UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
x
|
Quarterly
report pursuant to section 13 or 15(d) of the Securities Exchange Act of
1934
|
|
For
the quarter ended June 30, 2008 or
|
|
|
o
|
Transition
report pursuant to section 13 or 15(d) of the Securities Exchange Act of
1934
|
|
For
the transition period from ___________ to
____________
|
Commission
file number 0-6814
|
U.S.
ENERGY CORP.
|
|
(Exact
Name of Company as Specified in its
Charter)
|
|
Wyoming
|
83-0205516
|
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
|
incorporation
or organization)
|
Identification
No.)
|
|
|
877
North 8th
West, Riverton, WY
|
82501
|
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
|
Company's
telephone number, including area code:
|
(307)
856-9271
|
|
Not
Applicable
|
|
Former
name, address and fiscal year, if changed since last
report
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
YES o NO x
Indicate
by check mark if the registrant is not required to file reports to Section 13 or
Section 15(d) of the Act.
YES o NO x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Company was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES x NO o
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 o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES o NO x
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
YES o NO o
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
|
Class
|
Outstanding
Shares at August 8, 2008
|
|
|
Common
stock, $.01 par value
|
23,552,996
|
-2-
U.S.
ENERGY CORP. and SUBSIDIARIES
|
Page
No.
|
||
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
ITEM
1.
|
Financial
Statements
|
|
|
Condensed Balance Sheet as of June 30, 2008
and Condensed Consolidated Balance Sheet as of
December 31, 2007 (unaudited)
|
4-5
|
|
|
Condensed Statements of Operations for the Three
and Six Months Ended June 30, 2008 and 2007 (unaudited)
|
6-7
|
|
|
Condensed Statements of Cash Flows for the Six
Months Ended June 30, 2008 and 2007 (unaudited)
|
8-9
|
|
|
Notes to Condensed Financial Statements
(unaudited)
|
10-22
|
|
|
ITEM
2.
|
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
|
23-35
|
|
ITEM
3.
|
Quantitative and Qualitative Disclosures about Market
Risk
|
35
|
|
ITEM
4.
|
Controls and Procedures
|
36
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
ITEM
1.
|
Legal Proceedings
|
37-39
|
|
ITEM
1A.
|
Risk Factors
|
39
|
|
ITEM
2.
|
Changes in Securities and Use of
Proceeds
|
39
|
|
ITEM
3.
|
Defaults Upon Senior Securities
|
39
|
|
ITEM
4.
|
Submission of Matters to a Vote of
Shareholders
|
40
|
|
ITEM
5.
|
Other Information
|
40
|
|
ITEM
6.
|
Exhibits and Reports on Form 8-K
|
40-41
|
|
41
|
||
|
Certifications
|
See
Exhibits
|
-3-
PART
I. FINANCIAL INFORMATION
ITEM
1. Financial Statements
|
U.S.
ENERGY CORP.
|
||||||||
|
CONDENSED
BALANCE SHEETS
|
||||||||
|
(Unaudited)
|
||||||||
|
June
30,
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 9,900,600 | $ | 72,292,200 | ||||
|
Marketable
securities
|
||||||||
|
Held
to maturity - treasuries
|
60,298,100 | -- | ||||||
|
Available
for sale securities
|
109,200 | 480,200 | ||||||
|
Accounts
receivable
|
||||||||
|
Trade
|
67,700 | 171,700 | ||||||
|
Reimbursable
project costs
|
-- | 782,100 | ||||||
|
Dissolution
of subsidiaries
|
-- | 197,600 | ||||||
|
Income
taxes
|
2,243,800 | 902,900 | ||||||
|
Restricted
investments
|
4,879,600 | 6,624,700 | ||||||
|
Real
estate held for sale
|
550,400 | -- | ||||||
|
Assets
held for sale
|
1,624,200 | 1,112,600 | ||||||
|
Deferred
tax assets
|
297,400 | 59,700 | ||||||
|
Prepaid
drilling costs
|
944,300 | -- | ||||||
|
Prepaid
expenses and other current assets
|
177,100 | 105,200 | ||||||
|
Total
current assets
|
81,092,400 | 82,728,900 | ||||||
|
PROPERTIES
AND EQUIPMENT:
|
59,618,100 | 52,785,200 | ||||||
|
Less
accumulated depreciation,
|
||||||||
|
depletion
and amortization
|
(4,608,400 | ) | (4,691,700 | ) | ||||
|
Net
properties and equipment
|
55,009,700 | 48,093,500 | ||||||
|
OTHER
ASSETS:
|
||||||||
|
Restricted
investments
|
372,700 | 375,500 | ||||||
|
Deposits
and other
|
542,500 | 206,500 | ||||||
|
Total
other assets
|
915,200 | 582,000 | ||||||
|
Total
assets
|
$ | 137,017,300 | $ | 131,404,400 | ||||
|
U.S.
ENERGY CORP.
|
||||||||
|
CONDENSED
BALANCE SHEETS
|
||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
(Unaudited)
|
||||||||
|
June
30,
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable
|
$ | 276,300 | $ | 1,589,600 | ||||
|
Accrued
compensation expense
|
717,300 | 275,200 | ||||||
|
Short
term construction debt
|
13,922,900 | 5,489,000 | ||||||
|
Current
portion of long-term debt
|
71,900 | 71,900 | ||||||
|
Liabilities
held for sale
|
141,500 | -- | ||||||
|
Other
current liabilities
|
670,600 | 667,500 | ||||||
|
Total
current liabilities
|
15,800,500 | 8,093,200 | ||||||
|
LONG-TERM
DEBT, net of current portion
|
152,800 | 190,500 | ||||||
|
DEFERRED
TAX LIABILITY
|
7,868,300 | 6,928,800 | ||||||
|
ASSET
RETIREMENT OBLIGATIONS
|
114,500 | 133,400 | ||||||
|
OTHER
ACCRUED LIABILITIES
|
1,057,800 | 958,600 | ||||||
|
PREFERRED
STOCK,
|
||||||||
|
$.01
par value; 100,000 shares authorized
|
||||||||
|
No
shares issued or outstanding
|
-- | -- | ||||||
|
SHAREHOLDERS'
EQUITY:
|
||||||||
|
Common
stock, $.01 par value; unlimited shares
|
||||||||
|
authorized;
23,532,996 and 23,592,493
|
||||||||
|
shares
issued, respectively
|
235,300 | 235,900 | ||||||
|
Additional
paid-in capital
|
97,080,600 | 96,560,100 | ||||||
|
Accumulated
surplus
|
15,584,400 | 19,050,900 | ||||||
|
Unrealized
loss on marketable securities
|
(386,400 | ) | (256,500 | ) | ||||
|
Unallocated
ESOP contribution
|
(490,500 | ) | (490,500 | ) | ||||
|
Total
shareholders' equity
|
112,023,400 | 115,099,900 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 137,017,300 | $ | 131,404,400 | ||||
|
U.S.
ENERGY CORP.
|
||||||||||||||||
|
CONDENSED
STATEMENTS OF OPERATIONS
|
||||||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
Three
months ended June 30,
|
For
the six months ended June 30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
OPERATING
REVENUES:
|
||||||||||||||||
|
Remington
Village real estate
|
$ | 288,600 | $ | -- | $ | 376,000 | $ | -- | ||||||||
|
Other
real estate
|
23,900 | 143,900 | 55,300 | 169,200 | ||||||||||||
|
Management
fees and other
|
15,900 | 86,900 | 46,600 | 141,200 | ||||||||||||
| 328,400 | 230,800 | 477,900 | 310,400 | |||||||||||||
|
OPERATING
COSTS AND EXPENSES:
|
||||||||||||||||
|
Remington
Village real estate
|
151,300 | -- | 242,300 | -- | ||||||||||||
|
Other
real estate
|
82,500 | 2,300 | 158,600 | 167,400 | ||||||||||||
|
Mineral
holding costs
|
943,700 | 682,200 | 1,073,500 | 1,115,400 | ||||||||||||
|
General
and administrative
|
1,650,300 | 7,906,200 | 4,271,100 | 9,319,200 | ||||||||||||
| 2,827,800 | 8,590,700 | 5,745,500 | 10,602,000 | |||||||||||||
|
LOSS
BEFORE INVESTMENT AND
|
||||||||||||||||
|
PROPERTY
TRANSACTIONS
|
(2,499,400 | ) | (8,359,900 | ) | (5,267,600 | ) | (10,291,600 | ) | ||||||||
|
OTHER
INCOME & (EXPENSES):
|
||||||||||||||||
|
(Loss)
gain on sales of assets
|
(29,000 | ) | 1,821,200 | (29,000 | ) | 1,822,200 | ||||||||||
|
Loss
on sale of marketable securities
|
-- | (6,828,800 | ) | -- | (6,091,400 | ) | ||||||||||
|
Gain
on foreign exchange
|
-- | 502,500 | -- | 502,500 | ||||||||||||
|
Gain
on sale of uranium assets
|
-- | 111,728,200 | -- | 111,728,200 | ||||||||||||
|
Dividends
|
-- | 2,700 | -- | 5,600 | ||||||||||||
|
Interest
income
|
296,800 | 636,400 | 850,400 | 851,300 | ||||||||||||
|
Interest
expense
|
(88,800 | ) | 6,200 | (107,800 | ) | (49,400 | ) | |||||||||
| 179,000 | 107,868,400 | 713,600 | 108,769,000 | |||||||||||||
|
(LOSS)
GAIN BEFORE MINORITY
|
||||||||||||||||
|
INTEREST,
PROVISION FOR
|
||||||||||||||||
|
INCOME
TAXES AND
|
||||||||||||||||
|
DISCONTINUED
OPERATIONS
|
(2,320,400 | ) | 99,508,500 | (4,554,000 | ) | 98,477,400 | ||||||||||
|
MINORITY
INTEREST IN LOSS OF
|
||||||||||||||||
|
CONSOLIDATED
SUBSIDIARIES
|
-- | (3,716,800 | ) | -- | (3,698,600 | ) | ||||||||||
|
(LOSS)
GAIN BEFORE PROVISION
|
||||||||||||||||
|
FOR
INCOME TAXES AND
|
||||||||||||||||
|
DISCONTINUED
OPERATIONS
|
(2,320,400 | ) | 95,791,700 | (4,554,000 | ) | 94,778,800 | ||||||||||
|
INCOME
TAXES:
|
||||||||||||||||
|
Current
benefit from (provision for)
|
1,494,200 | (20,968,600 | ) | 2,122,200 | (20,620,300 | ) | ||||||||||
|
Deferred
benefit from (provision for)
|
(790,100 | ) | (15,039,000 | ) | (744,400 | ) | (15,039,000 | ) | ||||||||
| 704,100 | (36,007,600 | ) | 1,377,800 | (35,659,300 | ) | |||||||||||
|
(LOSS)
GAIN FROM CONTINUING
|
||||||||||||||||
|
OPERATIONS
|
(1,616,300 | ) | 59,784,100 | (3,176,200 | ) | 59,119,500 | ||||||||||
|
U.S.
ENERGY CORP.
|
||||||||||||||||
|
CONDENSED
STATEMENTS OF OPERATIONS
|
||||||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
Three
months ended June 30,
|
For
the six months ended June 30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
LOSS
FROM DISCONTINUED
|
||||||||||||||||
|
OPERATIONS (net
of taxes)
|
(133,600 | ) | (488,700 | ) | (290,300 | ) | (1,142,300 | ) | ||||||||
|
NET
(LOSS) INCOME
|
$ | (1,749,900 | ) | $ | 59,295,400 | $ | (3,466,500 | ) | $ | 57,977,200 | ||||||
|
PER
SHARE DATA
|
||||||||||||||||
|
Basic
(loss) earnings
|
||||||||||||||||
|
from
continuing operations
|
$ | (0.07 | ) | $ | 2.98 | $ | (0.14 | ) | $ | 2.99 | ||||||
|
Basic
loss from discontinued operations
|
-- | (0.03 | ) | (0.01 | ) | (0.05 | ) | |||||||||
|
Basic
(loss) earnings per share
|
$ | (0.07 | ) | $ | 2.95 | $ | (0.15 | ) | $ | 2.94 | ||||||
|
Diluted
(loss) earnings
|
||||||||||||||||
|
from
continuing operations
|
$ | (0.07 | ) | $ | 2.67 | $ | (0.14 | ) | $ | 2.68 | ||||||
|
Diluted
loss from discontinued operations
|
-- | (0.02 | ) | (0.01 | ) | (0.05 | ) | |||||||||
|
Diluted
(loss) earnings per share
|
$ | (0.07 | ) | $ | 2.65 | $ | (0.15 | ) | $ | 2.63 | ||||||
|
BASIC
WEIGHTED AVERAGE
|
||||||||||||||||
|
SHARES
OUTSTANDING
|
23,615,657 | 20,087,999 | 23,682,357 | 19,752,827 | ||||||||||||
|
DILUTED
WEIGHTED AVERAGE
|
||||||||||||||||
|
SHARES
OUTSTANDING
|
23,615,657 | 22,378,861 | 23,682,357 | 22,036,586 | ||||||||||||
|
U.S.
ENERGY CORP.
|
||||||||
|
STATEMENTS
OF CASH FLOWS
|
||||||||
|
(Unaudited)
|
||||||||
|
For
the six months ended June 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
(loss) income
|
$ | (3,466,500 | ) | $ | 57,977,200 | |||
|
Reconcile
net loss to net cash used in operations
|
||||||||
|
Minority
interest in the loss of
|
||||||||
|
consolidated
subsidiaries
|
-- | 3,698,600 | ||||||
|
Depreciation
|
407,200 | 203,000 | ||||||
|
Accretion
of asset retirement obligations
|
4,400 | 4,100 | ||||||
|
Income
tax receivable
|
(1,340,900 | ) | 19,906,200 | |||||
|
Deferred
income taxes
|
744,400 | 15,039,000 | ||||||
|
Gain
on sale of assets to sxr
|
-- | (111,728,200 | ) | |||||
|
Loss
(gain) on sale of assets
|
29,000 | (1,822,200 | ) | |||||
|
Gain
on foreign exchange
|
-- | (516,400 | ) | |||||
|
Gain
(loss) on sales of marketable securities
|
-- | 6,091,500 | ||||||
|
Warrant
extension and repricing
|
-- | 116,300 | ||||||
|
Noncash
compensation
|
1,567,300 | 207,500 | ||||||
|
Noncash
services
|
7,600 | -- | ||||||
|
Net
changes in assets and liabilities:
|
(1,808,800 | ) | (1,863,100 | ) | ||||
|
NET
CASH USED IN
|
||||||||
|
OPERATING
ACTIVITIES
|
(3,856,300 | ) | (12,686,500 | ) | ||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Proceeds
from sale of marketable securities
|
$ | -- | $ | 62,497,000 | ||||
|
Proceeds
from sale of uranium assets
|
-- | 14,022,700 | ||||||
|
Proceeds
from sale of property and equipment
|
1,084,600 | 1,027,000 | ||||||
|
Acquisition
& development of real estate
|
(8,415,000 | ) | (1,549,700 | ) | ||||
|
Acquisition
of unproved oil & gas properties
|
(740,800 | ) | (2,747,400 | ) | ||||
|
Acquisition
of unproved mining claims
|
(43,100 | ) | (224,200 | ) | ||||
|
Acquisition
of property and equipment
|
(27,200 | ) | (102,100 | ) | ||||
|
Investment
in treasury bills
|
(60,298,100 | ) | (70,330,100 | ) | ||||
|
Net
change in restricted investments
|
1,747,900 | -- | ||||||
|
Net
change in notes receivable
|
-- | 560,500 | ||||||
|
Net
change in investments in affiliates
|
-- | 140,100 | ||||||
|
NET
CASH (USED IN) PROVIDED
|
||||||||
|
BY
INVESTING ACTIVITIES
|
(66,691,700 | ) | 3,293,800 | |||||
|
U.S.
ENERGY CORP.
|
||||||||
|
STATEMENTS
OF CASH FLOWS
|
||||||||
|
(Unaudited)
|
||||||||
|
For
the six months ended June 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Issuance
of common stock
|
1,527,600 | 1,783,300 | ||||||
|
Deferred
taxes from stock options
|
-- | 714,100 | ||||||
|
Proceeds
from long term debt
|
8,433,900 | 164,100 | ||||||
|
Repayments
of long term debt
|
(37,700 | ) | (1,019,100 | ) | ||||
|
Stock
buyback program
|
(1,892,100 | ) | -- | |||||
|
NET
CASH PROVIDED BY
|
||||||||
|
FINANCING
ACTIVITIES
|
8,031,700 | 1,642,400 | ||||||
|
Net
cash (used in) provided by operating
|
||||||||
|
activities
of discontinued operations
|
66,700 | (186,100 | ) | |||||
|
Net
cash (used in) provided by investing
|
||||||||
|
activities
of discontinued operations
|
92,800 | (88,700 | ) | |||||
|
Net
cash (used in) provided by financing
|
||||||||
|
activities
of discontinued operations
|
(34,800 | ) | -- | |||||
|
NET
INCREASE (DECREASE) IN
|
||||||||
|
CASH
AND CASH EQUIVALENTS
|
(62,391,600 | ) | (8,025,100 | ) | ||||
|
CASH
AND CASH EQUIVALENTS
|
||||||||
|
AT
BEGINNING OF PERIOD
|
72,292,200 | 16,973,500 | ||||||
|
CASH
AND CASH EQUIVALENTS
|
||||||||
|
AT
END OF PERIOD
|
$ | 9,900,600 | $ | 8,948,400 | ||||
|
SUPPLEMENTAL
DISCLOSURES:
|
||||||||
|
Income
tax refund
|
$ | (800,000 | ) | $ | -- | |||
|
Interest
paid
|
$ | 107,800 | $ | 49,700 | ||||
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
||||||||
|
Development
of assets through issuance of debt
|
$ | 8,433,900 | $ | -- | ||||
|
Issuance
of subsidiary stock to acquire
|
||||||||
|
mining
claims
|
$ | -- | $ | 33,700 | ||||
|
Receipt
of marketable securities
|
||||||||
|
from
the sale of assets
|
$ | -- | $ | 99,400,600 | ||||
|
Unrealized
loss/gain
|
$ | 95,700 | $ | 2,619,400 | ||||
The
accompanying notes are an integral part of these statements.
-9-
U.S.
ENERGY CORP. & SUBSIDIARIES
Notes
to Condensed Financial Statements (Unaudited)
1) Basis of
Presentation
The
Condensed Balance Sheet as of June 30, 2008, the Condensed Statements of
Operations for the three and six months ended June 30, 2008 and 2007
and the Condensed Statements of Cash Flows for the six months ended June 30,
2008 and 2007, have been prepared by the Company without audit. The
Condensed Consolidated Balance Sheet at December 31, 2007 was derived from
financial statements audited by Moss Adams, LLP, independent public accountants,
as indicated on their report for the year ended December 31, 2007 (which report
is not included in this Form 10-Q Report). In the opinion of the
Company, the accompanying condensed financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of the Company as of June 30, 2008 and December 31, 2007,
the results of operations for the three and six months ended June 30, 2008 and
2007 and cash flows for the six months ended June 30, 2008 and
2007.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. It is
suggested that these financial statements be read in conjunction with the
Company's December 31, 2007 Form 10-K. The results of operations for
the periods ended June 30, 2008 and 2007 are not necessarily indicative of the
operating results for the full year.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates based on certain 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.
2) Principles
of Consolidation
The
consolidated financial statements of the Company include the accounts of the
Company and Sutter Gold Mining Inc. (“SGMI”) which was owned 54.4% by the
Company at June 30, 2008. All material inter-company profits,
transactions and balances have been eliminated. During the quarter
ended June 30, 2008, the Company contracted to sell the majority of its shares
of SGMI (see Note 9). The assets and liabilities of SGMI are therefore reported
as assets and liabilities held for sale and the operations of Sutter are
reported as discontinued operations.
The
consolidated statement of operation and statement of cash flows of the Company
as of June 30, 2007 also include the accounts of its then majority-owned or
controlled subsidiaries Plateau Resources Limited, Inc. (“Plateau”) (100%); Four
Nines Gold, Inc. ("FNG") (50.9%); Crested Corp. (“Crested”) (70.9%); Yellow
Stone Fuels, Inc. (“YSFI”) (35.9%); U.S. Moly Corp. (“USMC”) (90%); InterWest,
Inc. (“InterWest”) (90%), and the USECC Joint Venture ("USECC"), a consolidated
joint venture which was equally owned by the Company and
Crested. Subsequent to June 30, 2007 all these subsidiaries and
affiliated companies were liquidated or merged into the Company.
-10-
U.S.
ENERGY CORP. & SUBSIDIARIES
Notes
to Condensed Financial Statements (Unaudited)
(Continued)
3) Recent
Accounting Pronouncements
SFAS 141R In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business
Combinations” (“SFAS
141(R)”), to replace SFAS 141, “Business Combinations”. SFAS 141(R)
requires use of the acquisition method of accounting, defines the acquirer,
establishes the acquisition date and broadens the scope to all transactions and
other events in which one entity obtains control over one or more other
businesses. This statement is effective for financial statements
issued for fiscal years beginning on or after December 15, 2008 with earlier
adoption prohibited. While the Company does not expect that the
adoption of SFAS 141(R) to have a material impact to its consolidated financial
statements for transactions completed prior to December 31, 2008, the impact of
the accounting change could be material for business combinations which may be
consummated subsequent thereto.
SFAS 157 In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (“SFAS 157”), which defines fair value, establishes a
framework for measuring fair value under generally accepted accounting
principles and expands disclosures about fair value measurements. SFAS 157
applies to other existing accounting pronouncements that require or permit fair
value measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
While SFAS 157 does not require any new fair value measurements, its
application may change the current practice for fair value measurements.
SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years. On February 8, 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No.
157, which
delays the effective date of SFAS 157 for nonfinancial assets and liabilities to
fiscal years beginning after November 15, 2008. The adoption of SFAS 157
for financial assets and liabilities in the first quarter of 2008 had no impact
on our consolidated financial statements. The Company is currently
evaluating the impact of SFAS 157 for non-financial assets and
liabilities.
SFAS 159 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”) which
permits entities to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair
value. SFAS 159 will be effective for the Company’s current fiscal
year ending December 31, 2008. The effect of adopting this statement did not
have a material impact on the Company’s consolidated financial position, results
of operations or cash flows.
SFAS 160 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”—an amendment of Accounting Research Bulletin
No. 51 , (“SFAS
160”). SFAS 160 establishes accounting and reporting standards for the non
controlling interest in a subsidiary and for the retained interest and gain or
loss when a subsidiary is deconsolidated. This statement is effective
for financial statements issued for fiscal years beginning on or after December
15, 2008 with earlier adoption prohibited. The Company is currently
evaluating the impact of SFAS 160 on its financial statements.
The
Company has reviewed other recently issued accounting pronouncements and does
not believe that any of those pronouncements will have a material effect on the
Company’s financial position or results of operations when adopted.
-11-
U.S.
ENERGY CORP. & SUBSIDIARIES
Notes
to Condensed Financial Statements (Unaudited)
(Continued)
4) Stock
Based Compensation
Stock Options - The Company
accounts for all stock-based compensation pursuant to SFAS No. 123(R), “Share
Based Payment” which requires the recognition of the fair value of stock-based
compensation in operations. Stock-based compensation to all employees
primarily consists of stock options. Stock options are granted to
employees at exercise prices equal to the fair market value of the Company’s
stock at the dates of grant.
Options
expire 90 days after the employee voluntarily terminates their employment with
the Company and twelve months after retirement, disability or death and vest
over various time periods established at time of grant. No
stock options were granted during the three and six months ended June 30,
2008. The Company recognizes the stock-based compensation expense
over the requisite service period of the individual grantees, which generally
equals the vesting period. The Company provides newly issued shares
to satisfy stock option exercises (see Note 13).
The
Company also issues shares of Common Stock to four officers of the Company under
the 2001 Stock Compensation Plan as amended by vote of the shareholders on June
22, 2007. Under the terms of the 2001 Stock Compensation Plan each of
the four officers is issued 5,000 shares on a quarterly basis and the Company
reimburses the officers any taxes due as a result of the issuance of the
shares. The officers have agreed not to sell, pledge or in any other
way encumber the shares issued under the 2001 Stock Compensation Plan prior to
their retirement, disability or death. These shares are a portion of
the overall compensation package of the executives and are in lieu of cash (see
Note 13).
5) Properties
and Equipment
The
components of Properties and Equipment at June 30, 2008 are oil and gas
properties, mining properties, land, buildings and equipment.
|
Accumulated
|
||||||||||||
|
Amortization
|
||||||||||||
|
Depletion
and
|
Net
|
|||||||||||
|
Cost
|
Depreciation
|
Book
Value
|
||||||||||
|
Oil
& Gas properties
|
$ | 3,651,000 | $ | - | $ | 3,651,000 | ||||||
|
Mining
properties
|
21,078,700 | - | 21,078,700 | |||||||||
|
Buildings,
land and equipment
|
34,888,400 | (4,608,400 | ) | 30,280,000 | ||||||||
|
Totals
|
$ | 59,618,100 | $ | (4,608,400 | ) | $ | 55,009,700 | |||||
The
Company evaluates assets for impairment when events or circumstances indicate
that recorded values may not be recoverable. There were no
impairments for the three and six months ended June 30, 2008 and
2007. Mining properties of $21,078,700 are the result of the
allocation of the purchase price associated with the merger of Crested Corp.
into the Company during the fourth quarter of 2007. The Company is in
the process of conducting a valuation of the allocation of the purchase price
under SFAS 141R which it anticipates having completed during the third or fourth
quarter of 2008. The Company incurred $257,800 in permitting and
engineering studies relating to the Lucky Jack mining claims, which were
capitalized, during the six months ended June 30, 2008. During the
quarter ended June 30, 2008 the Company abandoned certain options on uranium
leases it held with a book value of $31,100 as the Company saw no economic value
in retaining the leases.
-12-
U.S.
ENERGY CORP. & SUBSIDIARIES
Notes
to Condensed Financial Statements (Unaudited)
(Continued)
Land,
buildings, improvements, machinery and equipment are carried at
cost. Depreciation of buildings, improvements, machinery and
equipment is provided principally by the straight-line method over estimated
useful lives ranging from 3 to 45 years. Following is a breakdown of
the lives over which assets are depreciated.
|
Machinery
and equipment
|
||
|
Office
Equipment
|
3
to 5 years
|
|
|
Aircraft
|
10
years
|
|
|
Field
Tools and Hand Equipment
|
5
to 7 years
|
|
|
Vehicles
and Trucks
|
3
to 7 years
|
|
|
Heavy
Equipment
|
7
to 10 years
|
|
|
Buildings
and improvements
|
||
|
Service
Buildings
Multifamily
Housing
|
20
years
25
years
|
|
|
Corporate
Headquarters' Building
|
45
years
|
|
6) Marketable
Securities
The
Company accounts for its marketable securities as (1) held-to-maturity, (2)
available-for-sale and (3) trading. The Company holds short-term
securities which have maturities of greater than three months but less than one
year from the date of purchase are classified as held-to-maturity based on the
Company's intent to hold such securities to the maturity date. All
held-to-maturity securities are U.S. Government securities and are stated at
amortized cost, which approximates fair market value. Income related
to these securities is reported as a component of interest
income. The Company's available-for-sale securities are carried at
fair value with net unrealized gain or (loss) recorded as a separate component
of shareholders' equity. If a decline in fair value of
held-to-maturity securities is determined to be other than temporary, the
investment is written down to fair value. Based on the Company's intent to sell
the securities, its equity securities are reported as trading
securities.
7) Other
Comprehensive Income (Loss)
Unrealized
gains and losses on investments, available-for-sale securities, are excluded
from net income but are reported as comprehensive income on the Condensed
Consolidated Balance Sheets under Shareholders’ equity. The following
table reconciles net loss/gain to comprehensive loss/gain:
|
For
the three months ending June 30,
|
For
the six months ending June 30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Net
(loss)/gain
|
$ | (1,749,900 | ) | $ | 59,295,400 | $ | (3,466,500 | ) | $ | 57,977,200 | ||||||
|
Comprehensive
loss from the
|
||||||||||||||||
|
unrealized
loss on marketable securities
|
(55,800 | ) | (4,335,800 | ) | (174,500 | ) | (4,335,800 | ) | ||||||||
|
Deferred
income taxes
|
||||||||||||||||
|
on
marketable securities
|
21,500 | 1,410,400 | 44,600 | 1,410,400 | ||||||||||||
|
Comprehensive
(loss)/gain
|
$ | (1,784,200 | ) | $ | 56,370,000 | $ | (3,596,400 | ) | $ | 55,051,800 | ||||||
-13-
U.S.
ENERGY CORP. & SUBSIDIARIES
Notes
to Condensed Financial Statements (Unaudited)
(Continued)
|
8)
|
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:
|
Three
Months Ended June 30,
|
Six
Months Ended
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Consolidated
book income before income tax
|
$ | (2,454,000 | ) | $ | 95,303,000 | $ | (4,844,300 | ) | $ | 93,636,500 | ||||||
|
Add
back equity loss from non consolidated tax subsidiary
|
$ | 3,729,700 | 3,711,500 | |||||||||||||
|
Add
back losses from non consolidated tax subsidiaries
|
$ | 133,600 | $ | 1,154,100 | $ | 290,300 | 1,154,100 | |||||||||
|
Permanent
differences
|
308,800 | (451,200 | ) | 617,500 | 238,300 | |||||||||||
|
Taxable
income before temporary differences
|
$ | (2,011,600 | ) | $ | 99,735,600 | $ | (3,936,500 | ) | $ | 98,740,400 | ||||||
|
Expected
federal income tax expense (benefit) 35%
|
$ | (704,100 | ) | $ | 34,907,600 | $ | (1,377,800 | ) | $ | 34,559,300 | ||||||
|
Federal
deferred income tax expense (benefit)
|
$ | 790,100 | $ | 15,039,000 | $ | 744,400 | $ | 15,039,000 | ||||||||
|
Federal
current expense (benefit)
|
(1,494,200 | ) | 19,868,600 | (2,122,200 | ) | 19,520,300 | ||||||||||
|
Total
federal income tax expense (benefit)
|
(704,100 | ) | 34,907,600 | (1,377,800 | ) | 34,559,300 | ||||||||||
|
Current
state income tax expense net of
|
||||||||||||||||
|
federal
tax benefit
|
- | 1,100,000 | - | 1,100,000 | ||||||||||||
|
Total
provision (benefit)
|
$ | (704,100 | ) | $ | 36,007,600 | $ | (1,377,800 | ) | $ | 35,659,300 | ||||||
Current
taxes receivable at June 30, 2008 is comprised of $2,243,800 of federal income
taxes. The amount of current taxes receivable has been increased by $18,800
benefit from the exercise of pre-FAS 123R nonqualified stock options and
warrants which result in an increase to paid in capital. At December
31, 2007, current taxes receivable was $902,900.
There was
no tax effect for the discontinued operations for the period ended June 30,
2008.
-14-
U.S.
ENERGY CORP. & SUBSIDIARIES
Notes
to Condensed Financial Statements (Unaudited)
(Continued)
The
components of deferred taxes as of June 30, 2008 and December 31, 2007 are as
follows:
|
June
30,
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
Current
deferred tax assets:
|
||||||||
|
Tax
basis in excess of book
|
$ | 206,100 | $ | - | ||||
|
Non-deductible
reserves and other
|
91,300 | 59,700 | ||||||
|
Total
net current deferred tax assets/(liabilities)
|
$ | 297,400 | $ | 59,700 | ||||
|
Non-current
deferred tax assets:
|
||||||||
|
Deferred
compensation
|
$ | 605,800 | $ | 436,300 | ||||
|
Accrued
reclamation
|
40,100 | 38,500 | ||||||
|
Tax
basis in excess of book
|
- | 200,400 | ||||||
|
Total
noncurrent deferred tax assets
|
645,900 | 675,200 | ||||||
|
Non-current
deferred tax liabilities:
|
||||||||
|
Book
basis in excess of tax basis
|
(8,514,200 | ) | (7,604,000 | ) | ||||
|
Total
deferred tax liabilities
|
(8,514,200 | ) | (7,604,000 | ) | ||||
|
Total
net non-current deferred tax assets/(liabilities)
|
$ | (7,868,300 | ) | $ | (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 June 30, 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 six months ended June 30, 2008, net current deferred tax assets increased by
$237,700 and net non-current deferred tax liabilities increased by $939,500.
The total change in net deferred tax liabilities was an increase of
$701,800. This is comprised of the following: a deferred income tax expense of
$744,400 and the recognition of other comprehensive income in the amount of
$44,600 resulting from the tax benefit related to the mark to market of
available for sale 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 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 June 30, 2008 or December 31, 2007.
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.
-15-
U.S.
ENERGY CORP. & SUBSIDIARIES
Notes
to Condensed Financial Statements (Unaudited)
(Continued)
9) Assets
Held for Sale
Long
lived assets and liabilities that will be sold within one year of the financial
statements are classified as current. At June 30, 2008 the Company
believed a majority of its holdings in SGMI would be sold within a twelve month
period. On June 13, 2008 the Company entered into an agreement to
sell an aggregate of 39,062,720 common shares SGMI, or 49.9% of the outstanding
shares of SGMI, to RMB Resources Ltd. (“RMB”), as trustee for the Telluride
Investment Trust, for an aggregate purchase price of approximately Cdn. $5.4
million, in accordance with the terms of a Share Purchase Agreement (“Purchase
Agreement”). Should the transaction with RMB not close, management of
the Company intends to pursue other potential buyers.
At June
30, 2008, the Company reported $1,624,200 in assets held for sale and $141,500
in liabilities held for sale, both from Sutter. Revenues from the
operations of Sutter were not material during these periods. In the
event that the transaction with RMB does not close the Company believes it will
be able to sell the Sutter assets during the subsequent twelve months from June
30, 2008 in excess of the net book value of $1,482,700.
The
Company recorded losses of $290,300 and $133,600 respectively for the six and
three months ended June 30, 2008 as discontinued operations relating to
Sutter. The Company also retrospectively recorded losses of
$1,142,300 and $488,700 respectively for the six and three months ended June 30,
2007 as discontinued operations relating to Sutter.
All
capitalized asset balances associated with these assets, including cash bonds
pledged as collateral for reclamation liabilities, were classified as Assets
Held for Sale as of June 30, 2008. Likewise all asset retirement
obligations as well as any other liability associated with these properties was
classified as current Liabilities Held for Sale at June 30, 2008. In
the event that these assets and liabilities are not sold during the 12 months
from June 30, 2008, they will be re-evaluated to insure that no impairment has
taken place and re-classified as long term assets and liabilities.
10) Earnings
Per Share
The
Company presents basic and diluted earnings per share in accordance with the
provisions of SFAS No. 128, "Earnings per Share". Basic earnings per
common share are based on the weighted average number of common shares
outstanding during the period. 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. As the results of operations for
the three and six months ended June 30, 2008 were losses, dilutive options and
warrants were excluded from the diluted calculation because they would be
anti-dilutive. Dilutive options and warrants excluded at June 30,
2008 totaled 4,736,131.
-16-
U.S.
ENERGY CORP. & SUBSIDIARIES
Notes
to Condensed Financial Statements (Unaudited)
(Continued)
11) Debt
At June
30, 2008, debt consists of debt related to the construction of the Remington
Village multifamily property and the purchase of equipment at various interest
rates and due dates:
|
Short
term construction debt
|
$ | 13,922,900 | ||
|
Current
portion of long term debt
|
71,900 | |||
|
Long
term debt
|
152,800 | |||
| $ | 14,147,600 | |||
12) Asset
Retirement Obligations
The
Company accounts for the reclamation of its mineral properties pursuant to SFAS
No. 143, “Accounting for Asset Retirement Obligation.” Under the
provisions of this statement, the Company records the estimated fair value of
the reclamation liability on its mineral properties as of the date that the
liability is incurred with a corresponding increase in the property’s book
value. Actual costs could differ from those estimates. The Company
deducts any actual funds expended for reclamation from the asset retirement
obligations during the quarter in which it occurs. The reclamation
liabilities are reviewed each quarter to determine whether estimates for the
total asset retirement obligation are sufficient to complete the reclamation
work required. Asset retirement obligations at June 30, 2008 are for
reclamation obligations related to the Lucky Jack project.
The
following is a reconciliation of the total liability for asset retirement
obligations (unaudited):
|
For
the six months ending June 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Balance
January 1,
|
$ | 133,400 | $ | 124,400 | ||||
|
Accretion
Expense
|
4,400 | 2,100 | ||||||
|
Deconsolidation
of Sutter Gold
|
(23,300 | ) | -- | |||||
|
Balance
June 30,
|
$ | 114,500 | $ | 126,500 | ||||
13) Shareholders’
Equity
Stock
Option Plans
The Board
of Directors adopted, and the shareholders approved, the U.S. Energy Corp. 2001
Incentive Stock Option Plan (the "2001 ISOP") for the benefit of USE's
employees. The 2001 ISOP reserves for issuance shares of the
Company’s common stock equal to 25% of the Company’s shares of common stock
issued and outstanding at any time. The 2001 ISOP has a term of 10
years.
On July
27, 2007 the Compensation Committee of the Company granted 1,558,000 stock
options to employees and officers of the Company under the 2001
ISOP. These options vest over three years (358,000) and five years
(1,200,000) and are exercisable at the closing price on July 27, 2007 or $4.97
per share.
-17-
U.S.
ENERGY CORP. & SUBSIDIARIES
Notes
to Condensed Financial Statements (Unaudited)
(Continued)
The
weighted average remaining contractual term and aggregate intrinsic value of all
employee options at June 30, 2008 was 5.79 years and $865,700,
respectively. At June 30, 2008, 1,023,329 of the options granted were
not vested. During the three and six months ending June 30, 2008, the
Company recognized $344,000 and $688,000, respectively in compensation expense
related to employee options and will recognize an additional $3,848,800 over the
remaining vesting period of four years. During the three and six
months ended June 30, 2007 the Company recognized no compensation expense
related to employee stock options. The Company computes the fair
values of its options granted using the Black-Scholes pricing
model. The options issued in 2007 were valued under Black-Scholes
using a risk free interest rate of 4.82%, expected life of 10 years and expected
volatility of 48.8%. To estimate expected lives of options for this
valuation, it was assumed options will be exercised at the end of their expected
lives. All options are initially assumed to
vest. Cumulative compensation cost recognized in pro forma net income
or loss with respect to options that are forfeited prior to vesting is adjusted
as a reduction of pro forma compensation expense in the period of
forfeiture.
Warrants
to Others
From time
to time the Company issues stock purchase warrants to non-employees for
services.
The
following table represents the activity in employee stock options and
non-employee stock purchase warrants for the six months ended June 30,
2008:
|
June
30, 2008
|
||||||||||||||||
|
Employee
Stock Options
|
Stock
Purchase Warrants
|
|||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||
|
Average
|
Average
|
|||||||||||||||
|
Exercise
|
Exercise
|
|||||||||||||||
|
Options
|
Price
|
Warrants
|
Price
|
|||||||||||||
|
Outstanding
at beginning
|
||||||||||||||||
|
Outstanding
balance at December 31, 2007
|
3,819,927 | $ | 3.75 | 1,445,585 | $ | 3.58 | ||||||||||
|
Granted
|
- | $ | - | 40,000 | $ | 2.81 | ||||||||||
|
Forfeited
|
- | $ | - | - | $ | - | ||||||||||
|
Expired
|
(211,571 | ) | $ | 3.92 | (45,000 | ) | $ | 3.88 | ||||||||
|
Exercised
|
- | $ | - | (446,698 | ) | $ | 3.42 | |||||||||
|
Outstanding
at June 30, 2008
|
3,608,356 | $ | 3.74 | 993,887 | $ | 3.61 | ||||||||||
|
Exercisable
at June 30, 2008
|
2,585,027 | $ | 3.26 | 953,887 | $ | 3.64 | ||||||||||
|
Weighted
Average Remaining Contractual Life - Years
|
5.79 | 2.41 | ||||||||||||||
|
Aggregate
intrinsic value of options / warrants outstanding
|
$ | 865,700 | $ | 150,100 | ||||||||||||
During
the quarter ended June 30, 2008, the Company issued 40,000 warrants to a
consultant. The warrants were issued at the closing price on the date
of grant, $2.81, vest over a four year period and expire four years from date of
grant. The Company recorded $7,700 in expense during the six months
ended June 30, 2008 for warrants issued to third parties and no expense
associated with warrants during the six months ended June 30,
2007. The Company will recognize an additional $26,500 in expense
over the life of the warrants issued during the six months ended June 30,
2008.
-18-
U.S.
ENERGY CORP. & SUBSIDIARIES
Notes
to Condensed Financial Statements (Unaudited)
(Continued)
Common
Stock
During
the six months ended June 30, 2008, the Company issued 491,698 shares of common
stock. Issued shares consist of 45,000 shares issued to officers of
the Company pursuant to the 2001 Stock Compensation Plan and 446,698 shares
issued as the result of the exercise of warrants. The Company also
purchased 551,195 shares during the six months ended June 30, 2008 under its
June 22, 2007 stock buyback plan.
The
following table details the changes in common stock during the six months ended
June 30, 2008:
|
Additional
|
||||||||||||
|
Common
Stock
|
Paid-In
|
|||||||||||
|
Shares
|
Amount
|
Capital
|
||||||||||
|
Balance
December 31, 2007
|
23,592,493 | $ | 235,900 | $ | 96,560,100 | |||||||
|
2001
stock compensation plan
|
45,000 | 400 | 169,600 | |||||||||
|
Exercise
of warrants
|
446,698 | 4,500 | 1,523,100 | |||||||||
|
Expense
of employee options
|
- | - | 688,100 | |||||||||
|
Expense
of company warrants issued
|
- | - | 7,600 | |||||||||
|
Buy
Back Program
|
(551,195 | ) | (5,500 | ) | (1,886,600 | ) | ||||||
|
Deferred
taxes on FAS 123R compensation
|
- | - | 18,700 | |||||||||
|
Balance
as of June 30, 2008
|
23,532,996 | $ | 235,300 | $ | 97,080,600 | |||||||
Equity
Compensation
During
the three and six months ended June 30, 2008 the Company recorded compensation
expense of $150,600 and $252,800 respectively in the form of common stock issued
to officers pursuant to the shareholder approved 2001 Stock Compensation
Plan. This compensation is a portion of the overall compensation
package of the executives and is in lieu of cash compensation (see Note
4).
Common
Stock Buy Back Program
On June
22, 2007 the Board of Directors of the Company approved a share buyback program
for up to $5 million in common stock. The buyback program is being
administered exclusively through a brokerage firm and is subject to blackout
periods. During the three and six months ended June, 2008 the Company
purchased 354,235 and 551,195 shares of common stock respectively for a total of
$1,892,000 or an average cost per share of $3.43. From the
commencement of the stock buyback plan through June 30, 2008 the Company has
purchased 779,195 shares for $2,939,300 or an average price of $3.77 per
share.
-19-
U.S.
ENERGY CORP. & SUBSIDIARIES
Notes
to Condensed Financial Statements (Unaudited)
(Continued)
14) Real
Estate Investment
Remington Village –
Gillette, Wyoming. The Company is developing a nine building
Class A multifamily apartment complex, with 216 units on 10.15 acres (purchased
in 2007) located in Gillette, Wyoming. At June 30, 2008, overall
project construction is about 84% complete, with 5 buildings finished and
occupied by tenants. Remaining buildings should be ready for
occupancy by the end of 2008. The apartments are a mix of one, two,
and three bedroom units, and a clubhouse and family amenities are still under
construction. All construction is being conducted by a third party
contractor.
A
commercial bank is providing construction financing of up to $18.5
million. Total cost including land, developer’s fee, permits,
entitlements, site work and construction, is estimated at $26
million. Pursuant to the loan agreement, the Company has invested
$7.0 million into the project (including $1,247,700 for land
purchase). At June 30, 2008, the outstanding balance on the
construction loan was $13.9 million. The interest rate on the loan
balance at June 30, 2008 was 4.7206% based on LIBOR, and interest is payable
monthly. Loan maturity is March 1, 2009 (extendable to September 1,
2009 at our election). Obtaining permanent financing is expected to
be subject to the project meeting the lender’s customary appraised value
requirements.
15) Lucky
Jack Molybdenum Property
Kobex
gave notice to the Company, effective March 31, 2008, that it was terminating
the April 3, 2007 Exploration, Operating and Mine Development Agreement on the
Lucky Jack molybdenum project. 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. It is the Company’s understanding
that Kobex terminated the agreement due to Kobex’ perception of uncertainties in
the regulatory and legal environment for developing the property.
On August
7, 2007, the Town of Crested Butte issued a temporary moratorium on development
activities within its watershed that were not ongoing at the effective date of
the moratorium, until an updated Ordinance Amending the Towns’ Watershed
Protection District Ordinance (“Watershed Ordinance”) could be
adopted. On May 19, 2008, the Town Counsel adopted a revised
Watershed Ordinance. USE intends to work with the Town to proceed
with the necessary rehabilitation activities, in a manner which will be
consistent with applicable rules, regulations, and statutes, including
applicable provisions of the Watershed Ordinance. It is possible that
unexpected delays, and/or increased costs, may be encountered in developing a
new mine plan for the Lucky Jack property as a result of the revised Watershed
Ordinance.
The board
of directors and management of the Company intend to move the Lucky Jack project
forward. They will do so through application of cash reserves on hand
as well as seeking an industry partner to replace Kobex.
-20-
U.S.
ENERGY CORP. & SUBSIDIARIES
Notes
to Condensed Financial Statements (Unaudited)
(Continued)
16) Oil
and Gas Exploration Activities
The
Company has signed agreements with two Gulf Coast (United States) oil and gas
exploration and production companies. The Company anticipates it will
participate as a 20% working interest partner in one of the projects and a 4.55%
working interest partner in the second. These projects may result in
numerous wells being drilled over the next three to five
years. Approximately $3.6 million has been expended under the
agreement through June 30, 2008. Drilling of the first well under the
20% working interest agreement commenced after the end of the quarter ended June
30, 2008. The company has advanced $944,300 in prepaid drilling costs
on this well as of June 30, 2008 which is in addition to the $3.6 million
expended in land and seismic acquisition costs.
The
Company believes that numerous prospects could be generated, leased and drilled
potentially resulting in $10,000,000 to $15,000,000 in exploration and
development expenditures for its working interest over the course of the
anticipated three to five year programs.
17) Segment
Information
As of
June 30, 2008, the Company had two reportable segments: Mineral Properties,
Management Fees and Other and Real Estate Operations. As of December
31, 2007 and June 30, 2007, the Company did not meet the quantifiable thresholds
of SFAS No. 131, (Disclosures About Segments of an Enterprise and Related
Information), and therefore did not disclose any segment
information.
The only
revenues from maintaining mineral properties are management fees charged on
reimbursable costs related to the Lucky Jack molybdenum property, and paid by
Kobex, during the quarter ended March 31, 2008. Operating costs
associated with mineral properties during the six months ended June 30, 2008
were $1,073,500. These costs were as a result of the assumption of
all costs related to the Lucky Jack project after the withdrawal of Kobex on
March 31, 2008. Operating costs of mineral properties of $1,115,400
during the six months ended June 30, 2007 were as a result of the expenditures
the Company incurred prior to selling its uranium properties in April of
2007.
During
the three and six months ended June 30, 2008, the Company capitalized $129,100,
and expensed $74,600, in construction loan interest related to the construction
of a multifamily housing project in Gillette, Wyoming (see Note
14). This project accounts for 87.2% of total revenues received from
real estate operations during the three and six months ended June 30,
2008.
-21-
U.S.
ENERGY CORP. & SUBSIDIARIES
Notes
to Condensed Financial Statements (Unaudited)
(Continued)
A summary
of results of operations and total assets by segment follows:
|
For
the three months ended June 30,
|
For
the six months ended June 30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Revenues:
|
||||||||||||||||
|
Real
estate
|
$ | 312,500 | $ | 143,900 | $ | 431,300 | $ | 169,200 | ||||||||
|
Mineral
properties, management
|
||||||||||||||||
|
fees
& other
|
15,900 | 86,900 | 46,600 | 141,200 | ||||||||||||
|
Total
revenues:
|
328,400 | 230,800 | 477,900 | 310,400 | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Real
estate
|
233,800 | 2,300 | 400,900 | 167,400 | ||||||||||||
|
Mineral
properties
|
943,700 | 682,200 | 1,073,500 | 1,115,400 | ||||||||||||
|
Total
operating expenses:
|
1,177,500 | 684,500 | 1,474,400 | 1,282,800 | ||||||||||||
|
Interest
expense
|
||||||||||||||||
|
Real
estate
|
74,600 | -- | 74,600 | -- | ||||||||||||
|
Mineral
properties
|
-- | -- | -- | -- | ||||||||||||
|
Total
interest expense:
|
74,600 | -- | 74,600 | -- | ||||||||||||
|
(Loss)
gain before investment and
|
||||||||||||||||
|
property
transactions:
|
||||||||||||||||
|
Real
estate
|
4,100 | 141,600 | (44,200 | ) | 1,800 | |||||||||||
|
Mineral
properties
|
(927,800 | ) | (595,300 | ) | (1,026,900 | ) | (974,200 | ) | ||||||||
|
Loss
before investment
|
||||||||||||||||
|
and
property transactions:
|
(923,700 | ) | (453,700 | ) | (1,071,100 | ) | (972,400 | ) | ||||||||
|
Corporate
other revenues and expenses:
|
(1,396,700 | ) | 96,245,400 | (3,482,900 | ) | 95,751,200 | ||||||||||
|
(Loss)
gain before discontinued
|
||||||||||||||||
|
operations
and income taxes
|
$ | (2,320,400 | ) | $ | 95,791,700 | $ | (4,554,000 | ) | $ | 94,778,800 | ||||||
|
Depreciation
expense:
|
||||||||||||||||
|
Real
estate
|
$ | 97,500 | $ | 10,100 | $ | 148,200 | $ | 20,200 | ||||||||
|
Mineral
properties, management
|
||||||||||||||||
|
fees
& other
|
7,500 | 5,700 | 17,900 | 11,400 | ||||||||||||
|
Corporate
|
117,400 | 66,900 | 241,100 | 171,400 | ||||||||||||
|
Total
depreciation expense
|
$ | 222,400 | $ | 82,700 | $ | 407,200 | $ | 203,000 | ||||||||
|
As
of
|
||||||||||||||||
|
June
30,
|
December
31,
|
|||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
Assets
by segment
|
||||||||||||||||
|
Real
estate
|
$ | 28,181,300 | $ | 18,951,700 | ||||||||||||
|
Mineral
/ Oil & Gas properties
|
25,276,200 | 26,817,100 | ||||||||||||||
|
Corporate
assets
|
83,559,800 | 85,635,600 | ||||||||||||||
|
Total
assets
|
$ | 137,017,300 | $ | 131,404,400 | ||||||||||||
ITEM 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The
following is Management's Discussion and Analysis of significant factors that
affect the Company's liquidity, capital resources and results of operations
during the three and six months ended June 30, 2008 and 2007.
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
Our
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 two fronts with varying time horizons and levels of
risk:
|
|
·
|
Near
and Mid-Term Investments. This segment includes investment in
selected oil and gas exploration and development projects and
capitalization of legacy assets.
|
Our Gulf
Coast oil and gas assets provide a large inventory of high-potential exploration
opportunities. Consistent with our strategy, drilling commenced in
July 2008. 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 five years.
Additionally,
pursuant to its agreement with RMB Resources, the Company intends to sell a
majority of its ownership position in SGMI. This transaction is
expected to close in the third quarter of 2008.
The
Company is also constructing a multifamily housing project in Gillette,
Wyoming. 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.
|
|
·
|
Long-Term
Investments. This segment includes identification, acquisition
and development of mineral properties and is particularly focused on
development of the Lucky Jack molybdenum
project.
|
As a
result of the termination of the agreement with Kobex, the Company has budgeted
$5.0 million for the advancement of the Lucky Jack project through December 31,
2008. The budgeted amounts will be expended for permitting costs,
engineering studies, operating costs related to the water treatment plant and
holding costs related to the mining claims. Prior to the termination
of the Kobex agreement, Kobex had furnished a majority of the funds needed to
advance the project. The Company is now seeking a highly qualified,
well financed industry partner which may reduce the Company’s capital
requirements.
Historical
records filed by predecessor owners of the Lucky Jack 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 (MoS2)
mineralization. A high grade section of the mineralization containing
roughly 23 million tons at a grade of 0.689% MoS2 was also
reported. While no assurance can be given that these quantities of
MoS2
exist, the Company believes that this project has extraordinary
potential. The average market price for MoS2 at June
30, 2008 was $34.13 per pound.
Liquidity
and Capital Resources
The
Company, at June 30, 2008, had $9,900,600 in cash and cash equivalents,
$60,298,100 in U.S. Government Treasuries with longer than 90 day maturities
from date of purchase and $4,879,600 in restricted investments which were also
invested in U.S. Treasuries and pledged on the construction loan for a Class A
multifamily housing project in Gillette, Wyoming. These balances
total $75.1 million or $3.19 per outstanding common share at June 30,
2008. Working capital (current assets minus current liabilities), at
June 30, 2008, was $65,291,900. As discussed below in Capital
Resources and Capital Requirements, the Company projects that its capital
resources at June 30, 2008 will be sufficient to fund its operations and capital
projects through the balance of 2008 and into the future.
Due to
the nature of the Company’s business (acquiring, developing and selling mineral
properties), the principal factors affecting the Company are commodity prices,
the grade of mineral deposits discovered and permitting. As commodity
prices fall, it is typically less expensive for the Company to acquire
properties and hold them until commodity prices raise 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 six months ended June 30, 2008
were:
Current
Assets
|
·
|
Cash
decreased by $62,391,600 as a result of investing $60,298,100 in
marketable securities, U.S. Treasuries, with maturities greater than three
months. The Company also used cash in operations, mineral
property holding, permitting and engineering study costs, and oil and gas
exploration. Please see discussion below regarding cash flows
for the six months ended June 30,
2008.
|
|
·
|
Accounts
receivable trade, reimbursable project costs and the dissolution of
subsidiaries decreased $1,083,700. This reduction was as a
result of the collection of $782,100 paid by the Company on the Lucky Jack
project and reimbursed by Kobex, collection of $197,600 due the Company
upon the dissolution of its subsidiaries and a reduction of accounts
receivable trade of $104,000.
|
|
·
|
During
the six months ended June 30, 2008, the Company received a partial payment
of $800,000 of the amount due from the Internal Revenue Service at
December 31, 2007. The loss incurred during the six months
ended June 30, 2008 resulted in an increase in the amount of the account
receivable from the Internal Revenue Service of $2,140,900 as a result of
that loss being carried back against taxes paid during
2007.
|
|
·
|
The
Company’s restricted investments, cash held in an interest bearing
account, decreased by $1,745,100 due to the release of funds held in
escrow at December 31, 2007 . The remaining restricted
investments at June 30, 2008 earned $94,100 in interest during the six
months ended June 30, 2008.
|
|
|
·
|
The
Company reported $1,624,200 in assets held for sale at June 30, 2008 and
$1,112,600 at December 31, 2007. Assets held for sale at June
30, 2008 are assets related to Sutter Gold Mining Company, Inc. (“SGMI”)
and are offset by $141,500 in SGMI liabilities also held for
sale. On June 13, 2008 the Company entered into a private
agreement to sell an aggregate of 39,062,720 common shares SGMI, or 49.9%
of the outstanding shares of SGMI, to RMB Resources Ltd. (“RMB”), as
trustee for the Telluride Investment Trust, for an aggregate purchase
price of approximately Cdn. $5.4 million, in accordance with the terms of
a Share Purchase Agreement.
|
|
|
·
|
The
Company advanced $1,206,700 in prepaid drilling costs, and was invoiced
$262,400 for expenses during June 2008 for the drilling of the first well.
The amount of prepaid drilling expensed in excess of the invoiced amount,
$944,300, is carried as prepaid drilling costs at June 30,
2008. The Company has a 20% working interest in this well that
is being drilled by PetroQuest Energy, LLC (the operator of the
well). The well is projected to be completed in August
2008. As the operator of the well invoices the Company for its
proportionate share of drilling costs, prepaid drilling costs will be
reclassified to properties and equipment as oil and gas
properties. Although the $1,206,700 represents the anticipated
cost to the Company for the drilling of the well, the ultimate cost may
exceed or be less than that amount depending on conditions of the drilling
and any difficulties encountered.
|
Current
Liabilities
|
|
·
|
Accounts
payable decreased by $1,313,300 during the six months ended June 30,
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.
|
|
|
·
|
Accrued
compensation expense increased by $442,100 during the six months ended
June 30, 2008. This increase reflects a onetime bonus accrued
to an officer of the company for past performance in the amount of
$500,000 plus taxes, to be paid out quarterly over a two year period
beginning in March 2008.
|
|
|
·
|
The
construction loan associated with our multifamily housing development in
Gillette, Wyoming increased by $8,433,900 to $13,922,900 at June 30,
2008.
|
Cash flows during the six months
ended June 30, 2008:
|
|
·
|
Operations
consumed $3,856,300, Investing Activities consumed $66,691,700 and
Financing Activities provided $8,031,700. The vast majority of
the cash consumed from investing activities, $60,298,100 was the
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.
|
|
|
·
|
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
$1,084,600.
|
|
|
·
|
An
increase of $1,842,000 in cash as a result of restricted cash investments
being released less $94,100 interest earned on restricted cash investments
for a net increase in cash from restricted investments of
$1,747,900.
|
|
|
·
|
Cash
consumed in investing activities:
|
|
|
·
|
The
Company invested $8,415,000 in its multifamily housing development in
Gillette, Wyoming during the six months ended June 30,
2008.
|
|
|
·
|
The
Company paid $478,400 as for its portion of oil and gas acquisition costs
subject to its agreement on properties in the U.S. gulf coast and paid
$262,400 of drilling costs and expenses on its first well. The
Company also advanced $944,300 in prepaid drilling costs discussed above
in liquidity.
|
|
|
·
|
The Company
invested $257,800 in its mineral properties during the six months ended
June 30, 2008. This investment amount was reduced by the
abandonment of certain options on uranium leases and the cancellation of a
finders fee on the Lucky Jack project for a net increase in mineral
properties of $43,100.
|
|
|
·
|
The
Company invested $60,298,100 in U.S. Treasuries. The Treasuries
are classified as marketable securities rather than cash as they have
maturities longer than three months from the date of
purchase.
|
Financing
Activities:
|
|
·
|
Cash
provided by Financing Activities:
|
|
|
·
|
$8,433,900
additional funds were drawn against the construction loan for our
multifamily housing development in Gillette,
Wyoming.
|
|
|
·
|
A
total of $1,527,600 was received as the result of the cash exercise of
446,698 warrants.
|
|
|
·
|
Cash
consumed in Financing Activities:
|
|
|
·
|
Payment
of long term debt of $37,700 relating primarily to the payment on notes
related to various pieces of
equipment.
|
|
|
·
|
On June 22, 2007 the Company
announced a stock buyback plan to purchase up to $5.0 million of its
common stock. During the three and six months ended June 30,
2008 the Company purchased 354,235 and 551,195 shares respectively under
the buyback plan for $1,892,100 during the six months ended June 30, 2008
or an average price of $3.43 per share. From inception of the
stock buyback plan through June 30, 2008, the Company has purchased
779,195 shares at an average price per share of $3.77 or
$2,939,300.
|
Capital
Resources
Lucky
Jack molybdenum property and Kobex Resources Ltd. Agreement
Historical
records filed by predecessor owners of the Lucky Jack 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 (MoS2)
mineralization. A high grade section of the mineralization containing
roughly 23 million tons at a grade of 0.689% MoS2 was also
reported. No assurance can be given that these quantities of MoS2
exist. The average market price for MoS2 at June
30, 2008 was $34.13 per pound.
On March
31, 2008, Kobex gave notice to the Company that it was immediately terminating
the April 3, 2007 Exploration, Operating and Mine Development Agreement with the
Company. Through March 31, 2008, Kobex had expended over $8.0 million
on the project. It is the Company’s understanding that Kobex
terminated the agreement due to Kobex’ perception of uncertainties in the
regulatory and legal environment for developing the property. As a
result of Kobex electing to no longer participate in the Lucky Jack project, the
Company will no longer receive annual option payments from Kobex and is
responsible for all of the holding permitting and exploration costs associated
with the Lucky Jack project. The Company has approved a $5.0 million
budget for the balance of 2008.
The
Company plans on continuing its permitting efforts on the Lucky Jack
project. Additionally, the Company will continue to seek an industry
partner to participate in the cost of development of the project.
Cash
on Hand
The
Company has invested its cash surplus in interest bearing accounts and short
term U.S. Government Treasuries providing working capital to fund the Company’s
projects. Although the Company could benefit from higher interest
bearing investments, it has its cash invested in U.S. Treasuries to avoid
becoming an inadvertent investment company.
Commercial
Bank
Line of Credit - The
Company has a $5,000,000 line of credit from a commercial bank. The
full line of credit was available to the Company at June 30, 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 inception (October 26,
2007), the interest rate was 7.75% per annum. The line of credit is
available until October 1, 2008 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.
Construction Loan -
On August 31, 2007, the Company obtained $18.5 million in construction financing
from a commercial bank for the construction of our Gillette, Wyoming multifamily
housing project. The construction loan matures on March 1, 2009,
bears interest at 2.25% over 30 day LIBOR and required a 0.75% origination
fee. We can elect to extend the due date to September 1,
2009. Collateral for the loan is the Gillette, Wyoming property, a
guarantee by the Company and a deposit of an additional $4.7 million with the
commercial bank, held in an interest bearing account that is to be released to
the Company upon obtaining permanent financing. The Company has
contacted various lending institutions regarding permanent
financing. Once 90% occupancy is obtained on all the units, these
financial institutions have indicated that they will consider providing long
term financing.
Future
Receipts of Royalties and Contractual Commitments from Uranium
Properties
We
retained our 4% Net Profits Royalty on 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 Uranium One contract for the sale of our uranium properties,
the Company also is entitled to receive $20,000,000 when commercial production
begins at the uranium mill the Company sold to Uranium One; $7,500,000 when the
first delivery of ore to a 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 $12,500,000. No assurance can be
given as to when these events and payments will occur.
Other
Current Asset held for
sale – The Company believes it will receive Cdn. $5.4 million for the
sale of 39,062,720 shares of SGMI to RMB during the third quarter of 2008 (see
Note 9). No assurance can be given however that the transaction with
RMB will actually close.
Restricted Cash
Investments – At June 30, 2008, we had $4,879,600 in current restricted
cash investments that is pledged as additional collateral with a commercial bank
providing the construction loan for our Gillette, Wyoming multifamily housing
project. Once the project is completely built and permanent financing
is secured for the project, this cash deposit will be released to the
Company.
Capital
Requirements
The
direct capital requirements of the Company during the balance of 2008 are the
funding of the Lucky Jack molybdenum project, development of the Company’s
interest in recently acquired oil and gas properties, completion of the
Gillette, Wyoming multifamily housing project, general and administrative costs,
the stock buyback program, and the potential acquisition of other natural
resources or mineral interests.
Lucky
Jack Molybdenum Property
The
Company has approved a $5.0 million budget for the year ended December 31,
2008. The budgeted amounts will be expended for permitting costs,
engineering studies, operating costs related to the water treatment plant and
holding costs related to the mining claims. The Company is seeking a
joint venture industry partner which may reduce the amount of capital that the
Company will have to expend on the project. In the event that the
Company is not successful in securing a joint interest partner, it may spend in
excess of the approved $5.0 million in the third and fourth quarters of
2008. The Company’s board of directors reviews funding needs of the
project at each board meeting and may approve additional expenditures as
warranted to move the property into production.
Oil
and Gas Development
The
Company signed agreements with two Gulf Coast oil and gas exploration and
production companies for potential onshore oil and gas
development. The Company anticipates it will participate as a 20%
working interest partner in the first project and a 4.55% working interest
partner in the second. Numerous wells may be drilled pursuant to
these agreements over the next three to five years. As of June 30,
2008, the Company had invested $3,651,000 under the agreements for the
acquisition of its interests, seismic data and drilling expenses.
The
Company believes that numerous prospects could be generated, leased and drilled
potentially resulting in $10,000,000 to $15,000,000 in exploration and
development expenditures for its working interest over the course of an
anticipated three to five year program. The Company has forecast an
expenditure of $6.2 million cash for the drilling and possible completion of up
to three initial wells with PetroQuest Energy LLC and the potential purchase of
additional leases and seismic data during 2008. The Company has
funded $1,206,700 of that amount as pre-paid drilling costs, $944,300, and
$262,400 in actual drilling costs as of June 30, 2008. Drilling of
the first well is anticipated being completed in the third quarter of
2008.
Real
Estate
Remington Village
multifamily housing – The Company has budgeted $26 million to complete
this project. The Company has funded approximately $7.0 million of
its cash commitment of $7.5 million or approximately 29% of the total project
cost. The Company was also required to place $4,725,000 in escrow
with the commercial bank at the time of the closing of the construction
loan.
As of
June 30, 2008, a total of $13,922,900 had been drawn on the $18,500,000
construction loan. The project in on budget and the Company believes
that the remainder of the construction loan, $4.5 million, will be sufficient to
complete the project. In the event the construction loan is not
sufficient to complete the project, the Company intends to make up any
shortfall. The Company anticipates that all apartment units will be
completed and fully occupied before or during the fourth quarter of 2008 at
which time it expects to obtain long term financing for the
property.
Stock
Buyback Program
Effective
June 22, 2007, the Board of Directors of the Company approved a share buyback
program for up to $5.0 million. The buyback program is being
administered exclusively through an individual brokerage firm and is subject to
blackout periods. Through June 30, 2008, the Company had repurchased
779,195 shares of its common stock for $2,939,300 leaving an additional
$2,060,700 available for the purchase of shares of the Company under the
plan.
Sutter
Gold Mining Inc. Properties
The
Company has contractually agreed to sell its controlling position in
SGMI. At June 30, 2008, all intercompany accounts
receivable accounts were current. It is anticipated that the sale of
the Company’s shares of SGMI will occur in August 2008 (see Note
9). In the event that the sale of the shares is not
closed, SGMI has sufficient working capital to continue to fund its operations
on a standby basis for 2008 and into 2009. Should SGMI need
working capital beyond its current balances, it will need to raise funds by
selling equity, properties or bringing in joint venture partners.
Reclamation
Costs
The Lucky
Jack 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 the Company will be submitting a
Plan of Operations to the USFS in 2009 for USFS review and
approval. USFS approval is required before construction can begin 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 Lucky Jack
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 the Lucky Jack
molybdenum property 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’s control, or changes in
agency policy and Federal and State law, could further complicate getting
changes to the mine’s operation approved.
Although
the Company is confident that the Plan of Operations for the Lucky Jack
molybdenum property will ultimately be approved by the USFS, the timing and
cost, and ultimate success of the mining operation cannot be
predicted.
The asset
retirement obligation for the Lucky Jack molybdenum property at June 30, 2008 is
$114,500. As the Lucky Jack project is developed, the reclamation
liability will 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 Lucky Jack property, is to eliminate long-term liabilities
associated with the property.
Other
The
Company continues to evaluate mineral projects in which it may
invest. Additionally, the Company is researching other opportunities
to deploy its capital outside of the minerals business. At June 30,
2008, none of these acquisition opportunities had advanced past the initial
internal evaluation stage.
Results of
Operations
Three
and Six Months Ended June 30, 2008 compared with the Three and Six Months Ended
June 30, 2007
During
the three and six months ended June 30, 2008, the Company recognized losses of
$1,749,900 and $3,466,500 respectively as compared to gains of $59,295,400 and
$57,977,200 respectively during the three and six months ended June
30, 2007. The decrease in net earnings for both the three and six
months ended June 30, 2008 as compared to the same periods of the previous year
is primarily due to higher Other Income during the three and six months ended
June 30, 2007 as a result of the sale of the Company’s uranium properties to
Uranium One during the second quarter of 2007. Other components in
the net change to the results of operations were (a) increased Revenues for the
three and six months ended June 30, 2008; (b) decreased Operating Costs and
Expenses during the three and six months ended June 30, 2008; (c) reduced Other
Income and Expenses during the three and six months ended June 30, 2008 (d) the
elimination of minority interest in the gain of consolidated subsidiaries, (e)
reduced operating costs of SGMI and (f) changes in the provision for and benefit
from Income Taxes.
Operating
Revenues:
Rental
revenues of $376,000 and $288,600 were received from Remington Villages during
the six months and three months ended June 30, 2008
respectively. During the three and six months ended June 30, 2007
there were no rental revenues from this project. Other real estate
revenues decreased $113,900 and $120,000 during the six and three months ended
June 30, 2008 respectively from the other real estate revenues recorded during
the same periods of the previous year. The reduction of other real
estate revenues came as a result of the Company sold 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 reductions
of $94,600 and $71,000 in management fee and other revenues during the six and
three months ended June 30, 2008 respectively are as a result of reduced
management fees being charged for its uranium properties, that were sold in
2007, and its molybdenum property. Subsequent to Kobex’ withdrawal
from the molybdenum property on March 31, 2008, no management fees have been
charged for that property.
Operating
revenues therefore increased by $167,500 for the six months and $97,600 for the
three months ended June 30, 2008. These increases are as a result of
the revenues from the rental of the Remington Village multifamily real estate
units during 2008.
Operating Costs and
Expenses:
All
Operating Costs and Expenses were reduced during the three and six months ended
June 30, 2008 with the exception of expenses associated with the Remington
Village multifamily housing project. The total reductions in
Operating Costs and Expenses during the three and six months ended June 30, 2008
were $5,762,900 and $4,856,500 respectively. The majority of this
reduction is due to a bonus paid to all employees and directors of the Company
during the three and six months ended June 30, 2007 at the closing of the sale
of the Company’s uranium assets to Uranium One. There was no
similar bonus paid during the three and six months ended June 30,
2008.
Mineral
holding costs of $1,073,500 during the six months ended June 30, 2008 were down
$41,900 from the amount of mineral holding costs recorded during the six months
ended June 30, 2007. While the amount of mineral holding costs
decreased during the six months ended June 30, 2008, they increased during the
quarter ended June 30, 2008 from $682,200 during the quarter ended June 30, 2007
to $943,700 during the quarter ended June 30, 2007, or an increase of $261,500
during the three months ended June 30, 2008 over the prior year for the same
quarter. The fluctuation in mineral holding costs during the periods
are as a result of higher costs during the first and part of the second quarters
in 2007 relating to holding costs of uranium properties which were ultimately
sold during 2007 resulting in no costs during 2008. Likewise, with
the withdrawal of Kobex from the Lucky Jack molybdenum property on March 31,
2008, the Company paid all holding costs related to that property during the
quarter ended June 30, 2008 while there were no costs for Lucky Jack during
2007.
The
operating costs for Remington Village during the three and six months ended June
30, 2008 were $151,300 and $242,300 respectively. These costs consist
of contract property management services, maintenance, insurance and general
administration costs. There were no operating costs relating to
Remington Villages during the three and six months ended June 30,
2007. The six months operating costs of Remington Villages include
$118,600 in depreciation expense.
Other Income and
Expenses:
During
the three and six months ended June 30, 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 the three and six months ended June
30, 2008. These transactions resulted in a reduction of the net Other
Income and Expenses of $108,055,400 for the six months ended June 30,
2008. A detailed discussion of these transactions please see Results
of Operations for the Three and Six Months Ended June 30, 2007 compared to the
Three and Six Months Ended June 30, 2006 below.
During
the three and six months ended June 30, 2008 the Company recorded a net loss of
$29,000 on the sale of its used corporate aircraft due to some repairs that had
to be made to the plane prior to selling it. The company netted
$1,079,200 from the sale of the plane when it was sold in the quarter ended June
30, 2008. The description of the gain on the sale of assets during
the three and six months ended June 30, 2007 is discussed below.
Interest
Income – The Company recognized $850,400 in interest income during the six
months ended June 30, 2008 which is comparable to the interest income received
during the six months ended June 30, 2007. Interest received on U.S.
Treasuries decreased by $339,600 during the quarter ended June 30, 2008 as
compared to the quarter ended June 30, 2007. The decrease during the
quarter ended June 30, 2008 is as a result of lower levels of cash being
invested at lower interest rates.
Interest
Expense for the three and six months ended June 30, 2008 increased primarily as
a result of the completion of a portion of the Remington Village multifamily
housing project in Gillette during the six months ended June 30,
2008. As the units are completed the interest on the construction
loan is expensed rather than being capitalized.
During
the fourth quarter of 2007, the Company acquired the minority interest
shareholders of Crested Corp. As a result of that acquisition and the
anticipated sale of SGMI, there are no minority interest in gains and losses of
consolidated subsidiaries at June 30, 2008. During the previous three
and six months ended June 30, 2007 the Company recorded a minority interest in
the gain of consolidated subsidiaries of $3,716,800 and $3,698,600 respectively
which was a reduction of earnings reported by the Company.
The
Company believes that its controlling interest in SGMI will be sold during the
third quarter of 2008. The operations of SGMI are therefore shown as
discontinued operations at June 30, 2008 and retrospectively as of June 30,
2007. SGMI significantly reduced its operations during the six months
ended June 30, 2008 to preserve cash. An income tax benefit from the
sale of the Company’s shares of SGMI is recorded at June 30, 2008 and is
included in the discontinued operations at the three and six months then
ended.
Due
to the loss recorded during the six months ended June 30, 2008, the Company
recorded a net benefit from income taxes during the three and six months of
$704,100 and $1,377,800 respectively. During the three and six months
ended June 30, 2007 the Company recorded a provision for income taxes of
$36,007,600 and $35,659,300 respectively.
As a
result of the above described changes in revenues, costs and expenses, the
Company recorded a losses of $3,466,500 and $1,749,900 during of the six and
three months ended June 30, 2008 respectively or a losses of $0.15 per share for
the six months ended June 30, 2008 and a loss of $0.07 per share for the quarter
ended June 30, 2008. During the six and three months ended June 30,
2007 the Company recorded gains of $58.0 million or $2.94 per share basic, and
$59.3 million or $2.95 per share basic.
Three
and Six Months Ended June 30, 2007 compared with the Three and Six Months Ended
June 30, 2006
The sale
of uranium assets to Uranium One resulted in net income before taxes of
$93,636,500 and $95,303,000 for the six and three months ended June 30, 2007
respectively. This is an increase in earnings before taxes of
$100,982,500 and $101,539,200 respectively from the reported losses of the six
and three months ended June 30, 2006. The net earnings after taxes
for the six and three months ended June 30, 2007 were $57,977,200 and
$59,295,400 respectively or $2.94 and $2.95 per share basic and $2.63 and $2.65
per share diluted.
Operating
revenues for the six months ended June 30, 2007 were comparable to those
recorded during the six months ended June 30, 2006. Revenues from
real estate operations during the six months ended June 30, 2007 increased by
$81,300 over operating revenues for the six months ended June 30, 2006 due to
increased revenues relating to real estate operations in southern
Utah.
Operating
costs and expenses increased during the six months ended June 30, 2007 by
$5,552,900 over those recorded during the six months ended June 30,
2006. The increase came as a result of increased activity on the
Company’s mineral claims, $612,200, the vast majority of which were sold to
Uranium One and General and Administrative expenses which increased by
$4,908,000 primarily as a result of employee compensation. Components
of that compensation are (1) a cash bonus of $4,887,000 gross cash bonus to all
employees for extraordinary service related to the April 30, 2007 sale of the
uranium assets to Uranium One; (2) each outside director was paid a
one time bonus of $40,000 at the closing of the Uranium One sale, and (3) June
22, 2007, the shareholders of the Company approved the payment of $649,500 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.
During
the six months ended June 30, 2007, the Company recorded $1,822,200 from the
gain on the sale of assets as compared to a gain on the sale of assets of
$2,823,500 during the six months ended June 30, 2006. This reduction
of $1,001,300 was as a result of a reduction in the payments received from UPC
during the six months ended June 30, 2007 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. An offset to
the reduction of UPC payments was the receipt of 285,632 shares of Kobex common
stock valued at $750,000. These 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
shares of Uranium One were recorded at April 30, 2007 at the then market price
for Uranium One common shares of $15.04 per share. The sale of
4,900,000 the Uranium One shares at an average net sales price of $13.65 per
share resulted in a loss during the quarter ended June 30, 2007 of
$6,837,100. Included in this net loss are commissions and a bulk
discount of $1,799,000. The balance is due to a reduction in the
market price of the Uranium One shares. At June 30, 2007 the Company
had an additional 1,707,606 shares of Uranium One common stock which were all
sold in July 2007.
Along
with the sale of the Uranium One common stock, the Company sold its remaining
shares of UPC common stock during the six months ended June 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 $29,000 loss on the market valuation of shares of
Enterra Energy Trust (“Enterra”) held by one of its subsidiaries. The
sales of the Uranium One, UPC and the market value adjustment of the Enterra
shares resulted in a net loss from the sale of marketable securities during the
six months ended June 30, 2007 of $6,091,400. There were no sales of
marketable securities during the six months ended June 30, 2006.
During
the three and six months ended June 30, 2007 the Company recorded gains based on
foreign exchange rates of $516,600. This gain was as a result of the
sale of the sale of Uranium One common stock, $394,200; the receipt of
additional shares of Sutter common stock in payment of debt to USECC, $108,400;
and the conversion of Sutter expenditures paid in Canada of
$14,000.
The sale
of the Company’s uranium assets to Uranium One resulted in a net gain before
taxes of $111,728,200 during both the three and six months ended June 30,
2007.
The
Company recorded a minority interest in the gain of consolidated subsidiaries of
$3,698,600 for the six months ended June 30, 2007 and $3,716,800 for the quarter
then ended. The minority interest gains increased when compared to
minority interest losses of $47,600 and $43,400 during the six and three months
ended June 30, 2006 respectively. The minority interest gain in
consolidated subsidiaries recorded during the six months ended June 30, 2007 was
primarily the minority interest gain of $3,711,500 of Crested. This
amount was offset by a minority loss during the six months ended June 30, 2007
of $12,900 from two small consolidated subsidiaries. On a
consolidated basis, all previous minority interest losses of Crested that were
absorbed by the USE in consolidation have been fully reinstated through June 30,
2007.
During
the three and six months ended June 30, 2006 the Company recorded losses from
the valuation of derivatives and the exchange of Enterra shares. The
Enterra shares were sold prior to the six months ended June 30, 2007 so there
was no similar activity during the six months ended June 30, 2007.
The net
gain of $57,977,200 during the six months ended June 30, 2007 resulted in
positive retained earnings for the Company of $16,743,400 from a accumulated
deficit at December 31, 2006 of $39,101,900.
Critical Accounting
Policies
Principles of Consolidation –
The Company used the equity method of accounting in the consolidation of SGMI at
December 31, 2007. All material inter-company profits, transactions
and balances have been eliminated.
Marketable Securities - The
Company accounts for its marketable securities as (1) held-to-maturity, (2)
available-for-sale and (3) trading. The Company holds short-term
securities which have maturities of greater than three months but less than one
year from the date of purchase. These securities are classified as
held-to-maturity based on the Company's intent to hold such securities to the
maturity date. All held-to-maturity securities are U.S. Government
securities and are stated at amortized cost, which approximates fair market
value. Income related to these securities is reported as a component
of interest income. The Company's available-for-sale securities are
carried at fair value with net unrealized gain or (loss) recorded as a separate
component of shareholders' equity. If a decline in fair value of
held-to-maturity securities is determined to be other than temporary, the
investment is written down to fair value. Based on the Company's intent to sell
the securities, its equity securities are reported as trading
securities.
Mineral Claims - We follow
the full cost method of accounting for mineral
properties. Accordingly, all costs associated with acquisition,
development and capital equipment as well as construction of plant relating to
mineral properties are capitalized and are subject to ceiling tests to ensure
the carrying value does not exceed the fair market value. All
associated general and administrative as well as exploration costs and expenses
associated with mineral properties are expensed when incurred.
All
capitalized costs of mineral properties subject to amortization and the
estimated future costs to develop proved reserves are amortized by applying the
unit-of-production method using estimates of proved
reserves. Investments in unproven properties and major construction
and development projects are not amortized until proven reserves associated with
the projects can be determined or until impairment occurs.
If the
sum of estimated future cash flows on an undiscounted basis is less than the
carrying amount of the related asset, an asset impairment is considered to
exist. The related impairment loss is measured by comparing estimated
future cash flows on a discounted basis to the carrying amount of the
asset. Changes in significant assumptions underlying future cash flow
estimates may have a material effect on the Company's financial position and
results of operations. An uneconomic commodity market price, if
sustained for an extended period of time, or an inability to obtain financing
necessary to develop mineral interests, may result in asset
impairment. If the results of an assessment indicate that the
properties are impaired, the capitalized cost of the property is
expensed.
Asset Impairments - We assess
the impairment of property and equipment whenever events or circumstances
indicate that the carrying value may not be recoverable.
Asset Retirement Obligations
- The Company records the fair value of the reclamation liability on its mining
properties as of the date that the liability is incurred. The Company
reviews the liability each quarter and determines if a change in estimate is
required as well as accretes the total liability on a quarterly basis for the
future liability. Final determinations are made during the fourth
quarter of each year. The Company deducts any actual funds expended
for reclamation during the quarter in which it occurs.
Assets Held for Sale – Long
lived assets that will be sold within one year of the financial statements are
classified as current. At June 30, 2008 and December 31, 2007, the
Company believed that its majority ownership position in SGMI and its used
corporate aircraft, respectively, would be sold within a twelve month
period. The used corporate aircraft was sold during the six months
ended June 30, 2008.
Revenue Recognition -
Revenues are reported on a gross revenue basis and are recorded at the time
services are provided or the commodity is sold. Sales of proved and unproved
properties are accounted for as adjustments of capitalized costs with no gain or
loss recognized, unless such adjustments would significantly alter the
relationship between capitalized costs and proved reserves, in which case the
gain or loss is recognized in income.
Income Taxes - The Company
recognizes deferred income tax assets and liabilities for the expected future
income tax consequences, based on enacted tax laws, of temporary differences
between the financial reporting and tax basis of assets, liabilities and carry
forwards. The Company recognizes deferred tax assets for the expected
future effects of all deductible temporary differences, loss carry forwards and
tax credit carry forwards. Deferred tax assets are reduced, if deemed
necessary, by a valuation allowance for any tax benefits which, based on current
circumstances, are not expected to be realized.
Use of Accounting Estimates -
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Contractual
Obligations
We had
three divisions of contractual obligations at June 30, 2008: Debt relating to a
construction loan of $13,922,900, long term debt of $224,700 and asset
retirement obligations of $114,500. The construction loan will be
paid within the next nine months by a long term financing
facility. The long term debt will be paid over a period of three
years and the retirement obligations will be retired during the next 34
years. The following table shows the scheduled debt payment and
expenditures for budgeted asset retirement obligations:
|
Payments
due by period
|
||||||||||||||||||||
|
Less
|
One
to
|
Three
to
|
More
than
|
|||||||||||||||||
|
than
one
|
Three
|
Five
|
Five
|
|||||||||||||||||
|
Total
|
Year
|
Years
|
Years
|
Years
|
||||||||||||||||
|
Short-term
debt obligations
|
$ | 13,922,900 | $ | 13,922,900 | $ | -- | $ | -- | $ | -- | ||||||||||
|
Long-term
debt obligations
|
224,700 | 71,900 | 152,800 | -- | -- | |||||||||||||||
|
Other
long-term liabilities
|
114,500 | -- | -- | -- | 114,500 | |||||||||||||||
|
Totals
|
$ | 14,262,100 | $ | 13,994,800 | $ | 152,800 | $ | -- | $ | 114,500 | ||||||||||
ITEM 3. Quantitative and Qualitative
Disclosures About Market Risk
None
ITEM 4. Controls and
Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and procedures,
our management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and our management is required to apply its judgment
in evaluating the cost-benefit relationship of possible controls and
procedures.
As of
June 30, 2008, the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective at the reasonable assurance level.
There
have not been any changes in our internal controls over financial reporting
during the first six months of 2008 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
PART
II. OTHER INFORMATION
ITEM 1. Legal
Proceedings
Material
legal proceedings pending at June 30, 2008, and developments in those
proceedings from that date to the date this Quarterly Report is filed, are
summarized below. The status of the legal proceedings, which were
pending during the year has either not changed, been settled or is otherwise
immaterial.
Water
Rights Litigation – Lucky Jack Molybdenum Property
Prior to
the transfer of the Lucky Jack molybdenum property (formerly the Mount Emmons
property) from Phelps Dodge Corporation (“PD”) and Mount Emmons Mining Company
(“MEMCO”) to USE 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 USE) were filed and approved by the Water
Court. These cases are as follows:
|
|
1.
|
Concerning the
Application for Water Rights of Virgil and Lee Spann Ranches, Inc.,
Case No. 03CW033, 03CW034, 03CW035, 03CW036 and
03CW037. These related cases involve the Spann Ranches, Inc.’s
Water Court applications to change the point of diversion through
alternative points for the purpose of rotating a portion of their senior
water rights between ditches to maximize beneficial use in the event of a
major downstream senior call. MEMCO filed Statements of
Opposition to ensure that the final decrees to be issued by the Water
Court contain terms and conditions sufficient to protect MEMCO’s water
rights from material injury. On May 12, 2008, the Water Court
entered an Order for Dismissal without prejudice on these pending cases
for inactivity. The Applicant Spann Ranch failed to submit
proposed decrees to the parties.
|
|
|
2.
|
Concerning the
Application for Water Rights of the Town of Crested Butte, Case No.
02CW63. This case involves an application filed by the Town of
Crested Butte to provide for an alternative point of
diversion. MEMCO filed a Statement of Opposition to ensure that
the final decree to be issued by the Water Court contains terms and
conditions sufficient to protect MEMCO’s water rights from material
injury. The Town of Crested Butte and USE have reached a
settlement to protect USE’s water rights pursuant to a proposed final
decree, which will be submitted with a Stipulation signed by the parties
to the Water Court for its
approval.
|
|
|
3.
|
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 Mt. Emmons Iron Bog Spring, located in the vicinity of
the Lucky Jack property. 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.
|
|
|
4.
|
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. USECC 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 the future final decree to be issued by the Water
Court. Future Water Court proceedings in this case will involve
quantification of the in-stream flows claimed for the
Black Canyon Park.
|
Moratorium Related to the
Crested Butte Watershed
On August
7, 2007, the Town of Crested Butte, Colorado issued a temporary moratorium on
development activities within its watershed that were not ongoing at the
effective date of the moratorium, until an updated Ordinance Amending the Towns’
Watershed Protection District Ordinance (“Watershed Ordinance”) could be
adopted. On May 19, 2008, the Town Counsel adopted a revised
Watershed Ordinance.
USE
intends to work with the Town to proceed with the necessary rehabilitation
activities, in a manner which will be consistent with applicable rules,
regulations, and statutes, including applicable provisions of the Watershed
Ordinance. It is possible that unexpected delays, and/or increased
costs, may be encountered in developing a new mine plan for the Lucky Jack
property as a result of the revised Watershed Ordinance.
Appeal
of Approval of Notice of Intent to Conduct Prospecting for the Lucky Jack
Molybdenum Property
On March
8, 2008, the High Country Citizens’ Alliance (‘HCCA”) filed a request for
hearing before the Colorado Land Reclamation Board of the approval of a Notice
of Intent to Conduct Prospecting Notice for the Lucky Jack 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 collect
by Amax in the late 1970’s.
On March
28, 2008 USE 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 July
11, 2008 HCCA filed an appeal with the District Court, City and County of
Denver, Colorado in July, 2008, seeking certiorari relief (i) on procedural
grounds, that the Board’s proceedings and order did not comply with the
procedures mandated by the Colorado Administrative Procedure Act, the Colorado
Mined Land Reclamation Act, and the rules of the Board; and (ii) on substantive
grounds, that the Board’s determination that it lacked jurisdiction to order a
public hearing on the NOI was arbitrary because USE’s proposed activities at the
Lucky Jack property are “development” work, not “prospecting,” as those terms
are defined under the Mined Land Reclamation Act, and therefore the Board’s
authorization of the NOI should be the subject of an open
hearing.
USE
believes that the work at the property is prospecting in nature, not
development, and therefore is not subject to the public hearing provisions of
Colorado law. USE believes that the Board’s decision will be upheld
by the District Court. USE will coordinate its response with the
Colorado Attorney General’s Office, which will file an answer on behalf of the
Board and the Division of Reclamation, Mining and Safety.
The
timing and results of this proceeding are not predicted. USE does not
believe that an adverse result would adversely its financial condition or
results of operations.
ITEM 1A. Risk
Factors
Please
refer to Risk Factors in the Company’s Form 10K for the year ended December 31,
2007.
ITEM 2. Changes in Securities and
Use of Proceeds
During
the six months ended June 30, 2008, the Company issued a total of 491,698 shares
of its common stock. These 491,698 shares were issued as new
issuances as a result of the exercise of 446,698 warrants, and the issuance of
45,000 shares pursuant to the 2001 Stock Compensation Plan. The
Company also purchased and cancelled 551,195 shares of its common stock under
its Stock Buyback Plan during the six months ended June 30, 2008.
On June
22, 2007 the Board of Directors of the Company approved a share buyback program
for up to $5.0 million in common stock. The following table sets
forth the activity under the stock buyback plan during since inception through
June 30, 2008.
|
Number
|
Average
|
Total
shares
|
Maximum
|
|||||||||||||
|
of
shares
|
per
share
|
purchased
|
value
of shares
|
|||||||||||||
|
Period
|
purchased
|
price
|
under
plan
|
to
be purchased
|
||||||||||||
|
Inception
- June 22, 2007
|
$ | 5,000,000 | ||||||||||||||
|
July
1, through December 31, 2007
|
228,000 | $ | 4.59 | 228,000 | $ | 3,952,700 | ||||||||||
|
January
1, 2008 through March 31, 2008
|
196,960 | $ | 4.16 | 424,960 | $ | 3,132,400 | ||||||||||
|
April
1, 2008 through June 30, 2008
|
354,235 | $ | 3.03 | 779,195 | $ | 2,060,700 | ||||||||||
|
Totals
|
779,195 | $ | 3.77 | |||||||||||||
ITEM 3. Defaults Upon Senior
Securities
Not
Applicable
ITEM 4. Submission of Matter to a
Vote of Shareholders
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
|
ITEM 5. Other
Information
Not
Applicable
ITEM 6. Exhibits and Reports on Form
8-K
|
(a)
|
Exhibits.
|
||
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-15(e) / Rule
15d-15(e)
|
||
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a) / Rule
15(e)/15d-15(e)
|
||
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
by Section 906 of the Sarbanes-Oxley Act of 2002
|
||
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
by Section 906 of the Sarbanes-Oxley Act of 2002
|
||
|
(b)
|
Reports on Form
8-K. The Company filed seven (7) reports on Form 8-K for
the quarter ended June 30, 2008. The events reported were as
follows:
|
||
|
1.
|
The
report filed on April 1, 2008, under Item 1.02 referenced Kobex Resources
Ltd. termination of Exploration, Operating and Mine Development
Agreement.
|
||
|
2.
|
The
report filed on April 30, 2008, under Item 8.01 referenced the engagement
of an engineering firm for the Lucky Jack Project.
|
||
|
3.
|
The
report filed on May 12, 2008, under Item 8.01 referenced the operations
update and conference call.
|
||
|
4.
|
The
report filed on May 14, 2008, under Item 8.01 referenced the purchase of
4.55% working interest in a South Louisiana oil and gas area of mutual
interest.
|
||
|
5.
|
The
report filed on June 13, 2008, under Item 8.01 referenced the Agreement
for USE to sell shares in Sutter Gold Mining, Inc.
|
||
|
6.
|
The
report filed on June 19, 2008, under Item 8.01 referenced the decision of
the Colorado Mined Land Reclamation Board regarding the Lucky Jack
Project.
|
||
|
7.
|
The
report (8-K/A) filed on June 19, 2008, under Item 8.01 is an amendment to
the report noted in 6 above.
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this Report to be signed on its behalf by the undersigned, there unto
duly authorized.
|
U.S.
ENERGY CORP.
|
||||
|
(Company)
|
||||
|
Date:
August 8, 2008
|
By:
|
/s/
Keith G. Larsen
|
||
|
KEITH
G. LARSEN,
|
||||
|
Chairman
and CEO
|
||||
|
Date:
August 8, 2008
|
By:
|
/s/
Robert Scott Lorimer
|
||
|
ROBERT
SCOTT LORIMER
|
||||
|
Principal
Financial Officer and
|
||||
|
Chief
Accounting Officer
|
||||
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