The
market prices of USE common stock and Crested common stock will fluctuate
prior
to the merger. You should obtain current market quotations before
voting.
Material
United States Federal Income Tax Consequences of the Merger to Crested
Shareholders (page 98)
The
merger is intended to qualify as a reorganization within the meaning
of Section
368(a) of the Code, so that for U.S. federal income tax purposes you
will not
recognize gain or loss on the receipt of USE shares as part of the
merger
consideration. The merger is conditioned on the receipt of an opinion
from Conrad Henderson, LLC, certified public accountants, that the
merger will
qualify as a reorganization for United States federal income tax
purposes. The officers, directors and employees of USE will recognize
gain on the receipt of the USE shares they exchange for the Crested
shares
acquired on exercise of non-qualified Crested options.
If
you
own 500 or fewer shares of Crested and elect to receive cash instead
of USE
shares, and USE determines to pay cash to all such electing persons,
you will
recognize gain or loss depending on your basis in your Crested
shares.
For
a
more complete discussion of the United States federal income tax consequences
of
the merger, see “MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER.”
Tax
matters can be complicated and the tax consequences of the merger to
Crested
shareholders will depend on each shareholder’s particular tax
situation. Crested shareholders should consult their tax advisors to
understand fully the tax consequences of the merger to
them.
Opinion
of the Crested Financial Advisor (page 80)
In
connection with the merger, the Crested board of directors appointed
its two
independent directors to comprise the special committee of the board
of
directors for Crested. The Crested special committee retained
Neidiger, Tucker, Bruner Inc. (“NTB”) as its independent financial
advisor. Crested’s special committee of the board of directors has
received NTB’s written opinion as to the fairness, from a financial point of
view, of the merger consideration to be received by the holders of
Crested
common stock, other than USE holders, subject to the assumptions and
qualifications in such opinion. The full text of NTB’s opinion, dated
October 12, 2007, is, as authorized by NTB, attached to this proxy
statement/prospectus as Appendix C. You are encouraged to read the
NTB opinion carefully in its entirety for a description of the assumptions
made,
procedures followed, matters considered and limitations on the review
undertaken. NTB’s opinion was provided to the Crested board in its
evaluation of the proposed merger. The opinion does not address any
other aspect of the merger or any related transaction and does not
constitute a
recommendation to any Crested shareholder with respect to any matters
relating
to the proposed merger.
Crested
Shareholders Have Dissenters’ Rights of Appraisal (page
96)
Under
the
Colorado Business Corporation Act, Crested shareholders have the right
to
dissent from the merger and seek payment in cash of the fair value
of their
Crested shares. See “DISSENTERS’ RIGHTS” on page 96.
The
Voting Agreement (page 95)
The
voting agreement is attached as Appendix B. We urge you to read this
agreement as it governs how the Crested shares held by USE and by some
of the
affiliates of USE are to be voted.
Conditions
that Must Be Satisfied or Waived for the Merger to Occur (page
93)
As
more
fully described in this proxy statement/prospectus and the merger agreement,
the
completion of the merger depends on a number of conditions being satisfied
or
waived, including receipt of Crested shareholder approval and effectiveness
of
this registration statement.
Termination
of the Merger Agreement (page 94)
The
merger agreement may be terminated before the special meeting under
specific
conditions. In addition, even if the minority shareholders of Crested
adopt the merger agreement, the merger agreement may be terminated
by mutual
written consent, or for other reasons. Under certain circumstances,
termination fees would have to be paid. See “THE MERGER AGEEMENT” on
page 91 of this proxy statement/prospectus.
Crested’s
and USE’s Directors and Officers Have Financial Interests in the Merger (page
89)
All
of
Crested’s directors and officers have interests in the merger as
individuals. In addition, the Crested officers and directors who also
serve as officers and directors of USE hold options to buy Crested
shares and
two officers own Crested shares now. The Crested independent
directors own shares of Crested, and, like the officers and other directors,
will receive USE shares, on the same exchange ratio as all other Crested
shareholders, in the merger, if it is consummated. Under the merger
agreement, all of the Crested officers and directors are entitled to
indemnification by USE for events related to the merger.
All
but
one of the USE directors and officers, several of whom also are directors
and
officers of Crested, hold qualified and nonqualified options to buy
Crested
stock. A recently retired officer of USE and Crested (Daniel P.
Svilar) and a recently retired director of USE (Don C. Anderson) also
hold
qualified and nonqualified Crested options. If the merger is
completed, the options will be exercised on a cashless basis and the
Crested
shares will be converted to USE shares using the same 2:1 exchange
ratio as
applies to the minority Crested shareholders. Crested will pay the
income taxes which will be owed on cashless exercise of the nonqualified
Crested options by such persons as well as USE officers.
The
independent directors, as members of Crested’s special committee, were aware of
all these factors and considered them in approving the merger agreement
and the
amendment thereto.
The
Rights of Crested Shareholders Will Be Governed by Different Laws and
New
Governing Documents After the Merger (page 101)
USE
is a
Wyoming corporation and Crested is a Colorado corporation. After the
merger, Crested shareholders will own stock in a Wyoming corporation, and
their rights will differ in some significant respects from their current
rights
in Colorado corporation.
USE
is
listed on the Nasdaq Capital Market, and Crested is traded on the
Over-the-Counter Bulletin Board. As shareholders of USE after the
merger, Crested shareholders will have the right to vote on certain
matters
under the Nasdaq Market Place rules. These rules do not apply to
OTCBB traded companies.
Accounting
Treatment of the Merger by USE (page 98)
USE
will
account for the merger as a purchase for financial reporting
purposes.
USE
Shareholder Approval Is Not Required
USE
shareholders are not required to approve the issuance of the USE shares
in the
merger, and the board of directors of USE will not ask the USE shareholders
to
vote on the merger agreement.
Regulatory
Requirements
Other
than approval of the registration statement by the Securities and Exchange
Commission, of which this proxy statement/prospectus is a part, neither
USE nor
Crested is aware of any federal or state regulatory requirements that
must be
complied with or approval that must be obtained in connection with
the
merger.
Risk
Factors (page 19)
In
evaluating the merger and the merger agreement and before deciding
how to vote
your Crested shares, please carefully read this proxy statement/prospectus
and
especially consider certain factors, risks and uncertainties discussed
in the
section entitled “RISK FACTORS” beginning on page 19.
Restrictions
on the Ability to Sell USE Common Stock
All
the
USE shares which you receive in the merger will be freely transferable
unless
you are considered an “affiliate” of either Crested or USE under the Securities
Act of 1933 (the “Securities Act”). Affiliates will be permitted to sell the USE
shares they acquire in the merger under the SEC’s rules 144 and
145. The volume limitations, notice of sale and other requirements of
the rule would have to be satisfied for such sales, but the two-year
holding
requirement of the rule will not apply. This proxy statement/
prospectus does not register the resale of USE shares held by
affiliates.
Surrender
of Stock Certificates
Following
the effective time of the merger, USE will cause a letter of transmittal
to be
mailed to all holders of Crested shares containing instructions for
surrendering
their certificates. Certificates should not be surrendered until the
letter of transmittal is received, fully completed and returned.
The
Special Meeting of Crested Shareholders (page 70)
The
special meeting of the Crested shareholders will be held on November
26, 2007,
at 10:00 a.m., local time, at the offices of Crested , 877 N. 8th
W., Riverton,
Wyoming 82501.
The
purpose of the meeting is to consider and vote upon (i) a proposal
to adopt the
merger agreement and (ii) such other business as may properly come
before the
meeting or any adjournment or postponement of the meeting.
Crested’s
board of directors has fixed the close of business on October 10, 2007
as the
record date for determination of Crested shareholders entitled to notice
of and
to vote at the meeting. As of the close of business on October 10,
2007, there were 17,382,704 shares of Crested outstanding, which were
held of
record by approximately 1,618 shareholders. A majority of these
shares, present in person or represented by proxy, will constitute
a quorum for
the transaction of business at the meeting. Each Crested shareholder
is entitled to one vote for each share of Crested held as of the record
date.
Adoption
of the merger agreement by the holders of a majority of the Crested
shares
outstanding on the record date is required by Colorado law. The
merger agreement requires approval by the holders of a majority of
the minority
shares of Crested; 2,487,866 shares constitutes such “majority of the minority”
(not including those who have agreed to vote “in line” with the vote of
the majority of the minority).
USE,
its
consolidated subsidiaries, those of its officers, a retired USE officer
the USE
directors, and the Crested directors, who own Crested stock, have agreed
to vote
consistent with the majority of the minority. As of August 21, 2007
USE and such persons together own 71.4% of the Crested shares. In the
event that the merger is consummated officers, directors and employees
of USE
will be allowed to exercise their options on a cashless basis and receive
an
additional 394,398 shares of Crested for a total ownership by USE,
its
consolidated subsidiaries, its officers, directors, employees, and
the Crested
directors of 72.0% of the outstanding Crested shares immediately prior
to the
merger. Please see “THE VOTING AGREEMENT” beginning on page
95.
Before
you vote, carefully consider the risks described below in addition
to the other
information in this proxy statement/prospectus, including the section
entitled
“Cautionary Statement Regarding Forward-Looking Statements.” By
voting in favor of the merger, you will be choosing to invest in
USE’s common stock. If any of the following risks actually
occur, USE’s business, financial condition or results of operations could be
materially adversely affected, the value of USE’s shares could decline, and you
could lose all or part of your investment.
Risks
Relating to the Merger
The
value of the USE shares that you will receive in the merger may vary
as a result
of the fixed exchange ratio and fluctuations in the price of USE’s
stock.
The
2
Crested shares for 1 USE share exchange ratio is fixed. When the
exchange ratio was approved by the two companies’ boards of directors on
December 20, 2006, the ratio represented a premium of about 12% in
the value of the Crested minority shares (if the merger had closed
that day) to
the relative stock prices between the two companies for the 30 days
ended
December 18, 2006.
You
may
not realize this premium when you sell your USE shares. If USE’s
market price decreases before the merger is consummated, the value
of the merger
consideration to be received by Crested shareholders will
decrease. Stock price variations could be the result of changes in
the business, operations or prospects of USE, market assessments of
when the
merger will be completed, general market and economic conditions, and
other
factors which are beyond the control of USE or Crested. Please see
recent market prices for USE and Crested stock under “COMPARATIVE MARKET
PRICES AND DIVIDENDS.”
If
the conditions to the merger are not met, the merger may not
occur.
Specific
conditions in the merger agreement must be satisfied or waived to complete
the
merger. If the conditions are not satisfied or waived, to the extent
permitted by law, the merger will not occur, and each of USE and Crested
may
lose some or all of the intended benefits of the merger. The
following conditions, in addition to other customary closing conditions,
must be
satisfied or waived before USE and Crested are obligated to complete
the
merger:
·
|
there
is no temporary restraining order, preliminary or permanent
injunction or
other order or decree issued by any court of competent jurisdiction
or
other statute, law, rule, legal restraint or prohibition
in effect
preventing the completion of the
merger;
|
·
|
USE’s
shares to be issued in the merger have been approved for
listing on
Nasdaq, subject to official notice of
issuance;
|
·
|
the
merger agreement is adopted by the holders of a majority
of minority
shares of Crested;
|
·
|
holders
of not more than 200,000 Crested shares have dissented from
the merger;
and
|
·
|
at
any time before consummation of the merger, USE’s closing stock price has
not been 20% more or less than the 2-to-1 exchange ratio
as applied to the
Crested stock price, for two or more consecutive trading
days, and neither
USE or Crested has terminated the merger agreement. For
example, if Crested’s price per share is $2.40, the implied value for two
Crested shares under the exchange ratio would be $4.80. Under
those circumstances, if USE’s price is more than $5.768 and Crested’s
price stays at $2.40, or if Crested’s price stays at $2.40 but USE’s price
decreases to less than $3.84, then the merger agreement could
be
terminated by either USE or
Crested.
|
Crested
may waive one or more of the conditions to the merger without re-soliciting
shareholder approval.
Each
of
the conditions to Crested’s obligations to complete the merger may be waived, in
whole or in part, by agreement of USE and Crested if the condition
is an
obligation of both to complete the merger. The board of directors of
Crested may evaluate the materiality of any such waiver to determine
whether an
amendment of this proxy statement/prospectus and re-solicitation of
proxies is
necessary. Crested generally does not expect any such waiver to be
significant enough to require re-solicitation. In the event that any
such waiver is not determined to be significant enough to require
re-solicitation of shareholders, the companies will have the discretion
to
complete the merger without seeking further shareholder approval.
Directors
and executive officers of Crested may have potential conflicts of interest
in
recommending that you vote in favor of the merger.
The
directors and officers of Crested have interests in the merger that
are in
addition to the interests of the minority Crested shareholders. See
“THE MERGER- Crested’s Directors and Officers Have Financial Interests in the
Merger” on page 89.
The
merger agreement restricts Crested’s ability to pursue alternatives to the
merger.
The
merger agreement contains a “no shop” provision that, subject to limited
fiduciary exceptions, restricts Crested’s ability directly or indirectly to
initiate, solicit, encourage or facilitate, discuss or commit to competing
third-party proposals to acquire all or a significant part of
Crested. Further, there are only limited exceptions to Crested’s
agreement that the Crested board of directors will not withdraw, modify
or
qualify in a manner adverse to USE its adoption of the merger or its
recommendation to holders of Crested stock that they vote in favor
of the
adoption of the merger, or recommend any acquisition proposal. Although
the
Crested board of directors is permitted to take these actions if it
determined
that these actions are likely to be required in order for its board
of directors
to comply with its fiduciary duties, doing so in specified situations
could
entitle USE to terminate the merger agreement and to be paid by Crested a
termination fee of 50% of USE’s legal and financial advisory fees.
USE
required that Crested agree to these provisions as a condition to USE’s
willingness to enter into the merger agreement. These provisions
could discourage a potential competing acquiror that might have an
interest in
acquiring all or a significant part of Crested from considering or
proposing an
acquisition, even if it were prepared to pay consideration with a higher
market
value than the consideration USE proposes to pay in the merger, or
might result
in a potential competing acquiror proposing to pay a lower per share
price to
acquire Crested than it might otherwise have proposed to pay due to
the added
expense of the termination fee.
Risks
Relating to USE’s Business
USE
has a history of operating losses.
At
June
30, 2007 USE had $16,743,400 retained earnings compared with an accumulated
deficit of $39,101,900 at December 31, 2006. During the first quarter
of 2007 (ended March 31, 2007), USE recorded a net loss of $1,318,200
and during
the second quarter of 2007 (ended June 30, 2007), USE recorded a gain
of
$59,295,400. During the six months ended June 30, 2007 USE recorded
a loss from
continuing operations of $11,462,500 and a net gain of $57,977,200.
For the year
ended December 31, 2006, USE recorded a loss before a benefit from
income taxes
of $14,279,400 and a net gain after benefit from income taxes of
$1,052,200. The large change in earnings from quarter to quarter is
the nature of the USE business model of acquiring, holding and selling
mineral
properties. The process from acquisition of the properties until
ultimate sale is capital intensive and often takes years to
complete.
Working
capital at June 30, 2007 and December 31, 2006 was $86,664,100 and
$31,730,000,
respectively. Historically, working capital needs have been primarily
met from receipt of funds from liquidating investments, selling partial
interests in mineral properties and selling equity. Although USE
received significant cash proceeds from the sale of the uranium properties
in
April 2007, and has received additional cash from selling the Uranium
One
shares, the development and production of mineral properties is very
capital
intensive. The Luck Jack Property will take significant amounts of
capital to place it into production. USE may seek equity and/or debt
financing for this purpose, which may result in dilution to current
shareholders. Please see the risk factor below captioned “Future
equity transactions, including exercise of options or warrants, could
result in dilution; and registration for public resale of the common
stock in
these transactions may depress stock prices.”
No
recurring business revenues and uncertainties associated with transaction-based
revenues.
Presently
USE does not have an operating business with recurring
revenues. Receipt of funds from selling interests in mineral
properties, or liquidating investments in mineral properties (or the
subsidiaries which hold properties) is unpredictable as to timing,
structure,
and profitability. For example, we began activities in the coalbed
methane sector in 1999 by starting up RMG. RMG used, rather than
provided, capital until it was sold to Enterra Energy Trust in June
2005. In 2003, we acquired stock in Pinnacle by RMG’s contribution of
properties into Pinnacle, but we did not realize a return on the transaction
until September 2006.
Working
capital on hand is expected to be sufficient to fund general and administrative
expenses, and conduct exploration and a limited amount of development
work on
the mineral properties as well as other business ventures USE is pursuing,
including multifamily housing. Although USE currently has working
capital, it will need to continue to seek funding from industry partners
or sell
equity or debt to develop all the projects. Also, it is anticipated
the necessary capital for developing the Lucky Jack Molybdenum Property
will be
available through Kobex to obtain mining and other permits, further
delineate
the mineral resources underground, and plan the mining and processing
operation. However, additional capital (the costs of which would be
shared by USE and Kobex) will be necessary to put the property into
production.
The
interest retained by USE in the Lucky Jack molybdenum property, is
not expected
to generate recurring revenues for several years. In addition, the
mine plan of
Phelps Dodge Corporation (from whom USE and Crested received the property)
and
its predecessor companies encountered opposition from local and environmental
groups, as well as municipal and county government agencies. That
opposition will likely continue and, may result in unexpected delays and
increased costs to get a new mine plan approved.
Uncertainties
in the value of the mineral properties.
While
USE
believes that its mineral properties are valuable, substantial work
and capital
will be needed to establish whether they are in fact valuable.
The
profitable mining and processing of gold by SGMI will also depend on
many
factors, including: receipt of permits and keeping in compliance with
permit
conditions; delineation through extensive drilling and sampling of
sufficient
volumes of mineralized material with sufficient grades to make mining
and
processing economic over time; continued sustained high prices for
gold, and
obtaining the capital required to initiate and sustain mining operations
and
build and operate a gold processing mill.
The
Lucky
Jack Property has been analyzed and explored by its prior
owners. This data will have to be updated to the level of a current
feasibility study to determine the viability of starting mining
operations. Obtaining mining and other permits to begin mining the
molybdenum property may be difficult, even with the assistance of
Kobex. Capital requirements for a molybdenum mining operation will be
substantial.
USE
has
not yet obtained final feasibility studies on any of its mineral
properties. These studies would establish the potential economic
viability of the different properties based on extensive drilling and
sampling;
the design and costs to build and operate mills, the cost of capital,
and other
factors. Feasibility studies can take many months to
complete. These studies are conducted by professional third-party
consulting and engineering firms, and will have to be completed, at
considerable
cost, to determine if the deposits contain proved reserves (i.e., amounts
of
minerals in sufficient grades that can be extracted profitably under
current
commodity pricing assumptions and estimated for development and operating
costs). A feasibility study usually, but not always, must be
completed in order to raise the substantial capital needed to put a
mineral
property into production. USE has not established any reserves (i.e.,
economic deposits of mineralized materials) on any of its properties,
and future
studies may indicate that some or all of the properties will not be
economic to
put into production.
Compliance
with environmental regulations may be
costly.
USE’s
business is regulated by government agencies. Permits are required to
explore for minerals, operate mines and build and operate processing
plants. The regulations under which permits are issued change from
time to time to reflect changes in public policy or scientific understanding
of
issues. If the economics of a project cannot withstand the cost of
complying with changed regulations, USE might decide not to move forward
with
the project.
USE
must
comply with numerous environmental regulations on a continuous basis,
to comply
with United States environmental laws, including the Clean Air Act,
the Clean
Water Act, and the Resource Conservation and Recovery Act
(“RCRA”). For example, water and dust discharged from mines and
tailings from prior mining or milling operations must be monitored
and contained
and reports filed with federal, state and county regulatory
authorities. Additional monitoring and reporting is required by state
and local regulatory agencies. The Abandoned Mine Reclamation Act in
Wyoming and similar laws in other states (for examples, California
for SGMI’s
gold property and Colorado for the Lucky Jack project) impose reclamation
obligations on abandoned mining properties, in addition to or in conjunction
with federal statutes. Environmental regulatory programs create
potential liability for operations, and may result in requirements
to perform
environmental investigations or corrective actions under federal and
state laws
and federal and state Superfund requirements.
Failure
to comply with these regulations could result in substantial fines,
environmental remediation orders and/or potential shut down of the
project until
compliance is achieved. Failure to timely obtain required permits to
start operations at a project could cause delay and/or the failure
of the
project resulting in a potential write-off of the investments
therein.
USE
depends on key personnel.
USE
has a
very limited staff and executive group. These persons are
knowledgeable of USE’s mineral properties and have experience in dealing with
the exploration of mineral properties as well as the financing of
them. The loss of key employees would adversely impact our business,
as finding replacements is difficult as a result of competition for
experienced
personnel in the minerals industry.
USE
will seek additional business activities.
USE’s
interests in SGMI and the Lucky Jack Property are the primary mineral
properties
owned by USE (indirect in the case of SGMI) after the sale of the uranium
assets
to Uranium One. USE intends to acquire other mineral interests, and
pursue other business activities such as real estate development and
oil and gas
exploration. Other than real estate investment opportunities and a
contract to explore for gas and oil with a major industry partner,
USE currently
does not have any agreements in place for other business
opportunities.
We
may be classified as an inadvertent investment
company.
We
are
not engaged in the business of investing, reinvesting, or trading in
securities,
and we do not hold ourselves out as being engaged in those activities.
However,
under the federal Investment Company Act of 1940, a company may be
fall within
the scope of being an “inadvertent investment company” under section 3(a)(1)(C)
of the 1940 Act if the value of its investment securities is more than
40% of
its total assets (exclusive of government securities and cash
items).
As
a
result of the April 30, 2007 sale of our uranium assets to Uranium
One, we
received investment securities (our stock in Uranium One) with a value
in excess
of 40% of the value of our total assets.
An
inadvertent investment company can avoid being classified as an investment
company if it can rely on one of the exclusions under the 1940
Act. One such exclusion, Rule 3a-2 under the 1940 Act, allows an
inadvertent investment company (as a “transient investment company”) a grace
period of one year from the date of classification (in our case, April
30,
2008), to seek to comply with the 40% limit, or with any other available
exclusion. Accordingly, we are taking actions to comply with this 40%
limit from
the present time through April 30, 2008. These actions may include
liquidating
investment securities as necessary to stay within the 40% limit.
As
Rule
3a-2 is available to a company no more than once every three years,
and assuming
no other exclusion were available to us, we would have to keep within
the 40%
limit through April 30, 2010. In any event, we would not intend to
become an
intentional investment company (i.e. engaging in investment and trading
activities in investment securities), even after April 30, 2010.
Classification
as an investment company under the 1940 Act requires registration with
the SEC.
If an investment company fails to register, it would have to stop doing
almost
all business, and its contracts would become voidable. Registration
is time
consuming and restrictive, and we would be very constrained in the
kind of
business we could do as a registered investment company.
There
can
be no assurance that we will be able to accomplish this objective by
April 30,
2008.
Risks
Relating to USE Stock
USE
may issue shares of preferred stock with greater rights than its common
stock.
Although
it has no current plans, arrangements, understandings or agreements
to do so,
USE’s articles of incorporation authorize USE’s board of directors to issue one
or more series of preferred stock and set the terms of the stock without
seeking
approval from holders of the common stock. Preferred stock that is
issued may have preferential rights over USE’s common stock, in terms of
dividends, liquidation rights and voting rights.
Future
equity transactions, including exercise of options or warrants, could
result in
dilution; and registration for public resale of the common stock in
these
transactions may depress stock prices.
From
time
to time, USE has sold restricted stock and warrants, and convertible
debt (or
stock in subsidiary companies, convertible to USE stock), to investors
in
private placements conducted by broker-dealers, or in negotiated
transactions. Because the stock was issued as restricted, the stock
was sold at a discount to market prices, and the exercise price of
the warrants
sometimes, and/or the conversion price for stock in subsidiaries, was
at or
lower than market prices. These transactions caused dilution to
existing shareholders. Also, from time to time, options are issued to
employees, directors and third parties as incentives, with exercise
prices equal
to market prices. Exercise of in-the-money options and warrants will
result in dilution to existing shareholders; the amount of dilution
will depend
on the spread between market and exercise price, and the number of
shares
involved.
Although
it does not intend to do so at this time, USE may continue to raise
capital from
the equity markets using private placements at discounted prices. In
addition, USE may continue to grant options to employees and directors
with
exercise prices equal to market price at the grant date, and in the
future may
sell restricted stock and warrants (or stock in subsidiary companies
convertible
to stock of USE), all of which may result in dilution to existing
shareholders.
Public
resale of such restricted stock, and of stock issued in conversion
of debt or
stock of subsidiary companies, may depress the market price of the
USE
stock.
Dividends
on USE common stock
USE
declared a special cash dividend of $0.10 per share on all outstanding
shares of
its common stock on the record date of July 6, 2007, payable on July
16,
2007. Prior to this dividend, USE has only declared a dividend on one
other occasion, November 1, 1990, when it declared a 1 for 10 share
dividend. Management of USE does not currently anticipate any
dividends to be paid in the near term future but anticipates retaining
earnings
to fund investments and business development.
USE’s
take-over defense mechanisms could discourage some advantageous
transactions.
USE
has
adopted a shareholder rights plan, also known as a poison
pill. The plan is designed to discourage a takeover of USE at
an unfair price. However, it is possible that the board of directors
and the takeover acquirer would not agree on a higher price, in which
case the
takeover might be abandoned, even though the takeover price might be
at a
significant premium to market prices. Therefore, as a result of the
mere existence of the plan, shareholders may not receive the premium
price. See “DESCRIPTION OF USE SECURITIES – Preferred Stock – Series
P Preferred Stock.”
USE’s
stock price likely will continue to be volatile due to several
factors.
In
the 18
months ended June 30, 2007, USE’s stock has traded as low as $3.32 per share and
as high as $7.20 per share. USE believes that some of the factors
which cause this volatility are:
· price
and
volume fluctuations in the stock market generally;
· relatively
small amounts of USE stock trading on any given day;
· fluctuations
in USE’s financial operating results; and
· price
swings in the minerals commodities markets.
You
should expect continued volatility in the stock price after the
merger. It is possible that when you want to sell your USE shares,
USE’s stock price could be lower than what you paid for your Crested shares,
resulting in a loss on your investment.
The
following tables summarize financial information for Crested, using
its audited
financial statements for each of the five fiscal years from December
31, 2002 to
December 31, 2006, and unaudited financial statements at June 30, 2007
and June
30, 2006 and the six months then ended. You should read this
information in conjunction with Crested’s “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” under the caption
“INFORMATION ABOUT CRESTED.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
Year
Ended
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
39,637,400
|
|
|
$ |
3,385,200
|
|
|
$ |
10,751,300
|
|
|
$ |
95,100
|
|
|
$ |
3,800
|
|
|
$ |
3,300
|
|
|
$ |
3,300
|
|
Current
liabilities
|
|
|
13,654,900
|
|
|
|
12,435,800
|
|
|
|
14,482,100
|
|
|
|
10,928,000
|
|
|
|
9,747,300
|
|
|
|
9,408,300
|
|
|
|
8,553,900
|
|
Working
capital (deficit)
|
|
|
25,982,500
|
|
|
|
(9,050,600 |
) |
|
|
(3,730,800 |
) |
|
|
(10,832,900 |
) |
|
|
(9,743,500 |
) |
|
|
(9,405,000 |
) |
|
|
(8,550,600 |
) |
Total
assets
|
|
|
44,470,800
|
|
|
|
8,065,900
|
|
|
|
15,123,000
|
|
|
|
8,682,200
|
|
|
|
2,983,600
|
|
|
|
4,387,100
|
|
|
|
5,889,900
|
|
Long-term
obligations(1)
|
|
|
220,900
|
|
|
|
1,360,600
|
|
|
|
266,600
|
|
|
|
1,260,800
|
|
|
|
1,289,100
|
|
|
|
1,268,900
|
|
|
|
964,000
|
|
Shareholders'
equity (deficit)
|
|
|
30,537,200
|
|
|
|
(5,740,600 |
) |
|
|
364,200
|
|
|
|
(3,516,700 |
) |
|
|
(8,062,900 |
) |
|
|
(6,300,200 |
) |
|
|
(3,638,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Included $53,000, $1,145,000 at June 30, 2007 and June
30, 2006
respectively as well as $51,000, $1,045,200, 1,073,500,
$1,053,300 and
$748,400
|
|
of
accrued reclamation costs on uranium properties at December
31, 2006,
2005, 2004, 2003 and 2002 respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
Income
(loss) before equity in loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
affiliates and income taxes
|
|
|
53,051,900
|
|
|
|
(1,879,600 |
) |
|
|
(157,300 |
) |
|
|
6,341,200
|
|
|
|
(320,000 |
) |
|
|
(263,300 |
) |
|
|
(102,400 |
) |
Equity
in (loss) gain of affiliates
|
|
|
(3,727,500 |
) |
|
|
(344,300 |
) |
|
|
(3,625,600 |
) |
|
|
(1,699,800 |
) |
|
|
(1,447,500 |
) |
|
|
(2,114,600 |
) |
|
|
(1,055,000 |
) |
(Provision
for) Benefit from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Income
Taxes
|
|
|
(17,841,700 |
) |
|
|
--
|
|
|
|
7,633,800
|
|
|
|
(100,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
change
|
|
|
|
|
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(293,800 |
) |
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
31,482,700
|
|
|
$ |
(2,223,900 |
) |
|
$ |
3,850,900
|
|
|
$ |
4,541,400
|
|
|
$ |
(1,767,500 |
) |
|
$ |
(2,671,700 |
) |
|
$ |
(1,157,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share - Basic
|
|
$ |
1.83
|
|
|
$ |
(0.13 |
) |
|
$ |
0.22
|
|
|
$ |
0.26
|
|
|
$ |
(0.10 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share - Diluted
|
|
$ |
1.77
|
|
|
$ |
(0.13 |
) |
|
$ |
0.22
|
|
|
$ |
0.26
|
|
|
$ |
(0.10 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELECTED
CONSOLIDATED HISTORICAL FINANCIAL DATA OF USE
The
following tables summarize financial information for USE, using its
audited
financial statements for each of the five fiscal years ended December
31, 2006,
and its unaudited financial statements for the six months ended June
30, 2007
and 2006.
|
|
Six
Months Ended
|
|
|
Year
Ended
|
|
|
|
June
30,
|
|
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
110,317,400
|
|
|
$ |
19,866,200
|
|
|
$ |
43,325,200
|
|
|
$ |
7,840,600
|
|
|
$ |
5,421,500
|
|
|
$ |
5,191,400
|
|
|
$ |
4,755,300
|
|
Current
liabilities
|
|
|
23,653,300
|
|
|
|
1,339,100
|
|
|
|
11,595,200
|
|
|
|
1,232,200
|
|
|
|
6,355,900
|
|
|
|
1,909,700
|
|
|
|
2,044,400
|
|
Working
capital (deficit)
|
|
|
86,664,100
|
|
|
|
18,527,100
|
|
|
|
31,730,000
|
|
|
|
6,608,400
|
|
|
|
(934,400 |
) |
|
|
3,281,700
|
|
|
|
2,710,900
|
|
Total
assets
|
|
|
123,215,500
|
|
|
|
37,318,100
|
|
|
|
51,901,400
|
|
|
|
38,106,700
|
|
|
|
30,703,700
|
|
|
|
23,929,700
|
|
|
|
28,190,600
|
|
Long-term
obligations(1)
|
|
|
778,200
|
|
|
|
8,602,400
|
|
|
|
882,000
|
|
|
|
7,949,800
|
|
|
|
13,317,400
|
|
|
|
12,036,600
|
|
|
|
14,047,300
|
|
Shareholders'
equity
|
|
|
90,422,100
|
|
|
|
19,818,600
|
|
|
|
32,977,400
|
|
|
|
24,558,200
|
|
|
|
6,281,300
|
|
|
|
6,760,800
|
|
|
|
8,501,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Includes
$129,300, of accrued reclamation costs on properties at
June 30,
2007, $6,138,000 at June 30, 2006, $124,400, at December 31,
2006,
|
|
$5,669,000
at December 31, 2005, $7,882,400 at December 31, 2004,
$7,264,700 at
December 31, 2003 and $8,906,800 at December 31,
2002 respectively.
|
|
SELECTED
CONSOLIDATED HISTORICAL
FINANCIAL DATA OF USE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven
Months
|
|
|
|
|
|
Six
Months Ended
|
|
|
Year
Ended
|
|
|
Ended
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
$ |
325,100
|
|
|
$ |
324,900
|
|
|
$ |
813,400
|
|
|
$ |
849,500
|
|
|
$ |
815,600
|
|
|
$ |
513,500
|
|
|
$ |
673,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
(11,463,500 |
) |
|
|
(5,910,800 |
) |
|
|
(16,670,700 |
) |
|
|
(6,066,900 |
) |
|
|
(4,983,100 |
) |
|
|
(5,066,800 |
) |
|
|
(3,524,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income & expenses
|
|
|
108,798,600
|
|
|
|
(1,482,800 |
) |
|
|
2,302,700
|
|
|
|
(484,000 |
) |
|
|
465,100
|
|
|
|
(311,500 |
) |
|
|
(387,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before minority
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest,
equity in income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
affiliates, income taxes,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discontinued
operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
change
|
|
|
|
97,335,100
|
|
|
|
(7,393,600 |
) |
|
|
(14,368,000 |
) |
|
|
(6,550,900 |
) |
|
|
(4,518,000 |
) |
|
|
(5,378,300 |
) |
|
|
(3,912,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in loss (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
consolidated subsidiaries
|
|
|
(3,698,600 |
) |
|
|
47,600
|
|
|
|
88,600
|
|
|
|
185,000
|
|
|
|
207,800
|
|
|
|
13,000
|
|
|
|
54,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision
for) Benefit from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
|
|
(35,659,300 |
) |
|
|
--
|
|
|
|
15,331,600
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
15,207,400
|
|
|
|
(1,938,500 |
) |
|
|
(2,060,400 |
) |
|
|
17,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
change
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1,615,600
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common shareholders
|
|
$ |
57,977,200
|
|
|
$ |
(7,346,000 |
) |
|
$ |
1,052,200
|
|
|
$ |
8,841,500
|
|
|
$ |
(6,248,700 |
) |
|
$ |
(5,810,100 |
) |
|
$ |
(3,840,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELECTED
CONSOLIDATED HISTORICAL
FINANCIAL DATA OF USE
General
Crested
Corp. is a Colorado corporation formed in 1970 and is in the business
of
acquiring, exploring, developing and/or selling or leasing mineral
properties. Crested and USE originally were independent companies,
with two common affiliates, John L. Larsen and Max T. Evans. Mr.
Evans died in February 2002 and Mr. Larsen died in 2006. In 1982,
Crested and USE formed the USECC Joint Venture to do business
together. See “SUMMARY INFORMATION – The USECC Joint Venture.” From
time to time, USE has funded many of Crested’s obligations because Crested did
not have the funds to pay its share of the obligations. Crested has
paid a portion of this debt by issuing common stock to USE. At
December 31, 2006, Crested owed $13,277,200 to USE. As a result of
Crested receiving one-half of the proceeds from the sale of the uranium
properties to Uranium One, Crested paid in full the amount owed to
USE as of
July 31, 2007.
Historically,
Crested’s business strategy has been, and will continue to be, acquiring
undeveloped and/or developed mineral properties at low acquisition
costs and
then operating, selling, leasing or joint venturing the properties,
or selling
the subsidiary companies to other companies in the mineral sector at
a
profit.
Typically,
projects initially are acquired, financed and operated by Crested and
USE in
their Joint Venture (“SUMMARY INFORMATION – The USECC Joint Venture”
above). From time to time, some of the projects are then transferred
to separate companies organized for that purpose, with the objective
of raising
capital from an outside source for further development and/or joint
venturing
with other companies. Examples include: SGMI for gold, RMG for
coalbed methane and Remington Village, LLC. for real estate.
Recent
Significant Transactions
Sutter
Gold Mining Inc.
USE
and
Crested organized a limited liability company in 1994 to hold and develop
California gold properties. The assets were transferred to Sutter
Gold Mining Company, and activities were funded by continued capital
from USE
and third party investors. In 2004, the corporation completed a
reverse takeover of Globemin Resources Inc. (Toronto Venture Exchange
“SGMI”)
and has raised additional capital from third party investors. In
connection with the reverse takeover, the name was changed to Sutter
Gold Mining
Inc. (“Sutter” or “SGMI”).
On
March
14, 2007 the independent directors of USE, Crested and Sutter negotiated
a
settlement of $2,025,700 in debt due to USE and Crested as of December
31, 2006
for the issuance of 7,621,867 shares of Sutter common stock. The
issuance of these shares was subject to the approval of the Toronto
Stock
Exchange (“TSX”) which was obtained on May 2, 2007. As a result of
the issuance of these shares (at market prices) for debt, USE currently
owns
48.8% of SGMI and Crested owns 5.7%. In addition, USE and Crested
agreed to convert their $4.6 million Contingent Stock Purchase Warrant
which
allowed them to purchase common stock in SGMI into a 5% Net Profits
Interest
Royalty ("NPIR") on its Lincoln Project in California, until the total
amount of
$4.6 million is paid, and a 1% NPIR thereafter.
The
USECC
Joint Venture also is providing, by a Line of Credit and Loan Agreement,
dated
June 20, 2007, a $1.0 million line of credit to SGMI at 12% interest
(interest
payable quarterly). Maturity of all debt incurred under the line of
credit is due June 20, 2009; prepayment without penalty is
allowed. The debt is secured by SGMI properties. The USECC Joint
Venture has the sole option to have SGMI repay the principal amount
of the debt
in common shares; however, interest is not payable in shares. If the
principal is paid in shares of SGMI common stock, such shares would
be issued at
a 10% discount to the 10 days’ volume weighted average price before
payment.
Rocky
Mountain Gas, Inc. and Pinnacle Gas Resources, Inc.
– Coalbed Methane.
From
1999
through mid-2005, USE’s primary business focus was in the CBM business conducted
through RMG, an entity formed in 1999 by USE and Crested. In 2001,
RMG entered into a CBM property acquisition and development arrangement
with a
subsidiary of Carrizo Oil & Gas, a public Houston-based
company. In 2003, RMG and the Carrizo subsidiary contributed CBM
properties to a new corporation, Pinnacle Gas Resources, Inc., in exchange
for
Pinnacle common stock issued to USE and Crested, and Carrizo. At the
same time, Pinnacle received financing from funds affiliated with DLJ
Merchant
Banking.
In
September 2006, USE and Crested sold their Pinnacle shares in a private
transaction for $13.8 million, of which Crested received $4,830,000
in cash
proceeds and recorded a gain on the transaction of $3,794,800. As a
result of the sale of the equity ownership of Pinnacle, Crested and
USE became
obligated to pay Enterra Energy Trust (see below) $2.0 million in either
cash or
stock of USE. Subsequent to September 30, 2006, Crested and USE
agreed to pay the obligation to Enterra with 506,395 shares of USE
common stock
owned by Crested. Through the delivery of these shares of USE common
stock, Crested paid $700,000, representing 35% of the $2.0 million
and its share
of RMG before it was sold, and received a credit on its debt to USE
in the
amount of $1.3 million.
RMG
was
sold to Enterra Energy Trust (TSX: ENT.UN and NYSE: ENT) on June 1,
2005 for
approximately $20 million in cash and securities of Enterra, which
was paid to
USE and Crested. The Enterra securities were subsequently
sold.
SXR
Uranium One
Uranium
-For information on sale of the uranium assets, see “SUMMARY INFORMATION- U.S.
Energy Corp. - Recent Significant Transactions - SXR Uranium One –
Uranium Assets” above.
Kobex
Resources Ltd. – Molybdenum
On
February 28, 2006, Crested and USE re-acquired the Lucky Jack molybdenum
property (formerly the Mount Emmons molybdenum property), located near
Crested Butte, Colorado. The property was returned to Crested and USE
by Phelps Dodge Corporation (“PD”) in accordance with a 1987 Amended Royalty
Deed and Agreement between Crested, USE and Amax Inc. (“Amax”). The
Lucky Jack property includes 25 patented mining claims and approximately
520
unpatented mining claims, which together approximate 5,400 acres.
Crested
and USE are pursuing permitting and development of the Lucky Jack
Property. Development of the property for mining will require
extensive capital and long term planning and permitting
activities. Our agreement with Kobex Resources Ltd. is expected to
provide a significant amount of capital to advance the project, but
added
capital will be required to open and operate a mine.
Molybdic
oxide is an alloy used primarily in specialty steel products for enhanced
corrosion resistance, metal strengthening and heat
resistance. Molybdenum chemicals are used in a number of diverse
applications such as lubricants, additives for water treatment, feedstock
for
the production of pure molybdenum metal and catalysts used for petroleum
refining. Pure molybdenum metal powder products are used in a number
of diverse applications, such as lighting, electronics and specialty
steel
alloys.
Molybdic
oxide prices have recently increased: Annual Metal Week Dealer Oxide
mean prices
for molybdic oxide averaged $25.55 per pound in 2006 compared with
$32.94 in
2005, $16.41 in 2004, $5.32 in 2003 and $3.77 in 2002. The price at
April 13, 2007 was $28.75 per pound. The metallurgical market for
molybdenum is characterized by cyclical and volatile prices, little
product
differentiation and strong competition. In the market, prices are
influenced by production costs of domestic and foreign competitors,
worldwide
economic conditions, world supply/demand balances, inventory levels,
the U.S.
Dollar exchange rate and other factors. Molybdenum prices also are
affected by the demand for end-use products in, for example, the construction,
transportation and durable goods markets. A substantial portion of
world’s annual molybdenum supply is produced as a by-product of copper
mining. By-product production is estimated to account for
approximately 60% of global molybdenum production.
Molybdenum
price experienced continued stability during 2006 and to date in 2007,
with
molybdenum prices in 2005 reaching near historical highs. Production
increases were experienced in by-product copper production and primary
production as metal prices improved throughout the year. Production
in China remains difficult to estimate; however, based on published
reports,
production was negatively impacted in several molybdenum producing
regions due
to safety concerns and operational issues. Although a more stable
supply of western, high-quality materials continued through the
year. The overall market remained in slight deficit during 2006 due
to demand outpacing supply.
· Kobex
Resources Ltd. Agreement
On
April
3, 2007, USE, Crested, and Kobex Resources Ltd. (“Kobex”) (a British Columbia
company traded on the TSX Venture Exchange under the symbol “KBX”), signed a
formal Exploration, Development and Mine Operating Agreement (the “agreement”)
for the Lucky Jack Property.
The
agreement grants Kobex the exclusive option to acquire up to a 50%
undivided
interest in patented and unpatented claims located near Crested Butte,
Colorado,
which are held by USECC, for $50 million. The $50 million to be spent
will be for all project-related expenditures, the cost for a bankable
feasibility study, and option payments to USECC. The balance between
money spent on expenditures and option payments, and $50 million, will
be paid
to USECC in cash.
Expenditures
and Option payments
Date
by When Expenditures
and
Options Must be Paid(1)
|
|
Expenditures
Amount(2)
-
$
|
|
|
Option
Payment
Amount
(3)
-
$
|
|
|
Total
Expenditure
a
nd
Option
Payment
Amount
- $
|
|
|
Cumulative
Total
for
Expenditures
Amounts
and
Option
Payments
- $
|
|
May
22, 2007(4)
|
|
|
-0-
|
|
|
|
750,000
|
|
|
|
750,000
|
|
|
|
750,000
|
|
March
31, 2008
|
|
|
3,500,000
|
(4) |
|
|
1,200,000
|
(4)
|
|
|
4,200,000
|
|
|
|
4,950,000
|
|
Dec.
31, 2008
|
|
|
5,000,000
|
|
|
|
500,000
|
|
|
|
5,500,000
|
|
|
|
10,450,000
|
|
Dec.
31, 2009
|
|
|
5,000,000
|
|
|
|
500,000
|
|
|
|
5,500,000
|
|
|
|
15,950,000
|
|
Dec.
31, 2010
|
|
|
2,500,000
|
|
|
|
500,000
|
|
|
|
3,000,000
|
|
|
|
18,950,000
|
|
Dec.
31, 2011
|
|
|
-0-
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
19,450,000
|
|
Totals
|
|
|
16,000,000
|
|
|
|
3,950,000
|
|
|
|
19,450,000
|
|
|
|
|
|
(1)
|
Any
shortfall in expenditures may be paid direct, in cash, to
USECC. Except for the initial payment of $3,500,000 in
expenditures by March 31, 2008 (which is a firm commitment
of Kobex), if
any expenditures amount is not fulfilled and/or option payment
is not made
by 90 days after the due date, the agreement will be deemed
to have been
terminated by Kobex. However, if Kobex fails to incur an
expenditures amount and/or does not make an option payment
after the date
when Kobex has earned a 15% interest, USE and Crested will
replace Kobex
as manager of the property.
|
|
(2)
|
Expenditures
include, but not limited to, holding and permitting costs for the
Lucky Jack property; geological, geophysical, metallurgical,
and related
work; salaries and wages; and water treatment plant capital
and operating
costs.
|
(3)
|
At
Kobex’ election, option payments may be made in cash or Kobex common
stock
at the market price on issue date. Kobex may accelerate these
payments in advance of the scheduled dates. In May 2007, Kobex
paid the first option payment (US$750,000) by issuing 285,632
shares of
Kobex common stock (142,816 shares to each of USE and Crested),
valued at
the market price for Kobex stock on May 22,
2007.
|
(4)
|
For
this period, Kobex may reduce the option payment by $700,000
by increasing
expenditures by that amount, or apportioning the $700,000
between the
option payment and expenditures.
|
Bankable
Feasibility Study
Kobex
is
required to deliver a bankable feasibility study (the “BFS”) for the Lucky Jack
property, including confirmation of advance permitting or issuance of a
mining permit. If option payments and expenditures, plus the costs to
prepare the BFS, total $50 million before the BFS is completed and
delivered to
USECC, Kobex and USECC shall jointly (50% each) fund completion of
the
BFS.
If,
at
the time of the delivery of a BFS, option payments and expenditures
are less
than $50 million, then, in order to fully exercise the option to acquire
an
aggregate 50% interest in the Lucky Jack property, Kobex shall pay
USECC in cash
the difference between $50 million, and the option payments plus expenditures
plus the costs to prepare and complete the BFS. This amount is the
“study cash difference.” If the BFS is not completed by December 31,
2016, Kobex’ interest will revert to 15% (if an aggregate of $15 million has
been spent on the property by that date and an aggregate of $50 million has
not been spent by that date) and USE and Crested will assume operatorship
of the Lucky Jack property.
Exercise
of the Option
The
option is exercisable in two stages. The “option period” is the time
between April 3, 2007, and that date when Kobex has earned a 50% interest
in the
project.
First
Stage: When Kobex has incurred an initial $15 million in
expenditures, Kobex shall have earned a 15% interest in the Lucky Jack
property.
Second
Stage: If Kobex completes the remaining option payments and
expenditures and delivers the BFS (and pays the study cash difference,
if
applicable), Kobex shall have earned an additional 35% interest (for
a total of
50%). This date will be the “50% option exercise date.”
Management
During the Option Period. On the 50% option exercise date, Kobex
may enter into a 50-50 joint venture or provide USECC, at its sole
discretion,
the option to either (i) continue as a joint venture with Kobex (50%
interest
each); or (ii) have Kobex arrange all future financing for all operations
on the
property, for an additional 15% interest to Kobex (for a total 65%
interest in
the joint venture); or (iii) have Kobex acquire all the outstanding
securities
of an entity formed by USECC to hold its joint venture interest, for
Kobex
stock, with the purchase price determined by negotiation or an independent
valuator.
Throughout
the option period, Kobex shall be the manager of all programs on the
Lucky Jack
property, and its activities shall be subject to the direction and
control of a
management committee. The management committee shall have four
members (two each from USECC and Kobex); in the event of a tie, the
Kobex
members shall have the tie breaking vote. A technical committee, also
with two members from each party, shall provide technical assistance
to the
management committee.
The
Joint Venture. After the 50% option exercise date, a joint
venture (the “Lucky Jack Joint Venture”) shall be deemed formed between USECC
and Kobex, to hold and explore the property; if feasible, develop a
mine on the
Lucky Jack property; and for so long as feasible, operate the mine
and exploit
minerals from the property. USECC and Kobex each shall have a 50%
interest in the joint venture and shall be obligated to contribute
funds to
adopted programs and budgets in proportion to their interests.
Kobex
shall be the manager of the joint venture, subject to the direction
and control
of a management committee, which may be the same as the management
committee during the option period.
Broker’s
Fee. Kobex has paid a broker’s fee in connection with the
agreement in the amount of CAD $463,750. USECC is responsible for 50%
of this fee (CAD $231,875) payable in equal amounts over 5 years in
cash or
common stock of USE, or in shares of Kobex which USECC will have received
for
option payments from Kobex. If the master agreement with Kobex is
terminated for any reason during the five year period, USECC’s obligations to
reimburse Kobex for the broker’s fee also would be terminated.
Continuing
Royalty held by USECC. USE and Crested shall each continue to
retain a 3% gross overriding royalty (for a cumulative 6% gross overriding
royalty) on production from the property, under the Amended and Restated
Royalty
Deeds and Agreement dated May 29, 1987 between USE, Crested, and Mt.
Emmons
Mining Company. USE and Crested’s 6% royalty will be reduced to 5.1%
when Kobex earns a 15% interest in the Lucky Jack property, and will
be reduced
again to 3% when Kobex earns a 50% interest in the property. Kobex
also has an option to eliminate an additional 1% of the 3% royalty
for $10
million in cash after they have earned their 50% interest.
Real
Estate – Remington Village, LLC
On
May
10, 2007, USE and Crested, through a wholly owned limited liability
company,
Remington Village, LLC, closed a contract for the purchase of approximately
10.15 acres of land located in Gillette, Wyoming. The total purchase
price was $1,272,693, paid in cash by USE. The property will be
developed for a 216 unit multifamily complex to meet the strong demand
for
housing resulting from the growth of the energy business in
Wyoming.
USE
also
signed a Development Agreement with P.E.G. Development, LLC (“PEG”) (a private
real estate development company) to assist in obtaining the entitlements,
engineering and architectural plans necessary to construct the complex.
PEG has
considerable development experience, including 10 projects in the inter-Rocky
Mountain region.
The
construction cost of the entire complex is estimated to be approximately
$26.1
million. Local demographics suggest Gillette’s population will
increase from 26,000 to 50,000 by 2015 because of increased coal and
coalbed
methane production in Campbell County, Wyoming, as well as the construction
of
three new coal fired power plants nearby. There is significant unmet
demand for rental units, as there is currently little, if any, available
and
long wait lists. USE is now in negotiations with local large
employers to pre-lease 80% or more of the USE complex for an extended
period of
time.
USE
has
obtained a construction loan commitment from a commercial bank. The equity
component required to be contributed by Remington Village is approximately
$7.5
million; a portion (approximately $3 million) of this amount is comprised
of the
contribution (by USE and Crested) of the purchased real estate to Remington
Village, and payment of inital development expenses related to the
project, and
the balance of approximately $4.5 million will be paid by USE and Crested.
After expenditure of the equity component of the project financing,
Remington
Village will draw down the construction loan. The construction loan is
secured by the property (and repayment is guaranteed by USE); matures
March 1,
2009, and bears interest (payable montly on outstanding balance) at
2.25% above
the LIBOR rate in effect each month. Under the terms of the USECC Joint
Venture, Crested will be responsible to USE for one-half of all development
expense. Construction of the Remington Village project commenced
during the third quarter of 2007 and is projected to be completed in
2008.
USE
intends to expand operations in the multifamily housing sector, with
focus on
the energy basins of Wyoming, Utah, and Colorado where housing demand
is
expected to remain strong.
Oil
and Gas Exploration
USE
signed an Exploration and Area of Mutual Interest agreement with a
Gulf Coast (United States) oil and gas exploration and production
company. USE anticipates it will participate as a 20% working
interest partner in numerous wells that will be drilled over the next
three to
five years. Approximately $3 million has been paid by USE under the
agreement to date. Two prospects have already been leased, and
exploration and development activities should commence in the later
part of the
fourth quarter 2007 or the first quarter of 2008.
USE
believes that numerous prospects will 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 program. USE has retained a technical
advisor to advise it in regards to the program.
Properties
Molybdenum
Crested
and USE re-acquired the Lucky Jack Project (formerly the Mount Emmons
molybdenum property) located near Crested Butte, Colorado on February
28,
2006. The property was returned to Crested and USE by Phelps Dodge
Corporation (“PD”) in accordance with a 1987 Amended Royalty Deed and Agreement
between Company and Amax Inc. (“Amax”). The Lucky Jack Project
includes a total of 25 patented and approximately 520 unpatented mining
claims,
which together approximate 5,400 acres, or over 8 square miles of mining
claims.
Kobex
Resources Ltd. has an option to acquire up to 50% of the Lucky Jack
Project. See “Kobex Resources Ltd. – Molybdenum” discussion
above.
Conveyance
of the property to Crested and USE also included the transfer of ownership
and
operational responsibility of the mine water treatment plant located
on the
properties. The water treatment permit issued under the Colorado
Discharge Permit System (“CDPS”) was assigned to Crested and USE by the Colorado
Department of Health and Environment. Operating costs for the water
treatment plant have been approximately $1.3 million
annually. Crested and USE have hired a contractor to operate the
water treatment plant. Crested and USE will also evaluate the
potential use of the water treatment plant in the milling
operations.
Crested
and USE leased various patented and unpatented mining claims on the
Lucky Jack
molybdenum property to Amax in 1974. In the late 1970s, Amax
delineated a large deposit of molybdenum on the properties, reportedly
containing approximately 155 million tons of mineralized material averaging
0.44% molybdenum disulfide (MoS2). In 1980, Amax constructed a water
treatment plant at the Lucky Jack property to treat water flowing from
old mine
workings and for potential use in milling operations. By 1983, Amax
had reportedly spent an estimated $150 million in the acquisition of
the
property, securing water rights, extensive exploration, ore body delineation,
mine planning, metallurgical testing and other activities involving
the mineral
deposit. Amax was merged into Cyprus Minerals in 1992 to form Cyprus
Amax. PD then acquired the Lucky Jack property project in 1999
through its acquisition of Cyprus Amax. Thereafter, PD acquired
additional water rights and patents to certain claims to mine and mill
the
deposit.
In
its
1992 patent application to the Bureau of Land Management of the United
States
Department of the Interior (“BLM”), Amax stated that the size and grade of the
Mount Emmons deposit was determined to approximate 220 million tons
grading
0.366% molybdenite. In a letter dated April 2, 2004, BLM estimated
that there were about 23 million tons of mineable reserves containing
0.689%
molybdenite, and that about 267 million pounds of molybdenum trioxide
was
recoverable. This letter covered only the high-grade mineralization
which is only a portion of the total mineral deposit delineated to
date. The BLM relied on a mineral report prepared by Western
Mine Engineering (WME) for the U.S. Forest Service, which directed
and
administered the WME contract. WME’s analysis was based upon a price
of $4.61 per pound for molybdic oxide and was used by BLM in determining
that nine claims satisfied the patenting requirement that the mining claims
contain a valuable mineral that could be mined profitably. WME
consulted a variety of sources in preparation of its report, including
a study
prepared in 1990 by American Mine Services, Inc. and a pre-feasibility
report
prepared by Behre Dolbear & Company, Inc. of Denver, CO in
1998.
Uranium
All
uranium properties owned by USE and Crested were sold to Uranium One
on April
30, 2007.
Gold
California. USE’s
and Crested’s subsidiary, SGMI, holds approximately 535 acres of surface and
mineral rights near Sutter Creek, Amador County, California, 45 miles
east-southeast of Sacramento, California, in the central part of the
121-mile-long Mother Lode gold belt. The project is located in the
western Sierra Nevada Mountains at 1,000 to 1,500 feet in
elevation. The year round climate is temperate. Access is
by California State Highway 16 from Sacramento to California State
Highway 49,
then by paved county road approximately .4 miles outside of Sutter
Creek.
A
Conditional Use Permit is being kept current to allow for planned mining
activities on the properties in the future.
Surface
and mineral rights holding costs, and property taxes were $823,300
in
2006. Additionally, SGMI expended $471,324 in a drilling program and
the maintenance of equipment. The leases are for varying terms
and require rental fees, annual royalty payments and payment of real
property
taxes and insurance. A tourist visitor’s center and gift shop has
been set up and leased to a third party for $1,500 per month plus a 4%
gross royalty on revenues. These revenues offset a portion of costs
for holding the SGMI properties.
A
review
of documentation of historic gold production from properties to the
north and
south of the project shows that between 1857 and 1951, a total of 2,350,096
ounces of gold were produced from the project.
Production
was halted in most of the producing mines because of the Second World
War. The report indicates that these very productive mines chased
gold bearing mineralized veins to seven times the depth of SGMI’s present
workings.
The
areas
of large historic gold production are found at the north and south
ends of the
project area, bracketing a one-mile long portion of the Mother Lode
Belt with no
historic gold production, and which hosts the Lincoln and Comet
Zones. The Lincoln and Comet Zones were blind discoveries that did
not outcrop at surface and which represent the first significant new
gold
discoveries made along the Mother Lode Belt in the last 50 years that
are
unrelated to past-producing mines. SGMI believes there is significant
potential for continued new discoveries within the area of the Lincoln
and Comet
Zones, both near the surface and at depth as 90% of the property has
not been
explored.
The
property has been the subject of considerable modern exploration activity,
most
of it centering on the Lincoln and Comet zones, which are adjacent
to each
other. A total of 85,085 feet of drilling has been accomplished in
prior years, with 190 diamond drill holes, and modern underground development
consists of a 2,850-foot declined ramp with 2,400 feet of crosscuts
plus five
raises.
To
further delineate the resource size and connect the Lincoln and Comet
blocks, an
underground and surface drilling program was executed in the latter
part of 2006
and continued into 2007. During 2006, 8,718 feet of underground core
drilling in 32 holes and 1,931 feet of surface core in 2 holes were
completed. Assay results have been received for 14 of the
holes. Notable intercepts in those holes included 24 feet of
0.21 ounces gold per ton in hole 0164 and 9.3 feet of 1.26 ounces gold
per ton
in hole 0165. Drilling is continuing in 2007.
Mexico. In
November, 2006, SGMI signed an Exclusive Option Agreement with The
Alamo Group,
Inc. of Scottsdale, Arizona, to acquire a 100% interest (less royalty
provisions) in the Santa Teresa mineral concession located in the historic
El
Alamo gold mining district southeast of Ensenada, Mexico for Cdn$500,000
in
payments and work commitments.
The
concession contains several historic underground gold mines along its
approximate 1.5 mile long strike length. The concession is located in
the northern Baja peninsula of Mexico approximately 60 miles southeast
of the
port city of Ensenada, Mexico. Mining in the district was initiated
in 1888 with the discovery of placer gold resulting in the El Alamo
Gold Rush of
1888. Operations quickly went underground as miners followed surface
outcroppings of quartz veins down to the shallow water table at about
50
feet. Mining generally ceased in 1905 due to political unrest and the
lack of infrastructure which would have allowed underground production
to
continue below the shallow water table Since 1905, there has been
only limited exploration work conducted in the
district.
Santa
Teresa geology is characterized by a series of thin highly enriched quartz
veins. The vein system located in this area consists of five main parallel,
near
vertical, auriferous quartz veins and numerous shorter parallel companion
veins. As with the California Mother Lode gold system, a majority of
the gold in the quartz is considered "free" gold and amenable to simple
gravity
recovery.
SGMI
has
signed a Letter of Intent (LOI) with Premier Gold Mines Limited (TSX:
“PG”) to
jointly explore Sutter's Santa Teresa mineral concession located in
the historic
and high grade El Alamo Mineral District of Baja California Norte,
Mexico. The Sutter concession is located in the heart of the gold
district which was the subject of the El Alamo Gold Rush of 1888. It
is located some 100 kilometres southeast of Ensenada, Mexico and about
250
kilometres from San Diego, California, USA.
The
proposed joint venture (JV) with Premier provides the funding for immediate
exploration of the project.
Other
Properties
· Fort
Peck
Lustre Field (Montana)
Crested
and USE operated a small oil production facility (two wells) at the
Lustre Oil
Field on the Ft. Peck Indian Reservation in northeastern Montana, for
a fee
based on oil produced. The wells were shut in during April 2006 and
negotiations began to return the wells to the Ft. Peck
Tribes. Negotiations resulted in an agreement, whereby the Tribes
would assume all reclamation obligations on the wells and Crested,
USE and their
co-participants in the wells would deed over to the tribes all tanks,
pump
equipment and down hole equipment to the Tribes. A final distribution
of residual funds from production and the conveyance of wells were
completed in
April 2007.
· Wyoming
Crested
and USE own a 14-acre tract in Riverton, Wyoming, with a two-story
30,400 square
foot office building. The first floor is rented to non-affiliates and
government agencies; the second floor is occupied by Crested and
USE. Crested and USE also own a 10,000 square foot aircraft hangar on
land leased from the City of Riverton; 7,000 square feet of associated
offices
and facilities, three vacant lots covering 16 acres in Fremont County,
Wyoming;
and two city lots and improvements including one small office
building.
· Utah
On
February 27, 2006, USE through its wholly owned subsidiary Plateau
Resources
Limited, Inc. (“Plateau”) re-acquired by foreclosure sale the Ticaboo, Utah
properties. The properties include: a motel, restaurant, lounge,
convenience store, recreational boat storage/service facility, and
improved
residential and mobile home lots. These properties were acquired when
the Shootaring Canyon uranium mill was acquired in 1993. The
mill was part of the uranium assets sold to Uranium One, but the Ticaboo
properties were not included in the sale.
On
April
12, 2006, USE signed a contract with ARAMARK Sports and Entertainment
Services,
Inc., a subsidiary of ARAMARK (NYSE: “RMK”), for the management and operation of
all commercial services at the Ticaboo town site. The initial term of
the contract is for three years, with one three-year extension option
to be
exercised upon the mutual agreement of USE and ARAMARK. Under the
terms of the contract, ARAMARK manages the Ticaboo town site’s 70-room
motel, convenience store, mobile home park, boat storage facility,
restaurant
and lounge. ARAMARK will add Ticaboo to its nationwide
reservation center and website. ARAMARK receives a management
fee and will invest in a marketing program designed to maximize future
revenues.
On
October 15, 2007, Plateau and USE signed a contract to sell the Ticaboo
properties to Uranium One for $2.7 million cash plus certain assumed
liabilites. Crested shares all cash flows, both positive and netgative,
from the Ticaboo properties with USE on a 50-50 basis.
Closing
is anticipated to be on October 23, 2007, subject to obtaining third
party
consents and resolution of a title issue. The contract must be closed by
December 1, 2007 or it will terminate unless extended by the parties
on or
before such date.
Mining
Claim Holdings
Title
Approximately
25 of the Lucky Jack mining claims which Crested and USE received back
from
Phelps Dodge are patented claims; however the majority of the mining
claims
located there are unpatented.
Unpatented
claims are located upon federal and public land pursuant to procedures
established by the General Mining Law, which governs mining claims
and related
activities on federal public lands. Requirements for the location of
a valid mining claim on public land depend on the type of claim being
staked,
but generally include discovery of valuable minerals, erecting a discovery
monument and posting thereon a location notice, marking the boundaries
of the
claim with monuments, and filing a certificate of location with the
county in
which the claim is located and with the BLM. If the statutes and
regulations for the location of a mining claim are complied with, the
locator
obtains a valid possessory right to the contained minerals. To
preserve an otherwise valid claim, a claimant must also pay certain
rental fees
annually to the federal government and make certain additional filings
with the
county and the BLM. Failure to pay such fees or make the required
filing may render the mining claim void or voidable.
Because
mining claims are self-initiated and self-maintained, they possess
some unique
vulnerability not associated with other types of property
interests. It is impossible to ascertain the validity of unpatented
mining claims solely from public records and it can be difficult or
impossible
to confirm that all of the requisite steps have been followed for location
and
maintenance of a claim. If the validity of an unpatented mining claim
is challenged by the government, the claimant has the burden of proving
the
economic feasibility of mining minerals located thereon. However, we
believe that all of our Lucky Jack mining claims are valid and in good
standing.
Proposed
Federal Legislation
The
U.S.
Congress from time to time has considered proposed revisions to the
General
Mining Law, including as recently as in 2007. If these proposed
revisions were enacted, payment of royalties on production of minerals
from
federal lands could be required as well as additional procedural
measures, new
requirements for reclamation of mined land, and other environmental
control
measures. The effect of any revision of the General Mining Law on
operations cannot be determined until enactment, however, it is possible
that
revisions would materially increase the carrying and operating costs
of mineral
properties located on federal unpatented mining claims.
Legal
Proceedings
Except
for matters involving water rights, USE and Crested are not parties
to any
pending legal proceeding. SGMI is defending a quiet title action, to
which USE and Crested are not parties.
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 and Crested 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
and Crested)
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. These cases are pending, and USE
and Crested are awaiting proposed decrees from Applicant
Spann Ranches,
Inc. for consideration.
|
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, USE and Crested have reached
a settlement to protect USECC’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 issued a temporary moratorium
on development
activities within its watershed that were not ongoing at the
effective date of
the moratorium. USE and Crested believe the Lucky Jack Project should
not be affected by this moratorium and they are continuing all
ongoing
activities while reviewing and evaluating the matter.
USE,
Crested, and Kobex intend to work with the Town to proceed with
necessary
rehabilitation activities, in a manner which will be consistent
with Ordinance
23 and other applicable rules, regulations, and statutes. However,
the timing of expected revisions to the Watershed Protection District
Ordinance,
and the nature of such revisions, are not predicted. As a result, it
is possible that unexpected delays, and/or increased costs, may
be encountered
in developing a new mine plan for the Lucky Jack
property.
Quiet
Title Litigation – Sutter Gold Mining Inc.
In
2004,
USECC Gold Limited Liability Company (a predecessor of SGMI) as plaintiff
filed
an action (USECC Gold Limited Liability Company vs. Nevada-Wabash Mining
Company, et al, Case No. 04CV3419) in Superior Court of California, County
of Amador) seeking to quiet title as vested in plaintiff to two patented
mining
claims at the Sutter Gold project. All but one of the approximately
54 defendants (dissolved private corporations and other entities, their
stockholders and/or estates of deceased stockholders) has
defaulted. Plaintiff and the remaining defendant have had settlement
discussions; if a settlement is not obtained, a trial will be
scheduled.
SGMI
is
confident that plaintiff would prevail on the merits in the event of
trial. The subject property includes a portion of the existing
decline prior to intercepting the mineralized resource at the Sutter
Gold
project. The remaining defendant claims a one-fifth interest in one
of the two patented mining claims. If settlement discussions are not
successful, and if plaintiff does not prevail at trial, defendant may
be
entitled to seek remedies related to the property, possibly including
filing a
partition action. The outcome of such post-trial proceedings (if
commenced by defendant following an outcome adverse to plaintiff at
trial) after
filing a petition action cannot be predicted, but management does not
expect any
outcome to ultimately adversely affect SGMI’s plan of operations or financial
condition.
Research
and Development
No
research and development expenditures have been incurred during the
past three
fiscal years.
Environmental
Regulations
General. Operations
are subject to various federal, state and local laws and regulations
regarding
the discharge of materials into the environment or otherwise relating
to the
protection of the environment, including the Clean Air Act, the Clean
Water Act
and the Resource Conservation and Recovery Act (“RCRA”). With respect to mining
operations conducted in Colorado, Abandoned Mine Reclamation Act
and industrial
development and siting laws and regulations also impact USE and
Crested. Similar law and regulations in California affect SGMI
operations.
Management
believes USE and Crested, as well as their subsidiaries, comply in
all material
respects with existing environmental regulations.
Other
Environmental Costs. Actual costs for compliance with
environmental laws may vary considerably from estimates, depending
upon such
factors as changes in environmental law and regulations (e.g., the
new Clean Air
Act), and conditions encountered in minerals exploration and
mining. USE and Crested do not anticipate that expenditures to
comply with law regulating the discharge of materials into the environment,
or
which are otherwise designed to protect the environment, will have
any
substantial adverse impact on our competitive position. Environmental
regulatory programs create potential liability for operations and
may result in
a requirement to perform environmental investigations or corrective
actions
under federal and state laws and federal and state Superfund
requirements.
Employees
As
of
August 21, 2007, Crested had no full-time employees. The expenses
associated with USE's 25 full-time employees, including payroll taxes,
fringe
benefits, bonus plans and retirement plans, are shared with Crested
for all
ventures in which Crested participates on a percentage ownership
basis. Crested uses approximately 50 percent of the time of USE
employees, and reimburses USE on a cost reimbursement basis for their
wages,
payroll taxes, benefits, health insurance and retirement
contributions.
Change
in Accountants
Termination
of relationship with prior audit firm. On January 19, 2007,
Crested received a letter, dated January 10, 2007, from Epstein, Weber
&
Conover, PLC (“EWC”), stating that EWC is combining with Moss Adams LLP, that
EWC therefore had resigned as Crested’s registered independent public accounting
firm, and that the client-auditor relationship between Crested and
EWC had
ceased. EWC advised Crested that all partners of EWC had become partners
of Moss
Adams.
EWC’s
audit reports, dated April 2, 2007, March 3, 2006 and April 11, 2005,
on
Crested’s financial statements for years ended December 31, 2006, December
31,
2005 and 2004 all contained a going concern qualification. In this
respect, the
qualification in the reports on Crested’s statements referenced Crested’s
working capital deficits at December 31, 2006, December 31, 2005, and
at
December 31, 2004, as well as Crested’s history of substantial operating losses.
The qualification in the reports stated that these factors raised substantial
doubt about the ability of Crested to continue as a going concern.
In
connection with the audits of Crested’s financial statements for the fiscal
years ended December 31, 2006. 2005 and 2004, and in the subsequent
interim
periods through June 30, 2007, (1) there were no disagreements with
EWC on any
matter of accounting principles or practices, financial statement disclosure
or
auditing scope and procedure that, if not resolved to the satisfaction
of EWC,
would have caused EWC to make reference to the matter in its report
and (2)
there were no “reportable events” as that term is defined in Item 304 of the
SEC’s Regulation S-K promulgated under the Securities Exchange Act of
1934.
EWC’s
notice to Crested, dated January 10, 2007 but received on January 19,
2007, of
the cessation of the auditor-client relationship, and EWC’s concurrence with the
statements made in the above two paragraphs, are filed as exhibits
to the Form
S-4 registration statement of which this proxy statement/prospectus
forms a
part.
Engagement
of New Audit Firm. Effective February 2, 2007,
Crested engaged Moss Adams LLP to act as its principal independent
accountant to
audit its financial statements for the year ended December 31,
2006. The board of directors approved the decision to engage Moss
Adams LLP.
During
the fiscal years ended December 31, 2006, 2005 and 2004, and for the
interim
period from December 31, 2006 through June 30, 2007, Crested did not
consult
Moss Adams LLP regarding the application of accounting principles to
a specified
transaction, either completed or proposed, or the type of audit opinion
that
might be rendered on the financial statements, or any matter that was
the
subject of a disagreement with Crested’s former accountants or was otherwise a
reportable event.
Crested’s
Management’s Discussion and Analysis
of
Financial Condition and Results of Operations
for
the Six Months Ended June 30, 2007
as
Compared to the six months ended June 30,
2006
The
following is Management’s Discussion and Analysis of significant factors which
have affected Crested’s liquidity, capital resources and results of operations
during the six months ended June 30, 2007 and 2006 and the year ended
December
31, 2006. The discussion contains forward-looking statements that
involve risks and uncertainties.
Forward
Looking Statements
This
Report on Form 10-Q 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.
Overview
of Business
Crested
Corp. ("Crested" or the "Company") has been involved in the acquisition,
exploration, development and production of properties prospective for
hard rock
minerals including lead, zinc, silver, molybdenum, gold, uranium, and
oil and
gas. The Company also has been engaged to a limited extent in
commercial real estate, but only in connection with acquiring mineral
properties
which included commercial real estate.
The
Company manages its operations through a joint venture, USECC Joint
Venture
("USECC"), with its parent company, U.S. Energy Corp. ("USE"). The
Company has entered into partnerships through which it either joint
ventured or
leased properties with non-related parties for the development and
production of
certain of its mineral properties. The Company had no production from
any of its mineral properties during the three and six months ended
June 30,
2007.
Recent
Developments
Sale
of Uranium Assets
On
April
30, 2007, the Company and USE sold all of their uranium assets, with
the
exception of a 4% Net Profits Royalty on the Green Mountain uranium
property in
Wyoming, to sxr Uranium One Inc. (“Uranium One”). Uranium One is
listed on the Toronto Stock Exchange and Johannesburg Stock Exchange
under the
symbol “SXR”. At closing, the Company and USE received (a) $1,585,100
in reimbursable costs relating to work performed on the uranium properties,
(b)
$5,020,900 as a result of Uranium One purchasing the Uranium Power
Corp. (“UPC”)
position in the properties and (c) 6,607,605 shares of Uranium One
common stock
valued at the date of closing at $99,400,600. The Company and USE
also received the cash and collateral bonds posted for asset retirement
obligations relating to the uranium properties. Through July 31,
2007, the Company and USE had received $7,326,100 in returned cash
bonds and
also the release of its corporate headquarters which had also been
pledged for
certain asset retirement obligations.
Crested’s
Management’s Discussion and Analysis
of
Financial Condition and Results of Operations
for
the Six Months Ended June 30, 2007
as
Compared to the six months ended June 30, 2006
(continued)
As
of
June 30, 2007, the Company and USE sold 4,900,000 of the Uranium One
shares for
which they received $60,714,300 during the quarter ended June 30, 2007
and
$6,159,400 during July 2007. The Company and USE sold the remaining
1,707,606 shares of Uranium One during July 2007 and received an additional
$23,529,300. The Company and USE also received $321,000 as a result
of a benefit from the foreign currency exchange rate. The total
received by the Company and USE through July 2007 from the sale of
Uranium One
common stock was $90,724,000. The Company and USE had a cash flow
arrangement on the uranium properties which were sold. All positive
and negative cash flows, pursuant to the agreement, were shared 50-50
by the
Company and USE. The Company therefore received one half of all cash
proceeds from the sale to Uranium One.
In
summary, the Company received a total of $48,665,100 from the sale
of the
Company’s uranium assets to Uranium One through July 2007 ($792,600 in
reimbursable costs, $2,510,500 from the buy out of the UPC position
and
$45,362,000 from the sale of Uranium One stock). This, plus the
release of the reclamation bonds of $3,663,100, positions the Company
in its
strongest cash and liquidity position in its forty year history.
Pursuant
to the terms of the Uranium One contract, the Company and USE (one
half to each)
will also 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,
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. The Company and USE also retained a 4% Net Profits
Royalty on the Green Mountain uranium property in central Wyoming;
this property
is owned and operated by Rio Tinto, Inc.
Lucky
Jack Molybdenum Property – Kobex Resources Ltd.
On
April
3, 2007, the Company, USE and Kobex Resources Ltd. (“Kobex”) (a British Columbia
company traded on the TSX Venture Exchange under the symbol “Kobex”) signed a
formal Exploration, Development and Mine Operating Agreement for the
permitting
and development of the Mt. Emmons, “Lucky Jack”, molybdenum
property.
Pursuant
to the April 3, 2007 agreement, Kobex is required to expend $16,000,000
on the
property through December 2010. On July 6, 2007, Kobex announced its
budget for its first year of operations through April of 2008 would
be
$14,200,000. Kobex will not own an interest in the Lucky Jack
property until it has expended $15,000,000 at which time it will own
15%. After spending an additional $35,000,000, the ownership interest
for Kobex will be 50%. Kobex also may acquire an additional 15% at
the Company and USE’s option after it obtains a 50% interest. As of
June 30, 2007 Kobex had expended $1,429,100 since it began participating
in the
costs of the project.
Historical
records filed with the Bureau of Land Management (“BLM”) in the 1990’s for the
application of patented mineral claims, identify mineral resources
of some 220
million tons of 0.366% molybdic disulfide (MoS2)
mineralization. A high grade section of the mineralization containing
some 22.5 million tons at a grade of 0.701% MoS2
was also
reported. No assurance can be given that these quantities of MoS2
exist. The
average market price for MoS2 at
June 30, 2007
was $32.75 per pound. Although no future cost of production can be
made nor the market price predicted at time of production, at current
market
prices it is believed that the property could be very profitable for
the
Company.
Crested’s
Management’s Discussion and Analysis
of
Financial Condition and Results of Operations
for
the Six Months Ended June 30, 2007
as
Compared to the six months ended June 30, 2006
(continued)
Merger
Agreement
The
boards of directors of the Company and USE have approved a recommendation
of the
Special Committees of both boards, consisting of outside directors,
to merge
Crested into USE. The exchange ratio is 2 shares of the Company’s
common stock for 1 share of USE. It is anticipated that the merger
will be concluded, if approved by the Crested shareholders, during
the fourth
quarter of 2007. (See Note 10 above)
Mineral
Prices
Uranium
- The price of uranium concentrates has increased from a five year
low of $9.75
per pound in September 2002 to $120.00 per pound on July 30, 2007 (Ux
Weekly).
Gold
- The five year low for gold was $302.10 per ounce in April 2002. The
price for gold on July 30, 2007 was $664.10 per ounce (Metal
Prices.com).
Molybdenum
- The five year low for molybdic oxide was $2.68 per pound in April
2002. The average price for molybdic oxide was $31.75 per pound on
July 27, 2007. (Metal Prices.com).
Results
of Operations
Three
and Six Months Ended June 30, 2007 compared with the Three and Six
Months Ended
June 30, 2006
During
the six and three months ended June 30, 2007 the Company recorded net
income of
$31,482,700 and $31,721,200 respectively or $1.83 and $1.85 per share
basic for
those periods. This compares to net losses of $2,223,900 and
$2,147,200 respectively for the three and six months ended June 30,
2006. The major change in earnings was as a result of the gain on the
sale of the uranium assets to sxr Uranium One (“Uranium One”). Please
see note 13 above. The Company sold 2,450,000 shares of the Uranium
shares it received from the uranium asset sale upon which it recorded
a loss of
$3,418,600 during the three and six months ended June 30, 2007.
The
Company recorded $400,000 in revenues from the sale of assets as a
result of the
signing of the Exploration, Development and Mine Operating Agreement
with
Kobex. Kobex had previously made a refundable deposit of $25,000 that
was released as a result of the formal agreement. Additionally, Kobex
made its first contractual payment of $375,000 to the Company by delivering
142,816 shares of its common stock during the three months ended June
30,
2007.
The
other
major change to other revenues and expenses during the six and three
months
ended June 30, 2007 from those recorded during comparative periods
of the prior
year are losses on the exchange of and valuation of shares of Enterra
Energy
Trust (“Enterra”) that the Company received for the sale of a subsidiary coal
bed methane company. The Company recorded a total loss from these
items of $1,577,800 during the six months ended June 30, 2006. The
shares of Enterra were sold subsequent to June 30, 2006.
Crested’s
Management’s Discussion and Analysis
of
Financial Condition and Results of Operations
for
the Six Months Ended June 30, 2007
as
Compared to the six months ended June 30, 2006
(continued)
The
Company had no revenues during the three and six months ended June
30, 2007 and
2006. General and Administrative expenses increased by $119,100 to
$268,500 during the six months ended June 30, 2007 compared to the
same period
of 2006. The increase is the result of increased professional
services relating to the merger with USE during 2007. A similar
increase of $112,400 was recorded during the quarter ended June 30,
2007 over
that recorded during June 30, 2006.
During
the six months ended June 30, 2007 the Company recognized an equity
loss of
$3,727,500 compared to an equity loss of $344,300 for the six months
ended June
30, 2006. The major component for the increase of $3,383,200 in
equity losses during the six months ended June 30, 2007 was employment
related
payments made by USE in the form of bonuses to employees, officers
and directors
for the work they accomplished in closing the sale of uranium assets
to Uranium
One. Please see note 14 above.
Liquidity
and Capital Resources
The
liquidity position of the Company is the best it has ever been during
its forty
year history. At June 30, 2007, the Company had $24,615,600 in cash
on hand and Government Treasury Bills as well as $11,205,000 in marketable
securities. Current assets at June 30, 2007 were $39,637,400 as
compared to current liabilities of $13,654,900. The Company therefore
had working capital at June 30, 2007 of $25,982,500 and a current ratio
of 2.9
to 1.
Current
liabilities at June 30, 2007 consisted of income taxes payable of $10,404,100
and debt to USE of $3,250,800. The debt to USE was paid in July
2007. The Company has sufficient capital to fund its portion of the
operations it and USE participate in jointly and should not need to
borrow any
additional funds from USE during the balance of 2007.
Cash
and
cash equivalents increased by $1,285,300 as a result of the sale of
the uranium
assets to Uranium One. An additional amount of cash which was
generated from the sale to Uranium One, $20,000,000 along with the
interest
earned thereon, was invested in Government Treasury Bills. The Company
held
$20,093,700 invested in Government Treasury Bills at June 30, 2007
and considers
them very liquid. Pursuant to FAS 95 these investments are considered
Marketable Securities as they have maturity dates, from date of purchase,
in
excess of 90 days. The Company can sell these Government Treasury
Bills at any time cash is required without penalty.
Cash
provided by investing activities came primarily as a result of the
sale of
marketable securities of $30,522,300 (shares of Uranium One and
UPC). This increase in cash from investing activities was offset by
the funding of USECC in the amount of $2,430,200 and the purchase of
Government
Treasury Bills during the six months ended June 30, 2007.
Financing
activities consumed $6,882,100 as a result of a payment during the
six months
ended June 30, 2007 the Company made on its debt to USE.
Crested’s
Management’s Discussion and Analysis
of
Financial Condition and Results of Operations
for
the Six Months Ended June 30, 2007
as
Compared to the six months ended June 30, 2006
(continued)
Capital
Resources
Kobex
Resources Ltd. Agreement
On
April
3, 2007, the Company and USE signed a formal Exploration, Development
and Mine
Operating Agreement providing Kobex an option to acquire up to a 65%
interest in
the Lucky Jack molybdenum property. Prior to Kobex expending $15
million it will not own an interest in the Lucky Jack property. At
such time as Kobex spends $15 million it will own a 15% interest and
after it
expends a total of $50 million it will own a 50% interest in the Lucky
Jack
property. In the event that Kobex is able to deliver a bankable
feasibility study on the Lucky Jack property prior to spending the
$50 million
it can pay the reminder of the $50 million directly to the Company
and USE to
obtain its 50% interest. As a result of the Kobex agreement, it is
not anticipated that any of the Company’s cash reserves will be consumed in
permitting, development and maintenance of the property during the
balance of
2007 and into the near term.
The
principal financial benefit to be realized in 2007 and thereafter by
the Company
(if Kobex meets its contractual obligations) is that Kobex will fund
substantially all costs and expenses which otherwise may have to be
funded by
the Company and USE (including paying for the water treatment plant,
obtain
necessary permits, and have a bankable feasibility study prepared in
advance of
mining the property). In addition to the payment of operating,
permitting and construction costs, the contract also calls for option
payments
in the aggregate amount of $3,950,000 payable to the Company and USE
over five
years payable in either cash or common shares of Kobex. These option
payments began in 2007 and continue through December 2011. The first
payment of $750,000 in Kobex common stock was made on May 23, 2007.
Cash
on Hand
As
discussed above, the Company has monetized certain of its assets which
have
provided significant amounts of cash that will continue to be used
to fund
general and administrative expenses, and possible exploration and development
of
new mineral properties as well as real estate developments. The
Company has invested its cash surplus in interest bearing accounts
and U.S.
Government Treasury Bills which will provide working capital to fund
the
Company’s projects.
Other
Due
to
the current levels of the market prices for gold and molybdenum, management
of
the Company believes that sufficient capital will be available to develop
its
mineral properties from strategic industry partners, debt financing,
cash on
hand, and the sale of equity or a combination of the four.
Capital
Requirements
The
Company believes that the current market prices for gold and molybdenum
are at
levels that warrant further exploration and development of the Company’s mineral
properties. Management of the Company anticipates these metals prices
will remain at levels which will allow the properties to be produced
economically. The successful development and production of these
properties could greatly enhance the liquidity and financial position
of the
Company. It is not possible to predict the future price of minerals
and the ultimate economic liability of our projects.
Crested’s
Management’s Discussion and Analysis
of
Financial Condition and Results of Operations
for
the Six Months Ended June 30, 2007
as
Compared to the six months ended June 30, 2006
(continued)
The
direct capital requirements of the Company during the third and fourth
quarter
of 2007 are its general and administrative costs, its one half of a
$1,000,000
letter of credit to Sutter, the development of the real estate properties
and
the purchase of various assets and potential acquisitions.
Lucky
Jack Molybdenum Property
As
a
result of the Exploration, Development and Mine Operating agreement
entered into
on April 3, 2007 with Kobex, it is not anticipated that the Company
will have to
expend its capital resources on the Lucky Jack project during the balance
of
2007. Budgeted cash outlays by the Company and USE to fund operations
at Lucky Jack are reimbursed by Kobex. At June 30, 2007, Kobex owed
USECC $631,200. Kobex has paid all the amounts due to the Company and
USE within 30 days of being invoiced and is current on its obligations
to the
Company and USE. There have been no billing or operation disputes
between Kobex and the Company and USE.
Sutter
Gold Mining Inc. Properties
The
Company and USE have agreed to provide Sutter with a $1,000,000 credit
facility
at 12% interest for a term of two years. The credit facility will be
able to be drawn down over time in $50,000 increments and is repayable
at the
option of the Company and USE either in cash or common stock of
Sutter. The grant of the line of credit was subject to the approval
of the TSX for the issuance of 7,621,868 shares of Sutter’s common stock to
repay the Company and USE for an existing $2,025,700 in debt as of
December 31,
2006. Approval of the issuance of the shares was received on May 4,
2007 at which time the credit facility became available to Sutter. As
of June 30, 2007, management of the Company does not anticipate extending
any
further credit to Sutter other than its one half of this $1,000,000
line of
credit. To fund its additional development and capital infrastructure
commitments, Sutter will have to locate an industry partner, sell a
portion or
all of its position in the gold properties or seek equity or commercial
financing.
Real
Estate
On
January 8, 2007, the Company and USE, through their wholly owned limited
liability company, Remington Village, LLC (“Remington”), signed a Contract to
Buy and Sell Real Estate to purchase approximately 10.15 acres of land
located
in Gillette, Wyoming for $1,268,800. The Company and USE closed on
the property on May 10, 2007. The Company also signed a Development
Agreement with P.E.G. Development, LLC to assist in the evaluation
of the
property and to obtain the entitlements, engineering and architecture
necessary
to construct multifamily housing on the property. The cost to obtain
entitlements, engineering and architecture is estimated to be approximately
$698,000. Total land purchase and construction costs is estimated to
be $26.1 million. At June 30, 2007, the board of directors of the
Company had authorized the expenditure of up to $3,889,000 for the
purchase of
the land, payment of the entitlements and the commencement of site
work. All of the assets relating to Remington are owned by USECC
which is not consolidated into the Company financials but carried as
an
investment in an affiliate. The Company is responsible for one half
of all expenditures on the Remington development.
Crested’s
Management’s Discussion and Analysis
of
Financial Condition and Results of Operations
for
the Six Months Ended June 30, 2007
as
Compared to the six months ended June 30, 2006
(continued)
The
Company and USE are currently evaluating opportunities to finance a
portion of
the development of the multifamily housing project which include commercial
construction loans and industry partners. As of the filing of this
report, no final determination on the actual construction financing
terms had
been made. In the event that the Company and USE develop the
multifamily property currently under evaluation, and finances the construction
through commercial banking, it is anticipated that the Company and
USE will be
required to put up $7,600,000 in equity and may be required to put
up to an
additional $4,725,000 as a deposit with the commercial bank. The
deposit of $4,725,000 would be held as collateral but would earn interest
at the
same rate as the Company and USE receive on their Treasury Bills. It
is expected that construction financing in the amount of $18,500,000
will be
obtained in the third quarter of 2007 and that the project will be
completed
within 18 months of inception.
Reclamation
Costs
At
the
close of the sale of the uranium properties to Uranium One, all asset
retirement
obligations relating to those assets were transferred to Uranium
One. With the relief of those obligations, the Company only has
obligations relating to the Lucky Jack properties.
The
asset
retirement obligation for the Lucky Jack molybdenum property at June
30, 2007 is
$53,000. It is not anticipated that this reclamation work will occur
in the near term.
Other
The
employees of the Company and USE are not given raises on a regular
basis. In consideration of this and in appreciation of their work,
the board of directors from time to time has accepted the recommendation
of the
Compensation Committee to grant a bonus to employees and directors
when major
transactions are closed.
The
Company and USE purchased a used airplane in August 2007 to replace
its current
corporate airplane. The cost of the airplane, with refurbishments,
was approximately $5.3 million. The corporate airplane that the
Company and USE used previously is for sale and is anticipated to sell
for
between $1.2 and $1.5 million. The Company is responsible for one
half of the purchase price of the recently acquired airplane and will
receive
one half of the proceeds from the sale of the old airplane. The
airplanes are not reflected on the balance sheet of the Company as
they are
recorded on the non-consolidated financial statements of USECC and
shown as the
Company’s investment in an affiliate.
The
Company and USE are evaluating several mineral projects in which it
may
invest. Additionally, the Company and USE are researching several
other opportunities to deploy its capital outside of the minerals
business. At June 30, 2007 none of these acquisition targets had
advanced past the research stage.
Crested’s
Management’s Discussion and
Analysis - Results of Operations
for
the Year Ended December 31, 2006, 2005 and
2004
The
following is Management’s Discussion and Analysis of significant factors which
have affected the Company’s liquidity, capital resources and results of
operations during the years ended December 31, 2006, 2005 and
2004. The discussion contains forward-looking statements that involve
risks and uncertainties.
General
Overview
Crested
Corp. ("Crested" or the "Company") has been involved in the acquisition,
exploration, development and production of properties prospective for
hard rock
minerals including lead, zinc, silver, molybdenum, gold, uranium, and
oil and
gas. The Company also has been engaged to a limited extent in
commercial real estate, but only in connection with acquiring mineral
properties
which included commercial real estate. Going forward, the Company
intends to expand commercial real estate operations. Initially the
Company will target multifamily housing in communities located in the
Rocky
Mountain area that are being impacted by the energy development.
The
Company manages its operations through a joint venture, USECC Joint
Venture
("USECC"), with its parent company, U.S. Energy Corp. ("USE"). The
Company has entered into partnerships through which it either joint
ventured or
leased properties with non-related parties for the development and
production of
certain of its mineral properties. The Company had no production from
any of its mineral properties during the year ended December 31,
2006. Additional subsidiaries have been organized by the Company and
USE which include U.S. Moly Corp. (“USMC”) for molybdenum and InterWest, Inc.
(“InterWest”) for real estate. The Company and USE each own 45% of
the common stock of these entities with the employees, officers and
directors of
the Company and USE owning the remaining 10%.
During
the years ended December 31, 2003 and 2004, the Company’s uranium and gold
properties were shut down due to depressed metals prices. During
2005, the market prices for gold and uranium increased to levels which
may allow
the Company to place these properties into production or sell part
or all of
them to industry participants. Exploration work was resumed on the
uranium properties in 2005 and new uranium properties have been acquired
during
2006.
Uranium
- The price of uranium concentrate has increased from a five year low
of $7.25
per pound in January 2001 to a five year high of $72 per pound in December
2006. During the first quarter of 2007 this increase continued ($91
at March 12, 2007).
Gold
- The five year low for gold was in 2001 when it hit $256 per
ounce. The market price for gold has risen in subsequent years with
the average annual price for gold at $603 in 2006, $445 in 2005, $410
in 2004,
$363 in 2003 and $310 in 2004.
Molybdenum
- Annual Metal Week Dealer Oxide mean prices averaged $25.55 per pound
in 2006
compared with $32.94 per pound in 2005, $16.41 per pound in 2004, $5.32
in 2003
and $3.77 in 2002. Continued strong demand has outpaced supply over
the past several years (deficit market conditions) and has reduced
inventory
levels throughout the industry. At March 9, 2007, the price was $28.25
per
pound.
Crested’s
Management’s Discussion and
Analysis - Results of Operations
for
the Year Ended December 31, 2006, 2005 and 2004
(continued)
The
rebound in the Company’s commodity prices present opportunities. The
Company holds what we consider to be significant mineral and related
properties
in gold and uranium, and received a significant molybdenum property
from Phelps
Dodge Corporation (“PD”) on February 28, 2006. In contrast to the
prior five years, we now have cash on hand sufficient for general and
administrative expenses, the continuation of our uranium property acquisition
and exploration plan, and operation of the water treatment plant on
the
molybdenum property. Kobex Resources Ltd. (“KBX”) is expected to pay
the Lucky Jack molybdenum property permitting expenses and water treatment
plan
operating costs, and if the sxr Uranium One (“Uranium One”) contract is closed,
additional cash will be available to acquire new mineral properties
and pursue
other business opportunities.
Management’s
strategy to generate a return on shareholder capital is first, to demonstrate
prospective value in the mineral properties sufficient to support substantial
investments by large industry partners and second, to structure these
investments to bring capital and long term development expertise to
move the
properties into production. There are uncertainties associated with
this strategy. Please see the risk factor disclosure in this
report.
Proposed
merger with USE
On
December 20, 2006, the Company’s Special Committee of the independent board
members met with the Special Committee of the independent board members
of
USE. Following extensive discussions between the two committees, the
USE Special Committee proposed a merger of the Company into USE, by
means of an
offer to acquire the minority shares of the Company, based on an exchange
ratio
of one share of common stock of USE for every two shares of the Company’s common
stock not held by USE (which owns 70.9% of the Company’s common
stock). Navigant Capital Advisors, LLC served as financial advisor to
the USE Special Committee, and Neidiger Tucker Bruner Inc. served as
financial
advisor to the Company’s Special Committee. Both Navigant Capital
Advisors, LLC and Neidiger Tucker Bruner submitted fairness opinions
on the
final proposal for the merger.
The
offer
also provided that:
(i) USE
would vote in line with the vote of a majority of the holders of the
Company’s
minority share holders;
(ii) USE
may decline to consummate the merger, even after approval by the holders
of a
majority of the minority the Company’s shares, if the holders of more than
200,000 the Company’s shares perfect their rights to dissent from the merger
under Colorado law or for other reasons, in USE’s sole discretion;
and
(iii) Shares
of common stock issuable under options issued by the Company which
are held by
USE officers, directors, and employees are to participate in the offer
on the
same exchange ratio basis as the minority shareholders of the Company
(the
number of option shares would be determined by the extent to which
the Company’s
market price exceeds the $1.71 option exercise price).
The
Special Committee for the Company accepted the offer. Thereafter, the
Special Committees recommended to their respective full boards that
the merger
offer be approved. On December 20, 2006, the full boards of directors
of the Company and USE voted to approve the merger offer.
Crested’s
Management’s Discussion and
Analysis - Results of Operations
for
the Year Ended December 31, 2006, 2005 and 2004
(continued)
Consummation
of the merger is subject to execution of definitive documents; USE
delivering to
the Company’s minority shareholders a proxy statement/prospectus (following
declaration of effectiveness by the SEC of a Form S-4 to be filed by
USE with
the SEC) for a special meeting of the Company’s shareholders; approval of the
merger by the holders of a majority of the minority the
Company’s shares; and satisfaction of customary representations and
warranties to be contained in the definitive documents.
Forward
Looking Statements
This
Report on Form 10-K for the years ended December 31, 2006, 2005 and
2004
includes "forward-looking statements" within the meaning of Section
21E of the
Securities Exchange Act of 1934, as amended ("the Exchange Act"). All
statements other than statements of historical fact included in this
Report are
forward-looking statements. In addition, whenever words like
"expect", "anticipate”, or "believe" are used, we are making forward looking
statements. Actual results may vary materially from the
forward-looking statements and there is no assurance that the assumptions
used
will be realized in fact.
Critical
Accounting Policies
Marketable
Securities - The Company accounts for its marketable securities (1) as
trading, (2) available-for-sale or (3) held-to-maturity. Based on the
Company's intent to sell the securities, its equity securities are
reported as a
trading security. The Company's available-for-sale securities are
carried at fair value with net unrealized gain or (loss) recorded as
a separate
component of shareholders' equity. If a decline in fair value of
held-to-maturity securities is determined to be other than temporary,
the
investment is written down to fair value.
Asset
Impairments - We assess the impairment of property and equipment whenever
events or circumstances indicate that the carrying value may not be
recoverable.
Asset
Retirement Obligations - The Company records the fair value of the
reclamation liability on its shut down mining properties as of the
date that the
liability is incurred. The Company reviews the liability each quarter
and determines if a change in estimate is required as well as accretes
the total
liability on a quarterly basis for the future liability. Final
determinations are made during the fourth quarter of each year. The
Company deducts any actual funds expended for reclamation during the
quarter in
which it occurs.
Liabilities
Held for Sale– Long lived liabilities that will be sold within one year of
the financial statements are classified as current. At December 31,
2006 the Company believed that its uranium assets in Wyoming, Utah,
Colorado and
Arizona would be sold within a twelve month period. All asset
retirement obligations as well as any other liability associated with
these
properties was classified as current Liabilities Held for Sale at December
31,
2006. In the event that these assets and liabilities are not sold,
they will be re-evaluated to insure that no impairment has taken place
and
re-classified as long term assets and liabilities.
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.
Crested’s
Management’s Discussion and
Analysis - Results of Operations
for
the Year Ended December 31, 2006, 2005 and 2004
(continued)
Income
Taxes - The Company recognizes deferred income tax assets and liabilities
for the expected future income tax consequences, based on enacted tax
laws, of
temporary differences between the financial reporting and tax basis
of assets,
liabilities and carry forwards. The Company recognizes deferred tax
assets for the expected future effects of all deductible temporary
differences,
loss carry forwards and tax credit carry forwards. Deferred tax assets
are
reduced, if deemed necessary, by a valuation allowance for any tax
benefits
which, based on current circumstances, are not expected to be
realized. We recognized an income tax benefit of $7,533,800 by
reducing the valuation allowance on the deferred income tax assets
based upon
our assessment that we will generate taxable income as a result of
the
transaction with sxr Uranium One Inc. for the sale of uranium
assets.
Use
of Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to
make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and disclosure
of
contingent assets and liabilities at the date of the financial statements,
and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Recent
Accounting Pronouncements
FIN
48 In June 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes,” (“FIN 48”) an interpretation of
FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48
prescribes a recognition threshold and measurement attribute for the
financial
statement recognition and measurement of a tax position taken or expected
to be
taken in a tax return. FIN 48 requires that the Company recognize in
its financial statements, the impact of a tax position, if that position
is more
likely than not of being sustained on audit, based on the technical
merits of
the position. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods
and
disclosure. The provisions of FIN 48 are effective beginning January
1, 2007 with the cumulative effect of the change in accounting principle
recorded as an adjustment to the opening balance of retained earnings,
goodwill,
deferred income taxes and income taxes payable in the Balance
Sheets. The Company does not expect that the adoption of FIN 48 will
have a significant impact on the financial statements of the
Company.
FAS
157 In September 2006, the FASB issued FASB Statement No.
157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair
value, establishes a framework for measuring fair value in generally
accepted
accounting principles, and expands disclosures about fair value
measurements. The provisions for FAS 157 are effective for the
Company’s fiscal year beginning January 1, 2008. The Company is
currently evaluating the impact that the adoption of this statement
will have on
the Company’s financial position, results of operations or cash
flows.
In
September 2006, the Securities and Exchange Commission issued Staff
Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements (“SAB 108”).
SAB 108 provides guidance on consideration of the effects of prior
year
misstatements in quantifying current year misstatements for the purpose
of a
materiality assessment. SAB 108 is effective for fiscal years ending
after
November 15, 2006. The adoption of SAB 108 did not have an impact
on our
financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS 159”) which permits
entities to choose to measure many financial instruments and certain
other items
at fair value that are not currently required to be measured at fair
value. SFAS
159 will be effective for us on January 1, 2008. We are currently evaluating
the
impact of adopting SFAS 159 on our financial position, cash flows,
and results
of operations.
Crested’s
Management’s Discussion and
Analysis - Results of Operations
for
the Year Ended December 31, 2006, 2005 and 2004
(continued)
The
Company has reviewed other current outstanding statements from the
Financial
Accounting Standards Board and does not believe that any of those statements
will have a material adverse affect on the financial statements of
the Company
when adopted.
Liquidity
and Capital Resources
On
June
8, 2006, the Company converted 245,759 Enterra Acquisitions Class D
Shares
(“Acquisitions”) into Enterra Energy Trust units (“Enterra”). The
Enterra units were sold during the third quarter of 2006. The Company
received $2,991,000 in net cash proceeds from the liquidation of this
investment
position. The Company also sold its minority interest in Pinnacle Gas
Resources, Inc. (“Pinnacle”) for $4,830,000.
Although
the Company received these cash proceeds during the year ended December
31, 2006
it continued to have a working capital deficit of $3,730,800 and an
accumulated
deficit of $11,497,400. The principal component of the working
capital deficit is a debt payable to USE in the amount of
$13,277,200. The debt to USE increased $2,455,400 during the year
ended December 31, 2006 as a result of USE paying the Company’s portion of
working capital and investment capital needs in various entities in
which they
jointly participate.
During
the year ended December 31, 2006, the Company consumed $15,600 in operations
and
$3,313,900 in financing activities while investing activities generated
$6,471,000. The Company recorded a net loss before a benefit from
income taxes of $3,782,900 during the year ended December 31, 2006.
The major
component of the loss was a negotiated settlement payment to Phelps
Dodge
Corporation (“PD”) in the amount of $3.5 million. The settlement was
as a result of an order from the Federal District Court of Colorado
in favor of
PD wherein the Company and USE were ordered to pay PD $7,538,300 plus
interest
at 5.5% per annum. Rather than appeal the award, the parties agreed
on a settlement $7.0 million, of which the Company was obligated to
pay one
half. The Company had sufficient working capital to pay the
settlement amount.
The
Company believes that the current market prices for gold, uranium and
molybdenum
are at levels that warrant the exploration and development of the Company’s
mineral properties. Management of the Company anticipates these
metals prices will remain at levels which will allow the properties
to be
produced economically. Management of the Company therefore believes
that sufficient capital will be available to develop its mineral properties
from
strategic industry partners, debt financing, and the sale of equity
or a
combination of the three. The successful development and production
of these properties could greatly enhance the liquidity and financial
position
of the Company.
Capital
Resources
Contract
to Sell Uranium Assets to Uranium One and the UPC
Agreement
On
February 22, 2007, the Company and USE signed an asset purchase agreement
with
sxr Uranium One Inc. (“Uranium One”) and certain of its private subsidiary
companies. If this agreement is closed, Uranium One will buy all the
uranium assets and take over the Company and USE’s rights in the UPC purchase
and mining venture. These proceeds will substantially enhance
liquidity, and with respect to UPC, the receipt of approximately $5
million from
Uranium One for UPC’s future obligations under its purchase agreement with the
Company and USE will eliminate the uncertainty associated with UPC
making those
payments under the UPC purchase agreement (UPC would be paying Uranium
One
following the closing of the asset purchase agreement). The value of
the proceeds is indeterminable as they are based on stock prices that
will
fluctuate until closing.
Crested’s
Management’s Discussion and
Analysis - Results of Operations
for
the Year Ended December 31, 2006, 2005 and 2004
(continued)
Kobex
Resources Ltd. Agreement
On
October 6, 2006, the Company and USE signed an agreement (amended December
7,
2006) giving Kobex (“KBX”) an option to acquire up to a 65% interest in the
Lucky Jack molybdenum property. The principal financial benefit to be
realized in 2007 and thereafter by the Company of Kobex performance
under the
agreement, is that Kobex will fund substantial costs and expenses which
otherwise may have to be funded by the Company and USE (including paying
for the
water treatment plant, obtain necessary permits, and have performed
a bankable
feasibility study preparatory to mining or selling the property). See
“Lucky Jack Molybdenum Property” below. The Company’s liquidity will
be affected positively when the agreement is signed and executed. The
closing date has not been determined.
Line
of Credit
The
Company, jointly with USE, has a $500,000 line of credit with a commercial
bank. The line of credit is secured by certain real estate holdings
and equipment jointly owned with USE. At December 31, 2006, the full
line of credit was available to the Company and USE. This line credit
is used for short term working capital needs associated with
operations.
Cash
on Hand
As
discussed above the Company has monetized certain of its assets which
have
provided cash which will continue to be used to fund general and administrative
expenses, limited exploration, development and required remedial work
on its
mineral properties and the maintenance of those properties and associated
facilities such as the water treatment plant at the Lucky Jack property
until
such time as an industry partner is secured to develop the properties
or they
are sold.
Capital
Requirements
The
direct capital requirements of the Company during 2006 remain its general
and
administrative costs; expenses and funding of exploration drilling;
the holding
costs of the Sheep Mountain uranium properties in Wyoming, required
reclamation
work on the Sheep Mountain properties and the maintenance of the Shootaring
Canyon uranium mill (“Shootaring”) and uranium properties in southern Utah,
Colorado and Arizona and the maintenance of jointly owned real
estate. On February 28, 2006, the Company and USE re-acquired the
Lucky Jack molybdenum property from PD. In addition to receiving the
Lucky Jack property the Company and USE became the owners of a water
treatment
plant which is attached to the property and thereby responsible for
the
operation of the plant and thereby became responsible for the operating
costs of
this plant. The Company, as a result of the formation of InterWest
and the pursuit of the real estate market, will be obligated to fund
its
percentage of capital required to purchase and or develop real estate
properties.
Crested’s
Management’s Discussion and
Analysis - Results of Operations
for
the Year Ended December 31, 2006, 2005 and 2004
(continued)
Maintaining
Mineral Properties
Uranium
Properties
The
average care and maintenance costs associated with the Sheep Mountain
uranium
mineral properties in Wyoming is approximately $200,000 per year of
which UPC is
required to pay 50% annually. There are also costs associated with
the
exploration and maintenance of the uranium properties in Utah, Colorado
and
Arizona. The majority of these costs are covered as a result of the
agreements with UPC and Uranium One detailed above in Capital
Resources. In the event that the sale of the properties to Uranium
One is concluded all the costs of maintaining, exploring and developing
and
reclaiming these properties will be paid for by Uranium One and
UPC. Additionally, if the Uranium One agreement is successfully
closed, Uranium has agreed to reimburse the Company and USE for any
pre-approved
costs associated with the properties from June 14, 2006 to the date
of
closing. It is therefore projected that although the Company and USE
will pay the holding costs associated with the uranium properties until
the time
of the close with Uranium One that there will be no net consumption
of cash for
these properties during 2007 if the transaction with Uranium One
closes.
Lucky
Jack Molybdenum Property
The
Company and USE re-acquired the Lucky Jack molybdenum property, from
PD on
February 28, 2006. The property was returned to the Company and USE
by PD in accordance with a 1987 Amended Royalty Deed and Agreement
between the
Company and USE and Amax Inc. PD became the successor owner of the
property in 1999. On September 26, 2006, the Company and USE each
paid PD $3,500,000 for a total of $7,000,000 as final settlement of
the July 26,
2006 Judgment of $7,538,300 awarded by the U.S. Federal District Court
of
Colorado to PD.
Conveyance
of the property by PD to the Company and USE also included the transfer
of
ownership and operational responsibility of the mine water treatment
plant
located on the properties. Operating costs for the water treatment
plant are expected to approximate $1.5 million annually. In an effort
to assure continued compliance, the Company and USE has retained the
technical
expert and contractor hired by PD on January 2, 2006 to operate the
water
treatment plant. Under the agreement with Kobex Resources Ltd., Kobex
is expected to pay these and other costs. However, until such time as
the Company is able to find an industry partner to participate in the
property,
costs related to the property in excess of Kobex’s obligations will be shared by
the Company and USE and Kobex in proportion to their interests in the
property
(assuming Kobex performs and exercises its options). The Company and
USE’s share of these future costs could be significant.
Asset
Retirement Obligations
The
Company and USE are equally responsible for the reclamation obligations,
environmental liabilities and liabilities for injuries to employees
in mining
operations with respect to the Sheep Mountain uranium properties. The
balance in the reclamation liability account at December 31, 2006 of
$2.4
million (½ accrued by the Company) is believed by management to be
adequate. The Company and USE are self bonded for this obligation by
mortgaging certain of their real estate assets, including the Glen
L. Larsen
building and by posting cash bonds. Due the pending Uranium One
purchase of the uranium assets and the belief of management that the
sale of the
assets will close during the twelve months after December 31, 2006,
the asset
retirement obligation of $1,204,900 is classified as a current liability
held
for sale.
Crested’s
Management’s Discussion and
Analysis - Results of Operations
for
the Year Ended December 31, 2006, 2005 and 2004
(continued)
The
environmental and reclamation obligations acquired with the acquisition
of
Plateau include obligations relating to the Shootaring Mill. As of
December 31, 2006, the present value at 8% of the reclamation liability
on the
Plateau properties was $4,117,400. Plateau holds a cash deposit for
reclamation in the amount of approximately $6.8 million. The Company
is obligated to pay one half of any amount of reclamation cost over
the bond
amount at the time the actual reclamation cost is incurred. It is not
anticipated that the reclamation work will begin for at least 33
years.
If
the
sale of the uranium properties to Uranium One closes, the asset retirement
obligations on the Sheep Mountain and Plateau Resources properties
will be
transferred to Uranium One.
The
Lucky
Jack molybdenum property has a reclamation liability of $102,000 as
of December
31, 2006 of which the Company is obligated to pay one half. No
capital resources will be used for this obligation during 2007.
InterWest
On
January 8, 2007, InterWest, through its wholly owned limited liability
company,
Remington Village, LLC, signed a Contract to Buy and Sell Real Estate
to
purchase approximately 10.15 acres of land located in Gillette, Wyoming
for
$1,268,800. InterWest also signed a Development Agreement with PEG to
assist in the evaluation of the property and to obtain the entitlements,
engineering and architecture necessary to construct multi-family housing
on the
property. The cost to obtain entitlements, engineering and
architecture is estimated to be approximately $698,000 and the construction
cost
of the 216 rental units is estimated to be between $22 and $25
million.
A
substantial part of total costs may be funded with commercial loans,
and the
Company and USE may seek private investors to offset the equity component
(estimated at 20% of total costs). If the Uranium One contract is not
closed, InterWest may sell the property with the planning permit, instead
of
building the complex.
InterWest
intends to expand operations in the multifamily housing sector, with
focus on
the energy basins of Wyoming, Utah, and Colorado where housing demand
is
expected to remain strong. Funding of these projects is predicated
upon the projects meeting specific rate of return, financing and management
requirements. If such projects are found the Company may be obligated
to fund up to 20% of each project from cash reserves.
Debt
Obligations
of the Company consist of advances payable to USE, which are due upon
demand. The obligation is due to USE for funding a majority of the
operations of USECC, of which 50% is the responsibility of the
Company. All advances payable to USE are classified as current as of
December 31, 2006 and 2005 as a result of USE’s unilateral ability to modify the
repayment terms.
Other
The
employees of the Company are not given raises on a regular basis. In
consideration of this and in appreciation of their work, the board
of directors
from time to time has accepted the recommendation of the Compensation
Committee
to grant a bonus to employees and directors when major transactions
are
closed.
Crested’s
Management’s Discussion and
Analysis - Results of Operations
for
the Year Ended December 31, 2006, 2005 and 2004
(continued)
Results
of Operations
Year
Ended December 31, 2006 as Compared to the Year Ended December 31,
2005
During
the years ended December 31, 2006 and December 2005 the Company did
not have any
revenues from operations. Operating costs and expenses consisted of
non cash accretion of asset retirement obligations of $113,000 for
the twelve
months ended December 31, 2006 and $90,900 for the year ended December
31,
2005. The increase in accretion expenses during the year ended
December 31, 2006 as compared to those recorded at December 31, 2005
of $22,100
was as a result of a re-estimation of the actual reclamation cost associated
with the Sheep Mountain uranium properties and the addition of reclamation
costs
associated with the Lucky Jack project.
General
and administrative expenses increased from $179,500 during the year
ended
December 31, 2005 to $531,000 at December 31, 2006 for an increase
of
$351,500. This increase is directly related to the re-valuation of
the Executive Retirement Plan of the Company and USE for two of its
executive
officers, one of whom passed away during 2006 and the other who determined
that
he would retire during the first quarter of 2007. The acceleration of
their use of the retirement policy is within the requirements of the
policy but
was not anticipated so quickly. The change caused an acceleration of
the accrual of the benefits due under the policy. Additionally the
Company experienced an increase in professional services due to consultants
and
legal fees associated with the potential merger with USE.
During
the year ended December 31, 2006, the Company recorded a loss from
the exchange
of the Enterra Acquisition shares of $1,354,200 and a loss of $324,300
from the
sale of Enterra units. The Company received exchangeable shares of
Enterra Acquisitions when it sold RMG to Enterra in June of
2005. These shares were convertible to units of Enterra Energy Trust
after a one year holding period. Prior to the actual conversion the
conversion feature of the Enterra Acquisition shares was accounted
for as an
imbedded derivative. At the time the actual conversion took place the
market price of Enterra Energy Trust units had significantly
decreased. The Company sold all of the units of Enterra and recorded
a loss on the sale of $324,300 while it recorded a net increase in
cash of
$2,991,000 from the sales.
During
the year ended December 31, 2006 the Company recorded a net loss of
$223,600
from the value of the derivative discussed above on the Enterra Acquisition
shares. During the year ended December 31, 2005 the Company
recognized revenue of $223,600 from the valuation of the
derivative. Additionally, the Company recorded a net gain on the sale
of RMG of $5,816,700 during the year ended December 31, 2005.
During
the year ended December 31, 2006, the Company sold its equity ownership
interest
in Pinnacle to a third party. As a result of this sale the Company
received $4,830,000 in cash proceeds and recognized a net gain on the
sale of
$3,794,800. The Company also settled its portion of the PD award
ordered by the U.S. District Court of Colorado by paying $3.5 million
to
PD. There were no similar sales or litigation settlement transactions
during the year ended December 31, 2005.
During
the year ended December 31, 2006 the Company and USE became obligated
to pay
Enterra $2.0 million as a result of their net proceeds from the sale
of their
interest in Pinnacle. The Company and USE paid this obligation
through the release of 506,395 shares of USE common stock that the
Company
owned. The Company further released the balance of the shares of USE
it owned, 5,964 shares, to USE. For the release of these shares the
Company paid its portion of the obligation to Enterra, $700,000, which
was
netted against the gain recognized from the sale of Pinnacle equity,
and
received a credit from USE on its indebtedness to USE in the amount
of
$1,323,800. The Company recognized a net gain on the transfer of
these shares of USE common stock of $2,023,800 during the year ended
December
31, 2006.
Crested’s
Management’s Discussion and
Analysis - Results of Operations
for
the Year Ended December 31, 2006, 2005 and 2004
(continued)
Equity
losses from USECC increased by $1,925,800 from $1,699,800 during the
year ended
December 31, 2005 to $3,625,600 during the twelve months ended December
31,
2006. The primary reason for the increase in the equity loss from
USECC was as a result of the Compensation Committee of USE recommending
that a
cash bonus in the aggregate amount of $3,013,000 be paid to all 29
employees
(including officers) of USE on September 29, 2006. The bonus was paid
for the results of the employees’ work on behalf of the Company and USE related
to the sale of the Company and USE’s stock in Pinnacle and other
transactions.
The
USE
Compensation Committee is comprised of the four independent directors
of USE;
none of these persons are directors or officers or employees of the
Company. The Compensation Committee determined that the bonus amount
allocated to each recipient should be based upon years of service and
previous
compensation. All employees work for both the Company and
USE. Under the long-standing joint venture agreement between the
Company and USE, each is responsible for paying one-half of all administrative
expenses. Accordingly, one-half of the bonus was paid by the
Company.
The
Company recorded a net loss if $3,782,900 before income taxes during
the year
ended December 31, 2006 as compared to a net gain before taxes of $4,641,400
during the year ended December 31, 2005. As explained above the major
difference between the two periods was litigation settlement expense
with PD and
losses recorded during 2006 on the exchange of Enterra shares and a
lower amount
recognized from the sale of investments. During 2006 the Company
recorded a tax benefit as a result of the accounting treatment related
to
valuation allowances and deferred tax assets. The result was a tax
benefit of $7,533,800 as compared to a tax provision during the year
ended
December 31, 2005 of $100,000. Additionally the Company received a
current benefit from income taxes as a result of a refund from prior
year
provisions. (See Note G to financial statements)
The
Company recorded a net gain per share of $0.22 for the year ended December
31,
2006 as compared to a net gain per share of $0.26 per share during
the year
ended December 31, 2005.
Year
ended December 31, 2005 compared to Year ended December 31,
2004
During
the year ended December 31, 2005, the Company had no revenues or income
from
operations. The expenses incurred relate to General and
Administrative costs and the accretion of the reclamation liability
of the
Company on the Sheep Mountain uranium properties. General and
Administrative costs and expenses decreased by $23,900 during the year
ended
December 31, 2005. This reduction in General and Administrative
expenses was primarily related to reduce professional
services. During the year ended December 31, 2005 the Company
accreted $90,900 in additional reclamation expenses on the Sheep Mountain
uranium properties. Due to the rise in the market price for uranium
the reclamation of the Sheep Mountain uranium properties has been delayed
which
resulted in a reverse charge to earnings $109,500.
During
the year ended December 31, 2005, a gain was recognized on the sale
of RMG, for
the receipt of 91,029 Enterra Initial Units and 245,759 Class D shares
of
Acquisitions valued at $19.00 each or a total of $6,399,000. The gain
was offset by the Company’s investment in RMG; the purchase of an overriding
royalty from an entity that had financed the purchase of RMG’s producing
properties, and the Company’s portion of the buy-out of the RMG minority
shareholders’ interest in Pinnacle. The net gain recognized on the
sale of RMG was therefore $5,816,700. There were no similar revenues
during the year ended December 31, 2005. The Company also recognized
a gain on the revaluation of the Acquisitions Class D shares of $223,600
for the
year ended December 31, 2005.
Crested’s
Management’s Discussion and
Analysis - Results of Operations
for
the Year Ended December 31, 2006, 2005 and 2004
(continued)
During
the year ended December 31, 2005, the Company received dividend revenues
of
$12,400 from the Enterra Initial Units and recognized $1,100 in interest
revenue
on cash received from the sale of those Units which resulted in cash
receipts of
$2,177,800 and net profits of $448,300. No similar revenues were
recognized during the year ended December 31, 2004.
The
Company recorded a net gain of $4,541,400 or $0.26 per share during
the year
ended December 31, 2005 as compared to a net loss of $1,767,500 or
a loss of
$0.10 per share during the year ended December 31, 2004.
Future
Operations
Management
of the Company intends to take advantage of the opportunity presented
by the
recent and future projected market prices for all the minerals that
it is
involved with. The development of the Company’s mineral properties
will require large amounts of cash, which the Company will have to
obtain from
industry or equity partners. The holding costs of these properties is
not beyond the Company’s capital resources in the short term but to maintain the
properties long term additional financing will be required.
Effects
of Changes in Prices
Mineral
operations are significantly affected by changes in commodity
prices. As prices for a particular mineral increase, prices for
prospects for that mineral also increase, making acquisitions of such
properties
costly and sales advantageous. Conversely, a price decline
facilitates acquisitions of properties containing that mineral, but
makes sales
of such properties more difficult. Operational impacts of changes in
mineral commodity prices are common in the mining industry.
Uranium
and Gold. Changes in the prices of uranium and gold will
affect our operational decisions the most. Currently, both gold and
uranium have
experienced an increase in price. We continually evaluate market
trends and data and are seeking financing or a joint venture to place
the
Company’s gold and uranium properties in production.
Molybdenum. The
price of molybdenum at December 31, 2006 was $28.00 per pound (Metal
Prices.com). Production from the Lucky Jack Project will have a very
long life and changes in prices of molybdenum would affect the revenues
from
that property. A significant decrease in the current market price
would have to occur prior to the time that the Mt. Emmons property
would no
longer be profitable. In addition to the market risk it is not known
how long the permitting process on Mt. Emmons will take or how much
it will
cost.
Contractual
Obligations
The
Company has three divisions of contractual obligations as of December
31, 2006:
Debt to USE of $13,277,200, liabilities held for sale $1,204,900 and
asset
retirement obligations of $51,000.
Accordingly,
even if the Uranium One contract is closed, future property acquisitions
and
development work may require large amounts of cash, of which the Company
may
have to obtain from industry or equity partners.
This
section contains information from Crested about the special meeting
of
shareholders that Crested has called to consider, and possibly adopt,
the merger
agreement.
Together
with this proxy statement/prospectus, Crested is also sending you a
notice of
the Crested special meeting and a form of proxy that is solicited by
Crested’s
board of directors for use at the Crested special meeting to be held
on November
26, 2007, at 10:00 a.m., local time, at the offices of Crested, 877
N. 8th
W., Riverton,
Wyoming 82501, and any adjournments or postponements of the
meeting.
Matters
to be Considered
The
purpose of the special meeting is to consider and to vote on a proposal
to adopt
the January 23, 2007 Agreement and Plan of Merger between USE and
Crested.
You
may
be asked to vote upon other matters that may properly be submitted
to a vote at
the special meeting. You also may be asked to vote on a proposal to
adjourn or postpone the special meeting.
Proxies
Each
copy
of this proxy statement/prospectus mailed to Crested shareholders is
accompanied
by a form of proxy with voting instructions for submission by
mail. You should complete and return the proxy card to ensure that
your vote is counted at the special meeting, or any adjournment or
postponement
thereof, regardless of whether or not you plan to attend.
You
may
revoke your proxy at any time before the vote is taken by:
·
|
submitting
written notice of revocation to the Secretary of Crested
prior to the
voting of such proxy;
|
·
|
submitting
a properly executed proxy of a later date;
or
|
·
|
voting
in person at the special meeting; however, simply attending
the special
meeting without voting will not revoke an earlier
proxy.
|
If
your
shares are not held in street name, written notices of revocation and
other
communications regarding the revocation of your proxy should be addressed
to:
Crested
Corp.
877
N.
8th
W.
Riverton,
Wyoming 82501
Attn:
Robert Scott Lorimer, CFO/Treasurer
Such
written notice should be mailed as early as possible to ensure that
the notice
of revocation reaches Crested prior to the date of the meeting.
If
your
shares are held in street name, you should follow the instructions
of your
broker or bank regarding revocation of proxies.
All
shares represented by valid proxies that Crested receives through this
solicitation, and that are not revoked, on a timely basis, will be
voted in
accordance with the instructions on the proxy card. If you make no
specification on your proxy card as to how you want your shares to
be voted
before signing and returning it, your proxy will be voted
“FOR” the adoption of the merger agreement
and
the transactions contemplated by the merger agreement. The Crested
board of directors is currently unaware of any other matters that may
be
presented for action at the meeting. If other matters properly come
before the meeting, or any adjournment or postponement thereof, Crested
intends
that shares represented by properly submitted proxies will be voted,
or not
voted, by and at the discretion of the persons named as proxies on
the proxy
card.
Crested
shareholders should NOT send stock certificates with their proxy
cards.
Shares
Subject to Voting Agreement
Under
a
voting agreement dated as of January 23, 2007 between Crested and certain
Crested shareholders (including USE), those shareholders have agreed
to vote or
cause to be voted all of their shares of Crested common stock in the
same way
the holders of a majority of the minority shares of Crested vote, with
respect
only to the adoption of the merger agreement. The shares subject to
the voting agreement represent approximately 71.4% of the outstanding
shares of
Crested as of the record date (70.1% held by USE and its subsidiaries
and 1.3%
by the other shareholders who signed the voting agreement).
Solicitation
of Proxies; Expenses of Solicitation
Crested
and USE each will pay one-half of the costs to file, print and mail
this proxy
statement/prospectus for the special meeting. In addition to
solicitation by mail, directors and officers of Crested may solicit
proxies from
shareholders by telephone, telegram, e-mail, personal interview or
other
means. USE and Crested currently expect not to incur any costs beyond
those customarily expended for a solicitation of proxies in connection
with a
merger agreement. Directors and officers will not receive additional
compensation for their solicitation activities, but may be reimbursed
for
reasonable out-of-pocket expenses incurred by them in connection with
the
solicitation. Brokers, dealers, commercial banks, trust companies,
fiduciaries, custodians and other nominees have been requested to forward
proxy
solicitation materials to their customers and such nominees will be
reimbursed
for their reasonable out of pocket expenses.
Record
Date
Crested
has fixed the close of business on October 10, 2007 as the record date
for
determining the Crested shareholders entitled to receive notice of
and to vote
at the Crested special meeting or any adjournment or postponement
thereof.
Voting
Rights and Vote Required
The
presence, in person or by properly executed proxy, of the holders of
a majority
of the outstanding shares of Crested entitled to vote thereon is necessary
to
constitute a quorum at the special meeting. Under Nasdaq rules,
brokers or members who hold shares in street name for customers who
are the
beneficial owners of such shares are prohibited from giving a proxy
to vote
those shares with respect to adopting the merger agreement without
specific
instructions from such customers. An un-voted proxy submitted by a
broker is sometimes referred to as a “broker non-vote” and is the
equivalent of a vote “AGAINST” the merger.
The
actions proposed in this proxy statement/prospectus are not matters that
can be voted on by brokers holding shares for beneficial owners without
the
owners’ specific instructions. If you do not instruct your broker,
bank or other nominee, they will not be able to vote your shares, such
failure
to vote is a broker non-vote. Accordingly, if a broker or
bank holds your shares you are urged to instruct your broker or bank
on how to
vote your shares.
The
adoption of the merger agreement requires the affirmative vote of the
holders of
a majority of the shares of Crested common stock outstanding as of
the record
date. You are entitled to one vote for each share of Crested common
stock you held as of the record date.
As
of the
record date:
·
|
USE
executive officers (and a recently retired officer (Daniel
P. Svilar)) and
directors of Crested own 222,241 Crested shares (1.3%), not
including the
12,024,733 shares owned by USE, 60,000 shares owned by Plateau
and 100,000 shares owned by SGMI, which are consolidated
subsidiaries of
USE, for a consolidated USE ownership of 12,184,733 shares
(70.1%).
|
Recommendation
of the Board of Directors
All
of
the Crested directors have determined that the terms of the merger,
the merger
agreement and the other transactions contemplated thereby are advisable,
fair to
and in the best interests of Crested and all of its shareholders, and
recommend
that you vote “FOR” the adoption of the merger
agreement and the transactions contemplated by the merger agreement,
including
the merger.
See
“THE
MERGER—Crested’s Reasons for the Merger; Recommendation of Crested’s Board of
Directors” on page 78 for a more detailed discussion of the Crested board of
directors’ recommendation.
Interest
of Certain Matters to be Acted Upon
Please
see discussion entitled “Crested and USE Directors and Officers Have Financial
Interests in the Merger” on page 89.
Attending
the Meeting
If
you
are a beneficial owner of Crested common stock held by a broker, bank
or other
holder of record, you will need proof of ownership to be admitted to
the special
meeting. A recent brokerage statement or letter from a bank or broker
are examples of proof. If you want to vote your shares of Crested
common stock held in street name in person at the meeting, you will
have to get
a written proxy in your name from the broker, bank or other holder
of record who
holds your shares.
Revocation
of Proxies
You
may
revoke your proxy at any time prior to its use by delivering it to
Robert Scott
Lorimer at Crested’s offices a signed notice of revocation bearing a date
later than the date of your proxy, stating that the proxy is revoked
or
by granting a duly executed new, signed proxy bearing a later date,
or if you
are a holder of record, by attending the special meeting and voting
in
person. However, simply attending the special meeting without voting
will not revoke your proxy. If you hold your shares in “street name,”
you must get a proxy from your broker, bank or other custodian to vote your
shares in person at the special meeting.
Householding
Some
banks, brokers and other nominee record holders may be participating
in the
practice of “householding” proxy statements and annual reports. This
means that only one copy of this proxy statement/prospectus may have
been sent
to multiple shareholders in your household. Crested will promptly
deliver to you a separate copy of this proxy statement/prospectus,
if you write
to Mr. Robert Scott Lorimer, CFO/ Treasurer of USE and Crested, or
call him at
307.856.9271. If you wish to receive separate copies of an annual
report or proxy statement in the future, or if you are receiving multiple
copies
and would like to receive only one copy for your household, you should
contact
your bank, broker or other nominee record holder, or you may contact
Crested.
The
matters to be considered at the special meeting are of great importance
to the
Crested shareholders. You are urged to read and carefully consider
the information presented in this proxy statement/prospectus, and to
complete,
date, sign and promptly return the enclosed proxy in the enclosed postage-paid
envelope.
Future
Crested Shareholder Proposals
If
the
merger is not consummated, Crested will hold its annual shareholders
meeting on
about June 20, 2008. Any shareholder proposal intended to be
considered for inclusion in the Crested proxy statement for presentation
at that
meeting should be received at Crested’s office, located at 877 N. 8th
W., Riverton,
Wyoming 82501 by January 18, 2008.
The
following discussion contains material information pertaining to the
merger. This discussion is subject, and qualified in its entirety by
reference, to the merger agreement and the financial advisor opinion
attached as
appendices to this proxy statement/prospectus. We urge you to read
and review those entire documents as well as the discussion in this
proxy
statement/prospectus.
General
This
section provides material information about the merger and the background
of
Crested and USE signing the merger agreement. The next sections of
this proxy statement/prospectus, entitled “THE MERGER AGREEMENT” and “THE VOTING
AGREEMENT” have additional and more detailed information regarding the legal
documents that govern the merger.
At
the
Crested special meeting, Crested shareholders will be asked to consider
and vote
upon a proposal to adopt the merger agreement.
Structure
If
the
merger agreement is adopted by the affirmative vote of the holders
of a majority
of the minority Crested shares, Crested will be merged into USE, and
the
separate corporate existence of Crested will cease. USE will continue
as the surviving entity.
The
merger agreement provides that each share of Crested common stock issued
and
outstanding immediately prior to the effective time of the merger,
other than
the Crested shares owned by USE, will be converted into the right to
receive
one-half USE share (2 Crested shares for 1 USE share, which is referred
to below
as the “Exchange Ratio”). Fractional USE shares will be rounded up to
a full share. The USE shares will be validly issued, fully paid and
non-assessable shares of common stock. Upon completion of the merger,
all Crested shares will no longer be outstanding and will be automatically
canceled and cease to exist.
USE
will
account for the merger as a purchase for financial reporting
purposes. See “ACCOUNTING TREATMENT” below. The merger is
intended to qualify as a reorganization within the meaning of Section
368(a) of
the Code, so that for U.S. federal income tax purposes you will not
recognize
gain or loss on the receipt of USE common stock as part of the merger
consideration. However, if you receive USE shares for Crested shares
underlying a Crested option, and that option is non-qualified under
IRS
regulations, you will recognize income for tax purposes. The merger
is conditioned on the receipt of opinions that the merger will qualify
as a
reorganization for United States federal income tax purposes. For a
more complete discussion of the United States federal income tax consequences
of
the merger, see “MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER” below.
Background
of the Merger
Crested
was actively involved in the minerals industry for its own account
and
independent of USE for many years. In 1982, following a successful
sale of the molybdenum properties owned by both USE and Crested to
AMAX, Inc.,
the boards of directors of both companies decided to enter into the
Joint
Venture agreement, to allow joint participation in new projects. Most
of the business conducted by the companies has been done under the
USECC Joint
Venture. For many years, the companies had at least one director in
common, but each company paid its share of property acquisition and
development
costs as incurred. Since 1982, USE and Crested have held interests in
the same properties and projects. By 1993, Crested no longer had the
capital to pay its share of the obligations under the Joint Venture,
and USE
began paying for Crested’s shortfalls, and booking a receivable from
Crested. Despite Crested paying substantial portions of the
receivable by issuing Crested stock to USE, by December 31, 2006, Crested
owed
USE more than $13 million. Crested has not had any officers who are
independent of USE for the past 15 years, and had no directors independent
of
USE from 2002 until two independent directors were appointed in connection
with
the merger negotiations.
From
time
to time since 2004, the management of USE and Crested have informally
discussed
the potential benefits to USE and Crested shareholders of merging Crested
into
USE, but these discussions never yielded any agreement on the terms
of a
possible transaction, and no offers were communicated from USE to
Crested. As a result of the formal discussions relating to the
potential merger, Crested asked two former independent board members
to serve on
the board of directors of Crested and also as the Special Committee
members for
the merger negotiations. Both prior board members accepted and
resumed board service on October 13, 2006, and continue to serve as
directors of
Crested.
History
of Communications between the Boards of Directors of the Companies
Regarding the
Merger.
In
late
July 2006, Crested and USE management contacted outside legal counsel
to discuss
a possible acquisition by USE of the Crested shares not held by
USE.
From
September 19, 2006 to September 27, 2006, USE management discussed
with outside
legal counsel procedures to establish a special committee of independent
directors of USE to evaluate a possible offer to be made to the Crested
board of
directors; retain an independent financial advisory firm to advise
the USE
special committee; and have the Crested board of directors establish
a special
committee of independent directors, and retain separate outside legal
counsel,
to represent the interests of the Crested minority shareholders.
On
October 13, 2006, the USE board of directors established a special
committee of
independent directors of USE, H. Russell Fraser and Mike Anderson, to
explore a possible offer from USE to Crested, to acquire the minority
shares of
Crested in exchange for USE shares, and to negotiate with a special
committee of
the Crested directors any offer which might be made to Crested. Also
on that date, the special committee retained Navigant Capital Advisors,
LLC
(“Navigant Capital”) to advise the committee as to the fairness to USE
shareholders of any offer which the special committee might
recommend. On October 13, 2006, USE notified the Crested board of
directors that USE had established its special committee to evaluate
whether,
and if so how, USE might offer to acquire the minority shares of
Crested.
Also
on
October 13, 2006, Mike Zwickl and Kathleen Martin, former directors
of Crested,
were appointed to the Crested board of directors and to a newly created
special
committee of independent directors of Crested, to evaluate the fairness
to the
Crested minority shareholders, of any offer which USE might make to
acquire the
Crested minority shares, and to negotiate with the USE special committee
about
the terms of any offer which USE might make. The Crested board of
directors agreed to compensate Mr. Zwickl and Ms. Martin by issuing
to them
$15,000 each in restricted shares of Crested common stock, valued at
Crested’s
$1.63 market price on October 13, 2006 (i.e., 9,203 shares to each
member.
On
October 17, 2006, the Crested special committee had a meeting where
it
interviewed Neidiger, Tucker, Bruner, Inc. (“NTB”) to advise the committee on
the fairness to the Crested minority shareholders of any offer USE
might
make. The special committee also interviewed separate outside legal
counsel, Davis Graham & Stubbs LLP (“DGS”), to advise the special committee
regarding a possible offer from USE. The special committee further
discussed its charter, responsibilities and discretion. The special
committee
engaged NTB and DGS.
From
September 28, 2006 to November 28, 2006, the USE special committee
conducted
several meetings by telephone conference, to review and discuss, with
the
participation of Navigant Capital, the various preliminary analyses
prepared by
Navigant Capital concerning the historical relationship between the
stock prices
for USE and Crested, the relative asset values of the two companies,
and other
matters. The USE special committee, with the approval of Navigant
Capital, shared Navigant Capital’s preliminary analyses with NTB, and Navigant
Capital and NTB discussed these analyses.
On
December 4, 2006, the USE board of directors informed the Crested special
committee that the USE board had accepted the recommendation of the
USE special
committee to make a preliminary offer to acquire all the minority shares
of
Crested in exchange for shares of USE, using an exchange ratio of 2.3
Crested
shares for 1 USE share. This ratio was based on comparative stock
prices for the 30 days preceding November 28, 2006, and represented
a premium of
3% over Crested’s price of $2.38 relative to USE’s price of $5.64 on December 4,
2006.
From
December 14, 2006 to December 19, 2006, the Crested special committee,
with NTB
and DGS participating, conducted several meetings to review and discuss
the USE
offer, Navigant Capital’s analysis, NTB’s analysis and certain other
information.
On
December 20, 2006, Michael Feinstein, an alternative member of the
USE special
committee, and the committee’s outside legal counsel held an informal breakfast
meeting at 8:00 am on December 20, 2006 with Crested’s outside legal
counsel. Counsel to Crested reported that the Crested special
committee had determined that it was rejecting USE’s preliminary offer of
December 4, 2006 of a 3% premium to stock prices as such offer was
not
consistent with the ranges of premium paid in comparable deals (comparable
in
terms of related party transactions, where a parent company offers
to buy a
minority stake in a subsidiary), as shown in a preliminary analysis
which had
been prepared by Navigant Capital and shared with Crested’s special committee
and work done by NTB. Counsel to Crested stated that the Crested
special committee was prepared to consider a offer with an exchange
ratio that
would represent a price premium in the range of 15%, and invited further
discussion on the matter from the USE special committee.
At
formal
subsequent meetings on December 20, 2006:
· The
USE
special committee met at 10:00 am (members of Navigant Capital were
present by
conference call), to discuss the rejection and counter-offer of the
Crested
special committee. The USE special committee discussed with Navigant
Capital the relationship between various possible exchange ratios,
the net asset
values of the companies, and the “implied exchange ratios” suggested by the
analyses conducted by Navigant Capital for the USE special
committee. For more information on Navigant Capital’s engagement and
the work it performed for the special committee, see “Opinion of the USE
Financial Advisor – Navigant Capital Advisors, LLC.”
The
USE
special committee also considered certain “intangible” factors which had not
been quantified by Navigant Capital in its preliminary evaluations,
including
Crested’s lack of trading liquidity, absence of a stand alone business plan,
dependence on USE employees, and its complete reliance on interest-free
capital
from USE for many years to stay in business. At the conclusion of
this meeting, the USE special committee decided to make a one-time
offer based
on an exchange ratio of two Crested shares for one USE share which
represented a
12% premium at such time.
The
two
special committees subsequently met at 11:00 am, with their respective
outside
legal counsel. The USE special committee expressed its disagreement
with the Crested special committee’s basis for a 15% premium offer made at the
breakfast meeting, and informed the Crested special committee that
the relative
asset values of the companies, and the intangible factors involving
the two
companies, would not justify a stock exchange ratio of more than
2:1. In particular, the USE special committee stated that the range
of premiums paid by acquirors in other transactions was not applicable to
the USE-Crested transaction. The other transactions involved
companies with different or complementary businesses, and in the mineral
sector,
companies with different but complementary properties,
while USE and Crested own interests in the same
properties.
The
USE
special committee also expressed its support, which had been discussed
between
outside legal counsel for the two companies, for recommending to the
full USE
board of directors that USE commit to voting its block of Crested shares
in line
with the vote of the holders of a majority of the minority Crested
shares if the
companies were to come to agreement on an exchange ratio. Also
discussed and conveyed to the Crested special committee was the inclusion
of
shares underlying Crested stock options in the USE exchange offer.
After
extensive discussion, the Crested special committee evaluated USE’s new offer
and accepted the proposed 2:1 exchange ratio, along with the proposals
that USE
would vote its Crested shares in line with a majority of the minority
Crested
shares, and inclusion of the Crested option shares as part of the total
merger
consideration. The special committees agreed to recommend these terms
to the full boards of directors of the companies.
· At
full
separate meetings of the USE and Crested boards of directors, the terms
recommended by the special committees were discussed. During the
board meetings, Navigant Capital and NTB indicated they would be willing
to
provide fairness opinions to USE, and Crested, respectively, if a definitive
merger agreement reflecting the 2:1 exchange ratio was signed. Following
the
meetings, on December 20, 2006, the following matters were agreed upon
by the
two special committees in separate discussions and approved by the
full USE
board: (i) USE would have the right to not consummate the merger if
Crested
shareholders with more than 200,000 shares dissented from the merger
under
Colorado law; and (ii) an optional cash out would be available (at
USE’s
discretion) for all of those Crested shareholders holding a small number
of
shares, in lieu of issuing USE shares to them. Each of the Crested
and USE boards of directors approved inclusion of these two latter
items in the
formal minutes of the USE board of directors meeting of December 20,
2006.
· From
December 21, 2006 to January 19, 2006, outside legal counsel exchanged
drafts of
the merger agreement and the voting agreement, and the respective boards
of
directors negotiated (through outside counsel) various provisions in
the draft
agreements. On January 22, 2007, NTB delivered its fairness opinion
to the special committee of the Crested board of directors, to the
effect that
the 2:1 exchange ratio was fair and reasonable from a financial point
of view to
the Crested minority shareholders. On January 23, 2007, Navigant
Capital made a final presentation to the full USE board of directors
of the
proposed terms and conditions of the exchange ratio, and thereafter
delivered
its opinion to the board of directors, to the effect that the exchange
ratio was
fair to the USE shareholders. The merger agreement and voting
agreement were unanimously approved by the directors of USE and were
signed on
January 23, 2007. The merger agreement and voting agreement were
unanimously approved by the directors of Crested and were signed on
January 23,
2007.
· On
July
31, 2007, the boards of directors of USE and Crested approved (upon
the
recommendation of their respective special committees), an amendment
to the
merger agreement to extend the deadline for consummating the merger
and to
provide that if the merger is approved by the Crested shareholders,
and the
merger is consummated, then Crested will pay the income tax which will
be owed
by each officer or director of USE who is a holder of a nonqualified
Crested
stock option upon its cashless exercise, provided that each such holder
delivers
to USE an agreement (a “lockup agreement”) not to sell (until retirement, death
or disability) any of the USE stock they receive in exchange for the
Crested
shares they acquire on exercise of those options.
· On
October 12, 2007, the special committees of USE and Crested, as well
as the full
boards of directors of both companies, approved and accepted the
updated
fairness opinions received from Navigant Capital and NTB, both dated on
October 12, 2007.
USE’s
Reasons for the Merger
In
reaching its decision to merge with Crested, USE considered the
following:
·
|
The
merger would result in the elimination of approximately $500,000
in
recurring annual costs, that has historically been paid by
USE, for
Crested’s legal and other expenses associated with Crested being
a public
company. USE has not derived any economic benefit from its
joint venture arrangement with Crested. Instead, USE has funded
Crested’s share of operational and administrative expenses for years,
without charging interest.
|
·
|
Crested
has no business independent of USE.
|
·
|
Joint
ownership of assets with Crested as a majority-owned subsidiary
is
confusing to the USE shareholders and the public markets. The
merger would eliminate this two tier
ownership.
|
Crested’s
Reasons for the Merger; Recommendation of Crested’s Board of
Directors
In
deciding to approve the merger agreement and to recommend approval
of the merger
to Crested’s minority shareholders, the Crested board of directors took into
account the Crested special committee’s recommendation that the 2:1 exchange
ratio be approved, and that the merger would be in the best interests
of the
Crested minority shareholders. The full board of directors of
Crested, including the independent directors who comprise the special
committee,
considered a number of factors, including the following:
·
|
At
December 31, 2006, Crested owed more than $13 million to
USE, and at that
date did not have the funds to pay the obligation. As a result
of receipt of proceeds from the Uranium One closing, Crested
has since paid its obligation to USE. However, Crested still
may not have sufficient capital to fund its portion of mineral
property
exploration and development costs. If Crested should not have
enough capital to continue participating with USE, USE may
not continue to
fund Crested’s costs if the merger is not consummated, which would result
in dilution to Crested’s interest in the
projects.
|
·
|
Crested
has no assets or business separate from USE. Because Crested is
traded on the OTCBB, Crested may find it difficult, if not
impossible, to
raise capital for a separate business plan. In addition,
because USE and Crested have the same economic interest in
the molybdenum
project, the companies would be competing for investment
capital needed
for this project.
|
·
|
Trading
volume in Crested’s stock has been small in relation to the number of
shares held by the minority shareholders and this condition
is not
expected to change. As a result, sales by the minority
shareholders of any significant portion of their Crested
shares likely
would cause the price to decrease substantially. USE is traded
on the Nasdaq Capital Market and historically has much greater stock
trading volume.
|
·
|
USE
has employees, greater financial resources than Crested,
and as a Nasdaq
listed company, has better access to the capital
markets.
|
·
|
Given
USE’s consolidated 70.1% ownership of Crested, the Crested board
of
directors did not consider it feasible to consider seeking
another company
to acquire Crested.
|
Based
on
the information available, the Crested board of directors determined
that the
value to be received by the Crested minority shareholders in the merger
is
greater than that available to them in a liquidation, a combination
with another
entity, or with Crested remaining an independent entity.
Financial
terms of the merger The Crested board of directors believes that the merger
consideration is fair to the shareholders based upon Crested’s current financial
condition and future prospects, as well as the current financial condition
and
the board’s perception of the future prospects of USE. In arriving at
this conclusion, the board of directors, together with Crested’s management and
legal and financial advisors, evaluated the lack of strategic alternatives
available to Crested.
The
Crested board of directors also recognized that in December 2006, the
merger
consideration represented an approximate 12% premium over the average
trading
price of Crested’s common stock during preceding periods. The Crested board
of directors also determined that the merger consideration fairly valued
the
cash and other assets on Crested’s balance sheet. In this regard, the Crested
board of directors considered the information presented by, and the
opinion of,
NTB. See “Opinion of the Crested Financial Advisor – Neidiger, Tucker, Bruner,
Inc.” below, and considered the updated opinion of NTB dated October 12,
2007 as
confirming the fairness of the exchange ratio as originally
determined.
Terms
of the merger agreement and voting agreement The Crested board of directors
considered the terms of the merger agreement, including the nature
and scope of
the closing conditions. The board also considered the potential for
incurring a termination fee in the event of a termination of the merger
agreement under certain circumstances. While this fee is small in
relation to similar fees in other merger transactions, it is potentially
significant given Crested’s limited financial resources, and this provision
might discourage third parties from seeking to acquire Crested.
The
board
took into account the other termination provisions of the merger agreement,
which were the subject of negotiations between the parties and which
would
permit either party to terminate the merger agreement without cause,
including
the provision that allows either party to terminate if the relative
stock prices
of the companies varies more than 20%.
In
addition, the Crested board considered the terms of the voting agreement
between
USE and certain of its affiliates who own Crested stock, and
Crested. The Crested board considered it important that USE and those
affiliates vote in line with the vote of the holders of a majority
of the
minority Crested shares.
Strategic
Alternatives. Other than the merger, the Crested board of
directors believed that the only strategic alternatives available to
Crested
were to liquidate or remain a stand-alone public company and seek to
grow.
Liquidation The
Crested board of directors considered a voluntary dissolution and liquidation
of
its assets as an alternative to the merger. Dissolution would require
approval by the holders of a majority of Crested’s shares, including the shares
held by USE. If approval were obtained, Crested would have to cease
doing business except to liquidate assets, pay creditors, and distribute
remaining assets to all shareholders. During the wind up phase, it is
possible that Crested would have to continue filing periodic reports
with the
SEC, and if it didn’t have the funds to pay these compliance costs, it might be
relying on USE to pay the costs, as well as other general and administrative
expenses.
Whether
USE would vote in favor of a liquidation is not known to the Crested
board. The Crested board also considered the fact that even if USE
approved of a liquidation, the amount Crested might obtain from liquidating
assets (for example, it’s 50% interest in the molybdenum properties) is
unknown. In addition, an attempted sale of the 50% interest in the
molybdenum properties might not be possible under the existing agreement
between
Kobex Resources Ltd., USE, and Crested. It is possible that buyers
could not be located, or if located, the price would be unrealistically
low
compared to the value Crested minority shareholders may receive by
owning shares
in USE after the merger, with USE continuing to develop value from
100% of the
two companies’ assets, including the molybdenum property.
Continuing
as an independent public entity. The other strategic alternative
considered by the Crested board was for Crested to remain an independent
entity. For Crested to realistically continue to operate as an
independent entity for the benefit of all its shareholders, it would
have to
grow significantly. This would require hiring officers and employees,
and potentially setting up an office outside of USE’s headquarters that the
USECC Joint Venture owns. If Crested moved out of the headquarters,
USE would have to either rent or purchase Crested’s one-half ownership in the
building. Crested would also have to seek new opportunities for
developing and executing a business plan that is not reliant on
USE.
Even
with
its share of the proceeds, after retiring debt to USE, from the sale
of the
uranium assets to Uranium One, Crested likely may not have enough capital
to
continue as an independent public company, and additional funding for
a new
untested business plan would be difficult if not impossible to
obtain.
The
Crested board acknowledges the risks related to its minority shareholders
owning
USE shares: USE historically has relied on transaction-based revenues;
its
operations require locating and successful working with industry partners;
and
protracted downturns in mineral commodity prices can delay realizing
value from
significant investments. However, Crested faces the same
risks. On balance, the Crested board concluded that the benefits of
combining with USE greatly outweigh the strategic alternatives. This
explanation of the Crested board of directors’ reasons for the merger and all
other information presented in this section is forward-looking in nature
and,
therefore, should be read in light of the factors discussed under the
caption
“CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS” in this proxy
statement/prospectus. The Crested board of directors also considered
the fact
that some members of the board of directors and of Crested management
may have
interests in the merger that are different from those of Crested shareholders
generally. See “THE MERGER—Crested’s Directors and Officers Have Financial
Interests in the Merger” and “—Indemnification” in this proxy
statement/prospectus.
At
a meeting held on January 23, 2007, after due consideration and consultation
with its financial and legal advisors, all Crested directors (including
the
independent directors) determined that the merger agreement and the
transactions
contemplated thereby were advisable, fair to and in the best interests
of
Crested and its shareholders, including the minority shareholders,
adopted the
merger agreement, and recommended that Crested shareholders vote to
adopt the
merger agreement. On October 12, 2007, all Crested directors reaffirmed
the proceeding, taking into account the updated opinion from
NTB.
Opinion
of the Crested Financial Advisor – Neidiger, Tucker, Bruner,
Inc.
Under
an
engagement letter dated October 25, 2006, Crested engaged Neidiger,
Tucker,
Bruner, Inc. to, among other things, render an opinion to the Crested
board of
directors that, as of the date of the opinion, the exchange ratio of
1 USE share
for each 2 Crested shares held by the Crested minority shareholders
in the
merger agreement is fair and reasonable from a financial point of view
to the
minority shareholders. On December 20, 2006, NTB orally advised a
meeting of the Crested board held that day that NTB was prepared to
issue its
opinion, and the written opinion, dated January 22, 2007, was delivered
to the
special committee of the Crested board on January 23, 2007. NTB’s
opinion is based upon and subject to the matters reviewed with the special
committee of the Crested board of directors and set forth in its opinion.
At the request of the Crested board of directors, NTB updated its opinion
as of
October 12, 2007, and confirmed the fairness of the exchange ratio
as fair and
reasonable to the Crested minority shareholders from a financial point
of
view. In this discussion, "NTB's opinion" refers to the opinion as of
October 12, 2007.
NTB,
as
part of its investment banking service, is regularly engaged in the
valuation of
businesses, securities and assets in connection with mergers, acquisitions,
underwritings, sales and distribution of securities, private placements
and
valuations for estates, and for corporate and other purposes.
This
description of NTB’s opinion is qualified by reference to the full text of the
opinion included as Appendix C. Crested shareholders are
urged to read the Neidiger, Tucker, Bruner, Inc. opinion in its
entirety.
NTB’s
engagement and its opinion are directed to and
for the benefit of the special committee of the Crested board of directors
in
connection with its consideration of the merger. It addresses only
the fairness of the merger consideration to the Crested minority shareholders
from a financial point of view as of the date of the opinion. It does
not address the merits of the proposed merger compared to the liquidation
of
Crested or Crested remaining an independent company. The opinion does
not address the merits of the underlying decision by Crested to engage
in the
merger. NTB expresses no opinion or recommendation as to how the
Crested shareholders should vote. Crested has paid NTB a cash
financial advisory fee.
The
NTB
opinion is necessarily based on market and other conditions as in effect
on, and
the information made available to NTB, as of the date of its
opinion. It should be understood that subsequent developments may
affect the conclusion expressed in the opinion and that NTB assumes
no
responsibility for advising any person of any change in any matter
affecting the
opinion, or for updating or revising it based on circumstances or events
occurring after its date. In rendering its opinion, NTB was not
authorized to solicit, and did not solicit, third-party indications
of interest
in acquiring all or a part of Crested or engaging in a business combination
or
any other strategic transaction with Crested.
In
the
course of performing its review and analyses in rendering its opinion,
NTB:
·
|
Reviewed
Crested and USE audited financial statements and annual
10-K filings with
the SEC for the fiscal years ended December 31, 2003, 2004,
2005 and
2006.
|
·
|
Reviewed
Crested and USE unaudited financial statements and quarterly
10-Q filings
with the SEC for the quarters ended March 31, 2006, June
30, 2006,
September 30, 2006, March 31, 2007, and June 30,
2007.
|
·
|
Conducted
discussions with certain members of management of USE and
Crested.
|
·
|
Reviewed
the Preliminary Analysis Presentation to USE prepared by
navigant Capital
Advisors, LLC, dated November 28, 2006 and revised November
30,
2006. Reviewed the fairness Analysis presented to USE by
Navigant Capital Advisors, LLC dated October 12,
2007.
|
·
|
Reviewed
the list of outstanding employee stock options and warrants
issued by
Crested and USE as provided by
management.
|
·
|
Reviewed
the financial condition and past operating results of Crested
and
USE.
|
·
|
Reviewed
the Merger Agreement dated January 23, 2007 and the First
Amendment to
Agreement and Plan of Merger dated July 31, 2007 by and
among USE and
Crested.
|
·
|
Reviewed
other publicly available information for both Crested and
USE.
|
·
|
Conducted
such other studies and analyses as deemed appropriate by
NTB.
|
NTB
relied on the accuracy and completeness of the financial and other
information
provided by Crested, and the information provided by Crested’s
management. NTB did not make an independent verification of such
information. NTB relied upon the accuracy and completeness of the
foregoing information, and did not assume any responsibility for and
did not
conduct any independent verification of this information. In addition,
NTB did
not conduct any independent valuation or appraisal of the assets or
liabilities
of Crested or concerning its solvency or fair value, and NTB was not
provided
with any such valuation or appraisal.
In
rendering its opinion, NTB assumed that the merger would be consummated
on the
terms described in the merger agreement without any waiver of any material
terms
or conditions. NTB also assumed that obtaining or not obtaining necessary
regulatory approvals for the merger would not have an adverse effect
on Crested
or the combined USE or the contemplated benefits of the consummation
of the
merger. NTB did not express any opinion as to tax or other consequences
that
might result from the merger, nor did its opinion address any legal,
tax,
regulatory or accounting matters, as to which NTB understood that Crested
had
obtained or would obtained such advice as it deemed necessary from
qualified
professionals.
NTB
and
the Crested Special Committee mutually reached a decision on the amount
of
consideration that would be deemed reasonable.
NTB
did
not express any opinion as to the price at which shares of Crested
or USE may
trade in the future.
Opinion
of the USE Financial Advisor – Navigant Capital Advisors,
LLC
The
following is a summary of the material financial and comparative analyses
that
were performed by Navigant Capital in connection with rendering its
opinion to
the board of directors of U.S. Energy Corp. The summary of is not a
complete
description of the analyses. The preparation of a fairness opinion is
a complex analytical process involving various determinations as to
the most
appropriate and relevant methods of financial analyses and the application
of
those methods to the particular circumstances, and, therefore, is not
readily
susceptible to summary description. In arriving at its opinion,
Navigant Capital considered the results of all the analyses and did
not
attribute any particular weight to any factor or analysis
considered. Rather, Navigant Capital made its determination as to
fairness on the basis of its experience and professional judgment after
considering the results of all of the analyses.
Navigant
Capital acted as USE’s financial advisor in connection with the proposed merger,
pursuant to an engagement letter dated as of October 6, 2006, and USE
has paid
Navigant Capital a customary fee. The USE board of directors selected
Navigant Capital as its financial advisor based on Navigant Capital’s
qualifications, expertise, reputation and professional
experience. Navigant Capital is an internationally recognized
investment banking firm that regularly engages in the valuation of
businesses
and securities in connection with mergers and acquisitions, leveraged
buyouts,
private placements and valuations for corporate and other purposes.
Navigant
Capital delivered to USE a written opintion dated January 23, 2007. That
opinion was updated and reissued as of October 12, 2007. The full text of
Navigant Capital’s October 12, 2007 written opinion to the USE board of
directors is attached as Appendix D and is referred to in the following
discussion as "Navigant Capital's opinion.". You should read
Navigant Capital’s opinion
carefully. The opinion is limited to the fairness, from a financial
point of view, to the holders of USE common stock of the
exchange ratio of one share of USE common stock for each two issued
and
outstanding shares of Crested common stock. The opinion does not
address the fairness of the exchange ratio to Crested or the minority
shareholders of Crested. Navigant
Capital’s opinion does not constitute a
recommendation to you on how to vote on the merger.
The
following summary, which is qualified in its entirety by reference
to the full
text of Navigant Capital’s opinion, discusses the material terms of Navigant’s
opinion.
In
arriving at its opinion, Navigant Capital:
·
|
Reviewed
USE’s and Crested’s audited financial statements included in their
respective Annual Reports on Securities and Exchange Commission
("SEC")
Form 10-K for the fiscal years ended December 31, 2002 through
2006 and
their respective unaudited financial statements included
in their
respective Quarterly Reports on SEC Form 10-Q for the six months
ended June 30, 2007, together with in each case the related
Management’s Discussion and Analysis of Financial Condition and Results
of
Operations included in the Report;
|
·
|
Reviewed
the January 23, 2007 Merger Agreement and the First Amendment
effective July 31, 2007, including (a) Section 1.5 providing
for the
conversion of Crested common stock into the right to receive
USE common
stock based on the Exchange Ratio and (b) Section 1.6 providing
for the
cashless exercise at the effective time of the Merger of
options to
purchase Crested common stock outstanding under Crested’s Incentive Stock
Option Plan and the conversion of such shares of Crested
common stock into
shares of USE common stock based on the Exchange
Ratio;
|
·
|
Reviewed
the Voting Agreement dated January 23, 2007 between USE, Crested
and
certain stockholders of Crested;
|
·
|
Reviewed
certain internal financial and other data concerning the
operations,
financial condition and financial forecasts relating to the
business,
earnings, cash flow, assets, liabilities and prospects of
USE and Crested
prepared by management of USE;
|
·
|
Conducted
discussions with members of management of USE concerning
the matters
described in the first four paragraphs
above;
|
·
|
Visited
certain facilities and business offices of USE and
Crested;
|
·
|
Visited
certain of USE’s and Crested’s
properties;
|
·
|
Reviewed
the executed Exploration, Development and Mine Operating
Agreement between U.S. Moly, USE, Crested and Kobex Resources Ltd.
dated April 3, 2007; Reviewed the executed Joint Venture
Agreement by and
between USE and Crested dated July 31, 1982 and subsequent amendment
dated January 20, 1989;
|
·
|
Reviewed
the list of outstanding employee stock options and warrants
issued by USE
and Crested as provided by USE;
|
·
|
Evaluated
net asset approaches for USE and Crested as stand-alone
entities;
|
·
|
Reviewed
the terms of (i) recent mergers and acquisitions of companies
in the
sector and (ii) premiums paid in acquisitions of a diverse
set of
companies;
|
·
|
Reviewed
the historical market prices, trading activity, and valuation
multiples
for USE’s and Crested’s publicly traded securities and compared them with
those of certain publicly traded companies;
and
|
·
|
Conducted
such other studies, analyses and inquiries as Navigant Capital
deemed
appropriate.
|
In
preparing its opinion, Navigant Capital assumed and relied upon, and
did not
independently verify, the accuracy and completeness of the information
reviewed
by it with respect to USE or Crested and did not assume any responsibility
with
respect thereto, and further relied upon the assurance of management
of USE that
it was not aware of any facts that would make such information inaccurate
or
misleading in any respect material to its analysis. Navigant Capital
did not make any physical inspection or independent appraisal of any
of the
properties or assets of USE, nor did it evaluate the solvency or fair
value of
USE under any state or federal laws related to bankruptcy, insolvency
or similar
matters. Navigant Capital’s opinion was necessarily based
on business, economic, market and other conditions existing as of the
date
of its opinion and could be evaluated by it at the date of the
opinion.
With
respect to the financial forecast information furnished to or discussed
with
Navigant Capital by USE, Navigant Capital assumed that such information
was
reasonably prepared and that it reflected the best currently available
estimates
and judgment of USE’s management as to the expected future financial performance
of USE and Crested. For purposes of its opinion, Navigant Capital
assumed that USE and Crested were not involved in any material transaction
other
than the merger and those activities undertaken in the ordinary course
of
business.
Navigant
Capital assumed that the merger would be consummated on the terms and
conditions
described in the merger agreement reviewed by Navigant Capital, without
material
delay, waiver, amendment or modification of any material term, condition
or
agreement therein, and that the definitive merger agreement would not
differ in
any material respect from the draft reviewed.
Based
upon the foregoing and other statements in the opinion, and in reliance
thereon,
Navigant Capital’s opinion states that the exchange ratio is fair, from a
financial point of view, to the shareholders of USE.
Navigant
Capital’s opinion only addressed the matters specifically addressed thereby.
Without limiting the foregoing, Navigant Capital’s opinion did not address: (i)
matters that require legal, regulatory, accounting, insurance, tax
or other
professional advice; (ii) the underlying business decision of USE,
its
shareholders or any other party to proceed with or effect the merger;
(iii) the
fairness of any portion or aspect of the merger not expressly addressed
in the
opinion; (iv) the fairness of any portion or aspect of the merger to
the holders
of any class of securities, creditors or other constituencies of USE,
or any
other party other than those set forth in the opinion; (v) the relative
merits
of the merger as compared to any alternative business strategies that
might
exist for USE or the effect of any other transaction in which USE and
Crested
might engage; (vi) the tax or legal consequences of the merger to either
USE,
its security holders, or any other party; (vii) the degree to which
the amount
and nature of the compensation from the merger benefits any individual
officers,
directors, employees or class of such persons, relative to the benefits
to the
shareholders of USE; (viii) the likely price at which USE’s or Crested’s common
stock will trade; or (ix) matters relating to the exercise or conversion
of
options issued pursuant to Crested’s Incentive Stock Option
Plan. Navigant Capital was not engaged to initiate any discussions
with third parties with respect to a possible acquisition or any other
alternative transaction or to negotiate the terms of the merger, and
Navigant
Capital was not asked to, and Navigant Capital did not, offer any opinion
as to
the material terms of the merger agreement or the form of the
merger.
Navigant
Capital assumed that the merger will be consummated on the terms and
conditions
described in the merger agreement and amendment, without material delay,
waiver,
amendment or modification of any material term, condition or agreement
therein.
Navigant
Capital’s opinion does not address the relative merits of the merger or any
alternatives thereto, the underlying decision of the board to proceed
with or
effect the merger, or any other aspect of the merger. In furnishing
its opinion, Navigant Capital does not admit that it is an expert within
the
meaning of the term “expert” as used in the Securities Act, nor does it admit
that its opinion constitutes a report or valuation within the meaning
of the
Securities Act.
Navigant
Capital employed generally accepted valuation practices and methods
in preparing
its opinion. The following summarizes Navigant Capital’s material
financial analyses used in developing its opinion. The summary does
not
constitute a complete description of Navigant Capital’s analyses and the factors
it considered in preparing its opinion, including the assumptions and
methodologies that underlie the analyses. The preparation of an
opinion regarding fairness, from a financial point of view, is a complex
process
involving the application of subjective business judgment in determining
the most appropriate and relevant methods of financial analysis and
the
application of those methods to the particular circumstances and, therefore,
is
not readily susceptible to summary description.
No
company, transaction or business used in Navigant Capital’s analyses as a
comparison is identical or directly comparable to USE, Crested, or
the proposed
merger, and an evaluation of the results of those analyses is not entirely
mathematical. Rather, the analyses involve complex considerations and
judgments concerning financial and operating characteristics and other
factors
that could affect values of the companies or the merger.
In
performing its analyses, Navigant Capital made numerous assumptions
with respect
to financial conditions and other matters, many of which are beyond
the control
of Navigant Capital or USE. Any estimates contained in the analyses
are not necessarily indicative of actual values or future results,
which may be
significantly more or less favorable than suggested by the analyses.
The
analyses do not purport to be appraisals or to reflect the prices at
USE’s
assets actually could be sold.
Summary
of Analyses Performed by Navigant
Navigant
Capital’s principal analyses were a comparison of the relative stock prices
of
USE and Crested, a comparison of the ranges of fair market value of
the equity
of USE and Crested utilizing a net asset approach and premiums paid
in similar
transactions. These analyses each suggested an “implied exchange
ratio” of the number of Crested shares exchangeable into one USE share that
would be supported by relative stock prices, and by the net asset
approach.
In
arriving at its opinion, Navigant Capital considered all of the analyses
it
performed and did not attribute any particular weight to any specific
analysis
nor did it reach a conclusion based on any single analysis. Consequently,
no
single analysis should be considered independently as it may lead to
a
misleading conclusion about Navigant’s opinion concerning the exchange ratio for
the merger.
Stock
Price Comparison. The simple average price of USE and
Crested stock prices, as reported for the 30 days ended December 18,
2006, were
$5.16 and $2.32, respectively, indicating an implied exchange ratio
of 2.224
Crested shares for 1 USE share. The volume weighted average prices
for that period, using reported prices and trading volumes in each
company’s
stock, were $5.30 and $2.31, respectively, indicating an implied exchange
ratio
of 2.294 Crested shares for 1 USE share.
The
simple average price of USE and Crested stock prices, as reported for
the 60
days ended December 18, 2006, were $4.64 and $1.98, respectively, indicating
an
implied exchange ratio of 2.343 Crested shares for one USE share. The
volume weighted average prices for that period, using reported prices
and
trading volumes in each company’s stock, were $5.02 and $2.12, respectively,
indicating an implied exchange ratio of 2.368 Crested shares for one
USE
share.
Since
December 26, 2007, the two companies' stock prices have
converged to the 2 for 1 exchange ratio.
Net
Asset Approach to Equity Value. The main
properties owned by USE and Crested were discretely valued based
on indications
of cash flows associated with the agreements relating to USE’s and Crested’s
mining properties, and discounting these cash flows at an annual
rate of 10%,
and further discounting, for the underlying transaction risks, ranging
from 10%
to 20%, to account for the risks (i) due to the transactions having
not yet been
completed, (ii) associated with developing properties, and (iii)
the credit risk
of third parties. The values of other assets and liabilities were
based on book value or values represented by USE
management. Adjustments in these values were based on the judgment of
Navigant Capital. This net asset approach discretely estimated the
equity value
of the companies.
As
shown
in the following table, the range of implied exchange ratios was
from 1.909 to
1.929 Crested shares for one USE share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Approach
|
|
10%
Project Completion Risk
|
|
|
15%
Project Completion Risk
|
|
|
20%
Project Completion Risk
|
|
|
|
for
Kobex Mining Agreement;
|
|
|
for
Kobex Mining Agreement;
|
|
|
for
Kobex Mining Agreement;
|
|
|
|
10%
SGMI share discount (1)
|
|
|
15%
SGMI share discount (2)
|
|
|
20%
SGMI share discount (3)
|
|
Ticker
Symbol
|
|
USEG
(4)
|
|
|
CBAG
(4)
|
|
|
USEG
(4)
|
|
|
CBAG
(4)
|
|
|
USEG
(4)
|
|
|
CBAG
(4)
|
|
Shares
Outstanding as of 10/5/07
|
|
|
20,912,000
|
|
|
|
17,183,000
|
|
|
|
20,912,000
|
|
|
|
17,183,000
|
|
|
|
20,912,000
|
|
|
|
17,183,000
|
|
Adjustment
for Vested Options and Warrants
|
|
|
1,522,275
|
|
|
|
373,353
|
|
|
|
1,522,275
|
|
|
|
373,353
|
|
|
|
1,522,275
|
|
|
|
373,353
|
|
Diluted
Number of Shares Outstanding
|
|
|
22,434,275
|
|
|
|
17,556,353
|
|
|
|
22,434,275
|
|
|
|
17,556,353
|
|
|
|
22,434,275
|
|
|
|
17,556,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
of Underlying Properties
|
|
$ |
25,786,978
|
|
|
$ |
19,920,134
|
|
|
$ |
24,184,360
|
|
|
$ |
18,643,451
|
|
|
$ |
22,581,741
|
|
|
$ |
17,366,768
|
|
Plus:
Current Assets Including Cash (5)
|
|
|
64,680,602
|
|
|
|
35,341,533
|
|
|
|
64,680,602
|
|
|
|
35,341,533
|
|
|
|
64,680,602
|
|
|
|
35,341,533
|
|
Less:
Current Liabilities ex-ST Debt (5)
|
|
|
2,445,890
|
|
|
|
2,916,451
|
|
|
|
2,445,890
|
|
|
|
2,916,451
|
|
|
|
2,445,890
|
|
|
|
2,916,451
|
|
Less:
Total Debt (5)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Less:
Other Accrued Liabilities (5)
|
|
|
(806,505 |
) |
|
|
894,373
|
|
|
|
(806,505 |
) |
|
|
894,373
|
|
|
|
(806,505 |
) |
|
|
894,373
|
|
Plus:
Other Net Assets (5)
|
|
|
373,781
|
|
|
|
85,158
|
|
|
|
373,781
|
|
|
|
85,158
|
|
|
|
373,781
|
|
|
|
85,158
|
|
Equals:
Fair Market Value of Equity
|
|
|
89,201,976
|
|
|
|
51,536,000
|
|
|
|
87,599,357
|
|
|
|
50,259,317
|
|
|
|
85,996,739
|
|
|
|
48,982,634
|
|
Plus:
Adj for Cash Infusion from Exercise of O&W
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equals:
Adjusted Fair Market Value of Equity
|
|
|
89,201,976
|
|
|
|
51,536,000
|
|
|
|
87,599,357
|
|
|
|
50,259,317
|
|
|
|
85,996,739
|
|
|
|
48,982,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus:
70.9% of CBAG Net Assets
|
|
|
36,539,024
|
|
|
|
|
|
|
|
35,633,856
|
|
|
|
|
|
|
|
34,728,688
|
|
|
|
|
|
Equals:
Adj FMV of USEG (Consolidated)
|
|
|
125,741,000
|
|
|
|
|
|
|
|
123,233,213
|
|
|
|
|
|
|
|
120,725,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
Share Price
|
|
$ |
5.60
|
|
|
$ |
2.94
|
|
|
$ |
5.49
|
|
|
$ |
2.86
|
|
|
$ |
5.38
|
|
|
$ |
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of CBAG Net Assets to Acquire 29.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
Consideration
|
|
|
|
|
|
$ |
14,996,976
|
|
|
|
|
|
|
$ |
14,625,461
|
|
|
|
|
|
|
$ |
14,253,947
|
|
Implied
Exchange Ratio (rounded)
|
|
|
|
|
|
|
1.909
|
|
|
|
|
|
|
|
1.919
|
|
|
|
|
|
|
|
1.929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
(1)
|
Assumes
10% transaction risk for KOBEX exploration, development and mine
operating agreement and 10% illiquidity discount for the shares of
SGMI.
|
|
(2)
|
Assumes
15% transaction risk for KOBEX exploration, development and mine
operating agreement and 15% illiquidity discount for the shares of
SGMI.
|
|
(3)
|
Assumes
20% transaction risk for KOBEX exploration, development
and mine operating
agreement and 20% illiquidity discount for the shares of
SGMI. |
|
(4)
|
Includes
50% of USECC assets and
liabilities.
|
|
(5)
|
Valued
at book value from 6/30/07 balance
sheets.
|
Premiums
Paid in Similar Transactions. Navigant Capital also reviewed
the terms and premiums paid in similar transactions over the past
five
years. Some of the transactions involved companies in the minerals
sector (uranium, and gold and silver) and other transactions involved
companies
in other industry sectors. This analysis showed acquirors paid
premiums over (or under) the 30 day trading average of the target
companies’
stock price, ranging from 314% to -55% for uranium companies 14 transactions
analyzed having an arithmetic mean of 72.5% and a median of 42%);
348% to -36%
for gold and silver companies (63 transactions analyzed having an
arithmetic
mean of 60.3% and a median of 48%); and 114% to -62% for target companies
in all
industries (less than $1 billion deal size) in cases where a greater-than-70%
majority owner purchased the remaining minority stake (15 transactions
analyzed
having an arithmetic mean of 27% and a median of 22%).
Decision
of USE’s Board of Directors
In
deciding to approve the merger agreement and to recommend approval
of the
merger, the USE board of directors (including the independent directors
on the
special committee) carefully considered Navigant Capital’s original opinion on
the fairness of the 2:1 exchange ratio and the several analyses performed
by
Navigant Capital regarding the relative values of USE and
Crested. These same elements were taken in account by the board of
directors in its review of Navigant Capital's October 12, 2007 opinion.
However, Navigant Capital’s opinion was one of several factors taken into
consideration.
The
board
also considered the other factors described under “USE’s Reasons for the
Merger.” Further, the board considered the possibility that the strategic
alternative of Crested continuing as an independent company would
not be
successful, in which case the USE shareholders would not realize
any value for
the consolidated 70.1% stake held in Crested.
Board
of Directors and Management of USE Following the Merger
There
will be no change in the current directors and executive officers
of USE
following the merger. The USE board is not under any obligation to,
and does not intend to, appoint the Crested outside directors to
the USE
board. The officers of Crested also serve as officers of USE, and
those individuals will continue in service to USE. USE may at some
point in the future ask officers of Crested who are currently not
on the USE
board of directors to stand for election as directors of USE.
Information
about the USE directors and officers, and compensation paid to
such persons, can
be found in USE’s proxy statement for the annual meeting which was held on June
22, 2007. See “WHERE YOU CAN FIND MORE
INFORMATION.”
Distribution
of the Merger Consideration
Within
five business days after the completion of the merger, USE will send
a letter of
transmittal and instructions to each Crested shareholder for use
in (i)
exchanging certificates representing shares of Crested for shares
of USE (which
will be in book-entry form unless a physical certificate is requested),
and (ii)
for those Crested shareholders owning 500 or fewer Crested shares,
the option of
receiving cash instead of USE shares; provided, that USE has the
right to elect
to pay such cash or issue shares to all such electing Crested
shareholders. USE will cause its transfer agent (Computershare Trust
Company) to deliver USE shares to each Crested shareholder (or cash
for holders who decide to receive and USE agrees to pay cash), once it
receives the properly completed transmittal materials together with
such
shareholder’s certificated or uncertificated Crested
shares.
Certificated
Crested shares may be delivered to USE up to six months after completion
of the
merger. At the end of that period, in its discretion, USE may refuse
to honor further requests for issuing USE shares. USE will not be
liable to anyone if merger consideration is delivered to a public
official
pursuant to any applicable abandoned property, escheat or similar
law.
If
your certificate representing Crested shares has been lost, stolen
or destroyed,
you may receive the merger consideration if you give the exchange
an affidavit
to that effect. USE may require you to post a bond in reasonable
amount as an indemnity against any claim that may be made against
USE with
respect to the lost, stolen or destroyed certificate.
After
completion of the merger, there will be no further
transfers on
the stock transfer books of Crested and all Crested shares presented
to
USE’s transfer agent for any reason
will be converted into the right to receive USE shares.
Public
Trading Markets
USE
common stock is listed on the Nasdaq Capital Market (“USEG”). Crested
common stock is listed on the Over-the-Counter Bulletin Board
(“CBAG”). If the merger is consummated, Crested stock will be
delisted from the OTCBB and deregistered with the SEC under the Securities
Exchange Act of 1934. USE will use its reasonable best efforts to
cause the merger consideration (the shares of USE issued in the merger)
to be
listed on Nasdaq.
Except
for USE shares issued to any person who is deemed to be an affiliate
of Crested,
all the USE shares to be issued in the merger will be freely transferable
under
the Securities Act.
For
information on the implied value of one Crested share on the day
before the
signing of the merger agreement, and a date prior to the distribution
of this
proxy statement/prospectus, please see “COMPARATIVE MARKET PRICES AND DIVIDENDS
– Recent Closing Prices.”
USE
Dividends
USE
declared a dividend of $0.10 per share on all outstanding shares
of its common
stock for all holders on the record date of July 6, 2007, payable
on July 16,
2007. Prior to the current dividend USE has only declared a dividend
on one other occasion, November 1, 1990, when it declared a 1 for 10 share
dividend. Management of USE does not currently anticipate any
dividends to be paid in the near term future but anticipates retaining
earnings
to fund investments and business development.
Crested’s
and USE’s Directors and Officers Have Financial Interests in the
Merger
Those
executive officers and directors of Crested that hold options to
buy Crested
shares underlying options may be deemed to have financial interests
in the
merger that are in addition to their financial interests as current
shareholders
of Crested. The Crested board of directors was aware of these
financial interests and considered them, among other matters, in
approving the
merger agreement. The officers and directors of USE who do not serve
Crested also hold Crested options.
If
at the
special meeting the merger is approved by the holders of a majority
of the
minority Crested Shares, then, immediately prior to that consummation,
those
officers, directors, and employees of USE (and a recently-retired
officer, Daniel P. Svilar) who elect to exercise their options under
the Crested
incentive stock option plan, will receive shares of Crested. The
exercise of options would be by a “cashless exercise” method, using the Crested
$2.32 stock price at December 21, 2006, resulting in the issuance
of a total of
394,398 Crested shares.
In
addition, the merger agreement provides that if the merger is consummated,
then
Crested would pay the income taxes which would be owed by those persons
who
exercise (by cashless method) their Crested options which are nonqualified
(the
“Crested NSOs”). Additionally Crested has agreed to pay the income
taxes 15,000 forfeitable shares of Crested common stock which were
issued in
1990 to Mr. Lorimer. As a result of the merger, these forfeitable
Crested shares will be converted into 7,500 shares of USE on the
same ratio of
2:1 pursuant to the Merger Agreement. The 7,500 shares of USE will be
subject to a Lock-up Agreement not to sell the shares until retirement,
total
disability or death. This provision was approved by the independent
directors of Crested.
The
amount of tax which would be owed by such persons will depend on
the market
prices for USE and Crested stock when the merger is closed. Assuming
market prices for USE of $4.74 and Crested of $2.32, the total income
tax which
would be paid by Crested for all such persons would be approximately
$268,700. Such persons include the officers and directors in service
to USE, a retired USE director (Don C. Anderson); and a recently-retired
USE and
Crested officer (Daniel P. Svilar);. Further to USE’s Compensation
Committee’s objective of compensating current officers with equity to further
motivate them to stay in service, the Compensation Committee recommended
(and
the USE Board of Directors has mandated) that all of the officers
of USE sign
lockup agreements not to sell (until retirement, death or disability)
any of the
USE stock they receive in exchange for the Crested stock they receive
on
cashless exercise of the Crested NSOs, and, for Steven R. Youngbauer,
those
shares he would receive on cashless exercise of his qualified options (even
though he will not recognize income on exercise of such options).
The
following table shows the amount of Crested options held by officers
and
directors of USE and the number of shares which will be issued to
each such
person if the merger is consummated.
|
Name
|
|
CRESTED
Options
|
CRESTED
Shares
Upon
Cashless
Exercise
|
USE
Shares
After
Merger
|
|
Officers
and Directors of USE and Crested
|
|
|
|
Harold
F. Herron
|
(1)
|
200,000
|
52,586
|
26,293
|
|
Keith
G. Larsen
|
(2)
|
200,000
|
52,586
|
26,293
|
|
Robert
Scott Lorimer
|
(3)
|
200,000
|
52,586
|
26,293
|
|
Steven
R. Youngbauer
|
(4)
|
50,000
|
13,147
|
6,574
|
|
|
|
650,000
|
170,905
|
85,453
|
|
|
|
|
|
|
|
Officer
and Directors of USE only
|
|
|
|
|
|
Mark
J. Larsen
|
(5)
|
200,000
|
52,586
|
26,293
|
|
Michael
T. Anderson
|
(6)
|
30,000
|
7,888
|
3,944
|
|
Michael
H. Feinstein
|
(6)
|
30,000
|
7,888
|
3,944
|
|
H.
Russell Fraser
|
(6)
|
30,000
|
7,888
|
3,944
|
|
|
|
290,000
|
76,250
|
38,125
|
|
|
|
|
|
|
|
Prior
Officers and Directors
|
|
|
|
|
|
Don
Anderson
|
(7)
|
30,000
|
7,888
|
3,944
|
|
Daniel
P. Svilar
|
(8)
|
200,000
|
52,586
|
26,293
|
|
|
|
230,000
|
60,474
|
30,237
|
|
|
|
|
|
|
|
|
|
1,170,000
|
307,629
|
153,815
|
|
|
|
|
|
|
(1)
|
Serves
as Co - Chairman, President and Director of Crested. Also
serves as Sr. Vice President and Director of USE
|
(2)
|
Serves
as Co-Chairman and Director of Crested. Also serves as Chairman
and CEO of USE as a Director of Crested
|
(3)
|
Serves
as CFO, Treasurer and Vice President of Finance for Crested
and
USE. Also serves
|
(4)
|
Serves
as General Counsel and Secretary for Crested and USE
|
|
(5)
|
Serves
as President, COO and Director of USE
|
|
|
(6)
|
Serves
as Director of USE
|
|
|
|
|
(7)
|
Served
as a Director of USE until retirement in January of 2007
|
|
(8)
|
Served
as General Counsel and Secretary of USE. Also served as
a Director Crested
and as a
|
|
Director
and General Council of Crested until retirement on January
12,
2007
|
The
USE
shares will be issued based on the same 2:1 exchange ratio as applies
to
Crested’s minority shareholders.
Indemnification
and Insurance
The
merger agreement provides that, for six years following consummation
of the
merger, USE will indemnify and hold harmless, the directors and officers
of
Crested (with respect to claims arising from facts or events relating
to the
merger and occurring prior to consummation of the merger), to the
fullest extent
permitted by USE’s articles of incorporation and bylaws, and Wyoming
law. This indemnification extends to Mike Zwickl and Kathleen Martin,
independent directors of Crested and special committee members, who
will not
become directors of USE. USE will obtain a rider to its current
policy of directors’ and officers’ liability insurance to cover such claims
against such persons once the merger is completed.
The
following summarizes certain provisions of the agreement and plan
of merger, as
amended, and the merger which are not summarized elsewhere. The
summaries are qualified in their entirety by reference to the complete
text of
the agreement and plan of merger which is incorporated by reference
into the
prospectus and attached as Appendix A. Please read the entire merger
agreement.
Representations
and Warranties
The
merger agreement contains representations and warranties by USE and
Crested,
some of which reflect negotiations between the parties and which
are customary
in transactions of this type. The representations and
warranties are solely for the benefit of the parties to the merger
agreement and
may be limited or modified by a variety of factors, including: subsequent
events, information included in public filings, and disclosure schedules
to the
merger agreement. Accordingly, some of the representations and
warranties may not describe the actual state of affairs after the
date of the
merger agreement, and you should not rely on them as statements of
fact.
Closing
and Effective Time of the Merger
Closing. The
closing of the merger will take place on the first business day following
the
date on which all closing conditions set forth in the merger agreement
have been
either satisfied or waived (other than any conditions which by their
terms
cannot be satisfied until the closing date) or such other time as
agreed to in
writing by USE and Crested. We currently expect to complete the
merger in the fourth quarter of 2007.
Effective
Time. The merger will be effective upon the filing of (a) a
statement of merger executed in accordance with the relevant provisions
of the
Colorado Corporations and Associations Act with the Secretary of
State of the
State of Colorado, and (b) articles of merger executed in accordance
with the
relevant provisions of the Wyoming Business Corporations Act with
the Secretary
of State of the State of Wyoming. The effective time may be a later
date than when both filings have been made, if a later time is specified
in the
filings by USE and Crested.
No
Solicitation of Takeover Proposals.
The
merger agreement provides that, until its termination, Crested will
not, and
will not permit any of its subsidiaries or any of its or its subsidiaries’
officers, directors or employees, or any investment bankers, attorneys
or other
advisors or representatives to, directly or indirectly, (i) solicit,
initiate,
or encourage any inquiries relating to, or the submission of, any
Takeover
Proposal (as defined below), (ii) approve or recommend any Takeover
Proposal,
accept any Takeover Proposal or enter into any letter of intent,
agreement in
principle or agreement with respect to any Takeover Proposal (or
resolve to or
publicly propose to do any of the foregoing) or (iii) participate
in any
discussions or negotiations regarding, or furnish to any person any
information
with respect to, or take any other action to facilitate any inquiries
or the
making of any proposal or offer that constitutes, or may reasonably
be expected
to lead to, any Takeover Proposal.
Despite
this general prohibition on activities with respect to a Takeover
Proposal,
Crested or its board of directors may take and disclose to Crested’s
shareholders a position with respect to a tender offer by a third
party pursuant
to the SEC’s Rules 14d-9 and 14e-2 promulgated under the Exchange Act, provided
that the board may not recommend that the shareholders tender their
Crested
common stock in connection with any such tender or exchange offer
unless the
board determines in good faith:
·
|
after
consultation with its financial advisors and outside counsel,
that failing
to take such action would reasonably be expected to constitute
a breach of
the fiduciary duties of the board;
and
|
·
|
that
the Takeover Proposal is a “Superior Proposal” (as defined
below).
|
In
addition, if, prior to the special meeting of Crested shareholders
relating to
approval of the merger, Crested received an unsolicited bona fide
written
Takeover Proposal from a third party that the board determined in
good faith
(after receiving the advice of a financial adviser of nationally or
regionally recognized reputation) is reasonably likely to be a Superior
Proposal, Crested and its representatives would be permitted to conduct
such
discussion or provide such information as the board determines. Moreover,
the
board would have to determine in its good faith judgment those actions
which it
would be required to take in order to comply with its fiduciary duties.
Crested
has agreed that, prior to providing any information or data to, or
entering into
any negotiations or discussions with, any such third-party or making
any such
recommendation in connection with a proposal or offer for a Takeover
Proposal,
it will receive from such third-party an executed confidentiality
agreement.
Crested
has agreed to promptly notify USE if it receives any Takeover Proposal,
including the identity of the party submitting such proposal, and
to provide
USE, no later than 24 hours after receipt, with the material terms,
conditions
and other aspects of any inquiries, proposals or offers with respect
to, or
which could reasonably be expected to lead to, a Takeover Proposal,
and of any
modifications or revisions to the terms of the Takeover Proposal.
“Takeover
Proposal” means any proposal or offer (whether or not in writing and whether
or
not delivered to the shareholders of Crested generally) for a merger
or other
business combination, reorganization, share exchange, recapitalization,
liquidation, dissolution or similar transaction involving Crested
or any of its
subsidiaries or to acquire in any manner (including by tender or exchange
offer), directly or indirectly, a 25% or more equity interest in,
any voting
securities of, or assets (including equity interests in other entities)
of
Crested and its subsidiaries having an aggregate value equal to 10%
or more of
Crested’s net asset value, other than the transactions contemplated by the
merger agreement.
“Superior
Proposal” means any unsolicited bona fide written Takeover Proposal
which:
|
(A) a
merger or other business combination, reorganization, share
exchange,
recapitalization, liquidation, dissolution, tender offer,
exchange offer
or similar transaction involving Crested as a result of
which Crested’s
shareholders prior to such transaction in the aggregate
cease to own at
least 20% of the voting securities of the ultimate parent
entity resulting
from such transaction; or
|
|
(B) a
sale, lease, exchange, transfer or other disposition (including,
without
limitation, a contribution to a joint venture) of at least
10% of the
value of the net assets of Crested and its subsidiaries,
taken as a whole;
and
|
|
(2) is
otherwise on terms which Crested’s board of directors determines after
consultation with its financial advisor and outside legal
counsel,
|
|
(A) would
result in a transaction that, if consummated, is more favorable
to
Crested’s shareholders from a financial point of view than the
merger or,
if applicable, any proposal by USE to amend the terms of
the merger
agreement taking into account all the terms and conditions
of such
proposal and the merger agreement;
and
|
|
(B) is
reasonably capable of being completed without undue
delay.
|
Conditions
to the Completion of the Merger
In
addition to the satisfaction immediately prior to completion of the
merger of
customary representations and warranties made by each party in the
merger
agreement, there are specific conditions which must be satisfied
or waived to
complete the merger. If the conditions are not satisfied or waived,
to the extent permitted by law, the merger will not occur, and each
of USE and
Crested may lose some or all of the intended benefits of the
merger. If these conditions have been satisfied (or waived), USE will
(pursuant to the voting agreement with Crested) vote its shares consistent
with
the vote of the holders of a majority of the minority Crested
shares. Certain conditions are:
·
|
there
is no temporary restraining order, preliminary or permanent
injunction or
other order or decree issued by any court of competent
jurisdiction or
other statute, law, rule, legal restraint or prohibition
in effect
preventing the completion of the
merger;
|
·
|
USE’s
shares to be issued in the merger have been approved for
listing on
Nasdaq, subject to official notice of
issuance;
|
·
|
the
merger agreement is adopted by the holders of a majority
of minority
shares of Crested;
|
·
|
holders
of not more than 200,000 Crested shares have not dissented
from the
merger; and
|
·
|
certain
legal and tax opinions are
delivered.
|
Conduct
of Business of Crested and USE Pending the Merger
Pursuant
to the merger agreement, Crested and USE each have agreed that, prior
to the
Effective Time, except as otherwise agreed to by the other party
in writing
(which agreement will not be unreasonably withheld) or except in
connection with
the transactions contemplated by the merger agreement, each will,
and will cause
each of its subsidiaries to, conduct its business in the ordinary
and usual
course and in a manner consistent with past practice, and will use
all
reasonable efforts to maintain beneficial business relationship and
good will
with suppliers, contractors, distributors, customers, licensors,
licensees and
others having business relationships, and keep available the services
of its
current key officers (and in the case of USE, its key
employees). “Ordinary and usual course of business” include the
activities contemplated by the agreement with Kobex Resources Ltd.
and the
acquisition of mineral properties. In addition, Crested (but not USE)
has agreed not to issue or acquire any of its common stock or issue
securities
convertible into common stock (except for the issuance of common
stock on
exercise of options outstanding under Crested’s incentive stock option
plan).
·
|
Each
of the companies in addition have agreed not to enter into
or modify
material agreements, or amend their articles of incorporation
or bylaws,
or permit their subsidiaries to do so. Excepted from this
agreement would be modifications to the agreement with
Kobex (so long as
such modifications are of equal application to each of
USE and
Crested).
|
Termination
and Termination Fees; Payment of Fees and Costs Generally
The
merger agreement may be terminated before the special meeting, or
after the
special meeting even if the minority shareholders of Crested have
approved the
merger agreement, under specific conditions:
·
|
by
either USE or Crested if the merger is not completed, through
no fault of
the terminating party, by December 31, 2007, although this
deadline may be
extended by mutual agreement;
|
·
|
by
USE if the holders of a majority of the Crested minority
shares do not
approve the merger agreement;
|
·
|
by
USE or Crested if any final and nonappealable legal restraint
is issued
having the effect of permanently restraining, enjoining
or otherwise
prohibiting the merger;
|
·
|
by
USE if the Crested board of directors (or its special committee)
withdraws, modifies or amends its approval or recommendation
in favor of
the merger or recommends or approves to Crested’s shareholders a Takeover
Proposal or resolves to do any of the foregoing, or otherwise
breaches its
obligations relating to the solicitation of Takeover Proposals
(see
below);
|
·
|
by
USE if the holders of more than 200,000 Crested shares
dissent from the
merger;
|
·
|
by
USE or Crested if, at any time before completion of the
merger, USE’s
closing stock price has been 20% more or less than the 2 to 1
exchange ratio as applied to the Crested stock price, for
two or more
consecutive trading days;
|
·
|
by
USE or Crested due to material uncovered breaches or failures
to perform
by the other party.
|
Crested
has agreed to pay USE a termination fee equal to 50% of USE’s legal and
financial advisory fees incurred in connection with the merger agreement
(the
“Termination Fee”) if the merger agreement is terminated by USE because (i)
Crested’s board of directors (or any committee thereof) has withdrawn, modified
or amended in any manner adverse to USE its approval of or recommendation
in
favor of the merger or recommended or approved a Takeover Proposal
or resolved
to do any of the foregoing; (ii) Crested breached its covenant in
Section 5.9 of
the merger agreement relating to the solicitation of Takeover Proposals;
or
(iii) Crested otherwise intentionally breaches the merger
agreement.
·
|
USE
has agreed to pay Crested (i) all of Crested’s legal and financial
advisory fees if USE terminates the agreement because the
holders of more
than 200,000 Crested shares dissent from the merger; and
(ii) 50% of
Crested’s legal and financial advisory fees incurred in connection
with
the merger agreement if Crested terminates the agreement
due to USE’s
intentional breach of the agreement, even if all conditions
to USE
consummating the merger have been
fulfilled.
|
In
the
event of termination, USE and Crested will have no obligations thereunder
to
each other except for payment of the Termination Fee or payment of
Crested’s
fees as described in the preceding paragraph.
·
|
Except
as described above, and except for costs to mail this proxy
statement/prospectus (to be shared equally), the parties
will pay their
own legal and financial advisory fees and costs related
to the merger
agreement.
|
At
the
same time USE and Crested signed the merger agreement, the companies
and those
officers and directors of USE who own shares of Crested, signed an
irrevocable
voting agreement (attached as Appendix B). The voting agreement was
signed as an inducement for Crested to sign the merger agreement.
Voting
of Shares Pursuant to the voting agreement, USE and the others
who are party to it have agreed to vote (at the Crested special meeting)
consistent with the vote of holders of a majority of the minority
Crested
shares, whether in favor of, or against, approval of the merger agreement,
as
well as any other matters required to be approved by the Crested
shareholders at
the meeting. However, under the voting agreement, USE may elect to
not vote in favor of the merger, even if it has been approved by
the holders of
a majority of the minority Crested shares, to the extent such election
is
permitted (see “THE MERGER AGREEMENT - Conditions to the Completion
of the Merger” above).
Under
the
voting agreement, USE and the others also have agreed to vote against
any
proposal at the meeting which would result in a breach by Crested
of the merger
agreement. The others who are party to the voting agreement have
agreed not to assert dissenters’ rights. See “DISSENTERS’ RIGHTS”
below.
The
Crested shares subject to the voting agreement are:
|
U.S.
Energy Corp.
|
|
12,024,733
|
|
|
|
|
|
Plateau
Resources
|
|
60,000
|
|
|
|
|
|
Sutter
Gold
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harold
F. Herron
|
(1)
|
3,466
|
|
|
|
|
|
Robert
Scott Lorimer
|
(2)
|
15,000
|
|
|
|
|
|
Daniel
P. Svilar
|
(3)
|
147,850
|
|
|
|
|
|
Kathleen
Martin
|
(4)
|
41,722
|
|
|
|
|
|
Mike
Zwickl
|
(4)
|
14,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,406,974
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Mr.
Herron serves as a director of USE and Crested, Sr. Vice
President of USE
and
|
|
Co-Chairman
and President of Crested
|
|
|
|
|
(2)
|
Mr.
Lorimer serves as CFO/Treasurer and Vice President of Finance
of USE and
Crested
|
|
and
as a director of Crested
|
|
|
|
|
(3)
|
Mr.
Svilar served as General Counsel and Secretary of USE and
Crested and as a
director
|
|
of
Crested until his retirement on January 12, 2007.
|
|
|
|
(4)
|
Serves
as an Independent Director of Crested and on Special Committee
of Crested
for
|
|
the
USE - Crested merger.
|
|
|
|
|
|
The
Crested shares not owned by USE will be exchanged for USE shares
at the same 2:1
exchange ratio as applies to the minority Crested shareholders. USE
and the other shareholders have agreed not to transfer any of their
Crested
shares prior to the merger.
Under
Article 113 of the Colorado Business Corporation Act (the “CBCA”), the Crested
minority shareholders have the right to dissent from the merger and
obtain
payment of the fair value of their Crested shares if the merger is
completed. A copy of Article 113 is attached as Appendix
E. The following summarizes the steps that you must take to
perfect your rights to dissent and be paid the fair value of your
Crested
shares. If you fail to follow each step in a timely manner, as
provided in Article 113, you will lose your right to be paid fair
value for your
Crested shares.
The
summary only addresses some of the provisions of Article 113. The
summary is qualified in its entirety by the complete text of Appendix
E. Read it carefully.
First
step to be taken by a dissenter. If you desire to receive
payment of the fair value for your shares, you must:
·
|
Cause
Crested to receive, before the vote is taken at the special
meeting,
written notice of your intention to demand payment for
your shares if the
merger is completed; and
|
·
|
Not
vote your shares in favor of the merger
agreement.
|
Note
that if you hold record ownership of the Crested shares you own beneficially,
and you wish to dissent with respect to those beneficially owned
shares, you
must instruct your record holder (for example, your broker or
bank, or,
if your shares are held of record by a partnership or corporation,
then that
entity) to assert dissenters’ rights as to all of your shares held
beneficially by the record holder.
Step
to be taken by USE (sending a Notice to Dissenters). If the
merger is completed,
USE
will
give to each record shareholder who has given written notice of intent
to demand
payment (and who has not voted in favor of the merger agreement),
a written
dissenters’ notice along with a copy of Appendix E. USE’s written
dissenters’ notice will
(i)
|
state
that the merger has been authorized and been completed
as of a specific
date;
|
(ii)
|
state
that dissenters’ payment demands and stock certificates must be sent to
USE;
|
(iii)
|
provide
a form for demanding payment (which will request an address
be provided
where payment is to be made);
|
(iv)
|
set
the date by which USE must receive the payment demand and
certificates for
the Crested shares (the date cannot be less than 30 days
after USE gives
its written dissenters’ notice);
|
(v)
|
require
each beneficial owner and the record shareholder(s) of all shares
owned beneficially to certify to USE that dissenters’ rights have been
asserted as to all of the shares;
and
|
(vi)
|
state
that the first public announcement of the 2:1 exchange
ratio was made on
December 26, 2006 and that in the payment demand form (under
(iii) above),
each shareholder (or the beneficial owner if the shares
are held by
another record holder) must certify in writing whether
the shares were
acquired before or after December 26,
2006.
|
First
step to be taken by a dissenter. Within the time period set
by USE in the dissenters’ notice, you must
(a)
Cause
USE
to receive a payment demand (USE will send you a form for this
along with USE’s
dissenters’ notice); and
(b) Deposit
the stock certificate(s) with USE.
Payment
by USE. If you have taken the first and second steps, then
USE will pay you an amount it estimates is the fair value of your
shares, plus
interest, and send you financial information about USE, how it estimates
the
fair value, and other information.
Third
step to be taken by a dissenter if dissatisfied with the
payment. If you don’t agree with USE’s estimate of value,
send a notice to USE of your own estimate.
Judicial
appraisal if payment demands are not resolved. If payment
demands are not resolved, USE will initiate a legal proceeding in
the District
Court, City and County of Denver, and the court will determine fair
value of all
the shares for which payment demands are not resolved, appointing
appraisers to
help the court make its decision, if appropriate. If fair value is
determined to be more than what was paid by USE, USE will pay the
difference.
The
merger of Crested with and into USE will be accounted for in accordance
with
accounting principles generally accepted in the United States using
the purchase
method of accounting. USE will establish a new accounting basis for
the assets and liabilities of Crested based on their fair values,
the value of
the consideration deemed to be provided to Crested’s shareholders in connection
with the merger and the costs of the merger. USE will record as
mining claims the excess of the consideration over the book value
of Crested’s
assets (including identifiable intangible assets) and liabilities
which
primarily represents the 30% of Crested’s 50% ownership of the Lucky Jack
Molybdenum property near Crested Butte, Colorado. A final
determination of required purchase accounting adjustments, including
the
allocation of consideration to the assets acquired and liabilities
assumed,
based on their respective fair values, has not yet been made. For
financial reporting purposes, the results of operations of Crested
will be
included in USE consolidated statement of operations following the
completion of
the merger. USE’s financial statements for prior periods will not be
restated as a result of the merger.
MATERIAL
UNITED STATES FEDERAL INCOME
TAX
CONSEQUENCES
OF THE
MERGER
The
following discussion sets forth the material U.S. federal income
tax
consequences of the merger to U.S. holders (as defined below) of
Crested common
stock. This discussion does not address any tax consequences arising
under the laws of any state, local or foreign jurisdiction. This
discussion is based upon the Code, the regulations of the U.S. Treasury
Department and court and administrative rulings and decisions in
effect and
available on the date of this proxy statement/prospectus, any of
which may
change, possibly retroactively. Such a change could affect the
continuing validity of this discussion.
For
purposes of this discussion, the term “U.S. holder” means a beneficial owner of
Crested common stock who for U.S. federal income tax purposes is:
·
|
a
citizen or resident of the United
States;
|
·
|
a
corporation, or an entity treated as a corporation, created
or organized
in or under the laws of the United States or any state
or political
subdivision thereof;
|
·
|
a
trust that (i) is subject to (a) the primary supervision
of a court within
the United States and (b) the authority of one or more
United States
persons to control all substantial decisions or (ii) has
a valid election
in effect under applicable Treasury regulations to be treated
as a United
States person; or
|
·
|
an
estate that is subject to U.S. federal income tax on its
income regardless
of its source.
|
If
a
partnership (including for this purpose any entity treated as a partnership
for
U.S. federal income tax purposes) holds Crested common stock, the
tax treatment
of a partner generally will depend on the status of such partner
and the
activities of the partnership. If you are a partner in a partnership
holding Crested common stock, you should consult your tax advisors.
This
discussion assumes that you, as a U.S. holder, hold your shares of
Crested
common stock as capital assets within the meaning of the Code. This
discussion does not address all aspects of U.S. federal income taxation
that may
be relevant to you in light of your particular circumstances or that
may be
applicable to you if you are subject to special treatment under the
U.S. federal
income tax laws, including if you are:
·
|
a
financial institution;
|
·
|
a
tax-exempt organization;
|
·
|
an
S corporation or other pass-through
entity;
|
·
|
a
dealer in stocks and securities, or foreign
currencies;
|
·
|
a
trader in securities who elects the mark-to-market method
of accounting
for your securities;
|
·
|
a
holder of Crested common stock subject to the alternative
minimum tax
provisions of the Code;
|
·
|
a
holder of Crested common stock who received his or her
Crested common
stock through the exercise of employee stock options or
otherwise as
compensation or through a tax-qualified retirement
plan;
|
·
|
a
holder that is not a U.S. holder, certain expatriates,
or a person that
has a functional currency other than the U.S.
dollar;
|
·
|
a
holder of options granted under any Crested benefit plan;
or
|
·
|
a
holder of Crested common stock who holds Crested common
stock as part of a
hedge against currency risk, a straddle or a constructive
sale or a
conversion transaction.
|
In
General
Completion
of the merger is conditioned on, among other things, the receipt
by each of USE
and Crested of tax opinions from Conrad Henderson LLC, that the merger
will be
treated for U.S. federal income tax purposes as a reorganization
within the
meaning of Section 368(a) of the Code. These opinions will be based
on representation letters provided by USE and Crested to be delivered
at the
time of closing and on customary factual assumptions, and will assume
that the
merger will be completed according to the terms of the merger
agreement.
USE
and
Crested have not and will not seek any ruling from the Internal Revenue
Service
regarding any matters relating to the merger, and as a result, there
can be no
assurance that the Internal Revenue Service will not disagree with
or challenge
any of the conclusions described herein.
Based
on
the above assumptions and qualifications and the representations
provided by USE
and Crested and on certain customary factual assumptions, all of
which must
continue to be true, accurate and complete in all material respects
as of the
completion of the merger, it is the opinion of Conrad Henderson LLC
that the
material U.S. federal income tax consequences of the merger will
be as
follows:
·
|
the
merger will be treated as a “reorganization” within the meaning of Section
368(a) of the Code and each of Crested and USE will be
a party to the
reorganization within the meaning of Section 368(b) of
the
Code;
|
·
|
subject
to the paragraph captioned “Cash in Lieu of USE Shares” below, you will
not recognize gain or loss upon exchanging Crested common
stock for shares
of USE common stock in the merger;
|
·
|
your
aggregate tax basis in the shares of USE common stock that
you receive in
the merger will equal your aggregate tax basis in the Crested
common stock you surrendered in the merger;
and
|
·
|
your
holding period for the shares of USE common stock that
you receive in the
merger will include your holding period for the shares
of Crested common
stock that you surrender in the
exchange.
|
If
you
acquired different blocks of Crested common stock at different times
and at
different prices, any gain or loss will be determined separately
with respect to
each block of Crested common stock, and the shares of USE common
stock you
receive will be allocated pro rata to each such block of stock. In
addition, your basis and holding period in your shares of USE common
stock may
be determined with reference to each block of Crested common stock.
Cash
in Lieu of USE Shares, Backup Withholding, and
Reporting. If pursuant to the merger (i) you own 500 or
fewer Crested shares and you elect to receive cash equal to the value
of the USE
shares instead of USE shares, and (ii) USE decides to pay you and
all other such
electors cash instead of delivering USE shares, then you will generally
recognize capital gain or loss on any cash received equal to the
difference
between the amount of cash received and your basis in the Crested
shares. Any such capital gain or loss will be a long-term capital
gain or loss if you have held (or are treated as having held) your
Crested
common stock for more than one year at the time of the merger.
Holders
of Crested common stock may be subject to information reporting and
backup
withholding on cash payments received. You will not be subject to
backup withholding, however, if you:
·
|
furnish
a correct taxpayer identification number and certify that
you are a U.S.
person (including a U.S. resident alien) not subject to
backup withholding
on the substitute Form W-9 you will
receive;
|
·
|
are
a corporation and, when required, demonstrate that fact
and otherwise
comply with applicable requirements of the backup withholding
rules;
or
|
·
|
otherwise
establish that you are exempt from backup
withholding.
|
Any
amounts withheld under the backup withholding rules will be allowed
as a refund
or credit against your U.S. federal income tax liability, provided
you furnish
the required information to the Internal Revenue Service. The backup
withholding tax rate is currently 28%.
If
you
receive shares of USE as a result of the merger, you will be required
to retain
records pertaining to the merger and you will be required to attach
to your
United States federal income tax return for the year in which the
merger takes
place a statement setting forth all relevant facts relating to the
merger. At a minimum, the statement must include (i) the
shareholder’s tax basis in the Crested stock surrendered and (ii) the fair
market value, as of the time of the effective date of the merger,
of the USE
common stock received in the exchange therefore.
Tax
Consequences If the Merger Does Not Qualify as a Reorganization Under
Section
368(a) of the Code
If
the
Internal Revenue Service determines that the merger does not qualify
as a
reorganization within the meaning of Section 368(a) of the Code and
that
determination is upheld, you would be required to recognize a gain
or loss with
respect to each share of Crested common stock surrendered in the
merger in an
amount equal to the difference between (i) the fair market value
of any USE
common stock (or cash if the cash in lieu of USE shares election
is made and
paid by USE), and (ii) the tax basis of the shares of Crested common
stock
surrendered in exchange therefore. Such gain or loss will be a
long-term capital gain or loss if you held the Crested stock for
more than one
year, and will be a short-term capital gain or loss if you held the
Crested
stock for one year or less. The amount and character of a gain or
loss will be
computed separately for each block of Crested common stock that you
purchased in
the same transaction. Your aggregate tax basis in the USE stock received
in the
merger would in this case be equal to its fair market value at the
time of the
closing of the merger, and the holding period for the USE stock would
begin the
day after the closing of the merger.
This
discussion does not address tax consequences that may vary with,
or are
contingent upon, the individual circumstances of holders of Crested
common stock
and does not address the tax consequences to any foreign
shareholder. Moreover, it does not address any non-income tax or any
foreign, state or local tax consequences of the merger. Tax matters
are very complicated, and the tax consequences of the merger to holders
of
Crested common stock will depend upon the facts of their particular
situation. Accordingly, we strongly urge holders of Crested common
stock to consult with their tax advisors to determine the particular
federal,
state, local or foreign income or other tax consequences to them
as a result of
the merger.
General
USE
is a
Wyoming corporation, and Crested is a Colorado corporation. The
rights of USE shareholders are governed by Wyoming law and the USE
articles of
incorporation and bylaws. If the merger is completed, the rights of
the Crested shareholders also will be governed by Wyoming law and
the USE
articles of incorporation and bylaws.
Comparison
of Shareholders’ Rights
This
table summarizes the material differences between the rights of USE
shareholders
under Wyoming law - the Wyoming Business Corporation Act (the “WBCA”) and the
Wyoming Management Stability Act (the “WMSA”), and under USE’s articles of
incorporation and bylaws, and the rights of Crested shareholders
under Colorado
law - the Colorado Business Corporation Act (the “CBCA), and under Crested’s
articles of incorporation and bylaws. This summary does not include
all of the differences between Wyoming and Colorado law relating
to the rights
of shareholders of corporations, nor does it include all the differences
between
the governing documents of the companies. The articles of
incorporation and bylaws of the companies have been filed as exhibits
to the
Form S-4 registration statement of which this proxy statement/prospectus
forms a
part, and this summary is qualified in its entirety by reference
to those
exhibits. Completion of the merger will not effect any change in the
articles of incorporation or bylaws of USE.
|
|
U.S.
Energy Corp.
|
|
Crested
Corp.
|
Classification
and Election of Directors
|
|
As
allowed by the USE articles of incorporation and
the WBCA, the board of
directors are divided into three classes, to be elected
until the third
succeeding annual meeting and until their successors
have been duly
elected or appointed and qualified or until death,
resignation or
removal.
Nominees
in number equal to the seats to be filled, who receive
a plurality of
votes cast, are elected. Shareholders may cumulate their votes:
each holder may multiply the number of shares owned
by the number of
directors being elected, and distribute the resulting
number of votes
among nominees in any proportion that the holder
chooses.
|
|
As
allowed by the CBCA and the Crested articles of incorporation,
the board
of directors is divided into three classes, to be
elected until the third
succeeding annual meeting and until their successors
have been duly
elected or appointed and qualified or until death,
resignation or
removal.
At
each election for directors, every shareholder entitled
to vote at such
election shall have the right to vote, in person
or by proxy, the number
of shares owned by him for as many persons as there
are directors to be
elected, and for whose election he has the right
to
vote. Cumulative voting is not permitted.
|
Authorized
Shares
|
|
The
board of directors may issue an unlimited number
of shares (which is
permitted by the WBCA and is so provided in the USE
articles of
incorporation) of common stock ($0.01 par value),
and 100,000 shares of
preferred stock ($0.01 par value). The board of directors may
establish dividend, liquidation, voting and other
rights of any series of
preferred stock within the 100,000 shares authorized.
|
|
Under
the Crested articles of incorporation, the board
of directors may issue up
to 100 million shares of common stock ($0.001 par
value), and 100,000
shares of preferred stock ($0.001 par value). The board of
directors may establish dividend, liquidation, voting
and other rights of
any series of preferred stock within the 100,000
shares
authorized.
|
Removal
of Directors
|
|
As
permitted by the WBCA and the USE articles of incorporation,
directors may
be removed by shareholders at a duly convened meeting
called for the
purpose of such removal. The notice for any meeting
at which a director is
proposed for removal must specifically state that
purpose.
|
|
As
permitted by the CBCA and the Crested articles of
incorporation, directors
may only be removed for
cause.
|
|
|
U.S.
Energy Corp.
|
|
Crested
Corp.
|
Vacancies
on the Board of Directors
|
|
Vacancies
are filled by the affirmative vote of the majority of
the directors voting
on such matter at a duly convened meeting, or in the
event that the
directors remaining in office constitute fewer than a
quorum of the board,
by the affirmative vote of a majority of all directors
remaining in
office, as allowed by the WBCA and by the USE bylaws.
|
|
Vacancies
are filled by the affirmative vote of a majority of the
remaining
directors, though less than a quorum, as allowed by the
CBCA and by the
Crested bylaws.
|
Number
of Directors
|
|
Under
the USE bylaws, the number of directors shall be seven
(7).
|
|
The
number of directors shall be seven (7), pursuant to the
Crested
bylaws.
|
Quorum
for Shareholder Action
|
|
As
permitted by the WBCA and the USE bylaws, a majority
of the votes entitled
to be cast on a matter represented in person or by proxy
shall constitute
a quorum at a meeting of shareholders.
|
|
As
permitted by the CBCA and the Crested bylaws, a quorum
for a shareholder
meeting will exist if a majority of the outstanding shares
of Crested
entitled to vote are represented in person or by proxy.
|
Nomination
of Candidates for Opposition Slate
|
|
Pursuant
to the bylaws, any record shareholder for a shareholders’ meeting at which
directors are to be elected may nominate directors for
election at such
meeting in opposition to the slate of candidates for
which management has
solicited proxies, only if a notice of intent to nominate
such persons has
been submitted to the Secretary of USE no later than
25 days and no more
than 60 days prior to the meeting. Notices of intent
to nominate must
include specific information, and be followed by a completed
questionnaire
relating to the proposed nominee.
|
|
Neither
the CBCA nor the articles of incorporation or bylaws
of Crested have
provisions regarding the submission of names for inclusion
of
non-management recommended persons for election to the
board of
directors.
|
|
|
U.S.
Energy Corp.
|
|
Crested
Corp.
|
Shareholders’
Right to Demand a Meeting
|
|
As
permitted by the WMSA and pursuant to the USE bylaws,
special meetings for
any purpose, unless otherwise prescribed by statute,
may be called by the
president or the board of directors and must be called
by the president
upon receipt of a written demand by the holders of
50% of the votes
entitled to be cast at a proposed special meeting,
setting forth the
issues to be considered at the meeting. The board of directors
has the discretion to require that the issues for which
a special meeting
is demanded be considered at the following year’s annual meeting, if the
demand is made within 180 days of the next annual meeting.
|
|
As
permitted by the CBCA and pursuant to the Crested bylaws,
special meetings
for any purpose, unless otherwise prescribed by statute,
may be called by
the president or the board of directors, and shall
be called by the
president at the request of holders of not less than
10% of all
outstanding shares of Crested entitled to vote at the
meeting.
|
Matters
Voted Upon at Meetings; and Votes Required
|
|
As
permitted by the WMSA, USE’s bylaws provide that only the specific
purposes stated in the notice of an annual or special
meeting shall be
considered at a meeting of shareholders. Written notice
stating the
location and time of the meeting must be delivered
not less than ten and
no more than sixty days before the date of the meeting
to each shareholder
of record entitled to vote at the meeting. A notice
of special meeting,
sent because it was demanded by 50% of all votes entitled
to be cast at
the meeting, shall state the purpose of the meeting
and be delivered not
more than 110 days before the special meeting date.
|
|
A
description of the matters to be considered at special
meetings of
shareholders is required under the CBCA and the Crested
bylaws, and only
those matters may be then considered. A description of purpose
is not required generally by the CBCA for annual meetings
(although a
description of certain matters like removal of directors,
a merger, etc.,
is required). The Crested bylaws provide that written notice
stating the location and time of the meeting, and in
the case of a special
meeting, the purpose of the meeting, must be delivered
not less than ten
and no more than fifty days before the date of the
meeting to each
shareholder of record entitled to vote at the meeting.
|
|
|
U.S.
Energy Corp.
|
|
Crested
Corp.
|
|
|
Generally,
under the WBCA, a matter is approved at a meeting if
the number of votes
in favor exceeds the number of votes opposed, unless
the WBCA requires a
different ratio (for example, directors are elected
by a plurality of the
votes cast by the shares entitled to vote in the election
at the meeting
at which a quorum is present and at least a majority
of all votes entitled
to be cast is required in the case of a merger proposal
wherein the vote
of USE shareholders is required).
|
|
Under
the CBCA, once a quorum exists, action on a matter,
other than the
election of directors, is approved if the number of
votes cast in favor
exceeds the number of votes opposed. There are exceptions,
such as a
merger, where the favorable vote of a majority of all
votes entitled to be
cast is required.
|
|
|
|
|
|
Shareholder
voting rights in certain transactions
|
|
Under
the WMSA, USE cannot participate in a merger, consolidation
or share
exchange with a stockholder owning 15% or more of the
voting stock of USE,
for a period of three years after the stockholder comes
to own that much
stock, unless the transaction is approved by the board
of directors and by
the affirmative vote of the holders of two-thirds of
the stock not owned
by the 15% stockholder.
|
|
Colorado
does not have a statute like the
WMSA.
|
DESCRIPTION
OF
USE
SECURITIES
Common
Stock
USE
is
authorized by its articles of incorporation to issue an unlimited
number of
shares of common stock, $0.01 par value, and 100,000 shares of preferred
stock,
$0.01 par value.
Shares
of
common stock may be issued for such consideration and on such terms
as
determined by the board of directors, without shareholder
approval. Holders are entitled to receive dividends when and as
declared by the board of directors out of funds legally available
therefore. There are no restrictions on payment of cash
dividends. It is anticipated that future earnings would be reinvested
into operations and not declared as dividends on the common stock.
All
holders of shares of common stock have equal voting rights. Holders
of shares of
common stock are entitled to one vote per share on all matters upon
which such
holders are entitled to vote, and further have the right to cumulate
their votes
in elections of directors. Cumulation means multiplying the number of
shares held, by the number of nominees to the board of directors,
then voting
the product among the nominees as desired. Directors are elected by a
plurality of the votes cast. Pursuant to the articles of
incorporation and as permitted by the Wyoming Management Stability
Act, shares
of common stock held by USE subsidiaries may be voted by such subsidiaries
as
determined by the board of directors of each, in elections of directors
and
other matters brought before shareholders.
Preferred
Stock
General
Shares
of
preferred stock may be issued by the board of directors with such
dividend,
liquidation, voting and conversion features as may be determined
by the board of
directors without shareholder approval. There are no shares of
preferred stock outstanding, and, except for the Convertible Series
A and Series
P preferred stock (discussed below), no series has been established
as of the
date of this proxy statement/prospectus.
Convertible
Series A
In
June
2000, USE established the Series A preferred stock in connection
with certain
financings it was contemplating with its subsidiary RMG. The total
number of Series A Preferred shares to be issued was 1,000 with a
per share
sales price of $10,000 per share and 2,000,000 shares of common stock
for
issuance if all the authorized Series A Preferred Stock was sold
and later
converted into common stock of USE. The Convertible Series A
Preferred stock have no voting rights but have certain dividend
rights. As of July 15, 2007, no Convertible Series A Preferred stock
was outstanding.
Series
P
In
September 2001, USE established the Series P preferred stock in connection
with
USE adopting, in September 2001, a shareholder rights plan (referred
to below as
the “plan”). The plan was amended as of September 30, 2005, and the
plan, as amended, was filed with the Securities and Exchange
Commission. For more information, please see “WHERE YOU CAN FIND MORE
INFORMATION – Incorporation of Documents by Reference” below.
The
following summarizes several of the principal features of the plan:
·
|
The
purpose of the plan is to deter an unfairly low priced
hostile takeover of
USE, by encouraging a hostile party to negotiate a fair
offer with the
board of directors. A “hostile takeover” is a transaction or a
series of transactions with the objective of acquiring
a controlling block
of a company’s voting stock with a view toward selling assets or
liquidating the company. If a hostile takeover is
commenced (or the board of directors is informed that such
a takeover is
about to be commenced), but subsequently a fair offer was
negotiated
between the hostile party and the board of directors, the
plan would be
terminated.
|
·
|
The
rights trade with the common stock and are not separable
therefrom. However, no separate certificate for the rights
would be issued unless and until there is a hostile takeover
attempted,
after which time separate and tradable rights certificates
would be
issued.
|
·
|
Under
the plan, the holder of each share of common stock has
the right to
purchase (when the rights become exercisable) from USE
one-one thousandth
(1/1,000th) of one share of Series P preferred stock, at
$200.00 for each
one-one thousandth (1/1,000th) share Series P stock. The rights
are not exercisable unless and until a hostile takeover
of USE is
initiated with the aim of acquiring 15% of USE's voting
stock.
|
·
|
If,
before a hostile takeover is launched, the hostile party
comes to
agreement with the board of directors about price and terms
and makes a
"qualified offer" to buy the outstanding stock of USE (i.e.
an offer which
the USE board of directors deems is fair to all USE shareholders),
then
the board of directors may redeem (purchase) the rights
for $0.01
each. But, if a qualified offer is not agreed upon, then the
rights become exercisable for Series P stock. The Series P
preferred stock, when issued on exercise of the rights,
would be
convertible into shares of USE common stock, which USE
would issue at a
price equal to one-half the market price of USE at that
time.
|
U.S.
Energy Corp.
The
consolidated balance sheets of U.S. Energy Corp. as of December 31,
2005 and
2006, and the related consolidated statements of operations, shareholders’
equity, and cash flows for each of the three years ended December
31, 2006, set
forth in U.S. Energy Corp.’s annual report on Form 10-K for the year ended
December 31, 2006, which balance sheets and related statements are
incorporated
herein by reference.
The
consolidated balance sheet at December 31, 2006 and related consolidated
statements of operations, shareholders’ equity, and cash flows for the year then
ended have been incorporated herein in reliance upon the report of
Moss Adams,
LLP independent registered accounting firm, upon the authority of
said firms as
experts in accounting and auditing.
The
consolidated balance sheet at December 31, 2005 and related consolidated
statements of operations, shareholders’ equity, and cash flows for each of the
two years in the period ended December 31, 2005 have been incorporated
herein in
reliance upon the report of Epstein Weber & Conover, PLC, independent
registered accounting firm, upon the authority of said firms as experts
in
accounting and auditing.
Crested
Corp.
The
balance sheets of Crested Corp. as of December 31, 2005 and 2006
and the related
statements of operations, shareholders’ deficit, and cash flows for each of the
three years ended December 31, 2006, set forth in this proxy
statement/prospectus, have been included herein.
The
consolidated balance sheet at December 31, 2006 and related consolidated
statements of operations, shareholders’ equity, and cash flows for year then
ended have been included herein in reliance upon the report of Moss
Adams, LLP,
independent registered accounting firm, upon the authority of said
firm as
experts in accounting and auditing.
The
consolidated balance sheet at December 31, 2005 and related consolidated
statements of operations, shareholders’ equity, and cash flows for each of the
two years in the period ended December 31, 2005 have been included
herein in
reliance upon the report of Epstein Weber & Conover, PLC, independent
registered accounting firm, upon the authority of said firms as experts
in
accounting and auditing.
The
opinion of Conrad Henderson LLC as to the tax consequences of the
merger to
Crested shareholders, as set forth herein, is included herein in
reliance upon
the authority of said firm as experts in tax matters.
The
validity of the shares of U.S. Energy Corp. common stock to be issued
in the
merger will be passed upon by The Law Office of Stephen E.
Rounds. Davis Graham & Stubbs LLP has represented Crested Corp.
as special counsel in connection with the merger.
USE
has
filed with the Securities and Exchange Commission a registration
statement on
Form S-4 to register with the SEC the shares of USE common stock
to be issued to
the minority Crested shareholders in the merger. This proxy
statement/prospectus is part of the registration statement - a prospectus
of USE
and a proxy statement of Crested for the Crested special meeting. The
registration statement, including its exhibits and schedules, contains
additional relevant information about USE and USE’s capital
stock. The rules and regulations of the SEC allow us to omit certain
information included in the registration statement from this proxy
statement/prospectus.
In
addition, USE and Crested file reports, proxy statements and other
information
with the SEC under the Exchange Act. You may read and copy this
information at the SEC:
Public
Reference Room
100
F
Street, N.E.
Washington,
D.C. 20549
You
may
obtain copies of this information by mail from the Public Reference
Section of
the SEC, 100 F Street, N.E., Washington, D.C. 20549, at prescribed
rates. You may obtain information on the operation of the SEC’s
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
also maintains an Internet worldwide web site that contains reports,
proxy
statements and other information about issuers, like USE and Crested,
who file
electronically with the SEC. The address of the site is
http://www.sec.gov. The SEC allows USE to “incorporate by reference”
information into this proxy statement/prospectus. This means that USE
can disclose important information to you by referring you to another
document
filed separately with the SEC. The information incorporated by
reference is considered to be a part of this proxy statement/prospectus,
except
for any information that is superseded by information that is included
directly
in this proxy statement/prospectus or incorporated by reference
subsequent to
the date of this proxy statement/prospectus as described below. Because the market value
of the minority shares of
Crested is less than $75 million, the SEC’s rules as to use of Form S-4 do not
allow information about Crested to be incorporated by reference
into this proxy
statement/prospectus.
This
proxy statement/prospectus incorporates by reference the following
documents
that USE has filed with the SEC. They contain important information
about USE and its financial condition.
Incorporation
of Documents by Reference
·
|
Annual
Report on Form 10-K for year ended December 31,
2006.
|
·
|
Quarterly
Report on Form 10-Q for the six months and quarter ended
June 30,
2007.
|
·
|
Proxy
Statement on Schedule 14A for USE Annual Meeting on June
22,
2007.
|
·
|
Current
Reports on Form 8-K:
|
·
|
August
6, 2007: Amendment of Plan and Agreement of Merger for Crested
Corp.
|
·
|
July
27, 2007: Final sale of sxr Uranium One
shares.
|
·
|
July
5, 2007: Cash dividend, stock buy back program and update on
Oil and Gas Exploration activities
|
·
|
June
27, 2007: Results of the Annual Meeting held June 22, 2007,
Credit Facility for Sutter Gold Mining Inc. and changes
to Company
Bylaws.
|
·
|
June
4, 2007: TSX-V approval of the Exploration, Development and
Mine Operating Agreement with Kobex Resources
Ltd.
|
·
|
May
7, 2007: Amendment of the 8-K filed May 4,
2007.
|
·
|
May
4, 2007: Sale of uranium assets to sxr Uranium One Inc.
including Pro Forma Financial Information, the approval
of Compensation
Committee recommendations and tax
obligation.
|
·
|
April
9, 2007: Execution of formal Exploration, Development and Mine
Operating Agreement with Kobex Resources
Ltd.
|
·
|
February
23, 2007: Execution of Assets Purchase Agreement with
SXR Uranium One
Inc.
|
· February
5, 2007: Engagement of new independent accounting firm.
·
February
1, 2007: Termination of relationship with former independent accounting
firm.
·
|
January
24, 2007: Termination of relationship with former independent
accounting
firm; execution of Merger Agreement with Crested Corp.;
and appoint of new
director and new officer.
|
·
|
January
8, 2007: Extension of time period for Exclusivity Agreement
with SXR Uranium One Inc.
|
·
|
The
Amended Rights Agreement relating to the shareholder
rights plan, which
Agreement is an exhibit to the Form 8-A12G/A filed with
the SEC on
November 17, 2005.
|
In
addition, USE also incorporates by reference additional documents
that USE may
file with the SEC between the date of this proxy statement/prospectus
and the
date of the Crested special meeting pursuant to Sections 13(a),
13(c), 14, or
15(d) of the Exchange Act. These documents include periodic reports,
such as Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q and Current
Reports on Form 8-K, as well as proxy statements. Nothing in this
proxy statement/prospectus shall be deemed to incorporate information
furnished
but not filed with the SEC pursuant to Item 2.02 or Item 7.01 of
Form 8-K or any
exhibit thereto.
Further,
USE incorporates into this proxy statement/prospectus all filings
filed by USE
with the SEC pursuant to the Exchange Act after the date of the initial
filing
of the Form S-4 registration statement and prior to effectiveness
of the
registration statement. This paragraph shall not be included in the
final rule 424 proxy statement/prospectus filed with the SEC after
declaration
of effectiveness of the registration statement.
USE
has
supplied all information contained or incorporated by reference in
this proxy
statement/prospectus relating to USE, and Crested has supplied all
information
in this proxy statement/prospectus relating to Crested.
Documents
incorporated by reference are available from USE without charge,
excluding any
exhibits or schedules to those documents unless the exhibit is specifically
incorporated by reference as an exhibit in this proxy
statement/prospectus. Copies of all exhibits which are filed with the
Form S-4, but not incorporated by reference, are available from USE
or Crested
without charge. You can obtain copies of any of these documents by
requesting them in writing or by telephone from U.S. Energy Corp.,
877 N. 8th
W., Riverton,
Wyoming 82501, attention Robert Scott Lorimer, CFO/Treasurer.
Crested
shareholders requesting documents must request them at least five
business days
before the special meeting in order to receive them before the
special
meeting.
Neither
USE nor Crested has authorized anyone to give any information or
make any
representation about the merger or our companies that is different
from, or in
addition to, that contained in this proxy statement/prospectus
or in any of the
materials that have been incorporated into this proxy
statement/prospectus. Therefore, if anyone gives you information of
this sort, you should not rely on it. If you are in a jurisdiction
where offers to exchange or sell, or solicitations of offers to
exchange or
purchase, the securities offered by this proxy statement/prospectus
or the
solicitation of proxies is unlawful, or if you are a person to
whom it is
unlawful to direct these types of activities, then the offer presented
in this
proxy statement/prospectus does not extend to you. The information
contained in this proxy statement/prospectus speaks only as of
the date of this
proxy statement/prospectus unless the information specifically
indicates that
another date applies.
The
following pages F-1 – F-51 are the Financial Statements for Crested Corp. for
the Six Months and Quarters ended June 30, 2007 and 2006 and the
three years
ended December 31, 2006.
CRESTED
CORP.
PROXY/VOTING
INSTRUCTIONS
FOR
SPECIAL MEETING OF SHAREHOLDERS
November
26, 2007, at 10:00 AM Mountain Standard Time
PROXY
This
Proxy is solicited by the Board of Directors for use at the Special
Meeting of
Shareholders on November 26, 2007. Your shares will be
voted as you specify. If no choice is specified, your Proxy will be
voted “FOR” Proposal 1, and, in the discretion of the Proxy Holder on any other
matter which may properly come before the Special Meeting of Shareholders,
and
all adjournments or postponements of the meeting.
By
signing on the other side, I/we appoint Harold F. Herron and Robert
Scott
Lorimer, and either of them, as proxies, each with full power of
substitution,
acting jointly or by any of them if only one be present and acting,
to vote and
act with respect to all shares of common stock of the undersigned
in Crested
Corp., at the Special Meeting of Shareholders to be held on Monday,
November 26,
2007, or any adjournment or postponement thereof, upon all subjects
that may
properly come before the meeting, including the matters described
in the proxy
statement/prospectus furnished herewith, subject to the directions
indicated on
the reverse side of this card, and at the discretion of the proxies
on any other
matters that may properly come before the meeting.
If
specific voting instructions are not given with respect to matters
to be acted
upon and the signed card is returned, the proxies will vote in
accordance with
the directors’ recommendations provided below and at their discretion on any
matters that may properly come before the meeting.
The
Board of Directors recommends a vote “FOR” Proposal 1 listed on the reverse side
of this card. The Board of Directors knows of no other matters that
are to be presented at the meeting.
Please
sign on the reverse side of this card and mail it in the envelope
provided as
soon as possible. If you do not sign and return a proxy, shares that
you own directly cannot be voted.
The
undersigned acknowledges receipt from Crested Corp. prior to the
execution of
this proxy of a Notice of Special Meeting of Shareholders and a
proxy
statement/prospectus dated October 25, 2007.
SEE
REVERSE SIDE. If you wish to vote by mail, just complete, sign and
date the reverse side of this card and use the enclosed envelope. IF
YOU DO NOT SUBMIT YOUR PROXY OR PROPERLY INSTRUCT YOUR BROKER TO
VOTE YOUR
SHARES AND YOU DO NOT VOTE IN PERSON AT THE SPECIAL MEETING OF
SHAREHOLDERS, THE
EFFECT WILL BE THE SAME AS IF YOU VOTED “AGAINST” PROPOSAL
1.
to
attend
the Special Meeting.
ý Please
mark
with an x as in this example.
The
board
of directors recommends a vote “FOR” Proposal 1.
|
|
|
|
|
|
|
1. To
adopt the Agreement and Plan of Merger, dated as of January
23, 2007, and
as amended on July 31, 2007, by and between Crested Corp.
and U.S. Energy
Corp., and the transactions contemplated thereby, including
the merger, as
more fully described in the accompanying proxy
statement/prospectus.
|
|
FOR
[_____]
|
|
AGAINST
[_____]
|
|
ABSTAIN
[_____]
|
|
|
|
|
|
|
|
Signature:
|
|
Date:
|
|
Signature (if held jointly):
|
|
Date:
|
|
|
|
|
|
|
|
___________________________
|
|
________________
|
|
________________________
|
|
_________________
|
|
|
|
Please
sign exactly as name(s) appears hereon. Joint owners should
each sign personally. When signing as executor, administrator,
corporation officer, attorney, agent, trustee, guardian
or in other
representative capacity, please state your full title
as
such.
|
|
|
CRESTED
CORP.
|
|
BALANCE
SHEETS
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
4,521,900
|
|
|
$ |
3,236,600
|
|
Marketable
securities
|
|
|
|
|
|
|
|
|
Held
to maturity - treasury bills
|
|
|
20,093,700
|
|
|
|
--
|
|
Available
for sale
|
|
|
11,205,000
|
|
|
|
--
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
|
Sale
of marketable securities
|
|
|
3,111,600
|
|
|
|
--
|
|
Reimbursement
of costs
|
|
|
--
|
|
|
|
72,200
|
|
Deferred
tax asset
|
|
|
705,200
|
|
|
|
7,442,500
|
|
|
|
|
39,637,400
|
|
|
|
10,751,300
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT
IN AFFILIATE
|
|
|
4,737,100
|
|
|
|
4,280,400
|
|
|
|
|
|
|
|
|
|
|
DEFERRED
TAX ASSETS
|
|
|
96,300
|
|
|
|
91,300
|
|
|
|
$ |
44,470,800
|
|
|
$ |
15,123,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Current
debt to affiliate
|
|
$ |
3,250,800
|
|
|
$ |
13,277,200
|
|
Liabilities
held for sale
|
|
|
--
|
|
|
|
1,204,900
|
|
Income
taxes payable
|
|
|
10,404,100
|
|
|
|
--
|
|
|
|
|
13,654,900
|
|
|
|
14,482,100
|
|
|
|
|
|
|
|
|
|
|
COMMITMENT
TO FUND EQUITY INVESTEES
|
|
|
215,600
|
|
|
|
215,600
|
|
|
|
|
|
|
|
|
|
|
ASSET
RETIREMENT OBLIGATION
|
|
|
53,000
|
|
|
|
51,000
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FORFEITABLE
COMMON STOCK, $.001 par value
|
|
|
|
|
|
|
|
|
15,000
shares issued, forfeitable until earned
|
|
|
10,100
|
|
|
|
10,100
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value;
|
|
|
|
|
|
|
|
|
100,000
shares authorized none issued or outstanding
|
|
|
--
|
|
|
|
--
|
|
Common
stock, $.001 par value; 100,000,000 shares
|
|
|
|
|
|
|
|
|
authorized;
17,167,704
|
|
|
|
|
|
|
|
|
shares
issued and outstanding
|
|
|
17,200
|
|
|
|
17,200
|
|
Additional
paid-in capital
|
|
|
11,844,400
|
|
|
|
11,844,400
|
|
Unrealized
loss
|
|
|
(1,309,700 |
) |
|
|
--
|
|
Retained
earnings (accumulated deficit)
|
|
|
19,985,300
|
|
|
|
(11,497,400 |
) |
|
|
|
30,537,200
|
|
|
|
364,200
|
|
|
|
$ |
44,470,800
|
|
|
$ |
15,123,000
|
|
|
|
|
|
|
|
|
|
|
CRESTED
CORP.
|
|
STATEMENTS
OF OPERATIONS
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
REVENUES:
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of asset retirement obligation
|
|
|
(24,000 |
) |
|
|
29,200
|
|
|
|
1,100
|
|
|
|
99,800
|
|
General
and administrative
|
|
|
173,500
|
|
|
|
61,100
|
|
|
|
268,500
|
|
|
|
149,400
|
|
|
|
|
149,500
|
|
|
|
90,300
|
|
|
|
269,600
|
|
|
|
249,200
|
|
LOSS
FROM CONTINUING OPERATIONS
|
|
|
(149,500 |
) |
|
|
(90,300 |
) |
|
|
(269,600 |
) |
|
|
(249,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
REVENUES AND (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
156,500
|
|
|
|
500
|
|
|
|
183,400
|
|
|
|
900
|
|
Loss
on sale of marketable securities
|
|
|
(3,418,600 |
) |
|
|
(53,500 |
) |
|
|
(3,418,600 |
) |
|
|
(53,500 |
) |
Loss
on exchange of Enterra Acquisition shares
|
|
|
--
|
|
|
|
(1,354,200 |
) |
|
|
--
|
|
|
|
(1,354,200 |
) |
Loss
on valuation of derivatives
|
|
|
--
|
|
|
|
(16,100 |
) |
|
|
--
|
|
|
|
(223,600 |
) |
Gain
on sale of uranium assets
|
|
|
55,905,400
|
|
|
|
--
|
|
|
|
55,905,400
|
|
|
|
--
|
|
Gain
on sale of assets
|
|
|
400,000
|
|
|
|
--
|
|
|
|
400,000
|
|
|
|
--
|
|
Gain
on foreign exchange
|
|
|
251,300
|
|
|
|
--
|
|
|
|
251,300
|
|
|
|
--
|
|
|
|
|
53,294,600
|
|
|
|
(1,423,300 |
) |
|
|
53,321,500
|
|
|
|
(1,630,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE EQUITY LOSS,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AND
INCOME TAXES
|
|
|
53,145,100
|
|
|
|
(1,513,600 |
) |
|
|
53,051,900
|
|
|
|
(1,879,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
IN LOSS OF AFFILIATE
|
|
|
(3,453,700 |
) |
|
|
(633,600 |
) |
|
|
(3,727,500 |
) |
|
|
(344,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAXES
|
|
|
49,691,400
|
|
|
|
(2,147,200 |
) |
|
|
49,324,400
|
|
|
|
(2,223,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAXES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
provision for
|
|
|
(10,532,600 |
) |
|
|
--
|
|
|
|
(10,404,100 |
) |
|
|
--
|
|
Deferred
provision for
|
|
|
(7,437,600 |
) |
|
|
--
|
|
|
|
(7,437,600 |
) |
|
|
--
|
|
|
|
|
(17,970,200 |
) |
|
|
--
|
|
|
|
(17,841,700 |
) |
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$ |
31,721,200
|
|
|
$ |
(2,147,200 |
) |
|
$ |
31,482,700
|
|
|
$ |
(2,223,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER
SHARE DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER SHARE, BASIC
|
|
$ |
1.85
|
|
|
$ |
(0.13 |
) |
|
$ |
1.83
|
|
|
$ |
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER SHARE, DILUTED
|
|
$ |
1.78
|
|
|
$ |
(0.13 |
) |
|
$ |
1.77
|
|
|
$ |
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
WEIGHTED AVERAGE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES
OUTSTANDING
|
|
|
17,167,704
|
|
|
|
17,149,298
|
|
|
|
17,167,704
|
|
|
|
17,149,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
WEIGHTED AVERAGE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES
OUTSTANDING
|
|
|
17,860,740
|
|
|
|
17,164,298
|
|
|
|
17,794,293
|
|
|
|
17,149,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRESTED
CORP.
|
|
STATEMENTS
OF CASH FLOWS
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For
six months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
31,482,700
|
|
|
$ |
(2,223,900 |
) |
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
|
used
in by operating activities:
|
|
|
|
|
|
|
|
|
Equity
in loss of affiliate
|
|
|
3,727,500
|
|
|
|
344,300
|
|
Loss
on exchange of Enterra units
|
|
|
--
|
|
|
|
1,354,200
|
|
Loss
on sale of marketable securities
|
|
|
3,418,600
|
|
|
|
53,500
|
|
Proceeds
from sale of trading securities
|
|
|
--
|
|
|
|
1,295,500
|
|
Gain
on sale of assets
|
|
|
(400,000 |
) |
|
|
--
|
|
Gain
on sale of assets to sxr
|
|
|
(55,905,400 |
) |
|
|
--
|
|
Gain
on foreign exchange rates
|
|
|
(251,300 |
) |
|
|
--
|
|
Income
taxes payable
|
|
|
10,404,100
|
|
|
|
--
|
|
Deferred
income taxes
|
|
|
7,437,500
|
|
|
|
--
|
|
Noncash
compensation
|
|
|
157,000
|
|
|
|
94,200
|
|
Change
in valuation of derivatives
|
|
|
--
|
|
|
|
223,600
|
|
Accretion
of asset retirement obligation
|
|
|
1,100
|
|
|
|
99,800
|
|
Change
in accounts receivable
|
|
|
72,200
|
|
|
|
--
|
|
NET
CASH PROVIDED BY
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES
|
|
|
144,000
|
|
|
|
1,241,200
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of marketable securities
|
|
|
30,522,300
|
|
|
|
--
|
|
Proceeds
from sale of fixed assets
|
|
|
25,000
|
|
|
|
--
|
|
Purchase
of treasury bills
|
|
|
(20,093,700 |
) |
|
|
--
|
|
Investment
in affiliate
|
|
|
(2,430,200 |
) |
|
|
(1,331,000 |
) |
NET
CASH PROVIDED BY (USED IN)
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
8,023,400
|
|
|
|
(1,331,000 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVATES:
|
|
|
|
|
|
|
|
|
Net
activity on debt to affiliate
|
|
|
(6,882,100 |
) |
|
|
1,413,600
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS
|
|
|
1,285,300
|
|
|
|
1,323,800
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT
|
|
|
|
|
|
|
|
|
BEGINNING
OF PERIOD
|
|
|
3,236,600
|
|
|
|
95,100
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT
|
|
|
|
|
|
|
|
|
END
OF PERIOD
|
|
$ |
4,521,900
|
|
|
$ |
1,418,900
|
|
|
|
|
|
|
|
|
|
|
CRESTED
CORP.
|
|
STATEMENTS
OF CASH FLOWS
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For
six months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
--
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
Income
tax paid
|
|
$ |
--
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
NONCASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
Receipt
of marketable securities from
|
|
|
|
|
|
|
|
|
the
sale of assets
|
|
$ |
49,700,300
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss
|
|
$ |
1,309,700
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
Exchange
of Enterra Acquisition Shares for
|
|
|
|
|
|
|
|
|
Enterra
Trust Units
|
|
$ |
--
|
|
|
$ |
3,315,300
|
|
|
|
|
|
|
|
|
|
|
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)
1) Basis
of Presentation
The
Balance Sheet as of June 30, 2007, the Statements of Operations for
the three
and six months ended June 30, 2007 and 2006 and Statements of Cash
Flows for the
six months ended June 30, 2007 and 2006 have been prepared by the
Company
without audit. The Balance Sheet at December 31, 2006, was derived
from financial statements audited by Moss Adams LLP, independent
public
accountants, as indicated in their report for the year ended December
31, 2006
(not included). In the opinion of the Company, the accompanying
financial statements contain all adjustments (consisting of only
normal
recurring accruals) necessary to fairly present the financial position
of the
Company as of June 30, 2007 and the results of operations for the
three and six
months ended June 30, 2007 and 2006 and cash flows for the six months
ended June
30, 2007 and 2006.
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, 2006 Form 10-K. The results of operations for
the periods ended June 30, 2007 and 2006 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 of reclamation expenses 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) Recent
Accounting Pronouncements
FIN
48 In June 2006, the Financial Accounting Standards Board
(“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes,” (“FIN 48”) an interpretation of FASB Statement No. 109,
“Accounting for Income Taxes.” FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a
tax
return. FIN 48 requires that the Company recognize in its financial
statements, the impact of a tax position, if that position is more
likely than
not of being sustained on audit, based on the technical merits of
the
position. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods
and
disclosure. The provisions of FIN 48 are effective beginning January
1, 2007 with the cumulative effect of the change in accounting principle
recorded as an adjustment to the opening balance of retained earnings,
goodwill,
deferred income taxes and income taxes payable in the Balance
Sheets. The adoption of FIN 48 has no significant impact on the
financial statements of the Company at June 30, 2007.
FAS
157 In September 2006, the FASB issued FASB Statement No.
157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair
value, establishes a framework for measuring fair value in generally
accepted
accounting principles, and expands disclosures about fair value
measurements. The provisions for FAS 157 are effective for the
Company’s fiscal year beginning January 1, 2008. The Company is
currently evaluating the impact that the adoption of this statement
will have on
the Company’s financial position, results of operations or cash
flows.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)
(continued)
SAB
108 In September 2006, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 108, Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current
Year
Financial Statements (“SAB 108”). SAB 108 provides guidance on
consideration of the effects of prior year misstatements in quantifying
current
year misstatements for the purpose of a materiality assessment. SAB
108 is effective for fiscal years ending after November 15, 2006. The
adoption of SAB 108 did not have an impact on our financial
statements.
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 us on January 1,
2008. We are currently evaluating the impact of adopting SFAS 159 on
our financial position, cash flows, and results of operations.
The
Company has reviewed other current outstanding statements from the
Financial
Accounting Standards Board and does not believe that any of those
statements
will have a material adverse affect on the financial statements of
the Company
when adopted.
3) 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.
At
June
30, 2007, the Company owned held to maturity and available for sale
securities.
|
|
|
|
|
Market
|
|
|
Unrealized
|
|
|
|
Cost
|
|
|
Value
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity - treasury bills
|
|
|
$ |
20,093,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale securities
|
|
|
|
|
|
|
|
|
|
|
sxr
shares
|
|
$ |
12,844,900
|
|
|
$ |
10,884,400
|
|
|
$ |
1,960,500
|
|
Kobex
shares
|
|
|
375,000
|
|
|
|
320,600
|
|
|
|
54,500
|
|
|
|
$ |
13,219,900
|
|
|
$ |
11,205,000
|
|
|
$ |
2,015,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4) Long
Term Debt
Debt
at
June 30, 2007 and December 31, 2006, consists of debt payable to
U.S. Energy
Corp, (“USE”) of $3,250,800 and $13,277,200, respectively. USE owns
70.9% of the Company’s outstanding stock. This debt has been incurred
as a result of USE funding the Company’s portion of joint operations and
investments. The entire debt to USE was retired as of July 31,
2007.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)
(continued)
5) Other
Comprehensive Income (Loss)
Unrealized
gains and losses on investments are excluded from net income but
are reported as
comprehensive income on the Condensed Consolidated Balance Sheets
under
Shareholders’ equity. The following table illustrates the effect on
net income (loss) if the Company had recognized comprehensive
income:
|
|
|
Six
months ending June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
Net
income/(loss)
|
|
$ |
31,482,700
|
|
|
$ |
(2,223,900 |
) |
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss from the
|
|
|
|
|
|
|
|
|
unrealized
loss on marketable securities
|
|
|
(2,015,000 |
) |
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes on
|
|
|
|
|
|
|
|
|
|
stock
options
|
|
|
705,300
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income/(loss)
|
|
$ |
30,173,000
|
|
|
$ |
(2,223,900 |
) |
|
|
|
|
|
|
|
|
|
|
6) Earnings
Per Share
The
Company presents basic and diluted earnings per share in accordance
with the
provisions of Statement of Financial Accounting Standards No. 128,
"Earnings per
Share". Basic earnings per common share is 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 to purchase common stock, if
dilutive. Potential common shares relating to employee options are
excluded from the computation of diluted earnings (loss) per share,
because they
are anti-dilutive. There were no anti-dilutive options at June 30,
2007.
7) Stock
Based Compensation
The
Company's management adopted an Incentive Stock Option Plan (“ISOP”), which was
approved by the Company’s shareholders on September 2,
2004. 2,000,000 shares of common stock are reserved for grant under
the ISOP. The number of shares so reserved will be automatically
increased to equal 20% of the Company’s issued and outstanding shares of common
stock. As of June 30, 2007 a total of 1,700,000 options under the
ISOP had been issued to officers and employees of the Company and
USE and
directors of USE. These options were issued on June 10, 2005, have an
exercise price of $1.71 per share and expire on June 9, 2015.
The
Company has adopted the disclosure requirements of SFAS No. 123(R)
"Accounting
for Stock - Based Compensation - Transition and Disclosure". No
stock-based employee compensation cost is reflected in net income
during the
quarter ended June 30, 2007. All options were previously fully
vested.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)
(continued)
8) Income
Taxes
The
income tax provision is different from the amounts computed by applying
the
statutory federal income tax rate to income from continuing operations
before
taxes. The reasons for these differences are as follows:
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June
30, 2007
|
|
|
June
30, 2007
|
|
Consolidated
book income before income tax
|
|
$ |
49,691,400
|
|
|
$ |
49,324,400
|
|
Permanent
differences
|
|
|
--
|
|
|
|
(205,400 |
) |
Taxable
income before temporary differrences
|
|
$ |
49,691,400
|
|
|
$ |
49,119,000
|
|
|
|
|
|
|
|
|
|
|
Expected
federal income tax expense (benefit) 35%
|
|
$ |
17,320,200
|
|
|
$ |
17,191,600
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in valuation allowance
|
|
|
|
|
|
|
|
|
Deferred
income tax provision (benefit)
|
|
$ |
7,566,100
|
|
|
$ |
7,437,600
|
|
Current
tax provision (refund)
|
|
|
9,754,100
|
|
|
|
9,754,100
|
|
Total
federal tax expense
|
|
|
17,320,200
|
|
|
|
17,191,700
|
|
State
income tax net of fed benefit
|
|
|
650,000
|
|
|
|
650,000
|
|
|
|
|
|
|
|
|
|
|
Total
provision
|
|
$ |
17,970,200
|
|
|
$ |
17,841,700
|
|
|
|
|
|
|
|
|
|
|
The
components of deferred taxes as of June 30, 2007 and December 31,
2006 are as
follows:
Current
taxes payable at June 30, 2007 are comprised of $9,754,100 of federal
income
taxes and $650,000 of state income taxes. This results in a current
taxes payable of $10,404,100 at June 30, 2007. There were no current
taxes payable at December 31, 2006.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)
(continued)
The
components of deferred taxes as of June 30, 2007 and December 31,
2006 are as
follows:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Deferred
compensation
|
|
$ |
85,100
|
|
|
$ |
81,000
|
|
Accrued
reclamation
|
|
|
18,600
|
|
|
|
439,600
|
|
Tax
basis in excess of book
|
|
|
705,200
|
|
|
|
--
|
|
Net
operating loss carryforwards
|
|
|
--
|
|
|
|
6,976,600
|
|
Tax
credits (AMT credit carryover)
|
|
|
--
|
|
|
|
44,200
|
|
Other
|
|
|
200
|
|
|
|
--
|
|
Total
deferred tax assets
|
|
|
809,100
|
|
|
|
7,541,400
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Book
basis in excess of tax basis - Enterra Units
|
|
|
--
|
|
|
|
--
|
|
Depreciable
assets
|
|
|
(7,600 |
) |
|
|
(7,600 |
) |
Total
deferred tax liabilities
|
|
|
(7,600 |
) |
|
|
(7,600 |
) |
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
|
801,500
|
|
|
|
7,533,800
|
|
Valuation
allowance
|
|
|
--
|
|
|
|
--
|
|
Deferred
tax assets net of valuation allowance
|
|
$ |
801,500
|
|
|
$ |
7,533,800
|
|
|
|
|
|
|
|
|
|
|
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 therefore provided at June 30,
2007 and December 31, 2006 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, 2007, net current deferred tax assets
decreased by
$6,732,400. After giving effect to $705,200 of tax benefit of
unrealized losses, which was a credit to other comprehensive income,
the Company
recorded a deferred federal income tax expense in the amount of
$7,437,600. The decrease in net deferred tax assets was largely the
result of the utilization of net operating losses and the accrued
reclamation
liabilities resulting from the sxr sale.
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. As a
result, the adoption of FIN 48 had no impact on the Company’s financial
statements.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)
(continued)
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, 2007 or December 31, 2006.
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.
9) Sale
of Marketable Securities
During
the six months ended June 30, 2007, the Company sold (to a Canadian
financial
institution) 2,450,000 shares of sxr Uranium One for net proceeds
(after
commission and bulk sale discount) of $33,436,800. An additional
$3,111,600 was received July 2007 as a result of the settlement of
a portion of
this sale of securities which occurred in late June 2007. The Company
recorded a loss of $3,418,600 on the sale of the sxr Uranium One
shares.
The
Company, through its joint venture with U.S. Energy (“USECC”), also sold 750,000
shares of UPC during the six months ended June 30, 2007. USECC
received $722,800 in net cash proceeds and recorded a net gain of
$387,300 on
the sale of the UPC shares. The Company recorded this income as part
of the equity loss it recognized from USECC for the six months ended
June 30,
2007.
10) Asset
Retirement Obligations
The
Company accounts for the reclamation of its mineral properties and
oil
properties pursuant to SFAS No. 143, “Accounting for Asset Retirement
Obligation.” Under the provisions of this accounting 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 reclamation liabilities are reviewed each
quarter to determine whether estimates for the total asset retirement
obligation
are sufficient to complete the reclamation work required.
The
following is a reconciliation of the total liability for asset retirement
obligations (unaudited):
Balance
December 31, 2006
|
|
$ |
51,000
|
|
Revaluation
of liability
|
|
|
900
|
|
Accretion
Expense
|
|
|
1,100
|
|
Balance
June 30, 2007
|
|
$ |
53,000
|
|
|
|
|
|
|
11) Merger
Agreement
On
January 23, 2007, the Company and USE entered into a plan and agreement
of
merger (the “merger agreement”) for the proposed acquisition of the minority
shares of the Company (approximately 29.1% is not owned by USE) and
the
subsequent merger of the Company into USE. The merger agreement was
approved by all directors of both companies. The exchange ratio of 2
of the Company’s shares for one share of USE was negotiated between the special
committees of independent directors of both companies, and approved
by the full
boards of both companies on December 20, 2006. For detailed
information, please see the Form 8-K filed on January 24, 2007.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)
(continued)
Management
believes that the merger of the Company into USE will enhance shareholder
value
due to consolidation of assets, simplification of reporting requirements
and the
application of all resources to one company. It is anticipated that
the merger will occur during the fourth quarter 2007.
12) Real
Estate Investment
On
May
10, 2007, the Company and USE through their wholly owned subsidiary,
Remington
Village, LLC (owned on a 50-50 basis) acquired approximately 10.15
acres of land
located in Gillette, Wyoming for a purchase price of $1,247,700. The
Company and USE have now also successfully obtained entitlements
and permits
necessary to construct a 216 unit multifamily housing complex on
the
property. It is estimated that the construction cost of this
multifamily complex will be approximately $26.2 million. The Board of
Directors has approved up to a 30% equity investment in the property
for a total
of $7.6 million and has directed the management of the Company to
seek
construction financing in the amount of $18.5 million for the project
from a
conventional lender. Further, the boards of directors of the Company
and USE have authorized up to $3,889,000 to purchase the property
and commence
site work until the conventional financing is in place. This amount
has been committed thus far to purchase the property and commence
site work,
which is underway. The Company and USE have expended $1,549,700
through June 30, 2007.
13) Sutter
Gold Mining, Inc.
On
March
14, 2007, Sutter reached a Settlement Agreement with the Company,
USE and USECC
concerning: 1) an accumulated debt obligation by Sutter of approximately
$2,025,700 at December 31, 2006 for expenditures made by USECC on
behalf of
Sutter. The debt was settled by Sutter issuing and delivering
7,621,867 shares of Sutter common stock to the Company and USE, one
half to
each. 2) a Contingent Stock Purchase Warrant between Sutter, the
Company and USE was settled by issuing a 5% Net Profits Interest
Royalty
(“NPIR”) to the Company and USE (reducing to 1% after $4.6 million has been
paid
under the 5% NPIR. In addition, the Company and USE agreed to provide
a $1 million line of credit ($500,000 each) to Sutter at 12% annual
interest,
drawable and repayable at any time in tranches of $50,000 or
more. The line of credit is collateralized by Sutter’s California
properties. The Company and USE have the sole option to have Sutter
repay the debt in cash or Sutter stock at a 10% discount to the 10
day Volume
Weighted Average Price (“VWAP”) before payment (subject to Exchange
approval). Prepayment without penalty is allowed. Terms of
the credit agreement were negotiated and approved by the independent
directors
of Sutter, the Company and USE.
14) Uranium
One Asset Purchase Agreement Closing
On
April
30, 2007, the Company and USE and certain of their private subsidiary
companies,
completed the sale of their uranium assets by closing the February
22, 2007
Asset Purchase Agreement (the “APA”) with sxr Uranium One Inc. (“Uranium One,”
headquartered in Toronto, Canada (Toronto Stock Exchange and Johannesburg
Stock
Exchange, “SXR”)), and certain of its private subsidiary
companies. Also, please see footnote 8 above concerning proceeds from
sale of Uranium One stock as of June 30, 2007.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)
(continued)
The
net
gain on the sale of the uranium assets to sxr Uranium One is as
follows:
Revenues
from sale of assets to sxr Uranium One
|
|
|
|
Release
of refundable deposit
|
|
$ |
375,000
|
|
Relief
from Asset Retirement Obligations
|
|
|
3,729,200
|
|
sxr
Uranium One purchase of UPC position
|
|
|
2,510,500
|
|
Reimbursable
Costs
|
|
|
792,600
|
|
Receipt
of sxr Uranium One common stock
|
|
|
49,700,300
|
|
|
|
|
|
|
|
|
|
57,107,600
|
|
|
|
|
|
|
Cost
of sale of assets to sxr Uranium One
|
|
|
|
|
|
|
|
|
|
Reimbursable
Costs
|
|
|
1,200,500
|
|
Pro-ration
of property taxes
|
|
|
1,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,202,200
|
|
|
|
|
|
|
Net
gain before income taxes
|
|
|
55,905,400
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
21,395,400
|
|
|
|
|
|
|
Net
gain on sale of assets to sxr Uranium One
|
|
$ |
34,510,000
|
|
|
|
|
|
|
15) Payment
of Cash Bonus and Related Matters
On
May 2,
2007, the Company and USE, with the approval of their boards of directors
and
upon the recommendation of the compensation committee of the USE
board of
directors (independent directors), paid a $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.
Also
on
May 2, 2007, USE, with the approval of its board of directors and
upon the
recommendation of the compensation committee, paid a total of $649,500
in taxes
owed by officers and employees, upon the proposed release to them
on May 2, 2007
by USE, of a total of 177,600 forfeitable shares of common stock
of U.S. Energy
Corp., and 2,460 dividend shares, for a total proposed release of
180,060
shares. USE also reimbursed the estate of John L Larsen for $213,800
of taxes recently paid by the estate upon release of forfeitable
shares to the
estate following Mr. Larsen’s passing in September 2006; and reimbursed Daniel
P. Svilar $162,300 for taxes he paid following release of forfeitable
shares to
him upon his retirement in January 2007. These matters were ratified
by the shareholders of USE at the June 22, 2007 annual meeting and
the shares
have been released. The Company shares in the expenses of all USE
employees on a 50-50 basis and therefore is responsible for one half
of these
expenses.
The
Company's portion of the bonus and taxes paid to and for the benefit
of the
officers, employees and the John L. Larsen estate were $4,443,500,
$324,800 and
$81,000, respectively.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)
(continued)
16) Lucky
Jack Molybdenum Property – Kobex Resources Ltd.
On
April
3, 2007, the Company, USE and Kobex Resources Ltd. (“Kobex”) (a British Columbia
company traded on the TSX Venture Exchange under the symbol “Kobex”), signed a
formal Exploration, Development and Mine Operating Agreement for
the permitting,
development and production of the Mt. Emmons “Lucky Jack” Molybdenum
Property. The agreement grants Kobex the exclusive option to acquire
up to a 50% undivided interest in patented and unpatented claims
located near
Crested Butte, Colorado, which are held by the Company and USE, for
$50
million. The $50 million to be spent will be for all Project-related
expenditures, the cost for a bankable feasibility study, and option
payments to
the Company and USE. The balance between money spent on expenditures
and option payments, if any, and $50 million, will be paid to the
Company and
USE in cash.
At
June
30, 2007, Kobex owed USECC $631,200 in reimbursable project
costs. Kobex paid this amount in July 2007 and is current on its
obligations to the Company. Kobex also delivered 142,816 shares of
its common stock valued at $375,000 pursuant to the Exploration,
Development and
Mine Operating Agreement.
Report
of Independent Registered Public Accounting Firm
Crested
Corp. Board of Directors
We
have
audited the accompanying balance sheet of Crested Corp. (the “Company”) as of
December 31, 2006, and the related statements of operations, shareholders’
equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements
based on
our audit.
We
conducted our audit in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform,
an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis
for
designing audit procedures that are appropriate in the circumstances,
but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements,
assessing the accounting principles used and significant estimates
made by
management, as well as evaluating the overall financial statement
presentation.
We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, such financial statements present fairly, in all material
respects, the
financial position of Crested Corp. at December 31, 2006, and the
results of
their operations and their cash flows for the year then ended, in
conformity
with accounting principles generally accepted in the United States
of
America.
The
accompanying financial statements have been prepared assuming the
Company will
continue as a going concern. As discussed in Note A to the financial
statements, the Company has experienced significant losses from
operations. In addition, the Company has a working capital deficit of
$3,730,800 as of December 31, 2006; the substantial portion of
the obligation is
owned to an affiliated entity. These factors raise substantial doubt
about the ability of the Company to continue as a going
concern. Management’s plans in regards to these matters are also
described in Note A. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
As
described in Note B to the financial statements, the Company adopted
a new
principle of accounting for share-based payments in accordance
with Financial
Accounting Standards Board Statement No. 123R, Share-Based
Payment.
/s/
Moss
Adams LLP
Scottsdale,
Arizona
Report
of Independent Registered Public Accounting Firm
Crested
Corp. Board of Directors
We
have
audited the accompanying balance sheet of Crested Corp. as of December
31, 2005
and the related statements of operations, shareholders’ equity and cash flows
for each of the two years in the period ended December 31,
2005. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion of these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance
about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by
management, as well as evaluating the overall financial statement
presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the financial statements referred to above present fairly,
in all
material respects, the financial position of Crested Corp. as of
December 31,
2005 and the results of their operations and their cash flows for
each of the
two years in the period ended December 31, 2005, in conformity with
accounting
principles generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming the
Company will
continue as a going concern. As discussed in Note A to the financial
statements, the Company has experienced significant losses from
operations. In addition, the Company has a working capital deficit of
$10,832,900 as of December 31, 2006; the substantial portion of
the obligation
is owned to an affiliated entity. These factors raise substantial
doubt about the ability of the Company to continue as a going
concern. Management’s plans in regards to these matters are also
described in Note A. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
/s/
EPSTEIN WEBER & CONOVER, PLC
Scottsdale,
Arizona
March
3,
2006
CRESTED
CORP.
|
|
BALANCE
SHEETS
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
2006
|
|
|
2005
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
3,236,600
|
|
|
$ |
95,100
|
|
Accounts
receivable
|
|
|
72,200
|
|
|
|
--
|
|
Deferred
tax assets
|
|
|
7,442,500
|
|
|
|
--
|
|
|
|
|
10,751,300
|
|
|
|
95,100
|
|
|
|
|
|
|
|
|
|
|
INVESTMENTS
IN AFFILIATES
|
|
|
|
|
|
|
|
|
Affiliated
companies
|
|
|
4,280,400
|
|
|
|
3,348,800
|
|
Non-affiliated
companies
|
|
|
--
|
|
|
|
5,228,300
|
|
|
|
|
4,280,400
|
|
|
|
8,577,100
|
|
PROPERTIES
AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Library
|
|
|
--
|
|
|
|
10,000
|
|
Developed
oil properties, full cost method
|
|
|
--
|
|
|
|
886,800
|
|
|
|
|
--
|
|
|
|
896,800
|
|
Less
accumulated depreciation, depletion and amortization
|
|
|
--
|
|
|
|
(886,800 |
) |
|
|
|
--
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
DEFERRED
TAX ASSETS
|
|
|
91,300
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,123,000
|
|
|
$ |
8,682,200
|
|
|
|
|
|
|
|
|
|
|
CRESTED
CORP.
|
|
BALANCE
SHEETS
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
Current
debt to affiliate
|
|
$ |
13,277,200
|
|
|
$ |
10,821,800
|
|
Liabilities
held for sale
|
|
|
1,204,900
|
|
|
|
--
|
|
Asset
retirement obligation
|
|
|
--
|
|
|
|
106,200
|
|
|
|
|
|
14,482,100
|
|
|
|
10,928,000
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENT
TO FUND EQUITY INVESTEES
|
|
|
215,600
|
|
|
|
215,600
|
|
|
|
|
|
|
|
|
|
|
|
ASSET
RETIREMENT OBLIGATION
|
|
|
51,000
|
|
|
|
1,045,200
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
FORFEITABLE
COMMON STOCK, $.001 par value
|
|
|
|
|
|
|
|
|
15,000
shares issued, forfeitable until earned
|
|
|
10,100
|
|
|
|
10,100
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value;
|
|
|
|
|
|
|
|
|
|
100,000
shares authorized none issued or outstanding
|
|
|
--
|
|
|
|
--
|
|
Common
stock, $.001 par value; 100,000,000 shares
|
|
|
|
|
|
|
|
|
|
authorized;
17,167,704 and 17,149,298
|
|
|
|
|
|
|
|
|
|
shares
issued and outstanding
|
|
|
17,200
|
|
|
|
17,200
|
|
Additional
paid-in capital
|
|
|
11,844,400
|
|
|
|
11,814,400
|
|
Accumulated
deficit
|
|
|
(11,497,400 |
) |
|
|
(15,348,300 |
) |
|
|
|
|
364,200
|
|
|
|
(3,516,700 |
) |
|
|
|
$ |
15,123,000
|
|
|
$ |
8,682,200
|
|
|
|
|
|
|
|
|
|
|
|
CRESTED
CORP.
|
|
STATEMENTS
OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of asset retirement obligation
|
|
|
113,000
|
|
|
|
90,900
|
|
|
|
90,900
|
|
Change
in estimate of asset retirement obligation
|
|
|
(8,500 |
) |
|
|
(109,500 |
) |
|
|
25,700
|
|
General
and administrative
|
|
|
531,000
|
|
|
|
179,500
|
|
|
|
203,400
|
|
|
|
|
635,500
|
|
|
|
160,900
|
|
|
|
320,000
|
|
LOSS
BEFORE PROPERTY AND
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT
TRANSACTIONS
|
|
|
(635,500 |
) |
|
|
(160,900 |
) |
|
|
(320,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
REVENUES AND (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
44,700
|
|
|
|
1,100
|
|
|
|
--
|
|
Dividend
income
|
|
|
27,000
|
|
|
|
12,400
|
|
|
|
--
|
|
Gain
on sale of investment
|
|
|
3,794,800
|
|
|
|
--
|
|
|
|
--
|
|
Gain
on sale of Rocky Mountain Gas
|
|
|
--
|
|
|
|
5,816,700
|
|
|
|
--
|
|
Loss
on write off of fixed assets
|
|
|
(10,000 |
) |
|
|
--
|
|
|
|
--
|
|
Loss
on exchange of Enterra Acquisition shares
|
|
|
(1,354,200 |
) |
|
|
--
|
|
|
|
--
|
|
(Loss)
gain on sale of marketable securities
|
|
|
(324,300 |
) |
|
|
448,300
|
|
|
|
--
|
|
(Loss)
gain on valuation of derivatives
|
|
|
(223,600 |
) |
|
|
223,600
|
|
|
|
--
|
|
Gain
on sale of U.S. Energy stock
|
|
|
2,023,800
|
|
|
|
--
|
|
|
|
--
|
|
Litigation
settlement
|
|
|
(3,500,000 |
) |
|
|
--
|
|
|
|
--
|
|
|
|
|
478,200
|
|
|
|
6,502,100
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS)
GAIN BEFORE EQUITY LOSS,
|
|
|
|
|
|
|
|
|
|
|
|
|
AND
INCOME TAXES
|
|
|
(157,300 |
) |
|
|
6,341,200
|
|
|
|
(320,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
IN LOSS OF AFFILIATE
|
|
|
(3,625,600 |
) |
|
|
(1,699,800 |
) |
|
|
(1,447,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS)
INCOME BEFORE
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAXES
|
|
|
(3,782,900 |
) |
|
|
4,641,400
|
|
|
|
(1,767,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAXES
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
benefit from (provision for)
|
|
|
100,000
|
|
|
|
(100,000 |
) |
|
|
--
|
|
Deferred
benefit
|
|
|
7,533,800
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
7,633,800
|
|
|
|
(100,000 |
) |
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$ |
3,850,900
|
|
|
$ |
4,541,400
|
|
|
$ |
(1,767,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
PER
SHARE DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER SHARE, BASIC
|
|
$ |
0.22
|
|
|
$ |
0.26
|
|
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER SHARE, DILUTED
|
|
$ |
0.22
|
|
|
$ |
0.26
|
|
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
WEIGHTED AVERAGE
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES
OUTSTANDING
|
|
|
17,153,282
|
|
|
|
17,146,306
|
|
|
|
17,124,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
WEIGHTED AVERAGE
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES
OUTSTANDING
|
|
|
17,711,842
|
|
|
|
17,161,306
|
|
|
|
17,124,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRESTED
CORP.
|
|
STATEMENT
OF SHAREHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Shareholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
(Deficit)
|
|
Balance
December 31, 2003
|
|
|
17,118,098
|
|
|
$ |
17,200
|
|
|
$ |
11,804,800
|
|
|
$ |
(18,122,200 |
) |
|
$ |
(6,300,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock to directors
|
|
|
19,200
|
|
|
|
--
|
|
|
|
4,800
|
|
|
|
--
|
|
|
|
4,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(1,767,500 |
) |
|
|
(1,767,500 |
) |
Balance
December 31, 2004
|
|
|
17,137,298
|
|
|
$ |
17,200
|
|
|
$ |
11,809,600
|
|
|
$ |
(19,889,700 |
) |
|
$ |
(8,062,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock to directors
|
|
|
12,000
|
|
|
|
--
|
|
|
|
4,800
|
|
|
|
--
|
|
|
|
4,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
4,541,400
|
|
|
|
4,541,400
|
|
Balance
December 31, 2005
|
|
|
17,149,298
|
|
|
$ |
17,200
|
|
|
$ |
11,814,400
|
|
|
$ |
(15,348,300 |
) |
|
$ |
(3,516,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock to directors
|
|
|
18,406
|
|
|
|
--
|
|
|
|
30,000
|
|
|
|
--
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
3,850,900
|
|
|
|
3,850,900
|
|
Balance
December 31, 2006
|
|
|
17,167,704
|
|
|
$ |
17,200
|
|
|
$ |
11,844,400
|
|
|
$ |
(11,497,400 |
) |
|
$ |
364,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Shareholders' Equity at December 31, 2006, Deficit at December
31, 2005,
and December 31, 2004 does
|
|
|
|
|
|
not
include 15,000 shares currently issued but forfeitable
if certain
conditions are not met by the recipients.
|
|
|
|
|
|
CRESTED
CORP.
|
|
STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
3,850,900
|
|
|
$ |
4,541,400
|
|
|
$ |
(1,767,500 |
) |
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
used
in by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in loss of affiliate
|
|
|
3,625,600
|
|
|
|
1,699,800
|
|
|
|
1,447,500
|
|
Loss
on exchange of Enterra acquisition shares
|
|
|
1,354,200
|
|
|
|
--
|
|
|
|
--
|
|
Loss
(gain) on sale of marketable securities
|
|
|
324,300
|
|
|
|
(448,300 |
) |
|
|
--
|
|
Loss
from write off of fixed assets
|
|
|
10,000
|
|
|
|
--
|
|
|
|
--
|
|
Loss
from litigation settlement
|
|
|
3,500,000
|
|
|
|
--
|
|
|
|
--
|
|
Gain
on sale of investment
|
|
|
(3,794,800 |
) |
|
|
--
|
|
|
|
--
|
|
Gain
on sale of U.S. Energy stock
|
|
|
(2,023,800 |
) |
|
|
--
|
|
|
|
--
|
|
Benefit
from deferred tax assets
|
|
|
(7,533,800 |
) |
|
|
--
|
|
|
|
--
|
|
Gain
on sale of Rocky Mountain Gas
|
|
|
--
|
|
|
|
(5,816,700 |
) |
|
|
--
|
|
Noncash
compensation
|
|
|
415,900
|
|
|
|
136,100
|
|
|
|
4,800
|
|
Loss
(gain) on valuation of derivatives
|
|
|
223,600
|
|
|
|
(223,600 |
) |
|
|
--
|
|
Accretion
of asset retirement obligation
|
|
|
113,000
|
|
|
|
90,900
|
|
|
|
90,900
|
|
Change
is accounts receivable
|
|
|
(72,200 |
) |
|
|
--
|
|
|
|
--
|
|
Change
in asset retirement obligation
|
|
|
(8,500 |
) |
|
|
(109,500 |
) |
|
|
25,700
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(15,600 |
) |
|
|
(129,900 |
) |
|
|
(198,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of marketable securities
|
|
|
2,991,000
|
|
|
|
2,177,900
|
|
|
|
--
|
|
Proceeds
from the sale of Pinnacle Gas
|
|
|
4,830,000
|
|
|
|
--
|
|
|
|
--
|
|
Investment
in affiliate
|
|
|
(1,350,000 |
) |
|
|
(2,795,900 |
) |
|
|
(43,500 |
) |
NET
CASH PROVIDED BY (USED IN)
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
6,471,000
|
|
|
|
(618,000 |
) |
|
|
(43,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVATES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
activity on debt to affiliate
|
|
|
(3,313,900 |
) |
|
|
839,200
|
|
|
|
242,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS
|
|
|
3,141,500
|
|
|
|
91,300
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING
OF PERIOD
|
|
|
95,100
|
|
|
|
3,800
|
|
|
|
3,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT
|
|
|
|
|
|
|
|
|
|
|
|
|
END
OF PERIOD
|
|
$ |
3,236,600
|
|
|
$ |
95,100
|
|
|
$ |
3,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRESTED
CORP.
|
|
STATEMENTS
OF CASH FLOWS
|
|
(continued)
|
|
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (refund) paid
|
|
$ |
(100,000 |
) |
|
$ |
100,000
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange
of Enterra Acquisition Shares for
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterra
Trust Units
|
|
$ |
3,315,300
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock to outside directors
|
|
$ |
30,000
|
|
|
$ |
4,800
|
|
|
$ |
4,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in Non-affiliated companies
|
|
$ |
--
|
|
|
$ |
917,600
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in affiliate
|
|
$ |
--
|
|
|
$ |
717,100
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
activity on debt to parent
|
|
$ |
--
|
|
|
$ |
200,400
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
A. BUSINESS
ORGANIZATION AND OPERATIONS:
Crested
Corp. (the “Company” or “Crested”) was incorporated in the State of Colorado on
September 18, 1970. It engages in the acquisition, exploration, sale
and/or development of mineral properties, the production of petroleum
properties
and marketing of minerals through equity investees. Principal mineral
interests are in uranium, gold and molybdenum. The Company also
historically participated in the development and production of coalbed
methane
gas through a non consolidated investee, Rocky Mountain Gas, Inc.
(“RMG”), which
was sold during the year ended December 31, 2005. (See Note E) The
Company holds various real estate properties. These properties are
managed through a non consolidated joint venture USECB joint venture
("USECB" or
"USECC") discussed below and in Note B. Although not consolidated,
the majority of the Company's assets and operations are recorded
on the books
and records of USECB which is accounted for using the equity method
of
accounting. Due to the fact that the Company's interest in assets and
operations are reported by USECB, the USECB financial statements
are attached
hereto.
The
Company and U. S. Energy Corp. (“USE”), an approximate 70.9% shareholder of the
Company, at December 31, 2006, are engaged in the standby and maintenance
of two
uranium properties, one in southern Utah known as the Shootaring
Uranium Mill,
which is owned by Plateau Resources Limited, a 100% owned subsidiary
of USE, and
a second consisting of a group of mining claims and a state lease
on Sheep
Mountain located in central Wyoming. The Company and USE also own
various uranium mining claims located in Wyoming, Utah, Colorado
and
Arizona. Sutter Gold Mining Inc. (“SGMI”), a Wyoming corporation,
manages the Company’s and USE’s interest in gold properties. At
December 31, 2006, the Company owned 0.9% of SGMI. Additional
companies organized during 2006 by the Company and USE include U.S.
Moly Corp.
(“USMC”) for the management of the molybdenum business and InterWest, Inc.
for
the prospective real estate business. Initial ownership of these
shell companies is 45% the Company, 45% USE and 10% by their officers,
directors
and employees.
Management
Plan
During
the year ended December 31, 2006 the Company recorded a net gain
of
$3,850,900. Ongoing annual losses have resulted in an accumulated
deficit of $11,497,400 at December 31, 2006. The Company also has a
working capital deficit of $3,730,800 at December 31, 2006 that includes
$13,277,200 due to USE. The Company experienced negative cash flows
from operations of $15,600, $129,900 and $198,600 for the years ended
December
31, 2006, 2005 and 2004 respectively. At December 31, 2006, the
Company does not have sufficient cash or cash flows from operations
to meet its
on going general and administrative costs and retire the debt due
to
USE. All of these factors raise substantial doubt about the Company’s
ability to continue as a going concern during the upcoming year.
The
Company has assets that are unencumbered that could be sold to generate
cash,
however, there can be no assurances that funds generated from the
sale of assets
will be sufficient to meet all of the Company’s obligations.
In
order
to improve the liquidity of the Company, management intends to do
the
following:
· Continue
working with Uranium Power Corp. (“UPC”) and USE to explore and develop jointly
held uranium properties along with seeking a joint venture partner.
(See Note
E)
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
· Continue
to work with USE to close the sale of its uranium assets, including
the
Shootaring Canyon Uranium mill (“Shootaring”) in southern Utah to sxr Uranium
One (“Uranium One”). (See Note E)
· Continue
working with USE to finalize an operating agreement with Kobex Resources
Ltd.
(“KBX”) which will fund the initial exploration, permitting and development
of
the Lucky Jack molybdenum property (“Lucky Jack”) in Colorado. (See Note
E)
· Seek
additional investment opportunities through the acquisition of operating
companies or the development of entities such as real estate.
· Seek
joint venture partners on other mineral properties which the Company
owns an
interest in.
B. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
Investments
Investments
in joint ventures and 20% to 50% owned companies are accounted for
using the
equity method. The Company’s investment in SGMI and USECC Joint
Venture (“USECC”) are accounted for using the equity method (see Note D) as they
under the control by USE and its management.
Cash
Equivalents
The
Company considers all highly liquid investments with original maturities
of
three months or less to be cash equivalents. The Company maintains
its cash and cash equivalents in bank deposit accounts which may
exceed
federally insured limits. At December 31, 2006, the Company and USECC
had all of their cash and cash equivalents with several financial
institutions. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit
risk on cash
and cash equivalents.
Marketable
Securities
The
Company accounts for its marketable securities under Statement of
Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments
in
Debt and Equity Securities , which requires certain securities to
be categorized
as either trading, available-for-sale or held-to-maturity. Based on
the Company's intent to hold the securities at least through the
minimum
contractual holding period, with exception, the Enterra securities
described
below, the Company's marketable securities are carried at fair value
with net
unrealized gain or (loss) recorded as a separate component of shareholders'
equity.
At
December 31, 2005, the Company had an investment in non-affiliated
company,
245,759 shares of Enterra Series D Common Stock, in the amount of
$5,228,300. On June 8, 2006, the Enterra stock was converted into
Enterra units and became marketable. The units were classified as
Trading Marketable Securities. The Company recognized a $1,354,200
loss on the conversion of the shares, and a loss of $223,600 on the
valuation of
the derivatives to convert the Enterra shares. All of these
marketable securities were sold during the year ended December 31,
2006. The Company received $2,991,000 in cash proceeds and recognized
a loss of $324,300 from the sale of these marketable securities. Due
to the short period that these securities were held they are classified
as
trading securities.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
Properties
and Equipment
The
Company capitalizes all costs incidental to the acquisition as
incurred. Mineral exploration costs are expensed as
incurred. When exploration work indicates that a mineral property can
be economically developed as a result of establishing proved and
probable
reserves, costs for the development of the mineral property as well
as capital
purchases and capital construction are capitalized and amortized
using units of
production over the estimated recoverable proved and probable reserves.
Costs
and expenses related to general corporate overhead are expensed as
incurred. All
capitalized costs are charged to operations if the Company subsequently
determines that the property is not economical due to permanent decreases
in
market prices of commodities, too high of production costs or depletion
of the
mineral resource.
Oil
and
gas properties are accounted for using the full cost
method. Capitalized costs plus any future development costs are
amortized by the units-of-production method using proven
reserves. All oil and gas properties are fully depleted.
Long-Lived
Assets
The
Company evaluates its long-lived assets for impairment when events
or changes in
circumstances indicate that the related carrying amount may not be
recoverable. If the sum of estimated future cash flows on an
undiscounted basis is less than the carrying amount of the related
asset, asset
impairment is considered to exist. The related impairment loss is
measured by comparing estimated future cash flows on a discounted
basis to the
carrying amount of the asset. Changes in significant assumptions
underlying future cash flow estimates may have a material effect
on the
Company’s financial position and results of operations. An uneconomic
commodity market price, if sustained for an extended period of time,
or an
inability to obtain financing necessary to develop the mineral interests
may
result in asset impairment. The Company participates in long lived
assets through its investments in USECC and SGMI. These assets are
not consolidated on the financial statements of the Company. As of
December 31, 2006, no impairment existed in the USECC or SGMI
assets.
Fair
Value of Financial Instruments
The
carrying amount of cash equivalents and other current assets approximates
fair
value because of the short term nature of those instruments. It is
not practicable to determine the fair value of debt to affiliate
carried at
$13,277,200 and $10,821,800 at December 31, 2006 and December 31,
2005,
respectively.
Stock
Based Compensation
On
September 2, 2004, the Company's shareholders adopted an Incentive
Stock Option
Plan ("ISOP") for employees of the Company and USE. 2,000,000 shares
of common stock were initially reserved for the ISOP. At such time as
options have been granted to purchase 2,000,000 shares, the number
of shares
available for issuance under the ISOP will automatically be increased
to 20% of
the issued and outstanding common shares of the Company. The Company
granted 1.7 million of these ISOP options to various directors, officers
and
employees on June 10, 2005.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
SFAS
123,
"Accounting for Stock-Based Compensation," ("SFAS 123") defines a
fair value
based method of accounting for employee stock options or similar
equity
instruments. SFAS 123 allowed the continued measurement of compensation
cost for
such plans using the intrinsic value based method prescribed by APB
Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), provided
that pro
forma disclosures are made to net income or loss and net income or
loss per
share, assuming the fair value based method of SFAS 123 had been
applied. The
Company has elected to account for its stock-based compensation plans
under APB
25 through calendar year 2005. Effective January 1, 2006, the Company
adopted Statement of Financial Accounting Standards No. 123 (revised
2004),
Share-Based Payment (“SFAS 123R”), which requires the Company to measure the
cost of employee services received in exchange for all equity awards
granted
including stock options based on the fair market value of the award
as of the
grant date. SFAS 123R supersedes Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) and
Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to
Employees (“APB 25”). The Company has adopted SFAS 123R using the
modified prospective method. Accordingly, prior period amounts have
not been restated. Under the modified prospective method, stock
options awards that are granted, modified or settled after December
31, 2005
will be valued at fair value in accordance with provisions of SFAS
123R and
recognized on a straight line basis over the service period of the
entire
award.
Implementing
SFAS No. 123(R) as of January 1, 2006 has had no effect on the results
of
operations of the Company for the year ended December 31, 2006.
The
Company has computed the fair values of all options granted using
the
Black-Scholes pricing model and the following weighted average
assumptions:
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
Risk-free
interest rate
|
|
|
4.38 |
% |
|
|
4.82 |
% |
Expected
lives (years)
|
|
|
9.44
|
|
|
|
--
|
|
Expected
volatility
|
|
|
107.20 |
% |
|
|
--
|
|
Expected
dividend yield
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
To
estimate expected lives of options for this valuation, it was assumed
options
will be exercised at the end of their expected lives. All options
are initially
assumed to vest. Cumulative compensation cost recognized in pro forma
net income
or loss with respect to options that are forfeited prior to vesting
is adjusted
as a reduction of pro forma compensation expense in the period of
forfeiture.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
If
the
Company had accounted for its stock-based compensation plans in accordance
with
SFAS 123, the Company's net gain (loss) and pro forma net gain (loss)
per common
share would have been reported as follows:
|
|
Year
Ended
|
|
|
|
December
31,
|
|
|
|
2005
|
|
|
2004
|
|
Net
gain (loss) to common
|
|
$ |
4,541,400
|
|
|
$ |
(1,767,500 |
) |
shareholder
as reported
|
|
|
|
|
|
|
|
|
Deduct:
Total stock based
|
|
|
|
|
|
|
|
|
employee
expense
|
|
|
|
|
|
|
|
|
determined
under fair
|
|
|
|
|
|
|
|
|
value
based method
|
|
|
(1,013,500 |
) |
|
|
--
|
|
Pro
forma net gain (loss)
|
|
$ |
3,527,900
|
|
|
$ |
(1,767,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported, Basic and Diluted
|
|
$ |
0.26
|
|
|
$ |
(0.10 |
) |
Pro
forma, Basic and Diluted
|
|
$ |
0.21
|
|
|
$ |
(0.10 |
) |
Weighted
average shares used to calculate pro forma net loss per share were
determined as
described below, except in applying the treasury stock method to
outstanding
options; net proceeds assumed received upon exercise were increased
by the
amount of compensation cost attributable to future service periods
and not yet
recognized as pro forma expense.
Asset
Retirement Obligations
The
Company accounts for its asset retirement obligations under SFAS
No. 143
“Accounting for Asset Retirement Obligation.” The Company records the
fair value of the reclamation liability on its shut down mining properties
as of
the date that the liability is incurred. The Company reviews the
liability each quarter and determines if a change in estimate is
required as
well as accretes the total liability on a quarterly basis for the
future
liability. Final determinations are made during the fourth quarter of
each year.
Liabilities
Held for Sale
The
Company accounts for long lived liabilities held for sale pursuant
to FAS 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”. On
July 10, 2006, the Company and USE signed an Exclusivity Agreement
tot sell its
uranium properties. On February 22, 2007, the Company and USE signed
an Asset Purchase Agreement for the sale of these uranium assets. As
the terms of the agreement dictate that the actual sale of these
assets will
occur within calendar 2007, the long term asset retirement obligation
of
$1,204,900 at December 31, 2006 is classified as a current
liability. (See Notes E and K) No other liabilities or
asset carrying values are reflected in the December 31, 2006 Balance
Sheet of
the Company. The Uranium assets are held in a shut down mode and
there are no operations at them.
The
Company deducts any actual funds expended for reclamation during
the quarter in
which it occurs. The Company has no remaining book value for these
properties.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
The
following is a reconciliation of the total liability
for asset retirement
obligations
|
|
|
|
|
|
Balance
December 31, 2005
|
|
$ |
1,151,400
|
|
Addition
to Liability
|
|
|
44,100
|
|
Revaluation
of liability
|
|
|
(52,600 |
) |
Accretion
Expense
|
|
|
113,000
|
|
Reclassification
to liabilities held for sale
|
|
|
(1,204,900 |
) |
Balance
December 31, 2006
|
|
$ |
51,000
|
|
|
|
|
|
|
Income
Taxes
The
Company accounts for income taxes under the provisions of Statement
of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes". This statement requires recognition of deferred income tax
assets and liabilities for the expected future income tax consequences,
based on
enacted tax laws, of temporary differences between the financial
reporting and
tax bases of assets, liabilities and carry forwards.
SFAS
109
requires recognition of deferred tax assets for the expected future
effects of
all deductible temporary differences, loss carry forwards and tax
credit carry
forwards. Deferred tax assets are reduced, if deemed necessary, by
a valuation
allowance for any tax benefits which, based on current circumstances,
are not
expected to be realized.
Net
Income (Loss) Per Share
The
Company reports net gain (loss) per share pursuant to Statement of
Financial
Accounting Standards No. 128 (“SFAS 128”). Basic earnings per share
is computed based on the weighted average number of common shares
outstanding. Diluted earnings per share is computed based on the
weighted average number of common shares outstanding adjusted for
the
incremental shares attributed to outstanding options to purchase
common stock,
if dilutive. Using the treasury stock method there were 558,560
potential shares relating to forfeitable shares and options that
are included in
the diluted earnings per share for the year ended December 31,
2006. Potential common shares relating to options and were excluded
from the computation of diluted gain (loss) per share, because they
were
anti-dilutive, totaled 1,700,000, and -0- at December 31, 2005 and
2004
respectively.
Diluted
Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per
Share
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earning per share
|
|
$ |
3,850,900
|
|
|
|
17,153,282
|
|
|
$ |
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitable
shares
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
Outstanding
options
|
|
|
|
|
|
|
543,560
|
|
|
|
|
|
|
|
|
|
|
|
|
558,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earning per share:
|
|
$ |
3,850,900
|
|
|
|
17,711,842
|
|
|
$ |
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
|
|
2005
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per
Share
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earning per share
|
|
$ |
4,541,400
|
|
|
|
17,146,306
|
|
|
$ |
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitable
shares
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
Outstanding
options
|
|
|
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earning per share:
|
|
$ |
4,541,400
|
|
|
|
17,161,306
|
|
|
$ |
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Use
of Estimates
The
preparation of financial statements in conformity with accounting
principles
generally accepted in the United States of America requires management
to make
estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities and disclosure of contingent
assets
and liabilities at the date of the financial statements, and the
reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Recent
Accounting Pronouncements
FIN
48 In June 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes,” (“FIN 48”) an interpretation of
FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a
recognition threshold and measurement attribute for the financial
statement
recognition and measurement of a tax position taken or expected to
be taken in a
tax return. FIN 48 requires that the Company recognize in its financial
statements, the impact of a tax position, if that position is more
likely than
not of being sustained on audit, based on the technical merits of
the position.
FIN 48 also provides guidance on de-recognition, classification,
interest and
penalties, accounting in interim periods and disclosure. The provisions
of FIN
48 are effective beginning January 1, 2007 with the cumulative effect
of the
change in accounting principle recorded as an adjustment to the opening
balance
of retained earnings, goodwill, deferred income taxes and income
taxes payable
in the Balance Sheets. The Company does not expect that the adoption
of FIN 48
will have a significant impact on the financial statements of the
Company.
FAS
157 In September 2006, the FASB issued FASB Statement No.
157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
The provisions for FAS 157 are effective for the Company’s fiscal year beginning
January 1, 2008. The Company is currently evaluating the impact that
the
adoption of this statement will have on the Company’s financial position,
results of operations or cash flows.
In
September 2006, the Securities and Exchange Commission issued Staff
Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements
(“SAB 108”).
SAB 108 provides guidance on consideration of the effects of prior
year
misstatements in quantifying current year misstatements for the
purpose of a
materiality assessment. SAB 108 is effective for fiscal years ending
after
November 15, 2006. The adoption of SAB 108 did not have an impact
on our
financial statements.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS 159”) which permits
entities to choose to measure many financial instruments and certain
other items
at fair value that are not currently required to be measured at fair
value. SFAS
159 will be effective for us on January 1, 2008. We are currently
evaluating the
impact of adopting SFAS 159 on our financial position, cash flows,
and results
of operations.
The
Company has reviewed other current outstanding statements from the
Financial
Accounting Standards Board and does not believe that any of those
statements
will have a material adverse affect on the financial statements of
the Company
when adopted.
C. RELATED-PARTY
TRANSACTIONS:
The
Company does not have employees, but utilized USE's employees and
pays for
one-half of these costs under the USECC Joint Venture Agreement. The
Board of Directors of USE adopted the U.S. Energy Corp. 1989 Employee
Stock
Ownership Plan ("ESOP") in 1989, for the benefit of USE's
employees. As of December 31, 2006, 2005, and 2004 the Board of
Directors of USE contributed 70,756, 56,494 and 70,439 shares of
USE stock to
the ESOP at prices of $4.98, $4.65 and $2.96 per share,
respectively. The Company is responsible for one-half of the value of
these contributions or $176,200, $131,400 and $104,200, for the years
ended
December 31, 2006, 2005 and 2004, respectively, which was advanced
through debt
to affiliate. As of December 31, 2006, all shares of USE stock that
have been contributed to the ESOP have been allocated. The estimated
fair value of shares that are not vested is approximately $196,100.
Proposed
merger with USE
On
December 20, 2006, the Company’s Special Committee of the independent board
members met with the Special Committee of the independent board members
of
USE. Following extensive discussions between the two committees, the
USE Special Committee proposed a merger of the Company into USE,
by means of an
offer to acquire the minority shares of the Company, based on an
exchange ratio
of one share of common stock of USE for every two shares of the Company’s common
stock not held by USE (which owns 70.9% of the Company’s common
stock). Navigant Capital Advisors, LLC served as financial advisor to
the USE Special Committee, and Neidiger Tucker Bruner Inc. served
as financial
advisor to the Company’s Special Committee. Both Navigant Capital
Advisors, LLC and Neidiger Tucker Bruner submitted fairness opinions
on the
final proposal for the merger.
The
offer
also provided that:
(i) USE
would vote in line with the vote of a majority of the holders of
the Company’s
minority share holders;
(ii) USE
may decline to consummate the merger, even after approval by the
holders of a
majority of the minority the Company’s shares, if the holders of more
than 200,000 the Company’s shares perfect their rights to dissent from the
merger under Colorado law or for other reasons, in USE’s sole discretion;
and
(iii) Shares
of common stock issuable under options issued by the Company which
are held by
USE officers, directors, and employees are to participate in the
offer on the
same exchange ratio basis as the minority shareholders of the Company
(the
number of option shares would be determined by the extent to which
the Company’s
market price exceeds the $1.71 option exercise price).
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
The
Special Committee for the Company accepted the offer. Thereafter, the
Special Committees recommended to their respective full boards that
the merger
offer be approved. On December 20, 2006, the full boards of directors
of the Company and USE voted to approve the merger offer.
Consummation
of the merger is subject to execution of definitive documents; USE
delivering to
the Company’s minority shareholders a proxy statement/prospectus (following
declaration of effectiveness by the SEC of a Form S-4 to be filed
by USE with
the SEC) for a special meeting of the Company’s shareholders; approval of the
merger by the holders of a majority of the minority the
Company’s shares; and satisfaction of customary representations and
warranties to be contained in the definitive documents.
D. INVESTMENTS
IN AFFILIATES:
The
Company's investments in affiliates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
USECC
|
|
|
50.0 |
% |
|
$ |
4,274,900
|
|
|
$ |
3,342,100
|
|
Others
|
|
various
|
|
|
|
5,500
|
|
|
|
6,700
|
|
|
|
|
|
|
|
$ |
4,280,400
|
|
|
$ |
3,348,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SGMI
|
|
|
0.9 |
% |
|
$ |
(85,500 |
) |
|
$ |
(85,500 |
) |
Yellow
Stone Fuels Corp. ("YSFC")
|
|
|
13.2 |
% |
|
|
(130,100 |
) |
|
|
(130,100 |
) |
|
|
|
|
|
|
$ |
(215,600 |
) |
|
$ |
(215,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2006, and 2005 investments of $4,280,400, $3,348,800,
respectively,
are presented as investments in affiliates in the accompanying balance
sheets. A liability of $215,600 has been presented as a commitment to
fund equity investees as of December 31, 2006 and 2005 for these
investments in
affiliates that the Company must fund.
During
the year ended December 31, 2006, the Company paid its portion of
the $2,000,000
obligation to Enterra ($700,000) by transferring its 512,359 shares
of USE
common stock to USE (valued at $3.95 per share at the time). USE then
paid the total obligation of $2,000,000 to Enterra by transferring
506,329
shares of USE stock. The Company recognized a gain of $2,023,800 on
the statement of operations and the Company also received a $1,323,800
credit
from USE on the debt that the Company owes to USE.
Equity
loss from investments accounted for by the equity method
is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
USECC
|
|
$ |
(3,625,600 |
) |
|
$ |
(1,699,800 |
) |
|
$ |
(1,447,500 |
) |
|
|
$ |
(3,625,600 |
) |
|
$ |
(1,699,800 |
) |
|
$ |
(1,447,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
USECC
is
an entity established primarily to provide management and administrative
services to the Company and its affiliates. Commercial operations of
USECC with unaffiliated entities is limited.
The
difference of the Company's recorded investment in USECC and
the Company's capital account on USECC's balance sheet of $668,300
consists of
prior year establishment and changes of the asset retirement obligation
for the
Company.
CONDENSED
COMBINED BALANCE
SHEETS:
|
|
EQUITY
INVESTEES
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
2006
|
|
|
2005
|
|
Current
assets
|
|
$ |
9,032,900
|
|
|
$ |
22,495,000
|
|
Non-current
assets
|
|
|
9,816,900
|
|
|
|
16,665,000
|
|
|
|
$ |
18,849,800
|
|
|
$ |
39,160,000
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$ |
6,175,200
|
|
|
$ |
4,355,000
|
|
Reclamation
and other liabilities
|
|
|
7,474,000
|
|
|
|
10,589,700
|
|
Excess
in assets
|
|
|
5,200,600
|
|
|
|
24,215,300
|
|
|
|
$ |
18,849,800
|
|
|
$ |
39,160,000
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
COMBINED STATEMENTS OF
OPERATIONS:
|
|
EQUITY
INVESTEES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Revenues
|
|
$ |
912,000
|
|
|
$ |
911,900
|
|
|
$ |
4,951,700
|
|
Costs
and expenses
|
|
$ |
(13,240,900 |
) |
|
$ |
(8,630,200 |
) |
|
$ |
(10,921,400 |
) |
Other
Income & Expenses
|
|
$ |
2,967,700
|
|
|
$ |
7,313,800
|
|
|
$ |
(759,700 |
) |
Net
gain (loss)
|
|
$ |
(9,361,200 |
) |
|
$ |
(404,500 |
) |
|
$ |
(6,729,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
E. MINERAL
TRANSACTIONS AND MINING PROPERTIES:
Lucky
Jack Molybdenum Properties
The
Company and USE re-acquired the Lucky Jack Project (formerly the Mount
Emmons
molybdenum property) located near Crested Butte, Colorado on February
28,
2006. The property was returned to the Company and USE by Phelps
Dodge Corporation (“PD”) in accordance with a 1987 Amended Royalty Deed and
Agreement between the Company, USE and Amax Inc. (“Amax”). The Lucky
Jack Project includes a total of 25 patented and approximately 520
unpatented
mining claims, which together approximate 5,400 acres, or over 8 square
miles of
mining claims. Pursuant to a court order the Company and USE paid PD
$7,000,000, one half each, for prior holding and operating costs of
the property
and water treatment plant as well as litigation expenses when the properties
were transferred from PD to the Company and USE.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
Conveyance
of the property to the Company and USE also included the transfer of
ownership
and operational responsibility of the mine water treatment plant located
on the
properties. The water treatment permit issued under the Colorado
Discharge Permit System (“CDPS”) was assigned to the Company and USE by the
Colorado Department of Health and Environment. Operating costs for
the water treatment plant are expected to approximate $1 million
annually. The Company and USE through USECC, have hired a contractor
to operate the water treatment plant. The Company and USE will also
evaluate the potential use of the water treatment plant in the milling
operations.
On
October 6, 2006, the Company, USE and USMC on the one hand, and Kobex
Resources
Ltd. (“KBX”) (a British Columbia company traded on the TSX Venture Exchange
under the symbol “KBX”), on the other hand, signed a letter agreement (the
“Letter Agreement”) providing KBX an option to acquire up to a 65% interest in
certain patented and unpatented claims held by the Company and USE
at the Lucky
Jack molybdenum property (“Property”). The Letter Agreement was
amended on December 7, 2006, with an effective date of December 5,
2006.
The
total
cost to KBX over an estimated period of five years to exercise the
full option
will be $50 million in option payments and property expenditures, including
the
costs to prepare a bankable feasibility study on the Property and with
a cash
differential payment if this total is less than $50 million.
The
Letter Agreement entitles KBX with an exclusive option (the “Option”) to
acquire, in two stages, up to an undivided 65% interest in the Property,
by
paying all of the Option Payments to the Company and USE and also paying
for
permitting, engineering, exploring, operating (including water treatment
plant
expenses) and all other property-related costs and expenses (“Expenditures”),
until a bankable feasibility study is provided to the Company and
USE. Option Payments may be made in cash or KBX common stock, at
KBX’s election. The Expenditures will be paid in cash. KBX
also will have to pay an additional cash amount if the total of all
Option
Payments and Expenditures is less than $50 million at the time a bankable
feasibility study is delivered to the Company and USE (see below).
Date
or
|
|
Option
|
|
|
|
|
Anniversary(1)
|
|
Payment
|
|
|
Expenditures
|
|
|
|
|
|
|
|
|
10
business days
|
|
|
|
|
|
|
after
Effective Date(2)
|
|
$ |
750,000
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
By
first anniversary(3)
|
|
$ |
500,000/1,200,000
|
|
|
$ |
3,500,000/4,200,000
|
|
|
|
|
|
|
|
|
|
|
By
second anniversary
|
|
$ |
500,000
|
|
|
$ |
5,000,000
|
|
|
|
|
|
|
|
|
|
|
By
third anniversary
|
|
$ |
500,000
|
|
|
$ |
5,000,000
|
|
|
|
|
|
|
|
|
|
|
By
fourth anniversary
|
|
$ |
500,000
|
|
|
$ |
2,500,000
|
|
|
|
|
|
|
|
|
|
|
By
fifth anniversary
|
|
$ |
500,000
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,000,000 |
(4) |
|
|
$ |
3,950,000
|
|
|
$ |
46,000,000
|
|
One
half
of these amounts will be for the benefit of Company.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
(1)
|
Anniversary
of Effective Date.
|
(2)
|
If
paid in KBX stock, 10 business days after Canadian regulatory
and stock
exchange approval which has not yet occurred.
|
(3)
|
Of
this amount, $700,000 is payable by the first anniversary
of the Effective
Date, either by KBX paying an additional like amount in Expenditures,
in
the first year; or increasing the first anniversary option
payment by a
like amount (payable in cash or KBX common stock); or a combination
of the
preceding.
|
(4)
|
Delivery
of a bankable feasibility study (“BFS”) on the Property. If the
total Option Payments and Expenditures and costs to prepare
the BFS are
less than $50 million, KBX will pay the Company and USE the
difference in
cash. If the total is more than $50 million before the BFS
is completed,
The Company and USE and KBX each will pay 50% of the balance
needed to
complete the BFS.
|
Except
for the first Expenditures of $3.5 million and the first Option Payment
of
$750,000 (both of which must be paid by KBX), all other Option Payments
and
Expenditures are at KBX’s discretion. However, if KBX fails to make
any other Option Payments and Expenditures by the due dates and applicable
grace
periods, the Letter Agreement (or definitive agreement, if any) will
be
terminated and all rights and interests will revert to the Company
and
USE.
When
KBX
has paid $15 million in Expenditures, it will have earned a 15% interest
in the
Property. When all remaining option payments, and all of the
expenditures over $15 million, have been paid, KBX will have earned
an
additional 35% interest (or a 50% total interest). However, when the
BFS is delivered, if the total of all option payments, expenditures,
and BFS
costs are less than $50 million, earning this additional 35% interest
also will
be subject to KBX paying the Company and USE (in cash) the difference
between
the actual Option payments and Expenditures paid to date, and $50
million.
The
Company and USE each hold a 3% gross overriding royalty interest in
the property
and this will be reserved for their separate benefit when the property
is
transferred to KBX. If KBX earns a 15% interest in the property, the
royalty will be reduced to 2.55% each; if KBX earns a 50% interest,
the royalty
will be reduced to 1.5% each. For one year after the final reduction,
KBX will have the option to terminate 1% (.5% of each 1.5%) by paying
$10
million in cash or KBX common stock (at the Company and USE’s sole discretion),
with one-half paid to each Crested and USE.
At
such
time as KBX has earned a 50% interest, KBX will have the right to form
a joint
venture with the Company and USE for the property on a 50%-50%
basis. Alternatively, within four months of earning a 50% interest,
KBX may offer the Company and USE a one time only election to (i) elect
to
remain in the 50%/50% joint venture; or (ii) to allow KBX to acquire
an
additional 15% interest in the property for a total of 65% interest
in the
property (the “65% Election”), whereby The Company and USE would revert to a 35%
interest , which change in ownership will require KBX to have arranged
all
future property financing on optimal terms; or (iii) have KBX acquire
all of the
Company and USE’s interest for KBX common stock on an agreed upon valuation
basis (but the KBX shares issued cannot be less than 50% for KBX and
not more
than 50% for the Company and USE’s interest).
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
Until
KBX
earns its 50% interest, KBX will manage all programs on the property,
but a
management committee (with two representatives from each of KBX and
the Company
and USE) will approve all programs and budgets for Expenditures. If
there is a tie vote, the KBX representative would cast the deciding
vote. A technical committee will also be formed to provide technical
advice; each of KBX and the Company and USE will have two
representatives. The Technical Committee will report to the
management committee.
KBX
may
terminate the Letter Agreement or the formal agreement at any time,
subject to
KBX paying the Company and USE the initial $1.45 million Option Payment
(in cash
or KBX stock), and KBX having paid the minimum initial $3.5 million
of
Expenditures. Further, if and to the extent the initial minimum $1.45
million Option Payment and $3.5 million in Expenditures have not been
met,
termination by KBX will be subject to its paying to the Company and
USE $700,000
in cash or KBX stock and the difference between $4.2 million and the
total
Expenditures actually made by the date of termination.
If
KBX
pays a broker or finder’s fee in connection with the transaction, the Company
will reimburse KBX up to 50% of the fee (but the reimbursable amount
will not
exceed Cdn $400,000), in cash or common stock of USE (at the Company
and USE’s
election), in four equal annual installments. The reimbursement
obligation would terminate if the Letter Agreement or the formal agreement
is
terminated before it is fully paid.
Contract
to Sell Uranium Assets to Uranium One - Uranium
On
July
10, 2006, the Company and USE signed an Exclusivity Agreement with
sxr Uranium
One Inc. (“Uranium One” or “SXR”), which is headquartered in Toronto, Canada
with offices in South Africa and Australia (TSE and JSE “SXR”). Upon
signing the Exclusivity Agreement, the Term Sheet (signed by Uranium
One and by
the Company and USE on June 22, 2006) became effective. The Term
Sheet sets forth the indicative terms of a proposed sale of the majority
of the
Company and USE’s uranium assets to Uranium One.
Under
the
terms of the Exclusivity Agreement, Uranium One paid to the USECC $750,000
cash
(nonrefundable, except for material breach of the Exclusivity Agreement)
for the
exclusive right to purchase the their uranium assets, including the
Shootaring
Canyon uranium mill in southeast Utah (and all geological libraries
and other
intellectual property related to the acquired assets and the mill),
for a period
of up to 270 days (an initial six month period, plus an optional three
month
extension) during which time Uranium One was to conduct their due
diligence. (See Subsequent Event at Note K)
· UPC
Purchase and Sale Agreement
As
of
January 31, 2007, the Company, USE and UPC, signed an Amendment to
Agreements (filed as an exhibit to this Report) to allow USE and Crested
to
transfer to Uranium One all of their rights, responsibilities and obligations
under the Purchase and Sale Agreement, and the Mining Venture Agreement,
which
relate to uranium properties. In the Amendment to Agreements, the
Company and USE relinquished all their rights to the Green River South
property
in favor of UPC, and those specific rights therefore will be excluded
from the
transfer. All other rights will be transferred to Uranium One when
the APA is closed. The following summarizes the agreements with UPC
which are the subject of the Amendment to Agreements.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
On
December 8, 2004, the Company and USE entered into a Purchase and Sale
Agreement
(the “Agreement”) with Bell Coast Capital Corp. now named Uranium Power Corp.
(“UPC”), a British Columbia corporation (TSX-V “UCP-V”) for the sale to UPC of
an undivided 50% interest in the Sheep Mountain properties located
in
Wyoming.
The
Agreement was amended on January 13, 2006. A summary of certain
provisions follows: The purchase price for the properties is
$7,050,000 plus 4 million shares of UPC common stock. During the year
ended December 31, 2006, UPC paid $2,100,000 and delivered 1,500,000
shares of
their stock to USECC. At December 31, 2006, UPC had therefore, on a
cumulative basis, paid $2,950,000 and delivered 2.5 million UPC shares
to
USECC. An additional $4.1 million and 1.5 million shares are required
to pay the full purchase price as follows: $1.0 million cash on April
29, 2007
and $1.5 million cash on October 29, 2007 (provided that UPC is required
to pay
50% of all money it raises after January 13, 2006, which would be applied
against the two cash payments); and two additional
payments each of $800,000 cash and 750,000 UPC shares on June 29, 2007
and
December 29, 2007, respectively (total $1,600,000 cash and 1,500,000
UPC
shares).
UPC
will
contribute up to $10,000,000 to the joint venture (at $500,000 for
each of 20
exploration projects). The Company and USE on the one hand and UPC on
the other will then each be responsible for 50% of costs on each project
in
excess of $500,000. The USECC and UPC will also each be responsible
for paying 50% of (i) current and future Sheep Mountain reclamation
costs in
excess of $1,600,000, and (ii) all costs to maintain and hold the
properties.
UPC
may
terminate the agreement before closing, in which event UPC (i) would
forfeit all
payments made to termination date; (ii) lose all of its interest in
the
properties to be contributed by the Company under the agreement; (iii)
lose all
rights to additional properties acquired in the joint venture as well
as forfeit
all cash contributions to the joint venture, and (iv) be relieved of
its share
of reclamation liabilities existing at December 8, 2004.
If
the
Uranium One contract is not closed, then closing of the UPC Purchase
and Sale
Agreement is required on or before December 29, 2007, with UPC’s last payment of
the purchase price. At the closing, UPC will contribute its 50%
interest in the properties, and the Company will contribute their aggregate
50%
interest in the properties, to the joint venture, wherein UPC and USECC
will
each hold a 50% interest. If the installments are not timely paid,
UPC will forfeit all of the 50% interest it is to earn in the properties
and the
joint venture to be formed.
· UPC
Mining Venture Agreement
As
of
April 11, 2005, the Company and USE signed a Mining Venture Agreement
with UPC
to establish a joint venture, with a term of 30 years, to explore,
develop and
mine the properties being purchased by UPC under the Purchase and Sale
Agreement, and acquire, explore and develop additional uranium
properties. An area of mutual interest (“AMI”) was revised by the
January 31, 2007 Amendment to Agreements and generally covers uranium
properties
within one mile of the properties subject to the joint venture.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
In
2005 -
2006, USECC and UPC added the Burro Canyon project (in Colorado), the
Breccia
Pipes project (in Arizona) and the Green River North and South (Utah)
projects
to their joint venture under the Mining Venture Agreement. Payments
by UPC related to these additional uranium properties are separate
from the
payments required for UPC to acquire its 50% interest in the Sheep
Mountain
properties. UPC’s ownership of the 50% interest in the Burro Canyon
and Breccia Pipes project is subject to UPC’s timely completion of all its
payment obligations under the Agreement.
In
2006,
the Company, USE and UPC signed an agreement for USECC to earn one-half
of UPC’s
rights to earn up to a 85% interest in the Green River South project
(also known
as the Sahara Property) held by Uranium Group (“UG”). For its
one-half interest, USECC would pay $1,475,000 in option payments and
work on the
properties, plus pay to UPC (in cash or in USE stock) an amount equal
to
one-half of the lesser of the value of the UPC stock issued to UG when
issued,
and Cdn$1.00 per share. The project would be held and developed in
the Mining Venture Agreement.
If
the
contract with Uranium One is closed, USECC will assign to UPC all of
USECC’s
rights in the Green River South project, and receive from Uranium One
about
$441,000 for USECC’s expenditures on the project from July 10, 2006 to February
22, 2007. Uranium One would have no interest in the
project. If the contract is not closed, the Company may or
may not continue to participate in the project.
Plateau
Resources Limited
During
fiscal 1994, USE entered into an agreement with Consumers Power Company
to
acquire all the issued and outstanding common stock of Plateau Resources
Limited
(“Plateau”), a Utah corporation. Plateau owns a uranium processing mill, the
Shootaring Canyon Uranium Mill and support facilities and certain other
real
estate assets in southeastern Utah. USE paid nominal cash consideration
for the
Plateau stock and agreed to assume all environmental liabilities and
reclamation
bonding obligations. At December 31, 2006, Plateau has a cash security
in the
amount of $6.8 million to cover reclamation and annual licensing of
the
properties (see Note I). The Directors of the Company and USE have
agreed to
divide equally the cash flows, both positive and negative from Plateau
operations as well as 50% of the reclamation obligations. The
Shootaring Canyon uranium mill is subject to the Uranium One asset
purchase
agreement.
On
April
12, 2006, USE signed a contract with ARAMARK Sports and Entertainment
Services,
Inc., a subsidiary of ARAMARK (NYSE: “RMK”), for the management and operation of
all commercial services owned by Plateau. The initial term of the contract
is
for three years, with one three-year extension option to be exercised
upon the
mutual agreement of U.S. Energy Corp. and ARAMARK. Under the terms of
the contract, ARAMARK will manage the 70-room motel, convenience store,
mobile
home park, boat storage facility, restaurant and lounge owned by
Plateau. ARAMARK will also add these assets to its nationwide
reservation center and website. Per terms of the agreement, ARAMARK
will receive a management fee and will invest in a marketing program
designed to
maximize future revenues.
Sutter
Gold Mining, Inc.
Sutter
Gold Mining Company (“SGMC”) was established in 1990 to conduct operations on
mining leases and to produce gold from the Lincoln Project in
California. On December 29, 2004, approximately 90% of SGMC was
acquired by Sutter Gold Mining Inc. ("SGMI") (formerly Globemin Resources,
Inc.)
of Vancouver; B.C. SGMI is traded on the TSX Venture Exchange.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
During
prior periods an impairment of the acquisition and exploration costs
associated
with the SGMI property in California was recorded. During fiscal 2000,
a
visitor’s center was developed and became operational to help defray the holding
costs associated with the property.
Although
no economic reserves have been delineated on the property, the spot
market price
for gold has attained and maintained levels that management believes
warrants
further exploration that will allow SGMI to produce gold from the property
on an
economic basis. In 2006, SGMI raised $3,413,800 of net proceeds from
two private
placements of its common stock. Proceeds have funded a combined
underground and surface diamond drill program and will also be used
to prepare a
pre-feasibility study on the property.
ROCKY
MOUNTAIN GAS, INC.
In
1999,
the Company and USE organized Rocky Mountain Gas, Inc. (“RMG”) to enter into the
coalbed methane gas/natural gas business. RMG was engaged in the acquisition
of
coalbed methane gas properties and the future exploration, development
and
production of methane gas from those properties.
On
June
1, 2005 Enterra US Acquisitions Inc. (“Acquisitions”) (a privately-held
Washington corporation organized by Enterra Energy Trust (“Enterra”) for
purposes of the RMG acquisition) acquired all the outstanding stock
of RMG, for
which Enterra paid $500,000 cash and issued $5,234,000 of Enterra units
(the
"Enterra Initial Units"), net of the $266,000 adjustment for the purchase
of
overriding royalty interests (effected May 1, 2005); and Acquisitions
issued
$14,000,000 of class D shares of Acquisitions. The Enterra Initial
Units and the class D shares were issued pro rata to the RMG
shareholders.
The
Company’s participation in the consideration received during the year ended
December 31, 2005 was approximately $6,399,000 resulting in a gain
of
$5,816,700. The carrying value of the Company’s interest in RMG was
$422,500 at the date of disposition. The Company received 91,029
Enterra Initial Units and 245,759 Class D shares of Acquisitions, recorded
on
the December 31, 2005 balance sheet as long term investments in non
affiliates
of $4,893,100. The Initial Units of Enterra were sold during the year
ended December 31, 2005 for a gain of $448,300. The sale of the
Initial Units also generated $2,177,800 in cash of which the Company
applied
$2.0 million to its debt to USE.
As
of
December 31, 2006, the Company had sold all of the 245,759 units of
Enterra
Energy Trust (“Enterra”) which were received in June, 2006 as an automatic
conversion of its shares of Enterra Acquisition Class D shares, which
shares
were received as partial consideration for the June 2005 sale of RMG
to
Enterra. The Company received $2,991,000 cash from sale of the
Enterra units.
PINNACLE
On
June
23, 2003, a Subscription and Contribution Agreement was executed by
RMG, CCBM, a
wholly owned subsidiary of Carrizo Oil and Gas, Inc., and seven affiliates
of
Credit Suisse First Boston Private Equity (“CSFB Parties”). Under the Agreement,
RMG and CCBM contributed certain of their respective interests, having
an
estimated fair value of approximately $7.5 million each, carried on
RMG’s books
at a cost of $957,600, comprised of (1) leases in the Clearmont, Kirby,
Arvada
and Bobcat CBM project areas and (2) oil and gas reserves in the Bobcat
project
area, to a newly formed entity, Pinnacle Gas Resources, Inc., a Delaware
corporation (“Pinnacle”). In exchange for the contribution of these assets, RMG
and CCBM each received 37.5% of the common stock of Pinnacle (“Pinnacle Common
Stock”) as of the closing date and options to purchase Pinnacle Common Stock
(“Pinnacle Stock Options”). CFSB contributed $5.0 million for 25% of the common
stock of Pinnacle and agreed under certain terms to fund additional
acquisition
and development programs.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
The
Pinnacle shares (which had been owned by RMG, but were not sold as
part of the
2005 Enterra transaction) were transferred to the Company and USE in
2005. The transaction with Enterra required the Company and
USE to pay Enterra if the Pinnacle shares were later sold for more
than $10 million; the payment (allowed to be by either cash or USE
stock) would
be the difference between $10 million and proceeds of sale (but not
more than $2
million). In September 2006, the Company and USE sold their Pinnacle
shares in a private transaction for $13.8 million cash, of which Crested
received $4,830,000 and USE received $8,970,000. As a result of the
sale of the Pinnacle shares, the Company and USE became obligated to
pay Enterra
$2.0 million in either cash or stock of USE. The Company and USE paid
Enterra with 506,395 shares (valued at $3.95 per share at the time)
of USE
common stock (with a market value of $2 million) owned by the
Company. As a result of the transfer of these USE shares, along with
an additional 5,964 shares of USE owned by the Company which were returned
to
USE, the Company paid its proportionate share of the $2.0 million which
was
$700,000 and received a credit of $1,323,800 against the amount it
owed
USE.
F. DEBT:
Obligations
of the Company consist of advances payable to USE, which are due upon
demand. The obligation is due to USE for funding a majority of the
operations of USECC, of which 50% is the responsibility of the
Company. All advances payable to USE are classified as current as of
December 31, 2006 and 2005 as a result of USE’s unilateral ability to modify the
repayment terms.
|
|
December
31,
|
|
|
|
2006
|
|
|
2005
|
|
Advances
payable - U.S. Energy
|
|
|
|
|
balance
payable in full on
|
|
|
|
|
|
|
demand
(see Note A)
|
|
$ |
13,277,200
|
|
|
$ |
10,821,800
|
|
|
|
|
|
|
|
|
|
|
The
Company and USE have a $500,000 line of credit from a commercial
bank. The line of credit has a variable interest rate (9.25% as of
December 31, 2006). The weighted average interest rate for the year
ended December 31, 2006 was 8.96%. As of December 31, 2006, none of
the line of credit had been borrowed. The line of credit is
collateralized by certain real property.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
G. INCOME
TAXES:
The
components of deferred taxes as of December 31, 2006 and 2005 are as
follows:
|
|
December
31,
|
|
|
|
2006
|
|
|
2005
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Deferred
compensation
|
|
$ |
81,000
|
|
|
$ |
10,800
|
|
Accrued
reclamation
|
|
|
439,600
|
|
|
|
391,500
|
|
Tax
basis in excess of book
|
|
|
-
|
|
|
|
629,800
|
|
Net
operating loss carry forwards
|
|
|
6,976,600
|
|
|
|
4,179,500
|
|
Tax
credits (AMT credit carryover)
|
|
|
44,200
|
|
|
|
144,100
|
|
Total
deferred tax assets
|
|
|
7,541,400
|
|
|
|
5,355,700
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Book
basis in excess of tax basis - Enterra Units
|
|
|
--
|
|
|
|
(76,000 |
) |
Non-deductible
reserves and other
|
|
|
(7,600 |
) |
|
|
--
|
|
Total
deferred tax assets
|
|
|
(7,600 |
) |
|
|
(76,000 |
) |
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
|
7,533,800
|
|
|
|
5,279,700
|
|
Valuation
allowance
|
|
|
--
|
|
|
|
(5,279,700 |
) |
Deferred
tax assets net of valuation allowance
|
|
$ |
7,533,800
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
A
valuation allowance for deferred tax assets is required when it is more likely
than not that some portion or all of the deferred tax assets will or
will not be
realized. Pursuant to paragraph 103 of Statement of Financial
Accounting Standards No. 109 it is more likely than not that the net
operating
loss of the Company and the other deferred tax assets will be realized
as a
result of the closing of the Uranium One Asset Purchase Agreement. No
valuation allowance is therefore provided at December 31, 2006 as management
of
the Company believes that the deferred tax assets will be utilized
in future
years.
During
the year ended December 31, 2006 a net long term deferred tax asset
of $91,300
and a current deferred tax asset of $7,442,500 were recorded. The
Company therefore recognized a net tax benefit of $7,533,800.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
The
income tax provision is different from the amount computed by applying
the
statutory federal income tax rate to the income before taxes. The
reasons for those differences are as follows:
|
|
December
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Expected
federal income tax expense (benefit)
|
|
$ |
(1,324,000 |
) |
|
$ |
1,544,100
|
|
|
$ |
(600,900 |
) |
Dividends
received deduction
|
|
|
--
|
|
|
|
(595,000 |
) |
|
|
--
|
|
Net
operating loss utilized
|
|
|
--
|
|
|
|
--
|
|
|
|
237,800
|
|
Permanent
differences
|
|
|
(609,300 |
) |
|
|
--
|
|
|
|
--
|
|
Prior
year true-up & rate change
|
|
|
(420,800 |
) |
|
|
--
|
|
|
|
--
|
|
Increase
(decrease) in valuation allowance
|
|
|
(5,279,700 |
) |
|
|
(849,100 |
) |
|
|
363,100
|
|
|
|
$ |
(7,633,800 |
) |
|
$ |
100,000
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There
were no taxes payable as of December 31, 2006 and 2005.
At
December 31, 2006, the Company had available, for federal income tax
purposes,
net operating loss carry-forwards of approximately $19,933,300 which
expire from
2008 through 2026.
The
Internal Revenue Service has audited the Company’s and subsidiaries tax returns
through the year ended May 31, 2000. The Company’s income tax
liabilities are settled through fiscal 2000.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
H. SHAREHOLDERS’
EQUITY:
The
Board
of Directors of the Company from time to time, issued stock as compensation
to
certain directors, employees and third parties. These shares are
forfeitable to the Company until earned. The Company is responsible
for the compensation expense related to these issuances. For the
years ended December 31, 2006, 2005, and 2004, the Company did not
recognize
compensation expense resulting from these issuances. These shares
will vest and be released upon the retirement of the employees that
they were
granted to. A schedule of forfeitable shares for Crested is set forth
in the following table:
Issue
|
|
Number
|
|
|
Issue
|
|
|
Total
|
|
Date
|
|
of
Shares
|
|
|
Price
|
|
|
Compensation
|
|
June
1990
|
|
|
25,000
|
|
|
$ |
1.06
|
|
|
$ |
26,500
|
|
December
1990
|
|
|
7,500
|
|
|
|
.50
|
|
|
|
3,800
|
|
January
1993
|
|
|
6,500
|
|
|
|
.22
|
|
|
|
1,400
|
|
January
1994
|
|
|
6,500
|
|
|
|
.28
|
|
|
|
1,800
|
|
January
1995
|
|
|
6,500
|
|
|
|
.19
|
|
|
|
1,200
|
|
January
1996
|
|
|
5,000
|
|
|
|
.3125
|
|
|
|
1,600
|
|
January
1997
|
|
|
8,000
|
|
|
|
.9375
|
|
|
|
7,500
|
|
Release
of Earned Shares; August 2000
|
|
|
(50,000 |
) |
|
|
|
|
|
|
(33,700 |
) |
Balance
at December 31, 2005
|
|
|
15,000
|
|
|
|
|
|
|
$ |
10,100
|
|
On
September 2, 2004, the Board of Directors adopted (and the shareholders
approved) the 2004 Incentive Stock Option Plan (the "2004 ISOP") for
the benefit
of Crested’s key employees. The 2004 ISOP reserves for issuance shares of the
Company’s common stock equal to 20% of the Company’s shares of common stock
issued and outstanding at any time. The 2004 ISOP has a term of 10
years.
During
the years ended December 31, 2006, 2005 and 2004 the following activity
occurred
under the 2004 ISOP:
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Grants
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
--
|
|
|
|
809,353
|
|
|
|
--
|
|
Non-Qualified
|
|
|
--
|
|
|
|
890,647
|
|
|
|
--
|
|
|
|
|
--
|
|
|
|
1,700,000
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price
of Grants
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$ |
--
|
|
|
$ |
1.71
|
|
|
$ |
--
|
|
Low
|
|
$ |
--
|
|
|
$ |
1.71
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Non-Qualified
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Total
Cash Received
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures/Cancellations
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Non-Qualified
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
A
summary
of the Incentive Stock Option Plans activity in all plans for the year
ended
December 31, 2006, 2005 and 2004 is as follows:
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
Outstanding
at beginning
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
the period
|
|
|
1,700,000
|
|
|
$ |
1.71
|
|
|
|
--
|
|
|
$ |
--
|
|
|
|
--
|
|
|
$ |
--
|
|
Granted
|
|
|
--
|
|
|
$ |
--
|
|
|
|
1,700,000
|
|
|
$ |
1.71
|
|
|
|
--
|
|
|
$ |
--
|
|
Forfeited
|
|
|
--
|
|
|
$ |
--
|
|
|
|
--
|
|
|
$ |
--
|
|
|
|
--
|
|
|
$ |
--
|
|
Expired
|
|
|
--
|
|
|
$ |
--
|
|
|
|
--
|
|
|
$ |
--
|
|
|
|
--
|
|
|
$ |
--
|
|
Exercised
|
|
|
--
|
|
|
$ |
--
|
|
|
|
--
|
|
|
$ |
--
|
|
|
|
--
|
|
|
$ |
--
|
|
Outstanding
at period end
|
|
|
1,700,000
|
|
|
$ |
1.71
|
|
|
|
1,700,000
|
|
|
$ |
1.71
|
|
|
|
--
|
|
|
$ |
--
|
|
Exercisable
at period end
|
|
|
1,700,000
|
|
|
$ |
1.71
|
|
|
|
1,700,000
|
|
|
$ |
1.71
|
|
|
|
--
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value
of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
granted
during
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
period
|
|
|
|
|
|
$ |
--
|
|
|
|
|
|
|
$ |
1.54
|
|
|
|
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarized information about employee stock options
outstanding
and exercisable at December 31, 2006:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
|
outstanding
|
|
|
average
|
|
|
Weighted
|
|
|
exercisable
|
|
|
Weighted
|
|
|
|
|
at
|
|
|
remaining
|
|
|
average
|
|
|
at
|
|
|
average
|
|
Grant
Price
|
|
|
December
31,
|
|
|
contractual
|
|
|
exercise
|
|
|
December
31,
|
|
|
exercise
|
|
Range
|
|
|
2006
|
|
|
Life
in years
|
|
|
price
|
|
|
2006
|
|
|
price
|
|
$ |
1.71
|
|
|
|
1,700,000
|
|
|
|
8.44
|
|
|
$ |
1.71
|
|
|
|
1,700,000
|
|
|
$ |
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,700,000
|
|
|
|
8.44
|
|
|
$ |
1.71
|
|
|
|
1,700,000
|
|
|
$ |
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
The
following table sets forth the number of options available for grant
as well as
the intrinsic value of the options outstanding and exercisable:
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Available
for future grant
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
2,000,000
|
|
Intrinsic
value of option exercised
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
Aggregate
intrinsic value of options outstanding
|
|
$ |
1,292,000
|
|
|
$ |
1,428,000
|
|
|
$ |
-
|
|
I. COMMITMENTS,
CONTINGENCIES AND QUARTERLY FINANCIAL DATA:
Material
legal proceedings pending at December 31, 2006, and developments in
those
proceedings from that date to the date this Annual Report is filed,
are
summarized below. Legal proceedings which were not material to the
Company were concluded in the fourth quarter 2006.
Phelps
Dodge – Lucky Jack Molybdenum Property
On
September 26, 2006, the Company and USE signed a Settlement Agreement
and
Release with Phelps Dodge Corporation (“PD”) resulting in a $7,000,000 payment
to PD as part of the final agreement. The Company and USE each were
responsible for one half of this payment or $3.5 million on the Statement
of
Operations during the year ended December 31, 2006. This settlement
resulted in a cash savings of $538,300 from the $7,538,300 awarded
to PD by the
U.S. Federal District Court of Colorado on July 26, 2006.
Patent
Claims Litigation – Lucky Jack Molybdenum Property
The
only
pending legal proceeding to which the Company and USE are parties relates
to a
challenge to the validity of title to the patented claims included
in the
molybdenum property.
On
April
2, 2004, the United States Bureau of Land Management (“BLM”) issued patents
on nine additional mining claims for the Lucky Jack molybdenum
property (previously known as Mount Emmons), for a total of 25 patented
claims
which consists of approximately 350 patented or “fee” acres. A
lawsuit was filed by local governmental entities and environmentalists
(“Appellants”) in U.S. District Court of Colorado challenging BLM’s issuance of
the nine additional mining patents and alleging BLM violated the 1872
Mining
Law, applicable regulations, and the Administrative Procedures Act
by overruling
their protests to Mt. Emmons Mining Company’s mineral patent application, by
awarding the patents, and by conveying the land to Mt. Emmons Mining
Company (a
subsidiary of Phelps Dodge Corporation). The case was High Country
Citizen’s Alliance, Town of Crested Butte, Colorado, and The Board of County
Commissioners of the County of Gunnison, Colorado v. Kathleen Clarke,
Director
of the Bureau of Land Management et. al., Gale Norton, Secretary of
Interior,
U.S. Department of the Interior; Phelps Dodge Corporation; Mt. Emmons
Mining
Company.
On
January 12, 2005, U.S. District Court dismissed the Appellants’ appeal holding:
(i) that they had no right of appeal from a decision to issue a mineral
patent,
because the 1872 Mining Law created no private cause of action for
unrelated
parties to challenge the issuance of a mineral patent, and (ii) because
the 1872
Mining Law implicitly precludes unrelated third parties from challenging
mineral
patent by judicial action, the Administrative Procedures Act does not
constitute
a waiver of sovereign immunity for purposes of the action. Appellants
filed an appeal of the U.S. District Court’s decision to the United States Tenth
Circuit Court of Appeals (10th
CAA”). The 10th
CCA case number is
D.C. No. 04-MK-749PAC and No. 05-1085.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
On
February 28, 2006, the property was transferred to the Company and
USE and
Crested by Phelps Dodge Corporation and Mt. Emmons Mining Company. On
July 21, 2006, the 10th
CAA affirmed the
January 12, 2005 dismissal by the U.S. District Court of challenges
to the
issuance of nine additional mining patents on the molybdenum
property. On September 5, 2006, the Appellants filed a Petition for
Rehearing En Banc of the July 21, 2006, decision before the entire
10th
CCA. On
September 8, 2006, USE and Crested were admitted as substitute parties
for
Phelps Dodge Corporation and Mt. Emmons Mining Company (following USE’s and
Crested’s filing of a Motion to Substitute Parties.
On
October 27, 2006, the entire 10th
CCA affirmed and
upheld the July 21, 2006, decision by the 10th
CCA panel, thereby
denying the Appellants’ Petition of Rehearing En Banc and their challenges to
the issuance of the patents.
On
February 26, 2007, the Appellants filed a petition for certiorari with
the
United States Supreme Court again arguing that they were improperly
denied
judicial review of the decision by BLM to issue the patents. The BLM
and the Company and USE must file any opposition briefs on or before
March 28,
2007. Management is not able to predict the outcome
or the ultimate effect, if any, this litigation will have on the Company
and
USE.
Asset
Retirement Obligations
Sheep
Mountain Properties
The
Company and USE are equally responsible for the reclamation obligations,
environmental liabilities and liabilities for injuries to employees
in mining
operations with respect to the Sheep Mountain uranium
`properties. The reclamation obligations, which are established by
regulatory authorities, were reviewed by the Company, USE and the regulatory
authorities during the year ended December 31, 2006 and the balance
in the
reclamation liability account at December 31, 2006 of $2,409,800 million
(½
accrued by the Company) is believed by management to be
adequate. This liability of $1,204,900 is classified as a Liability
Held for Sale on the Company’s balance sheet. The Company and USE are
self bonded for this obligation by mortgaging certain of their real
estate
assets, including the Glen L. Larsen building and by posting cash
bonds.
Plateau
Resources, Limited
The
environmental and reclamation obligations acquired with the acquisition
of
Plateau include obligations relating to the Shootaring Mill. As of
December 31, 2006, the present value at 8% of the reclamation liability
on the
Plateau properties was $4,117,400. Plateau holds a cash deposit for
reclamation in the amount of approximately $6.9 million. The Company,
pursuant to its cash flow sharing agreement with USE on the Plateau
properties,
is obligated to pay one half of the reclamation expenses in excess
of the cash
bond should this occur.
If
the
sale of the uranium properties to Uranium One closes, See Note E, the
asset
retirement obligations on the Sheep Mountain and Plateau Resources
properties
will be transferred to Uranium One (See Note B, Liabilities Held for
Sale).
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
Sutter
Gold Mining Inc.
SGMI's
mineral properties are currently on shut down status and have never
been in
production. There has been minimal surface disturbance on the Sutter
properties. Reclamation obligations consist of closing the mine entry
and removal of a mine shop. The reclamation obligation to close the
property has been set by the State of California at $22,400 which is
covered by
a cash reclamation bond. This amount was recorded by SGMI as a
reclamation liability as of December 31, 2006.
Lucky
Jack
The
Company is obligated to pay one half of the asset retirement obligation
on the
Lucky Jack molybdenum property. At December 31, 2006, the total asset
retirement obligation was $102,000 of which the Company and USE will
each pay
one half. The reclamation work on this property is not projected to
commence until the property is fully mined which would be over 30
years.
401(K)
Plan
The
Board
of Directors of the Company and USE adopted the U.S. Energy Corp. 401(K)
Plan
("401(K)") in 2004, for the benefit of USE employees. The Company and
USE match 50% of an employee’s salary deferrals up to a maximum contribution per
employee of $4,000 annually. The Company was responsible for $31,100
and $26,400 for the years ended December 31, 2006 and 2005, respectively
related
to these contributions.
Executive
Compensation
The
Company and USE are committed to pay the surviving spouse or dependant
children
of the former Chairman and Founder, who passed away on September 4,
2006, one
years’ salary and 50% of that amount annually for an additional four years
thereafter. The maximum compensation due under these agreements for
the first year is $255,000 and $170,000 thereafter. Certain officers
and employees have employment agreements with the Company and USE.
On
October 20, 2005 the Board of Directors of the Company and USE adopted
an
Executive Retirement Policy for the Chairman/CEO, Chairman Emeritus,
President/COO, CFO/Treasurer/V.P. Finance, Senior Vice President and
General
Counsel. Under the terms of the Retirement Plan the retired executive
will receive monthly installments in accordance with the normal bi-weekly
payroll practices of the USE in the amount of 50% of the greater of
(i) that
amount of compensation the Executive Officer received as base cash
pay on
his/her final regular pay check or (ii) the average annual pay rate,
less all
bonuses, he/she received over the last five years of his/her employment
with
USE. To be eligible for this benefit the executive officer must serve
in one of the designated executive offices for 15 years, reach the
age of 60 and
be an employee of USE on December 31, 2010. The compensation expense
for the year ended December 31, 2006 was $419,400, one half of which
is the
obligation of the Company. The Company and USE have also established
a mandatory retirement age of 65 unless the Board specifically requests
the
services of an employee or officer beyond that point. The total
accrued liability at December 31, 2006 for executive retirement was
$462,700.
The
employees of the Company and USE are not given raises on a regular
basis. In consideration of this and in appreciation of the work these
employees perform. The recommendation for bonuses are made by the
Chairman and ratified, first by the Compensation Committee and second
by the
full boards prior to being paid. Similar bonuses to those paid during
prior years may be paid in the future.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
J. SELECTED
QUARTERLY FINANCIAL DATA (Unaudited)
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
March
31
|
|
|
June
30,
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) before investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
property transactions
|
|
$ |
(366,000 |
) |
|
$ |
(1,513,600 |
) |
|
$ |
(185,800 |
) |
|
$ |
1,908,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in (loss) gain from affiliate
|
|
$ |
289,300
|
|
|
$ |
(633,600 |
) |
|
$ |
(2,311,900 |
) |
|
$ |
(969,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
from income taxes
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
7,633,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
$ |
(76,700 |
) |
|
$ |
(2,147,200 |
) |
|
$ |
(2,497,700 |
) |
|
$ |
8,572,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per Share, basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
gain (loss)
|
|
|
$ |
(0.02 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.01 |
) |
|
$ |
0.56
|
|
Equity
in gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
affiliate
|
|
|
|
0.02
|
|
|
|
(0.04 |
) |
|
|
(0.14 |
) |
|
|
(0.06 |
) |
|
|
|
|
$ |
--
|
|
|
$ |
(0.13 |
) |
|
$ |
(0.15 |
) |
|
$ |
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
|
17,149,298
|
|
|
|
17,149,298
|
|
|
|
17,149,298
|
|
|
|
17,165,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per Share, diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
gain (loss)
|
|
|
$ |
(0.02 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.01 |
) |
|
$ |
0.55
|
|
Equity
in (loss) gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
affiliate
|
|
|
$ |
0.02
|
|
|
$ |
(0.04 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
$ |
--
|
|
|
$ |
(0.13 |
) |
|
$ |
(0.15 |
) |
|
$ |
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
|
17,149,298
|
|
|
|
17,149,298
|
|
|
|
17,149,298
|
|
|
|
17,518,565
|
|
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
March
31
|
|
|
June
30,
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
gain (loss)
|
|
$ |
(51,600 |
) |
|
$ |
7,006,700 |
|
|
$ |
580,300 |
|
|
$ |
(1,194,200
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in (loss) gain from affiliate
|
|
$ |
(372,900
|
) |
|
$ |
(717,400 |
) |
|
$ |
187,600 |
|
|
$ |
(797,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gain (loss)
|
|
|
$ |
(424,500
|
) |
|
$ |
6,189,300
|
|
|
$ |
767,900
|
|
|
$ |
(1,991,300
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per Share, basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
gain (loss)
|
|
|
$ |
(0.00 |
) |
|
$ |
0.41 |
|
|
$ |
0.03 |
|
|
$ |
(0.07
|
) |
Equity
in gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
affiliate
|
|
|
$ |
(0.02
|
) |
|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
$ |
(0.06 |
) |
|
|
|
|
$ |
(0.02
|
) |
|
$ |
0.37 |
|
|
$ |
0.04 |
|
|
$ |
(0.13
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
|
17,137,298
|
|
|
|
17,137,298
|
|
|
|
17,149,298
|
|
|
|
17,149,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss)
per Share, diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
gain (loss)
|
|
|
$ |
(0.00 |
) |
|
$ |
0.41 |
|
|
$ |
0.03 |
|
|
$ |
(0.07
|
) |
Equity
in gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
affiliate
|
|
|
$ |
(0.02
|
) |
|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
$ |
(0.06 |
) |
|
|
|
|
$ |
(0.02
|
) |
|
$ |
0.37 |
|
|
$ |
0.04 |
|
|
$ |
(0.13
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
|
17,137,298
|
|
|
|
17,152,298
|
|
|
|
17,164,298
|
|
|
|
17,149,298
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
March
31
|
|
|
June
30,
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
$ |
(57,500 |
) |
|
$ |
(146,600 |
) |
|
$ |
(73,400 |
) |
|
$ |
(42,500
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in loss from affiliate
|
|
$ |
(469,900
|
) |
|
$ |
(318,800 |
) |
|
$ |
(300,600 |
) |
|
$ |
(358,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
$ |
(527,400 |
) |
|
$ |
(465,400 |
) |
|
$ |
(374,000 |
) |
|
$ |
(400,700
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per Share, basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.00
|
) |
Equity
in loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
affiliate
|
|
|
$ |
(0.03
|
) |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
$ |
(0.03
|
) |
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.02
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
|
17,118,098
|
|
|
|
17,118,098
|
|
|
|
17,124,639
|
|
|
|
17,137,298
|
|
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
K. SUBSEQUENT
EVENTS
Entry into a Material Definitive Agreement – Plan and Agreement
of Merger for Crested Corp.
On
January 23, 2007, the Company and USE signed a plan and agreement of
merger (the
“merger agreement”) for the proposed acquisition of the minority shares of the
Company not owned by USE, and the subsequent merger of the Company
into USE
pursuant to Wyoming and Colorado law (USE and Crested are Wyoming and
Colorado
corporations, respectively). The merger agreement was approved by all
directors of both companies. USE (and its officers and directors)
have signed an agreement to vote its and their shares of the Company
in line
with the vote of the holders of a majority of the Company’s minority
shares. The affirmative vote of the holders of a majority of the
Company’s outstanding shares is required to consummate the
merger. USE will not seek USE shareholder approval of the
merger. Pursuant to the merger agreement, USE will issue a total of
approximately 2,802,481 shares of common stock to the minority holders
of the
Company common stock, including the shares equal to the equity value
of options
to buy the Company’s common stock underlying 1,700,000 options. (See
Note C)
Entry
into a Material Definitive Agreement – For Sale of Uranium Assets to sxr Uranium
One Inc.
On
February 22, 2007, the Company and USE, and certain of their private
subsidiary
companies, signed an Asset Purchase Agreement (the “APA”) with sxr Uranium One
Inc. (“Uranium One,” headquartered in Toronto, Canada with offices in South
Africa and Australia (Toronto Stock Exchange and Johannesburg Stock
Exchange,
“SXR”)), and certain of its private subsidiary companies.
The
following is only a summary of the APA, and is qualified by reference
to the
complete agreement filed as an exhibit to this Report.
At
closing of the APA, the Company and USE will sell substantially all
of their
uranium assets (the Shootaring Canyon uranium mill in Utah, unpatented
uranium
claims in Wyoming, Colorado, Arizona and Utah (and geological library
information related to the claims), and the Company’s and USE’s contractual
rights with Uranium Power Corp.), to subsidiaries of Uranium One, for
consideration (purchase price) comprised of:
·
|
$750,000
cash (paid in advance on July 13, 2006 after the parties
signed the
Exclusivity Agreement).
|
·
|
6,607,605
Uranium One common shares, at
closing.
|
·
|
Approximately
$5,000,000 at closing, as a UPC-Related payment. On January 31,
2007, the Company, USE, and Uranium Power Corp. (“UPC), amended their
purchase and sale agreement for UPC to buy a 50% interest
in certain of
the Company’s and USE’s mining properties (as well as the mining venture
agreement between the Company and USE, and UPC, to acquire
and develop
additional properties, and other agreements), to grant the
Company and USE
the right to transfer several UPC agreements, including the
right to
receive all future payments there under from UPC ($4,100,000
cash plus
1,500,000 UPC common shares), to Uranium One. For information
about the agreements with UPC, see
below.
|
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
At
closing of the APA, Uranium One will acquire the Company’s and USE’s agreements
with UPC (excluding those agreements related to Green River South,
which will be
retained by UPC), for which Uranium One will pay the Company and USE
the
UPC-Related payment in an amount equal to a 5.25% annual discount rate
applied
to the sum of (i) $4,100,000 plus (ii) 1,500,000 multiplied by the
volume
weighted average closing price of UPC’s shares for the 10 trading days ending
five days before the APA is closed.
·
|
Approximately
$1,400,000, at closing, to reimburse the Company and USE
for uranium
property exploration and acquisition expenditures from July
10, 2006 to
the closing of the APA. These reimbursable costs relate to the
Company’s and USE’s expenditures on the properties being sold to Uranium
One since the signing of the Exclusivity
Agreement.
|
·
|
Additional
consideration, if and when certain events occur as
follows:
|
·
|
$20,000,000
cash when commercial production occurs at the Shootaring
Canyon Mill (when
the Shootaring Canyon Mill has been operating at 60% or more
of its design
capacity of 750 short tons per day for 60 consecutive
days).
|
·
|
$7,500,000
cash on the first delivery (after commercial production has
occurred) of
mineralized material from any of the properties being sold
to Uranium One
under the APA (excluding existing ore stockpiles on the
properties).
|
·
|
From
and after commercial production occurs at the Shootaring
Canyon Mill, a
production royalty (up to but not more than $12,500,000)
equal to five
percent of (i) the gross value of uranium and vanadium products
produced
at and sold from the mill; or (ii) mill fees received by
Uranium One from
third parties for custom milling or tolling arrangements,
as
applicable. If production is sold to a Uranium One affiliate,
partner, or joint venturer, gross value shall be determined
by reference
to mining industry publications or
data.
|
·
|
Assumption
of assumed liabilities: Uranium One will assume certain
specific liabilities associated with the assets to be sold,
including (but
not limited to) those future reclamation liabilities associated
with the
Shootaring Canyon Mill in Utah, and the Sheep Mountain properties
in
Wyoming. Subject to regulatory approval of replacement bonds
issued by a Uranium One subsidiary as the responsible party,
cash bonds in
the approximate amount of $6,883,300 on the Shootaring Canyon
Mill and
other reclamation cash bonds in the approximate amount of
$413,400 will be
released and the cash will be returned to the Company and
USE by the
regulatory authorities. Receipt of these amounts is
expected to follow closing of the
APA.
|
All
consideration will be paid to USE, for itself and as agent for the
Company and
the several private subsidiaries of the Company and USE that are parties
to the
APA. As of the date of this Report, the Company and USE have not
finalized the allocation of the consideration as between USE and Crested
and the
subsidiaries.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
Closing
of the APA is subject to satisfaction of closing conditions customary
to
transactions of this nature, including (i) approval by the Toronto
Stock
Exchange of the issuance of the Uranium One common shares; (ii) approval
by the
State of Utah of the transfer to a Uranium One subsidiary of ownership
of the
Utah Department of Environmental Quality, Division of Radiation Control
Radioactive Material License related to the Shootaring Canyon Mill;
and (iii)
the termination of the review period and receipt of a favorable ruling
(following an ‘Exon-Florio’ filing to be made by the parties under the APA) that
the transactions contemplated by the APA would not threaten the national
security of the United States.
USECC
holds a 4% net profits interest on Rio Tinto’s Jackpot uranium property located
on Green Mountain in Wyoming. This interest is not included in the
APA.
The
APA
also provides that the Company, USE and Uranium One will enter into
a “strategic
alliance” agreement at closing under which, for a period of two years, Uranium
One will have the first opportunity to earn into or fund uranium property
interests which may in the future be owned or acquired by the Company
and USE
outside the five mile area surrounding the purchased properties.
InterWest
InterWest,
Inc. (owned 45% by each the Company and USE) was formed in 2006 to
investigate
and invest in commercial real estate. On January 8, 2007 InterWest,
Inc. signed a Contract to Buy and Sell Real Estate to purchase approximately
10.15 acres of land located in Gillette, Wyoming. The purchase price
is $1,268,800 payable as follows: $25,000 earnest money deposit and
$1,243,800 payable at closing. InterWest has a sixty day due
diligence period wherein it is to evaluate the property and obtain
entitlements
necessary to construct multifamily housing complex on the
property. It is estimated that the construction cost of these rental
units will be between $22 and $25 million. The Board of Directors has
directed the management of InterWest that they should attempt to invest
no more
than 20% equity into the project should it go forward and that the
balance of
the funds must come from lenders. In the event that the entitlements
do not prove up InterWest is not obligated to purchase the
property.
SGMI
Contingent Stock Purchase Warrant
On
March
14, 2007, SGMI reached a Settlement Agreement with USE, Crested and
USECC
concerning: 1) an accumulated debt obligation by SGMI of approximately
$2,025,700 for expenditures made by USECC on behalf of SGMI and 2)
a Contingent
Stock Purchase Warrant between SGMI, USE and Crested.
Pursuant
to the terms and conditions of the Settlement Agreement, the parties
agreed as
follows:
1. To
settle the accumulated debt obligation as of December 31, 2006 of $2,025,700,
USECC agreed to accept 7,621,867 shares of SGMI common stock (subject
to
approval by the Toronto Stock Exchange (“Exchange”)). The debt is
therefore being paid at negotiated price of $.26 per share. The price
for SMGI stock on March 15, 2007 was $.20 per share.
2. To
settle the Contingent Stock Purchase Warrant agreement of approximately
$4.6
million, USE and Crested agreed to accept a 5% net profits interest
royalty
("NPIR") in exchange for the Contingent Stock Purchase
Warrant. Furthermore, USE and Crested agree that the 5% royalty shall
continue until USE and Crested have recouped the $4.6 million. Once
the $4.6 million is recouped the 5% NPIR shall be converted to a 1%
NPIR
thereafter.
CRESTED
CORP.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004
(Continued)
3. In
addition, subject to the closing of USE and Crested’s sxr Uranium One
transaction, USE and Crested have agreed to provide a $1 million line
of credit
($500,000 each) to SGMI at 12% annual interest, drawable and repayable
at
anytime in tranches of $50,000 or more by SGMI. USE and Crested have
the sole option to have SGMI repay the debt in cash or SGMI stock at
a 10%
discount to the 10 day VWAP before payment (subject to Exchange
approval).
APPENDIX
A
AGREEMENT
AND PLAN OF MERGER, AS AMENDED
FIRST
AMENDMENT TO
AGREEMENT
AND PLAN OF MERGER
This
First Amendment to Agreement and Plan of Merger is effective as of
July 31,
2007.
Whereas,
U.S. Energy Corp. (“USE”) and Crested Corp. (“Crested”) entered into an
Agreement and Plan of Merger (the “Agreement”) as of January 23, 2007;
and
Whereas,
USE and Crested desire to amend the Agreement,
Now
Therefore, the Agreement is amended as follows:
1.
|
Section
7.1(c) of the Agreement is amended to provide that the
Outside Date shall
be December 31, 2007, unless further amended by mutual
agreement of USE
and Crested.
|
2.
|
Section
1.1.2 (“Stock Options, and Equity and Other Compensation Plans
and
Benefits”) is amended by the addition of the following at the end
of such
section: “The Company shall pay the income tax which will be
owed by each holder of a non-qualified Company Stock Option
upon exercise
thereof, provided that each such holder executes and delivers
to Parent an
agreement (a “lockup agreement”) not to sell (until retirement, death or
disability) any of the Parent stock they receive in exchange
for Company
Stock acquired on such exercise of a non-qualified Company
Stock Option
(including Company Stock issued to Steven R. Youngbauer,
even though he
will not recognize income on exercise of his Company Stock
Options (which
are qualified options).”
|
Capitalized
terms not defined in this First Amendment have the meanings assigned
in the
Agreement.
This
First Amendment has been approved by the boards of directors of
USE and
Crested.
Except
as
amended above, the Agreement remains in full force and effect.
U.S.
Energy Corp.
/s/
Mark J. Larsen
Mark
J.
Larsen, President
Crested
Corp.
/s/
Keith
G. Larsen
Keith
G.
Larsen, Co-Chairman
AGREEMENT
AND PLAN OF MERGER
dated
as of January 23, 2007
by
and between
U.S.
ENERGY CORP., a Wyoming corporation,
and
CRESTED
CORP., a Colorado corporation
TABLE
OF CONTENTS
Page
|
THE
MERGER
|
3
|
|
1.1
|
The
Merger
|
3
|
|
1.2
|
Closing
|
3
|
|
1.3
|
Effective
Date
|
4
|
|
1.4
|
Effects
of the Merger
|
4
|
|
1.5
|
Effect
on Capital Stock
|
4
|
|
1.6
|
Stock
Options, and Equity and Other Compensation Plans and
Benefits
|
5
|
|
1.7
|
Exchange
Of Certificates
|
5
|
|
1.8
|
Taking
of Necessary Action; Further Action
|
7
|
ARTICLE
2
|
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
|
8
|
|
2.1
|
Organization
|
8
|
|
2.2
|
Capital
Stock of the Company
|
9
|
|
2.3
|
Authority
Relative to this Agreement
|
9
|
|
2.4
|
SEC
Reports and Financial Statements
|
10
|
|
2.5
|
Certain
Changes
|
11
|
|
2.6
|
Litigation
|
11
|
|
2.7
|
Disclosure
in Proxy Statement
|
11
|
|
2.8
|
Broker’s
or Finder’s Fees
|
11
|
|
2.9
|
Employee
Plans
|
11
|
|
2.10
|
Board
Recommendation; Company Action; Requisite Vote of the Company’s
Stockholders
|
12
|
|
2.11
|
Taxes
|
12
|
|
2.12
|
Environmental
|
14
|
|
2.13
|
Compliance
with Laws
|
15
|
|
2.14
|
Employment
Matters
|
15
|
|
2.15
|
Certain
Contracts and Arrangements
|
15
|
|
2.16
|
Financial
and Commodity Hedging
|
16
|
|
2.17
|
Properties
|
16
|
|
2.18
|
Accounting
Controls
|
16
|
|
2.19
|
Intellectual
Property
|
16
|
ARTICLE
3
|
REPRESENTATIONS
AND WARRANTIES OF PARENT
|
16
|
|
3.1
|
Organization
|
16
|
|
3.2
|
Capital
Stock
|
17
|
|
3.3
|
Authority
Relative to this Agreement
|
18
|
|
3.4
|
SEC
Reports and Financial Statements
|
18
|
|
3.5
|
Certain
Changes
|
19
|
|
3.6
|
Litigation
|
19
|
|
3.7
|
Disclosure
in Proxy Statement
|
19
|
|
3.8
|
Broker’s
or Finder’s Fees
|
20
|
|
3.9
|
Employee
Plans
|
20
|
|
3.10
|
Board
Recommendation
|
22
|
|
3.11
|
Taxes
|
22
|
|
3.12
|
Environmental
|
23
|
|
3.13
|
Compliance
with Laws
|
24
|
|
3.14
|
Employment
Matters
|
24
|
TABLE
OF CONTENTS
(continued)
Page
|
3.15
|
Certain
Contracts and Arrangements
|
25
|
|
3.16
|
Financial
and Commodity Hedging
|
25
|
|
3.17
|
Properties
|
25
|
|
3.18
|
Accounting
Controls
|
25
|
|
3.19
|
Intellectual
Property
|
25
|
ARTICLE
4
|
CONDUCT
OF BUSINESS PENDING THE MERGER
|
26
|
|
4.1
|
Conduct
of Business by the Company Pending the Merger
|
26
|
|
4.2
|
Conduct
of Business of Parent
|
27
|
ARTICLE
5
|
ADDITIONAL
AGREEMENTS
|
28
|
|
5.1
|
Shareholders’
Meeting
|
28
|
|
5.2
|
Registration
Statement
|
28
|
|
5.3
|
Employee
Benefit Matters
|
29
|
|
5.4
|
Consents
and Approvals
|
29
|
|
5.5
|
Public
Statements
|
30
|
|
5.6
|
Commercially
Reasonable Best Efforts
|
30
|
|
5.7
|
Notification
of Certain Matters
|
30
|
|
5.8
|
Access
to Information; Confidentiality
|
31
|
|
5.9
|
No
Solicitation
|
31
|
|
5.10
|
Section
16 Matters
|
32
|
|
5.11
|
Voting
Agreement
|
32
|
|
5.12
|
Nasdaq
Listing
|
33
|
|
5.13
|
Tax
Treatment
|
33
|
|
5.14
|
Indemnification
|
33
|
ARTICLE
6
|
CONDITIONS
|
33
|
|
6.1
|
Conditions
to the Obligation of Each Party to Effect the Merger
|
33
|
|
6.2
|
Additional
Conditions to the Obligations of Parent
|
34
|
|
6.3
|
Additional
Conditions to the Obligation of the Company
|
34
|
ARTICLE
7
|
TERMINATION,
AMENDMENT AND WAIVER
|
35
|
|
7.1
|
Termination
|
35
|
|
7.2
|
Effect
of Termination
|
36
|
|
7.3
|
Fees
and Expenses
|
36
|
|
7.4
|
Amendment
|
37
|
|
7.5
|
Waiver
|
37
|
ARTICLE
8
|
GENERAL
PROVISIONS
|
38
|
|
8.1
|
Notices
|
38
|
|
8.2
|
Representations
and Warranties
|
38
|
|
8.3
|
Governing
Law; Waiver of Jury Trial
|
38
|
|
8.4
|
Counterparts;
Facsimile Transmission of Signatures
|
39
|
|
8.5
|
Assignment;
No Third Party Beneficiaries
|
39
|
|
8.6
|
Severability
|
39
|
|
8.7
|
Entire
Agreement
|
39
|
Schedule of Definitions
Term
|
Section
|
'33
Act
|
2.3(c)
|
'34
Act
|
2.3(c)
|
Action
|
5.14
|
Agreement
|
Preamble
|
Articles
of Merger
|
1.3
|
Book-Entry
Shares
|
1.7(a)
|
CBCA
|
1.1(a)
|
CCCA
|
1.3
|
CERCLA
|
2.12(h)
|
Closing
|
1.2
|
Closing
Date
|
1.2
|
Code
|
Recitals
|
Company
|
Preamble
|
Company
Board
|
1.6
|
Company
Cases
|
2.6
|
Company
Common Stock
|
1.5
|
Company
Disclosure Letter
|
2
|
Company
Financial Statements
|
2.4(b)
|
Company
Material Adverse Effect
|
2.1(a)
|
Company
SEC Reports
|
2.4(a)
|
Company
Stock Option
|
1.6
|
Company
Stock Plan
|
1.6
|
Company
Subsidiaries
|
2.1(a)
|
Dissenters’
Rights Statute
|
1.5(b)
|
Effective
Date
|
1.3
|
Electing
Cash Out Holders
|
1.5(d)
|
Employee
Benefit
Plan
|
2.9(b)
|
Environmental
Laws
|
2.12(h)
|
ERISA
|
2.9(b)
|
Exchange
Agent
|
1.7(a)
|
Exchange
Ratio
|
1.5(b)
|
GAAP
|
2.4(b)
|
Hazardous
Substance
|
2.12(i)
|
Indemnified
Liabilities
|
5.14
|
Indemnitees
|
5.14
|
Intellectual
Property
|
2.19
|
Intended
Tax Treatment
|
5.13
|
Law
|
2.13
|
Liens
|
2.1(b)
|
Merger
|
1.1(a)
|
Merger
Consideration
|
1.5(b)
|
Navigant
|
3.10(a)
|
Order
|
2.3(b)
|
Other
Filings
|
5.2(b)
|
Outside
Date
|
7.1(c)
|
Parent
|
Preamble
|
Parent
Board
|
3.3(a)
|
Parent
Cases
|
3.6
|
Parent
Common Stock
|
1.5(a)
|
Parent
Financial Statements
|
3.4(b)
|
Parent
Material Adverse Effect
|
3.1(a)
|
Parent
SEC Reports
|
3.4(a)
|
Parent
Subsidiaries
|
3.1(a)
|
person
|
2.1(b)
|
Proxy
Statement/Prospectus
|
2.7
|
RCRA
|
2.12(h)
|
S-4
|
5.2(a)
|
SARs
|
2.2(b)
|
SEC
|
2
|
SGMI
|
2.1(a)
|
Shareholders’
Meeting
|
5.1
|
Statement
of Merger
|
1.3
|
Stock
Certificate
|
1.5(c)
|
Superior
Proposal
|
5.9(c)
|
Surviving
Company
|
1.1(a)
|
Takeover
Proposal
|
5.9(c)
|
Termination
Fee
|
7.3(a)
|
USECB
Joint Venture
|
1.4
|
Voting
Agreement
|
Recitals
|
WBCA
|
1.1(a)
|
AGREEMENT
AND PLAN OF MERGER
THIS
AGREEMENT AND PLAN OF MERGER (this “Agreement”),
dated
as of January 23, 2007 is by and between U.S. Energy Corp., a Wyoming
corporation (“Parent”),
and
Crested Corp., a Colorado corporation (the “Company”).
WHEREAS,
the parties desire that the Company be merged with and into Parent
with Parent
as the surviving company, all as set forth in Article 1 of this
Agreement;
WHEREAS,
the boards of directors of Parent and the Company established special
committees
in order to evaluate the proposed Merger (as defined below), and
each special
committee evaluated the Merger and recommended approval of the
Merger to its
board of directors;
WHEREAS,
the boards of directors of Parent and the Company have approved
this Agreement
and deem it advisable and in the best interests of their respective
stockholders
to consummate the transactions contemplated hereby on the terms
and conditions
set forth herein;
WHEREAS,
in consideration of Parent entering into this Agreement and incurring
certain
related fees and expenses, Parent, the officers and directors of
Parent who own
Company Common Stock and the Company are executing a voting agreement,
of even
date herewith (the “Voting
Agreement”),
relating to the Company Common Stock (as defined below) beneficially
owned by
Parent;
WHEREAS,
it is intended that, for United States federal income tax purposes,
the Merger
(as defined below) shall qualify as a reorganization within the
meaning of
Section 368(a) of the United States Internal Revenue Code of 1986,
as amended
(the “Code”),
and
the regulations promulgated thereunder and this Agreement constitutes
a “plan of
reorganization” within the meaning of Section 1.368(c) of the Treasury
Regulations.
NOW,
THEREFORE, in consideration of the foregoing and of the mutual
covenants
contained in this Agreement and for other valuable consideration,
the receipt
and sufficiency of which are hereby acknowledged, Parent and the
Company,
intending to be legally bound, hereby agree as follows:
ARTICLE
1
THE
MERGER
1.1 The
Merger.
(a) On
the
terms and subject to the conditions set forth in this Agreement,
and in
accordance with the Colorado Business Corporation Act (“CBCA”)
and
the Wyoming Business Corporation Act (“WBCA”),
the
Company shall be merged with and into Parent at the Effective Date
(the
“Merger”).
At
the Effective Date, the separate corporate existence of the Company
shall cease
and Parent shall continue as the surviving corporation of the Merger
(the
“Surviving
Company”).
(b) It
is
intended that the Merger shall constitute a reorganization under
the
Code.
1.2 Closing.
Unless
this Agreement is earlier terminated, the closing (the “Closing”)
of the
Merger shall take place at the offices of Parent, 877 North 8th
West,
Riverton, Wyoming 82501, at 10:00 am on the first business day following
the
satisfaction or waiver (to the extent permitted by applicable Law
(as defined in
Section
2.13))
of the
conditions set forth in Article
6,
or at
such other place, time and date as shall be agreed in writing between
Parent and
the Company. The date on which the Closing occurs is referred to
in this
Agreement as the “Closing
Date.”
1.3 Effective
Date.
Prior
to the Closing, Parent shall prepare, and on the Closing Date or
as soon as
practicable thereafter, Parent
shall file (a) a statement of merger (the “Statement
of Merger”)
executed in accordance with the relevant provisions of the Colorado
Corporations
and Associations Act (the “CCAA”)
with the Secretary of State of the State of Colorado, and (b) articles
of merger
(“Articles
of Merger”)
executed in accordance with the relevant provisions of the WBCA with
the
Secretary of State of the State of Wyoming. The Merger shall become
effective at
such time as both the Statement of Merger and the Articles of Merger
have been
duly filed with the Secretaries of State of the States of Colorado
and Wyoming,
or at such subsequent time as Parent and the Company shall agree
and specify in
the Statement of Merger and the Articles of Merger (the date the
Merger becomes
effective being the “Effective
Date”).
1.4 Effects
of the Merger.
The
Merger
shall
have the effects set forth in section 7-90-204(1)(a) of the CCAA
and section
17-16-1106(a) of the WBCA. The articles of incorporation and bylaws
of Parent
immediately prior to the Effective Date shall be the articles of
incorporation
and bylaws of the Surviving Company. The directors and officers of
Parent
immediately prior to the Effective Date shall continue in service
until the
earlier
of their resignation or removal or until their respective successors
are duly
elected or appointed and qualified, as the case may be. When Parent
deems it
appropriate, the joint venture between Parent and the Company (“USECB
Joint Venture”)
shall be terminated and wound up.
1.5 Effect
on Capital Stock.
At the
Effective Date, by virtue of the Merger
and
without any action on the part of the holder of any shares of common
stock, par value $0.001, of the Company (“Company
Common Stock”),
the following shall occur:
(a) Cancellation
Of Treasury Stock, Parent-Owned Stock and Certain Parent Common
Stock.
Each
share of Company Common Stock that is owned by the Company or Parent
shall no
longer
be outstanding and shall automatically be canceled and shall cease
to exist, and
no consideration shall be delivered or deliverable in exchange therefor.
Any
common stock of Parent (“Parent
Common Stock”)
owned by the Company shall
no
longer
be outstanding and shall automatically be canceled and shall cease
to
exist.
(b) Conversion
Of Company Common Stock; Merger Consideration.
Subject
to Sections
1.5(a),
1.6
and
1.7(e),
every
two issued and outstanding shares of Company Common Stock not held
by
Parent
(including shares of Company Common Stock issued on exercise of the
Company
Stock Options (as those terms are defined in Section
1.6
below)) shall be converted into the right to receive one validly
issued, fully
paid and non-assessable share of Parent Common Stock (the “Merger
Consideration”),
resulting in an exchange ratio of 2:1 (the “Exchange
Ratio”).
The Merger Consideration on the Effective Date is subject to (i)
reduction by
operation of sections 7-113-101 to 7-113-302 of the CBCA (the “Dissenters’
Rights Statute”);
and (ii) increase by such additional shares as may be needed to pay
for
fractional shares of Company Common Stock under Section
1.7(e)
(such additional share number not being determinable until the Effective
Date).
(c) Effect
Of Conversion.
From
and after the Effective Date, all of the shares of Company Common
Stock
converted into the Merger
Consideration
pursuant
to this Section 1.5 shall no longer be outstanding and shall automatically
be
canceled and retired and shall cease to exist, and each holder
of such shares
evidenced by a certificate (each a “Stock
Certificate”),
representing any such shares of Company Common Stock (and each
holder of shares
of Company Common Stock issued upon exercise of a Company Stock
Option, but not
evidenced by a stock certificate) shall thereafter cease to have
any rights with
respect thereto, except the right to receive (i) the Total Merger
Consideration,
(ii) any dividends and other distributions in accordance with Sections
1.7(d)
and 1.7(f);
(iii) any cash to be paid to an Electing Cash Out Holder (as defined
below)
under Section
1.5(c)(1);
and (iv) rights to payment under the Dissenters’ Rights Statute.
(d) Payments
to Electing Cash Out Holders.
In the
form to be included in the proxy as part of the Prospectus/Proxy
Statement,
Parent shall provide an option to all holders of 500 or fewer shares
of Company
Common Stock to elect to receive cash in lieu of shares of Parent
Common Stock
(the “Electing
Cash Out Holders”).
Upon
receiving the elections from Electing Cash Out Holders, Parent
may elect either
to (i) pay each Electing Cash Out Holder, in cash, the amount of
cash equal to
the number of shares of Parent Common Stock to which the Electing
Cash Out
Holder otherwise would be entitled, multiplied by the closing price
of one share
of Parent Common Stock on the Nasdaq Capital Market on the Effective
Date, or
(ii) reject the election of each Electing Cash Out Holder, and
issue shares of
Parent Common Stock in accordance with this Article.
(e) Changes
To Stock.
If at
any time during the period between the date of this Agreement and
the Effective
Date, any change in the outstanding shares
of capital stock of Parent or the Company shall occur by reason
of any
reclassification, recapitalization, stock split or combination,
split-up,
exchange or readjustment of shares, rights issued in respect of
Parent Common
Stock or any stock dividend thereon with a record date during such
period, the
Merger Consideration and any other similarly dependent items, as
the case may
be, shall be appropriately adjusted to provide the holders of shares
of Company
Common Stock the same economic effect as contemplated by this Agreement
prior to
such event.
1.6 Stock
Options, and Equity and Other Compensation Plans and Benefits.
The
board of directors of the Company (the “Company
Board”),
or
the appropriate committee thereof, shall take such action as is
within its power
so that
(i) at the Effective Date, each outstanding option to purchase
shares of Company
Common Stock (a “Company
Stock Option”)
granted under the Company’s Incentive Stock Option Plan (the “Company
Stock Plan”),
whether or not vested, is exercisable by its holder on a “cashless exercise”
basis, and each exercising holder shall, on the Effective Date,
be entitled to
receive her or his portion of the Merger Consideration, and (ii)
after the
Effective Date, any unexercised Company Stock Option shall cease
to represent a
right to acquire shares of Company Common Stock and shall be administered
in
accordance with the Company Stock Plan. All other compensation
arrangements or
plans or benefit plans (including without limitation salary, and
insurance and
retirement benefits) with or for the benefit of persons who may
be deemed to be
employees of the Company, and who also are employees of Parent,
shall be
terminated, but all such arrangements and plans for such persons
as employees of
Parent which are in place at the Effective Date shall not be affected
as a
result of the Merger.
1.7 Exchange
Of Certificates.
(a) Exchange
Agent.
Computershare Trust Company (which also is the stock transfer agent
for Parent
and the Company) shall serve as the exchange agent for the Parent
Common Stock
(the
“Exchange
Agent”)
for the purpose of exchanging Stock Certificates representing shares
of Company
Common Stock and non-certificated shares represented by book entry
(“Book-Entry
Shares”)
for the Total Merger Consideration. Upon request by a holder of
Company Common
Stock, a stock certificate shall be issued to such a holder in
lieu of
Book-Entry Shares. Promptly after the Effective Date (but in any
event within
five business days thereafter), Parent will send, or will cause
the Exchange
Agent to send, to each holder of record of shares of Company Common
Stock as of
the Effective Date (exclusive of Electing Cash Out Holders) a letter
of
transmittal for use in such exchange (which shall specify that
delivery shall be
effected, and risk of loss and title to the Stock Certificates
theretofore
representing shares of Company Common Stock shall pass, only upon
proper
delivery of such Stock Certificates to the Exchange Agent or by
appropriate
guarantee of delivery in the form customarily used in transactions
of this
nature from a member of a national securities exchange, a member
of the National
Association of Securities Dealers, Inc., or a commercial bank or
trust company
in the United States) in such form as the Company and Parent may
reasonably
agree, for use in effecting delivery of shares of Company Common
Stock to the
Exchange Agent. Exchange of any Book-Entry Shares of the Company
which are
outstanding shall be effected in accordance with Parent’s customary procedures
with respect to securities represented by book entry.
(a)(1) No
Requirement for Issuance of Stock Certificates for Company Common
Stock Issued
on Exercise of Company Stock Options.
If
permitted by the Company’s articles of incorporation and bylaws, and by the
operating procedures of the Exchange Agent, the Company shall not
be required to
issue stock certificates for shares of Company Common Stock issued
upon exercise
of Company Stock Options, and shares of Parent Common Stock shall
be issued
against such documentation as the Exchange Agent may request.
(b) Exchange
Procedure.
Each
holder of shares of Company Common Stock that have been converted
into a right
to receive the Total Merger Consideration, upon surrender
to the Exchange Agent of a Stock Certificate (or other documentation
if a stock
certificate is not issued under Section
1.7(a)(1)),
together with a properly completed letter of transmittal, will
be entitled to
receive (i) one or more shares of Parent Common Stock (which shall
be in
non-certificated book-entry form unless a physical certificate
is requested)
representing, in the aggregate, the whole number of shares of Parent
Common
Stock, if any, that such holder has the right to receive pursuant
to Section
1.5(b), plus one additional share if the holder otherwise would
have the right
to receive a fractional share under Section
1.7(e)
and dividends and other distributions pursuant to Section
1.7(d)
and 1.7(f).
No interest shall be paid or accrued on any of the Total Merger
Consideration,
or on any unpaid dividends and distributions payable to holders
of Stock
Certificates or holders of Company shares without certificates.
Until so
surrendered, each such Stock Certificate shall, after the Effective
Date,
represent for all purposes only the right to receive such Merger
Consideration
and any dividends and other distributions in accordance with Sections
1.7(d)
and 1.7(f),
and an additional one share as applicable in lieu of any fractional
share of
Parent Common Stock.
(c) Certificate
Holder.
If any
portion of the Merger Consideration is to be registered in the
name of a person
other than the person in whose name the applicable
surrendered Stock Certificate is registered, it shall be a condition
to the
registration thereof that the surrendered Stock Certificate shall
be properly
endorsed or otherwise be in proper form for transfer and that the
person
requesting such delivery of the Merger Consideration shall pay
to the Exchange
Agent any transfer or other similar taxes required as a result
of such
registration in the name of a person other than the registered
holder of such
Stock Certificate or establish to the satisfaction of the Exchange
Agent that
such tax has been paid or is not payable.
(d) Dividends
And Distributions.
No
dividends or other distributions with respect to shares of Parent
Common Stock
issued in the Merger shall be paid to
the holder of any unsurrendered Stock Certificates or Book-Entry
Shares until
such Stock Certificates or Book-Entry Shares are properly surrendered.
Following
such surrender, there shall be paid, without interest, to the record
holder of
the shares of Parent Common Stock issued in exchange therefor (i)
at the time of
such surrender, all dividends and other distributions payable in
respect of such
shares of Parent Common Stock with a record date after the Effective
Date and a
payment date on or prior to the date of such surrender and not
previously paid
and (ii) at the appropriate payment date, the dividends or other
distributions
payable with respect to such shares of Parent Common Stock with
a record date
after the Effective Date but with a payment date subsequent to
such surrender.
For purposes of dividends or other distributions in respect of
shares of Parent
Common Stock, all shares of Parent Common Stock to be issued pursuant
to the
Merger shall be entitled to dividends pursuant to the immediately
preceding
sentence as if issued and outstanding as of the Effective Date.
(e) Fractional
Shares.
No
fractional shares of Parent Common Stock shall be issued in the
Merger, but in
lieu thereof each holder of Company Common Stock otherwise
entitled to a fractional share of Parent Common Stock will be entitled
to
receive one additional share of Parent Common Stock. No cash payment
shall be
made for fractional shares of Parent Common Stock.
(f) No
Further Ownership Rights In Company Common Stock.
The
Total Merger Consideration
paid in accordance with the terms of this Article I upon conversion
of any shares of Company Common Stock shall be deemed to have been
paid in full
satisfaction of all rights pertaining to such shares of Company
Common Stock,
subject, however, to the Surviving Company’s obligation to pay any dividends or
make any other distributions with a record date prior to the Effective
Date that
may have been declared or made by the Company on such shares of
Company Common
Stock in accordance with the terms of this Agreement or prior to
the date of
this Agreement and which remain unpaid at the Effective Date. After
the
Effective Date there shall be no further registration of transfers
on the equity
transfer books of the Surviving Company of shares of Company Common
Stock that
were outstanding immediately prior to the Effective Date. If, after
the
Effective Date, any Stock Certificates formerly representing shares
of Company
Common Stock are presented to the Surviving Company or the Exchange
Agent for
any reason, they shall be canceled and exchanged as provided in
this Article
I.
(g) No
Liability.
None of
Parent, the Company or the Exchange Agent shall be liable to any
person in
respect of any Parent Common Stock
delivered to a public official to the extent required by any applicable
abandoned property, escheat or similar Law. If any Stock Certificate
has not
been surrendered immediately prior to such date on which the Merger
Consideration in respect of such Stock Certificate would otherwise
irrevocably
escheat to or become the property of any governmental entity, any
such shares,
cash, dividends or distributions in respect of such Stock Certificate
shall, to
the extent permitted by applicable Law, become the property of
the Surviving
Company, free and clear of all claims or interest of any person
previously
entitled thereto, except as otherwise provided by Law.
(h) Withholding
Rights.
Parent
and the Exchange Agent shall be entitled to deduct and withhold
from the
consideration otherwise payable to any holder
of Company Common Stock pursuant to this Agreement such amounts
as are required
to be deducted and withheld with respect to the making of such
payment under the
Code, or under any other provision of applicable federal, state,
local or
foreign tax Law. To the extent that amounts are so withheld and
paid over to the
appropriate taxing authority by Parent or the Exchange Agent, as
applicable,
such withheld amounts shall be treated for all purposes of this
Agreement as
having been paid to the holders of the shares of Company Common
Stock in respect
of which such deduction and withholding was made by Parent or the
Exchange
Agent.
(i) Lost
Certificates.
If any
Stock Certificate shall have been lost, stolen, defaced or destroyed,
upon the
making of an affidavit of that fact by the
person claiming such Stock Certificate to be lost, stolen, defaced
or destroyed
and, if reasonably required by Exchange Agent, the posting by such
person of a
bond in such reasonable amount as Exchange Agent may direct as
indemnity against
any claim that may be made against it with respect to such Stock
Certificate,
the Exchange Agent shall pay in respect of such lost, stolen,
defaced or destroyed Stock Certificate the Merger Consideration
with respect to
each share of Company Common Stock formerly represented by such
Stock
Certificate.
1.8 Taking
of Necessary Action; Further Action.
Parent
and the Company shall use all reasonable efforts to take all such
actions as may
be necessary or appropriate in order to effectuate the Merger as
promptly as
commercially practicable. If, at any time after the Effective Date,
any further
action is necessary or desirable to carry out the purposes of this
Agreement and
to vest the Parent with full right, title and possession to all
assets,
property, rights, privileges, powers and franchises of either the
Company or the
USECB Joint Venture, the officers of Parent are fully authorized
in the name of
each constituent entity or otherwise to take, and shall take, all
such lawful
and necessary action.
ARTICLE
2
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
Except
as
publicly disclosed by the Company in the Company SEC Reports (as
defined in
Section
2.4(a))
filed
with the Securities and Exchange Commission (“SEC”)
prior
to the date of this Agreement and except as set forth on the disclosure
letter
(each section of which qualifies the correspondingly numbered representation
and
warranty or covenant to the extent specified therein, provided
that any
disclosure set forth with respect to any particular section shall
be deemed to
be disclosed in reference to all other applicable sections of this
Agreement and
the disclosure letter) previously delivered by the Company to Parent
(the
“Company
Disclosure Letter”),
the
Company hereby represents and warrants to Parent as follows. “To the knowledge
of the Company” and similar phrases mean the actual knowledge of the Chief
Executive Officer and Chief Financial Officer of the Company.
2.1 Organization.
(a) The
Company owns a 50% interest in the USECC Joint Venture with Parent,
through
which they conduct all their business. Additionally, the Company
owns a 1.2%
ownership in Sutter Gold Mining, Inc. (“SGMI”).
The
Company also participates in mineral property ownership with Parent
and has a
cash flow sharing arrangement with the Parent on uranium properties
in southern
Utah, which are owned by Plateau Resources Limited, a 100% owned
subsidiary of
Parent. The Company therefore has no consolidated subsidiaries.
Any reference to
“Company Subsidiaries” refers to USECC, SGMI or Plateau. Each of the Company and
the Company Subsidiaries is duly organized, validly existing and
in good
standing under the Laws of the jurisdiction of its organization
and has the
requisite corporate or limited partnership power and authority
and any necessary
governmental approvals to own, lease and operate its property and
to carry on
its business as now being conducted. The Company and each of the
Company
Subsidiaries is duly qualified and/or licensed, as may be required,
and in good
standing in each of the jurisdictions in which the nature of the
business
conducted by it or the character of the property owned, leased or
used by it
makes such qualification and/or licensing necessary, except in such
jurisdictions where the failure to be so qualified and/or licensed
would not,
individually or in the aggregate, have a Company Material Adverse
Effect. A
“Company
Material Adverse Effect”
means
any change, effect, fact, event, condition or development that would
have or be
reasonably likely to have a material adverse effect on (i) the condition
(financial or otherwise), business, operations or assets of the Company
and the
Company Subsidiaries considered as a single enterprise or (ii) the
ability of
the Company to consummate the transactions contemplated by this Agreement.
Notwithstanding anything to the contrary herein, any change, effect,
fact, event
or condition (x) which adversely affects the minerals industry generally
or (y)
which arises out of general economic conditions shall not be considered
in
determining whether a Company Material Adverse Effect has occurred.
The copies
of the articles of incorporation, and amendments, and bylaws of the
Company
which are filed as exhibits to the Company’s SEC Reports are complete and
correct copies of such documents as in effect on the date of this
Agreement.
(b) Section
2.1(b) of the Company Disclosure Letter
lists
all of the Company Subsidiaries and their respective jurisdictions
of
incorporation. All the outstanding shares of capital stock of, or
other equity
interests in, each Company Subsidiary have been validly issued and
are fully
paid and nonassessable and are owned directly or indirectly by the
Company, free
and clear of all pledges, claims, liens, charges, encumbrances and
security
interests of any kind or nature whatsoever (“Liens”)
and
free of any other restriction (including any restriction on the right
to vote,
sell or otherwise dispose of such capital stock or other ownership
interests).
Other than joint ventures, operating agreements and similar arrangements
typical
in the Company’s industry entered into in the ordinary course of business,
neither the Company nor any of the Company Subsidiaries directly
or indirectly
owns any equity or similar interest in, or any interest convertible
into or
exchangeable or exercisable for, any other person that is or would
reasonably be
expected to be material to the Company and the Company Subsidiaries
considered
as a single entity, other than the shares of Parent Common Stock
owned by the
Company or any Company Subsidiary. The term “person” as used in this Agreement
will be interpreted broadly to include any corporation, company,
group,
partnership or other entity or individual.
2.2 Capital
Stock of the Company.
(a) As
of the
date of this Agreement, the authorized capital stock of the Company
consists of
100,000,000 shares of Company Common Stock, of which 17,182,704 are
issued and
outstanding, and 100,000 shares of Preferred Stock, of which none
are issued and
outstanding. No shares of Company Common Stock are held in the treasury
of the
Company. Such issued shares of Company Common Stock have been duly
authorized,
validly issued, are fully paid and nonassessable, and are free of
preemptive
rights. The Company has not declared or paid any dividend, or declared
or made
any distribution on, or authorized the creation or issuance of, or
issued, or
authorized or effected any split-up or any other recapitalization
of, any of its
capital stock, or directly or indirectly redeemed, purchased or otherwise
acquired any of its outstanding capital stock. The Company has not
agreed to
take any such action, and there are no outstanding contractual obligations
of
the Company to repurchase, redeem or otherwise acquire any outstanding
shares of
capital stock of the Company.
(b) Section
2.2(b) of the Company Disclosure Letter
lists
all outstanding options (including the holders of Company Stock Options),
warrants or other rights to subscribe for, purchase or acquire from
the Company
any capital stock of the Company or securities convertible into or
exchangeable
for capital stock of the Company. There are no stock appreciation
rights
(“SARs”)
attached to the options, warrants or rights.
(c) Except
for obligations under the USECB Joint Venture, and except as otherwise
described
in this Section
2.2
or as
described in Section
2.2(b) of the Company Disclosure Letter,
the
Company is not subject to or bound by any outstanding option, warrant,
call,
subscription or other right (including any preemptive or similar
right),
agreement, arrangement or commitment which (i) obligates the Company
to issue,
sell or transfer, or repurchase, redeem or otherwise acquire, any
shares of the
capital stock or other equity interests of the Company, (ii) obligates
the
Company to provide funds to make any investment (in the form of
a loan, capital
contribution or otherwise) or any other entity, (iii) restricts
the transfer of
any shares of capital stock of the Company or (iv) relates to the
holding,
voting or disposition of any shares of capital stock of the Company.
No bonds,
debentures, notes or other indebtedness of the Company having the
right to vote
(or convertible into, or exchangeable for, securities having the
right to vote)
on any matters on which the stockholders of the Company may vote
are issued or
outstanding.
2.3 Authority
Relative to this Agreement.
(a) The
Company has the requisite corporate power to enter into this Agreement
and to
carry out its obligations hereunder. The execution and delivery
of this
Agreement by the Company, the performance by the Company of its
obligations
hereunder and the consummation by the Company of the transactions
contemplated
herein have been duly authorized by the Company Board. No other
corporate
proceedings on the part of the Company are necessary to authorize
the execution
and delivery of this Agreement, the performance by the Company
of its
obligations hereunder and the consummation by the Company of the
transactions
contemplated hereby, except for the approval of the Company’s stockholders as
contemplated in Section
5.1.
This
Agreement has been duly executed and delivered by the Company and
constitutes a
valid and binding obligation of the Company, enforceable in accordance
with its
terms, except to the extent that its enforceability may be limited
by applicable
bankruptcy, insolvency, fraudulent transfer, reorganization or
other Laws
affecting the enforcement of creditors’ rights generally or by general equitable
principles.
(b) Neither
the execution and delivery of this Agreement by the Company nor
the consummation
by the Company of the transactions contemplated herein nor compliance
by the
Company with any of the provisions hereof will (i) conflict with
or result in
any breach of the articles of incorporation or bylaws of the Company
or any of
the Company Subsidiaries, (ii) result in a violation or breach
of any provisions
of, or constitute a default (or an event which, with notice or
lapse of time or
both, would constitute a default) under, or result in the termination
or
cancellation of, or accelerate the performance or increase the
fees required by,
or result in a right of termination, amendment or acceleration
under, a right to
require redemption or repurchase of or otherwise “put” securities, or the loss
of a material benefit under, or result in the creation of a Lien
upon any of the
properties or assets of the Company or any Company Subsidiaries
under, any of
the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed
of trust, license, contract, lease, agreement or other instrument
or obligation
of any kind to which the Company is a party or by which the Company
or any of
its properties or assets may be bound or (iii) subject to compliance
with the
statutes and regulations referred to in subsection
(c)
below,
violate any judgment, ruling, order, writ, injunction, decree,
statute, rule or
regulation (“Order”)
applicable to the Company or any of its properties or assets, other
than any
such event described in items (ii) or (iii) which would not be
reasonably likely
to (x) prevent the consummation of the transactions contemplated hereby
or
(y) have a Company Material Adverse Effect.
(c) Except
for compliance with the provisions of the CBCA, the Securities
Exchange Act of
1934 (“’34
Act”),
the
Securities Act of 1933 (the “‘33
Act”),
the
rules and regulations of Nasdaq and the “blue sky” laws of various states and
foreign laws, no action by any governmental authority is necessary
for the
Company’s execution and delivery of this Agreement or the consummation
by the
Company of the transactions contemplated hereby except where the
failure to
obtain or take such action would not be reasonably likely to have
a Company
Material Adverse Effect.
2.4 SEC
Reports and Financial Statements.
(a) Since
January 1, 2006, the Company has filed with the SEC all forms,
reports,
schedules, registration statements, definitive proxy statements
and other
documents (the “Company
SEC Reports”)
required to be filed by the Company with the SEC, excluding reports
on Forms 4
or 5. As of their respective dates and, if amended or superseded
by a subsequent
filing prior to the date of this Agreement or the Effective Date,
then as of the
date of such filing, the Company SEC Reports, including, without
limitation, any
financial statements or schedules included therein, complied or
will comply in
all material respects with the requirements of the ‘33 Act, the ‘34 Act and the
rules and regulations of the SEC applicable to such Company SEC
Reports, and
none of the Company SEC Reports contained any untrue statement
of a material
fact or omitted or will omit to state a material fact required
to be stated
therein or necessary to make the statements made therein, in the
light of the
circumstances under which they were made, not misleading. None
of the Company
Subsidiaries is required to file any forms, reports or other documents
with the
SEC pursuant to sections 12 or 15 of the ‘34 Act.
(b) The
audited and unaudited financial statements (including, in each
case, any related
notes and schedules thereto) (collectively, the “Company
Financial Statements”)
of the
Company contained in the Company SEC Reports have been prepared
from the books
and records of the Company, and the Company Financial Statements
present fairly
in all material respects the consolidated financial position and
the
consolidated results of operations and cash flows of the Company
and its
consolidated subsidiaries as of the dates thereof or for the periods
presented
therein in conformity with United States generally accepted accounting
principles (“GAAP”)
applied on a consistent basis during the periods involved (except
as otherwise
noted therein, including the related notes, and subject, in the
case of
quarterly financial statements, to normal and recurring year-end
adjustments in
the ordinary course of business).
(c) Except
as
disclosed in the Company SEC Reports or as described in Section
2.4(c) of the Company Disclosure Letter,
since
January 1, 2006 the Company has not incurred any liabilities or
obligations of
any nature, whether accrued, contingent or absolute or otherwise
(including
without limitation under royalty arrangements), except for those
arising in the
ordinary course of business consistent with past practice and that
would not,
individually or in the aggregate, reasonably be expected to have
a Company
Material Adverse Effect.
2.5 Certain
Changes.
Except
as disclosed in the Company SEC Reports, since January 1, 2006,
the Company has
conducted its businesses only in the ordinary course consistent
with past
practice, and there has not been: (i) any Company Material Adverse
Effect or
(ii) any action taken by the Company that, if taken during the
period from the
date of this Agreement through the Effective Date, would constitute
a breach of
Section
4.1.
2.6 Litigation.
Except
as disclosed in the Company SEC Reports or set forth on Section
2.6 of the Company Disclosure Letter,
there
is no suit, action or legal, administrative, arbitration or other
proceeding or
governmental investigation (the “Company
Cases”)
or
Order pending or, to the knowledge of the Company, threatened against
the
Company which, if decided adversely to the Company, considered individually
or
in the aggregate, is reasonably likely to have a Company Material
Adverse Effect
nor is there any judgment, decree, injunction, rule or order of any
court or
other governmental entity or arbitrator outstanding against the Company
having,
or which, considered individually or in the aggregate, is reasonably
likely to
have, a Company Material Adverse Effect.
2.7 Disclosure
in Proxy Statement.
No
information supplied by the Company for inclusion in the proxy statement
to be
sent to the shareholders of the Company in connection with the Shareholders’
Meeting (as defined in Section
5.1)
(the
“Proxy
Statement/Prospectus”)
shall,
at the date the Proxy Statement/Prospectus (or any amendment thereof
or
supplement thereto) is first mailed to shareholders and at the time
of the
Shareholders’ Meeting and at the Effective Date, be false or misleading with
respect to any material fact, or omit to state any material fact
required to be
stated therein or necessary in order to make the statements made
therein, in the
light of the circumstances under which they are made, not misleading
or
necessary to correct any statement in any earlier communication with
respect to
the solicitation of proxies for the Shareholders’ Meeting which has become false
or misleading. The portions of the Proxy Statement/Prospectus and
S-4 supplied
by the Company (whether by inclusion or by incorporation by reference
therein)
will comply as to form in all material respects with the requirements
of the ‘33
Act and the ‘34 Act and the rules and regulations of the SEC. Notwithstanding
the foregoing, the Company makes no representation or warranty with
respect to
any information supplied by Parent which is contained in any of the
foregoing
documents.
2.8 Broker’s
or Finder’s Fees.
No
agent, broker, person or firm acting on behalf of the Company or
under its
authority is or will be entitled to any advisory, commission or broker’s or
finder’s fee from any of the parties hereto in connection with any of the
transactions contemplated herein.
2.9 Employee
Plans.
(a) The
Company does not have any employees. The Company does, however, share
in the
expenses associated with Parent’s employees, including payroll taxes, fringe
benefits and retirement plans for all ventures in which it participates
on a
percentage ownership basis. The Company uses approximately 50 percent
of the
time of Parent’s employees, and reimburses the Parent on a cost reimbursement
basis.
(b) Other
than as disclosed in the Company SEC Reports, or as set forth on
Section
2.9(a) of the Company Disclosure Letter,
there
are no Employee Benefit Plans established, maintained or contributed
to by the
Company. An “Employee
Benefit Plan”
means
any employee benefit plan, program, policy, practice, agreement or
other
arrangement providing benefits to any current or former employee,
officer or
director of the Company or any beneficiary or dependent thereof that
is
sponsored or maintained by the Company or to which the Company contributes
or is
obligated to contribute, whether or not written, including without
limitation
any employee welfare benefit plan within the meaning of Section 3(1)
of the
Employee Retirement Income Security Act of 1974, as amended (“ERISA”),
any
employee pension benefit plan within the meaning of Section 3(2)
of ERISA
(whether or not such plan is subject to ERISA) and any bonus, incentive,
deferred compensation, vacation, education assistance, stock purchase,
stock
option, severance, employment, change of control or fringe benefit
plan, program
or policy.
(c) As
of
January 1, 2007, the Company does not have any outstanding loans
to any current
or former employees of the Company.
2.10 Board
Recommendation; Company Action; Requisite Vote of the Company’s
Stockholders.
(a) The
special committee of the Company’s Board has recommended, and the Company Board
has by resolutions duly approved and adopted by the unanimous vote
of its entire
board of directors at a meeting of such board duly called and held
on (x)
December 20, 2006, determined that the Exchange Ratio and the Merger
Consideration are fair to and in the best interests of the Company
and its
stockholders (other than Parent); and on (y) January 23, 2007, approved
and
declared advisable this Agreement, the Merger and the other transactions
contemplated hereby and recommended that the stockholders of the
Company approve
and adopt this Agreement and the Merger. In connection with such
approval, the
special committee of the Company Board received confirmation from
its financial
adviser, Neidiger Tucker Bruner Inc., that it would receive a formal
opinion to
the effect that the Merger Consideration to be paid to the stockholders
of the
Company in the Merger is fair to the stockholders of the Company
(other than
Parent) from a financial point of view, subject to the assumptions
and
qualifications in such opinion. The Company has been authorized by
Neidiger
Tucker Bruner Inc. to include such opinion in its entirety in the
Proxy
Statement/Prospectus, and to summarize the opinion in the Proxy
Statement/Prospectus, so long as such summary is in form and substance
reasonably satisfactory to Neidiger Tucker Bruner Inc. and its
counsel.
(b) The
affirmative vote of stockholders of the Company required for approval
and
adoption of this Agreement and the Merger is and will be (pursuant
to
Section
6.1(a))
no
greater than a majority of the outstanding shares of Company Common
Stock.
Except for the vote of Company Common Stock held by Parent and directors
and
officers of Parent, pursuant to the Voting Agreement under Section
5.11,
no
other vote of any holder of the Company’s securities is required for the
approval and adoption of this Agreement or the Merger.
2.11 Taxes.
(a) Except
as
would not have a Company Material Adverse Effect, the Company has
timely filed
all federal, state, local, and other tax returns and reports required
to be
filed on or before the Effective Date by the Company under applicable
Laws and
have paid all required taxes (including any additions to taxes, penalties
and
interest related thereto) due and payable on or before the date hereof
and all
such tax returns and reports were true, complete and correct. The
Company has
withheld and paid over all taxes required to have been withheld and
paid over,
and complied in all material respects with all information reporting
and backup
withholding requirements, including the maintenance of required records
with
respect thereto, in connection with amounts paid or owing to any
employee,
creditor, independent contractor or other third party. There are
no material
encumbrances on any of the assets, rights or properties of the Company
with
respect to taxes, other than liens for taxes not yet due and payable
or for
taxes that the Company is contesting in good faith through appropriate
proceedings. The Company is not a party to any tax sharing agreements,
other
than agreements between the Company and Parent.
(b) Except
as
set forth on Section
2.11(b) of the Company Disclosure Letter,
no
audit of the tax returns of the Company is pending or, to the knowledge
of the
Company, threatened. No deficiencies have been asserted against the
Company as a
result of examinations by any state, local, federal or foreign taxing
authority
and no issue has been raised, either to the knowledge of the Company
or in
writing, by any examination conducted by any state, local, federal
or foreign
taxing authority that, by application of the same principles, might
result in a
proposed deficiency for any other period not so examined. The Company
is not
subject to any private letter ruling of the Internal Revenue Service
or
comparable rulings of other tax authorities that will be binding
on the Company
with respect to any period following the Closing Date.
(c) There
are
no agreements, waivers of statutes of limitations, or other arrange-ments
providing for extensions of time in respect of the assessment or
collection of
any unpaid taxes against the Company. The Company has disclosed on
its federal
income tax returns all positions taken therein that could, if not
so disclosed,
give rise to a substantial understatement penalty within the meaning
of Section
6662 of the Code. Except for the USECB Joint Venture, or otherwise
as set forth
on Section
2.11(c) of the Company Disclosure Letter,
the
Company is not a party to any arrangement that constitutes a partnership
for
purposes of subchapter K of Chapter 1 of Subtitle A of the Code.
The Company has
properly identified any transactions that qualify as hedges under
Treasury
Regulation Section 1.1221-2 as hedges under Treasury Regulation Section
1.1221-2(f).
(d) The
Company is not a party to any safe harbor lease within the meaning
of Section
168(f)(8) of the Code, as in effect prior to amendment by The Tax
Equity and
Fiscal Responsibility Act of 1982. None of the property owned by
the Company is
“tax-exempt use property” within the meaning of Section 168(h) of the Code. The
Company is not required to make any adjustment under Code Section
481(a) by
reason of a change in accounting method or otherwise except possibly
by reason
of the Merger. The Company has not been a member of an affiliated
group of
corporations filing a consolidated federal income tax return (other
than a group
the common parent of which was the Company) or has any liability
for the taxes
of another person (other than the Company or any Company Subsidiary)
arising
pursuant to Treasury Regulation § 1.1502-6 or analogous provision of state,
local or foreign Law, or as a transferee or successor, or by contract,
tax
sharing agreement, tax indemnification agreement, or otherwise. The
Company has
not filed a consent under Section 341(f) of the Code with respect
to the Company
or any Company Subsidiary. The Company has not been a party to any
distribution
occurring during the two year period prior to the date of this Agreement
in
which the parties to such distribution treated the distribution as
one to which
Section 355 of the Code applied, except for distributions occurring
among
members of the same group of affiliated corporations filing a consolidated
federal income tax return.
(e) The
Company has not taken, or agreed to take any action, and has no knowledge
of any
condition, that would prevent the Merger from qualifying as a reorganization
described in Section 368(a) of the Code.
2.12 Environmental.
Except
for such matters that are not, individually or in the aggregate,
reasonably
likely to have a Company Material Adverse Effect and except as set
forth on
Section
2.12 of the Company Disclosure Letter:
(a) To
the
knowledge of the Company, there is no condition existing on any real
property or
other asset previously or currently owned, leased or operated by
the Company or
resulting from operations conducted thereon that would reasonably
be expected to
be subject to remediation obligations under Environmental Laws or
give rise to
any liability to the Company under Environmental Laws or constitute
a violation
of any Environmental Laws, and the Company is otherwise in compliance,
in all
material respects, with all applicable Environmental Laws.
(b) None
of
the Company’s real property or other assets previously or currently owned,
leased or operated by the Company, nor the operations previously
or currently
conducted thereon or in relation thereto by the Company, are, to
the knowledge
of the Company, subject to any pending or threatened action, suit,
investigation, inquiry or proceeding relating to any Environmental
Laws by or
before any court or other governmental authority.
(c) The
Company has made available to Parent all material site assessments,
compliance
audits, and other similar studies in its possession, custody or
control and
prepared since January 1, 2006 relating to (i) the environmental conditions
on, under or about the properties or assets previously or currently
owned,
leased or operated by the Company, or any predecessor in interest
thereto and
(ii) any Hazardous Substances used, managed, handled, transported, treated,
generated, stored, discharged, emitted, or otherwise released by
the Company or
any other Person on, under, about or from any real property or
other assets
previously or currently owned, leased or operated by the Company;
(d) The
Company has not received any communication, whether from a governmental
authority, citizen’s group, employee or otherwise, alleging that it is liable
under or not in compliance with any Environmental Law.
(e) All
material permits, notices and authorizations, if any, required
under any
Environmental Law to be obtained or filed in connection with the
operation or
use of any real property or other asset owned, leased or operated
by the
Company, including without limitation past or present treatment,
storage,
disposal or release of a Hazardous Substance or solid waste into
the
environment, have been duly obtained or filed, and the Company
is in compliance
in all material respects with the terms and conditions of all such
permits,
notices and authorizations.
(f) Hazardous
Substances have not been released, disposed of or arranged to be
disposed of by
the Company, in violation of, or in a manner or to a location that
would
reasonably be expected to give rise to a material liability under,
or cause the
Company to be subject to remediation obligations under, any Environmental
Laws.
(g) The
Company has not assumed, contractually or, to the knowledge of
the Company, by
operation of Law, any liabilities or obligations of third parties
under any
Environmental Laws, except in connection with the acquisition of
assets or
entities associated therewith.
(h) “Environmental
Laws”
means
any federal, state and local health, safety and environmental laws,
regulations,
orders, permits, licenses, approvals, ordinances, rule of common
law, and
directives including without limitation the Clean Air Act, the
Clean Water Act,
the Resource Conservation and Recovery Act (“RCRA”),
the
Comprehensive Environmental Response, Compensation, and Liability
Act
(“CERCLA”),
the
Occupational Health and Safety Act, the Toxic Substances Control
Act, the
Endangered Species Act, the Oil Pollution Act and any similar foreign,
state or
local law, and including without limitation all Laws relating to
or governing
the use, management, treatment, transport, generation, storage,
discharge or
disposal of Hazardous Substances.
(i) “Hazardous
Substance”
means
(i) any “hazardous substance,” as defined by CERCLA, (ii) any “hazardous waste,”
as defined by RCRA, or (iii) any pollutant or contaminant or hazardous,
dangerous or toxic chemical or material or any other substance
including, but
not limited to, asbestos, buried contaminants, regulated chemicals,
flammable
explosives, radioactive materials (including without limitation
naturally
occurring radioactive materials), polychlorinated biphenyls, natural
gas,
natural gas liquids, liquified natural gas, condensates, petroleum
(including
without limitation crude oil and petroleum products), including
without
limitation any Hazardous Substance regulated by, or that could
result in the
imposition of liability under, any Environmental Law or other applicable
Law of
any applicable governmental authority, all as amended.
2.13 Compliance
with Laws.
The
Company is in compliance in all material respects with any applicable
law, rule
or regulation of any United States federal, state, local or foreign
government
or agency thereof (any such law, rule or regulation, a “Law”)
that
materially affects the business, properties or assets of the Company
and the
Company Subsidiaries, and no notice, charge, claim, action or assertion
has been
received by the Company or, to the Company’s knowledge, has been filed,
commenced or threatened against the Company alleging any such violation,
nor do
reasonable grounds for any of the foregoing exist, that would be
reasonably
likely to have a Company Material Adverse Effect. All licenses,
permits and
approvals required under such Laws are in full force and effect,
except where
the failure to be in full force and effect would not, individually
or in the
aggregate, be reasonably likely to have a Company Material Adverse
Effect.
2.14 Employment
Matters.
The
Company: (i) is not a party to or otherwise bound by any collective
bargaining
agreement, contract or other agreement or understanding with a
labor union or
labor organization, nor is any such contract or agreement presently
being
negotiated, nor, to the knowledge of the Company, is there, nor
has there been
in the last five years, a representation campaign respecting any
of the
employees of the Company, and, to the knowledge of the Company,
there are no
campaigns being conducted to solicit cards from employees of Company
or any of
the Company Subsidiaries to authorize representation by any labor
organization;
(ii) is not a party to, or bound by, any consent decree with, or
citation by,
any governmental agency relating to employees or employment practices
which
would reasonably be expected to have a Company Material Adverse
Effect; or (iii)
is not the subject of any proceeding asserting that it has committed
an unfair
labor practice or is seeking to compel it to bargain with any labor
union or
labor organization nor, as of the date of this Agreement, is there
pending or,
to the knowledge of the Company, threatened, any labor strike,
dispute, walkout,
work stoppage, slow-down or lockout involving the Company which,
with respect to
any event described in this clause (iii), would, individually or
in the
aggregate, reasonably be expected to have a Company Material Adverse
Effect.
2.15 Certain
Contracts and Arrangements.
Except
as disclosed in the Company SEC Reports or Section
2.15 of the Company Disclosure Letter,
the
Company is not a party to or bound by any agreement or other arrangement
that
limits or otherwise restricts the Company or any of its affiliates
or any
successor thereto, or that would, after the Effective Date, to
the knowledge of
the Company, materially limit or restrict the Surviving Company
or any of its
subsidiaries or any of their respective affiliates or any successor
thereto,
from engaging or competing in the minerals business in any significant
geographic area, except for joint ventures, area of mutual interest
agreements
entered into in connection with prospect reviews (including such
agreements with
Enterra Energy Trust and Pinnacle Resources, Inc.) and similar
arrangements
entered into in the ordinary course of business. The Company is
not in breach or
default under any contract filed or incorporated by reference as
an exhibit to
the Company’s Annual Report on Form 10-K for the year ended December 31, 2005,
or any agreements disclosed in or filed as exhibits to Forms 8-K
filed from
January 1, 2006 to the Effective Date, nor, to the knowledge of
the Company, is
any other party to any such contract in breach or default thereunder,
except
such breach or default as would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect.
2.16 Financial
and Commodity Hedging.
The
Company is not a party to any hedging agreements or arrangements
(including
fixed price contracts, collars, swaps, caps, hedges and
puts).
2.17 Properties.
Except
as set forth below, and except for property sold, used or otherwise
disposed of
since January 1, 2006 in the ordinary course of business, the Company
has good
record and marketable title in fee simple (or, with respect to
real property not
owned, a valid leasehold interest in all real property (excluding
certain water
rights which are held), to all interests in properties and assets
reflected in
the Company SEC Reports filed prior to the date of this Agreement
as owned by
the Company, free and clear of any Liens, other than liens for
taxes not yet due
and payable and mechanic’s, materialman’s, supplier’s, vendor’s or similar liens
arising in the ordinary course of business securing amounts that
are not
delinquent. The preceding warranty is limited to such
defects in title as could, individually or in the aggregate, reasonably
be
expected to have a Company Material Adverse Effect.
2.18 Accounting
Controls.
The
Company has devised and maintained systems of internal accounting
controls
sufficient to provide reasonable assurances, in the judgment of
the Company
Board, that (a) all material transactions are executed in accordance
with
management’s general or specific authorization; (b) all material transactions
are recorded as necessary to permit the preparation of financial
statements in
conformity with generally accepted accounting principals consistently
applied
with respect to any criteria applicable to such statements, (c)
access to the
material property and assets of the Company is permitted only in
accordance with
management’s general or specific authorization; and (d) the recorded
accountability for items is compared with the actual levels at
reasonable
intervals and appropriate action is taken with respect to any
differences.
2.19 Intellectual
Property.
The
Company does not own any patents, patent applications, trademarks
or trademark
applications or copyrights or copyright applications (“Intellectual
Property”).
ARTICLE
3
REPRESENTATIONS
AND WARRANTIES OF PARENT
Except
as
publicly disclosed by Parent in the Parent SEC Reports (as defined
in
Section
3.4(a))
filed
with the SEC prior to the date of this Agreement, Parent hereby represents
and
warrants to the Company as follows. “To the knowledge of Parent” and similar
phrases mean the actual knowledge of the Chief Executive Officer
and Chief
Financial Officer of Parent.
3.1 Organization.
(a) Each
of
Parent and Parent Subsidiaries (as defined below) is duly organized,
validly
existing and in good standing under its jurisdiction of incorporation
or
formation. Each of Parent and Parent Subsidiaries has the requisite
corporate
power and authority and any necessary governmental approvals to own,
lease and
operate its property and to carry on its business as now being conducted.
Each
of Parent and Parent Subsidiaries is duly qualified and/or licensed,
as may be
required, and in good standing in each of the jurisdictions in which
the nature
of the business conducted by it or the character of the property
owned, leased
or used by it makes such qualification and/or licensing necessary,
except in
such jurisdictions where the failure to be so qualified and/or licensed
would
not, individually or in the aggregate, have a Parent Material Adverse
Effect. A
“Parent
Material Adverse Effect”
means
any change, effect, fact, event, condition or development that would
have or be
reasonably likely to have a material adverse effect on (i) the condition
(financial or otherwise), business, operations or assets of Parent
and each
corporation, partnership, joint venture or other legal entity of
which Parent
owns, directly or indirectly, 50% or more of the stock or other equity
interests
the holder of which is generally entitled to vote for the election
of the board
of directors or other governing body of such corporation or other
legal entity
(the “Parent
Subsidiaries,”
but
for purposes of this Article 3, the Company is not deemed to be a
Parent
Subsidiary) considered as a single enterprise or (ii) the ability
of Parent to
consummate the transactions contemplated by this Agreement. Notwithstanding
anything to the contrary herein, any
change,
effect, fact, event or condition which adversely affects the minerals
industry
generally or which arises out of general economic conditions shall
not be
considered in determining whether a Parent Material Adverse Effect
has occurred.
The copies of the articles of incorporation and amendments and
the bylaws of
Parent which are filed as exhibits to Parent’s SEC Reports are complete and
correct copies of such documents as in effect on the date of this
Agreement.
(b) All
the
outstanding shares of capital stock of, or other equity interests
in, each
Parent Subsidiary have been validly issued and are fully paid and
nonassessable
and are owned directly or indirectly by Parent, free of all Liens
and free of
any other restriction (including any restriction on the right to
vote, sell or
otherwise dispose of such capital stock or other ownership interests).
Neither
Parent nor any of the Parent Subsidiaries directly or indirectly
owns any equity
or similar interest in, or any interest convertible into or exchangeable
or
exercisable for, any other person that is or would reasonably be
expected to be
material to Parent and the Parent Subsidiaries considered as a
single
entity.
3.2 Capital
Stock.
(a) As
of the
date of this Agreement, the authorized capital stock of Parent
consists of an
unlimited number of shares of Parent Common Stock, of which 19,747,912
are
issued and outstanding, and 100,000 shares of Preferred Stock,
of which none are
issued and outstanding. 1,004,174 shares of Parent Common Stock
are held in the
treasury. All issued shares of Parent Common Stock (excluding for
this purpose
the treasury shares) have been duly authorized, validly issued,
are fully paid
and nonassessable, and are free of preemptive rights. Parent has
not declared or
paid any dividend, or declared or made any distribution on, or
authorized the
creation or issuance of, or issued, or authorized or effected any
split-up or
any other recapitalization of, any of its capital stock, or directly
or
indirectly redeemed, purchased or otherwise acquired any of its
outstanding
capital stock. Parent has not agreed to take any such action, and
there are no
outstanding contractual obligations of Parent to repurchase, redeem
or otherwise
acquire any outstanding shares of capital stock of Parent.
(b) Section
3.2(b) of the Parent Disclosure Letter
lists
all outstanding options, warrants or other rights to subscribe
for, purchase or
acquire from the Parent any capital stock of the Parent or securities
convertible into or exchangeable for capital stock of the Parent.
There are no
SARs attached to the options, warrants or rights.
(c) Except
for their obligations under the USECB Joint Venture, and except
as otherwise
described in this Section
3.2
or as
described in Section
3.2(b) of the Parent Disclosure Letter,
the
Parent has no, nor is it subject to or bound by any outstanding
option, warrant,
call, subscription or other right (including any preemptive or
similar right),
agreement, arrangement or commitment which (i) obligates the Parent
to issue,
sell or transfer, or repurchase, redeem or otherwise acquire, any
shares of the
capital stock or other equity interests of the Parent, (ii) obligates
the Parent
to provide funds to make any investment (in the form of a loan,
capital
contribution or otherwise) or any other entity, (iii) restricts
the transfer of
any shares of capital stock of the Parent, or (iv) relates to the
holding,
voting or disposition of any shares of capital stock of the Parent.
No bonds,
debentures, notes or other indebtedness of the Parent having the
right to vote
(or convertible into, or exchangeable for, securities having the
right to vote)
on any matters on which the stockholders of the Parent may vote
are issued or
outstanding.
3.3 Authority
Relative to this Agreement.
(a) The
Parent has the requisite corporate power to enter into this Agreement
and to
carry out its obligations hereunder. The execution and delivery
of this
Agreement by the Parent, the performance by the Parent of its obligations
hereunder and the consummation by the Parent of the transactions
contemplated
herein have been duly authorized by the Parent Board of Directors
(“Parent
Board”).
No
other corporate proceedings on the part of the Parent or any of
the Parent
Subsidiaries are necessary to authorize the execution and delivery
of this
Agreement, the performance by the Parent of its obligations hereunder
and the
consummation by the Parent of the transactions contemplated hereby.
This
Agreement has been duly executed and delivered by the Parent and
constitutes a
valid and binding obligation of the Parent, enforceable in accordance
with its
terms, except to the extent that its enforceability may be limited
by applicable
bankruptcy, insolvency, fraudulent transfer, reorganization or
other Laws
affecting the enforcement of creditors’ rights generally or by general equitable
principles.
(b) Neither
the execution and delivery of this Agreement by the Parent nor
the consummation
by the Parent of the transactions contemplated herein nor compliance
by the
Parent with any of the provisions hereof will (i) conflict with
or result in any
breach of the articles of incorporation or bylaws of the Parent
or any of the
Parent Subsidiaries, (ii) result in a violation or breach of any
provisions of,
or constitute a default (or an event which, with notice or lapse
of time or
both, would constitute a default) under, or result in the termination
or
cancellation of, or accelerate the performance or increase the
fees required by,
or result in a right of termination, amendment or acceleration
under, a right to
require redemption or repurchase of or otherwise “put” securities, or the loss
of a material benefit under, or result in the creation of a Lien
upon any of the
properties or assets of the Parent or any Parent Subsidiaries under,
any of the
terms, conditions or provisions of any note, bond, mortgage, indenture,
deed of
trust, license, contract, lease, agreement or other instrument
or obligation of
any kind to which the Parent or any of the Parent Subsidiaries
is a party or by
which the Parent or any of the Parent Subsidiaries or any of their
respective
properties or assets may be bound or (iii) subject to compliance
with the
statutes and regulations referred to in subsection
(c)
below,
violate any Order applicable to the Parent or any of the Parent
Subsidiaries or
any of their respective properties or assets, other than any such
event
described in items (ii) or (iii) which would not be reasonably
likely to (x)
prevent the consummation of the transactions contemplated hereby
or
(y) have a Parent Material Adverse Effect.
(c) Except
for compliance with the provisions of the WBCA, the ’34 Act, the ‘33 Act, the
rules and regulations of Nasdaq and the “blue sky” laws of various states and
foreign laws, no action by any governmental authority is necessary
for the
Parent’s execution and delivery of this Agreement or the consummation
by the
Parent of the transactions contemplated hereby except where the
failure to
obtain or take such action would not be reasonably likely to have
a Parent
Material Adverse Effect.
3.4 SEC
Reports and Financial Statements.
(a) Since
January 1, 2006, the Parent has filed with the SEC all forms, reports,
schedules, definitive proxy statements and other documents (the
“Parent
SEC Reports”)
required to be filed by the Parent with the SEC, excluding reports
on Forms 4 or
5. As of their respective dates and, if amended or superseded by
a subsequent
filing prior to the date of this Agreement or the Effective Date,
then as of the
date of such filing, the Parent SEC Reports, including, without
limitation, any
financial statements or schedules included therein, complied or
will comply in
all material respects with the requirements of the ‘33 Act, the ‘34 Act and the
rules and regulations of the SEC promulgated which are applicable
to such Parent
SEC Reports. None of the Parent SEC Reports contained any untrue
statement of a
material fact or omitted or will omit to state a material fact
required to be
stated therein or necessary to make the statements made therein,
in the light of
the circumstances under which they were made, not misleading. None
of the Parent
Subsidiaries is required to file any forms, reports or other documents
with the
SEC pursuant to sections 12 or 15 of the ‘34 Act.
(b) The
audited and unaudited financial statements (including, in each case,
any related
notes and schedules thereto) (collectively, the “Parent
Financial Statements”)
of the
Parent contained in the Parent SEC Reports have been prepared from
the books and
records of the Parent and its consolidated subsidiaries, and the
Parent
Financial Statements present fairly in all material respects the
consolidated
financial position and the consolidated results of operations and
cash flows of
the Parent and its consolidated subsidiaries as of the dates thereof
or for the
periods presented therein in conformity with GAAP applied on a consistent
basis
during the periods involved (except as otherwise noted therein, including
the
related notes, and subject, in the case of quarterly financial statements,
to
normal and recurring year-end adjustments in the ordinary course
of
business).
(c) Except
as
disclosed in the Parent SEC Reports or as described in Section
3.4(c) of the Parent Disclosure Letter,
since
January 1, 2006 neither the Parent nor any of the Parent Subsidiaries
has
incurred any liabilities or obligations of any nature, whether accrued,
contingent or absolute or otherwise (including without limitation
under royalty
arrangements), except for those arising in the ordinary course of
business
consistent with past practice and that would not, individually or
in the
aggregate, reasonably be expected to have a Parent Material Adverse
Effect.
3.5 Certain
Changes.
Except
as disclosed in the Parent SEC Reports, since January 1, 2006, the
Parent and
each of the Parent Subsidiaries have conducted their businesses only
in the
ordinary course consistent with past practice, and there has not
been: (i) any
Parent Material Adverse Effect or (ii) any action taken by the Parent
or any of
the Parent Subsidiaries that, if taken during the period from the
date of this
Agreement through the Effective Date, would constitute a breach of
Section
4.1.
3.6 Litigation.
Except
as disclosed in the Parent SEC Reports or set forth on Section
3.6 of the Parent Disclosure Letter,
there
is no suit, action or legal, administrative, arbitration or other
proceeding or
governmental investigation (the “Parent
Cases”)
or
Order pending or, to the knowledge of the Parent, threatened against
the Parent
or any of the Parent Subsidiaries which, if decided adversely to
the Parent,
considered individually or in the aggregate, is reasonably likely
to have a
Parent Material Adverse Effect, nor is there any judgment, decree,
injunction,
rule or order of any court or other governmental entity or arbitrator
outstanding against the Parent or any of the Parent Subsidiaries
having, or
which, considered individually or in the aggregate, is reasonably
likely to
have, a Parent Material Adverse Effect.
3.7 Disclosure
in Proxy Statement.
No
information about the Parent in the Proxy Statement/Prospectus shall,
at the
date the Proxy Statement/Prospectus (or any amendment thereof or
supplement
thereto) is first mailed to Company shareholders and at the time
of the
Shareholders’ Meeting and at the Effective Date, be false or misleading with
respect to any material fact, or omit to state any material fact
required to be
stated therein or necessary in order to make the statements made
therein, in the
light of the circumstances under which they are made, not misleading
or
necessary to correct any statement in any earlier communication with
respect to
the solicitation of proxies for the Shareholders’ Meeting which has become false
or misleading. The Proxy Statement/Prospectus and S-4 will comply
as to form in
all material respects with the requirements of the ‘33 Act and the ‘34 Act and
the rules and regulations of the SEC. Notwithstanding the foregoing,
the Parent
makes no representation or warranty with respect to any information
supplied by
the Company which is contained in any of the foregoing documents.
3.8 Broker’s
or Finder’s Fees.
No
agent, broker, person or firm acting on behalf of the Parent or under
its
authority is or will be entitled to any advisory, commission or broker’s or
finder’s fee from any of the parties hereto in connection with any of the
transactions contemplated herein.
3.9 Employee
Plans.
(a) Other
than as disclosed in the Parent SEC Reports, or as set forth on
Section
3.9(a) of the Parent Disclosure Letter,
there
are no Employee Benefit Plans established, maintained or contributed
to by the
Parent.
(b) With
respect to each Employee Benefit Plan, the Parent has made available
to the
Company a true, correct and complete copy of: (i) each writing
constituting a
part of such Employee Benefit Plan (or to the extent no copy exists,
a
materially accurate description); (ii) for the three most recent
plan years,
Annual Report (Form 5500 Series), if any; (iii) the current summary
plan
description and any material modifications thereto, if required
to be furnished
under ERISA; and (iii) the most recent determination letter from
the Internal
Revenue Service, if any.
(c) Each
Employee Benefit Plan that is intended to be a “qualified plan” within the
meaning of Section 401(a) of the Code is either (i) entitled to
reliance with
respect to an opinion letter issued to a prototype plan, pursuant
to Revenue
Procedure 2005-16, or (ii) is the recipient of a favorable determination
letter
from the Internal Revenue Service that has not been revoked, and
to the
knowledge of the Parent, no event has occurred and no condition
exists that
could reasonably be expected to result in the revocation of any
such
determination letter.
(d) Except
as
is not reasonably likely, individually or in the aggregate, to
have a Parent
Material Adverse Effect, (i) all contributions required to be made
to any
Employee Benefit Plan (or to any person pursuant to the terms thereof)
have been
made or the amount of such payment or contribution obligation has
been reflected
in the Parent SEC Reports filed with the SEC prior to the date
of this
Agreement, (ii) a proper accrual has been made on the books of
account of the
Parent and any of the Parent Subsidiaries for all contributions,
premium
payments and other payments due in the current fiscal year and
not paid on or
before the Effective Date, and (iii) no contribution, premium payment
or other
payment has been made in support of any Employee Benefit Plan that
is in excess
of the allowable deduction for federal income tax purposes for
the year with
respect to which the contribution was made (whether under Section
162, Section
280G, Section 404, Section 419, Section 419A of the Code or
otherwise).
(e) Except
as
is not reasonably likely, individually or in the aggregate, to
have a Parent
Material Adverse Effect, with respect to each Employee Benefit
Plan, the Parent
and the Parent Subsidiaries have complied, and are now in compliance,
with all
provisions of ERISA, the Code and all Laws applicable to such Employee
Benefit
Plans in all material respects. Each Employee Benefit Plan has
been established
and administered in accordance with its terms in all material respects.
All
reports and filings with governmental entities (including the Department
of
Labor, the Internal Revenue Service and the SEC) required in connection
with
each Employee Benefit Plan have been timely made. All disclosures
and notices
required by Law or Employee Benefit Plan provisions to be given
to participants
and beneficiaries in connection with each Employee Benefit Plan
have been
properly and timely made. All Employee Benefit Plans intended to
be tax
qualified under Section 401(a) or Section 403(a) of the Code are
so qualified.
All trusts established in connection with Employee Benefit Plans
intended to be
tax exempt under Section 501(a) or (c) of the Code are so tax exempt.
(f) No
Employee Benefit Plan is subject to Title IV of ERISA (including,
without
limitation, any multiemployer plan within the meaning of Section
4001(a)(3) of
ERISA) and no liability under Title IV of ERISA has been or is
expected to be
incurred by the Parent, any of the Parent Subsidiaries or any other
entities
that are, along with the Parent or any of the Parent Subsidiaries,
treated as a
single employer under Sections 414(b), (c) or (m) of the
Code.
(g) Other
than as set forth on Section
3.9(g) of the Parent Disclosure Letter,
no
Employee Benefit Plan is subject to Section 409A of the Code.
(h) Neither
the Parent nor any of the Parent Subsidiaries sponsor any of the
following: (i)
a plan that is or is intended to be an employee stock ownership
plan as defined
in Section 4975(c)(7) of the Code, (iii) a nonqualified deferred
compensation
arrangement, (iv) a multiemployer plan as defined in Section 3(37)
of ERISA or
Section 414(f) of the Code, (v) a multiple employer plan maintained
by more than
one employer as defined in Section 413(c) of the Code, (vi) a plan
that owns any
employer securities as an investment, (vii) a plan that provides
benefits (or
provides increased benefits or vesting) as a result of a change
in control of
the Parent or any of the Parent Subsidiaries, (viii) a plan that
is maintained
pursuant to collective bargaining, or (ix) a plan that is funded,
in whole or in
part, through a voluntary employees’ beneficiary association exempt from tax
under Section 501(c)(9) of the Code.
(i) Neither
the Parent nor any of the Parent Subsidiaries have any material
liability for
life, health or medical benefits to former employees or beneficiaries
or
dependents thereof, except for health continuation coverage as
required by
Section 4980B of the Code or Part 6 of Title I of ERISA.
(j) Except
as
set forth on Section
3.9(j) of the Parent Disclosure Letter,
the
consummation of the transactions contemplated by this Agreement
will not, either
alone or in connection with termination of employment, (i) entitle
any current
or former employee or officer of the Parent or the Parent Subsidiaries
to
severance pay or any other material payment, (ii) accelerate the
time of payment
or vesting, or increase the amount of compensation due any such
employee or
officer or (iii) give rise to the payment of any amount that would
not be
deductible under Section 280G of the Code.
(k) To
the
knowledge of the Parent, there is no suit, action or legal, administrative,
arbitration or other proceeding or governmental investigation or
Order pending
with regard to any Employee Benefit Plan other than routine uncontested
claims
for benefits. To the knowledge of the Parent, no Employee Benefit
Plan is
currently under examination or audit by the Department of Labor,
the Internal
Revenue Service or the Pension Benefit Guaranty Corporation. To
the knowledge of
the Parent, neither the Parent nor any of the Parent Subsidiaries
have any
liability (either directly or as a result of indemnification) for
(and the
transactions contemplated by this Agreement will not cause any
liability for):
(i) any excise taxes under Section 4971 through Section 4980B,
Section 4999,
Section 5000 or any other Section of the Code, (ii) any penalty
under Section
502(i), Section 502(l), Part 6 of Title I or any other provision
of ERISA, or
(iii) any excise taxes, penalties, damages or equitable relief
as a result of
any prohibited transaction, breach of fiduciary duty or other violation
under
ERISA or any other applicable Law. All accruals required under
FAS 106 and FAS
112 have been properly accrued on the most recently issued quarterly
financial
statements. No condition, agreement or Employee Benefit Plan provision
limits
the right of any Parent to amend, cut back or terminate any Employee
Benefit
Plan (except to the extent such limitation arises under ERISA).
Neither the
Parent nor any of the Parent Subsidiaries have any liability for
life insurance,
death or medical benefits after separation from employment other
than (i) death
benefits under the Employee Benefit Plans and (ii) health care
continuation
benefits described in Section 4980B of the Code.
(l) As
of
January 1, 2007, the Parent does not have any outstanding loans
to any current
or former employees of the Parent.
3.10 Board
Recommendation.
(a) The
special committee of the Parent Board has recommended, and the
Parent Board has
by resolutions duly approved and adopted by the unanimous vote
of its entire
board of directors at a meeting of such board duly called and held
on (x)
December 20, 2006, determined that the Exchange Ratio is fair to
and in the best
interests of the Parent and its stockholders; and (y) January 23,
2007 approved
and declared advisable this Agreement, the Merger and the other
transactions
contemplated hereby. In connection with such approval under (x),
the Parent
Board received from Navigant Capital Advisors, LLC (“Navigant”)
confirmation that a formal opinion would be issued by Navigant
to the effect
that the Exchange Ratio, and the Merger Consideration to be paid
to the
stockholders of the Company (other than Parent) in the Merger is
fair to the
stockholders of the Parent from a financial point of view, subject
to the
assumptions and qualifications in such opinion. The Parent has
been authorized
by Navigant to include such opinion in its entirety in the Proxy
Statement/Prospectus, and to summarize the opinion in the Proxy
Statement/Prospectus, so long as such summary is in form and substance
reasonably satisfactory to Navigant and its counsel.
(b) The
vote
of Parent stockholders is not required for approval and adoption
of this
Agreement under either the WBCA or the Nasdaq rules. In connection
with this
representation and warranty, the Parent Board received from The
Law Office of
Stephen E. Rounds an opinion that such vote is not required.
3.11 Taxes.
(a) Except
as
would not have a Parent Material Adverse Effect, the Parent and
the Parent
Subsidiaries have timely filed all federal, state, local, and other
tax returns
and reports required to be filed on or before the Effective Date
by the Parent
and each Parent Subsidiary under applicable Laws and have paid
all required
taxes (including any additions to taxes, penalties and interest
related thereto)
due and payable on or before the date hereof and all such tax returns
and
reports were true, complete and correct. The Parent and the Parent
Subsidiaries
have withheld and paid over all taxes required to have been withheld
and paid
over, and complied in all material respects with all information
reporting and
backup withholding requirements, including the maintenance of required
records
with respect thereto, in connection with amounts paid or owing
to any employee,
creditor, independent contractor or other third party. There are
no material
encumbrances on any of the assets, rights or properties of the
Parent or any
Parent Subsidiary with respect to taxes, other than liens for taxes
not yet due
and payable or for taxes that the Parent or a Parent Subsidiary
is contesting in
good faith through appropriate proceedings. The Parent is not a
party to any tax
sharing agreements, other than agreements between the Parent and
the Parent
Subsidiaries.
(b) Except
as
set forth on Section
3.11(b) of the Parent Disclosure Letter,
no
audit of the tax returns of the Parent or any Parent Subsidiary
is pending or,
to the knowledge of the Parent, threatened. No deficiencies have
been asserted
against the Parent or any Parent Subsidiary as a result of examinations
by any
state, local, federal or foreign taxing authority and no issue
has been raised,
either to the knowledge of the Parent or in writing, by any examination
conducted by any state, local, federal or foreign taxing authority
that, by
application of the same principles, might result in a proposed
deficiency for
any other period not so examined. Neither the Parent nor any Parent
Subsidiary
is subject to any private letter ruling of the Internal Revenue
Service or
comparable rulings of other tax authorities that will be binding
on the Parent
or any Parent Subsidiary with respect to any period following the
Closing
Date.
(c) There
are
no agreements, waivers of statutes of limitations, or other arrange-ments
providing for extensions of time in respect of the assessment or
collection of
any unpaid taxes against the Parent or any Parent Subsidiary. The
Parent and
each Parent Subsidiary have disclosed on their federal income tax
returns all
positions taken therein that could, if not so disclosed, give rise
to a
substantial understatement penalty within the meaning of Section
6662 of the
Code. Except for the USECB Joint Venture, or otherwise as set forth
on
Section
3.11(c) of the Parent Disclosure Letter,
the
Parent is not a party to any arrangement that constitutes a partnership
for
purposes of subchapter K of Chapter 1 of Subtitle A of the Code.
The Parent has
properly identified any transactions that qualify as hedges under
Treasury
Regulation Section 1.1221-2 as hedges under Treasury Regulation
Section
1.1221-2(f).
(d) Neither
the Parent nor any Parent Subsidiary is a party to any safe harbor
lease within
the meaning of Section 168(f)(8) of the Code, as in effect prior
to amendment by
The Tax Equity and Fiscal Responsibility Act of 1982. None of the
property owned
by the Parent nor a Parent Subsidiary is “tax-exempt use property” within the
meaning of Section 168(h) of the Code. Neither the Parent nor any
Parent
Subsidiary is required to make any adjustment under Code Section
481(a) by
reason of a change in accounting method or otherwise except possibly
by reason
of the Merger. Neither the Parent nor any Parent Subsidiary has
been a member of
an affiliated group of corporations filing a consolidated federal
income tax
return (other than a group the common parent of which was the Parent)
or has any
liability for the taxes of another person (other than the Parent
or any Parent
Subsidiary) arising pursuant to Treasury Regulation § 1.1502-6 or analogous
provision of state, local or foreign Law, or as a transferee or
successor, or by
contract, tax sharing agreement, tax indemnification agreement,
or otherwise.
Neither the Parent nor any Parent Subsidiary has filed a consent
under Section
341(f) of the Code with respect to the Parent or any Parent Subsidiary.
Neither
the Parent nor any Parent Subsidiary has been a party to any distribution
occurring during the two year period prior to the date of this
Agreement in
which the parties to such distribution treated the distribution
as one to which
Section 355 of the Code applied, except for distributions occurring
among
members of the same group of affiliated corporations filing a consolidated
federal income tax return.
(e) The
Parent has not taken, or agreed to take any action, and has no
knowledge of any
condition, that would prevent the Merger from qualifying as a reorganization
described in Section 368(a) of the Code.
3.12 Environmental.
Except
for such matters that are not, individually or in the aggregate,
reasonably
likely to have a Parent Material Adverse Effect and except as set
forth on
Section
3.12 of the Parent Disclosure Letter:
(a) To
the
knowledge of the Parent, there is no condition existing on any
real property or
other asset previously or currently owned, leased or operated by
the Parent or
any Parent Subsidiary or resulting from operations conducted thereon
that would
reasonably be expected to be subject to remediation obligations
under
Environmental Laws or give rise to any liability to the Parent
or any Parent
Subsidiary under Environmental Laws or constitute a violation of
any
Environmental Laws, and the Parent and all Parent Subsidiaries
are otherwise in
compliance, in all material respects, with all applicable Environmental
Laws.
(b) None
of
the Parent and the Parent Subsidiaries, no real property or other
asset
previously or currently owned, leased or operated by the Parent
or any Parent
Subsidiary, nor the operations previously or currently conducted
thereon or in
relation thereto by the Parent or any Parent Subsidiary, are, to
the knowledge
of the Parent, subject to any pending or threatened action, suit,
investigation,
inquiry or proceeding relating to any Environmental Laws by or
before any court
or other governmental authority.
(c) The
Parent has made available to Company all material site assessments,
compliance
audits, and other similar studies in its possession, custody or
control and
prepared since January 1, 2006 relating to (i) the environmental conditions
on, under or about the properties or assets previously or currently
owned,
leased or operated by the Parent, or any predecessor in interest
thereto and
(ii) any Hazardous Substances used, managed, handled, transported, treated,
generated, stored, discharged, emitted, or otherwise released by
the Parent or
any other Person on, under, about or from any real property or
other assets
previously or currently owned, leased or operated by the Parent;
(d) The
Parent has not received any communication, whether from a governmental
authority, citizen’s group, employee or otherwise, alleging that it is liable
under or not in compliance with any Environmental Law.
(e) All
material permits, notices and authorizations, if any, required
under any
Environmental Law to be obtained or filed in connection with the
operation or
use of any real property or other asset owned, leased or operated
by the Parent
or any Parent Subsidiary, including without limitation past or
present
treatment, storage, disposal or release of a Hazardous Substance
or solid waste
into the environment, have been duly obtained or filed, and the
Parent is in
compliance in all material respects with the terms and conditions
of all such
permits, notices and authorizations.
(f) Hazardous
Substances have not been released, disposed of or arranged to be
disposed of by
the Parent or any Parent Subsidiary, in violation of, or in a manner
or to a
location that would reasonably be expected to give rise to a material
liability
under, or cause the Parent to be subject to remediation obligations
under, any
Environmental Laws.
(g) None
of
the Parent and the Parent Subsidiaries has assumed, contractually
or, to the
knowledge of the Parent, by operation of Law, any liabilities or
obligations of
third parties under any Environmental Laws, except in connection
with the
acquisition of assets or entities associated therewith.
(h) Environmental
Laws and Hazardous Substances have the meanings defined in Section
2.12(h).
3.13 Compliance
with Laws.
The
Parent and the Parent Subsidiaries are in compliance in all material
respects
with any applicable Law that materially affects the business, properties
or
assets of the Parent and the Parent Subsidiaries, and no notice,
charge, claim,
action or assertion has been received by the Parent or any Parent
Subsidiary or,
to the Parent’s knowledge, has been filed, commenced or threatened against the
Parent or any Parent Subsidiary alleging any such violation, nor
do reasonable
grounds for any of the foregoing exist, that would be reasonably
likely to have
a Parent Material Adverse Effect. All licenses, permits and approvals
required
under such Laws are in full force and effect, except where the
failure to be in
full force and effect would not, individually or in the aggregate,
be reasonably
likely to have a Parent Material Adverse Effect.
3.14 Employment
Matters.
Neither
the Parent nor any Parent Subsidiary: (i) is a party to or otherwise
bound by
any collective bargaining agreement, contract or other agreement
or
understanding with a labor union or labor organization, nor is
any such contract
or agreement presently being negotiated, nor, to the knowledge
of the Parent, is
there, nor has there been in the last five years, a representation
campaign
respecting any of the employees of the Parent or any of the Parent
Subsidiaries,
and, to the knowledge of the Parent, there are no campaigns being
conducted to
solicit cards from employees of Parent or any of the Parent Subsidiaries
to
authorize representation by any labor organization; (ii) is a party
to, or bound
by, any consent decree with, or citation by, any governmental agency
relating to
employees or employment practices which would reasonably be expected
to have a
Parent Material Adverse Effect; or (iii) is the subject of any
proceeding
asserting that it has committed an unfair labor practice or is
seeking to compel
it to bargain with any labor union or labor organization nor, as
of the date of
this Agreement, is there pending or, to the knowledge of the Parent,
threatened,
any labor strike, dispute, walkout, work stoppage, slow-down or
lockout
involving the Parent or any of the Parent Subsidiaries which, with
respect to
any event described in this clause (iii), would, individually or
in the
aggregate, reasonably be expected to have a Parent Material Adverse
Effect.
3.15 Certain
Contracts and Arrangements.
Except
as disclosed in the Parent SEC Reports or Section
3.15 of the Parent Disclosure Letter,
neither
the Parent nor any of the Parent Subsidiaries is a party to or
bound by any
agreement or other arrangement that limits or otherwise restricts
the Parent or
any of its Subsidiaries or any of their respective affiliates or
any successor
thereto, or that would, after the Effective Date, to the knowledge
of the
Parent, materially limit or restrict Subsidiary or the Surviving
Parent or any
of their subsidiaries or any of their respective affiliates or
any successor
thereto, from engaging or competing in the minerals business in
any significant
geographic area, except for joint ventures, area of mutual interest
agreements
entered into in connection with prospect reviews (including such
agreements with
Enterra Energy Trust and Pinnacle Resources, Inc.) and similar
arrangements
entered into in the ordinary course of business. Neither the Parent
nor any
Parent Subsidiary is in breach or default under any contract filed
or
incorporated by reference as an exhibit to the Parent’s Annual Report on Form
10-K for the year ended December 31, 2005, or any agreements disclosed
in or
filed as exhibits to Forms 8-K filed from January 1, 2006 to the
Effective Date,
nor, to the knowledge of the Parent, is any other party to any
such contract in
breach or default thereunder, except such breach or default as
would not,
individually or in the aggregate, reasonably be expected to have
a Parent
Material Adverse Effect.
3.16 Financial
and Commodity Hedging.
Neither
the Parent nor any of the Parent Subsidiaries is a party to any
hedging
agreements or arrangements (including fixed price contracts, collars,
swaps,
caps, hedges and puts).
3.17 Properties.
Except
as set forth below, and except for property sold, used or otherwise
disposed of
since January 1, 2006 in the ordinary course of business, the Parent
and the
Parent Subsidiaries have good record and marketable title in fee
simple (or,
with respect to real property not owned, a valid leasehold interest
in all real
property (excluding water rights, as to which certain rights are
held), to all
interests in properties and assets reflected in the Parent SEC
Reports filed
prior to the date of this Agreement as owned by the Parent and
the Parent
Subsidiaries, free and clear of any Liens, other than liens for
taxes not yet
due and payable and mechanic’s, materialman’s, supplier’s, vendor’s or similar
liens arising in the ordinary course of business securing amounts
that are not
delinquent. The preceding warranty is limited to such
defects in title as could, individually or in the aggregate, reasonably
be
expected to have a Parent Material Adverse Effect.
3.18 Accounting
Controls.
The
Parent has devised and maintained systems of internal accounting
controls
sufficient to provide reasonable assurances, in the judgment of
the Parent
Board, that (a) all material transactions are executed in accordance
with
management’s general or specific authorization; (b) all material transactions
are recorded as necessary to permit the preparation of financial
statements in
conformity with generally accepted accounting principals consistently
applied
with respect to any criteria applicable to such statements, (c)
access to the
material property and assets of the Parent is permitted only in
accordance with
management’s general or specific authorization; and (d) the recorded
accountability for items is compared with the actual levels at
reasonable
intervals and appropriate action is taken with respect to any
differences.
3.19 Intellectual
Property.
The
Parent does not own any Intellectual Property.
ARTICLE
4
CONDUCT
OF BUSINESS PENDING THE MERGER
4.1 Conduct
of Business by the Company Pending the Merger.
The
Company covenants and agrees that, prior to the Effective Date,
unless Parent
shall otherwise agree in writing (which agreement shall not be
unreasonably
withheld) or except in connection with the transactions contemplated
by this
Agreement:
(a) Except
as
set forth in Section
4.1
of the
Company Disclosure Letter, the businesses of the Company shall
be conducted only
in the ordinary and usual course of business (as qualified below)
and consistent
with past practices, and the Company shall use all reasonable efforts
to
maintain and preserve intact its business organization, to maintain
beneficial
business relationships and good will with suppliers, contractors,
distributors,
customers, licensors, licensees and others having business relationships
with it
and keep available the services of its current key officers and
employees. For
all purposes of this Article 4, as applied to the Company or Parent
or any of
their subsidiaries, “ordinary and usual course of business” shall include a sale
of uranium assets to sxr Uranium One and continuing the activities
contemplated
by the letter agreement with Kobex Resources Ltd. and the acquisition
of mineral
properties.
(b) Without
limiting the generality of the foregoing Section
4.1(a),
except
as set forth in Section
4.1
of the
Company Disclosure Letter, the Company shall not directly or indirectly
do any
of the following:
(i) other
than as disclosed in or contemplated by the Company and Parent
SEC filings,
acquire, sell, encumber, lease, transfer or dispose of any assets,
rights or
securities that are material to the Company or terminate, cancel,
materially
modify or enter into any material commitment, transaction, line
of business or
other agreement, in each case other than in the ordinary course
of business
consistent with past practice, or acquire by merging or consolidating
with or by
purchasing a substantial equity interest in or a substantial portion
of the
assets of, or by any other manner, any business, corporation, partnership,
association or other business organization or division thereof;
(ii) amend
or
propose to amend its articles of incorporation or bylaws or, in
the case of the
Company Subsidiaries, their respective constituent documents;
(iii) split,
combine or reclassify any outstanding shares of, or interests in,
its capital
stock;
(iv) declare,
set aside or pay any dividend or distribution, payable in cash,
stock, property
or otherwise, with respect to any of its capital stock;
(v) redeem,
purchase or otherwise acquire, or offer to redeem, purchase or
otherwise
acquire, any shares of its capital stock or any options, warrants
or rights to
acquire capital stock of the Company;
(vi) issue,
sell, pledge, dispose of or encumber, or authorize, propose or
agree to the
issuance, sale, pledge or disposition or encumbrance by the Company
shares of,
or any options, warrants or rights of any kind to acquire any shares
of, or any
securities convertible into or exchangeable for any shares of,
its capital stock
of any class, or any other securities in respect of, in lieu of,
or in
substitution for any class of its capital stock outstanding on
the date hereof,
other than issuances of common stock upon exercise of any Company
Stock Options
outstanding on the date hereof;
(vii) modify
the terms of any existing indebtedness for borrowed money or incur
any
indebtedness for borrowed money or issue any debt securities;
(viii) assume,
guarantee, endorse or otherwise as an accommodation become responsible
for, the
obligations of any other person, or make any loans or advances;
(ix) authorize,
recommend or propose any change in its capitalization;
(x) take
any
action with respect to the grant of or increase in any severance
or termination
pay;
(xi) adopt
or
establish any new employee benefit plan;
(xii) settle
or
compromise any liability for taxes, other than in the ordinary
course of
business;
(xiii) make
or
commit to make capital expenditures.;
(xiv) make
any
material changes in tax accounting methods except as required by
GAAP or
applicable Law;
(xv) other
than in the ordinary course of business, pay or discharge any claims,
liens or
liabilities involving more than $25,000 individually or $50,000
in the
aggregate, which are not reserved for on the balance sheet included
in the
Company Financial Statements;
(xvi) write
off
any accounts or notes receivable except in the ordinary course
of
business;
(xvii) knowingly
take, or agree to commit to take, any action that would or is reasonably
likely
to result in any of the conditions to the Merger not being satisfied,
or would
make any representation or warranty of the Company contained herein
inaccurate
in any material respect at, or as of any time prior to, the Effective
Date, or
that would materially impair the ability of the Company, Parent,
Subsidiary or
the holders of shares of Company Common Stock to consummate the
Merger in
accordance with the terms hereof or materially delay such consummation;
or
(xviii) take
any
action that would, or is reasonably likely to, prevent or impede
the Merger from
qualifying as a reorganization within the meaning of Section 368(a)
of the Code;
or
(xix) enter
into or modify any contract, agreement, commitment or arrangement
to do any of
the foregoing.
4.2 Conduct
of Business of Parent.
Except
as contemplated by this Agreement, during the period from the date
hereof to the
Effective Date or earlier termination of this Agreement, Parent
without the
prior written consent of the Company (which consent will not unreasonably
be
withheld), shall not:
(a) adopt
or
propose to adopt any amendments to its constituent documents, and
other than
amendments which would not have a material adverse effect on the
consummation of
the transactions contemplated by this Agreement;
(b) take
any
action that would or is reasonably likely to prevent or impede
the Merger from
qualifying as a reorganization described in Section 368(a) of the
Code;
(c) split,
combine or reclassify any shares of its capital stock, declare,
set aside or pay
any dividend or other distribution (whether in cash, stock or property
or any
combination thereof) in respect of its capital stock, make any
other actual,
constructive or deemed distribution in respect of its capital stock
or otherwise
make any payments to stockholders in their capacity as such;
(d) adopt
a
plan of complete or partial liquidation or dissolution of Parent;
(e) knowingly
take, or agree to commit to take, any action that would or is reasonably
likely
to result in any of the conditions to the Merger not being satisfied,
or would
make any representation or warranty of Parent contained herein
inaccurate in a
manner that would be reasonably likely to have a Parent Material
Adverse Effect
at, or as of any time prior to, the Effective Date, or that would
materially
impair the ability of the Company and Parent to consummate the
Merger in
accordance with the terms hereof or materially delay such consummation;
or
(f) take
or
agree in writing or otherwise to take any of the actions precluded
by
Sections
4.2(a)
through
4.2(e).
ARTICLE
5
ADDITIONAL
AGREEMENTS
5.1 Shareholders’
Meeting.
The
Company, acting through its board of directors, shall, in accordance
with
applicable Law and the Company’s articles of incorporation and bylaws, (i) duly
call, give notice of, convene and hold a meeting of its shareholders
as soon as
practicable following the date hereof for the purpose of considering
and taking
action on this Agreement and the transactions contemplated hereby
(the
“Shareholders’
Meeting”)
and
(ii) subject to its fiduciary duties under applicable Law after
consultation
with outside counsel, (A) include in the Proxy Statement/Prospectus
(as defined
in Section
2.7)
the
unanimous recommendation of the directors entitled to vote that
the shareholders
of the Company vote in favor of the approval and adoption of this
Agreement and
the transactions contemplated hereby and (B) use its reasonable
best efforts to
obtain the necessary approval and adoption of this Agreement and
the
transactions contemplated hereby by its shareholders.
Notwithstanding
the Company’s failure to include the recommendation contemplated by clause
(A)
of the preceding sentence (in the circumstances permitted thereby),
unless this
Agreement shall have been terminated pursuant to Section 7.1, the
Company shall
submit this Agreement to its stockholders at the Shareholders’ Meeting for the
purpose of adopting this Agreement and nothing contained herein
shall be deemed
to relieve the Company of such obligation.
5.2 Registration
Statement.
(a) As
soon
as practicable following the date hereof, Parent shall prepare
and file with the
SEC a registration statement on S-4 to register under the Securities
Act the
issuance of the Parent Common Stock constituting the Merger Consideration
pursuant to the Merger (the “S-4”).
The
Proxy Statement/Prospectus will be included as part of the S-4.
Parent, the
Company shall use their reasonable best efforts to have the S-4
declared
effective under the ‘33 Act as promptly as practicable after such filing. Parent
and the Company will cooperate with each other in the preparation
of the S-4;
without limiting the generality of the foregoing, Parent and the
Company will
furnish to each other the information relating to the party furnishing
such
information required to be included in the S-4, and Company and
its counsel
shall be given the opportunity to review and comment on the S-4
prior to filing
with the SEC. Parent and the Company each agree to use its reasonable
best
efforts, after consultation with the other parties hereto, to respond
promptly
to any comments made by the SEC with respect to the S-4. The Company
will use
its reasonable best efforts to cause the Proxy Statement/Prospectus
to be mailed
to its stockholders as promptly as practicable after the S-4 is
declared
effective under the ’33 Act. No representation, covenant or agreement is made by
a party with respect to information supplied by the other party
for inclusion in
the S-4.
(b) As
soon
as practicable after the date hereof, the Company and Parent shall
promptly and
properly prepare and file any other schedules, statements, reports,
or other
documents required under the ‘34 Act (if any) or any other federal or state
securities Laws relating to the Merger and the transactions contemplated
herein
(the “Other
Filings”).
Each
party shall notify the other promptly of the receipt by such party
of any
comments or requests for additional information from any governmental
official
with respect to any Other Filings made by such party and will supply
the others
with copies of all correspondence between such party and its representatives,
on
the one hand, and the appropriate government official, on the other
hand, with
respect to the Other Filings. Each of the Company and Parent shall
use
reasonable efforts to obtain and furnish the information required
to be included
in the S-4 and Other Filings and, after consultation with the other,
to respond
promptly to any comments made by any governmental official.
5.3 Employee
Benefit Matters.
(a) The
Company has no employees but will pay its portion of Employee Benefit
Plans,
wages and other employee expenses that are accrued and payable
at Closing for
employees it shares with the Parent.
(b) The
Parent will assume liability under any Employee Benefit Plan for
claims under
Section 4980B of the Code with respect to M&A Qualified Beneficiaries, as
defined under Section 54.4980B-9 of the Treasury Regulations or
with respect to
any applicable state group health plan continuation coverage statutes.
However,
if Section 4980B of the Code or an applicable state group health
plan
continuation coverage statute does not apply, the Parent agrees
to provide
continuation coverage that would otherwise comply with the terms
of Section
4980B of the Code to any former employee of the Company and the
Company
Subsidiaries who meets the M&A Qualified Beneficiary definition set forth
above under the Parent's Employee Benefit Plans.
5.4 Consents
and Approvals.
The
Company and Parent shall cooperate to (a) promptly prepare and
file all
necessary documentation, (b) effect all necessary applications,
notices,
petitions and filings and execute all agreements and documents,
(c) use all
reasonable efforts to obtain all necessary permits, consents, approvals
and
authorizations of all governmental bodies and (d) use all reasonable
efforts to
obtain all necessary permits, consents, approvals and authorizations
of all
other parties, as necessary or advisable to consummate the transactions
contemplated by this Agreement or required by the terms of any
note, bond,
mortgage, indenture, deed of trust, license, franchise, permit,
concession,
contract, lease or other instrument to which the Company and Parent
or any of
their respective subsidiaries is a party or by which any of them
is bound;
provided,
however,
that
(i) no note, bond, mortgage, indenture, deed of trust, license,
franchise,
permit, concession, contract, lease or other instrument shall be
amended or
modified to increase materially the amount payable thereunder or
to be otherwise
materially more burdensome to the Company in order to obtain any
permit,
consent, approval or authorization without first obtaining the
written approval
of Parent and (ii) without the prior consent of Parent, no such actions or
things shall be done to the extent they would, individually or
in the aggregate,
reasonably be expected to have a Company Material Adverse Effect
(after giving
effect to the Merger); and provided, further, that in the event
of any action by
or inquiry (formal or informal) of any governmental agency or third
party
related to or based upon matters associated with the Company’s representation in
Section 2.25, Parent shall be entitled to take (or not take) any
action it deems
necessary or advisable in its sole, unfettered discretion, including
that set
forth in Section 7.1(e); provided,
however,
that
Parent shall not take any affirmative action that would detrimentally
affect the
Company with respect to such matter. The Company shall have the
right to review
and approve in advance all characterizations of the information
relating to the
Company; Parent shall have the right to review and approve in advance
all
characterizations of the information relating to Parent; and each
of the Company
and Parent shall have the right to review and approve in advance
all
characterizations of the information relating to the transactions
contemplated
by this Agreement, in each case which appear in any filing (including,
without
limitation, the S-4) made in connection with the transactions under
this
Agreement. The Company and Parent agree that they will consult
with each other
with respect to the obtaining of all such necessary permits, consents,
approvals
and authorizations of all third parties and governmental bodies.
5.5 Public
Statements.
The
Company and Parent shall consult with each other prior to issuing
any public
announcement, statement or other disclosure with respect to this
Agreement or
the transactions contemplated herein and shall not issue any such
public
announcement or statement prior to such consultation, except as
may be required
by Law or Nasdaq, and each party will use commercially reasonable
efforts to
provide copies of such release or other announcement to the other
party hereto,
and give due consideration to such comments as such other party
may have, prior
to such press release or other announcement.
5.6 Commercially
Reasonable Best Efforts.
Subject
to the terms and conditions herein provided, the Company and Parent
agree to use
commercially reasonable best efforts to take, or cause to be taken,
all action,
and to do, or cause to be done, all things commercially reasonably
necessary,
proper or advisable under applicable Laws to consummate and make
effective the
transactions contemplated by this Agreement, including but not
limited to
obtaining all consents, approvals and authorizations required for
or in
connection with the consummation by the parties hereto of the transactions
contemplated by this Agreement, provided, however, that the parties
shall not be
required to contest any legislative, administrative or judicial
action or seek
to have vacated, lifted, reversed or overturned, any decree, judgment,
injunction or other order (whether temporary, preliminary or permanent)
that
restricts, prevents or prohibits the consummation of the transactions
contemplated by this Agreement or pay any material amounts to obtain
any
consent, approval or authorization. In case at any time after the
Effective Date
any further action is necessary or desirable to carry out the purposes
of this
Agreement, that action shall be taken. In the event any litigation
is commenced
by any person involving the Company or Parent that relates to the
transactions
contemplated by this Agreement, including any other Takeover Proposal
(as
defined
in Section
5.9(c)),
the
Company and Parent shall have the right, at its own expense, to
participate
therein.
5.7 Notification
of Certain Matters.
The
Company and the Parent agree to give prompt notice to each other
of, and to use
their respective reasonable best efforts to prevent or promptly
remedy,
(i) the occurrence or failure to occur, or the impending or threatened
occurrence or failure to occur, of any event which occurrence or
failure to
occur would be likely to cause any of its representations or warranties
in this
Agreement to be untrue or inaccurate in any material respect at
any time from
the date hereof through the Effective Date; and (ii) any material
failure on its
part to comply with or satisfy any covenant, condition or agreement
to be
complied with or satisfied by it hereunder; provided, however,
that the delivery
of any notice pursuant to this Section
5.7
shall
not limit or otherwise affect the remedies available hereunder
to the party
receiving such notice.
5.8 Access
to Information; Confidentiality.
(a) The
Company shall, and shall cause the officers, directors, employees
and agents of
the Company to, afford the officers, employees and agents of Parent
reasonable
access at all reasonable times through the Effective Date to its
officers,
employees, agents, properties, facilities, books, records, contracts
and other
assets and shall furnish Parent all financial, operating and other
data and
information as Parent through its officers, employees or agents,
may reasonably
request. Parent shall have the right to make such due diligence
investigations
of Company as Parent shall deem reasonable. No additional investigations
or
disclosures shall affect the Company’s representations and warranties contained
herein, or limit or otherwise affect the remedies available to
Parent pursuant
to this Agreement.
(b) Parent
shall, and Parent shall cause officers of Parent to, afford the
officers and
directors of the Company complete access at all reasonable times
from the date
hereof through the Effective Date to its and its subsidiaries’ officers,
properties, facilities, books, records and contracts and shall
furnish the
Company all financial, operating and other data and information
as the Company
through its officers, employees or agents, may reasonably request.
The Company
shall have the right to make such reasonable due diligence investigations
as the
Company shall deem necessary or reasonable. No additional investigations
or
disclosures shall affect Parent’s representations and warranties in, or limit or
otherwise affect the remedies available to the Company pursuant
to, this
Agreement.
5.9 No
Solicitation.
(a) From
the
date hereof until termination or Closing of this Agreement, the
Company agrees
that it shall not, nor shall it authorize or permit any officer,
director or
employee of, or any investment banker, attorney or other advisor
or
representative of, the Company, directly or indirectly, to (i)
solicit,
initiate, or encourage any inquiries relating to, or the submission
of, any
Takeover Proposal (defined below), (ii) approve or recommend any
Takeover
Proposal, accept any Takeover Proposal or enter into any letter
of intent,
agreement in principle or agreement with respect to any Takeover
Proposal (or
resolve to or publicly propose to do any of the foregoing), or
(iii) participate
in any discussions or negotiations regarding, or furnish to any
person any
information with respect to, or take any other action to facilitate
any
inquiries or the making of any proposal or offer that constitutes,
or may
reasonably be expected to lead to, any Takeover Proposal; provided,
however,
that
(x) nothing contained in subclauses (ii) or (iii) above shall prohibit
the
Company or its board of directors from taking and disclosing to
the Company’s
stockholders a position with respect to a tender offer by a third
party pursuant
to Rules 14d-9 and 14e-2 promulgated under the ‘34 Act, provided that the board
of directors of the Company shall not recommend that the stockholders
of the
Company tender their Company Common Stock in connection with any
such tender or
exchange offer unless the board of directors shall have determined
in good
faith,
after
consultation with its financial advisors and outside counsel, that
failing to
take such action would reasonably be expected to constitute a breach
of the
fiduciary duties of the board of directors and that the relevant
Takeover
Proposal is a Superior Proposal (as defined below) and (y) prior
to the
Shareholders’ Meeting, if the Company receives an unsolicited bona fide written
Takeover Proposal from a third party that the board of directors
of the Company
determines in good faith (after receiving the advice of a financial
adviser of
nationally or regionally recognized reputation) is reasonably likely
to be a
Superior Proposal, the Company and its representatives may conduct
such
discussions or provide such information as the board of directors
of the Company
shall determine, but only if, prior to such provision of information
or conduct
of such discussions, (A) such third party shall have entered into
a
confidentiality agreement, and (B) the board of directors of the
Company
determines in its good faith judgment, after consultation with
outside counsel,
that it is required to do so in order to comply with its fiduciary
duties. The
Company shall promptly notify Parent in the event it receives any
Takeover
Proposal, including the identity of the party submitting such
proposal.
(b) The
Company shall promptly (but in no event later than 24 hours after
receipt)
notify Parent of the material terms, conditions and other aspects
of any
inquiries, proposals or offers with respect to, or which could
reasonably be
expected to lead to, a Takeover Proposal, and of any modifications
or revisions
to the terms of any Takeover Proposal.
(c) For
purposes of this Agreement, “Takeover
Proposal”
means
any proposal or offer (whether or not in writing and whether or
not delivered to
the stockholders of the Company generally) for a merger or other
business
combination, reorganization, share exchange, recapitalization,
liquidation,
dissolution or similar transaction involving the Company or to
acquire in any
manner (including by tender or exchange offer), directly or indirectly,
a 25% or
more equity interest in, any voting securities of, or assets (including
equity
interests in other entities) of the Company having an aggregate
value equal to
10% or more of the Company’s consolidated net asset value, other than the
transactions contemplated by this Agreement. For purposes of this
Agreement,
“Superior
Proposal”
means
any unsolicited bona fide written Takeover Proposal which (i) contemplates
(A) a
merger or other business combination, reorganization, share exchange,
recapitalization, liquidation, dissolution, tender offer, exchange
offer or
similar transaction involving the Company as a result of which
the Company’s
stockholders prior to such transaction in the aggregate cease to
own at least
20% of the voting securities of the ultimate parent entity resulting
from such
transaction, or (B) a sale, lease, exchange, transfer or other
disposition
(including, without limitation, a contribution to a joint venture)
of at least
10% of the value of the net assets of the Company, taken as a whole,
and (ii) is
on terms which the board of directors of the Company determines
(after
consultation with its financial advisor and outside counsel), taking
into
account, among other things, all legal, financial, regulatory and
other aspects
of the proposal and the person making the proposal, (A) would,
if consummated,
result in a transaction that is more favorable to its stockholders
from a
financial point of view (in their capacities as such) than the
transactions
contemplated by this Agreement (including the terms of any proposal
by Parent to
modify the terms of the transactions contemplated by this Agreement),
and (B) is
reasonably likely to be financed and otherwise completed without
undue
delay.
(d) The
Company agrees that it will, and will cause its officers, employees,
directors,
agents and representatives to, immediately cease any activities,
discussions or
negotiations existing as of the date of this Agreement with any
parties
conducted heretofore with respect to any Takeover Proposal and
will use its
reasonable best efforts to cause any such parties (and its agents
or advisors)
in possession of confidential information regarding the Company
that was
furnished by or on behalf of the Company to return or destroy all
such
information. The Company shall use its reasonable best efforts
to ensure that
its officers, directors and representatives are aware of the provisions
of this
Section
5.9.
5.10 Section
16 Matters.
Prior
to the Effective Date of the Merger, Parent, Subsidiary and the
Company shall
take all such steps as may be required to cause any dispositions
of capital
stock of Parent and the Company (including derivative securities)
or
acquisitions of Parent Common Stock (including derivative securities)
resulting
from the transactions contemplated by this Agreement by each individual
who is
subject to the reporting requirements of Section 16(a) of the ‘34 Act with
respect to Parent or the Company, to be exempt under Rule 16b-3 under the
‘34 Act.
5.11 Voting
Agreement.
The
Company and Parent acknowledge and agree that Parent and those
officers and
directors of Parent who hold Company Common Stock, and the Company,
have
entered, or will enter, into a Voting Agreement providing that
at the
Shareholders’ Meeting, Parent (and those officers and directors of Parent who
hold Company Common Stock) shall vote all of its and their Company
Common Stock
in the same manner (for, or against, the Merger) as voted by the
holders of a
majority of the shares of Company Common Stock not owned by Parent.
The
preceding is only a summary of the Voting Agreement.
5.12 Nasdaq
Listing.
Parent
shall use its reasonable best efforts to cause the Total Merger
Consideration to
be issued in the Merger to be approved for listing on Nasdaq, prior
to the
Effective Date, subject to official notice of issuance.
5.13 Tax
Treatment.
The
parties will cooperate with each other and use their respective
reasonable best
efforts to cause the Merger to qualify as a “reorganization” within the meaning
of Section 368(a) of the Code (the “Intended
Tax Treatment”),
including (a) not taking any action that is reasonably likely to
prevent the
Intended Tax Treatment and (b) reporting the transaction in a manner
consistent
with the Intended Tax Treatment.
5.14 Indemnification.
Parent
agrees that, for a period of six years following the Effective
Date, Parent
shall defend, protect, indemnify and hold harmless each of the
Company’s
officers and directors (collectively, the “Indemnitees”)
from
and against any and all actions, causes of action, suits, claims,
losses, costs,
penalties, fees, liabilities and damages, and expenses in connection
therewith,
including threatened actions, causes of action, suits or claims,
hereafter an
“Action”
(irrespective of whether any such Indemnitee is a party to such
action or other
proceeding for which indemnification hereunder is sought), and
including
reasonable attorneys’ fees and disbursements (the “Indemnified
Liabilities”),
incurred by the Indemnitees or any of them as a result of, or arising
out of, or
relating to (a) any misrepresentation or breach of any representation
or
warranty made by the Company in this Agreement or any other certificate,
instrument or document contemplated hereby or thereby, (b) any
breach of any
covenant, agreement or obligation of the Company contained in this
Agreement or
any other certificate, instrument or document contemplated hereby
or thereby, or
(c) any Action brought or made against such Indemnitee arising
out of or
resulting from the execution, delivery, performance or enforcement
of this
Agreement or any other instrument, document or agreement executed
pursuant
hereto. To the extent that the foregoing indemnification may be
unenforceable
for any reason, including but not limited to policies of the SEC,
Parent shall
make the maximum contribution to the payment and satisfaction of
each of the
Indemnified Liabilities which is permissible under law. The
obligations of the parties to indemnify or make contribution under
this
Section
5.14
shall
survive termination.
ARTICLE
6
CONDITIONS
6.1 Conditions
to the Obligation of Each Party to Effect the Merger.
The
obligations of each party to effect the Merger shall be subject
to the
fulfillment at or prior to the Closing Date of the following
conditions:
(a) this
Agreement shall have been adopted by the requisite vote of the
stockholders of
the Company, as required by the CBCA and the Company’s articles of incorporation
and bylaws;
(b) no
preliminary or permanent injunction or other order, decree or ruling
issued by a
court of competent jurisdiction or by a governmental, regulatory
or
administrative agency or commission, nor any statute, rule, regulation
or
executive order promulgated or enacted by any governmental authority,
shall be
in effect that would make the Merger illegal or otherwise prevent
the
consummation of the Merger provided, however, that prior to invoking
this
condition, each party shall have complied fully with its obligations
under
Section
5.6
and, in
addition, shall use commercially reasonable efforts to have any
such decree,
ruling, injunction or order vacated, except as otherwise contemplated
by this
Agreement;
(c) The
Merger Consideration to be issued in the Merger shall have been
approved for
listing on the Nasdaq, subject to official notice of issuance;
and
(d) The
S-4
shall have been declared effective by the SEC under the ‘33 Act. No stop order
suspending the effectiveness of the S-4 shall have been issued
by the SEC and no
proceedings for that purpose shall have been initiated or threatened
by the
SEC.
6.2 Additional
Conditions to the Obligations of Parent.
The
obligations of Parent to effect the Merger shall be subject to
fulfillment at or
prior to the Effective Date of the following additional conditions:
(a) Each
representation or warranty of the Company shall be true and correct
except for
circumstances which, when considered individually or in the aggregate,
have not
had or would not reasonably be expected to have a Company Material
Adverse
Effect, in each case as if such representations and warranties
were made at the
date of this Agreement and as of the Closing Date (other than to
the extent such
representations and warranties are made as of a specified date,
in which case
such representations and warranties shall be true and correct as
of such date
and provided that any representation or warranty that is qualified
by
materiality or Company Material Adverse Effect shall be true and
correct in all
respects). There shall not have been a breach in any respect by
the Company of
any covenant or agreement set forth in this Agreement which breach
shall not
have been remedied within 20 days (or by the Outside Date (as defined
below), if
sooner) of written notice specifying such breach in reasonable
detail and
demanding that same be remedied (except where such failure to be
true and
correct or such breach, taken together with all other such failures
and
breaches, would not have a Company Material Adverse Effect);
(b) There
shall not be any pending suit, action, investigation or proceeding
brought by
any governmental authority before any court (domestic or foreign)
or any action
taken, or any statute, rule, regulation, decree, order or injunction
promulgated, enacted, entered into or enforced by any state, federal
or foreign
government or governmental agency or authority or by any court
(domestic or
foreign) that would reasonably be expected to have the effect of:
(i) making illegal or otherwise restraining or prohibiting the consummation
of the Merger or materially delaying the Merger; or (ii) prohibiting
or
materially limiting the ownership or operation by the Company or
Parent or any
of their subsidiaries or their properties, or compelling Parent
or any of
Parent’s subsidiaries to dispose of or hold separate all or any material
portion
of the business or assets of the Company and any of its subsidiaries,
taken as a
whole, or Parent and its subsidiaries, taken as a whole, as a result
of the
transactions contemplated herein;
(c) There
shall not have occurred and continue to exist any event that individually
or in
the aggregate would reasonably be expected to have a Company Material
Adverse
Effect (other than matters set forth in the Company Disclosure
Letter).
(d) Parent
shall have received the written opinion from Steve Conrad, dated
as of the
Effective Date, which shall be based on such written representations
from
Parent, the Company and others as such person may reasonably request,
to the
effect that the Merger will constitute a reorganization within
the meaning of
Section 368(a) of the Code.
6.3 Additional
Conditions to the Obligation of the Company.
The
obligations of the Company to effect the Merger shall be subject
to fulfillment
at or prior to the Effective Date of the following additional
conditions:
(a) Each
representation or warranty of Parent and Parent Subsidiaries shall
be true and
correct except for circumstances which, when considered individually
or in the
aggregate, have not had or would not reasonably be expected to
have a Parent
Material Adverse Effect, in each case as if such representations
and warranties
were made at the date of this Agreement and as of the Closing Date
(other than
to the extent such representations and warranties are made as of
a specified
date, in which case such representations and warranties shall be
true and
correct as of such date and provided that any representation or
warranty that is
qualified by materiality or Parent Material Adverse Effect shall
be true and
correct in all respects). There shall not have been a breach in
any respect by
Parent and Subsidiary of any covenant or agreement set forth herein
which breach
shall not have been remedied within 10 days (or by the Outside
Date, if sooner)
of written notice specifying such breach in reasonable detail and
demanding that
same be remedied (except where such failure to be true and correct
or such
breach, taken together with all other such failures and breaches,
would not have
a Parent Material Adverse Effect); or
(b) There
shall not be any pending suit, action, investigation or proceeding
brought by
any governmental authority before any court (domestic or foreign)
or any action
taken, or any statute, rule, regulation, decree, order or injunction
promulgated, enacted, entered into or enforced by any state, federal
or foreign
government or governmental agency or authority or by any court
(domestic or
foreign) that would reasonably be expected to have the effect of
making illegal
or otherwise restraining or prohibiting the consummation of the
Merger or
materially delaying the Merger.
(c) The
Company shall have received a legal opinion dated the Effective
Date from the
Law Office of Stephen E. Rounds as counsel to Parent, in a form
previously
reviewed by and reasonably satisfactory to the Company.
(d) The
Company shall have received the written opinion from Steve Conrad
provided for
in Section
6.2(d)
to the
effect that the Merger will constitute a reorganization within
the meaning of
Section 368(a) of the Code.
(e) There
shall not have occurred and continue to exist any event that individually
or in
the aggregate would reasonably be expected to have a Parent Material
Adverse
Effect.
ARTICLE
7
TERMINATION,
AMENDMENT AND WAIVER
7.1 Termination.
This
Agreement may be terminated and the Merger may be abandoned at
any time prior to
the Effective Date notwithstanding approval thereof by the stockholders
of the
Company:
(a) by
mutual
written consent of Parent and the Company;
(b) by
Parent, at its sole election, without the consent of the Company,
if the holders
of more than 200,000 shares of Company Common Stock (3% of the
Company Common
Stock not held by Parent) properly give notice to Parent under,
and otherwise
satisfy the requirements of, section 7-113-202 of the CBCA.
(c) by
Parent
or the Company if the consummation of the Merger shall not have
occurred on or
before July 31, 2007 (the “Outside
Date”),
unless mutually extended beyond such date; provided,
however,
that
the right to terminate this Agreement under this Section 7.1(b)
shall
not be available to any party whose failure to fulfill any obligation
under this
Agreement has been the cause of, or resulted in, the failure of
the Effective
Date to occur on or before such date; provided further
that
such time periods shall be tolled for any period during which any
party shall be
subject to a nonfinal order, decree, ruling or action restraining,
enjoining or
otherwise prohibiting the consummation of the Merger;
(d) by
Parent
or the Company if a court of competent jurisdiction or governmental,
regulatory
or administrative agency or commission shall have issued an order,
decree or
ruling or taken any other action (which order, decree or ruling
each of the
parties hereto shall use all reasonable efforts to lift), in each
case
permanently restraining, enjoining or otherwise prohibiting the
transactions
contemplated by this Agreement, and such order, decree, ruling
or other action
shall have become final and nonappealable;
(e) by
Parent
if:
(i) the
Company Board (or any committee thereof) shall have withdrawn,
modified or
amended in any manner adverse to Parent its approval of or recommendation
in
favor of the Merger or shall have recommended or approved a Takeover
Proposal or
shall have resolved to do any of the foregoing;
(ii) the
Company shall have breached Section
5.9
in any
material respect;
(iii) prior
to
the Effective Date there shall be a breach of any representation,
warranty,
covenant or agreement of the Company in this Agreement such that
the conditions
set forth in Section 6.2(a) are not capable of being satisfied on or before
the Outside Date; provided
that
Parent may not terminate this Agreement pursuant to this clause
(iii)
if
Parent is in material breach of this Agreement; or
(iv) prior
to
the Effective Date any governmental agency or third party shall
have taken any
action or commenced any inquiry related to or based upon matters
associated with
the Company’s representation in Section 2.25, and such matter has not been
resolved prior to the Outside Date to the Parent’s satisfaction in its sole,
unfettered discretion.
(f) by
the
Company if, prior to the Effective Date there shall be a breach
of any
representation, warranty, covenant or agreement of Parent in this
Agreement such
that the conditions set forth in Section
6.3(a)
are not
capable of being satisfied on or before the Outside Date; provided
that the
Company may not terminate this Agreement pursuant to this clause
(f)
if the
Company is in material breach of this Agreement; or
(g) by
Parent
or the Company if the vote of the Company’s stockholders taken at a duly
convened stockholders meeting shall not have been sufficient to
approve the
Merger; or
(h) by
Parent
or the Company if the ratio of the closing stock price of the Common
Stock to
the closing stock price of the Parent Common Stock is 20% greater
or less than
the Exchange Ratio for two (2) or more consecutive trading days,
even if the
Merger has been approved by the holders of a majority of the minority
shares of
Company Common Stock.
7.2 Effect
of Termination.
Upon
the termination of this Agreement pursuant to Section
7.1,
this
Agreement shall forthwith become null and void except as set forth
in
Section
7.3
(which
shall be the sole remedy), which shall survive such termination.
7.3 Fees
and Expenses.
(a) If
Parent
terminates this Agreement pursuant to Section
7.1(e)(i),
or
(ii),
then in
each case the Company shall pay, or cause to be paid, to Parent,
as promptly as
is reasonably practicable (but in no event later than two business
days)
following the date of termination an amount (“Termination
Fee”)
equal
to 50% of the legal and financial advisory fees incurred by the
Parent. In
addition, if (i)(x) this Agreement is terminated pursuant to Section
7.1(c) (by
the Company), or 7.1(g) (by Parent or the Company), (y) prior to
such
termination a Takeover Proposal has been publicly announced, disclosed
or
communicated and (z) on the date of such termination, Parent is
not in material
breach of this Agreement and (ii) within 12 months after such termination
the
Company shall consummate or enter into an agreement with the proponent
of such
Takeover Proposal or an affiliate of such proponent, then the Company
shall pay
the Termination Fee concurrently with the earlier of entering into
any such
agreement or consummating such transaction.
(b) If
Parent
terminates this Agreement pursuant to Section 7.1(b), Parent shall
reimburse the
Company 100% of the Company’s legal and advisory fees.
(c) If
the
Company terminates this Agreement pursuant to Section 7.1(e) following
the
intentional breach by Parent of its obligation to consummate the
Merger
following the fulfillment of each of the conditions to its obligations
as set
forth in Sections 6.1 and 6.2 above, then Parent shall pay, or
cause to be paid,
to the Company, as promptly as is reasonably practicable (but in
no event later
than two business days) after the date of termination, the Termination
Fee.
(d) If
Parent
terminates this Agreement pursuant to Section 7.1(d)(iii) following
the
intentional breach by the Company of its obligation to consummate
the Merger
following the fulfillment of each of the conditions to its obligations
as set
forth in Sections 6.1 and 6.3 above, then the Company shall pay,
or cause to be
paid, to Parent, as promptly as is reasonably practicable (but
in no event later
than two business days) after the date of termination, the Termination
Fee.
(e) All
costs
and expenses incurred in connection with this Agreement and the
transactions
contemplated hereby shall be paid by the party incurring such expenses,
whether
or not the Merger is consummated; provided, that if this Agreement
is terminated
by Parent pursuant to Section 7.1(d)(iv), the Company shall reimburse
Parent for
all reasonable out-of-pocket fees and expenses incurred by Parent
(including the
fees and expenses of its counsel and financial advisor) in connection
with this
Agreement and the transactions contemplated hereby, and provided
further that if
this Agreement is terminated by the Company pursuant to Section
7.1(e), Parent
shall reimburse the Company for all reasonable out-of-pocket fees
and expenses
incurred by the Company (including the fees and expenses of its
counsel and
financial advisor) in connection with this Agreement and the transactions
contemplated hereby, provided,
however,
that
this Section 7.3(d) shall not be applicable in the event a payment
is made
pursuant to Section 7.3(b) or (c).
7.4 Amendment.
This
Agreement may be amended by the parties hereto, at any time before
or after
approval of this Agreement and the transactions contemplated herein
by the
respective boards of directors or stockholders of the parties hereto;
provided,
however,
that
after any such approval by the stockholders, no amendment which
under applicable
Law may not be made without stockholder approval shall be made
without such
stockholder approval. This Agreement may not be amended except
by an instrument
in writing signed on behalf of each of the parties hereto.
7.5 Waiver.
Any
failure of any of the parties to comply with any obligation, covenant,
agreement
or condition herein may be waived at any time prior to the Effective
Date by any
of the parties entitled to the benefit thereof only by a written
instrument
signed by each such party granting such waiver, but such waiver
or failure to
insist upon strict compliance with such obligation, representation,
warranty,
covenant, agreement or condition shall not operate as a waiver
of or estoppel
with respect to, any subsequent or other failure.
ARTICLE
8
GENERAL
PROVISIONS
8.1 Notices.
All
notices and other com-munications hereunder shall be in writing
and shall be
deemed to have been duly given if delivered personally, sent by
recognized
overnight courier or sent by telecopier to the parties at the following
addresses or at such other addresses as shall be specified by the
parties by
like notice:
(a) if
to the
Company:
Crested
Corp.
877
N.
8th
W.
Riverton,
Wyoming 82501
Attn:
Harold F. Herron and Steve Youngbauer
Fax
307.857.3050
with
a
copy to:
Davis
Graham & Stubbs
Attn:
Scot Anderson
1550
Seventeenth Street, Suite 500
Denver,
Colorado 80202
Fax
303.893.1379
(b) if
to
Parent:
U.S.
Energy Corp.
877
N.
8th
W.
Riverton,
Wyoming 82501
Attn:
Keith G. Larsen and Steve Youngbauer
Fax
307.857.3050
with
a
copy to:
The
Law
Office of Stephen E. Rounds
1544
York
Street, Suite 110
Denver,
Colorado 80206
Fax
303.377.0231
Notice
so
given shall (in the case of notice so given by mail) be deemed
to be given when
received and (in the case of notice so given by cable, telegram,
telecopier,
telex or personal delivery) on the date of actual transmission
or (as the case
may be) personal delivery.
8.2 Representations
and Warranties.
The
representations and warranties contained in this Agreement shall
not survive the
Merger.
8.3 Governing
Law; Waiver of Jury Trial.
(a) THIS
AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF
THE STATE OF WYOMING (except as to matters of corporate statutory
law applicable
to the Company, which law shall be the CBCA) REGARDLESS OF THE
LAWS THAT MIGHT
OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS.
ALL MATERS
WILL BE TRIED BEFORE EITHER A WYOMING COURT OF LAW OR A FEDERAL
COURT OF LAW
LOCATED WITHIN WYOMING.
(b) NO
PARTY
TO THIS AGREEMENT OR ANY ASSIGNEE OR SUCCESSOR OF A PARTY SHALL
SEEK A JURY
TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER LITIGATION
PROCEDURE
BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER
AGREEMENTS OR
THE DEALINGS OR THE RELATIONSHIP BETWEEN THE PARTIES. NO PARTY
WILL SEEK TO
CONSOLIDATE ANY SUCH ACTION, IN WHICH A JURY TRIAL HAS BEEN WAIVED,
WITH ANY
OTHER ACTION IN WHICH A JURY TRIAL CANNOT OR HAS NOT BEEN WAIVED.
THE PROVISIONS
OF THIS SECTION HAVE BEEN FULLY DISCUSSED BY THE PARTIES HERETO,
AND THESE
PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NEITHER PARTY HAS
IN ANY WAY
AGREED WITH OR REPRESENTED TO THE OTHER PARTY THAT THE PROVISIONS
OF THIS
SECTION WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
8.4 Counterparts;
Facsimile Transmission of Signatures.
This
Agreement may be executed in any number of counterparts and by
different parties
hereto in separate counterparts, and delivered by means of facsimile
transmission or otherwise, each of which when so executed and delivered
shall be
deemed to be an original and all of which when taken together shall
constitute
but one and the same agreement. If any party hereto elects to execute
and
deliver a counterpart signature page by means of facsimile transmission,
it
shall deliver an original of such counterpart to each of the other
parties
hereto within ten days of the date hereof, but in no event will
the failure to
do so affect in any way the validity of the facsimile signature
or its
delivery.
8.5 Assignment;
No Third Party Beneficiaries.
(a) This
Agreement and all of the provisions hereto shall be binding upon
and inure to
the benefit of, and be enforceable by, the parties hereto and their
respective
successors and permitted assigns, but neither this Agreement nor
any of the
rights, interests or obligations set forth herein shall be assigned
by any party
hereto without the prior written consent of the other parties hereto
and any
purported assignment without such consent shall be void.
(b) Nothing
in this Agreement shall be construed as giving any person, other
than the
parties hereto and their heirs, successors, legal representatives
and permitted
assigns, any right, remedy or claim under or in respect of this
Agreement or any
provision hereof except as provided in Section
5.14.
8.6 Severability.
If any
provision of this Agreement shall be held to be illegal, invalid
or
unenforceable under any applicable Law, then such contravention
or invalidity
shall not invalidate the entire Agreement. Such provision shall
be deemed to be
modified to the extent necessary to render it legal, valid and
enforceable, and
if no such modification shall render it legal, valid and enforceable,
then this
Agreement shall be construed as if not containing the provision
held to be
invalid, and the rights and obligations of the parties shall be
construed and
enforced accordingly.
8.7 Entire
Agreement.
This
Agreement (and the Voting Agreement) contain (and as to matters
covered by the
Voting Agreement, will contain) all of the terms of the understandings
of the
parties hereto with respect to the subject matters hereof and
thereof.
[The
remainder of this page is intentionally blank]
IN
WITNESS WHEREOF, Parent and the Company have caused this Agreement
to be
executed as of the date first written above.
U.S.
ENERGY CORP.
By:
/s/
Keith G. Larsen
Name:
Keith G. Larsen
Title:
Chief Executive Officer
CRESTED
CORP.
By:
/s/
Harold F. Herron
Name:
Harold F. Herron
Title:
President
[AGREEMENT
AND PLAN OF MERGER SIGNATURE PAGE]
APPENDIX
B
VOTING
AGREEMENT
Voting
Agreement
Between
U.S.
Energy Corp. and Crested Corp.
And
Certain Shareholders of Crested Corp.
This
Voting Agreement (“Agreement”) is entered into on July 31, 2007, but is
to be effective as of January 23, 2007, by and between U.S. Energy
Corp., a
Wyoming corporation (“USEG”), and the individual shareholders
(each, an “Individual Shareholder”) of Crested Corp., a Colorado
corporation (“Crested”) identified on the signature page. Each
of USEG and the Individual Shareholders are individually referred to
as a
“Shareholder;” and collectively those parties are referred to as the
“Shareholders.”
WHEREAS,
USEG and Crested have entered into an Agreement and Plan of Merger
(the
“Merger Agreement”) providing for the merger of Crested with and into
USEG (the “Merger”), dated as of the date hereof. Terms not
defined in this Agreement have the meanings defined in the Merger
Agreement.
WHEREAS,
the Merger Agreement requires that the Shareholders, in their capacities
as
holders of Crested common stock, enter into, and the Shareholders have
agreed to
enter into, this Agreement.
NOW,
THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
the
parties hereby agree as follows:
1. Representations
and Warranties of the Shareholders. The Shareholders represent
and warrant to Crested as follows:
(a) Authority;
Binding Obligation. The Shareholder has all necessary power and
authority to enter into this Agreement and perform all of the Shareholder’s
obligations hereunder. This Agreement has been duly and validly executed
and
delivered by the Shareholder and constitutes a valid and legally binding
obligation of the Shareholder, enforceable against the Shareholder
in accordance
with its terms.
(b) Ownership
of Shares. The Shareholder is the beneficial owner or record holder of
the
number of shares of Crested listed under the Shareholder’s name on the signature
page (the “Existing Shares” and, together with any shares of Crested
common stock the record or beneficial ownership of which is acquired
by the
Shareholder after the date hereof, the “Shares” including (only for the
individual Shareholders) any shares of common stock of Crested which
are
acquired pursuant to exercise of options to buy Crested common stock
(the
“Option Shares”) and, as of the date hereof, the Existing Shares and
Option Shares constitute all the shares of Crested common stock owned
of record
or beneficially by the Shareholder). Provided, however, that
the Existing Shares shown for each individual Shareholder does not
reflect that
person’s beneficial ownership (as defined in Rule 13d-3 promulgated under
the
’34 Act) of shares of Crested common stock which he holds indirectly
as an
officer or director of USEG.
With
respect to the Existing Shares, the Shareholder has (and with respect
to the
Options Shares, will have), without any restrictions, except as imposed
by law
and this Agreement, (i) sole voting power and sole power to issue
instructions
with respect to or otherwise engage in the actions set forth in Section 2;
(ii) sole power of disposition; and (iii) sole power to demand dissenters
rights
under Article 113 of the Colorado Business Corporation Act (subclause
(iii)
applies only to the Existing Shares).
(c) No
Conflicts. Neither the execution, delivery and performance of this
Agreement nor the consummation of the transactions contemplated hereby
will
conflict with or constitute a violation of, or a default under, (with
or without
notice, lapse of time, or both) any contract, agreement, voting agreement,
shareholders’ agreement, trust agreement, voting trust, proxy, power of
attorney, pooling arrangement, note, mortgage, indenture, instrument,
arrangement or other obligation or restriction of any kind to which
the
Shareholder is a party or to which the Shareholder or Shareholder’s Shares are
subject to or bound.
2. Voting
Agreement and Agreement Not to Transfer.
(a)
|
The
Shareholder agrees to vote or cause to be voted all of
the Shareholder’s
Shares:
|
(i) consistent
with the vote of holders of a majority of the shares of Crested common
stock not
held by the Shareholders (the “Majority Vote of the Minority Holders”),
whether in favor of, or against, the approval of the Merger Agreement
at a
meeting of the Crested shareholders, as well as any other matters
required to be
approved by the Crested shareholders at the meeting wherein the Merger
is voted
upon by the Crested shareholders. Provided, however,
that USEG may elect not to vote in favor of the Merger, even if the
Merger
Agreement has been approved by a Majority Vote of the Minority Holders,
to the
extent such election is permitted pursuant to the termination provisions
of the
Merger Agreement.
(ii) against
any action or agreement that would result in a breach in any material
respect of
any covenant, representation or warranty or any other obligation
or agreement of
Crested under the Merger Agreement; and
(iii)
against the following actions (other than the Merger or the consummation
of any
actions contemplated by the Merger Agreement):
(A)
any
extraordinary corporate transactions, such as a merger, consolidation
or other
business combination involving Crested;
(B)
any
sale, lease, transfer or disposition of a material amount of the
assets of
Crested, except as may be contemplated by the Company SEC Reports;
(C)
any
change in the majority of the board of directors of Crested;
(D)
any
material change in the present capitalization of Crested;
(E)
any
amendment of Crested’s articles of incorporation or bylaws;
(F)
any
other change in the corporate structure, business, assets or ownership
of
Crested, provided, however, a vote in favor of amending the Crested
Incentive
Stock Option Plan to allow for cashless exercise shall be permitted;
or
(G)
any
other action which is intended, or could reasonably be expected to,
impede,
interfere with, delay, postpone, discourage or adversely affect the
contemplated
economic benefits to Crested of the Merger and the transactions contemplated
by
the Merger Agreement.
(b) The
Shareholder(s) agree not to (i) sell, transfer, convey, assign or otherwise
dispose of any of his, her or its Existing Shares, or any of the
Option Shares
if an Individual Shareholder exercises his or her Option before the
Effective
Date; or (ii) pledge, mortgage or otherwise encumber such Existing or
Option Shares.
3. Cooperation. The
Shareholder(s) agree that he, she or it will not (directly or indirectly)
initiate, solicit, encourage or facilitate any Takeover Proposal.
4. Shareholder
Capacity. Each Individual Shareholder is entering this Agreement in
his or
her capacity as the record or beneficial owner of the Shares and
the Option
Shares, and not in his or her capacity as a director or officer of
Crested.
Nothing in this Agreement shall be deemed in any manner to limit
the discretion
of any Shareholder to take any action, or fail to take any action,
in his or her
capacity as a director or officer of Crested that may be either
(a) required of the Shareholder under applicable law or (b) is
otherwise permitted by the Merger Agreement.
5. Termination.
The obligations of the Shareholder(s) hereunder shall terminate upon
the
consummation of the Merger. If the Merger is not consummated, the
obligations of the Shareholder shall terminate upon the termination
of the
Merger Agreement.
6. Specific
Performance. The Shareholder(s) acknowledges that it would be impossible
to
determine the amount of damages that would result from any breach
of any of its
obligations under this Agreement, and that the remedy at law for
any breach, or
threatened breach, would likely be inadequate. Accordingly, the
Shareholder agrees that Crested shall, in addition to any other rights
or
remedies which it may have at law or in equity, be entitled to seek
such
equitable and injunctive relief as may be available from any court
of competent
jurisdiction to restrain the Shareholder from violating any of his,
her, or its
obligations under this Agreement. In connection with any action or
proceeding for such equitable or injunctive relief, the Shareholder
hereby
waives any claim or defense that a remedy at law alone is adequate
and agrees,
to the maximum extent permitted by law, to have the obligations of
the
Shareholder under this Agreement specifically enforced against him,
her or it,
without the necessity of posting bond or other security, and consents
to the
entry of equitable or injunctive relief against the Shareholder enjoining
or
restraining any breach or threatened breach of this Agreement.
7. Indemnification.
(a) If
and only if the Merger is consummated in accordance with the Merger
Agreement,
USEG and its successors and assigns (the “Indemnifying Party”) shall, to
the fullest extent permitted by law, indemnify, defend and hold harmless
each
Individual Shareholder (as incurred to the extent incurred subsequent
to the
Effective Date) against all costs or expenses (including reasonable
attorneys’
fees), judgments, fines, losses, claims, damages or liabilities incurred
by each
Individual Shareholder, regardless of whether incurred prior to or
after the
Effective Date (collectively, “Costs”) in connection with any claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of this Agreement other
than an
action for specific performance under Section 6. A Shareholder
wishing to claim indemnification under this Section 7, upon learning of any
claim, action, suit, proceeding or investigation described above,
shall promptly
notify Indemnifying Party thereof; provided that the failure so to
notify shall
not affect the obligations of Indemnifying Party under this Section 7
unless and to the extent that Indemnifying Party is actually and
materially
prejudiced as a result of such failure. In case any such action shall
be brought against an Individual Shareholder, he or she shall promptly
notify
the Indemnifying Party of the commencement thereof, and the Indemnifying
Party
shall be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Shareholder, and after notice from the Indemnifying
Party to
Shareholder of its election to so assume the defense thereof, the
Indemnifying
Party shall not be liable to Shareholder for any legal expenses of
other counsel
or any other expenses, in each case subsequently incurred by
Shareholder.
(b) If
USEG or any of its successors or assigns shall consolidate with or
merge into
any other entity and shall not be the continuing or surviving entity
of such
consolidation or merger or transfers all or substantially all of
its assets to
any other entity, then and in each case, USEG shall cause proper
provision to be
made so that its successors and assigns shall assume the obligations
set forth
in this Section 7.
(c) The
provisions of this Section 7 shall survive termination of this
Agreement.
8. Miscellaneous.
(a) Entire
Agreement. This Agreement (and the Merger Agreement) constitutes
the entire agreement of the parties with reference to the
transactions contemplated hereby and supersedes all other prior agreements,
understandings, representations and warranties, both written and
oral, between
the parties or their respective representatives, agents or attorneys,
with
respect to the subject matters hereof.
(b) Parties
in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto and the other parties
to the Merger
Agreement and their respective successors, assigns, estate, heirs,
executors,
administrators and other legal representatives, as the case may
be. Nothing in this Agreement, express or implied, is intended to
confer upon any other person, other than parties hereto or their
respective
successors, assigns, estate, heirs, executors, administrators and
other legal
representatives, as the case may be, any rights, remedies, obligations
or
liabilities under or by reason of this Agreement.
(c)
Modifications;
Waivers. This Agreement shall not be amended, altered or modified in
any
manner except in writing. No waiver of breach hereunder shall be
considered valid unless in writing, and no waiver shall be deemed
a waiver of
any subsequent breach.
(d) Severability. Any
term or provision of this Agreement which is invalid or unenforceable
in any
jurisdiction shall, as to that jurisdiction, be ineffective to the
extent of
such invalidity and unenforceability without rendering invalid or
unenforceable
the remaining terms and provisions of this Agreement. If any
provision of this Agreement is so broad as to be unenforceable, the
provision
shall be interpreted to be only so broad as is enforceable.
(e) Governing
Law. This Agreement shall be deemed to be made in and in all
respects shall be interpreted, construed and governed by and in accordance
with
the laws of the State of Wyoming, without regard to the conflict
of law
principles thereof.
(f) Jurisdiction
and Venue. Any legal action or proceeding with respect to this Agreement
may be brought only in Fremont County, Wyoming, or in the courts
of the United
States of America for Wyoming. By this Agreement, each party (i)
accepts for itself the jurisdiction of and venue in such courts;
and (ii)
irrevocably consents to the service of process out of such courts
by the
delivery of notice as provided below, such service to become effective
10 days after delivery.
(g) Attorney’s
Fees. The prevailing party in any litigation, arbitration, mediation,
bankruptcy, insolvency or other proceeding (“Proceeding”) relating to the
enforcement or interpretation of this Agreement may recover from
the
unsuccessful party all fees and disbursements of counsel (including
expert
witness and other consultants’ fees and costs) relating to or arising out of
(a) the Proceeding (whether or not the Proceeding results in a judgment)
and (b) any post-judgment or post-award Proceeding including, without
limitation, one to enforce or collect any judgment or award resulting
from any
Proceeding. All such judgments and awards shall contain a specific
provision for the recovery of all such subsequently incurred costs,
expenses,
fees and disbursements of counsel.
(h) Counterparts.
This Agreement may be executed in one or more counterparts (including
by
facsimile), each of which shall be deemed to be an original, but
all of which
shall constitute one and the same instrument.
(i) Notices.
All notices, requests, instructions and other communications to be
given
hereunder shall be in writing and shall be deemed given if personally
delivered,
telecopied (with confirmation) or mailed by registered or certified
mail,
postage prepaid (return receipt requested), to such party at its
address set
forth below or such other address as such party may specify to the
other party
by notice:
If
to
USEG:
U.S.
Energy Corp.
877
N.
8th
W.
Riverton,
Wyoming 82501
Attention:
Keith G. Larsen and Steve Youngbauer
Fax
307.857.3050
With
copy
(which shall not constitute notice) to:
Stephen
E. Rounds, Attorney
1544
York
Street, Suite 110
Denver,
Colorado 80206
Fax
303.377.0231
If
to
Crested:
Crested
Corp.
877
N.
8th
W.
Riverton,
Wyoming 82501
Attention:
Harold F. Herron and Steve Youngbauer
Fax
307.857.3050
With
copy
(which shall not constitute notice) to:
Davis
Graham & Stubbs, LLP
1550
17th
Street,
Suite 500
Denver,
Colorado 80202
Attention:
Scot W. Anderson
Fax
303.893.1379
If
to an
Individual Shareholder, to the address on the signature page
(j) Advice
of Counsel. Each Individual shareholder acknowledges that he or
she has had the opportunity to seek the advice of independent legal
counsel, and
has read and understood all of this Agreement. This Agreement shall
not be construed against any party by reason of the drafting
hereof.
[remainder
of page intentionally left blank]
IN
WITNESS WHEREOF, the parties execute this Agreement to be effective
as of the
date first above written.
|
|
|
|
Existing
Shares
|
Crested
Corp.
|
|
|
|
|
|
|
|
|
/s/
Harold F. Herron |
|
|
|
|
Harold
F. Herron, Co-Chairman
|
|
|
|
|
|
|
U.S.
Energy Corp.
|
|
|
12,024,733
|
|
|
|
|
|
/s/
Keith G. Larsen |
|
|
|
|
Keith
G. Larsen, Chairman, CEO
|
|
|
|
|
|
|
|
|
|
|
|
Plateau
Resources, Ltd.
|
|
60,000
|
|
|
|
|
|
/s/
Harold F. Herron |
|
|
|
|
Harold
F. Herron, President
|
|
|
|
|
|
|
|
|
|
|
|
|
Sutter
Gold Mining, Inc.
|
|
100,000
|
|
|
|
|
|
/s/
Harold F. Herron |
|
|
|
|
Harold
F. Herron, President
|
|
|
Individual
Shareholders*
|
|
|
|
|
|
|
|
|
|
|
Option
Shares for which
|
|
|
|
|
Existing
Shares
|
|
USEG
Shares will be issued
|
|
|
|
|
|
|
|
/s/
Daniel P. Svilar |
|
|
|
147,850
|
|
200,000
|
Daniel
P. Svilar
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Robert Scott Lorimer |
|
|
|
15,000
|
|
200,000
|
Robert
Scott Lorimer
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Harold F. Herron |
|
|
|
3,466
|
|
200,000
|
Harold
F. Herron
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Keith G. Larsen |
|
|
|
-
|
|
200,000
|
Keith
G. Larsen
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Mark J. Larsen |
|
|
|
|
|
200,000
|
Mark
J. Larsen
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
Donald
A. Anderson
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Michael T. Anderson |
|
|
|
|
|
30,000
|
Michael
T. Anderson
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Michael H. Feinstein |
|
|
|
|
|
30,000
|
Michael
H. Feinstein
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
H. Russell Fraser |
|
|
|
|
|
30,000
|
H.
Russell Fraser
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Steven R. Youngbauer |
|
|
|
|
|
50,000
|
Steven
R. Youngbauer
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Kathleen Martin |
|
|
|
41,722
|
|
|
Kathleen
Martin
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Michael Zwickl |
|
|
|
14,203
|
|
|
Michael
Zwickl
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Notice for each individual shareholder will be delivered
to the USEG
address.
|
OPINION
OF NEIDIGER, TUCKER, BRUNER, INC.
October
12, 2007
The
Special Committee of the Board of Directors
Crested
Corp.
877
North
8th
West
Riverton,
WY 82501
To
the
Special Committee of the Board of Directors,
Crested
Corp., a Colorado corporation (“Crested” or the “CBAG”) has agreed to a merger
transaction (the “Transaction”) whereby U.S. Energy Corp., a Wyoming Corporation
(“USE”) will acquire all shares of Crested not currently owned by USE
(approximately 4,982,984 shares, or 29%). Upon completion of the
Transaction and with the exception of the Crested Common Stock
currently held by
USE, every two issued and outstanding shares of Crested Common
Stock and Crested
Common Stock issued on exercise of Crested Stock Options shall
be converted into
the right to receive one validly issued fully paid and non-assessable
share of
USE Common Stock. The Transaction is subject to a Definitive
Agreement and Plan of Merger (the “Agreement”) being executed and the terms and
conditions therein.
The
Special Committee of the Board of Directors of Crested requested
that Neidiger,
Tucker, Bruner, Inc. (“NTB”) render its opinion (the “Opinion”) as to the
fairness of the Transaction from a financial point of view, to
the shareholders
of Crested excluding USE. On January 22, 2007, NTB expressed its
opinion that the Transaction contemplated was fair and reasonable
from a
financial point of view to the shareholders of Crested excluding
USE. The Special Committee of the Board of Directors of Crested has
requested that NTB provide an update to its opinion dated January
22,
2007.
In
connection with our examination, we have among other
things:
·
|
Reviewed
Crested and USE audited financial statements and annual
10-K filings with
the Securities and Exchange Commission for the fiscal years
ended December
31, 2003, December 31, 2004 December 31, 2005 and December
31,
2006.
|
·
|
Reviewed
Crested and USE unaudited financial statements and quarterly
10-Q filings
with the Securities and Exchange Commission for the quarters
ended March
31, 2006, June 30, 2006, September 30, 2006 March 31, 2007
and June 30,
2007.
|
The
Special Committee of the Board of Directors
October
12, 2007
Page
2
·
|
Conducted
discussions with certain members of management of Crested
and
USE.
|
·
|
Reviewed
the Preliminary Analysis Presentation to USE prepared
by Navigant Capital
Advisors, LLC dated November 28, 2006 and revised November
30,
2006. Reviewed the Fairness Analysis presented to USE by
Navigant Capital Advisors, LLC dated October 12,
2007.
|
·
|
Reviewed
the list of outstanding employee stock options and warrants
issued by
Crested and USE as provided by
management.
|
·
|
Reviewed
the terms of many recent mergers and acquisitions of
companies in the
sector and otherwise and premiums paid in acquisitions
of a diverse set of
companies.
|
·
|
Reviewed
the historical market prices and trading activity for
the publicly traded
securities of Crested and USE.
|
·
|
Reviewed
the financial condition and past operating results of
Crested and
USE.
|
·
|
Reviewed
the Merger Agreement dated January 23, 2007 and the First
Amendment to
Agreement and Plan of Merger dated July 31, 2007 by and
among U.S. Energy
Corp. and Crested Corp.
|
·
|
Reviewed
other publicly available information for both Crested
Corp. and
USE.
|
·
|
Conducted
such other studies and analyses as we have deemed
appropriate.
|
In
rendering our Opinion, we have relied on the accuracy and completeness
of the
financial and other information provided to us by the Company,
and the
information provided by the Company’s management and has made no independent
verification of such information.
Neidiger,
Tucker, Bruner, Inc., as part of its investment banking service,
is regularly
engaged in the valuation of businesses, securities and assets in
connection with
mergers,
The
Special Committee of the Board of Directors
October
12, 2007
Page
3
acquisitions,
underwritings, sales and distribution of securities, private placements
and
valuations for estate, corporate and other purposes.
Based
on
the foregoing and such other factors, as we deem relevant, we are
of the opinion
that the Transaction contemplated whereby USE will acquire all
minority shares
of Crested using an exchange ratio of two (2) Crested shares for
one (1) share
of USE is fair and reasonable from a financial point of view to
the shareholders
of Crested excluding USE. We hereby give our expressed permission for
Crested and/or USE to include this letter in their filings with
the Securities
and Exchange Commission.
Sincerely,
NEIDIGER,TUCKER,BRUNER,
INC.
/s/
Anthony B. Petrelli
Anthony
B. Petrelli
Senior
Vice President
ABP:bGw
APPENDIX
D
OPINION
OF NAVIGANT CAPITAL ADVISORS, LLC
October
12, 2007
The
Board
of Directors
U.S.
Energy Corp.
877
North
8th
West
Riverton,
WY 82501
Gentlemen:
We
understand that U.S. Energy Corp., a Wyoming corporation (“Parent”),
owns approximately 71% of the outstanding common stock of Crested
Corp., a
Colorado corporation (“Crested”). We also understand that
Parent and Crested have entered into an Agreement and Plan of
Merger dated as of
January 23, 2007, as amended by a First Amendment dated as of
July 31, 2007
(collectively, the “Merger Agreement”), which provides that Crested
will merge with and into Parent with Parent as the surviving
corporation (the
“Merger”), and that in the Merger each two issued and outstanding
shares of Crested common stock not held by Parent will be converted into
the right to receive one share of Parent common stock (the “Exchange
Ratio”).
You
have
requested our opinion (the “Opinion”) as to the fairness, from a
financial point of view, to the common stockholders of Parent
of the Exchange
Ratio.
In
connection with this Opinion, we have made such reviews, analyses
and inquiries
as we have deemed necessary and appropriate under the
circumstances. Among other things, we have:
1.
|
Reviewed
Parent’s and Crested’s audited financial statements included in their
respective Annual Reports on Securities and Exchange
Commission
(“SEC”) Form 10-K for the fiscal years ended December
31, 2002
through 2006 and their respective unaudited financial
statements included
in their respective Quarterly Reports on SEC Form 10-Q
for the six months
ended June 30, 2007, together with in each case the
related Management’s
Discussion and Analysis of Financial Condition and
Results of Operations
included in the Report;
|
2.
|
Reviewed
the Merger Agreement, including (a) Section 1.5 providing
for the
conversion of Crested common stock into the right to
receive Parent common
stock based on the Exchange Ratio and (b) Section 1.6
providing for the
cashless exercise at the effective time of the Merger
of options to
purchase Crested common stock outstanding under Crested’s Incentive Stock
Option Plan and the conversion of such shares of Crested
common stock into
shares of Parent common stock based on the Exchange
Ratio;
|
3.
|
Reviewed
the Voting Agreement dated January 23, 2007 between
Parent, Crested and
certain stockholders of Crested;
|
4.
|
Reviewed
certain internal financial and other data concerning
the operations,
financial condition and financial forecasts relating
to the business,
earnings, cash flow, assets, liabilities and prospects
of Parent and
Crested prepared by management of
Parent;
|
5.
|
Conducted
discussions with members of management of Parent concerning
the matters
described in subparagraphs 1, 2, 3 and 4
above;
|
6.
|
Visited
certain facilities and business offices of Parent and
Crested;
|
7.
|
Visited
certain of Parent’s and Crested’s
properties;
|
8.
|
Reviewed
the executed Exploration, Development and Mine Operating
Agreement between
U.S. Moly, Parent, Crested, and Kobex Resources Ltd.
dated April 3,
2007;
|
9.
|
Reviewed
the executed Joint Venture Agreement by and between
Parent and Crested
dated August 1, 1981 and subsequent amendment dated
January 20,
1989;
|
10.
|
Reviewed
the list of outstanding employee stock options and
warrants issued by
Parent and Crested as provided by
Parent;
|
11.
|
Evaluated
net asset approaches for Parent and Crested as stand-alone
entities;
|
12.
|
Reviewed
the terms of (i) recent mergers and acquisitions of
companies in the
sector and (ii) premiums paid in acquisitions of a
diverse set of
companies;
|
13.
|
Reviewed
the historical market prices, trading activity, and
valuation multiples
for Parent’s and Crested’s publicly traded securities and compared them
with those of certain publicly traded companies;
and
|
14.
|
Conducted
such other studies, analyses and inquiries as we have
deemed
appropriate.
|
In
preparing our Opinion, we have not independently verified the
accuracy and
completeness of the information supplied to us with respect to
Parent or Crested
and do not assume any responsibility with respect thereto, and
have further
relied upon the assurance of management of Parent that it is
not aware of any
facts that will make such information inaccurate or misleading
in any respect
material to our analysis. We have not made any physical inspection or
independent appraisal of any of the properties or assets of Parent,
nor have we
evaluated the solvency or fair value of Parent under any state
or federal laws
relating to bankruptcy, insolvency, or similar matters. Our opinion
is necessarily based on business, economic, market and other
conditions as they
exist and can be evaluated by us at the date of this letter. With
respect to the financial forecast information furnished to or
discussed with us
by Parent, we have assumed that such information has been reasonably
prepared
and that it reflects the best currently available estimates and
judgment of
Parent’s management as to the expected future financial performance
of Parent
and Crested. For purposes of this Opinion, we have assumed that
Parent and Crested are not involved in any material transaction
other than the
Merger and those activities undertaken in the ordinary course
of
business.
This
Opinion only addresses the matters specifically addressed
hereby. Without limiting the foregoing, this Opinion does not
address: (i) matters that require legal, regulatory, accounting,
insurance, tax
or other professional advice; (ii) the underlying business decision
of Parent,
its security holders or any other party to proceed with or effect
the Merger;
(iii) the fairness of any portion or aspect of the Merger not
expressly
addressed in this Opinion; (iv) the fairness of any portion or
aspect of the
Merger to the holders of any class of securities, creditors or
other
constituencies of Parent, or any other party other than those
set forth in this
Opinion; (v) the relative merits of the Merger as compared to
any alternative
business strategies that might exist for Parent or the effect
of any other
transaction in which Parent or Crested might engage; (vi) the
tax or legal
consequences of the Merger to either Parent, its security holders,
or any other
party; (vii) the degree to which the amount and nature of the
compensation from
the Merger benefits any individual officers, directors, employees
or class of
such persons, relative to the benefits to the stockholders of
Parent; (viii) the
likely price at which Parent’s or Crested’s common stock will trade; or (ix)
matters relating to the exercise or conversion of options issued
pursuant to
Crested’s Incentive Stock Option Plan. We have not been engaged to
initiate any discussions with third parties with respect to a
possible
acquisition or any other alternative transaction or to negotiate
the terms of
the Merger, and we have not been asked to, and do not, offer
any opinion as to
the material terms of the Merger Agreement or the form of the
Merger.
We
have
assumed that the Merger will be consummated on the terms and
conditions
described in the Merger Agreement reviewed by us, without material
delay,
waiver, amendment or modification of any material term, condition
or agreement
therein, and that the definitive Merger Agreement will not differ
in any
material respect from the draft reviewed.
It
should
be understood that subsequent developments may affect the conclusions
expressed
in this Opinion if this Opinion were rendered as of a later date,
and we
disclaim any obligation to advise any person of any change in
any manner
affecting this Opinion that may come to our attention after the
date of this
Opinion.
Based
upon the foregoing, and in reliance thereon, it is our opinion
that the Exchange
Ratio is fair, from a financial point of view, to the holders
of Parent’s common
stock.
This
letter is not to be quoted or referred to, in whole or in part,
in any
registration statement, prospectus or proxy statement, or in
any other document
used in connection with the offer or sale of securities, nor
shall this letter
be used for any other purposes, without our prior written consent;
provided,
that we consent to a description of and the inclusion of the
text of this
Opinion in any filing required to be made by Parent with the
SEC in connection
with the Merger and in materials delivered to Crested’s stockholders that are a
part of such filings, provided that any such description shall
or inclusion
shall be subject to our prior review and approval.
We
will
receive a fee from Parent for this Opinion, no portion of which
is contingent
upon the consummation of the Merger or the conclusions reached
in this
Opinion. In addition, Parent has agreed to indemnify us for certain
liabilities arising out of our engagement.
Our
Opinion is furnished solely for your benefit and may not be relied
upon by any
other person without our express, prior written consent. Our Opinion
is delivered to each recipient subject to the conditions, scope
of engagement,
limitations and understandings set forth in this Opinion and
our retainer
agreement, and subject to the understanding that our obligations
in connection
with this Opinion are solely corporate obligations, and no officer,
director,
employee, agent, shareholder or controlling person of ours shall
be subjected to
any personal liability whatsoever to any person, nor will any
such claim be
asserted by or on behalf of you or your affiliates.
NAVIGANT
CAPITAL ADVISORS, LLC
APPENDIX
E
ARTICLE
113 OF THE COLORADO BUSINESS CORPORATION ACT
-
DISSENTERS’ RIGHTS
ARTICLE 113
DISSENTERS’
RIGHTS
UNDER
THE COLORADO BUSINESS CORPORATION ACT
Part 1
Right
of Dissent—Payment for Shares
§ 7-113-101. Definitions.
|
For
purposes of this article:
|
|
(1)
|
“Beneficial
shareholder” means the beneficial owner of shares held in a voting trust
or by a nominee as the record
shareholder.
|
|
(2)
|
“Corporation”
means the issuer of the shares held by a dissenter before
the corporate
action, or the surviving or acquiring domestic or foreign
corporation, by
merger or share exchange of that
issuer.
|
|
(3)
|
“Dissenter”
means a shareholder who is entitled to dissent from corporate
action under
§ 7-113-102 and who exercises that right at the time and
in the
manner required by Part 2 of this
article.
|
|
(4)
|
“Fair
value,” with respect to a dissenter’s shares, means the value of the
shares immediately before the effective date of the corporate
action to
which the dissenter objects, excluding any appreciation
or depreciation in
anticipation of the corporate action except to the extent
that exclusion
would be inequitable.
|
|
(5)
|
“Interest”
means interest from the effective date of the corporate
action until the
date of payment, at the average rate currently paid by
the corporation on
its principal bank loans or, if none, at the legal rate
as specified in
C.R.S. § 5-12-101.
|
|
(6)
|
“Record
shareholder” means the person in whose name shares are registered in
the
records of a corporation or the beneficial owner of shares
that are
registered in the name of a nominee to the extent such
owner is recognized
by the corporation as the shareholder as provided in
§ 7-107-204.
|
|
(7)
|
“Shareholder”
means either a record shareholder or a beneficial
shareholder.
|
§ 7-113-102. Right
to dissent.
|
(1)
|
A
shareholder, whether or not entitled to vote, is entitled
to dissent and
obtain payment of the fair value of the shareholder’s shares in the event
of any of the following corporate
actions:
|
|
(a)
|
Consummation
of a plan of merger to which the corporation is a party
if:
|
|
(I)
|
Approval
by the shareholders of that corporation is required for
the merger by
§§ 7-111-103 or 7-111-104 or by the articles of incorporation;
or
|
|
(II)
|
The
corporation is a subsidiary that is merged with its parent
corporation
under § 7-111-104;
|
|
(b)
|
Consummation
of a plan of share exchange to which the corporation is
a party as the
corporation whose shares will be
acquired;
|
|
(c)
|
Consummation
of a sale, lease, exchange, or other disposition of all,
or substantially
all, of the property of the corporation for which a shareholder
vote is
required under § 7-112-102(1);
and
|
|
(d)
|
Consummation
of a sale, lease, exchange, or other disposition of all,
or substantially
all, of the property of an entity controlled by the corporation
if the
shareholders of the corporation were entitled to vote upon
the consent of
the corporation to the disposition pursuant to
§ 7-112-102(2).
|
|
(1.3)
|
A
shareholder is not entitled to dissent and obtain payment,
under
subsection (1) of this section, of the fair value of the shares of
any class or series of shares which either were listed
on a national
securities exchange registered under the federal “Securities Exchange Act
of 1934”, as amended, or on the national market system of the national
association of securities dealers automated quotation system,
or were held
of record by more than two thousand shareholders, at the
time
of:
|
|
(a)
|
The
record date fixed under § 7-107-107 to determine the shareholders
entitled to receive notice of the shareholders’ meeting at which the
corporate action is submitted to a
vote;
|
|
(b)
|
The
record date fixed under § 7-107-104 to determine shareholders
entitled to sign writings consenting to the corporate action;
or
|
|
(c)
|
The
effective date of the corporate action if the corporate
action is
authorized other than by a vote of
shareholders.
|
|
(1.8)
|
The
limitation set forth in subsection (1.3) of this section shall not
apply if the shareholder will receive for the shareholder’s shares,
pursuant to the corporate action, anything
except:
|
|
(a)
|
Shares
of the corporation surviving the consummation of the plan
of merger or
share exchange;
|
|
(b)
|
Shares
of any other corporation which at the effective date of
the plan of merger
or share exchange either will be listed on a national securities
exchange
registered under the federal “Securities Exchange Act of 1934”, as
amended, or on the national market system of the national
association of
securities dealers automated quotation system, or will
be held of record
by more than two thousand
shareholders;
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|
(c)
|
Cash
in lieu of fractional shares; or
|
|
(d)
|
Any
combination of the foregoing described shares or cash in
lieu of
fractional shares.
|
|
(2)
|
(Deleted
by amendment, L. 96, p. 1321, § 30, effective June 1,
1996.)
|
|
(2.5)
|
A
shareholder, whether or not entitled to vote, is entitled
to dissent and
obtain payment of the fair value of the shareholder’s shares in the event
of a reverse split that reduces the number of shares owned
by the
shareholder to a fraction of a share or to scrip if the
fractional share
or scrip so created is to be acquired for cash or the scrip
is to be
voided under § 7-106-104.
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|
(3)
|
A
shareholder is entitled to dissent and obtain payment of
the fair value of
the shareholder’s shares in the event of any corporate action to the
extent provided by the bylaws or a resolution of the board
of
directors.
|
|
(4)
|
A
shareholder entitled to dissent and obtain payment for
the shareholder’s
shares under this article may not challenge the corporate
action creating
such entitlement unless the action is unlawful or fraudulent
with respect
to the shareholder or the
corporation.
|
§ 7-113-103. Dissent
by nominees and beneficial owners.
|
(1)
|
A
record shareholder may assert dissenters’ rights as to fewer than all the
shares registered in the record shareholder’s name only if the record
shareholder dissents with respect to all shares beneficially
owned by any
one person and causes the corporation to receive written
notice which
states such dissent and the name, address, and federal
taxpayer
identification number, if any, of each person on whose
behalf the record
shareholder asserts dissenters’ rights. The rights of a record
shareholder under this subsection (1) are determined as if the shares
as to which the record shareholder dissents and the other
shares of the
record shareholder were registered in the names of different
shareholders.
|
|
(2)
|
A
beneficial shareholder may assert dissenters’ rights as to the shares held
on the beneficial shareholder’s behalf only
if:
|
|
(a)
|
The
beneficial shareholder causes the corporation to receive
the record
shareholder’s written consent to the dissent not later than the time
the
beneficial shareholder asserts dissenters’ rights;
and
|
|
(b)
|
The
beneficial shareholder dissents with respect to all shares
beneficially
owned by the beneficial
shareholder.
|
|
(3)
|
The
corporation may require that, when a record shareholder
dissents with
respect to the shares held by any one or more beneficial
shareholders,
each such beneficial shareholder must certify to the corporation
that the
beneficial shareholder and the record shareholder or record
shareholders
of all shares owned beneficially by the beneficial shareholder
have
asserted, or will timely assert, dissenters’ rights as to all such shares
as to which there is no limitation on the ability to exercise
dissenters’
rights. Any such requirement shall be stated in the dissenters’
notice given pursuant to
§ 7-113-203.
|
Part 2
Procedure
for Exercise of Dissenters’ Rights
§ 7-113-201. Notice
of dissenters’ rights.
|
(1)
|
If
a proposed corporate action creating dissenters’ rights under
§ 7-113-102 is submitted to a vote at a shareholders’ meeting, the
notice of the meeting shall be given to all shareholders,
whether or not
entitled to vote. The notice shall state that shareholders
are or may be
entitled to assert dissenters’ rights under this article and shall be
accompanied by a copy of this article and the materials,
if any, that,
under Articles 101 to 117 of this title, are required to be given to
shareholders entitled to vote on the proposed action at
the
meeting. Failure to give notice as provided by this
subsection (1) shall not affect any action taken at the shareholders’
meeting for which the notice was to have been given, but
any shareholder
who was entitled to dissent but who was not given such
notice shall not be
precluded from demanding payment for the shareholder’s shares under this
article by reason of the shareholder’s failure to comply with the
provisions of § 7-113-202(1).
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|
(2)
|
If
a proposed corporate action creating dissenters’ rights under
§ 7-113-102 is authorized without a meeting of shareholders
pursuant
to § 7-107-104, any written or oral solicitation of a shareholder
to
execute a writing consenting to such action contemplated
in
§ 7-107-104 shall be accompanied or preceded by a written
notice
stating that shareholders are or may be entitled to assert
dissenters’
rights under this article, by a copy of this article, and
by the
materials, if any, that, under Articles 101 to 117 of this title,
would have been required to be given to shareholders entitled
to vote on
the proposed action if the proposed action were submitted
to a vote at a
shareholders’ meeting. Failure to give notice as provided by
this subsection (2) shall not affect any action taken pursuant to
§ 7-107-104 for which the notice was to have been given,
but any
shareholder who was entitled to dissent but who was not
given such notice
shall not be precluded from demanding payment for the shareholder’s shares
under this article by reason of the shareholder’s failure to comply with
the provisions of
§ 7-113-202(2).
|
§ 7-113-202. Notice
of intent to demand payment.
|
(1)
|
If
a proposed corporate action creating dissenters’ rights under
§ 7-113-102 is submitted to a vote at a shareholders’ meeting and if
notice of dissenters’ rights has been given to such shareholder in
connection with the action pursuant to § 7-113-201(1), a shareholder
who wishes to assert dissenters’ rights
shall:
|
|
(a)
|
Cause
the corporation to receive, before the vote is taken, written
notice of
the shareholder’s intention to demand payment for the shareholder’s shares
if the proposed corporate action is effectuated;
and
|
|
(b)
|
Not
vote the shares in favor of the proposed corporate
action.
|
|
(2)
|
If
a proposed corporate action creating dissenters’ rights under
§ 7-113-102 is authorized without a meeting of shareholders
pursuant
to § 7-107-104 and if notice of dissenters’ rights has been given to
such shareholder in connection with the action pursuant
to
§ 7-113-201(2) a shareholder who wishes to assert dissenters’ rights
shall not execute a writing consenting to the proposed
corporate
action.
|
|
(3)
|
A
shareholder who does not satisfy the requirements of subsections (1)
or (2) of this section is not entitled to demand payment
for the
shareholder’s shares under this
article.
|
§ 7-113-203. Dissenters’
notice.
|
(1)
|
If
a proposed corporate action creating dissenters’ rights under
§ 7-113-102 is authorized, the corporation shall give a written
dissenters’ notice to all shareholders who are entitled to demand payment
for their shares under this
article.
|
|
(2)
|
The
dissenters’ notice required by subsection (1) of this section shall
be given no later than ten days after the effective date
of the corporate
action creating dissenters’ rights under § 7-113-102 and
shall:
|
|
(a)
|
State
that the corporate action was authorized and state the
effective date or
proposed effective date of the corporate
action;
|
|
(b)
|
State
an address at which the corporation will receive payment
demands and the
address of a place where certificates for certificated
shares must be
deposited;
|
|
(c)
|
Inform
holders of uncertificated shares to what extent transfer
of the shares
will be restricted after the payment demand is
received;
|
|
(d)
|
Supply
a form for demanding payment, which form shall request
a dissenter to
state an address to which payment is to be
made;
|
|
(e)
|
Set
the date by which the corporation must receive the payment
demand and
certificates for certificated shares, which date shall
not be less than
thirty days after the date the notice required by subsection (1) of
this section is given;
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|
(f)
|
State
the requirement contemplated in § 7-113-103(3), if such requirement
is imposed; and
|
|
(g)
|
Be
accompanied by a copy of this
article.
|
§ 7-113-204. Procedure
to demand payment.
|
(1)
|
A
shareholder who is given a dissenters’ notice pursuant to § 7-113-203
and who wishes to assert dissenters’ rights shall, in accordance with the
terms of the dissenters’ notice:
|
|
(a)
|
Cause
the corporation to receive a payment demand, which may
be the payment
demand form contemplated in § 7-113-203(2)(d), duly completed, or may
be stated in another writing; and
|
|
(b)
|
Deposit
the shareholder’s certificates for certificated
shares.
|
|
(2)
|
A
shareholder who demands payment in accordance with subsection (1) of
this section retains all rights of a shareholder, except
the right to
transfer the shares, until the effective date of the proposed
corporate
action giving rise to the shareholder’s exercise of dissenters’ rights and
has only the right to receive payment for the shares after
the effective
date of such corporate action.
|
|
(3)
|
Except
as provided in §§ 7-113-207 or 7-113-209(1)(b), the demand for
payment and deposit of certificates are
irrevocable.
|
|
(4)
|
A
shareholder who does not demand payment and deposit the
shareholder’s
share certificates as required by the date or dates set
in the dissenters’
notice is not entitled to payment for the shares under
this
article.
|
§ 7-113-205. Uncertificated
shares.
|
(1)
|
Upon
receipt of a demand for payment under § 7-113-204 from a shareholder
holding uncertificated shares, and in lieu of the deposit
of certificates
representing the shares, the corporation may restrict the
transfer
thereof.
|
|
(2)
|
In
all other respects, the provisions of § 7-113-204 shall be applicable
to shareholders who own uncertificated
shares.
|
§ 7-113-206. Payment.
|
(1)
|
Except
as provided in § 7-113-208, upon the effective date of the corporate
action creating dissenters’ rights under § 7-113-102 or upon receipt
of a payment demand pursuant to § 7-113-204, whichever is later, the
corporation shall pay each dissenter who complied with
§ 7-113-204,
at the address stated in the payment demand, or if no such
address is
stated in the payment demand, at the address shown on the
corporation’s
current record of shareholders for the record shareholder
holding the
dissenter’s shares, the amount the corporation estimates to be the
fair
value of the dissenter’s shares, plus accrued
interest.
|
|
(2)
|
The
payment made pursuant to subsection (1) of this section shall be
accompanied by:
|
|
(a)
|
The
corporation’s balance sheet as of the end of its most recent fiscal
year
or, if that is not available, the corporation’s balance sheet as of the
end of a fiscal year ending not more than sixteen months
before the date
of payment, an income statement for that year, and, if
the corporation
customarily provides such statements to shareholders, a
statement of
changes in shareholders’ equity for that year and a statement of cash flow
for that year, which balance sheet and statements shall
have been audited
if the corporation customarily provides audited financial
statements to
shareholders, as well as the latest available financial
statements, if
any, for the interim or full-year period, which financial
statements need
not be audited;
|
|
(b)
|
A
statement of the corporation’s estimate of the fair value of the
shares;
|
|
(c)
|
An
explanation of how the interest was
calculated;
|
|
(d)
|
A
statement of the dissenter’s right to demand payment under
§ 7-113-209; and
|
|
(e)
|
A
copy of this article.
|
§ 7-113-207. Failure
to take action.
|
(1)
|
If
the effective date of the corporate action creating dissenters’ rights
under § 7-113-102 does not occur within sixty days after the date
set
by the corporation by which the corporation must receive
the payment
demand as provided in § 7-113-203, the corporation shall return the
deposited certificates and release the transfer restrictions
imposed on
uncertificated shares.
|
|
(2)
|
If
the effective date of the corporate action creating dissenters’ rights
under § 7-113-102 occurs more than sixty days after the date set
by
the corporation by which the corporation must receive the
payment demand
as provided in § 7-113-203, then the corporation shall send a new
dissenters’ notice, as provided in § 7-113-203, and the provisions of
§§ 7-113-204 to 7-113-209 shall again be
applicable.
|
§ 7-113-208. Special
provisions relating to shares acquired after announcement of proposed
corporate
action.
|
(1)
|
The
corporation may, in or with the dissenters’ notice given pursuant to
§ 7-113-203, state the date of the first announcement to
news media
or to shareholders of the terms of the proposed corporate
action creating
dissenters’ rights under § 7-113-102 and state that the dissenter
shall certify in writing, in or with the dissenter’s payment demand under
§ 7-113-204, whether or not the dissenter (or the person
on whose
behalf dissenters’ rights are asserted) acquired beneficial ownership of
the shares before that date. With respect to any dissenter who
does not so certify in writing, in or with the payment
demand, that the
dissenter or the person on whose behalf the dissenter asserts
dissenters’
rights acquired beneficial ownership of the shares before
such date, the
corporation may, in lieu of making the payment provided
in
§ 7-113-206, offer to make such payment if the dissenter
agrees to
accept it in full satisfaction of the
demand.
|
|
(2)
|
An
offer to make payment under subsection (1) of this section shall
include or be accompanied by the information required by
§ 7-113-206(2).
|
§ 7-113-209. Procedure
if dissenter is dissatisfied with payment or offer.
|
(1)
|
A
dissenter may give notice to the corporation in writing
of the dissenter’s
estimate of the fair value of the dissenter’s shares and of the amount of
interest due and may demand payment of such estimate, less
any payment
made under § 7-113-206, or reject the corporation’s offer under
§ 7-113-208 and demand payment of the fair value of the shares
and
interest due, if:
|
|
(a)
|
The
dissenter believes that the amount paid under § 7-113-206 or offered
under § 7-113-208 is less than the fair value of the shares or
that
the interest due was incorrectly
calculated;
|
|
(b)
|
The
corporation fails to make payment under § 7-113-206 within sixty days
after the date set by the corporation by which the corporation
must
receive the payment demand; or
|
|
(c)
|
The
corporation does not return the deposited certificates
or release the
transfer restrictions imposed on uncertificated shares
as required by
§ 7-113-207(1).
|
|
(2)
|
A
dissenter waives the right to demand payment under this
section unless the
dissenter causes the corporation to receive the notice
required by
subsection (1) of this section within thirty days after the
corporation made or offered payment for the dissenter’s
shares.
|
Part 3
Judicial
Appraisal of Shares
§ 7-113-301. Court
action.
|
(1)
|
If
a demand for payment under § 7-113-209 remains unresolved, the
corporation may, within sixty days after receiving the
payment demand,
commence a proceeding and petition the court to determine
the fair value
of the shares and accrued interest. If the corporation does not
commence the proceeding within the sixty-day period, it
shall pay to each
dissenter whose demand remains unresolved the amount
demanded.
|
|
(2)
|
The
corporation shall commence the proceeding described in
subsection (1)
of this section in the district court for the county in
this state in
which the street address of the corporation’s principal office is located
or, if the corporation has no principal office in this
state, in the
district court for the county in which the street address
of its
registered agent is located or if the corporation has no
registered agent,
in the district court for the City and County of Denver. If the
corporation is a foreign corporation without a registered
agent, it shall
commence the proceeding in the county in which the domestic
corporation
merged into, or whose shares were acquired by, the foreign
corporation
would have commenced the action if that corporation were
subject to the
first sentence of this
subsection (2).
|
|
(3)
|
The
corporation shall make all dissenters, whether or not residents
of this
state, whose demands remain unresolved parties to the proceeding
commenced
under subsection (2) of this section as in an action against their
shares, and all parties shall be served with a copy of
the
petition. Service on each dissenter shall be by registered or
certified mail, to the address stated in such dissenter’s payment demand,
or if no such address is stated in the payment demand,
at the address
shown on the corporation’s current record of shareholders for the record
shareholder holding the dissenter’s shares, or as provided by
law.
|
|
(4)
|
The
jurisdiction of the court in which the proceeding is commenced
under
subsection (2) of this section is plenary and
exclusive. The court may appoint one or more persons as
appraisers to receive evidence and recommend a decision
on the question of
fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to such order. The
parties to the proceeding are entitled to the same discovery
rights as
parties in other civil proceedings.
|
|
(5)
|
Each
dissenter made a party to the proceeding commenced under
subsection (2) of this section is entitled to judgment for the
amount, if any, by which the court finds the fair value
of the dissenter’s
shares, plus interest, exceeds the amount paid by the corporation,
or for
the fair value, plus interest, of the dissenter’s shares for which the
corporation elected to withhold payment under
§ 7-113-208.
|
§ 7-113-302. Court
costs and counsel fees.
|
(1)
|
The
court in an appraisal proceeding commenced under § 7-113-301 shall
determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the
court. The court shall assess the costs against the
corporation; except that the court may assess costs against
all or some of
the dissenters, in amounts the court finds equitable, to
the extent the
court finds the dissenters acted arbitrarily, vexatiously,
or not in good
faith in demanding payment under
§ 7-113-209.
|
|
(2)
|
The
court may also assess the fees and expenses of counsel
and experts for the
respective parties, in amounts the court finds
equitable:
|
|
(a)
|
Against
the corporation and in favor of any dissenters if the court
finds the
corporation did not substantially comply with the requirements
of
Part 2 of this article; or
|
|
(b)
|
Against
either the corporation or one or more dissenters, in favor
of any other
party, if the court finds that the party against whom the
fees and
expenses are assessed acted arbitrarily, vexatiously, or
not in good faith
with respect to the rights provided by this
article.
|
|
(3)
|
If
the court finds that the services of counsel for any dissenter
were of
substantial benefit to other dissenters similarly situated,
and that the
fees for those services should not be assessed against
the corporation,
the court may award to said counsel reasonable fees to
be paid out of the
amounts awarded to the dissenters who were
benefited.
|