As filed with the Securities and Exchange Commission on May 13, 2004
Registration No. 333-________
Securities and Exchange Commission
Washington, D.C. 20549
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FORM S-1
Registration Statement
Under the Securities Act of 1933
U.S. ENERGY CORP.
-----------------
(Exact name of registrant as specified in its charter)
Wyoming
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(State or other jurisdiction of incorporation or organization)
83-0205516
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(I.R.S. Employer Identification No.)
877 North 8th West, Riverton, Wyoming 82501; Tel. 307.856.9271
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(Address, including zip code, and telephone number, including area code,
of issuer's principal executive offices)
Daniel P. Svilar, 877 North 8th West
Riverton, WY 82501; Tel. 307.856.9271
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(Name, address, including zip code, and telephone number of agent for service)
Copies to: Stephen E. Rounds, Esq.
The Law Office of Stephen E. Rounds
1544 York Street, Suite 110, Denver, CO 80206
Tel: 303.377.6997; Fax: 303.377.0231
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Approximate date of commencement and end of proposed sale to the public: From
time to time after the registration statement becomes effective.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering:[ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Proposed
Proposed Maximum
Amount of Maximum Aggregate
Title of Each Class Securities Offering Dollar Price Amount
of Securities to be Registered Price Per of Securities to of
to be Registered in the Offering Security be Registered Fee
---------------- --------------- -------- ---------------- ----------
Common Stock 1,801,352 $2.25 $ 4,053,042.00 $ 513.53
Shares (1)
Common Stock 1,442,192 $2.25 $ 3,244,932.00 $ 411.13
Shares (2)
Common Stock 977,838 $2.25 $ 2,200,135.50 $ 278.76
Shares (3)
Common Stock 245,991 $2.25 $ 553,479.75 $ 70.13
Shares (4)
Common Stock 1,472,689 $2.25 $ 3,313,550.25 $ 419.83
Shares (5)
Total No. of Securities
to be Registered 5,940,062 $ 13,365,139.50 $ 1,693.37
Shares
(1) The shares being registered for resale under this registration statement
consist of: 1,801,852 outstanding shares held by 56 individuals and 12 entities;
(2) 1,442,192 shares issuable on conversion of Series A preferred stock in a
subsidiary (Rocky Mountain Gas, Inc., "RMG") held by three institutional
investors (number of shares assumes a $1.00 per share conversion price);
(3) 977,838 shares issuable on conversion of shares of common stock in RMG held
by ten individuals and one entity (number of shares assumes a $3.00 per share
conversion price);
(4) 245,991 shares issuable on conversion of debt held by one entity; and
(5) 1,472,689 shares issuable on exercise of warrants and options held by 46
individuals and 19 entities.
Pursuant to rule 457(c), registration fee calculations are estimated based
on the $2.25 market value of the registrant's common stock (Nasdaq Small Cap
price on May, 12, 2004), which is within 5 business days prior to the initial
filing of this registration statement; fees are based on $126.70 per million
dollars of the aggregate offering-market price at that date. The offering price
(for purposes of fee calculation) for shares issuable on exchange conversion of
common and preferred stock of the subsidiary (RMG), and in
2
conversion of registrant debt, is at a low assumed price of $1.00 per share.
Shares may be issued at a higher price depending on market prices.
DELAYING AMENDMENT UNDER RULE 473(A): The registrant hereby amends this
registration statement on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which
specifically states that this registration statement shall become effective in
accordance with section 8(a) of the Securities Act of 1933 or until the
registration statement shall become effective on such date as the Commission
acting pursuant to section 8(a), may determine.
The information in this prospectus is subject to completion or amendment.
The securities covered by this prospectus cannot be sold until the registration
statement filed with the Securities and Exchange Commission becomes effective.
This prospectus shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any state in
which an offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of that state.
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U.S. ENERGY CORP.
5,940,062 SHARES OF COMMON STOCK
This prospectus covers the offer and sale of up to 1,801,352 shares of
common stock ($0.01 par value) of U.S. Energy Corp. ("USE") by shareholders; up
to 1,472,689 shares of common stock by holders of warrants and options on
exercise thereof; up to 2,420,030 shares which may be issued on exchange of
outstanding common stock, and preferred stock, in Rocky Mountain Gas, Inc.
("RMG"), a majority-owned subsidiary of USE) for common stock of USE; and up to
245,991 shares which may be issued on conversion of principal and interest on
debt.
In this prospectus, "selling shareholder" or "selling shareholders" refers
to Bourne Capital, LLC and five individuals who hold warrants to purchase stock
in USE, all of whom also purchased stock in RMG which may be exchanged for stock
in USE; 60 individuals and 12 entities which hold outstanding stock in USE; 48
individuals and 15 entities which hold warrants or options to purchase stock in
USE; three institutional investors who purchased preferred stock in RMG which is
convertible to USE stock, and warrants to purchase USE stock; two entities (two
lenders on a mezzanine credit facility) which hold warrants to purchase to
purchase stock in USE; and Tsunami Partners L.P., which holds debt convertible
to USE stock and warrants to purchase stock. For information about the selling
shareholders, and the transactions in which they acquired the various shares,
options, warrants, and rights to exchange RMG stock for stock in the company,
see "Selling Shareholders."
In this prospectus, "we," "company," and "USE" refer to U.S. Energy Corp.
(and its subsidiaries unless otherwise specifically stated).
The selling shareholders may sell the shares from time to time in
negotiated transactions, brokers' transactions or a combination of such methods
of sale at market prices prevailing at the time of sale or at negotiated prices,
or under rule 144. See "Plan of Distribution." Although we will receive proceeds
if and to the extent options and warrants are exercised, we will not receive
proceeds from sale of any of the shares offered by the selling shareholders.
USE is traded ("USEG") on the Nasdaq Small Cap Market ($2.25 on May 12,
2004).
AN INVESTMENT IN THE SHARES OFFERED BY THIS PROSPECTUS IS SPECULATIVE AND
SUBJECT TO RISK OF LOSS. SEE "RISK FACTORS" BEGINNING ON PAGE 11 AND THE TABLE
OF CONTENTS ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY __, 2004
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TABLE OF CONTENTS
Page No.
Summary Information
The Company..................................................................7
The Offering................................................................10
Risk Factors................................................................11
Risk Factors Involving the Company.....................................11
Limited reserves and production may slow
down exploration of other properties...................................11
Volatile gas prices for Powder River Basin
production may hurt business...........................................11
We may have to begin to curtail operations if we
don't raise more capital by August 2004................................12
We are subject to certain kinds of risk which
are unique to the minerals business....................................12
Delays in obtaining permits for methane
wells could impair our business........................................12
The company's poison pill could discourage
some advantageous transactions.........................................13
Compliance with environmental
regulations may be costly..............................................13
Risk Factors Involving This Offering...................................13
Future equity transactions, including exercise
of options or warrants, could result in dilution;
and registration for public resale of the common
stock in these transactions may depress stock prices...................13
Terms of subsequent financings may
adversely impact your investment.......................................14
Representations About This Offering.........................................14
Forward Looking Statements..................................................14
Use of Proceeds.............................................................14
Capitalization..............................................................16
Selling Shareholders........................................................17
Plan of Distribution........................................................34
5
Business of the Company.....................................................35
Research and Development....................................................61
Environmental...............................................................61
Employees...................................................................62
Mining Claim Holdings.......................................................62
Legal Proceedings...........................................................62
Market for Common Stock, Related Stockholder
Matters and Issuer Purchases of Equity Securities...........................66
Selected Financial Data.....................................................68
Management's Discussion and Analysis of
Financial Condition and Results of Operations...............................71
Future Operations...........................................................81
Effects of Changes in Prices................................................81
Directors and Officers......................................................82
Certain Relationships and Related Transactions..............................92
Principal Accounting Fees and Services......................................92
Description of Securities...................................................93
Disclosure of Commission Position on Indemnification........................95
Where to Find More Information About Us.....................................95
Legal Matters...............................................................96
Experts.....................................................................96
Financial Statements for the Three Years Ended
December 31, 2003...........................................................97
Pro Forma Financial Statements for the year ended
December 31, 2003, Which Give Effect to the
Acquisition of the Hi-Pro Properties .......................................153
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SUMMARY INFORMATION
The following summarizes all material information found elsewhere in this
prospectus. This summary is qualified by the more detailed information in this
prospectus and the exhibits filed with the registration statement which contains
this prospectus.
THE COMPANY
U.S. Energy Corp. is a Wyoming corporation (formed in 1966) in the business
of acquiring, exploring, developing and/or selling or leasing mineral
properties. Our fiscal year ends December 31.
In 2003, almost all 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; 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 - Acquisition of Producing and Non-Producing Properties from Hi-Pro
Production, LLC" and "RMG Equity Financing."
RMG's CBM properties are located in Wyoming and southeastern Montana
(approximately 261,180 gross mineral acres, including properties under option,
but not including acreage held by Pinnacle). 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 may be further
improved with more capacity in 2005. 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
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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 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 of USE funding certain of Crested's obligations from time to time
(due to Crested's lack of cash on hand), Crested subsequently paid a portion of
this debt by issuing common stock to USE, Crested became a majority-owned
subsidiary of USE in fiscal 1993. In fiscal 2001, 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 in the United States.
In the first quarter 2004, USE obtained $350,000 of equity funding from an
accredited investor (100,000 restricted shares of common stock, three year
warrants to purchase 50,000 shares at $3.00 per share; and five year warrants to
purchase 200,000 shares at $3.00 per share). Proceeds will be used as working
capital.
Principal executive offices of USE are located in the Glen L. Larsen
building at 877 North 8th Street West, Riverton, Wyoming 82501, telephone
307-856-9271. RMG has a field office in Gillette, Wyoming.
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
* 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 mill 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."
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In coalbed methane, we compete against many companies, some of which are
much larger and better financed than the company. 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 Dodge does not have a plan to place the molybdenum property into
production.
In the motel, real estate and airport operations area (significant as a
percentage of revenues for 2003, but not our primary business focus), we own and
manage an office building (where the company's headquarters are located), and
small parcels 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.
THE OFFERING
Securities Outstanding 13,658,645 shares of common stock, $0.01 par
value.
Securities To Be Outstanding 17,797,355 shares, assuming options and
warrants on 1,472,689 shares held by the
selling shareholders were exercised as of the
date of this prospectus; outstanding RMG
common and preferred stock is exchanged for
2,420,030 shares of USE; and 245,991 shares
are issued on conversion of principal and
interest on restructured debt (1 share for
each $2.25 principal and interest). The
actual number of USE shares issued in
exchange for RMG stock will depend on the
market price for USE stock at conversion
dates. See "Description of Securities -
Options, Warrant, Convertible Shares of RMG,
and Convertible Debt" and "Selling
Shareholders."
Securities Offered 5,940,062 shares owned or to be owned by the
selling shareholders.
Use of Proceeds We will not receive any proceeds from sale of
shares by the selling shareholders, but we
will receive up to $4,966,400 in proceeds
from exercise of the warrants and options, if
they are exercised, which will be used for
working capital.
Plan of Distribution The offering is made by the selling
shareholders named in this prospectus, to the
extent they sell shares. Sales may be made in
the open market or in private negotiated
transactions, at fixed or negotiated prices.
See "Plan of Distribution."
Risk Factors An investment is subject to risk. See "Risk
Factors."
10
RISK FACTORS
An investment in our common stock is speculative in nature and involves a
high degree of risk. You should carefully consider the following risks and the
other information in this prospectus before investing.
RISK FACTORS INVOLVING THE COMPANY
LIMITED RESERVES AND PRODUCTION MAY SLOW DOWN EXPLORATION OF OTHER
PROPERTIES. In June 2003, RMG transferred coalbed methane properties, including
RMG's only producing wells at the time (the Bobcat property) to Pinnacle Gas
Resources, Inc. ("Pinnacle") in exchange for an equity position in Pinnacle. In
January, 2004, we acquired a producing field. See "Business - Transaction with
Pinnacle Gas Resources, Inc." and "Acquisition of Producing and Non-Producing
Properties from Hi-Pro Production, LLC."
No reserves have been established for any other properties, because we have
not drilled and tested enough wells on the properties to determine if they
contain economic reserves of coalbed methane. For some properties, we will have
to establish at least some reserve parameters before gas transmission companies
will build gas lines to our properties, and construction of lines will depend
also on then-current and projected gas market prices. If we have the necessary
capital, we may elect to build our own lines over to existing transmission lines
near the properties in the Powder River Basin in Wyoming and Montana.
Due to permitting delays in Montana, we may not realize production from the
Montana properties until mid-2005, or later. Other Wyoming properties could be
in production in late 2004 - early 2005, but production might be delayed due to
low market prices for gas. Low market prices could delay gas purchasers from
building the lines necessary to move gas from our properties to the major gas
transmission lines.
These factors may make it difficult to raise the amount of capital needed
to further explore the coalbed methane production potential in our properties in
a rapid manner. In the meantime, we have only limited working capital. See
below.
VOLATILE GAS PRICES FOR POWDER RIVER BASIN PRODUCTION MAY HURT BUSINESS.
Gas prices per Mcf (1,000 cubic feet) for Powder River Basin production (where
RMG owns properties) averaged $4.44, $3.33 and $2.13 for 2003, 2002 and 2001,
but in those years the lowest prices were $3.14, $1.09 and $1.05. The negative
effect of price swings can be neutralized to some extent by fixed price
contracts, but volatile prices make it difficult to pick the optimum price to
fix; the fixed price could turn out to be lower than market over the life of the
contract. And, even with stable prices, if a field's production declines
significantly, the producer must buy gas in the open market to fill the
contract.
Historically, Powder River Basin gas prices have been lower than national
prices, due to the limited capacity of gas transmission lines to ship production
to the mid-west and west coast markets. In 2003, this negative price
differential was from 10% to 45% (and even more during the off season), although
the differential decreased in the fourth quarter of 2003 and first quarter 2004,
compared to prices in the fourth quarter 2002. Recent increases in this 'take
away capacity,' and other pipelilne increases planned or under construction, may
not eliminate the negative price differential or even significantly decrease it.
A return to sustained low gas prices nationwide (particularly as amplified
for Powder River Basin products through the negative pricing differential) would
impair our ability to raise capital for RMG and reduce revenues from production
coming on line.
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WE MAY HAVE TO BEGIN TO CURTAIL OPERATIONS IF WE DON'T RAISE MORE CAPITAL
BY AUGUST 2004. At December 31, 2003 we had working capital of $3,281,700 and an
accumulated deficit of $43,073,000. Our current level of operations, including
general and administrative overhead, mineral operations (primarily holding costs
for the uranium and gold properties), and costs to comply with lease and
permitting obligations for the coalbed properties, are estimated to cost
$8,262,000 for the twelve months ending December 31, 2004. If we do not realize
cash from liquidating assets, or other sources, or if RMG spends more money on
exploration than will be covered by current arrangements, additional equity
financing may be necessary to sustain the company's current level of operations
after the second quarter 2004. There are no current commitments for such future
financing as may be necessary.
Approximately $21 million under a lending facility is available to a
wholly-owned subsidiary of RMG (RMG I) to buy and develop coalbed methane
properties, but only if the lenders approve the properties to be acquired and
the development plans for those properties. Loan proceeds can't be used for USE
working capital or for RMG's operating expenses unrelated to the acquired
properties, and until the loans are repaid, all revenues from acquired
properties are dedicated to pay only RMG I's operating expenses related to the
properties, and loan payments. In addition, failure to maintain financial ratios
and minimum production levels required by the lenders could result in loss of
the properties, as well as our investments in the properties in excess of the
loans. See "Business - Acquisition of Producing and Non-Producing Properties
from Hi-Pro Production, LLC."
Only the Hi - Pro properties are in production. Lack of production and
established reserves on the other properties may make it difficult to raise
capital for exploration and development, or to acquire properties which are not
at the level of development required by the lenders.
WE ARE SUBJECT TO CERTAIN KINDS OF RISK WHICH ARE UNIQUE TO THE MINERALS
BUSINESS. The exploration for and production of minerals is highly speculative
and involves risks different from and in some instances greater than risks
encountered by companies in other industries. Many exploration programs do not
result in the discovery of mineralization and any mineralization discovered may
not be of sufficient quantity or quality. Also, the mere discovery of promising
mineralization may not warrant production, because the minerals (including
methane gas) may be difficult or impossible to extract (produce) on a profitable
basis.
Profitability of any mining and production we may conduct will involve a
number of factors, including, but not limited to: The ability to obtain all
required permits; costs of bringing the property into production; the
construction of adequate production facilities; the availability and costs of
financing; keeping ongoing costs of production at economic levels, and market
prices for the metals or hydrocarbons to be produced staying above production
costs. Our properties, or properties we might acquire in the future, may not
contain deposits of minerals or coalbed methane gas that will be profitable to
produce.
In addition, all forms of mineral (and oil and gas and coalbed methane)
exploration and production require permits to have been issued by various
federal and state agencies. See below.
DELAYS IN OBTAINING PERMITS FOR METHANE WELLS COULD IMPAIR OUR BUSINESS.
Drilling and producing coalbed methane wells requires obtaining permits from
various governmental agencies. The ease of obtaining the necessary permits
depends on the type of mineral ownership and the state in which the property is
located. Intermittent delays in the permitting process can reasonably be
expected throughout the development of any property. We may shift our
exploration and development strategy as needed to accommodate the permitting
process. As with all governmental permit processes, permits may not be issued in
a timely fashion or in a form consistent with our plan of operations.
12
THE COMPANY'S POISON PILL COULD DISCOURAGE SOME ADVANTAGEOUS TRANSACTIONS.
We have adopted a shareholder rights plan, also known as a poison pill (see
"Description of Securities"). The plan is designed to discourage a takeover of
the company at an unfair low price. However, it is possible that the board of
directors and the takeover acquiror would not agree on a higher price, in which
case the takeover might be abandoned, even though the takeover price was at a
significant premium to market prices. Therefore, as a result of the mere
existence of the plan, shareholders would not receive the premium price.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS MAY BE COSTLY. Our business
(mostly coalbed methane) is intensely regulated by government agencies. Permits
are required to drill and pump methane wells, explore for minerals, operate
mines, build and operate processing plants, and handle and store waste. The
regulations under which permits are issued change from time to time to reflect
changes in public policy or scientific understanding of issues. If the economics
of a project would not justify the changes, we might have to abandon the
project.
The company must comply with numerous environmental regulations on a
continuous basis, to comply with the United States Clean Air Act, the Clean
Water Act, the Resource Conservation and Recovery Act ("RCRA"), and the
Comprehensive Environmental Response Compensation Liability Act ("CERCLA"). For
example, water and dust discharged from mines and tailings from prior mining or
milling operations must be monitored and contained and reports filed with
federal, state and county regulatory authorities. Additional monitoring and
reporting is required by the United States Nuclear Regulatory Commission for
uranium mills even if not currently operating (like the company's uranium mill
at Ticaboo, Utah). The Abandoned Mine Reclamation Act in Wyoming and similar
laws in other states where we have properties impose reclamation obligations on
abandoned mining properties, in addition to or in conjunction with federal
statutes.
Failure to comply with these regulations could result in substantial fines
and environmental remediation orders.
RISK FACTORS INVOLVING THIS OFFERING
FUTURE EQUITY TRANSACTIONS, INCLUDING EXERCISE OF OPTIONS OR WARRANTS,
COULD RESULT IN DILUTION; AND REGISTRATION FOR PUBLIC RESALE OF THE COMMON STOCK
IN THESE TRANSACTIONS MAY DEPRESS STOCK PRICES. From time to time, the company
sells restricted stock and warrants, and convertible debt (or stock in
subsidiary companies, convertible to stock in the company), to investors in
private placements conducted by broker-dealers, or in negotiated transactions.
Because the stock is restricted, the stock is often sold at a discount to market
prices compared to a public stock offering, and the exercise price of the
warrants sometimes (and/or the conversion price for stock in subsidiaries) is at
or even lower than market prices. These transactions cause dilution to existing
shareholders. Also, from time to time, options are issued to employees and third
parties as incentives, with exercise prices equal to market. Exercise of in-
the-money options and warrants will result in dilution to existing shareholders;
the amount of dilution will depend on the spread between market and exercise
price, and the number of shares involved. The company will continue to grant
options to employees with exercise prices equal to market price at the grant
date, and in the future may sell restricted stock and warrants (or stock in
subsidiary companies convertible to stock in the company), all of which may
result in dilution to existing shareholders.
Public resale (pursuant to registration statements) of such restricted
stock, and of stock issued in conversion of debt or stock of subsidiary
companies, may depress our price. For example, all of the stock covered by this
prospectus was sold to private investors, or will be issued on conversion of
debt or stock in subsidiary companies which was sold to private investors; these
private investors are the selling shareholders under this prospectus.
13
TERMS OF SUBSEQUENT FINANCINGS MAY ADVERSELY IMPACT YOUR INVESTMENT. We may
have to raise equity, debt or preferred stock financing in the future. Your
rights and the value of your investment in the common stock could be reduced.
For example, if we have to issue secured debt securities, the holders of the
debt would have a claim to our assets that would be prior to the rights of
stockholders until the debt is paid. Interest on these debt securities would
increase costs and negatively impact operating results. Preferred stock could be
issued in series from time to time with such designations, rights, preferences,
and limitations as needed to raise capital. The terms of preferred stock could
be more advantageous to those investors than to the holders of common stock. In
addition, if we need to raise more equity capital from sale of common stock,
institutional or other investors may negotiate terms at least and possibly more
favorable than the terms of this offering. Shares of common stock which we sell
could be sold into the market, which could adversely affect market price.
REPRESENTATIONS ABOUT THIS OFFERING
We have not authorized anyone to provide you with information different
from that contained in this prospectus. This prospectus is not an offer to sell
nor does it seek an offer to buy the shares in any jurisdiction where this offer
or sale is not permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus (or any supplement), regardless
of when it is delivered or when any shares are sold.
FORWARD LOOKING STATEMENTS
We make statements in this prospectus which are considered to be "forward
looking" statements. All statements (other than statements of historical fact)
about financial and business strategy and the performance objectives of
management are forward-looking statements. These forward-looking statements are
based on the beliefs of management, as well as assumptions made by and
information currently available to them. These statements involve risks that are
both known and unknown, including unexpected economic and market factors,
failure to accurately forecast operating and capital expenditures and capital
needs (due to rising costs and/or different drilling and production conditions
in the field), changes in timing or conditions for getting regulatory approvals
to drill coalbed methane wells where needed, and other business factors. The use
of the words "anticipate," "believe," "estimate," "expect," "may," "will,"
"should," "continue," "intend" and similar words or phrases, are intended by us
to identify forward-looking statements (also known as "cautionary statements"
because you should be cautious in evaluating such statements in the context of
all the information in this prospectus and the information incorporated by
reference into this prospectus). These statements reflect our current views with
respect to future events. They are subject to the realization in fact of
assumptions, but what we now think will happen, may turn out much different, and
our assumptions may prove to have been inaccurate or incomplete.
The investment risks discussed under "Risk Factors" specifically address
all of the material risk factors that may influence future operating results and
financial performance. Those investment risks are not "boiler plate" but are
intended to tell you about the uncertainties and risks inherent in our business
at the present time which you need to evaluate before making your investment
decision.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares by the
selling shareholders pursuant to this prospectus, but we will receive up to
$4,966,400 in proceeds from the exercise of the options and warrants, if they
exercise all the options and warrants, which will be used by the company for
working capital.
14
DILUTION
At December 31, 2003, the net tangible book value ("NTBV") of the company
was $6,760,800, or $0.49 per share. NTBV per share represents the amount of our
total tangible assets less total liabilities, divided by the number of shares of
common stock outstanding at April 30, 2004 of 13,658,645. Dilution in pro forma
net tangible book value per share represents the difference between the amount
per share paid by purchasers of common stock in this offering and the pro forma
NTBV per share of common stock immediately after completion of this offering on
a pro forma as adjusted basis.
After giving effect to the selling shareholders' conversion of RMG
preferred and common stock to shares of the company, conversion of company debt
to shares of the company, and exercise of the warrants and options held by the
selling shareholders, our pro forma NTBV as of December 31, 2003 would have been
$14,824,900, or $0.83 per share, with 17,797,355 shares outstanding,
representing an immediate increase in NTBV of $0.34 per share of common stock to
existing shareholders.
Assuming the selling shareholders sell their shares at an assumed market
price of $2.21, new investors in this offering would realize an immediate
dilution in pro forma NTBV of $1.38. The table illustrates this per share
dilution:
Assumed offering price per share: $2.21
NTBV per share at December 31, 2003: $0.49
Increase in NTBV per share
attributable to conversions and
exercise of warrants and options $0.34
-----
Pro forma NTBV per share
as of December 31, 2003 $0.83
--- ---- -----
Dilution in pro forma NTBV
per share for new investors $1.38
=====
The foregoing assumes no options held by officers, directors and employees
of the company are exercised. At December 31, 2003, there were 2,873,646 shares
of common stock issuable on exercise of such options at a weighted average
exercise price of $2.74 per share.
15
CAPITALIZATION
The capitalization of the company at December 31, 2003, and as adjusted for
the selling shareholders' conversion of common and preferred stock of RMG,
conversion of company debt, and exercise of warrants and options, is shown in
the table.
December 31, 2003
-------------------------------------------------------------
Pro Forma Pro Forma
Actual Adjustments (1) As Adjusted
-------------- -------------------- ---------------
Cash and cash equivalents $ 4,084,800 $ 6,766,400 (2) $ 10,851,200
Long-term debt $ 1,317,600 $ (397,700) (3) $ 919,900
Minority Interests $ 496,000 $ (200,000) (4) $ 296,000
Shareholders' equity
Common stock, unlimited number authorized,
13,658,645 shares issued and outstanding
(actual); 17,797,355 shares issued and
outstanding (as adjusted) $ 128,200 $ 41,400 (2)(3)(4) $ 169,600
Additional paid-in capital $ 52,961,200 $ 8,178,500 (2)(3)(4) $ 61,139,700
Accumulated deficit $ (43,073,000) $ (155,800) (3) $ (43,228,800)
Total shareholders' equity $ 6,760,800 $ 8,064,100 $ 14,824,900
(1) Gives effect to the issuance of stock should (a) all outstanding warrants
be exercised, (b) certain RMG shares be converted to shares of the
company's common stock and (c) the retirement of certain debt take place.
All these issuances of common stock of the company are included in this
prospectus. Also includes the issuance of Series A Preferred stock by RMG
after December 31, 2003 and the issuance of stock for the purchase of
assets of Hi-Pro Production.
(2) The assumed exercise of 1,472,689 warrants or options for $4,966,400, and
the issuance of Series A Preferred RMG shares after December 31, 2003 for
$1,800,000 which are convertible to 1,442,192 common shares of the company
(at an assumed conversion price of $1.50).
(3) Gives effect to the conversion of long term debt with interest to an
investor for the issuance of 245,991 shares of the company's common stock.
(4) Gives effect to issuance of RMG common shares for the purchase of Hi-Pro
Production assets and the conversion of those shares into 700,000 shares of
the company's common stock assuming a conversion price of $1.00 per share,
and the conversion of RMG common stock purchased by investors into 277,838
common shares of the company.
16
SELLING SHAREHOLDERS
This prospectus covers the offer and sale by the selling shareholders of up
to 5,940,062 shares of common stock owned or to be owned on exercise of options
and warrants by the selling shareholders, on conversion of RMG common and
preferred stock, and conversion of debt. The footnotes to the table below give
information about shares issuable on exercise of the options and warrants by the
selling shareholders.
None of the selling shareholders are affiliates of the company or any
subsidiary of the company.
The shares covered by this prospectus, and the transactions in which the
selling shareholders acquired their shares (or options or warrants), are
summarized below:
o 279,033 shares are held by 16 accredited investors who purchased shares at
$3.00 per share (and warrants, see below) from the company during the
period June 21, 2001 to October 18, 2001, in a private placement conducted
by the company (see below).
o 1,205 shares held by 3 persons associated with McKim & Company LLC
("McKim", a registered broker-dealer, formerly VentureRound Group LLC) who
acquired the shares through the exercise of warrants at $3.75 per share.
These and other shares acquired on exercise of warrants, and outstanding
warrants held by persons either associated (licensed) with, or owners of
equity interests in McKim (which transactions are described below) were
acquired in financing or advisory service transactions in which McKim was
involved. In each of these transactions, the services provided by McKim
were provided by persons associated (licensed) with McKim. The warrants
were issued in partial consideration for these services, but distributed to
the owners of McKim (including the licensed brokers, who also own equity
interests in McKim). Those persons who received warrants as owners of
McKim, but who are not licensed as brokers, did not provide
securities-transaction services and did not otherwise pay for the warrants.
o 10,667 shares held by two persons who acquired the shares on exercise of
warrants at $3.75 per share.
o 45,795 shares underlying warrants held by 24 persons associated with McKim,
exercisable at $3.75 per share. These warrants include (a) warrants
(expiring October 18, 2006) for 38,966 shares issued to McKim for services
as financial advisor to the company in connection with the private
placement of securities to 18 accredited investors completed on October 18,
2001 (see above), plus (b) warrants (expiring November 2, 2006) for 9,829
shares held by persons associated (licensed) with McKim, for financial
planning and strategic services provided to the company by McKim.
o 523,297 shares of restricted common stock issued to seven investors in
exchange for shares of RMG.
o 222,874 shares are held by 14 accredited investors who purchased shares at
$3.25 per share (and warrants, see below) from the company during the
period February 20, 2002 to March 26, 2002, in a private placement
conducted by the company (see below). There were 16 investors in the
private placement; two have sold their shares (but not exercised their
warrants) prior to the date of this prospectus.
o 56,383 shares are issuable on exercise of warrants held by the 16
investors, at an exercise price of $4.00 per share, expiring in March 2005.
17
o 27,813 shares under warrants held by 34 persons who own equity interests in
McKim, exercisable at $4.00 per share, expiring in March 2005.
o 379 shares held by two persons who own equity interests in McKim, who
acquired the shares on exercise of warrants at $4.00 per share
o 120,000 shares under warrants held by Bourne Capital, LLC, a private lender
and shareholder of U.S. Energy Corp., exercisable at $3.00 per share. These
warrants originally were issued to Caydal, LLC. in connection with Caydal's
May 2002 purchase of shares and warrants in the company . Caydal sold the
shares and retained the warrants. On March 16, 2004, Caydal transferred all
such warrants to Bourne Capital, LLC; Bourne and Caydal have the same
beneficial owners.
o 29,559 shares under warrants held by 27 persons who own equity interests in
McKim, exercisable at $3.00 per share, expiring March 18 and 25, 2005.
o 441 shares held by two persons who own equity interests in McKim, who
acquired the shares on exercise of warrants at $3.00 per share.
o 3,000 shares held by one person who owns an equity interest in McKim, who
acquired the shares on exercise of warrants at $3.75 per share.
o 52,110 shares held by 10 persons who had been associated (licensed) with a
broker-dealer which raised funds for Yellowstone Fuels Corp., a subsidiary
of the company, under a private placement of YSFC common stock in 1997. The
shares were acquired through the exercise of warrants at $3.64 per share.
The YSFC warrants were exchanged for warrants of the company in 1999. The
unexercised warrants have expired.
o 60,000 shares under warrants held by Tsunami Partners, L.P., exercisable at
$3.00 per share. These warrants expire November 19, 2005.
o 14,799 shares under warrants held by 30 persons who own equity interests in
McKim, exercisable at $3.00 per share. These warrants expire November 19,
2005.
o 201 shares held by two persons who own equity interests in McKim, who
acquired the shares on exercise of warrants at $3.00 per share.
o 10,000 shares held by a trusts issued in settlement of a lawsuit involving
the company's subsidiary Sutter Gold Mining Company.
o 18,000 shares under options held by Robert Nicholas, which were issued as
partial payment for legal services, exercisable at $3.00 per share. These
options expire August 9, 2004.
o 9,805 shares held by two persons, which shares were issued as partial
payment for legal services.
o 1,913 shares were issued to Dale May and his wife Jeanne May in March 2002,
in exchange for 2,500 RMG shares which were issued to Mr. May in January
2002 as a finder's fee for his introduction to RMG of several investors.
Mr. May has represented to the company that he is not a securities 'dealer'
as that term is defined in the Securities Act of 1933.
18
o 50,000 shares, and warrants to purchase an additional 50,000 shares
(exercisable at $5.00 per share, expiring June 30, 2006), were issued to
Sanders Morris Harris Inc. ("SMH"), a financial advisory firm, 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.
o 15,000 held by Riches In Resources, Inc., a financial consulting firm.
7,920 shares were issued to for services to the company provided from
November 15, 2002 through July 15, 2002 and another 7,080 shares were
issued for services during the remaining term of the agreement (through May
15, 2004) with this consultant. This consulting agreement was entered into
on May 30, 2003.
o 12,000 shares were issued to C.C.R.I. Corporation, a financial consulting
firm, under an agreement entered into May 30, 2003, 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 12,000
shares and a warrant to purchase 12,500 shares, exercisable at $3.75 per
share to C & H Capital, Inc., which is owned by Jason Wayne Assad, who is
associated with C.C.R.I. All of these warrants expire March 16, 2006.
o 59,000 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. 25,000 of these shares were issued in May
and July 2002, and 34,000 shares were issued in July 2003.
o 10,000 shares were issued to Tim and Betty Crotty in June of 2003 as
settlement of a lease obligation relating to a property owned by the
company's subsidiary, Sutter Gold Mining Company.
o 12,500 shares were issued to Robert Hockert and 25,000 shares to Mathew B.
Murphy in May of 2002 as partial payment of producing coalbed methane
properties.
o 24,260 shares were issued to James and Vida Roebling as payment for a
coalbed methane lease. These shares were issued in December of 2001 and
January 2002.
o In 2002, the company borrowed $500,000 from Tsunami Partners L.P., with
rights to convert principal, but not interest, to shares of the company at
a conversion rate of 1 share for each $3.00 of principal. On October 28,
2003, the company and Tsunami amended the loan 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 $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 the warrants issued to
Tsunami was extended 12 months (from the original May 30, 2005 to the new
date of May 30, 2006).
Resale of 245,991 shares issuable on Tsunami's future conversion of
principal and interest is covered by this prospectus.
19
o In June and July 2003, Caydal, LLC and five individuals invested $750,000
in 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.
On October 28, 2003, Caydal and one individual (James McCaughey) accepted
the company's and RMG's offer, made to all of the 2003 investors in RMG, to
restructure the 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%.
Caydal has converted the RMG shares (at the adjusted 77.5% conversion rate)
owned after Caydal accepted RMG's offer in October 2003, and has sold the
conversion shares. Caydal's warrants on 31,250 shares of the company's
stock now are owned by Bourne Capital, LLC.
This prospectus covers the resale of 277,838 shares of the company on
conversion of RMG shares, using an assumed conversion price of $1.00 per
share. The actual number of shares issued will depend on market price at
conversion dates. The RMG shares issuable on exercise of the RMG warrants
are not entitled to conversion into USE shares.
This prospectus covers the resale of the 46,875 shares underlying warrants,
of which 6,250 have been exercised.
o In partial compensation for services provided by McKim to RMG and USE in
connection with the June and July, 2003 investments in RMG, USE issued to
McKim warrants to purchase 19,500 shares of USE common stock, exercisable
at $4.00 per share. The warrants expire June 6, 2006. Warrants to purchase
an additional 3,000 shares, on the same terms, were issued to John Schlie,
an employee of McKim.
o Warrants to purchase 10,000 shares were issued to Frederick P. Lutz in
partial compensation for consulting services he provided to the company
from August 1, 2002 to January 1, 2003. The warrants are exercisable at
$2.00 per share, and expire August 1, 2005.
o Two options to purchase a total of 80,000 shares were issued to two
individuals (Murray Roark and Robert Craig, 40,000 shares each),
exercisable at $4.30 per share and expiring July 31, 2006. These options
were issued to compensate Mr. Roark and Mr. Craig as finders for their
introducing RMG to Carrizo Oil & Gas, Inc. in early July 2001. Mr. Roark
and Mr. Craig are licensed securities brokers. Since July 2001, RMG has had
an agreement with a subsidiary of Carrizo for the acquisition and
exploration of coalbed methane properties in Wyoming and Montana.
o Options to purchase 10,000 shares were issued to Karl Eppich on December
12, 2003, exercisable at $2.90 per share and expiring December 11, 2004.
o 200,000 restricted shares held by seven persons who were issued shares of
the company as partial payment to Hi - Pro Production, LLC of the purchase
price for RMG I's purchase of coalbed methane
20
properties from Hi - Pro. See "Acquisition of Producing and Non-Producing
Properties from Hi - Pro Production, LLC" above. These persons are members
of Hi - Pro Production, LLC.
o 166,667 shares issued to seven persons as payment in lieu of cash on the
company's $500,000 promissory note, issued as partial payment to Hi - Pro
Production, LLC of the purchase price for RMG I's purchase of coalbed
methane properties from Hi - Pro. See "Acquisition of Producing and Non-
Producing Properties from Hi - Pro Production, LLC" above. These persons
are members of Hi - Pro Production, LLC. The shares had secured the note.
o 700,000 shares issuable on conversion (after November 1, 2004) of 233,333
restricted shares of RMG common stock, which RMG shares were issued to
seven persons in partial payment of the purchase price for RMG I's purchase
of coalbed methane properties from Hi - Pro. See "Acquisition of Producing
and Non-Producing Properties from Hi - Pro Production, LLC" above. These
persons are members of Hi - Pro Production, LLC. From November 1, 2004 to
November 1, 2006, the RMG shares are convertible at the election of the
holders into restricted shares of common stock of the company. The number
of shares to be issued on conversion 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 the company as reported on
Nasdaq for the 10 trading days prior to notice of conversion. The
conversion right is exercisable cumulatively, in minimum amounts of at
least $50,000. Resale of the conversion shares is covered by this
prospectus.
This prospectus covers the resale of shares of the company on conversion of
the RMG common shares, using an assumed conversion price of $1.00 per
share. The actual number of shares issued will depend on market price at
conversion dates.
o 1,442,192 shares of stock issuable on conversion of (and payment of
dividends on) 600,000 shares of Series A preferred stock of RMG, purchased
by three institutional investors (Crestview Capital Master, L.L.C.; Spring
Street Partners, L.P.; and Lion Fund, L.P.) for $1,800,000 ($3.00 per
Series A share) as of February 26, 2004. These investors also acquired
warrants in the transaction (see below).
The Series A stock bears an annual dividend of 10%, and is convertible to
common stock of the company at 90% of the company's volume weighted average
pricing (VWAP) on Nasdaq for the five trading days before conversion (but
the conversion price cannot be less than $1.50 per share of the company's
stock). Dividends are payable in cash or shares of the company's stock (at
RMG's election) on each dividend payment date (March 1, beginning in 2005),
with USE stock calculated in the same manner. Series A stock not converted
on the second anniversary of investment will be converted into shares of
RMG common stock.
Resale of the 1,442,192 shares issuable for conversion of (and dividends
on) the Series A preferred stock is based on as assumed conversion price of
$1.50. The number of shares issued will depend on market prices.
o 150,000 shares under warrants (held by the three institutional investors),
exercisable (vesting) 25% per quarter (fully exercisable after one year,
then expiring in February 2007), at a price equal to 90% of VWAP for the
five trading days before exercise (but not less than $1.50 per share). If
the stock price determined under the 90% of VWAP formula exceeds $6.00 for
15 consecutive trading days, the warrants will expire 10 on the tenth
trading day after the company sends a call notice to the investors.
o 75,000 shares under options held by consultant Michael Baybak at $2.25 per
share. The options were issued for services to be performed, on February 8,
1999, and expire August 9, 2004.
21
o 350,000 shares (comprised of 100,000 shares; 50,000 shares underlying Class
A warrants, exercisable at $3.00 per share; and 200,000 shares underlying
five year Class B warrants, exercisable at $3.00 per share (the Class A
warrants expire March 2, 2007; the Class B warrants expire March 2, 2009)).
If the closing Nasdaq price for the company's stock is at or more than
$7.50 for any 10 consecutive trading days, the warrants shall expire on the
30th calendar day after such 10th trading day. The shares and warrants were
purchased by Bourne Capital, LLC on March 2, 2007 for $350,000 ($300,000
for the shares and the Class A warrants, and $50,000 for the Class B
warrants).
o 318,465 shares under warrants issued to the participating lenders
(Drawbridge Special Opportunities Fund, L.P., and Highbridge/Zwirn Special
Opportunities Fund, L.P.) in the mezzanine financing - see "Acquisition of
Producing and Non-Producing Properties from Hi - Pro Production, LLC"). The
warrants are exercisable for three years (subject to vesting) at $3.30 per
share. Warrants on 63,693 shares are vested at prospectus date. The
remaining warrants will vest at the rate of the right to buy one share for
each $78.50 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 the company notifies the warrant
holders that the company's stock price has achieved or exceeded $6.60 per
share for a consecutive 15 business day period.
The selling shareholders may offer their shares for sale on a continuous
basis pursuant to rule 415 under the 1933 Act.
The following information has been provided to us by the selling
shareholders. All numbers of shares, and percentage ownership, are stated on a
pro forma basis as of the date of this prospectus, assuming issuance of
4,182,357 shares upon exercise of all the selling shareholders' options and
warrants, and conversion of all preferred and common stock of RMG, and company
debt, held by the selling shareholders. Not included in the pro forma
calculations are the additional shares issuable on exercise of other options and
warrants held by persons who are not selling shareholders.
NUMBER OF NUMBER OF PERCENT OWNED
SHARES OF SHARES -------------------------
COMMON STOCK TO BE BEFORE AFTER
OWNED(1) REGISTERED OFFERING OFFERING(2)
-------------- ---------- -------- -----------
A. Clinton Allen 18,909(3)(4)(5) 18,909 * *
1280 Massachusetts Ave. #200
Cambridge, MA 02138
Ardell J. Schelich 35,359(3)(4)(5) 34,500 * *
347 Lake View Dr.
Washington, MO 93090
Bathgate McColley & Associates LLC 538(4)(5) 538 * *
5350 S. Roslyn Street, Suite 308
Greenwood Village, CO 80111
Belmont Navy, LLC 1,167(3)(4)(5) 1,167 * *
111 Sixth Street
Cambridge, MA 02141
22
NUMBER OF NUMBER OF PERCENT OWNED
SHARES OF SHARES -------------------------
COMMON STOCK TO BE BEFORE AFTER
OWNED(1) REGISTERED OFFERING OFFERING(2)
-------------- ---------- -------- -----------
Beverly Karns 149,106(9) 149,106 * *
5424 South Geneva Way
Englewood, CO 80111
Bourne Capital LLC 502,845(3)(4)(5) 502,845 2.8% *
410 Marion Street
Denver, CO 80218
Burg Simpson Eldredge Hersh Jardine PC 59,000 59,000 * *
40 Iverness Dr. East
Englewood, CO 80112
C.C.R.I. Corporation 87,000(10) 87,000 * *
3104 E. Camelback Rd., Suite 539
Phoenix, AZ 85016
Charles D. & Bonnie B. Snow 23,367 6,667 * *
4725 Travis Way
Reno, NV 89502-5358
Curragh Capital Partners, LLC 1,500(5) 1,500 * *
609 5th Avenue - 2nd Floor
New York, NY 10017
Dale S. and Jeanne L. May 40,178 40,178 * *
960 Point of the Pines Drive
Colorado Springs, CO 80919
David Berlin, Birchwood Resources 1,167 1,167 * *
1675 Broadway #1020
Denver, CO 80202
David Gertz 1,167(3)(4)(5) 1,167 * *
7120 E. Orchard Rd. #300
Greenwood Village, CO 80111
Domenico Porco 8,333 8,333 * *
32777 West Warren
Garden City, MI 48135
Donald F. Kern 27,692(4) 27,692 * *
2737 Nestlebrook Trail
Virginia Beach, VA 23456
23
NUMBER OF NUMBER OF PERCENT OWNED
SHARES OF SHARES -------------------------
COMMON STOCK TO BE BEFORE AFTER
OWNED(1) REGISTERED OFFERING OFFERING(2)
-------------- ---------- -------- -----------
Donna Schulze 3,208(5) 3,208 * *
8777 E. Dry Creek Rd., Apt. 1422
Englewood, CO 80112
Dr. Ross T. Krueger 18,462(4) 18,462 * *
1801 Barrs St., Suite 605
Jacksonville, FL 32204-4751
Edward J. Godin 1,000(5) 1,000 * *
7424 S. Chapparal Circle East
Aurora, CO 80016
Eggleston's LLC 9,230(4) 9,230 * *
8109 Wellington Road
Alexandria, VA 22308
Eleanor Crosswait 3,333 3,333 * *
7790 Cherrywood Lane
Verona, WI 53593
Eric Stroud 1,100 1,100 * *
7715 Dairy Ln.
Village of Lakewood, IL 60014
Francis M. Harris 50,000 50,000 * *
541 Thornton Road
Lithia Springs, GA 30122
Frederick P. Lutz 10,000(11) 10,000 * *
1089 Dunbarton Chase
Atlanta, GA 30319
Generation Capital Association 36,924(4) 36,924 * *
1085 Riverside Trace
Atlanta, GA 30328
George D. Thompson 285(3)(4)(5) 285 * *
11710 W. 102 Place
Overland Park, KS 66214
Gulf Projects Investment Company 4,670(3)(4)(5) 4,670 * *
Kuwait Stock Exchange Building
Safat 13066, Kuwait
24
NUMBER OF NUMBER OF PERCENT OWNED
SHARES OF SHARES -------------------------
COMMON STOCK TO BE BEFORE AFTER
OWNED(1) REGISTERED OFFERING OFFERING(2)
-------------- ---------- -------- -----------
Jack D. Koser 10,333 10,333 * *
728 Azalea Dr.
Rockville, MD 20856
James and Vida Ann Roebling 24,260 24,260 * *
P. O. Box 71
Clearmont, WY 82835
James A. McCaughey 101,169(3)(4)(5)(9) 101,169 * *
3 Cueta Drive
Rancho Mirage, CA 92270
James E. Hosch 1,231(4) 1,231 * *
7038 Willa Lane
Evergreen, CO 80439
James J. Cahill 26,148(3)(4)(5) 26,148 * *
57 Lawrence Hill Rd.
Huntington, NY 11743
James V. Rauh 19,036(3)(4)(5) 19,036 * *
7234 South Uravan Ct.
Aurora, CO 60016
Jason Wayne Assad 77,077(4) 18,462 * *
6585 Sterling Drive
Suwanee, GA 30024
C & H Capital, Inc. 24,500(3) 24,500 * *
6585 Sterling Drive
Suwanee, GA 30024
Jeffrey J. Schmitz 4,266(4)(5) 4,266 * *
5834 S. Paris Ct.
Englewood, CO 80111
John J. Lais, III 5,574(3)(4)(5) 5,574 * *
2602 Woodland Ct
McKinney, TX 75070
John P. Kanouff 15,000 15,000 * *
2525 E. Cedar Ave.
Denver, CO 80209
25
NUMBER OF NUMBER OF PERCENT OWNED
SHARES OF SHARES -------------------------
COMMON STOCK TO BE BEFORE AFTER
OWNED(1) REGISTERED OFFERING OFFERING(2)
-------------- ---------- -------- -----------
John Schlie 3,000(4) 3,000 * *
2406 West Davies Ave.
Littleton, CO 80120
John W. & Annette C. Golen JTWROS 4,333 4,333 * *
1898 Harley Dr.
Ann Arbor, MI 48103
John Shuster 1,788 1,788 * *
21379 York Ct.
Kildeer, IL 60047
Joseph & Daphne C. Alphonso 33,333 33,333 * *
Family Trust
7731 Provincial Drive
Canton, MI 48187-2152
Kurt Novey 550 550 * *
4224 Nasmyth Drive
Plano, TX 75093
Lance Hering 2,175(3)(4) 2,175 * *
7163 S. Chapparal Cir. E
Centennial, CO 80016-2129
Larry A. Bach & Susan A. Bach 285(3)(4)(5) 285 * *
501 W. Fairbanks Avenue
Winter Park, FL 32789
Linda Monahan & Donald R. Cotner 43,767(9) 43,767 * *
224 Anglers Drive South
Marathon, FL 33050
Lynden L. Rader 26,000 24,000 * *
10342 Carioca Ct.
San Diego, CA 92124-1315
Mark A. & Kangping K.
Lowenstein Jtwros 33,469(5) 33,469 * *
12512 White Drive
Sliver Spring, MD 20904
Marshall G. Folkes, III 20,574(3)(4)(5) 20,574 * *
3841 Houndstooth Court
Richmond, VA 23233
26
NUMBER OF NUMBER OF PERCENT OWNED
SHARES OF SHARES -------------------------
COMMON STOCK TO BE BEFORE AFTER
OWNED(1) REGISTERED OFFERING OFFERING(2)
-------------- ---------- -------- -----------
Marshall Gray Folkes, Jr. 6,700 6,700 * *
829 Long Point Lane
Topping, VA 23169
Martin G. Williams & 574(3)(4)(5) 574 * *
Margaret M. Williams
13333 Long Leaf Dr.
Clarksville, MD 21029
Mathew B. Murphy 25,000 25,000 * *
P. O. Box 15181
Gillette, WY 82717-1581
Maury Rogow 925(3)(4)(5) 925 * *
1050 Taylor Street N #709
Arlington, VA 22201
McKim & Company LLC 19,500(3) 19,500 * *
8400 E. Crescent Parkway, Suite 600
Greenwood Village, CO 80111
Michael J. Alfano 40,000 40,000 * *
10310 Forest Maple Rd.
Vienna, VA 22182
Michael Bayback 75,000(6) 75,000 * *
45150 Ocean View Blvd., Suite 305
LaCanada, CA 91011
Michael Bagnulo 412 412 * *
1020 Martins Lake
Roswell, GA 30076
Michael M. Vuocolo DDS 18,462(4) 18,462 * *
407 Arrowhead BL 123
Jonesboro, GA 30236
Mildred Swift McBride 10,000 10,000 * *
Testamentary Trust
50 Church Street, P. O. Box 128
Sutter Creek, CA 95685
Mohamed Ali Ahmed 574(3)(4)(5) 574 * *
5052 Grimm Dr. #512
Alexandria, VA 23233
27
NUMBER OF NUMBER OF PERCENT OWNED
SHARES OF SHARES -------------------------
COMMON STOCK TO BE BEFORE AFTER
OWNED(1) REGISTERED OFFERING OFFERING(2)
-------------- ---------- -------- -----------
Morgan Stanley Dean Witter 574(3)(4)(5) 574 * *
FBO Thomas Garrity
1857 Wainwright Dr.
Reston, VA 20190
Murray Roark 40,000(7) 40,000 * *
4400 Post Oak Parkway, Suite 1720
Houston, TX 77027
P-Con Consulting 9,230(4) 9,230 * *
5432 Broadmoor St.
Alexandria, VA 22315
Peyton N. Jackson & Linda M. Jackson 10,190(3)(4)(5) 10,190 * *
8704 Standish Rd.
Alexandria, VA 22308
Philip A. Nicholas 4,331 4,331 * *
170 North 5th Street
P. O. Box 928 Laramie, WY 82703
R. A. Fitzner, Jr 3,574(3) 3,574 * *
P. O. Box 8000-260
Mesquite, NV 89024
Richard A. Peterson 4,000 4,000 * *
5839 Boca Raton Drive
Dallas, TX 75230
Richard Huebner 1,731(4) 1,731 * *
16318 E. Berry Avenue
Centennial, CO 80115
Riches In Resources, Inc. 15,000 15,000 * *
1433 Oakleaf Circle
Boulder, CO 80304
Robert A. Nicholas 23,474(5) 23,474 * *
107 South Broadway, Suite 213
Riverton, WY 82501
Robert H. Taggart, Jr. 25,148(3)(4)(5) 25,148 * *
4163 S. Chapparrel Circle East
Aurora, CO 80116
28
NUMBER OF NUMBER OF PERCENT OWNED
SHARES OF SHARES -------------------------
COMMON STOCK TO BE BEFORE AFTER
OWNED(1) REGISTERED OFFERING OFFERING(2)
-------------- ---------- -------- -----------
Robert Hockert 12,500 12,500 * *
Petrol Pacific Corporation
3212 Fitzpatrick Dr.
Gillette, WY 82718
Robert Long 31,335 31,335 * *
3125 Riverside Drive
Riverton, WY 82501
Robert S. Craig 40,000(7) 40,000 * *
2931 Highland Lakes Dr.
Missouri City, TX 77459
Roger Conan 574(3)(4)(5) 574 * *
14 Oakley Road
Dublin 6, Ireland
Roy Van Buskirk & Rachel Deutsch 872(3)(4)(5) 872 * *
1513 Forest Lane
McLean, VA 22101
Russell A. Pomeroy 9,333 9,333 * *
1801 Broadway, Suite 680
Denver, CO 80202
Sterne Agee & Leach, Inc. 574(3)(4)(5) 574 * *
C/F Michael M. Vuocolo IRA
813 Shades Creek Pkwy., Suite
100B, Birmingham, AL 35209
Sanders Morris Harris Inc. 100,000(8) 100,000 * *
600 Travis, Suite 3100
Houston, TX 77002
Steven Bathgate 1,835(4) 1,835 * *
6376 E. Tufts Avenue
Englewood, CO 80112
SJS Holdings c/o Susan Schoch 5,909(3)(4)(5) 5,909 * *
350 East 84th Street
New York, NY 10028
29
NUMBER OF NUMBER OF PERCENT OWNED
SHARES OF SHARES -------------------------
COMMON STOCK TO BE BEFORE AFTER
OWNED(1) REGISTERED OFFERING OFFERING(2)
-------------- ---------- -------- -----------
Timothy R. Crotty TTEE FBO 10,000 10,000 * *
Timothy R. Crotty Trust DTD 3/14/03
13575 Ridge Road
Sutter Creek, CA 95685
Troy G. Taggart 8,894(3)(4)(5) 8,894 * *
21220 Craborchard Ct.
Ashburn, VA 20147
Tsunami Partners 305,991 305,991 1.7% *
2011 Cedar Springs Rd., Apt. 506
Dallas, TX 75201
Vicki D.E. Barone 51(4) 51 * *
7854 S. Harrison Circle
Littleton, CO 80122
Vincent Schmitz 19,629(4)(5) 19,629 * *
4207 Montview Blvd.
Denver, CO 80207
Wayne A. Moore 1,167(3)(4)(5) 1,167 * *
P. O. Box 68
Rock Falls, IL 61071
Wesley A. Pomeroy 2,668 2,668 * *
1801 Broadway, Suite 680
Denver, CO 80202
William N. Anderson 55,385(4) 55,385 * *
6650 Oakhills Drive
Bloomfield, MI 48301-3238
William Gamello 550 550 * *
19 West Sky Lane
Clifton Park, NY 12065
William Gavin Kessler 275 275 * *
1921 Bissell - Unit C
Chicago, IL 60614
William Potter 159(4)(5) 159 * *
498 Ridgewood Avenue
Glen Ridge, NJ 07028
30
NUMBER OF NUMBER OF PERCENT OWNED
SHARES OF SHARES -------------------------
COMMON STOCK TO BE BEFORE AFTER
OWNED(1) REGISTERED OFFERING OFFERING(2)
-------------- ---------- -------- -----------
William Powers 550 550 * *
19900 Earlwood Dr.
Jupiter, FL 33458
William G. Van Buren 29,822(9) 29,822 * *
6576 Fairview Avenue
Downers Grove, IL
Raymond Lynde 224,000(12) 224,000 1.3% *
501 Clarion Dr.
Gillette, WY 82718
Richard Lynde 224,000(12) 224,000 1.3% *
P. O. Box 325
Gillette, WY 82718
Virginia H. Lynde Trustee 176,000(12) 176,000 * *
604 Warren Avenue
Gillette, WY 82718
Ronald K. Lynde Trustee 176,000(12) 176,000 * *
604 Warren Avenue
Gillett,e WY 82718
The Riggs Company LLC 106,667(12) 106,667 * *
155 Scott Drive
Sheridan, WY 82801
Steve Youngbauer 106,667(12) 106,667 * *
25 Buckhorn Flats Rd.
Riverton, WY 82501
Carl Andresen 53,333(12) 53,333 * *
8511 W. Donald Dr.
Peoria, AZ 85383
Lion Fund LP 88,715(13) 88,715 * *
601 Jefferson, Suite 3600
Houston, TX 77002
Spring Street Partners L.P. 177,655(13) 177,655 * *
601 Jefferson, Suite 3600
Houston, Tx 77002
31
NUMBER OF NUMBER OF PERCENT OWNED
SHARES OF SHARES -------------------------
COMMON STOCK TO BE BEFORE AFTER
OWNED(1) REGISTERED OFFERING OFFERING(2)
-------------- ---------- -------- -----------
Crestview Capital Master L.L.C. 1,325,822(13) 1,325,822(14) 7.4% *
95 Revere Drive, Suite A
Northbrook, IL 60062
Drawbridge Special 159,233(15) 159,233 * *
Opportunities Fund, LP
1251 Avenue of the Americas
New York, NY 10020
Highbridge/Zwirn Special 159,232(15) 159,232 * *
Opportunities Fund, LP
745 Fifth Avenue, 18th Floor
New York, NY 10151
Christopher A. Flanigan 127,289 127,289 * *
Irrevocable Trust
1572 Northfield Lane
Lafayette, CO 80026
Sean Flanigan 164,120 164,120 * *
904 East Stanford Avenue
Englewood, CO 80110
B.W. Squared LLC 38,265 38,265 * *
2407 W. Colorado Avenue
Colorado, Springs, CO 80904
Adaya Family Trust 76,531 76,531 * *
1301 Ocean Avenue
Santa Monica, CA 90401
SHYM, LLC 76,531 76,531 * *
515 S. Figueroa Street, #1600
Los Angeles, CA 90071
James Pearl 2,296 2,296 * *
324 Tenth Avenue, Suit 170
Salt Lake City, UT 84103
Karl Eppich 10,000(16) 10,000 * *
15 Piper Road
Sheridan, WY 82801
-----------
(1) Includes shares underlying warrants or options which may not have yet been
exercised.
32
(2) Assumes all shares registered for resale under this prospectus are sold by
the selling shareholder.
(3) Includes shares issuable on exercise of warrants and/or options at $3.75
per share.
(4) Includes shares issuable on exercise of warrants and/or options at $4.00
per share.
(5) Includes shares issuable on exercise of warrants and/or options at $3.00
per share.
(6) Includes shares issuable on exercise of warrants and/or options at $2.25
per share.
(7) Includes shares issuable on exercise of warrants and/or options at $3.75
per share. (8) Includes shares issuable on exercise of warrants and/or
options at $5.00 per share.
(9) Includes shares issuable upon conversion of RMG common stock and warrants
exercisable at $4.00 per share.
(10) Includes shares issuable on exercise of warrants at $3.75, $4.50 and $5.50
per share.
(11) Includes shares issuable on exercise of warrants at $2.00 per share.
(12) Includes shares issuable upon conversion of RMG common stock.
(13) Includes shares issuable upon conversion of Rock Mountain's Series A
Convertible Preferred Stock assuming the lowest conversion price of $1.50
per share, shares issuable in lieu of cash dividend payments on Series A
Convertible Preferred Stock assuming the preferred stock is outstanding for
two years and the interest conversion rate is $1.50 per share, shares
issuable upon exercise of a Common Stock Purchase Warrant issued in
connection with the issuance of the Series A Convertible Preferred Stock.
Does not include additional shares which may be issuable in the event of an
adjustment to the conversion price of the Series A Convertible Preferred
Stock as a result of a dilutive issuance by the company.
(14) The provisions in the Series A Preferred Stock and Stock Purchase Warrants
held by such selling shareholder prohibit such selling shareholder form
converting its preferred stock or exercising its warrants to the extent
such conversion or exercise would cause its beneficial ownership to exceed
4.99%. Accordingly, the actual beneficial ownership of the selling
shareholder at all times cannot exceed 4.99%.
(15) Includes shares issuable on exercise of warrants at $3.30 per share.
(16) Includes shares issuable on exercise of warrants at $2.90 per share.
The shares owned or to be owned by the selling shareholders are registered
under rule 415 of the general rules and regulations of the Securities and
Exchange Commission, concerning delayed and continuous offers and sales of
securities. In regard to the offer and sale of such shares, we have made certain
undertakings in Part II of the registration statement of which this prospectus
is part, by which, in general, we have committed to keep this prospectus current
during any period in which the selling shareholders make offers to sell the
covered securities pursuant to rule 415.
33
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales entered into after the date of this
prospectus (a short sale occurs when shares, not owned by the seller,
are sold in hopes of a decline in market price so the seller can
purchase in the market at a lower price to be able to deliver the
shares sold);
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise;
o a combination of any such methods of sale; or
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under rule 144 under the 1933
Act, if available, rather than under this prospectus. Broker-dealers engaged by
the selling stockholders may arrange for other brokers-dealers to participate in
sales. Broker-dealers may receive commissions or discounts from the selling
stockholders (or, if any broker-dealer acts as agent for the purchaser of
shares, from the purchaser) in amounts to be negotiated. The selling
stockholders do not expect these commissions and discounts to exceed what is
customary in the types of transactions involved. Broker-dealers may agree to
sell a specified number of such shares at a stipulated price per share, and, to
the extent such broker-dealer is unable to do so acting as agent for us or a
selling shareholder, to purchase as principal any unsold shares at the price
required to fulfill the broker-dealer commitment. Broker-dealers who acquire
shares as principal may thereafter resell such shares from time to time in
transactions, which may involve block transactions and sales to and through
other broker-dealers, including transactions of the nature described above, in
the over-the-counter markets or otherwise at prices and on terms then prevailing
at the time of sale, at prices than related to the then-current market price or
in negotiated transactions. In connection with such resales, broker-dealers may
pay to or receive from the purchasers such share commissions as described above.
In connection with the sale of our common stock or interests therein, the
selling stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities.
34
The selling stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The selling stockholders also may transfer the shares of common stock in
other circumstances, in which case the transferees, pledgees or other successors
in interest will be the selling beneficial owners for purposes of this
prospectus.
The selling stockholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the 1933 Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the 1933 Act. The selling stockholders have informed the company
that none of them have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
The company is required to pay all fees and expenses incurred by the
company incident to the registration of the shares. The company has agreed to
indemnify certain of the selling stockholders against certain losses, claims,
damages and liabilities, including liabilities under the 1933 Act.
In order to comply with the securities laws of certain states, if
applicable, the shares will be sold in such jurisdictions, if required, only
through registered or licensed brokers or dealers. In addition, in certain
states the shares may not be sold unless the shares have been registered or
qualified for sale in such state or an exemption from registration or
qualification is available.
BUSINESS AND PROPERTIES OF THE COMPANY
COALBED METHANE
GENERAL
Rocky Mountain Gas, Inc. ("RMG") was incorporated in Wyoming on November 1,
1999 for business in the coalbed methane industry in Wyoming and Montana. RMG is
a subsidiary of the company (owned 49.4% by the company and 39.1% by Crested as
of the date of this prospectus).
In 2003, RMG transferred all of its interest in certain coalbed methane
properties, including a producing property, to Pinnacle. At the same time,
Carrizo Oil & Gas, Inc.'s wholly owned subsidiary CCBM, Inc. ("CCBM") (with
which RMG has an agreement to jointly acquire and explore properties)
transferred to Pinnacle all of its interests 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 (through its wholly-owned, newly organized
subsidiary RMG I LLC ("RMG I") acquired coalbed methane properties in the Powder
River Basin of Wyoming. See "Acquisition of Producing and Non-Producing
Properties from Hi-Pro Production, LLC." Part of the purchase price was financed
under a $25 million mezzanine credit facility.
RMG I plans to drill five development wells on the Hi-Pro properties in
2004 and upgrade existing infrastructure to improve gas production, and, subject
to raising equity funding, drill up to 120 exploratory wells on undeveloped
Hi-Pro acreage in 2004 and 2005.
35
In addition, RMG plans to drill exploratory wells on the Castle Rock and
Oyster Ridge properties, and seek to acquire other producing coalbed methane
properties, primarily in Wyoming. Financing may be available under the mezzanine
credit facility for more acquisitions, if approved by the lenders. 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.
RMG holds leases and options on approximately 261,180 gross mineral acres
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.
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.
From RMG's inception, through December 31, 2003, 72 exploratory wells have
been drilled, almost all with funds provided by industry partner CCBM and former
industry partner SENGAI (see below). 43 of the wells were on properties
transferred to Pinnacle in mid-2003. The balance of 29 wells (15 of which have
been plugged and abandoned) are on properties held by RMG. Reserves have not
been established for any of the properties on which these 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
extended dewatering for each group or "pod" of wells (possibly as much as 24
months after drilling and completion) before an assessment of reserves can be
made.
Among the uncertainties we face in determining if our coalbed methane
investments will yield value are the following: 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
readily by lower gas prices. The Hi-Pro properties, and all revenues therefrom,
are pledged to service $3,635,000 of 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't 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
prospectus. 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.
36
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.
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.
RMG's ownership in Pinnacle's common stock is 37.5%. RMG's ownership of
Pinnacle on a fully-diluted basis will change if the CSFB Parties exercise their
warrants to buy equity in Pinnacle, 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, 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 261,180 gross (126,920 net) mineral
acres:(A) 171,500 gross (68,675 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) 51,500
gross (46,790 net) mineral acres acquired from Hi-Pro Production, LLC, and (C)
38,184 gross and net acres held by another company, which are at the north and
south ends of the Anadarko acreage. The acreage total does not reflect
properties held by Pinnacle.
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 CBM properties to Pinnacle as having been fully
paid for. See "Continuing Operations of RMG, Continuing Agreement with CCBM, and
the AMI Agreement, After 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). Pinnacle has
established series A preferred stock with the following provisions: 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
37
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 any 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) thereafter in 2004 (subsequent capital call
funded by the CSFB parties - see footnote (3)). At April 26, 2004, RMG owns
37.5% of the common stock of Pinnacle.
Equity in Pinnacle
---------------------------------
Series A Equity Rights in Pinnacle
Parties Contribution Common Stock Preferred Stock Warrants(1) Options(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 $29,400,000(3) 50,000 shares 250,000 shares 250,000 -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) Includes funding of a subsequent capital request from Pinnacle of
$11,760,000 ($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 of December 31, 2003, RMG has recorded its 37.5% equity investment in
Pinnacle at the carrying value of its coalbed methane properties of
approximately $922,600.
Sanders Morris Harris Inc. ("SMH") of Houston, Texas acted as financial
advisor to RMG on 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). Resale of
these shares and warrant shares is covered by this prospectus (See "Selling
Shareholders"). SMH did not receive any equity or equity rights in Pinnacle in
connection with the transaction or the Gastar acquisition.
38
- GASTAR ACQUISITION
With proceeds from the CSFB financing, Pinnacle paid Gastar $6.2 million,
effective June 1, 2003, 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.
- CONTINUING OPERATIONS OF RMG, CONTINUING AGREEMENT WITH CCBM, AND THE
AMI AGREEMENT AFTER THE PINNACLE TRANSACTION
RMG retained ownership, with CCBM, of the Castle Rock, Oyster Ridge, and
Baggs projects, totaling about 189,000 gross acres (currently about 171,500
gross acres net of 15,200 gross acres returned to Anadarko after the transaction
date and expiration of three leases). RMG and CCBM plan to continue exploration
and development activities on these properties as well as acquiring other
properties in Wyoming 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.
CCBM paid RMG approximately $1.8 million for CCBM's outstanding purchase
obligation (under the July 2001 agreement) on CCBM's interests in those
properties it contributed to Pinnacle. The balance on the note at December 31,
2003 was $836,200. The balance of CCBM's original purchase obligation is payable
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, 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 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). 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 is still in effect.
With respect to the properties acquired 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, LLC
On January 30, 2004, RMG I, LLC ("RMG I"), a wholly-owned subsidiary of
RMG, purchased coalbed methane properties from Hi-Pro for $6,800,000. This
transaction was closed after December 31, 2003. See the subsequent event
footnote to the audited financial statements in this prospectus.
39
The purchased properties (all located in the Powder River Basin of Wyoming)
include 247 completed wells and 40,120 undeveloped fee acres. As of the date of
this prospectus, 108 wells now are producing approximately 4.7 million cubic
feet (Mmcf) of gas per day (approximately 2.7 Mmcf per day net to RMG I). Net
daily Mmcf sales are less than gross production, due to produced gas being
consumed to run compressors, and from adjustments by purchasers for thermal
content (gas is sold based on BTU heat content).
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 royal 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% 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 methane reserves. RMG may utilize RMG I for future acquisitions (none
are presently under contract or agreement in principle). 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 Data" below for the estimate as of December 31, 2003.
The $6,800,000 purchase price 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. The purchase price of $6,800,000 was paid:
o $ 776,700 cash by RMG.
o $ 588,300 net revenues from November 1, 2003 to December 31, 2003,
which were retained by Hi-Pro.(1)
o $ 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)
o $ 600,000 by 200,000 restricted shares of USE common stock (valued at
$3.00 per share) (2).
o $ 700,000 by 233,333 restricted shares of RMG common stock (valued at
$3.00 per share).(3)
o $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 2003 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) The note subsequently was paid in full by delivery of the collateral
shares. Resale of such shares, and the 200,000 shares issued in the
transaction (all of which now are held by the owners of Hi - Pro in
proportion to their ownership in Hi - Pro), is covered by this
prospectus.
See "Selling Shareholders."
40
(3) These RMG shares are held by the owners of Hi - Pro in proportion to
their ownership in Hi - Pro). From November 1, 2004 to November 1,
2006, the RMG shares shall be convertible at the election of the
holders into restricted shares of common stock of USE. The number of
USE shares to be issued 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. Resale of the conversion shares is covered
by this prospectus. See "Selling Shareholders."
(4) See "Mezzanine Credit Facility."
- PROPERTIES PURCHASED.
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, 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 Hub Spot market price of $5.965 per mmbtu,
adjusted by lease for energy content, transportation fees and regional price
differentials on December 31, 2003, without price escalation. Henry Hub Spot
prices closely approximate the prices paid to Powder River Basin producers.
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
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
41
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. 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.
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 additional 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 the second quarter of 2004, RMG I plans to drill five proven undeveloped
locations to the Wyodak coal, continue a remedial workover program on a number
of existing wells, and upgrade the gas gathering and pipeline facilities
included in the purchase. The workover program is estimated to cost $250,000 and
will be funded by the working interest partners. The drilling and gathering
upgrade is estimated to cost approximately $640,000, and is being funded with a
loan from the mezzanine credit facility. The programs are designed to enhance
production from current levels. After the 5 new wells to the Wyodak are drilled,
there will be no 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
42
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 (gathering lines, compressors, and water
disposal) should significantly reduce drilling and completion costs for new
wells to the deeper Dannar and Moyer coals (950 to 1,150 feet). Subject to
raising capital, up to 120 wells could be drilled and completed to these deeper
coals in 2004 and 2005, all on locations now producing from the Wyodak. This
development activity is contingent upon obtaining future financing. We do not
expect that funding for this activity will be available through the mezzanine
credit facility.
No 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. The target coals on the Reno property are the Anderson coal,
which is about 600-650 feet in depth and approximately 40 feet in thickness and
the Canyon coal which is about 700-850 feet in depth and 35 feet in thickness.
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. In addition, in March 2004, RMG I drilled a fifth well, which has been
completed 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.
- 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. 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 been applied to the Hi-Pro asset purchase ($3,700,000) including transaction
costs and professional fees; and for a Phase I development program ($640,000).
Terms for all loans under the credit facility include the following:
o 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) is 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.
43
o The loans are secured by all of RMG I's properties and by RMG's equity
interest in RMG I.
o The lenders, in the aggregate, receive an overriding royalty interest
of 3% of production from the wells producing when the acquisition was
closed, and 2% 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% 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. The percentage of overrides on
future properties may vary.
o Negative covenants: RMG I will not permit the ratio of (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) current assets
to current liabilities to be less than 1.00 to 1.00; or (d) PV 10
(proved developed producing reserves) to total debt to be less than
1.00 to 1.00. All these ratios 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 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, warrants on 63,693 shares vested. The remaining warrants
will vest at the rate of the right to buy one USE share for each $78.50 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' stock price has achieved or
exceeded $6.60 per share for a consecutive 15 business day period. Resale of the
warrant shares is covered by this prospectus.
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 the registration
statement of which this prospectus is a part.
- RMG EQUITY TRANSACTION
In 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:
o 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 price for the five days, referred to as the "set
price," provided that the set price cannot be less than $1.50). 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.
o 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
44
Series A Preferred Stock. The warrants are exercisable as to 25% of
the underlying shares beginning in May 2004, 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. Subject to ths prospectus
then being current, 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 canceled.
o 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 the registration
statement (of which this prospectus is a part) 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.
o 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 the registrations statement (of which this prospectus is a
part).
Resale of the shares into which the Series A Preferred stock may be
converted, and shares issuable on exercise of the warrants, is covered by this
prospectus.
VOLUMES, PRICES AND GAS OPERATING EXPENSE - BOBCAT PROPERTY (TRANSFERRED TO
PINNACLE GAS RESOURCES, INC. IN JUNE 2003)
This table shows RMG's 27.6% working (22% net revenue) sales volumes of gas
produced, average sales prices received for gas sold, and average production
costs for those sales, 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.
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
45
(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
From inception on November 1, 1999 through December 31, 2003, RMG incurred
net acquisition (purchase price and holding costs) and exploration costs
(drilling and completion) on CBM properties of approximately $1,353,900, which
does not include approximately $2,194,900 funded by CCBM on RMG's behalf for
leasehold, drilling and completion costs. Unproved properties on the balance
sheet at December 31, 2003 reflect the reduction (by $5,143,000) 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 spent by RMG on properties transferred
to Pinnacle. The $922,600 was 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
========== ============ ==========
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 $265,400,
$1,033,400, and $280,000 represent 1.1%, 3.6%, and 1.0% of total assets at
December 31, 2003, December 31, 2002, and May 31, 2002, respectively.
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)
exceed the present value (using a 10% discount rate) of 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 reserves can be established, or not, for the property. If no
reserves are established, those capitalized costs will be transferred to the
amortization basis and be subject to an impairment test. To the extent reserves
are established for an exploration property to be less than such costs, the
costs will be written-down to the
46
amount of present value of the 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
We hold leases and options to develop approximately 261,180 gross mineral
acres (including 69,895 acres under options - 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 coal 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. 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
dewatering the well sufficiently so production can start. The decision whether
to complete the well is made by the executive officers of RMG.
Table 1 reflects RMG's, Quaneco's and CCBM's acreage position. Table 1 does
not reflect the reduction in net acreage held by RMG in the Oyster Ridge
property if Anadarko Petroleum, Inc. exercises its options to back-in for a 25%
working interest on 31,711 gross acres, or if the holder of the 38,184 gross
acres (which became subject to exploration and participation agreement as of
March 1, 2004) exercises its option to back-in for a 40% working interest on
those acres. Also, 69,895 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 agreements with Anadarko, and the holder of the 38,184 acres now under
the exploration and participation agreement. See "Description of Prospects -
Oyster Ridge" below.
47
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 85,720 85,720 31,259 0 31,259
Dec. 1999
--------------------------------------------------------------------------------------------------------
Baggs North 120 120 60 0 60
Jan. 2000
--------------------------------------------------------------------------------------------------------
Hi-Pro 51,500 51,500 46,791 0 0
Jan.2003
--------------------------------------------------------------------------------------------------------
TOTAL 261,180 248,907 126,921 55,784 38,292
--------------------------------------------------------------------------------------------------------
We own 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.
CCBM agreed to pay up to $5,000,000 for drilling and completing CBM wells
on the properties owned by RMG and CCBM. We have a carried working interest in
all of the wells drilled on properties owned in July 2001 (after the Pinnacle
transaction, those properties consist of the Castle Rock, Baggs, and the Oyster
Ridge property (not including 38,184 acres in the Oyster Ridge area which acres
now are subject to the exploration and participation agreement, under which the
other party can back in for acreage). To date, CCBM has not indicated whether
they will participate in the subject 38,184 acres. CCBM has the right to
participate as to 50% of the working interest we acquire 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 in wells on future 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 in 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 of 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 a working interest in the 8 wells. Other than the Castle Rock
wells, RMG and CCBM both have a 50% working interest in all 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.
48
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.
TABLE 2
Prospect FY 2001 FY 2002 New Year 2002 FY 2003 TOTAL Remaining
6/1/00-5/31/01 6/1/01-5/31/02 6/1/01-12/31/02 1/1/03-12/31/03 Permits
Wells $ Wells $ Wells $ Wells $ Wells $
------------------------------------------------------------------------------------------------------------------------------------
Castle 3* $283,900 19** $ 2,500,000 $ 4,300 0 0 22 $ 2,788,200 5
Rock
------------------------------------------------------------------------------------------------------------------------------------
Oyster 2 150,500 5 464,200 3,400 0 0 7** 618,100 4
Ridge *
------------------------------------------------------------------------------------------------------------------------------------
Hi-Pro n/a n/a n/a n/a n/a n/a 0 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 price 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.
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
49
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 of Bureau of Land Management ("BLM") land; 14,916 net acres of state land
(Montana), and 82,775 net acres of fee land. 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.
DESCRIPTION OF PROSPECTS
Leases of federal mineral rights are obtained from the United States Bureau
of Land Management and expire from 2004 to 2009, unless RMG establishes
production on the lease, in which event the lease is held so long as coalbed
methane 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 2004 to 2009 in Wyoming
and Montana, unless RMG establishes production on the lease, in which event the
lease is held so long as coalbed methane or other gas or oil is produced. The
royalty paid to the State of Wyoming is from 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
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").
Leases on private (fee) land for coalbed methane and conventional gas
expire at various times from 2004 to 2011, unless production is established, in
which event the lease is held so long as there is production. 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
May 4, 2004, and the Hi-Pro acreage as of May 4, 2004.
50
TABLE 3
Net Leased Net Leased Net Leased
Gross Net Leased from BLM from from Net Leased
Prospect Leased Acres State of State of from
Acres Wyoming Montana Private
Owners
--------------------------------------------------------------------------------------------------------------
Castle Rock 123,840 111,567 55,104 0 10,860 45,603
--------------------------------------------------------------------------------------------------------------
Oyster Ridge* 18,385 18,385 15,825 0 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 182,465 170,192 70,929 232 10,860 88,171
Acres
--------------------------------------------------------------------------------------------------------------
Hi-Pro (developed) 11,380 11,380 460 280 0 10,640
--------------------------------------------------------------------------------------------------------------
Total Acres 193,845 181,572 71,389 512 10,860 98,811
--------------------------------------------------------------------------------------------------------------
* Does not include 29,151 acres under option from Anadarko Petroleum and
38,184 acres under an exploration and participation agreement. See "Description
of Properties - Oyster Ridge."
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: The Castle Rock project consists of 123,840 gross and 111,567
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: The Oyster Ridge project consists of two acreage positions:
(1) 54,536 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 an option to
acquire a 100% working interest (50% each) in this acreage, which is held
primarily by Anadarko Petroleum, Inc.; and (2) 38,184 gross and net acres held
by another company, which are at the north and south ends of the Anadarko
acreage.
The area is prospective for coalbed methane production from two primary
Cretaceous age coals, the Frontier and the Adaville. The Kern River pipeline,
which services southern California, crosses the property. Through December 31,
2003, $799,500 has been spent on drilling and completion at Oyster Ridge.
(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. Wells drilled by the lease holder, and by us
(with CCBM), have earned 2,560 acres.
51
Another 29,151 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% RMG, 37.5% CCBM, and 25% Anadarko.
(2) Effective as of March 1, 2004, RMG entered into an exploration and
participation agreement to acquire a 60% working interest from another company
in 38,184 gross acres held by the other company under federal and Wyoming state
leases.
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.
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") 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 methane 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; 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;
and 4) as absorbed gas within the molecular structure of the coal molecules.
Coals at shallower depth with 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 methane gas is
released by pressure changes when the water in the coal is removed. In contrast
to conventional gas wells, new coalbed methane wells initially produce water for
several months. As the formation water pressure decreases, methane gas is
released from the structure.
Methane production is a direct result of reducing the hydrostatic (water)
pressure in the coal formation. Three principal stages are involved:
o 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
conducive to the formation of CBM.
o 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 6 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).
52
o Installing (or have a transmission company install) a compressor and
transport line 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
Operators drilling for coalbed methane are subject to many rules and
regulations and must obtain drilling, water discharge 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 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") which has imposed environmental limitations and
conditions on coalbed methane 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 the construction of rights-of-way,
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
methane 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 "Legal Proceedings, Rocky
Mountain Gas, Inc."
The state-based environmental agencies primarily concern themselves with
the issuance of permits related to drilling, land, air quality and water
discharge. The primary state-based agencies for which coalbed methane operators
are subject to include:
o Wyoming Department of Environmental Quality ("WDEQ")
o Wyoming Oil and Gas Conservation Commission ("WOGCC")
o Montana Department of Environmental Quality ("MDEQ")
o Montana Board of Oil and Gas Conservation ("MBOGC")
While the BLM is primarily responsible for issuing broadly based EISs 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.
53
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
methane 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 methane
wells, the disposal of this water is tightly regulated. If the SAR content is
low, the water can 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 ponds may
also be built right beside the wells, enabling the wells to drain 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.
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 has applied for such permits in Montana.
The following summarizes permits now in place.
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
--------------------------------------------------------------------------------
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 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 prospect 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.
54
Due to the low pressure characteristics of the coalbeds, the production of
coalbed methane 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 pumped into a surface reservoir.
Companies involved in coalbed methane production generally outsource gas
gathering, compression and transmission. RMG and industry partners have and will
likely continue to outsource their compression and gathering to third parties at
fixed charges per mcf transported.
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 away 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 market 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:
o The Colorado Interstate Gas ("CIG") station near Cheyenne in
southeastern Wyoming, which primarily feeds regional markets or
markets in the Midwest.
o 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 Plains and
Midwest.
o 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 CIG MARKET
Two large diameter intrastate pipelines, 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.
o Fort Union. The Fort Union Gas Gathering pipeline consists of a 106
mile, 24 inch, 434 Mmcfd capacity line completed in August 1999 and a
20" pipeline with a capacity of 200 Mmcfd
55
completed in September 2001. It is believed that capacity could be
increased by another 200 Mmcfd by adding additional compression to this
line.
o 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 be in-service in January 2005, and may help narrow the negative price
differential for CIG prices compared to national prices.
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 Border pipeline. Descriptions are as follows:
o Bitter 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.
o 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 expandable to 200 Mmcfd.
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 enlarged capacity of 1.73 Bcfd,
delivering to markets in Utah, Nevada, Arizona and California. If the Oyster
Ridge property is put into production, gas likely could be sold into this
market.
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, as compared to prices realized on the national gas
market, ranged from 10% to 45% (higher outside the heating season). The negative
price differential in the fourth quarter 2003 and first quarter 2004 narrowed
56
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 - 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" in Garfield County). 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/or 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") for sale to public utilities that operate nuclear
powered electricity generating plants. Currently there is no operating uranium
mill in Wyoming and it would take a substantial increase in the market price of
uranium concentrate over a period of time before a company with the financial
wherewithal would build a mill and place the deposits in production. Therefore,
until uranium oxide prices improve significantly, the uranium properties will
remain shut down.
At the dates of the consolidated balance sheets in this Report, there are
no values carried on the balance sheets for uranium properties.
SHEEP MOUNTAIN - 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, 1988 to June 1, 1998, these properties were
held by Sheep Mountain Partners ("SMP"). On June 1, 1998, the company 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 contracts in a constructive trust with SMP
remains unresolved. See "Legal Proceedings."
We have recorded reclamation liabilities for the SMP properties. All
historical costs in the SMP properties were offset against a monetary award
which was received from Nukem during fiscal 1999.
UTAH
Plateau Resources Limited ("Plateau") is a wholly-owned subsidiary of USE.
In 2003, reclamation work on uranium properties (the Tony M, Velvet, and Woods
Complex) in San Juan County, 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 Canyon uranium
processing mill and support facilities in southeastern Utah (the "Shootaring
Mill") for a nominal cash consideration. 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 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
placed the mill on standby because CPC had canceled the construction of an
additional nuclear energy plant.
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For information on the Shootaring mill facility and related real estate
property at Ticaboo, please see "Plateau's Shootaring Canyon Mill and
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 information 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. then 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 result of the SMP arbitration/litigation. During fiscal 1991, disputes
arose between the SMP partners which resulted in litigation. See "Legal
Proceedings."
PROPERTIES. USE, Crested and/or USECC own 98 unpatented lode mining claims
and a 644 acre Wyoming State Mineral Lease 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.
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 permit under the Clean Water Act
has been obtained; monitoring and treatment of water removed from the mines and
discharged in nearby Crooks Creek is generally required. However, for 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 Mountain
Mining venture).
INACTIVE MINING PROPERTIES - GOLD
SUTTER GOLD MINING COMPANY. In fiscal 1991, USE acquired an interest in
Sutter 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) is owned by Sutter Gold Mining Company, a Wyoming corporation
("SGMC"), and a majority-owned subsidiary of USE.
This property has never been in production. Persistent low prices for gold
made financing difficult, and in fiscal 1999 resulted in a substantial write
down of the SGMC properties.
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Due to the depressed gold prices in the past, litigation (since resolved)
and lack of funding, SGMC has deferred the start of construction of a gold mill
complex and extension of existing underground workings. A tourist visitors
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. The conditional use permit is being
kept current as necessary to allow for possible 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 holds approximately 435 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.
Surface and mineral rights holding costs, and property taxes, will be
approximately $130,000 and $9,900 for 2004.
The leases are for varying terms and require rental fees, annual royalty
payments and payment of real property taxes and insurance.
PERMITS. The Amador County Board of Supervisors has issued a Conditional
Use Permit ("CUP") allowing mining of the SGM and milling of production, subject
to conditions relating to land use, environmental and public safety issues, road
construction and improvement, and site reclamation. Applications will be made in
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 tails in a surface fill unit.
VISITORS CENTER. In fiscal 2000, SGMC spent approximately $298,000 for
surface infrastructure related to improving access to the mine site, and to a
lesser extent tourist related improvements. The visitors center is being
operated by a third party. The visitors center 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
59
were $48,800 for 2003, $49,200 for the seven months ended December 31, 2002, and
$41,200 in (former) fiscal year 2002, and are included in "real estate" in the
consolidated statements of operations included in this report. These revenues
offset a majority of costs for holding the Sutter properties.
MOLYBDENUM
As a holder 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 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 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.
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 are in litigation with Phelps Dodge concerning the
properties and related agreements, see "Legal Proceedings."
OIL AND GAS AND OTHER PROPERTIES
FORT PECK LUSTRE FIELD (MONTANA). We operate a small oil production
facility (three 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 bank line of
credit.
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
60
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. USECC owns 175 acres of undeveloped land in and near Gunnison,
Colorado.
UTAH. On August 14, 2003, USE's wholly-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.
RESEARCH AND DEVELOPMENT
No research and development expenditures have been incurred, either on the
company's account or sponsored by customers, during the past three fiscal years.
ENVIRONMENTAL
GENERAL. Operations are subject to various federal, state and local laws
and regulations regarding the discharge of materials into the environment or
otherwise relating to the protection of the environment, including the Clean Air
Act, the Clean Water Act, the Resource Conservation and Recovery Act ("RCRA"),
and the Comprehensive Environmental Response Compensation Liability Act
("CERCLA"). With respect to mining operations conducted in Wyoming, Wyoming's
mine permitting statutes, Abandoned Mine Reclamation Act and industrial
development and siting laws and regulations also impact us. Similar laws and
regulations in California affect SGMC operations and Utah laws and regulations
effect Plateau's operations.
Management believes the company complies in all material respects with
existing environmental regulations.
As of December 31, 2003, we have recorded estimated reclamation obligations
of $7,264,700. 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 in this prospectus.
OTHER ENVIRONMENTAL COSTS. Actual costs for compliance with environmental
laws may vary considerably from estimates, depending upon such factors as
changes in environmental laws and regulation (e.g., the new Clean Air Act), and
conditions encountered in minerals exploration and mining. We do not anticipate
that expenditures to comply with laws regulating the discharge of materials into
the environment,
61
or which are otherwise designed to protect the environment, will have any
substantial adverse impact on the competitive position of the company.
EMPLOYEES
The company has 34 full-time employees, including 11 employees working only
for RMG. Crested uses approximately 50 percent of the time of USE employees, and
reimburses the company on a cost reimbursement basis.
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 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 filings 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 times of falling metal prices, claims which were valid when located could
become invalid if challenged.
PROPOSED FEDERAL LEGISLATION. The U.S. Congress has, in legislative
sessions in recent years, actively considered several proposals for major
revision of the General Mining Law, which governs mining claims and related
activities on federal public lands. If any of the recent proposals become law,
it could result in the imposition of a royalty upon production of minerals from
federal lands and new requirements for 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
revision is enacted; however, such legislation could materially increase the
carrying 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.
LEGAL PROCEEDINGS
Material pending proceedings 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.
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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 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 Panel entered an Order and Award on April 18,
1996 and clarified the Order on July 3, 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 Panel 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 to 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 a constructive trust and a damage award," and the
Arbitration Awards and the Second Amended Judgment were "clear and unambiguous."
On February 8, 1999, the U.S. District Court ordered Nukem 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 "provided 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 Report in
part and rejected it in part. Judgment was then entered by the Court on August
1, 2003 in favor of USECC and against Nukem in the amount of $20,044,183.
On August 15, 2003, Nukem filed a "Motion to Remand to the Arbitration
Panel or in the Alternative, to Alter, Amend and/or Correct the Court's August
1, 2003 Judgment and July 30, 2003 Order," and a "Motion to Correct Certain
Findings or Statements in the Court's Order 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.
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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.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE and Crested filed a lawsuit in the 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 consequential 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 parties settled
the litigation in 2004. In the settlement, USE and Crested received $25,000 in
cash; two lots in the City of Gunnison, Colorado, which have been sold for
approximately $250,000; and an additional five development lots covering 175
acres north of Gunnison, Colorado.
PHELPS DODGE LITIGATION
USE and 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") and its subsidiary, Mt. Emmons Mining Company
("MEMCO"), over contractual obligations in USECC's agreement with PD's
predecessor companies, concerning mining properties on Mt. Emmons, near Crested
Butte, Colorado.
The litigation stems from agreements that date back to 1974 when USE and
Crested leased the mining claims AMAX Inc., PD's predecessor company. The mining
claims cover one of the world's largest and richest deposits of molybdenum
discovered by AMAX. AMAX reportedly spent over $200 million on the acquisition,
exploration and mine planning activities on the Mt. Emmons properties.
The complaint filed by PD and MEMCO seeks a determination that PD'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 Minerals Co. USECC's counter and cross-claims allege that in 1999,
PD formed a wholly-owned subsidiary CAV Corporation, for the purpose of
purchasing the controlling interest of 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 asserts the
acquisition of Cyprus Amax by PD was a sale of MEMCO and the properties that
triggers the obligation of Cyprus Amax to pay USECC the $3.75 million plus
interest.
The other issue in the litigation is 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 seek to obligate USECC to
assume the operating costs of the water treatment plant. USECC refuses to have
the water treatment plant included in the return of 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 breach 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 owner of the mining rights to the properties, (iii) damages for
unjust enrichment of
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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.
LITIGATION INVOLVING LEASES ON COALBED METHANE PROPERTIES IN MONTANA
On or about April 1, 2001, RMG, a subsidiary of USE and Crested, was served
with a Second Amended Complaint wherein the Northern Plains Resource Council had
filed suit in the U.S. District Court of Montana, Billings Division in Case No.
CV-01-96-BLG-RWA against the United States Bureau of Land Management ("BLM"),
RMG, certain of its affiliates (including USE and Crested) 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 for the complaint appears to be 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 respond to some objecting adjacent landowners.
However, all of the BLM leases in Montana held by RMG (none are held by U.S.
Energy Corp. or Crested Corp. in their own corporate names) are at least four
years old, and 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's leases were validly
issued in compliance with BLM procedures, and do not believe the plaintiff's
lawsuit will adversely affect any of RMG's Montana BLM leases.
LAWSUITS CHALLENGING BLM'S RECORDS OF DECISIONS
Three lawsuits are 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 billings Resource
Management Plans in Montana. Neither the company nor RMG are parties to any of
these lawsuits.
LITIGATION INVOLVING DRILLING ON A COALBED METHANE LEASE
A drilling company, Eagle Energy Services, LLC filed a lien on RMG's
leasehold in southwestern Wyoming for drilling services performed at RMG's
Oyster Ridge Property and filed a lawsuit foreclosing the lien. Eagle Energy'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. C02-9-328 in the 4th Judicial District of Sheridan County, Wyoming. Eagle
Energy's claim is for a contract to drill a well for coalbed methane.
65
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. 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.
MARKET FOR COMMON STOCK, 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
Quarter ended March 31, 2004 $3.33 $2.49
---------------------------- ----- -----
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
(b) Holders
(1) At May 4, 2004 the closing market price was $2.21 per share and there
were approximately 660 shareholders of record, with 13,658,645 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.
66
(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.
(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 for
of outstanding options outstanding options 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 $2.69 -0-
2001 USE ISOP
3,000,000 shares
of common stock
on exercise of
outstanding 1,409,000 $3.09 1,464,664
options
-------------------------------------------------------------------------------------------------------
Equity -- -- --
compensation
plans not approved
by security holders
None
-------------------------------------------------------------------------------------------------------
Total 2,873,646 $2.74 1,464,664
-------------------------------------------------------------------------------------------------------
67
ITEM 6. SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following sets forth selected historical financial data for U.S. Energy
Corp. as of and for the dates indicated and selected pro forma financial data as
of and for the year ended December 31, 2003. The selected financial data as of
and for the years ended December 31, 2003, May 31, 2002, 2001, 2000 and 1999;
and as of and for the seven months ended December 31, 2002 have been derived
from our audited financial statements. The selected historical financial data
for the year ended December 31, 2002 and as of and for the year ended December
31, 2001 has been derived from our unaudited financial statements and, in our
opinion, has been prepared on the same basis as the audited financial
statements, and includes all adjustments consisting of normal recurring
adjustments, necessary for a fair presentation of this information.
The selected pro forma financial information reflects the Company's
historical financial data as of and for the year ended December 31, 2003 as
adjusted for the acquisition of gas properties from Hi-Pro Production LLC on
January 30, 2004. The pro forma selected balance sheet data assumes the
acquisition occurred December 31, 2003 and the pro forma selected operating data
assumes the acquisition occurred January 1, 2003. For a description of the
assumptions used in preparing the selected pro forma financial data, see the
notes to the pro forma financial statements. The pro forma financial and
operating data should not be considered as indicative of the historical results
the Company would have had or the future results the Company will have due to
the acquisition.
This information should be read together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" immediately following
these tables.
68
ITEM 6. SELECTED FINANCIAL DATA
December 31,
----------------------------------------------
2003 2002 2001
---- ---- ----
(Unaudited)
Current assets $ 5,191,400 $ 4,755,300 $ 4,597,900
Current liabilities 2,044,400 2,563,800
1,909,700
Working capital (deficit) 2,710,900 2,034,100
3,281,700
Total assets 23,929,700 28,190,600 30,991,700
Long-term obligations(1) 12,036,600 14,047,300 13,596,400
Shareholders' equity 6,760,800 8,501,600 8,018,700
Hi-Pro
Pro Forma May 31,
December 31, ------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Unaudited)
Current assets $ 5,124,600 $ 4,892,600 $ 3,330,000 $ 3,456,800 $12,718,900
Current liabilities 3,525,100 1,406,400 2,396,700 6,617,900 5,355,600
Working capital (deficit) 1,599,500 3,486,200 933,300 (3,161,100) 7,363,300
Total assets 30,652,900 30,537,900 30,465,200 30,876,100 33,391,000
Long-term obligations(1) 15,650,900 13,804,300 13,836,700 14,025,200 14,526,900
Shareholders' equity 7,554,300 11,742,000 8,465,400 4,683,800 10,180,300
(1)Includes $7,264,700, 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.
Year Ended Seven Months Ended
December 31, December 31,
----------------------------- -----------------------------
2003 2002 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited)
Operating revenues $ 837,300 $ 648,700 $ 673,000 $ 545,900
Loss from
continuing operations (7,237,900) (7,563,600) (3,524,900) (3,914,900)
Other income & expenses (73,000) (72,600) (387,100) 1,005,000
(Loss) income before minority
interest, equity in income
(loss) of affiliates,
income taxes,
Discontinued
operations, and
cumulative effect of
accounting change (7,310,900) (7,636,200) (3,912,000) (2,909,900)
Minority interest in loss
(income) of
consolidated 235,100 69,800 54,800 24,500
subsidiaries
Equity in loss of affiliates -- -- --
Income taxes -- -- --
Discontinued operations, (349,900) 255,600 17,100 175,000
net of tax
Cumulative effect of
accounting change 1,615,600 -- -- --
Preferred stock dividends -- (11,500) -- (75,000)
Net (loss) income
to common shareholders $ (5,810,100) $(7,322,300) $(3,840,100) $ (2,785,400)
============ =========== =========== ============
Hi-Pro
Pro Forma For Former Fiscal Years Ended May 31,
December 31, --------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Unaudited)
Operating revenues $ 5,218,400 $ 2,004,100 $ 3,263,000 $ 3,303,900 $ 3,788,600
Loss from
continuing operations (6,557,900) (7,454,200) (7,517,800) (11,356,100) (22,713,300)
Other income & expenses (73,000) 1,319,500 8,730,800 802,200 6,655,500
(Loss) income before minority
interest, equity in income
(loss) of affiliates,
income taxes,
Discontinued
operations, and
cumulative effect of
accounting change (6,630,900) (6,134,700) 1,213,000 (10,553,900) (16,057,800)
Minority interest in loss (income)
of consolidated subsidiearies 39,500 220,100 509,300 4,468,400
Equity in loss of affiliates -- -- (2,900) (59,100)
Income taxes -- -- -- --
Discontinued operations, (85,900) 488,100 (594,300) --
net of tax
Cumulative effect of
accounting change -- -- -- --
Preferred stock dividends (86,500) (150,000) (20,800) --
Net (loss) income
to common shareholders $ (6,630,900) $ (6,267,600) $ 1,771,200 $ (10,662,600) $ (11,648,500)
============ ============= =========== ============= =============
69
Year Ended Seven Months Ended
December 31, December 31,
----------------------------- ---------------------------
2003 2002 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited)
Per share financial data
Operating revenues $ 0.07 $ 0.06 $ 0.06 $ 0.07
Loss from
continuing operations (0.64) (0.70) (0.33) (0.47)
Other income & expenses (0.01) (0.01) (0.03) 0.12
(Loss)income before minority
interest, equity in income
(loss) of affiliates,
income taxes, discontinued
operations, and cumulative
effect of accounting change (0.65) (0.71) (0.36) (0.35
Minority interest in loss
(income)
of consolidated 0.02 0.01 -- --
subsidiaries
Equity in loss of affiliates -- -- -- --
Income taxes -- -- -- --
Discontinued operations, (0.03) 0.02 -- 0.02
net of tax
Cumulative effect of
accounting change 0.14 -- -- --
Preferred stock dividends -- -- -- (0.01)
-------- --------- --------- ---------
Net (loss) income
per share, basic $ (0.52) $ (0.68) $ (0.36) $ (0.34)
======== ========= ========= =========
Net (loss) income
per share, diluted $ (0.52) $ (0.68) $ (0.36) $ (0.34)
======== ========= ========= =========
Per share financial data
Hi-Pro
Pro Forma For Former Fiscal Years Ended May 31,
December 31, --------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Unaudited)
Operating revenues $ 0.22 $ 0.42 $ 0.43 $ 0.53
Loss from
continuing operations (0.80) (0.96) (1.39) (3.18)
Other income & expenses 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 (0.66) 0.15 (1.38) (2.25)
Minority interest in loss
(income)
of consolidated 0.01 0.03 0.07 0.63
subsidiaries
Equity in loss of affiliates -- -- -- (0.01)
Income taxes -- -- -- --
Discontinued operations, (0.01) 0.06 (0.08) --
net of tax
Cumulative effect of
accounting change -- -- -- --
Preferred stock dividends (0.01) (0.01) -- --
-------- -------- ---------- ----------
Net (loss) income
per share, basic $ (0.58) $ (0.67) $ 0.23 $ (1.39) $ (1.63)
========= ======== ======== ========== =========
Net (loss) income
per share, diluted $ (0.58) $ (0.67) $ 0.21 $ (1.39) $ (1.63)
========= ======== ======== ========== =========
70
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
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., of which it owns a consolidated 71.5%.
The narrative discussion below refers only to the company (also referred to as
"USE") but includes the consolidated financial statement 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. The company has
had no production from any of its mineral properties during the periods from May
31, 2001 through December 31, 2003, 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 become the primary business focus of the
company. At December 31, 2003, the company on a consolidated basis owned 88.5%
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 plans 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") 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
-----------------------------------------------
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
71
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 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
Readers of this document and users of the information contained in it
should be aware of how certain events may impact our financial results based on
the accounting policies in place. The policies we consider to be the most
significant are discussed below. The company's management has discussed each
critical accounting policy with the audit committee of the company's board of
directors.
The selection and application of accounting policies is an important
process that changes as our business changes and as accounting rules are
developed. Accounting rules generally do not involve a selection among
alternatives, but involve implementation and interpretation of existing rules
and the use of judgment to the specific set of circumstances existing in our
business.
Oil and Gas Properties - The accounting for our business is subject to
special accounting rules that are unique to the oil and gas industry. There are
two allowable methods of accounting for oil and gas business activities: the
successful efforts method and the full-cost method., The company follows the
full-cost method of accounting under which all costs associated with property
acquisition, exploration and development activities are capitalized. We also
capitalize internal costs that can be directly identified with our acquisitions,
exploration and development activities and do not include any costs related to
production, general corporate overhead or similar activities. Under the
successful efforts method, geological and geophysical costs and costs of
carrying and retaining undeveloped properties are charged to expense as
incurred. Costs of drilling exploratory wells that do not result in proved
reserves are charged to expense. Depreciation, depletion, amortization and
impairment of oil and gas properties are generally calculated on a well by well
or lease or field basis versus the aggregated "full cost" pool basis. Additional
gain or loss is generally recognized on all sales of oil and gas properties
under the successful efforts method. As a result, our financial statements will
differ from companies that apply the successful efforts method since we will
generally reflect a higher level of capitalized costs as well as a higher oil
and gas depreciation, depletion and amortization rate.
Capitalized costs are amortized on a composite unit-of-production method
based on proved oil and gas reserves. Depreciation, depletion and amortization
expense is based on the amount of estimated reserves. If we maintain the same
level of production year over year, the depreciation, depletion and amortization
expense may be significantly different if our estimate of remaining reserves
changes significantly.
Proceeds from the sale of properties are accounted for as reductions of
capitalized costs unless such sales involve a significant change in the
relationship between costs and the value of proved reserves or the underlying
value of unproved properties, in which case a gain or loss is recognized. No
income is recognized in connection with contractual services provided by the
company on properties in which we hold an economic interest.
The costs of unproved properties are excluded from amortization until the
properties are evaluated. We review all of our unevaluated properties quarterly
to determine whether or not and to what extent proved reserves have been
assigned to the properties, and otherwise if impairment has occurred.
72
Unevaluated properties are grouped by major producing area where individual
property costs are not significant and are assessed individually when individual
costs are significant.
We review the carrying value of our oil and gas properties under the
full-cost accounting rules of the Securities Exchange Commission on a quarterly
basis. This quarterly review is referred to as a ceiling test. Under the ceiling
test, capitalized costs, less accumulated amortization and related deferred
income taxes, may not exceed an amount equal to the sum of the present value of
estimated future net revenues less estimated future expenditures to be incurred
in developing and producing the proved reserves discounted at 10%, less any
related income tax effects. The two primary factors impacting this test are
reserve levels and current prices, and their associated impact on the present
value of estimate future net revenues. Revisions to estimates of natural gas and
oil reserves and/or an increase or decrease in prices can have a material impact
on the present value of estimate future net revenues. The process of estimating
natural gas and oil reserves is very complex, requiring significant decisions in
the evaluation of available geological, geophysical, engineering and economic
data. The data for a given property may also change substantially over time as a
result of numerous factors, including additional development activity, evolving
production history and a continual reassessment of the viability of production
under changing economic conditions. As a result, material revisions to existing
reserve estimates occur from time to time. Although every reasonable effort is
made to ensure that reserve estimates reported represent the most accurate
assessments possible, the subjective decisions and variances in available data
for various properties increases the likelihood of significant changes in these
estimates. In addition, the prices of natural gas and oil are volatile and
change from period to period. Price changes directly impact the estimated
revenues from our properties and the associated present value of future net
revenues. Such changes also impact the economic life of our properties and
thereby affect the quantity of reserves that can be assigned to a property.
The volatility of oil and natural gas prices and the impact of revisions to
reserve estimates can have a significant impact on the company's financial
condition and results of operations.
Asset Retirement Obligations - The company has adopted SFAS NO. 143,
"Accounting for Asset Retirement Obligation". Under this statement the company
is required to record the fair value of the reclamation liability on its shut
down mining as gas properties as of the date that the liability is incurred. The
company reviews the liability each quarter and determines if a change in the
estimate is required. The company accrues the total liability on a quarterly
basis for the future liability. The company also deducts any actual funds
expended for reclamation during the quarter in which it occurs. Changes in
inflation and environmental regulations, among other things, may cause
significant future revisions in these estimates.
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 impairment loss is measured by comparing estimated
future cash flows on a discounted basis to the carrying amount of the asset.
Changes in significant assumptions underlying future cash flow estimates may
have a material effect on the Company's financial position and results of
operations. An uneconomic commodity market price, if sustained for an extended
period of time, or an inability to obtain financing necessary to develop mineral
interests, may result in asset impairment.
Use of Accounting Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported
73
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
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 accrue 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 to the audited
financial statements.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 2003, operations resulted in a loss of
$5,810,100 and consumed $5,673,600 of cash. The company increased cash and cash
equivalents during the same period by $2,343,800. Investing activities provided
$6,964,000 as a result of the sale of 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 investing
activities of $1,053,400 was as a result of the sale of the company's and RMG's
common stock. Cash provided by investing activities was partly used to pay down
third party debt.
During the year ended December 31, 2003, the company contributed its
interest in producing methane gas properties to a new entity, Pinnacle Gas
Resources, Inc. ("Pinnacle") See above, and Note F to the audited financial
statements. The company will therefore not be receiving revenues from those
properties. RMG continues to evaluate CBM properties and plans on generating
cash flows from methane gas production. See Note P to the audited financial
statements.
CAPITAL RESOURCES
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") Partnership. On August 1, 2003, 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"). The company has filed a cross-appeal
and answer to Nukem's appeal. See "Legal Proceedings" 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 will be significantly
improved. Although no assurance can be given as to the outcome of the appeal,
Nukem was required to post a supersedeas bond in the full amount of the Judgment
with interest.
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, USE received cash of
$349,300 and a promissory note from Cactus in the amount of $3,120,700. USE is
to receive $203,000 in payments from Cactus during calendar 2004. All of these
payments will be applied to interest only. Cactus will continue to make monthly
payments, primarily interest, until August 2008 at which time a balloon payment
of $2.8 million is due.
74
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, the full line of credit was available. The line of credit could be
used for short-term working capital needs associated with operations.
CAPITAL REQUIREMENTS
The company will continue to maintain its uranium properties in a shut down
mode during 2004 unless an industry partner funds the development costs of the
properties. The company anticipates funding its gold property through 2004 and
completing an equity 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 reclamation costs associated with the SMP and Plateau uranium properties.
Our current level of operations, including general and administrative
overhead, mineral operations (primarily holding costs for the uranium and gold
properties), and costs to comply with lease and permitting obligations for the
coalbed properties, are estimated to cost $8,262,000 for the twelve months
ending December 31, 2004. If we do not realize cash from liquidating assets, or
other sources, or if RMG spends more money on exploration than will be covered
by current arrangements, additional equity financing may be necessary to sustain
the company's current level of operations after the second quarter 2004. There
are no current commitments for such future financing as may be necessary.
MAINTAINING URANIUM PROPERTIES
SMP URANIUM PROPERTIES
The care and maintenance costs associated with the Sheep Mountain uranium
mineral properties decreased by $11,500 from $28,000 as of December 31, 2002 to
approximately $16,500 per month at December 31, 2003. Included in the average
monthly cost during the year ended December 31, 2003, is ongoing reclamation
work on the SMP properties. It is anticipated that a total of $125,000 in
reclamation costs will be incurred during 2004.
PLATEAU RESOURCES URANIUM PROPERTIES
Plateau owns and maintains the Shootaring Canyon Uranium Mill (the
"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.
During the year ended December 31, 2003, Plateau performed approximately
$209,600 in reclamation on the Velvet and Tony M mines 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.
75
Although reclamation has been initiated on the Plateau properties, the
company continues to evaluate the future of the properties as a result of the
significant increases in the market price for uranium to approximately
$17.50/lb. U3O8 in March 2004 from approximately $10.10/lb. in March 2003.
The cash costs per month, including reclamation costs, at the Plateau
properties during calendar 2003 were approximately $100,000 per month. These
costs are projected to decrease to $55,000 per month during the year ending
December 31, 2004.
SUTTER GOLD MINING COMPANY PROPERTIES
Due to the recent increase in the price of gold, management of SGMC has
decided to place its properties into production. No extensive development work
or mill construction will be initiated until such time as funding from either
debt or equity sources is in place. The goal is to have SGMC properties be
self-supporting and not require any capital resources commitment from the
company. Until such time as SGMC 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 to the audited financial statements. No reclamation costs
are projected to be incurred on the SGMC properties during 2004.
DEVELOPMENT OF COALBED METHANE PROPERTIES
The majority of the costs during the year ended December 31, 2003 for the
development of RMG's CBM properties, was funded through an agreement that RMG
entered into with CCBM, Inc. ("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 of RMG. 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") to form Pinnacle Gas Resources, Inc. ("Pinnacle"). As a
result of the formation of Pinnacle, RMG and CCBM contributed certain
undeveloped and producing CBM properties to Pinnacle. RMG has the opportunity to
increase its ownership in Pinnacle by purchasing common stock in Pinnacle
through the exercise of options. Any increase in RMG's equity would be offset by
contributions made by the other owners of Pinnacle. See "Transaction with
Pinnacle Gas Resources, Inc." above. We do not anticipate exercising these
options during calendar 2004 unless surplus capital resources are received. RMG
has no capital commitments on the properties contributed to Pinnacle. See Note F
to the audited financial statements.
RMG continues to pursue other investment and production opportunities in
the CBM business. On January 30, 2004, RMG purchased the assets of 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"). See "Acquisition of Producing and Non-Producing
Properties from Hi-Pro Production, LLC" and Note P to the audited financial
statements.
All cash flows from the sale of gas from the Hi-Pro properties are pledged
to Petrobridge for the loan to purchase the Hi-Pro property. 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 of the debt
financing entity.
76
In addition, we don't expect the lenders under the mezzanine credit
facility to fund more than the drilling and completion of five wells on proved
undeveloped locations on the properties. Future equity financing by RMG, or
industry financings, will be needed for RMG I, 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 the drilling and completion of
five wells on proved undeveloped locations on the Hi-Pro properties. Future
equity financing by RMG, or industry financings, will be needed for RMG I, LLC
to drill and complete wells on the substantial undeveloped acreage acquired from
Hi-Pro.
As a result of RMG's sale of property interests and the formation of joint
operating ventures with industry partners, it is not anticipated that the
company's capital resources will be used to fund RMG operations during the
balance of 2004.
LIQUIDITY SUMMARY
The company's capital resources on hand at December 31, 2003 were
sufficient to fund mine standby costs, limited reclamation and general and
administrative expenses. Development of our gold property and undeveloped CBM
properties will require funding from either debt or equity sources.
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 the coal bed methane industry
during the year ended May 31, 2002. At the same time the company began selling
its other assets that produced revenues from commercial real estate operations,
construction and drilling operations and the commercial repair of aircraft. The
company has entered the coal bed methane industry and anticipates revenues from
the production of coal bed methane during calendar 2004. Cash flows are
projected to begin being recognized in calendar 2005 after debt on the company's
newly acquired (from Hi - Pro) coal bed methane properties is retired.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 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 gas sales were $119,400 during the twelve months
ended December 31, 2002 or an increase of $168,000. This increase is as a result
of the company producing and selling coal bed methane gas for six months during
2003 as compared only three months during 2002 as well as increased production
rates during 2002.
The Company recognized a minimal increase of $23,400 in management fee
revenues during the year ended December 31, 2003 to $215,600 over the $192,200
recognized in management fee revenues during the twelve months ended December
31, 2002. Management fee revenues were reduced after June 2003
77
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:
------------------
Costs and expenses for the year ended December 31, 2003 were $8,075,200 as
compared to $8,212,300 for the year ended December 31, 2002. Costs and expenses
of real estate operations decreased by $446,500 during that twelve months ended
December 31, 2003 when compared to the costs and expenses incurred during the
year ended December 31, 2002. This decrease was primarily as a result of the
sale of various tracts of real estate.
During the year ended December 31, 2003 the Company recognized $313,100 in
gas operating expenses. During the year ended December 31, 2002 $355,200 in gas
operating expenses were recorded. This reduction came as a result of no start up
costs during the year ended December 31, 2003.
Mineral holding costs decreased by $220,2000 to $1,461,700 at December 31,
2003 from $1,241,500 at December 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 $2,006,100 during the twelve
months ended December 31, 2003 over the twelve months ended December 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's common stock.
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 accrue
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'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.
78
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:
-------------------------
Interest income decreased $277,300 during the year ended December 31, 2003
when compared to the year ended December 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. Interest
expense increased $219,300 during the year ended December 31, 2003 over the year
ended December 31, 2002. This increase was as a result of various financing
activities that the Company entered into with third party lenders.
Effective January 1, 2003 the Company adopted SFAS 143 "Accounting for
Asset Retirement 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 $7,322,300 or $0.68 per
share during the year ended December 31, 2002.
SEVEN MONTHS ENDED DECEMBER 31, 2002 COMPARED 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 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:
------------------
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.
79
Other Income and Expenses:
-------------------------
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 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; and management fees of $389,600. Mineral sales during fiscal 2001
resulted from the purchase of uranium oxide on the open market to fill uranium
sales contracts and the sale of a uranium contract to a third party. We did not
supply any of the uranium sold under the contracts from production out of our
mines. We have not produced any minerals from mines for several years. The
uranium contracts expired and no molybdenum advance royalties have been received
since 2001.
There were no mineral sales during fiscal 2002 while there was one delivery
under a uranium contract as well as the sale of one of the company's uranium
contracts to a third party during fiscal 2001. Currently, the company does not
have any delivery contracts for uranium or any other mineral. Depending on the
outcome of the SMP litigation, the company may well have CIS pounds 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 the royalty agreement, the
company and Crested are to receive 50,000 pounds of molybdenum 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.
The company has filed counter claims against Phelps Dodge requesting that the
advance royalty be reinstated and other issues. It is not known what the outcome
of this litigation will be.
Management fees were reduced by $389,600 in fiscal 2002 from the prior
period due to reduced activity in 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 result of the company reducing costs associated with
mineral properties that are shut down. The general and administrative costs
80
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 (1,105,499
shares of 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.
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.
FUTURE OPERATIONS
We have generated operating losses for the year ended December 31, 2003,
the seven months ended December 31, 2002 and in each of the three fiscal years
ended May 31, 2002 as a result of costs associated with shut down mineral
properties. We have discontinued our focus on these properties and at December
31, 2003 we are committed to be in the CBM business well into the future.
EFFECTS OF CHANGES IN PRICES
Mineral operations are significantly affected by changes in commodity
prices. As prices for a particular mineral increase, prices for prospects for
that mineral also increase, making acquisitions of such properties costly, and
sales advantageous. Conversely, a price decline facilitates acquisitions of
properties containing that mineral, but makes sales of such properties more
difficult. Operational impacts of changes in mineral commodity prices are common
in the mining industry.
81
NATURAL GAS. Our decision to expand into the CBM gas industry was
predicated on the projections for natural gas demand and prices. The company is
confident that it can maintain its costs at CBM industry standards but cannot
predict what will happen to the price of CBM gas.
URANIUM AND GOLD. Changes in the prices of uranium and gold are not
expected to materially affect operations during 2004.
MOLYBDENUM AND OIL. Changes in prices of molybdenum and petroleum are not
expected to materially affect operations during 2004.
CONTRACTUAL OBLIGATIONS. The company had two divisions of contractual
obligations as of December 31, 2003: Debt to third parties of $2,249,800, and
asset retirement obligations of $7,264,700 required under these obligations are
as follows:
Less than One to Three to More than
Total one year three years five years five years
---------- ---------- ----------- ---------- ----------
Long-term debt obligations $2,249,800 $ 932,200 $1,285,800 $ 31,800 $ --
Capital lease obligations -- -- -- -- --
Operating lease obligations -- -- -- -- --
Purchase obligations -- -- -- -- --
Other long-term liabilities 7,264,700 450,000 4,573,500 2,241,200 --
---------- ---------- ---------- ---------- ----------
Total obligations $9,514,500 $1,382,200 $5,859,300 $2,273,000 $ --
========== ========== ========== ========== ==========
DIRECTORS AND EXECUTIVE OFFICERS
Information about the directors and executive officers of the company
follows. As near as possible, the board of directors is divided into groups of
two, with each director serving a term of three years from election.
Executive officers are elected by the board of directors at the annual
directors' meeting, which follows each Annual Shareholders' Meeting, to serve
until his successor has been duly elected.
FAMILY RELATIONSHIPS
Keith G. Larsen, a director, President and COO, and Mark J. Larsen,
President of Rocky Mountain Gas, Inc., are sons of John L. Larsen, Chairman, CEO
and a principal shareholder. Harold F. Herron, a director and Senior
Vice-President, is a former son-in-law of John L. Larsen. Nick Bebout, a
director, is a nephew of Daniel P. Svilar, a principal shareholder, Secretary
and General Counsel. There are no other family relationships among the executive
officers or directors of the company.
BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS OF DIRECTORS
JOHN L. LARSEN, age 72, has been principally employed as an officer and
director of the company and Crested Corp. for more than the past five years. Mr.
Larsen is the Chairman of the Board and Chief Executive Officer. He is also the
Chairman and a director of Crested, an affiliate of the company. Crested has
registered equity securities under the Securities Exchange Act of 1934 (the
"Exchange Act"). Mr. Larsen is Chief Executive Officer and Chairman of the board
of directors of Plateau Resources, Limited and President and a
82
director of Sutter Gold Mining Company, and he is a director of Rocky Mountain
Gas, Inc. and Yellow Stone Fuels Corp.
KEITH G. LARSEN, age 45, has been principally employed by the company and
Crested for more than the past five years. He has been a director of the company
and its President and Chief Operating Officer since November 25, 1997. Mr.
Larsen is also the Chief Executive Officer and a director of Rocky Mountain Gas,
Inc. and is a director of Crested.
HAROLD F. HERRON, age 50, has been the company's Vice-President since
January 1989, and now is Senior Vice President. Mr. Herron was the President of
The Brunton Company, which was a wholly-owned subsidiary until Brunton was sold
in February 1996. Mr. Herron is president and a director of NWG, President and a
director of Plateau, Chief Executive Officer and a director of Sutter Gold
Mining Company, and a director of Rocky Mountain Gas, Inc. Mr. Herron received
an M.B.A. degree from the University of Wyoming after receiving a B.S. degree in
Business Administration from the University of Nebraska at Omaha.
DON C. ANDERSON, age 76, has been a company director since May 1990. From
January 1990 until mid- 1993, Mr. Anderson was the Manager of the Geology
Department for the company. Mr. Anderson was Manager of Exploration and
Development for Pathfinder Mines Corporation, a major domestic uranium mining
and milling corporation, from 1976 until his retirement in 1988. Previously, he
was Mine Manager for Pathfinder's predecessor, Utah International, Inc., from
1965 to 1976. He received a B. S. degree in geology from Brigham Young
University.
NICK BEBOUT, age 53, has been director of the company since 1989. He has
been a director and President of NUCOR, Inc. ("NUCOR"), a privately-held
corporation that provides exploration and development drilling services to the
mineral and oil and gas industries, since 1987. Prior to that time, Mr. Bebout
was Vice President of NUCOR from 1984. Mr. Bebout is also an officer, director
and owner of other privately-held entities involved in the resources industry.
H. RUSSELL FRASER, age 62, has been a director of the company since 1996
and a director of Rocky Mountain Gas, Inc. since 1999. He is past President and
director of American Capital, Inc., the first "A" rated financial guarantee
company in New York, New York. Mr. Fraser was chairman of the board and chief
executive officer of Fitch Investors Services, L.P. for more than the past five
years. Fitch Investors Services, L.P., New York, New York, is a nationwide stock
and bond rating and information distribution company. From 1980-1989, Mr. Fraser
served as president and chief executive officer of AMBAC, the oldest municipal
bond issuer in the United States.
Before joining AMBAC, Mr. Fraser was senior vice president and director of
fixed-income research at PaineWebber, Inc. While a member of the board of
directors at PaineWebber, Mr. Fraser participated in both the corporate and
public finance departments and headed PaineWebber's trading and sales for all
corporate bond products. Previously, he managed corporate ratings at Standard &
Poor's, supervising research analysis of corporate bonds, preferred stock, and
commercial paper. Mr. Fraser holds a B.S. in finance and economics from the
University of Arizona. He is a member of the Municipal Analysts Group of New
York and founder of the Fixed Income Analysts Society.
MICHAEL THOMAS ANDERSON, age 52, was appointed to the board of directors on
May 23, 2003. Mr. Anderson has run his own accounting and consulting practice
since 1993. Prior to that, he was chief financial officer for an operating unit
of a Fortune 500 company for eight years. From 1977 to 1985, Mr. Anderson worked
in public accounting. He is a member of the AICPA and The Wyoming Society of
CPAs. Mr. Anderson holds a B.S. degree in accounting from Brigham Young
University.
83
INFORMATION CONCERNING EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following persons are executive officers of the company but are not
directors.
DANIEL P. SVILAR, age 75, has been General Counsel for USE and Crested for
more than the past five years. He also is Secretary and a director of Crested,
and Secretary of USE. His positions of General Counsel to, and as officers of
the companies, are at the will of the 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 officers or directors of USE or Crested, except his nephew
Nick Bebout is a USE director. During the past five years, Mr. Svilar has not
been involved in any Reg. S-K Item 401(f) proceeding.
ROBERT SCOTT LORIMER, age 53, has been Chief Accounting Officer, Chief
Financial Officer and Treasurer for both USE and Crested for more than the past
five years. Mr. Lorimer also has been their Vice President Finance since April
1998. He serves at the will of the 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,
he has not been involved in any Reg. S-K Item 401(f) listed proceeding.
MARK J. LARSEN, age 41, became the President of RMG on October 15, 2003. He
was formerly the Director of Business Development for RMG and since its
inception has played a lead role in each of the company's financings,
acquisitions, the Carrizo partnership and the formation of Pinnacle Gas
Resources, Inc. Mr. Larsen is also the Director of Business Development and
Operations Manager for USE. Since 1997 he also has led the transition of USE
from uranium mining to natural gas development. Mr. Larsen is the son of John L.
Larsen, Chairman and CEO of U.S. Energy Corp.
EXECUTIVE COMPENSATION
Under a Management Agreement dated August 1, 1981, USE and Crested share
certain general and administrative expenses, including compensation of the
officers and directors of the companies (but excluding directors' fees) which
have been paid through the USECC Joint Venture ("USECC"). Substantially all the
work efforts of the officers of USE and Crested are devoted to the business of
both companies.
All USECC personnel are employees of USE, in order to utilize the company's
ESOP as an employee benefit mechanism. The company charges USECC for the direct
and indirect costs of its employees for time spent on USECC matters, and USECC
charges one-half of that amount to Crested and the company.
The following table sets forth the compensation paid to the USE Chief
Executive Officer, and the four USE executive officers, and Mark J. Larsen,
President of RMG, in 2001, 2002 (and the seven months ended December 31, 2002),
and 2003. The company changed its fiscal year in 2002 from the (former) period
ending May 31, to the calendar fiscal year ending December 31.
84
SUMMARY COMPENSATION TABLE
Long Term Compensation
-------------------------------------
Annual Compensation Awards Payouts
-------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Name Annual Restricted All Other
and Compen- Stock LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) SARs(#) ($) ($)(1)
---------------------------------------------------------------------------------------------------------------------------
John L. Larsen 2003 $ 174,800 $25,300(2) $ -0- $117,200(6) -0- $ -0- $ 22,700
CEO and Chairman 2002* 109,500 7,500(3) -0- -0- 97,000(9) -0- 11,700
2002 152,000 18,000(4) -0- 78,000(7) 100,000(9) -0- 17,000
2001 153,000 4,300(5) -0- 107,000(7) 184,400(10) -0- 15,700
Keith G. Larsen 2003 $ 156,000 $40,000(2) $ -0- $ 62,000(6) -0- $ -0- $ 22,700
President and 2002* 90,000 7,200(3) -0- -0- 97,000(9) -0- 9,700
COO 2002 152,300 17,700(4) -0- -0- 100,000(9) -0- 17,000
2001 153,900 3,600(5) -0- -0- 309,400(10) -0- 15,700
Daniel P. Svilar 2003 $ 149,400 $24,700(2) $ -0- $103,400(6) -0- $ -0- $ 22,700
General Counsel 2002* 86,200 6,900(3) -0- -0- 97,000(9) -0- 9,300
and Secretary 2002 149,400 17,400(4) -0- 58,500(7) 100,000(9) -0- 16,700
2001 140,400 4,000(5) -0- 80,250(7) 121,900(10) -0- 14,400
Harold F. Herron 2003 $ 106,200 $65,800(2) $ -0- $ 89,600(6) -0- $ -0- $ 22,700
Sr. Vice President 2002* 60,500 27,800(8) -0- -0- 97,000(9) -0- 8,800
2002 99,500 53,600(8) -0- 39,000 (7) 100,000(9) -0- 15,300
2001 96,400 40,800(8) -0- 53,500(7) 96,900(10) -0- 13,700
R. Scott Lorimer 2003 $ 135,700 $24,000(2) $ -0- $ 89,600(6) -0- $ -0- $ 22,700
Treasurer 2002* 83,500 6,800(3) -0- -0- 97,000(9) -0- 9,000
and CFO 2002 141,000 17,000(4) -0- 39,000 (7) 100,000(9) -0- 15,800
2001 136,900 3,900(5) -0- 53,500(7) 121,900(10) -0- 14,100
Mark J. Larsen 2003** $ 120,000 $33,300(2) $ -0- $ -0- -0- $ -0- $ 17,400
President of RMG
* For seven months June 1, 2002 to December 31, 2002
** Mr. Larsen became President of RMG on October 15, 2003. Compensation paid to
Mr. Larsen as an employee of the company(not an officer) before that date is not
included in the table.
(1) Dollar values for ESOP contributions.
(2) Consists of a bonus granted to officers and employees after the conclusion
of the formation of Pinnacle Gas and an additional bonus granted to officers and
employees after the successful release of a portion of the cash bond for
reclamation of the Shootaring Canyon uranium mill and a Christmas Bonus. Mr.
Herron was instrumental in growing The Brunton Company to the level that it
could be sold to a third party. For his efforts the company granted Mr. Herron a
bonus which is paid out over several years, ending in August 2004. See note (8)
for data on payments prior to 2003. A break down of the bonuses paid to the
officers of the company during the year ended December 31, 2003 is as follows:
85
Pinnacle Shootaring Brunton Christmas
Name Bonus Bonus Bonus Bonus
---- -------- ---------- -------- ---------
John L. Larsen $ 10,000 $ 7,500 $ $ 7,800
Keith G. Larsen 25,000 7,500 7,500
Daniel P. Svilar 10,000 7,500 7,200
Harold F. Herron 10,000 12,500 36,900 6,400
Robert Scott Lorimer 10,000 7,500 6,500
Mark J. Larsen 20,000 7,500 5,800
(3) Consists of Christmas bonus amounts granted to employees during the seven
month period ended December 31, 2002.
(4) Consists of $10,000 bonus granted to officers and employees after the
conclusion of a coalbed methane gas transition, and a Christmas bonus
granted to employees. The Christmas bonus amounts granted for John L.
Larsen, Keith G. Larsen, Daniel P. Svilar, Harold F. Herron and Robert
Scott Lorimer during the fiscal year ended May 31, 2002 were $8,000,
$7,700, $7,400, $6,700 and $7,000, respectively.
(5) Consists of a Christmas bonus paid in fiscal 2001.
(6) Consists 20,000 shares issued to each Officer pursuant to the company's
2001 Stock Compensation Plan. Under the terms of the plan each Officer is
to receive 10,000 shares of the company's common stock or some other
portion as approved by the compensation committee. There were no issuances
of shares under the plan during the years ended May 31, 2001 and 2002 or
the seven months ended December 31, 2002. The issuance of these shares to
the officers was therefore retroactive for the funding of the shares due
each officer for 2002 and 2003. The company has agreed under the terms of
the plan to pay all taxes due. The officer has agreed not to sell these
shares to the market or pledge them on obligations until after his (i)
retirement; (ii) total disability or (iii) in the case of the death of the
officer his estate may sell the shares of stock. Also includes shares
issued under the 1996 stock award program multiplied by $3.50 (the closing
market price on the issue date for the year ending December 31, 2003).
These shares are subject to forfeiture on termination of employment, except
for retirement, death or disability. If the company were to pay a stock
dividend, dividends would be paid on these shares. The shares issued to
each officer were 15,774, 11,830, 7,887 and 7,887 shares to John L. Larsen,
Daniel P. Svilar, Harold F. Herron and Robert Scott Lorimer, respectively.
This is the final funding under the company's 2001 Stock Compensation Plan.
(7) Consists of shares issued under the 1996 stock award program multiplied by
$5.35 and $3.90 (the closing market price on the issue dates for former
fiscal years 2001 and 2002 respectively) These shares are subject to
forfeiture on termination of employment, except for retirement, death or
disability. If the company were to pay a stock dividend, dividends would be
paid on these shares. The following table lists the number of shares issued
to each executive each year.
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Number of Shares
-----------------------------
Name 2001 2002
------ ------
John L. Larsen 20,000 20,000
Keith G. Larsen -0- -0-
Daniel P. Svilar 15,000 15,000
Harold F. Herron 10,000 10,000
R. Scott Lorimer 10,000 10,000
(8) Mr. Herron was instrumental in growing The Brunton Company to the level
that it could be sold to a third party. For his efforts the company granted
Mr. Herron a bonus which is paid out over several years, ending in August
2004. The amount of the bonus paid was $21,200 $36,900, and $36,900 for the
seven months ended December 31, 2002, and the fiscal years ended May 31,
2002 and 2001, respectively. The total bonus paid to Mr. Herron also
includes a bonus of $6,600 for the seven months ended December 31, 2002,
and $6,700 and $3,900 for fiscal years ended May 31, 2002 and 2001,
respectively, and a $10,000 bonus paid in 2002 to officers and employees
after the conclusion of a coalbed methane gas transaction.
(9) Stock options granted pursuant to the company's 2001 Incentive Stock Option
Plan. See details of the options under "Grants to Executive Officers
(Qualified and Nonqualified)" below.
(10) Stock options granted pursuant to the company's 1998 Incentive Stock Option
Plan. See details of the options under "Grants to Executive Officers
(Qualified and Nonqualified)" below.
EXECUTIVE COMPENSATION PLANS AND EMPLOYMENT AGREEMENTS
The company has adopted a plan to pay the dependants of Messrs. J. Larsen
and Svilar amounts equivalent to the salaries they are receiving at the time of
their death, for a period of one year after death, and reduced amounts for up to
five years thereafter. The amounts to be paid in such subsequent years have not
yet been established, but would be established by the boards of directors of the
company and Crested.
Mr. Svilar has an employment agreement with the company and Crested, which
provides for an annual salary in excess of $100,000, with the condition that Mr.
Svilar pay an unspecified amount of expenses incurred by him on behalf of the
company and its affiliates. In the event Mr. Svilar's employment is
involuntarily terminated, he is to receive an amount equal to the salary he was
being paid at termination, for a year. If he should voluntarily terminate his
employment, the company and Crested will pay him that salary for nine months
thereafter. The foregoing is in addition to Mr. Svilar's Executive Severance and
Non-Compete Agreement with the company (see below).
In fiscal 1992, the company signed Executive Severance and Non-Compete
Agreements with Messrs. John L. Larsen, Svilar and Lorimer, providing for
payment to such person upon termination of his employment with the company,
occurring within three years after a change in control of the company, of an
amount equal to (i) severance pay in an amount equal to three times the average
annual compensation over the prior five taxable years ending before change in
control, (ii) legal fees and expenses incurred by such persons as a result of
termination, and (iii) the difference between market value of securities
issuable on exercise of vested options to purchase securities in USE, and the
options' exercise price. These Agreements also provide that for the three years
following termination, the terminated individual will not compete with USE in
most of the western United States in regards to exploration and development
activities for uranium, molybdenum, silver or gold. During fiscal 2001, the
company signed similar Agreements with Keith Larsen, Mark Larsen, Richard
Larsen, and Harold Herron. For such non-compete covenant, such persons will be
paid monthly over a three year period an agreed amount for the value of
87
such covenants. These Agreements are intended to benefit the company's
shareholders, by enabling such persons to negotiate with a hostile takeover
offeror and assist the board of directors concerning the fairness of a takeover,
without the distraction of possible tenure insecurity following a change in
control. As of this proxy statement, the company is unaware of any proposed
hostile takeover.
The company and Crested provide all of their employees with certain forms
of insurance coverage, including life and health insurance, with the exception
of Messrs. John L. Larsen and Daniel P. Svilar. The company and Crested
reimburse Messrs. John Larsen and Svilar for their medicare supplement premiums.
The health insurance plan does not discriminate in favor of executive employees;
life insurance of $200,000 is provided to each member of upper management (which
includes all persons in the compensation table), $100,000 of such coverage is
provided to middle-management employees, and $90,000 of such coverage is
provided to other employees.
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP"). An ESOP has been adopted to
encourage ownership of the common stock by employees, and to provide a source of
retirement income to them. The ESOP is a combination stock bonus plan and money
purchase pension plan. It is expected that the ESOP will continue to invest
primarily in the common stock. Messrs. J. Larsen and Herron are the trustees of
the ESOP.
Contributions to the stock bonus plan portion of the ESOP are discretionary
and are limited to a maximum of 15% of the covered employees' compensation for
each accounting year. Contributions to the money purchase pension portion of the
ESOP are mandatory (fixed at ten percent of the compensation of covered
employees for each year), are not dependent upon profits or the presence of
accumulated earnings, and may be made in cash or shares of company's common
stock.
The company made a contribution of 76,794 shares to the ESOP for the twelve
months ended December 31, 2003, all of which were contributed under the money
purchase pension plan. At the time the shares were contributed, the market price
was $3.10 per share, for a total contribution with a market value of $236,400
(which has been funded by the company). The company and Crested each are
responsible for one-half of that amount. 37,204 of the shares were allocated to
the ESOP accounts of the executive officers of the company and the president of
Rocky Mountain Gas, Inc. Additionally, 5,166 shares were allocated to the ESOP
accounts of these same individuals from ESOP shares forfeited by terminated
employees who were not fully vested.
Employee interests in the ESOP are earned pursuant to a seven year vesting
schedule; after three years of service, the employee is vested to 20% of the
ESOP account, and thereafter at 20% per year. Any portion which is not vested is
forfeited upon termination of employment, other than by retirement, disability,
or death.
The maximum loan outstanding during the twelve months ended December 31,
2003 under a loan arrangement between the company and the ESOP was $927,013 at
December 31, 2003. Interest owed by the ESOP was not booked by the company.
Crested pays one-half of the amounts contributed to the ESOP by the company.
Because the loans are expected to be repaid by contributions to the ESOP,
Crested may be considered to indirectly owe one-half of the loan amounts to the
company.
401(K) PLAN. In first quarter 2004, the company established a traditional
qualified 401(k) plan for employees, by which the company will match $0.50 for
each $1.00 contributed by participating employees, up to an annual $3,000 per
employee maximum contribution by the company. Through March 31, 2004, the
company has contributed $3,382 to this plan. Plan eligibility and vesting rules
are uniform for all employees, including executive officers of the company.
88
1998 INCENTIVE STOCK OPTION PLAN. The company's 1998 Incentive Stock Option
Plan ("1998 ISOP") reserved an aggregate of 2,750,000 shares of common stock for
issuance upon exercise of options granted thereunder.
Options expire no later than ten years from the date of grant, and upon
termination of employment for cause. Subject to the ten year maximum period,
upon termination, unless terminated for cause, options are exercisable for three
months or in the case of retirement, disability or death, for one year.
Options on 1,494,146 shares are outstanding. No more options will be issued
under the 1998 ISOP.
2001 INCENTIVE STOCK OPTION PLAN ("2001 ISOP"). The 2001 ISOP was approved
at the 2001 Annual Meeting of Shareholders meeting, and provides for the
issuance of options to purchase up to 3.0 million shares of common stock; the
options are intended to qualify under section 422 of the Internal Revenue Code.
Options are issued at exercise prices equal to (or for holders of 10% or more of
the outstanding stock at the time, 110% of) market price on grant dates, and
would vest (become exercisable) at various times as determined by the executive
committee and approved by the board of directors. All options are exercisable
for cash, or through other means as determined by the executive committee and
approved by the board of directors, in accordance with similar plans of public
companies.
For information about options, please see the consolidated Financial
Statements in this prospectus for the twelve months ended December 31, 2003. In
2003, no options were granted, and previously granted options on 275,621 shares
were exercised.
89
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
TWELVE MONTHS ENDED 12/31/03 AND OPTION/SAR VALUES AT 12/31/03
The following table shows options exercised during the twelve months ended
December 31, 2003, options exercisable at December 31, 2003, and options
exercisable and the dollar values for in-the-money options, at December 31, 2003
(closing market price on that date was $2.98).
(a) (b) (c) (d) (e) (f)
In Twelve Months Ended 12/31/03 Value of
------------------------------- Number of Number of In-the-Money
Shares Options/SARS Options/SARs Options/SARs
Acquired Value at 12/31/02 at 12/31/03 at 12/31/02
Name on Exercise (#) Realized($) Exercisable Exercisable Exercisable
---- --------------- ----------- ----------- ----------- -----------
John L. Larsen, -0- -0- 34,782 34,782 $ 3,652 (1)
CEO -0- -0- 77,718 77,718 $ 76,164 (2)
-0- -0- 184,400 184,400 $106,952 (3)
-0- -0- 100,000 100,000 $(92,000)(4)
-0- -0- 97,000 97,000 $ 70,810 (5)
Keith G. Larsen -0- -0- 34,782 34,782 $ 3,652 (1)
President -0- -0- 52,718 52,718 $ 51,664 (2)
-0- -0- 309,400 309,400 $179,452 (3)
-0- -0- 100,000 100,000 $(92,000)(4)
-0- -0- 97,000 97,000 $ 70,810 (5)
Harold F. Herron, -0- -0- 34,782 17,391 $ 1,826 (1)
Sr. Vice President -0- -0- 40,218 20,109 $ 19,707 (2)
-0- -0- 67,400 33,700 $ 19,546 (3)
-0- -0- 100,000 50,000 $(46,000)(4)
-0- -0- 97,000 48,500 $ 35,405 (5)
Daniel P. Svilar -0- -0- 34,782 34,782 $ 3,652 (1)
Secretary -0- -0- 40,218 40,218 $ 39,414 (2)
-0- -0- 121,900 121,900 $ 70,702 (3)
-0- -0- 100,000 100,000 $(92,000)(4)
-0- -0- 97,000 97,000 $ 70,810 (5)
R. Scott Lorimer -0- -0- 34,782 34,782 $ 3,652 (1)
Treasurer -0- -0- 40,218 40,218 $ 39,414 (2)
-0- -0- 80,233 80,233 $ 46,535 (3)
-0- -0- 100,000 100,000 $(92,000)(4)
-0- -0- 97,000 97,000 $ 70,810 (5)
Mark J. Larsen -0- -0- 27,782 27,782 $ 2,917 (1)
President of RMG -0- -0- -0- -0- $ -0- (2)
10,000 $ 27,800 (6) 51,248 41,248 $ 23,924 (3)
-0- -0- 100,000 100,000 $(92,000)(4)
-0- -0- 97,000 97,000 $ 70,810 (5)
-----------
(1) Equal to $2.98, the closing market price on December 31, 2003, less
$2.00 per share option exercise price, multiplied by all shares exercisable.
(2) Equal to $2.98, the closing market price on December 31, 2003, less
$2.875 per share option exercise price, multiplied by all shares exercisable.
90
(3) Equal to $2.98, the closing market price on December 31, 2003, less
$2.40 per share option exercise price, multiplied by all shares exercisable.
(4) Equal to $2.98, the closing market price on December 31, 2003, less
$3.90 per share option exercise price, multiplied by all shares exercisable.
(5) Equal to $2.98, the closing market price on December 31, 2003, less
$2.25 per share option exercise price, multiplied by all shares exercisable.
(6) Equal to $5.18, the closing market price on the date of exercise, less
$2.40 per share option exercise price, multiplied by the number of options
exercised. No shares acquired on exercise of these options have been sold.
1996 STOCK AWARD PROGRAM. The company had an annual incentive compensation
arrangement for the issuance of up to 67,000 shares of common stock each year
(from 1997 through 2002) to executive officers of the company, in amounts
determined each year based on earnings of the company for the prior fiscal. A
total of 392,536 shares were issued under this plan. The compensation committee
did not award any shares under this plan during the seven months ended December
31, 2002; 43,378 shares were issued in 2003 to close out the program.
One-half of the compensation expense under the Program was the
responsibility of Crested.
Each allocation of shares was issued in the name of the officer, and is
earned out (vested) over 5 years, at the rate of 20% as of May 31 of each year
following the date of issue. However, none of the vested shares become available
to or come under the control of the officer until termination of employment by
retirement, death or disability. Upon termination, the share certificates will
be released to the officer; until termination, the certificates are held by the
Treasurer of the company. Voting rights are exercised over the shares by the
non-employee directors of the company; dividends or other distributions with
respect to the shares will be held by the Treasurer for the benefit of the
officers.
The number of shares awarded each year out of such 67,000 shares aggregate
limit was determined by the compensation committee.
2001 STOCK COMPENSATION PLAN. The shareholders approved the 2001 Stock
Compensation Plan (the "plan") at the 2001 Annual Shareholders Meeting.
The plan has an initial term of seven years, with up to 10,000 shares of
common stock to be issued in January of each year to six individuals (five
officers of U.S. Energy Corp: John L. Larsen, Keith G. Larsen, Robert Scott
Lorimer, Harold F. Herron, Daniel P. Svilar, and Mark J. Larsen, president and a
director of Rocky Mountain Gas, Inc.). The number of shares to be issued in any
year is determined by the compensation committee and approved by the independent
directors, taking into account our public stock prices at the date of grant and
during the prior calendar year, the company's financial condition and business
prospects, and other factors deemed appropriate. The company pays the income
taxes owed by recipients as a result of receipt of the stock.
The stock recipients will agree not to sell or transfer such shares during
their employment with the company. As of December 31, 2003, 100,000 shares had
been granted under the Plan (20,000 shares each to John L. Larsen, Keith G.
Larsen, Robert Scott Lorimer, Harold F. Herron, and Daniel P. Svilar). No shares
were issued under the Plan in 2001 or 2002. Mark J. Larsen will be first
eligible to receive shares under the Plan in 2005.
91
The 2001 Stock Compensation Plan is now the sole mechanism for compensating
management with stock, however options may be granted to management and others
under the 2001 ISOP. This plan is designed to reward executives with equity, and
encourage them to increase their ownership of the company and not sell their
shares in the market.
DIRECTORS' FEES AND OTHER COMPENSATION
The company pays non-employee directors a fee of $150 per meeting attended.
All directors are reimbursed for expenses incurred with attending meetings.
In addition, non-employee directors are compensated for services at $400
per month, payable each year by the issue of shares of USE common stock based on
the closing stock market price as of January 15. In 2003, the company issued
3,891 shares to the non-employee directors on that date (1,297 shares each to
Don Anderson, H. Russell Fraser, and Nick Bebout), at $3.70 per share (market
price on January 15, 2003).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DEBT OWED BY A DIRECTOR. In the early 1990s, Harold F. Herron, an officer
and director, had been living in and caring for a house owned by the company. In
fiscal 1995, Mr. Herron purchased the house for $260,000 (equal to appraised
value), and was reimbursed by the company for $22,830 of leasehold improvements
he had made to the property. The company accepted a promissory note for $112,170
of the purchase price, with 7% annual interest; a payment schedule was entered
into and Mr. Herron is current in his payments on the note. This note was a
nonrecourse note secured by 30,000 shares of the company's common stock owned by
Mr. Herron. At December 31, 2003, he owed $90,300 on the note. During 2003, he
gave up 5,000 shares of the collateral to reduce the debt. The collateral now
consists of 10,000 shares of the company.
FAMILY EMPLOYMENT. Three of John L. Larsen's sons, one former son-in-law
(Harold F. Herron), and one grandson are employed by the company or
subsidiaries. Collectively, Mr. Larsen and these family members received
$1,217,600 in total compensation for services during the twelve months ended
December 31, 2003. Not included is 2003 compensation paid to two sons-in-law who
ceased working for the company or its subsidiaries (including Peter Schoonmaker,
who is now employed by Pinnacle Gas Resources, Inc., a minority-owned
subsidiary).
TRANSACTIONS INVOLVING USECC AND CRESTED. The company and Crested conduct
most activities through their equally-owned joint venture USECC. From time to
time the company and Crested advance funds to or make payments on behalf of
USECC, which create intercompany debt. The party extending funds is subsequently
reimbursed by the other venturer. Crested owed the company $9,403,300 at
December 31, 2003.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Grant Thornton LLP billed us for services as follows for the year ended
December 31, 2003, the seven months ended December 31, 2002 and the year ended
May 31, 2002. Amounts and percentages reflect billings received after December
31 of those periods.
92
Year Ended Seven Months Ended Year Ended
December 31, 2003 December 31, 2002 May 31, 2002
----------------- ----------------- ------------
Audit Fees(a) $ 106,600 $ 90,500 $ 84,300
89% 92% 90%
Audit-Related Fees(b) $ -- $ -- $ --
Tax Fees(c) $ 12,800 $ 8,000 $ 9,000
11% 8% 10%
All Other Fees(d): $ -- $ -- $ --
(a) Includes fees for audit of the annual financial statements and review
of quarterly financial information filed with the Securities and Exchange
Commission and service provided for statutory and regulatory filings.
(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 covered.
(c) For tax compliance, tax advice, and tax planning services, relating to
any and all federal and state tax returns as necessary for the periods covered.
(d) For services and products provided by the principal accountant other
than services included in (a) through (c) above. No such services and products
in this category were provided in the periods covered.
Our audit committee approves the terms of engagement before we engage Grant
Thornton for audit and non-audit services, except as to engagements for services
outside the scope of the original terms, in which instances the services have
been provided pursuant to pre-approval policies and procedures, established by
the audit committee. These pre-approval policies and procedures are detailed as
to the category of service and the audit committee is kept informed of each
service provided. These policies and procedures, and the work performed pursuant
thereto, do not include any delegation to management of the audit committee's
responsibilities under the Securities Exchange Act of 1934.
The services provided for Audit-Related Fees, Tax Fees and All Other Fees
were delivered pursuant to pre-approval policies and procedures established by
the audit committee.
DESCRIPTION OF SECURITIES
COMMON STOCK. We are authorized by our articles of incorporation to issue
an unlimited number of shares of common stock, $0.01 par value, and 100,000
shares of preferred stock, $0.01 par value.
Shares of common stock may be issued for such consideration and on such
terms as determined by the board of directors, without shareholder approval.
Holders are entitled to receive dividends when and as declared by the board of
directors out of funds legally available therefore. There are no restrictions on
payment of cash dividends. Cash dividends have not been declared on the common
stock, although a 1 for 10 stock dividend was declared in November 1990. It is
anticipated that future earnings would be reinvested into operations and not
declared as dividends on the common stock. All holders of shares of common stock
have equal voting rights, and the shares of common stock sold in this offering
will have the same rights. Holders of shares of common stock are entitled to one
vote per share on all matters upon
93
which such holders are entitled to vote, and further have the right to cumulate
their votes in elections of directors. Cumulation means multiplying the number
of shares held, by the number of nominees to the board of directors, then voting
the product among the nominees as desired. Directors are elected by a plurality
of the votes cast.
Shares of common stock sold in this offering are fully-paid and
nonassessable shares of U.S. Energy Corp.
Pursuant to our articles of incorporation and as permitted by Wyoming law,
shares of common stock held by our subsidiaries may be voted by such
subsidiaries as determined by the board of directors of each, in elections of
directors and other matters brought before shareholders.
In September 2001, the company adopted a shareholder rights plan ("poison
pill") and filed the plan with the Securities and Exchange Commission as an
exhibit to Form 8-A. The following three paragraphs briefly state principal
features of the plan, which are qualified by reference to the complete plan,
which is incorporated by reference into this prospectus.
Under the plan, the holder of each share of common stock has the right to
purchase (when the rights become exercisable) from the company one-one
thousandth (1/1,000th) of one (1) share of Series P preferred stock at a price
of $200.00 for each one-one thousandth (1/1,000th) share of such preferred
stock. The purpose of the plan is to deter an unfairly low priced hostile
takeover of the company, by encouraging a hostile party to negotiate a fair
offer with the board of directors and thus eliminate the poison pill.
The rights trade with the common stock and aren't separable therefrom; no
separate certificate for the rights is issued unless and until there is a
hostile takeover attempted, after which time separate and tradable rights
certificates would be issued.
The rights are not exercisable and never can be unless and until a hostile
(not negotiated with the board) takeover of the company is initiated with the
objective of acquiring 15% of the company's voting stock. If before the takeover
is launched the hostile party comes to agreement with the board of directors
about price and terms and makes a "qualified offer" to buy the stock of the
company, then the board of directors may redeem (buy back) the rights for $0.01
each. But, if such a "qualified offer" isn't agreed upon, then the rights are
exercisable for preferred stock, which in turn would enable the holder to
convert the preferred stock into voting common stock of the company at a price
equal to one-half the market price.
PREFERRED STOCK. Shares of preferred stock may be issued by the board of
directors with such dividend, liquidation, voting and conversion features as may
be determined by the board of directors without shareholder approval. In June
2000, we established a Series A Convertible Preferred Stock, for which 1,000
shares of preferred stock were reserved for sale at $10,000 per share and 200
shares were issued and outstanding at November 30, 2001. In January 2002, we
converted the 200 outstanding shares of Series A stock by issuing 513,140 shares
of restricted common stock to the holder, based on $2,000,000 invested plus
$11,507 of interest (annual rate of 7.5%) which accrued in December 2001
(previous interest had been paid in cash), divided by $3.92 (market price for
USE stock on December 5, 2001).
OPTIONS, WARRANTS, CONVERTIBLE SHARES OF RMG, AND CONVERTIBLE DEBT. As of
the date of this prospectus, options are held by employees and officers to
purchase a total of 2,873,646 shares of common stock, at exercise prices ranging
from $2.00 to $3.90. These options expire at various times from 2008 to 2011.
94
For information on warrants, convertible shares of RMG, and convertible
debt, see "Selling Shareholders."
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our articles of incorporation and bylaws provide that we shall indemnify
directors provided that the indemnification shall not eliminate or limit the
liability of a director for breach of the director's duty or loyalty to the
corporation or its stockholders, or for acts of omission not in good faith or
which involve intentional misconduct or a knowing violation of law.
Wyoming law permits a corporation, under specified circumstances, to
indemnify its directors, officers, employees or agents against expenses
(including attorney's fees), judgments, fines and amounts paid in settlements
actually and reasonably incurred by them in connection with any action, suit or
proceeding brought by third parties by reason of the fact that they were or are
directors, officers, employees or agents of the corporation, if these directors,
officers, employees or agents acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceedings, had no
reason to believe their conduct was unlawful. In a derivative action, i.e., one
by or in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors, officers, employees or
agent in connection with the defense or settlement of an action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnify for such expenses despite
such adjudication of liability.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
company pursuant to the foregoing provisions, or otherwise (for example, in
connection with the sale of securities), we have been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the 1933 Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the company of expenses incurred or paid by a director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Securities Act, and will be
governed by the final adjudication of such issue.
WHERE TO FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 under the 1933 Act with
respect to the shares offered by this prospectus. This prospectus, filed as a
part of the registration statement, does not contain certain information
contained in part II of the registration statement or filed as exhibits to the
registration statement. We refer you to the registration statement and exhibits
which may be inspected and copied at the Public Reference Section of the
Commission, 450 5th Street, NW, Washington, D.C. 20549, at prescribed rates; the
telephone number for the Public Reference Section is 1.800.SEC.0330. The
registration statement and exhibits also are available for viewing at and
downloading from the EDGAR location within the Commission's internet website
(http://www.sec.gov).
95
Our common stock is registered with the Commission under section 12(g) of
the Securities Exchange Act of 1934 (the "1934 Act"). Under the 1934 Act, we
file with the Commission periodic reports on Forms 10-K, 10-Q and 8-K, and proxy
statements, and our officers and directors file reports of stock ownership on
Forms 3, 4 and 5. These filings may be viewed and downloaded from the
Commission's internet website (http://www.sec.gov) at the EDGAR location, and
also may be inspected and copied at the Public Reference Section of the
Commission, 450 5th Street, NW, Washington, D.C. 20549, at prescribed rates; the
telephone number for the Public Reference Section is 1.800.SEC.0330. Information
on the operation of the Public Reference Room can be obtained by calling the
Commission at 1.800.SEC.0330.
We will provide copies of the reports and proxy statements we file with the
Commission (and any amendments to those documents), on request and without
charge. We hold an annual shareholder meeting each June; before the meeting, we
send proxy statements and annual reports to record holders of our common stock.
LEGAL MATTERS
The validity of the issuance of the shares offered has been passed upon by
The Law Office of Stephen E. Rounds, Denver, Colorado.
EXPERTS
Our consolidated balance sheets as of December 31, 2003, December 31, 2002,
and May 31, 2002, 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 (former) fiscal years ended May 31,
2002 and 2001, have been audited by Grant Thornton LLP, and are included in this
prospectus, with the audit report from Grant Thornton LLP, in reliance upon the
authority of such firm as experts in accounting and auditing.
The combined statements of revenue and direct operating expenses of certain
acquired property interests, (combined statements) (the assets acquired from
Hi-Production, LLC) for the years ended December 31, 2003, 2002 and 2001 have
been audited by Grant Thorton LLP and are included in this prospectus with the
audit report from Grant Thorton LLP, in reliance upon the authority of such firm
as experts in accounting and auditing.
96
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To U.S. Energy Corp.:
We have audited the accompanying consolidated balance sheets of U.S. Energy
Corp. and subsidiaries as of December 31, 2003 and 2002 and May 31, 2002, 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 years ended May 31, 2002 and 2001. 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 auditing standards generally accepted
in the United States of America. 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 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 years 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.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
February 27, 2004
97
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 of allowance of $27,800 300,900 1,655,700 768,800
Affiliates 96,800 117,600 132,800
Current portion of long-term notes
receivable, net 102,500 165,900 229,000
Assets held 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.
98
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 portion 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)
Treasury 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.
99
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.
100
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.
101
U.S. ENERGY & AFFILIATES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(RESTATED, NOTE A)
Common Stock Additional Treasury Stock
----------------- Paid-In Accumulated ---------------------
Shares Amount Capital Deficit Shares Amount
--------- ------- ----------- ------------- ------- ------------
Balance June 1, 2000
as previously presented 8,763,155 $87,700 $37,797,700 $(30,071,200) 944,725 $(2,639,900)
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)
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)
========= ======= =========== ============= ======= ============
Unallocated Total
ESOP Shareholders'
Contribution Equity
------------- -------------
Balance June 1, 2000
as previously presented $ (490,500) $ 4,683,800
Adjustment for deferred taxes
See note a -- 1,144,800
-------------- -----------
Balance June 1, 2000
as restated (490,500) 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 $ (490,500) $ 8,465,400
============== ===========
Total Shareholders' Equity at May 31, 2001 does not include 433,788 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.
102
U.S. ENERGY & AFFILIATES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(RESTATED, NOTE A)
(CONTINUED)
Common Stock Additional Treasury Stock
------------------ Paid-In Accumulated ---------------------
Shares Amount Capital Deficit Shares Amount
--------- ------- ----------- ------------- ------- ------------
Balance May 31, 2001 8,989,047 $ 90,000 $38,681,600 $(27,155,200) 949,725 $(2,660,500)
Funding of ESOP 70,075 700 236,200 -- -- --
Issuance of common stock
to outside directors 3,429 -- 14,400 -- -- --
Issuance of common stock
for services rendered 45,000 500 147,600 -- -- --
Issuance of common stock
warrants for services rendered -- -- 592,900 -- -- --
Treasury stock from payment
on balance of note receivable -- -- -- -- 10,000 (79,900)
Issuance 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)
========== ======== =========== ============= ======= ============
Unallocated Total
ESOP Shareholders'
Contribution Equity
-------------- -------------
Balance May 31, 2001 $ (490,500) $ 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) $ (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 this statement.
103
U.S. ENERGY & AFFILIATES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(RESTATED, NOTE A)
(CONTINUED)
Common Stock Additional Treasury Stock
------------------ Paid-In Accumulated ---------------------
Shares Amount Capital Deficit Shares Amount
--------- ------- ----------- ------------- ------- ------------
Balance May 31, 2002 11,720,818 $117,200 $48,278,500 $(33,422,800) 959,725 $(2,740,400)
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)
========== ======== =========== ============ ======= ===========
Unallocated Total
ESOP Shareholders'
Contribution Equity
-------------- -------------
Balance May 31, 2002 $ (490,500) $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) $ (490,500) $ 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.
104
U.S. ENERGY & AFFILIATES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(RESTATED, NOTE A)
(CONTINUED)
Common Stock Additional Treasury Stock
------------------ Paid-In Accumulated -----------------------
Shares Amount Capital Deficit Shares Amount
--------- ------- ----------- ------------- ------- ------------
Balance December 31, 2002 11,826,396 $118,300 $48,877,100 $(37,262,900) 959,725 $(2,740,400)
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)
========== ======== =========== ============ ======= ===========
Unallocated Total
ESOP Shareholders'
Contribution Equity
-------------- -------------
Balance December 31, 2002 $ (490,500) $ 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) $ (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 this statement.
105
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.
106
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.
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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.
108
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
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. 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 Company ("SGMC"), a Wyoming corporation owned 78.5% by the Company
at December 31, 2003, manages the Company's interest in gold properties. The
Company also owns 100% of the outstanding stock of Plateau Resources Limited
("Plateau"), which owns a nonoperating uranium mill in southeastern Utah.
Currently, the mill is nonoperating but has been granted a license to operate
subject to certain conditions. 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% of RMG as of December 31, 2003.
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
-----------------
The Company has generated significant net losses during recent years and
has an accumulated deficit of approximately $43,073,000 at December 31, 2003.
The Company has working capital of approximately $3,281,700 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. The Company used cash in its operating
activities of $5,673,700 and $3,334,800 during the years ended December 31, 2003
and May 31, 2002 and used cash of $2,857,800 during the seven moths ended
December 31, 2002. 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
109
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
and $230,900, respectively, for the seven months ended December 31, 2002 and the
fiscal year ended May 31, 2001.
The Company has entered into agreements to provide funding for the
development of coalbed methane properties (See Note F). 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:
o Continue to reduce its mining activities.
o Sell raw land in Riverton, Wyoming 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.
o Seek equity funding or a joint venture partner to place the SGMC
property into production or sell the entire property to an industry
partner.
o 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.
o Reduce overhead expenses and concentrate on its primary business -
coalbed methane.
o Successfully resolve disputes relating to SMP assets. (See Note K)
As a result of these plans, management believes that they will generate
sufficient cash flows to meet its cash requirements in calendar 2004, although
there is no assurance the plans will be accomplished.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of USE and subsidiaries include the
accounts of the Company, the accounts of its majority-owned or controlled
subsidiaries Plateau (100%), Energx, Ltd ("Energx") (90%), Four Nines Gold, Inc.
("FNG") (50.9%), SGMC (78.5%), Crested Corp. ("Crested") (71.5%), Yellowstone
Fuels Corp. ("YSFC") (35.9%) Rocky Mountain Gas ("RMG") (88.5%) 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.
110
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
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.
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, the Company had approximately 99% 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
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
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 sales of land. 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, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts.
In addition, the Company is due $863,200 from CCBM 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 reserved due to
its non-recourse nature with payments received credited against natural gas
properties in accordance with the full cost method of accounting.
INVENTORIES
Inventories consist of aviation fuel and well casing and tubing.
Inventories are stated at lower of cost or market using the average cost method.
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
111
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
estimated useful lives ranging from 3 to 45 years. Following is a breakdown of
the lives over which assets are depreciated.
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
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.
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
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
112
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
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
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 measured by comparing estimated future
cash flows on a discounted basis to the carrying amount of the asset. Changes in
significant assumptions underlying future cash flow estimates may have a
material effect on the Company's financial position and results of operations.
An uneconomic commodity market price, if sustained for an extended period of
time, or an inability to obtain financing necessary to develop mineral
interests, may result in asset impairment.
During the fiscal year ended May 31, 2002, the Company recorded a
$1,622,700 impairment 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
The carrying amount of cash equivalents, receivables, other current assets,
accounts payable and accrued expenses approximates 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
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
113
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
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 May 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).
Management fees are recorded as a percentage of actual costs for services
provided for subsidiaries and partnerships for which the Company provides
management services. The Company is also paid a management fee for overseeing
oil production on the Fort Peck Reservation in Montana. Management fees are
recorded when the service is provided.
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 the 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 -- -- -- --
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.
114
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net (loss) income and pro forma net loss
per common share would have been reported as follows:
Year Ended Seven Months Ended Year Ended May 31,
December 31, December 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)
Weighted average shares used to calculate pro forma net loss per share were
determined as described in Note B, except in applying the treasury stock method
to outstanding options, net proceeds assumed received upon exercise were
increased by the amount of compensation cost attributable to future service
periods and not yet recognized as pro forma expense.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes". This statement requires recognition of deferred income tax assets and
liabilities for the expected future income tax consequences, based on enacted
tax laws, of temporary differences between the financial reporting and tax bases
of assets, liabilities and 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
The Company reports net (loss) income 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
115
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
are excluded from the computation of diluted earnings (loss) per share, because
they were antidilutive, totaled 3,790,370, 4,910,900, 3,999,468 and 3,316,011 at
December 31, 2003 and 2002 and May 31, 2002 and 2001, respectively.
USE OF 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.
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
--------------------------------
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 in estimate is required as well as accrue 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.
The following is a reconciliation of the total liability for asset
retirement obligations
Balance December 31, 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 December 31, 2003 $ 7,264,700
=============
The following table shows the Company's net income (loss) and net income
(loss) per share on a pro forma basis as if the provisions of SFAS No. 143 had
been applied retroactively in all periods presented.
116
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
Seven Months
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
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 at December 31, 2002, May
31, 2002 and 2001 and June 1, 2000, respectively.
The Company has reviewed other current outstanding statements from the
Financial Accounting Standards Board and does not believe that any of those
statements will have a material adverse affect on the financial statements of
the Company when adopted.
C. RELATED-PARTY TRANSACTIONS:
The Company provides management and administrative services for affiliates
under the terms of various management agreements. Revenues from services
provided by the Company 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.
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.
117
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
E. INVESTMENTS IN AND ADVANCES TO AFFILIATES:
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,
2002 and May 31, 2002, 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
During fiscal 1990, the Company entered into an agreement with Kennecott, a
wholly-owned, indirect subsidiary of The RTZ Corporation PLC, for Kennecott to
acquire a 50% interest in certain uranium mineral properties in Wyoming known as
the Green Mountain Properties. During the life of the venture, the parties
entered into various amendments to the GMMV Agreement.
As a result of sustained depressed uranium prices, the GMMV properties were
maintained on a shut down basis. During fiscal 2000, certain differences arose
in the GMMV and Kennecott sued the Company and USE. On September 11, 2000, the
parties settled all disputes and Kennecott paid the Company and USE $3.25
million and assumed reclamation liability for the Sweetwater Mill, Jackpot and
Big Eagle Mine properties. (Note K.)
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. SMP 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 thirteen years. See
Note K for the status of the related litigation/arbitration.
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, December 31, 2002 and May 31,
2002. (see Note K).
PHELPS DODGE
During prior years, the Company 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 of 1999. The properties have not
been placed into production as of December 31, 2003.
118
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
Amax and later Cyprus Amax paid the Company an annual advance royalty of
50,000 pounds of molybdenum (or its cash equivalent). 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 $60,300 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% 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).
PLATEAU RESOURCES LIMITED
During fiscal 1994, USE entered into an agreement with Consumers Power
Company to acquire all the issued and outstanding common stock of Plateau
Resources Limited ("Plateau"), a Utah corporation. Plateau owns a uranium
processing mill and support facilities and certain other real estate assets
through its wholly-owned subsidiary, Canyon Homesteads, Inc., in southeastern
Utah. USE paid nominal cash consideration for the Plateau stock and agreed to
assume all environmental liabilities and reclamation bonding obligations. At
December 31, 2003, Plateau had a cash security in the amount of $6.8 million to
cover reclamation and annual licensing of the properties (see Note K).
119
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 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 and agreed to a $6.1 million 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.
On August 1, 2003, the Company sold all of the stock of Canyon Resources as
a result of Plateau entering into a Stock Purchase Agreement to sell all the
outstanding shares of Canyon Homesteads, Inc. ("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 sheet 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.
Pursuant to the promissory note, the Company is to receive $5,000 per month
for the months of November 2003 to 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 will also receive the
first $210,000 in gross proceeds from the sale of either single family or mobile
home lots in Ticaboo.
ROCKY MOUNTAIN GAS, INC.
During fiscal 2000, the Company organized Rocky Mountain Gas, Inc. ("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, RMG is owned 90.1% by the Company.
On January 3, 2000, 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 interest and 40% net revenue interest in approximately
185,000 acres of unproven leasehold interests in the Powder River Basin of
southeastern Montana.
120
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
RMG also acquired a 100% working 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 gas properties to 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 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.
RMG is the designated operator under a Joint Operating Agreement ("JOA")
between RMG and 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's with other entities, and operations or properties in the area
of mutual interest ("AMI"). CCBM has the right to participate in other
properties RMG may acquire under the area of mutual interest ("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 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).
121
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
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 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
--------
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"). Under the Agreement, RMG and CCBM contributed certain of their
respective interests, having an estimated fair value of approximately $7.5
million each, carried on RMG's books at a cost of $922,600, comprised of (1)
leases in the Clearmont, Kirby, Arvada and Bobcat CBM project areas and (2) oil
and gas reserves in the Bobcat project area, to a newly formed entity, Pinnacle
Gas Resources, Inc., a Delaware corporation ("Pinnacle"). In exchange for the
contribution of these assets, RMG and CCBM each received 37.5% of the common
stock of Pinnacle ("Pinnacle Common Stock") as of the closing date and options
to purchase Pinnacle Common Stock ("Pinnacle Stock Options"). The CSFB Parties
contributed $5.0 million for 25% of the common stock in Pinnacle.
CSFB Parties also contributed approximately $13 million of cash to Pinnacle
in return for the Redeemable Preferred Stock of Pinnacle ("Pinnacle Preferred
Stock"), 25% of the Pinnacle Common Stock as of the closing date and warrants to
purchase Pinnacle Common Stock ("Pinnacle 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 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
122
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
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.
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.
Oil and Gas Properties and Equipment Included the Following:
-----------------------------------------------------------
December 31, May 31,
------------------------------ ------------------------------
2003 2002 2002 2001
------------- ------------- ------------ -------------
Oil and gas properties:
Subject 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
Not subject 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
Sale 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
============= ============= ============ =============
The Company began drilling of its coalbed methane properties during 2001
and acquired producing properties in June of 2002.
123
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 following sets forth costs incurred for oil and gas property
acquisition and development activities, whether capitalized or expensed:
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
=========== =========== =========== ============
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.
The results from operations of oil and gas activities for the year ended
December 31, 2003 and the seven months ended December 31, 2002 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)
================ =================
Depreciation, depletion and amortization was $1.09 and $1.14 per equivalent
mcf of production for the year ended December 31, 2003 and the seven months
ended December 31, 2002, respectively.
G. DEBT:
LINES OF CREDIT
---------------
The Company has a $750,000 line of credit from a commercial bank. The line
of credit has a variable interest rate (5.0% as of December 31, 2003). The
weighted average interest rate for the year ended December 31, 2003 was 5.12%.
As of December 31, 2003, none of the line of credit had been borrowed. The line
of credit is collateralized by certain real property and a share of the net
proceeds of fees from production from certain oil wells.
124
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
LONG-TERM DEBT
The components of long-term debt as of December 31, 2003, 2002 and May 31,
2002 are as follows:
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
=========== =========== ===========
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.
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.
125
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
H. INCOME TAXES:
The components of deferred taxes as of December 31, 2003, 2002 and May 31,
2002 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 $ -- $ -- $ --
============= ============= ============
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 for
December 31, 2002 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 for the seven months ended December 31, 2002 and
decreased $2,740,300 and $2,641,300 for the years ended May 31, 2002 and 2001,
respectively.
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, 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 $ -- $ -- $ -- $ --
============ ============ ============ ============
126
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
There were no taxes currently payable as of December 31, 2003, December 31,
2002, May 31, 2002, or May 31,2001 related to continuing operations.
At December 31, 2003, the Company and its subsidiaries had available, for
federal income tax purposes, net operating loss carryforwards of approximately
$33,300,000 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 is 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:
127
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(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
=============== =============
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
=============== =============
128
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
Year Ended December 31, 2003
--------------------------------------------------------------------
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
=============== ============
129
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
Year Ended December 31, 2003
--------------------------------------------------------------------
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
=============== ============
130
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
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
============== ============ ============
131
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
J. SHAREHOLDERS' EQUITY:
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, 2003, the seven months ended December
31, 2002 and the years ended May 31, 2002 and 2001 the following activity
occurred under the 1998 ISOP:
Year Ended Seven Months Year Ended May 31,
December 31, Ended December 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
=========== ============ ========== ===========
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 reserves 3,000,000
shares of the Company's $.01 par value common stock for issuance for a period of
10 years.
132
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 following table represents the activity in the 2001 ISOP for the
periods covered by the Annual Report for the year ended December 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 --
============ =========== ==========
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.
133
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 following table represents the activity in employee options for the
periods covered by the Annual Report for the year ended December 31, 2003 that
are not in employee stock option plans:
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
============= ============== ==========
A summary of the Employee Stock Option Plans activity in all plans for the
year ended December 31, 2003; the seven months ended December 31, 2002 and the
years ended May 31, 2002 and 2001 is as follows:
Seven Months
Year Ended Ended December 31, Year Ended May 31,
December 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
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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)
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
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, 2003 the Board of Directors of USE contributed
76,294 shares to the ESOP at the price of $3.10 for a total expense of $236,400.
This compares to contributions to the ESOP during the seven months ended
December 31, 2002 and fiscal years ended May 31, 2002 and 2001 of 43,867, 70,075
and 53,837 shares to the ESOP at prices of $3.08, $3.29 and $5.35 per share,
respectively. The Company has expensed $236,400, $135,100, $236,900 and $288,000
during the year ended December 31, 2003; the seven months ended December 31,
2002 and the fiscal years ended May 31, 2002 and 2001, respectively related to
these contributions. As of December 31, 2003, 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. 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 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
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. The 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
135
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 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 100,000 shares may be
issued each year from 2002. 100,000 shares were issued under the Plan during the
year ended December 31, 2003. No shares were issued under this Plan during the
seven month ended December 31, 2002 and the fiscal year ended May 31, 2002.
OPTIONS AND WARRANTS TO OTHERS
As of December 31, 2003, there are 906,724 options and warrants outstanding
to purchase shares of the Company's common stock. The Company values these
warrants using the black-scholes option pricing model and expenses that value
over the life of the warrants. Activity for the periods ended December 31, 2003
for warrants is represented in the following table:
Year Ended Seven Months Year Ended May 31,
December 31, Ended December 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 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
-------- ----------------- ------------- -----------------
$ 3.506 906,734 2.94 831,724
These options and warrants are held by persons or entities other than employees,
officers and directors of the Company.
136
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(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 of compensation expense for the year ended December
31, 2003 compared to $178,300 for the seven months ended December 31, 2002;
$298,300 and $201,000 for the years ended May 31, 2002 and 2001, respectively. A
schedule of total forfeitable shares for the Company is set forth in the
following table:
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
======== ===========
K. COMMITMENTS, CONTINGENCIES AND OTHER:
LEGAL PROCEEDINGS
Material pending proceedings 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
In 1991, disputes arose between the U.S. Energy Corp. ("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
No. 91B1153. The Federal Court
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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)
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 Panel entered an Order and Award on April 18,
1996 and clarified the Order on July 3, 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 Panel 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 to 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 a constructive trust and a damage award," and the
Arbitration Awards and the Second Amended Judgment were "clear and unambiguous."
On February 8, 1999, the U.S. District Court ordered Nukem 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 "provided 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 Report in
part and rejected it in part. Judgment was then entered by the Court on August
1, 2003 in favor of USECC and against Nukem in the amount of $20,044,183.
On August 15, 2003, Nukem filed a "Motion to Remand to the Arbitration
Panel or in the Alternative, to Alter, Amend and/or Correct the Court's August
1, 2003 Judgment and July 30, 2003 Order," and a "Motion to Correct Certain
Findings or Statements in the Court's Order 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
138
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
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 believes that the
ultimate outcome of this matter will not have an adverse affect on the Company's
financial condition or result of operation.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE and Crested filed a lawsuit in the 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 consequential 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 parties settled
the litigation in 2004. In the settlement, USE and Crested received $25,000 in
cash; two lots in the City of Gunnison, Colorado (one of which has been sold 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) 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) and its
subsidiary, Mt. Emmons Mining Company (MEMCO), over contractual obligations in
USECC's agreement with PD's predecessor companies, concerning mining properties
on Mt. Emmons, near Crested Butte, Colorado.
The litigation stems from agreements that date back to 1974 when USE and
Crested leased the mining claims from AMAX Inc., PD's predecessor company. The
mining claims cover one of the world's largest and richest deposits of
molybdenum discovered by AMAX. AMAX reportedly spent over $200 million on the
acquisition, exploration and mine planning activities on the Mt. Emmons
properties.
The complaint filed by PD and MEMCO seeks a determination that PD'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.
Energy 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 Minerals Co. USECC's counter and cross-claims allege that in
1999, PD formed a wholly-owned subsidiary CAV Corporation, for the purpose of
purchasing the controlling interest of 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 asserts the
acquisition of Cyprus Amax by PD was a sale of MEMCO and the properties that
triggers the obligation of Cyprus Amax to pay USECC the $3.75 million plus
interest.
The other issue in the litigation is 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
139
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
with State of Colorado regulations. PD's and MEMCO's claim seek to obligate
USECC to assume the operating costs of the water treatment plant. USECC refuses
to have the water treatment plant included in the return of 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 breach 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 owner of the mining rights to the 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 about April 1, 2001, Rocky Mountain Gas, Inc. (RMG), a subsidiary of
USE and Crested, was served with a Second Amended Complaint wherein the Northern
Plains Resource Council had filed suit in the U.S. District Court of Montana,
Billings Division in Case No. CV-01-96-BLG-RWA against the United States Bureau
of Land Management ("BLM"), RMG, certain of its affiliates (including U.S.
Energy Corp. and Crested Corp.) 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 for the complaint appears to be 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 respond to some objecting adjacent landowners.
However, all of the BLM leases in Montana held by RMG (none are held by USE in
its corporate name) are at least four years old, and 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's leases were validly
issued in compliance with BLM procedures, and do not believe the plaintiff's
lawsuit will adversely affect any of RMG's Montana BLM leases.
140
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
LAWSUITS CHALLENGING BLM'S RECORDS OF DECISIONS
Three lawsuits are 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 billings Resource
Management Plans in Montana. Neither the Company, nor RMG is a party to any of
these lawsuits.
LITIGATION INVOLVING DRILLING ON A COALBED METHANE LEASE
A drilling company, Eagle Energy Services, LLC filed a lien on RMG's
leasehold in southwestern Wyoming for drilling services performed at RMG's
Oyster Ridge Property and filed a lawsuit foreclosing the lien. Eagle Energy'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. C02-9-328 in the 4th Judicial District of Sheridan County, Wyoming. Eagle
Energy's 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. Management believes
that the ultimate outcome of the matters will not have a material effect on the
Company's financial condition or results of operations.
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 Environmental Quality ("WDEQ") review the
Company's reclamation, environmental and decommissioning 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 or 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
141
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
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 doe not believe that any significant capital expenditures to monitor or
reduce hazardous substances 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, estimated reclamation obligations related to the
above mentioned mining properties total $7,264,700. The Company currently has
three mineral properties or investments that account for most of their
environmental obligations, SMP, Plateau and SGMC. 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. 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 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's mineral properties are currently on shut down status and have never
been in production. There has been minimal surface disturbance on the Sutter
properties. Reclamation obligations consist of closing the mine entry and
removal of a mine shop. The reclamation obligation to close the property has
been set by the State of California at $27,800 which is covered by a cash
reclamation bond. This amount was recorded by SGMC as a reclamation liability as
of December 31, 2003.
142
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
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, 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
----------------------
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.
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 being 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.
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.
143
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 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. 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 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
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
-------------------------------------------------------------
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
================== ================= ==================
144
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 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. No deduction has been made for depletion, depreciation or any
indirect costs such as general corporate overhead or interest expense.
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
===============
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
================= =================
(1) During June 2003, RMG contributed proved and unproved properties in exchange
for a 37.5% interest in Pinnacle (See Note F).
145
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(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
============ ============
146
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
O. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
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 $ (0.16) $ (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
147
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
Three Months Ended
Month 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
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.
148
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002, MAY 31, 2002 AND MAY 31, 2001
(CONTINUED)
P. SUBSEQUENT EVENT
ROCKY MOUNTAIN GAS, INC.
On January 30, 2004 the Company's affiliate, RMG, acquired Wyoming coalbed
methane (CBM) properties from a non-affiliated party. The purchase price of $6.8
million was paid with $5.0 million of cash, $500,000 in a 30 day secured note,
$600,000 in restricted USE stock and $700,000 in restricted RMG stock. RMG
financed $3.7 million of the cash component from a recently established $25
million credit facility arranged 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 subject to lenders 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 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% working interest in the producing wells and a 100%
working interest in all of the undeveloped acreage. The properties purchased
serve as the sole collateral for the credit facility. With the acquisition,
RMG's gross and net acreage holdings increase to approximately 264,300 and
128,200, respectively.
SUTTER GOLD MINING CO.
On January 5, 2004, the Company, through Suttter, entered into a Letter 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 exploration work will be run through the Comet mineralized
zone as soon as funds are made available through equity or debt financing. 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. Closing
of the reverse takeover is subject to negotiation and approval of the share
exchange agreements by the directors and shareholders of both companies and
approval by Canadian Regulatory Authorities.
149
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS 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 years ended May 31, 2002 and 2001. In our opinion,
this schedule when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information to be set forth therein.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
February 27, 2004
150
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
========== ========== ========== ============
151
Board of Directors
U.S. Energy Corp.
We have audited the accompanying Combined Statements of Revenue and Direct
Operating Expenses of Acquired Hi-Pro Properties (combined statements) for the
years ended December 31, 2003, 2002 and 2001. The combined statements are the
responsibility of the Acquired Properties management. Our responsibility is to
express an opinion on the combined statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the combined
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the combined
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the combined statements. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying combined statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for inclusion in the Form 8-K of U.S. Energy Corp.) as described in
Note A and are not intended to be a complete presentation of the Acquired
Properties revenue and expenses.
In our opinion, the combined statements referred to above present fairly,
in all material respects, the revenue and direct operating expenses as described
in Note A of the Acquired Property Interests for the years ended December 31,
2003, 2002 and 2001, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Grant Thornton LLP
Oklahoma City, Oklahoma
April 7, 2004
152
U.S. ENERGY CORP.
STATEMENTS OF REVENUE AND DIRECT OPERATING EXPENSES
OF ACQUIRED HI-PRO PROPERTIES
Year ended December 31,
----------------------------------------
2003 2002 2001
---------- ---------- ----------
Revenue- gas sales $4,381,100 $3,846,600 $6,922,500
Direct operating expenses
Lease operations 1,091,700 956,100 1,181,700
Production taxes 521,800 495,800 849,800
---------- ---------- ----------
1,613,500 1,451,900 2,031,500
---------- ---------- ----------
Excess of revenue over direct
operating expenses $2,767,600 $2,394,700 $4,891,000
========== ========== ==========
The accompanying notes are an integral part of these statements.
153
U.S. ENERGY CORP.
NOTES TO STATEMENTS OF REVENUE AND
DIRECT OPERATING EXPENSES OF
ACQUIRED HI-PRO PROPERTIES
DECEMBER 31, 2003, 2002 AND 2001
NOTE A - BASIS OF PRESENTATION AND GENERAL INFORMATION
The accompanying combined statements present the ownership interests of the
Company in the revenue and direct operating expenses of certain coalbed methane
gas properties acquired in the acquisition of the Hi-Pro Properties on January
30, 2004. The combined statements include the revenue and direct operating
expenses of the Properties for the years ended December 31, 2003, 2002 and 2001.
The accompanying combined statements do not reflect provisions for
depletion, depreciation, and amortization, if any, which may have been recorded
in the financial records of the previous owner. The combined statements do not
reflect certain additional expenses that may have been incurred in connection
with the ownership of the Properties such as interest on indebtedness and
general and administrative expenses incurred individually by the prior interest
owners as such costs are not comparable to those which will result from the
future operation of the Properties.
Lease operations expense includes direct costs of operating the Properties.
The Properties are not taxpaying entities. Any taxable income arising from
the operation of the Properties accrues directly to the interest owners
Accordingly, no provision for income taxes has been made in the combined
statements of revenue and direct operating expenses.
NOTE B - GAS RESERVE DATA (UNAUDITED)
The following estimates of proved developed and proved undeveloped reserve
quantities and related standardized measure of discounted future net cash flows
are estimates only, and do not purport to reflect realizable values or fair
market values of the Properties' reserves. It is emphasized that reserve
estimates are inherently imprecise and that estimates of new discoveries are
more imprecise than those of producing oil and gas properties. Accordingly,
these estimates are expected to change as future information becomes available.
Proved reserves are estimated reserves of coalbed methane gas that
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those expected to be
recovered through existing wells, equipment, and operating methods.
154
U.S. ENERGY CORP.
NOTES TO STATEMENTS OF REVENUE AND
DIRECT OPERATING EXPENSES OF
ACQUIRED HI-PRO PROPERTIES
DECEMBER 31, 2003, 2002 AND 2001
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of gas (with consideration of price changes only to the
extent provided by contractual arrangements) to the estimated future production
of proved gas reserves, less estimated future expenditures (based on year-end
costs) to be incurred in developing and producing the proved reserves, and
assuming continuation of existing economic conditions. The estimated future net
cash flows are then discounted using a rate of 10% a year to reflect the
estimated timing of the future cash flows. The following summaries of changes in
reserves and standardized measure of discounted future net cash flows were
prepared from estimates of proved reserves developed by an independent petroleum
engineer and Company personnel. The acquired properties have no proved
undeveloped reserves.
CHANGE IN STANDARDIZED MEASURE OF QUANTITIES
December 31,
2003 2002 2001
MCF MCF MCF
----------------------------------------------
Beginning of Year 5,409,210 7,349,918 8,997,579
Revision of previous estimates (170,404) 628,246 (276,442)
Extensions & Discoveries -- -- 2,088,700
Production (1,834,113) (2,568,954) (3,459,919)
----------------------------------------------
End of Year 3,404,693 5,409,210 7,349,918
==============================================
155
U.S. ENERGY CORP.
NOTES TO STATEMENTS OF REVENUE AND
DIRECT OPERATING EXPENSES OF
ACQUIRED HI-PRO PROPERTIES
DECEMBER 31, 2003, 2002 AND 2001
NOTE B - OIL AND GAS RESERVE DATA (UNAUDITED) - CONTINUED
Changes in Standardized Measure of Discounted Future Net Cash Flows
Related to Proved Gas Reserves
December 31,
2003 2002 2001
-------------------------------------------------
Standardized measure - beginning of year $ 11,000,591 $ 4,727,437 $ 45,547,500
Sale & Transfer, net of production cost (2,767,511) (2,394,703) (4,890,983)
Net change in sales & transfer price,
net of production cost 370,529 5,373,659 (30,173,881)
Extensions, discoveries and improved
recovery, net of future production and
development cost -- -- 1,343,452
Revision of Quantity Estimate (353,171) 1,277,650 (177,806)
Accretion of Discount 1,100,059 472,743 4,554,750
Change in Production Rate & Other (2,294,097) 1,543,805 (11,475,595)
-------------------------------------------------
Standardized measure - end of year $ 7,056,400 $ 11,000,591 $ 4,727,437
=================================================
156
U.S. ENERGY CORP.
PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
The unaudited pro forma combined condensed consolidated balance sheet as of
December 31, 2003 and the unaudited pro forma combined condensed consolidated
statement of operations for the year ended December 31, 2003 give effect to the
acquisition of certain property interests acquired in the acquisition of the
Hi-Pro Properties by U.S. Energy Corp. ("USE" or "the Company"), and its
subsidiary Rocky Mountain Gas, ("RMG") which has been accounted for using the
purchase method of accounting. The pro forma combined financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the operating results that would have occurred if the transactions given pro
forma effect herein had been consummated as of the time reflected herein, nor
are they necessarily indicative of the future operating results or financial
position of the Company. The pro forma adjustments are based upon available
information and certain assumptions that the Company believes are reasonable.
This information should be read in conjunction with the historical financial
statements and related notes of the Company and the Statements of Revenue and
Direct Operating Expenses of Hi-Pro Acquired Properties.
157
PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
U.S. ENERGY CORP. AND SUBSIDIARIES
ASSETS
DECEMBER 31, 2003
(UNAUDITED)
ACQUISITION
ADJUSTMENTS
U.S. ENERGY FOR HI-PRO
HISTORICAL PROPERTIES COMBINED
------------- ------------ -------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,084,800 $ (706,200) (1) $ 3,378,600
Accounts Receivable 397,700 551,100 (1) 948,800
Other Current Assets 708,900 88,300 (1) 797,200
------------- ------------ ------------
Total current assets 5,191,400 (66,800) 5,124,600
INVESTMENTS: 7,831,900 7,831,900
PROPERTIES AND EQUIPMENT:
Land, Buildings, Machinery and Oil Properties 12,884,100 146,700 (1) 13,030,800
Proven coal bed methane properties -- 3,285,300 (1) 3,285,300
Unproved coal bed methane properties
excluded from amortization 1,204,400 3,213,000 (1) 4,417,400
------------- ------------ ------------
Total property and equipment 14,088,500 6,645,000 20,733,500
Less accumulated depreciation,
depletion and amortization (6,901,400) (6,901,400)
------------- ------------ ------------
Net property and equipment 7,187,100 6,645,000 13,832,100
OTHER ASSETS: 3,719,300 145,000 (1) 3,864,300
------------- ------------ ------------
Total assets $ 23,929,700 $ 6,723,200 $ 30,652,900
============= ============ =============
The accompanying notes are an integral part of these statements.
158
U.S. ENERGY CORP. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, 2003
(UNAUDITED)
ACQUISITION
ADJUSTMENTS
U.S. ENERGY FOR HI-PRO
HISTORICAL PROPERTIES COMBINED
------------- ------------- -------------
CURRENT LIABILITIES $ 1,909,700 $ 1,615,400 (1) $ 3,525,100
LONG-TERM DEBT 1,317,600 3,242,200 (1) 4,559,800
ASSET RETIREMENT OBLIGATIONS 7,264,700 372,100 (1) 7,636,800
OTHER ACCRUED LIABILITIES 2,158,600 2,158,600
DEFERRED GAIN ON SALE OF ASSET 1,295,700 1,295,700
MINORITY INTERESTS 496,000 700,000 (1) 1,196,000
COMMITMENTS AND CONTINGENCIES
FORFEITABLE COMMON STOCK,
$.01 par value
465,880 and 500,788 shares issued,
forfeitable until earned 2,726,600 2,726,600
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value;
unlimited shares authorized; 12,824,698
and 13,024,698 shares issued respectively 49,833,800 793,500 (1) 50,627,300
Accumulated deficit (43,073,000) (43,073,000)
-------------- ------------ -------------
Total shareholders' equity 6,760,800 793,500 7,554,300
-------------- ------------ -------------
Total liabilities and shareholders' equity $ 23,929,700 $ 6,723,200 $ 30,652,900
============== ============ =============
The accompanying notes are an integral part of these statements.
159
U.S. ENERGY CORP. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
(UNAUDITED)
OPERATING REVENUES:
Gas sales $ 287,400 $ 4,381,100 $ -- $ 4,668,500
Other 549,900 -- -- 549,900
------------ ------------ ------------ ------------
837,300 4,381,100 -- 5,218,400
OPERATING COSTS AND EXPENSES:
Gas operations 3 313,100 1,613,600 1,601,600 (2) 3,528,300
Mineral holding costs 1,461,700 -- -- 1,461,700
General and administrative 6,300,400 -- 485,900 (3) 6,786,300
------------ ------------ ------------ ------------
8,075,200 1,613,600 2,087,500 11,776,300
------------ ------------ ------------ ------------
OPERATING (LOSS) GAIN: (7,237,900) 2,767,500 (2,087,500) (6,557,900)
OTHER INCOME & EXPENSES:
Other Income 758,500 -- -- 758,500
Other Expenses (831,500) -- -- (831,500)
------------ ------------ ------------ ------------
(73,000) -- -- (73,000)
------------ ------------ ------------ ------------
(LOSS) GAIN INCOME BEFORE
MINORITY INTEREST,
PROVISION FOR INCOME TAXES,
DISCONTINUED OPERATIONS
AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE: $ (7,310,900) $ 2,767,500 $ (2,087,500) $ (6,630,900)
NET (LOSS) INCOME PER SHARE
BASIC $ (0.65) $ (0.58)
NET (LOSS) INCOME PER SHARE
DILUTED $ (0.65) $ (0.58)
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 11,180,975 11,380,975
============ ===========
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 11,180,975 11,380,975
============ ===========
The accompanying notes are an integral part of these statements.
160
U.S. ENERGY CORP.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE A - BASIS OF PRESENTATION
On January 30, 2004, the Company acquired the Hi-Pro coalbed methane
Properties for $6,800,000 and other equipment, inventory and vehicles were also
purchased for approximately $235,000. The accompanying pro forma combined
condensed consolidated balance sheet has been presented as if the acquisition
occurred on December 31, 2003 and the accompanying pro forma combined condensed
consolidated statement of operations for the year ended December 31, 2003 has
been prepared as if the acquisition was consummated on January 1, 2003.
Basic earnings per share are based upon the weighted average number of
common shares outstanding. Diluted earnings per common share are based on the
assumption that all of the common stock options and purchase warrants are
converted into common shares using the treasury stock method. There are no
differences in net earnings for purposes of computing basic and diluted earnings
per share as conversion of the common stock options and purchase warrants would
have not effect on net earnings.
NOTE B - PRO FORMA ADJUSTMENTS
Pro forma adjustments are necessary to reflect the assumed effect of the
acquisition on the balance sheet as of December 31, 2003 and statement of
operations assuming the acquisition was consummated on January 1, 2003. The
accompanying pro forma balance sheet and statement of operations reflect the
following adjustments:
(1) To record the acquisition of the Hi-Pro properties as of December 31,
2003. The fair value of stock warrants to acquire USE stock and
overriding royalty interests on acquired properties conveyed to the
lender are reflected as discount on debt.
(2) To record pro forma overriding royalty to lender, depletion, fixed
operating expenses and asset retirement accretion related to the
Hi-Pro properties as though they had been purchased as of January 1,
2003.
(3) To record interest expense on the long term debt and the amortization
of warrants issued in relation to that debt and other debt issue cost
as though the Hi-Pro properties had been purchased as of January 1,
2003.
161
U.S. ENERGY CORP.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE C - GAS RESERVE DATA (UNAUDITED)
The following tables contain certain gas disclosures reflecting the pro
forma combined gas activities as of and for the year ended December 31, 2003.
Summary of Changes in Proved Reserves
December 31,
2003
MCF
------------
Beginning of Year 5,994,813
Revision of previous estimates (170,404)
Exchange of reserves in place (1) (504,087)
Production (1,915,629)
------------
End of Year 3,404,693
============
(1) During June 2003, RMG contributed proved and unproved properties
in exchange for a 37.5% interest in Pinnacle
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Gas Reserves
December 31,
2003
-------------
Future Cash Inflows $ 14,217,600
Future Cost $ (5,613,700)
-------------
Future Net Cash Flows $ 8,603,900
10% Discount Factor $ (1,547,500)
-------------
Standardized measure of discounted $ 7,056,400
=============
future net cash flows
162
U.S. ENERGY CORP.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE C - OIL AND GAS RESERVE DATA (UNAUDITED) - CONTINUED
Changes in Standardized Measure of Discounted Future Net Cash Flows
Related to Proved Gas Reserves
December 31,
2003
------------
Standardized measure - beginning of year $ 11,889,019
Sale & Transfer, net of production cost (2,830,711)
Net change in sales & transfer price,
net of production cost 370,529
Revision of Quantity Estimate (353,171)
Accretion of Discount 1,188,902
Net Change in income tax (1) --
Exchange of reserves in place (2) (825,228)
Change in Production Rate & Other (2,382,940)
-------------
Standardized measure - end of year $ 7,056,400
=============
(1) Due to significant net operating loss carryforwards no income tax expense
is recognized.
(2) During June 2003, RMG contributed proved and unproved properties in
exchange for a 37.5% interest in Pinnacle.
163
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses in connection with the issuance and distribution of the
securities being registered:
Securities and Exchange Commission registration fee.................$ 1,663.25
National Association of Securities Dealers, Inc. examination fee.... n/a
Accounting ......................................................... 9,000.00
Legal fees and expenses............................................. 20,000.00
Printing ........................................................... n/a
Blue Sky fees and expenses ......................................... $5,000.00
Transfer agent ..................................................... n/a
Escrow agent........................................................ n/a
Miscellaneous....................................................... n/a
Total...............................................................$ 35,663.25
The Registrant will pay all of these expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our articles of incorporation and bylaws provide that we shall indemnify
directors provided that the indemnification shall not eliminate or limit the
liability of a director for breach of the director's duty or loyalty to the
corporation or its stockholders, or for acts of omission not in good faith or
which involve intentional misconduct or a knowing violation of law.
Wyoming law permits a corporation, under specified circumstances, to
indemnify its directors, officers, employees or agents against expenses
(including attorney's fees), judgments, fines and amounts paid in settlements
actually and reasonably incurred by them in connection with any action, suit or
proceeding brought by third parties by reason of the fact that they were or are
directors, officers, employees or agents of the corporation, if these directors,
officers, employees or agents acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceedings, had no
reason to believe their conduct was unlawful. In a derivative action, i.e., one
by or in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors, officers, employees or
agent in connection with the defense or settlement of an action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnify for such expenses despite
such adjudication of liability.
164
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years ended December 31, 2003 and the period from January 1,
2004 to April 23, 2004, the Registrant (referred to as the "company") has sold
restricted securities as set forth below. All securities certificates bear a
restrictive legend under rule 144. No brokers were involved in the transactions,
except as noted. All sales were to accredited investors, except where noted. The
offer and sale of all the subject securities were made in reliance on from the
registration requirements of section 5 of the Securities Act of 1933, as
provided by rule 506, except for those transactions noted wherein the exemption
claimed is pursuant to section 4(2) of the Securities Act of 1933. In the
section 4(2) exemption-claimed transactions, each investor was provided complete
information about the company and each investor is believed to be financially
sophisticated.
Jan. 1, 2001-
Dec. 31, 2001 On April 11, 2001, options to purchase 20,000
shares at $3.98 per share were issued to consultant
R. J. Faulkner and Company ("RJF"). The company had
a consulting agreement with RJF for 24 months
ending April 22, 2003, for public relations and
investor relations services. The options have been
exercised.
On May 25, 2001, 15,000 shares and warrants to
purchase 10,000 shares on exercise of warrants at
$4.70 per share (exercisable only if the company's
stock closes at or above $6.50 per share for 90
consecutive days), and 20,000 more shares on
exercise of warrants at $4.70 per share
(exercisable only if the company's stock closes at
or above $10.00 per share for 90 consecutive days)
were issued to Riches and Resources for consulting
services. The warrants expired on May 14, 2003. The
entity is not an accredited investor; the section
4(2) exemption is claimed.
From July 27, 2001 through October 18, 2001,
389,666 shares and warrants to purchase 77,936
shares (at $3.75 per share) were issued to 18
investors for cash in a private placement offering.
The warrants expired on October 18, 2003. Warrants
to purchase 38,966 shares at $3.75 per share were
issued to persons associated with the financial
advisory firm for its services in the private
placement. The warrants expired on October 18,
2003.
On August 1, 2001, two options to purchase a total
of 80,000 shares were issued to two individuals
(Murray Roark and Robert Craig, 40,000 shares
each), exercisable at $4.30 per share and expiring
July 31, 2006. These options were issued to
compensate Mr. Roark and Mr. Craig as finders for
their introducing RMG to Carrizo Oil & Gas, Inc. in
early July 2001. Mr. Roark and Mr. Craig are
licensed securities brokers. Since July 2001, RMG
has had an agreement with a subsidiary of Carrizo
for the acquisition and exploration of coalbed
methane properties in Wyoming and Montana.
On October 23, 2001, 200,000 shares and warrants to
purchase 50,000 shares issuable upon exercise of
warrants at $3.00 per share, were issued to Caydal,
LLC for cash in a private placement offering. The
warrants expired on October 23, 2003.
165
On November 2, 2001, warrants to purchase 11,034
shares at $3.75 were issued to members of
VentureRound Group LLC (now McKim & Company,
"McKim")) for financial consulting services
provided by VentureRound Group LLC. These warrants
expire November 2, 2006.
On December 7, 2001, 24,260 shares were issued to
James and Vida Roebling as payment for a coalbed
methane lease. These persons are not accredited
investors; the section 4(2) exemption is claimed.
On December 7, 2001, 513,140 shares of restricted
common stock issued to Amiee Flanigan Glas, upon
conversion of 200 shares of series A preferred
stock, based on $2,000,000 invested, plus $11,507
of interest (annual rate of 7.5%) which accrued in
December 2001 (previous interest had been paid in
cash), divided by $3.92 (market price for USE stock
on December 5, 2001); and 910, 320 shares of
restricted common stock issued to nine investors in
exchange for shares of RMG.
Jan. 1, 2002 -
Dec. 31, 2002 On January 10, 2002, options to purchase 20,000
shares at $3.90 were issued to James E. Seale,
expiring on January 9, 2005 for consulting
services. Mr. Seale is not an accredited investor;
the section 4(2) exemption is claimed.
From February 20, 2002 through March 25, 2002 ,
281,926 shares and 56,383 warrants to purchase
shares at $4.00 per share were issued to 16
investors in a private placement conducted by the
company (for total proceeds of $916,254).
On May 7, 2002, 20,000 shares were issued to Robert
H. Taggart, Jr., in part for the exchange of
warrants to purchase 6,703 shares of common stock
of the company (at $3.64 per share) which he
acquired in a share exchange agreement with
Yellowstone Fuels Corporation, and for other
services. Mr. Taggart, a securities broker
presently associated with McKim, previously was
associated with another broker-dealer which raised
equity financing for Yellowstone; the former firm
compensated Mr. Taggart by transferring to him
warrants to purchase 6,703 shares of Yellowstone,
subsequently exchanged (along with all other
Yellowstone warrants held by the former firm) for
warrants to purchase shares of the company. The
Yellowstone and company warrants (acquired by
exchange of his Yellowstone warrants) held by Mr.
Taggart have been canceled. Additional
consideration for the issuance of the 20,000 shares
to Mr. Taggart are his service to the company for
financial public relations and the introduction of
the company to other stock brokerage firms. These
services have not involved capital formation
activities by the company.
On March 25, 2002, warrants to purchase 28,192
shares at $4.00 were issued to 36 persons who own
equity interests in McKim, which served as the
financial advisor to the company in connection with
the private
166
transactions in February and March 2002. These
warrants expired on March 25, 2004.
On March 25, 2002, 1,913 shares were issued to Dale
May and his wife Jeanne May, in exchange for 2,500
RMG shares which were issued to Mr. May in January
2002 as a finder's fee for his introduction to RMG
of several investors. Mr. May has represented to
the company that he is not a securities dealer as
that term is defined in the Securities Act of 1933.
Mr. and Mrs. May are not accredited investors; the
section 4(2) exemption is claimed.
On May 20, 2002, 12,500 shares were issued to
Robert Hockert and 25,000 shares to Mathew B.
Murphy as partial payment of producing coalbed
methane properties. These persons are not
accredited investors; the section 4(2) exemption is
claimed.
On May 30, 2002, warrants to purchase 120,000
shares at $3.00 were issued to Caydal, LLC (now
held by Bourne Capital LLC), expiring May 30, 2005,
in connection with a convertible loan to the
company from Caydal.
On May 30, 2002, warrants to purchase 30,000 shares
at $3.00 were issued to 31 persons who own equity
interests in VRG, which served as financial advisor
in connection with the Caydal loan transaction. The
warrants were expire on May 30, 2005.
59,000 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. 25,000 of these
shares were issued in May and July 2002, and 34,000
shares were issued in July 2003. This firm is not
an accredited investor; the section 4(2) exemption
is claimed.
Warrants to purchase 10,000 shares were issued to
Frederick P. Lutz in partial compensation for
consulting services he provided to the company from
August 1, 2002 to January 1, 2003. The warrants are
exercisable at $2.00 per share, and expire August
1, 2005. Mr. Lutz is not an accredited investor;
the section 4(2) exemption is claimed.
On November 19, 2002 warrants to purchase 60,000
shares at $3.00 were issued to Tsunami Partners,
L.P., expiring November 19, 2005, in connection
with a $500,000 convertible loan to the company
from Tsunami.
On November 19, 2002, warrants to purchase 15,000
shares at $3.00 were issued to 34 persons who own
equity interests in McKim, a licensed
broker-dealer, which served as financial advisor in
connection with the Tsunami loan transaction. The
warrants expire on November 19, 2005.
On December 2, 2002, 20,000 shares were issued to
two trusts (10,000 shares each) as a result of a
settlement agreement involving the company's
167
subsidiary Sutter Gold Mining Company. The trusts
are not accredited investors; the section 4(2)
exemption is claimed.
Jan. 1, 2003 -
Dec. 31, 2003 On March 24, 2003, 43,378 shares were issued to
four executive officers of the company (John L.
Larsen, Daniel P. Svilar, Harold F. Herron and
Robert Scott Lorimer) being the balance of shares
issuable under the 1996 stock award program (now
closed out).
Options 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, and is a former employee of
the company. The section 4(2) exemption is claimed.
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. 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 restricted 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).
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. These securities were not
issued in connection with the sale of any
securities by SMH.
168
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; the
section 4(2) exemption is claimed.
In March 2003, 12,000 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 C & H Capital, Inc. (owned by Jason
Wayne Assad who is associated with C.C.R.I.) 12,000
shares and a warrant to purchase 12,500 shares,
exercisable at $3.75 per share. All of these
warrants expire March 16, 2006. CCRI and C & H
Capital are not accredited investors; the section
4(2) exemption is claimed.
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 firm is not an accredited investor; the
section 4(2) exemption is claimed.
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; the
section 4(2) exemption is claimed.
In June and July 2003, Caydal, LLC and four
individuals invested $750,000 in 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. The RMG shares are
convertible to shares of the company. The terms of
converting the RMG stock to company stock were
adjusted on October 28, 2003 (see below).
In partial compensation for services provided by
McKim to RMG and the company in connection with the
foregoing investments in RMG, the company paid a
cash commission of $30,000 to McKim & Company, and
issued to McKim warrants to purchase 19,500 shares
of the company, 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.
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
169
(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. He is not an accredited
investor; the section 4(2) exemption is claimed. As
of December 31, 2003, pursuant to the
shareholder-approved 2001 Stock Compensation Plan,
100,000 shares were issued to officers of the
company at the rate of 20,000 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.
Jan 1, 2004 -
Apr. 23, 2004 On January 30, 2004, 200,000 restricted shares
(valued at $3.00 per share) were issued to the
seven members of Hi - Pro Production, LLC as
partial payment for the purchase of coalbed methane
properties by its subsidiary RMG. In March 2004,
166,667 shares issued to these seven persons as
payment in lieu of cash on the company's $500,000
promissory note, issued as further partial payment
to Hi - Pro of the purchase price. The shares had
secured the note. These persons are not accredited
investors; the section 4(2) exemption is claimed.
On January 30, 2004, RMG issued to the seven
members of Hi - Pro 233,333 restricted shares of
RMG common stock in partial payment of the purchase
price. The RMG shares are convertible at the
election of the holders into restricted shares of
common stock of the company.
At closing of the Hi-Pro acquisition, the company
issued to lenders three year warrants to purchase a
total of 318,465 shares of common stock of the
company (subject to vesting) at $3.30 cash per
share. At closing of the Hi-Pro acquisition,
warrants on 63,393 shares vested. The remaining
warrants will vest at the rate of the right to buy
one share for each $78.50 which RMG 1 subsequently
borrows under the credit facility.
On March 2, 2004, RMG issued 600,000 shares of
Series A Preferred Stock, at $3.00 per share to
three institutional investors in connection with an
$1,800,000 equity funding of RMG. The Series A
stock is convertible to common stock of the
company. In connection with this funding, the
company issued warrants to purchase 150,000 shares
of the company's common stock at $3.00 per share.
On March 2, 2004, the company issued 100,000 shares
and three year warrants to purchase 50,000 shares
at $3.00 per share to an investor for $300,000 in
equity funding, and issued five year warrants to
purchase
170
200,000 shares at $3.00 per share for $50,000 in
equity funding. If the company closing stock price
is at or more than $7.50 for any consecutive 10
trading days, then all unexercised warrants shall
expire on the 30th day after such 10th trading day.
On April 1, 2004, 12,500 restricted shares of
common stock were issued (2,500 shares each) to the
five executive officers of the company under a
shareholder approved stock compensation plan.
ITEM 16.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
SEQUENTIAL
EXHIBIT NO. TITLE OF EXHIBIT PAGE NO.
----------- ---------------- --------
3.1 USE Restated Articles of Incorporation......................[2]
3.1(a) USE Articles of Amendment to
Restated Articles of Incorporation..........................[4]
3.1(b) USE Articles of Amendment (Second) to
Restated Articles of Incorporation
(Establishing Series A Convertible Preferred Stock..........[9]
3.1(c) Articles of Amendment (Third) to
Restated Articles of Incorporation
(Increasing number of authorized shares)...................[14]
3.2 USE Bylaws, as amended through April 22, 1992...............[4]
4.1 Amendment to USE 1998
Incentive Stock Option Plan
(To include Family Transferability
of Options Under SEC Rule 16b).............................[11]
4.2 USE 1998 Incentive Stock Option Plan
and Form of Stock Option Agreement 1/99.....................[8]
4.3 USE Restricted Stock Bonus Plan,
as amended through 2/94.....................................[5]
4.4 Form of Stock Option Agreement, and Schedule
Options Granted January 1, 1996.............................[6]
4.5 Form of Stock Option Agreement and Schedule,
Options Granted January 10, 2001...........................[11]
4.6 [intentionally left blank]
171
4.7 USE 1996 Officers' Stock Award Program (Plan)...............[7]
4.8 USE Restated 1996 Officers' Stock
Award Plan and Amendment to USE
1990 Restricted Stock Bonus Plan............................[7]
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).......................................[24]
4.10 [intentionally left blank]
4.11 Rights Agreement, dated as of September 19, 2001
between U.S. Energy Corp. and Computershare
Trust Company, Inc. as Rights Agent. The Articles of
Amendment to Articles of Incorporation creating the
Series P Preferred Stock is included herewith as an
exhibit to the Rights Agreement.
Form of Right Certificate (as an exhibit to the
Rights Agreement).
Summary of Rights, which will be sent to all holders
of record of the outstanding shares of Common Stock
of the registrant, also included as an exhibit to the
Rights Agreement...........................................[12]
4.12 Form of Advisor Warrant dated October 18, 2001
and List of Holders .......................................[14]
4.13 Form of Advisor Warrant dated November 2, 2001
and List of Holders........................................[14]
4.14 - 4.15 Intentionally left blank
4.16 Warrant held by Riches In Resources
dated May 14, 2001.........................................[14]
4.17 Stock Option held by Karl Eppich..............................*
4.18 Intentionally left blank
4.19 USE 2001 Incentive Stock Option Plan
with Form of Option Agreement..............................[18]
4.20 USE Schedule of Options
Issued - 12/7/01 and 5/20/01...............................[18]
4.21 USE 2001 Officers' Stock Compensation Plan.................[18]
172
4.22 Warrant held by Michael Baybak
and Addendum to Warrant.......................................*
4.23 Stock Option held by Robert Nicholas
and Amended Stock Option Agreement............................*
4.24 Form of warrant held by
Sanders Morris Harris, Inc.................................[24]
4.25(a) Consulting Agreement with
and Warrant held by C.C.R.I................................[24]
4.25(b) Warrant held by C & H Capital, Inc............................*
4.26 Exchange Agreement (for conversion
of RMG shares into USE shares).............................[24]
4.26(a) Form of Amendment to Exchange Agreement
(Caydal and McCaughey).....................................[24]
4.26(b) Form of Amendment to Exchange Agreement
(Karns, Monahan/Cotner,Van Buren)..........................[24]
4.27 Form of warrant held by
McKim & Company- 19,500 and John Schlie-3,000..............[24]
4.28 Form of warrant held by Frederick P. Lutz..................[24]
4.29 Form of option held by
Murray Roark-40,000 and Robert Craig-40,000................[24]
4.30 Form of Warrant (2004 - Mezzanine Lenders).................[26]
4.31 Amendment to Secured Convertible Note (Tsunami)............[24]
4.32 Class A Warrant (Bourne Capital - 2004 Investment)
Class B Warrant (Bourne Capital - 2004 Investment.............*
4.33 Form of Warrant (2004 Investment by 3
Institutional Investors: Crestview Capital,
Spring Street, and Lion Fund).................................*
5.1 Opinion re legality and consent of counsel....................*
10.1 USECC Joint Venture Agreement - Amended as of 1/20/89.......[1]
10.2 Management Agreement with USECC.............................[3]
10.3 - 10.4 Intentionally left blank
173
10.5 Agreement for Strategic Services
VentureRound Group LLC.....................................[14]
10.6-10.60 [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 Purchase and Sale Agreement
Bobcat Property............................................[16]
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 Contribution and Subscription Agreement (to which
RMG, Pinnacle Gas Resources and others are parties)........[22]
10.68 Purchase and Sale Agreement, with Three
Amendments (for Purchase of Hi-Pro Assets).................[23]
10.69 Credit Agreement (Mezzanine Credit Facility
with Petrobridge Investment Management)....................[23]
10.70 Stock Purchase Agreement (Plateau Resources/
Canyon Homesteads - The Cactus Group
(August 2003)..............................................[27]
21.1 Subsidiaries of Registrant.................................[11]
23.1 Included in Exhibit 5.1
23.2 Consent of Independent Auditors (Grant Thornton LLP)..........*
23.3 Consent of Netherland, Swewll & Associates, Inc...............*
* Filed herewith
_____________
Unless otherwise indicated, the SEC File Number for each of the following
documents incorporated by reference is 000-6814.
174
[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] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form S-1 registration statement, initial filing (SEC File
No. 333-1689) filed June 18, 1996).
[6] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31, 1996,
filed September 13, 1996.
[7] Incorporated by reference from the like-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended May 31, 1997,
filed September 15, 1997.
[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] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form 8-K, filed February 5, 2001.
[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.
[15] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form S-3 registration statement (SEC File No. 333-83040),
filed February 19, 2002.
[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.
175
[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] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form S-3 registration statement, amendment no. 4 (SEC File
No. 333-83040), filed March 3, 2003.
[21] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form S-3 registration statement, amendment no. 1 (SEC File
No. 333-88584), filed March 10, 2003.
[22] Incorporated by reference from the exhibit filed with th Registrant's
Form 8-K, filed July 15, 2003.
[23] Incorporated by reference from the exhibit filed with th Registrant's
March 5, 2004 Form 8-K Report.
[24] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form S-3 registration statement (333-110882).
[25] Incorporated by reference from exhibit 3.1(d) to the Registrant's Form
10-K, filed March 30, 2004.
[26] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form 10-K, filed March 30, 2004.
[27] Incorporated by reference from the like-numbered exhibit to the
Registrant's Form 10-K, filed March 30, 2004.
176
ITEM 17. UNDERTAKINGS.
(a) RULE 415 OFFERING.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment
to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or event arising after the
effective date of the registration statement (or in the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
177
(h) Relative to request for acceleration of effective date.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer, or controlling person of the registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933, as
amended, and will be governed by the final adjudication of such issue.
178
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the city of Riverton, state of Wyoming
on May 13, 2004.
U.S. ENERGY CORP.
(Registrant)
Date: May 13, 2004 By: /s/ John L. Larsen
------------------------------------
John L. Larsen,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
registration statement on Form S-3 has been signed below by the following
persons in the capacities and on the dates indicated.
Date: May 13, 2004 By: /s/ John L. Larsen
------------------------------------
John L. Larsen, Director
Date: May 13, 2004 By: /s/ Keith G. Larsen
------------------------------------
Keith G. Larsen, Director
Date: May 13, 2004 By: /s/ Harold F. Herron
------------------------------------
Harold F. Herron, Director
Date: May 13, 2004 By: /s/ Nick Bebout
------------------------------------
Nick Bebout, Director
Date: May 13, 2004 By: /s/ Don C. Anderson
------------------------------------
Don C. Anderson, Director
Date: May 13, 2004 By: /s/ H. Russell Fraser
------------------------------------
H. Russell Fraser, Director
Date: May 13, 2004 By: /s/ Michael Anderson
------------------------------------
Michael Anderson, Director
Date: May 13, 2004 By: /s/ Robert Scott Lorimer
------------------------------------
Robert Scott Lorimer,
Principal Financial Officer/
Chief Accounting Officer
179