||||
|
Federal
current expense (benefit)
|
(4,551,600 | ) | 17,239,200 | (235,000 | ) | |||||||
|
Total
federal income tax expense (benefit)
|
$ | (3,232,400 | ) | $ | 32,016,800 | $ | (15,331,600 | ) | ||||
|
Current
state income tax expense net of
|
||||||||||||
|
federal
tax benefit
|
(93,400 | ) | 350,000 | -- | ||||||||
|
Total
provision (benefit)
|
$ | (3,325,800 | ) | $ | 32,366,800 | $ | (15,331,600 | ) | ||||
Current
taxes receivable at December 31, 2008 is comprised of $5,896,400 of federal
income taxes. The amount of current taxes receivable has been increased by a
$201,900 benefit from the exercise of pre-FAS 123R nonqualified stock options
and warrants which result in an increase to paid in capital and a $1,184,900
benefit related to the sale of discontinued operations. At December
31, 2007, current taxes receivable was $902,900.
-91-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
The tax
impact of change in asset classification relates to the Company’s investment in
shares of Sutter Gold Mining, Inc. that it owns at December 31,
2008. When this asset was previously accounted for as a subsidiary,
no deferred tax asset for the excess of tax basis over book basis was
recognized. As this investment is now being treated as a marketable
security, subject to impairment, a deferred tax asset is recognized in the
current period.
The
components of deferred taxes as of December 31, 2008 and December 31, 2007 are
as follows:
|
December
31, 2008
|
December
31, 2007
|
|||||||
|
Current
deferred tax assets:
|
||||||||
|
Tax
basis in excess of book
|
$ | 550,300 | $ | -- | ||||
|
Non-deductible
reserves and other
|
43,200 | 59,700 | ||||||
|
Total
net current deferred tax assets/(liabilities)
|
$ | 593,500 | $ | 59,700 | ||||
|
Non-current
deferred tax assets:
|
||||||||
|
Deferred
compensation
|
$ | 650,800 | $ | 436,300 | ||||
|
Accrued
reclamation
|
50,400 | 38,500 | ||||||
|
Tax
basis in excess of book
|
-- | 200,400 | ||||||
|
Total
noncurrent deferred tax assets
|
701,200 | 675,200 | ||||||
|
Non-current
deferred tax liabilities:
|
||||||||
|
Book
basis in excess of tax basis
|
(7,884,300 | ) | (7,376,900 | ) | ||||
|
Book
basis in excess of tax basis - oil and gas
|
(1,750,300 | ) | (227,100 | ) | ||||
|
Accrued
reclamation
|
(11,900 | ) | -- | |||||
|
Total
deferred tax liabilities
|
(9,646,500 | ) | (7,604,000 | ) | ||||
|
Total
net non-current deferred tax assets/(liabilities)
|
$ | (8,945,300 | ) | $ | (6,928,800 | ) | ||
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 not be
realized. No valuation allowance is provided at December 31, 2008 and
December 31, 2007 as the Company believes that it is more likely than not that
the deferred tax assets will be utilized in future years.
During
the year ended December 31, 2008, net current deferred tax assets increased by
$533,800 and net non-current deferred tax liabilities increased by
$2,016,500. The total change in net deferred tax liabilities was a
decrease of $1,482,700, comprised of a deferred income tax expense of $1,319,200
and the recognition of other comprehensive income in the amount of $163,500
resulting from the reversal of the other comprehensive income impact of impaired
marketable securities. The book basis in excess of tax basis in the schedule
above relates primarily to the $7,287,300 difference created from the excess of
the purchase price over the carrying value of the assets acquired in the
purchase of the remaining minority interest of Crested Corp. in
2007.
The
Company’s practice is to recognize interest and/or penalties related to income
tax matters in income tax expense. The Company had no accrued
interest or penalties at December 31, 2008 or December 31, 2007.
-92-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
On
January 1, 2007, the Company adopted FASB Interpretation No. 48, “
Accounting for Uncertainty in Income
Taxes
” (“FIN 48”). Pursuant to FIN 48, the Company identified
and evaluated any potential uncertain tax positions. The Company has
concluded that there are no uncertain tax positions requiring recognition in the
financial statements.
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.
K. SEGMENTS
AND MAJOR CUSTOMERS
During
the year ended December 31, 2008, the Company, for financial reporting purposes,
operated in three business segments, the exploration for and sale of oil and
gas, rental of multifamily housing units and mining. The Company had
only one purchaser of its oil and gas production which began in November
2008. As of December 31, 2008, no one customer had a majority of the
units under contract in the Company’s multifamily housing project in Gillette,
Wyoming.
During
the years ended December 31, 2007 and 2006, the Company was involved in one
reportable business segment, commercial activities which include operations
managed by third parties and the sale of real estate lots at the Company’s
commercial real estate property in southern Utah which has been
sold. (See Note E) The Company also received management
fees for mineral properties which were not consolidated business segments in
prior years but are broken out separately in the attached table for
comparison. In addition the Company owned a gold mining property
which was on standby and maintenance in prior years. This property
was not material enough to be considered a financial reporting
segment. The property was sold in 2008 and the operations related to
it are reported as discontinued operations and are therefore not reflected in
the table below:
-93-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
|
For
the year ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Revenues:
|
||||||||||||
|
Real
estate
|
$ | 1,633,400 | $ | 934,500 | $ | 170,200 | ||||||
|
Oil
& gas
|
571,000 | -- | -- | |||||||||
|
Mineral
properties, management
|
||||||||||||
|
fees
& other
|
82,600 | 239,600 | 710,000 | |||||||||
|
Total
revenues:
|
2,287,000 | 1,174,100 | 880,200 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Real
estate
|
1,165,200 | 379,900 | 271,900 | |||||||||
|
Oil
& gas
|
444,200 | -- | -- | |||||||||
|
Mineral
properties
|
1,106,100 | 1,092,700 | 2,752,700 | |||||||||
|
Total
operating expenses:
|
2,715,500 | 1,472,600 | 3,024,600 | |||||||||
|
Interest
expense
|
||||||||||||
|
Real
estate
|
416,800 | -- | -- | |||||||||
|
Oil
& gas
|
-- | -- | -- | |||||||||
|
Mineral
properties
|
-- | -- | -- | |||||||||
|
Total
interest expense:
|
416,800 | -- | -- | |||||||||
|
(Loss)
income before investment and
|
||||||||||||
|
property
transactions:
|
||||||||||||
|
Real
estate
|
51,400 | 554,600 | (101,700 | ) | ||||||||
|
Oil
& gas
|
126,800 | -- | -- | |||||||||
|
Mineral
properties
|
(1,023,500 | ) | (853,100 | ) | (2,042,700 | ) | ||||||
|
Loss
before investment
|
||||||||||||
|
and
property transactions:
|
(845,300 | ) | (298,500 | ) | (2,144,400 | ) | ||||||
|
Corporate
other revenues and expenses:
|
(8,775,100 | ) | 91,032,100 | (10,316,400 | ) | |||||||
|
(Loss)
income before discontinued
|
||||||||||||
|
operations
and income taxes
|
$ | (9,620,400 | ) | $ | 90,733,600 | $ | (12,460,800 | ) | ||||
|
Depreciation
expense:
|
||||||||||||
|
Real
estate
|
$ | 516,600 | $ | 40,400 | $ | 40,500 | ||||||
|
Oil
& gas
|
382,000 | -- | -- | |||||||||
|
Mineral
properties, management
|
||||||||||||
|
fees
& other
|
49,500 | 35,900 | 30,400 | |||||||||
|
Corporate
|
477,700 | 361,200 | 382,600 | |||||||||
|
Total
depreciation expense
|
$ | 1,425,800 | $ | 437,500 | $ | 453,500 | ||||||
-94-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
|
As
of
|
||||||||
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Assets
by segment
|
||||||||
|
Real
estate
|
$ | 30,979,800 | $ | 18,330,200 | ||||
|
Oil
& gas
|
8,522,800 | 2,910,200 | ||||||
|
Mineral
properties
|
24,926,800 | 23,900,400 | ||||||
|
Corporate
assets
|
78,201,500 | 86,263,600 | ||||||
|
Total
assets
|
$ | 142,630,900 | $ | 131,404,400 | ||||
L. SHAREHOLDERS’
EQUITY
During
2008, the Company issued 658,576 shares of common stock. Issued
shares consist of 126,878 shares issued for the 2008 ESOP contribution, 85,000
shares issued to officers of the Company pursuant to the 2001 Stock Compensation
Plan, and 446,698 shares issued from warrants that were exercised.
During
2008, the Company also cancelled a total of 2,315,940 shares of its common
stock. The cancelled shares consist of 2,160,129 shares purchased pursuant to a
stock buyback plan (discussed below) and the cancellation of 155,811 shares
which had been held as unallocated contributions to the Company’s ESOP as a
result of a loan the Company had made to the ESOP. The Company
accepted the 155,811 shares of its common stock as full payment of the debt and
cancelled the shares.
Stock
Buyback Plan
On
September 19, 2008, the Board of Directors amended the previously approved stock
buyback plan of $5.0 million by increasing the total value of shares to be
repurchased to $8.0 million. The buyback program is being
administered exclusively through a brokerage firm. During the year
ended December 31, 2008, the Company purchased 2,160,129 shares of common stock
for a total of $5,554,100 or an average cost per share of $2.57. From
the commencement of the stock buyback plan through December 31, 2008, the
Company has purchased 2,388,129 shares for $6,601,800 or an average price of
$2.76 per share.
Stock
Option Plans
The Board
of Directors adopted the U.S. Energy Corp. 1989 Stock Option Plan for the
benefit of the Company’s 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. Options
granted under the 1998 ISOP remain exercisable until their expiration date under
the terms of that Plan.
-95-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
During
the years ended December 31, 2008, 2007 and 2006 the following activity occurred
under the 1998 ISOP:
|
Year
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Grants
|
||||||||||||
|
Qualified
|
-- | -- | -- | |||||||||
|
Non-Qualified
|
-- | -- | -- | |||||||||
| -- | -- | -- | ||||||||||
|
Price of Grants
|
||||||||||||
|
High
|
-- | -- | -- | |||||||||
|
Low
|
-- | -- | -- | |||||||||
|
Exercised
|
-- | |||||||||||
|
Qualified
|
-- | 141,687 | 83,529 | |||||||||
|
Non-Qualified
|
-- | 481,566 | 20,109 | |||||||||
| -- | 623,253 | 103,638 | ||||||||||
|
Total
Cash Received
|
$ | -- | $ | 546,400 | (1) | $ | -- | (2) | ||||
|
Forfeitures/Cancellations
|
||||||||||||
|
Qualified
|
77,782 | -- | -- | |||||||||
|
Non-Qualified
|
27,617 | -- | -- | |||||||||
| 105,399 | -- | -- | ||||||||||
|
(1)
In
addition to the cash exercise of options, shares valued at $890,400 were
exchanged for the exercise of 402,780 of the total shares
exercised.
|
||||||||||||
|
(2)
All
options were exercised by the exchange of 46,863 shares valued at
$254,600.
|
||||||||||||
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 the Company's employees. The 2001 ISOP (amended by
approval of the shareholders in 2004 and 2007) reserves for issuance 25% of the
Company’s shares of common stock issued and outstanding at any
time. The 2001 ISOP has a term of 10 years.
-96-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
During
the years ended December 31, 2008, 2007 and 2006 the following activity occurred
under the 2001 ISOP:
|
Year
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Grants
|
||||||||||||
|
Qualified
|
248,817 | 1,310,400 | 25,000 | |||||||||
|
Non-Qualified
|
313,683 | 247,600 | -- | |||||||||
| 562,500 | 1,558,000 | 25,000 | ||||||||||
|
Price of Grants
|
||||||||||||
|
High
|
$ | 2.52 | $ | 4.97 | $ | 4.09 | ||||||
|
Low
|
$ | 2.52 | $ | 4.97 | $ | 4.09 | ||||||
|
Exercised
|
||||||||||||
|
Qualified
|
-- | 342,220 | 169,393 | |||||||||
|
Non-Qualified
|
-- | 454,051 | 79,865 | |||||||||
| -- | 796,271 | 249,258 | ||||||||||
|
Total
Cash Received
|
$ | -- | $ | 1,424,100 | (1) | $ | 198,100 | (2) | ||||
|
Forfeitures/Cancellations
|
||||||||||||
|
Qualified
|
77,221 | 197,029 | -- | |||||||||
|
Non-Qualified
|
482,709 | 49,400 | -- | |||||||||
| 559,930 | 246,429 | -- | ||||||||||
| (1) In addition to the cash exercise of options there were 145,729 shares valued at $792,600 exchanged for exercises of 328,047 options. | ||||||||||||
| (2) In addition to the cash exercise of options there were 132,874 shares valued at $687,200 exchanged for exercises of 177,952 options. | ||||||||||||
-97-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
A summary
of the Employee Stock Option Plans activity in all plans for the year ended
December 31, 2008, 2007 and 2006 is as follows:
|
Year
ended December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Options
|
Weighted
Average Exercise Price
|
Options
|
Weighted
Average Exercise Price
|
Options
|
Weighted
Average Exercise Price
|
|||||||||||||||||||
|
Outstanding
at beginning
|
||||||||||||||||||||||||
|
of
the period
|
3,819,927 | $ | 3.75 | 3,927,880 | $ | 2.92 | 4,255,776 | $ | 2.88 | |||||||||||||||
|
Granted
|
562,500 | $ | 2.52 | 1,558,000 | $ | 4.97 | 25,000 | $ | 4.09 | |||||||||||||||
|
Forfeited
|
(5,333 | ) | $ | 4.97 | (246,429 | ) | $ | 4.89 | -- | -- | ||||||||||||||
|
Expired
|
(659,996 | ) | $ | 3.37 | -- | -- | -- | -- | ||||||||||||||||
|
Exercised
|
-- | $ | -- | (1,419,524 | ) | $ | 2.57 | (352,896 | ) | $ | 2.51 | |||||||||||||
|
Outstanding
at period end
|
3,717,098 | $ | 3.63 | 3,819,927 | $ | 3.75 | 3,927,880 | $ | 2.92 | |||||||||||||||
|
Exercisable
at period end
|
2,131,269 | $ | 3.29 | 2,486,927 | $ | 3.10 | 3,902,880 | $ | 2.91 | |||||||||||||||
|
Weighted
average fair
|
||||||||||||||||||||||||
|
value
of options
|
||||||||||||||||||||||||
|
granted
during
|
||||||||||||||||||||||||
|
the
period
|
$ | 1.41 | $ | 3.28 | $ | 3.38 | ||||||||||||||||||
The
exercise of 1,419,524 options during the year ended December 31, 2007 resulted
in the net issuance of 1,109,894 shares. The options were exercised
due to the payment of cash for 688,697 shares and cashless exercise of 730,827
options as a result of the cancellation of 309,630 shares.
The
exercise of 352,896 options during the year ended December 31, 2006 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.
Option
related compensation expense is recognized over the vesting period of the
options and is calculated using the Black Scholes option pricing
model. The Company initially assumed no forfeitures, but has
subsequently reduced the cumulative expense based on historical
forfeiture.
No option
related compensation expense was recognized for options which vested prior to
the adoption of FAS 123R. Prior to the adoption of FAS 123R, the
Company accounted for option compensation pursuant to APB Opinion No.
25. The following table sets forth the option compensation related
expense for the years ended December 31, 2007 through the vesting period of the
employee options outstanding at December 31, 2008:
|
Option
Realted Compensation Expense for the Year Ended December
31,
|
||||||||||||||||||||||||||||
|
Year
Ended December 31,
|
Options
Granted
|
Total
Expense
|
2007
|
2008
|
2009
|
2010
|
Thereafter
|
|||||||||||||||||||||
|
2006
|
25,000 | 12,100 | 15,300 | (3,200 | ) | -- | -- | -- | ||||||||||||||||||||
|
2007
|
1,558,000 | 4,354,700 | 592,100 | 1,081,300 | 1,166,700 | 756,800 | 757,800 | |||||||||||||||||||||
|
2008
|
562,500 | 791,000 | -- | 72,800 | 263,100 | 263,700 | 191,400 | |||||||||||||||||||||
| 2,145,500 | 5,157,800 | 607,400 | 1,150,900 | 1,429,800 | 1,020,500 | 949,200 | ||||||||||||||||||||||
-98-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
The
following table summarizes information about employee stock options outstanding
and exercisable at December 31, 2008:
|
Grant
Price Range
|
Options
Outstanding at December 31, 2008
|
Weighted
average remaining contractual life in years
|
Weighted
average exercise price
|
Options
exercisable at December 31, 2008
|
Weighted
average exercise price
|
|||||||||||||||||
| $ | 2.25 | 177,668 | 2.93 | $ | 2.25 | 177,668 | $ | 2.25 | ||||||||||||||
| $ | 2.26 - $2.40 | 434,215 | 2.03 | $ | 2.40 | 434,215 | $ | 2.40 | ||||||||||||||
| $ | 2.41 - $2.46 | 466,019 | 5.50 | $ | 2.46 | 466,019 | $ | 2.46 | ||||||||||||||
| $ | 2.47 - $2.52 | 562,500 | 9.72 | $ | 2.52 | -- | $ | -- | ||||||||||||||
| $ | 2.53 - $3.86 | 373,768 | 6.78 | $ | 3.86 | 373,768 | $ | 3.86 | ||||||||||||||
| $ | 3.87 - $3.90 | 377,928 | 2.93 | $ | 3.90 | 377,928 | $ | 3.90 | ||||||||||||||
| $ | 3.91 - $4.97 | 1,325,000 | 8.57 | $ | 4.97 | 301,671 | $ | 4.97 | ||||||||||||||
| 3,717,098 | 6.57 | $ | 3.63 | 2,131,269 | $ | 3.29 | ||||||||||||||||
The
following table sets forth the number of options available for grant as well as
the intrinsic value of the options outstanding and exercisable:
|
2008
|
2007
|
2006
|
||||||||||
|
Available
for future grant
|
1,924,524 | 1,927,094 | 1,166,905 | |||||||||
|
Intrinsic
value of option exercised
|
$ | -- | $ | 4,227,900 | $ | 994,300 | ||||||
|
Aggregate
intrinsic value of options outstanding
|
$ | -- | $ | 2,852,700 | $ | 8,378,300 | ||||||
|
Aggregate
intrinsic value of options exercisable
|
$ | -- | $ | 2,852,700 | $ | 8,354,300 | ||||||
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 $230,000, $225,000 and $220,000 for the years ended
December 31, 2008, 2007 and 2006, 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, 2008,
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 $82,000.
-99-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
During
the year ended December 31, 2008, the Board of Directors of the Company approved
a contribution of 126,878 shares to the ESOP at the price of $1.64 for a total
expense of $208,100. This compares to contributions to the ESOP
during the year ended December 31, 2007 and 2006 of 84,995 and 70,756 shares to
the ESOP at prices of $4.25 and $4.98 per share, respectively. The
expense for the contributions during the years ended December 31, 2007 and 2006
were $361,300 and $352,300, respectively.
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. During 2008,
the Company accepted, and the ESOP returned, the remaining 155,811 shares that
were being held as collateral as full satisfaction of the debt. The
shares were cancelled by the Company.
Warrants
to Others
As of
December 31, 2008, there were 1,036,387 warrants outstanding to purchase shares
of the Company's common stock. Of the total outstanding warrants,
886,387 were exercisable. 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, 2008, 2007 and 2006 for warrants is presented in the following
table:
|
Year
ended December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Warrants
|
Weighted
Average Exercise Price
|
Warrants
|
Weighted
Average Exercise Price
|
Warrants
|
Weighted
Average Exercise Price
|
|||||||||||||||||||
|
Outstanding
at beginning
|
||||||||||||||||||||||||
|
of
the period
|
1,445,585 | $ | 3.58 | 1,821,323 | $ | 3.57 | 1,672,326 | $ | 3.44 | |||||||||||||||
|
Granted
|
170,000 | $ | 2.59 | 31,215 | $ | 3.28 | 425,012 | $ | 4.39 | |||||||||||||||
|
Forfeited
|
-- | $ | -- | -- | $ | -- | -- | $ | -- | |||||||||||||||
|
Expired
|
(132,500 | ) | $ | 3.98 | (47,355 | ) | $ | 3.72 | (50,000 | ) | $ | 3.63 | ||||||||||||
|
Exercised
|
(446,698 | ) | $ | 3.42 | (359,598 | ) | $ | 3.47 | (226,015 | ) | $ | 3.84 | ||||||||||||
|
Outstanding
at period end
|
1,036,387 | $ | 3.43 | 1,445,585 | $ | 3.58 | 1,821,323 | $ | 3.61 | |||||||||||||||
|
Exercisable
at period end
|
886,387 | $ | 3.58 | 1,445,585 | $ | 3.58 | 1,821,323 | $ | 3.61 | |||||||||||||||
|
Weighted
average fair
|
||||||||||||||||||||||||
|
value
of options
|
||||||||||||||||||||||||
|
granted
during
|
||||||||||||||||||||||||
|
the
period
|
$ | 1.28 | $ | 2.20 | $ | 1.69 | ||||||||||||||||||
During
the year ended December 31, 2008, the Company issued a total of 170,000 new
warrants. Of these, 40,000 warrants were issued to an outside
consultant at an exercise price of $2.81 per share, 120,000 warrants were issued
to outside directors at an exercise price of $2.52 per share and 10,000 warrants
were issued to an advisory board member at an exercise price of $2.52 per share.
The warrants granted to the independent and advisory board members vest over a
three year period and expire on September 21, 2018. The warrants
granted to the consultant vest at the rate of 10,000 warrants per quarter,
beginning from date of grant, May 21, 2008, and expire three years from date of
vesting.
-100-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
The
following table summarizes information about non employee warrants outstanding
and exercisable at December 31, 2008:
|
Grant
Price Range
|
Warrants
Outstanding at December 31, 2008
|
Weighted
average remaining contractual life in years
|
Weighted
average exercise price
|
Warrants
exercisable at December 31, 2008
|
Weighted
average exercise price
|
|||||||||||||||||
| 2.25 | 10,000 | 2.93 | $ | 2.25 | 10,000 | $ | 2.25 | |||||||||||||||
| $ | 2.26 - $2.40 | 10,000 | 2.03 | $ | 2.40 | 10,000 | $ | 2.40 | ||||||||||||||
| $ | 2.41 - $2.46 | 100,000 | 5.49 | $ | 2.46 | 100,000 | $ | 2.46 | ||||||||||||||
| $ | 2.47 - $2.52 | 130,000 | 9.72 | $ | 2.52 | -- | $ | -- | ||||||||||||||
| $ | 2.53 - $2.77 | 192,455 | 1.33 | $ | 2.77 | 192,455 | $ | 2.77 | ||||||||||||||
| $ | 2.78 - $2.81 | 40,000 | 3.03 | $ | 2.81 | 20,000 | $ | 2.81 | ||||||||||||||
| $ | 2.82 - $3.15 | 232,143 | 0.65 | $ | 3.15 | 232,143 | $ | 3.15 | ||||||||||||||
| $ | 3.16 - $3.81 | 50,000 | 0.58 | $ | 3.81 | 50,000 | $ | 3.81 | ||||||||||||||
| $ | 3.82 - $3.86 | 150,000 | 4.26 | $ | 3.86 | 150,000 | $ | 3.86 | ||||||||||||||
| $ | 3.87 - $3.90 | 20,000 | 2.93 | $ | 3.90 | 20,000 | $ | 3.90 | ||||||||||||||
| $ | 3.91 - $7.02 | 101,789 | 0.43 | $ | 7.02 | 101,789 | $ | 7.02 | ||||||||||||||
| 1,036,387 | 3.05 | $ | 3.43 | 886,387 | $ | 3.58 | ||||||||||||||||
These
warrants are held by persons or entities other than employees and officers of
the Company.
The
Company has computed the fair values of its warrants granted to outside
consultants and outside directors using the Black Scholes pricing model and the
following weighted average assumptions:
|
Year
Ended
|
||||
|
December
31,
|
||||
|
2008
|
2007
|
2006
|
||
|
Risk-free
interest rate
|
2.41%
- 3.23%
|
4.38%
|
4.82%
|
|
|
Expected
lives (years)
|
1.78
- 6.0
|
0.29
- 2.79
|
1.17
- 4.82
|
|
|
Expected
volatility
|
46.05%
- 56.51%
|
48.12%
|
50.79%
|
|
|
Expected
dividend yield
|
--
|
--
|
--
|
|
-101-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
M. COMMITMENTS,
CONTINGENCIES AND OTHER
Legal
Proceedings
Water Rights Litigation
–Mount Emmons Molybdenum Property
Prior to
the transfer of the Mount Emmons molybdenum property PD and Mount Emmons Mining
Company (“MEMCO”) to the Company on February 28, 2006, MEMCO filed a number of
Statements of Opposition in the Water Court, Water Division No. 4, State of
Colorado to protect its existing water rights against applications filed by
other parties seeking to appropriate or change water rights or perfect
conditional water rights. Subsequent to transfer of the mine
property, Motions for Substitution of Parties (from MEMCO to the Company) were
filed and approved by the Water Court. In addition, the Company filed
a diligence application to preserve the conditional water rights associated with
Mount Emmons. These cases are as follows:
|
1.
|
Concerning the
Application of the United States of America in the Gunnison River,
Gunnison County
, Case No. 99CW267. This case involves an
application filed by the United States of America to appropriate 0.033
cubic feet per second of water for wildlife use and for incidental
irrigation of riparian vegetation at the Mount Emmons Iron Bog Spring,
located in the vicinity of Mount Emmons. MEMCO filed a
Statement of Opposition to protect proposed mining operations against any
adverse impacts by the water requirements of the Iron Bog on such
operations. This case is pending while the parties attempt to
reach a settlement on the proposed decree terms and
conditions.
|
|
2.
|
Concerning the
Application fo
r Water Rights of the
United States of America for Quantification of Reserved Right for Black
Canyon of Gunnison National Park
, Case No. 01CW05. This
case involves an application filed by the United States of America to make
absolute conditional water rights claimed in the Gunnison River in
relation to the Black Canyon of the Gunnison National Park for, and to
quantify in-stream flows for the protection and reproduction of fish and
to preserve the recreational, scenic and aesthetic
conditions. MEMCO and over 350 other parties filed Statements
of Opposition to protect their existing water rights. The
Company and most other Opposers have taken the position that the flows
claimed by the United States should be subordinated to the historical
operations of the federally owned and operated Aspinall Unit, and are
subject to the provisions contained in the Aspinall Unit Subordination
Agreement between the federal government and water districts which protect
junior water users in the Upper Gunnison River Basin. This case
is pending while the parties negotiate terms and conditions for
incorporation into Stipulations among the parties and into Proposed Decree
for presentation to the Water Court for
approval.
|
-102-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
|
3.
|
Concerning the
Application of U.S. Energy
, Case No. 2008CW81. On July
25, 2008, the Company filed an Application for Finding of Reasonable
Diligence with the Water Court concerning the conditional water rights
associated with Mount Emmons. The conditional water decree
(“Decree”) requires the Company to file its proposed plan of operations
and associated permits (“Plan”) with the Forest Service and BLM within six
years of entry of the 2002 Decree, or within six years of the final
determination in the Applicant’s pending patent application, whichever
occurs later. Although the BLM issued the mineral patents on
April 2, 2004, the patents remained subject to a challenge by High Country
Citizens’ Alliance, the Town of Crested Butte, and the Board of County
Commissioners of Gunnison County (collectively
“Protestors”). The Company vigorously defended this legal
action through the Federal District Court for the District of Colorado and
the Tenth Circuit Court of Appeals. On April 30, 2007, the
United States Supreme Court made a final determination upholding BLM’s
issuance of the mineral patents through denial of
certiorari. The Company believes that the deadline for filing
the Plan specified by the Decree is April 30, 2013 (six years from the
final determination of issuance of the mineral patents by the United
States Supreme Court). The Forest Service has indicated that
the deadline should be April 2, 2010 (six years from the issuance of the
mineral patents by BLM). The United States, on behalf of the
Forest Service and BLM, filed a Statement of Opposition on this specific
issue only. Statements of Opposition were also filed by six
other parties including the City of Gunnison, the State of Colorado, and
High Country Citizens’ Alliance in September for various reasons,
including requesting the Company be put on strict proof as to
demonstrating evidence of reasonable diligence in developing the
conditional water rights. Although, the Company and TCM will be
prepared to file a Plan by the April 2, 2010 proposed deadline, the
Company and TCM will pursue a ruling from the Water Court that the
deadline specified in the Decree requires the filing of the Plan by the
April 30, 2013.
|
Ordinance Related to the
Crested Butte Watershed
On May
19, 2008, the Town Council adopted a revised Watershed Ordinance. The
Company and TCM intend to work with the Town of Crested Butte concerning
activities at Mount Emmons consistent with lawful and applicable rules,
regulations, and statutes. It is possible that unexpected delays,
and/or increased costs, may be encountered in developing a new mine plan for
Mount Emmons as a result of the revised Watershed Ordinance.
Appeal of Approval of Notice
of Intent to Conduct Prospecting for the Mount Emmons Molybdenum
Property
On March
8, 2008, High Country Citizens’ Alliance (“HCCA”) filed a request for hearing
before the Colorado Land Reclamation Board (“Board”) of the approval of a Notice
of Intent to Conduct Prospecting Notice for the Mount Emmons molybdenum property
(“NOI”), which was approved by the Division of Reclamation, Mining and Safety of
the Colorado Department of Natural Resources (“DRMS”) on January 3,
2008. The NOI as approved provided for continued exploration of the
molybdenum deposit to update, improve and verify, in accordance with current
industry standards and legal requirements, mineralization data that was
collected by Amax in the late 1970’s.
On March
28, 2008, the Company and the Colorado Attorney General’s Office filed
independent Motions to Dismiss alleging among other matters that: (i) HCCA had
no standing to appeal the NOI; (ii) the NOI is not an appealable decision under
Colorado law; (iii) HCCA’s appeal is not timely; and (iv) the appeal is based on
information obtained in violation of Colorado law.
-103-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
On May
14, 2008, the Board denied HCCA’s Request for Hearing and also denied their
Request for a Declaratory Order. Citing Colorado law, the Board
determined that HCCA did not have standing or the right to appeal DRMS’s
approval of the NOI under Colorado law.
On August
28, 2008, HCCA appealed the Board’s decision in Denver District
Court.
Plaintiff:
High Country Citizen’s Alliance v. Defendants: Colorado Mined Land
Reclamation Board, Colorado Division of Reclamation Mining and Safety and U.S.
Energy Corp.,
Case No.: 08CV6156 (District Court, 2d Jud. Dist., City and
County of Denver). The Board has filed an answer with the
Court. The DRMS and the Company (in conjunction with TCM) have both
filed the responsive pleadings in addition to motions to dismiss the HCCA
complaint.
Water Treatment Facility –
Permit Renewal Protest
The
Company received a NPDES Permit renewal for Mount Emmons from the Colorado
Department of Public Health and Environment – Water Quality Division (“Water
Quality Division”) effective September 1, 2008. The NPDES Permit is
for a five (5) year period (2008 - 2013). On August 28, 2008, the
Town of Crested Butte, Board of County Commissioners for the County of Gunnison
and High Country Citizens’ Alliance (“Petitioners”) filed a Request for
Adjudicatory Hearing before the Water Quality Division to challenge the NPDES
Permit. The Petitioners seek revisions to the Permit that would
require the Company to maintain a prepaid operating contract and provide
additional financial security for long term operation of the
plant. During the permit approval process, the Division rejected
similar permit revisions proposed by the Petitioners as not being required or
authorized by Colorado law. The hearing will be held in early
2009 before an Administrative Law Judge in the Office of Administrative Courts
(“OAC”). The Company will participate in the hearing as an interested
party. The Company expects to work cooperatively with the Water
Quality Division in defending the NPDES Permit.
Asset Retirement
Obligations
Reclamation
liabilities at December 31, 2008 were those related to the Mount Emmons
molybdenum property and one oil and gas well drilled with
PetroQuest Energy, Inc.
(“PQ”).
Mount
Emmons
The Mount
Emmons molybdenum property is located on fee property within the boundary of
U.S. Forest Service (“USFS”) land. Although mining of the mineral
resource will occur on the fee property, associated ancillary activities will
occur on USFS land. The Company and TCM expects to submit a Plan of
Operations to the USFS in 2010 for the USFS approval, which approval is required
before initial construction and mining and processing may
occur. Under the procedures mandated by National Environmental
Protection Act (“NEPA”), the USFS will prepare an environmental analysis in the
form of an Environmental Assessment and/or and Environmental Impact Statement to
evaluate the predicted environmental and social economic impacts of the proposed
development and mining of the Mount Emmons molybdenum property. The
NEPA process provides for public review and comment of the proposed
plan.
Obtaining
and maintaining the various permits for the mining operations at Mount Emmons
will be complex, time-consuming, and expensive. Changes in a mine’s
design, production rates, quality of material mined, and many other matters,
often require submission of the proposed changes for agency approval prior to
implementation. In addition, changes in operating conditions beyond
the Company and TCM’s control, or changes in agency policy and Federal and State
law, could further affect the successful permitting of the mine
operations.
-104-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
Although
the Company is confident that the Plan of Operations for Mount Emmons will
ultimately be approved by the USFS, the timing and cost, and ultimate success of
the mining operation cannot be predicted. The reclamation liability
at December 31, 2008 for Mount Emmons was $118,900.
Oil and Gas Well with
PetroQuest
During
2008, the Company drilled its first successful well with PQ. (See Note
E) The Company will be responsible for its portion of reclamation
costs once the well is no longer economic and needs to be plugged and
abandoned. At December 31, 2008, the Company’s liability for this
well was $25,200. The well is projected to be reclaimed some time in
2013. In the event that the reclamation cost changes the reclamation
cost will be adjusted.
The
following table represents the Company’s reclamation liability as of December
31, 2008 and 2007:
|
For
the years ending December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Beginning
asset retirement obligation
|
$ | 133,400 | $ | 124,400 | ||||
|
Accretion
of estimated ARO
|
9,400 | 9,000 | ||||||
|
Liabilities
incurred
|
24,600 | -- | ||||||
|
Liabilities
settled
|
(23,300 | ) | -- | |||||
|
Ending
asset retirement obligation
|
$ | 144,100 | $ | 133,400 | ||||
|
December
31, 2008
|
December
31, 2007
|
|||||||
|
Asset
Retirement Obligation - Mount Emmons
|
$ | 118,900 | $ | 110,200 | ||||
|
Asset
Retirement Obligation - Oil and Gas Well
|
25,200 | -- | ||||||
|
Asset
Retirement Obligation - Sutter Gold
|
-- | 23,200 | ||||||
| $ | 144,100 | $ | 133,400 | |||||
During
the year ended December 31, 2007, the Company sold all of its uranium properties
in Wyoming, Utah, Colorado and Arizona to Uranium One (See Note
E). All the prior reclamation obligations associated with these
properties were assumed by Uranium One. During the year ended
December 31, 2008, the Company sold its controlling interest in SGMI and the
acquirer of the majority ownership position of the Company assumed the
reclamation liabilities on the SGMI properties. (See Note
E)
401(K)
Plan
The Board
of Directors of the Company adopted the U.S. Energy Corp. 401(K) Plan ("401(K)")
in 2004. The Company matches 50% of an employee’s salary deferrals up
to a maximum contribution per employee of $4,000 annually. The
Company expensed $51,100, $59,900 and $62,300 for the years ended December 31,
2008, 2007 and 2006, respectively related to these contributions.
-105-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
Executive Officer
Compensation
In
December 2001, the Board of Directors adopted (and the shareholders approved)
the 2001 Stock Award Plan to compensate its executive officers. The
Stock Award Plan was amended on June 22, 2007 by a vote of the
shareholders. Under the Plan, 20,000 shares may be issued annually to
each officer during his employment. During the years ended December
31, 2008, 2007 and 2006, the Company collectively issued 85,000, 62,500 and
57,500 shares of stock to these officers, respectively. While in the
Company’s employ, the officers have agreed not to sell, pledge or otherwise
dispose of or encumber the shares granted under the 2001 Stock Award
Plan. In consideration of this agreement the Company has agreed to
pay all taxes due on the shares granted to the officers.
The
Company is committed to pay the surviving spouse or dependent children of the
former Chairman and Founder, who passed away on September 4, 2006, one years’
full salary and 50% of that amount annually for an additional four years
thereafter. During the years ended December 31, 2008 and 2007, the
Company paid $85,000 and $116,000, respectively under this plan. The
Company will continue to pay $85,000, or the pro-rata amount on an annual basis,
until September 5, 2011. The Board of Directors also approved payment of 50% of
the then existing wages to the Company’s former General Counsel for a period of
five years. The Company will pay $85,000 annually under this
agreement beginning at date of retirement, January 12, 2007, to January 12,
2012. Neither of these two retirement benefits to former officers are
funded.
On
October 20, 2005, the Board of Directors of the Company adopted an Executive
Retirement Policy for the then Chairman/CEO President/COO, CFO/Treasurer/V.P.
Finance and Senior Vice President. Under the terms of the Retirement
Plan, the retired executive will receive payments equaling 50% of the greater of
(i) the 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 the Company on December 31, 2010. The
compensation expense for the year ended December 31, 2008, 2007 and 2006 was
$107,900, $564,600 and $419,400, respectively. The total accrued
liability at December 31, 2008, 2007 and 2006 for executive retirement was
$879,100, $927,000 and $462,700, respectively. During 2007, the Board
of Directors voted unanimously to fund the retirement benefit for the then
currently employed officers who qualified under the plan. The funding
is held in a separate trust account that is managed by an independent trustee
and is subject only to the claims of creditors in the event of insolvency of the
Company. At December 31, 2008, the Company had funded the executive
retirement account with the amount calculated by a third party actuary, of
$368,300. Additional amounts will be deposited annually until each
executive’s 60
th
birthday. At December 31, 2008, there were three officers who were
included in the Retirement Plan.
The
Company has also established a mandatory retirement age of 70 unless the board
specifically requests the services of an employee or officer beyond that
age. Certain officers and one employee have agreements for payment of
severance in the event of a change of control of the Company.
The
employees of the Company are not given raises on a regular
basis. Historically, 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.
-106-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(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 May 2011, and provide for minimum
monthly receipts of $11,200 through December 2009.
The total
costs of the office buildings and building improvements totaled $4,756,100 and
$5,182,400 as of December 31, 2008 and 2007, respectively and accumulated
depreciation amounted to $2,529,400 and $2,612,700 as of December 31, 2008 and
2007, respectively. Rental income under the agreements was $102,300,
$136,000 and $187,300 for the years ended December 31, 2008, 2007 and 2006,
respectively.
Future
minimum receipts for non-cancelable operating leases are as
follows:
|
Years
Ending
|
||||
|
December
31,
|
Amount
|
|||
|
2009
|
$ | 134,400 | ||
|
2010
|
99,900 | |||
N. DISCONTINUED
OPERATIONS
On August
22, 2008, the Company sold its controlling interest in SGMI. As a
result of the sale the revenues and expenditures of SGMI for the years ended
December 31, 2008 are presented in the December 31, 2008 Statement of Operations
as Discontinued Operations. The revenues and expenses associated with
SGMI during the years ended December 31, 2007 and 2006 have also been
reclassified to Discontinued Operations in the Statements of Operations
presented in this report. The following table represents the gain
(loss) from discontinued operations as well as the gain from the sale of the
discontinued operations during the year ended December 31, 2008.
Discontinued
Operations
|
Year
ending December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Gain
on sale of discontinued segment
|
||||||||||||
|
Gain
|
$ | 4,222,700 | $ | -- | $ | -- | ||||||
|
Taxes
paid
|
1,184,900 | -- | -- | |||||||||
| $ | 5,407,600 | $ | -- | $ | -- | |||||||
|
Gain
(loss) from dicontinued operations
|
||||||||||||
|
Sutter
Gold Mining
|
||||||||||||
|
Revenues
|
$ | 27,600 | $ | 41,700 | (1) | $ | 47,500 | (2) | ||||
|
Expenditures
|
(466,200 | ) | (2,247,500 | ) | (1,992,600 | ) | ||||||
|
Other
|
(62,500 | ) | 202,000 | 126,500 | ||||||||
| $ | (501,100 | ) | $ | (2,003,800 | ) | $ | (1,818,600 | ) | ||||
|
Total
gain (loss) from dicontinued operations
|
$ | 4,906,500 | $ | (2,003,800 | ) | $ | (1,818,600 | ) | ||||
-107-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
(1)
The
Company’s Statement of Operations contained in this report for the year ended
December 31, 2007 is $3,600 less as a result of the recognition of intercompany
management fees which were previously eliminated.
(2)
The
Company’s Statement of Operations contained in this report for the year ended
December 31, 2006 is $66,800 more as a result of the recognition of intercompany
management fees which were previously eliminated.
O. 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,
|
|||||||||||||
|
2008
|
2008
|
2008
|
2008
|
|||||||||||||
|
Operating
revenues
|
$ | 1,240,400 | $ | 568,700 | $ | 328,400 | $ | 149,500 | ||||||||
|
Operating
loss
|
$ | (1,605,200 | ) | $ | (2,648,100 | ) | $ | (2,499,400 | ) | $ | (2,768,200 | ) | ||||
|
Loss
from continuing operations
|
$ | (2,608,500 | ) | $ | (2,457,900 | ) | $ | (2,320,400 | ) | $ | (2,233,600 | ) | ||||
|
Benefit
from income taxes
|
$ | 886,000 | $ | 1,062,000 | $ | 704,100 | $ | 673,700 | ||||||||
|
Discontinued
operations, net of tax
|
$ | -- | $ | 5,196,800 | $ | (133,600 | ) | $ | (156,700 | ) | ||||||
|
Net
(loss) income
|
$ | (1,722,500 | ) | $ | 3,800,900 | $ | (1,749,900 | ) | $ | (1,716,600 | ) | |||||
|
Income
(loss) per share, basic
|
||||||||||||||||
|
Continuing
operations
|
$ | (0.08 | ) | $ | (0.06 | ) | $ | (0.07 | ) | $ | (0.06 | ) | ||||
|
Discontinued
operations
|
-- | 0.22 | -- | (0.01 | ) | |||||||||||
| $ | (0.08 | ) | $ | 0.16 | $ | (0.07 | ) | $ | (0.07 | ) | ||||||
|
Basic
weighted average shares outstanding
|
22,195,694 | 23,505,340 | 23,615,657 | 23,749,056 | ||||||||||||
|
Income
(loss) per share, diluted
|
||||||||||||||||
|
Continuing
operations
|
$ | (0.08 | ) | $ | (0.06 | ) | $ | (0.07 | ) | $ | (0.06 | ) | ||||
|
Discontinued
operations
|
-- | 0.22 | -- | (0.01 | ) | |||||||||||
| $ | (0.08 | ) | $ | 0.16 | $ | (0.07 | ) | $ | (0.07 | ) | ||||||
|
Diluted
weighted average shares outstanding
|
22,195,694 | 23,505,340 | 23,615,657 | 23,749,056 | ||||||||||||
-108-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
|
Three
Months Ended
|
||||||||||||||||
|
December
31,
|
September
30,
|
June
30,
|
March
31,
|
|||||||||||||
|
2007
|
2007
|
2007
|
2007
|
|||||||||||||
|
Operating
revenues
|
$ | 245,800 | $ | 606,800 | $ | 253,100 | $ | 72,000 | ||||||||
|
Operating
loss
|
$ | (2,863,200 | ) | $ | (2,381,700 | ) | $ | (8,867,300 | ) | $ | (2,596,200 | ) | ||||
|
Loss
from continuing operations
|
$ | (1,634,900 | ) | $ | (3,271,600 | ) | $ | 95,303,000 | $ | (1,666,500 | ) | |||||
|
(Provision
for) benefit from income taxes
|
$ | 771,000 | $ | 2,521,500 | $ | (36,007,600 | ) | $ | 348,300 | |||||||
|
Discontinued
operations, net of tax
|
$ | -- | $ | -- | $ | -- | $ | -- | ||||||||
|
Net
loss
|
$ | (863,900 | ) | $ | (750,100 | ) | $ | 59,295,400 | $ | (1,318,200 | ) | |||||
|
Loss
per share, basic
|
||||||||||||||||
|
Continuing
operations
|
$ | (0.04 | ) | $ | (0.04 | ) | $ | 2.95 | $ | (0.07 | ) | |||||
|
Discontinued
operations
|
-- | -- | -- | -- | ||||||||||||
| $ | (0.04 | ) | $ | (0.04 | ) | $ | 2.95 | $ | (0.07 | ) | ||||||
|
Basic
weighted average shares outstanding
|
21,791,468 | 20,558,882 | 20,087,999 | 19,413,931 | ||||||||||||
|
Loss
per share, diluted
|
||||||||||||||||
|
Continuing
operations
|
$ | (0.04 | ) | $ | (0.04 | ) | $ | 2.65 | $ | (0.07 | ) | |||||
|
Discontinued
operations
|
-- | -- | -- | -- | ||||||||||||
| $ | (0.04 | ) | $ | (0.04 | ) | $ | 2.65 | $ | (0.07 | ) | ||||||
|
Diluted
weighted average shares outstanding
|
21,791,468 | 20,558,882 | 22,378,861 | 19,413,931 | ||||||||||||
P. SUBSEQUENT
EVENTS
Stock
Buyback Plan
As of
March 9, 2009, the Company purchased an additional 433,800 shares of its common
stock pursuant to the stock buyback plan (See Note L) at an average purchase
price of $1.91 per share. The total number of shares purchased
from inception through March 9, 2009 is 2,821,929 for $7,431,800 or an average
cost per share of $2.63. The dollar amount remaining under the
buyback plan is $568,200.
-109-
U.S. ENERGY CORP. AND
SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 and 2006
(continued)
Mount
Emmons
On
January 2, 2009, TCM paid the Company the contractual $1.0 million payment due
under the August 19, 2008 Exploration, Development and Mine Operating Agreement
between the Company and TCM on the Mount Emmons property.
On
January 6, 2009 the Company paid $875,000 as its portion of the amount due for
the purchase of certain property. TCM made the same payment under the
terms of the purchase agreement.
Remington
Village Multifamily Project
On
January 16, 2009, the Company paid $16,831,500 to Zions National Bank to retire
the August 2007 construction loan for the multifamily housing project in
Gillette, Wyoming.
Ridgeland
Wyoming Oil Well
During
January and February of 2009, the Company drilled its first well with Ridgeland
in north eastern Wyoming. The drilling resulted in a dry hole at an
approximate cost of $338,800 to the Company. Drilling and abandoning
costs have not been finalized. The Company is evaluating whether it
will participate in any additional wells on this prospect.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Changes in Certifying
Accountant
|
(a)
|
The
Company’s audit committee’s charter mandates a review of the Company’s
relationship with its independent accounting firm every five
years. Moss Adams, LLP (“MA” including its predecessor firm)
served as the Company’s independent audit firm for five
years. In the course of its review, the audit committee
determined that USE should change to a firm with particular expertise in
the minerals sector. On November 10, 2008, the full board of
directors of USE dismissed MA as the Company’s independent accounting
firm, and as of that same date, appointed Hein & Associates LLP (“HA”)
as the independent accounting firm.
|
|
MA’s
reports on USE’s financial statements for the years ended December 31,
2006 and 2007 did not contain an adverse opinion or a disclaimer of
opinion, nor were such reports qualified or modified as to uncertainty,
audit scope, or accounting principles.
|
|
|
During
the two most recent fiscal years (ended December 31, 2007) and through
November 10, 2008, there were no disagreements with MA on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope of procedure, which disagreement(s), if not resolved to the
satisfaction of MA, would have caused it to make reference to the subject
matter of the disagreement(s) in connection with its
reports.
|
|
|
During
the two most recent fiscal years (ended December 31, 2007) and through
November 10, 2008, neither USE nor anyone acting on its behalf engaged HA
either as the principal accountant for our financial statements, or as an
independent accountant to audit a significant
subsidiary.
|
|
|
In
addition, during the two fiscal years ended December 31, 2007, and the
subsequent interim periods, through November 10, 2008, neither USE nor
anyone acting on its behalf consulted HA regarding either (i) the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered
on our financial statements, and either a written report was provided to
us or orally advised was provided that HA concluded was an important
factor considered by the registrant in reaching a decision as to the
accounting, auditing or financial reporting issue; or (ii) any matter that
was either the subject of a disagreement (as described above and defined
in the SEC’s instructions as set forth in Form 8-K), or a reportable event
as described in paragraph 304(a)1)(v) of Form
8-K.
|
We
requested that HA review the above disclosure as it relates to them before it
was filed with the Commission and have provided HA the opportunity to furnish us
with a letter to the Commission containing any new information, clarification of
our expression of our views or the respects in which it does not agree with the
statements made by us. HA agreed with the statements as it related to
them.
ITEM
9A. CONTROLS AND PROCEDURES
Effectiveness of Disclosure
Controls and Procedures
We are
required to maintain disclosure controls and procedures (as defined by Rules
13a-15(e) and 15d-15(e) under the Exchange Act) that are assigned to ensure that
required information is recorded, processed, summarized and reported within the
required timeframe, as specified in the rules set forth by the
SEC. Our disclosure controls and procedures are also designed to
ensure that information required to be disclosed is accumulated and communicated
to management, including our Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosures.
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of our disclosure controls
and procedures as of December 31, 2008 and, based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures were effective as of December 31, 2008.
Management’s Annual Report
on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Internal control over financial reporting is a process
designed by, or under the supervision of, our Chief Executive Officer and Chief
Financial Officer, and effected by our Board, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
Internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors; and (3)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of our assets that could have a
material effect on our financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Forward looking statements regarding
the effectiveness of internal controls during future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies and procedures may
deteriorate.
Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control – Integrated Framework. Based
on our assessment, we believe that, as of December 31, 2008, our internal
control over financial reporting was effective based on those
criteria.
Our
internal control over financial reporting as of December 31, 2008, has been
audited by Hein & Associates LLP, the independent registered public
accounting firm who also audited our consolidated financial
statements. Hein & Associates LLP’s report on our internal
control over financial reporting appears on page 113 of this Annual
Report.
Changes in Internal Control
over Financial Reporting
There has
been no change in our internal control over financial reporting that occurred
during the quarter ended December 31, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders
U.S.
Energy Corp.
We have
audited U.S. Energy Corp.’s internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. U.S. Energy Corp.’s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying
Management’s Report on Internal
Control Over Financial Reporting
. Our responsibility is to
express an opinion on the company’s internal control over financial reporting
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
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(a)
pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company;
(b)
provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and
(c)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, U.S. Energy Corp. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on
criteria established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
HEIN
& ASSOCIATES LLP
Denver,
Colorado
March 13,
2009
ITEM
9B. OTHER INFORMATION
None
PART
III
In the
event a definitive proxy statement containing the information being incorporated
by reference into this Part III is not filed within 120 days of December 31,
2008, 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 2009, 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 8
th
West,
Riverton, Wyoming 82501.
Information Concerning
Executive Officers Who Are Not Directors
Steven R.
Youngbauer is not a director of USE. Mr. Youngbauer (age 59) 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 2009, 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 2009, under the
caption "Principal Holders of Voting Securities."
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 2009, under the
caption “Certain Relationships and Related Transactions.”
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information required by Item 14 is incorporated herein by reference to the Proxy
Statement for the Meeting of Shareholders to be held in June 2009, under the
caption “Principal Accountant Fees and Services”.
PART
IV
|
(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
|
2008
Stock Option Plan for Independent Directors
|
*
|
|
4.4
– 4.0
|
Intentionally
omitted
|
|
|
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
|
Exploration,
Development and Mine Operating Agreement with Thompson Creek Metals (USA)
– Redacted
(1)
|
[8]
|
|
10.2
|
Form
of Production Payment Royalty Agreement (an exhibit to the Asset Purchase
Agreement with sxr Uranium One, Inc.)
|
[14]
|
|
14.0
|
Code
of Ethics
|
[6]
|
|
16.0
|
Concurrence
letter of former accountants
|
[15]
|
|
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 10-Q, filed March
13, 2008.
|
|
[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 the like-numbered exhibit to the Registrant's Report on
Form 10-Q for the quarter ended September 30, 2008, filed on November 7,
2008
|
|
[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]
|
Intentionally
left blank.
|
|
[14]
|
Incorporated
by reference from exhibit 6.1 to the Registrant's Form 8-K filed November
12, 2008.
|
|
[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.
|
|
(b)
|
Reports
on Form 8-K. In the last quarter of 2008, the Registrant filed
four Reports on Form 8-K:
October
14, 2008 - Signing of Lease Purchase and Drilling Agreement (Texas
prospect)
November
6, 2008 - Announcement of suspension of application for
Toronto Stock Exchange listing.
November
12, 2008 - Change in Certifying Accountant.
December
22, 2008 – Investment in Standard Steam Trust, LLC
(geothermal)
|
|
(c)
|
See
paragraph a(3) above for exhibits.
|
|
(d)
|
Financial
statement schedules, see above. No other financial statements are required
to be filed.
|
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:
March 13, 2009
|
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 persons on behalf of the Registrant
and in the capacities and on the dates indicated.
|
||||
|
Date:
March 13, 2009
|
By:
|
/s/
Keith G. Larsen
|
||
|
KEITH
G. LARSEN, Director, Chairman and CEO
|
||||
|
Date:
March 13, 2009
|
By:
|
/s/
Robert Scott Lorimer
|
||
|
ROBERT
SCOTT LORIMER
|
||||
|
Principal
Financial Officer/
|
||||
|
Chief
Accounting Officer, and Director
|
||||
|
Date:
March 13, 2009
|
By:
|
/s/
Mark J. Larsen
|
||
|
MARK
J. LARSEN, President and Director
|
||||
|
Date:
March 13, 2009
|
By:
|
/s/
Allen S. Winters
|
||
|
ALLEN
S. WINTERS, Director
|
||||
|
Date:
March 13, 2009
|
By:
|
/s/
H. Russell Fraser
|
||
|
H.
RUSSELL FRASER, Director
|
||||
|
Date:
March 13, 2009
|
By:
|
/s/
Michael T. Anderson
|
||
|
MICHAEL
T. ANDERSON, Director
|
||||
|
Date:
March 13, 2009
|
By:
|
/s/
Michael H. Feinstein
|
||
|
MICHAEL
H. FEINSTEIN, Director
|
||||