UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2003 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from June 1, 2002 to
December 31, 2002
| x | Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year Ended December 31, 2004 |
| |
| o | Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the |
| transition period from ___________ to ___________ |
Commission file number 000-6814
U.S. ENERGY CORP.
- --------------------------------------------------------------------------------
(Exact
U.S. ENERGY CORP. |
| (Exact Name of Company as Specified in its Charter) |
Wyoming | | 83-0205516 |
| (State or other jurisdiction of | | (I.R.S. Employer |
| incorporation or organization) | | Identification No.) |
| | |
877 North 8th West, Riverton, WY | | 82501 |
| (Address of principal executive offices) | | (Zip Code) |
| | |
| Registrant's telephone number, including area code: | | (307) 856-9271 |
Securities registered pursuant to Section 12(b) of the Act: None |
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value |
(Title of Registrant as Specified in its Charter)
Wyoming 83-0205516
- ----------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West
Riverton, WY 82501
- ----------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (307) 856-9271
--------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the RegistrantCompany was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X] xNO [ ]
o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-212b-2 of the Exchange Act).
YES [ ] oNO [X]
x
The aggregate market value of the shares of voting stock held by non-affiliates of the Registrant as of June 30, 2003,March 31, 2005, computed by reference to the average of the bid and asked prices of the Registrant's common stock as reported on Nasdaq Small Cap on that date, was $61,728,467.
Class Outstanding at March 24, 2004
- --------------------------------------- ------------------------------------
Common Stock, $0.01 par value 13,992,750 shares
$79,008,500.
| Class | | Outstanding at March 31, 2005 |
| Common stock, $.01 par value | | 16,264,465 Shares |
Documents incorporated by reference:reference: Portions of the documents listed below
- --------------------------------------- have been incorporated by reference into the indicated parts of this report as
specified in the responses to the referenced sections of this filing.
Proxy Statement for the Meeting of Shareholders to be held in June 2004,2005, into Part III of the filing.
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ].
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oDISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact included in this Report are forward-looking statements, including without limitation the statements under Management's Discussion and Analysis of Financial Condition and Results of Operations andOperations; the disclosures about Rocky Mountain Gas, Inc. ("RMG") and plans for developing its coalbed methane acreage. In
addition, whenever("CBM") acreage and its possible acquisition by a Canadian company; the disclosures about possible exploration and other programs for uranium and molybdenum properties; and the disclosures about Sutter Gold Mining Inc., formerly Globemin Resources Inc., and its plans for a gold property in Calif ornia. Whenever words like "expect," "anticipate" or "believe" are used, we are making forward-looking statements.
Although we believe that our forward-looking statements are reasonable, we don't know if our expectations will prove to be correct. Important future factors that could cause actual results to differ materially from expectations include: Domestic consumption rateswill depend on:
For CBM gas, whether current plans to merge RMG into (or sell its assets to) a Canadian company will be successfully completed. If those plans are successfully completed, U.S. Energy will hold an equity interest in an oil and market prices for natural gas;gas company with interest in CBM, but USE would not be directly involved in operations. If those plans are not successfully completed and RMG remains in the gas business, results of operations will depend on domestic gas prices; results of exploration drilling; the amounts of gas we will be able to produce from our coalbed methane properties;produce; the availability of permits to drill and operate coalbed methaneCBM wells; whether and when gas transmission lines will be built in reasonable proximity to the coalbed methane properties;properties being developed; and whether and on what terms the capital necessary to developcontinue holding and developing the properties can be obtained. obtai ned.
For the uranium properties, market prices for uranium oxide, whether and on what terms capital can be obtained to develop the properties (and for the uranium mill in Utah, refurbish and put the mill into operation); and the availability of permits to mine the properties, and for the Utah mill obtain an operating license.
For the gold properties held by Sutter Gold Mining Inc., formerly Globemin Resources Inc., whether certain permits can be obtained from the State of California, and whether and on what terms capital can be obtained for further exploration, mining and processing operations.
For the molybdenum property, that the Company expects to receive back from Phelps Dodge Corporation, the Colorado regulatory requirements which we will have to comply with to operate a water treatment plant on the properties, whether adequate water rights for mine development and operation will be obtained from Phelps Dodge or others, and whether permits and bonding for a mine can be obtained, and whether U. S. Energy Corp. and Crested Corp. can raise the necessary capital and/or enter into a joint venture or other arrangement with a third party to put the property into production.
The forward-looking statements should be carefully considered in the context of all the information set forth in this Annual Report.
PART I
ITEM
Item 1 AND ITEMand Item 2. BUSINESS AND PROPERTIES.
(A) GENERAL.
Business and Properties.
(a) General.
U.S. Energy Corp.
("USE") is a Wyoming corporation (formed in 1966) in the business of acquiring, exploring, developing and/or selling or leasing mineral properties.
In this Annual Report, "we," "Company" or "USE" refer to U.S. Energy
Corp. including subsidiaries unless otherwise specifically noted. Our fiscal
year ends December 31; this is the first full year of our new fiscal year (the
prior year ended May 31, and the last Annual Report was a transition report for
the seven months ended December 31, 2002 (filed April 1, 2003)).
In 2003, most of our business activity was devoted to the coalbed methane
("CBM") business, which is conducted through Rocky Mountain Gas, Inc ("RMG") a
subsidiary of the Company.
In 2003, RMG transferred certain of its CBM assets including a producing,
and several non-producing, CBM properties to Pinnacle Gas Resources, Inc.
("Pinnacle"), a newly-organized Delaware corporation. Other parties to this
transaction included CCBM, Inc. and its parent company Carrizo Oil & Gas, Inc.
("CRZO") of Houston Texas; and seven affiliates of Credit Suisse First Boston
Private Equity. As a result of the transaction, RMG became a 37.5% shareholder
of Pinnacle and RMG accounts for its investment on the equity method. RMG
recorded revenues from gas sales from mid-2002 until the transfer to Pinnacle
was completed in mid-2003. See "Transaction with Pinnacle Gas Resources, Inc."
On January 30, 2004, RMG acquired producing and non-producing CBM
properties located near Gillette, Wyoming, from Hi-Pro Production, LLC
("Hi-Pro"). These properties contain proven gas reserves. A portion of the
purchase price was paid with a loan from institutional lenders under a $25
million mezzanine lending facility, which was established in connection with the
Hi-Pro purchase; additional loans will be available to acquire more CBM
properties, subject to lenders' approval. In the first quarter of 2004, RMG
raised $1.8 million in working capital from institutional investors. See "Coal
Bed Methane - RMG Equity Financing."
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RMG's properties are located in Wyoming and southeastern Montana. As of the
filing date of this Annual Report, RMG holds approximately 264,300 gross
(128,200 net) mineral acres of CBM properties. A limited amount of exploratory
drilling and testing was conducted on some of the non-producing properties in
2003, but in general, significant additional work is needed before we can
determine if those properties contain gas reserves. No prediction is made when
such determinations can be made.
In 2003, the Company sold an indirect subsidiary (Canyon Resources) which
owns commercial properties in Ticaboo, Utah. Canyon Resources was acquired in
the 1990s from a utility as part of an acquisition of uranium properties and a
uranium mill near Ticaboo, Utah. See "Oil And Gas, and Other Properties." The
uranium properties and mill, presently inactive, have not been sold. See
"Inactive Mining Properties - Uranium."
Historically, gas prices for production in the Powder River Basin (our area
of activity) have been lower than national prices due to limited pipeline
"takeaway capacity." This limitation was somewhat eased in late 2002 and 2003 by
new pipeline construction and enlargement of existing lines, and will be further
improved with more capacity in 2005. For example, a new large pipeline is
planned to be in service in January 2005, running from the Cheyenne hub in
Cheyenne, Wyoming, to Kansas. See "Gas Markets."
However, on both historical and seasonal bases, gas prices have been
volatile. A return to low gas prices, particularly if aggravated by the negative
price differential experienced by Powder River Basin producers, could adversely
impact not only the economics of current production but also the economics of
exploration projects as they move into production in the future.
USE and Crested Corp. ("Crested") originally were independent companies, with two common affiliates (John L. Larsen and Max T. Evans; Mr. Evans died in February 2002). In 1980, USE and Crested formed a joint venture ("USECC") to do business together (unless one or the other elected not to pursue an individual project). As a result ofFrom time to time, USE funding certainhas funded many of Crested's obligations from timebecause Crested did not have the funds to time
(due to Crested's lack of cash on hand),pay its own obligations. Crested subsequentlyhas paid a portion of this debt by issuing common stock to USE. At December 31, 2004, Crested owed $9,650,900 to USE.
Historically, our business strategy has been, and will continue to be, acquiring grass roots and/or developed mineral properties when commodity prices are low (such as they have been in natural gas, gold, uranium and molybdenum), then operating, selling, leasing or joint venturing the properties, or selling the companies we set up to hold and explore or develop the properties to other companies in the mineral sector when prices are moving upward.
Typically, projects initially are acquired, financed and operated by USE and Crested becamein their joint venture (see below). 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 of this corporate strategy are, for gold properties, Sutter Gold Mining Inc. (formerly Globemin Resources Inc., a majority-ownedpublicly traded British Columbia company, which acquired Sutter Gold Mining Company, and then changed its name to Sutter Gold Mining Inc.); and Rocky Mountain Gas, Inc. for CBM. Additional subsidiaries may be organized in the future such as U.S. Uranium Ltd. for uranium and U.S. Moly Corp. for molybdenum. Initial ownership of these sub sidiaries is by USE and Crested, with additional stock (plus options) held by their officers, directors and employees.
In 2002 and 2003, USE's primary business focus was in the CBM business conducted through its subsidiary Rocky Mountain Gas, Inc. ("RMG"). In 2004 and into 2005, commodity prices for the minerals in all our properties (and for molybdenum, the property that we expect to receive back from Phelps Dodge Corporation) increased significantly. Accordingly, in 2004 and continuing into 2005, our business activity has been expanding to include the gold, uranium and molybdenum properties.
Principal executive offices of USE in fiscal 1993. In fiscal 2001,and Crested issued another
6,666,666 shares of its common stock to reduce Crested's debt owed to USE by
$3.0 million, which increased USE's ownership of Crested to 71.5%. All the
operations of USE (and Crested) are located in the United States.
Glen L. Larsen building at 877 North 8th West, Riverton, Wyoming 82501, telephone 307-856-9271. RMG has a field office in Gillette, Wyoming. Sutter Gold Mining Inc. has an office in Sutter Creek, California.
In this Annual Report, "we," "Company" or "USE" refer to U.S. Energy Corp. including Crested Corp. ("Crested") and other subsidiaries unless otherwise specifically noted. The Company's fiscal year ends December 31.
Capital Activities in 2004 and First Quarter 2005.
USE
$350,000 Equity - 2004.In the first quarter 2004, USEwe obtained $350,000 of equity funding from an accredited investor (100,000 restricted shares of USE common stock, three year warrants to purchase 50,000 shares of USE common stock, at $3.00 per share; and five year warrants to purchase 200,000 shares at $3.00 per share).
$3,000,000 Loan - 2004. In the third quarter 2004, we borrowed $3,000,000 from Geddes and Company of Phoenix, Arizona. The loan matures on July 30, 2006, bears 10% annual interest, and is secured principally by RMG's CBM properties in the Castle Rock prospect and 4,000,000 shares of RMG stock held by USE. The loan may be prepaid in cash without penalty, but the lender at any time may convert loan principal to RMG common stock at $3.00 per share on the first $1,500,000 converted; and at $3.25, $3.50 and $3.75 per share for each additional $500,000 converted. In connection with the loan, RMG issued to the lender five year warrants to buy 600,000 shares of common stock of RMG: $3.00 per share for 300,000 sha res; and $3.25, $3.50 and $3.75 per share for 100,000 shares at each price.
$4,720,000 Loan - First Quarter 2005. On February 9, 2005, we borrowed $4,000,000 from seven accredited investors, issuing $4,720,000 face amount of debentures (including three years of annual interest at 6%). Net proceeds to USE were $3,700,000 after paying a commission and lenders' legal costs.
The debentures are unsecured; the face amount of the debentures are payable every six months from February 4, 2005, in five installments of 20%, in cash or in restricted common stock of USE. USE may pay this amortization payment in cash or in stock at the lower of $2.43 per share (the “set price”) or 90% of the volume weighted average price of USE’s stock for the 90 trading days prior to the repayment date. The set price was determined on the formula of 90% of the volume weighted average price of the stock over the 90 trading days prior to February 4, 2005. The debentures are convertible to restricted common stock of USE at the set price.
At any time, USE has the right to redeem some or all of the debentures in cash or stock, in an amount equal to 120% of the face amount of the debentures until February 4, 2006; 115% from February 5, 2006 to February 4, 2007; and 110% from February 5, 2007 until maturity. Payment in stock would be at the set price. The holders may convert the debentures to stock even if USE should seek to redeem in cash.
If at any time, after registration for public resale of the conversion shares have been approved, USE’s stock trades at more than 150% of the set price for 20 consecutive trading days, USE may convert the balance of the face amount of the debentures at the set price.
In the event of default, the investors may require payment (i) in cash equal to 130% of the then outstanding face amount; or (ii) in stock equal to 100% of face amount, with the stock priced at the set price, or (iii) in stock equal to 130% of the face amount, with the stock priced at 100% of the volume weighted average price of USE’s stock for the 90 trading days prior to default.
The preceding is a summary of the principal terms of the debentures. The form of debenture is filed as an exhibit to this Annual Report.
USE issued warrants to the investors, expiring February 4, 2008, to purchase 971,195 shares of restricted common stock, at $3.63 per share (equal to 110% of the Nasdaq closing price on February 3, 2005). The number of shares underlying the warrants equals 50% of the shares issuable on full conversion of the debentures at the set price (as if the debentures were so converted on February 4, 2005).
Warrants to purchase 100,000 shares, at the same price and for the same term as the warrants issued to the investors, have been issued to HPC Capital Management (a registered broker-dealer) as compensation (in addition to a 7% cash commission) for its services in connection with the transaction.
If in any period of 20 consecutive trading days (after registration has been approved) USE’s stock price exceeds 200% of the warrants’ exercise price, on each of the trading days, all of the warrants will expire on the 30th day after USE sends a call notice to the warrant holders.
USE has agreed to file with the Securities and Exchange Commission a registration statement to cover the future public sale of shares issuable in payment and/or conversion of the debentures, and the shares issuable on exercise of the warrants. The registration statement also will cover the future sale by HPC Capital Management of the shares issuable on exercise of the warrants issued to HPC.
RMG
Preferred Stock - 2004. In the first quarter 2004, RMG raised $1,800,000 of equity financing from the sale of shares of Series A Preferred Stock in RMG, and warrants to purchase shares of common stock of USE, to institutional investors. Proceeds will bewere used asto pay part of the Hi-Pro acquisition price, and for RMG working capital. Principal executive officesTerms of the securities:
1.600,000 shares of Series A Preferred Stock at $3.00 per share, 10% cumulative annual dividend payable at RMG's election in cash or shares of common stock of RMG (at $3.00 per share) or shares of common stock of USE (at 90% of USE's volume weighted average price for the five days, referred to as the "set price"). The Series A Preferred Stock was convertible at the holder's election into shares of common stock of RMG, at $3.00 per share, or shares of common stock of USE at the set price, until February 2006.
2.Warrants to purchase 150,000 shares of common stock of USE, at the set price.
As of March 3, 2005, all Series A Preferred Stock including dividends has been converted to and paid with USE common stock (894,299 shares), and all warrants have been exercised (150,000 shares of USE common stock).
Purchase of the Hi-Pro Production, LLC ("Hi-Pro") Properties. In 2004, RMG organized a wholly-owned subsidiary RMG I, LLC for the purchase of producing and non-producing CBM properties (the "Hi-Pro properties) near Gillette, Wyoming. RMG and USE participated in raising equity capital and mezzanine financing for this transaction.
Agreement for Acquisition of RMG by with Enterra Energy Trust.As of April 11, 2005, RMG entered into a binding agreement with Enterra Energy Trust ("Enterra," listed on the Toronto Stock Exchange and the Nasdaq National Market), for the acquisition of RMG by Enterra for cash and Enterra units. Enterra would acquire RMG including approximately $3.49 million owed by RMG to its lenders.
Sutter Gold Mining Inc.
In 2004, Sutter Gold Mining Company, a majority-owned subsidiary with gold properties in California, was acquired by Globemin Resources Inc., a British Columbia corporation which is traded on the TSX Venture Exchange (“TSX-V) under its new name, Sutter Gold Mining Inc. A total of Cdn $1,061,800 of equity capital has been raised to continue exploration work on the properties.
Molybdenum
In February 2005, the United States District Court in Colorado issued an order authorizing Phelps Dodge to return mining claims at Mt. Emmons (near Crested Butte, Colorado) to USE and Crested, including a water treatment plant and the responsibility for operating it. The mining claims contain a world class molybdenum deposit. In 2005, USE and Crested expect to receive back from Phelps Dodge Corporation the patented and unpatented mining claims containing the molybdenum deposit. There are locatedno current plans to put these properties into production but various strategies are being evaluated, including putting the property into production, or selling or leasing the property to (or joint venturing the property with) other entities. These strategies will require resolution of significant permitting issues and substanti al amounts of capital. In 2005, we expect to transfer the properties to a new subsidiary, U.S. Moly Corp.
Uranium
In December 2004, USE and Crested agreed to sell a 50% interest in the Glen L. Larsen
building at 877 North 8th Street West, Riverton, Wyoming 82501, telephone
307-856-9271. RMG hasSheep Mountain (Wyoming) uranium properties to Bell Coast Capital Corp., now named Uranium Power Corp. ("UPC"), a field officeBritish Columbia company trading on the TSX Venture Exchange, for $4,050,000 and 4,000,000 shares of UPC common stock payable by installments through December 2007. The parties signed a Mining Venture Agreement with UPC as of April 11, 2005 for the Sheep Mountain property and other properties to be acquired. UPC may provide up to $10,000,000 for up to 20 different projects.
Plateau Resources Limited (a wholly-owned subsidiary of USE) agreed in Gillette, Wyoming.December 2004 to lease uranium properties now controlled or owned (and to be acquired) by a third party in reasonable proximity to Plateau’s Shootaring Canyon Mill ("Shootaring Mill") in southeastern Utah. The purpose of this agreement is to obtain uranium properties for future mining to supply the Shootaring Mill, which we plan to put into production.
In 2005, we expect to transfer the uranium claims, and Plateau Resources Limited to a new subsidiary, U.S. Uranium Ltd. We have filed a request with the State of Utah for an operational license to reopen and operate the Shootaring Mill.
Summary Information about the Subsidiaries. Most of the Company's operations are conducted through subsidiaries, the USECC Joint Venture with Crested, and jointly-owned subsidiaries of USE and Crested.
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The Company's subsidiaries are:
Percent Primary
Subsidiary Owned by USE* Business Conducted
---------- ------------- ------------------
Plateau Resources Ltd. 100.0% Uranium (Utah) - inactive mill
- shut down
Motel/real estate - sold
Rocky Mountain Gas, Inc. 88.5% Coalbed methane - active
Energx, Ltd. 90.0% Gas - inactive - shut down
Crested Corp. 71.5% Uranium, gold and molybdenum
Properties (all inactive and
shut down), and exploration
activities on coalbed methane
properties
Sutter Gold Mining Company 78.5% Gold (California) - inactive -
Being reactivated
Four Nines Gold, Inc. 50.9% Contract Drilling/Construction
- inactive
USECC Joint Venture 50.0% Uranium (Wyoming, Utah), gold
and molybdenum,** all inactive
and shut down; real estate
management and coalbed methane
exploration
Yellowstone Fuels Corp. 35.9% Uranium (Wyoming) - inactive -
Shut down
Pinnacle Gas Resources, Inc. 37.5% CBM exploration and production
- active
*
| Percent | Primary |
| Subsidiary | Owned by USE(1) | Business Conducted |
| Plateau Resources Limited | 100% | Uranium (Utah) - inactive mill - shut down, application filed to reopen and operate |
Rocky Mountain Gas, Inc.(2) | 91.1% | CBM - active |
| Crested Corp. | 70.1% | Uranium and molybdenum (inactive and shut down, with limited reactivation in uranium planned for 2005), gold (being reactivated on a limited basis), and exploration and production activities on CBM properties. |
Sutter Gold Mining Inc.(2) | 65.5% | Gold (California) - inactive - being reactivated |
| Four Nines Gold, Inc. | 50.9% | Contract Drilling/Construction - inactive |
| USECC Joint Venture | 50.0% | Uranium and molybdenum (inactive and shut down, with limited reactivation in Wyoming uranium planned for 2005), gold (being reactivated), and CBM. Limited real estate and airport operations. |
| Yellowstone Fuels Corp. | 35.9% | Uranium (Wyoming) - inactive - shut down |
Pinnacle Gas Resources, Inc.(2) | 16.7% | CBM exploration and production - active |
(1)As of December 31, 2004
(2)Includes ownership of Crested Corp. in RMG, and Sutter.
** There are no plans to put the molybdenum property into production in
the foreseeable future. See "Inactive Mining Properties - Molybdenum
and Item 3, "Legal Proceedings".
Until September 11, 2000, USE, USECC and Kennecott Uranium Company
("Kennecott") owned the Green Mountain Mining Venture ("GMMV"), which held a
large uranium deposit and uranium mill in Wyoming. On September 11, 2000, USE
and Crested settled litigation with Kennecott involving the GMMV by selling
their interest in the GMMV and its properties back to Kennecott for $3,250,000,
receiving a royalty interest in the uranium properties and miscellaneous
equipment. The GMMV properties are shut down. Kennecott also assumed all
reclamation obligations on the GMMV properties; reclamation obligations for an
ion exchange facility located on properties outside the GMMV were not assumed by
Kennecott, see "Sheep Mountain Partners - Properties" below. Other uranium
properties and a uranium mill in southeast Utah are held by Plateau Resources
Ltd., a wholly-owned subsidiary of USE. The Utah uranium properties are shut
down.
Activities on the mineral properties held by Sutter Gold Mining Company
("SGMC") were shut down because the historical market price of gold did not
permit raising the necessary capital to build a millInc., and put the properties into
production. However, improved gold prices over the last 12 months have revived
the capital markets, particularly in Canada. See "Sutter Gold Mining Company,
below."
In coalbed methane, we compete against many companies, some of which are
much larger and better financed than the Company. Pinnacle Gas Resources, Inc.
The
principal area of
competition is encountered in the financial ability to acquire good acreage
positions and drill wells to explore coalbed methane potential, then, if
warranted, drill production wells and install production equipment (gathering
systems, compressors, etc.).
We own a royalty interest in a molybdenum property in Colorado; the
property is owned by Phelps Dodge Corporation. We believe, at the present time,
that Phelps Dodgeforegoing does not
include information on ownership of subsidiaries which have
a plan to place the molybdenum property into
production.
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In the motel, real estate and airport operations area (significant as a
percentage of revenues for 2003,been formed but not our primary business focus), we ownyet active (U.S. Uranium Ltd. and manage an office building (where the Company's headquarters are located), and
small parcelsU.S. Moly Corp.). See Part III of land, in Riverton, Wyoming, and a small amount of other land in
Wyoming and Colorado. An indirect subsidiary (Canyon Resources), owned a
townsite, motel, convenience store and other commercial facilities in Utah,
which was sold in August 2003, thus greatly reducing activities in this commercial segment.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
During 2003, the seven months endedReport.
Financial information about industry segments.
From June 1, 2002 to December 31, 2002, and the (former)
fiscal year ended May 31, 2002,2003, for technical financial presentation purposes, we operated in two business segments: (i) coalbed methaneCBM gas exploration (and holding shut down mines and mineral properties); and (ii) commercial operations (motel, real estate, and airport operations)airport). While we technically had two segments in
this 31 month period, byBy December 31, 2003, all activities in minerals (except coalbed methane)CBM) and some of the commercial (motel/real estate/airport), had ceased or were
severely curtailed, and the motel/commercial properties in Utah had been sold.
As of the date of this Annual Report, the only currentprimary activities of a material and recurring nature are in coalbed methane.
CBM. However, in 2004 and continuing in 2005, activities in gold and uranium were initiated, and activities are expected to start up in molybdenum in 2005. If the proposed merger with Enterra is consummated, the investments in CBM (RMG) may be changed from direct involvement in the CBM business to a continuing but passive investment in Enterra, which has conventional producing and non-producing oil and gas properties. Therefore, in 2005 and beyond, we expect to continue to have one active industry segment - exploration and development of mineral properties in gold, molybdenum and uranium.
The principal products of operating units within each of the reportable industry segments for the full yearyears 2004 and 2003, the seven months ended December 31, 2002 and the (former) fiscal year ended May 31, 2002 are shown below. For more information, see note I to the financial statements.
INDUSTRY SEGMENTS PRINCIPAL PRODUCTS
Industry SegmentsPrincipal Products
Minerals:Acquisition and exploration of CBM Acquisition of coalbed methane properties,
Exploration and Production production of properties for coalbed methane.
(and shut down mineralproperties. This activity is material and recurring, and properties) iswas our principal business focus.focus in these periods. Sales and leases of other mineral-bearing properties and, from time to time, the production and/or marketing of uranium, gold and receipt of
advance royalties on molybdenum.minerals. Activities in uranium and gold and molybdenum arewere largely shut down as recurring activities. Gold propertiesactivities in the periods but uranium and gold are being reactivated at the date of this Report.
Commercial:Operation of a motel and rental of real
Motel/Real Estate/ estate, operation of an aircraft fixed base
Airport FBObased operation (fuel sales, flight instruction and aircraft maintenance, whichmaintenance) was shut down in the (former) fiscal year 2002;2002. The motel in Utah was sold in 2003. Real estate rental and motel
and real estate activities (sold in 2003)).
Variousvarious contract services continue, including managerialmanagement services for subsidiary companies,
continue.
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C) NARRATIVE DESCRIPTION OF BUSINESS (INCLUDING ITEM 2 - PROPERTIES)companies.
Business and Properties
Coalbed Methane
General.
COALBED METHANE
GENERAL.
Rocky Mountain Gas, Inc. ("RMG")
RMG was incorporated in Wyoming on November 1, 1999 for business in the coalbed methaneCBM industry in Wyoming and Montana. RMG is a subsidiary of the CompanyUSE (owned 50.3%51.3% by the CompanyUSE and 39.8% by Crested as
ofat December 31, 2003 (as2004). At December 31, 2004, RMG was indebted to the Company in the amount of
$6,059,300. The obligation was incurred by RMG's continuing operating deficits (funded by USE) and for USE issuing common stock on conversion of RMG common stock, as well as preferred stock and payment of dividends on the datepreferred stock. In addition, a small percentage of RMG stock is held by employees, officers and directors of USE, Crested and RMG (plus options to buy more subsidiary stock) as an equity incentive for those persons to work for the subsidiary in addition to their responsibilities to USE and Crested. The shares and options are forfeitable if service is terminated before retirement.
Please see the Glossary in this Annual Report 49.4% byfor definitions of certain terms used in the Companyoil and 39.1% by Crested).
gas industry, and in this Annual Report.
In 2003, RMG transferred all of its interest in certain coalbed methaneCBM properties, including a producing property, to Pinnacle.Pinnacle Gas Resources, Inc. ("Pinnacle"). At the same time, Carrizo Oil & Gas, Inc.'s wholly owned subsidiary CCBM, Inc. ("CCBM") (withCCBM," with which RMG has an agreement to jointly acquire and explore CBM properties) transferred to Pinnacle all of its interestsinterest in the same properties, and affiliates of Credit Suisse First Boston contributed equity financing to Pinnacle. See "Transaction with Pinnacle Gas Resources, Inc."
On January 30, 2004, RMG, (throughthrough its wholly-owned newly organized subsidiary RMG I, LLC "RMGI"("RMG I"), acquired coalbed methaneCBM properties in the Powder River Basin of Wyoming. See "Acquisition of Producing and Non-Producing Properties from Hi-Pro Production, LLC.Hi-Pro." Part of the purchase price was financed under a $25 million mezzanine credit facility.
As of April 11, 2005, the company and its subsidiary Rocky Mountain Gas, Inc. (“RMG”) has entered into a binding agreement with Enterra Energy Trust (“Enterra”) for the acquisition of RMG I plansby Enterra in consideration of $20,000,000, payable pro rata to drill five development wellsthe RMG shareholders in the amounts of $6,000,000 in cash and $14,000,000 in exchangeable shares of one of the subsidiary companies of Enterra. The shares will be exchangeable for units of Enterra twelve months after closing of the transaction. The Enterra units are traded on the Hi-Pro properties in
2004Toronto Stock Exchange and upgrade existing infrastructureon Nasdaq; the exchangeable shares will not be traded. RMG will be acquired with approximately $3,500,000 of debt owed to improve gas production, and,its mezzanine lenders.
Closing of the transaction is subject to raisingapproval of the RMG shareholders; U.S. Energy Corp. and Crested Corp., the principal shareholders of RMG, have agreed to vote in favor of the acquisition. Closing is further subject to completion of due diligence by Enterra, and to obtaining regulatory and stock exchange approvals.
RMG’s minority equity funding, drillownership of Pinnacle Gas Resources, Inc. will not be included in the transaction with Enterra, which has resulted in a decrease in the consideration to be paid by Enterra from the previously-announced $30,000,000, to the $20,000,000 in the definitive agreement signed as of April 11, 2005. However, Enterra will be entitled to be paid up to 120(but not more than) $2,000,000 if proceeds from a future disposition of the minority equity interest in Pinnacle exceed $10,000,000.
If the transaction with Enterra is not consummated, additional development of the RMG properties will be contingent upon RMG's ability to raise additional capital. If RMG can obtain the necessary capital, RMG may drill exploratory wells on undeveloped
Hi-Pro acreage in 2004 and 2005.
In addition, RMG plans to drill exploratorydevelopment wells on the Castle Rock, and
Oyster Ridge and Hi-Pro properties, and seek to acquire other producing coalbed methaneCBM properties, primarily in Wyoming. Financing may be available under the mezzanine credit facility for more acquisitions, if approved by the lenders. As of the filing date of this Annual Report, RMG does not have any agreements to acquire other producing properties.
RMG raised $1.8 million of equity financing in the first quarter of 2004.
As of the filing date of this Annual Report, RMG holds leases and options on approximately 264,300237,200 gross mineral acres (not including acreage held by Pinnacle) of federal, state and private (fee) land in the Powder River Basin ("PRB") of Wyoming and Montana, and adjacent to the Green River Basin of Wyoming, not including acreage held by Pinnacle.
As of the filing date of this Annual Report, there are 108 producing wells
on the properties bought by RMG from Hi-Pro Production, LLC. RMG owns an average
58% working interest (46.4% average net revenue interest, before deduction of
overriding royalty interests held by lenders) in these properties.
Wyoming.
From RMG's inception, through December 31, 2003, 722004, 88 exploratory wells have been drilled almost allprimarily with funds provided by our industry partner CCBM (and another oil and former
industry partner SENGAI (see below)gas company under a farmout agreement (completed in 2002) for exploration on our Castle Rock, Montana property). 43Forty-three of the wells were on properties transferred to Pinnacle in mid-2003. The balance of 2945 wells, (15 of which have been plugged and abandoned) are on properties held by RMG. ReservesProven reserves have not been established for any of the properties on which thesethe exploratory wells were drilled.
The Castle Rock property in southeast Montana,
, and the Oyster Ridge property adjacent to the Green River Basin (southwest Wyoming), are large properties which will require the drilling of numerous exploratory wells and
extendedextensive dewatering for each group
or "pod" of wells (possibly as much as
243-12 months after drilling and completion) before an assessment of
proven reserves can be made.
-6-
Among the uncertainties we face in determining if our coalbed methaneCBM investments will yield value are the following: PricesBecause prices for gas sold in the Powder River Basin are typically lower than national prices, and therefore, the economics of Powder River Basin properties can be adversely affected more
readilydisproportionately by lower gas prices.prices nationwide. The Hi-Pro properties and all revenues therefrom,their cash flows after operation costs are pledged to service $3,635,000 ofacquisition debt. To continue exploration efforts, additional capital (in addition to RMG's one-half of remaining balance under the
CCBM $5.0 million drilling commitment, which one half of remaining balance was
$305,100 at December 31, 2003) will be needed. Permitting issues for new wells on undeveloped acreage may be delayed. An unfavorable confluence of these uncertainties could result in a write-down of the carrying value of those properties which don'tmay not produce enough gas at low prices to be economic; in a write-down of the carrying value of other properties which need more wells drilled and dewatered to establish or improve the economics of production; and/or the delay (whether from lack of capital or permitting problems) in establishing reserves for the larger prospects where many wells will have to be drilled to assess their value.
Certain technical terms used in the oil and gas industry appear in this
Annual Report. The following are general definitions of those terms: Working
interests percentages of a mineral lease total 100%; the working interest owners
together (an aggregate of 100%) pay all of the costs to hold undeveloped leases,
drill and complete wells on leases, and produce minerals from the leased
property (including pump costs, gathering and transmission costs and marketing
costs). Net revenue interests are the percentages of production which the
working interest owners own, after deduction for payment of royalties to the
owners of the minerals under lease (private parties, the Bureau of Land
Management, or the State, as applicable). Owners of royalty interests pay none
of the costs to drill, complete, or operate wells on a lease. An overriding
royalty interest is carved out of the total net revenue interest; overriding
royalty interest holders pay none of the costs to hold, drill, or produce the
minerals. All owners pay their share of ad valorem and severance taxes.
TRANSACTION WITH PINNACLE GAS RESOURCES, INC.
Transaction with Pinnacle Gas Resources, Inc.
On June 23, 2003, RMG, CCBM and its parent company Carrizo Oil & Gas, Inc.;, and seven affiliates of Credit Suisse First Boston Private Equity (the "CSFB Parties") signed and closed agreements for a transaction with Pinnacle. The transaction included: (1) the contribution to Pinnacle by RMG and CCBM of all of their ownership of a portion of the CBM properties owned by RMG and CCBM, in exchange for common stock and options to buy common stock in Pinnacle; and (2) $17,640,000 cash to Pinnacle by the CSFB Parties for common stock and series A preferred stock of Pinnacle, and warrants to purchase series A preferred stock of Pinnacle. The CSFB Parties have contributed significant additional capital to Pinnacle since June 2003.
Pinnacle is a private corporation. Only suchthat information about Pinnacle aswhich its board of directors elects to release is available to the public. All other information about Pinnacle is subject to confidentiality agreements between Pinnacle, RMG, and the other parties to the June 2003 transaction.
Pinnacle shareholders.
At December 31,
2003,2004, RMG's ownership in Pinnacle's common stock was
37.5%16.7%. RMG's ownership of Pinnacle on a fully-diluted basis will change if the CSFB Parties fund subsequent capital requests from Pinnacle and/or exercise their warrants to buy equity in Pinnacle
(but RMG does not), and/or if RMG and/or CCBM exercise their options to buy equity in Pinnacle, or other events occur.
See the discussion
under Pinnacle Equity Transaction below.
Immediately following, and in connection with, the transaction, Pinnacle
acquired additional producing and non-producing CBM properties located in the
Powder River Basin of Wyoming from Gastar Exploration, Ltd. ("Gastar," listed on
the Toronto Stock Exchange), referred to below as the "Gastar acquisition."
The transaction and the follow-on Gastar acquisition provide (1) Pinnacle
the funded opportunity to explore and develop the contributed and acquired
assets, and to acquire and explore, and if warranted,
-7-
develop, additional CBM properties in Wyoming and Montana; and (2) RMG (through
its ownership interest in Pinnacle) the opportunity to benefit (on a passive
basis) from the continued development of the contributed assets and other
properties which Pinnacle may acquire in the future. Since June 2003, Pinnacle
has acquired additional acreage, and drilled numerous exploratory and
development wells.
RMG now has interests in approximately 264,300 gross (128,200 net) mineral
acres:(A) 173,400 gross (66,900 net) acres in the Castle Rock, Oyster Ridge, and
Baggs properties, which were not contributed to Pinnacle (these properties are
operated by RMG and held with its industry partner CCBM, Inc.); and (B) 52,700
gross (47,000 net) mineral acres acquired from Hi-Pro Production, LLC. The
acreage total does not reflect properties held by Pinnacle. The acreage total
for Oyster Ridge includes the proposed acquisition from Kerr McGee (38,184
gross, 11,455 fully diluted net). See "Oyster Ridge".
CCBM is a wholly-owned subsidiary of Carrizo Oil & Gas, Inc. ("Carrizo," a
Nasdaq listed company). Carrizo, CCBM and RMG entered into an agreement in July
2001 for CCBM to buy a 50% interest in, and fund exploration and development of,
RMG's CBM properties then owned.
Prior to and in connection with the Pinnacle transaction, CCBM paid RMG approximately $1.8 million cash to complete its purchase of 50% of RMG's contributed CBM properties, thus enabling CCBM to contribute its interests in the CBMsubject properties to Pinnacle as having been fully paid for. See "Continuing Operations of RMG, Continuing Agreement with CCBM, and the AMI Agreement, Afterafter the Pinnacle Transaction" below.
- PINNACLE EQUITY TRANSACTION
Pinnacle is authorized to issue common stock (100 million shares, $0.01 par
value) and preferred stock (100 million shares, $0.01 par value).stock. Pinnacle has establishedissued series A preferred stock, withall held by the following provisions:CSFB Parties: Liquidation preference of $100.00 per share; 10.5% compounded cumulative annual dividend (12.5% after July 1, 2010); redeemable at Pinnacle's option after July 1, 2004 at a premium declining to par after July 1, 2009 (mandatory redemption if there is a change in control of RMG or CCBM); and with voting rights (a) pari passu with the common stock on regular matters, and (b) as a separate class, to authorize changes in the series A preferred stock, to authorize issuance of stock senior to or in parity with the series A preferred stock, to approve anya reorganization or merger of Pinnacle, to approve Pinnacle's sale of substantially all its assets, and similar matters.
Pinnacle's board of directors has eight directors (two each from RMG and CCBM, and four from the CSFB Parties).
The chart below summarizes (a) the contributions made by the parties to the
transaction at the closing, and (b) as of the closing, the subsequent
contributions which would be made by the CSFB Parties in response to future
capital requests from Pinnacle. As of the filing date of this Annual Report, as
a result of a capital request funded after the closing by the CSFB parties,
In 2003, RMG
owns 37.5% of the common stock of Pinnacle.
-8-
Equity in Pinnacle
--------------------
Series A Equity Rights in Pinnacle
Parties Contribution Common Stock Preferred Stock Warrants(1) Options Common Stock(2)
------- --------------- -------------- --------------- ----------- -----------------------
RMG All CBM 75,000 shares -0- -0- 30,000 shares
properties
(except Castle
Rock, Baggs
and Oyster
Ridge)
CCBM All CBM 75,000 shares -0- -0- 30,000 shares
properties
(except Castle
Rock, Baggs
and Oyster
Ridge)
CSFB $ 17,640,000 50,000 shares 130,000 shares 130,000 -0-
Parties
CSFB $ 11,760,000(3) 120,000 shares 120,000 -0-
Parties
- ----------------------------------------
(1) At $100 per share of common stock.
(2) Options to buy common stock at $100.00 per share, as increased by 10%
per annum compounded quarterly for the first 15,000 shares, and 20%
per annum for the second 15,000 shares.
(3) Commitment to fund subsequent capital requests from Pinnacle, not more
than $11,760,000, if made prior to July 1, 2004, for development work
on CBM wells, or (if approved by CSFB Parties) a property acquisition.
The commitment price is $980,000 for each 10,000 shares of series A
stock (coupled with warrants to purchase 10,000 shares of common
stock, exercisable at $100 per share).
As a result, RMG has recorded its 37.5% equity investment in pinnaclePinnacle at the carrying value of its coalbed methanecontributed CBM properties (approximately $957,700).
- Continuing Operations of approximately $922,600.
Sanders Morris Harris Inc. ("SMH") of Houston, Texas acted as financial
advisor to RMG, onContinuing Agreement with CCBM, and the AMI Agreement after the Pinnacle transaction. For its services in connection with
the transaction and the Gastar acquisition, SMH was paid $650,000 by Pinnacle.
As additional compensation for SMH's services, USE issued to SMH 50,000
restricted shares of common stock and warrants to purchase (until June 30, 2006)
another 50,000 restricted shares of common stock (at $5.00 per share). SMH did
not receive any equity or equity rights in Pinnacle in connection with the
transaction or the Gastar acquisition.
- GASTAR ACQUISITION
With proceeds from the CSFB financing, Pinnacle paid Gastar $6.2 million
for approximately 50% of Gastar's working interest in existing producing and
non-producing CBM properties which included 95 producing wells in the early
stages of dewatering and approximately 36,529 gross developed and undeveloped
acres. The majority of the leases are either part of or located adjacent to the
producing Bobcat property, which RMG and CCBM contributed to Pinnacle.
Pinnacle also agreed to fund up to $14.5 million of future drilling and
development costs on behalf of Gastar and Pinnacle prior to December 31, 2005,
on the properties purchased from Gastar.
-9-
- CONTINUING OPERATIONS OF RMG, CONTINUING AGREEMENT WITH CCBM, AND THE
AMI AGREEMENT AFTER THE PINNACLE TRANSACTION
Transaction
RMG retained ownership, with CCBM, of the Castle Rock, Oyster Ridge, and Baggs projects, totaling about 189,000 gross acres (currently about 173,400
gross acres net of 15,200 gross acres returned to Anadarko after the transaction
date and expiration of one lease).acres. The Baggs project was dropped in 2004. RMG and CCBM plan to continue exploration and development activities on these properties as well as acquiring other properties
in WyomingCastle Rock and Montana, under their July 2001 agreement (see "Carrizo - Purchase
and Sale Agreement"). Presently there are no agreements for RMG and CCBM to
acquire producing properties.
Oyster Ridge.
CCBM paid RMG approximately $1.8 million for CCBM's outstanding purchase obligation (under the July 2001 agreement) on CCBM's interestsinterest in those properties it contributed to Pinnacle. The $836,200 balance on the note at December 31, 2003 was $836,200. The balance of CCBM's original purchase obligation is payablepaid in monthly installments of approximately $52,800 through November 2004 with a
balloon payment of $282,400 due on December 31, 2004.
In connection with the transaction with Pinnacle, RMG and Pinnacle signed a
transition services agreement, for Pinnacle to pay RMG to assist in setting up
operational accounting systems for Pinnacle through December 2003. The agreement
was terminated by RMG effective January 1, 2004.
Also in connection with the transaction, RMG, CCBM, Carrizo, USE and the CSFB Parties signed an area of mutual interest ("AMI") agreement: Until June 23,
2008,agreement. Pinnacle has the right to acquire from the other parties up to 100% of any interest in oil and gas leases, or interests therein or mineral interests or rights to acquire the same, which the other parties acquire, at the same price paid or payable by the other parties, within the Powder River Basin in Montana and Wyoming (excluding most of Powder River County, Montana)., until the AMI expires on June 23, 2008. The original AMI agreement between CCBM and RMG from July 2001 is superseded by the new AMI agreement, except for areas outside the new AMI agreement territory, wherein the original agreement with CCBM still is still in effect. With respect to the properties acquiredThe CCBM AMI expires on June 30, 2005.
Acquisition of Properties from Hi-Pro (see below), CCBM and
Pinnacle waived their rights to buy any of the producing or undeveloped acreage.
ACQUISITION OF PRODUCING AND NON-PRODUCING PROPERTIES FROM HI-PRO
PRODUCTION,Production, LLC
On January 30, 2004, RMG I, LLC ("RMG I"), a wholly-owned subsidiary of RMG, purchased coalbed methaneCBM properties from Hi-Pro for $6,800,000. This
transaction was closed after December 31, 2003. See the subsequent event
footnote to the financial statements in this Annual Report.
The purchased properties (all located in the Powder River Basin of Wyoming) includeincluded 247 completed wells and 40,12018,450 undeveloped fee acres. As of the filing date for this Annual Report, 108 wells now are producing approximately 5.94.418 million cubic feet (Mmcf) of gas per day (approximately 3.12.615 Mmcf per day net to RMG I). Net daily Mmcf sales are less than gross production, due to producedSales, net of gas being consumedused to run the compressors, and from adjustments by purchasers for
thermal content (gas is soldare based on BTUMmbtu (BTU heat content). A portion of Hi - Pro production has low Mmbtu content per Mcf, which has increased overall field operating costs.
RMG I owns an average 58% working (average 46.4% net revenue) interest in the producing wells and proved developed acreage, and a 100% working (average 80% net revenue) interest in all of the undeveloped acreage. The net revenue interest percentage after deduction of the overriding royalroyalty interests held by lenders (see "Mezzanine Credit Facility") are 44.66% for the producing and five future wells to the Wyodak coal, and 78.0% 77%
for production from deeper coals and all of the undeveloped acreage.
The transaction was structured as an asset purchase, with RMG I as the purchaser, in connection with the establishment of a mezzanine credit facility for up to $25,000,000 of secured loans to acquire and develop more proven
coalbed methaneCBM reserves. RMG may utilize RMG I for future acquisitions (none
are presently
-10-
under contract or agreement in principle)contract). See "Mezzanine Credit Facility." A substantial portion of the cash consideration paid to Hi-Pro was funded with the initial advance on the credit facility. RMG I replaced Hi-Pro as the contract operator for 89% of the wells that were acquired.
RMG negotiated the purchase based on the $7,113,000 present value, discounted 10%, of gas reserves recoverable (and the estimated future net revenues to be derived) from proved reserves in the Hi-Pro properties, as estimated as of November 1, 2003 by Netherland Sewell and Associates, Inc. See "Reserve Date"Data" below for the estimate as of December 31, 2003.
2004.
The $6,800,000 purchase price for the Hi-Pro properties reflects a deduction, negotiated by the parties in January 2004, to account for the decrease in gas production from October 2003 due to the impact on production from deferred maintenance on the properties, and the expected cost of such maintenance work after closing.
- TERMS OF THE PURCHASE.Terms of the Purchase. The purchase price of $6,800,000 was paid:
X $ 776,700 cash by RMG.
X $ 588,300 net revenues from November 1, 2003 to December 31, 2003,
which were retained by Hi-Pro.
| 1. | $ | 776,700 | cash by RMG |
| 2. | $ | 588,300 | net revenues from November 1, 2003 to December 31, 2003, which were retained by Hi-Pro.(1) |
| 3. | $ | 500,000 | by USE's 30 day promissory note (secured by 166,667 restricted shares of USE common stock, valued at $3.00 per share). |
| 4. | $ | 600,000 | by 200,000 restricted shares of USE common stock (valued at $3.00 per share) |
| 5. | $ | 700,000 | by 233,333 restricted shares of RMG common stock (valued at $3.00 per shares).(2) |
| 6. | $ | 3,635,000 | cash, loaned to RMG I under the credit facility agreement.(3) |
| | $ | 6,800,000 | |
| | | (588,300) | reverse net revenues from November 1, 2003 to December 31, 2003, which were retained by Hi-Pro. |
| | $ | 6,211,700 | |
(1)
X $ 500,000 by USE's 30 day promissory note (secured by 166,667
restricted shares of USE common stock, valued at $3.00 per share).
X $ 600,000 by 200,000 restricted shares of USE common stock (valued
at $3.00 per share).(2)
X $ 700,000 by 233,333 restricted shares of RMG common stock (valued
at $3.00 per share).(3)
X $3,635,000 cash, loaned to RMG I under the credit facility
---------- agreement. (4)
$6,800,000
(1) RMG paid all January operating costs at closing. Net revenues from the purchased properties for January 20032004 were credited to RMG I's obligations under the credit facility agreement. These net revenues were considered by the parties to be a reduction in the purchase price which RMG otherwise would have paid at the January 30, 2004 closing.
(2) USE has agreed to file a resale registration statement with the SEC to
cover public resale ofAll these 200,000 shares.
(3) From November 1, 2004 to November 1, 2006, the RMG shares shall be
convertible at Hi-Pro's sole election into restrictedhave been converted to shares of common stock of USE. The number of USE shares to be issued to Hi-Pro shall
equal (A) the number of RMG shares to be converted, multiplied by
$3.00 per share, divided by (B) the average closing sale price of the
shares of USE for the 10 trading days prior to notice of conversion.
The conversion right is exercisable cumulatively, as to at least
16,666 RMG shares per conversion.
(4)
(3)See "Mezzanine Credit Facility."
- PROPERTIES PURCHASED.
RESERVE DATA
Reserve Data
Netherland Sewell and Associates, Inc. ("NSAI," Houston, Texas), independent petroleum engineers, have prepared a report on the proved reserves, as of December 31,
2003,2004, estimating recoverable reserves from the Hi-Pro properties, and the present value (discounted 10%) of future cash flow therefrom. NSAI's report takes into account fixed pricing for some production in
2004 and 2005, reflects the reduction in RMG's net revenue interests due to the overriding royalty interests held by lenders, and (except for fixed pricing in
2004 and 2005) is based on the
Henry HubCIG Spot market price of
$5.965$5.515 per
mmbtu,Mmbtu, adjusted by lease for energy content, transportation fees and regional price differentials on December 31,
2003,2004, without price escalation.
-11-
NET PRESENT
RESERVES VALUE
(Mmcf) (discounted at 10%)
------ ---------------------
Proved Developed Producing 2,206.490 $4,589,600
Proved Developed Non-Producing 464.423 $1,084,800
Proved Undeveloped 733.780 $1,382,000
---------- ----------
Total 3,404.693 $7,056,400
========= ==========
Following is a summary of the December 31, 2004 reserve report:
| | | | | Net Present |
| | | Reserves | | Value |
| | | (MCF) | | (discounted at 10%) |
| Proved Developed Producing | | 1,651,666 | | $3,486,400 |
| Proved Developed Non-Producing | | 889,051 | | $2,304,800 |
| Proved Undeveloped | | 515,224 | | $ 723,400 |
| Total | | 3,055,941 | | $6,514,600 |
The present value, discounted 10% value ("PV10 value") was prepared after ad valorem and production taxes on a pre-income tax basis, and is not intended to represent the current market value of the estimated gas reserves purchased from Hi-Pro. The PV10 discount factor is not the same as the standardized
measure of present value calculations which are determined on an after-income
tax basis.
Reserves as of November 1, 2003 were calculated by NSAI based on actual
production up to June 30, 2003, with production decline curves to November 1,
2003 estimated based on that production, resulting in total net proven reserves
of 4,034.5 Mmcf. For estimates as of December 31, 2003, NSAI was supplied with
actual production data through that date. Because actual production was below
the production predicted for the same period by the November 1, 2003 decline
curves, the decline curves for the later report had a lower starting point on
January 1, 2004 and a steeper rate of decline. These new decline curves thus
predict lower future production (3,404.693 Mmcf net to RMG) as of December 31,
2003.
We expect production in 2004 from producing wells, and hence proven
reserves (after adjustments for actual gas produced), will increase as
maintenance work now in progress (which had been deferred by Hi-Pro in the last
two quarters of 2003) is completed in the second quarter 2004. The reduction in
the present value, discounted 10%, of proven reserves at November 1, 2003
($7,113,000) as compared to December 31, 2003 ($7,056,400) was less than 1%,
notwithstanding the decreased volume of reserves, due to the higher price at the
later date compared with prices used in the November 1, 2003 estimate ($4.50 per
mcf in 2003, $4.29 in 2004, and $4.25 in 2005).
There are numerous uncertainties inherent in estimating gas reserves and their estimated values. Reservoir engineering is a subjective process of estimating underground accumulations of gas that cannot be measured exactly. Estimates of economically recoverable gas, and the future net cash flows which may be realized from the reserves, necessarily depend on a number of variable factors and assumptions, such as historical production from the area compared with production from other areas, the assumed effects of regulations by government agencies, assumptions about future gas prices and operating costs, severance and excise taxes, development costs, and work-over and remedial costs. The outcomes in fact may vary considerably from the assumptions.
The PV10 value takes into account RMG I's contracts to sell 2,000 Mmbtu per
day in 2004 at a fixed price of $4.76 per Mmbtu, and 1,000 Mmbtu per day in 2005 at a fixed price of $4.14 per Mmbtu and 500 Mmbtu per day for January 1, 2005 through March 31, 2005 at a fixed price of $8.10 per Mmbtu. From time to time, RMG I may sign fixed price contracts for more production. In addition, gas market prices will vary, possibly by significant amounts, throughout each year, and on an average basis from year to year. For these reasons, the cash flow realized from production likely will vary from the estimates of cash flow used to determine the PV10 value.
Estimates of the economically recoverable quantities of gas attributable to any particular property, the classification of reserves as to proved developed and proved undeveloped based on risk of recovery, and estimates of the future net cash flows expected from the properties, as prepared by different engineers or by the same engineers but at different times, may vary substantially, and the estimates may be revised up or down as assumptions change.
In addition, it is likely that actual production volumes will vary from the
estimates.
-12-
The PV10 discount factor, which is required by the SEC for use in calculating discounted future net cash flows for reporting purposes, is not necessarily the most appropriate discount factor, based on interest rates in effect in the financial markets, and risks associated with the gas business.
The business of exploring for, developing, or acquiring reserves is capital intensive. To the extent operating cash flow is reduced and external capital becomes unavailable or limited, RMG's ability to make the necessary capital
investment to maintain or expand the gas reserves asset base would be impaired. There is no assurance future exploration, development, and acquisition
activities will result in additionalwould increase proved reserves. Even if revenues increase because of higher gas prices, increased exploration and development costs could neutralize cash flows from the increased revenues.
- FUTURE PLANS FOR THE HI-PRO PRODUCTION PROPERTIES
In
Future Plans for the second quarter ofHi-Pro Properties
In 2004, RMG I plans to drill fivedrilled one proven undeveloped locationslocation to the Wyodak coal, continuecontinued a remedial workover program on a number
of existing wells, and upgrade theupgraded gas gathering and pipeline facilities
included in the purchase.facilities. The workover program is estimated to cost approximately $250,000 and will bewas funded by the working interest partners. The drilling and gathering upgrade is estimated to cost approximately $640,000 and is beingwas funded with a loan from the mezzanine credit
facility. The programs did not substantially increase production revenues from January 2004 levels (due to declines in BTU content from other wells) but the new well did increase proven reserves for the North Field. There are designed to enhance
production from current levels. After the 5 new wells to the Wyodak are drilled,
there will be nofour more undrilled locations on the currently producing properties available for the Wyodak coal. The first coals of interest under the undeveloped acreage are the Anderson and Canyon coals (for example under the Reno property); the Wyodak coal is not present under the undeveloped acreage. In addition to the
5 new wells, RMG-I plans to hook up 2 additional wells that were previously
drilled by Hi-Pro and are in close proximity to the 5 new wells.
The Wyodak coal formation is 200 to 600 feet from surface. Existing infrastructure for the Wyodak wells in the North and South Fields (gathering lines, compressors, and water disposal) should significantly reduce drilling and completiongathering costs for new wells to the deeper Dannar and Moyer coals (1,100(900 to 1,8001,300 feet). Subject to raising capital, up to 120a significant number of wells could be drilled and completed to these deeper coals in 20042005 and 2005,2006, all on locations now producing from the Wyodak. This
development activity is contingent upon obtaining future financing. We do not expect that immediate funding for this activity will be available through the mezzanine credit facility.
facility, as proven reserves have not yet been established.
No proven reserves have been established for the Dannar and Moyer coals. Because no other operators are producing gas from or dewatering these coals in the vicinity of the Hi-Pro properties, we expect several pods of wells will have to be drilled and completed to these coals, with an extended dewatering period (which could be up to 24 months), before significant gas production begins.
RMG is also developing plans to put five coalbed methane wells from the
Reno property on production during 2004.
The Reno property, was part of the Hi-Pro acquisition.Hi - Pro acquisition, consists of 760 gross and net acres, all on fee acreage, located in Campbell County, Wyoming, approximately 50 miles south of Gillette. The target coals on the Reno property are the Anderson, coal, which is about 600-650 feet in depth and approximately 40 feet in thicknessthick and the Canyon coal which is about 700-850 feet in depth and 35 feet in thickness.
thick.
Four wells were previously drilled by Hi-Pro at
the Reno
Property which were completed in both the Anderson and Canyon
coals, with slotted screening in
each.coals. In
addition, in March 2004, RMG I drilled
a fifth well, which has beenand completed
4 additional wells at Reno, 2 in the Anderson coal and 2 in the Canyon coal.
The shallower Anderson coal may be completed at a
later date. Four additional well locations exist at the Reno property based upon
80-acre spacing.
The Reno property consists of 760 gross and net acres, all on fee acreage.
It is located in Campbell County, Wyoming, approximately 50 miles south of
Gillette. RMG owns a 100% working interest in this property.
-13-
- MEZZANINE CREDIT FACILITY.
Mezzanine Credit Facility.
RMG I has signed a credit agreement with Petrobridge Investment Management, LLC (Houston, , Texas) as lead arranger, and institutional lenders, for up to $25,000,000 of loans to RMG I.loans. The loan commitment is through June 30, 2006. All loans will have a three year term from funding date.
Funding to acquire and/or improve any project is subject to the lenders' approval of the transaction and RMG I's development plan.
The first loan ($4,340,000 on January 29, 2004) under the credit facility
has beenwas applied to the Hi-Pro asset purchase ($3,700,000) including transaction costs and professional fees; and for a Phase Idrilling five development programwells and production infrastructure upgrades ($640,000).
Terms
Loan balance at December 31, 2004 was $3,214,800 plus a discount of $274,100, which is accreted monthly, for a total of $3,488,900.
A summary of certain terms for all loans under the credit facility include the following:
X follows:
1.Principal is not amortized, but interest must be paid monthly. All revenues from the properties owned by RMG I (including all current and new wells) isare paid to a lock box account controlled by the lenders, from which is paid by the lenders, the lease operating costs, revenue distributions, RMG I operating fees and RMG pumping fees (all approved by the lenders). With the exception of operating
and pumping fees, no revenues will be available for RMG operations until all loans are paid off.
X The loans are secured
2.Secured by all of RMG I's properties and by RMG's equity interest in RMG I.
X
3.The lenders, in the aggregate, receivereceived an overriding royalty interest of 3% of production from the wells producing when the acquisition was closed, and 2%3% of production from new wells on an 8/8ths working interest basis, proportionately reduced where less than 100% of the working interest is owned by RMG I. For the Hi-Pro properties, the 3% rate applies to all wells (producing and to be drilled) to the Wyodak formation (an aggregate override of 1.74%), and 2%3% to all wells to deeper formations (aggregate override to be determined based on working interest ownership by well). Override payments to the lenders are not applied to the loan balances.bala nces. The percentage of overrides on future properties may vary.
X
4.Negative covenants: RMG I will not permit the ratio of (a)(a total debt to EBITDA to exceed 2.00 to 1.00; (b) EBITDA to interest expense and rents (lease expense) to be less than 3.00 to 1.00; c)(c) current assets to current liabilities to be less than 1.00 to 1.00; or (d) PV 10
(provedPV10 proved developed producing reserves) to total debt to be less than 1.00 to 1.00. All these ratiosrations are to be determined quarterly. In addition, RMG I shall not permit net sales volume of gas from its properties to be less than 270 Mmcf, 230 Mmcf, 230 Mmcf and 210 Mmcf for each quarter in 2004, or less than 180 Mmcf per quarter in 2005 and the first two quarters of 2006.
At December 31, 2004 and as of the date this Annual Report is filed, RMG I is not in compliance with the negative covenants. As a result, the loan was classified at December 31, 2004 as a current liability. To date, the lenders have granted to RMG I conditional waivers of non-compliance; receipt of future waivers is expected but not assured.
At closing of the Hi-Pro acquisition, USE issued to the participating lenders three year warrants to purchase a total of 318,465 shares of common stock of USE (subject to vesting) at $3.30 cash per share. At closing of the Hi-Pro Acquisition,acquisition, warrants on 63,693 shares vested. The remaining warrants will vest at the rate of the right to buy one USE share for each $157 which RMG I subsequently borrows under the credit facility. Regardless of when vested, all warrants will expire on the earlier of January 30, 2007, or the 180th day after USE notifies the warrant holders that USE'USE stock price has achieved or exceeded $6.60 per share for a consecutive 15 business day period. USE has agreed to file
a registration statement with the SEC to cover public resale of the warrant
shares.
The preceding is a summary of some of the terms of the credit agreement, and is qualified by the text of the agreement, filed
with this Annual Report as an
exhibit.
-14-
- RMG EQUITY TRANSACTION
Inexhibit to the first quarter, RMG raised $1,800,000 of equity financing from the
sale of shares of Series A Preferred Stock in RMG, and warrants to purchase
shares of common stock of USE, to institutional investors. Proceeds are being
used for RMG working capital. The terms of the securities sold are:
X 600,000 shares of Series A Preferred Stock at $3.00 per share. The
Series A Preferred Stock bears a 10% cumulative annual dividend
(payable on March 1 of each year, beginning March 1, 2005), payable at
RMG's election in cash or shares of common stock of RMG (at $3.00 per
share) or shares of common stock of USE (at 90% of USE' volume
weighted average priceForm 10-K for the five days, referred to as the "set
price"). The Series A Preferred Stock is convertible at the holder's
election into shares of common stock of RMG, at $3.00 per share, or
shares of common stock of USE at the set price, until February 2006,
at which time all Series A Preferred Stock shares not previously
converted shall automatically be converted into shares of common stock
of RMG. The Series A Preferred Stock carries a liquidation preference
of $4.05 per share.
X Warrants to purchase 150,000 shares of common stock of USE, at the set
price. The investors did not pay additional consideration for the
warrants issued in connection with the purchase of the Series A
Preferred Stock. The warrants are exercisable as to 25% of the
underlying shares beginning in May 2004,year ended December 31, 2003.
Volumes, Prices and an additional 25% of the
underlying shares on each of the six months, nine months, and twelve
months thereafter, at which time the warrants are exercisable for the
full number of underlying shares. USE may call the warrants for
exercise if USE's volume weighted average price (VWAP) for its stock
exceeds $6.00 for any consecutive 15 trading days; warrants not
exercised by the tenth trading day after a call notice is sent will be
cancelled.
X The number of shares of RMG or USE common stock issuable in payment of
dividends on, or conversion of, the Series A Preferred Stock, and the
number of shares of common stock of USE issuable on exercise of the
warrants, are subject to adjustment in certain events to protect the
holders from dilution. The first anti-dilutive provision is 'full
ratchet': If RMG or USE issue shares of common stock, or derivative
securities exercisable for or convertible into such shares of common
stock, at a price less than $3.00 per share for RMG stock or the set
price for USE stock, at any time until 30 days after a registration
statement (to be filed by USE) has been declared effective by the SEC
to permit the resale to the public by the holders of the USE common
stock issuable on payment of dividends, in conversion, and on exercise
of warrants, then the issue price for the dividends and conversions,
and the exercise price of the warrants (for RMG and USE common stock,
as applicable) shall be reduced (ratcheted down) to equal the lower
issue price, until the 30th day after the registration statement is
declared effective.
X The second anti-dilutive provision would take effect after that 30th
day: The issue price would be adjusted up to a fully weighted adjusted
price, and would continue to be adjusted for any other issuance by RMG
or USE of stock or derivative securities at a price less than $3.00 or
the set price, as applicable, until the Series A Preferred Stock is
converted to common stock or RMG or USE, or until the expiration of
the warrants, as applicable. As an example of fully weighted
anti-dilution protection, if RMG were to sell 3,200,000 shares of
common stock at $2.50 per share, the dividend and conversion price on
the Series A Preferred Stock would be $2.91.
The preceding is a summary of some of the terms of the Series A Preferred
stock designation, and the USE warrants, and is qualified by the text of the
documents filed with this annual report as exhibits.
VOLUMES, PRICES AND GAS OPERATING EXPENSEGas Operating Expense - BOBCAT PROPERTY (TRANSFERRED TO
PINNACLE GAS RESOURCES, INC. IN JUNE 2003)
Hi - Pro Property
This table shows
RMG's 27.6% working (22% net revenue) sales volumesthe volume of gas
produced,sold (net of usage to fuel compressors); and average sales prices
received for gas sold and average production costs
calculated on a per mcf basis, for
those sales, for the seven months ended
-15-
Hi-Pro production in 2004.
| | Year Ended December 31, |
| | 2004 |
| | |
| Sales volume (mcf) | | 728,051 |
Average sales price per mcf(1) | | $4.05 |
Average cost per mcf(2) | | $3.19 |
| (1) | Represents the weighted average of selling 92% of production at fixed contract prices and 8% at the market. |
| (2) | Includes direct lifting costs (labor, repairs and maintenance, materials and supplies, workover costs, insurance and property, gathering, compression, marketing and severance taxes). |
Acquisition and Exploration Capital Expenditures - All Properties Through December 31, 2002, and for the year ended December, 2003, all from the Bobcat
property which was transferred to Pinnacle in June 2003.
Year Ended Seven Months Ended
December 31, 2003 December 31, 2002
------------------- -------------------
Sales volumes (mcf) 81,516 64,314
Average sales price per mcf(1) $3.71 $1.86
Average cost (per mcf)(2) $1.91 $1.91
(1) From time to time, we sold some of the production at a set price and
the balance at daily market prices. For the six months ended June 30,
2003, we sold 37.0% of our share of production at contract prices and
63.0% at the market. There were no gas sales after June 30, 2003.
(2) Includes direct lifting costs (labor, repairs and maintenance,
materials and supplies, workover costs, insurance and property,
gathering, compression, marketing and severance taxes).
ACQUISITION AND EXPLORATION CAPITAL EXPENDITURES - ALL PROPERTIES THROUGH
DECEMBER 31, 2003
2004
From inception on November 1, 1999 through December 31, 2003,2004, RMG incurred net acquisition (purchase price and holding costs) and exploration costs (drilling and completion) on CBM properties of approximately $1,353,900,$8,897,300, which does not include approximately $2,194,900$2,500,000 funded by CCBM on RMG's behalf for leasehold, drilling and completion costs. Unproved properties on the balance sheet at December 31, 20032004 reflect the reduction (by $5,143,000)$5,706,600) to reflect the reduction of the full cost price as a result of principal payments made by CCBM under its agreement with RMG and by payments from other industry partners. The foregoing data does not include $922,600$957,700 spent by RMG on properties transferred to Pinnacle. The $922,600 wasPinnacle, which we recorded at December 31, 2003 as an investment in Pinnacle.
The following table shows certain information regarding the gross costs incurred by RMG.
Costs associated with the Hi-Pro acquisition after December 31,
2003 are not included.
Year Ended Seven Months Ended Year Ended
December 31, December 31, May 31,
------------- ------------------- -----------
2003 2002 2002
------------- ------------------- -----------
Acquisition costs $ 107,100 $ 936,200 $ 192,600
Development 158,300 97,200 87,400
------------- ------------------- -----------
$ 265,400 $ 1,033,400 $ 280,000
============= =================== ===========
| | | Year Ended | | Year Ended | | Seven Months Ended | | Year Ended | |
| | | December 31, | | December 31, | | December 31, | | May 31, | |
| | | 2004 | | 2003 | | 2002 | | 2002 | |
| Acquisition costs | | $ | 6,613,900 | | $ | 107,100 | | $ | 936,200 | | $ | 192,600 | |
| Development | | | 1,642,600 | | | 158,300 | | | 97,200 | | | 87,400 | |
| | | $ | 8,256,500 | | $ | 265,400 | | $ | 1,033,400 | | $ | 280,000 | |
The acquisition costs included amounts paid for properties, delay rentals, lease option payments, and general and administrative costs directly attributable to the acquisitions.
The recorded amounts for acquisition and exploration of $8,256,500, $265,400, $1,033,400 and $280,000 represent 26.9%, 1.1%, 3.6%, and 1.0% of total assets at December 31, 2004, 2003 December 31, 2002,and 2003, and May 31, 2002, respectively.
2002.
We use the full-cost method of accounting for gas properties. Under this method, all acquisition and exploration costs are capitalized in a "full-cost pool" as incurred. Depletion of the pool will be recorded using the unit-of-production method. To the extent capitalized costs in the full-cost pool (net of depreciation, depletion and amortization and related deferred
taxes)taxes exceed the present value (using a 10% discount rate) of
-16-
estimated future net pre-tax cash flows from proved gas reserves as established by reserve reports, the excess costs will be charged to operations.
All acquisition and exploration costs for a property are capitalized until such time as proven reserves can be established, or not, for the property. If no proven reserves are established, those capitalized costs will be transferred to the amortization basis and be subject to an impairment testTotest. To the extent proven reserves are established for an exploration property to be less than such costs, the costs will be written-down to the amount of present value of the proven reserves. In this event, assets would decrease and expenses would increase. Once incurred, a write-down of gas properties can't later be reversed.
In addition, if future exploration work (in particular the larger prospects) is delayed because of lack of capital or permitting delays, or both, with the result that it cannot be established whether or not proved reserves exist on the properties, the exploration costs for those properties would be written-off.
COALBED METHANE PROPERTIES
Coalbed Methane Properties
As of the filing of this Annual Report, we hold leases and options to develop approximately 264,300237,200 gross mineral acres (including 69,89549,493 acres under optionsoption - see "Oyster Ridge" below) under leases from the United States Bureau of Land Management, the states of Wyoming and Montana, and private landowners.
Table 1 shows the total gross and net lease acres held in each prospect, and the
amount of such acreage held by RMG and by companies with which RMG has
agreements (CCBM, Inc. and Quaneco, L.L.C.). These agreements are summarized
under "Carrizo - Purchase and Sale Agreement" and "Quaneco - Agreement." Acreage
data assumes CCBM completes its obligations; CCBM will own its 50% working
interest in wells drilled under CCBM's drilling fund commitment, but if CCBM
does not complete its purchase obligations, CCBM would be entitled to a reduced
working interest in the remaining undrilled acreage.
CCBM currently has purchase rights to acquire a 6.25% working interest in
the Castle Rock prospect, and owns a 6.25% working interest in eight wells in
Castle Rock, which were drilled by Suncor Energy Natural Gas America, Inc.
("SENGAI"). RMG's and CCBM's interests in the Castle Rock prospect, as shown in
Table 1, reflect the completion of SENGAI's drilling program in late calendar
2001. SENGAI elected not to exercise its option under an Option and Farmin
Agreement on February 8, 2002.
Prospects are evaluated for coalCBM potential using available public and industry data, taking into account proximity to other positions held by RMG and existing or planned gas transmission lines, and whether drilling and production permits can be obtained and the costs thereof. The final decision to acquire a
prospect is made by the executive officers of RMG.obtained. Well drilling and testing is done by outside contract drilling companies. Drilling results (cores, gas and water flow rates, and other data) are evaluated by RMG staff, using customary technical methods, to determine if any coal zones encountered in the well should be completed for production. Completion requires setting casing pipe down to the coal zone(s), installing pumps, and installing and setting up the necessary surface equipment (for example, water disposal lines and water holding tanks and/or holding ponds for evaluation wells, pending production permitting), and dewateringd ewatering the well sufficiently so production can start. The decision whether to complete the well is made by the executive officers of RMG.
Table
Productive Wells
At December 31, 2004, gross and net productive wells were as shown in the following table. A “productive well” is a well which is producing (or demonstrated to be capable of production but is shut in).
Project | | Gross | | Net |
| Hi-Pro Field | | | | |
| | North | | 92 | | 79 |
| | South | | 100 | | 41 |
| Total | | | 192 | | 120 |
Drilling Activity
The following table shows drilling activity for the two fiscal years ended December 31, 2004 and 2003, from RMG’s inception to December 31, 2004, and total wells at March 15, 2005. The data includes wells which have been plugged and abandoned.
Prospect | Twelve Months Ended 12/31/04 | Twelve Months Ended 12/31/03 | Inception to 12/31/04 | Total Wells at 2/14/05 |
| Castle Rock (2) | 4 | 0 | 26 | 26 |
| Oyster Ridge (3) | 8 | 0 | 15 | 15 |
| Hi-Pro(1) | 4 | 0 | 4 | 4 |
| Total | 16 | 0 | 45 | 45 |
(1)Does not include any wells drilled by Hi-Pro Production LLC before November 1, reflects RMG's, Quaneco's2003, which wells with associated acreage were purchased by RMG in January 2004.
(2)Includes 12 wells that have been plugged and CCBM's acreage positionabandoned.
(3)Includes 3 wells that have been plugged and abandoned.
Acreage
Acreage as of the
filing of this Annual Report. Table 1 does not reflect the reduction in net
acreage held by RMG if Anadarko Petroleum, Inc. exercises its options to back-inMarch 15, 2005 is:
| | | Total |
Property | | Gross | | Net (RMG) |
| Castle Rock | | 123,520 | | 48,772 |
Oyster Ridge(1) | | 64,677 | | 40,375 |
| Hi-Pro | | 49,009 | | 39,521 |
| Total | | 237,206 | | 128,668 |
(1)Data for a 25% working interest on 31,711 gross acres or Kerr McGee exercises its
option to back-in for a 40% working interest on 38,184 gross acres within the Oyster Ridge prospect. Also, 69,895assumes we will earn some of the acres shown as held in Oyster Ridge
assume we continue to earn acreage under the drill-to-earn-acreage provisions of
the option agreementsa drill-to-earn agreement with Anadarko and Kerr McGee.another oil and gas company. See "Description of Prospects - Oyster Ridge" below.
-17-
TABLE 1
- --------------------------------------------------------------------------------
Project
and Date Gross Lease Net Lease RMG Net Quaneco Net CCBM Net
Acquired Acres Acres Acres Acres Acres
- --------------------------------------------------------------------------------
Castle Rock 123,840 111,567 48,811 55,784 6,973
Jan. 2000
Oyster Ridge 87,642 87,642 32,380 0 32,380
Dec. 1999
Baggs North 120 120 60 0 60
Jan. 2000
Hi-Pro 52,740 51,938 46,974 0 0
Jan.2003
- --------------------------------------------------------------------------------
TOTAL 264,342 251,267 128,225 55,784 39,413
- --------------------------------------------------------------------------------
We own
Under a
43.75% working interest (35% net revenue interest) in the Castle
Rock prospect on 123,840 gross and 111,567 net acres in southeast Montana. CCBM
can purchase a 6.25% working interest in our acreage (6,973 net acres) of the
Castle Rock prospect if they meet certain payment obligations. In July 2001
we
sold a 50% working interest in all our coalbed methane leases, except at Castle
Rock, to CCBM for $7,500,000, plus other consideration. The acreage data in
Table 1 reflects these transactions.agreement, CCBM agreed to pay up to $5,000,000 for drilling and completing CBM wells on the properties owned by RMG and CCBM.
WeThis drilling commitment was completed by December 31, 2004. Pursuant to the agreement with CCBM, we have a carried working interest in all of the wells drilled
with the CCBM drilling fund on properties owned in July 2001 (after the Pinnacle
transaction, those properties consist oftransaction), including the Castle Rock
Baggs, and
the Oyster Ridge
property (not including the Kerr-McKee earn-in acreage)). To date, CCBM
has not indicated whether they will participate in the Kerr McGee acreage under
the AMI agreement as it is still under review by CCBM under the AMI review
timeline.properties. CCBM has the right to participate
asup to 50% of the working interest
in CBM properties we acquire
until the AMI expires on June 30, 2005. We will not receive carried interests from CCBM in
properties RMG or RMG I acquires in the future; if CCBM elects to
participate, RMG or RMG I would not have a carried interest infuture wells on
futureany properties.
A total of 72 wells have been drilled on RMG acreage through December 31,
2003: 5 in (former) fiscal year 2001; 53 in (former) fiscal year 2002; 12 inAlso pursuant to the
seven months ended December 31, 2002; and 2 in 2003. 43 of the wells were
drilled on properties transferred to Pinnacle in mid-2003. Nineteen of the wells
were drilled by SENGAI in Castle Rock under the terms of2001 Agreement, CCBM has bought a
option and farmin
agreement. Eleven of those 19 wells were stratigraphic wells and have been
plugged by SENGAI; 8 of those 19 wells were completed and are owned by RMG
(93.75% working interest) and CCBM (6.25% working interest), as Quaneco opted
out of maintaining a25% working interest in the
8 wells. Other than the Castle Rock
wells, RMG and CCBM both have a 50% working interest in allAnadarko Portion of
these wells (see
Table 2 below).
As of December 31, 2003, CCBM and RMG have spent approximately $2,194,900
of the $2,500,000 drilling fund CCBM is committed to spend on RMG's behalf. This
reflects a reduction of $391,000 for RMG's participation in two of Carrizo's
Gulf Coast wells. We are relying on the $305,100 balance to pay for continued
drilling and completion work on the Castle Rock and Oyster Ridge
properties, as
to which RMG will have a carried working interest with no financial obligation
of RMG for drilling and
completion costs until the drilling fund is exhausted.
For other properties we acquire in which CCBM elects to participate, CCBM would
bear 50% of drilling and completion costs for their 50% working interest.
Future annual financial obligations for coalbed methane properties consist
of approximately $173,100 gross in rental fees to the lessors for 2004 ($81,800
net to RMG).
Table 2 lists the number of wells drilled, the total exploration costs and
the remaining number of wells currently permitted for drilling as of December
31, 2003. Wells permitted for drilling on the Hi-Pro properties are shown;
exploration costs and numbers of wells drilled by Hi-Pro Production are not
shown.
-18-
TABLE 2
FY 2001 FY 2002 New Year 2002 FY 2003
Prospect 6/1/00-5/31/01 6/1/01-5/31/02 6/1/02-12/31/02 1/1/03-12/31/03 TOTAL Remaining
Wells $ Wells $ Wells $ Wells $ Wells $ Permits
- ---------------------------------------------------------------------------------------------------------------------------
Castle
Rock 3* $283,900 19** $2,500,000 $ 4,300 0 0 22 $2,788,200 5
- ---------------------------------------------------------------------------------------------------------------------------
Oyster
Ridge 2 150,500 5 464,200 3,400 0 0 7*** 618,100 4
- ---------------------------------------------------------------------------------------------------------------------------
Hi-Pro n/a n/a n/a n/a n/a n/a n/a 0 n/a n/a 9
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL 5 434,400 24 2,964,200 7,700 0 0 29 3,406,300 18
* one well has been plugged and abandoned
** drilled by SENGAI, 11 have been plugged and abandoned
*** includes 3 wells that have been plugged and abandoned
CARRIZO - PURCHASE AND SALE AGREEMENT. On July 10, 2001, RMG closed a
Purchase and Sale Agreement with CCBM, Inc., a Delaware corporation which is
wholly-owned by Carrizo Oil & Gas, Inc., Houston, Texas (NMS "CRZO"). The
agreement between CCBM and RMG is intended to finance the further exploration of
the properties held in Montana and Wyoming, and to acquire and develop more
properties.
RMG assigned CCBM an undivided 50% interest in all of RMG's then current
coalbed methane properties (with the exception of Castle Rock of which only a 6.25% working interest was assigned) for a purchase pricein Castl e Rock.
RMG's leases of $7,500,000 by a
promissory note payable in principal amounts of $125,000 per month plus interest
at an annual rate of 8%, over 41 months (starting July 31, 2001) with a balloon
payment due on the forty-second month. This note was reduced in connection with
CCBM's contribution of properties to Pinnacle (see "Transaction with Pinnacle
Gas Resources, Inc. - Continuing Operations of RMG, Continuing Agreement with
CCBM, and the AMI Agreement, after the Pinnacle Transaction"), and the balance
on the note is secured with a 50% undivided interest in the remaining properties
(Oyster Ridge and Baggs North (but not Hi-Pro).
CCBM has the right to participate in other properties RMG may acquire under
an area of mutual interest ("AMI") agreement. This agreement has been modified
by the AMI agreement signed in connection with the Pinnacle transaction; CCBM
waived its right to participate in the Hi-Pro acquisition. For information on
the original AMI agreement, see "Carrizo - Purchase and Sale Agreement" in the
Annual Report (Form 10-K/A1) for the former fiscal year ended May 31, 2002.
In addition to its one-half share of revenues in proportion to its one-half
share of the working interest, CCBM was entitled to a credit (applied as a
prepayment of the purchase price for the undivided 50% interest in RMG's
acreage), equal to 20% of RMG's net revenue interest from wells drilled with the
$5,000,000 drilling budget, until the amount of that credit in favor of CCBM
equals $1,250,000. At the formation of Pinnacle, CCBM paid RMG approximately
$1.8 million to complete is purchase value on the contracts properties. The
payment of $1.8 million was a reduction to the principal on the original $7.5
million note from CCBM. The $1.25 million that CCBM was to recover from 20% of
RMG's revenue interest on the contributed properties was netted against the
total purchase price on the contributed properties which yielded the $1.8
million cash payment. CCBM is not entitled to any additional disproportionate
revenue distributions.
QUANECO - AGREEMENT. On January 3, 2000, RMG purchased a 50% working
interest and 40% net revenue interest in the Castle Rock and Kirby prospects in
the Powder River Basin of southeast Montana consisting of approximately 185,000
net mineral acres from Quaneco, L.L.C. (formerly Quantum Energy, L.L.C.,
Cleveland, Ohio and Oklahoma City, Oklahoma). The acreage includes 88,409 net
acres ofUnited States Bureau of Land Management ("BLM") land; 14,916 net acres, state and fee lands will require annual cash payments of state land
(Montana), and 82,775 net acresapproximately $347,500 in 2005 ($206,900 for RMG's portion, to keep undeveloped CBM leases.
Description of fee land.
-19-
In fiscal 2000 and 2001, RMG paid Quaneco the cash purchase price of $5,500,000
for the acreage plus a drilling commitment of $2,500,000. RMG and CCBM
transferred their interests in the Kirby prospect to Pinnacle in mid-2003.
For information on the Quaneco agreement, see "Quaneco Agreement" in the
Annual Report (Form 10-K/A1) for the (former) fiscal year ended May 31, 2002.
DESCRIPTION OF PROSPECTS
Prospects
Leases of federal mineral rights are obtained from the United States Bureau
of Land ManagementBLM and expire from 20042005 to 2009, unless RMG establishes production on the lease, in which event the lease is held so long as coalbed
methaneCBM or other gas or oil is produced. A royalty interest of 12.5% on the production is paid to the BLM. State leases expire from 20042005 to 2009 in Wyoming and Montana, unless RMG establishes production on the lease, in which event the lease is held so long as coalbed methaneCBM or other gas or oil is produced. The royalty paid to the State of Wyoming is from 12.5 %12.5% to 16.67%, and 12.5% to the State of Montana. Annual renewal fees for non-producing Federal leases is $1.50 to $2.00 per acre, and $1.00 and $2.75 for non-producing Wyoming and Montana state leases.
An environmental group has filed a lawsuit against the BLM, RMG and others, challenging the validity of numerous BLM leases in the Powder River Basin of Montana. See Item 3, Legal Proceedings ("Rocky Mountain Gas Litigation").
"Legal Proceedings."
Leases on private (fee) land for
coalbed methaneCBM and conventional gas expire at various times from
20042005 to
2011, unless production is established, in
which event the lease is2009, and are held so long as
there is production.the wells are capable of production on the lease. The landowner is paid a royalty from production of 12.5% to 20.0%, depending on the lease terms.
Table 3 presents total acreage (developed and undeveloped) held by RMG at
December 31, 2003, and the Hi-Pro acreage as of the filing date of this Annual
Report.
TABLE 3
Net Net Net
Net Leased Leased Leased
Gross Net Leased from from from
Leased Leased from State of State of Private
Prospect Acres Acres BLM Wyoming Montana Owners
------- ------- -------- ------- ------- ------
Castle Rock 123,840 111,567 55,104 0 10,860 45,603
Oyster Ridge* 20,306 20,306 17,107 639 0 2,560
Baggs North 120 120 0 120 0 0
Hi-Pro (undeveloped) 40,120 40,120 0 112 0 40,008
------- ------- ------ ----- ------ ------
Total Undeveloped Acres 184,386 172,113 72,211 871 10,860 88,171
Hi-Pro (developed) 12,620 11,818 460 280 0 11,078
------- ------- ------ ----- ------ ------
Total Acres 197,006 183,931 72,671 1,151 10,860 99,249
======= ======= ====== ===== ====== ======
*Does not include 29,151 acres under option from Anadarko Petroleum and
38,184 acres under option from Kerr McGee. See "Description of Properties -
Oyster Ridge."
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RMG's properties and mineral leases of BLM, state and fee lands require
annual cash payments of approximately $173,100 during 2004. CCBM is obligated
for $59,600 of the $173,100 required to keep undeveloped coalbed methane leases
in effect.
CASTLE ROCK:
Castle Rock: The Castle Rock project consists of 123,840123,520 gross and 111,56748,772 net acres located in the northeastern portion of the Powder River Basin of Montana, west of Broadus, Montana. Coals present are in the Tongue River member of the Fort Union formation and appear comparable to coals currently being
developed by other operators south of the Castle Rock acreage near the Montana/Wyoming border. Currently, there are no pipelines in this area.
OYSTER RIDGE:
Oyster Ridge: The Oyster Ridge project consists of two acreage positions: (1) 49,45746,896 gross and net acres located in southwestern Wyoming in the Ham's Fork Coal Field adjacent to the Green River Basin; RMG and CCBM have a 100% working interest (50% each)(75% RMG and 25% CCBM) in 20,76515,185 gross acres within this play, which isposition, and earn-in rights on 31,711 gross acres held withby Anadarko Petroleum, Inc. Oyster Ridge;; and (2) 38,18417,781 gross and net acres held by Kerr-McGee Rocky Mountain Corporation,another oil and gas company (the "Other Party"), which are at the north and south ends of the Anadarko acreage.
The area is prospective for coalbed methane productionCBM from two primary
Cretaceous age coals, the FrontierKemmerer and the Adaville.Adaville coals. The Kern River pipeline, which services southern California, crosses the property. Through December 31, 2003, $799,5002004, $1,608,400 has been spent on drilling and completion at Oyster Ridge. RMG is the operator for all the acreage.
(1)Anadarko Petroleum, Inc. is successor to Union Pacific Land Resources Corporation, which sold the acreage subject to UPLRC's back-in option to third parties, from whom RMG acquired the acreage in December 1999.
The agreement with Anadarko is a drill-to-earn-acreage agreement: We must drill at least four wells each year, each on a new section (640 acres), to earn a lease on each drilled section, and also to keep in force previously earned
leases in the 31,711 acres area.section. Wells drilled by our seller, and by us (with CCBM), have earned 2,560 acres, which are included in3,200 acres. Four of the 20,306 acres leased
presently.
Another 29,1512004 wells were drilled to the Frontier coal and four were drilled to the Adaville coal. These wells warrant further testing and the drilling of more exploratory wells.
31,711 gross acres in the Oyster Ridge project are subject to an option held by Anadarko Petroleum, Inc. to participate as a 25% working interest owner on all wells drilled each year. Anadarko has not yet elected to participate, and has no working interest in the wells drilled to date on this prospect. If Anadarko elects to participate in the future, working interest ownership in affected wells would be 37.5%56.25% RMG, 37.5%18.75% CCBM, and 25% Anadarko.
(2) Effective March 31, 2004,In February 2005, RMG signed a letter of intent to enter into
an earn-inexploration and participation agreement to acquireearn a 60%65% working interest from Kerr-McGee Rocky
Mountain Corporation ("KM")the Other Party in 38,18417,781 gross and net mineral acres held by KMthe Other Party under federal and Wyoming state leases. When executed,This agreement replaces a 2004 agreement between the earn-in agreement
will be for a total of six years, with three phases: drilling commitment, pilot
program, and development program. parties.
The earn-in agreement is expected to be
executed by Marchthrough December 31, 2004.2011 if not terminated sooner. The following is a summary of terms.
Drilling Commitment.agreement has two phases:
Commitment wells. On or before September 30, 2004,August 15, 2005, RMG will commence to drill, completecase and attempt to produce for at least 30 dayscomplete (at its sole expense) two
coalbed methanefour CBM wells (one to(at least one in the Frontier coal seams and one tocoal), each on a 640 acre drilling block. RMG must spend at least $300,000 on the Adaville
Cretaceous coal seams), to earn 60%total of KM's working and net revenuefour wells. Upon completion of the four wells, RMG shall have earned 65% of the Other Party's interest in the 640 acredrilling block and in one additional section surroundingoffsetting that block. The Other Party's retained 35% interest in each well downwill be relinquished until RMG attains payout.
Development program. If the four commitment wells have been completed, RMG may elect to commit to an on-going drilling program, by drilling a minimum of five wells per year on unearned Other Party leases or in drilling blocks containing at least 50% of unearned Other Party lands. The development program is extendable in this manner for up to three additional one-year terms. Each development well will earn RMG 65% of the unearned Other Party leasehold in the drilling block, and in the unearned Other Party leasehold in one offsetting section located nearest to the deepest depth drilled.
Drillingdrilling block.
At payout to RMG of its drilling and completion costs for
each commitment well, the
two wells will beOther Party may then back-in for a
minimum of $300,000.
RMG will receive all production revenues from each well until RMG reaches payout
(total drilling and completion costs) from the wells, at which time KM will
begin to participate for its 40% working interest. KM's leases will be delivered
to RMG with a 82.5% net revenue interest.
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Pilot Program. If RMG determines the drilling program results to be
favorable, in its exclusive judgment, a pilot program for four wells (at RMG's
sole expense) will be initiated by September 30, 2005.
Development Program. If RMG determines the pilot program results to be
favorable, in its exclusive judgment, RMG will notify KM by December 31, 2005 of
its election to commit to a development program. If this commitment is made, RMG
shall drill at least 10 wells per year on KM lands beginning in 2006. Each well
will earn for RMG a 60%35% working interest in the 640 acre section surroundingdrilling block or keep only its overriding royalty interest (from 3.5% to 5% depending on the acreage). At payout of the first development well in a drilling block, the Other Party may either back in for a 35% working interest in the well and each lease will be deliveredor keep only its overriding royalty interest. These elections would not apply to RMG with a 82.5% net revenue interest.
KM may electthe extent the Other Party elects to participate for a 40%35% working interest in any development well.
If KM elects
CCBM decided not to participate in the first well in the section, KM will be
deemed to relinquish the 40% working (and associated net revenue) interest in
the well until RMG reaches payout. If KM elects not to participate in the second
well in any section previously earned by RMG, then KM shall have relinquished
all of its interest in the entire section.
RMG will be the operator for each stage of the KM project.
As of the filing date of this Annual Report, CCBM has not determined
whether to participate with us in the Kerr-McGeeOther Party earn-in agreement. However, our
net acreage calculations assume that CCBM will participate.
BAGGS NORTH: This prospect contains 120 gross and net acres located in
Carbon County, Wyoming. This State lease is located 7 miles north of Baggs,
Wyoming. RMG holds a 50% working interest in this prospect. To date, RMG has not
conducted any significant exploration on the property.
GENERAL INFORMATION ABOUT COALBED METHANE.
General Information About Coalbed Methane.
Methane is the primary commercial component of natural gas produced from conventional gas wells. Methane also exists in its natural state in coal seams. Natural gas produced from conventional wells generally contains other hydrocarbons in varying amounts which require the natural gas to be processed. Methane gas produced from coalbeds generally contains only methane and is pipeline-quality gas after simple water dehydration.
Coalbed methane ("CBM")
CBM production is similar to conventional natural gas production in terms of the physical producing facilities. However, the subsurface mechanisms that allow gas movement to the wellbore are very different. Conventional natural gas wells require a porous and permeable reservoir, hydrocarbon migration and a natural structural or stratigraphic trap.
Coalbed methaneCBM is stored in four ways: 1) as free gas within the micropores (pores with a diameter of less than .0025 inch) and cleats (set of natural fractures in the
coal;coal); 2) as dissolved gas in water within the coal; 3) as absorbed gas held by molecular attraction on surfaces
of macerals (organic constituents that comprise the coal mass), micropores, and cleats in the
coal;coal, and 4) as absorbed gas within the molecular structure of the coal molecules. Coals at shallower
depth withdepths wi th good cleat development contain significant amounts of free and dissolved gas while the percentage of absorbed methane generally increases with increasing pressure (depth) and coal rank.
Coalbed methaneCBM gas is released by pressure changes when the water in the coal is removed. In contrast to conventional gas wells, new
coalbed methaneCBM wells initially produce water for several months. As the formation water pressure decreases, methane gas is released from the structure.
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Methane production is a direct result of reducing the hydrostatic (water) pressure in the coal formation. Three principal stages are involved:
X
1.Drill wells (typically eight or more in a 'pod') down to the same coal formation, in contiguous 80 acre spacing per well; test the water in the formation and test coal samples taken from the formation. Water testing determines if the geochemical environment of the coal seam is conduciveconductive to the formation of CBM.
X
2.Install gathering lines to hook up and put wells on pump to "dewater" the coal formation. Hydrostatic pressure must be reduced to about 50% of initial pressure before enough data is obtained (water flow rates, CBM gas flows) to determine how much CBM the wells may produce. This dewatering stage may take 63 to 18 months, and in some instances 24 months (where there is no dewatering of the coal seam occurring from wells drilled by others on adjacent properties).
X
3.Installing (or have a transmission company install) a compressor and transport linelines to carry produced gas to a gas transmission line for sale to end users. Gas production starts gradually then continues to grow in volume as hydrostatic pressure is reduced; optimal production won't occur until hydrostatic pressure is reduced approximately 90% from initial levels.
COALBED METHANE WELL PERMITTING
Coalbed Methane Well Permitting
Operators drilling for coalbed methaneCBM are subject to many rules and regulations and must obtain drilling, waterdischarge and other permits from various governmental agencies depending on the type of mineral ownership and location of the property. Intermittent delays in the permitting process can reasonably be expected throughout the development of all RMG projects. As with all governmental permit processes, there is no assurance that permits will be issued in a timely fashion or in a form consistent with the plan of operations.
Drilling and production operations on our Powder River Basin ("PRB") leases in Wyoming and Montana are subject to environmental rules, requirements and permits issued by various federal authorities for drilling and operating on all land, regardless of ownership, and state and local regulatory agencies for land owned by the state or in fee by private interests. The primary Federal agency with related responsibilities is the Bureau of Land Management of the U.S. Department
of the Interior ("BLM")BLM which has imposed environmental limitations and conditions on coalbed methaneCBM drilling, production and related construction activities on federal leases in the PRB. These conditions and requirements are imposed through Records of Decision ("ROD") issued pursuant to Environmental Impact Statements ("EIS"). The BLM may also impose site-specific conditions on development activities, such as drilling and rights- of-way for the construction of rights-of-way,roads, before it approves required applications for permits to drill and plans of development.
In April 2003, the BLM issued Records of Decision finalizing two impact statements: The Powder River Basin Oil and Gas EIS (PRB-EIS) for the Wyoming portion of the basin, and the Statewide Oil and Gas EIS and Proposed Amendment for the Powder River and Billings Resource Management Plans in Montana. Together, the impact statements authorize the development of some 77,000 coalbed
methaneCBM gas wells in the Powder River Basin, most of which would be drilled on the Wyoming side of the basin.
With the EIS completed, the BLM will be able to consider drilling or development proposals in the geographic areas studied, however, before any permits are approved, the BLM will conduct an additional round of environmental review to identify site-specific environmental impacts and appropriate mitigation measures. Three lawsuits have been filed challenging the Record of Decisions, however, no stays have been issued.
(See I.3. LegalSee Item 3, “Legal Proceedings
- Rocky Mountain Gas, Inc.
)
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”
The state-based environmental agencies primarily concern themselves withhave primary jurisdiction over the issuance of permits related to drilling, land, air quality and water discharge. The primary state-basedThese agencies for which coalbed methane operators
are subject to include:
X are:
1.Wyoming Department of Environmental Quality ("WDEQ")
X
2.Wyoming Oil and Gas Conservation Commission ("WOGCC")
X
3.Montana Department of Environmental Quality ("MDEQ")
X
4.Montana Board of Oil and Gas Conservation ("MBOGC")
While the BLM is primarily responsible for issuing broadly based EISsbroad-based EIS's for each state, its jurisdiction over related matters and the actual issuance of drilling permits is primarily reserved for federal leases. Permits for drilling on state or fee owned land are issued by the WOGCC and MBOGC.
In contrast to Wyoming, Montana authorities have been very slow in undertaking CBM environmental studies and granting permits to drill wells. In fact, to date, only the Redstone (Fidelity) project is producing CBM gas in Montana. With the exception of a relatively small number of drilling permits available from earlier issuance (including those held by RMG which have allowed some drilling on the Castle Rock project), a drilling moratorium had been in effect during the last three years, prior to the approval of the two environmental impact statements.
The DEQs are primarily responsible for issuing air quality and water discharge permits, among other things. Water disposal has been and is expected to continue to be a significant issue, particularly with respect to coalbed
methaneCBM gas production, which typically entails substantial water production at least during the
dewatering phase of completion of a new well. The primary issue of concern is the salinity content in the produced water, which is measured by the sodium absorption ratio ("SAR"), which, depending upon a location, can range from slightly less than that in surface water to a substantially greater amount. Due to the discrepancies of the SAR content found in water from coalbed methaneCBM wells, the disposal of this water is tightly regulated. If the SAR content is low, the water canmay be used for irrigation, livestock drinking water or even as a water supply for cities. If the SAR content is higher, the water quality does not merit use for drinking water or irrigation and, under these measures, the DEQ has outlined various other methods of water disposal. Man-made pondsreservoirs may also be built right besidenear the wells, enabling the wells to draind rain their water into the ponds (called surface discharge). Additionally, there might be drainages which the produced water can flow into. Finally, the water might be reinjected through wells into the ground below levels from which the water was produced. Thus far, the vast majority of associated water produced has been discharged on the surface, primarily captured in reservoirs and ponds and
allowed to evaporate.
evaporate or permeate into the ground.
Overall, RMG has not experienced any difficulty in obtaining air quality and water discharge permits from the WDEQ, and those permits are in place for the Hi-Pro properties. RMG has not hasyet applied for such permits in Montana.
The following summarizes permits now in place.
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Table 4
Expiration
Prospect Remaining Permits or Renewal Date
-------- ------------------ -----------------
Castle Rock 5 May - July 2004
Hi-Pro 9 August - September 2004
Oyster Ridge 4 September 2004
------------------
Total 18
| Prospect | Remaining Permits |
| Castle Rock | 0 |
| Hi-Pro | 8 |
| Oyster Ridge | 7 |
| |
| Total | 15 |
Drilling permits issued by the State of Wyoming allow one year for drilling completion; permits issued by the State of Montana allow six months.
Once drilled, all wells producing water in Wyoming are subject to a National Pollution Discharge Elimination System ("NPDES") permit relating to water testing and discharge. All wells in the Castle Rock prospectproject also remain subject to the Montana Board of Oil and Gas Commission approval. Upon completion of drilling, wells are subject to monthly reporting regarding status and production to the respective state agencies in which they are located.
Due to the low pressure characteristics of the coalbeds, the production of coalbed methaneCBM is dependent on the installation of multi-stage compression facilities. Gas is gathered from the wells, and transported to a low level compression station, then on to a high level compression station and finally to the transmission pipeline. The water is commonly collected through another pipeline from each of the wells and either discharged directly into the stream channel or pumped intoto a surface reservoir.
Companies involved in coalbed methaneCBM production generally outsource gas gathering, compression and transmission. RMG and industry partners have and will likely continue to outsource most of their compression and gathering to third parties at fixed charges per mcfbased on volume transported.
GAS MARKETS
Gas Markets
Gas production from the Powder River Basin is significant. Since this area is sparsely populated,
most of the gas must be exported to distant markets. The existing Wyoming pipeline infrastructure is already substantial and continues to expand with gathering systems and intrastate lines, yet is ultimately dependent on large interstate pipelines. With the exception of a portion of the gathering systems, this pipeline system is typically owned and operated by independent mid-stream energy companies, rather than oil and gas operators. The pipelines generally will not be financed and constructed until appropriate amounts of gas have been proven and committed for transport on the new lines. While the total current take awayway capacity from the PRB is approximately 1.25 billion cubic feet per day (Bcfd), excess capacity over current production rates does not exist in all locations and not all producers have a ready marketma rket for the sale of their gas at all times. Some major producers in the region reserve portions of pipeline capacity beyond their current requirements, resulting in less than stated maximum capacity being available for other producers. In addition, total stated capacity is unavailable at times as pipelines are shut down for maintenance or construction activities.
Based on the existing pipeline systems and the gas sales markets in its area of operations in Wyoming, RMG expects that, at least for the next few years, the markets in which it sells its gas, and the spot prices to which it will be subject, will be dependent upon three major sales points:
X
1.The Colorado Interstate Gas ("CIG") station near Cheyenne in southeastern Wyoming which primarily feeds regional markets or markets in the Midwest.
-25-
X
2.The Ventura market ("Ventura") located in Ventura, Iowa, which prices gas on the Northern Border pipeline where it interconnects with Northern Natural Gas and feeds markets in the Northern Plainsplains and Midwest.
X
3.The Opal market ("Opal") in southwestern Wyoming, which delivers to the Kern River pipeline for delivery to Utah, Nevada, Arizona and California.
PIPELINES THAT SERVE THE
Pipelines That Serve the CIG MARKET
Market
Two large diameter intrastate pipelines,pipeline, the Fort Union and the Thunder Creek, were constructed in the Basin in 1999, and gathering system infrastructure has continued to grow significantly. These two major intrastate pipelines currently provide almost 1.1 Bcfd capacity, flowing south out of the Basin to the CIG Hub in Southeast Wyoming.
-
·Fort Union. The Fort Union Gas Gathering pipeline consists of a 106 -----------
mile,24mile, 24 inch, 434 Mmcfd capacity line completed in August 1999 and a 20" pipeline with a capacity of 200 Mmcfd completed in
September 2001. It is believed that capacity could be increased by another 200 Mmcfd by adding additional compression to this line.
-
·Thunder Creek. Thunder Creek Gas Services pipeline is a 126-mile, 24
-------------- inch pipeline which commenced operations on September 1, 1999 with a capacity of 450 Mmcfd.
The Hi-Pro production is delivered to the Thunder Creek pipeline where it is carried south and delivered to the CIG market.
El Paso Corporation's subsidiary Cheyenne Plains Gas Pipeline Co. received approval from the Federal Energy Regulatory Commission in March 2004 for construction of a new 380 mile pipeline from Cheyenne, Wyoming to Greensburg, Kansas, with a capacity of 560 Mmcf per day. Cheyenne Plains has announced its intent to apply to the FERC for permission to enlarge the line to handle 760 Mmcf per day. This line, with the enlarged capacity, is expected by Cheyenne
Plains to bewas placed in-service in January 2005, and may help further narrow the negative price differential for CIG prices compared to national prices.
PIPELINES THAT SERVE THE VENTURA MARKET
Pipelines That Serve the Ventura Market
There are currently only two significant pipelines capable of transporting gas out of the Basin to the north, the Bitter Creek pipeline, which connects with the Northern Border interstate pipeline and the Glasslands pipeline.
However, one additional line that is well along in its planning stages, would
also deliver gas to the Northern BorderGrasslands pipeline. Descriptions are as follows:
X
·Bitter Creek.Creek. The Bitter Creek pipeline is owned by Williston Basin
------------- Interstate Pipeline Company ("WBI"), a subsidiary of MDU Resources Group, Inc. It was completed in 2001 with initial capacity
of 150 Mmcfd.
X Grasslands.
·Grasslands. In response to the need for expandable access to the
---------- Ventura market, the Grasslands pipeline, also owned by WBI, went into service in November 2003. It is a 245 mile, 16 inch line
with an initial capacity of 80 Mmcfd and
reportably is expandable to 200 Mmcfd.
-26-
THE OPAL MARKET
The Opal Market
The Opal market, in southwestern Wyoming, is a major pipeline connection point, with several intrastate and interstate lines connecting to the major interstate Kern River line (with a recently enlargedwith capacity of 1.73 Bcfd, delivering to markets in Utah, Nevada, Arizona and California. If the Oyster Ridge property is put into production, gas could be sold into this market.
GAS PRICES
Gas Prices
Historically, spot gas prices received by producers at the Ventura, CIG and Opal markets have generally been at discounts to the NYMEX front month contract and Henry Hub spot cash prices, although with lesser discounts during the winter months. Prices at CIG can trade at a further discount to the Ventura prices, and again with an even higher discount during the second and third quarters, because CIG is partially based on local demand which can drop outside the heating season, while Ventura serves larger national markets and is highly correlated to Chicago market prices.
The negative price differential in the prices realized by Powder River Basin producers in 2003,2004, as compared to prices realized on the national gas market, ranged from 10%8% to 45% (higher outside the heating season)23%. The negative
price differential in the fourth quarter 2003 and first quarter 2004 narrowed in
comparison to the fourth quarter 2002. However, there is no guarantee that
increased capacity will eliminate the negative price differential or even
significantly reduce it.
INACTIVE MINING PROPERTIES
Inactive Mining Properties - URANIUM
GENERAL.Uranium
General. We have interests in several uranium-bearing properties in Wyoming and Utah, and in a uranium processing mill in southeastern Utah (the "Shootaring
Mill"the Shootaring Mill, in Garfield County).County, Utah, and properties in proximity to the mill. All the uranium-bearing properties are in areas which produced significant amounts of uranium in the 1970s and 1980s. At some future date, we could sell, develop and/orand operate these properties (directly or through a subsidiary company or a joint venture) with companies having the
necessary capital to mine and mill the uranium bearing material to produce uranium concentrates ("U3O8"U3O8") for sale to public utilities that operatewith nuclear powered electricity generating plants. Currently thereUranium concentrate spot prices have increased substantially to $22 per pound at March 23, 2005, compared to $10 in 2002. However, further increases to sustained higher prices will be needed to warrant putting the properties in production. All of the uranium properties are shut down; work is no operating uranium
millperformed on the mines to prevent flooding and permitting work is done as needed (monitoring and reporting) to keep existing permits in Wyoming and it would take a substantial increase in the market price of
uranium concentrate overeffect.
Over a period of time beforeat least 18 months, substantial and expensive work would be required to put the uranium mines into production, including permitting, cleaning rock and other debris from shafts and tunnels, pumping water out of the mines, extending shafts and tunnels, and drill sampling to ascertain whether a company withcommercially viable ore body exists on any of the financial
wherewithal would build a mill and place the deposits in production. Therefore,
until uranium oxide prices improve significantly,properties.
A decision to put the uranium properties into production will remain shut down.
depend upon uranium prices, mining and milling costs and the ability to raise the necessary funds.
At the dates of the consolidated balance sheets in this Report,December 31, 2004, there are no values carried on the balance sheets for uranium properties.
SHEEP MOUNTAIN
However, we believe the uranium properties we now hold have significant value because uranium prices continue to rise and stabilize at higher prices. Our decision to proceed will be based on our efforts to raise capital through joint ventures or otherwise, to explore the properties further, and put the mines into production and refurbish the Shootaring Mill in Utah. To that end, we have signed an agreement to sell a 50% interest in the Sheep Mountain properties in Wyoming and enter into a joint venture agreement for those properties (and others to be acquired) with Bell Coast Capital Corp., now named Uranium Power Corp. ("UPC") and a separate agreement to lease and acquire more uranium properties in Utah.
Sheep Mountain - WYOMING
Wyoming
Unpatented lode mining claims, underground and open pit uranium mines and mining equipment in the Crooks Gap area are located on Sheep Mountain in Fremont County, Wyoming. From December 21,31, 1988 to June 1, 1998, these properties were held by Sheep Mountain Partners ("SMP"). a Colorado general partnership. In February 1988, USE and Crested acquired from Western Nuclear, Inc. unpatented lode uranium mines, mining equipment and mineralized properties (including underground and open pit mines) at Crooks Gap in south-central Fremont County, Wyoming. The mines were first operated by Western Nuclear in the 1970s. USECC mined and milled uranium ore from one of the underground Sheep Mines in 1988 and 1989. In December 1988, USECC sold 50 percent of the interest in the Crooks Gap properties to a subsidiary of Nukem, Inc. and formed Sheep Mountain Partners ("SMP"), in which USECC received an undivided 50 percent interest.
On June 1, 1998, the CompanyUSE and Crested received back from SMP all of the Sheep Mountain mineral properties and equipment, in partial settlement of certain disputes with Nukem, Inc. ("Nukem") and its
subsidiary Cycle Resource Investment Corp. ("CRIC"). The judgment against Nukem
impressing the CIS uranium supply contractsOther of those disputes remain in a constructive trust with SMP
remains unresolved. Seelitigation - see Item 3, "Legal Proceedings."
We have recorded reclamation liabilities for the SMP
properties.properties (see note K to the consolidated financial statements). All historical costs in the SMP properties were offset against a monetary award which was received from Nukem during fiscal 1999.
-27-
UTAH
Plateau Resources Limited ("Plateau"Permits are in place only for standby maintenance of the mines and discharge of waste water pumped from the mines.
At the filing date of this report, we own 139 unpatented lode mining claims and a 644 acre Wyoming State Mineral Lease on Sheep Mountain in the Crooks Gap area.
- UPC Joint Venture.
Purchase and Sale Agreement. On December 8, 2004, USE and Crested entered into a Purchase and Sale Agreement (the “agreement”) with Bell Coast Capital Corp. now named Uranium Power Corp. (“UPC”), a British Columbia corporation (TSX-V “UCP-V”) for the sale to UPC of an undivided 50% interest in the Sheep Mountain properties. A summary of certain provisions in the agreement follows.
The initial purchase price for the 50% interest in the properties is $4,050,000 and 4,000,000 shares of common stock of UPC, payable by installments.
Initial cash and equity purchase price:
| October 29, 2004 | $ 175,000 | Paid |
| | |
| November 29, 2004 | $ 175,000 | Paid |
| | |
| June 29, 2005 | $ 500,000 | and 1,000,000 common shares of UPC stock |
| | |
| June 29, 2006 | $ 800,000 | and 750,000 common shares of UPC stock |
| | |
| December 29, 2006 | $ 800,000 | and 750,000 common shares of UPC stock |
| | |
| June 29, 2007 | $ 800,000 | and 750,000 common shares of UPC stock |
| | |
| December 29, 2007 | $ 800,000 | and 750,000 common shares of UPC stock |
| | |
| Total | $ 4,050,000 | 4,000,000 common shares of UPC stock |
The cash portion of the initial purchase price will be increased by $3,000,000 (in two $1,500,000 installments) after the uranium oxide price (long term indicator) is at or exceeds $30.00/lb for four consecutive weeks (the “price benchmark”). If the price benchmark is attained on or before April 29, 2006, the first installment will be due six months after price attainment (but not before April 29, 2006). If the price benchmark is attained after April 29, 2006, the first installment will be due six months after attainment. In either event, the second installment will be due six months after the first installment is due. These payment obligations will survive closing of the purchase of the 50% interest in the properties; if the installments are not timely paid, UPC will forfeit all of its 50% interest i n the properties, and in the joint venture to be formed.
USE and Crested, and UPC, will each be responsible for paying 50% of (i) current and future Sheep Mountain reclamation costs in excess of $1,600,000, and (ii) all costs to maintain and hold the properties.
Closing of the agreement is required on or before December 29, 2007, with UPC’s last payment of the initial purchase price (plus, if applicable, the increase in the cash portion). At the closing, UPC will contribute its 50% interest in the properties, and USE and Crested will contribute their aggregate 50% interest in the properties, to the joint venture (see below), wherein UPC and USE/Crested each hold a 50% interest.
UPC will contribute up to $10,000,000 to the joint venture (at $500,000 for each of 20 exploration projects). USE/Crested, and UPC, each will be responsible for 50% of costs on each project in excess of $500,000.
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 USE/Crested under the agreement and (iii) be relieved of its share of reclamation liabilities existing at December 8, 2004.
- Mining Venture Agreement
As of April 11, 2005, the company and Crested (as the USECC Joint Venture) 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. The joint venture generally covers uranium properties in Wyoming and other properties identified in the USECC Joint Venture uranium property data base, but excluding the Green Mountain area and Kennecott’s Sweetwater uranium mill, the Shootaring Canyon uranium mill in southeast Utah (and properties within ten miles of that mill), and properties acquired in connection with a future joint venture involving that mill.
The initial participating interests in the joint venture (profits, losses and capital calls) are 50% for the USECC Joint Venture and 50% for UPC, based on their contributions of the Sheep Mountain properties. Operations will be funded by cash capital contributions of the parties; failure by a party to fund a capital call may result in a reduction or the elimination of its participating interest. In addition, a failure by UPC to pay for its 50% interest in the Sheep Mountain properties may result in a reduction or the elimination of UPC’s participating interest. A budget of $567,842 for the seven months ending December 31, 2005 has been approved, relating to reclamation work at the Sheep Mountain properties, exploration drilling, geological and engineering work, and other costs. A substantial portion of thi s work will be performed by (and be paid to) USECC Joint Venture as manager.
The manager of the joint venture is the USECC Joint Venture; the manager will implement the decisions of the management committee and operate the business of the joint venture. UPC and the USECC Joint Venture each have two representatives on the four person management committee, subject to change if the participating interests of the parties are adjusted. The manager is entitled to a management fee from the joint venture equal to a minimum of 10% of the manager’s costs to provide services and materials to the joint venture (excluding capital costs) for field work and personnel, office overhead and general and administrative expenses, and 2% of capital costs. The manager may be replaced if its participating interest becomes less than 50%.
The preceding is a wholly-owned subsidiarysummary of USE.
In 2003, reclamation work on uranium properties (the Tony M, Velvet,certain provisions of the Mining Venture Agreement and Woods
Complex) in San Juan County, the Purchase and Sale Agreement, and is qualified by reference to those agreements which are filed as exhibits to this Annual Report.
Utah was completed.
PLATEAU'S SHOOTARING CANYON MILL AND PROPERTIES
In August 1993, USE purchased from Consumers Power Company ("CPC"), all of the outstanding stock of Plateau, which owns the Shootaring CanyonMill, a uranium processing mill and support facilities in southeastern Utah (the "Shootaring
Mill") for a nominal cash consideration.consideration and the assumption of various reclamation obligations. The Shootaring Mill holds a source materials license from the NRC. In the purchase of the stock from CPC, we agreed
to various obligations, as disclosed in USE's 1998 Form 10-K at pages 15 and 16.
The Shootaring Mill, is located in southeastern Utah, and occupies 19 acres of a 265 acre plant site. The millShootaring Mill was designed to process 750 tpd, but only operated on a trial basis for two months in mid-summer of 1982. In 1984, Plateau (now a wholly-owned subsidiary of USE) placed the mill on standby because CPC had canceled the construction of an additional nuclear energy plant. For informationPlateau also owns approximately 90,000 tons of uranium mineralized material stockpiled at the mill site.
In 2003 and 2004, reclamation work on uranium properties (the Tony M, Velvet, and Woods Complex, then held by Plateau in San Juan County, Utah) was completed. Plateau had relinquished these properties in 2003 and 2004, but has subsequently leased the Velvet from a third party who staked unpatented mining claims on the property (see below).
With recent improvements in uranium concentrate prices, Plateau has obtained an extension to January 2007 to commence reclamation work at the mill (reclamation costs are bonded, see Note K to the financial statements). Plateau has filed a request with the State of Utah for a permit and licenses to put the mill in operating status.
The Shootaring mill facilityMill is owned by Plateau Resources Limited ("Plateau"), a subsidiary of USE. Crested has a 50% interest in Plateau’s cash flows. The Shootaring Mill was designed to process 750 tons of material per day (tpd) and related real estate
propertyshould be capable of operating at Ticaboo, please see "Plateau's1,000 tpd, once refurbishing is completed.
When refurbished and the operational license is issued, the Shootaring Canyon Mill will have the capacity to produce 1.5 million pounds of uranium concentrates annually depending on the grade of material fed to the Shootaring Mill. It will cost at least $25 million to modify the ShootaringMill’s tailings cell to Utah standards; post additional reclamation bonding; and Properties"complete other ShootaringMill upgrades befo re production can begin. Additionally, a circuit to process the vanadium which is contained in almost all of the mineralized material is planned to be added to the ShootaringMill.
Except for the lower grade mineralized material which has been stockpiled at the Shootaring Mill for over ten years, the grades of materials controlled at other properties in the annual report (Form 10-K/A1) for the former fiscal year ended
May 31, 2002.
THE GREEN MOUNTAIN MINING VENTURE ("GMMV") PROJECT
For informationvicinity have not been determined. Until such grades have been established with drilling and testing, and a feasibility study completed on the GMMV agreement, see "Green Mountain Mining Venture"
in the annual report (Form 10-K/A1) for the (former) fiscal year ended May 31,
2002.
SHEEP MOUNTAIN PARTNERS ("SMP")
SMP PARTNERSHIP. In February 1988, USE acquired uranium mines, mining
equipment and mineralized properties (Sheep Mountain Mines) at Crooks Gap in
south-central Fremont County, Wyoming, from Western Nuclear, Inc. These Crooks
Gap mining properties are adjacent to the Green Mountain uranium properties.
USECC mined and milled uranium ore from one of the underground Sheep Mines
during fiscal 1988 and 1989. In December 1988, USECC sold 50 percent of the
interests in the Crooks Gap properties to Nukem's subsidiary Cycle Resource
Investment Corporation ("CRIC") for cash. The parties thereafter contributed the properties to and formed Sheep Mountain Partners ("SMP"), in which USECC
received an undivided 50 percent interest. SMP is a Colorado general partnership
formed on December 21, 1988, between USECC and Nukem, Inc. thendetermine the economics of Stamford, CT
("Nukem") through its wholly-owned subsidiary CRIC.
SMP was directed by a management committee, with three members appointed by
USECC and three members appointed by Nukem/CRIC. The committee has not met since
1991 as a resultrunning the Shootaring Mill to process these materials, we cannot determine if the properties contain any uranium reserves. In any event, the feasibility of the SMP arbitration/litigation. During fiscal 1991, disputes
arose betweenmines, and therefore of operating the SMP partners which resultedShootaring Mill, will be dependent on sustained high prices for uranium concentrates, and overall, the grades of material available for processing being economic (containing sufficient uranium) at such sustained high prices.
Once required financing is in litigation. See Item 3, Legal
Proceedings.
PROPERTIES. USE, Crested and/or USECC own 98place, the work is planned to be completed in approximately 18 months after the operating license is granted by the State of Utah, but unforeseen causes may delay the project. Efforts are underway while going through the State of Utah permitting process to raise the necessary financing for the project. However, financing terms have not been finalized, and we cannot predict if and when the financing will be completed.
In addition to the Shootaring Mill site, Plateau holds approximately 200 unpatented lode mining claims which have been acquired through a December 2004 agreement with a third party. Under this agreement, all of the uranium properties currently controlled or owned by the third party have been leased to Plateau (including the Velvet mine, currently shut down), and the third party will assist Plateau in locating additional uranium mineral properties for lease or purchase by Plateau. In return, the third party and Plateau will negotiate a 644 acre Wyoming State Mineral Leasecontract mining agreement for the third party to mine and deliver uranium material from those properties to the Shootaring Mill for processing, and pay the third party for that material. In addition to purchasing the material, Plateau will pay the third party a 2.5% gross royalty of the value received by Plateau for uranium concentrates and vanadium recovered at the mill from such material. Plateau has agreed to fund the development of the uranium properties on a project-by-project basis, on terms and in amounts to be agreed upon with the third party.
Included in the
Crooks Gap area.
An ion exchange plant located on the properties
(to remove natural soluble
uranium from mine water) was reclaimed and the plant disposed of at the
Sweetwater Mill impoundment facility in fiscal 2002.
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Permits to operate existing mines (now shut down) on the Crooks Gap
properties had been issued by the State of Wyoming, but amendments would be
needed to re-open them. A NPDES water discharge permitacquired under the Clean Water Act
has been obtained; monitoring and treatment of water removedthird party agreement is the Velvet Mine, located approximately 178 miles from the minesShootaring Mill, which was developed in the 1970s. The prior owner drove several miles of access tunnels (adits) and discharged in nearby Crooks Creek is generally required. However, fordrifts (access tunnels) and mined material from the last
three years, USECC has not discharged wastewater into Crooks Creek, and the
water instead is being discharged into the USECC McIntosh Pit at the Sweetwater
mill owned by Kennecott (the Sweetwater mill had been part of the Green Mountainworkings.
Inactive Mining venture).
INACTIVE MINING PROPERTIESProperties - GOLD
SUTTER GOLD MINING COMPANY.Gold
Sutter Gold Mining Inc. In fiscal 1991, USE acquired an interest in Suttergold properties located in the Mother Lode Mining District of Amador County, California. The entire Lincoln Project (which is the name we use for the properties) iswas owned by Sutter Gold Mining Company, a Wyoming corporation ("SGMC"). SGMC has been acquired by Globemin Resources Inc., a TSX-V listed company, in a reverse takeover stock exchange transaction in 2004. Globemin has changed its name to Sutter Gold Mining, Inc.("SGMI"). For information on ownership in SGMI by employees and a majority-owned subsidiarydirector of USE.
USE, see Part III of this report.
This property has never been in production. PersistentWe do not have a current feasibility study to support a determination that the Lincoln Project contains gold reserves.
SGMC has taken impairments (write-downs), in the 1990s, totaling $13,098,900, of the carrying value of its gold properties. These two impairments wrote off almost 85% of the investment. We determined that we could not produce gold from these properties at a profit as a result of low pricesmarket price for gold made financing difficult, and in fiscal 1999at the time. This resulted in a substantial write
down ofno value allocated to the SGMC properties.
Lincoln Project; the remaining assets relating to this property include raw land which is no longer needed for mining activity, and buildings and equipment.
Due to the depressed gold prices in the past, litigation (since resolved) and lack of funding, SGMCSGMI has deferred the start of construction of a gold mill complex and extension of existing underground workings. A tourist visitorsvisitor's center has been set up (see below) and leased to a third party for $1,500 per month plus a 4% gross royalty on revenues. There is one caretaker employee at
the Sutter operation. The conditional use permit is being kept current as necessary to allow for possibleplanned mining activities on the properties in the future.
In 1998 and 1999, the Company took impairments (write-downs) in the amounts
of $1,500,000 and $10,718,800, respectively, of the carrying value of the gold
properties. These two impairments wrote off almost 85% of our investment in
these properties. As a result of low market prices for gold at the time, we
determined that we could not produce gold from these properties at a profit. The
impairments taken in 1998 and 1999 resulted in no value for mine exploration,
and the remaining assets relating to this property include raw land which is no
longer needed for mining activity, and buildings and equipment. A significant
portion of the raw land has been sold.
We have not obtained a final feasibility study to support a determination
that the Sutter property contains proven or probable reserves of gold.
In late 2003, SGMC signed a letter of intent for an acquisition of SGMC by
Globemin Resources Inc., a British Columbia corporation listed on the TSX-V.
Completion of the acquisition is subject to negotiation and execution of a share
exchange agreement, approval by the TSX-V, Canadian regulatory authorities, and
the boards of directors and if necessary, shareholders of SGMC and Globemin. If
the acquisition is consummated, a majority of the stock of Globemin would be
owned by the (former) SGMC shareholders. Globemin thereafter would seek to raise
financing in Canada to begin mining the Lincoln Project and build a mill.
PROPERTIES. SGMC
Properties. SGMI holds approximately 435535 acres of surface and mineral rights: (87 acres of surface rights (owned), 73 acres of surface rights
(leased), 146 acres of mineral rights (leased), and 289 acres of mineral rights
(owned), all on patented mining claims near Sutter Creek, Amador County, California. The properties are located in the western Sierra Nevada Mountains at from 1,000 to 1,500 feet in elevation; 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 mile outside of Sutter Creek.
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Surface and mineral rights holding costs, and property taxes, will be approximately $130,000 and $9,900 respectively, for 2004.
2005.
The leases are for varying terms and require rental fees, annual royalty payments and payment of real property taxes and insurance.
PERMITS.
The Lincoln Project 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 have 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 four raises.
SGMI plans to begin further exploration work and the construction of a new raise to comply with U.S. Mine Safety Health Administration regulations and improve ventilation.
Permits. The Amador County Board of Supervisors has issued a Conditional Use Permit ("CUP") allowing mining of the SGM and milling of production,up to 1,000 tons per day, subject to conditions relating to land use, environmental and public safety issues, road construction and improvement, and site reclamation. Applications will beApplication has been made into the second quarter of 2004 to California regulatory authorities, for a waste
water discharge permit to allow the Company to utilize mill tails as mine
backfill and to store de-watered tails inat a dry stacked surface fill unit.
VISITORS CENTER. In fiscal 2000, SGMC spent approximately $298,000unit, and also use mill tailings for surface infrastructure related to improving access tomine back fill. This permit is the mine site, and tofinal major permit required for the project; a lesser extent tourist related improvements.decision is expected in second quarter 2005.
Visitor's Center. The visitorsvisitor's center, is being operated by a third party. The visitors centerparty, is an exhibit of the pictures and memorabilia from mining operations on other properties in the Sutter district in the nineteenth century, and a guided tour of the underground workings at the Lincoln Project. Revenues from this tourist operation were $40,300 for 2004, $48,800 for 2003, $49,200$26,500 for the seven months ended December 31, 2002, and $41,200 in (former) fiscal year ended May 31, 2002, and are included in "real estate" in theconsolidated statements of operations included in this report. These revenues offset a majorityportion of costs for holding the SutterSutte r properties.
MOLYBDENUM
As a holder
Molybdenum
In 1974, 1977 and 1987, USE and Crested leased and then sold various mining claims and mines near the town of royalty, reversionary and certain other interests in
properties located at Mt. Emmons near Crested Butte, Colorado, USE and Crested
are entitled to receive annual advance royalties of 50,000 pounds of molybdenum,
or cash equivalent. AMAX Inc. (which was acquiredof Greenwich, Connecticut. AMAX Inc. (acquired by Cyprus Minerals Company and
was renamed Cyprus Amax Minerals Company in November 1993, then later acquired later by Phelps Dodge) delineated a deposit of molybdenum on the leased claims containing approximately 146,000,000 tons of mineralization averaging 0.43% molybdenum disulfide on the properties of USE and Crested.
Advance royalties are required to be paid in quarterly installments until:
(i) commencement of production; (ii) failure to obtain certain licenses,
permits, etc., that are required for production; or (iii) AMAX's return of the
properties to USE and Crested. The advance royalty payments reduce the operating
royalties (6% of gross production proceeds) which would otherwise be due out of
production. There is no obligation to repay the advance royalties if the
property is not placed in production. USE recognized $108,500 advance royalty
revenues in (former) fiscal 2001. Phelps Dodge ceased making payments in July
2001.
Since June 2002, USE and Crested
also are entitled to receive $2,000,000 if the Mt. Emmons
properties are put into production and, in the event of a sale of Mt. Emmons
Mining Company (which owns the properties) or of its interest in the properties,
USE and Crested are entitled to receive 15% of the first $25,000,000 of sale
proceeds.
AMAX Inc. and its successor companies have
sought to put the Mt. Emmons
molybdenum property into production for 20 years. Due to local opposition to
mining (the property is close to the Crested Butte, Colorado recreational resort
area) and AMAX's successors' failure to diligently pursue obtaining the permits
needed to start mining, we know of no plans at this time to put the property
into production.
USE and Crested arebeen in litigation with Phelps Dodge concerning the properties and related
agreements, see "Itemagreements. In late 2004 and February 2005, the U.S. District Court issued orders in the litigation (see Item 3 -
Legal Proceedings."
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OIL AND GAS AND OTHER PROPERTIES
FORT PECK LUSTRE FIELD (MONTANA)"Legal Proceedings"). Although additional rulings are expected concerning water rights associated with the properties, we expect to receive back from Phelps Dodge, in 2005, the patented and unpatented lode mining claims which contain the molybdenum deposit, as well as a mine water discharge treatment plant located on those properties. Later in 2005, we expect to be receiving clarification from the Colorado Department of Public Health and the Environment (which has jurisdiction over how the treatment plant is operated to comply with environmental laws) as to our responsibilities to operate the plant. Plant operating costs, for which we will be responsible, will likely exceed $1,000,000 annually.
For more than 20 years, Phelps Dodge and its predecessor companies worked on a mine plan for the Mt. Emmons property, obtaining rights to the water necessary to mine and process molybdenum, and obtaining other permits necessary to put the property into production. We do not know why Phelps Dodge, one of the largest international mining companies, decided to cease trying to put the Mt. Emmons property into production, although the fact that Phelps Dodge is producing molybdenum from other mines may have been a factor in their decision.
In light of the rebound in molybdenum oxide prices to the $30 - $35 per pound range in March 2005 (compared to an average of approximately $3.25 per pound over the last several years), we may seek joint venture partners to work on a new mine plan and obtain the permits required to put the property into production. In this scenario, the properties would be transferred to a new subsidiary of USE and Crested, U.S. Moly Corp., then the subsidiary would seek to raise capital for the project and enlist large mining companies or other entities to enter into a joint mining venture. See Part III to this Annual Report. Ownership of the subsidiary subsequently would be reduced to the extent additional shares are sold to investors.
Development of the Mt. Emmons property for mining will require extensive capital and a long time to implement. We would have to obtain that capital through equity financing and/or a joint venture or other arrangement, however, we have no such arrangements as of the date of this Annual Report and may not obtain such. Reportedly, the mine plan of Phelps Dodge and its predecessor companies encountered opposition from local and environmental groups, and that opposition likely will continue, as Mt. Emmons is located close to Crested Butte, Colorado, a year round recreation area. Even with the resources of a joint venture partner, successful resolution of various issues arising with local and environmental groups is not assured.
Oil and Gas and Other Properties
Fort Peck Lustre Field (Montana). We operate a small oil production facility (three(two wells) at the Lustre Oil Field on the Ft. Peck Indian Reservation in northeastern Montana. We receive a fee based on oil produced. This fee and other assets of the Company collateralize a $750,000 line of credit from a bank.
WYOMING.
Wyoming. The Company and Crested own a 14-acre tract in Riverton, Wyoming, with a two-story 30,400 square foot office building (including underground parking). The first floor is rented to non-affiliates and government agencies; the second floor is occupied by the Company. The property is mortgaged to the WDEQ as security for future reclamation work on the Sheep Mountain Crooks Gap uranium properties.
The Company also owns a fixed base aircraft facility at the Riverton Regional Airport, including a 10,000 square foot aircraft hangar and 7,000 square feet of associated offices and facilities. This facility is on land leased from the City of Riverton for a term ending December 16, 2005, with an option to renew on mutually agreeable terms for five years. The aircraft fueling operation to the public was shut down late in fiscal 2002.
The Company owns three mountain sites covering 16 acres in Fremont County, Wyoming. In Riverton, Wyoming, the Company owns four city lots and improvements including two smaller office buildings.
COLORADO.
Colorado. USECC owns 182175 acres of undeveloped land in and near Gunnison, Colorado.
UTAH.
Utah. On August 14, 2003, USE's wholy-ownedwholly-owned subsidiary Plateau Resources Limited (and Plateau's wholly-owned subsidiary Canyon Homesteads, Inc.) sold all of the outstanding stock of Canyon Homesteads to The Cactus Group, LLC, for $3,470,000: $349,250 cash and $3,120,750 with The Cactus Group's five year promissory note. The note is secured with all the assets of The Cactus Group and Canyon (and is personally guaranteed by the six principals of The Cactus Group). The note is payable monthly (with annual interest at 7.5%) with a $2,940,581 balloon payment due in August 2008.
The sold properties are in Ticaboo, Utah, near Lake Powell, and included a motel, restaurant and lounge, convenience store, recreational boat storage and service facility, and improved residential and mobile home lots. Most of these properties had been acquired when the Shootaring Mill was acquired in the early 1990s.
RESEARCH AND DEVELOPMENT
No research and development expenditures have been incurred, either on the Company's account or sponsored by customers,customer, during the past three fiscal years.
ENVIRONMENTAL
GENERAL.
General. Operations are subject to various federal, state and local laws and regulations regarding the discharge of materials into the environment or otherwise relating to the protection of the environment, including the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act ("RCRA"), and the Comprehensive Environmental Response Compensation Liability Act ("CERCLA"). With respect to mining operations conducted in Wyoming, Wyoming's mine permitting statutes,statues, Abandoned Mine Reclamation Act and industrial development and siting laws and regulations also impact us. Similar lawslaw and regulations in California affect SGMCSGMI operations and Utah laws and regulations effect Plateau's operations.
Management believes the Company complies in all material respects with existing environmental regulations.
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As of December 31, 2003,2004, we have recorded estimated reclamation obligations of $7,264,700.$8,027,400. We anticipate paying for those reclamation efforts over several years. For further information on the approximate reclamation costs (decommissioning, decontamination and other reclamation efforts for which we are primarily responsible or potentially responsible), see note K to the consolidated financial statements included with this report.
OTHER ENVIRONMENTAL COSTS. Annual Report.
Other Environmental Costs.Actual costs for compliance with environmental laws may vary considerably from estimates, depending upon such factors as changes in environmental lawslaw and regulationregulations (e.g., the new Clean Air Act), and conditions encountered in minerals exploration and mining. USE doesWe do not anticipate that expenditures to comply with lawslaw regulating the discharge of materials into the environment, or which are otherwise designed to protect the environment, will have any substantial adverse impact on theour competitive position of the Company.
EMPLOYEES
position.
Employees
As of the filing date of this Annual Report, USE had 3435 full-time employees, including 11 employees working only for RMG. Persons who work only for RMG and Sutter Gold Mining Inc. are paid by USE. The expenses associated with USE's employees, including payroll taxes, fringe benefits and retirement plans is shared with Crested for all ventures in which it 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.
MINING CLAIM HOLDINGS
TITLE.
Mining Claim Holdings
Title.Nearly all the uranium mining properties held by the Company are on federal unpatented claims. Unpatented claims are located upon federal and public land pursuant to procedure established by the General Mining Law. Requirements for the location of a valid mining claim on public land depend on the type of claim being staked, but generally include discovery of valuable minerals, erecting a discovery monument and posting thereon a location notice, marking the boundaries of the claim with monuments, and filing a certificate of location with the county in which the claim is located and with the BLM. If the statutes and regulations for the location of a mining claim are complied with, the locator obtains a valid possessory right to the contained minerals. To preserve an otherwise valid claim, a claimant must also pay certain rental fees annually to the federal government (currently $100 per claim) and make certain additional filings with the county and the BLM. Failure to pay such fees or make the required filingsfiling may render the mining claim void or voidable. Because mining claims are self-initiated and self-maintained, they possess some unique vulnerabilities not associated with other types of property interests. It is impossible to ascertain the validity of unpatented mining claims solely from public real estate records and it can be difficult or impossible to confirm that all of the requisite steps have been followed for location and maintenance of a claim. If the validity of an unpatented mining claim is challenged by the government, the claimant has the burden of proving the present economic feasibility of mining minerals located thereon. Thus, it is conceivable that during timestime of falling metal prices, claims which were valid whenwh en located could become invalid if challenged.
PROPOSED FEDERAL LEGISLATION.
Some of the Mt. Emmons claims which the Company expects to receive back from Phelps Dodge Corporation were patented by Phelps Dodge and others are unpatented claims.
Proposed Federal Legislation. The U.S. Congress from time to time has in legislative
sessions in recent years, actively considered several proposals for major
revision ofproposedrevisions to the General Mining Law, which governs mining claims and related activities on federal public lands. If anythese proposed revisions were enacted, payment of the recent proposals become law,
it could result in the imposition of a royalty uponroyalties on production of minerals from federal lands andcould be required as well as new requirements for reclamation of mined land reclamation and other environmental control measures. It remains unclear whether the current Congress
will pass such legislation and, if passed, the extent such new legislation will
affect existing mining claims and operations. The effect of any revision of the General Mining Law on operations cannot be determined conclusively until such
revisionenactment, however, it is enacted; however, such legislation couldpossible that revisions would materially increase the carrying and operating costs of mineral properties which are located on federal unpatented mining claims, and could increase both the capital and operating costs for such
projects and impair the ability to hold or develop such properties.
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claims.
ITEM 3. LEGAL PROCEEDINGS
Legal Proceedings
Material proceedings pending at December 31, 2004, and developments in those proceedings from that date to the date this Annual Report is filed, are summarized below. Certain of the Company's
affiliates are involved in ordinary routine litigation incidental to their
business. Other proceedings which were pending during the year ended December
31, 2003 have been settled or otherwise finally resolved.
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
Sheep Mountain Partners Arbitration/Litigation
In 1991, disputes arose between USE/Crested d/b/a/ USECC, and Nukem, Inc. and its subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation and operation of their equally owned Sheep Mountain Partners (SMP) partnership. Arbitration proceedings were initiated by CRIC in June 1991 and in July 1991, USECC filed a lawsuit against Nukem, CRIC and others in the U.S. District Court of Colorado in Civil Action No. 91B1153. The Federal Court stayed the arbitration proceedings and discovery proceeded. In February 1994, all of the parties agreed to consensual and binding arbitration of all of their disputes over SMP before an arbitration panel (the "Panel").
After 73 hearing days, the
The Panel entered an Order and Award on April 18,
1996 and clarified the Order on July 3,in 1996, finding generally in favor of USE and Crested on certain of their claims and imposed a constructive trust in favor of Sheep Mountain Partners on uranium contracts Nukem entered into to purchase uranium from CIS republics. The Panelrepublics, and also awarded SMP damages of $31,355,070 against Nukem. USECC filed a petition for confirmation of the Order and on June
27, 1997, the U.S. District Court confirmed the Panel's Orders in its Second
Amended Judgment.
Thereafter, Nukem/CRIC appealed the Judgment toFurther legal proceedings ensued. On appeal, the 10th Circuit Court of Appeals ("CCA"). On October 22, 1998, the 10th CCA issued an Order and Judgment affirming the U.S. District Court's Second Amended Judgment without modification. The ruling affirmed (i) the imposition of a constructive trust in favor of SMP on Nukem's rights to purchase CIS uranium, the uranium acquired pursuant to those rights, and the profits therefrom; and (ii) the damage award in favor of SMP against Nukem. The 10th CCA held that the Panel's Awards
"clearly retains both
As a constructive trust and a damage award," and the
---
Arbitration Awards and the Second Amended Judgment were "clear and unambiguous."
On February 8, 1999,result of further proceedings, the U.S. District Court ordered Nukemappointed a Special Master to pay USECC the
balance of the damage award. Nukem did so, but then moved for a satisfaction of
judgment without accounting for the monies earned in the Constructive Trust. The
District Court denied Nukem's motion and Nukem filed its second appeal to the
10th CCA. On October 16, 2000, the 10th CCA again affirmed the order of the
District Court. The 10th CCA held that Nukem had not "providedconduct an accounting of the partnership assets," finding that "the district court order presented for
our review does not decide which CIS contracts are covered by the constructive trust."
On November 3, 2000, USECC filed a motion for a further accounting of the
Constructive Trust. On February 15, 2001, the District Court entered an Order of
Reference appointing a Special Master to "conduct an accounting" of the
Constructive Trust. The accounting was conducted and on May 1, 2003, the Special
Master filed his Report with the District Court. Both parties filed objections
to the Report. On July 30, 2003, the U.S. District Court adopted the ReportSpecial Master’s report in part and rejected it in part. Judgment was thenpart, and entered by the Courtjudgment on August 1, 2003 in favor of USECC and against Nukem for $20,044,183. In early 2004, the parties appealed this judgment to the CCA.
On February 24, 2005, a three judge panel of the CCA vacated the judgment of the U.S. District Court and remanded the case to the Panel for clarification of the 1996 Order and Award. In remanding this case, the CCA stated: "The arbitration award in this case is silent as to the definition of 'purchase rights' and the 'profits therefrom,' including the valuation of either. Also unstated in the amountaward is the duration of $20,044,183.
On August 15, 2003, Nukem filedthe constructive trust and whether and what costs should be deducted when computing the value of the constructive trust. Further, the arbitration panel failed to address whether prejudgment interest should be awarded on the value of the constructive trust. As a "Motion to Remandresult, the district court's valuation of the constructive trust was based upon extensive guesswork. Therefore, a remand to the Arbitration
Panel or inarbitration panel for clarification is necessary, despite the Alternative, to Alter, Amend and/or Correct the Court's August
1, 2003 Judgmentlong and July 30, 2003 Order,tortured procedural history of this case."
The timing and
a "Motion to Correct Certain
Findings or Statements in the Court's Orderultimate outcome of
July 30, 2003." On the same day,
USECC filed a motion under Fed.R.Civ.P. 52(b) and 59(e) to alter or amend the
July 30, 2003 Order and the
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August 1, 2003 Judgment. The District Court denied the parties' motions on
September 10 and 11, 2003, respectively. Nukem's appeal and USECC's cross-appeal
followed. Nukem's opening brief was filed on January 16, 2004 and on February
24, 2004, USECC filed an opening brief in its cross-appeal and an answer to
Nukem's brief. Nukem has until March 29, 2004 or any extension thereof to file
an answer to USECC's opening brief. USECC may then file a reply brief 14 days
after service of Nukem's answer. Management believesthis litigation is not predicted. We believe that the ultimate outcome
of this matter will not have an adverse affect on the Company'sour financial condition or resultresults of operations.
CONTOUR DEVELOPMENT LITIGATION
Contour Development Litigation
On July 28,8, 1998, USE and Crested filed a lawsuit in the U. S.U.S. District Court of Colorado in Case No. 98WM1630, against Contour Development Company, L.L.C. and entities and persons associated with Contour Development Company, L.L.C. (together, "Contour") seeking compensatory and consequentialfor substantial damages of
more than $1.3 million from the defendants for dealings in real estate owned by USE and Crested in Gunnison, Colorado. The Contour defendants asserted a
counterclaim asking for payment of attorneys fee and costs. The partiesThis litigation was settled the litigation in 2004. In the settlement,2004 with USE and Crested received $25,000 in
cash; tworeceiving nominal cash and seven real estate lots in the City of Gunnison, Colorado (one of which hasand near Gunnison. Two lots have been sold and five are for a net of $65,326 and the other lot is under contract to sell for $180,000), and
an additional five development lots covering 175 acres north of Gunnison,
Colorado.
PHELPS DODGE LITIGATION
U.S. Energy Corp. (USE)sale.
Phelps Dodge Litigation
USE and Crested Corp. (Crested), d/b/a USECC, were served with a lawsuit on June 19, 2002, filed in the U.S. District Court of Colorado (Case No. 02-B-0796(PAC)) by Phelps Dodge Corporation (PD)(“PD”) and its subsidiary, Mt. Emmons Mining Company (MEMCO)(“MEMCO”), over contractual obligations in USECC'sUSECC’s agreement with PD'sPD’s predecessor companies, concerning mining properties on Mt. Emmons, near Crested Butte, Colorado.
The litigation stemsrelates to agreements from agreements that date back to 1974 when USE and Crested leased the mining claims to AMAX Inc., PD'sPD’s predecessor company. The mining claims cover one of the world'sworld’s largest and richest deposits of molybdenum, which was discovered by AMAX. AMAX reportedly spent over $200 million on the acquisition,
exploration and mine planning activities on the Mt. Emmons properties.
The June 19, 2002 complaint filed by PD and MEMCO seekssought a determination that PD'sPD’s acquisition of Cyprus Amax was not a sale. Under a 1986 agreement between USECC and AMAX, if AMAX sold MEMCO or its interest in the mining properties, USE and Crested would receive 15% (7.5% each) of the first $25 million of the purchase price ($3.75 million). In 1991, Cyprus Minerals Company acquired AMAX to form Cyprus Amax MineralsMineral Co. USECC'sUSECC’s counter and cross-claims allegealleged that in 1999, PD formed a wholly-owned subsidiary CAV Corporation, for the purpose of purchasing the controlling interest ofin Cyprus Amax and its subsidiaries (including MEMCO) at an estimated value in cash and PD stock exceeding $1
billion and making Cyprus Amax a subsidiary of PD. Therefore, USECC assertsasserted that the acquisition of Cyprus Amax by PD was a sale of MEMCO and the properties that triggerstriggered the obligationobl igation of Cyprus Amax to pay USECC the $3.75 million plus interest.
The other issueissues in the litigation iswere whether USECC must, under terms of a 1987 Royalty Deed, accept PD's and MEMCO's conveyance of the Mt. Emmons properties back to USECC, which properties now include a plant to treat mine water, costing in excess of $1 million a year to operate in compliance with State of Colorado regulations. PD's and MEMCO's claim seeksought to obligate USECC to assume the operating costs of the water treatment plant. USECC refuses to haveasserted counterclaims against the water treatment plant includeddefendants, including a claim for nonpayment of advance royalties.
On July 28, 2004, the Court entered an Order granting certain of PD's motions and denying USECC's counterclaims and cross-claims. The case was tried in late 2004.
On February 4, 2005, the
returnCourt entered Findings and Fact and Conclusions of
Law and ordered that the
properties because, the
USECC counterclaim argues, the properties must be in the same condition as when
they were acquired by AMAX before the water treatment plant was constructed by
AMAX.
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As added counterclaims, USECC seeks (i) damages for PD's breachconveyance of
covenants of good faith and fair dealing; (ii) damages for PD's failure to
develop the Mt. Emmons properties and not protecting USECC's rights as a
revisionary ownerunder Paragraph 8 of the mining1987 Agreement includes the transfer of ownership and operational responsibility for the Water Treatment Plant, and that PD does not owe USECC any advanced royalty payments. However, the Order did not address the NPDES permit. NPDES permits are administered and regulated by the Colorado Department of Public Health and the Environment (“CDPHE”). The timing and scope of responsibilities for maintaining and operating the plant will be addressed by the CDPHE later in 2005.
USECC has filed a motion with the Court to amend the Order to determine that the decreed water rights from the Colorado Supreme Court opinion (decided in 2002, finding that the predecessor owners ofthe Mt. Emmons property had rights to thewater to develop a mine), and any other appurtenant water rights, be conveyed to USECC. The motion is pending.
Rocky Mountain Gas, Inc. (RMG)
Litigation involving leases on coalbed methane properties (iii) damages for
unjust enrichment of PD; (iv) damages for breach of the PD's fiduciary duties
owed to USECC as revisionary owner of the property, and for neglecting to
maintain the mining rights and interests in the properties.
On March 17, 2003, PD filed additional motions for partial summary judgment
on various claims. On January 22, 2004, the District Court heard the motions and
responses of USECC and additional briefs were thereafter filed with the Court.
The Court is considering the motions. Management believes that the ultimate
outcome of this matter will not have an adverse affect on the Company's
financial condition or result of operations.
ROCKY MOUNTAIN GAS, INC. (RMG)
LITIGATION INVOLVING LEASES ON COALBED METHANE PROPERTIES IN MONTANA
On or aboutMontana
In April 1, 2001, RMG a subsidiary of USE and Crested, was served with a Second Amended Complaint, whereinin which the Northern Plains Resource Council ("NPRC") had filed suit in the U.S.U. S. District Court of Montana, Billings Division in Case No.
CV-01-96-BLG-RWA(No. CV-01-96-BLG-RWA) against the United States Bureau of Land Management ("BLM"(“BLM”), RMG, certain of its affiliates (including USE and Crested) and some 20 other defendants. The plaintiff is seeking to cancel oil and gas leases issued to RMG et. al. by the BLM in the Powder River Basin of Montana and for other relief.
The basis
In December 2003, Federal District Court Judge Anderson granted BLM’s and the other defendants Motion for the complaint appears to beSummary Judgment and ruled that the BLM's regulations
require the BLM to respond to objections filed by persons owning land or lease
rights adjacent to the coalbed properties which the BLM is offering to lease to
the public. The argument of plaintiff appears to be that if objections are not
responded to by the BLM prior to issuing CBM leases, the leases are invalid.
Based on this argument, the plaintiff appears to have been successful in forcing
cancellation of some CBM leases granted to others in the Powder River Basin of
Montana, because the BLM did not respondhave to some objecting adjacent landowners.
However, allconsider environmental impacts in an Environmental Impact Statement (“EIS”) prior to leasing because the 1994 Resource Management Plan (“RMP”) limited lease right to exploration and small scale development. On August 30, 2004, the Ninth Circuit Court of Appeals affirmed the District Court decision and held that the six-year statue of limitations precluded challenging the 1994 RMP and EIS. On February 10, 2005, NRPC's petition for rehearing or in the alternative petition for en banc hearing was denied by the Ninth Circuit Court of Appeals.
All of RMG's BLM Montana leases in Montanaare held by RMG (none are held by U.S.
Energy Corp. or Crested Corp. in their own corporate names)and are at least four years old, and thereold. There is no record of any objections being made to the issue of those leases. Based on filings in the case to date, it appears that the BLM is taking the
initiative in responding to the plaintiff. We believe RMG'sRMG’s leases were validly issued in compliance with BLM procedures, and do not believe the plaintiff'splaintiff’s lawsuit will adversely affect any of RMG's MontanaRMG’s BLM leases.
LAWSUITS CHALLENGING BLM'S RECORDS OF DECISIONS
Three lawsuits areleases in Montana.
Lawsuits challenging BLM's Records of Decisions
There is a lawsuit currently pending in the Montana Federal District Court challenging BLM's Records of Decisions for the Powder River Basin Oil and Gas EIS (PRB-EIS) for the Wyoming portion of the basin, and the Statewide Oil and Gas EIS and Proposed Amendment for the Powder River and billingsBillings Resource Management Plans in Montana:
In April of 2003 NPRC and the Northern Cheyenne Tribe and Native Action (the “Tribe”) filed a suit against BLM challenging the April 2003 decision by BLM approving the Final Statewide Oil and Gas Environmental Impact Statement (FEIS) and proposed amendments to the RMP. On February 25, 2005 Federal District Court Judge Anderson dismissed all counts with the exception of the allegation that the FEIS is inadequate because it failed to consider any alternatives to full-field development and ruled that BLM’s failure to analyze a phased development alternative renders the FEIS inadequate. BLM will now be required to perform a Supplemental EIS (“SEIS”) examining a phased development alternative, which could take 18 months to complete.
On April 5, 2005 Federal District Court Judge Anderson rejected the Tribe's request for a complete moratorium on CBM drilling in Montana and instead accepted the BLM's proposal that limited the number of Federal APDs issued by the BLM to a maximum of 500 wells per year, including federal, state and fee wells within a certain defined geographic area. The decision will prohibit the BLM from issuing Federal wells in RMG's Castle Rock property until the SEIS is completed, because it is not located with the defined geographic area. However, the decision does not limit the number of fee and state wells that can be approved in the Castle Rock property by the State of Montana. RMG will request the BLM toextend the expiration date of th e Federal leases for the period of the delay.
Neither the Company nor RMG is a party to any of
these lawsuits.
LITIGATION INVOLVING DRILLING ON A COALBED METHANE LEASE
this lawsuit. However, further permitting for federal CBM wells in Montana could be impacted until the issues have been resolved.
Litigation involving drilling
A drilling company, Eagle Energy Services, LLC filed a lien on RMG's
leasehold in southwestern Wyominglawsuit against RMG for drilling services performed at RMG's
Oyster Ridge Property and filed a lawsuit foreclosing the lien.claiming $49,309.50 for non-payment in Civil Action No. C02-9-341. Eagle Energy'sEnergy’s bank, Community First National Bank of Sheridan, Wyoming, filed a similar suit for the same amount on an assignment from Eagle Energy against RMG Eagle Energy
Services, LLC and others
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who guaranteed a loan to Eagle Energy in Civil Action No. C02-9-328CO2-9-328 in the 4th4th Judicial District of Sheridan County, Wyoming. In February 2005 RMG and Community First reached a full and complete settlement of Civil Action No. C02-9-328 and a Joint Motion to Dismiss with Prejudice is currently pending with the Court. RMG has also request ed Eagle Energy'sEnergy to join in a Motion to Dismiss in Civil Action No. C02-9-341 because the claim is for a
contract to drill a well for coalbed methane. RMG terminated the agreement
because of the dangerous conditions of Eagle Energy's equipment and other
reasons. The claim against RMG is for approximately $49,300. Negotiations to
settle the lien and lawsuits are pending.was settled as noted above. Management believes that the ultimate outcome of this matterthe matters will not have an adverse affecta material effect on the Company'sCompany’s financial condition or result of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Submission of Matters to a Vote of Security Holders
On June 6, 2003,15, 2004, the annual meeting of shareholders was held for voting on the re-election of two directors: John L. LarsenMichael Anderson and Keith G. Larsen.Harold F. Herron. These directors were re-elected for a term expiring on the third succeeding Annual Meeting of Shareholders and until their successors are duly elected or appointed and qualified. With respect to the re-election of the two directors, the votes cast werewere:
| Name of Director | | For | | Abstain* |
| Michael Anderson | | 11,554,562 | | 334,210 |
| Harold F. Herron | | 11,303,419 | | 531,578 |
Also at the June, 2004 meeting, the shareholders approved an amendment to the 2001 Incentive Stock Option Plan, to reserve for issuance upon exercise of options that number of shares of common stock as follows:
Nameequals 20% of Director For Abstain
------------------ --- -------
John L. Larsen 9,243,517 61,281
Keith G. Larsen 9,243,517 61,281
-36-
the issued and outstanding shares of common stock at any point in time. With respect to this matter the votes cast were:
| For | | Against | | Abstain* |
| | | | | |
| 3,851,612 | | 1,327,608 | | 21,833 |
* Includes Broker non-vote
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market for Registrant's common equity, related Stockholder Matters and Issuer Purchases of Equity Securities
(a)Market Information
Shares of USE common stock are traded on the over-the-counter market, and prices are reported on a "last sale" basis on the Nasdaq Small Cap of the National Association of Securities Dealers Automated Quotation System ("Nasdaq"). The range by quarter of high and low sales prices was:
High Low
----- -----
Fiscal year ended December 31, 2003
- -----------------------------------
First quarter ended 3/31/03 $3.85 $2.95
Second quarter ended 6/30/03 5.92 3.12
Third quarter ended 9/30/03 5.70 3.15
Fourth quarter ended 12/31/03 3.68 2.30
Transition period ended December 31, 2002
- -----------------------------------------
First quarter 8/31/02 $3.95 $2.00
Second quarter ended 11/30/02 4.20 3.38
Month ended 12/31/02 3.98 3.08
Fiscal year ended May 31, 2002
- ------------------------------
First quarter ended 8/31/01 $6.05 $3.56
Second quarter ended 11/30/01 4.15 3.09
Third quarter ended 2/29/02 5.27 3.50
Fourth quarter ended 5/31/02 4.30 3.29
Fiscal year to ended May 31, 2001
- ---------------------------------
First quarter ended 8/31/00 $3.00 $1.75
Second quarter ended 11/30/00 3.38 1.75
Third quarter ended 2/28/01 4.00 2.00
Fourth quarter ended 5/31/01 6.25 3.56
| Fiscal Year ended December 31, 2004 | | | High | | | Low | |
| First quarter ended 3/31/04 | | $ | 3.45 | | $ | 2.41 | |
| Second quarter ended 6/30/04 | | | 3.14 | | | 2.11 | |
| Third quarter ended 9/30/04 | | | 2.59 | | | 2.12 | |
| Fourth quarter ended 12/31/04 | | | 3.05 | | | 2.10 | |
| | | | | | | | |
| Fiscal Year ended December 31, 2003 | | | | | | | |
| First quarter ended 3/31/03 | | $ | 3.85 | | $ | 2.95 | |
| Second quarter ended 6/30/03 | | | 5.92 | | | 3.12 | |
| Third quarter ended 9/30/03 | | | 5.70 | | | 3.15 | |
| Fourth quarter ended 12/31/03 | | | 3.68 | | | 2.30 | |
(b)Holders
(1) At March 23, 200431, 2005 the closing market price was $2.54$5.98 per share and there were approximately 660641 shareholders of record, with 13,992,75016,219,079 shares of common stock issued and outstanding, including shares owned by our subsidiaries and shares in officers' and directors' names that are subject to forfeiture.
(2) Not applicable.
c)
(c)We have not paid any cash dividends with respect to common stock. There are no contractual restrictions on our present or future ability to pay cash dividends, however, we intend to retain any earnings in the near future for operations.
-37-
d)
(d) Equity Plan Compensation Information - Information about Compensation Plans as of December 31, 2003:
Plan category Number of securities to Weighted average Number of securities
be issued upon exercise exercise price of remaining available
of outstanding options outstanding future issuance
options under equity
compensation plans
(excluding securities
reflected in column
(a))
(a) (b) (c)
- --------------------------------------------------------------------------------
Equity
compensation
plans approved
by security
holders
1998 USE SOP
3,250,000
shares of
common stock
on exercise
of outstanding
options 1,464,646 $2.69 -0-
2001 USE ISOP
3,000,000 shares
of common stock on
exercise of
outstanding options 1,409,000 $3.09 1,464,664
- --------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders
None -- -- --
- --------------------------------------------------------------------------------
Total 2,873,646 $2.74 1,464,664
2004:
| Plan category | Number of securities to be issued upon exercise of outstanding options | Weighted average exercise price of outstanding options | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | (a) | (b) | (c) |
| Equity compensation plans approved by security holders | | | |
| 1998 USE ISOP 3,250,000 shares of common stock on exercise of outstanding options | 1,464,646 | $2.67 | -0- |
| 2001 USE ISOP 3,000,000 shares of common stock on exercise of outstanding options | 2,659,000 | $2.85 | 214,664 |
| Equity compensation plans not approved by security holders | | | |
| None | -- | -- | -- |
| Total | 4,123,646 | $2.79 | 214,664 |
Sales of Unregistered Securities in 2003:
As of2004
During the twelve months ended December 31, 2003,2004, pursuant to the shareholder-approved 2001 Stock Compensation Plan, 100,00050,000 shares were issued to officers of the Company at the rate of 20,00010,000 shares each: John L. Larsen, Keith G. Larsen, Harold F. Herron, Robert Scott Lorimer, and Daniel P. Svilar. The shares were issued at the closing market price of $3.10 on December 19, 2003.
On March 24, 2003, 43,378$3.02, $2.57, $2.46 and $2.22 as of January 5, 2004, April 1, 2004, July 1, 2004 and October 1, 2004, respectively.
In 2004, the Company issued 476,883 shares were issuedof common stock as payment of principal and interest to four officers (John L.
Larsen, Daniel P. Svilar, Harold F. Herron and Robert Scott Lorimer) beingsettle the balancenote due two private investors; 123,879 shares of common stock in exchange for 124,444 shares issuable under the 1996of RMG stock award program (now closed out).
Optionsas part of a provision given to purchase 18,000 shares at $3.00 were issued to Robert A.
Nicholas on February 3, 2003 and expiring February 2, 2004, as partial payment
for legal services. Mr. Nicholas is not an accredited investor when it invested in RMG common stock; 678,888 shares of common stock and prior318,465 common stock warrants (exercisable until January 2007 at an exercise price of $3.28 per share) in the purchase of the Hi-Pro properties; 100,000 shares of common stock and 250,000 warrants (exercisable until March 2009 at an exercise price of $2.98 per share) to purchase common stock to an accredited investor in a private placement; 758,360 shares of common stock to an accredited investor in exchange for 500,000 shares of RMG Series A preferred stock; released 22,1 40 shares of forfeitable shares to employees and 50,000 shares of common stock to five employees under the 2001 Stock Award Program, which was approved by the shareholders at the 2002 shareholder's meeting, 125,000 shares to an investor who exercised its warrants and 70,439 shares to the
filing date
USE Employee Stock Ownership Plan for the calendar 2004 funding requirement. Three investment firms held an additional 300,000 shares of
this Annual Report, he wasRMG preferred stock (at an
employeeexchange rate of 90% the Company's stock price on conversion date), convertible to the Company's common stock at 90% of the
Company. He was
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provided all information about the Company prior to the issuancemarket value of the options.
This transaction is believedCompany's common stock when converted. All this stock has been converted as of March 31, 2005. The Company also issued a total of 150,000 common stock purchase warrants (exercisable until February 2007, at an exercise price of $3.11 per share) to bethree accredited investment firms as part of their investment in RMG Series A preferred stock. Warrants on 125,000 of these shares have been exercised as of March 31, 2005. These transactions were exempt under sectionSection 4(2) of the Securities Act of 1933. The expiration date of the options has been extended to August 9,
2004.
On October 28, 2003, the Company and Caydal, LLC and Tsunami Partners, L.P.
amended separate secured convertible loans to the Company from Caydal
($1,000,000) and Tsunami Partners ($500,000) in 2002, to (i) reduce the interest
rate, starting September 1, 2003, from the original 8% annual rate, to be equal
to the Federal Short Term Rate for annual compounding (the "Federal Short Term
Rate" as defined in section 1274(d) of the Internal Revenue Code), as that rate
changes from time to time; (ii) allow conversion of interest, as well as
principal, to shares; (iii) not require quarterly payment of interest with cash,
but add accruing interest to principal; (iv) extend the maturity date for the
loan to December 31, 2004; (v) reduce the conversion rate for principal to (and
establish the conversion rate for interest at) 1 share for each $2.25 of
principal and interest; and (vi) provide for mandatory conversion of principal
and accrued interest outstanding at maturity to shares at the same conversion
rate of 1 share for each $2.25 of principal and interest. Optional conversion of
principal and accrued interest prior to maturity is permitted. Also, in
connection with the restructuring of debt, the expiration date of warrants on
120,000 shares (at $3.00 per share) which were issued to Caydal, and warrants on
60,000 shares (at $3.00 per share) issued to Tsunami Partners, in 2002, was
extended 12 months (from the original May 30, 2005 to the new date of May 30,
2006).
In 2003, Caydal converted $500,000 of debt to 211,109 shares of common
stock (33,333 shares at the original $3.00 conversion price, and 177,776 shares
at the restructured price of $2.25). The outstanding principal balance on the
debts owed to Caydal and Tsunami Partners was $500,000 and $500,000, convertible
at December 31, 2003 into 222,220 and 222,220 shares, respectively. Tsunami
Partners did not convert any debt to shares in 2003. Caydal and Tsunami Partners
are accredited investors.
On July 7, 2003, the Company issued 50,000 shares, and warrants to purchase
an additional 50,000 shares (exercisable at $5.00 per share, expiring June 30,
2006) to Sanders Morris Harris Inc. ("SMH"), a financial advisory firm and
registered broker-dealer, in partial payment of SMH's services provided to RMG
in connection with RMG's transfer of certain coalbed methane properties to
Pinnacle Gas Resources, Inc. SMH is an accredited investor. These securities
were not issued in connection with the sale of any securities by SMH.
On May 30, 2003, the Company entered into a consulting agreement with
Riches In Resources, Inc., a financial consulting firm. In June 2003, 7,920
shares were issued to Riches In Resources, Inc. for services to the Company
provided from November 15, 2002 through July 15, 2003. Up to another 7,080
shares may be issued for services during the remaining term of the agreement
(through May 15, 2004) with this consultant. Riches In Resources, Inc. is not an
accredited investor. Riches In Resources, Inc. was provided all information
about the Company prior to the issuance of the shares. This transaction is
believed to be exempt under section 4(2) of the Securities Act of 1933.
In March 2003, 24,000 shares were issued to C.C.R.I. Corporation, a
financial consulting firm, for services to the Company provided through
September 2003. Pursuant to the same agreement, the Company issued to C.C.R.I.
warrants to purchase 75,000 shares, 25,000 exercisable at $3.75 per share,
25,000 shares exercisable at $4.50 per share and 25,000 shares exercisable at
$5.50 per share; and issued to an individual (Jason Wayne Assad) associated with
C.C.R.I. a warrant to purchase 12,500 shares, exercisable at $3.75 per share.
All of these warrants expire March 16, 2006. CCRI and Mr. Assad are not
accredited investors. Each was provided all information about the Company prior
to the issuance of the securities These transactions are believed to be exempt
under section 4(2) of the Securities Act of 1933.
In June 2003, 34,000 shares were issued to Burg Simpson Eldredge Hersh
Jardine PC, a law firm representing the Company in litigation, in partial
payment of legal services provided to the Company. This
-39-
firm is not an accredited investor. The firm was provided all information about
the Company prior to the issuance of the securities. This transaction is
believed to be exempt under section 4(2) of the Securities Act of 1933.
10,000 shares were issued to Tim and Betty Crotty in June 2003 in
settlement of a lease obligation relating to a property owned by the Company's
subsidiary, Sutter Gold Mining Company. Mr. and Mrs. Crotty are not accredited
investors. They were provided all information about the Company prior to the
issuance of the securities. This transaction is believed to be exempt under
section 4(2) of the Securities Act of 1933.
In June and July 2003, Caydal, LLC and five individuals invested $750,000
in the Company's majority-owned subsidiary Rocky Mountain Gas, Inc. ("RMG") for
333,333 shares of RMG stock (at $2.25 per share); warrants on 62,500 RMG shares
at $3.00 per share, exercisable until June 3, 2006; and warrants on 46,875
shares of the Company at $4.00 per share, exercisable until June 3, 2006. Under
the terms of the original transaction, each share of RMG stock was convertible
into that number of shares of the Company obtained by dividing (i) $2.25
(subject to anti-dilution adjustments) by (ii) 85% of the then-current market
price of the Company's shares, provided that (a) the conversion price cannot
exceed $5.00, and (b) the exchange rights expire 20 business days after the
Company's stock price exceeds $7.50 for 20 consecutive trading days. None of the
RMG shares had been converted to shares of the Company at December 31, 2003.
Caydal and each of the five individuals are accredited investors.
In partial compensation for services provided by McKim & Company, LLC (a
registered broker-dealer) to RMG and USE in connection with the foregoing
investments in RMG, the Company paid a cash commission of $30,000 to McKim &
Company, and issued to McKim & Company warrants to purchase 19,500 shares of USE
common stock, exercisable at $4.00 per share. The warrants expire June 3, 2006.
Warrants to purchase an additional 3,000 shares, on the same terms, were issued
to John Schlie, an employee of McKim & Company.
On October 28, 2003, Caydal and one individual (James McCaughey) accepted
the Company's and RMG's offer, made to all of the investors in RMG in June and
July 2003 (see above), to restructure that transaction by (i) refunding 50% of
the investment (Caydal was refunded $250,000 and Mr. McCaughey was refunded
$50,000), and reducing the conversion rate for their remaining total of 133,333
RMG shares down to 77.5%. The other four individuals elected to remain fully
invested, for which election the Company and RMG reduced the conversion rate for
their remaining total of 66,666 RMG shares down to 70%.
On December 12, 2003, a non-qualified option was granted to Karl Eppich to
purchase 10,000 shares at $2.90 per share for one year. Mr. Eppich provides
title services to RMG. This transaction is believed to be exempt under section
4(2) of the Securities Act of 1933.
All of the foregoing securities have been issued with restrictive legend
under the Securities Act of 1933.
Act.
ITEM 6. SELECTED FINANCIAL DATA.
Selected Financial Data
The selected financial data is derived from and should be read with the financial statements for USE included in this Report.
-40-
| | | December 31, | | May 31, | |
| | | 2004 | | 2003 | | 2002 | | 2001 | | 2002 | | 2001 | | 2000 | |
| | | | | | | | | (Unaudited) | | | | | | | |
| | | | | | | | | | | | | | | | |
| Current assets | | $ | 5,421,500 | | $ | 5,191,400 | | $ | 4,755,300 | | $ | 4,597,900 | | $ | 4,892,600 | | $ | 3,330,000 | | $ | 3,456,800 | |
| Current liabilities | | | 6,058,000 | | | 1,909,700 | | | 2,044,400 | | | 2,563,800 | | | 1,406,400 | | | 2,396,700 | | | 6,617,900 | |
| Working capital deficit | | | (636,500 | ) | | 3,281,700 | | | 2,710,900 | | | 2,034,100 | | | 3,486,200 | | | 933,300 | | | (3,161,100 | ) |
| Total assets | | | 30,703,700 | | | 23,929,700 | | | 28,190,600 | | | 30,991,700 | | | 30,537,900 | | | 30,465,200 | | | 30,876,100 | |
| Long-term obligations (1) | | | 13,615,300 | | | 12,036,600 | | | 14,047,300 | | | 13,596,400 | | | 13,804,300 | | | 13,836,700 | | | 14,025,200 | |
| Shareholders' deficit | | | 6,281,300 | | | 6,760,800 | | | 8,501,600 | | | 8,018,700 | | | 11,742,000 | | | 8,465,400 | | | 4,683,800 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (1)Includes $7,384,700, of accrued reclamation costs on properties at December 31, 2004$7,264,700 at December 31, 2003, and $8,906,800, at December 31, 2002, 2001 and May 31, 2001 and 2000, respectively. See Note K of Notes to Consolidated Financial Statements. |
| | | | | | | | | | | | | | | | |
| | | Year Ended | | Seven Months Ended | | | | | | | |
| | | December 31, | | December 31, | | For Former Fiscal Years Ended May 31, | |
| | | 2004 | | 2003 | | 2002 | | 2001 | | 2002 | | 2001 | | 2000 | |
| | | | | | | | | (Unaudited) | | | | | | | |
| | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 4,641,700 | | $ | 837,300 | | $ | 673,000 | | $ | 545,900 | | $ | 2,004,100 | | $ | 3,263,000 | | $ | 3,303,900 | |
| Loss from | | | | | | | | | | | | | | | | | | | | | | |
| continuing operations | | | (6,659,300 | ) | | (7,237,900 | ) | | (3,524,900 | ) | | (3,914,900 | ) | | (7,454,200 | ) | | (7,517,800 | ) | | (11,356,100 | ) |
| Other income & expenses | | | 13,000 | | | (73,000 | ) | | (387,100 | ) | | 1,005,000 | | | 1,319,500 | | | 8,730,800 | | | 802,200 | |
| Loss before minority interest, equity | | | | | | | | | | | | | | | | | | | | | | |
| in loss of affiliates, income | | | | | | | | | | | | | | | | | | | | | | |
| taxes, discontinued operations, | | | | | | | | | | | | | | | | | | | | | | |
| and cumulative effect of | | | | | | | | | | | | | | | | | | | | | | |
| accounting change | | | (6,646,300 | ) | | (7,310,900 | ) | | (3,912,000 | ) | | (2,909,900 | ) | | (6,134,700 | ) | | 1,213,000 | | | (10,553,900 | ) |
| Minority interest in loss | | | | | | | | | | | | | | | | | | | | | | |
| of consolidated subsidiaries | | | 397,700 | | | 235,100 | | | 54,800 | | | 24,500 | | | 39,500 | | | 220,100 | | | 509,300 | |
| Equity in loss of affiliates | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | (2,900 | ) |
| Income taxes | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | |
| Discontinued operations, net of tax | | | -- | | | (349,900 | ) | | 17,100 | | | 175,000 | | | (85,900 | ) | | 488,100 | | | (594,300 | ) |
| Cumulative effect of | | | | | | | | | | | | | | | | | | | | | | |
| accounting change | | | -- | | | 1,615,600 | | | -- | | | -- | | | -- | | | -- | | | -- | |
| Preferred stock dividends | | | -- | | | -- | | | -- | | | (75,000 | ) | | (86,500 | ) | | (150,000 | ) | | (20,800 | ) |
| Net loss to common shareholders | | $ | (6,248,600 | ) | $ | (5,810,100 | ) | $ | (3,840,100 | ) | $ | (2,785,400 | ) | $ | (6,267,600 | ) | $ | 1,771,200 | | $ | (10,662,600 | ) |
December 31, May 31,
------------------------------------- ---------------------------------------------------
2003 2002 2001 2002 2001 2000 1999
----------- ----------- ----------- ----------- ----------- ------------ -----------
(Unaudited)
Current assets $ 5,191,400 $ 4,755,300 $ 4,597,900 $ 4,892,600 $ 3,330,000 $ 3,456,800 $12,718,900
Current liabilities 1,909,700 2,044,400 2,563,800 1,406,400 2,396,700 6,617,900 5,355,600
Working capital (deficit) 3,281,700 2,710,900 2,034,100 3,486,200 933,300 (3,161,100) 7,363,300
Total assets 23,929,700 28,190,600 30,991,700 30,537,900 30,465,200 30,876,100 33,391,000
Long-term obligations(1) 12,036,600 14,047,300 13,596,400 13,804,300 13,836,700 14,025,200 14,526,900
Shareholders' equity 6,760,800 8,501,600 8,018,700 11,742,000 8,465,400 4,683,800 10,180,300
(1)Includes $7,657,900, of accrued reclamation costs on properties at December 31, 2003, and $8,906,800, at December
31, 2002, 2001 and May 31, 2002, 2001, 2000, and 1999, respectively. See Note K of Notes to Consolidated
Financial Statements.
|
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|
| | | | | | | | | | | | |
| | | Year Ended December 31, | | Seven Months Ended December 31, | | For Former Fiscal Years Ended May 31, | |
| | | | | | | | | (Unaudited) | | | | | | | |
| | | 2004 | | 2003 | | 2002 | | 2001 | | 2002 | | 2001 | | 2000 | |
| Per share financial data | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 0.35 | | $ | 0.07 | | $ | 0.06 | | $ | 0.07 | | $ | 0.22 | | $ | 0.42 | | $ | 0.43 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Loss from | | | | | | | | | | | | | | | | | | | | | | |
| continuing operations | | | (0.51 | ) | | (0.64 | ) | | (0.33 | ) | | (0.47 | ) | | (0.80 | ) | | (0.96 | ) | | (1.39 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Other income & expense | | | 0.00 | | | (0.01 | ) | | (0.03 | ) | | 0.12 | | | 0.14 | | | 1.11 | | | 0.01 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Loss before minority | | | | | | | | | | | | | | | | | | | | | | |
| interest, equity in loss | | | | | | | | | | | | | | | | | | | | | | |
| of affiliates, income taxes, | | | | | | | | | | | | | | | | | | | | | | |
| discontinued operations, | | | | | | | | | | | | | | | | | | | | | | |
| and cumulative effect of | | | | | | | | | | | | | | | | | | | | | | |
| accounting change | | | (0.50 | ) | | (0.65 | ) | | (0.36 | ) | | (0.35 | ) | | (0.66 | ) | | 0.15 | | | (1.38 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Minority interest in loss (income) | | | | | | | | | | | | | | | | | | | | | | |
| of consolidated subsidiaries | | | 0.03 | | | 0.02 | | | -- | | | -- | | | 0.01 | | | 0.03 | | | 0.07 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Equity in loss of affiliates | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Income taxes | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Discontinued operations, | | | | | | | | | | | | | | | | | | | | | | |
| net of tax | | | -- | | | (0.03 | ) | | -- | | | 0.02 | | | (0.01 | ) | | 0.06 | | | (0.08 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative effect of | | | | | | | | | | | | | | | | | | | | | | |
| accounting change | | | -- | | | 0.14 | | | -- | | | -- | | | -- | | | -- | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock dividends | | | -- | | | -- | | | -- | | | (0.01 | ) | | (0.01 | ) | | (0.01 | ) | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net (loss) income | | | | | | | | | | | | | | | | | | | | | | |
| per share, basic | | $ | (0.47 | ) | $ | (0.52 | ) | $ | (0.36 | ) | $ | (0.34 | ) | $ | (0.67 | ) | $ | 0.23 | | $ | (1.39 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net (loss) income | | | | | | | | | | | | | | | | | | | | | | |
| per share, diluted | | $ | (0.47 | ) | $ | (0.52 | ) | $ | (0.36 | ) | $ | (0.34 | ) | $ | (0.67 | ) | $ | 0.23 | | $ | (1.39 | ) |
Year Ended Seven Months Ended
December 31, December 31, For Former Fiscal Years Ended May 31,
------------ -------------------------- ----------------------------------------
2003 2002 2001 2002 2001 2000
------------ ------------ ------------ ------------ ------------ -------------
(Unaudited)
Operating revenues $ 837,300 $ 673,000 $ 545,900 $ 2,004,100 $ 3,263,000 $ 3,303,900
----------- ----------- ----------- ----------- ----------- ------------
Loss from
continuing operations (7,237,900) (3,524,900) (3,914,900) (7,454,200) (7,517,800) (11,356,100)
Other income & expenses (73,000) (387,100) 1,005,000 1,319,500 8,730,800 802,200
(Loss) income before minority
interest, equity in income (loss)
of affiliates, income taxes,
discontinued operations,
and cumulative effect of ----------- ----------- ----------- ----------- ----------- ------------
accounting change (7,310,900) (3,912,000) (2,909,900) (6,134,700) 1,213,000 (10,553,900)
Minority interest in loss (income)
of consolidated subsidiaries 235,100 54,800 24,500 39,500 220,100 509,300
Equity in loss of affiliates -- -- -- -- -- (2,900)
Income taxes -- -- -- -- -- --
Discontinued operations, net of tax (349,900) 17,100 175,000 (85,900) 488,100 (594,300)
Cumulative effect of
accounting change 1,615,600 -- -- -- -- --
Preferred stock dividends -- -- (75,000) (86,500) (150,000) (20,800)
------------ ----------- ----------- ----------- ----------- ------------
Net (loss) income
to common shareholders $(5,810,100) $(3,840,100) $(2,785,400) $(6,267,600) $ 1,771,200 $(10,662,600)
============ ============ ============ ============ ============ =============
1999
-------------
Operating revenues $ 3,788,600
------------
Loss from
continuing operations (22,713,300)
Other income & expenses 6,655,500
(Loss) income before minority
interest, equity in income (loss)
of affiliates, income taxes,
discontinued operations,
and cumulative effect of -----------
accounting change (16,057,800)
Minority interest in loss (income)
of consolidated subsidiaries 4,468,400
Equity in loss of affiliates (59,100)
Income taxes --
Discontinued operations, net of tax --
Cumulative effect of
accounting change --
Preferred stock dividends --
------------
Net (loss) income
to common shareholders $(11,648,500)
=============
|
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|
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Year Ended Seven Months Ended For Former
December 31, December 31, Fiscal Years Ended May 31,
------------ ---------------- ----------------------------------
(Unaudited)
2003 2002 2001 2002 2001 2000 1999
-------- ------- ------- ------- ------- ------- -------
Per share financial data
Operating revenues $ 0.07 $ 0.06 $ 0.07 $ 0.22 $ 0.42 $ 0.43 $ 0.53
------ ------ ------ ------ ------ ------ ------
Loss from
continuing operations (0.64) (0.33) (0.47) (0.80) (0.96) (1.39) (3.18)
Other income & expenses (0.01) (0.03) 0.12 0.14 1.11 0.01 0.93
(Loss) income before minority
interest, equity in income (loss)
of affiliates, income taxes,
discontinued operations,
and cumulative effect of ------ ------ ------ ------ ------ ------ ------
accounting change (0.65) (0.36) (0.35) (0.66) 0.15 (1.38) (2.25)
Minority interest in loss (income)
of consolidated subsidiaries 0.02 -- -- 0.01 0.03 0.07 0.63
Equity in loss of affiliates -- -- -- -- -- -- (0.01)
Income taxes -- -- -- -- -- -- --
Discontinued operations, net of tax (0.03) -- 0.02 (0.01) 0.06 (0.08) --
Cumulative effect of
accounting change 0.14 -- -- -- -- -- --
Preferred stock dividends -- -- (0.01) (0.01) (0.01) -- --
------- ------- ------- ------- ------- ------- -------
Net (loss) income
per share, basic $(0.52) $(0.36) $(0.34) $(0.67) $ 0.23 $(1.39) $(1.63)
======= ======= ======= ======= ======= ======= =======
Net (loss) income
per share, diluted $(0.52) $(0.36) $(0.34) $(0.67) $ 0.21 $(1.39) $(1.63)
======= ======= ======= ======= ======= ======= =======
|
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following is Management's Discussion and Analysis of significant factors, which have affected the Company's liquidity, capital resources and results of operations during the periods included in the accompanying financial statements. The discussion contains forward-looking statements that involve risks and uncertainties. Due to uncertainties in the minerals business, the Company's actual results may differ materially from the results discussed in any such forward-looking statements.
GENERAL OVERVIEW
General Overview
U.S. Energy Corp. ("USE" or the "Company") and its subsidiaries historically have been involved in the acquisition, exploration, development and production of properties prospective for hard rock minerals including lead, zinc, silver, molybdenum, gold, uranium, oil and gas and commercial real estate. The Company manages all of its operations through a joint venture, USECC Joint Venture ("USECC"), with one of its subsidiary companies, Crested Corp. ("Crested") of which it owns a consolidated 71.5%70.1%. The narrative discussion of this MD&A refers only to USE or the Company but includes the consolidated financial statementstatements of Crested, Rocky Mountain Gas, Inc. ("RMG"), Plateau Resources Ltd. ("Plateau"), USECC and other subsidiaries. The Company has entered into partnerships through which it either joint ventured or leased properties with non-related parties for the development and production of certain of its mineral properties. Due to either depressed metal market prices or disputes in certain of the partnerships, all mineral properties have either been sold, reclaimed or are shut down.down except coalbed methane. However, activities have resumed on a limited basis in uranium and gold. See Items 2 and 3 above except coalbed
methane.above. The Company has had no production from any of its mineral properties during the periods from May 31, 2001 through December 31, 2003,2004, except coalbed methane.
The Company formed RMG to enter into the coalbed methane (CBM) business in 1999. The acquisition of leases and acreage for the exploration, development and production of coalbed methane has becomebecame the primary business focus of the Company. At December 31, 2003,2004, the Company on a consolidated basis, owned 90.1%91.1% of RMG. RMG has purchased or leased acreage for CBM exploration and development. RMG has entered into various agreements and joint operating agreements to develop and produce coalbed methane from these properties. Management of the Company plan to create value in RMG by growing RMG into an industry recognized producer of CBM. Management believes the fundamentals of natural gas supply and demand are, and will remain favorable well into the future. Management further believes that the investments the Company has made in RMG will provide a solid base of cash flows into the future.
The price that RMG receives for the sale of its coalbed methane is based on the Colorado Interstate Gas Index ("CIG"(“CIG”) for the Northern Rockies. Historically, the highest prices realized on the CIG over a twelve-month period are during the months of December and January and the lowest prices realized are during the months of late summer or early fall. Calendar 2003 did not follow
this trend as gas prices rose from a low of $3.14 per mcf (thousand cubic feet)
in January 2003 to a high of $5.01 per mcf in March 2003. The following table represents a summary of historical CIG prices:
| | | Prices per mcf | |
| | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 | |
| | | | | | | | | | | | |
| 12 Month High | | $ | 6.98 | | $ | 5.01 | | $ | 3.33 | | $ | 8.63 | | $ | 5.95 | |
| 12 Month Low | | $ | 4.17 | | $ | 3.14 | | $ | 1.09 | | $ | 1.05 | | $ | 2.15 | |
| 12 Month Average | | $ | 5.17 | | $ | 3.98 | | $ | 1.97 | | $ | 3.50 | | $ | 3.37 | |
| | | | | | | | | | | | | | | | |
| December 31 | | $ | 6.20 | | $ | 4.44 | | $ | 3.33 | | $ | 2.13 | | $ | 5.95 | |
Prices per mcf
----------------
2003 2002 2001 2000
----- ----- ----- -----
12 Month High $5.01 $3.33 $8.63 $5.95
12 Month Low $3.14 $1.09 $1.05 $2.15
12 Month Average $3.98 $1.97 $3.50 $3.37
December 31 $4.44 $3.33 $2.13 $5.95
|
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|
Although management believes that gas prices will increase over the long term from present levels, no assurance can be given that will happen. Gas prices are directly affected by 1) weather conditions, which
-43-
impact heating and cooling requirements; 2) electrical generation needs and 3) the amount of gas being produced by those companies in the gas production business. All of these factors are variable and cannot be accurately predicted.
Many of the Company's industry competitors are very large international companies that are well funded. CRITICAL ACCOUNTING POLICIES
All of these factors are variable and cannot be accurately predicted.
In the first quarter 2004, the Company obtained $350,000 of equity funding from an accredited investor (100,000 shares of USE common stock, three year warrants to purchase 50,000 shares of USE common stock, at $3.00 per share; and five year warrants to purchase 200,000 shares at $3.00 per share).
In the third quarter 2004, we borrowed $3,000,000 from Geddes and Company of Phoenix, Arizona. The loan matures on July 30, 2006, bears 10% annual interest, and is secured principally by RMG's CBM properties in the Castle Rock prospect and 4,000,000 shares of RMG stock held by the Company. The loan may be prepaid in cash without penalty, but the lender at any time may convert loan principal to RMG common stock at $3.00 per share on the first $1,500,000 converted; and at $3.25, $3.50 and $3.75 per share for each additional $500,000 converted. In connection with the loan, RMG issued to the lender five year warrants to buy 600,000 shares of common stock of RMG: $3.00 per share for 300,000 shares; and $3.25, $3.50 and $3.75 per share for 100,000 shares at each price.
In the first quarter 2004, RMG raised $1,800,000 of equity financing from the sale of shares of 600,000 shares of Series A Preferred Stock in RMG, and warrants to purchase shares of common stock of the Company, to institutional investors. Proceeds were used to pay part of the Hi-Pro acquisition price, and for RMG working capital. As of March 3, 2005, all Series A Preferred Stock including dividends have been converted to and paid with 894,299 shares of the Company’s common stock. Additionally the institutional investors exercised all 150,000 of their warrants for which the Company received $251,100 during the fourth quarter of 2004 and $73,700 during the first quarter of 2005.
On January 30, 2004, RMG organized a wholly-owned subsidiary RMG I, LLC for the purchase of producing and non-producing CBM properties (the "Hi-Pro properties) near Gillette, Wyoming. RMG I, LLC ("RMG I"), a wholly-owned subsidiary of RMG, purchased CBM properties from Hi-Pro for $6,800,000. RMG and the Company participated in raising equity capital and mezzanine financing for this transaction.
During the last six months of the year ended December 31, 2004 and the first quarter of 2005 uranium, gold and molybdenum market prices have experienced significant increases. Due to these increased market price conditions and industry projected prices over the foreseeable future, the Company is in the process of re-evaluating its mineral properties for these metals. Management of the Company is developing plans to maximize the value of existing properties and is in the process of acquiring and in some cases re-acquiring uranium properties.
A major component of the Company’s future cash flow projections is the ultimate resolution of litigation with Nukem, Inc. (“Nukem”) over issues relating to Sheep Mountain Partners (“SMP”) assets. On August 1, 2003, the U. S. District Court of Colorado entered a Judgment in favor of the Company and USE against Nukem in the amount of $20,044,183. Nukem appealed this Judgment to the 10th Circuit Court of Appeals (“10th CCA”) and USECC cross appealed. Oral Arguments were heard by the 10th CCA on September 28, 2004.
On February 24, 2005, a three judge panel of the 10th CCA vacated the judgment of the U.S. District Court and remanded the case to the Panel for clarification of the 1996 Order and Award. In remanding this case, the 10th CCA stated: "The arbitration award in this case is silent as to the definition of 'purchase
rights' and the 'profits therefrom,' including the valuation of either. Also unstated in the award is the duration of the constructive trust and whether and what costs should be deducted when computing the value of the constructive trust. Further, the arbitration panel failed to address whether prejudgment interest should be awarded on the value of the constructive trust. As a result, the district court's valuation of the constructive trust was based upon extensive guesswork. Therefore, a remand to the arbitration panel for clarification is necessary, despite the long and tortured procedural history of this case."
Management is not able to predict the timing and ultimate outcome of the Nukem litigation. We do however believe that the ultimate outcome will not have an adverse affect on our financial condition or results of operations.
On February 4, 2005, the U.S. District Court of Colorado entered Findings of Fact and Conclusions of Law in a case involving the Company, Crested and Phelps Dodge Corporation authorizing the return of the Mt. Emmons molybdenum properties and associated water treatment plant to the Company and Crested. USECC has filed a motion with the Court to amend the Order to determine that the decreed water rights be conveyed to USECC. The motion is pending. The ultimate impact of this decision on the financial statements of the Company in management’s opinion will not be measurable until such time as the final decisions are reached and the property actually transferred to USECC.
Critical Accounting Policies
Asset Impairments - We assess the impairment of property and equipment whenever events or circumstances indicate that the carrying value may not be recoverable.
Oil and Gas Producing Activities - We follow the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including directly related overhead costs, are capitalized.
capitalized and are subject to ceiling tests to insure the carrying value does not exceed the fair market value.
Reclamation Liabilities - The Company's policy is to accrue the liability for future reclamation costs of its mineral properties based on the current estimate of the future reclamation costs as determined by internal and external experts.
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 of oil and gas, in which case the gain or loss is recognized in income. Abandonments of properties are accounted for as adjustments of capitalized costs with no loss recognized.
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
SFAS 143 Effective January 1, 2003, the Company adopted SFAS No. 143,
"Accounting for Asset Retirement Obligation." The statement requires the Company
to record the fair value of the reclamation liability on its shut-down mining
Liquidity and gas properties as of the date the liability is incurred. The statement
further requires the Company to review the liability each quarter and determine
if a change is required as well as accrete the total liability on a quarterly
basis for the future liability.
The Company will also deduct any actual funds expended for reclamation
during the quarter in which it occurs. As a result of the Company taking
impairment allowances in prior periods on its shut-down mining properties, it
has no remaining book value for these properties. See Note B.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
During the year ended December 31, 2003,2004, operations resulted in a loss of $5,810,100$6,248,700 and consumed $5,673,600$4,282,300 of cash. The Company increased cash and cash
equivalents during the same period by $2,343,800. Investing activities provided
$6,964,000also consumed cash in the amount of $5,051,200 primarily as a result of the salepurchase of additional CBM properties sale of property and the reduction, after the approval of the Nuclear Regulatory Commission ("NRC"), of
the cash bond for reclamation obligations. The increase in cash from investingexploration expenses incurred on existing
CBM properties. Financing activities of $1,053,400 wasgenerated $9,091,300 as a result of the sale of the Company'sCompany’s and RMG's
common stock. Cash provided by investing activities was partly used to pay downRMG’s stock and third party debt. DuringAll these factors together resulted in a net reduction of cash and cash equivalents of $242,300.
Cash generated by the production of coalbed methane gas operations during the year ended December 31,
2003,2004 was swept by the
Company contributed its
interest in producing methane gas propertiesfinancing entities to
a new entity, Pinnacle Gas
Resources, Inc. ("Pinnacle") See Item 2 abovepay principal and
Note
-44-
F. The Company will therefore not be receiving revenues from those properties.
RMG continuesinterest. Prior to evaluate CBM properties and plans on generating cash flows from
methane gas production. See Note P.
CAPITAL RESOURCES
A major componentthe sweep of the Company's future cash flow projections isfor principal and interest payments, sufficient cash to pay well and field operating costs was advanced to RMG. RMG also receives a per well monthly fee of $193, net to RMG, average per well for operating the ultimate resolution of litigation with Nukem, Inc. ("Nukem") over issues
relating to Sheep Mountain Partners ("SMP") Partnership. On August 1, 2003,coalbed methane operations from the U.S. District Court of Colorado entered a Judgment in favor of the Company
against Nukem in the amount of $20,044,200. Nukem has appealed this Judgment to
the 10th Circuit Court of Appeals ("CCA"). working interest owners.
The Company has filed a cross-appeal
and answer to Nukem's appeal. See Item 3 above. Should the 10th CCA affirm the
District Court's Order and Judgment and/or grant the additional claims made by
the Company, the liquidity of the Company during the year ended December 31, 2004 was dependant therefore upon the sale of equity and increased debt to third parties. The Company anticipates repaying the debt once it is able to sell certain mineral or coalbed methane properties.
Capital Resources
As of April 11, 2005, the company and its subsidiary Rocky Mountain Gas, Inc. (“RMG”) has entered into a binding agreement with Enterra Energy Trust (“Enterra”) for the acquisition of RMG by Enterra in consideration of $20,000,000, payable pro rata to the RMG shareholders in the amounts of $6,000,000 in cash and $14,000,000 in exchangeable shares of one of the subsidiary companies of Enterra. The shares will be significantly improved.
Although no assurance canexchangeable for units of Enterra twelve months after closing of the transaction. The Enterra units are traded on the Toronto Stock Exchange and on Nasdaq; the exchangeable shares will not be given astraded. RMG will be acquired with approximately $3,500,000 of debt owed to its mezzanine lenders.
Two major components of anticipated future capital resources during 2005 therefore are the settlement of the litigation with Nukem and the sale of RMG to Enterra. Should the sale of RMG common stock to Enterra be concluded the Company will receive cash and trust units of Enterra which would be marketable in 12 months after the closing of the transaction. Management believes both these transactions will be concluded favorably, however, the ultimate outcome of the appeal, Nukem was
required to post a supersedeas bond inlitigation and the full amount of the Judgment with
interest.
Enterra transaction are not certain.
During the year ended December 31, 2003, the Company sold its interests in the town site operations to a non-affiliated entity, The Cactus Group ("Cactus"). As a result of the sale of the town site, USEthe Company received cash of $349,300 and a promissory note from Cactus in the amount of $3,120,700. USE is
to receive $203,000The Company received $166,000 in cash payments and $44,000 in room credits from Cactus during calendar 2004. All of these
paymentsThe room credits will be appliedused by the Company as it works on developing its uranium assets in southern Utah. Cactus is to interest only. Cactus will continue to makemaking monthly payments, primarily interest, until August 2008 at which time a balloon payment of $2.8 million is due.
Other sources of capital are cash on hand; collection of receivables;
receipt of monthly payments from an industry partner for the purchase of an
interest in RMG's CBM properties; contractual funding of drilling and
development programs by non-affiliates; sale of excess equipment and real estate
properties; a line of credit with a commercial bank, and equity financing of the
Company's subsidiaries.
The Company has a $750,000 line of credit with a commercial bank. The line of credit is secured by certain real estate holdings and equipment. At December 31, 2003,2004, the full line of credit was available. Theavailable to the Company and has been renewed by the bank through June 30, 2005. This line of credit could beis used for short-termshort term working capital needs associated with operations.
CAPITAL REQUIREMENTS
On February 9, 2005, the Company borrowed $4,000,000 from seven accredited investors, issuing $4,720,000 face amount of debentures (including three years of annual interest at 6%). Net proceeds to the Company were $3,700,000 after paying a commission and lenders' legal costs.
The debentures are unsecured; the face amount of the debentures are payable every six months from February 4, 2005, in five installments of 20%, in cash or in restricted common stock of the Company. We may pay this amortization payment in cash or in stock at the lower of $2.43 per share (the “set price”) or
90% of the volume weighted average price of The Company’s stock for the 90 trading days prior to the repayment date. The set price was determined on the formula of 90% of the volume weighted average price of the stock over the 90 trading days prior to February 4, 2005. The debentures are convertible to restricted common stock of the Company at the set price.
At any time, the Company has the right to redeem some or all of the debentures in cash or stock, in an amount equal to 120% of the face amount of the debentures until February 4, 2006; 115% from February 5, 2006 to February 4, 2007; and 110% from February 5, 2007 until maturity. Payment in stock would be at the set price. The holders may convert the debentures to stock even if USE should seek to redeem in cash.
If at any time, after registration for public resale of the conversion shares have been approved, the Company’s stock trades at more than 150% of the set price for 20 consecutive trading days, USE may convert the balance of the face amount of the debentures at the set price.
In the event of default, the investors may require payment (i) in cash equal to 130% of the then outstanding face amount; or (ii) in stock equal to 100% of face amount, with the stock priced at the set price, or (iii) in stock equal to 130% of the face amount, with the stock priced at 100% of the volume weighted average price of our stock for the 90 trading days prior to default.
The Company will continueissued warrants to maintain its uranium properties in a shut down
mode during 2004 unless an industry partner funds the development costsinvestors, expiring February 4, 2008, to purchase 971,195 shares of restricted common stock, at $3.63 per share (equal to 110% of the properties.Nasdaq closing price on February 3, 2005). The number of shares underlying the warrants equals 50% of the shares issuable on full conversion of the debentures at the set price (as if the debentures were so converted on February 4, 2005). Warrants to purchase an additional 100,000 shares, at the same price and for the same term as the warrants issued to the investors, were a registered broker-dealer as compensation for its services in connection with the transaction. If in any period of 20 consecutive trading days (after registration has been approved) the stock price of the Company’s common stock exceeds 200% of the warrants’ exercise price, on each of the trading days, all of the warrants will expire on the 30th day after the Company anticipatessends a call notice to the warrant holders.
During the quarter ended March 31, 2005, the Company received $1,529,300 from the exercise of 417,811 warrants by non-employee individuals and firms. The continued exercise of employee options and non-employee warrants is contingent upon the market price of the Company’s common stock remaining above the exercise prices.
Other sources of capital are cash on hand; collection of receivables; contractual funding of drilling and development programs by non-affiliates; sale of excess equipment and real estate properties; additional debt or equity financings through third parties; equity financing of the Company's subsidiaries and a line of credit with a commercial bank.
Capital Requirements
The capital requirements of the Company during 2005 remain its gold property through 2004General and completing an equityAdministrative costs and expenses; the funding in Canada which will provide the funds necessary to
place that property into production. The Company will also use its capital
resources during 2004 to pay down debt and general and administrative expenses
and reclamationof costs associated with the SMPmaintenance and Plateauoperation of its coalbed methane properties; permitting and development work on its gold property and the ongoing maintenance of its uranium properties. MAINTAINING URANIUM PROPERTIES
------------------------------
Additionally, pending the outcome of the litigation with Phelps Dodge, the Company may incur the costs associated with holding the molybdenum property. Although it is not known what the exact cost of maintaining the molybdenum properties is, it has been represented that the cost is approximately $1.0 million per year.
Maintaining Uranium Properties
SMP URANIUM PROPERTIES
Uranium Properties
The average monthly care and maintenance costs associated with the Sheep Mountain uranium mineral properties decreased by $11,500 from $28,000 as ofwas $23,100 during the year ended December 31, 2002 to
approximately $16,500 per month at December 31, 2003.2004. Included in the average monthly cost during the year ended December 31, 2003,2004 is ongoing reclamation work on the former SMP properties. It is anticipated that a total of $125,000$192,700 in reclamation costsexpenditures will be incurredconducted during 2005.
On December 8, 2004, the Company and Crested d/b/a USECC entered into a Purchase and Sale Agreement (the "agreement") with Bell Coast Capital Corp. now Uranium Power Corp. ("UPC"), a British Columbia corporation (TSX-V "UPC-V") for the sale to UPC of an undivided 50% interest in the former SMP uranium properties. The initial purchase price for the 50% interest in the properties is $4,050,000 and 4,000,000 shares of common stock of UPC, payable by installments. All amounts are stated in US dollars.
The Company, Crested and UPC, will each be responsible for paying 50% of (i) current and future Sheep Mountain reclamation costs in excess of $1,600,000, and (ii) all costs to maintain and hold the properties.
UPC has agreed to contribute $10,000,000 to the joint venture (at $500,000 for each of 20 exploration projects that are approved). The Company, USE and UPC, each will be responsible for 50% of costs on each project in excess of $500,000. (see Note F)
On April 11, 2005 USECC and UPC signed a mining venture agreement. See Items 2 and 3 above.
Plateau Resources Uranium Properties
Plateau owned the Ticaboo townsite, motel, convenience store, boat storage, restaurant and lounge. During the year ended December 31, 2003, the Company sold its interest in the townsite operations to a non-affiliated entity, Cactus. As a result of the sale of the townsite, USECC received a promissory note from Cactus in the amount of $3,120,700. The Company received $166,000 in cash payments and $44,000 in room credits from Cactus during calendar 2004.
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PLATEAU RESOURCES URANIUM PROPERTIES
Additionally, Plateau owns and maintains the Shootaring Canyon Uranium Mill (the "Shootaring Mill"“Shootaring Mill”). During the year ended December 31, 2003, Plateau requested a change in the status of the Shootaring Mill from active to reclamation from the NRC. The NRC granted the change in license status which generated a surplus in the cash bond account of approximately $2.9 million which was released to Plateau. The Company received the benefit of this release of cash.
During the yearyears ended December 31, 2004 and 2003, Plateau performed approximately $262,500 $209,600, respectively in reclamation on the Velvet and Tony M minesmining properties and the Shootaring Mill. No further reclamation expenses are anticipated on the Velvet and Tony M mine
properties. It is estimated that the Company will incur approximately $500,000
in reclamation costs at the Shootaring Mill during calendar 2004.
Although reclamation has been initiated on the Plateau properties,
management of the Company continuesDue to evaluate the future of the properties as
a result of the significant increases in the market price for uranium during the last six months of the year ended December 31, 2004 and the first quarter of 2005, the Company reconsidered its prior decision to approximately $17.50/lb. U3O8reclaim the Shootaring Mill property. In March 2005, Plateau filed an application with the State of Utah to restart the Mill. Therefore, the Company will not expend any capital resources in March 2004 from approximately $10.10/lb. in
March 2003.
the reclamation of the Mill during calendar 2005.
The cash costs per month, including reclamation costs, at the Plateau properties during calendar 20032004 were approximately $100,000$32,600 per month. These costs are projected to decreaseincrease to $55,000$75,000 to $100,000 per month during the year ending December 31, 2004.
SUTTER GOLD MINING COMPANY (SGMC)PROPERTIES
Due2005 due to increased activity in the uranium business.
Sutter Gold Mining Inc. (SGMI) Properties
Because of the recent increase in the price of gold, management of SGMCSutter Gold has decided to place itsthe properties controlled by it into production. No extensive development work or mill construction will be initiated until such time as funding from either
debt and or equity sources is in place. The goal of the Company'sCompany’s management is to have SGMCthe SGMI properties be self-supportingself supporting and thereby not requirerequiring any capital resourcesresource commitment from the Company. Until such time asOn December 29, 2004, SGMC merged with Globemin Resources, Inc., a Canadian company, and changed its name to Sutter Gold Mining Inc. (“SGMI”). SGMI is able to raise its own
capital, the Company will continue to fund SGMC. Management projects that the
total cash costs to be incurred in getting SGMC funded either through debt or
equity will not exceed $120,000. (See Note P). No reclamation costs are
projected to be incurredtraded on the SGMCTSX Venture Exchange. SGMI has sufficient capital to pay for the anticipated work which will be done on the properties during 2004.
DEVELOPMENT OF COALBED METHANE PROPERTIES
-----------------------------------------
The majoritycalendar 2005. Additional financing is being sought by SGMI. (s ee Note F)
Development of Coalbed Methane Properties
A portion of the costs during the year ended December 31, 20032004 for the development of RMG's CBMRMG’s coalbed methane properties waswere funded through an agreement that RMG entered into with CCBM, Inc. ("CCBM"(“CCBM”) a subsidiary of Carrizo Oil and Gas of Houston, Texas. At December 31, 2003, the balance remaining under this
arrangement was $610,200, one half of which was for the benefit ofCCBM had completely satisfied its cash and drilling commitments to RMG. See Part
2 above. After this drilling commitment is completed by CCBM, RMG will have to
fund its working interest amount on wells drilled.
During the year ended December 31, 2003, RMG and CCBM entered into a Subscription and Contribution Agreement with Credit Suisse First Boston Private Equity parties
("CSFB"(“CSFB”) to form Pinnacle Gas Resources, Inc.
("Pinnacle"(“Pinnacle”). As a result of the formation,
of Pinnacle, RMG and CCBM contributed certain undeveloped and producing
CBMcoalbed methane properties to Pinnacle. RMG has the opportunity to increase its ownership in Pinnacle by
purchasingadvancing cash to purchase common stock in Pinnacle through the exercise of
options. Anyoptions, but that increase
in RMG's equity would be offset
by
contributions made byto the
extent other
owners ofparties contribute additional capital to Pinnacle. See Part I
"Transaction“Transaction with Pinnacle Gas Resources, Inc.
"” Management of the Company does not anticipate exercising these options during calendar
20042005 unless surplus capital resources are received. RMG has no capital commitments on the properties contributed to Pinnacle.
See(see Note
F.
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F)
RMG continues to pursue other investment and production opportunities in the CBM business. On January 30, 2004, RMG purchased the assets of Hi-Pro Production, LLC a non-affiliated entity which included both producing and non-producing properties. The purchase of these CBM assets was accomplished by the issuance of common stock and warrants of both RMG and USE and cash, the majority of which was borrowed as a result of mezzanine financing through Petrobridge Investment Management, LLC ("Petrobridge").LLC. See Part I "Acquisition“Acquisition of Producing and Non-Producing Properties from Hi-Pro Production, LLC"LLC” and Note P.
F to the financial statements in this Annual Report.
All cash flows from the sale of gas fromproduction on the Hi-Pro properties are pledged to Petrobridge forpay the loan to purchase the Hi-Pro property.acquisition debt. See Note PF to the financial statements in this Annual Report and Part I, Acquisition of Producing and Non-Producing Properties fromform Hi-Pro Production, LLC .LLC. The Hi-Pro acquisition debt also requires minimum net production volumes through June 30, 2006 and maintenance of financial ratios. The Hi-Pro properties are held by RMG I, LLC, a wholly-owned subsidiary of RMG and are the sole collateral for the debt.
At December 31, 2004, RMG I was not in compliance with all of the debt financing entity.
In addition, we don't expect the lendersfinancial covenants under the mezzanine credit
facilityPetrobridge agreement. A revocable waiver was granted through January 31, 2006 by the lender. As the wavier is conditional, the entire debt is classified as current. Management of RMG I continues to fund moreseek solutions in the production of coalbed methane gas to bring the project into compliance. Due to lower than projected sales volumes, the drillingHi-Pro field will remain out of compliance unless (1) higher prices are realized, (2) costs are reduced and completion of five wells on proved
undeveloped locations on(3) the properties. debt is paid down. Because it is probable that RMG I will not
be in compliance with these ratios for the next reporting period the entire $3,214,800 is classified as current debt. Should the lender declare the note in default, the only asset available for recourse is the Hi-Pro property owned by RMG I. See Note F.
Future equity financing by RMG, or industry financings, will be needed for RMG I,RMGI, LLC to drill and complete wells on the substantial undeveloped acreage acquired from Hi-Pro. New production from this acreage could be needed to service the acquisition debt to offset the impact of declining production from the producing properties and/or low gas prices.
The Petrobridge credit facility will fund
As of April 11, 2005, the drillingCompany, USE, and completionRMG signed a binding agreement for the acquisition of five wells on proved undeveloped locations onRMG by Enterra Energy Trust. (see Capital Resources above.)
If the Hi-Pro properties. Future
equity financing by RMG, or industry financings,proposed transaction with Enterra is not consummated, management of the Company believes that continued exploration and development of RMG's unproven properties will be needed forfinanced through cash that RMG I, LLC
to drill and complete wellsUSE have on the substantial undeveloped acreage acquired from
Hi-Pro.
As a result of RMG's sale of property interests and the formation of joint
operatinghand as well as ventures with industry partners, itpartners. None of the Company’s capital resources should be needed therefore to fund operations or development work of RMG during 2005.
Debt Payments
Debt to non-related parties at December 31, 2004 was $7,180,700 net of a discount of $273,000. This debt consists of debt owed by RMG I to mezzanine lenders to purchase the Hi-Pro assets of $3.2 million; long term debt related to the purchase of vehicles and a corporate aircraft of $1.2 million, and convertible debt of $2.7million. The commitment of capital resources during calendar 2005 for equipment and liability insurance debt is $185,300. The mezzanine lenders for the Hi-Pro acquisition sweep all funds from operations of the field to pay interest and principal with the exception of funds to pay (a) lease operating expenses, (b) royalties and (c) production related taxes. At December 31, 2004, RMG I was not in compliance with five of the financial covenants under the Petrobridge agreement (see note F). A rev ocable waiver was granted through January 31, 2006 by the lender. As the waiver is conditional, the entire debt is classified as current. The convertible debt is not due until 2006 so will only require $300,000 of the Company’s capital resources to pay interest when due quarterly.
Reclamation Costs
The asset retirement obligations are substantially long term and are either bonded through the use of cash bonds or the pledge of assets. It is anticipated that $192,700 of reclamation work on the SMP properties in Wyoming will be performed during 2005.
The asset retirement obligation on the Plateau uranium mining and milling properties in Utah at December 31, 2004 was $5,249,100, which is reflected on the Balance Sheet. This liability is fully funded by cash investments that are recorded as long term restricted assets. Due to the increased market price of uranium, the reclamation of this property has been delayed significantly and is not anticipated to commence until 2032.
The asset retirement obligation of the Sheep Mountain uranium properties in Wyoming at September 30, 2004 are $2,339,900 and are covered by a reclamation bond which is secured by a pledge of certain real estate assets of the Company and Crested.
RMG asset retirement obligations at September 30, 2004 were $463,700. It is not anticipated that any reclamation work will commence on the Company's capitalcoalbed methane properties during 2005.
The asset retirement obligation for SGMI is $22,400 which is covered by a cash bond. No cash resources will be used to fund RMG operationsfor asset retirement obligations at SGMI during the balance of 2004.
LIQUIDITY SUMMARY
twelve months ended December 31, 2005.
Liquidity Summary
The Company's capital resources on hand atduring the year ended December 31, 20032004 were sufficient to fund mine standby costs,costs; coalbed methane property acquisition, maintenance and operations; limited reclamation and general and administrative expenses. DevelopmentThe anticipated development of our gold, propertyuranium, molybdenum and undeveloped CBMcoalbed methane gas properties will require additional funding. This funding fromwill be derived either through joint ventures with industry participants, debt or equity sources.
RESULTS OF OPERATIONS
---------------------
financings.
The current market prices for gold, uranium, molybdenum and coalbed methane gas are at levels that will warrant the exploration and development of the Company’s mineral properties. Industry projections for all these metals along with gas anticipate prices remaining at the current levels or higher during the next decade. Management of the Company therefore believes that sufficient capital will be available to develop its mineral properties. The successful development and production of these properties will greatly enhance the liquidity and financial position of the Company.
Results of Operations
During the periods presented, the Company has discontinued certain operations. Reclassifications to previously published financial statements have therefore been made to reflect ongoing operations and the effect of the discontinued operations. The Company changed its year end to December 31 effective December 31, 2002.
The Company began focusing its direction on
Year ended December 31, 2004 Compared to the coal bed methane industryYear ended December 31, 2003
Revenues:
Operating revenues during the year ended MayDecember 31, 2002. At2004 increased significantly over those recognized during the same timeprior year. The primary cause of this increase is as a result of the purchase of producing coalbed methane properties by RMG during the first quarter of 2004. The Company recognized $3,205,700 in gas sales during the twelve months ended December 31, 2004 as compared to only $287,400 during the prior year. The gas sales during the year ended December 31, 2003 were only for six months due to the formation of Pinnacle and the contribution of all of the Company’s producing properties to that entity.
The acquisition of producing gas properties also increased management fee revenues recognized by the Company began selling
itsduring the year ended December 31, 2004. This increase came as a result of the Company being paid a per well fee for the operation of the wells by the other assets that producedworking interest owners as well as a monthly fee for employees who manage the day to day production of the producing properties. During the year ended December 31, 2004 the Company recognized $796,300 in management revenues as a result of these activities. No similar revenues were recognized during the year ended December 31, 2003.
Revenues from commercial real estate operations constructiondecreased during the year ended December 31, 2004 from those recorded during the year ended December 31, 2003 by $78,200. This decrease was as a result of reduced lot sales at the Plateau operations in Utah. All other revenues for the year ended December 31, 2004 remained constant with those recognized during the previous year.
Costs and drillingExpenses:
As a result of the Company purchasing and operating coalbed methane properties during the year ended December 31, 2004, the costs associated with gas operations increased significantly from $313,100 to $4,168,800. These costs and expenses reflect the commercial repaircosts of aircraft.operations, repairs and maintenance and amortization of the purchase price on a units of production basis. The field which was purchased by the Company had not been well maintained for some time and therefore required major repairs and enhancements. Although the operation of a gas field constantly requires ongoing maintenance, it is not anticipated by management that the major enhancement costs will be required in the future as the Company has, and is committed to, perform the required maintenance on an ongoing basis. The enhancements and maintenance perfo rmed during the year ended December 31, 2004 have increased production and improved both the cash flow and results of operations relating to the gas property.
The production on all gas properties has a life certain and therefore begins to decline the longer the property is produced. The gas property that the Company purchased is on that decline curve and it is not known how long the property will continue to produce at its current levels. There are however additional coal seams that the management of the Company is evaluating for future development and production. The overall cost of the property is therefore anticipated to remain static; however, if the lower coals are not placed into production, the profitability of the property will decrease.
The holding costs associated with the Company’s mineral properties during the year ended December 31, 2004 remained constant with those costs recorded during the previous year. It is anticipated that these costs will increase during 2005 as the Company moves forward with the permitting process relating to its uranium and gold properties. Additionally the holding cost of the molybdenum property, which the Company most probably will receive back from Phelps Dodge, will increase these costs. All costs associated with the acquisition of additional properties will be capitalized but the permitting costs will be expensed.
Real estate operating costs and general and administrative costs were reduced during the year ended December 31, 2004 from those of the year ended December 31, 2003. The reduction of real estate costs is insignificant, $7,400, and is related to the reduction of the Company’s involvement in the southern Utah property sold to a third party which had previously been operated by Plateau. The reduction in general and administrative costs of $706,400 was due to the ongoing efforts of the Company’s management to reduce overhead and related expenses.
Other Income and Expenses:
Other Income and Expenses increased from net expenses of $73,000 during the year ended December 31, 2003 to net income of $13,000 during the year ended December 31, 2004. Although the net increase of $86,000 is insignificant there were some major changes in the individual components.
Due to the positive upward movement of the market prices for the minerals in which the Company is involved it has determined to retain its remaining mineral development and extraction equipment. The determination to retain this equipment is a direct cause of the reduction of $154,000 from the year ended December 31, 2003 to the year ended December 31, 2003 in the gain on the sale of assets.
The income recognized from the sale of investments is as a result of the liquidation of common stock of a company, Ruby Mining Company (“Ruby”), which the Company sold several years ago. The Company has enteredretained ownership of a portion of its former shares of common stock in Ruby and had no book basis in the coal bed methane industryshares. During the year ended December 31, 2004 the Company sold 832,500 shares of Ruby common stock and anticipates revenuesreceived $433,100. The Company also received $152,700 from the productionsale of coal bed methanea piece of
real estate during calendar 2004. Cash flows are
projected to begin beingthe year ended December 31, 2004 which had no book value.
Interest revenues recognized
in calendar 2005 after debt onduring the
Company's
newly acquired coal bed methane properties is retired.
-47-
YEAR ENDED DECEMBERyear ended December 31, 2004 decreased from those recognized during the year ended December 31, 2003 COMPARED TO THE YEAR ENDED MAYdue to the reduced amount of cash invested in interest bearing accounts. Interest expenses increased from $799,100 during the twelve months ended December 31, 2003 by $266,300 to $1,065,400 at December 31, 2004 as a result of increased debt associated with the purchase of coalbed methane properties.
Net Loss:
High and non-recurring remediation and maintenance costs associated with the new coalbed methane producing property resulted in a net loss from those operations of $963,100. This loss is offset by an increase of management fees of $964,300 which is directly tied to the operations of coalbed methane properties. Increased interest expenses and reduced interest revenues are therefore the primary causes for the increase in the loss of $438,600 during the year ended December 31, 2004 to $6,248,700 as compared to the loss during the year ended December 31, 2003 of $5,810,100. These losses reflect net losses per share of $0.47 per share and $0.52 per share for the years ended December 31, 2004 and 2003 respectively.
Year ended December 31, 2003 Compared to the Year ended May 31, 2002
Revenues:
- ---------
Revenues for the twelve months ended December 31, 2003 consisted of $334,300 from real estate operations, $287,400 from gas sales and $215,600 from management fees. Revenues from real estate operations during the fiscal year ended May 31, 2002 were $1,276,200. The decrease in real estate revenues was as a result of reduced sales of commercial real estate during the twelve months ended December 31, 2003. During fiscal 2002 the Company sold a tract of land in California which was no longer needed for the SGMC development plan for operations.
During the year ended December 31, 2003 the Company reported $287,400 in gas sales. There were no similar revenues during the twelve months ended May 31, 2002 as the Company had no production of coal bed methane gas at May 31, 2002.
The Company recognized a minimal increase in management fee revenues during the year ended December 31, 2003 to $215,600 over the $208,200 recognized in management fee revenues during the twelve months ended May 31, 2002. Management fee revenues were actually reduced after June 2003 when RMG contributed its producing and certain undeveloped properties to Pinnacle. Although RMG provided the transitional accounting services for Pinnacle through December 31, 2003, it received only its actual cost for those services.
Costs and Expenses:
- --------------------
Expenses:
Costs and expenses for the year ended December 31, 2003 were $8,075,200 as compared to $8,877,800 for the year ended May 31, 2002. Costs and expenses of real estate operations and the cost of real estate sold decreased by $1,045,500 during that twelve months ended December 31, 2003 when compared to the costs and expenses incurred during the fiscal year ended May 31, 2002. This decrease was primarily as a result of a tract of no longer needed. Real estate was sold by SGMC during the year ended May 31, 2002 while no similar sales occurred during the year ended December 31, 2003.
During the year ended December 31, 2003 the Company recognized $313,100 in gas operating expenses. No similar expenses were recorded during the fiscal year ended May 31, 2002 as the Company had not yet begun producing gas at that time.
Mineral holding costs decreased by $246,100 to $1,461,700 at December 31, 2003 from $1,707,800 at May 31, 2002. This decrease was as a result of the Company placing all its mining properties on a shut-down status and reducing costs of holding those properties.
General and administrative costs increased by $2,050,700 during the twelve months ended December 31, 2003 over the twelve months ended May 31, 2002. This increase was as a result of several non cash items. Non cash items which were expensed during the year ended December 31, 2003 were: depreciation and amortization of $554,200; accretion of asset retirement obligations of $366,700; amortization of debt discount of $537,700; amortization of non cash services of $134,700, and non cash compensation of $893,500 for a total of $2,486,800.
The amortization of debt discount increased primarily as a result of the acceleration in the discount amortization due to the conversion of approximately one half of the debt under the terms of $1.0 million of debt to common shares of the
Company'sCompany’s common stock.
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On January 1, 2003, the Company adopted SFAS 143, Accounting for Asset Retirement Obligation. Under the terms of this accounting standard, the Company is required to record the fair value of the reclamation liability on its shut-down mining and gas properties as of the date that the liability was incurred. The accounting standard further requires the Company to review the liability and determine if a change in estimate is required as well as accrete the total liability for the future liability. As a result of the adoption of this accounting standard, the Company recorded the non cash accretion of $366,700.
Non cash compensation increased as a result of the initial funding of the 2001 Stock Award Plan whereby five of the executive officers of the company were granted a total of 100,000 shares of common stock at $3.10 per share. Under the plan, each officer is to receive 10,000 shares of common stock annually under the condition that the shares cannot be sold until the officer'sofficer’s death or retirement. The plan was effective in 2001 and had not been funded. The funding for the twelve months ended December 2003 was therefore retroactive for two years. In addition to the increase due to the funding of the 2001 Stock Award Plan, the funding for the ESOP as well as the amortization of the deferred compensation recorded in prior periods were both for a full twelve months as compared to only seven months in the prior period.
p eriod.
The increase in the amortization of non cash services during the year ended December 31, 2003 resulted from the issuance of additional stock and warrants for legal and financial consulting services. These services related to the formation of Pinnacle and litigation with Phelps Dodge.
Other Income and Expenses:
- ----------------------------
Expenses:
During the fiscal year ended May 31, 2002 the Company recognized $812,700 in gains from the sale of assets while during the year ended December 31, 2003 the Company recognized only $198,200. The Company was selling the majority of its construction equipment during the years ended May 31, 2002 and 2001. The majority of the surplus equipment to be sold was sold during those two years.
Interest Incomeincome decreased $291,800 during the year ended December 31, 2003 when compared to the year ended May 31, 2002. This reduction in revenues occurred as a result of the company having less amounts of cash invested in interest bearing accounts during the year ended December 31, 2003. In May of 2002 the Company borrowed $1.5 million from third party lenders. During the year ended December
31, 2003 the Company recorded interest on this debt while there was not interest paid on this debt during fiscal 2002.
Effective January 1, 2003 the Company adopted SFAS 143 "Accounting“Accounting for Asset Retirement Obligations"Obligations” which requires the Company to record the fair value of the reclamation liability on its shut down mining and gas properties as of the date that the liability is incurred. The Company is further required to accrete the total liability for the full value of the future liability. As a result of adopting this new accounting policy the Company recorded a cumulative effect of accounting change of $1,615,600 as well as an accretion expense of 366,700.
Operations for the year ended December 31, 2003 resulted in a loss of $5,810,100 or $0.52 per share as compared to a loss of $6,181,100 or $0.66 per share during fiscal 2002.
SEVEN MONTHS ENDED DECEMBER
Seven months ended December 31, 2002 COMPARED TO THE SEVEN MONTHS ENDED DECEMBERCompared to the Seven months ended December 31, 2001
Revenues:
- ---------
During the seven months ended December 31, 2002, the Company recognized $673,000 in revenues as compared to $545,900 in revenues during the seven months ended December 31, 2001. This increase of $127,100 in revenues was primarily as a result of the production and sale of CBM gas during the seven
-49-
months ended December 31, 2002 of $119,400 while no revenues from CBM production were recognized during the same period of the previous year.
Through the purchase of the Bobcat Field, RMG began selling CBM gas during the seven months ended December 31, 2002. As anticipated, production from these newly developed wells was lower than it will be in the future. Additionally, the market price for natural gas was very low during the summer and fall months of 2002. These reasons along with high start up and operating costs of $355,200, resulted in a loss from operations for CBM of $235,800. Management believes with increased production volumes, reduced ongoing operating costs and increased market prices for natural gas, the CBM properties will show profits and cash flows during 2003.
Costs and Expenses:
- --------------------
Expenses:
Costs and expenses during the seven months ended December 2002 were $4,197,900 as compared to costs and expenses of $4,460,800 during the seven months ended December 31, 2001. This reduction of $262,900 was as a result of a reduction in the holding costs of shut-down mineral properties and an ongoing cost cutting program. These reductions in operating costs were offset primarily by the operating costs associated with CBM.
Other Income and Expenses:
- ----------------------------Expeses:
During the seven months ended December 31, 2002, the Company recognized a loss on the sale of assets of $342,600 while it recognized a gain on the sale of assets during the seven months ended December 31, 2001 of $592,600. The Company also had an increase in interest expense of $234,500 during the seven months ended December 31, 2002 over the same period of the previous year as a result of the interest on the Company's convertible debt.
Operations for the seven months ended December 31, 2002, resulted in a loss of $3,840,100 or $0.36 per share as compared to a loss of $2,785,400 or $0.34 per share for the seven months ended December 31, 2001.
FISCAL 2002 COMPARED TO FISCAL 2001
- ----------------------------------------
Revenues:
- ---------
Revenues from operations decreased by $1,038,400
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued FASB No. 123(R), Accounting for Stock-Based Compensation, which replaces FASB 123,Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,Accounting for Stock Issued to $1,484,400 during
fiscal 2002 from the $2,522,800 recognized during fiscal 2001. Components of
this decrease are reductions mineral sales of $334,300; mineral royalties of
$108,500;Employees, and management fees of $389,600. Mineral sales during fiscal 2001
resulted from the purchase of uranium oxideits related implementation guidance. The Company will be required to implement FASB 123(R) on the open marketquarterly report for the quarter ended September 30, 2005. Under the terms of FASB 123(R) the Company will be required to fill uranium
sales contractsexpense the fair value of stock options issued to employees. The fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock, the expected dividends on it, and the sale of a uranium contract to a third party. We did not
supply anyrisk-free interest rate over the expected life of the uranium sold underoption. The fair value of an option estimated at the contracts from production outgrant date is not subsequently adjusted for changes in the price of our
mines. We have not produced any minerals from minesthe underlying stock or its volatility, life of the option, dividends on the stock, or the risk-free interest rate.
Effective January 1, 2003, the Company adopted SFAS No. 143 “Accounting for several years.Asset Retirement Obligation.” The uranium contracts expiredstatement requires the Company to record the fair value of the reclamation liability on its shut down mining and no molybdenum advance royalties have been received
since 2001.
There were no mineral sales during fiscal 2002 while there was one delivery
undergas properties as of the date that the liability is incurred. The statement further requires that the Company review the liability each quarter and determine if a uranium contractchange in estimate is required as well as accrete the saletotal liability on a quarterly basis for the future liability.
The Company will also deduct any actual funds expended for reclamation during the quarter in which it occurs. The Company has no remaining book value for these properties.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of one of the Company's uranium
contracts to a third party during fiscal 2001. Currently,both Liabilities and Equity." This Statement establishes standards for how the Company does not
have any delivery contracts for uranium or any other mineral. Depending on the
outcomewill classify and measure certain financial instruments with characteristics of the SMP litigation,both liabilities and equity. It requires that the Company may well have CIS poundsclassify a financial instrument within its scope as a liability. Some of uranium
for which it will need to obtain delivery contracts.
The Company holds a 6% gross royalty on the Mt. Emmons molybdenum deposit
near Crested Butte, CO. Under the provisions of this Statement are consistent with the royalty agreement,current definition of liabilities in FASB Concepts Statement No. 6, "Elements of Financial Statements." The remaining provisions of this Statement are consistent w ith the CompanyFASB's proposal to revise that definition to encompass certain obligations that a reporting entity can or must settle by issuing its own equity shares, depending on the nature of the relationship established between the holder and Crested are to receive 50,000 pounds
-50-
the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of molybdenumthe first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 had no material impact on the Company's financial position or its cash equivalent annually as an advance royalty. The royalty
agreement was originally made with AMAX Inc. ("AMAX"), which was purchased by
Cyprus Minerals Company in 1993 and changed its name to Cyprus Amax Minerals
Company ("Cyprus Amax"). In 1999, Cyprus Amax was purchased by Phelps Dodge
Corporation ("PD"). AMAX and Cyprus Amax had made the advance royalty payments
to USECC on a timely basis. PD made one advance royalty payment and ceased
making payments in fiscal 2001. PD suspended payments under the advance royalty
agreement and has sued the Company. results of operations.
The Company has filed counter claims against
Phelps Dodge requesting that the advance royalty be reinstated andreviewed other issues.
It is not known what the outcome of this litigation will be.
Management fees were reduced by $389,600 in fiscal 2002current outstanding statements from the prior
period due to reduced activity inFinancial Accounting Standards Board and does not believe that any of those statements will have a material adverse affect on the entities from which management fees are
collected.
Costs and Expenses:
- --------------------
During fiscal 2002, costs and expenses were reduced by $1,061,100. This
reduction came about as a result of holding costs of mineral properties being
reduced by $1,661,500 as a resultfinancial statements of the Company reducing costs associated with
mineral properties that are shut down. The general and administrative costs were
reduced by $104,700. In addition to these reductions in costs and expenses, the
Company recognized an expense of $123,800 in abandonment of mining equipment
during fiscal 2001. There was no abandonment expense in fiscal 2002.
These reductions in costs and expenses were offset by increases in
impairment of goodwill of $1,622,700; provision for doubtful accounts of
$171,200, and other expenses of $80,900. The impairment of goodwill came as a
result of the Company purchasing an additional 8.7% of RMG equity or 1,105,499
shares of RMG stock by issuing 912,233 shares of the Company's common stock. The
shares of the Company's common stock were valued at $3.92 per share. An
impairment of $1,622,700 was taken on this investment in RMG as RMG had no gas
production and the impairment brought the total investment in RMG in line with
the fair market value of the RMG assets.
A provision for doubtful accounts was provided on the balance of a note
receivable that the Company held for the sale of Ruby Mining Company to
Admiralty Corporation. The note was in the original amount of $225,000 and had
been reduced to $171,200. The note went in default during fiscal 2002 at which
time the Company began negotiations with Admiralty to resolve the issue of the
outstanding balance. Terms were reached which required Admiralty to pay interest
on the note, plus accrued interest, through August 2003, at which time the
entire note balance would come due. Because of the financial condition of
Admiralty, it is not known if that company will be able to pay the balance of
the note when due. The entire amount of the note was therefore reserved.
Other Income and Expenses:
- ----------------------------
Gain on sale of assets income decreased by $350,900 during fiscal 2002 to
$812,700. This decrease was as a result of the sale of a majority of the surplus
mining equipment that the Company had for sale during the prior year. During
fiscal 2002, there was no income from litigation settlements while during fiscal
2001 there was $7,132,800 in litigation settlement as a result of the Company
settling all issues pertaining to the litigation initiated by Kennecott.
Interest income increased by $152,400 during fiscal 2002 over fiscal 2001 as did
interest expense which increased by $80,000 for the same period. These increases
were as a result of larger amounts of cash invested in interest bearing accounts
and increased debt.adopted.
Future Operations for the twelve months ended May 31, 2002, resulted in a net loss
of $6,267,600 or $0.67 per share as compared to net income of $1,771,200 or
$0.23 per share for the previous year.
-51-
FUTURE OPERATIONS
-----------------
We have generated operating losses for the yearyears ended December 31, 2004 and 2003, the seven months ended December 31, 2002 and in each of the three fiscal yearsyear ended May 31, 2002 as a result of costs associated with shut down mineral properties. We have discontinued our focus on these propertiesManagement of the Company intends to take advantage of the opportunity presented by the recent and at December
31, 2003, we are committed to befuture projected market prices for all the minerals and coalbed methane gas that it is involved with.
Effects of Changes in the CBM business well into the future.
EFFECTS OF CHANGES IN PRICES
----------------------------
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.
NATURAL GAS.
Natural Gas and Oil.Our decision to expand into the CBM gascoalbed methane industry waswere predicated on the projections for natural gas demand and prices. The Company is
confidentWe believe that it can maintain its costs at CBM industry standards but cannot
predict whatthe energy demands of the United States of America will happen tosustain higher natural prices. As a result of RMG’s hedging activities, the price of CBM gas.
URANIUM AND GOLD. gas will not materially affect our operations for fiscal 2005.
Uranium and Gold.Changes in the prices of uranium and gold are not
expected to materiallywill affect our operations during 2004.
MOLYBDENUM AND OIL. Changesoperational decisions the most. Currently, both gold and uranium have experienced an increase in price. We continually evaluate market trends and data and are seeking financing or a joint venture to place the Company’s gold and uranium properties in production. We are currently evaluating our gold and uranium properties as market prices have increased to the level that these properties could produce profitably. Management is evaluating how long this trend will continue and at what level market prices for gold and uranium will settle at for the long term.
Molybdenum.The price of Molybdenum at December 31, 2004 was at a 20 year high of $34 per pound. Since the U.S. District Court ruled in favor of those claims brought by Phelps Dodge, the Company and Crested believe they will receive the Mt. Emmons molybdenum property near Crested Butte, Colorado back. If the properties are received, the Company and Crested will seek financing or a joint venture partner to place the Mt. Emmons property into production. The Mt. Emmons property will have a very long life and changes in prices of molybdenum and petroleum arewould affect the revenues from that property. The Mt. Emmons property will not expected to materially affect our operationsbe placed into production during 2004.
CONTRACTUAL OBLIGATIONS. 2005 or the near term.
Contractual Obligations
The Company hadhas two divisions of contractual obligations as of December 31, 2003: Debt2004: debt to third parties of $2,249,800, the
payments are $932,200, $112,800, $116,600, $1,056,500, $22,600 and $9,200 for
the years ended December 31, 2004 through 2008, and thereafter, respectively,$7,180,700, and asset retirement obligations of $7,264,700 which$8,075,100. The debt will be paid over a period of five to seven years and the retirement obligations will be retired during the next 30 years. During the year ended December 31, 2004, RMG incurred new debt of $3.7 million in the acquisition of the assets of Hi-Pro, and the Company incurred $3.0 million of new debt to a private lender under a credit facility. The following table shows the schedule of the payments on the debt, and the expenditures for budgeted asset retirement obligations.
| | | | | Less | | One to | | Three to | | More than |
| | | | | than one | | Three | | Five | | Five |
| | | Total | | Year | | Years | | Years | | Years |
| Long-term debt obligations | | $ 7,180,700 | | $ 3,400,100 | | $ 3,771,500 | | $ 9,100 | | $ -- |
| | | | | | | | | | | |
| Other long-term liabilities | | 8,075,100 | | 192,700 | | 471,100 | | 1,946,100 | | 5,465,200 |
| Totals | | $ 15,255,800 | | $ 3,592,800 | | $ 4,242,600 | | $ 1,955,200 | | $ 5,465,200 |
| | | | | | | | | | | |
ITEM 8. FINANCIAL STATEMENTS
Financial Statements
Financial statements meeting the requirements of Regulation S-X for the Company follow immediately.
-52-
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To Report of Independent Registered Public Accounting Firm
U.S. Energy Corp.:
Board of Directors
We have audited the accompanying consolidated balance sheetssheet of U.S. Energy Corp. and subsidiaries as of December 31, 2003 and 2002 and May 31, 2002,2004 and the related consolidated statements of operations, shareholders'shareholders’ equity and cash flows for the year ended December 31, 2003, the seven months ended December 31,
2002 and the fiscal years ended May 31, 2002 and 2001.2004. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion onof these financial statements based on our audits.
audit.
We conducted our auditsaudit in accordance with auditingthe standards generally accepted
inof the United States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of U.S. Energy Corp. and subsidiaries as of December 31, 2004 and the results of their operations and their cash flows for the year ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company has experienced significant losses from operations. In addition, the Company has a working capital deficit of $636,500 as of December 31, 2004. These factors raise substantial doubt about the ability of the Company to continue as a going concern. Management’s plans in regards to these matters are also described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ EPSTEIN, WEBER & CONOVER, PLC
Scottsdale, Arizona
March 9, 2005, except for Note P
as to which the date is April 11, 2005
Report of Independent Registered Public Accounting Firm
To U.S. Energy Corp.:
We have audited the accompanying consolidated balance sheet of U.S. Energy Corp. and subsidiaries as of December 31, 2003 and the related consolidated statements of operations, shareholders' equity and cash flows for the year ended December 31, 2003, the seven months ended December 31, 2002 and the fiscal year ended May 31, 2002. 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 audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion of the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of U.S. Energy Corp. and subsidiaries as of December 31, 2003, and 2002 and May 31, 2002, and the results of their operations and their cash flows for the year ended December 31, 2003, the seven months ended December 31, 2002 and the fiscal yearsyear ended May 31, 2002 and 2001 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note B to the financial statements effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143,Accounting for Asset Retirement Obligations, and changed its method of accounting for asset retirement obligations.
As discussed in Note A to the financial statements, certain errors resulting in
overstatement of previously reported deferred tax liability as of December 31,
2002 and prior, were discovered by Company management during the year ended
December 31, 2003. Accordingly, an adjustment has been made to accumulated
deficit as of June 1, 2000 to correct the error.
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 and has a substantial accumulated deficit. 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/ GRANT THORNTON LLP
Oklahoma City, Oklahoma
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31, May 31,
2003 2002 2002
------------------- -------------- ------------
(Restated, Note A)(Restated, Note A)
CURRENT ASSETS:
Cash and cash equivalents $ 4,084,800 $ 1,741,000 $ 2,564,300
Accounts receivable
Trade, net |
| -58- | |
|
U.S. ENERGY CORP. AND SUBSIDIARIES | |
| | | | | | |
CONSOLIDATED BALANCE SHEETS | |
| | | | | | |
ASSETS | |
| | | | | | |
| | | December 31, | | December 31, | |
| | | 2004 | | 2003 | |
| CURRENT ASSETS: | | | | | |
| Cash and cash equivalents | | $ | 3,842,500 | | $ | 4,084,800 | |
| Accounts receivable | | | | | | | |
| Trade, net of allowance of $111,300 | | | | | | | |
| and $27,800 | | | 797,500 | | | 300,900 | |
| Affiliates | | | 13,500 | | | 96,800 | |
| Other | | | 52,700 | | | -- | |
| Current portion of long-term notes | | | | | | | |
| receivable, net | | | 49,500 | | | 102,500 | |
| Prepaid expenses | | | 489,700 | | | 584,700 | |
| Inventories | | | 176,100 | | | 21,700 | |
| Total current assets | | | 5,421,500 | | | 5,191,400 | |
| | | | | | | | |
| INVESTMENTS: | | | | | | | |
| Non-affiliated company | | | 957,700 | | | 957,700 | |
| Restricted investments | | | 6,852,300 | | | 6,874,200 | |
| Total investments | | | 7,810,000 | | | 7,831,900 | |
| | | | | | | | |
| PROPERTIES AND EQUIPMENT: | | | | | | | |
| Land | | | 576,300 | | | 570,000 | |
| Buildings and improvements | | | 5,922,400 | | | 5,777,700 | |
| Machinery and equipment | | | 4,919,000 | | | 4,762,800 | |
| Proved oil and gas properties, full cost method | | | 5,569,000 | | | 1,773,600 | |
| Unproved coal bed methane properties | | | | | | | |
| excluded from amortization | | | 5,101,900 | | | 1,204,400 | |
| Total properties and equipment | | | 22,088,600 | | | 14,088,500 | |
| Less accumulated depreciation, | | | | | | | |
| depletion and amortization | | | (8,322,000 | ) | | (6,901,400 | ) |
| Net properties and equipment | | | 13,766,600 | | | 7,187,100 | |
| | | | | | | | |
| OTHER ASSETS: | | | | | | | |
| Notes receivable trade | | | 2,971,800 | | | 2,950,600 | |
| Deposits and other | | | 733,800 | | | 768,700 | |
| Total other assets | | | 3,705,600 | | | 3,719,300 | |
| Total assets | | $ | 30,703,700 | | $ | 23,929,700 | |
| | | | | | | | |
The accompanying notes are an integral part of allowancethese statements. |
| -59- | |
|
U.S. ENERGY CORP. AND SUBSIDIARIES | |
| | | | | | |
CONSOLIDATED BALANCE SHEETS | |
| | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | |
| | | | | | |
| | | December 31, | | December 31, | |
| | | 2004 | | 2003 | |
| CURRENT LIABILITIES: | | | | | |
| Accounts payable | | $ | 1,751,300 | | $ | 727,800 | |
| Accrued compensation expense | | | 181,700 | | | 180,000 | |
| Asset retirement obligation | | | 192,700 | | | -- | |
| Current portion of long-term debt | | | 3,400,100 | | | 932,200 | |
| Other current liabilities | | | 532,200 | | | 69,700 | |
| Total current liabilities | | | 6,058,000 | | | 1,909,700 | |
| | | | | | | | |
| LONG-TERM DEBT | | | 3,780,600 | | | 1,317,600 | |
| | | | | | | | |
| ASSET RETIREMENT OBLIGATIONS | | | 7,882,400 | | | 7,264,700 | |
| | | | | | | | |
| OTHER ACCRUED LIABILITIES | | | 1,952,300 | | | 2,158,600 | |
| | | | | | | | |
| DEFERRED GAIN ON SALE OF ASSET | | | 1,279,000 | | | 1,295,700 | |
| | | | | | | | |
| MINORITY INTERESTS | | | 871,100 | | | 496,000 | |
| | | | | | | | |
| COMMITMENTS AND CONTINGENCIES | | | | | | | |
| | | | | | | | |
| FORFEITABLE COMMON STOCK, $.01 par value | | | |
| 442,740 and 465,880 shares issued, | | | | | | | |
| forfeitable until earned | | | 2,599,000 | | | 2,726,600 | |
| | | | | | | | |
| PREFERRED STOCK, | | | | | | | |
| $.01 par value; 100,000 shares authorized | | | | | | | |
| No shares issued or outstanding | | | -- | | | -- | |
| | | | | | | | |
| SHAREHOLDERS' EQUITY: | | | | | | | |
| Common stock, $.01 par value; | | | | | | | |
| unlimited shares authorized; 15,231,237 | | | | | | | |
| and 12,824,698 shares issued net of | | | | | | | |
| treasury stock, respectively | | | 152,300 | | | 128,200 | |
| Additional paid-in capital | | | 59,157,100 | | | 52,961,200 | |
| Accumulated deficit | | | (49,321,700 | ) | | (43,073,000 | ) |
| Treasury stock at cost, | | | | | | | |
| 972,306 and 966,306 shares respectively | | | (2,779,900 | ) | | (2,765,100 | ) |
| Accumulated comprehensive loss | | | (436,000 | ) | | -- | |
| Unallocated ESOP contribution | | | (490,500 | ) | | (490,500 | ) |
| Total shareholders' equity | | | 6,281,300 | | | 6,760,800 | |
| Total liabilities and shareholders' equity | | $ | 30,703,700 | | $ | 23,929,700 | |
| | | | | | | | |
The accompanying notes are an integral part of $27,800 300,900 1,655,700 768,800
Affiliates 96,800 117,600 132,800
Current portionthese statements. |
| -60- | |
|
U.S. ENERGY CORP. AND SUBSIDIARIES | |
| | | | | | | | | | |
CONSOLIDATED STATEMENTS OF OPERATIONS | |
| | | | | | | | | | |
| | | | | | | Seven months ended | | Year ended | |
| | | Year ended December 31, | | December 31, | | May 31, | |
| | | 2004 | | 2003 | | 2002 | | 2002 | |
| OPERATING REVENUES: | | | | | | | | | |
| Real estate operations | | $ | 256,100 | | $ | 334,300 | | $ | 394,500 | | $ | 1,276,200 | |
| Gas sales | | | 3,205,700 | | | 287,400 | | | 119,400 | | | -- | |
| Management fees | | | 1,179,900 | | | 215,600 | | | 159,100 | | | 208,200 | |
| | | | 4,641,700 | | | 837,300 | | | 673,000 | | | 1,484,400 | |
| | | | | | | | | | | | | | |
| OPERATING COSTS AND EXPENSES: | | | | | | | | | | | | | |
| Real estate operations | | | 295,500 | | | 302,900 | | | 189,700 | | | 1,348,400 | |
| Gas operations | | | 4,168,800 | | | 313,100 | | | 355,200 | | | -- | |
| Mineral holding costs | | | 1,466,700 | | | 1,461,700 | | | 737,200 | | | 1,707,800 | |
| General and administrative | | | 5,291,100 | | | 5,997,500 | | | 2,915,800 | | | 3,946,800 | |
| Impairment of goodwill | | | -- | | | -- | | | -- | | | 1,622,700 | |
| Other | | | -- | | | -- | | | -- | | | 80,900 | |
| Provision for doubtful accounts | | | 79,000 | | | -- | | | -- | | | 171,200 | |
| | | | 11,301,100 | | | 8,075,200 | | | 4,197,900 | | | 8,877,800 | |
| | | | | | | | | | | | | | |
| OPERATING LOSS | | | (6,659,400 | ) | | (7,237,900 | ) | | (3,524,900 | ) | | (7,393,400 | ) |
| | | | | | | | | | | | | | |
| OTHER INCOME & EXPENSES: | | | | | | | | | | | | | |
| Gain (loss) on sales of assets | | | 46,300 | | | 198,200 | | | (342,600 | ) | | 812,700 | |
| Gain (loss) on sale of investment | | | 656,300 | | | (32,400 | ) | | (207,800 | ) | | -- | |
| Interest income | | | 375,800 | | | 560,300 | | | 524,500 | | | 852,100 | |
| Interest expense | | | (1,065,400 | ) | | (799,100 | ) | | (361,200 | ) | | (345,300 | ) |
| | | | 13,000 | | | (73,000 | ) | | (387,100 | ) | | 1,319,500 | |
| | | | | | | | | | | | | | |
| LOSS BEFORE MINORITY INTEREST, | | | | | | | | | | | | | |
| PROVISION FOR INCOME TAXES, | | | | | | | | | | | | | |
| DISCONTINUED OPERATIONS AND | | | | | | | | | | | | | |
| CUMULATIVE EFFECT OF | | | | | | | | | | | | | |
| ACCOUNTING CHANGE | | | (6,646,400 | ) | | (7,310,900 | ) | | (3,912,000 | ) | | (6,073,900 | ) |
| | | | | | | | | | | | | | |
| MINORITY INTEREST IN LOSS OF | | | | | | | | | | | | | |
| CONSOLIDATED SUBSIDIARIES | | | 397,700 | | | 235,100 | | | 54,800 | | | 39,500 | |
| | | | | | | | | | | | | | |
| LOSS BEFORE PROVISION FOR INCOME | | | | | | | | | |
| TAXES, DISCONTINUED OPERATIONS | | | | | | | | | | | | | |
| AND CUMULATIVE EFFECT OF | | | | | | | | | | | | | |
| ACCOUNTING CHANGE | | | (6,248,700 | ) | | (7,075,800 | ) | | (3,857,200 | ) | | (6,034,400 | ) |
| | | | | | | | | | | | | | |
| PROVISION FOR INCOME TAXES | | | -- | | | -- | | | -- | | | -- | |
| | | | | | | | | | | | | | |
| (continued) | | | | | | | | | | | | | |
The accompanying notes are an integral part of long-termthese statements. |
| -61- | |
|
U.S. ENERGY CORP. AND SUBSIDIARIES | |
| | | | | | | | | | |
CONSOLIDATED STATEMENTS OF OPERATIONS | |
| | | | | | | | | | |
| | | | | | | Seven months ended | | Year ended | |
| | | Year ended December 31, | | December 31, | | May 31, | |
| | | 2004 | | 2003 | | 2002 | | 2002 | |
| | | | | | | | | | |
| NET LOSS FROM CONTINUING | | | | | | | | | |
| OPERATIONS | | $ | (6,248,700 | ) | $ | (7,075,800 | ) | $ | (3,857,200 | ) | $ | (6,034,400 | ) |
| | | | | | | | | | | | | | |
| DISCONTINUED OPERATIONS, | | | | | | | | | | | | | |
| NET OF TAX | | | -- | | | (349,900 | ) | | 17,100 | | | (146,700 | ) |
| | | | | | | | | | | | | | |
| CUMULATIVE EFFECT OF | | | | | | | | | | | | | |
| ACCOUNTING CHANGE | | | -- | | | 1,615,600 | | | -- | | | -- | |
| | | | | | | | | | | | | | |
| NET LOSS | | | (6,248,700 | ) | | (5,810,100 | ) | | (3,840,100 | ) | | (6,181,100 | ) |
| | | | | | | | | | | | | | |
| PREFERRED STOCK DIVIDENDS | | | -- | | | -- | | | -- | | | (86,500 | ) |
| | | | | | | | | | | | | | |
| NET LOSS AVAILABLE TO COMMON | | | | | | | | | | | | | |
| SHAREHOLDERS | | $ | (6,248,700 | ) | $ | (5,810,100 | ) | $ | (3,840,100 | ) | $ | (6,267,600 | ) |
| | | | | | | | | | | | | | |
| NET LOSS PER SHARE BASIC | | | | | | | | | | | | | |
| CONTINUED OPERATIONS | | $ | (0.47 | ) | $ | (0.63 | ) | $ | (0.36 | ) | $ | (0.65 | ) |
| DISCONTINUED OPERATIONS | | | -- | | | (0.03 | ) | | -- | | | (0.01 | ) |
| PREFERRED DIVIDENDS | | | -- | | | -- | | | -- | | | (0.01 | ) |
| EFFECT OF ACCOUNTING | | | | | | | | | | | | | |
| ACCOUNTING CHANGE | | | -- | | | 0.14 | | | -- | | | -- | |
| | | $ | (0.47 | ) | $ | (0.52 | ) | $ | (0.36 | ) | $ | (0.67 | ) |
| | | | | | | | | | | | | | |
| NET LOSS PER SHARE DILUTED | | | | | | | | | | | | | |
| CONTINUED OPERATIONS | | $ | (0.47 | ) | $ | (0.63 | ) | $ | (0.36 | ) | $ | (0.65 | ) |
| DISCONTINUED OPERATIONS | | | -- | | | (0.03 | ) | | -- | | | (0.01 | ) |
| PREFERRED DIVIDENDS | | | -- | | | -- | | | -- | | | (0.01 | ) |
| EFFECT OF ACCOUNTING | | | | | | | | | | | | | |
| ACCOUNTING CHANGE | | | -- | | | 0.14 | | | -- | | | -- | |
| | | $ | (0.47 | ) | $ | (0.52 | ) | $ | (0.36 | ) | $ | (0.67 | ) |
| | | | | | | | | | | | | | |
| BASIC WEIGHTED AVERAGE | | | | | | | | | | | | | |
| SHARES OUTSTANDING | | | 13,182,421 | | | 11,180,975 | | | 10,770,658 | | | 9,299,359 | |
| | | | | | | | | | | | | | |
| DILUTED WEIGHTED AVERAGE | | | | | | | | | | | | | |
| SHARES OUTSTANDING | | | 13,182,421 | | | 11,180,975 | | | 10,770,658 | | | 9,299,359 | |
| | | | | | | | | | | | | | |
The accompanying notes receivable, net 102,500 165,900 229,000
Assets heldare an integral part of these statements. |
| -62- | |
|
U.S. ENERGY & AFFILIATES | |
| | | | | | | | | | | | | | | | | | |
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | Additional | | | | | | | | Unallocated | | Total | |
| | | Common Stock | | Paid-In | | Accumulated | | Treasury Stock | | ESOP | | Shareholders' | |
| | | Shares | | Amount | | Capital | | Deficit | | Shares | | Amount | | Contribution | | Equity | |
| | | | | | | | | | | | | | | | | | |
| Balance May 31, 2001 | | | 8,989,047 | | $ | 90,000 | | $ | 38,681,600 | | $ | (27,155,200 | ) | | 949,725 | | $ | (2,660,500 | ) | $ | (490,500 | ) | $ | 8,465,400 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Funding of ESOP | | | 70,075 | | | 700 | | | 236,200 | | | -- | | | -- | | | -- | | | -- | | | 236,900 | |
| Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | |
| to outside directors | | | 3,429 | | | -- | | | 14,400 | | | -- | | | -- | | | -- | | | -- | | | 14,400 | |
| Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | |
| for services rendered | | | 45,000 | | | 500 | | | 147,600 | | | -- | | | -- | | | -- | | | -- | | | 148,100 | |
| Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | |
| warrants for services rendered | | | -- | | | -- | | | 592,900 | | | -- | | | -- | | | -- | | | -- | | | 592,900 | |
| Treasury stock from payment | | | | | | | | | | | | | | | | | | | | | | | | | |
| on balance of note receivable | | | -- | | | -- | | | -- | | | -- | | | 10,000 | | | (79,900 | ) | | -- | | | (79,900 | ) |
| Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | |
| in exchange for preferred stock | | | 513,140 | | | 5,100 | | | 1,846,400 | | | -- | | | -- | | | -- | | | -- | | | 1,851,500 | |
| Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | |
| in exchange for subsidiary stock | | | 912,233 | | | 9,100 | | | 3,566,900 | | | -- | | | -- | | | -- | | | -- | | | 3,576,000 | |
| Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | |
| to purchase property | | | 61,760 | | | 600 | | | 246,200 | | | -- | | | -- | | | -- | | | -- | | | 246,800 | |
| Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | |
| through private placement | | | 871,592 | | | 8,700 | | | 2,341,800 | | | -- | | | -- | | | -- | | | -- | | | 2,350,500 | |
| Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | |
| for exercised stock warrants | | | 1,205 | | | -- | | | 4,500 | | | -- | | | -- | | | -- | | | -- | | | 4,500 | |
| Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | |
from employee options(1) | | | 253,337 | | | 2,500 | | | 600,000 | | | -- | | | -- | | | -- | | | -- | | | 602,500 | |
| Net loss | | | -- | | | -- | | | -- | | | (6,267,600 | ) | | -- | | | -- | | | -- | | | (6,267,600 | ) |
Balance May 31, 2002(2) | | | 11,720,818 | | $ | 117,200 | | $ | 48,278,500 | | $ | (33,422,800 | ) | | 959,725 | | $ | (2,740,400 | ) | $ | (490,500 | ) | $ | 11,742,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(1)Net of 15,285 shares surrendered by employees for the exercise of 268,622 employee stock options. | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(2)Total Shareholders' Equity at May 31, 2002 does not include 500,788 shares currently issued but forfeitable if certain conditions are not met by the | | | | | | | | | |
| recipients. "Basic and Diluted Weighted Average Shares Outstanding" also includes 814,496 shares of common stock held by majority-owned subsidiaries, |
| which, in consolidation, are treated as treasury shares. | | | | | | | | | | | | | | | | | | |
| The accompanying notes are an integral part of these statements. |
| -63- | |
|
U.S. ENERGY & AFFILIATES | |
| | | | | | | | | | | | | | | | | | |
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY | |
(continued) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | Additional | | | | | | | | Unallocated | | Total | |
| | | Common Stock | | Paid-In | | Accumulated | | Treasury Stock | | ESOP | | Shareholders' | |
| | | Shares | | Amount | | Capital | | Deficit | | Shares | | Amount | | Contribution | | Equity | |
| | | | | | | | | | | | | | | | | | |
| Balance May 31, 2002 | | | 11,720,818 | | $ | 117,200 | | $ | 48,278,500 | | $ | (33,422,800 | ) | | 959,725 | | $ | (2,740,400 | ) | $ | (490,500 | ) | $ | 11,742,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Funding of ESOP | | | 43,867 | | | 400 | | | 134,700 | | | -- | | | -- | | | -- | | | -- | | | 135,100 | |
| Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | |
| to outside consultants | | | 15,000 | | | 200 | | | 60,700 | | | -- | | | -- | | | -- | | | -- | | | 60,900 | |
| Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | |
| warrants | | | -- | | | -- | | | 325,900 | | | -- | | | -- | | | -- | | | -- | | | 325,900 | |
| Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | |
| for settlement of law suit | | | 20,000 | | | 200 | | | 77,600 | | | -- | | | -- | | | -- | | | -- | | | 77,800 | |
| Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | |
from employee options(1) | | | 26,711 | | | 300 | | | (300 | ) | | -- | | | -- | | | -- | | | -- | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | -- | | | -- | | | -- | | | (3,840,100 | ) | | -- | | | -- | | | -- | | | (3,840,100 | ) |
Balance December 31, 2002(2) | | | 11,826,396 | | $ | 118,300 | | $ | 48,877,100 | | $ | (37,262,900 | ) | | 959,725 | | $ | (2,740,400 | ) | $ | (490,500 | ) | $ | 8,501,600 | |
(1)Net of 44,456 shares surrendered by employees for resale -- 532,800 532,800
Prepaid Expenses 584,700 528,300 578,300
Inventories 21,700 14,000 86,600
------------------ ------------- -----------
Total current assets 5,191,400 4,755,300 4,892,600
INVESTMENTS:
Non-affiliated company 957,700 -- --
Restricted investments 6,874,200 9,911,700 10,015,500
------------------- -------------- ------------
Total investments and advances 7,831,900 9,911,700 10,015,500
PROPERTIES AND EQUIPMENT:
Land 570,000 576,300 1,764,100
Buildings and improvements 5,777,700 7,811,300 8,501,300
Machinery and equipment 4,762,800 4,737,100 5,107,700
Proved oil and gas properties, full cost method 1,773,600 2,423,600 1,773,600
Unproved coal bed methane properties
excluded from amortization 1,204,400 4,254,000 4,995,600
------------------ ------------- -----------
Total property and equipment 14,088,500 19,802,300 22,142,300
Less accumulated depreciation,
depletion and amortization (6,901,400) (7,214,800) (7,584,200)
------------------- -------------- ------------
Net property and equipment 7,187,100 12,587,500 14,558,100
OTHER ASSETS:
Notes receivable trade 2,950,600 -- 36,800
Notes receivable employees -- 48,800 65,000
Deposits and other 768,700 887,300 969,900
------------------ ------------- -----------
Total other assets 3,719,300 936,100 1,071,700
------------------- -------------- ------------
Total assets $ 23,929,700 $ 28,190,600 $30,537,900
=================== ============== ============
|
The accompanying notes are an integral part of these statements.
-54-
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, December 31, May 31,
2003 2002 2002
------------------- -------------- -------------
(Restated, Note A)(Restated, Note A)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 977,500 $ 1,592,800 $ 758,600
Prepaid drilling costs -- 134,400 242,100
Current portionthe exercise of long-term debt 932,200 317,200 205,700
Line of credit -- -- 200,000
------------------- -------------- -------------
Total current liabilities 1,909,700 2,044,400 1,406,400
LONG-TERM DEBT 1,317,600 2,820,600 2,353,300
ASSET RETIREMENT OBLIGATIONS 7,264,700 8,906,800 8,906,800
OTHER ACCRUED LIABILITIES 2,158,600 2,319,900 2,544,200
DEFERRED GAIN ON SALE OF ASSET 1,295,700 -- --
MINORITY INTERESTS 496,000 587,400 575,300
COMMITMENTS AND CONTINGENCIES
FORFEITABLE COMMON STOCK, $.01 par value
465,880, 500,788 and 500,788 shares issued,
forfeitable until earned 2,726,600 3,009,900 3,009,900
PREFERRED STOCK,
$.01 par value; 100,000 shares authorized
No shares issued or outstanding; -- -- --
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value; unlimited shares
authorized; 12,824,698, 11,826,396,
and 11,720,818 shares issued respectively 128,200 118,300 117,200
Additional paid-in capital 52,961,200 48,877,100 48,278,500
Accumulated deficit (43,073,000) (37,262,900) (33,422,800)
Treasury71,167 employee stock at cost, 966,306,
959,725 and 959,725 shares respectively (2,765,100) (2,740,400) (2,740,400)
Unallocated ESOP contribution (490,500) (490,500) (490,500)
------------------- -------------- -------------
Total shareholders' equity 6,760,800 8,501,600 11,742,000
------------------- -------------- -------------
Total liabilities and shareholders' equity $ 23,929,700 $ 28,190,600 $ 30,537,900
=================== ============== =============
The accompanying notes are an integral part of these statements.
-55-
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Seven months ended
December 31, December 31, Year Ended May 31,
------------ ------------ --------------------------
2003 2002 2002 2001
------------ ------------ ------------ ------------
OPERATING REVENUES:
Real estate operations $ 334,300 $ 394,500 $ 1,276,200 $ 1,482,200
Gas sales 287,400 119,400 -- --
Mineral sales -- -- -- 334,300
Mineral royalties -- -- -- 108,500
Management fees 215,600 159,100 208,200 597,800
----------- ----------- ----------- -----------
837,300 673,000 1,484,400 2,522,800
OPERATING COSTS AND EXPENSES:
Real estate operations 302,900 189,700 1,348,400 2,394,300
Gas operations 313,100 355,200 -- --
Mineral holding costs 1,461,700 737,200 1,707,800 3,369,300
General and administrative 5,997,500 2,915,800 3,946,800 4,051,500
Impairment of goodwill -- -- 1,622,700 --
Abandonment of mining equipment -- -- -- 123,800
Other -- -- 80,900 --
Provision for doubtful accounts -- -- 171,200 --
----------- ----------- ----------- ------------
8,075,200 4,197,900 8,877,800 9,938,900
------------ ------------ ------------ ------------
OPERATING LOSS: (7,237,900) (3,524,900) (7,393,400) (7,416,100)
OTHER INCOME & EXPENSES:
Gain on sales of assets 198,200 (342,600) 812,700 1,163,600
Gain on sale of investment (32,400) (207,800) -- --
Litigation settlements, net -- -- -- 7,132,800
Interest income 560,300 524,500 852,100 699,700
Interest expense (799,100) (361,200) (345,300) (265,300)
----------- ----------- ----------- -----------
(73,000) (387,100) 1,319,500 8,730,800
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE MINORITY
INTEREST PROVISION FOR
INCOME TAXES, DISCONTINUED
OPERATIONS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE: (7,310,900) (3,912,000) (6,073,900) 1,314,700
MINORITY INTEREST IN LOSS OF
CONSOLIDATED SUBSIDIARIES 235,100 54,800 39,500 220,100
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE PROVISION
FOR INCOME TAXES DISCONTINUED
OPERATIONS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (7,075,800) (3,857,200) (6,034,400) 1,534,800
PROVISION FOR INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
(continued)
The accompanying notes are an integral part of these statements.
-56-
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Seven months ended
December 31, December 31, Year Ended May 31,
------------ ------------ -------------------------
2003 2002 2002 2001
------------ ------------ ------------ -----------
NET (LOSS) INCOME FROM
CONTINUING OPERATIONS (7,075,800) (3,857,200) (6,034,400) 1,534,800
DISCONTINUED OPERATIONS,
NET OF TAX (349,900) 17,100 (146,700) 386,400
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 1,615,600 -- -- --
------------ ------------ ------------ -----------
NET (LOSS) INCOME: (5,810,100) (3,840,100) (6,181,100) 1,921,200
PREFERRED STOCK DIVIDENDS $ -- $ -- $ (86,500) $ (150,000)
------------ ------------ ------------ -----------
NET (LOSS) INCOME AVAILABLE
TO COMMON SHAREHOLDERS $(5,810,100) $(3,840,100) $(6,267,600) $1,771,200
============ ============ ============ ===========
NET (LOSS) INCOME PER SHARE BASIC
CONTINUED OPERATIONS (0.63) (0.36) (0.65) 0.20
DISCONTINUED OPERATIONS (0.03) -- (0.01) 0.05
PREFERRED DIVIDENDS -- -- (0.01) (0.02)
EFFECT OF ACCOUNTING
ACCOUNTING CHANGE 0.14 -- -- --
------------ ------------ ------------ -----------
$ (0.52) $ (0.36) $ (0.67) $ 0.23
============ ============ ============ ===========
NET (LOSS) INCOME PER SHARE DILUTED
CONTINUED OPERATIONS (0.63) (0.36) (0.65) 0.18
DISCONTINUED OPERATIONS (0.03) -- (0.01) 0.05
PREFERRED DIVIDENDS -- -- (0.01) (0.02)
EFFECT OF ACCOUNTING
ACCOUNTING CHANGE 0.14 -- -- --
------------ ------------ ------------ -----------
$ (0.52) $ (0.36) $ (0.67) $ 0.21
============ ============ ============ ===========
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 11,180,975 10,770,658 9,299,359 7,826,001
============ ============ ============ ===========
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 11,180,975 10,770,658 9,299,359 8,487,680
============ ============ ============ ===========
The accompanying notes are an integral part of these statements.
-57-
U.S. ENERGY & AFFILIATES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(RESTATED, NOTE A)
Additional Unallocated Total
Common Stock Paid-In Accumulated Treasury Stock
---------------
ESOP Shareholders'
Shares Amount Capital Deficit Shares Amount Contribution
--------- ------- ----------- ------------- ------- ------------ --------------
Balance June 1, 2000
as previously presented 8,763,155 $87,700 $37,797,700 $(30,071,200) 944,725 $(2,639,900) $ (490,500)
Adjustment for deferred taxes
See note A -- -- -- 1,144,800 -- -- --
--------- ------- ----------- ------------- ------- ------------ --------------
Balance June 1, 2000
as restated 8,763,155 87,700 37,797,700 (28,926,400) 944,725 (2,639,900) (490,500)
Funding of ESOP 53,837 500 287,500 -- -- -- --
Issuance of common stock
to outside directors 8,532 100 19,100 -- -- -- --
Issuance of common stock
for services rendered 15,000 200 70,400 -- -- -- --
Forfeitable shares earned 29,820 300 193,900 -- -- -- --
Treasury stock from payment
on balance of note receivable -- -- -- -- 5,000 (20,600) --
Sale of Ruby Mining -- -- 25,800 -- -- -- --
Issuance of common stock
from employee options 118,703 1,200 287,200 -- -- -- --
Net income -- -- -- 1,771,200 -- -- --
--------- ------- ----------- ----------- ------- ----------- --------------
Balance May 31, 2001 8,989,047 $90,000 $38,681,600 $(27,155,200) 949,725 $(2,660,500) $ (490,500)
========= ======= =========== ============= ======= ============ ==============
Equity
-----------
Balance June 1, 2000
as previously presented $4,683,800
Adjustment for deferred taxes
See note a 1,144,800
-----------
Balance June 1, 2000
as restated 5,828,600
Funding of ESOP 288,000
Issuance of common stock
to outside directors 19,200
Issuance of common stock
for services rendered 70,600
Forfeitable shares earned 194,200
Treasury stock from payment
on balance of note receivable (20,600)
Sale of Ruby Mining 25,800
Issuance of common stock
from employee options 288,400
Net income 1,771,200
----------
Balance May 31, 2001 $8,465,400
===========
options. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(2)Total Shareholders' Equity at MayDecember 31, 20012002 does not include 433,788465,880 shares currently issued but forfeitable if certain conditions are not met by the | | | | | | |
| recipients. "Basic and Diluted Weighted Average Shares Outstanding" also includes 814,496 shares of common stock held by majority-owned subsidiaries, |
| which, in consolidation, are treated as treasury shares. | | | | | | | | | | | | |
The accompanying notes are an integral part of this statement.
-58-
U.S. ENERGY & AFFILIATES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(RESTATED, NOTE A)
(CONTINUED)
Additional Unallocated Total
Common Stock Paid-In Accumulated Treasury Stock ESOP
---------------
Shareholders'
Shares Amount Capital Deficit Shares Amount Contribution
---------- -------- ----------- ------------- ------- ------------ --------------
Balance May 31, 2001 8,989,047 $ 90,000 $38,681,600 $(27,155,200) 949,725 $(2,660,500) $ (490,500)
Funding of ESOP 70,075 700 236,200 -- -- -- --
Issuancethese statements. | -64- | |
|
U.S. ENERGY & AFFILIATES | | | | | | | | | | | | | | | | | | | | | CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY | | (continued) | | | | | | | | | Additional | | | | | | | | Unallocated | | Total | | | | | Common Stock | | Paid-In | | Accumulated | | Treasury Stock | | ESOP | | Shareholders' | | | | | Shares | | Amount | | Capital | | Deficit | | Shares | | Amount | | Contribution | | Equity | | | Balance December 31, 2002 | | | 11,826,396 | | $ | 118,300 | | $ | 48,877,100 | | $ | (37,262,900 | ) | | 959,725 | | $ | (2,740,400 | ) | $ | (490,500 | ) | $ | 8,501,600 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Funding of ESOP | | | 76,294 | | | 700 | | | 235,700 | | | -- | | | -- | | | -- | | | -- | | | 236,400 | | | Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | to outside directors | | | 3,891 | | | -- | | | 14,400 | | | -- | | | -- | | | -- | | | -- | | | 14,400 | | | Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | by release of forfeitable stock | | | 78,286 | | | 800 | | | 434,400 | | | -- | | | -- | | | -- | | | -- | | | 435,200 | | | Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | from stock warrants | | | 131,596 | | | 1,300 | | | 465,300 | | | -- | | | -- | | | -- | | | -- | | | 466,600 | | | Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | in stock compensation plan | | | 100,000 | | | 1,000 | | | 309,000 | | | -- | | | -- | | | -- | | | -- | | | 310,000 | | | Treasury stock from sale | | | | | | | | | | | | | | | | | | | | | | | | | | | of subsidiary | | | -- | | | -- | | | -- | | | -- | | | 1,581 | | | (4,200 | ) | | -- | | | (4,200 | ) | | Treasury stock from payment | | | | | | | | | | | | | | | | | | | | | | | | | | | on balance of note receivable | | | -- | | | -- | | | -- | | | -- | | | 5,000 | | | (20,500 | ) | | -- | | | (20,500 | ) | | Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | to outside consultants | | | 121,705 | | | 1,200 | | | 581,600 | | | -- | | | -- | | | -- | | | -- | | | 582,800 | | | Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | warrants to outside consultants | | | -- | | | -- | | | 886,300 | | | -- | | | -- | | | -- | | | -- | | | 886,300 | | | Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | for settlement of lawsuit | | | 10,000 | | | 100 | | | 49,900 | | | -- | | | -- | | | -- | | | -- | | | 50,000 | | | Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | in payment of debt | | | 211,109 | | | 2,100 | | | 497,900 | | | -- | | | -- | | | -- | | | -- | | | 500,000 | | | Issuance of common stock | | | | �� | | | | | | | | | | | | | | | | | | | | | | from employee options(1) | | | 265,421 | | | 2,700 | | | 609,600 | | | -- | | | -- | | | -- | | | -- | | | 612,300 | | | Net Loss | | | -- | | | -- | | | -- | | | (5,810,100 | ) | | -- | | | -- | | | -- | | | (5,810,100 | ) | Balance December 31, 2003(2) | | | 12,824,698 | | $ | 128,200 | | $ | 52,961,200 | | $ | (43,073,000 | ) | | 966,306 | | $ | (2,765,100 | ) | $ | (490,500 | ) | $ | 6,760,800 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1)Net of 10,200 shares surrendered by employees for the exercise of 275,621 employee stock options. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (2)Total Shareholders' Equity at December 31, 2003 does not include 465,880 shares currently issued but forfeitable if certain conditions are not met by the recipients. "Basic | | | | | | | | and Diluted Weighted Average Shares Outstanding" also includes 814,496 shares of common stock held by majority-owned subsidiaries, which, in consolidation, are | | treated as treasury shares. | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of common stock
to outside directors 3,429 -- 14,400 -- -- -- --
Issuancethese statements. | | -65- | |
|
U.S. ENERGY & AFFILIATES | | | | | | | | | | | | | | | | | | | | | | | | | CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | (continued) | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | Additional | | | | | | Total Other | | | | | | Unallocated | | Total | | | | | Common Stock | | Paid-In | | Comprehensive | | Accumulated | | Comprehensive | | Treasury Stock | | ESOP | | Shareholders' | | | | | Shares | | Amount | | Capital | | Loss | | Deficit | | Loss | | Shares | | Amount | | Contribution | | Equity | | | Balance December 31, 2003 | | | 12,824,698 | | $ | 128,200 | | $ | 52,961,200 | | | | | $ | (43,073,000 | ) | | | | | 966,306 | | $ | (2,765,100 | ) | $ | (490,500 | ) | $ | 6,760,800 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Funding of ESOP | | | 70,439 | | | 700 | | | 207,800 | | | | | | -- | | | -- | | | -- | | | -- | | | -- | | | 208,500 | | | Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | by release of forfeitable stock | | | 23,140 | | | 200 | | | 121,700 | | | | | | -- | | | -- | | | 1,000 | | | 5,700 | | | -- | | | 127,600 | | | Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | from stock warrants | | | 125,000 | | | 1,300 | | | 249,800 | | | | | | -- | | | -- | | | -- | | | -- | | | -- | | | 251,100 | | | Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | in stock compensation plan | | | 50,000 | | | 500 | | | 127,900 | | | | | | -- | | | -- | | | -- | | | -- | | | -- | | | 128,400 | | | Treasury stock from payment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | on balance of note receivable | | | -- | | | -- | | | -- | | | | | | -- | | | -- | | | 5,000 | | | (20,500 | ) | | -- | | | (20,500 | ) | | Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | to retire debt | | | 476,833 | | | 4,700 | | | 1,068,200 | | | | | | -- | | | -- | | | -- | | | -- | | | -- | | | 1,072,900 | | | Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | warrants to RMG investors | | | -- | | | -- | | | 291,500 | | | | | | -- | | | -- | | | -- | | | -- | | | -- | | | 291,500 | | | Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | to RMG investors | | | 882,239 | | | 8,900 | | | 1,803,700 | | | | | | -- | | | -- | | | -- | | | -- | | | -- | | | 1,812,600 | | | Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | to purchase property | | | 678,888 | | | 6,800 | | | 1,976,300 | | | | | | -- | | | -- | | | -- | | | -- | | | -- | | | 1,983,100 | | | Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | in a private placement | | | 100,000 | | | 1,000 | | | 349,000 | | | | | | -- | | | -- | | | -- | | | -- | | | -- | | | 350,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | net loss | | | -- | | | -- | | | -- | | $ | (6,248,700 | ) | | (6,248,700 | ) | | -- | | | -- | | | -- | | | -- | | | (6,248,700 | ) | | Other comprehensive loss on | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | hedging activity | | | -- | | | -- | | | -- | | | (436,000 | ) | | | | | (436,000 | ) | | -- | | | -- | | | -- | | | (436,000 | ) | | Comprehensive loss | | | | | | | | | | | | (6,684,700 | ) | | | | | | | | | | | | | | | | | | | Balance December 31, 2004(2) | | | 15,231,237 | | $ | 152,300 | | $ | 59,157,100 | | | | | $ | (49,321,700 | ) | $ | (436,000 | ) | | 972,306 | | $ | (2,779,900 | ) | $ | (490,500 | ) | $ | 6,281,300 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (2)Total Shareholders' Equity at December 31, 2004 does not include 442,740 shares currently issued but forfeitable if certain conditions are not met by the recipients. "Basic | | | | | | | | | | | | | | and Diluted Weighted Average Shares Outstanding" also includes 814,496 shares of common stock held by majority-owned subsidiaries, which, in consolidation, are | | | | | | | | treated as treasury shares. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of common stock
for services rendered 45,000 500 147,600 -- -- -- --
Issuancethese statements. | | -66- | |
|
U.S. ENERGY CORP. AND SUBSIDIARIES | | | | | | | | | | | | | CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | | | | | | | | | | | | | | | | Seven Months Ended | | Year Ended | | | | | Year Ended December 31, | | December 31, | | May 31, | | | | | 2004 | | 2003 | | 2002 | | 2002 | | | | | | | | | | | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | Net loss | | $ | (6,248,700 | ) | $ | (5,810,100 | ) | $ | (3,840,100 | ) | $ | (6,267,600 | ) | | Adjustments to reconcile net loss | | | | | | | | | | | | | | | to net cash used in operating activities: | | | | | | | | | | | | | | | Minority interest in loss of | | | | | | | | | | | | | | | consolidated subsidiaries | | | (397,700 | ) | | (235,100 | ) | | (54,800 | ) | | (39,500 | ) | | Amortization of deferred charge | | | 343,400 | | | 284,700 | | | 101,900 | | | 266,500 | | | Depreciation | | | 1,445,200 | | | 554,200 | | | 360,100 | | | 541,500 | | | Accretion of asset | | | | | | | | | | | | | | | retirement obligations | | | 346,700 | | | 366,700 | | | -- | | | -- | | | Amortization of debt discount | | | 384,300 | | | 537,700 | | | 211,200 | | | -- | | | Impairment of goodwill | | | -- | | | -- | | | -- | | | 1,622,700 | | | Noncash services | | | 50,400 | | | 134,700 | | | 31,500 | | | 787,700 | | | Noncash dividend | | | -- | | | -- | | | -- | | | 11,500 | | | Provision for doubtful accounts | | | 79,000 | | | -- | | | -- | | | 171,200 | | | Recognition of deferred gain | | | (16,700 | ) | | -- | | | -- | | | -- | | | (Gain) loss on sale of assets | | | (46,300 | ) | | (199,300 | ) | | 342,600 | | | (812,700 | ) | | (Gain) on sale investments | | | (656,300 | ) | | -- | | | -- | | | -- | | | Write off of properties | | | -- | | | -- | | | 21,500 | | | -- | | | Cumulative effect of accounting change | | | -- | | | (1,615,600 | ) | | -- | | | -- | | | Noncash compensation | | | 336,900 | | | 608,800 | | | 212,900 | | | 268,700 | | | Lease holding costs | | | -- | | | 50,000 | | | -- | | | -- | | | Net changes in assets and liabilities: | | | | | | | | | | | | | | | Accounts receivable | | | 64,500 | | | (470,300 | ) | | (755,600 | ) | | 799,900 | | | Other assets | | | (207,300 | ) | | 1,466,000 | | | 8,700 | | | (47,500 | ) | | Accounts payable | | | 132,400 | | | (827,200 | ) | | 609,900 | | | (970,100 | ) | | Accrued compensation expense | | | 1,700 | | | -- | | | -- | | | 90,800 | | | Prepaid drilling costs | | | -- | | | (134,400 | ) | | (107,700 | ) | | 242,100 | | | Reclamation and other liabilities | | | (179,800 | ) | | (393,200 | ) | | -- | | | -- | | | NET CASH USED IN | | | | | | | | | | | | | | | OPERATING ACTIVITIES | | | (4,568,300 | ) | | (5,682,400 | ) | | (2,857,900 | ) | | (3,334,800 | ) | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of common stock
warrants for services rendered -- -- 592,900 -- -- -- --
Treasury stock from payment
on balancethese statements. | | -67- | |
|
U.S. ENERGY CORP. AND SUBSIDIARIES | | | | | | | | | | | | | | | CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | (continued) | | | | | | | | | | | | | | | | | | | | | | | | Seven Months Ended | | Year Ended | | | | | | | Year Ended December 31, | | December 31, | | May 31, | | | | | | | 2004 | | 2003 | | 2002 | | 2002 | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | Development of proved gas properties | | | | | $ | (435,100 | ) | $ | -- | | $ | -- | | $ | -- | | | Development of unproved gas properties | | | | | | (1,385,100 | ) | | (176,400 | ) | | (233,400 | ) | | (142,100 | ) | | Acquisition of producing gas properties | | | | | | (1,198,000 | ) | | -- | | | (650,000 | ) | | -- | | | Acquisition of undeveloped gas properties | | | | | | (3,213,000 | ) | | -- | | | (650,000 | ) | | -- | | | Proceeds on sale of gas interests | | | | | | 792,100 | | | 2,813,800 | | | 1,125,000 | | | 1,125,000 | | | Proceeds on sale of property and equipment | | | | | | 49,700 | | | 1,604,400 | | | 1,566,000 | | | 752,000 | | | Proceeds from sale investments | | | | | | 656,300 | | | -- | | | -- | | | -- | | | Net change in restricted investments | | | | | | 21,900 | | | 3,037,500 | | | 66,100 | | | (236,800 | ) | | Purchase of property and equipment | | | | | | (294,500 | ) | | (92,700 | ) | | (411,200 | ) | | (82,300 | ) | | Net change in notes receivable | | | | | | 11,300 | | | 8,800 | | | -- | | | -- | | | Net change in investments in affiliates | | | | | | (64,500 | ) | | (222,600 | ) | | 104,600 | | | 406,500 | | | NET CASH (USED IN) PROVIDED BY | | | | | | | | | | | | | | BY INVESTING ACTIVITIES | | | | | | (5,058,900 | ) | | 6,972,800 | | | 1,567,100 | | | 1,822,300 | | | | | | | | | | | | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | Issuance of common stock | | | | | | 601,100 | | | 1,078,900 | | | -- | | | 2,957,400 | | | Issuance of subsidiary stock | | | | | | 2,526,700 | | | 650,000 | | | -- | | | 1,000,000 | | | Proceeds from long term debt | | | | | | 7,460,400 | | | 2,600 | | | 892,800 | | | 631,700 | | | Net activity on lines of credit | | | | | | -- | | | -- | | | (200,000 | ) | | (650,000 | ) | | Repayments of long term debt | | | | | | (1,203,400 | ) | | (678,100 | ) | | (225,300 | ) | | (547,800 | ) | | NET CASH PROVIDED BY | | | | | | | | | | | | | | FINANCING ACTIVITIES | | | | | | 9,384,800 | | | 1,053,400 | | | 467,500 | | | 3,391,300 | | | | | | | | | | | | | | | | | | | | | NET INCREASE (DECREASE) IN | | | | | | | | | | | | | | CASH AND CASH EQUIVALENTS | | | | | | (242,300 | ) | | 2,343,800 | | | (823,300 | ) | | 1,878,800 | | | | | | | | | | | | | | | | | | | | | CASH AND CASH EQUIVALENTS | | | | | | | | | | | | | | AT BEGINNING OF PERIOD | | | | | | 4,084,800 | | | 1,741,000 | | | 2,564,300 | | | 685,500 | | | | | | | | | | | | | | | | | | | | | CASH AND CASH EQUIVALENTS | | | | | | | | | | | | | | AT END OF PERIOD | | | | | $ | 3,842,500 | | $ | 4,084,800 | | $ | 1,741,000 | | $ | 2,564,300 | | | | | | | | | | | | | | | | | | | | | SUPPLEMENTAL DISCLOSURES: | | | | | | | | | | | | | | Income tax paid | | | | | $ | -- | | $ | -- | | $ | -- | | $ | -- | | | | | | | | | | | | | | | | | | | | | Interest paid | | | | | $ | 1,065,400 | | $ | 799,100 | | $ | 361,200 | | $ | 345,300 | |
The accompanying notes are an integral part of note receivable -- -- -- -- 10,000 (79,900) --
Issuancethese statements. | | -68- | |
|
U.S. ENERGY CORP. AND SUBSIDIARIES | | | | | | | | | | | | | | | CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | (continued) | | | | | | | | | | | Seven Months Ended | | Year Ended | | | | | | | Year Ended December 31, | | December 31, | | May 31, | | | | | | | 2004 | | 2003 | | 2002 | | 2002 | | | | | | | | | | | | | | | | NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | | Initial valuation of new asset | | | | | | | | | | | | | retirement obligations | | | | | $ | 463,700 | | $ | -- | | $ | -- | | $ | -- | | | | | | | | | | | | | | | | | | | | | Acquisition of assets | | | | | | | | | | | | | | | | | | through issuance of stock | | | | | $ | 1,983,100 | | $ | -- | | $ | 150,000 | | $ | 96,800 | | | | | | | | | | | | | | | | | | | | | Issuance of stock to satisfy debt | | | | | $ | 1,072,900 | | $ | 500,000 | | $ | -- | | $ | 3,568,500 | | | | | | | | | | | | | | | | | | | | | Issuance of stock warrants in | | | | | | | | | | | | | | | | | | conjunction with debt | | | | | $ | 291,500 | | $ | -- | | $ | 299,800 | | $ | 592,900 | | | | | | | | | | | | | | | | | | | | | Satisfaction of receivable - employee | | | | | | | | | | | | | | | | | | with stock in company | | | | | $ | 20,500 | | $ | 20,500 | | $ | -- | | $ | 79,900 | | | | | | | | | | | | | | | | | | | | | Acquisition of assets | | | | | | | | | | | | | | | | | | through issuance of debt | | | | | $ | -- | | $ | 26,300 | | $ | -- | | $ | 180,600 | | | | | | | | | | | | | | | | | | | | | Issuance of stock warrants for services | | | | | $ | -- | | $ | 563,400 | | $ | 26,100 | | $ | -- | | | | | | | | | | | | | | | | | | | | | Issuance of stock for services | | | | | $ | -- | | $ | 582,800 | | $ | 60,900 | | $ | 14,400 | | | | | | | | | | | | | | | | | | | | | Issuance of stock as deferred compensation | | | | | $ | -- | | $ | 151,900 | | $ | -- | | $ | 261,300 | | | | | | | | | | | | | | | | | | | | | Issuance of stock for retired employees | | | | | $ | -- | | $ | 435,200 | | $ | -- | | $ | -- | | | | | | | | | | | | | | | | | | | | | Sale of assets through issuance | | | | | | | | | | | | | | | | | | of a note receivable | | | | | $ | -- | | $ | -- | | $ | -- | | $ | 442,200 | | | | | | | | | | | | | | | | | | | | | Issuance of stock to retire preferred stock | | | | | $ | -- | | $ | -- | | $ | -- | | $ | 1,840,000 | |
The accompanying notes are an integral part of common stock
in exchange for preferred stock 513,140 5,100 1,846,400 -- -- -- --
Issuance of common stock
in exchange for subsidiary stock 912,233 9,100 3,566,900 -- -- -- --
Issuance of common stock
to purchase property 61,760 600 246,200 -- -- -- --
Issuance of common stock
through private placement 871,592 8,700 2,341,800 -- -- -- --
Issuance of common stock
for exercised stock warrants 1,205 -- 4,500 -- -- -- --
Issuance of common stock
from employee options (1) 253,337 2,500 600,000 -- -- -- --
Net loss -- -- -- (6,267,600) -- -- --
---------- -------- ----------- ------------ ------ ------------ --------------
Balance May 31, 2002(2) 11,720,818 $117,200 $48,278,500 $(33,422,800) 959,725 $(2,740,400) $ (490,500)
========== ======== =========== ============= ======= ============ ==============
Equity
------------
Balance May 31, 2001 $ 8,465,400
Funding of ESOP 236,900
Issuance of common stock
to outside directors 14,400
Issuance of common stock
for services rendered 148,100
Issuance of common stock
warrants for services rendered 592,900
Treasury stock from payment
on balance of note receivable (79,900)
Issuance of common stock
in exchange for preferred stock 1,851,500
Issuance of common stock
in exchange for subsidiary stock 3,576,000
Issuance of common stock
to purchase property 246,800
Issuance of common stock
through private placement 2,350,500
Issuance of common stock
for exercised stock warrants 4,500
Issuance of common stock
from employee options (1) 602,500
Net loss (6,267,600)
------------
Balance May 31, 2002(2) $11,742,000
============
(1)Net of 15,285 shares surrendered by employees for the exercise of 268,622 employee stock options.
(2)Total Shareholders' Equity at May 31, 2002 does not include 500,788 shares
currently issued but forfeitable if certain conditions are not met by the
recipients. "Basic and Diluted Weighted Average Shares Outstanding" also
includes 814,496 shares of common stock held by majority-owned subsidiaries,
which, in consolidation, are treated as treasury shares.
these statements. | | -69- | |
|
The accompanying notes are an integral part of this statement.
-59-
U.S. ENERGY & AFFILIATES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(RESTATED, NOTE A)
(CONTINUED)
Additional Unallocated Total
Common Stock Paid-In Accumulated Treasury Stock
---------------
ESOP Shareholders'
Shares Amount Capital Deficit Shares Amount Contribution
---------- -------- ------------ ------------- ------- ------------ --------------
Balance May 31, 2002 11,720,818 $117,200 $48,278,500 $(33,422,800) 959,725 $(2,740,400) $ (490,500)
Funding of ESOP 43,867 400 134,700 -- -- -- --
Issuance of common stock
to outside consultants 15,000 200 60,700 -- -- -- --
Issuance of common stock
warrants -- -- 325,900 -- -- -- --
Issuance of common stock
for settlement of law suit 20,000 200 77,600 -- -- -- --
Issuance of common stock
from employee options (1) 26,711 300 (300) -- -- -- --
Net loss -- -- -- (3,840,100) -- -- --
---------- -------- ----------- ------------ ------- ----------- --------------
Balance December 31, 2002(2) 11,826,396 $118,300 $48,877,100 $(37,262,900) 959,725 $(2,740,400) $ (490,500)
========== ======== ============ ============= ======= ============ ==============
Equity
------------
Balance May 31, 2002 $11,742,000
Funding of ESOP 135,100
Issuance of common stock
to outside consultants 60,900
Issuance of common stock
warrants 325,900
Issuance of common stock
for settlement of law suit 77,800
Issuance of common stock
from employee options (1) --
Net loss (3,840,100)
------------
Balance December 31, 2002(2) $ 8,501,600
============
(1)Net of 44,456 shares surrendered by employees for the exercise of 71,167 employee stock options.
(2)Total Shareholders' Equity at December 31, 2002 does not include 500,788 shares currently issued but forfeitable if
certain conditions are not met by the
recipients. "Basic and Diluted Weighted Average Shares Outstanding" also includes 814,496 shares of common stock held
by majority-owned subsidiaries,
which, in consolidation, are treated as treasury shares.
|
The accompanying notes are an integral part of this statement.
-60-
U.S. ENERGY & AFFILIATES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(RESTATED, NOTE A)
(CONTINUED)
Additional Unallocated Total
Common Stock Paid-In Accumulated Treasury Stock ESOP
---------------
Shareholders'
Shares Amount Capital Deficit Shares Amount Contribution
---------- -------- ----------- ------------- ------- ------------ --------------
Balance December 31, 2002 11,826,396 $118,300 $48,877,100 $(37,262,900) 959,725 $(2,740,400) $ (490,500)
Funding of ESOP 76,294 700 235,700 -- -- -- --
Issuance of common stock
to outside directors 3,891 -- 14,400 -- -- -- --
Issuance of common stock
by release of forfeitable stock 78,286 800 434,400 -- -- -- --
Issuance of common stock
from stock warrants 131,596 1,300 465,300 -- -- -- --
Issuance of common stock
in stock compensation plan 100,000 1,000 309,000 -- -- -- --
Treasury stock from sale
of subsidiary -- -- -- -- 1,581 (4,200) --
Treasury stock from payment
on balance of note receivable -- -- -- -- 5,000 (20,500) --
Issuance of common stock
to outside consultants 121,705 1,200 581,600 -- -- -- --
Issuance of common stock
warrants to outside consultants -- -- 886,300 -- -- -- --
Issuance of common stock
for settlement of lawsuit 10,000 100 49,900 -- -- -- --
Issuance of common stock
in payment of debt 211,109 2,100 497,900 -- -- -- --
Issuance of common stock
from employee options (1) 265,421 2,700 609,600 -- -- -- --
Net loss -- -- -- (5,810,100) -- -- --
---------- -------- ----------- ------------ ------- ----------- --------------
Balance December 31, 2003(2) 12,824,698 $128,200 $52,961,200 $(43,073,000) 966,306 $(2,765,100) $ (490,500)
========== ======== =========== ============= ======= ============ ==============
Equity
------------
Balance December 31, 2002 $ 8,501,600
Funding of ESOP 236,400
Issuance of common stock
to outside directors 14,400
Issuance of common stock
by release of forfeitable stock 435,200
Issuance of common stock
from stock warrants 466,600
Issuance of common stock
in stock compensation plan 310,000
Treasury stock from sale
of subsidiary (4,200)
Treasury stock from payment
on balance of note receivable (20,500)
Issuance of common stock
to outside consultants 582,800
Issuance of common stock
warrants to outside consultants 886,300
Issuance of common stock
for settlement of lawsuit 50,000
Issuance of common stock
in payment of debt 500,000
Issuance of common stock
from employee options (1) 612,300
Net Loss (5,810,100)
------------
Balance December 31, 2003(2) $ 6,760,800
============
(1)Net of 10,200 shares surrendered by employees for the exercise of 275,621 employee stock options.
(2)Total Shareholders' Equity at December 31, 2003 does not include 465,880 shares currently issued but forfeitable if
certain conditions are not met by the
recipients. "Basic and Diluted Weighted Average Shares Outstanding" also includes 814,496 shares of common stock held by
majority-owned subsidiaries,
which in consolidation, are treated as treasury shares.
The accompanying notes are an integral part of this statement.
-61-
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Seven Months Ended Year Ended
December 31, December 31, May 31,
------------ ------------ -------
2003 2002 2002 2001
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(5,810,100) $(3,840,100) $(6,267,600) $ 1,771,200
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Minority interest in loss of
consolidated subsidiaries (235,100) (54,800) (39,500) (220,100)
Depreciation and amortization 554,200 360,100 541,500 1,254,000
Accretion of asset
retirement obligations 366,700 -- -- --
Amortization of debt discount 537,700 211,200 -- --
Impairment of goodwill -- -- 1,622,700 --
Impairment of mineral interests -- -- -- 123,800
Noncash services 134,700 31,500 787,700 19,100
Noncash dividend -- -- 11,500 --
Provision for doubtful accounts -- -- 171,200 --
Deferred income -- -- -- (4,000,000)
(Gain) loss on sale of assets (199,300) 342,600 (812,700) (1,163,600)
Write off of properties -- 21,500 -- --
Cumulative effect
of accounting change (1,615,600) -- -- --
Noncash compensation 893,500 314,800 535,200 501,700
Lease holding costs 50,000 -- -- --
Net changes in assets and liabilities:
Accounts and notes receivable (461,500) (755,600) 799,900 1,241,000
Other assets 1,466,000 8,700 (47,500) (112,700)
Accounts payable
and accrued expenses (827,200) 609,900 (879,300) (887,300)
Prepaid drilling costs (134,400) (107,700) 242,100 --
Decrease in asset
retirement obligation (393,200) -- -- --
----------- ----------- ----------- ------------
NET CASH USED IN
OPERATING ACTIVITIES (5,673,600) (2,857,900) (3,334,800) (1,472,900)
The accompanying notes are an integral part of these statements.
-62-
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Year Ended Seven Months Ended Year Ended
December 31, December 31, May 31,
----------- ----------- -------------------------
2003 2002 2002 2001
----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration of coalbed methane gas properties (176,400) (883,400) (142,100) (1,187,800)
Proceeds from sale of gas interests 2,813,800 1,125,000 1,125,000 --
Proceeds from sale of property and equipment 1,604,400 1,566,000 752,000 2,608,000
Net change in restricted investments 3,037,500 66,100 (236,800) (417,700)
Purchase of property and equipment (92,700) (411,200) (82,300) (311,400)
Net change in investments in affiliates (222,600) 104,600 406,500 292,400
--------- --------- --------- ----------
NET CASH PROVIDED
BY INVESTING ACTIVITIES 6,964,000 1,567,100 1,822,300 983,500
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,078,900 -- 2,957,400 288,400
Proceeds from issuance of stock by subsidiary 650,000 -- 1,000,000 --
Proceeds from third party debt 2,600 892,800 631,700 619,100
Net activity from lines of credit -- (200,000) (650,000) 200,000
Purchase of treasury stock -- -- -- (20,600)
Repayments of third party debt (678,100) (225,300) (547,800) (828,400)
---------- ---------- ---------- ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 1,053,400 467,500 3,391,300 258,500
----------- ----------- ----------- ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 2,343,800 (823,300) 1,878,800 (230,900)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,741,000 2,564,300 685,500 916,400
----------- ----------- ----------- ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $4,084,800 $1,741,000 $2,564,300 $ 685,500
=========== =========== =========== ============
SUPPLEMENTAL DISCLOSURES:
Income tax paid $ -- $ -- $ -- $ --
=========== =========== =========== ============
Interest paid $ 799,100 $ 361,200 $ 345,300 $ 265,300
=========== =========== =========== ============
The accompanying notes are an integral part of these statements.
-63-
U.S. ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Year Ended Seven Months Ended Year Ended
December 31, December 31, May 31,
------------ ------------ ----------------------
2003 2002 2002 2001
-------- -------- ---------- ----------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Sale of assets through issuance
of a note receivable $ -- $ -- $ 442,200 $1,164,500
======== ======== ========== ==========
Acquisition of assets
through issuance of debt $ 26,300 $ -- $ 180,600 $1,631,700
======== ======== ========== ==========
Acquisition of assets
through issuance of stock $ -- $150,000 $ 96,800 $ -
======== ======== ========== ==========
Issuance of stock warrants for services $563,400 $ 26,100 $ -- $ --
======== ======== ========== ==========
Issuance of stock warrants in
conjunction with notes payable $ -- $299,800 $ 592,900 $ --
======== ======== ========== ==========
Issuance of stock as deferred compensation $151,900 $ -- $ 261,300 $ 358,400
======== ======== ========== ==========
Issuance of stock to satisfy debt $500,000 $ -- $3,568,500 $ --
======== ======== ========== ==========
Issuance of stock to retire preferred stock $ -- $ -- $1,840,000 $ -
======== ======== ========== ==========
Issuance of stock for retired employees $435,200 $ -- $ - $ 194,400
======== ======== ========== ==========
Issuance of stock for services $582,800 $ 60,900 $ 14,400 $ 70,500
======== ======== ========== ==========
Satisfaction of receivable - affiliate
with stock in affiliate $ -- $ -- $ -- $3,000,000
======== ======== ========== ==========
Satisfaction of receivable - employee
with stock in company $ 20,500 $ -- $ 79,900 $ --
======== ======== ========== ==========
The accompanying notes are an integral part of these statements.
-64-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003, AND 2002, MAY 31, 2002 AND MAY 31, 2001
2002 A.BUSINESS ORGANIZATION AND OPERATIONS:
U.S. Energy Corp. was incorporated in the State of Wyoming on January 26, 1966. U.S. Energy Corp. and subsidiaries (the "Company" or "USE") engages in the acquisition, exploration, holding, sale and/or development of mineral and coalbed methane gas properties, the production of petroleum properties and marketing of minerals and methane gas. Principal mineral interests are in coalbed methane, uranium, gold and molybdenum. Only coalbed methane was being produced during the year ended December 31, 2004. The Company's uranium and gold properties are currently all in a shut down status. The Company holds various real and personal properties used in commercial activities. Most of the Company's activities are conducted through subsidiaries and through the joint venture discussed below and in Note D.
The Company was engaged in the maintenance of two uranium properties, one in southern Utah, and the second in Wyoming known as Sheep Mountain Partners ("SMP"). SMP has been involved in significant litigation (see Note K). Sutter Gold Mining CompanyInc. ("SGMC"SGMI"), a WyomingCanadian corporation owned 78.5%65.5% by the Company at December 31, 2003,2004, manages the Company's interest in gold properties. The Company also owns 100% of the outstanding stock of Plateau Resources Limited ("Plateau"), which owns athe nonoperating uranium mill in southeastern Utah. Currently, the mill is nonoperating but has been granted a license to operate
subject to certain conditions.nonoperating. Rocky Mountain Gas, Inc. ("RMG") was formed in November 1999 to consolidate all methane gas operations of the Company. The Company owns and controls 90.1%91.1% of RMG as of December 31, 2003.
2004.
The Company's Board of Directors changed the Company's year end to December 31 effective December 31, 2002.
RESTATEMENT OF BALANCE SHEETS AND SHAREHOLDERS' EQUITY
------------------------------------------------------------
The balance sheets at December 31, 2002 and May 31, 2002 and statements of
shareholders' equity have been restated to reflect the correction of an
overstatement in deferred tax liability of $1,144,800. Accumulated deficit at
June 1, 2000 has been decreased by $1,144,800. The liability overstatement
occurred prior to any accompanying statements of operations presented;
therefore, there was no effect on net earnings for any periods presented in the
accompanying financial statements. Therefore, the statements of operations and
cash flows for the years ended December 31, 2003, seven months ended December
31, 2002 and the years ended May 31, 2002 and 2001 have not been restated.
MANAGEMENT'S PLAN
------------------
Management's Plan
The Company has generated significant net losses during recent years and has an accumulated deficit of approximately $43,073,000$49,321,700 at December 31, 2003.2004. The Company has a working capital deficit of approximately $3,281,700$636,500 at December 31, 2003
and its cash balance has increased from $1,741,000 at December 31, 2002 to
$4,084,800 at December 31, 2003.2004. This working capital deficit is primarily a result of debt of RMG being classified as current. See Note F. The Company used cash in its operating activities of $5,673,700 and $3,334,800 during all the yearsperiods ended December 31, 2003
and May 31, 2002 and used cash of $2,857,800 during the seven moths ended
December 31, 2002.2004 reported in these financial statements. During the year ended December 31, 2003 and the fiscal year ended May 31, 2002 the Company experienced positive cash flow of $2,343,800 and $1,878,800 respectively. The Company experienced negative cash flow of $823,300$242,300 and $230,900,$823,300, respectively, for the year ended December 31, 2004 and the seven months ended December 31, 2002 and the
fiscal year ended May 31, 2001.
-65-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
The Company has entered into agreements to provide funding for the
development of coalbed methane properties (See Note F). 2002.
After these work commitments are fully funded, the Company does not have sufficient capital available to fund its portion of the anticipated exploration and development activities on its coalbed methane properties. Additionally, the Company's known cash flows through December 31, 2004 from current operations and associated overhead are negative based on current projections. In order to improve liquidity of the Company, management intends to do the following:
X Continue to reduce its mining activities.
X Sell raw land in Riverton, Wyoming
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and Gunnison, Colorado. Management
intends to sell this land at its fair market value. The land is not
needed for the operations of the Company now or into the future.
X Seek equity funding or a joint venture partner to place the SGMC
property into production or sell the entire property to an industry
partner.
X Raise additional capital through a private placement and a public
offering of its subsidiary Rocky Mountain Gas, Inc. The timing of such
a public offering will depend on the market prices for methane gas.
X Reduce overhead expenses and concentrate on its primary business -
coalbed methane.
X Successfully resolve disputes relating to SMP assets. (See Note K)
2002, AND MAY 31, 2002 (Continued)
| · | Sell raw land it owns. Management intends to sell this land at its fair market value. The land is not needed for the operations of the Company now or into the future. |
| · | Seek additional funding through either sale of equity or joint venture partner to place SGMI and uranium properties into production or sell the properties to industry partners. |
| · | Raise additional capital through a private placement. |
| · | Reduce overhead expenses. |
| · | Successfully conclude the litigation with Nukem. See Note K |
| · | Conclude the initial phase of the UPC Agreement on the SMP properties. See Note F |
| · | Conclude the sale of RMG to Enterra. See Note P. In the event that the Enterra transaction is not closed, management will pursue private placements or a public offering of RMG common stock. |
As a result of these plans, management believes that they will generate sufficient cash flows to meet its cash requirements in calendar 2004,2005, although there is no assurance the plans will be accomplished.
B.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
Principles of Consolidation
The consolidated financial statements of USE and subsidiaries include the accounts of the Company, the accounts of its majority-owned or controlled subsidiaries Plateau (100%), Energx, Ltd ("Energx") (90%), Four Nines Gold, Inc. ("FNG") (50.9%), SGMC (78.5%SGMI (65.5%), Crested Corp. ("Crested") (71.5%(70.1%), Yellowstone Fuels Corp. ("YSFC") (35.9%), Rocky Mountain Gas ("RMG") (88.5%(91.1%) and the USECC Joint Venture ("USECC"), a consolidated joint venture which is equally owned by U.S. Energy Corp. and Crested, through which the bulk of their operations are conducted.
Investments in all 20% to 50% owned companies are accounted for using the
equity method.
Investments of less than 20% are accounted for by the cost method. All material intercompany profits, transactions and balances have been eliminated. -66-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
CASH EQUIVALENTS
Because of management control, YSFC is consolidated into the financial statements of the Company.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents in bank deposit accounts which exceed federally insured limits. At December 31, 2003,2004, the Company had approximately 99%77% of its cash and cash equivalents with one financial institution. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
RESTRICTED INVESTMENTS
Restricted Investments
Based on the provisions of Statement of Financial Accounting Standards No. 115 ("SFAS 115"), the Company accounts for its restricted investment in certain securities as held-to-maturity. Held-to-maturity securities are measured at amortized cost. If a decline in fair value of such investments is determined to be other than temporary, the investment is written down to fair value.
ACCOUNTS RECEIVABLE
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued)
Accounts Receivable
The majority of the Company's accounts receivable are due from industry partners for drilling and operating expenses associated with coalbed methane gas wells for which RMG acts as operator and from salessale of land.gas and properties on which the Company provided financing. The Company determines any required allowance by considering a number of factors including length of time trade accounts receivable are past due and the Company's previous loss history. The Company writes off accounts receivable when they become uncollectable,uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
In addition,
As of December 31, 2003, the Company iswas due $863,200 from CCBM, Inc. ("CCBM"), a Delaware corporation, which is wholly-owned by Carrizo Oil & Gas, Inc., Houston Texas (NMS "CRZO"),under a non-recourse promissory note receivable, which arose as part of the sale of a portion of RMG's coalbed methane properties to CCBM. The note receivable is fully reservedwas accounted for on a cash basis due to its non-recourse nature with principal payments received credited against natural gas properties in accordance with the full cost method of accounting. INVENTORIES
During the year ended December 31, 2004, CCBM notified the Company that it was electing to reduce its participation interest in certain properties which reduced proportionately the amount due under the note. At December 31, 2004, the note from CCBM had been paid i n full.
Inventories
Inventories consist of aviation fuel and well casingsupplies used in developing oil and tubing.gas properties. Inventories are stated at lower of cost or market using the average cost method.
PROPERTIES AND EQUIPMENT
Properties and Equipment
Land, buildings, improvements, machinery and equipment are carried at cost. Depreciation of buildings, improvements, machinery and equipment is provided principally by the straight-line method over estimated useful lives ranging from 3 to 45 years. Following is a breakdown of the lives over which assets are depreciated.
-67-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
Office Equipment 3 to 5 years
Field Tools and Hand Equipment 5 to 7 years
Vehicles and Trucks 3 to 7 years
Heavy Equipment 7 to 10 years
Service Buildings 20 years
Corporate Headquarter's Building 45 years
| Equipment | | | Office Equipment | 3 to 5 years | | Planes | 10 years | | Field Tools and Hand Equipment | 5 to 7 years | | Vehicles and Trucks | 3 to 7 years | | Heavy Equipment | 7 to 10 years | | Building | | | Service Buildings | 20 years | | Corporate Headquarters' Building | 45 years |
The Company capitalizes all costs incidental to the acquisition of mineral properties as incurred. Costs are charged to operations if the Company determines that the property is not economical. Mineral exploration costs are expensed as incurred. When it is determined that a mineral property can be economically developed as a result of establishing proved and probable reserves, costs subsequently incurred 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.
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued)
The Company has acquired substantial mining properties and associated facilities at minimal cash cost, primarily through the assumption of reclamation and environmental liabilities. Certain of these properties are owned by various ventures in which the Company is either a partner or venturer. (See Note F).
OIL AND GAS PROPERTIES
Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration, and development of oil and gas reserves, including directly related overhead costs, are capitalized.
All capitalized costs of oil and gas properties subject to amortization and the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major exploration and development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the capitalized cost of the property will be added to the costs to be amortized.
After there are proven reserves, the capitalized costs associated with those reserves are subject to a "ceiling test," which basically limits such costs to the aggregate of the "estimated present value," discounted at a 10-percent interest rate of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties.
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 of oil and gas, in which case the gain or loss is recognized in income. Abandonments of properties are accounted for as adjustments of capitalized costs with no loss recognized.
LONG-LIVED ASSETS
Long-Lived Assets
The Company evaluates its long-lived assets (other than oil and gas properties which are discussed above) for impairment when events or changes in circumstances indicate that the related carrying amount may not be recoverable. If the sum of estimated future cash flows on an undiscounted basis is less than the carrying amount of the related asset, an asset impairment is considered to exist. The related impairment loss is -68-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
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 necessarynecessa ry to develop mineral interests, may result in asset impairment.
During the fiscal year ended May 31, 2002, the Company recorded a
$1,622,700 impairment
Fair Value of goodwill that arose as part of the purchase of an
additional 1,105,499 shares of RMG common stock. These shares of stock were
purchased by issuing 910,320 shares of the Company's common stock pursuant to
conversion rights granted RMG private placement investors.
During fiscal 2001, the Company recorded an impairment on its mineral
properties of $123,800 in YSFC. As of December 31, 2003, management believes no
further impairment is necessary and that the fair market of remaining assets
exceeds the carrying value. See Note F for further discussion.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Instruments
The carrying amount of cash equivalents, receivables, other current assets, accounts payable and accrued expenses approximatesapproximate fair value because of the short-term nature of those instruments. The recorded amounts for short-term and long-term debt, approximate fair market value due to the variable nature of the interest rates on the short term debt, and the fact that interest rates remain generally unchanged from issuance of the long term debt.
REVENUE RECOGNITION
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued)
Revenue Recognition
Revenues from real estate operations are from the rental of office space in office buildings in Riverton, Wyoming. Airport operations consist of the sale of
aviation fuel, repair and maintenance of aircraft and rental of hanger space. All these revenues are reported on a gross revenue basis and are recorded at the time the service is provided.
The Company, through its subsidiary, RMG, utilizes the entitlements method of accounting for natural gas revenues whereby revenues are recognized as the Company's share of the gas is produced and delivered to a purchaser based upon its working interest in the properties. The Company will record a receivable (payable) to the extent that it receives less (more) than its proportionate share of the gas revenues. Revenues from mineral sales consist of the sale of uranium to a delivery
contract and the sale of that contract to a third party supplier. The sale of
uranium is reported on a net basis. The Company has not produced any uranium
from its properties during the period covered by the enclosed financial
statements and during the year ended MayThere were no significant imbalances at December 31, 2001 purchased all uranium
delivered under its supply contracts from the open market as all the Company's
uranium operations are shut down.
Mineral royalties which are non-refundable are recognized as revenue when
received (see Note F).
2004.
Management fees are recorded as a percentage of actual costs for services
provided for subsidiariesoperating and partnerships for which the Company provides
management services. The Company is also paid a management fee for overseeing coalbed methane production and oil production on the Fort Peck Reservation in Montana. Management fees are recorded when the service is provided.
-69-
Comprehensive Income
Unrealized gains (losses) on the hedging of gas sales are excluded from net income but are reported as comprehensive income on the consolidated statements of stockholders' equity.
Hedging Activities
The results of operations and operating cash flows are impacted by changes in market prices for oil and gas. To mitigate a portion of this exposure, the Company through RMG and its subsidiary RMG I has entered into certain derivative instruments. RMG I's derivative instruments covered approximately 92% of net gas sales for the twelve months ended December 31, 2004. All derivative instruments have been entered into and designated as cash flow hedges of gas price risk and not for speculative or trading purposes. As of December 31, 2004, RMG I's derivative instruments were comprised of swaps. For swap instruments, RMG I receives (pays) a fixed price for the hedged commodity and pays (receives) a floating market price, as defined in each instrument, to the counterparty. These instruments have been designated and ha ve qualified as cash flow hedges. Should the Company not be able to deliver the gas under hedge, it would have to acquire the gas. In the event the market price for gas exceeded the hedge price, the Company would recognize a loss.
The carrying values of these instruments are equal to the estimated fair values. The fair values of the derivative instruments were established using appropriate future cash flow valuation methodologies. The actual contribution to future results of operations will be based on the market prices at the time of settlement and may be more or less than fair value estimates used at December 31, 2004.
Net loss on hedging activities included in gas sales on the consolidated statement of operations were $254,100 during the period ended December 31, 2004. All forecasted transactions hedged as of December 31, 2004 are expected to occur by December 2005. Approximately 30,000 mmbtu per month are hedged at $4.14 per mmbtu through December 2005 and 15,000 mmbtu per month are hedged at $8.10 per mmbtu from January 1, 2005 through March 31, 2005, resulting in an estimated fair value liability of $435,900 as of December 31, 2004.
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002, MAY 31,and 2002, AND MAY 31, 2001
2002 (Continued)
STOCK BASED COMPENSATION
Stock Based Compensation
SFAS 123, "Accounting for Stock-Based Compensation," ("SFAS 123") defines a fair value based method of accounting for employee stock options or similar equity instruments. However, SFAS 123 allows 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 of 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; accordingly, for purposes of the pro forma disclosures presented below, the Company has computed the fair values of all options granted using the Black-Scholes pricing model and thet he following weighted average assumptions:
Year Ended Seven Months ended
December 31, December 31, Year ended May 31,
------------- ------------- ---------------------
2003 2002 2002 2001
------ ------ ------ -----
Risk-free interest rate 5.61% 4.4% 5.6% 4.29%
Expected lives (years) 7 8.5 10 10
Expected volatility 58.95% 50.38% 62.65% 73.1%
Expected dividend yield -- -- -- --
| | Year Ended | | Seven Months ended | | Year ended | | | December 31, | | December 31, | | May 31, | | | 2004 | | 2003 | | 2002 | | 2002 | | | | | | | | | | | Risk-free interest rate | 4.82% | | 5.61% | | 4.4% | | 5.6% | | Expected lives (years) | 7.1 | | 7 | | 8.5 | | 10 | | Expected volatility | 50.79% | | 58.95% | | 50.38% | | 62.65% | | 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.
If the Company had accounted for its stock-based compensation plans in accordance with SFAS 123, the Company's net (loss) incomeloss and pro forma net loss per common share would have been reported as follows:
| | Year Ended December 31, | | Seven Months ended December 31, | | Year ended May 31, | | | 2004 | | 2003 | | 2002 | | 2002 | | Net loss to common | | | | | | | | | shareholders as reported | $(6,248,700) | | $(5,810,100) | | $ (3,840,100) | | $ (6,267,600) | Deduct: Total stock based employee expense | | | | | | | | | determined under fair | | | | | | | | | value based method | (207,100) | | (652,900) | | (1,410,850) | | (3,079,700) | | Pro forma net loss | $(6,455,800) | | $(6,463,000) | | $ (5,250,950) | | $ (9,347,300) | | | | | | | | | | | As reported, Basic | $ (.47) | | $ (.52) | | $ (.36) | | $ (.67) | | As reported, Diluted | (.47) | | (.52) | | (.36) | | (.67) | | Pro forma, Basic | (.49) | | (.58) | | (.49) | | (1.01) | | Pro forma, Diluted | (.49) | | (.58) | | (.49) | | (1.01) |
Year Ended Seven Months Ended
December 31, December 31, Year Ended May 31,
-----------------------------
2003 2002 2002 2001
-------------- -------------- --------------- ------------
Net (loss) income to common shareholders
as reported $ (5,810,100) $ (3,840,100) $ (6,267,600) $ 1,771,200
Deduct: Total stock based employee
expense determined under fair
value based method (652,900) (1,410,850) (3,079,700) (2,746,600)
-------------- -------------- --------------- ------------
Pro forma net loss $ (6,463,000) $ (5,250,950) $ (9,347,300) $ (975,400)
============== ============== =============== ============
As reported, Basic $ (.52) $ (.36) $ (.67) $ .23
As reported, Diluted $ (.52) $ (.36) $ (.67) $ .21
Pro forma, Basic $ (.58) $ (.49) $ (1.01) $ (.12)
Pro forma, Diluted $ (.58) $ (.49) $ (1.01) $ (.12)
| | -75- | |
|
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued)
Weighted average shares used to calculate pro forma net loss per share were determined as described in Note B, except in applying the treasury stock method to outstanding options, net proceeds assumed received upon exercise were increased by the amount of compensation cost attributable to future service periods and not yet recognized as pro forma expense.
-70-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
INCOME TAXES
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 carryforwards.
SFAS 109 requires recognition of deferred tax assets for the expected future effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. 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 (LOSS) INCOME PER SHARE
Net Loss Per Share
The Company reports net (loss) incomeloss per share pursuant to Statement of Financial Accounting Standards No. 128 ("SFAS 128"). SFAS 128 specifies the computation, presentation and disclosure requirements for earnings per share. Basic earnings per share 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. Potential common shares relating to options and warrants are excluded from the computation of diluted earnings (loss) per share, because they were antidilutive, totaled 5,628,820, 3,790,370, 4,910,900 3,999,468 and 3,316,0113,999,468 at December 31, 2004, 2003 and 2002 and May 31, 2002, and 2001, respectively.
USE OF ESTIMATES
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the USA requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Reclassifications
Certain reclassifications have been made in the prior years financial statements in order to conform with the presentation for the current year.
RECENT ACCOUNTING PRONOUNCEMENTS
- ----------------------------------
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued)
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued FASB No. 123(R), Accounting for Stock-Based Compensation, which replaces FASB 123,Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and its related implementation guidance. The Company will be required to implement FASB 123(R) on the quarterly report for the quarter ending September 30, 2005. Under the terms of FASB 123(R) the Company will be required to expense the fair value of stock options issued to employees. The fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock, the expected dividends on it, and the risk-free interest rate over the expected life of the option. The fair value of an option estimated at the grant date is not subsequently adjusted for changes in the price of the underlying stock or its volatility, life of the option, dividends on the stock, or the risk-free interest rate.
SFAS 143 Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligation." The statement requires the Company to record the fair value of the reclamation liability on its shut down mining and gas properties as of the date that the liability is incurred. The statement further requires that the Company review the liability each quarter and determine if a change is estimate is required as well as accrete the total liability on a quarterly basis for the future liability.
-71-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
The Company will also deduct any actual funds expended for reclamation during the quarter in which it occurs. As a result of the Company taking impairment allowances in prior periods on its shut down mining properties, it has no remaining book value for these properties.
The following is a reconciliation of the total liability for asset retirement obligations
Balance Decemberobligations:
| | | Year ended December 31, | | | | | 2004 | | 2003 | | | Beginning balance | | $ | 7,264,700 | | $ | 8,906,800 | | | Impact of adoption of SFAS No. 143 | | | -- | | | (1,615,600 | ) | | Addition to Liability | | | 463,700 | | | -- | | | Liability Settled | | | -- | | | (393,200 | ) | | Accretion Expense | | | 346,700 | | | 366,700 | | | Ending balance | | $ | 8,075,100 | | $ | 7,264,700 | | | | | | | | | | |
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, $ 8,906,800
Impact of adoption of SFAS No. 143 (1,615,600)
Addition to Liability -0-
Liability Settled (393,200)
Accretion Expense 366,700
---------------
Balance DecemberAND MAY 31, 2003 $ 7,264,700
===============2002 (Continued)
The following table shows the Company's net income (loss)loss and net income
(loss)loss per share on a pro forma basis as if the provisions of SFAS No. 143 had been applied retroactively in all periods presented.
Seven Month
Year ended ended
December 31, December 31, Year ended
2003 2002 2002 2001
-------------- -------------- ------------ -----------
NET INCOME (LOSS):
Reported net income (loss)
from continuing operations $ (7,075,800) $ (3,857,200) $(6,034,400) $1,534,800
Pro-forma adjustments
net of tax -- (200,000) (333,000) (317,000)
-------------- -------------- ------------ -----------
Pro-forma net income (loss) $ (7,075,800) $ (4,057,200) $(6,367,400) $1,217,800
============== ============== ============ ===========
PER SHARE OF COMMON STOCK:
Reported net income (loss) basic
from continuing operations $ (0.63) $ (0.36) $ (0.65) $ 0.20
Pro-forma adjustments
net of tax -- (0.02) (0.03) (0.04)
-------------- -------------- ------------ -----------
Pro-forma net income (loss) basis $ (0.63) $ (0.38) $ (0.68) $ 0.16
============== ============== ============ ===========
Reported net income (loss) diluted $ (0.63) $ (0.36) $ (0.65) $ 0.18
Pro-forma adjustments -- (0.02) (0.03) (0.04)
-------------- -------------- ------------ -----------
Pro-forma net income (loss) diluted $ (0.63) $ (0.38) $ (0.68) $ 0.14
-------------- ============== ============ ===========
| | | | | | | Seven months | | | | | | | | | | | ended | | Year ended | | | | | Year ended December 31, | | December 31, | | May 31, | | | | | 2004 | | 2003 | | 2002 | | 2002 | | | NET LOSS: | | | | | | | | | | | | | | | Reported net loss | | $ | (6,248,700 | ) | $ | (7,075,800 | ) | $ | (3,857,200 | ) | $ | (6,034,400 | ) | | Cumulative effect of adoption | | | | | | | | | | | | | | | of SFAS No. 143 | | | -- | | | -- | | | (200,000 | ) | | (333,000 | ) | | Adjusted net loss | | $ | (6,248,700 | ) | $ | (7,075,800 | ) | $ | (4,057,200 | ) | $ | (6,367,400 | ) | | | | | | | | | | | | | | | | | PER SHARE OF COMMON STOCK: | | | | | | | | | | | | | | | Reported net loss-basic | | $ | (0.47 | ) | $ | (0.63 | ) | $ | (0.36 | ) | $ | (0.65 | ) | | Cumulative effect of adoption | | | | | | | | | | | | | | | of SFAS No. 143 | | | -- | | | -- | | | (0.02 | ) | | (0.04 | ) | | Adjusted net loss-basic | | $ | (0.47 | ) | $ | (0.63 | ) | $ | (0.38 | ) | $ | (0.69 | ) | | | | | | | | | | | | | | | | | Reported net loss-diluted | | $ | (0.47 | ) | $ | (0.63 | ) | $ | (0.36 | ) | $ | (0.65 | ) | | Cumulative effect of adoption | | | | | | | | | | | | | | | of SFAS No. 143 | | | -- | | | -- | | | (0.02 | ) | | (0.04 | ) | | Adjusted net loss-diluted | | $ | (0.47 | ) | $ | (0.63 | ) | $ | (0.38 | ) | $ | (0.69 | ) | | | | | | | | | | | | | | | | | Weighted average - basic | | | 13,182,421 | | | 11,180,975 | | | 10,770,658 | | | 9,299,359 | | | | | | | | | | | | | | | | | | Weighted average - diluted | | | 13,182,421 | | | 11,180,975 | | | 10,770,658 | | | 9,299,359 | |
Computed on a pro-forma basis, the provisions of SFAS No. 143 would have been $7,291,200, $7,091,200 $6,758,200 and $6,441,200$6,758,200 at December 31, 2002 and May 31, 2002 and 2001, respectively.
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for how the Company will classify and measure certain financial instruments with characteristics of both liabilities and equity. It requires that the Company classify a financial instrument within its scope as a liability. Some of the provisions of this Statement are consistent with the current definition of liabilities in FASB Concepts Statement No. 6, "Elements of Financial Statements." The remaining provisions of this Statement are consistent wi th the FASB's proposal to revise that definition to encompass certain obligations that a reporting entity can or must settle by issuing its own equity shares, depending on the nature of the relationship established between the holder and the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 1, 2000, respectively.
15, 2003. The adoption of SFAS No. 150 had no material impact on the Company's financial position or results of operations. U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (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.
-72-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
C.RELATED-PARTY TRANSACTIONS:
The Company provides management and administrative services for affiliates
under the terms of various management agreements. Revenues from services
provided by the Company
There are no related party disclosures related to unconsolidated affiliates were $33,400 during the
year ended December 31, 2003, $55,900 during the seven months ended December 31,
2002, and $78,800 and $132,500 for the years ended May 31, 2002 and 2001,
respectively. The Company has $96,800 of receivables from unconsolidated
subsidiaries as of December 31, 2003.
these financial statements
D.USECC JOINT VENTURE:
The Company operates the Glen L. Larsen office complex; holds interests in various mineral operations; conducts oil and gas operations; and transacts all operating and payroll expenses through a joint venture with Crested, the USECC joint venture.
Joint Venture.
E. INVESTMENTS IN AND ADVANCES TO AFFILIATES:
RESTRICTED INVESTMENTS:
The Company's restricted investments secure various decommissioning, reclamation and holding costs. Investments are comprised of debt securities issued by the U.S. Treasury that mature at varying times from three months to one year from the original purchase date. As of December 31, 2003, December 31,
20022004 and May 31, 2002,2003, the cost of debt securities was a reasonable approximation of fair market value. These investments are classified as held-to-maturity under SFAS 115 and are measured at amortized cost.
F.MINERAL CLAIMS TRANSACTIONS:
GMMV
Phelps Dodge
During prior years, the Company and Crested conveyed interests in mining claims to AMAX Inc. (“AMAX”) in exchange for cash, royalties and other consideration. AMAX merged with Cyprus Minerals (“Cyprus Amax”) which was purchased by Phelps Dodge Mining Company (“Phelps Dodge”) in December 1999. The properties have not been placed into production as of December 31, 2004.
Amax and later Cyprus Amax paid the Company and Crested an annual advance royalty of 50,000 (25,000 lbs. to each) pounds of molybdenum (or its cash equivalent). During fiscal 1990,2000, Phelps Dodge assumed this obligation.
Phelps Dodge filed suit against the Company and Crested on June 19, 2002 regarding these matters. On February 4, 2005, the U.S. District Court of Colorado entered into an agreementFindings of Fact and Conclusions of Law in a case involving the Company, Crested and Phelps Dodge Corporation authorizing the return of the Mt. Emmons molybdenum properties and associated water treatment plant to the Company and Crested. USECC has filed a motion with Kennecott, a
wholly-owned, indirect subsidiarythe Court to amend the Order to determine that the decreed water rights be conveyed to USECC. The motion is pending. The ultimate impact of The RTZ Corporation PLC, for Kennecott to
acquire a 50% interestthis decision on the financial statements of the Company in certain uranium mineral properties in Wyoming knownmanagement’s opinion will not be measurable until such time as the Green Mountain Properties. Duringfinal decisions are reached and the life of the venture, the parties
entered into various amendmentsproperty actually transferred to the GMMV Agreement.
As a result of sustained depressed uranium prices,Company. (See Note K) U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued)
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 GMMV propertiesLincoln Project in California.
SGMC has not generated any significant revenue. All acquisition and mine development costs since inception were maintainedcapitalized. SGMC put the property on a shut down basis.status and took an impairment on the associated assets due to the decline in the spot price for gold and the lack of adequate financing in prior periods. During fiscal 2000, certain differences arose
ina visitor’s center was developed and became operational. SGMC has leased the GMMV and Kennecott suedvisitor’s center to partially cover stand-by costs of the property.
On December 29, 2004, a majority of SGMC was acquired by Sutter Gold Mining Inc. ("SGMI") (formerly Globemin Resources, Inc.) of Vancouver, B.C. SGMI is traded on the TSX Venture Exchange. Approximately 90% of SGMI's common stock was exchanged for 40,190,647 shares of SGMI common stock. At December 31, 2004, the Company owned and USE. On September 11, 2000,controlled 65.5% of the parties settled all disputescommon stock of SGMI.
At December 31, 2004, the spot market price for gold had attained levels that management believes will allow SGMI to produce gold from the property on an economic basis. This conclusion is based on engineering analysis completed on the property, although, economic reserve have not been delineated. Management of SGMI is therefore pursuing the equity capital market and Kennecott paidnon-affiliated investors to obtain sufficient capital to complete the Companydevelopment of the mine, construct a mill and USE $3.25
million and assumed reclamation liability forplace the Sweetwater Mill, Jackpot and
Big Eagle Mine properties. (Note K.)
property into production.
SMP
During fiscal 1989, USE and Crested, through USECC, entered into an agreement to sell a 50% interest in their Sheep Mountain properties to a subsidiary of Nukem Inc., CRIC. USECC and CRIC immediately contributed their 50% interests in the properties to a newly-formed partnership, SMP. The SMP Partnership was established to further develop and mine the uranium claims on Sheep Mountain, acquire uranium supply contracts and market uranium. Certain disputes arose among USECC, CRIC and its parent Nukem, Inc. over the operation of SMP. These disputes have been in litigation/arbitration for the past thirteenfourteen years. See Note K for the status of the related litigation/arbitration.
-73-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
Due to the litigation and arbitration proceedings involving SMP, the Company has expensed all of its costs related to SMP and has no carrying value of its investment in SMP at December 31, 2003,2004 OR December 31, 2002 and May 31,
2002. (see Note K).
PHELPS DODGE
During prior years,2003.
On December 8, 2004, the Company conveyed interestsand Crested entered into a Purchase and Sale Agreement (the “agreement”) with Bell Coast Capital Corp. now named Uranium Power Corp. (“UPC”), a British Columbia corporation (TSX-V “UPC-V) for the sale to UPC of an undivided 50% interest in mining claimsthe SMP uranium properties. A summary of certain provisions in the agreement follows.
The initial purchase price for the 50% interest in the properties is $4,050,000 and 4,000,000 shares of common stock of UPC, payable by installments. All amounts are stated in US dollars.
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued)
Initial cash and equity purchase price:
| October 29, 2004 | | $ | 175,000 | | Non-refundable deposit against execution of the definitive agreement. | | | | | | | | November 29, 2004 | | $ | 175,000 | | Released from escrow on January 27, 2005 which was five days after TSX-V approval of the agreement. | | | | | | | | | June 29, 2005 | | $ | 500,000 | | and 1,000,000 common shares of UPC stock subject to TSX-V regulations. | | | | | | | | | June 29, 2006 | | $ | 800,000 | | and 750,000 common shares of UPC stock subject to TSX-V regulations. | | | | | | | | | December 29, 2006 | | $ | 800,000 | | and 750,000 common shares of UPC stock subject to TSX-V regulations. | | | | | | | | | June 29, 2007 | | $ | 800,000 | | and 750,000 common shares of UPC stock subject to TSX-V regulations. | | | | | | | | | December 29, 2007 | | $ | 800,000 | | and 750,000 common shares of UPC stock subject to TSX-V regulations | | Total | | $ | 4,050,000 | | 4,000,000 common shares of UPC |
Upward adjustment to AMAX
Inc. ("AMAX"initial cash purchase price:
The cash portion of the initial purchase price will be increased by $3,000,000 (in two $1,500,000 installments) after the uranium oxide price (long term indicator) is at or exceeds $30.00/lb for four consecutive weeks (the “price benchmark”). If the price benchmark is attained on or before April 29, 2006, the first installment will be due six months after price attainment (but not before April 29, 2006). If the price benchmark is attained after April 29, 2006, the first installment will be due six months after attainment. In either event, the second installment will be due six months after the first installment is due. These payment obligations will survive closing of the purchase of the 50% interest in exchangethe properties; if the installments are not timely paid, UPC will forfeit all of its 50% interest i n the properties, and in the joint venture to be formed.
The Company and Crested and UPC, will each be responsible for paying 50% of (i) current and future Sheep Mountain reclamation costs in excess of $1,600,000, and (ii) all costs to maintain and hold the properties.
Closing of the agreement is required on or before December 29, 2007, with UPC’s last payment of the initial purchase price (plus, if applicable, the increase in the cash royalties,portion). At the closing, UPC will contribute its 50% interest in the properties, and the Company and Crested will contribute their aggregate 50% interest in the properties, to a joint venture, wherein UPC and the Company and Crested each will hold a 50% interest. The joint venture generally will cover uranium properties in Wyoming and other consideration. AMAX
mergedproperties identified in the Company's and Crested’s uranium property data base, but excluding the Green U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued)
Mountain area and Kennecott’s Sweetwater uranium mill, the Shootaring Canyon uranium mill in southeast Utah (and properties within ten miles of that mill), and properties acquired in connection with Cyprus Minerals ("Cyprus Amax") which was purchased by Phelps Dodge
Mining Company ("Phelps Dodge") in Decembera future joint venture involving that mill.
UPC will contribute up to $10,000,000 to the joint venture (at $500,000 for each of 1999. The properties have not
been placed into production as of December 31, 2003.
Amax and later Cyprus Amax paid the Company an annual advance royalty of
50,000 pounds of molybdenum (or its cash equivalent)20 exploration projects). During fiscal 2000,
Phelps Dodge assumed this obligation and made its first advance royalty payment
to USE during the first quarter of 2001. Phelps Dodge is entitled to a partial
credit against future royalties for any advance royalty payments made, but such
royalties are not refundable if the properties are not placed into production. The Company, recognized $60,300Crested and UPC, each will be responsible for 50% of revenue from the advance royalty payments
during the year ended May 31, 2001. If Phelps Dodge formally decides to place
the properties into production, it is obligated to pay $2,000,000 to the
Company.
Per the contract with AMAX, the Company is to receive 15%costs on each project in excess of the first
$25,000,000, or $3,750,000, if the properties are sold, which the Company
believes occurred when Phelps Dodge purchased Cyprus Amax. Phelps Dodge filed
suit against the Company on June 19, 2002 regarding these matters (See Note K).
SUTTER GOLD MINING COMPANY
Sutter Gold Mining Company ("SGMC") was established in 1990 to conduct
operations on mining leases and to produce gold from the Lincoln Project in
California.
SGMC has not generated any significant revenue and has no assurance of
future revenue. All acquisition and mine development costs since inception were
capitalized. Due to the decline in the spot price for gold and the lack of
adequate financing, SGMC has put the property on a shut down status and has
impaired the associated assets.
During fiscal 2000, a visitor's center was developed and became
operational. Management has leased the visitor's center to partially cover
stand-by costs of the property. At December 31, 2003, the spot market price for
gold had attained levels management believe that will allow SGMC to produce gold
from the property on an economic basis. This conclusion is based on engineering
analysis completed on the property. Management of SGMC is therefore pursuing the
equity capital market and non-affiliated industry partners to obtain sufficient
capital to complete the development of the mine, construct a mill and place the
property into production. (See Note P).
$500,000.
PLATEAU RESOURCES LIMITED
During fiscal 1994, USEthe Company entered into an agreement with Consumers Power Company to acquire all the issued and outstanding common stock of Plateau Resources Limited ("Plateau"(“Plateau”), a Utah corporation. Plateau owns a uranium processing mill and support facilities and certain other real estate assets through its wholly-owned subsidiary, Canyon Homesteads, Inc., in southeastern Utah. USEThe Company paid nominal cash consideration for -74-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
the PlateauPleateau stock and agreed to assume all environmental liabilities and reclamation bonding obligations. At December 31, 2003,2004, Plateau hadhas a cash security in the amount of $6.8 million to cover reclamation and annual licensing of the properties (see Note K). The Directors of the Company is currently evaluating the best utilization of Plateau's
assets. Evaluations are ongoing to determine when, or if, the mine and mill
properties should be placed into production. The primary factor in these
evaluations relates to uranium market prices.
Due to uranium market conditions in 2002, Plateau decided to change the
license status from operational back to reclamation and filed a new reclamation
plan. The Nuclear Regulatory Commission (NRC) reviewed the revised reclamation
and decommissioning plan andCrested have agreed to divide equally the cash flows derived from operations and a $6.1 millionportion of certain reclamation plan.
Therefore, Plateau received about $2.9 Million of excess reclamation bond funds
on the Shootaring Canyon Uranium Mill. During the year ended December 31, 2003,
management of Plateau determined that the mine and mill properties should be
reclaimed.
obligations.
On August 1, 2003, the Company and Crested sold all ofinterest in the stock of Canyon ResourcesTicaboo Townsite in southern Utah as a result of PlateauPleateau entering into a Stock Purchase Agreement to sell all the outstanding shares of Canyon Homesteads, Inc. ("Canyon"(“Canyon”) to The Cactus Group LLC, a newly formed Colorado limited liability company. The Cactus Group purchased all of the outstanding stock of Canyon for $3,370,000. Of that amount, $349,300 was paid in cash at closing and the balance of $3,120,700 is to be paid under the terms of a promissory note.
The sale did not qualify for gain recognition under the full accrual
method. A gain of $1,295,700 was deferred and reported in the consolidated
balance sheetnote, which bears interest at December 31, 2003. The sale will be recognized by the
installment method as cash payments are received from the purchaser. An
installment note receivable of $2,988,000 at December 31, 2003 will be reduced
as payments are received.
7.5%.
Pursuant to the promissory note agreement, the Company isand Crested received $166,000 in payments on the note receivable and $44,000 in room credits. At December 31, 2004, the note was current. The Company and Crested are to receive $5,000$10,000 per month for the months of November 2003 toJanuary through March 2004 and $10,000 for the months of
November 2004 to March 2005 and $24,000 per month for the months of April to
October 2004 and $24,000 per month on a monthly basis after March of 2005 from
The Cactus Group until August of 2008, at which time, a balloon payment of $2.8 million is due. The note is secured with all the assets of The Cactus Group and Canyon along with personal guarantees by the six principals of The Cactus Group. As additional consideration for the sale, the Company and Crested will also receive the first $210,000 in gross proceeds from the sale of either single family or mobile home lots in Ticaboo.
The Company and Crested are currently evaluating the best utilization of Plateau’s assets. Evaluations are ongoing to determine when, or if, the mine and mill properties should be placed into production. The primary factor in these evaluations relates to uranium market prices.
ROCKY MOUNTAIN GAS, INC.
During fiscal 2000,
In 1999, the Company and Crested organized Rocky Mountain Gas, Inc. ("RMG"(“RMG”) to enter into the coalbed methane gas/natural gas business. RMG is engaged in the acquisition of coalbed methane gas properties and the future exploration, development and production of methane gas from those properties. At December 31, 2003,2004, RMG is owned 90.1%49.3% by the Company.
On January 3, 2000,Company and 39.8% by Crested. At December 31, 2004, RMG entered into an agreement with Quantum Energy,
L.L.C. (Quantum formed a subsidiary "Quaneco" to conduct its business with RMG)
to purchase a 50% working interestowns 237,200 gross acres and 40%128,700 net revenue interest in approximately
185,000 acres of unproven leasehold interests in the Powder River Basin of
southeastern Montana.
-75-
acres.
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002, MAY 31,and 2002, AND MAY 31, 2001
2002 (Continued)
CCBM
RMG also acquired a 100% workingsold an interest (82% revenue interest) in 65,247
net mineral acres in southwest Wyoming during the year ended May 31, 2000.
CCBM
- ----
On July 10, 2001, RMG completed a sale of gasits coalbed methane properties to CCBM, Inc., a
Delaware corporation, which is wholly-owned by Carrizo Oil & Gas, Inc., Houston,
Texas (NMS "CRZO").CCBM. The agreement between CCBM and RMG is to finance the further development of coalbed methane acreage currently owned by RMG in Montana and Wyoming, and to acquire and develop more acreage in Wyoming and the Powder River Basin of Montana. At December 31, 2004, CCBM had completed its funding and drilling commitments. RMG assigned a 25% undivided interest in its Oyster Ridge property and a 6.25% undivided interest in its Castle Rock properties to CCBM. RMG also assigned varying interests in other properties to CCBM which were later contributed to Pinnacle Gas Resources, Inc. ("Pinnacle") see discussion below on Pinnacle.
RMG is the designated operator under a Joint Operating Agreement ("JOA"(“JOA”) between RMG and CCBM.,CCBM, which will govern all operations on the properties subject to a Purchase and Sale Agreement between RMG and CCBM, subject to pre-existing JOA'sJOA’s with other entities, and operationsoperation or properties in the area of mutual interest ("AMI"(“AMI”). CCBM has the right to participate in other properties RMG may acquire under the area of mutual interest ("AMI"(“AMI”) .
RMG assigned CCBM an undivided 50% interest in all of RMG's existing
coalbed methane properties (with the exception of Castle Rock of which only a
6.25% working interest was assigned) for a sales price of $7,500,000 in the form
of a non-recourse promissory note payable in principal amounts of $125,000 per
month plus interest at an annual rate of 8% over 41 months (starting July 31,
2001) with a balloon payment due on the forty-second month. This note is
accounted for on a cash basis because it is non-recourse with its principle
payments reducing the natural gas properties in accordance with the full cost
method of accounting. The balance due under the note at December 31, 2003 is
$863,200. (See Pinnacle below) Interest income of $232,100, $269,700 and
$505,000 was recognized for the year ended December 31, 2003, the nine months
ended December 31, 2002 and the year ended March 31, 2002, respectively. These
properties sold to CCBM consisted of the Kirby, Oyster Ridge, Clearmont, Sussex,
Finley, Baggs North, and Gillette North properties. CCBM's 50% undivided
interest is pledged back to RMG to collateralize the promissory note.
To start development, and as part of the consideration for the acquisition,
CCBM agreed to pay $5,000,000 to drill and complete from, until June 30, to 60 wells on the
coalbed properties. RMG is "carried" for its 50% interest in these wells, and
will not be required to pay any of such costs. After the initial $5,000,000 has
been spent, RMG and CCBM each will pay for their 50% share of costs in
subsequent wells, and also will pay for their 50% share of operating costs for
the wells drilled and completed in this drilling program. Without CCBM's
consent, none of the drilling funds can be used for operations associated with
water disposal wells, gas compression beyond 100 PSIG, or for facilities
downstream of compression beyond 100 PSIG. CCBM will earn a 50% working interest
in each well location (80 acres) and gas production therefrom, regardless of the
status of payments on the promissory note. The balance under the work commitment
at December 31, 2003 was $305,100. In 2003, a portion of these interests were
exchanged for common stock of Pinnacle Gas Resources. (See Pinnacle below).
Bobcat
- ------
On April 12, 2002, RMG signed an agreement to purchase working interests in
approximately 1,940 gross acres of coalbed methane properties in the Powder
River Basin of Wyoming. The contract closed on June 4, 2002. RMG paid the seller
$500,000 cash and another $150,000 by having USE issue 37,500 shares of its
restricted common stock to the seller; CCBM paid $500,000 cash to the seller and
CRZO issued its
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U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
restricted shares of common stock valued at $150,000. The properties are located
approximately 25 miles north of Gillette, in Campbell County, Wyoming. In 2003
these interests were exchanged for common stock of Pinnacle Gas Resources. (See
Pinnacle below).
Pinnacle
- --------
2005.
PINNACLE
On June 23, 2003, a Subscription and Contribution Agreement was executed by RMG, CCBM and the seven affiliates of Credit Suisse First Boston Private Equity ("(“CSFB Parties"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'sRMG’s books at a cost of $922,600,$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"(“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"Stock”) as of the closing date and options to purchasepurch ase Pinnacle Common Stock ("(“Pinnacle Stock Options"Options”). The CSFB PartiesCFSB contributed $5.0 million for 25% of the common stock inof Pinnacle.
The CSFB Parties also contributed approximately $13$13.0 million of cash to Pinnacle in return for the Redeemable Preferred Stock of Pinnacle ("(“Pinnacle Preferred Stock"Stock”), 25% of the Pinnacle Common Stock as of the closing date and warrants to purchase Pinnacle Common Stock ("(“Pinnacle Warrants"Warrants”). The CSFB Parties also agreed to contribute additional cash, under certain circumstances, of up to approximately $11.8 million to Pinnacle to fund future drilling, development and acquisitions. The CSFB Parties currently have greater than 50% of the voting power of the Pinnacle capital stock through their ownership of Pinnacle Common Stock and Pinnacle Preferred Stock.
Currently, on a fully diluted basis, assuming that all parties exercised
their
At December 31, 2004 RMG and CCBM each owned 16.7% of Pinnacle Warrants and Pinnacle Options, the CSFB Parties RMG and CCBM
would have ownership interest of approximately 46.2%, 26.9% and 26.9%,
respectively. On a fully-diluted basis, assuming the additional $11.8 million of
cash was contributed by the CSFB Parties and all Pinnacle Warrants and Pinnacle
Options were exercised by all parties, the CSFB Parties would own 54.6% of
Pinnacle and RMG and CCBM would each own 22.7% of Pinnacle.
Prior to and in connection with its contribution of assets to Pinnacle,
CCBM paid RMG approximately $1.8 million in cash as part of its outstanding
purchase obligation on the coalbed methane property interests CCBM previously
acquired from RMG. CCBM was also given a credit of $1,250,000 against the note
payable pursuant to the original Purchase and Sale Agreement which allowed CCBM
to recover $1,250,000 from 20% of RMG's net revenue interest from any production
from the properties contributed to Pinnacle. After these payments and credits,
there was a balance of approximate $1.2 million remaining on the obligation from
CCBM to RMG at December 31, 2003, the balance on the note receivable for CCBM
was $863,200. The principal reductions to the note receivable from CCBM are
accounted for on a cash basis because it is non-recourse.
owned 66.6%.
Pinnacle is a private corporation. Only such information about Pinnacle as its board of directors elects to release is available to the public. All other information about Pinnacle is subject to confidentiality agreements between Pinnacle, RMG and the other parties to the June 2003 transaction.
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U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002, MAY 31,and 2002, AND MAY 31, 2001
2002 (Continued)
OIL AND GAS PROPERTIES AND EQUIPMENT INCLUDED THE FOLLOWING:
RMG I - --------------------------------------------------------------------
HI-PRO
On January 30, 2004, RMG, through its wholly owned subsidiary RMG I, purchased the producing, and non-producing properties of Hi-Pro Production LLC ("Hi-Pro"), a company in the Powder River Basin of Wyoming. The terms of the purchase were as follows:
| $ 776,700 | | | cash paid by RMG I, $75,000. | | | $ 588,300 8,300 | | | net revenues from November 1, 2003 to December 31, May2003, which were retained by Hi-Pro.(1) |
| | $ 500,000 | | | by USE's 30 day promissory note (secured by 166,667 restricted shares of USE common stock, valued at $3.00 per share.)(2) | | | $ 600,000 | | | by 200,000 restricted shares of USE common stock (valued at $3.00 per share). | | | $ 700,000 | | | by 233,333 restricted shares of RMG common stock (valued at $3.00 per share.)(3) | | | $ 3,635,000 | | | cash, loaned to RMG I under the credit facility agreement. | | | $ 6,800,000 | | | | | | (588,300) | | | reverse net revenues from November 1, 2003 to December 31, -------------------------- --------------------------
2003, 2002 2002 2001
------------ ------------ ------------ ------------
which were retained by Hi-Pro | | | $ 6,211,700 | | | | |
_________________________
(1)RMG I paid all January operating costs at closing. Net revenues from the purchased properties for January 2004 were credited to RMG I's obligations under the credit facility agreement. These net revenues were considered by the parties to be a reduction in the purchase price which RMG I otherwise would have paid at the January 30, 2004 closing. (2)Pursuant to the terms of the promissory note, USE issued 166,667 shares as payment in full of this obligation during the first quarter of 2004. (3)The RMG shares were convertible at Hi-Pro's sole election into restricted shares of common stock of USE. The number of USE shares to be issued were based upon (A) the number of RMG shares to be converted, multiplied by $3.00 per share, divided by (B) the average closing sale price of the shares of USE for the 10 trading days prior to notice of conversion. During the quarter ended June 30, 2004, all of these shares were converted into 312,221 shares of the Company's common stock. The Company has filed a resale registration statement with the Securities and Exchange Commission to cover public resale of these shares.
RMG I purchased these properties to continue its entry into the coalbed methane gas business and accounted for as a purchase transaction with the estimated fair value of assets and liabilities assumed in the acquisition as follows:
| Estimated fair value of assets acquired | | | Current assets | $ 639,400 | Oil and gas properties:
Subjectproperties | 6,538,300 | | Other property and equipment | 146,700 | | Other long term assets | 145,000 | | Total assets acquired | $7,469,400 |
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued)
| Estimated fair value of liabilities assumed | | | Current liabilities | $ 884,800 | | Asset retirement obligation | 372,100 | | Total liabilities assumed | 1,256,900 | | Net assets acquired | $ 6,212,500 |
RMG I financed $3.6 million of the cash component from a $25 million credit facility arranged by Petrobridge Investment Management, LLC (Petrobridge), a mezzanine lender headquartered in Houston, TX. The properties acquired from Hi-Pro serve as the sole collateral for the credit facility. As defined by the agreement, terms under the credit facility include the following: (1) advances under the credit facility are subject to lender's approval; (2) all revenues from oil and gas properties securing the credit facility will be paid to a lock box controlled by the lender. All disbursements for lease operating costs, revenue distributions and operating expense require approval by the lender before distributions are made; and (3) RMG I must maintain certain financial ratios and production volumes, among other requirem ents. Results of operations for the year ended December 31, 2004 would not be materially affected had the purchase if Hi-Pro occurred on January 1, 2004.
At December 31, 2004, RMG I was not in compliance with five of the financial covenants under the Petrobridge agreement. The ratios and production figures that RMG I is not in compliance with are:
| Terms of Loan | | Actual at 12-31-04 | Total Debt to amortization $ 1,773,600 $ 1,773,600 $ 1,773,600 $ 1,773,600
Acquired in calendar 2003 -- -- -- --
Acquired in calendar 2002 650,000 650,000 -- --
------------ ------------ ------------ ------------
2,423,600 2,423,600 1,773,600 1,773,600
EBITDA | No greater than 2 to 1 | | 5.7 to 1 | | EBITDA to interest and rents | Not subjectless than 3 to amortization:
Acquired in calendar 2003 265,400 -- -- --
Acquired in calendar 2002 508,400 508,400 -- --
Acquired in fiscal 2002 363,900 363,900 363,900 --
Acquired in fiscal 2001 1,154,500 1,154,500 1,154,500 1,154,500
Acquired in fiscal 2000 4,727,200 4,727,200 4,727,200 4,727,200
Less prior year's sales (2,500,000) (1,250,000) -- --
------------ ------------ ------------ ------------
4,519,400 5,504,000 6,245,600 5,881,700
Sale1 | | 1.3 to 1 | | Current Ratio | Not less than 1 to 1 | | .3 to 1 | NPV of gas property interests (3,815,600) (1,250,000) (1,250,000) --
------------ ------------ ------------ ------------
703,800 4,254,000 4,995,600 5,881,700
------------ ------------ ------------ ------------
Total oil and gas properties 3,127,400 6,677,600 6,769,200 7,655,300
Accumulated depreciation, depletion
and amortization (1,923,000) (1,834,100) (1,773,600) (1,773,600)
------------ ------------ ------------ ------------
Net oil and gas properties $ 1,204,400 $ 4,843,500 $ 4,995,600 $ 5,881,700
============ ============ ============ ============
proved developed Producing reserves to debt | Not less than 1 to 1 | | .9 to 1 | | Sales Volumes | 230 mmcf per quarter | | 182.2 mmcf |
A revocable waiver was granted through January 31, 2006 by the lender. As the wavier is conditional, the entire debt is classified by RMG as current. Management of RMG I continues to seek solutions in the production of coalbed methane gas to bring the project into compliance. Due to lower than projected sales volumes, the Hi-Pro field will remain out of compliance unless (1) higher prices are realized, (2) costs are reduced and (3) the debt is paid down. It is probable that RMG I will not be in compliance with these ratios for the next reporting period. Should the lender declare the note in default, the only asset available for recourse is the Hi-Pro property owned by RMG I.
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued)
Oil and Gas Properties and Equipment Included the Following: | | | December 31, | | May 31, | | | | | 2004 | | 2003 | | 2002 | | 2002 | | | Oil and gas properties: | | | | | | | | | | | | | | | Subject to amortization | | | 1,773,600 | | | 1,773,600 | | | 1,773,600 | | | 1,773,600 | | | Acquired in calendar 2004 | | | 3,785,400 | | | -- | | | -- | | | -- | | | Acquired in calendar 2003 | | | -- | | | -- | | | -- | | | -- | | | Acquired in calendar 2002 | | | 650,000 | | | 650,000 | | | 650,000 | | | -- | | | | | | 6,209,000 | | | 2,423,600 | | | 2,423,600 | | | 1,773,600 | | | Not subject to amortization: | | | | | | | | | | | | | | | Acquired in calendar 2004 | | | 4,471,100 | | | -- | | | -- | | | -- | | | Acquired in calendar 2003 | | | 265,400 | | | 265,400 | | | -- | | | -- | | | Acquired in calendar 2002 | | | 508,400 | | | 508,400 | | | 508,400 | | | -- | | | Acquired in fiscal 2002 | | | 363,900 | | | 363,900 | | | 363,900 | | | 363,900 | | | Acquired in fiscal 2001 | | | 1,154,500 | | | 1,154,500 | | | 1,154,500 | | | 1,154,500 | | | Acquired in fiscal 2000 | | | 4,727,200 | | | 4,727,200 | | | 4,727,200 | | | 4,727,200 | | | Less prior year's sales | | | (6,315,600 | ) | | (2,500,000 | ) | | (1,250,000 | ) | | -- | | | | | | 5,174,900 | | | 4,519,400 | | | 5,504,000 | | | 6,245,600 | | | | | | | | | | | | | | | | | | Sale of gas property interests | | | (563,600 | ) | | (3,815,600 | ) | | (1,250,000 | ) | | (1,250,000 | ) | | | | | 4,611,300 | | | 703,800 | | | 4,254,000 | | | 4,995,600 | | | Total oil and gas properties | | | 10,820,300 | | | 3,127,400 | | | 6,677,600 | | | 6,769,200 | | | Accumulated depreciation, depletion | | | | | | | | | | | | | | | and amortization | | | (2,917,500 | ) | | (1,923,000 | ) | | (1,834,100 | ) | | (1,773,600 | ) | | | | | | | | | | | | | | | | | Net oil and gas properties | | $ | 7,902,800 | | $ | 1,204,400 | | $ | 4,843,500 | | $ | 4,995,600 | | | | | | | | | | | | | | | | |
The Company began drilling of its coalbed methane properties during 20012002 and acquired producing properties in January of 2004 and June of 2002.
The following sets forth costs incurred forfrom oil and gas property acquisition and development activities, whether capitalized or expensed:
activities:
| | | December 31, | | May 31, | | | | | 2004 | | 2003 | | 2002 | | 2002 | | | Acquisition of properties/facilities | | $ | 6,613,900 | | $ | 107,100 | | $ | 936,200 | | $ | 192,600 | | | Development | | | 1,642,600 | | | 158,300 | | | 97,200 | | | 87,400 | | | | | $ | 8,256,500 | | $ | 265,400 | | $ | 1,033,400 | | $ | 280,000 | | | | | | | | | | | | | | | | |
December 31, May 31,
-------------------- --------------------
2003 2002 2002 2001
-------- ---------- -------- ----------
Acquisition of properties/facilities $107,100 $ 936,200 $192,600 $ 870,600
Development 158,300 97,200 87,400 283,900
-------- ---------- -------- ----------
$265,400 $1,033,400 $280,000 $1,154,500
======== ========== ======== ==========
| | -86- | |
|
As of February 27, 2004, the Company had approximately 128,200 net acres
for the potential development of coalbed methane ("CBM") natural gas production
in Wyoming and Montana with a cost basis of $1,204,400. These properties were
mostly acquired in 2000 and drilling projects on these properties are in the
early stage of evaluation and thus no reserves are recorded at year end
associated with these properties.
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U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002, MAY 31,and 2002, AND MAY 31, 2001
2002 (Continued)
The results from operations of oil and gas activities for the year ended December 31, 20032004 and the seven months ended December 31, 20022003 are as follows:
Year Ended Seven Months Ended
December 31, 2003 December 31, 2002
------------------- -------------------
Sales to third parties $ 287,400 $ 119,400
Production costs (224,200) (355,200)
Depreciation, depletion and amortization (88,900) (65,200)
------------------- -------------------
Loss from oil and gas production activities $ (25,700) $ (301,000)
=================== ===================
| | | | | | | Seven Months | | | | | | | | | Ended | | | | | Year ended December 31, | | May 31, | | | | | 2004 | | 2003 | | 2002 | | | Sales to third parties | | $ | 2,951,600 | | $ | 287,400 | | $ | 199,400 | | | Production costs | | | (2,322,200 | ) | | (224,200 | ) | | (335,200 | ) | | Depreciation, depletion and amortization | | | (994,500 | ) | | (88,900 | ) | $ | (65,200 | ) | | Loss from oil and gas production activities | | $ | (365,100 | ) | $ | (25,700 | ) | $ | (301,000 | ) | | | | | | | | | | | | |
Depreciation, depletion and amortization was $0.98, $1.09 and $1.14 per equivalent mcf of production for the year ended December 31, 2004, 2003 and the seven months ended December 31, 2002, respectively.
G.DEBT:
LINES OF CREDIT
- -----------------
The As of December 31, 2004 and 2003 the company and its affiliates had current and long term liabilities associated with the comprehensive loss from hedging of coalbed methane gas, prepaid rents, leases, self funding of employee health insurance and accrued holding costs of its uranium properties in southern Utah as follows: Current other liabilities:
| | | Year Ended December 31, | | | | | 2004 | | 2003 | | | Comprehensive loss from hedging | | $ | 436,000 | | $ | -- | | | Prepaid rent | | | 26,500 | | | -- | | | Mineral property lease | | | 69,700 | | | 69,700 | | | | | $ | 532,200 | | $ | 69,700 | | | | | | | | | | |
Long term other liabilities: | | | Year Ended December 31, | | | | | 2004 | | 2003 | | | Employee health insurance self funding | | $ | 297,900 | | $ | 247,500 | | | Holding cost of uranium property | | | 1,654,400 | | | 1,911,100 | | | | | $ | 1,952,300 | | $ | 2,158,600 | | | | | | | | | | |
Lines of Credit
As of December 31, 2004, the Company hashad a $750,000 line of credit fromwith a commercial bank. The line of credit hasbore interest at a variable interest rate (5.0%(6.25% as of December 31, 2003)2004). The weighted average interest rate for the year ended December 31, 20032004 was 5.12%5.34%. As of December 31, 2003, none of2004, there was no outstanding balance due under the line of credit had been borrowed.credit. The line of credit expired on December 31, 2004 and has been renewed for 6 months to June 30, 2005. This line of credit is collateralizedsecured by certain real property and a share of the net proceeds of fees from production fromof oil wells and certain oil wells.
LONG-TERM DEBT
- ---------------
The componentsassets of long-term debt as of December 31, 2003, 2002 and May 31,
2002 are as follows:
USECC.
December 31, May 31,
------------------------ -----------
2003 2002 2002
----------- ----------- -----------
USECC installment notes - collateralized by
equipment; interest at 5.0% to 9.0%,
matures in 2004 - 2009 $1,407,900 $1,839,400 $1,611,600
SGMC installment notes - collateralized by certain
properties, interest at 7.5% to 8.0%
maturity from 2004 - 2007 62,900 531,100 579,500
USE convertible notes - net of discount of
221,000 at December 31, 2003, $620,100
at December 31, 2002 and $620,100 at
May 31, 2002 collateralized by equipment
and real estate, interest at 8.0%; 779,000 741,300 329,900
PLATEAU installment note - collateralized by
equipment, interest at 8.0% -- 26,000 38,000
----------- ----------- -----------
2,249,800 3,137,800 2,559,000
Less current portion (932,200) (317,200) (205,700)
----------- ----------- -----------
$1,317,600 $2,820,600 $2,353,300
=========== =========== ===========
| | -87- | |
|
Principal requirements on long-term debt are $932,200, $112,800; $116,600;
$1,056,500; $22,600 and $9,100 for the years ended December 31, 2004 through
2008, and thereafter, respectively.
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U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002, MAY 31,and 2002, AND MAY 31, 2001
2002 (Continued)
Long-term Debt | The components of long-term debt as of December 31, 2004 and 2003 are as follows: | | | | | | | | | | | | | | | | December 31, | | | | | | | 2004 | | 2003 | | | USECC installment notes - collateralized | | | | | | | by equipment; interest at 5.25% | | | | | | | | | to 9.0%, matures in 2005-2009 | | | | | $ | 1,192,300 | | $ | 1,407,900 | | | SGMC installment notes - collateralized | | | | | | | | by certain properties, interest at | | | | | | | | | | | | 8.0% maturity 2009 | | | | | | 46,500 | | | 62,900 | | | PLATEAU installment note - collateralized | | | | | | | | by equipment, interest at 8.0% | | | | | | -- | | | -- | | | USE convertible note - net of discount | | | | | | | | collateralized by equipment coalbed methane | | | | | | | | | | | | leases and 4,000,000 shares of RMG stock | | | | | | | | | | | | interest at 10%, maturity 2006 | | | | | | 3,000,000 | | | | | | Discount for issuance of USE warrants | | | | | | (315,800 | ) | | | | | Amortization of warrants discount | | | | | | 42,800 | | | | | | | | | | | | 2,727,000 | | | -- | | | USE convertible notes - net of discounts | | | | | | | | by equipment, interest at 8.0%, maturity 2006 | | | | | | | | | 1,500,000 | | | Discount for issuance of USE warrants | | | | | | | | | (969,900 | ) | | Payment of principal | | | | | | | | | (500,000 | ) | | Amortization of warrants discount | | | | | | | | | 748,900 | | | -- | | | | | | | | | 779,000 | | | RMG production related note - collateralized | | | | | | | | by gas properties and production, | | | | | | | | | | | | interest at 11.0% | | | | | | 3,700,000 | | | | | | Additional borrowings | | | | | | 479,700 | | | | | | Discount for issuance of USE warrants | | | | | | (80,400 | ) | | | | | Discount for overriding royalty | | | | | | (314,200 | ) | | | | | Payment of principal | | | | | | (690,900 | ) | | | | | Amortization of warrant and royalty discount | | | | | | 120,600 | | | | | | | | | | | | 3,214,800 | | | -- | | | | | | | | | 7,180,600 | | | 2,249,800 | | | Less current portion | | (3,400,100 | ) | | (932,200 | ) | | | | | | | $ | 3,780,500 | | $ | 1,317,600 | | | | | | | | | | | | | | Principal requirements on long-term debt are $3,400,100, $2,873,100, $875,000, $23,400 and $9,000for the years ended December 31, 2005 through 2009, respectively. | | | | | |
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued) On July 30, 2004, the Company entered into a credit agreement with Geddes and Company ("Geddes"), based in Phoenix, Arizona, to borrow up to $3 million (USE convertible notes above). Proceeds from the credit facility are to be used to acquire and develop gas properties, and for general corporate purposes of USE and the Company.
Collateral for the credit facility include: | (a) | the Company's coalbed methane leases in the Castle Rock property (located in the Montana portion of the Powder River Basin) and; |
(b) 4 million shares of RMG's common stock owned by the Company.
In 2003, Caydal converted $500,000 of debt to 211,109 shares of commonscommon stock (33,333 shares at the original $3.00 conversion price, and 177,776 shares at the restructured price of $2.25). During the calendar year ended December 31, 2004, Caydal converted the balance of its debt of $500,000 into 222,220 shares of the Company's common stock. Tsunami parties (Tsunami") also converted its $500,000 in convertible debt into 222,220 shares of the Company's common stock. The outstanding principal balance on the
debts owedCompany paid $25,600 and $44,700 in interest to Caydal and Tsunami Partners was $500,000 and $500,000, convertible
at December 31, 2003 into 222,220 and 222,220respectively by issuing 11,447 shares respectively. Tsunami
Partners did not convert any debtof common stock to shares in 2003. Caydal and Tsunami Partners
are accredited investors.
20,946 shares of common stock to Tsunami.
H.INCOME TAXES:
The components of deferred taxes as of December 31, 2003, 20022004 and May 31,
20022003 are as follows:
December 31, May 31,
--------------------------- ------------
2003 2002 2002
------------- ------------ ------------
Deferred tax assets:
Deferred compensation $ 445,400 $ 345,500 $ 273,400
Net operating loss carryforwards 11,596,000 9,560,000 9,028,600
Non-deductible reserves and other 437,200 622,800 622,800
Tax basis in excess of book basis 106,700 250,000 250,000
------------- ------------ ------------
Total deferred tax assets 12,585,300 10,778,300 10,174,800
------------- ------------ ------------
Deferred tax liabilities:
Book basis in excess of tax basis 486,200 721,300 767,700
Development and exploration costs 107,600 107,600 107,600
------------- ------------ ------------
Total deferred tax liabilities 593,800 828,900 875,300
------------- ------------ ------------
11,991,500 9,949,400 9,299,500
Valuation allowance (11,991,500) (9,949,400) (9,299,500)
------------- ------------ ------------
Net deferred tax liability $ -- $ -- $ --
============= ============ ============
| | | December 31, | | | | | 2004 | | 2003 | | | Deferred tax assets: | | | | | | | Deferred compensation | | | 1,565,700 | | $ | 445,400 | | | Net operating loss carryforwards | | | 13,978,900 | | | 11,596,000 | | | Non-deductible reserves and other | | | 523,000 | | | 437,200 | | | Tax basis in excess of book basis | | | 994,700 | | | 106,700 | | | Total deferred tax assets | | | 17,062,300 | | | 12,585,300 | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Book basis in excess of tax basis | | | (1,397,900 | ) | | (486,200 | ) | | Development and exploration costs | | | (109,400 | ) | | (107,600 | ) | | Total deferred tax liabilities | | | (1,507,300 | ) | | (593,800 | ) | | | | | 15,555,000 | | | 11,991,500 | | | Valuation allowance | | | (15,555,000 | ) | | (11,991,500 | ) | | Net deferred tax liability | | $ | -- | | $ | -- | | | | | | | | | | |
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. The ultimate realization of this deferred tax asset depends on the Company's ability to generate sufficient taxable income in the future. Management believes it is more likely than not that the net deferred tax asset will not be realized by future operating results. Deferred tax component U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued) The valuation allowance increased $3,563,500 for the year ended December 31, 20022004 and May 31, 2002 have been restated (Note A).
The valuation allowance increased $2,042,100 for the year ended December 31, 2003, increased $649,900$649,000 for the seven months ended December 31, 2002 and decreased $2,740,300 and $2,641,300 for the yearsyear ended May 31, 2002 and 2001,
respectively.
2002.
The income tax provision (benefit) is different from the amounts computed by applying the statutory federal income tax rate to income before taxes. The reasons for these differences are as follows:
December 31, Year Ended May 31,
-------------------------- --------------------------
2003 2002 2002 2001
------------ ------------ ------------ ------------
Expected federal income tax $(2,405,800) $(1,305,600) $(2,131,000) $ 602,200
Net operating losses not previously
benefited and other 363,700 655,700 4,871,300 2,039,100
Valuation allowance 2,042,100 649,900 (2,740,300) (2,641,300)
------------ ------------ ------------ ------------
Income tax provision $ -- $ -- $ -- $ --
============ ============ ============ ============
| | | | | | | Seven | | | | | | | | | | | months ended | | Year ended | | | | | Year ended December 31, | | December 31, | | May 31, | | | | | 2004 | | 2003 | | 2002 | | 2002 | | | Expected federal income tax | | | (2,133,800 | ) | | (2,405,800 | ) | | (1,305,600 | ) | | (2,131,000 | ) | | Net operating losses not previously | | | | | | | | | | | | | | | benefitted and other | | | (1,429,700 | ) | | 363,700 | | | 655,700 | | | 4,871,300 | | | Valuation allowance | | | 3,563,500 | | | 2,042,100 | | | 649,900 | | | (2,740,300 | ) | | Income tax provision | | $ | -- | | $ | -- | | $ | -- | | $ | -- | | | | | | | | | | | | | | | | |
There were no taxes currently payable as of December 31, 2003,2004 and December 31, 2002, May 31, 2002, or May 31,20012003 related to continuing operations.
-80-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
At December 31, 2003,2004, the Company and its subsidiaries had available, for federal income tax purposes, net operating loss carryforwards of approximately $33,300,000$12,979,300 which will expire from 2006 to 2023. The Internal Revenue Code contains provisions which limit the NOL carryforwards available which can be used in a given year when significant changes in Company ownership interests occur. In addition, the NOL amounts are subject to examination by the tax authorities.
The Internal Revenue Service has audited the Company's and subsidiaries tax returns through the year ended May 31, 2000. The Company's income tax liabilities are settled through fiscal 2000.
I.SEGMENTS AND MAJOR CUSTOMERS:
The Company's primary business activity isduring the year ended December 31, 2004 has been coalbed methane gas property acquisition and exploration and production (and holding shut down mining properties). The Company has no producing mines. The other reportable industry segment is commercial activities through motel, real estate and airport operations. The Company discontinued its drilling/construction segment in the third quarter of fiscal 2002. The following is information related to these industry segments:
Year Ended December 31, 2003
------------------------------------------------
Coalbed
Methane Motel/
(and holding Real Estate/
costs for inactive Airport
mining properties) Operations Consolidated
------------------- ----------- --------------
Revenues $ 287,400 $ 334,300 $ 621,700
================== ===========
Other revenues 215,600
-------------
Total revenues $ 837,300
=============
Operating (loss) income $ (1,487,400) $ 31,400 $ (1,456,000)
================== ===========
Other revenue 215,600
General corporate and other expenses (5,997,500)
Other income and expenses (73,000)
Minority interest in loss of affiliates 235,100
-------------
Loss before income taxes $ (7,075,800)
=============
Identifiable net assets at
December 31, 2003 $ 9,365,000 $ 3,030,100 $ 12,395,100
================== ===========
Investment in non-affiliated company 957,600
Corporate assets 10,577,100
-------------
Total assets at December 31, 2003 $ 23,929,800
=============
Capital expenditures $ 176,400 $ --
=================== ===========
Depreciation, depletion and
amortization $ 217,600 $ 102,400
=================== ===========
| | -90- | |
|
-81-
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002, MAY 31,and 2002, AND MAY 31, 2001
2002 (Continued) | | | Year ended December 31, 2004 | | | | | Coalbed | | | | | | | | | Methane | | | | | | | | | (and holding | | | | | | | | | costs for inactive | | Real Estate | | | | | | | mining properties) | | Operations | | Consolidated | | | | | | | | | | | | Revenues | | $ | 3,205,700 | | $ | 256,100 | | $ | 3,461,800 | | | Management fees | | | | | | | | | 1,179,900 | | | Total Revenues | | | | | | | | $ | 4,641,700 | | | | | | | | | | | | | | | Operating loss | | $ | (2,429,800 | ) | $ | (39,400 | ) | $ | (2,469,200 | ) | | Management fees | | | | | | | | | 1,179,900 | | | General corporate and other expenses | | | | | | | | | (5,370,100 | ) | | Other income and expenses | | | | | | | | | 13,000 | | | Minority interest in loss of subsidiaries | | | | | | | | | 397,700 | | | Loss before income taxes | | | | | | | | $ | (6,248,700 | ) | | | | | | | | | | | | | | Identifiable assets at December 31, 2004 | | $ | 16,285,300 | | $ | 2,177,600 | | $ | 18,462,900 | | | Investments in affiliates | | | | | | | | | 957,700 | | | Corporate assets | | | | | | | | | 11,283,100 | | | Total assets at December 31, 2004 | | | | | | | | $ | 30,703,700 | | | | | | | | | | | | | | | Capital expenditures | | $ | 8,167,900 | | $ | 3,600 | | | | | | Depreciation, depletion and | | | | | | | | | | | | amortization | | $ | 1,183,500 | | $ | 91,200 | | | | | | | | | | | | | | | | | | Identifiable assets | | | | | | | | | | | | Net fixed assets | | $ | 9,280,900 | | $ | 2,177,600 | | | | | | Other investments | | | 6,852,300 | | | -- | | | | | | Inventory | | | 152,100 | | | -- | | | | | | | | $ | 16,285,300 | | $ | 2,177,600 | | | | | | | | | | | | | | | | |
Seven Months Ended December 31, 2002
------------------------------------------------
Coalbed
Methane Motel/
(and holding Real Estate/
costs for inactive Airport
mining properties) Operations Consolidated
------------------- ----------- --------------
Revenues $ 119,400 $ 749,100 $ 868,500
================== ===========
Other revenues 159,100
-------------
Total revenues $ 1,027,600
=============
Operating (loss) income $ (973,000) $ 221,900 $ (751,100)
=================== ===========
Other revenue 159,100
General corporate and other expenses (2,915,800)
Other income and expenses (387,100)
Discontinued operations, net of tax --
Equity in loss of affiliates and
minority interest in subsidiaries 54,800
-------------
Loss before income taxes $ (3,840,100)
=============
Identifiable net assets at
December 31, 2002 $ 16,022,800 $ 4,564,700 $ 20,587,500
=================== ===========
Corporate assets 7,603,100
-------------
Total assets at December 31, 2002 $ 28,190,600
=============
Capital expenditures $ 1,033,400 $ 37,800
=================== ===========
Depreciation, depletion and
amortization $ 94,800 $ 78,200
=================== ===========
| | -91- | |
|
-82-
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002, MAY 31,and 2002, AND MAY 31, 2001
2002 (Continued)
| | | Year Ended December 31, 2003 | | | | | | | Coalbed | | | | | | | | | Methane | | Motel/ | | | | | | | (and holding | | Real Estate/ | | | | | | | costs for inactive | | Airport | | | | | | | mining properties) | | Operations | | Consolidated | | | | | | | | | | | | Revenues | | $ | 287,400 | | $ | 334,300 | | $ | 621,700 | | | Management fees | | | | | | | | | 215,600 | | | Total revenues | | | | | | | | $ | 837,300 | | | | | | | | | | | | | | | Operating (loss) income | | $ | (1,487,400 | ) | $ | 31,400 | | $ | (1,456,000 | ) | | Management fees | | | | | | | | | 215,600 | | | General corporate and other expenses | | | | | | | | | (5,997,500 | ) | | Other income and expenses | | | | | | | | | (73,000 | ) | | Minority interest in loss of affiliates | | | | | | | | | 235,100 | | | Loss before income taxes | | | | | | | | $ | (7,075,800 | ) | | | | | | | | | | | | | | Identifiable net assets at | | | | | | | | | | | | December 31, 2003 | | $ | 9,365,000 | | $ | 3,030,100 | | $ | 12,395,100 | | | Investment in non-affiliated company | | | | | | | | | 957,600 | | | Corporate assets | | | | | | | | | 10,577,100 | | | Total assets at December 31, 2003 | | | | | | | | $ | 23,929,800 | | | | | | | | | | | | | | | Capital expenditures | | $ | 176,400 | | $ | -- | | | | | | Depreciation, depletion and | | | | | | | | | | | | amortization | | $ | 217,600 | | $ | 102,400 | | | | |
Year Ended May 31, 2002
-------------------------------------------------
Coalbed
Methane Motel/
(and holding Real Estate/
costs for inactive Airport
mining properties) Operations Consolidated
------------------- ------------ --------------
Revenues $ -- $ 1,795,900 $ 1,795,900
=================== ============
Other revenues 208,200
-------------
Total revenues $ 2,004,100
=============
Operating loss $ (1,707,800) $ (133,000) $ (1,840,800)
=================== ============
Other revenue 208,200
General corporate and other expenses (5,821,600)
Other income and expenses 1,319,500
Discontinued operations, net of tax (85,900)
Equity in loss of affiliates and
minority interest in subsidiaries 39,500
-------------
Loss before income taxes $ (6,181,100)
=============
Identifiable net assets at
May 31, 2002 $ 18,138,500 $ 4,351,600 $ 22,490,100
=================== ============
Investments in affiliates --
Corporate assets 8,047,800
-------------
Total assets at May 31, 2002 $ 30,537,900
=============
Capital expenditures $ 151,300 $ 101,500
=================== ============
Depreciation, depletion and
amortization $ 167,600 $ 254,300
=================== ============
| | -92- | |
|
-83-
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002, MAY 31,and 2002, AND MAY 31, 2001
2002 (Continued) | | | Seven Months Ended December 31, 2002 | | | | | | | Coalbed | | | | | | | | | Methane | | Motel/ | | | | | | | (and holding | | Real Estate/ | | | | | | | costs for inactive | | Airport | | | | | | | mining properties) | | Operations | | Consolidated | | | | | | | | | | | | Revenues | | $ | 119,400 | | $ | 749,100 | | $ | 868,500 | | | Management fees | | | | | | | | | 159,100 | | | Total revenues | | | | | | | | $ | 1,027,600 | | | | | | | | | | | | | | | Operating (loss) Income | | $ | (973,000 | ) | $ | 221,900 | | $ | (751,100 | ) | | Management fees | | | | | | | | | 159,100 | | | General corporate and other expenses | | | | | | | | | (2,915,800 | ) | | Other income and expenses | | | | | | | | | (387,100 | ) | | Discontinued operations, net of tax | | | | | | | | | -- | | | Equity in loss of affiliates and | | | | | | | | | | | | minority interest in subsidiaries | | | | | | | | | 54,800 | | | Loss before income taxes | | | | | | | | $ | (3,840,100 | ) | | | | | | | | | | | | | | Identifiable net assets at | | | | | | | | | | | | December 31, 2002 | | $ | 16,022,800 | | $ | 4,564,700 | | $ | 20,587,500 | | | Corporate assets | | | | | | | | | 7,603,100 | | | Total assets at December 31, 2002 | | | | | | | | $ | 28,190,600 | | | | | | | | | | | | | | | Capital expenditures | | $ | 1,033,400 | | $ | 37,800 | | | | | | Depreciation, depletion and | | | | | | | | | | | | amortization | | $ | 94,800 | | $ | 78,200 | | | | |
Year Ended May 31, 2001
--------------------------------------------------------------
Coalbed
Methane Motel Contract
(and holding Real Estate/ Drilling/
costs for inactive Airport Construction
mining properties) Operations Operations Consolidated
------------------- ------------ ----------- --------------
Revenues $ 442,800 $ 2,222,400 $ 2,238,600 $ 4,903,800
=================== ============ ===========
Other revenues 597,800
-------------
Total revenues $ 5,501,600
=============
Operating (loss) profit $ (2,866,400) $(1,013,800) $ 488,100 $ (3,392,100)
=================== ============ ===========
Other revenue, income and expenses 9,328,600
General corporate and other expenses (4,235,400)
Equity in loss of affiliates and
minority interest in subsidiaries 220,100
-------------
Income before income taxes $ 1,921,200
=============
Identifiable net assets at May 31, 2001 $ 18,424,900 $ 5,616,400 $ 1,050,500 $ 25,091,800
=================== ============ ===========
Investments in affiliates 16,200
Corporate assets 5,357,200
--------------
Total assets at May 31, 2001 $ 30,465,200
=============
Capital expenditures $ 1,280,200 $ 1,326,800 $ 256,000
=================== ============ ===========
Depreciation, depletion and
amortization $ 129,700 $ 271,100 $ 324,700
=================== ============ ===========
| | -93- | |
|
-84-
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002, MAY 31,and 2002, AND MAY 31, 2001
2002 (Continued)
| | | Year Ended December 31, 2002 | | | | | | | Coalbed | | | | | | | | | Methane | | Motel/ | | | | | | | (and holding | | Real Estate/ | | | | | | | costs for inactive | | Airport | | | | | | | mining properties) | | Operations | | Consolidated | | | | | | | | | | | | Revenues | | $ | -- | | $ | 1,795,900 | | $ | 1,795,900 | | | Management fees | | | | | | | | | 208,200 | | | Total revenues | | | | | | | | $ | 2,004,100 | | | | | | | | | | | | | | | Operating loss | | $ | (1,707,000 | ) | $ | (133,000 | ) | $ | (1,840,800 | ) | | Management fees | | | | | | | | | 208,200 | | | General corporate and other expenses | | | | | | | | | (5,821,600 | ) | | Other income and expenses | | | | | | | | | 1,319,500 | | | Discontinued operations, net of tax | | | | | | | | | (85,900 | ) | | Equity in loss of affiliates and | | | | | | | | | | | | minority interest in subsidiaries | | | | | | | | | 39,500 | | | Loss before income taxes | | | | | | | | $ | (6,181,100 | ) | | | | | | | | | | | | | | Identifiable net assets at | | | | | | | | | | | | May 31, 2002 | | $ | 18,138,500 | | $ | 4,351,600 | | $ | 22,490,100 | | | Corporate assets | | | | | | | | | 8,047,800 | | | Total assets at May 31, 2002 | | | | | | | | $ | 30,537,900 | | | | | | | | | | | | | | | Capital expenditures | | $ | 151,300 | | $ | 101,500 | | | | | | Depreciation, depletion and | | | | | | | | | | | | amortization | | $ | 167,600 | | $ | 254,300 | | | | |
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued) J.SHAREHOLDERS' EQUITY:
STOCK OPTION PLANS
Stock Option Plans
The Board of Directors adopted the U.S. Energy Corp. 1989 Stock Option Plan for the benefit of USE's key employees. The Option Plan, as amended and renamed the 1998 Incentive Stock Option Plan ("1998 ISOP"), reserved 3,250,000 shares of the Company's $.01 par value common stock for issuance under the 1998 ISOP. Options which expired without exercise were available for reissue.
During the year ended December 31, 2004 and 2003, the seven months ended December 31, 2002 and the yearsyear ended May 31, 2002 and 2001 the following activity occurred under the 1998 ISOP:
Year Ended Seven Months
December 31, Ended December 31, Year Ended May 31,
------------------ ------------------- --------------------
2003 2002 2002 2001
------------------ ------------------- -------- ----------
Grants
- ------
Qualified -- -- -- 542,726
Non-Qualified -- -- -- 888,774
------------------ ------------------ --------- ----------
-- -- -- 1,431,500
================== ================== ========= ==========
Price of Grants
- ---------------
High -- -- -- $ 2.40
Low -- -- -- $ 2.40
Exercises
- ---------
Qualified 77,832 71,166 243,250 56,985
Non-Qualified 71,453 1 55,372 31,718
------------------ ------------------ --------- ----------
149,285 71,167 298,622 88,703
================== =================== ======== ==========
Total Cash Received $ 364,200 $ 170,800 $742,000 $ 216,400
================== =================== ======== ==========
Forfeitures/Cancellations
- -------------------------
Qualified 34,782 -- 78,244 75,000
Non-Qualified 64,233 -- 346,018 42,000
------------------ ------------------ -------- ----------
99,015 -- 424,262 117,000
================== =================== ======== ==========
| | | | | | | | | Seven months | | | | | | | | | | | | | ended | | Year ended | | | | | | | Year ended December 31, | | December 31, | | May 31, | | | | | | | 2004 | | 2003 | | 2002 | | 2002 | | | Grants | | | | | | | | | | | Qualified | | | | -- | | -- | | -- | | -- | | | Non-Qualified | | | | -- | | -- | | -- | | -- | | | | | | | -- | | -- | | -- | | -- | | | | | | | | | | | | | | | | Price of Grants | | | | | | | | | | | High | | | | -- | | -- | | -- | | -- | | | Low | | | | -- | | -- | | -- | | -- | | | | | | | | | | | | | | | | Exercised | | | | | | | | | | | Qualified | | | | -- | | 77,832 | | 71,166 | | 243,250 | | | Non-Qualified | | | | -- | | 71,453 | | 1 | | 55,372 | | | | | | | -- | | 149,285 | | 71,167 | | 298,622 | | | Total Cash Received | $ | -- | | $ | 364,200 | | $ | 170,800 | | $ | 742,000 | | | | | | | | | | | | | | | | | | | | | Forfeitures/Cancellations | | | | | | | | | | | | | | Qualified | | | | | | -- | | | 34,782 | | | -- | | | 78,244 | | | Non-Qualified | | | | | | -- | | | 64,233 | | | -- | | | 346,018 | | | -- | | | | | | | | | 99,015 | | | -- | | | 424,262 | | | | | | | | | | | | | | | | | | | |
In December 2001, the Board of Directors adopted (and the shareholders approved) the U.S. Energy Corp. 2001 Incentive Stock Option Plan (the "2001 ISOP") for the benefit of USE's key employees. The 2001 ISOP (amended in 2004 and approved by the shareholders) reserves 3,000,000for issuance shares of the Company's $.01 par valueUSE common stock for issuance forequal to 20% of the USE shares of common stock issued and outstanding at any time. The 2001 ISOP has a periodterm of 10 years.
-85-
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002, MAY 31,and 2002, AND MAY 31, 2001
2002 (Continued)
The following table represents During the activity inyears ended December 31, 2004 and 2003, the 2001 ISOP for the
periods covered by the Annual Report forseven months ended December 31, 2002 and the year ended DecemberMay 31, 2003:
Year Ended Seven Months Year Ended
-----------
December 31, Ended December 31, May 31,
------------------- --------
2003 2002 2002
------------ ------------------- --------
Grants
- -------------------
Qualified -- 459,996 10,000
Non-Qualified -- 473,004 950,000
------------- ------------------- --------
-- 933,000 960,000
============= =================== ========
Price of Grant
- -------------------
High -- $2.25 $3.90
Low -- $2.25 $3.82
Exercises
- -------------------
Qualified 73,780 -- --
Non-Qualified 52,556 -- --
------------- ------------------- --------
126,336 -- --
============= =================== ========
Total Cash Received $ 284,300 $ -- $ --
============= =================== ========
Forfeited
- -------------------
Qualified 65,108 -- --
Non-Qualified 252,556 50,000 --
------------- ------------------- --------
317,664 50,000 --
============= =================== ========
2002 the following activity occurred under the 2001 ISOP:
| | | | | | | Seven months | | | | | | | | | | | ended | | Year ended | | | | | Year ended December 31, | | December 31, | | May 31, | | | | | 2004 | | 2003 | | 2002 | | 2002 | | | Grants | | | | | | | | | | | Qualified | | | 1,272,000 | | | -- | | | 459,996 | | | 10,000 | | | Non-Qualified | | | -- | | | -- | | | 473,004 | | | 950,000 | | | | | | 1,272,000 | | | -- | | | 933,000 | | | 960,000 | | | | | | | | | | | | | | | | | | Price ofGrants | | | | | | | | | | | | | | | High | | $ | 2.46 | | | -- | | $ | 2.25 | | $ | 3.90 | | | Low | | $ | 2.46 | | | -- | | $ | 2.25 | | $ | 3.82 | | | | | | | | | | | | | | | | | | Exercised | | | | | | | | | | | | | | | Qualified | | | -- | | | 73,780 | | | -- | | | -- | | | Non-Qualified | | | -- | | | 52,556 | | | -- | | | -- | | | | | | -- | | | 126,336 | | | -- | | | -- | | | Total Cash Received | | $ | -- | | $ | 284,300 | | $ | -- | | $ | -- | | | | | | | | | | | | | | | | | | Forfeitures/Cancellations | | | | | | | | | | | | | | | Qualified | | | 12,000 | | | 65,108 | | | -- | | | -- | | | Non-Qualified | | | -- | | | 252,556 | | | 50,000 | | | -- | | | | | | 12,000 | | | 317,664 | | | 50,000 | | | -- | | | | | | | | | | | | | | | | |
The 2001 ISOP replaces the 1998 ISOP, however, options granted under the 1998 ISOP remain exercisable until their expiration date under the terms of that Plan.
-86-
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002, MAY 31,and 2002, AND MAY 31, 2001
2002 (Continued) The following table represents the activity in employee options for the periods covered by the Annual Report for the year ended December 31, 20032004 that are not in employee stock option plans: | | | | | | | Seven months | | | | | | | | | | | ended | | Year ended | | | | | Year ended December 31, | | December 31, | | May 31, | | | | | 2004 | | 2003 | | 2002 | | 2002 | | | Grants | | | | | | | | | | | Qualified | | | -- | | | -- | | | -- | | | 10,000 | | | Non-Qualified | | | -- | | | 10,000 | | | -- | | | -- | | | | | | -- | | | 10,000 | | | -- | | | 10,000 | | | | | | | | | | | | | | | | | | Price ofGrants | | | | | | | | | | | | | | | High | | | -- | | $ | 2.90 | | $ | -- | | $ | 3.82 | | | Low | | | -- | | $ | 2.90 | | $ | -- | | $ | 3.82 | | | | | | | | | | | | | | | | | | Exercised | | | | | | | | | | | | | | | Qualified | | | -- | | | -- | | | -- | | | -- | | | Non-Qualified | | | -- | | | -- | | | -- | | | -- | | | | | | -- | | | -- | | | -- | | | -- | | | Total Cash Received | | $ | -- | | $ | - | | $ | -- | | $ | -- | | | | | | | | | | | | | | | | | | Forfeitures/Cancellations | | | | | | | | | | | | | | | Qualified | | | -- | | | -- | | | -- | | | -- | | | Non-Qualified | | | 10,000 | | | 10,000 | | | 100,000 | | | 200,000 | | | | | | 10,000 | | | 10,000 | | | 100,000 | | | 200,000 | | | | | | | | | | | | | | | | |
Year Ended Seven Months Year Ended
December 31, Ended December 31, May 31,
2003 2002 2002
------------- ------------------- --------
Grants
- ------
Qualified -- -- 10,000
Non-Qualified 10,000 -- --
------------- ------------------- --------
10,000 -- 10,000
============= =================== ========
Price of Grant
- --------------
High $ 2.90 -- $ 3.82
Low $ 2.90 -- $ 3.82
Exercises
- ---------
Qualified -- -- --
Non-Qualified -- -- --
------------- ------------------- --------
-- -- --
============= =================== ========
Total Cash Received $ -- $ -- $ --
============= =================== ========
Forfeited
- ---------
Qualified -- -- --
Non-Qualified 10,000 100,000 200,000
------------- ------------------- --------
10,000 100,000 200,000
============= =================== ========
| | -97- | |
|
-87-
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002, MAY 31,and 2002, AND MAY 31, 2001
2002 (Continued) A summary of the Employee Stock Option Plans activity in all plans for the year ended December 31, 2004, 2003; the seven months ended December 31, 2002 and the yearsyear ended May 31, 2002 and 2001 is as follows:
Year Ended Seven Months
December 31, Ended December 31, Year Ended May 31,
--------------------------------------
2003 2002 2002 2001
---------------------- --------------------- -------------------- -----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Options Price Options Price Options Price Options Price
----------- --------- ----------- -------- ---------- -------- ---------- -----
Outstanding at beginning
of the period 3,565,946 $ 2.76 2,854,113 $ 2.92 2,606,997 $ 2.69 1,581,200 $ 3.40
Granted 10,000 2.90 933,000 2.25 970,000 3.90 1,431,500 2.40
Forfeited (426,679) 3.17 (150,000) 2.63 (424,262) 3.30 (317,000) 6.03
Expired -- -- -- -- -- -- -- --
Exercised (275,621) 2.35 (71,167) 2.40 (298,622) 2.84 ( 88,703) 2.44
----------- ----------- ---------- ----------
Outstanding at period end 2,873,646 2.74 3,565,946 2.76 2,854,113 2.92 2,606,997 2.56
=========== =========== ========== ==========
Exercisable at period end 2,873,646 2.74 2,612,946 2.94 1,984,113 2.49 1,478,463 2.69
=========== =========== ========== ==========
Weighted average fair
value of options
granted during the period $ 0.68 $ 1.15 $ 1.99 $ 1.36
| | | | | | | | | | | Seven months ended | | | | | | | | | | | Year ended December 31, | | December 31, | | Year ended May 31, | | | | | 2004 | | 2003 | | 2002 | | | | | | 2002 | | | | | | | | | | | Weighted | | | | Weighted | | | | Weighted | | | | Weighted | | | | | | | Average | | | | Average | | | | Average | | | | Average | | | | | | | Exercise | | | | Exercise | | | | Exercise | | | | Exercise | | | | | Options | | Price | | Options | | Price | | Options | | Price | | | | Options | | Price | | | | | Outstanding at beginning | | | | | | | | | | | | | | | | | | | | | | | of the period | | | 2,873,646 | | $ | 2.74 | | | 3,565,946 | | $ | 2.76 | | | 2,854,113 | | | | | $ | 2.92 | | | 2,606,997 | | | | | $ | 2.69 | | | Granted | | | 1,272,000 | | | 2.46 | | | 10,000 | | | 2.90 | | | 933,000 | | | | | | 2.25 | | | 970,000 | | | | | | 3.90 | | | Forfeited | | | (22,000 | ) | | 2.66 | | | (426,679 | ) | | 3.17 | | | (150,000 | ) | | | | | 2.63 | | | (424,262 | ) | | | | | 3.30 | | | Expired | | | -- | | | -- | | | -- | | | -- | | | -- | | | | | | -- | | | -- | | | | | | -- | | | Exercised | | | -- | | | -- | | | (275,621 | ) | | 2.35 | | | (71,167 | ) | | | | | 2.40 | | | (298,622 | ) | | | | | 2.84 | | | Outstanding at period end | | | 4,123,646 | | | -- | | | 2,873,646 | | | 2.74 | | | 3,565,946 | | | | | | 2.76 | | | 2,854,113 | | | | | | 2.92 | | | Exercisable at period end | | | 2,863,646 | | | -- | | | 2,873,646 | | | 2.74 | | | 2,612,946 | | | | | | 2.94 | | | 1,984,113 | | | | | | 2.49 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average fair | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | value of options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | granted during | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | the period | | | | | $ | 1.66 | | | | | $ | 0.68 | | | | | | | | $ | 1.15 | | | | | | | | $ | 1.99 | |
The following table summarized information about employee stock options outstanding and exercisable at December 31, 2003:
Weighted
Weighted Number of Average Number
Average Options Remaining of Options
Exercise Outstanding at Contractual Exercisable at
Price December 31, 2003 Life in years December 31, 2003
-------- ------------------- --------------- ------------------
$2.74 2,873,646 7.02 2,873,646
EMPLOYEE STOCK OWNERSHIP PLAN
2004:
| | | | | Weighted | | | | Weighted | | Number of | | average | | Number of | | Average | | options | | remaining | | options | | Exercise | | outstanding at | | contractual | | exercisable at | | Price | | December 31, 2004 | | Life in years | | December 31, 2004 | | | | | | | | | | $ 2.65 | | 4,123,646 | | 7.1 | | 2,863,646 |
Employee Stock Ownership Plan
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 employees. During the year ended December 31, 20032004 the Board of Directors of USE contributed 76,29470,439 shares to the ESOP at the price of $3.10$2.96 for a total expense of $236,400.$208,500. This compares to contributions to the ESOP during the year ended December 31, 2003, the seven months ended December 31, 2002 and fiscal yearsyear ended May 31, 2002 of 76,294, 43,867 and 2001 of 43,867, 70,075
and 53,837 shares to the ESOP at prices of $3.10, $3.08 $3.29 and $5.35$3.29 per share, respectively. The Company has expensed $208,500, $236,400, $135,100 $236,900 and $288,000$236,900 during the yearyears ended December 31, 2003;2004, 2003, the seven months ended December 31, 2002 and the fiscal yearsyear ended May 31, 2002, and 2001, respectively related U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued) to these contributions. As of December 31, 2003,2004, all shares of the USE stock that have been contributed to the ESOP have been allocated. The estimated fair value of shares that are not vested is approximately $84,800.$85,500. USE has loaned the ESOP $1,014,300 to purchase 125,000 shares from the Company and 38,550 shares on the open market. During the year ended May 31, 1996, 10,089 of these shares were used to fund the Company's annual funding commitment and reduce the loan -88-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
to the Company by $87,300. These loans, which are secured by pledges of the stock purchased, bear interest at the rate of 10% per annum. The loans are reflected as unallocated ESOP contribution in the equity section of the accompanying Consolidated Balance Sheets.
EXECUTIVE OFFICER COMPENSATION
Executive Officer Compensation
In May 1996, the Board of Directors of USE approved an annual incentive compensation arrangement ("1996 Stock Award Program") for its CEO and four other officers of the Company payable in shares of the Company's common stock. The 1996 Stock Award Program was subsequently modified to reflect the intent of the directors which was to provide incentive to the officers of the Company to remain with USE. The shares were issued annually pursuant to the recommendation of the Compensation Committee on or before January 15 of each year, beginning January 15, 1997, as long as each officer is employed by the Company. The officers received up to an aggregate total of 67,000 shares per year for the years 1997 through 2002. The shares under the plan are forfeitable until retirement, death or disability of the officer. TheTh e shares are held in trust by the Company's treasurer and are voted by the Company's non-employee directors. As of December 31, 2003, 392,536 shares had been issued to the five officers of the Company under the 1996 Stock Award Plan and 62,536 shares had been released to the estate of one of the officers. The 1996 Stock award program was closed out in the year ended December 31, 2003.
In December 2001, the Board of Directors adopted (and the shareholders approved) the 2001 Stock Award Plan to compensate five of its executive officers and the president of RMG. Under the Plan, an aggregate of 100,00010,000 shares may be issued to each year from 2002.officer each year. 100,000 shares were issued under the Plan during the year ended December 31, 2003. NoAs compensation for the year ended December 31, 2003 and the seven months ended December 31, 2002. During the year ended December 31, 2004 an additional 50,000 shares were issued under this Plan duringto the seven month ended Decemberofficers.
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued) Options and the fiscal year ended May 31, 2002.
OPTIONS AND WARRANTS TO OTHERS
Warrants to Others
As of December 31, 2003,2004, there are 906,7241,505,174 options and warrants outstanding to purchase shares of the Company's common stock. The Company values these warrants using the black-scholesBlack-Scholes option pricing model and expenses that value over the life of the service period.warrants. Activity for the periods ended December 31, 20032004 for warrants is represented in the following table:
-89-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER| | | | | | | | | | | Seven months ended | | | | | | | | | Year ended December 31, | | December 31, | | Year ended May 31, | | | | | 2004 | | 2003 | | 2002 | | | | 2002 | | | | | | | | | Weighted | | | | Weighted | | | | Weighted | | | | Weighted | | | | | | | Average | | | | Average | | | | Average | | | | Average | | | | | | | Exercise | | | | Exercise | | | | Exercise | | | | Exercise | | | | | Warrants | | Price | | Warrants | | Price | | Warrants | | Price | | Warrants | | Price | | | Outstanding at beginning | | | | | | | | | | | | | | | | | | | of the period | | | 907,209 | | $ | 3.51 | | | 990,383 | | $ | 3.37 | | | 860,152 | | $ | 3.43 | | | 314,158 | | $ | 3.05 | | | Granted | | | 868,465 | | | 2.87 | | | 224,875 | | | 4.32 | | | 145,147 | | | 2.95 | | | 572,364 | | | 3.62 | | | Forfeited | | | (145,500 | ) | | 2.63 | | | (176,453 | ) | | 3.67 | | | (14,916 | ) | | -- | | | (25,165 | ) | | 2.88 | | | Expired | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | Exercised | | | (125,000 | ) | | 2.01 | | | (131,596 | ) | | 3.55 | | | -- | | | -- | | | (1,205 | ) | | 3.75 | | | Outstanding at period end | | | 1,505,174 | | | 3.35 | | | 907,209 | | | 3.51 | | | 990,383 | | | 3.36 | | | 860,152 | | | 3.43 | | | Exercisable at period end | | | 1,044,152 | | | 3.43 | | | 831,724 | | | 3.41 | | | 979,908 | | | 3.37 | | | 860,152 | | | 3.43 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average fair | | | | | | | | | | | | | | | | | | | | | | | | | | | value of options | | | | | | | | | | | | | | | | | | | | | | | | | | | granted during | | | | | | | | | | | | | | | | | | | | | | | | | | | the period | | | | | $ | 1.37 | | | | | $ | 0.68 | | | | | $ | 1.15 | | | | | $ | 1.99 | |
The following table summarized information about employee stock options outstanding and exercisable at December 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
Year Ended Seven Months
December 31, Ended December 31 Year Ended May 31,
-----------------------------------
2003 2002 2002 2001
----------------- -------------------- ----------------- ----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Warrants Price Warrants Price Warrants Price Warrants Price
--------- ------ --------- --------- --------- ------ -------- ------
Outstanding at beginning
of the period 989,908 $3.367 859,677 $ 3.427 313,683 $3.048 253,683 $2.960
Granted 224,875 $4.323 145,147 $ 2.950 572,364 $3.620 60,000 $3.310
Forfeited (176,453) $3.671 (14,916) (25,165) $2.880
Expired
Exercised (131,596) $3.546 (1,205) $3.750
--------- --------- --------- --------
Outstanding at
period end 906,734 $3.506 989,908 $ 3.355 859,677 $3.427 313,683 $3.027
========= ========= ========= ========
Exercisable at
period end 831,724 $3.409 979,908 $ 3.367 859,677 $3.427 303,683 $3.048
========= ========= ========= ========
The following table presents summarized information about warrants outstanding and exercisable at
December 31, 2003.
Weighted Average Number of
Average Number of Options Remaining Options
Exercise Outstanding at Contractual Exercisable at
Price December 31, 2003 Life in Years December 31, 2003
$ 3.506 906,734 2.94 831,724
2004:
| Weighted | | Number of | | average | | Number of | | Average | | options | | remaining | | options | | Exercise | | outstanding at | | contractual | | exercisable at | | Price | | December 31, 2004 | | Life in years | | December 31, 2004 | | | | | | | | | | $ 3.35 | | 1,505,174 | | 3.0 | | 1,044,152 |
These options and warrants are held by persons or entities other than employees, officers and directors of the Company.
FORFEITABLE SHARES
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued) Forfeitable Shares
Certain of the shares issued to officers, directors, employees and third parties are forfeitable if certain conditions are not met. Therefore, these shares have been reflected outside of the Shareholders' Equity section in the accompanying Consolidated Balance Sheets until earned. During fiscal 1993, the Company's Board of Directors amended the stock bonus plan. As a result, the earn-out dates of certain individuals were extended until retirement. The Company recorded $284,700$216,800 of compensation expense for the year ended December 31, 20032004 compared to $284,700, $178,300 for the year ended December 31, 2003, the seven months ended December 31, 2002; $298,300 and $201,000$298,300 for the yearsyear ended May 31, 2002, and 2001, respectively. The accompanying balance sheet at December 31, 2004 includes a deferred charge of $322,600 of which $171,000 is included in prepaid expenses. A schedule of total forfeitable shares for the Company is set forth in the following table:
-90-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
Issue Number Issue Total
Date of Shares Price Compensation
--------------- --------- --------- ------------
Balance at
June 1, 2000 396,608 $ 2,584,600
May 2001 67,000 $ 5.35 358,400
Shares earned (29,820) -- (194,400)
-------- ---------
Balance at
May 31, 2001 433,788 2,748,600
May 2002 67,000 $ 3.90 261,300
-------- ---------
Balance at
May 31, 2002 and
December 31, 2002 500,788 3,009,900
March 24, 2003 43,378 $ 3.50 151,900
Shares earned (78,286) -- (435,200)
-------- ---------
Balance at
December 31, 2003 465,880 $ 2,726,600
======== ===========
| Issue | | Number | | Issue | | Total | | | Date | | of Shares | | Price | | Compensation | | | Balance at | | | | | | | | | May 31, 2001 | | | 433,788 | | | | | $ | 2,748,600 | | | May 31, 2002 | | | 67,000 | | $ | 3.90 | | | 261,300 | | | Balance at | | | | | | | | | | | | May 31, 2002 and | | | | | | | | | | | | December 31, 2002 | | | 500,788 | | | | | | 3,009,900 | | | March 24, 2003 | | | 43,378 | | $ | 3.50 | | | 151,900 | | | Shares earned | | | (78,286 | ) | | -- | | | (435,200 | ) | | Balance at | | | | | | | | | | | | December 31, 2003 | | | 465,880 | | | | | | 2,726,600 | | | Shares earned | | | (23,140 | ) | | -- | | | (127,600 | ) | | Balance at | | | | | | | | | | | | December 31, 2004 | | | 442,740 | | | | | $ | 2,599,000 | |
K.COMMITMENTS, CONTINGENCIES AND OTHER:
LEGAL PROCEEDINGS
Legal Proceedings
Material proceedings pending at December 31, 2004, and developments in those proceedings from that date to the date this Annual Report is filed, are summarized below. Certain of the Company's
affiliates are involved in ordinary routine litigation incidental to their
business. Other proceedings which were pending during the year ended December
31, 2003 have been settled or otherwise finally resolved.
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
Sheep Mountain Partners Arbitration/Litigation
In 1991, disputes arose between the U.S. Energy Corp. ("USE")/USE/Crested Corp.
("Crested") d/b/a/ USECC, and Nukem, Inc. and its subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation and operation of their equally owned Sheep Mountain Partners (SMP) partnership. Arbitration proceedings were initiated by CRIC in June 1991 and in July 1991, USECC filed a lawsuit against Nukem, CRIC and others in the U.S. District Court of Colorado in Civil Action No. 91B1153. The Federal Court stayed the arbitration proceedings and discovery proceeded. In February 1994, all of the parties agreed to consensual and binding arbitration of all of their disputes over SMP before an arbitration panel (the "Panel").
After 73 hearing days, the
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued) The Panel entered an Order and Award on April 18,
1996 and clarified the Order on July 3,in 1996, finding generally in favor of USE and Crested on certain of their claims and imposed a constructive trust in favor of Sheep Mountain Partners on uranium contracts Nukem entered into to purchase uranium from CIS republics. The Panelrepublics, and also awarded SMP damages of $31,355,070 against Nukem. USECC filed a petition for confirmation of the Order and on June
27, 1997, the U.S. District Court confirmed the Panel's Orders in its Second
Amended Judgment.
Thereafter, Nukem/CRIC appealed the Judgment toFurther legal proceedings ensued. On appeal, the 10th Circuit Court of Appeals ("CCA") . On October 22, 1998, the 10th CCA issued an Order and Judgment affirming the U.S. District Court's Second Amended Judgment without modification. The ruling affirmed (i) the imposition of a constructive trust in favor of SMP on Nukem's rights to purchase CIS uranium, the uranium acquired pursuant to those rights, and the profits therefrom; and (ii) the damage award in favor of SMP against Nukem. The 10th CCA held that the
-91-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
Panel's Awards "clearly retains both
As a constructive trust and a damage award,"
---
and the Arbitration Awards and the Second Amended Judgment were "clear and
unambiguous."
On February 8, 1999,result of further proceedings, the U.S. District Court ordered Nukemappointed a Special Master to pay USECC the
balance of the damage award. Nukem did so, but then moved for a satisfaction of
judgment without accounting for the monies earned in the Constructive Trust. The
District Court denied Nukem's motion and Nukem filed its second appeal to the
10th CCA. On October 16, 2000, the 10th CCA again affirmed the order of the
District Court. The 10th CCA held that Nukem had not "providedconduct an accounting of the partnership assets," finding that "the district court order presented for
our review does not decide which CIS contracts are covered by the constructive trust."
On November 3, 2000, USECC filed a motion for a further accounting of the
Constructive Trust. On February 15, 2001, the District Court entered an Order of
Reference appointing a Special Master to "conduct an accounting" of the
Constructive Trust. The accounting was conducted and on May 1, 2003, the Special
Master filed his Report with the District Court. Both parties filed objections
to the Report. On July 30, 2003, the U.S. District Court adopted the ReportSpecial Master’s report in part and rejected it in part. Judgment was thenpart, and entered by the Courtjudgment on August 1, 2003 in favor of USECC and against Nukem for $20,044,183. In early 2004, the parties appealed this judgment to the CCA.
On February 24, 2005, a three judge panel of the CCA vacated the judgment of the U.S. District Court and remanded the case to the Panel for clarification of the 1996 Order and Award. In remanding this case, the CCA stated: "The arbitration award in this case is silent as to the definition of 'purchase rights' and the 'profits therefrom,' including the valuation of either. Also unstated in the amountaward is the duration of $20,044,183.
On August 15, 2003, Nukem filedthe constructive trust and whether and what costs should be deducted when computing the value of the constructive trust. Further, the arbitration panel failed to address whether prejudgment interest should be awarded on the value of the constructive trust. As a "Motion to Remandresult, the district court's valuation of the constructive trust was based upon extensive guesswork. Therefore, a remand to the Arbitration
Panel or inarbitration panel for clarification is necessary, despite the Alternative, to Alter, Amend and/or Correct the Court's August
1, 2003 Judgmentlong and July 30, 2003 Order,tortured procedural history of this case."
The timing and a "Motion to Correct Certain
Findings or Statements in the Court's Orderultimate outcome of July 30, 2003." On the same day,
USECC filed a motion under Fed.R.Civ.P. 52(b) and 59(e) to alter or amend the
July 30, 2003 Order and the August 1, 2003 Judgment. The District Court denied
the parties' motions on September 10 and 11, 2003, respectively. Nukem's appeal
and USECC's cross-appeal followed. Nukem's opening brief was filed on January
16, 2004 and on February 24, 2004, USECC filed an opening brief in its
cross-appeal and an answer to Nukem's brief. Nukem has until March 29, 2004 or
any extension thereof to file an answer to USECC's opening brief. USECC may then
file a reply brief 14 days after service of Nukem's answer. Management believesthis litigation is not predicted. We believe that the ultimate outcome of this matter will not have an adverse affect on the
Company'sour financial condition or resultresults of operations.
CONTOUR DEVELOPMENT LITIGATION
Contour Development Litigation
On July 28,8, 1998, USE and Crested filed a lawsuit in the U. S.U.S. District Court of Colorado in Case No. 98WM1630, against Contour Development Company, L.L.C. and entities and persons associated with Contour Development Company, L.L.C. (together, "Contour") seeking compensatory and consequentialfor substantial damages of
more than $1.3 million from the defendants for dealings in real estate owned by USE and Crested in Gunnison, Colorado. The Contour defendants asserted a
counterclaim asking for payment of attorneys fee and costs. The partiesThis litigation was settled the litigation in 2004. In the settlement,2004 with USE and Crested received $25,000 in
cash; tworeceiving nominal cash and seven real estate lots in the City of Gunnison, Colorado (one of which hasand near Gunnison. Two lots have been sold and five are for a net of $65,326 and the other lot is under contract to sell for $180,000), and
an additional five development lots covering 175 acres north of Gunnison,
Colorado.
PHELPS DODGE LITIGATION
U.S. Energy Corp. (USE)sale.
Phelps Dodge Litigation
USE and Crested Corp. (Crested), d/b/a USECC, were served with a lawsuit on June 19, 2002, filed in the U.S. District Court of Colorado (Case No. 02-B-0796(PAC)) by Phelps Dodge Corporation (PD)(“PD”) and its subsidiary, Mt. Emmons Mining Company (MEMCO)(“MEMCO”), over contractual obligations -92-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
in USECC'sUSECC’s agreement with PD'sPD’s predecessor companies, concerning mining properties on Mt. Emmons, near Crested Butte, Colorado.
The litigation stemsrelates to agreements from agreements that date back to 1974 when USE and Crested leased the mining claims fromto AMAX Inc., PD'sPD’s predecessor company. The mining claims cover one of the world'sworld’s largest and richest deposits of molybdenum, which was discovered by AMAX. AMAX reportedly spent over $200 million on the
acquisition, exploration
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and mine planning activities on the Mt. Emmons
properties.
2002, AND MAY 31, 2002 (Continued) The June 19, 2002 complaint filed by PD and MEMCO seekssought a determination that PD'sPD’s acquisition of Cyprus Amax was not a sale. Under a 1986 agreement between USECC and AMAX, if AMAX sold MEMCO or its interest in the mining properties, U.S.
EnergyUSE and Crested would receive 15% (7.5% each) of the first $25 million of the purchase price ($3.75 million). In 1991, Cyprus Minerals Company acquired AMAX to form Cyprus Amax MineralsMineral Co. USECC'sUSECC’s counter and cross-claims allegealleged that in 1999, PD formed a wholly-owned subsidiary CAV Corporation, for the purpose of purchasing the controlling interest ofin Cyprus Amax and its subsidiaries (including MEMCO) at an estimated value in cash and PD stock exceeding $1
billion and making Cyprus Amax a subsidiary of PD. Therefore, USECC assertsasserted that the acquisition of Cyprus Amax by PD was a sale of MEMCO and the properties that triggerstriggered the obligationobl igation of Cyprus Amax to pay USECC the $3.75 million plus interest.
The other issueissues in the litigation iswere whether USECC must, under terms of a 1987 Royalty Deed, accept PD's and MEMCO's conveyance of the Mt. Emmons properties back to USECC, which properties now include a plant to treat mine water, costing in excess of $1 million a year to operate in compliance with State of Colorado regulations. PD's and MEMCO's claim seeksought to obligate USECC to assume the operating costs of the water treatment plant. USECC refuses to haveasserted counterclaims against the water treatment plant includeddefendants, including a claim for nonpayment of advance royalties.
On July 28, 2004, the Court entered an Order granting certain of PD's motions and denying USECC's counterclaims and cross-claims. The case was tried in late 2004.
On February 4, 2005, the returnCourt entered Findings and Fact and Conclusions of Law and ordered that the properties because, the
USECC counterclaim argues, the properties must be in the same condition as when
they were acquired by AMAX before the water treatment plant was constructed by
AMAX.
As added counterclaims, USECC seeks (i) damages for PD's breachconveyance of
covenants of good faith and fair dealing; (ii) damages for PD's failure to
develop the Mt. Emmons properties and not protecting USECC's rights as a
revisionary ownerunder Paragraph 8 of the mining1987 Agreement includes the transfer of ownership and operational responsibility for the Water Treatment Plant, and that PD does not owe USECC any advanced royalty payments. However, the Order did not address the NPDES permit. NPDES permits are administered and regulated by the Colorado Department of Public Health and the Environment (“CDPHE”). The timing and scope of responsibilities for maintaining and operating the plant will be addressed by the CDPHE later in 2005.
USECC has filed a motion with the Court to amend the Order to determine that the decreed water rights from the Colorado Supreme Court opinion (decided in 2002, finding that the predecessor owners of the Mt. Emmons property had rights to the properties, (iii) damages for
unjust enrichment of PD; (iv) damages for breach of the PD's fiduciary duties
owedwater to USECC as revisionary owner of the property,develop a mine), and for neglectingany other appurtenant water rights, be conveyed to maintain the mining rights and interests in the properties.
On March 17, 2003, PD filed additional motions for partial summary judgment
on various claims. On January 22, 2004, the District Court heard the motions and
responses of USECC and additional briefs were thereafter filed with the Court.USECC. The Courtmotion is considering the motions. Management believes that the ultimate
outcome of this matter will not have an adverse affect on the Company's
financial condition or result of operations.
ROCKY MOUNTAIN GAS, INC. (RMG)
LITIGATION INVOLVING LEASES ON COALBED METHANE PROPERTIES IN MONTANA
On or about April 1, 2001, pending.
Rocky Mountain Gas, Inc. (RMG), a subsidiary of
USE and Crested,
Litigation involving leases on coalbed methane properties in Montana
In April 2001, RMG was served with a Second Amended Complaint, whereinin which the Northern Plains Resource Council ("NPRC") had filed suit in the U.S.U. S. District Court of Montana, Billings Division in Case No. CV-01-96-BLG-RWA(No. CV-01-96-BLG-RWA) against the United States Bureau of Land Management ("BLM"(“BLM”), RMG, certain of its affiliates (including U.S.
Energy Corp.USE and -93-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
Crested Corp.)Crested) and some 20 other defendants. The plaintiff iswas seeking to cancel oil and gas leases issued to RMG et. al. by the BLM in the Powder River Basin of Montana and for other relief.
The basis
In December 2003, Federal District Court Judge Anderson granted BLM’s and the other defendants Motion for the complaint appears to beSummary Judgment and ruled that the BLM's regulations
require the BLM to respond to objections filed by persons owning land or lease
rights adjacent to the coalbed properties which the BLM is offering to lease to
the public. The argument of plaintiff appears to be that if objections are not
responded to by the BLM prior to issuing CBM leases, the leases are invalid.
Based on this argument, the plaintiff appears to have been successful in forcing
cancellation of some CBM leases granted to others in the Powder River Basin of
Montana, because the BLM did not respondhave to some objecting adjacent landowners.
However, allconsider environmental impacts in an Environmental Impact Statement (“EIS”) prior to leasing because the 1994 Resource Management Plan (“RMP”) limited lease right to exploration and small scale development. On August 30, 2004, the Ninth U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued) Circuit Court of Appeals affirmed the District Court decision and held that the six-year statue of limitations precluded challenging the 1994 RMP and EIS. On February 10, 2005, NRPC's petition for rehearing or in the alternative petition for en banc was denied by the Ninth Circuit Court of Appeals.
All of RMG's BLM Montana leases in Montanaare held by RMG (none are held by USE in
its corporate name)and are at least four years old, and thereold. There is no record of any objections being made to the issue of those leases. Based on filings in the case to date, it appears that the BLM is taking the
initiative in responding to the plaintiff. We believe RMG'sRMG’s leases were validly issued in compliance with BLM procedures, and do not believe the plaintiff'splaintiff’s lawsuit will adversely affect any of RMG's MontanaRMG’s BLM leases.
LAWSUITS CHALLENGING BLM'S RECORDS OF DECISIONS
Three lawsuits areleases in Montana.
Lawsuits challenging BLM's Records of Decisions
There is a lawsuit currently pending in the Montana Federal District Court challenging BLM's Records of Decisions for the Powder River Basin Oil and Gas EIS (PRB-EIS) for the Wyoming portion of the basin, and the Statewide Oil and Gas EIS and Proposed Amendment for the Powder River and billingsBillings Resource Management Plans in Montana.
In April 2003 NPRC and the Northern Cheyenne Tribe and Native Action (the “Tribe”) filed a suit against BLM challenging the April 2003 decision by BLM approving the Final Statewide Oil and Gas Environmental Impact Statement (FEIS) and proposed amendments to the RMP. On February 25, 2005 Federal District Court Judge Anderson dismissed all counts with the exception of the allegation that the FEIS is inadequate because it failed to consider any alternatives to full-field development and ruled that BLM’s failure to analyze a phased development alternative renders the FEIS inadequate. BLM will now be required to perform a Supplemental EIS (“SEIS”) examining a phased development alternative, which could take 18 months to complete.
On April 5, 2005 Federal District Court Judge Anderson rejected the Tribe’s request for a complete moratorium on CBM drilling in Montana and instead accepted BLM’s proposal that limited the number of Federal APDs issued by BLM to maximum of 500 wells per year, including federal, state and fee wells within a certain defined geographic area. The decision will prohibit BLM from issuing Federal wells in RMG’s Castle Rock property until the SEIS is completed, because it is not located with the defined geographic area. However, the decision does not limit the number of fee and state wells that can be approved in the Castle Rock property by the State of Montana. RMG will request BLM to extend the expiration date of the Federal leases for the period of the delay.
Neither the Company nor RMG is a party to any of
these lawsuits.
LITIGATION INVOLVING DRILLING ON A COALBED METHANE LEASE
this lawsuit. However, further permitting for federal CBM wells in Montana could be impacted until the issues have been resolved.
Litigation involving drilling
A drilling company, Eagle Energy Services, LLC filed a lien on RMG's
leasehold in southwestern Wyominglawsuit against RMG for drilling services performed at RMG's
Oyster Ridge Property and filed a lawsuit foreclosing the lien.claiming $49,309.50 for non-payment in Civil Action No. C02-9-341. Eagle Energy'sEnergy’s bank, Community First National Bank of Sheridan, Wyoming, filed a similar suit for the same amount on an assignment from Eagle Energy against RMG Eagle Energy
Services, LLC and others who guaranteed a loan to Eagle Energy in Civil Action No. C02-9-328CO2-9-328 in the 4th4th Judicial District of Sheridan County, Wyoming. In February 2005 RMG and Community First reached a full and complete settlement of Civil Action No. C02-9-328 and a Joint Motion to Dismiss with Prejudice is currently pending with the Court. RMG has also request ed Eagle Energy'sEnergy to join in a Motion to Dismiss in Civil Action No. C02-9-341 because the claim is for a contract to drill a well for coalbed methane. RMG
terminated the agreement because of the dangerous conditions of Eagle Energy's
equipment and other reasons. The claim against RMG is for $49,309.50.
Negotiations to settle the lien and lawsuits are pending.was settled as noted above. Management believes that the ultimate outcome of the matters will not have a material effect on the Company'sCompany’s financial condition or resultsresult of operations.
RECLAMATION U.S. ENERGY CORP. AND ENVIRONMENTAL LIABILITIES
SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued) Reclamation and Environmental Liabilities
Most of the Company's exploration activities are subject to federal and state regulations that require the Company to protect the environment. The Company conducts its operations in accordance with these regulations. The Company's current estimates of its reclamation obligations and its current level of expenditures to perform ongoing reclamation may change in the future. At the present time, however, the Company cannot predict the outcome of future regulation or impact on costs. Nonetheless, the Company has recorded its best estimate of future reclamation and closure costs based on currently available facts, technology and enacted laws and regulations. Certain regulatory agencies, such as the Nuclear Regulatory Commission ("NRC"), the Bureau of Land Management ("BLM") and the Wyoming Department of EnvironmentalEnvironmenta l Quality ("WDEQ") review the Company's reclamation, environmental and decommissioning
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U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued) liabilities, and the Company believes the recorded amounts are consistent with those reviews and related bonding requirements. To the extent that planned production on its properties is delayed, interrupted ordiscontinuedor discontinued because of regulation or the economics of the properties, the future earnings of the Company would be adversely affected. The Company believes it has accrued all necessary reclamation costs and there are no additional contingent losses or unasserted claims to be disclosed or recorded.
The majority of the Company's environmental obligations relate to former mining properties acquired by the Company. Since the Company currently does not have any properties in production, the Company's policy of providing for future reclamation and mine closure costs on a unit-of-production basis has not resulted in any significant annual expenditures or costs. For the obligations recorded on acquired properties, including site-restoration, closure and monitoring costs, actual expenditures for reclamation will occur over several years, and since these properties are all considered future production properties, those expenditures, particularly the closure costs, may not be incurred for many years. The Company also doedoes not believe that any significant capital expenditures to monitor or reduce hazardous substancessubstance s or other environmental impacts are currently required. As a result, the near term reclamation obligations are not expected to have a significant impact on the Company's liquidity.
As of December 31, 2003,2004, estimated reclamation obligations related to the above mentioned mining properties total $7,264,700.$8,075,100. The Company currently has three mineral properties or investments that account for most of their environmental obligations, SMP, Plateau and SGMC.SGMI. The environmental obligations and the nature and extent of cost sharing arrangements with other potentially responsible parties, as well as any uncertainties with respect to joint and several liability of each are discussed in the following paragraphs:
SMP
---
The Company is responsible for the reclamation obligations, environmental liabilities and liabilities for injuries to employees in mining operations with respect to the Sheep Mountain properties. The reclamation obligations, which are established by regulatory authorities, were reviewed by the Company and the regulatory authorities during fiscal 2002 and they jointly determined that the reclamation liability was $2,106,600.$2,339,800. The Company is self bonded for this obligation by mortgaging certain of their real estate assets, including the Glen L. Larsen building, and by posting cash bonds.
GMMV
----
During fiscal 1991, the Company acquired mineral properties on Green
Mountain known as the Big Eagle Property. The GMMV also acquired a uranium mill
known as the Sweetwater Mill. As part of the settlement of the GMMV litigation
with Kennecott in September 2000, the Company was released from any
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and all
reclamation and environmental obligations related to the GMMV except the Ion
Exchange Plant. During fiscal 2002, the Company completed the required
reclamation on the Ion Exchange Plant. The reclamation work has been completed
and a final report has been submitted to and is being reviewed by the regulatory
agencies. No further monitoring of the site is required and no additional
reclamation work is anticipated.
SUTTER GOLD MINING COMPANY
-----------------------------
SGMC'sAND MAY 31, 2002 (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 -95-
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
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 $27,800$28,200 which is covered by a cash reclamation bond. This amount was recorded by SGMC as a reclamation liability as of December 31, 2003.
PLATEAU RESOURCES LIMITED
---------------------------
2004.
Plateau Resources Limited
The environmental and reclamation obligations acquired with the acquisition of Plateau include obligations relating to the Shootaring Mill. Based on the
bonding requirements, Plateau transferred $2,500,000 to a trust account as
financial surety to pay future costs of mill decommissioning, site reclamation
and long-term site surveillance. In fiscal 1997, Plateau requested that the mill
be place on operational status. The NRC increased the reclamation liability to
$6,784,000 as a result of this request. As of December 31, 2003,2004, the reclamation liability on the Plateau properties was $5.2 million. Plateau held a cash deposit for reclamation in the amount of $6,874,200 was held by Plateau's escrow agent
to satisfy the obligation of reclamation of $5,130,300.
EXECUTIVE COMPENSATION
- -----------------------
$6.8 million.
Executive Compensation
The Company is committed to pay the surviving spouse or dependant children of certain of their officers one years' salary and an amount to be determined by the Boards of Directors, for a period of up to five years thereafter. This commitment applies only in the event of the death or total disability of those officers who are full-time employees of the Company at the time of total disability or death. Certain officers and employees have employment agreements with the Company. The maximum compensation due under these agreements for the officers covered by the agreement for the first year after their deaths, should they die in the same year, is $311,400 at December 31, 2003.
2004.
Operating Leases
The Company is the lessor of portions of the office buildings and building improvements that it owns. The Company occupies the majority of the main office building. The leases are accounted for as operating leases and provide for minimum monthly receipts of $16,400 through December, 2006. All of the Company's leases are for two years or less.
The total costs of the office buildings and building improvements totaled $4,218,200 as of December 31, 2004 and 2003 and accumulated depreciation amounted to $2,374,400 and $2,283,200 as of December 31, 2004 and 2003, respectively. Rental income under the agreements was $245,000, $256,500, $187,000 and $375,900, for the years ended December 31, 2004 and 2003, the seven months ended December 31, 2002 and the fiscal year ended May 31, 2002.
Future minimum receipts for noncancellable operating leases are as follows:
| Years Ending | | | | December 31, | | Amount | | 2005 | | $196,300 | | 2006 | | $199,300 |
The Company, through RMG, has a lease commitment until January 30, 2006 in the amount of $1,300 per month on its field office. This lease can be cancelled upon 90 day notice by either party to the lease. RMG also has a lease for a compressor through December 2005. The monthly payment under this lease is U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued) approximately $17,400 per month. The total lease expense for these and another compressor lease that expired during the year was $440,000 and $41,300 for the years ended December 31, 2004 and 2003, respectively. Future commitments are as follows:
It is anticipated that the lease obligations for the year ended December 31, 2005 will remain consistent with those experienced during the year ended December 31, 2004 unless additional operation fields are required.
L.DISCONTINUED OPERATIONS.
During the third quarter of the fiscal year ended May 31, 2002, the Company made the decision to discontinue its drilling/construction segment. The assets associated with this business segment are beingwere sold and or converted for use elsewhere in the Company. The financial statements for the fiscal year ended May 31, 2001 have been revised to present the effect of discontinued operations. There is no material income or loss from discontinued operations from the measurement date to December 31, 2002.
2004.
During the third quarter of the year ended December 31, 2003, the Company sold its motel and retail operations in southern Utah. The financial statements for all of the periods presented have been revised to present these operations as discontinued.
M.SUPPLEMENTAL NATURAL GAS RESERVE INFORMATION (UNAUDITED):
The following estimates of proved gas reserves, both developed and undeveloped, represent interests owned by the Company located solely within the United States. Proved reserves represent estimated quantities of natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed gas reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells for which relatively major expenditures are required for completion.
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U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002, MAY 31,and 2002, AND MAY 31, 2001
2002 (Continued) The Company began natural gas production in June, 2002. Disclosures of gas reserves which follow are based on estimates prepared by independent engineering consultants as of December 31, 2002.2004. Such estimates are subject to numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. These estimates do not include probable or possible reserves. The information provided does not represent Management's estimate of the Company's expected future cash flows or value of proved oil and gas reserves.
RMG's sales volumes of gas produced, average sales prices received for gas sold, and average production costs for those sales for the years ended December 31, 2004 and 2003 and for the seven months ended December 31, 2002 and for the year ended December, 2003, all from the Bobcat
property which was transferred to Pinnacle in June 2003 are as follows:
Year Ended Seven Months Ended
December 31, 2003 December 31, 2002
------------------ ------------------
Sales volumes (mcf) 81,516 64,315
Average sales price per mcf $ 3.71 $ 1.86
Average cost (per mcf) $ 1.91 $ 1.91
| | | | | | | Seven months | | | | | | | | | ended | | | | | Year ended December 31, | | December 31, | | | | | 2004 | | 2003 | | 2002 | | | | | | | | | | | | Sales volumes (mcf) | | | 728,051 | | | 81,516 | | | 64,315 | | | Average sales price per mcf | | $ | 4.05 | | $ | 3.71 | | $ | 1.86 | | | Average cost (per mcf) | | $ | 3.19 | | $ | 1.91 | | $ | 1.91 | |
Changes in estimated reserve quantities
The net interest in estimated quantities of proved developed and undeveloped reserves of crude oil and natural gas and changes in such quantities and discounted future net cash flow were as follows:
| | | (Unaudited) - Unescalated | | | | | | | | | | | | | | MCF | | | | | Cubic Feet | | | | | | | | | Seven Months | | | | | Year Ended | | Year Ended | | Ended | | | | | December 31, 2004 | | December 31, 2003 | | December31, 2002 | | | Proved developed and | | | | | | | | | Undeveloped reserves: | | | | | | | | | Beginning of year | | -- | | 585,603 | | -- | | | Revision of previous estimates | | | (51,862 | ) | | -- | | | -- | | | Purchase of minerals in place | | | 3,404,693 | | | -- | | | 649,918 | | | Exchange of reserves in place (1) | | | -- | | | (504,087 | ) | | -- | | | Extensions & Discoveries | | | 817,459 | | | -- | | | -- | | | Production | | | (1,114,349 | ) | | (81,516 | ) | | (64,315 | ) | | End of year | | | 3,055,941 | | | -- | | | 585,603 | | | | | | | | | | | | | | | Proved developed producing | | | 1,651,666 | | | -- | | | 489,684 | | | Proved developed non-producing | | | 889,051 | | | -- | | | -- | | | Proved undeveloped | | | 515,224 | | | -- | | | 95,919 | | | Total proved reserves | | | 3,055,941 | | | -- | | | 585,603 | |
(Unaudited) - Unescalated
----------------------------------------------------------
Discounted
MCF Future Net Cash Flow
Cubic Feet (10% Discount)
-------------------------------------- ------------------
Seven Months Seven Months
Year Ended Ended Ended
December 31, 2003 December 31, 2002 December 31, 2002
------------------ ------------------ ------------------
Proved developed and
undeveloped reserves:
Beginning of period 585,603 --
Purchase of reserves in place -- 649,918
Exchange of reserves in place (1) (504,087) --
Production (81,516) (64,315)
------------------ ------------------
End of period -- 585,603
================== ==================
Proved developed producing -- 489,684 $ 793,481
Proved undeveloped -- 95,919 94,947
------------------ ------------------ ------------------
Total proved reserves -- 585,603 $ 888,428
================== ================== ==================
| | -108- | |
|
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued) The standardized measure has been prepared assuming year end sales prices adjusted for fixed and determinable contractual price changes, current costs. No provision has been made for income taxes due to available operating loss carryforwards.carry forwards. No deduction has been made for depletion, depreciation or any indirect costs such as general corporate overhead or interest expense.
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U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(Continued)
Standardized measure of discounted future net cash flows from estimated production of proved gas reserved:
Seven Months
Ended
December 31, 2002
-------------------
Future cash inflows $ 1,756,809
Future production and development costs (705,505)
-----------------
Future net cash flows 1,051,304
10% annual discount for estimated timing of cash flows (162,876)
---------------
Standardized measure of discounted future net cash flows $ 888,428
===============
| | | | | | | Seven Months | | | | | Year Ended | | Year Ended | | Ended | | | | | December 31, 2004 | | December 31, 2003 | | December 31, 2002 | | | Future Cash Inflows | | $ | 13,125,200 | | | -- | | $ | 1,756,809 | | Future Production and development costs | | | (5,208,800 | ) | | -- | | | (705,505 | ) | | Future Net Cash Flows | | | 7,916,400 | | | -- | | | 1,051,304 | | | Discount Factor | | | (1,401,800 | ) | | -- | | | (162,876 | ) | Standardized measure of discounted future net cash flows | | $ | 6,514,600 | | | -- | | $ | 888,428 | |
Changes in standard measure of discounted future net cash flows from proved gas reserves:
Seven Months
Year Ended Ended
December 31, 2003 December 31, 2002
------------------- ------------------
Standardized measure - beginning of period $ 888,428 $ --
Purchase of reserves in place -- 652,628
Exchange of reserves in place (1) (825,228) --
Sales of gas produced, net of production costs (63,200) 235,800
------------------- ------------------
Standardized measure - end of period $ -- $ 888,428
=================== ==================
| | | | | | | Seven Months | | | | | Year Ended | | Year Ended | | Ended | | | | | December 31, 2004 | | December 31, 2003 | | December 31, 2002 | | | Standardized measure - beginning of year | | $ | -- | | $ | 888,428 | | $ | -- | | | Sale & Transfer, net of production cost | | | (629,400 | ) | | (63,200 | ) | | 235,800 | | | Net change in sales & transfer price, net of production cost | | | (58,200 | ) | | -- | | | -- | | | Extensions, discoveries and improved recovery, net of future production and development cost | | | 2,671,800 | | | -- | | | -- | | | Exchange or reserves in place (1) | | | -- | | | (825,228 | ) | | -- | | | Revision of quantity estimate | | | (110,500 | ) | | -- | | | -- | | | Purchase of reserve in place | | | 7,056,400 | | | -- | | | 652,628 | | | Change in production rate & other | | | (2,415,500 | ) | | -- | | | -- | | | Standardized measure - end of period | | $ | 6,514,600 | | $ | -- | | $ | 888,428 | |
(1) During June 2003, RMG contributed proved and unproved properties in exchange for a 37.5% interest in Pinnacle (See Note F).
-98-
Pinnacle. At December 31, 2004, RMG owned 16.7% of Pinnacle.
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002, MAY 31,and 2002, AND MAY 31, 2001
2002 (Continued) N.TRANSITION PERIOD COMPARATIVE DATA
The following table presents certain financial information for the seven months ended December 31, 2002 and 2001, respectively: | | | Seven Months Ended | | | | | December 31, | | | | | 2002 | | 2001 | | | | | (Unaudited) | | | | | Revenues | | $ | 673,000 | | $ | 545,900 | | | | | | | | | | | | Costs and expenses | | | (4,197,900 | ) | | (4,460,800 | ) | | Operating loss | | | (3,524,900 | ) | | (3,914,900 | ) | | | | | | | | | | | Other income and expenses | | | (387,100 | ) | | 1,005,000 | | | Loss before minority interest | | | (3,912,000 | ) | | (2,909,900 | ) | | | | | | | | | | | Minority interest in loss of subsidiaries | | | 54,800 | | | 24,500 | | | Loss before income taxes | | | (3,857,200 | ) | | (2,885,400 | ) | | | | | | | | | | | Provision for income taxes | | | -- | | | -- | | | Net loss from continuing operations | | | (3,857,200 | ) | | (2,885,400 | ) | | | | | | | | | | | Discontinued operations, net of tax | | | 17,100 | | | 175,000 | | | Net loss | | | (3,840,100 | ) | | (2,710,400 | ) | | | | | | | | | | | Preferred stock dividends | | | -- | | | (75,000 | ) | | Net loss available to common stock shareholders | | $ | (3,840,100 | ) | $ | (2,785,400 | ) | | | | | | | | | | | PER SHARE DATA: | | | | | | | | | Revenues | | $ | 0.06 | | $ | 0.07 | | | | | | | | | | | | Operating loss | | | (0.33 | ) | | (0.47 | ) | | | | | | | | | | | Loss from continuing operations | | | (0.36 | ) | | (0.35 | ) | | | | | | | | | | | Net loss | | | (0.36 | ) | | (0.33 | ) | | | | | | | | | | | Preferred Stock dividends | | | -- | | | (0.01 | ) | | Net loss available to common stock shareholders | | $ | (0.36 | ) | $ | (0.34 | ) | | | | | | | | | | | Weighted average common shares outstanding | | | | | | | | | Basic | | | 10,770,658 | | | 8,386,672 | | | | | | | | | | | | Diluted | | | 10,770,658 | | | 8,386,672 | |
Seven Months Ended
December 31,
--------------------------
2002 2001
------------ ------------
(Unaudited)
Revenues $ 673,000 $ 545,900
Costs and expenses 4,197,900 4,460,800
------------ ------------
Operating loss (3,524,900) (3,914,900)
Other income and expenses (387,100) 1,005,000
------------ ------------
Loss before minority interest (3,912,000) (2,909,900)
Minority interest in loss of subsidiaries 54,800 24,500
------------ ------------
Loss before income taxes (3,857,200) (2,885,400)
Provision for income taxes -- --
------------ ------------
Net loss from continuing operations (3,857,200) (2,885,400)
Discontinued operations, net of tax 17,100 175,000
------------ ------------
Net loss (3,840,100) (2,710,400)
Preferred stock dividends -- (75,000)
------------ ------------
Net loss available to common stock shareholders $(3,840,100) $(2,785,400)
============ ============
PER SHARE DATA:
Revenues $ 0.06 $ 0.07
Operating loss (0.33) (0.47)
=========== ===========
Loss from continuing operations (0.36) (0.35)
=========== ===========
Net loss (0.36) (0.33)
Preferred Stock dividends -- (0.01)
------------ ------------
Net loss available to common stock
shareholders $ (0.36) $ (0.34)
============ ============
Weighted average common shares outstanding
Basic 10,770,658 8,386,672
============ ============
Diluted 10,770,658 8,386,672
============ ============
| | -110- | |
|
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U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002, MAY 31,and 2002, AND MAY 31, 2001
2002 (Continued) O.SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(Unaudited) | | | Three Months Ended | | | | | December 31, | | September 30, | | June 30, | | March 31 | | | | | 2004 | | 2004 | | 2004 | | 2004 | | | | | | | | | | | | | | Operating revenues | | $ | 1,140,500 | | $ | 1,266,300 | | $ | 1,367,400 | | $ | 867,500 | | | | | | | | | | | | | | | | | | Operating loss | | $ | (1,624,500 | ) | $ | (1,421,200 | ) | $ | (1,742,400 | ) | $ | (1,871,300 | ) | | | | | | | | | | | | | | | | | Loss from continuing operations | | $ | (1,238,400 | ) | $ | (1,626,100 | ) | $ | (1,609,200 | ) | $ | (1,775,000 | ) | | | | | | | | | | | | | | | | | Discontinued operations, net of tax | | $ | -- | | $ | -- | | $ | -- | | $ | -- | | | | | | | | | | | | | | | | | | Net loss | | $ | (1,260,300 | ) | $ | (1,604,200 | ) | $ | (1,609,200 | ) | $ | (1,775,000 | ) | | | | | | | | | | | | | | | | | Loss per share, basic | | | | | | | | | | | | | | | Continuing operations | | $ | (0.09 | ) | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.14 | ) | | Discontinued operations | | $ | -- | | $ | -- | | $ | -- | | $ | -- | | | | | $ | (0.09 | ) | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.14 | ) | | | | | | | | | | | | | | | | | Basic weighted average shares outstanding | | | 14,468,336 | | | 13,490,917 | | | 12,873,194 | | | 12,319,657 | | | | | | | | | | | | | | | | | | Loss per share, diluted | | | | | | | | | | | | | | | Continuing operations | | $ | (0.09 | ) | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.14 | ) | | Discontinued operations | | $ | -- | | $ | -- | | $ | -- | | $ | -- | | | | | $ | (0.09 | ) | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.14 | ) | | | | | | | | | | | | | | | | | Diluted weighted average shares outstanding | | | 14,468,336 | | | 13,490,917 | | | 12,873,194 | | | 12,319,657 | |
Three Months Ended
-----------------------------------------------------------
December 31, September 30, June 30, March 31,
2003 2003 2003 2003
-------------- --------------- ------------ ------------
Operating Revenues $ 109,000 $ 119,300 $ 241,300 $ 367,700
============= ============== =========== ===========
Operating loss $ (1,664,800) $ (1,988,400) $(2,418,800) $(1,165,900)
============= ============== =========== ===========
(Loss) income from continuing operations $ (1,780,800) $ (1,893,000) $(2,214,100) $(1,187,900)
Discontinued operations, net of tax $ (124,800) $ (88,700) $ (17,400) $ (119,000)
Cumulative effect of accounting change $ -- $ -- $ -- $ 1,615,600
------------- -------------- ----------- -----------
Net (loss) income $ (1,905,600) $ (1,981,700) $(2,231,500) $ 308,700
============= ============== =========== ===========
(Loss) income per Share, basic
Continuing operations $ (0.16) $ (0.17) $ (0.20) $ (0.11)
Discontinued operations $ (0.01) $ (0.01) $ -- $ (0.01)
Cumulative effect of accounting change $ -- $ -- $ -- $ 0.15
-------------- --------------- ------------ ------------
$ (0.17) $ (0.18) $ (0.20) $ 0.03
============== =============== ============ ============
Basic weighted average shares outstanding 11,383,576 11,127,796 10,916,971 10,881,394
(Loss) per share, diluted
Continued operations $ (0.17) $ (0.17) $ (0.20) $ (0.10)
Discontinued operations $ (0.01) $ (0.01) $ -- $ (0.01)
$ -- $ -- $ -- $ 0.14
-------------- --------------- ------------ ------------
$ (0.17) $ (0.18) $ (0.20) $ 0.03
============== =============== ============ ============
Diluted weighted average
shares outstanding 11,383,576 11,127,796 10,916,971 11,385,593
| | -111- | |
|
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U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002, MAY 31,and 2002, AND MAY 31, 2001
2002 (Continued) | | | Three Months Ended | | | | | December 31, | | September 30, | | June 30 | | March 31 | | | | | 2003 | | 2003 | | 2003 | | 2003 | | | | | | | | | | | | | | Operating revenues | | $ | 109,000 | | $ | 119,300 | | $ | 241,300 | | $ | 367,700 | | | | | | | | | | | | | | | | | | Operating loss | | $ | (1,664,800 | ) | $ | (1,988,400 | ) | $ | (2,418,800 | ) | $ | (1,165,900 | ) | | | | | | | | | | | | | | | | | Loss earnings from continuing operations | | $ | (1,780,800 | ) | $ | (1,893,000 | ) | $ | (2,214,100 | ) | $ | (1,187,900 | ) | | | | | | | | | | | | | | | | | Discontinued operations, net of tax | | $ | (124,800 | ) | $ | (88,700 | ) | $ | (17,400 | ) | $ | (119,000 | ) | | | | | | | | | | | | | | | | | Net earnings (loss) | | $ | (1,905,600 | ) | $ | (1,981,700 | ) | $ | (2,231,500 | ) | $ | 308,700 | | | | | | | | | | | | | | | | | | Earnings per Share, basic | | | | | | | | | | | | | | | Continuing operations | | $ | (0.16 | ) | $ | (0.17 | ) | $ | (0.20 | ) | $ | (0.11 | ) | | Discontinued operations | | $ | (0.01 | ) | $ | (0.01 | ) | $ | -- | | $ | (0.01 | ) | | Cumulative effect of accounting change | | $ | -- | | $ | -- | | $ | -- | | $ | 0.15 | | | | | $ | (0.17 | ) | $ | (0.18 | ) | $ | (0.20 | ) | $ | 0.03 | | | | | | | | | | | | | | | | | | Basic weighted average shares outstanding | | | 11,383,576 | | | 11,127,796 | | | 10,916,971 | | | 10,881,394 | | | | | | | | | | | | | | | | | | Earnings per Share, diluted | | | | | | | | | | | | | | | Continuing operations | | $ | (0.34 | ) | $ | (0.17 | ) | $ | (0.20 | ) | $ | (0.10 | ) | | Discontinued operations | | $ | (0.02 | ) | $ | (0.01 | ) | $ | -- | | $ | (0.01 | ) | | Cumulative effect of accounting change | | $ | -- | | $ | -- | | $ | -- | | $ | 0.14 | | | | | $ | (0.36 | ) | $ | (0.18 | ) | $ | (0.20 | ) | $ | 0.03 | | | | | | | | | | | | | | | | | | Diluted weighted average shares outstanding | | | 11,383,576 | | | 11,127,796 | | | 10,916,971 | | | 11,385,593 | |
Month Ended Three Months Ended
----------------------------
December 31, November 30, August 31,
2002 2002 2002
-------------- -------------- ------------
Operating Revenues $ 74,300 $ 359,600 $ 221,400
============= ============= ===========
Operating (loss) $ (664,200) $ (1,487,500) $(1,390,400)
============= ============= ===========
Loss from continuing operations $ (1,427,200) $ (1,195,600) $(1,252,200)
Discontinued operations, net of tax $ (26,400) $ (69,100) $ 130,400
-------------- -------------- ------------
Net loss $ (1,453,600) $ (1,264,700) $(1,121,800)
============== ============== ============
Loss per Share, basic and diluted
Continuing operations $ (0.14) $ (0.11) $ (0.11)
Discontinued operations $ -- $ (0.01) $ 0.01
-------------- -------------- ------------
$ (0.14) $ (0.12) $ (0.10)
============== ============== ============
Basic and diluted weighted average
shares outstanding 10,766,672 10,765,889 10,761,093
| | -112- | |
|
Three Months Ended
----------------------------------------------------------
May 31, February 28, November 30, August 31,
2002 2002 2001 2001
------------ -------------- -------------- ------------
Operating Revenues $ 408,800 $ 238,700 $ 724,200 $ 632,400
=========== ============= ============= ===========
Operating (loss) $(1,588,300) $ (3,066,700) $ (1,197,600) $(1,601,600)
=========== ============= ============= ===========
Loss from continuing operations $(1,109,700) $ (3,172,000) $ (550,900) $(1,349,100)
Discontinued operations, net of tax $ (22,200) $ (9,600) $ (37,300) $ (16,800)
------------ -------------- -------------- ------------
Net loss $(1,131,900) $ (3,181,600) $ (588,200) $(1,365,900)
============ ============== ============== ============
Loss per Share, basic and diluted
Continuing operations $ (0.10) $ (0.32) $ (0.07) $ (0.17)
Discontinued operations $ (0.01) $ -- $ -- $ --
------------ -------------- -------------- ------------
$ (0.11) $ (0.32) $ (0.07) $ (0.17)
============ ============== ============== ============
Basic and diluted weighted average
shares outstanding 10,579,828 9,837,494 8,580,904 8,192,316
|
Quarterly and year to day computation of per share amounts are made
independently. Therefore, the sum of quarterly per share amounts may not agree
with per share amounts for the year.
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U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002, MAY 31,and 2002, AND MAY 31, 2001
2002 (Continued) P. SUBSEQUENT EVENT
ROCKY MOUNTAIN GAS, INC.
HPC Capital Management
On JanuaryFebruary 9, 2005, U.S. Energy Corp. (the “company”) entered into, and closed, a securities purchase agreement with seven accredited investors for the issuance of $4,720,000 in face amount of debentures maturing February 4, 2008, and three year warrants to purchase common stock of the company. The face amount of the debentures includes simple annual interest at 6%; the investors paid $4,000,000 for the debentures. A commission of 7% on the $4,000,000 was paid by the company to HPC Capital Management (a registered broker-dealer) in connection with the transaction, and the company paid $20,000 of the investors’ counsel’s legal fees, resulting in net proceeds to the company of $3,700,000. Net proceeds will be used by the company for general workin g capital.
The debentures are unsecured; the face amount of the debentures are payable every six months from February 4, 2005, in five installments of 20%, in cash or in restricted common stock of the company. If the company gives notice that it intends to make the payment in cash, the investors have the right to take the payment in stock, at the lower of $2.43 per share (the “set price”) or 90% of the volume weighted average price of the company’s stock for the 90 trading days prior to the company’s notice that the six month payment is intended to be paid by the company in cash (the “VWAP price”). The set price equals 90% of the volume weighted average price of the company’s stock over the 90 trading days prior to February 4, 2005.
At any time, the debentures are convertible to restricted common stock of the company at the set price.
At any time, the company has the right to redeem some or all of the debentures in cash or stock, in amount equal to 120% of the face amount of the debentures until February 4, 2006; 115% from February 5, 2006 to February 4, 2007; and 110% from February 5, 2007 until maturity. Payment in stock would be at the set price.
If at any time the company’s stock trades at more than 150% of the set price for 20 consecutive trading days, the company may convert the balance of the face amount of the debentures to stock at 150% of the set price.
In the event of default, the investors may require payment (i) in cash equal to 130% of the then outstanding face amount; or (ii) in stock equal to 100% of face amount, with the stock priced at the set price, or (iii) in stock equal to 130% of the face amount, with the stock priced at 100% of the volume weighted average price of the company’s stock for the 90 trading days prior to default.
The company issued warrants to the investors, expiring February 4, 2008, to purchase 971,193 shares of restricted common stock, at $3.63 per share (equal to 110% of the closing price for the company’s stock on February 4, 2005). The number of shares underlying the warrants equals 50% of the shares issuable on full conversion of the debentures at the set price (as if the debentures were so converted on February 4, 2005).
Warrants to purchase 100,000 shares, at the same price and for the same term as the warrants issued to the investors, have been issued to HPC Capital Management as additional compensation for its services in connection with the transaction with the investors.
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002 (Continued) If in any period of 20 consecutive trading days the company’s stock price exceeds 200% of the warrants’ exercise price, on each of the trading days, all of the warrants shall expire on the 30 2004th day after the Company's affiliate,company sends a call notice to the warrantholders.
The company has agreed to file with the Securities and Exchange Commission a registration statement to cover the future sale by the investors of the shares issuable in payment and/or conversion of the debentures, and the shares issuable on exercise of the warrants. The registration statement also will cover the future sale by HCP Capital Management of the shares issuable on exercise of the warrants issued to HCP in connection with the transaction.
Enterra
As of April 11, 2005, the company and its subsidiary Rocky Mountain Gas, Inc. (“RMG”) has entered into a binding agreement with Enterra Energy Trust (“Enterra”) for the acquisition of RMG by Enterra in consideration of $20,000,000, payable pro rata to the RMG shareholders in the amounts of $6,000,000 in cash and $14,000,000 in exchangeable shares of one of the subsidiary companies of Enterra. The shares will be exchangeable for units of Enterra twelve months after closing of the transaction. The Enterra units are traded on the Toronto Stock Exchange and on Nasdaq; the exchangeable shares will not be traded. RMG will be acquired Wyoming coalbed
methane (CBM) propertieswith approximately $3,500,000 of debt owed to its mezzanine lenders.
Closing of the transaction is subject to approval of the RMG shareholders; U.S. Energy Corp. and Crested Corp., the principal shareholders of RMG, have agreed to vote in favor of the acquisition. Closing is further subject to completion of due diligence by Enterra, and to obtaining regulatory and stock exchange approvals.
RMG’s minority equity ownership of Pinnacle Gas Resources, Inc. will not be included in the transaction with Enterra, which has resulted in a decrease in the consideration to be paid by Enterra from the previously-announced $30,000,000, to the $20,000,000 in the definitive agreement signed as of April 11, 2005. However, Enterra will be entitled to be paid up to (but not more than) $2,000,000 if proceeds from a non-affiliated party.future disposition of the minority equity interest in Pinnacle exceed $10,000,000.
Uranium Power Corp.
As of April 11, 2005, the company and Crested (as the USECC Joint Venture) 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. The purchase pricejoint venture generally covers uranium properties in Wyoming and other properties identified in the USECC Joint Venture uranium property data base, but excluding the Green Mountain area and Kennecott’s Sweetwater uranium mill, the Shootaring Canyon uranium mill in southeast Utah (and properties within ten miles of $6.8
million was paidthat mill), and properties acquired in connection with $5.0 milliona future joint venture involving that mill.
The initial participating interests in the joint venture (profits, losses and capital calls) are 50% for the USECC Joint Venture and 50% for UPC, based on their contributions of the Sheep Mountain properties. Operations will be funded by cash $500,000capital contributions of the parties; failure by a party to fund a capital call may result in a 30 day secured note,
$600,000 in restricted USE stock and $700,000 in restricted RMG stock. RMG
financed $3.7 millionreduction or the elimination of the cash component fromits participating interest. In addition, a recently established $25
million credit facility arrangedfailure by Petrobridge Investment Management, LLC
(Petrobridge), a mezzanine lender headquartered in Houston, TX. As defined by
the agreement, terms under the credit facility include the following: (1)
Advances under the credit facility are subjectUPC to lenders approval; (2) All
revenues from oil and gas properties securing the credit facility will be paid
to a lock bos controlled by the lender. All disbursementspay for lease operating
costs, revenue distributions and operating expenses will require approval by the
lender before distributions are made, and (3) The Company must maintain certain
financial ratios and production volume, among other things.
The properties acquired include 247 completed wells of which 138 wells were
producing at the time of the acquisition, approximately 6.0 million cubic feet
of gas per day (mmcfd) (approximately 3.2 mmcfd net to RMG) and 40,120
undeveloped fee acres, of which RMG owns 100%. RMG will operate 89% of the wells
and owns an average 58% workingits 50% interest in the producing wellsSheep Mountain properties may result in a reduction or the elimination of
U.S. ENERGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 and a 100%
working interest in all2002, AND MAY 31, 2002 (Continued) UPC’s participating interest. A budget of the undeveloped acreage. The properties purchased
serve as the sole collateral$567,842 for the credit facility. Withseven months ending December 31, 2005 has been approved, relating to reclamation work at the acquisition,
RMG's grossSheep Mountain properties, exploration drilling, geological and net acreage holdings increase to approximately 264,300engineering work, and 128,200, respectively.
SUTTER GOLD MINING CO.
On January 5, 2004, the Company, through Suttter, entered into a Letterother costs. A substantial portion of Intent to merge, via a reverse takeover, with Globemin Resources, Inc. a public
company headquartered in Vancouver, Canada. Pursuant to the Letter of Intent,
after the reverse trakeover is closed, Sutter plans on raising equity funds and
begin further exploration work on the properties and the construction of a new
secondary access raise to comply with US Mine Safety Health Administration
regulations and improve ventilation as well as to better define known
mineralization. The explorationthis work will be run through the Comet mineralized
zoneperformed by (and be paid to) USECC Joint Venture as soon as funds are made available through equity or debt financing. manager.
The current resource production plan is to initially produce a stockpile of
mineralized material sufficient to operate a mill at 300 tons-per-day (tpd)
while the mill is being built. The second stage of development will be to
construct a conventional 300 tpd mill on site, which will be designed so that it
can easily be expanded to accommodate the planned production of 500 tpd. Closingmanager of the reverse takeoverjoint venture is the USECC Joint Venture; the manager will implement the decisions of the management committee and operate the business of the joint venture. UPC and the USECC Joint Venture each have two representatives on the four person management committee, subject to negotiation and approvalchange if the participating interests of the share
exchange agreements byparties are adjusted. The manager is entitled to a management fee from the directorsjoint venture equal to a minimum of 10% of the manager’s costs to provide services and shareholdersmaterials to the joint venture (excluding capital costs) for field work and personnel, office overhead and general and administrative expenses, and 2% of both companies and
approval by Canadian Regulatory Authorities.
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capital costs. The manager may be replaced if its participating interest becomes less than 50%.
REPORT OF INDEPENDENT CERTIFIED
REGISTERED PUBLIC ACCOUNTANTSACCOUNTING FIRM ON SCHEDULE
To U.S. Energy Corp:
In connection with our audit of the consolidated financial statements of U.S. Energy Corp. and subsidiaries referred to in our report dated February 27, 2004, which is included in the Company's annual report on Form 10-K, we have also audited Schedule II for the year ended December 31, 2003, the seven months ended December 31, 2002 and the yearsyear ended May 31, 2002 and 2001.2002. In our opinion, this schedule presents fairly, in all material respects, the information to be set forth therein.
/s/ GRANT THORNTON LLP
Oklahoma City, Oklahoma
U.S. ENERGY CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance Additions
beginning charged to Deductions Balance end
of period expenses and Other of period
---------- ---------- ---------- ------------
May 31, 2001 $ 27,800 -- -- $ 27,800
========== ========== ========== ============
May 31, 2002 $ 27,800 -- -- $ 27,800
========== ========== ========== ============
December 31, 2002 $ 27,800 -- -- $ 27,800
========== ========== ========== ============
December 31, 2003 $ 27,800 -- -- $ 27,800
========== ========== ========== ============
| | | Balance | | Additions | | | | | | | | | beginning | | charged to | | Deductions | | Balance end | | | | | of period | | expenses | | and Other | | of period | | | | | | | | | | | | | | May 31, 2002 | | $ | 27,800 | | | -- | | | -- | | $ | 27,800 | | | | | | | | | | | | | | | | | | December 31, 2002 | | $ | 27,800 | | | -- | | | -- | | $ | 27,800 | | | | | | | | | | | | | | | | | | December 31, 2003 | | $ | 27,800 | | | -- | | | -- | | $ | 27,800 | | | | | | | | | | | | | | | | | | December 31, 2004 | | $ | 111,300 | | | -- | | | -- | | $ | 111,300 | |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
On December 17, 2004, the Company dismissed the audit firm Grant Thornton LLP (“GT”). GT had audited the company’s financial statements for more than the last two fiscal years.
The Company has engaged the independent audit firm Epstein, Weber & Conover, Scottsdale, Arizona, to audit the company’s financial statements for the year ended December 31, 2004.
GT’s audit report on the financial statements for the year ended December 31, 2003, the seven months ended December 31, 2002, and the (former) fiscal year ended May 31, 2002, contained a qualification of uncertainty as to whether the Company will continue as a going concern. The audit report did not contain an adverse opinion or a disclaimer of opinion, and was not otherwise qualified or modified as to audit scope or accounting principles.
The decision to change audit firms was recommended by the Company’s audit committee, and approved by that committee and the board of directors.
There has not been, during the two most recent fiscal years, or during any subsequent interim period preceding the change of audit firms, any disagreement with GT on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of GT, would have caused it to make reference to the subject matter of the disagreement in connection with its report.
In addition, during the two most recent fiscal years, there were no disagreements between the Company and GT which constituted “reportable events” under item 304(a)(1)(v) of Regulation S-K. Disclosure of such “reportable events” would be required even if the Company and GT did not express a difference of opinion regarding the event.
ITEM 9A. CONTROLS AND PROCEDURES
Controls and Procedures
The Company'sCompany’s Principal Executive Officer and Principal Financial Officer have reviewed and evaluated the effectiveness of the Company'sCompany’s disclosure controls and procedures (as defined in Exchange Act Rule 240.13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Principal Executive Officer and the Principal Financial Officer have concluded that the Company'sCompany’s current disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission'scommission’s rules and forms. There was no change in the Company'sCompany’s internal controls that occurred during the fourthfurther quarter of the period covered by this report that has materially affected, or is reasonably likely to affect, the Company'sCompany’s internal controls over financial reporting.
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ITEM 9B. Other Information
None
PART III
In the event a definitive proxy statement containing the information being incorporated by reference into this Part III is not filed within 120 days of December 31, 2003,2004, we will file such information under cover of a Form 10-K/A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors and Executive officers of the Registrant.
The information required by Item 10 with respect to directors and certain executive officers is incorporated herein by reference to our Proxy Statement for the Meeting of Shareholders to be held in June 2004,2005, under the captions "Proposal“Proposal 1: Election of Directors,"” Filing of Reports Under Section 16(a),"
and" “and” Business Experience and Other Directorships of Directors and Nominees."” The information regarding the remaining executive officers follows:
The Company has adopted a Code of Ethics. A copy of the Code of Ethics will be provided to any person without charge upon written request addressed to Daniel P. Svilar, Secretary, 877 N. 8th W.,North 8th West, Riverton, Wyoming 82501.
INFORMATION CONCERNING EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS.
Information Concerning Executive Officers Who are Not Directors.
The following are the two executive officers of USE as of the date of this Form 10-K; these persons devote their full time to the Company'sCompany’s business.
ROBERT SCOTT LORIMER,
Robert Scott Lorimer, age 53,54, has been the Chief Accounting Officer for both USE and Crested for more than the past five years. Mr. Lorimer also has been Chief Financial Officer for both these companies since May 25, 1991, their Treasurer since December 14, 1990, and Vice President Finance since April 1998. He serves at the will of each board of directors. There are no understandings between Mr. Lorimer and any other person, pursuant to which he was named as an officer, and he has no family relationship with any of the other executive officers or directors of USE or Crested. During the past five years, Mr. Lorimer has not been involved in any Reg. S-K Item 401(f)40(f) listed proceeding.
DANIEL
Daniel P. SVILAR,Svilar, age 75,76, has been General Counsel for USE and Crested for more than the past five years. He also has served as Secretary and a director of Crested, and Assistant Secretary of USE. On March 25, 2002, Mr. Svilar was appointed Secretary of USE. His positions of General Counsel to, and as officers of the companies, are at the will of each board of directors. There are no understandings between Mr. Svilar and any other person pursuant to which he was named as officer or General Counsel. He has no family relationships with any of the other executive officersofficer or directors of USE or Crested, except his nephew
Nick Bebout is a USE director.Crested. During the past five years, Mr. Svilar has not been involved in any Reg. S-K Item 401(f) proceeding.
ITEM 11. EXECUTIVE COMPENSATION.
Executive Compensation.
The information required by Item 11 is incorporated herein by reference to the Proxyproxy Statement for the Meeting of Shareholders to be held in June 2004,2005, under the captions "Executive Compensation" and "Director's Fees and Other Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS.
Security Ownership Of Certain Beneficial Owners and Management and Related Stockholders matters.
The information required by Item 12 is incorporated herein by reference to the Proxy Statement for the Meeting of Shareholders to be held in June 2004,2005, under the caption "Principal Holders of Voting Securities."
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated herein by reference to the Proxy Statement for the Meeting of Shareholders to be held in June 2004,2005, under the caption "Certain Relationships and Related Transactions."
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Principal Accountant Fees and Services
(1) - (4) Grant Thornton LLP billed us as follows for the yearyears ended December 31, 20032004 and 2003. Grant Thornton was dismissed as the seven months endedCompany’s audit firm in December 31, 2002:
Year Ended Seven Months Ended
December 31, 2003 December 31, 2002
Audit Fees(a) $ 80,100 $ 68,900
Audit-Related Fees(b) $ -- $ --
Tax Fees(c) $ 15,800 $ 8,000
All Other Fees(d): $ 13,100 $ 11,000
2004 (see Item 9 above). The information does not include fees paid to the new audit firm in late 2004.
| | | Year ended December 31, | | | | | 2004 | | 2003 | | | | | | | | | | Audit fees (a) | | $ | 115,300 | | $ | 80,100 | | | Audit-related fees(b) | | $ | 27,200 | | $ | -- | | | Tax fees(c ) | | $ | 33,700 | | $ | 15,800 | | | All other fees(d) | | $ | 40,400 | | $ | 13,100 | |
(a)Includes fees for audit of the annual financial statements and review of quarterly financial information filed with the Securities and Exchange Commission ("SEC").
(b)For assurance and related services that were reasonably related to the performance of the audit or review of the financial statements, which fees are not included in the Audit Fees category. The Company had no Audit-Related Fees for the periods ended December 31, 2003,2004, and 2002, respectively.
2003.
(c)For tax compliance, tax advice, and tax planning services, relating to any and all federal and state tax returns as necessary for the periodsyears ended December 31, 20032004 and 2002, respectively.
2003.
(d)For services in respect of any and all other reports as required to be filed by the SEC and other governing agencies.
(5)(i) OurThe audit committee approves the terms of engagement before we engage Grant Thorntonthe audit firm for audit and non-audit services, except as to engagements for services outside the scope of the original terms, in which instances the services have been provided pursuant to pre-approval policies and procedures, established by the audit committee. These pre-approval policies and procedures are detailed as to the category of service and the audit committee is kept informed of each service provided. These policies and procedures, and the work performed pursuant thereto, do not include delegation any delegation to management of the audit committeescommittee's responsibilities under the Securities Exchange Act of 1934.
This approval process was used with respect to the engagement of Grant Thornton for the 2002 and 2003, and with respect for the appointment of the new audit firm Epsetin Weber & Conover for the audit of the 2004 financial statements and related services.
(5)(ii) The percentage of services provided for Audit-Related Fees, Tax Fees and All Other Fees which services were deliveredfor 2004 (and 2003), all provided pursuant to the audit committee’s pre-approval policies and procedures, established by the audit committee, in 2003 (and the
seven months ended December 31, 2002) were: Audit-Related Fees 74% (78%66% (74%); Tax Fees 14% (9%16% (14%); and All Other Fees 12% (13%18% (12%).
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GLOSSARY OF OIL AND NATUAL GAS TERMS
The following are definitions of terms commonly used in the oil and natural gas industry and this Annual Report.
Bbl. One stock tank barrel, or 42 U.S. gallons of liquid volume, used in reference to oil or other liquid hydrocarbons.
Btu. British thermal unit, which is the energy required to raise the temperature of a one-pound mass of water by one degree Fahrenheit.
Coal Bed Methane ("CBM"). A form of natural gas, predominately methane, which is generated during coal formation and is contained in the coal microstructure.
Capital expenditures. Investment outlays for exploratory and development drilling (including exploratory dry holes); leasehold acquisitions; seismic data acquisitions; geological, geophysical and land related overhead expenditures; delay rentals; producing property acquisitions; other miscellaneous capital expenditures; compression equipment and pipeline costs.
Developed acreage. The number of acres which are allocated or assignable to producing wells or wells capable of production.
Development well. A well drilled within the proved area of an oil or natural gas reservoir to the depth of a producing horizon known to be productive.
Exploratory well. A well drilled to find and produce oil or natural gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir, or to extend a known reservoir.
Gross acres or gross wells. The total acres or wells, as the case may be, in which the Company has a working interest.
Lease Operating Expenses ("LOE"). All operating costs related to production activities including direct costs such as direct labor, direct materials, certain workover costs, repairs and maintenance, insurance costs, and gas collection costs.
Mcf. One thousand cubic feet of natural gas at standard atmospheric conditions.
MMcf. One thousand Mcf or One million cubic feet.
MMBtu. One million Btu.
Net acres or net wells. A net acre or well is deemed to exist when the sum of the Company's fractional ownership working interests in gross acres or wells, as the case may be, equals one. The number of net acres or wells is the sum of the fractional working interests owned in gross acres or wells, as the case may be, expressed as whole numbers and fractions thereof.
Operator. The individual or company responsible to the working interest owners for the exploration, development and production of an oil or natural gas well or lease.
Reserves. Oil and natural gas on a net revenue interest basis, estimated to be commercially recoverable. "Proved developed reserves" include proved developed producing reserves and proved developed behind-pipe reserves. "Proved developed producing reserves" include only those reserves expected to be recovered from existing completion intervals in existing wells. "Proved undeveloped reserves" include those reserves expected to be recovered from new wells on proved undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.
Royalty interest. An interest in an oil and natural gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage, or of the proceeds of the sale thereof, but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage. Royalties may be either landowner’s royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.
Undeveloped acreage. Lease acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether or not such acreage contains proved reserves.
Working interest. An interest in an oil and natural gas lease that gives the owner of the interest the right to drill and produce oil and natural gas on the leased acreage and requires the owner to pay their proportionate share of the costs of drilling and production operations. The share of production to which a working interest owner is entitled will always be smaller than the share of costs that the working interest owner is required to bear, with the balance of the production accruing to governmental tax receipts and mineral interest royalties. ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, REPORTS AND FORMSExhibits, Financial Statements, Schedules, Reports and Forms 8-K. (a) Financial Statements and Exhibits (1) The following financial statements are filed as a part of the Report in Item 8:
Consolidated Financial Statements Page No.
---------
U.S. Energy Corp. and Subsidiaries
Report of Independent Public Accountants
Grant Thornton LLP . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Consolidated Balance Sheets - December 31, 2003, and
December 31, 2002 and May 31, 2002 . . . . . . . . . . . . . . .54-55
Consolidated Statements of Operations
for the Year Ended December 31, 2003, the
Seven Months Ended December 31, 2002
and the Years Ended May 31, 2002 and 2001. . . . . . . . . . .56-57
Consolidated Statements of Shareholders' Equity
for the Year Ended December 31, 2003,
the Seven Months Ended December 31, 2002,
and the Years Ended May 31, 2002 and 2001. . . . . . . . . . .58-61
Consolidated Statements of Cash Flows
for the Year Ended December 31, 2003,
the Seven Months Ended December 31, 2002,
and the Years Ended May 31, 2002 and 2001. . . . . . . . . . .62-64
Notes to Consolidated Financial Statements . . . . . . . . . . . 65-102
Report of Independent Certified
Public Accountants on Schedule. . . . . . . . . . . . . . . . . . . .103
Schedule II - Valuation and Qualifying Accounts. . . . . . . . . .104 | Page No. | | Consolidated Financial Statements U.S. Energy Corp. and Subsidiaries | 56 | | | | Report of Independent Registered Public Accounting Firm Epstein, Weber & Conover | 57 | | | | Report of (former) Independent Registered Public Accounting Firm Grant Thornton, LLP | 58 | | | | Consolidated Balance Sheets - December 31, 2004 and December 31, 2003 | 59-60 | | | | Consolidated Statement of Operations for the Years Ended December 31, 2004 and 2003, the Seven Months Ended December 31, 2002 and the Year Ended May 31, 2002 | 61-62 | | | | Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2004 and 2003, the Seven Months Ended December 31, 2002, and the Year Ended May 31, 2002 | 63-66 | | | | Consolidated Statements of Cash Flows for the Years Ended December 31, 2003 and 2004, the Seven Months Ended December 31, 2002, and the Year Ended May 31, 2002 | 67-69 | | | | Notes to Consolidated Financial Statements | 70-115 | | | | Report of Independent Certified Public Accountants on Schedule | 116 | | | | Schedule II - Valuation and Qualifying Accounts | 117 |
(2) All other schedules have been omitted because the required information in inapplicable or is shown in the notes to financial statements. (3) Exhibits
SEQUENTIAL
EXHIBIT NO. TITLE OF EXHIBIT PAGE NO.
- ------------ ---------------- --------
Exhibit No. | Title of Exhibit | SequentialPage No. | | | | | 3.1 | USE Restated Articles of Incorporation. . . . . . . . . . . . . [2]
Incorporation | [2] | | | | | 3.1(a) | USE Articles of Amendment to
RestatedtoRestated Articles of Incorporation . . . . . . . . . . . . . . . [4]
| [4] | | | | | 3.1(b) | USE Articles of Amendment (Second) to
Restated ArticlestoRestated Articleds of Incorporation
(EstablishingIncorporation(Establishing Series A Convertible Preferred Stock . . . . . . . [9]
-107-
| [9] | | | | | 3.1(c) | Articles of Amendment (Third) to
RestatedtoRestated Articles of Incorporation
(IncreasingIncorporation(Increasing number of authorized shares) . . . . . . . . . . . . [14]
| [14] |
| 3.1(d) | Articles of Amendment to the Articles
ofArticlesOf Incorporation of Rocky Mountain Gas, Inc.
(to(to establish Series A Preferred Stock in March 2004). . . . . . *
| [6] | | | | | 3.2 | USE Bylaws, as amended through April 22, 1992. . . . . . . . . . [4]
1992 | [4] | | | | | 4.1 | Amendment to USE 1998 Incentive Stock Option Plan .. . . . . .. [11]
| [11] | | | | | 4.2 | USE 19982001 Incentive Stock Option Plan
andPlanAnd Form of Stock Option Agreement . . . . . . . . . . . . . . . [8]
4.3-4.8 [intentionally | * | | | | | 4.3-4.10 | [intentionally left blank]
4.9 Form of USE Warrant held by investors in RMG
(Caydal, LLC-31,250, Karns-6,250, Monahan/Cotner-1,875,
Van Buren-1,250, 2nd McCaughey-6,250). . . . . . . . . . . . . . [23]
4.10 [intentionally left blank]
| | | | | | 4.11 | Rights Agreement, dated as of September 19, 2001
between2001between U.S. Energy Corp. and Computershare Trust Company, Inc. as Rights Agent. The Articles ofAmendment of
Amendment to Articles of Incorporation creating the
Series PtheSeries A Preferred Stock is included herewith as an
exhibitanexhibit to the Rights Agreement.
FormAgreement.Form of Right Certificate (as an exhibit to the
RightstheRights Agreement). Summary of Rights, which will be sent to all holders
ofholdersof record of the outstanding shares of Common Stock
ofStockof the registrant, also included as an exhibit to the
Rights Agreement.. . . . . . . . . . . . . . . . . . . . . . . . [12]
theRights Agreement | [12] | | | | 4.12-4.20 [intentionally | [intentionally left blank] | | | | | | 4.21 | USE 2001 Officers' Stock Compensation Plan . . . . . . . . . . . [18]
4.22-4.23 [intentionally | [18] | | | | | 4.22-4.30 | [intentionally left blank]
4.24 | | | | | | 10.1 | Securities Purchase Agreement for $4.72 million debentures (February 2005) | * | | | | | 10.2 | Form of warrant held by
Sanders Morris Harris, Inc.. . . . . . . . . . . . . . . . . . . [23]
4.25 [intentionally left blank]
4.26 Exchange Agreement (for conversion
of RMG shares into USE shares) . . . . . . . . . . . . . . . . . [23]
4.26(a) Debenture (February 2005) | * | | | | | 10.2(a) | Form of Amendment to ExchangeWarrant (February 2005) | * | | | | | 10.3 | Credit Agreement,
(Caydal and McCaughey) . . . . . . . . . . . . . . . . . . . . . [23]
-108-
4.26(b) Form of Amendment to Exchange Agreement
(Karns, Monahan/Cotner,Van Buren). . . . . . . . . . . . . . . . [23]
4.27 Form of warrant held by
McKim & Company- 19,500 and John Schlie-3,000. . . . . . . . . . [23]
4.28 Amendment to Secured Convertible Note, (Caydal) . . . . . . . . . [23]
4.29 Amendment to Secured Convertible Note (Tsunami) .. . . . . . . . [23]
4.30 Form of Warrant (issued to mezzanine credit facility lenders). . *
10.1 USECC Joint Venture Agreement. . . . . . . . . . . . . . . . . . [1]
10.2 Management Agreement with USECC. . . . . . . . . . . . . . . . . [3]
10.3-10.60 [intentionally left blank]
10.61 Closing Agreement - Addendum to Agreement
for Purchase and Sale of Assets (see Exhibit 10.62). . . . . . . [11]
10.62 Agreement for Purchase and Sale of Assets
(Rocky Mountain Gas, Inc. and Quantum Energy LLC). . . . . . . . [9]
10.63 Purchase and Sale Agreement
CCBM, Inc. (subsidiary of Carrizo Oil & Gas, Inc.)
and Rocky Mountain Gas, Inc. . . . . . . . . . . . . . . . . . . [16]
10.64 [intentionally left blank]
10.65 Convertible Promissory Note and
Security Agreement dated May 30, 2002. . . . . . . . . . . . . . [17]
10.66 Convertible Promissory Note and Security Agreement dated November 19, 2002 . . . . . . . . . . . [19]
10.67 ContributionWarrant (without sub-exhibits) - Geddes and Subscription Agreement (to which
RMG, Pinnacle Gas Resources and others are parties). . . . . . . [22]
10.68 Company (July 2004) | * | | | | | 10.4 | Purchase and Sale Agreement, with three amendments
(foramendments(for purchase of Hi - ProHi-Pro assets). . . . . . . . . . . . . . . . [24]
10.69 | [24] | | | | | 10.5 | Credit Agreement (mezzanine credit facility with
PetrobridgewithPetrobridge Investment Management) . . . . . . . . . . . . . . . [24]
10.70 Stock | [24] | | | | | 10.6 | Purchase and Sale Agreement (sale(without exhibits) - Bell Coast Capital, n/k/a/ Uranium Power Corp. (December 2004) | * |
10.7 | Mining Venture Agreement (without exhibits) - Uranium Power Corp. (April 2005) | * | | | | | 10.8 | Pre-Acquisition Agreement, (without exhibits) Enterra Energy Trust, Dated as of stock of subsidiary Canyon
Resources, Inc., owner of Utah commercial properties). . . . . . April 11, 2005 | * | | | | | 14.0 | Code of Ethics . . . . . . . . . . . . . . . . . . . . . . . . . *
| [6] | | | | | 21.1 | Subsidiaries of Registrant . . . . . . . . . . . . . . . . . . . [11]
-109-
| [11] | | | | | 23.0 | Consent of Netherland, Sewell & Associates, Inc., independent
petroleum engineers. . . . . . . . . . . . . . . . . . . . . . . independentpetroleum engineers | * | | | | | 31.1 | Certification under Rule 13a-14(a) John L. Larsen. . . . . . . . Larsen | * | | | | | 31.2 | Certification under Rule 13a-14(a) Robert Scott Lorimer. . . . . Lorimer | * | | | | | 32.1 | Certification under Rule 13a-14(b) John L. Larsen. . . . . . . . Larsen | * | | | | | 32.2 | Certification under Rule 13a-14(b) Robert Scott Lorimer. . . . . Lorimer | * | | | | | * Filed herewith | |
| [1] | Intentionally left blank. | | | | [2] | Incorporated by reference from the like-numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended May 31, 1990, filed September 14, 1990. | | | | [3] | Intentionally left blank. | | | | [4] | Incorporated by reference from the like-numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended May 31, 1992, filed September 14, 1991. | | | | [5] | Intentionally left blank. | | | | [6] | Incorporated by reference from the like-numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2003. | | | | [7] | Intentionally left blank. | | | | [8] | Intentionally left blank. | | | | [9] | Incorporated by reference from the like-numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended May 31, 1998, filed September 14, 1998. | | | | [10] | Intentionally left blank. | | | | [11] | Incorporated by reference from the like-numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended on May 31, 2001, filed August 29, 2001, and amended on June 18, 2002 and September 25, 2002. |
* Filed herewith
_____________
[1] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31, 1989,
filed August 29, 1989.
[2] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31, 1990,
filed September 14, 1990.
[3] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31, 1991,
filed September 13, 1991.
[4] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31, 1992,
filed September 14, 1991.
[5] Intentionally left blank.
[6] Intentionally left blank.
[7] Intentionally left blank.
[8] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31, 1998,
filed September 14, 1998.
[9] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31, 2000,
filed September 13, 2000.
[10] Intentionally left blank.
[11] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended on May 31, 2001,
filed August 29, 2001, and amended on June 18, 2002 and September 25, 2002.
[12] Incorporated by reference to exhibit number 4.1 to the Registrant's Form
8-A12G filed, September 20, 2001.
[13] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form S-3 registration statement (SEC File No. 333-73546),
filed November 16, 2001.
[14] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form S-3 registration statement (SEC File No. 333-75864),
filed December 21, 2001.
-110-
[15] Intentionally left blank.
[16] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form S-3 registration statement, amendment no. 1 (SEC File No.
333-83040), filed May 17, 2002.
[17] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form 8-K, filed June 6, 2002.
[18] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31, 2002,
filed September 13, 2002.
[19] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form 8-K, filed December 9, 2002.
[20] Intentionally left blank.
[21] Intentionally left blank.
[22] Incorporated by reference from the exhibit filed with the Registrant's Form
8-K, filed July 15, 2003
[23] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form S-3 registration statement (SEC File No. 333-110882),
filed December 3, 2003.
[24] Incorporated by reference from the exhibit filed with the Registrant's Form
8-K, filed March 5, 2004.
_________________
| [12] | Incorporated by reference to exhibit number 4.1 to the Registrant's Form 9-A12G filed, September 20, 2001. | | | | [13] | Intentionally left blank. | | | | [14] | Incorporated by reference from the like-numbered exhibit to the Registrant's Form S-3 registration statement (SEC File No. 333-75864), filed December 21, 2001. | | | | [15] | Intentionally left blank. | | | | [16] | Intentionally left blank. | | | | [17] | Intentionally left blank. | | | | [18] | Incorporated by reference from the like-numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended May 31, 2002, filed September 13, 2002. | | | | [19] | Intentionally left blank. | | | | [20] | Intentionally left blank. | | | | [21] | Intentionally left blank. | | | | [22] | Intentionally left blank. | | | | [23] | Intentionally left blank. | | | | [24] | Incorporated by referenced from the exhibit filed with the Registrant's Form 8-K, filed March 5, 2004. |
(b) Reports on Form 8-K. In the last quarter of 2003,2004, the Registrant filed fourtwo Reports on Form 8-K, allone on December 13, 2004 for an Item 5 events,1.01 event and one on November 5, 12 and 20, and December 24,
2003.22, 2004 for an Item 4.01 event. (c) See paragraph a(3) above for exhibits. (d)&n bsp; Financial statement schedules, see paragraph (a)(1) above. No other financial statements are required to be filed.
-111-
filed..
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized. U.S. ENERGY CORP. (Registrant)
Date: March 26, 2004 By: /s/ John L. Larsen
---------------------------------------
John L. Larsen, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 26, 2004 By: /s/ John L. Larsen
---------------------------------------
John L. Larsen, Director
Date: March 26, 2004 By: /s/ Keith G. Larsen
---------------------------------------
Keith G. Larsen, Director
Date: March 26, 2004 By: /s/ Harold F. Herron
---------------------------------------
Harold F. Herron, Director
Date: March 26, 2004 By: /s/ Don C. Anderson
---------------------------------------
Don C. Anderson, Director
Date: March 26, 2004 By: /s/ Nick Bebout
---------------------------------------
Nick Bebout, Director
Date: March 26, 2004 By: /s/ H. Russell Fraser
---------------------------------------
H. Russell Fraser, Director
Date: March 26, 2004 By: /s/ Michael T. Anderson
---------------------------------------
Michael T. Anderson, Director
Date: March 26, 2004 By: /s/ R. Scott Lorimer
---------------------------------------
Robert Scott Lorimer,
Principal Financial Officer/
Chief Accounting Officer
-112-
| | U.S. ENERGY CORP. (Registrant) | | | | | | | | | | | | Date: April 15, 2005 | | By: | /s/ John L. Larsen | | | | | JOHN L. LARSEN, Chief Executive Officer | | | | | | | | Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacities and on the dates indicated. | | | | | | | | | | | | Date: April 15, 2005 | | By: | /s/ John L. Larsen | | | | | JOHN L. LARSEN, Director | | | | | | | | | | | | | Date: April 15, 2005 | | By: | /s/ Keith G. Larsen | | | | | KEITH G. LARSEN, Director | | | | | | | | | | | | | Date: March 15, 2005 | | By: | /s/ Harold F. Herron | | | | | HAROLD F. HERRON, Director | | | | | | | | | | | | | Date: April 15, 2005 | | By: | /s/ Don C. Anderson | | | | | DON C. ANDERSON, Director | | | | | | | | | | | | | Date: April 15, 2005 | | By: | /s/ H. Russell Fraser | | | | | H. RUSSELL FRASER, Director | | | | | | | | | | | | | Date: April 15, 2005 | | By: | /s/ Michael T. Anderson | | | | | MICHAEL T. ANDERSON, Director | | | | | | | | | | | | | Date: April 15, 2005 | | By: | /s/ Michael H. Feinstein | | | | | MICHAEL H. FEINSTEIN, Director | | | | | | | | | | | | | Date: April 15, 2005 | | By: | /s/ Robert Scott Lorimer | | | | | ROBERT SCOTT LORIMER | | | | | Principal Financial Officer/ | | | | | Chief Accounting Officer | |
|