US ENERGY CORP - Annual Report: 2005 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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X
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Annual
report pursuant to section 13 or 15(d) of the Securities Exchange
Act of
1934 for the fiscal year Ended December 31, 2005
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Transition
report pursuant to section 13 or 15(d) of the Securities Exchange
Act of
1934 for the
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transition
period from ___________ to
___________
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Commission
file number 000-6814
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U.S.
ENERGY CORP.
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(Exact
Name of Company as Specified in its
Charter)
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Wyoming
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83-0205516
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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877
North 8th West, Riverton, WY
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82501
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code:
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(307)
856-9271
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Securities
registered pursuant to Section 12(b) of the Act:
None
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Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.01 par value
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(Title
of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. YES
NO
X
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES
NO
X
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Company was required
to
file such reports), and (2) has been subject to such filing requirements for
the
past 90 days. YES
X NO
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer Accelerated
filer Non-accelerated
filer X
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES
NO
X
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
last sold, or the average bid and ask price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter. $55,785,600.
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Class
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Outstanding
at March 31, 2006
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Common
stock, $.01 par value
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19,520,430
Shares
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Documents
incorporated by reference:
Portions of the documents listed below have been incorporated by reference
into
the indicated parts of this report
Proxy
Statement for the Meeting of Shareholders to be held in June 2006, into Part
III
of the filing.
Indicate
by check mark if disclosure of delinquent filers, pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best
of
the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K .
-2-
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K includes "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements other than statements of historical fact
included in this Report are forward-looking statements, including without
limitation the statements under Management's Discussion and Analysis of
Financial Condition and Results of Operations; the disclosures about U.S Energy
Corp.’s (“USE” or the “Company”) interest in coalbed methane ("CBM") as a result
of its minority equity interest in Pinnacle Gas Resources, Inc. (“Pinnacle”) and
its ownership in Class D shares of Enterra US Acquisitions Inc., a subsidiary
of
Enterra Energy Trust (“Enterra”), the disclosures about possible exploration and
other programs for uranium and molybdenum properties; and the disclosures about
Sutter Gold Mining Inc. (“SGMI”), formerly Globemin Resources Inc., and its
plans for a gold property in California. Whenever words like "expect,"
"anticipate" or "believe" are used, we are making forward-looking
statements.
Although
we believe that our forward-looking statements are reasonable, we don't know
if
our expectations will prove to be correct. Where we express an expectation
or
belief as to future events or results, such expectation or belief is expressed
in good faith and believed to have a reasonable basis. However, our
forward-looking statements are subject to risks and uncertainties, which could
cause actual results to differ materially from future results expressed,
projected or implied by those forward-looking statements. Important future
factors that could cause actual results to differ materially from expectations
will depend on:
For
CBM
gas, USE holds a minority equity interest in Pinnacle and Enterra, but is not
directly involved in their operations. Two officers of USE (Mark Larsen and
Keith Larsen) serve on the Pinnacle board of directors, which consists of eight
members. USE has no representation on the Enterra board of directors. The value
of USE’s equity interest in Pinnacle and Enterra will depend on those companies’
financial performance.
For
the
uranium properties, market prices for uranium oxide, whether and on what terms
capital can be obtained to develop the properties (and for the uranium mill
in
Utah, refurbish and put the mill into operation); the availability of permits
to
mine the properties, and whether the Utah mill can obtain an operating license
from the State of Utah.
For
the
gold properties held by SGMI, whether certain permits can be obtained from
the
State of California and the County of Amador, and whether and on what terms
capital can be obtained for further exploration, mining and construction of
processing operations.
For
the
molybdenum property re-acquired near Crested Butte, Colorado on February 28,
2006, our ability to comply with the Colorado regulatory requirements to operate
a water treatment plant on the properties; whether we have adequate water rights
for mine development and operation and processing; whether market prices for
molybdic oxide remain at a level that is profitable; and whether permits and
bonding for a mine and processing facility can be obtained, and whether USE
and
Crested can raise the necessary capital and/or enter into a joint venture or
other arrangement with a third party to put the property into
production.
The
forward-looking statements should be considered in the context of all the
information in this Annual Report.
-3-
DISCLOSURE
REGARDING MINERAL RESOURCES UNDER SEC AND
CANADIAN
REGULATIONS
USE
is a
joint venture partner with Uranium Power Corp. (“UPC”) and a major shareholder
of SGMI. The common stock of UPC and SGMI, both Canadian corporations, are
traded on the TSX-V, and are subject to the reporting requirements of the TSX-V
and Canadian securities regulatory authorities. Harold F. Herron, Senior Vice
President and Director of USE and Crested, serves on the board of directors
of
SGMI and is also the Company’s President and CEO and Chris Healey, Vice
President Exploration of USE, serves on the board of directors of
UPC.
From
time
to time, UPC and SGMI make public disclosures in compliance with National
Instrument 43-101, “Standards of Disclosure for Mineral Properties.” NI 43-101
establishes procedures and standards for determining the existence of, and
the
reporting of, Mineral Resources and Mineral Reserves. Mineral Resources are
classified in ascending categories of geological confidence, as Inferred,
Indicated, and Measured. Each definition relates to a resource that is
determined to be of “such a grade or quality that it has reasonable prospects
for economic extraction.” Mineral Reserves are classified as Proven or
Probable.
The
SEC
allows public disclosure of the extent and grade of mineral deposits, and,
under
SEC Industry Guide 7, “Description of Property by Issuers Engaged or to be
Engaged in Significant Mining Operations, of Proven (Measured) Reserves and
Probable (Indicated) Reserves. In contrast to NI 43-101, the SEC does not allow
public disclosure of Inferred, Indicated, or Measured Resources. In addition,
there are some significant differences in the standards allowed, and the
procedures required to be followed by the SEC for public disclosure of the
SEC’s
Proven (Measured) Reserves and Probable (Indicated) Reserves, as compared to
NI
43-101 for Proven and Probable Mineral Reserves.
United
States residents, who obtain information about those of our uranium properties,
and about the3 gold properties, which are reported upon by UPC and SGMI to
the
TSX-V in accordance with NI 43-101, and about SGMI’s gold properties, are
cautioned that such information may be materially different from what would
be
permitted under SEC rules for United States companies.
-4-
Risk
Factors
The
following risk factors should be considered in evaluating the information in
this Form 10-K.
Uncertain
value of investment securities, and operating losses.
At
December 31, 2005, we recorded $14,760,800 for the value of investments in
non-affiliates (including the Class D shares of Enterra US Acquisitions Inc.
and
$957,700 for the common stock in Pinnacle). However, the Class D shares are
not
tradable, but they will automatically convert to Enterra Energy Trust Units
on a
one-for-one basis on June 1, 2006. The cash we can realize from the Class D
shares will depend on the price of Enterra Energy Trust Units, which has been
somewhat volatile since June 1, 2005. Pinnacle is a private company. The cash
we
can realize from this investment presently is not determinable.
We
have a
history of operating losses, and our working capital needs have primarily come
from the receipt of funds from liquidating investments and selling equity.
These
sources of capital may not be sufficient to develop our mineral properties,
none
of which have proved reserves.
Working
capital and future receipt of proceeds from liquidating the Enterra securities
are expected to be sufficient to fund general and administrative expenses,
and
conduct exploration and a limited amount of development work on the mineral
properties, through 2006. However, putting mineral properties into production
(constructing and operating mines and processing facilities) requires very
substantial amounts of capital. We are seeking financing sources or
large-company industry partners for our uranium, gold and molybdenum properties,
but have not entered into agreements for such financing. The development of
some
or all of the properties will likely be delayed until we are successful in
obtaining financing, either in direct capital or through arrangements with
industry partners.
We
intend
to use proceeds from liquidating the Enterra securities, and intend to use
proceeds we might receive from liquidating other securities which we might
receive from sale of other of our mineral properties, in our minerals
exploration and development business. We are not in the business of investing,
reinvesting or trading in securities.
Uncertainties
in the value of the mineral properties.
While
we believe that our mineral properties are valuable, substantial work and
capital will be needed to establish whether they are valuable in
fact.
· The
profitable mining and processing of uranium and possibly vanadium at and in
the
vicinity of Plateau Resource Limited’s (“Plateau”) properties in Utah, will
depend on many factors: Obtaining properties in close proximity of the
Shootaring Mill to keep transportation costs economic; delineation through
extensive drilling and sampling of sufficient volumes of mineralized material
with sufficient grades to make mining and processing economic over time;
continued sustained high prices for uranium oxide and vanadium; obtaining the
capital required to upgrade the Shootaring Mill, and/or possibly add a vanadium
circuit, and obtaining and continued compliance with operating
permits.
· The
profitable mining at the Sheep Mountain uranium properties in Wyoming will
depend on: Evaluations of existing and future drilling data to delineate
sufficient volumes and grades of mineralized material to make mining and
processing economic over time; continued sustained high prices for uranium
oxide
and UPC and USE having sufficient capital. In addition, there is no operating
mill near the Sheep Mountain properties, although the Sweetwater Mill (which
is
on standby) is located 30 miles south of Sheep Mountain. The ultimate economics
of mining the Sheep Mountain properties will depend on sufficient volumes and
grades of mineralized materials, sustained high uranium oxide prices and access
to an operating mill.
-5-
· The
profitable mining and processing of gold by SGMI will depend on many factors,
including: Receipt of permits and keeping in compliance with permit conditions;
delineation through extensive drilling and sampling of sufficient volumes of
mineralized material with sufficient grades to make mining and processing
economic over time; continued sustained high prices for gold, and obtaining
the
capital required to initiate and sustain mining operations and build and operate
a gold processing mill.
· The
Lucky
Jack Project (formerly the Mount Emmons molybdenum property) has had extensive
work conducted by prior owners. This data will have to be updated to the level
of a current feasibility study to determine the viability of starting mining
operations. Obtaining mining and other permits to begin mining the molybdenum
property may be difficult, and like any mining operation, capital requirements
for a molybdenum mining operation will be substantial. There is a history of
opposition by local government entities and environmental organizations to
the
prior owners seeking permits to mine this property. This opposition has been
expressed in litigation from time to time. Continued legal challenges may delay
putting the Lucky Jack Project into production.
· We
have
not yet obtained feasibility studies on any of our mineral properties. These
studies would establish the economic viability, or not, of the different
properties based on extensive drilling and sampling; the design and costs to
build and operate mills; the cost of capital, and other factors. Feasibility
studies can take many months to complete. These studies are conducted by
professional third party consulting and engineering firms, and will have to
be
completed, at considerable cost, to determine if the deposits contain proved
reserves (amounts of minerals in sufficient grades that can be extracted
profitably under current pricing assumptions for development and operating
costs
and commodity prices). A feasibility study usually (but not always) must be
completed in order to raise the substantial capital needed to put a mineral
property into production. We have not established any reserves (economic
deposits of mineralized materials) on any of our properties, and future studies
may indicate that some or all of the properties will not be economic to put
into
production.
Compliance
with environmental regulations may be costly.
Our
business is intensely regulated by government agencies. Permits are required
to
explore for minerals, operate mines, build and operate processing plants. The
regulations under which permits are issued change from time to time to reflect
changes in public policy or scientific understanding of issues. If the economics
of a project cannot withstand the cost of complying with changed regulations,
we
might decide not to move forward with the project.
USE
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
Utah Division of Radiation Control for uranium mills even if not currently
operating (like the Shootaring 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. Environmental regulatory
programs create potential liability for our operations, and may result in
requirements to perform environmental investigations or corrective actions
under
federal and state laws and federal and state Superfund
requirements.
Failure
to comply with these regulations could result in substantial fines,
environmental remediation orders and/or potential shut down of the project
until
compliance is achieved. Failure to timely obtain required permits to start
operations at a project could cause delay and/or the failure of the project
resulting in a potential write-off of the investments therein.
-6-
Possible
Dilution to Shareholders.
Because
we don’t have enough capital to put our properties into production, shareholders
may be diluted in their ownership if we raise capital. Direct dilution would
occur if we sell preferred stock, common stock, or debt, convertible into common
stock, with conversion and other terms which large institutions can negotiate
for substantial capital financings which result in more favorable terms than
buying stock in the market. Indirect dilution would occur if institutional
financing is raised for a subsidiary company. In this scenario, the percentage
of the subsidiary held by us would be diluted.
PART
I
Item
1 and Item 2. Business and Properties.
General
U.S.
Energy Corp. is a Wyoming corporation (formed in 1966) in the business of
acquiring, exploring, developing and/or selling or leasing mineral and other
properties. USE and Crested Corp. ("Crested") originally were independent
companies, with two common affiliates (John L. Larsen and Max T. Evans; Mr.
Evans died in February 2002). In 1980, USE and Crested formed a joint venture
("USECC") to do business together (unless one or the other elected not to pursue
an individual project). From time to time, USE has funded many of Crested's
obligations because Crested did not have the funds to pay its share of the
obligations. Crested has paid a portion of this debt by issuing common stock
to
USE. At December 31, 2005, Crested owed $10,821,800 to USE.
Historically,
our business strategy has been, and will continue to be, acquiring undeveloped
and/or developed mineral properties at low acquisition costs and then operating,
selling, leasing or joint venturing the properties, or selling the companies
we
set up to other companies in the mineral sector at a profit.
Typically,
projects initially are acquired, financed and operated by USE and Crested in
their joint venture (see below). From time to time, some of the projects are
then transferred to separate companies organized for that purpose, with the
objective of raising capital from an outside source for further development
and/or joint venturing with other companies. Examples include: SGMI for gold
and
Rocky Mountain Gas, Inc. (“RMG”) for coalbed methane gas, referred to as “CBM”.
Additional subsidiaries have been organized: U.S. Uranium Ltd. for uranium
and
U.S. Moly Corp. for molybdenum. Initial ownership of these subsidiaries would
be
by USE and Crested, with additional stock (plus options) held by their officers,
directors and employees.
From
2002
through mid-2005, USE's primary business focus was in the CBM business conducted
through RMG. RMG was sold to Enterra Energy Trust (TSX: ENT.UN and NYSE: ENT)
on
June 1, 2005. Beginning in 2004 and continuing into 2006, commodity prices
for
the minerals in our other properties increased significantly. Management
believes that the rebound in uranium, gold and molybdenum commodity prices
presents valuable opportunities.
Management’s
strategy to generate a return on shareholder capital is to demonstrate
prospective value in the mineral properties sufficient to support substantial
investments by investment groups, financial institutions and/or large industry
partners, and then bring long term development expertise to move the properties
into production. In the alternative, we might sell one or more of the properties
(or our subsidiaries which hold the properties) outright, as we did with RMG
in
2005.
-7-
To
demonstrate prospective value in the mineral properties and raise the necessary
capital for development of the mineral projects in 2006 to 2007, management
is
considering having feasibility studies conducted on each of the properties.
These studies, to be performed by independent engineering firms, will in
general, determine the economic feasibility, at commodity prices existing at
the
time of the studies, of various mine plans for the properties, and various
processing (milling) facilities to refine the minerals to saleable commodities,
given the known mineral grades in the properties. In some instances, significant
additional exploratory drilling may have to be done to further delineate grades
as well as the extent of the minerals in the ground, if any.
The
principal uncertainties in the successful implementation of our strategy
are:
| · |
Whether
feasibility studies will show, for any of the properties, that the
minerals can be mined and processed profitably. Commodity prices
for gold,
uranium and molybdic oxide must be at levels so the properties can
be
mined at a profit;
|
| · |
Whether
the feasibility studies will show volume and grades of mineralization,
and
manageable costs of mining and processing, which are sufficient to
bring
industry partners to the point of investment,
and
|
| · |
Whether
we can negotiate terms with industry partners, which will return
a
substantial profit to USE for its retained interest and the project’s
development costs to that point in time, or, the property (or the
applicable subsidiary) can be sold
outright.
|
However,
it is possible that we may be able to raise capital for (or bring an industry
partner into) a property without having a feasibility study
prepared.
To
some
extent, the economic feasibility of a particular property can be changed with
modifications to the mine/processing plans (add or not add a circuit to process
a particular mineral, enlarge or reduce the production and mine plan, etc.).
However, overall, the principal drivers to attainment of the business strategy
are the quality of the minerals in the ground and international commodity
prices.
Principal
executive offices of USE and Crested are located in the Glen L. Larsen building
at 877 North 8th West, Riverton, Wyoming 82501, telephone 307-856-9271. SGMI
has
an office in Sutter Creek, California.
In
this
Annual Report, "we," "Company" or "USE" refer to U.S. Energy Corp. including
Crested Corp. ("Crested") and other subsidiaries unless otherwise specifically
noted. USE's fiscal year ends December 31.
USE
files
annual reports, quarterly reports and current reports, proxy statements and
other information with the U.S. Securities and Exchange Commission (the “SEC”).
You may read and copy any document we file at the SEC’s Public Reference Room at
Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC
at
1-800-SEC-3300 for information on the Public Reference Room. The SEC maintains
a
Web site that contains annual, quarterly and current reports, proxy statements
and other information that issuers (including USE) file electronically with
the
SEC. The SEC’s Web site is http://www.sec.gov.
USE’s
Web
site is http://www.usnrg.com. USE makes available free of charge through its
internet site, via a link to the SEC’s Web site at http://www.sec.gov, its
annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports
on
Form 8-K, and Forms 3, 4 and 5 filed on behalf of directors and executive
officers.
-8-
Capital
Activities in 2005 and First Quarter 2006.
USE
$3,000,000
Geddes Loan Repayment- 2005.
In the
third quarter 2004, we borrowed $3,000,000 from Geddes and Company (“Geddes”) of
Phoenix, Arizona. The loan (convertible to RMG Common stock) was scheduled
to
mature on July 30, 2006, with 10% annual interest, and was secured principally
by RMG's CBM properties in the Castle Rock of Montana prospect and 4,000,000
shares of RMG stock held by USE. In connection with the loan, RMG issued to
Geddes five year warrants to buy 600,000 shares of common stock of
RMG.
On
June
1, 2005, and in connection with the sale of RMG to Enterra, USE and Geddes
agreed to restructure the $3,000,000 secured debt; extinguish Geddes' right
to
convert the debt to RMG shares, retire outstanding RMG warrants and issue USE
shares (and transfer some of the Class D shares of Acquisitions) to
Geddes.
Pursuant
to the agreement, USE agreed to pay Geddes $500,000 cash and the $2,500,000
balance in ten monthly installments of $250,000 (plus interest) beginning July
1, 2005. USE also transferred to Geddes 10,664 of the Class D shares of
Acquisitions (valued at $225,000 or $21.10 per Class D share), which USE
received on closing of the Enterra agreement, and USE agreed to issue $225,000
in restricted shares of USE common stock (at the market price of $4.23 on
September 27, 2005). As of June 1, 2005, Geddes' option to convert the debt
to
RMG shares and all RMG warrants were extinguished, which was required under
the
Enterra agreement discussed below. The restructured debt was secured with
157,895 of the Enterra Initial Units out of USE's portion thereof (to be
released back to USE in tranches as installments were paid), and with the other
original collateral securing Geddes' loan which is unrelated to
RMG.
On
August
1, 2005, USE paid cash to completely retire the restructured the Geddes debt
with proceeds from the sale of RMG to Enterra Energy Trust. All collateral
associated with the Geddes Loan has been released.
$4,720,000
Loan Repayment- 2005.
On
February 4, 2005, we borrowed $4,000,000 from seven accredited investors,
issuing $4,720,000 face amount of unsecured debentures (including three years
of
annual interest at 6%). Net proceeds to USE were $3,700,000 after paying a
commission and lenders' legal costs and prepayment of interest.
The
face
amount of the debentures was payable every six months from February 4, 2005,
in
five principle and interest installments of 20% each period, in cash or in
restricted common stock of USE. USE had the right to pay this amortization
payment in cash, or in stock at the lower of $2.43 per share (the “set price”)
or 90% of the volume weighted average price of USE’s stock for the 90 trading
days prior to the repayment date. The set price was determined based on the
formula of 90% of the volume weighted average price of the stock over the 90
trading days prior to February 4, 2005. The debentures were convertible by
the
lenders, at any time, to restricted common stock of USE at the set
price.
USE
also
issued warrants to the investors, expiring February 4, 2008, to purchase 971,195
shares of restricted common stock, at $3.63 per share (equal to 110% of the
Nasdaq closing price on February 3, 2005). The number of shares underlying
the
warrants equaled 50% of the shares issuable on full conversion of the debentures
at the set price (as if the debentures were so converted on February 4, 2005).
At December 31, 2005, warrants on 485,597 shares had been exercised, for which
USE had received $1,762,700; as of March 1, 2006, an additional 121,400 warrants
had been exercised for $440,700, leaving 364,198 of the warrants
outstanding.
-9-
Warrants
to purchase 100,000 shares, at the same price and under the same terms as the
warrants issued to the investors, were issued to HPC Capital Management (a
registered broker-dealer) as compensation (in addition to a 7% cash commission)
for its services in connection with the transaction. None of those warrants
were
exercised at December 31, 2005. At March 1, 2006, 100,000 of these warrants
had
been exercised for $363,000.
If
in any
period of 20 consecutive trading days, USE’s stock price exceeds 200% of the
warrants’ exercise price, on each of the trading days, the warrants will expire
on the 30th
day
after USE sends a call notice to the warrant holders.
USE
has
filed with the Securities and Exchange Commission a registration statement
to
cover the future public sale of shares issuable in payment and/or conversion
of
the debentures, and the shares issuable upon exercise of the warrants. The
registration statement also covers the future sale by HPC Capital Management
of
the shares issuable upon exercise of the warrants issued to HPC.
Prior
to
the first scheduled debt payment, the investors exercised their option to
convert the entire debentures to 1,942,387 shares of USE restricted common
stock. The first conversion was made on June 14, 2005 and the last conversion
was made on July 15, 2005. Therefore the entire $4,720,000 debt has been
retired.
Sale
of Rocky Mountain Gas, Inc. (“RMG”)
- On
June 1, 2005, Enterra US Acquisitions Inc. (a privately-held Washington
corporation organized by Enterra for purposes of the RMG acquisition, hereafter
"Acquisitions") acquired all the outstanding stock of RMG, for which Enterra
paid $500,000 cash and issued $5,234,000 of Enterra units (the "Enterra Initial
Units"), net of the $266,000 adjustment for the purchase of overriding royalty
interests (effected May 1, 2005); and issued Class D shares of Acquisitions
(valued at $14,000,000), in the amounts of 436,586 shares to USE and 245,759
shares to Crested. The Enterra Initial Units and the Class D shares were issued
pro rata to the RMG shareholders. USE’s and Crested's participation in the
consideration received was approximately $18,341,600. USE’s consolidated
subsidiary, Yellowstone Fuels, Inc. (“YSFI”) also received approximately
$296,700. For information on the participation of USE employees, see Part III
of
this Annual Report.
RMG
was
acquired by Enterra with approximately $3,500,000 of debt (at May 31, 2005)
owed
by its subsidiary (RMG I, LLC) to its mezzanine lenders; this debt has been
eliminated from USE’s consolidated balance sheet. As a result of the RMG
disposition, USE and Crested no longer directly hold coalbed methane properties,
although with their holdings in securities of Enterra (and Acquisitions), and
Pinnacle (a private coalbed methane company in which USE and Crested hold a
minority equity interest), both companies will continue with investments in
the
oil and gas sector.
During
the three months ended September 30, 2005, USE and Crested sold all of the
Enterra Initial Units they received as a result of the sale of RMG. As a result
of the sale of these Enterra Initial Units, USE recorded an increase of
$5,916,600 in cash from investing activities and a gain of $1,038,500 from
the
sale of marketable securities. The Enterra Initial Units received by YSFI are
reflected on USE’s consolidated balance sheet as $77,100 as current assets -
marketable securities. The Class D shares of Acquisitions are carried as
$13,803,200 as investments in non-affiliates.
-10-
On
June
1, 2006, the 436,586 Class D shares of Acquisitions (not traded on any exchange)
owned by USE, and the 245,759 shares owned by Crested, will be exchangeable,
on
a one-for-one basis, for additional Enterra units (the "Enterra Additional
Units"); the Enterra Additional Units will be tradable on the Toronto Stock
Exchange (the “TSX”) at that time (and on the NYSE on June 1, 2007). A
substantial portion of any cash received by Crested from the sale of its Enterra
Additional Units will be applied to its debt to USE. Although the ultimate
value
of the Class D shares of Acquisitions will not be determinable until converted
to Enterra Additional Units and sold, the market value of the shares held by
USE
and Crested at March 27, 2006 was filed was a total of approximately $11.2
million, if the shares had been converted to Enterra Additional Units on that
date.
Proceeds
from liquidation over time of the Enterra Initial Units and the to-be-received
Enterra Additional Units will fund exploration and development work on other
mineral properties held by USE and Crested and will also be used for corporate
overhead.
RMG’s
minority equity ownership of Pinnacle was not included in the disposition of
RMG, but was assigned to USE and Crested in proportion to their ownership of
RMG. Enterra is entitled to be paid by USE an amount of up to (but not more
than) $2,000,000, if proceeds from a future disposition by USE and Crested
to a
third party of the minority equity interest in Pinnacle exceeds $10,000,000.
Currently, we have no information about whether or when Pinnacle might become
a
public company or might be purchased by third parties. The value of the minority
equity position upon a future disposition could be more or less than
$10,000,000. The boards of directors of USE and Crested determined that the
value of RMG’s minority equity interest in Pinnacle is approximately $6,250,000
based upon Pinnacle’s recent sales of equity to its shareholders (RMG did not
participate in those sales). To compensate the minority shareholders of RMG
(including officers, directors and employees of USE and Crested, Mark J. Larsen
(former president and a former director of RMG), YSFI and Tom Swank (a former
director of RMG) for their pro rata beneficially-owned 5.9% ($370,916) of the
$6,250,000 value of the minority Pinnacle interest transferred to USE and
Crested, restricted shares of common stock of USE were issued to the former
minority shareholders of RMG, pro rata for their May 31, 2005 percentage
beneficial ownership in Pinnacle (through their former ownership in RMG). These
USE shares were valued at $4.23 per share (the Nasdaq Official Close Price
on
September 27, 2005).
For
information on the participation in the Enterra agreement consideration of
USE
and Crested, certain of the officers and directors of USE and Crested, and
two
of the (former) officers and directors of RMG, please see the “Certain
Relationships and Related Transactions" disclosures in Part III of this Annual
Report.
Conversion
of RMG Preferred Stock.
In the
first quarter 2004, RMG raised $1,800,000 of equity financing from the sale
of
shares of Series A Preferred Stock in RMG, and warrants to purchase shares
of
common stock of USE, to institutional investors.
As
of
March 1, 2005, all Series A Preferred Stock including dividends had been
converted to and paid with USE common stock (894,299 shares), and all warrants
had been exercised (150,000 shares of USE common stock).
-11-
Exercise
of Warrants and Options.
In
2005,
USE issued a total of 3,593,897 shares of its common stock pursuant to the
exercise of warrants (910,362) and options (281,641); the 2001 stock
compensation plan, as compensation (60,000); to outside directors (11,475);
funding of USE’s Employee Stock Ownership Plan (56,494); conversion of
subsidiary RMG common stock (54,720); conversion of RMG Series A Preferred
shares (91,743); the payment of dividends on those RMG preferred shares
(44,195); the conversion of debentures entered into by USE during the first
quarter of 2005 (1,942,387); and the buyout of RMG’s minority shareholder
interest in Pinnacle (140,880).
Sutter
Gold Mining Inc.
In
2004,
Sutter Gold Mining Company, a majority-owned subsidiary with gold properties
in
California, was acquired by Globemin Resources Inc., a British Columbia
corporation which is traded on the TSX Venture Exchange (“TSX-V) under its new
name, Sutter Gold Mining Inc. (“SGMI”).
Molybdenum
On
February 28, 2006, Phelps Dodge Corporation (“PD”) conveyed back to USE and
Crested the mining claims at the Lucky Jack Project located near Crested Butte,
Colorado. The properties included the transfer of ownership and operational
responsibility for a water treatment plant located on the properties. In 2006,
we are considering transferring the properties to a new subsidiary, U.S. Moly
Corp.
Uranium
On
December 8, 2004, USE and Crested entered into a Purchase and Sales Agreement
to
sell a 50% interest in the Sheep Mountain (Wyoming) uranium properties to Bell
Coast Capital Corp., now named Uranium Power Corp. (“UPC”), a British Columbia
company trading on the TSX Venture Exchange. This agreement was amended in
January 2005, for a total purchase price of $7,050,000 and 2.5 million shares
of
UPC stock, payable by installments through December 2007. UPC has also agreed
to
fund up to $10 million in exploration projects by funding the first $500,000
of
each of 20 projects.
The
parties signed a Mining Venture Agreement with UPC as of April 11, 2005 to
develop and mine the Sheep Mountain and other properties to be
acquired.
Plateau
Resources Limited Uranium Properties
Plateau
Resources Limited (“Plateau”), a wholly-owned subsidiary of USE, agreed in
December 2004 to lease uranium properties now controlled or owned (and to be
acquired) by a third party in reasonable proximity to Plateau’s Shootaring
Canyon Mill ("Shootaring Mill") in southeastern Utah. The purpose of this
agreement is to obtain uranium properties for future mining to supply the
Shootaring Mill, which we plan to put into production.
Plateau
owns and maintains the Shootaring Mill.
USE
and
Crested are considering placing their ownership and cash flow rights in Plateau
and other uranium assets into a newly formed entity, U.S. Uranium Ltd.
(“USUL”).
Summary
Information about the Subsidiaries.
Most
operations are conducted through subsidiaries, the USECC Joint Venture with
Crested, and jointly-owned subsidiaries of USE and Crested.
-12-
|
Percent
|
Primary
|
|
|
Subsidiary
|
Owned
by USE(1)
|
Business
Conducted
|
|
Plateau
Resources Limited
|
100%
|
Uranium
(Utah) - inactive mill - shut down, application filed to reopen and
operate
|
|
Crested
Corp.
|
71.0%
|
Uranium
and molybdenum (inactive and shut down, with limited reactivation
in
uranium planned for 2006), and gold (being reactivated on a limited
basis).
|
|
Sutter
Gold Mining Inc.
|
65.4%
|
Gold
(California) - inactive - being reactivated
|
|
Four
Nines Gold, Inc.
|
50.9%
|
Contract
Drilling/Construction - inactive
|
|
USECC
Joint Venture
|
50.0%
|
Uranium
and molybdenum (inactive and shut down, with limited reactivation
in
uranium planned for 2006), and gold (being reactivated). Limited
real
estate and airport operations.
|
|
Yellowstone
Fuels Inc.
|
35.9%
|
Uranium
(Wyoming) - inactive - shut down
|
|
Pinnacle
Gas Resources, Inc.(2)
|
32.3%
|
CBM
exploration and production - active
|
| (1) |
As
of December 31, 2005
|
(2) USE
owns
21% and Crested owns 11.3% for a consolidated ownership of 32.3% of the common
stock of Pinnacle which does not reflect dilution which will occur after
redeemable preferred shares held by third parties is converted to shares of
common stock and outstanding options and warrants are exercised.
The
foregoing does not include information on ownership of subsidiaries which have
been formed but not yet active (U.S. Uranium Ltd. and U.S. Moly Corp.). See
Part
III of this Report.
Financial
information about industry segments.
Prior
to
the sale of RMG on June 1, 2005, USE derived revenues from two segments, 1)
coalbed methane (and holding costs for inactive mining properties) and 2)
commercial real estate. USE’s active coalbed methane operations were all sold as
of June 1, 2005 with the exception of the minority passive equity interests
that
USE holds in Pinnacle and Enterra.
In
2004,
2005 and continuing in 2006, activities in gold and uranium were initiated,
and
activities are expected to start up in molybdenum in 2006. In 2006 and beyond,
we expect to continue to have one active industry segment - exploration and
development of mineral properties in gold, molybdenum and uranium.
The
principal products of operating units within each of the reportable industry
segments for the full years 2005, 2004 and 2003 are shown below.
Industry
Segments / Principal Products
Minerals: Acquisition
and exploration of CBM properties. This activity was material and recurring,
and
was our principal business focus in these periods until the sale of RMG to
Enterra on June 1, 2005. Sales and leases of other mineral-bearing properties
and, from time to time, the production and/or marketing of minerals also
occurred. Activities in uranium and gold were largely shut down as recurring
activities in the periods, but uranium and gold are being reactivated at the
date of this Report, and activities in molybdenum are anticipated to begin
in
2006.
-13-
Commercial:
The motel in Utah was sold in 2003, but reacquired from the buyer through
foreclosure in 2006. Real estate rental and various contract services continue,
including management services for subsidiary companies.
Business
and Properties
Coalbed
Methane
Rocky
Mountain Gas, Inc.
On
June
1, 2005, RMG was sold to Enterra (see
“Sale of Rocky Mountain Gas, Inc. (“RMG”)” above).
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 then owned by RMG and CCBM,
in exchange for common stock and options to buy common stock in Pinnacle; and
(2) $17,640,000 cash to Pinnacle by the CSFB Parties for common stock and series
A preferred stock of Pinnacle, and warrants to purchase series A preferred
stock
of Pinnacle. The CSFB Parties have contributed significant additional capital
to
Pinnacle since June 2003.
Pinnacle
is a private corporation. Thus, only that information about Pinnacle which
its
board of directors elects to release is available to the public. All other
information about Pinnacle is subject to confidentiality agreements among
Pinnacle, USE and Crested, and the other Pinnacle shareholders.
At
December 31, 2005, USE and Crested’s consolidated ownership in Pinnacle's common
stock was 32.3% (USE owned 21.0% and Crested owned 11.3%). These ownership
percentages will be diluted when the CSFB owned redeemable preferred shares
are
redeemed for common stock and if and when outstanding warrants and options
for
common stock are exercised.
Pinnacle
is authorized to issue common and preferred stock. Pinnacle has issued series
A
preferred stock, all held by the CSFB Parties: Liquidation preference of $100.00
per share; 10.5% compounded cumulative annual dividend (12.5% after July 1,
2010); redeemable at Pinnacle's option after July 1, 2004 at a premium declining
to par after July 1, 2009 (mandatory redemption if there is a change in control
of USE and Crested 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 a 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 USE, and CCBM, and four
from the CSFB Parties).
In
2003,
RMG recorded its equity investment in Pinnacle at the carrying value of its
contributed CBM properties (approximately $957,700).
-14-
Inactive
Mining Properties - Uranium
General.
USE
and
Crested currently hold over 33,000 acres of mineral claims and leases and own
historical libraries/data covering several mines and exploration areas in Utah,
Colorado, Arizona and Wyoming. These properties range from exploration to
pre-production status. The property locations include the historic producing
areas of Lisbon Valley in San Juan County, Utah, properties in Colorado, and
properties in the Arizona Strip area of Mohave County, Arizona, where higher
grade “Breccia Pipe” uranium mines operated in the early 1980s. Extensive and
highly prospective land holdings have also been acquired in the Henry Mountains
area, within 20 - 40 miles of the Shootaring Mill.
All
of
these properties are actively being evaluated. Future drilling is planned for
all of these properties, to follow the Sheep Mountain and Breccia Pipe drilling
programs in an orderly manner. The overall objective of these programs in
Colorado and Arizona is to provide an assured source of mill feed for the
Shootaring Mill in Garfield County, Utah. In
March
2005, Plateau filed an application with the State of Utah for a permit and
licenses to put the Shootaring Mill in full operating status. As a result,
USE
expended limited amounts of capital in the reclamation of the Shootaring Mill
during calendar 2005.
At
some
future date, we could develop and operate these properties (directly or through
a subsidiary company or a joint venture) to produce uranium concentrates
("U3O8")
for
sale to public utilities with nuclear powered electricity generating plants.
Uranium concentrate spot prices have increased substantially to $40 per pound
in
March 2006, compared to $10 per pound in December 2002. However, sustained
higher prices may be needed to warrant putting the properties into production.
All of the uranium mining properties at Sheep Mountain are currently shut down,
but permitting work is done as needed (monitoring and reporting) to keep
existing permits in effect.
Over
a
period of at least 24 months, substantial work would be required to put the
Sheep Mountain uranium mines into production, including permitting, cleaning
rock and other debris from shafts and tunnels, pumping water out of the mines,
extending shafts and tunnels, and further drill sampling to ascertain whether
a
commercially viable ore body exists on any of the properties.
A
decision to put the uranium properties into production will depend upon uranium
prices, mining and milling costs and the ability to raise the necessary funds
to
bring the mine into production.
At
December 31, 2005, $739,400 is carried on the balance sheets for uranium
properties. We believe our mill and the uranium properties have significant
value because uranium prices have recently stabilized at higher prices. Our
decision to proceed will be based on our efforts to raise capital through joint
ventures or otherwise, to explore the properties further, and put mines into
production and refurbish the Shootaring Mill in Utah. To that end, we have
signed an agreement to sell a 50% interest in the Sheep Mountain properties
in
Wyoming to, and entered into a joint venture agreement for those properties
(and
others to be acquired) with, Uranium Power Corp. ("UPC") and a separate
agreement to lease and acquire more uranium properties in Utah.
-15-
Feasibility
studies have not been obtained on any of the companies’ uranium/vanadium
properties. These studies could establish the economic viability, or not, of
the
different properties based on extensive drilling and sampling, the design and
costs to refurbish and operate the Shootaring Mill (for the Utah and Arizona
properties), the cost of capital, and other factors. Feasibility studies can
take many months to complete. These studies are conducted by professional third
party consulting and engineering firms, and may have to be completed, at
considerable cost, to determine if the deposits contain proved reserves (amounts
of minerals in sufficient grades that can be extracted profitably under current
pricing assumptions for development and operating costs and commodity prices).
A
feasibility study may be necessary in order to raise the substantial capital
needed to put a property into production. We have not established any reserves
(economic deposits of mineralized materials) on any of our uranium/vanadium
properties, and future studies may indicate that some or all of the properties
may or may not be economic to put into production. Pre-feasibility studies,
and
resource studies, are typically the initial steps which must be taken before
a
full feasibility study can be prepared.
USE
and
Crested are currently considering placing their ownership and cash flow rights
respectively, from Plateau and other uranium assets into a newly formed entity,
such as U.S. Uranium Ltd. (“USUL”).
UPC
Purchase and Sale Agreement
On
December 8, 2004, USE and Crested entered into a Purchase and Sale Agreement
(the “agreement”) with Bell Coast Capital Corp. now named Uranium Power Corp.
(“UPC”), a British Columbia corporation (TSX-V “UCP-V”) for the sale to UPC of
an undivided 50% interest in the Sheep Mountain properties. The agreement was
amended on January 13, 2006. A summary of certain provisions in the agreement,
as amended, follows:
UPC
has
paid USECC $850,000, and issued 500,000 UPC shares each to USE and Crested
in
2004 and 2005. By the amendment, UPC has paid an additional $1.6 million and
issued 1.5 million more shares for a total of 2.5 million shares, against the
purchase price. An additional $4.6 million and 1.5 million shares are required
to pay the full purchase price: $1.5 million on April 29, 2007 and $1.5 million
on October 29, 2007 (provided UPC is required to pay 50% of all money it raises
after January 13, 2006 until the two $1.5 million payments are made); and two
additional payments each of $800,000 cash and 750,000 UPC shares (total
$1,600,000 cash and 1,500,000 UPC shares) on June 29, 2007 and December 29,
2007.
If
the
installments are not timely paid, UPC will forfeit all of the 50% interest
it is
to earn in the properties and the joint venture to be formed.
The
amendment required UPC to pay USECC the $152,000 outstanding balance for the
2005 uranium property drilling program and an additional $400,000 of $775,400
budgeted for the first half of the 2006 drilling program. UPC has paid this
$552,000, which does not apply to the purchase price.
USECC
and
UPC, will each be responsible for paying 50% of (i) current and future Sheep
Mountain reclamation costs in excess of $1,600,000, and (ii) all costs to
maintain and hold the properties.
Closing
of the agreement is required on or before December 29, 2007, with UPC’s last
payment of the purchase price. At the closing, UPC will contribute its 50%
interest in the properties, and USE and Crested will contribute their aggregate
50% interest in the properties, to the joint venture (see below), wherein UPC
and USECC will each hold a 50% interest.
-16-
UPC
will
contribute up to $10,000,000 to the joint venture (at $500,000 for each of
20
exploration projects). USECC and UPC, each will be responsible for 50% of costs
on each project in excess of $500,000.
In
2005,
USECC and UPC, added the Burro Canyon project (in Colorado) and the Breccia
Pipes project (in Arizona) to their joint venture under the Mining Venture
Agreement. Payments by UPC related to the Breccia Pipes project (see “Arizona”
below) are separate from the payments required for UPC to acquire its 50%
interest in the Sheep Mountain properties. UPC’s ownership of the 50% interest
in the Burrow Canyon project, like UPC’s 50% participation in the other uranium
properties, is subject to UPC’s timely completion of all its payment obligations
under the Purchase and Sale Agreement.
UPC
may
terminate the agreement before closing, in which event UPC (i) would forfeit
all
payments made to termination date; (ii) lose all of its interest in the
properties to be contributed by USE/Crested under the agreement; (iii) lose
all
rights to additional properties acquired in the joint venture as well as forfeit
all cash contributions to the joint venture, and (iv) be relieved of its share
of reclamation liabilities existing at December 8, 2004.
Mining
Venture Agreement
As
of
April 11, 2005, USE and Crested (as the USECC Joint Venture) signed a Mining
Venture Agreement with UPC to establish a joint venture, with a term of 30
years, to explore, develop and mine the properties being purchased by UPC under
the Purchase and Sale Agreement, and acquire, explore and develop additional
uranium properties. The joint venture generally covers uranium properties in
Wyoming and other properties identified in the USECC Joint Venture uranium
property data base, but excluding the Green Mountain area and Kennecott’s
Sweetwater uranium mill, the Shootaring Canyon uranium mill in southeast Utah
(and properties within ten miles of that mill), and properties acquired in
connection with a future joint venture involving that mill.
The
initial participating interests in the joint venture (profits, losses and
capital calls) are 50% for the USECC Joint Venture and 50% for UPC, based on
their contributions of the Sheep Mountain properties. Operations will be funded
by cash capital contributions of the parties; failure by a party to fund a
capital call may result in a reduction or the elimination of its participating
interest. $775,400 has been approved for the first six months of 2006 relating
to maintenance and reclamation work at the Sheep Mountain properties (about
$200,000 per year), exploration drilling, geological and engineering work,
and
other costs. A substantial portion of this work will be performed by (and be
paid to) USECC Joint Venture as manager.
The
manager of the joint venture is USECC. The manager will implement the decisions
of the management committee and operate the business of the joint venture.
UPC
and the USECC each have two representatives on the four person management
committee, subject to change if the participating interests of the parties
are
adjusted. The manager is entitled to a management fee from the joint venture
equal to a minimum of 10% of the manager’s costs to provide services and
materials to the joint venture (excluding capital costs) for field work and
personnel, office overhead and general and administrative expenses, and 2%
of
capital costs. The manager may be replaced if its participating interest becomes
less than 50%.
The
preceding is a summary of certain provisions of the Mining Venture Agreement
and
the Purchase and Sale Agreement, and is qualified by reference to those
agreements which are filed as exhibits to the 2004 Annual Report. The amendment
to the agreement is filed as an exhibit to this Annual Report.
-17-
The
approved budget for the seven months ended December 31, 2005 was $567,800,
relating to work at the Sheep Mountain properties, exploration drilling,
geological and engineering work, and other costs. As of December 31, 2005,
UPC
has paid USECC $504,000.
Wyoming
- Sheep Mountain Properties
In
February 1988, USE and Crested acquired from Western Nuclear, Inc. unpatented
lode uranium mines, mining equipment and mineralized properties (including
underground and open pit mines) at Crooks Gap in south-central Fremont County,
Wyoming. The mines were operated by Western Nuclear in the 1970s. USECC mined
and milled uranium ore from one of the underground Sheep Mines in 1988 and
1989.
We
have
recorded reclamation liabilities for the Sheep Mountain properties (see note
K
to the consolidated financial statements). No historical costs from the Sheep
Mountain properties are on the balance sheet of USE at December 31, 2005.
Permits are in place only for standby maintenance of the mines.
At
the
filing date of this Annual Report, we own 286 unpatented lode mining claims
(approximately 5,909 acres) and a 644 acre Wyoming State Mineral Lease on Sheep
Mountain in the Crooks Gap, Wyoming and adjacent areas. Production from 57
of
these claims and the leases which together comprise the core Sheep Mountain
properties is subject to royalty interests held by third parties ranging from
1%
to 4% of the NUEXCO monthly exchange value per pound of uranium oxide (a sliding
rate of 1% per pound if the price is $27.99 or less, up to 4% if the price
is at
or above $44.00). Additional royalties of from $0.50 per pound, to 5% of gross
sales price (less haulage and development allowances) of uranium oxide, burden
some of these same properties.
The
Sheep
Mountain property produced over 17 million pounds of uranium concentrates prior
to being idled by depressed market conditions in the 1980s. USECC is utilizing
its extensive uranium data library of drill, mine, and property information
to
identify exploration targets on this project. The deeper zones have not been
systematically tested nor have they been included in any historical resource
estimation. Current interpretations of the historical data indicate the
potential to expand mineralized areas believed to exist on the Sheep Mountain
property.
At
Sheep
Mountain, an eighteen hole rotary drill program was completed during 2005.
The
program accomplished three things. First, the 58 Sand roll front system in
Section 16 was identified and extended to over a mile in length. Secondly,
drilling in the Congo Pit area confirmed, and potentially upgraded, previously
identified mineralized zones. Thirdly, the historic drill data from Section
28
near the Sheep mines was validated in preparation for an updated resource study.
The objective for UPC is to assemble additional information for publication
to
the standards set out in Canadian National Instrument 43-101. USE and Crested
are not allowed under SEC rules to make public all of the categories of
information which are permitted for Canadian listed companies (like UPC) under
NI 43-101.
The
joint
venture is currently preparing a full resource study for the Sheep Mountain
project by independent consultants. This will involve the digitization of 1,250
drill holes for the project and the hiring of an engineering firm to complete
the study.
There
is
no operating uranium mill near Sheep Mountain, but Kennecott owns the Sweetwater
Mill (which is on standby) some 30 miles south of Sheep Mountain. The ultimate
economics of mining the Sheep Mountain properties through underground mining
will depend on access to a mill or sufficiently high uranium oxide prices to
warrant shipments to faraway mills.
-18-
Arizona
On
August
22, 2005, USECC and UPC signed an agreement to add two more uranium projects
to
their joint venture (Burro Canyon in Colorado and Breccia Pipes located in
Arizona). The latter project involves properties in the Arizona Strip, in
northern Arizona. This property consists of 54 lode mining claims (Star and
Java
claims) on BLM land in Mohave and Coconino counties, Arizona. The exploration
target on these properties is Breccia Pipes uranium deposits.
These
properties were acquired by USECC pursuant to an agreement with Nu Star
Exploration, LLC. Under the terms of the agreement between USECC and UPC, UPC
will earn a 50% interest in the project by contributing the first $500,000
in
acquisition and exploration expenses for the project (but still, UPC will have
to complete its payments under the Purchase and Sale Agreement generally, to
hold the 50% interest in the project). Additionally, UPC will issue up to
500,000 common shares of UPC stock to USECC, subject to regulations of the
TSX
Venture Exchange, within six months of the date drilling results outline an
Inferred Mineral Resource on the Breccia Pipes Project as follows: 1) 250,000
common shares for the first 500,000 lbs. of contained U3O8
identified
and 2) an additional 250,000 common shares for the second 500,000 lbs. of
contained U3O8
identified.
The
Arizona Strip was the site of a major uranium staking rush in the early 1980s.
Uranium-bearing Breccia Pipes were first located in the Hack Canyon area of
Mohave County and the mineralized material was typically of a higher grade
than
other uranium deposits located in surrounding areas of the Colorado Plateau.
Historic mining in the Arizona Strip had produced average uranium grade of
up to
0.80% U3O8.
Production from individual mines in this district has ranged from about
1,000,000 lbs to 7,000,000 lbs U3O8.
The
Star
claims are contiguous with the partially mined Arizona I mine. The area is
located within a short distance to the south of the Hack Canyon mining area.
Mapping on the Star claims indicates the presence of 23 potential pipes, with
the potential for 4 additional targets on the Java claims.
A
38
drill hole stratigraphic test program was completed in February 2006. The
program tested seven potential Breccia Pipe sites. At two sites, the drilling
confirmed collapse features consistent with the presence of pipes. A third
site
is considered to be a potential collapse feature. A Phase Two follow-up drilling
program is planned on the two confirmed collapse features (targets) to provide
a
deep test (maximum 2,000 feet) at these locations.
If
any of
the targets are developed to a mining stage, then USE’s Shootaring Mill would be
the likely location for ore processing.
Colorado
191
unpatented mining claims consisting of approximately 3,853 acres were acquired
in Colorado in the Sage Plains and Burro Canyon area. At the Burro Canyon area,
78 claims were acquired from a third party with a production royalty of
2.56%.
At
Burro
Canyon a Phase One drilling program was completed in March 2006. At total of
17
holes were drilled for a total of 20,303 feet. Of the 16 which reached the
target Salt Wash formation, nine encountered significant mineralization, and
two
can be considered to be well mineralized.
-19-
Utah
In
August
1993, USE purchased from Consumers Power Company ("CPC") all of the outstanding
stock of Plateau, which owns the Shootaring Mill, a uranium processing mill
in
southeastern Utah for nominal cash consideration and the assumption of various
reclamation obligations. The Shootaring Mill is owned by Plateau, a wholly
owned
subsidiary of USE. Crested has a 50% interest in Plateau’s cash flows. The
Shootaring Mill is one of only four remaining licensed uranium mills in the
United States. The Shootaring Mill holds a source materials license from the
State of Utah, Division of Radiation Control.
The
Shootaring Mill, occupies 19 acres of a 265 fee acre plant site. The Shootaring
Mill was the last uranium mill built (in the early 1980s) in the United States.
The Shootaring Mill was designed to process 750 tons of material per day
(“tpd”), but only operated on a trial basis for four months in mid-summer of
1982. In 1984, Plateau (now a wholly-owned subsidiary of USE) placed the mill
on
standby because CPC had canceled the construction of an additional nuclear
energy plant. Plateau also owns approximately 121,000 tons of uranium
mineralized material stockpiled at the mill site.
In
2003
and 2004, reclamation work on uranium properties (the Tony M, Velvet, and Woods
Complex, then held by Plateau in San Juan County, Utah) was completed. Plateau
had relinquished these properties in 2003 and 2004, but has subsequently
acquired the Velvet from a third party who staked unpatented mining claims
on
the property (see below). With recent improvements in uranium concentrate
prices, in March 2005, Plateau filed an application with the State of Utah
for a
permit and licenses to put the Shootaring Mill in full operating status. As
a
result, USE expended limited amounts of capital in the reclamation of the
Shootaring Mill during calendar 2005.
The
Shootaring Mill was designed to process 750 tons per day (“tpd”) and should be
capable of operating at 1,000 tpd, once the operation license is issued and
refurbishing is completed. Depending on the grade of material fed to the
Shootaring Mill, it will have the capacity to produce 1.5 million pounds of
uranium concentrates annually.
An
independent Technical Review and Valuation of its Shootaring Mill was completed
in July 2005 by Behre Dolbear & Company (USA), Inc. of Denver, Colorado
(“BDC”), which concluded that the current replacement cost value is $80.5
million. Further, BDC estimated capital expenditures to upgrade the Shootaring
Mill and tailings facility for uranium processing to be $31.2 million before
production can begin. BDC also estimated that the costs to add a vanadium
circuit that could produce an estimated 3.9 million pounds of vanadium
(V2O6)
annually to be $18.8 million. In order to fund the refurbishment of the
Shootaring Mill and acquire additional uranium properties from which to produce
uranium bearing ores, we are seeking joint venture partners or equity
participants.
Except
for the lower grade mineralized material which has been stockpiled at the
Shootaring Mill the grades of materials controlled at other properties in the
vicinity have not been determined by drilling and testing. A feasibility study
may be completed on the properties to determine the economics of running the
Shootaring Mill to process these materials. In any event, the feasibility of
the
mines, and therefore of operating the Shootaring Mill, will be dependent on
sustained high prices for uranium concentrates, and overall, the grades and
volumes of material available for processing.
Once
required financing is in place, the work is planned to be completed in
approximately 18-24 months after the operating license is granted by the State
of Utah, but unforeseen causes may delay the project. Efforts are underway
while
going through the State of Utah permitting process to secure the necessary
financing for the project. However, financing terms have not been finalized,
and
we cannot predict if and when any financing will be completed.
-20-
Plateau
controls a number of nearby uranium properties. Approximately 965 unpatented
lode mining claims (approximately 19,937 acres) have been acquired through
December 2005.
About
200
of these claims were acquired as a result of an agreement with a third party.
Under this agreement, all of the uranium properties currently controlled or
owned by the third party have been acquired by Plateau (including the Velvet
mine, currently shut down), and the third party will assist Plateau in locating
additional uranium mineral properties for lease or purchase by Plateau. In
return, the third party and Plateau will negotiate a contract mining agreement
for the third party to mine and deliver uranium material from those properties
to the Shootaring Mill for processing, and pay the third party for that
material. In addition to purchasing the material, Plateau will pay the third
party a 2.5% gross royalty of the value received by Plateau for uranium
concentrates and vanadium recovered at the mill from such material. Plateau
has
agreed to fund the development of the uranium properties on a project-by-project
basis, on terms and in amounts to be agreed upon with the third party. Included
in the properties acquired under the third party agreement is the Velvet Mine,
located approximately 178 miles from the Shootaring Mill, which was developed
in
the 1970s. The prior owner drove several miles of access tunnels (adits) and
drifts (access tunnels) and mined material from the workings.
To
provide immediate feed for the start-up of the Shootaring Mill, USE and Crested
own a stockpile of approximately 121,000 tons of mineralized material at the
Shootaring Mill site with an average grade of about 0.12% U3O8.
We also
expect that more other nearby mines will come into production to furnish
additional material for the Shootaring Mill.
Uranium
Markets
The
only
significant commercial use for uranium is to fuel nuclear power plants for
the
generation of electricity. In recent years, nuclear plants generated
approximately 16% of the world’s electricity. The major stages in the production
of nuclear fuel are uranium exploration, mining and milling, refining and
conversion, enrichment and fuel fabrication. Once a commercial uranium deposit
is discovered and reserves delineated, regulatory approval to mine is sought.
Following regulatory approval, the mine is developed, and ore is extracted
and
upgraded at a mill to produce uranium concentrates. Uranium concentrates are
sold to nuclear electricity generating companies around the world on the basis
of the U3O8
contained in the concentrates. These utilities then contract with converters,
enrichers and fuel fabricators to produce the required reactor
fuel.
The
nuclear industry is experiencing stable growth in the form of capacity factor
improvements, refurbishments, life extensions and in Asia, aggressive new-build
programs. It is difficult to determine which factors will dominate the outlook
for nuclear in the long term. However, the demand for nuclear power is expected
to grow even more significantly as increasing electricity demand, the need
for
non-emitting baseload energy and security of supply begin to take hold globally.
Overall, these indicators are expected to support a stable demand trend for
uranium and conversion services in the next 10 years with the potential for
accelerated growth if nuclear energy continues to gain broader acceptance in
the
world.
The
uranium market supply and demand fundamentals continued to strengthen in 2005,
indicating a need for more primary mine production over the coming decade.
During the past 20 years, uranium consumption has exceeded mine production
by a
wide margin, with the difference being made up by secondary supply sources
such
as various types of inventory and recycled products. While there are still
inventories, they are considerably reduced and more may be classified as
strategic rather than excess.
-21-
Utilities
secure the majority of their uranium requirements by entering into medium-term
(three - five years) and long-term (more than five years) contracts with uranium
suppliers. These contracts usually provide for deliveries to begin two to three
years after contracts are finalized. In awarding contracts, utilities consider
the commercial terms offered, including price, and the producer’s record of
performance and uranium reserves. Utilities acquire the remainder of their
uranium requirements through spot producers and traders. Spot market purchases
are those that call for delivery within one year.
Uranium
oxide prices were $36.25 per pound in December 2005, compared with $20.75 per
pound in December 2004, $14.50 per pound in December 2003 and $10.20 per pound
in December 2002. The continued strong demand, which has outpaced supply over
the past several years (deficit market conditions), has reduced inventory levels
throughout the industry.
Inactive
Mining Properties - Gold
Sutter
Gold Mining Inc.
In
fiscal 1991, USE acquired an interest in gold 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) was owned by Sutter Gold Mining
Company, a Wyoming corporation ("SGMC"). SGMC was acquired by Globemin Resources
Inc., a TSX-V listed company, in a reverse takeover stock exchange transaction
in 2004. Globemin changed its name to Sutter Gold Mining Inc. ("SGMI"). For
information on ownership in SGMI by employees and directors of USE, see Part
III
of this Annual Report.
This
property has never been in production. We do not have a current feasibility
study to support a determination that the Lincoln Project contains gold
reserves.
Due
to
the depressed gold prices in the past, litigation (since resolved) and lack
of
funding, SGMI has deferred the start of construction of a gold mill complex
and
extension of existing underground workings. A tourist visitor's center and
gift
shop has been set up (see below) and leased to a third party for $1,500 per
month plus a 4% gross royalty on revenues. A Conditional Use Permit is being
kept current as necessary to allow for planned mining activities on the
properties in the future.
Properties. SGMI
holds approximately 535 acres of surface and mineral rights near Sutter Creek,
Amador County, California, approximately 45 miles east-southeast of Sacramento,
Calif., in the central part of the 121-mile-long Mother Lode gold belt. The
Sutter Gold Project is 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 in the range
of
$55,000 to $65,000, for 2006.
The
leases are for varying terms and require rental fees, annual royalty payments
and payment of real property taxes and insurance.
The
Lincoln Project has been the subject of considerable modern exploration
activity, most of it centering on the Lincoln and Comet zones, which are
adjacent to each other. A total of 85,085 feet of drilling has been accomplished
in prior years, with 190 diamond drill holes, and modern underground development
consists of a 2,850-foot declined ramp with 2,400 feet of crosscuts plus five
raises.
SGMI
plans to begin further exploration work and the construction of a new raise
to
comply with U.S. Mine Safety Health Administration regulations and improve
ventilation.
-22-
A
detailed report was completed by Mark Payne, the consulting geologist to SGMI
and a Qualified Person as defined by Canadian NI 43-101. The report indicates
that a review of documentation of historic gold production from properties
to
the north and south of the Sutter Gold Project shows that between 1857 and
1951,
a total of 2,350,096 ounces of gold were produced from ten historic mines to
the
north and south of the Project. Mr. Payne is a registered Geologist in
California (#7067), and a Qualified Person as defined in Canada’s National
Instrument 43-101, “Standards of Disclosure for Mineral Projects.”
The
report indicates the potential of SGMI’s project. The 2.3 million ounces of gold
production came from zones ranging from the surface to 4,500 feet vertical
depth. Production was halted in most of the ten mines because of the Second
World War and not because they ran out of ore. The report indicates that these
very productive mines chased veins to seven times the depth of SGMI’s present
workings.
The
areas
of large historic gold production are found at the north and south ends of
the
Sutter Gold Project area, bracketing a one-mile long portion of the Mother
Lode
Belt with no historic gold production, and which hosts Sutter Gold’s Lincoln and
Comet Zones. The Lincoln and Comet Zones were blind discoveries that did not
outcrop at surface and which represent the first significant new gold
discoveries made along the Mother Lode Belt in the last 50 years, that are
unrelated to past-producing mines. We believe there is excellent potential
for
continued new discoveries within the area of the Lincoln and Comet Zones, both
near the surface and at depth.
Permits. The
Amador County Board of Supervisors has issued a Conditional Use Permit ("CUP")
in October 1998 allowing mining and milling of up to 1,000 tons per day, subject
to conditions relating to land use, environmental and public safety issues,
road
construction and improvement, and site reclamation. In 2005, SGMI received
approval of their Waste Discharge Permit application from the California Central
Valley Regional Water Quality Control Board. Approval of the Waste Discharge
Permit will allow Sutter Gold to construct waste piles, use mill tailings for
mine back fill and expand its mining operations. The Waste Discharge Permit
is
the final major permit other than permits to construct the mill and related
infrastructure that may be required by Amador County for the
project.
Visitor's
Center. The
visitor's center, operated by a third party, is an exhibit of the pictures
and
memorabilia from mining operations on other properties in the Sutter district
in
the nineteenth century, and a guided tour of the underground workings at the
Lincoln Project. Revenues from this tourist operation were $67,100 for 2005,
$39,700 for 2004, and $40,300 in 2003, and are included in "real estate" in
the
consolidated statements of operations included in this report. These revenues
offset a portion of costs for holding the SGMI properties.
Profitability.
The
profitable mining and processing of gold will depend on many factors, including
receipt of permits and keeping in compliance with permit conditions; delineation
through extensive drilling and sampling of sufficient volumes of mineralized
material with sufficient grades to make mining and processing economic over
time; continued sustained high prices for gold; and obtaining the capital
required to initiate and sustain mining operations and build and operate a
gold
processing mill. A feasibility study likely will be required to obtain the
capital necessary to put the mine into production and build a gold processing
mill.
Gold
Market.
Gold
has
two main categories of use; product fabrication and investment. Fabricated
gold
has a variety of end uses, including jewelry, electronics, dentistry, industrial
and decorative uses, medals, medallions and official coins. Gold investors
buy
gold bullion, official coins and high-karat jewelry.
-23-
The
worldwide supply of gold consists of a combination of new production from mining
and the draw-down of existing stocks of bullion and fabricated gold held by
governments, financial institutions, industrial organizations and private
individuals. In recent years, mine production has accounted for 60% to 70%
of
the total annual supply of gold.
Changes
in the market price of gold will significantly affect SGMI’s potential
profitability and cash flow. Gold prices can fluctuate widely due to numerous
factors, such as demand; forward selling by producers; central bank sales,
purchases and lending; investor sentiment; the strength of the U.S. dollar
and
global mine production levels.
The
following table presents the annual high, low and average afternoon fixing
prices for gold over the past ten years, expressed in U.S. dollars per ounce
on
the London Bullion Market.
|
Year
|
High
|
Low
|
Average
|
|
2001
|
$293
|
$256
|
$271
|
|
2002
|
$349
|
$278
|
$310
|
|
2003
|
$416
|
$320
|
$363
|
|
2004
|
$454
|
$375
|
$410
|
|
2005
|
$537
|
$411
|
$445
|
Source
of
Data: Kitco and Reuters
Molybdenum
USE
and
Crested re-acquired the Lucky Jack Project (formerly the Mount Emmons molybdenum
property) located near Crested Butte, Colorado on February 28, 2006. The
property was returned to USECC by Phelps Dodge Corporation (“PD”) in accordance
with a 1987 Amended Royalty Deed and Agreement between USECC and Amax Inc.
(“Amax”). USECC is a joint venture between USE and Crested. The Lucky Jack
Project includes a total of 25 patented and approximately 520 unpatented mining
claims, which together approximate 5,400 acres, or over 8 square miles of mining
claims.
In
a
letter dated April 2, 2004, the Bureau of Land Management (the “BLM”) of the
United States Department of the Interior estimated that there were about 23
million tons of mineable reserves containing 0.689% molybdenite, and that about
267 million pounds of molybdenum trioxide was recoverable. This report covered
only the high-grade mineralization which is only a portion of the total mineral
deposit delineated to date. The BLM relied on a mineral report prepared by
Western Mine Engineering (WME) for the U.S. Forest Service, which directed
and
administered the WME contract. WME’s analysis was based upon a price of $4.61
per pound of molybdic oxide and was used by BLM in determining that the nine
claims satisfied the patenting requirements that the mining claims contain
a
valuable mineral that could be mined profitably. WME consulted a variety of
sources in preparation of its report, including a study prepared in 1990 by
American Mine Services, Inc. and a pre-feasibility report prepared by Behre
Dolbear & Company, Inc. of Denver, CO in 1998. In its 1992 patent
application to the BLM, Amax stated that the size and grade of the (Lucky Jack
Project) deposit was determined to approximate 220 million tons grading 0.366%
molybdenite.
USECC
has
decided to pursue permitting and development of the property and is now engaged
in the active pursuit of a sizable mining industry partner to co-develop and
mine the property. USE and Crested are considering the commissioning of a full
mining feasibility study of the property in light of the fact that the price
of
molybdic oxide was at $24.00 per pound according to Metal Prices.com on February
24, 2006.
-24-
USE
and
Crested leased various patented and unpatented mining claims on the (Lucky
Jack
Project) property to Amax in 1974. In the late 1970s, Amax delineated a large
deposit of molybdenum on the properties, reportedly containing approximately
155
million tons of mineralized material averaging 0.44% molybdenum disulfide
(MoS2). In 1980, Amax constructed a water treatment plant at the Lucky Jack
Project to treat water flowing from old mine workings and for potential use
in
milling operations. By 1983, Amax had reportedly spent an estimated $150 million
in the acquisition of the property, securing water rights, extensive
exploration, ore body delineation, mine planning, metallurgical testing and
other activities involving the mineral deposit. Amax was merged into Cyprus
Minerals in 1992 to form Cyprus Amax. PD then acquired the Lucky Jack Project
in
1999 through its acquisition of Cyprus Amax. Thereafter, PD acquired additional
water rights to mine and mill the deposit.
Conveyance
of the property to USE and Crested also included the transfer of ownership
and
operational responsibility of the mine water treatment plant located on the
properties. The water treatment permit issued under the Colorado Discharge
Permit System (“CDPS”) was assigned to USE and Crested by the Colorado
Department of Health and Environment. Operating costs for the water treatment
plant are expected to approximate $1 million annually. In an effort to assure
continued compliance, USE and Crested have retained the technical expert and
contractor hired by PD on January 2, 2006 to operate the water treatment plant.
USE and Crested will also evaluate the potential use of the water treatment
plant in milling operations.
In
the
April 2, 2004 decision letter, the BLM issued patents on the nine additional
mining claims, for a total of 25 patented claims which consists of approximately
350 patented or “fee” acres. A lawsuit was filed by local governmental entities
and environmentalists in U.S. District Court of Colorado challenging BLM’s
issuance of the patents alleging BLM violated the 1872 Mining Law, applicable
regulations, and the Administrative Procedures Act by overruling their protests
to Mt. Emmons Mining Company’s mineral patent application, awarding the patents,
and by conveying the land to Mt. Emmons Mining Company. The case is High
Country Citizen’s Alliance, Town of Crested Butte, Colorado, and The Board of
County Commissioners of the County of Gunnison, Colorado v. Kathleen Clarke,
Director of the Bureau of Land Management et. al., Gale Norton, Secretary of
Interior, U.S. Department of the Interior; Phelps Dodge Corporation; Mt. Emmons
Mining Company.
USE and
Crested are currently not parties to this litigation.
On
January 12, 2005, U.S. District Court Judge Krieger dismissed the plaintiffs
appeal holding 1) that the plaintiffs had no right of appeal from a decision
to
issue a mineral patent because the 1872 Mining Law created no private cause
of
action for unrelated parties to challenge the issuance of a mineral patent
and
2) because the 1872 Mining Law implicitly precludes unrelated third parties
from
challenging mineral patent by judicial action, the Administrative Procedures
Act
does not constitute a waiver of sovereign immunity for purposes of this action.
Plaintiffs have filed an appeal of the U.S. District Court’s decision to the
10th
Circuit
Court of Appeals in Case No: 05-1085. Briefs have been filed by the parties
and
oral arguments were heard on January 9, 2006. The case is currently
pending.
USE
and
Crested are considering transferring the Lucky Jack Project to a new subsidiary,
U.S. Moly Corp. in the near future.
PD’s
conveyance of the Lucky Jack Project and the water treatment plant were the
subject of litigation from 2002. Notwithstanding the conveyance of the
properties, some issues remained unresolved. See Item 3, “Legal
Proceedings.”
-25-
Molybdenum
Markets.
Molybdic
oxide is an alloy used primarily in steel products for corrosion resistance,
metal strengthening and heat resistance. Molybdenum chemicals are used in a
number of diverse applications such as lubricants, additives for water
treatment, feedstock for the production of pure molybdenum metal and catalysts
used for petroleum refining. Pure molybdenum metal powder products are used
in a
number of diverse applications, such as lighting, electronics and specialty
steel alloys.
The
metallurgical market for molybdenum is characterized by cyclical and volatile
prices, little product differentiation and strong competition. In the market,
prices are influenced by production costs of domestic and foreign competitors,
worldwide economic conditions, world supply/demand balances, inventory levels,
the U.S. Dollar exchange rate and other factors. Molybdenum prices also are
affected by the demand for end-use products in, for example, the construction,
transportation and durable goods markets. A substantial portion of world
molybdenum is produced as a by-product of copper mining, which is relatively
insensitive to molybdenum price levels. Today, by-product production is
estimated to account for approximately 60% of global molybdenum
production.
Molybdenum
continued to experience price improvement during 2005 for the fourth straight
year, with molybdenum prices in 2005 reaching near historical highs. Production
increases were primarily experienced in by-product copper production, although
primary production also experienced an increase production as metal prices
improved throughout the year. Production in China remains difficult to estimate;
however, based on published reports, production was negatively impacted in
several molybdenum producing regions due to safety concerns and operational
issues. Tight supply of western, high-quality materials continued through the
year. The overall market remained in slight deficit during 2005 due to demand
outpacing supply.
Annual
Metal Week Dealer Oxide mean prices averaged $32.94 per pound in 2005, compared
with $16.41 per pound in 2004, $5.32 in 2003 and $3.77 in 2002. Continued strong
demand, which has outpaced supply over the past several years (deficit market
conditions), has reduced inventory levels throughout the industry. See Platts
Metals Week, Ryan’s Notes or Metal Bulletin for more information on molybdenum
prices.
We
are
actively seeking joint venture partners to work on a new mine plan and obtain
the permits required to put the property into production. The properties may
be
transferred to a new subsidiary of USE and Crested, U.S. Moly Corp. See Part
III
to this Annual Report. Ownership of the subsidiary subsequently would be reduced
to the extent additional shares are sold to investors.
Development
of the Lucky Jack Project for mining will require extensive capital and a long
time to implement. Capital through equity financing and/or a joint venture
or
other arrangement will have to be obtained. We have no such arrangements as
of
the date of this Annual Report and may not obtain such financing. Reportedly,
the mine plan of PD and its predecessor companies encountered opposition from
local and environmental groups, and that opposition likely will continue, as
the
Lucky Jack Project is located three miles from of Crested Butte, Colorado,
a
year round recreation area. Even with the resources of a joint venture partner,
successful resolution of various issues arising with local and environmental
groups is not assured.
Other
Properties
Fort
Peck Lustre Field (Montana).
We
operate a small oil production facility (two wells) at the Lustre Oil Field
on
the Ft. Peck Indian Reservation in northeastern Montana. We receive a fee based
on oil produced. This fee and other assets of USE collateralize a $750,000
line
of credit from a bank.
-26-
Wyoming. USE
and
Crested own a 14-acre tract in Riverton, Wyoming, with a two-story 30,400 square
foot office building. The first floor is rented to non-affiliates and government
agencies; the second floor is occupied by USECC. The property is mortgaged
to
the WDEQ as security for future reclamation work on the Sheep Mountain Crooks
Gap uranium properties. USECC also owns: A 10,000 square foot aircraft hangar
and 7,000 square feet of associated offices and facilities on land leased from
the City of Riverton; three mountain sites covering 16 acres in Fremont County,
Wyoming; and four city lots and improvements including two smaller office
buildings, one of which was sold on March 2006.
Utah. On
August
14, 2003, Plateau (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: $349,200 cash and $3,120,800 with The Cactus Group's
five year promissory note. The note was 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 was payable monthly (with annual interest at 7.5%)
with a $2,940,600 balloon payment due in August 2008.
The
properties of Canyon Resources are in Ticaboo, Utah, near Lake Powell, and
include a motel, restaurant and lounge, convenience store, recreational boat
storage and service facility, and improved residential and mobile home lots.
Most of these properties had been acquired when the Shootaring Mill was acquired
in the early 1990s.
On
February 27, 2006, Plateau re-acquired by Foreclosure Sale all of the Ticaboo
properties.
Plateau
will evaluate the property and determine the costs associated with the returned
properties including potential remediation and operations that may be necessary
until such time as the assets can be sold or leased.
RESEARCH
AND DEVELOPMENT
No
research and development expenditures have been incurred, either on USE's
account or sponsored by customer, 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 statues,
Abandoned Mine Reclamation Act and industrial development and siting laws and
regulations also impact us. Similar law and regulations in California affect
SGMI operations and Utah laws and regulations effect Plateau's
operations.
Management
believes USE complies in all material respects with existing environmental
regulations.
As
of
December 31, 2005, we have recorded estimated reclamation obligations of
$5,902,200. We anticipate paying for those reclamation efforts over several
years. For further information on the approximate reclamation costs
(decommissioning, decontamination and other reclamation efforts for which we
are
primarily responsible or potentially responsible), see note K to the
consolidated financial statements included with this Annual Report.
-27-
Other
Environmental Costs.
Actual
costs for compliance with environmental laws may vary considerably from
estimates, depending upon such factors as changes in environmental law and
regulations (e.g., the new Clean Air Act), and conditions encountered in
minerals exploration and mining. We do not anticipate that expenditures to
comply with law regulating the discharge of materials into the environment,
or
which are otherwise designed to protect the environment, will have any
substantial adverse impact on our competitive position. Environmental regulatory
programs create potential liability for our operations and may result in
requirement to perform environmental investigations or corrective actions under
federal and state laws and federal and state Superfund
requirements.
Employees
As
of
March 15, 2006, USE had 36 full-time employees, 4 of whom are temporary to
maintain the re-acquired Ticaboo town site. Persons who work only for SGMI
are
paid by USE. The expenses associated with USE's employees, including payroll
taxes, fringe benefits and retirement plans is shared with Crested for all
ventures in which it participates on a percentage ownership basis. Crested
uses
approximately 50 percent of the time of USE employees, and reimburses USE on
a
cost reimbursement basis.
Mining
Claim Holdings
Title.
Nearly
all the uranium mineral properties held by USE and USECC are on federal
unpatented claims. Unpatented claims are located upon federal and public land
pursuant to procedure established by the General Mining Law. Requirements for
the location of a valid mining claim on public land depend on the type of claim
being staked, but generally include discovery of valuable minerals, erecting
a
discovery monument and posting thereon a location notice, marking the boundaries
of the claim with monuments, and filing a certificate of location with the
county in which the claim is located and with the BLM. If the statutes and
regulations for the location of a mining claim are complied with, the locator
obtains a valid possessory right to the contained minerals. To preserve an
otherwise valid claim, a claimant must also pay certain rental fees annually
to
the federal government and make certain additional filings with the county
and
the BLM. Failure to pay such fees or make the required filing may render the
mining claim void or voidable. Because mining claims are self-initiated and
self-maintained, they possess some unique vulnerability not associated with
other types of property interests. It is impossible to ascertain the validity
of
unpatented mining claims solely from public 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 time of falling metal prices,
claims which were valid when located could become invalid if
challenged.
Approximately
25 of the Lucky Jack Project mining claims which USE received back from PD
are
patented claims, but the majority are unpatented claims.
Proposed
Federal Legislation. The
U.S.
Congress from time to time has considered proposed revisions to the General
Mining Law, which governs mining claims and related activities on federal public
lands. If these proposed revisions were enacted, payment of royalties on
production of minerals from federal lands could be required as well as new
requirements for reclamation of mined land and other environmental control
measures. The effect of any revision of the General Mining Law on operations
cannot be determined until enactment, however, it is possible that revisions
would materially increase the carrying and operating costs of mineral properties
located on federal unpatented mining claims.
-28-
ITEM
3. Legal Proceedings
Material
proceedings pending at December 31, 2005, and developments in those proceedings
from that date to the date this Annual Report is filed, are summarized below.
Other proceedings which were pending during the year have been settled or
otherwise finally resolved.
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 on July 2,
1991,
USECC filed a lawsuit against Nukem, CRIC and others in the U.S. District Court
of Colorado in Civil Action No. 91B1153. The Federal Court stayed the
arbitration proceedings and discovery proceeded against Nukem/CRIC. In February
1994, the parties agreed to consensual and binding arbitration of all of their
disputes over SMP before an arbitration panel (the "Panel").
The
Panel
entered an Order and Award in April 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 three CIS republics, and also awarded SMP damages of $31,355,100
against Nukem. Further legal proceedings ensued. On appeal, the 10th Circuit
Court of Appeals ("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.
As
a
result of further proceedings, the U.S. District Court appointed a Special
Master to conduct an accounting of the constructive trust. The U.S. District
Court adopted the Special Master’s report in part and rejected it in part, and
entered judgment on August 1, 2003 in favor of USECC and against Nukem for
$20,044,200. In early 2004, the parties appealed this judgment to the
CCA.
On
February 24, 2005, a three judge panel of the CCA vacated the judgment of the
U.S. District Court and remanded the case to the Panel for clarification of
its
1996 Orders and Award. In remanding this case, the CCA stated: "The arbitration
award in this case is silent as to the definition of 'purchase rights' and
the
'profits therefrom,' including the valuation of either. Also unstated in the
award is the duration of the constructive trust and whether and what costs
should be deducted when computing the value of the constructive trust. Further,
the arbitration panel failed to address whether prejudgment interest should
be
awarded on the value of the constructive trust. As a result, the district
court's valuation of the constructive trust was based upon extensive guesswork.
Therefore, a remand to the arbitration panel for clarification is necessary,
despite the long and tortured procedural history of this case."
The
Arbitration Panel (“Panel”) held a Status Conference Hearing in Denver, Colorado
on August 26, 2005 to consider the procedures, schedule and scope of the remand.
On August 26, 2005, the Panel directed the parties to make written submissions
to resolve the issues concerning the definition of the Constructive Trust and
its components (e.g. purchase rights).
-29-
The
Panel
issued a written order on August 31, 2005 confirming this directive. Nukem’s
request to present new facts and evidence on the issue of the Constructive
Trust
was rejected by the Panel. All submissions are specifically limited to the
facts
introduced into evidence before the Panel in the 1994 and 1995 hearings,
currently in the record. Initial submissions were due to the Panel on November
4, 2005 and reply submissions were due on December 6, 2005. A one day hearing
was held in New York City on December 20, 2005. On January 3, 2006 the Panel
entered an amended order requesting additional information concerning the CIS
contracts be submitted by the parties by February 3, 2006.
The
timing and ultimate outcome of this litigation cannot be predicted. We believe
that the ultimate outcome will not have an adverse affect on our financial
condition or results of operations.
Phelps
Dodge Litigation
USE
and
Crested are parties to 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
mineral properties on Lucky Jack Project (formerly the Mount Emmons molybdenum
properties), near Crested Butte, Colorado. For background information on this
litigation, please see the Form 10-K for the year ended December 31,
2004.
The
litigation relates to agreements from 1974 when USE and Crested leased the
mining claims to Amax Inc., PD’s predecessor company. The mining claims cover
one of the world’s largest and richest deposits of molybdenum, which was
discovered by Amax.
The
June
19, 2002 complaint filed by PD and MEMCO sought 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 Mineral Co. USECC’s counter and cross-claims alleged that in 1999,
PD formed a wholly-owned subsidiary CAV Corporation, for the purpose of
purchasing the controlling interest in Cyprus Amax and its subsidiaries
(including MEMCO) and making Cyprus Amax a subsidiary of PD. Therefore, USECC
asserted that the acquisition of Cyprus Amax by PD was a sale of MEMCO and
the
properties that triggered the obligation of Cyprus Amax to pay USECC the $3.75
million plus interest.
The
other
issues in the litigation were whether USECC must, under terms of a 1987 Royalty
Deed, accept PD's and MEMCO's conveyance of the Lucky Jack Project 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 sought to obligate USECC to assume the
operating costs of the water treatment plant. USECC asserted counterclaims
against the defendants, including a claim for nonpayment of advance
royalties.
On
July
28, 2004, the Court entered an Order granting certain of PD's motions and
denying USECC's counterclaims and cross-claims. The case was tried in late
2004.
On
February 4, 2005, the Court entered Findings and Fact and Conclusions of Law
and
ordered that the conveyance of the Lucky Jack Project includes the transfer
of
ownership and operational responsibility for the Water Treatment Plant, and
that
PD does not owe USECC any advanced royalty payments.
-30-
USECC
has
filed a motion with the Court to amend the Order to determine that the decreed
water rights from the Colorado Supreme Court opinion (decided in 2002, finding
that the predecessor owners of the Lucky Jack Project had rights to water to
develop a mine), and any other appurtenant water rights, be conveyed to USECC.
The motion is pending.
PD
and
USECC have been engaged in settlement discussions in an attempt to resolve
the
remaining issues and avoid an appeal of the District Court’s Judgment. In view
of the ongoing discussions and in the interest of conserving judicial and party
resources, on April 5, 2005, the parties filed a Joint Motion to Stay Ruling
on
Motion to Amend Judgment and to Extend Stay of Execution Pending Appeal. On
April 7, 2005, the Court granted the motion and entered an order staying
USE/CC’s Motion to Amend Judgment until ten days after filing of written notice
by PD that settlement has not been achieved. The parties have filed joint status
reports which have stayed the parties’ various motions.
On
October 31, 2005, PD filed a motion with the District Court to recover
attorney’s fees and expenses in the declaratory judgment action against USECC.
PD is claiming $4,050,164.09 in attorney’s fees and expenses and $3,692,138.09
in costs incurred for the operation of the water treatment plant for the last
three years. These claims were not part of the initial litigation with PD.
USECC
has filed a response with the Court denying that USECC owes PD such monies.
It
is not known how or when the Court will rule on these issues. Management of
USE
believes that no monies are due to PD. Resolution of these issues will not
affect PD’s February 28, 2006 conveyance of the Lucky Jack Project, and the
water treatment plant, to USE and Crested.
Coastline
Capital Partners
On
May
16, 2005, Coastline Capital Partners (“Coastline”) filed a complaint against USE
in Wyoming Federal District Court, Case No. 05-CV-0143-J for breach of contract.
Coastline is claiming partial performance fees for a private placement that
was
unsuccessful. Coastline and USE had entered into an engagement letter on July
22, 2004. USE filed an answer and counterclaims on June 22, 2005. The parties
are conducting discovery in the case. A jury trial is scheduled for April 3,
2006 on this matter.
ITEM
4. Submission of Matters to a Vote of Security Holders
On
July
22, 2005, the annual meeting of shareholders was held for voting on the
re-election of three directors: Michael H. Feinstein, H. Russell Fraser and
Don
C. Anderson. These directors were re-elected for a term expiring on the third
succeeding Annual Meeting of Shareholders and until their successors are duly
elected or appointed and qualified. With respect to the re-election of the
two
directors, the votes cast were:
|
Name
of Director
|
For
|
Abstain*
|
||
|
Michael
H. Feinstein
|
13,767,094
|
975,893
|
||
|
H.
Russell Fraser
|
13,762,724
|
984,263
|
||
|
Don
C. Anderson
|
13,765,224
|
977,763
|
*
Includes Broker non-vote
-31-
PART
II
ITEM
5. Market for Registrant's common equity, related Stockholder Matters and Issuer
Purchases of Equity Securities
(a) Market
Information
Shares
of
USE common stock are traded on the over-the-counter market, and prices are
reported on a "last sale" basis on the Nasdaq Capital Market of the National
Association of Securities Dealers Automated Quotation System ("Nasdaq"). The
range by quarter of high and low sales prices was:
|
Fiscal
Year ended December 31, 2005
|
High
|
Low
|
|||||
|
First
quarter ended 3/31/05
|
$
|
7.65
|
$
|
2.75
|
|||
|
Second
quarter ended 6/30/05
|
5.95
|
3.52
|
|||||
|
Third
quarter ended 9/30/05
|
4.55
|
3.44
|
|||||
|
Fourth
quarter ended 12/31/05
|
4.96
|
3.68
|
|||||
|
Fiscal
Year ended December 31, 2004
|
|||||||
|
First
quarter ended 3/31/04
|
$
|
3.45
|
2.41
|
||||
|
Second
quarter ended 6/30/04
|
3.14
|
2.11
|
|||||
|
Third
quarter ended 9/30/04
|
2.59
|
2.12
|
|||||
|
Fourth
quarter ended 12/31/04
|
3.05
|
2.10
|
|||||
(b) Holders
(1) At
March
30, 2006 the closing market price was $7.09 per share and there were
approximately 625 shareholders of record, with 19,520,430 shares of common
stock
issued and outstanding, including shares owned by our subsidiaries and shares
in
officers' and directors' names that are subject to forfeiture.
(2) Not
applicable.
(c) 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, 2005:
-32-
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options
|
Weighted
average exercise price of outstanding options
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
|
|
1998
USE ISOP 3,250,000 shares of common stock on exercise of outstanding
options
|
1,266,505
|
$2.24
|
-0-
|
|
2001
USE ISOP 3,341,084 shares of common stock on exercise of outstanding
options
|
2,989,271
|
$3.08
|
351,813
|
|
Equity
compensation plans not approved by security holders
|
|
|
|
|
None
|
--
|
--
|
--
|
|
Total
|
4,255,776
|
$2.83
|
351,813
|
Sales
of Unregistered Securities in 2005
During
the twelve months ended December 31, 2005, pursuant to the shareholder-approved
2001 Stock Compensation Plan, 60,000 shares were issued to officers of the
Company at the rate of 10,000 shares each: John L. Larsen, Keith G. Larsen,
Mark
J. Larsen, Harold F. Herron, Robert Scott Lorimer, and Daniel P. Svilar. The
shares were issued at the closing market price of $2.89, $5.87, $3.60 and $4.62
as of January 3, 2005, April 1, 2005, July 1, 2005 and October 3, 2005,
respectively.
In
2005,
the Company issued 11,275 shares of its common stock to outside directors as
partial compensation for serving on the board of directors. The Company also
issued common shares for the following: 54,720 shares to three investors who
had
the right to convert their shares in RMG to shares of the Company, 135,938
shares to three investment funds for the conversion of RMG preferred shares
and
the payment of dividends on those RMG shares, 281,641 net shares for the
exercise of employee options, 910,362 shares for the conversion of warrants
by
third parties, 1,942,387 shares for the retirement of $4,720,000 in convertible
debt, 140,880 shares for the buy out of RMG minority shareholders interest
in
Pinnacle and 56,494 shares to fund the Employee Stock Ownership Plan for
2005.
-33-
ITEM
6. Selected Financial Data
The
selected financial data is derived from and should be read with the financial
statements for USE included in this Report.
|
December
31,
|
May
31,
|
|||||||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
2002
|
2001
|
||||||||||||||||
|
(Unaudited)
|
||||||||||||||||||||||
|
Current
assets
|
$
|
7,840,600
|
$
|
5,421,500
|
$
|
5,191,400
|
$
|
4,755,300
|
$
|
4,597,900
|
$
|
4,892,600
|
$
|
3,330,000
|
||||||||
|
Current
liabilities
|
1,232,300
|
6,058,000
|
1,909,700
|
2,044,400
|
2,563,800
|
1,406,400
|
2,396,700
|
|||||||||||||||
|
Working
capital (deficit)
|
6,608,300
|
(636,500
|
)
|
3,281,700
|
2,710,900
|
2,034,100
|
3,486,200
|
933,300
|
||||||||||||||
|
Total
assets
|
38,106,700
|
30,703,700
|
23,929,700
|
28,190,600
|
30,991,700
|
30,537,900
|
30,465,200
|
|||||||||||||||
|
Long-term
obligations(1)
|
7,949,800
|
13,615,300
|
12,036,600
|
14,047,300
|
13,596,400
|
13,804,300
|
13,836,700
|
|||||||||||||||
|
Shareholders'
equity
|
24,558,100
|
6,281,300
|
6,760,800
|
8,501,600
|
8,018,700
|
11,742,000
|
8,465,400
|
|||||||||||||||
|
(1)Includes
$5,669,000, of accrued reclamation costs on properties at December
31,
2005, $7,882,400 at December 31, 2004, $7,657,900 at December 31,
2003,
and $8,906,800 at December 31, 2002, 2001, and May 31, 2002, and
2001,
respectively. See Note K of Notes to Consolidated Financial
Statements.
|
||||||||||||||||||||||
|
Year
Ended
|
Seven
Months Ended
|
Former
Fiscal Years Ended
|
||||||||||||||||||||
|
December
31,
|
December
31,
|
December
31,
|
December
31,
|
May
31,
|
||||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
2002
|
2001
|
||||||||||||||||
|
(Unaudited)
|
||||||||||||||||||||||
|
Operating
revenues
|
$
|
849,500
|
$
|
815,600
|
$
|
635,500
|
$
|
673,000
|
$
|
545,900
|
$
|
2,004,100
|
$
|
3,263,000
|
||||||||
|
Loss
from
|
||||||||||||||||||||||
|
continuing
operations
|
(6,066,900
|
)
|
(4,983,100
|
)
|
(5,066,800
|
)
|
(3,524,900
|
)
|
(3,914,900
|
)
|
(7,454,200
|
)
|
(7,517,800
|
)
|
||||||||
|
Other
income & expenses
|
(484,000
|
)
|
465,100
|
(311,500
|
)
|
(387,100
|
)
|
1,005,000
|
1,319,500
|
8,730,800
|
||||||||||||
|
(Loss)
income before minority
|
||||||||||||||||||||||
|
interest,
equity in income (loss)
|
||||||||||||||||||||||
|
of
affiliates, income taxes,
|
||||||||||||||||||||||
|
discontinued
operations,
|
||||||||||||||||||||||
|
and
cumulative effect of
|
||||||||||||||||||||||
|
accounting
change
|
(6,550,900
|
)
|
(4,518,000
|
)
|
(5,378,300
|
)
|
(3,912,000
|
)
|
(2,909,900
|
)
|
(6,134,700
|
)
|
1,213,000
|
|||||||||
|
Minority
interest in loss (income)
|
||||||||||||||||||||||
|
of
consolidated subsidiaries
|
185,000
|
207,800
|
13,000
|
54,800
|
24,500
|
39,500
|
220,100
|
|||||||||||||||
|
Income
taxes
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||
|
Discontinued
operations,
|
||||||||||||||||||||||
|
net
of taxes
|
15,207,400
|
(1,938,500
|
)
|
(2,060,400
|
)
|
17,100
|
175,000
|
(85,900
|
)
|
488,100
|
||||||||||||
-34-
|
Year
Ended
|
Seven
Months Ended
|
Former
Fiscal Years Ended
|
||||||||||||||||||||
|
December
31,
|
December
31,
|
December
31,
|
December
31,
|
May
31,
|
||||||||||||||||||
|
(Unaudited)
|
||||||||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
2002
|
2001
|
||||||||||||||||
|
Cumulative
effect of
|
||||||||||||||||||||||
|
accounting
change
|
$
|
--
|
$
|
--
|
$
|
1,615,600
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
||||||||
|
Preferred
stock dividends
|
--
|
--
|
--
|
--
|
(75,000
|
)
|
(86,500
|
)
|
(150,000
|
)
|
||||||||||||
|
Net
income (loss)
|
||||||||||||||||||||||
|
to
common shareholders
|
$
|
8,841,500
|
$
|
(6,248,700
|
)
|
$
|
(5,810,100
|
)
|
$
|
(3,840,100
|
)
|
$
|
(2,785,400
|
)
|
$
|
(6,267,600
|
)
|
$
|
1,771,200
|
|||
|
Per
share financial data
|
||||||||||||||||||||||
|
Operating
revenues
|
$
|
0.05
|
$
|
0.05
|
$
|
0.05
|
$
|
0.06
|
$
|
0.07
|
$
|
0.22
|
$
|
0.42
|
||||||||
|
Loss
from
|
||||||||||||||||||||||
|
continuing
operations
|
(0.38
|
)
|
(0.38
|
)
|
(0.44
|
)
|
(0.33
|
)
|
(0.47
|
)
|
(0.80
|
)
|
(0.96
|
)
|
||||||||
|
Other
income & expenses
|
(0.03
|
)
|
0.04
|
(0.03
|
)
|
(0.03
|
)
|
0.12
|
0.14
|
1.11
|
||||||||||||
|
(Loss)
income before minority
|
||||||||||||||||||||||
|
interest,
equity in income (loss)
|
||||||||||||||||||||||
|
of
affiliates, income taxes,
|
||||||||||||||||||||||
|
discontinued
operations,
|
||||||||||||||||||||||
|
and
cumulative effect of
|
||||||||||||||||||||||
|
accounting
change
|
(0.39
|
)
|
(0.34
|
)
|
(0.48
|
)
|
(0.36
|
)
|
(0.35
|
)
|
(0.66
|
)
|
0.15
|
|||||||||
|
Minority
interest in loss (income)
|
||||||||||||||||||||||
|
of
consolidated subsidiaries
|
--
|
0.02
|
0.00
|
--
|
--
|
0.01
|
0.03
|
|||||||||||||||
|
Income
taxes
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||
|
Discontinued
operations, net of tax
|
0.94
|
(0.15
|
)
|
(0.18
|
)
|
--
|
0.02
|
(0.01
|
)
|
0.06
|
||||||||||||
|
Cumulative
effect of
|
||||||||||||||||||||||
|
accounting
change
|
--
|
--
|
0.14
|
--
|
--
|
--
|
--
|
|||||||||||||||
|
Preferred
stock dividends
|
--
|
--
|
--
|
--
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
||||||||||||
|
Net
income (loss)
|
||||||||||||||||||||||
|
per
share, basic
|
$
|
0.55
|
$
|
(0.48
|
)
|
$
|
(0.52
|
)
|
$
|
(0.36
|
)
|
$
|
(0.34
|
)
|
$
|
(0.67
|
)
|
$
|
0.23
|
|||
|
Net
(loss) income
|
||||||||||||||||||||||
|
Per
share, diluted
|
$
|
0.55
|
$
|
(0.48
|
)
|
$
|
(0.52
|
)
|
$
|
(0.36
|
)
|
$
|
(0.34
|
)
|
$
|
(0.67
|
)
|
$
|
0.21
|
|||
-35-
ITEM
7. 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 calendar years ended December 31, 2005, 2004 and
2003. The discussion contains forward-looking statements that involve
risks and uncertainties.
General
Overview
U.S.
Energy Corp. ("USE" or the "Company") and its subsidiaries historically have
been involved in the acquisition, exploration, development and production of
properties prospective for hard rock minerals including lead, zinc, silver,
molybdenum, gold, uranium, and oil and gas. The Company also has been engaged
to
a limited extent in commercial real estate, but only in connection with
acquiring mineral properties which included commercial real estate.
The
Company manages its operations through a joint venture, USECC Joint Venture
("USECC"), with one of its subsidiary companies, Crested Corp. ("Crested")
of
which it owns a consolidated 70.1%. The narrative discussion of this MD&A
refers only to USE or the Company but includes the consolidated financial
statements of Crested, Plateau Resources Limited ("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. The Company had no
production from any of its mineral properties during the year ended December
31,
2005 except its coalbed methane business which was sold on June 1,
2005.
Prior
filings for previous periods, including the years ended December 31, 2004 and
2003, included the consolidated financial statements of Rocky Mountain Gas,
Inc.
(“RMG”). On June 1, 2005, all of the outstanding stock of RMG was sold to
Enterra US Acquisitions Inc. (“Acquisitions”), a privately-held Washington
corporation organized by Enterra Energy Trust (“Enterra”), for $20 million in
cash and securities. Financial statements in this Annual Report for the years
ended December 31, 2005, 2004 and 2003 therefore do not include the balances
of
RMG, as all prior reported balances of RMG are eliminated and reported as
discontinued operations.
During
the years ended December 31, 2003 and 2004, the Company’s uranium and gold
properties were shut down due to depressed metals prices. During 2005, the
market prices for gold and uranium increased to levels which may allow the
Company to place these properties into production or sell part or all of them
to
industry participants. Exploration work was resumed on the uranium properties
in
2005 and new uranium properties have been acquired.
Uranium
- The
price of uranium concentrate has increased from a five year low of $7.25 per
pound in January 2001 to a five year high of $36.25 per pound in December 2005.
During the first quarter of 2006 this increase in the market price
continued.
Gold
- The
five year low for gold was in 2001 when it hit $256 per ounce. The market price
for gold has risen since that time to a high of $570 in 2005 with an average
price for the year of 2005 of $445 per ounce. (Metal Prices.com).
Molybdenum
- Annual
Metal Week Dealer Oxide mean prices averaged $32.94 per pound in 2005, compared
with $16.41 per pound in 2004, $5.32 per pound in 2003 and $3.77 per pound
in
2002. (Metal Prices.com). Continued strong demand, which has outpaced supply
over the past several years (deficit market conditions), has reduced inventory
levels throughout the industry.
-36-
The
rebound in uranium, gold and molybdenum presents an opportunity for the Company.
The Company holds what we consider to be significant mineral and related
properties in gold and uranium, and received a significant molybdenum property
from Phelps Dodge Corporation (“PD”) on February 28, 2006. In contrast to the
prior five years, we now have cash on hand, and reasonably expect to receive
more cash during the year ending December 31, 2006 sufficient for general and
administrative expenses, the continuation of our uranium property acquisition
and exploration plan, and operation of the water treatment plant on the
molybdenum property.
Management’s
strategy to generate a return on shareholder capital is first, to demonstrate
prospective value in the mineral properties sufficient to support substantial
investments by large industry partners and second, to structure these
investments to bring capital and long term development expertise to move the
properties into production.
To
demonstrate prospective value in the mineral properties and therefore bring
investing industry partners into the mineral projects during the years ended
December 31, 2006 and 2007, management is evaluating having feasibility studies
prepared on each of the projects. Some of these studies have already begun.
All
the studies will be performed by independent engineering firms with the intent
of proving up economic development plans for the properties based on current
and
projected market prices as well as existing or projected infrastructure. In
some
instances, significant additional exploratory drilling will have to be completed
to further delineate grades as well as the extent of the minerals in the
ground.
The
principal uncertainties in the successful implementation of our strategy
are:
| · |
Whether
the feasibility studies will show, for any of the properties, that
the
minerals can be mined and processed profitably. For some of the properties
(like gold and uranium), commodity prices will have to be sustained
at
levels not materially less than current prices;
|
| · |
Whether
the feasibility studies will show volume and grades of mineralization,
and
manageable costs of mining and processing, which are sufficient to
bring
industry partners to the point of investment;
and
|
| · |
Whether
we can negotiate terms with industry partners which will return a
substantial profit to the Company for its retained interest and the
project’s development costs to that point in
time.
|
To
some
extent, the economic feasibility of a particular property can be changed with
modifications to the mine/processing plans (add or not add a circuit to process
a particular mineral, enlarge or make smaller the mine plan, etc.). However,
overall, the principal drivers to attainment of the business strategy are the
quality of the minerals in the ground and international commodity
prices.
Please
see the risk factor disclosures elsewhere in this Report for more information
on
the risks and uncertainties in the business.
Forward
Looking Statements
This
Report on Form 10-K for the years ended December 31, 2005, 2004 and 2003
includes "forward-looking statements" within the meaning of Section 21E of
the
Securities Exchange Act of 1934, as amended ("the Exchange Act"). All statements
other than statements of historical fact included in this Report are
forward-looking statements. In addition, whenever words like "expect",
"anticipate”, or "believe" are used, we are making forward looking statements.
Actual results may vary materially from the forward-looking statements and
there
is no assurance that the assumptions used will be realized in fact.
-37-
Critical
Accounting Policies
Asset
Impairments
- We
assess the impairment of property and equipment whenever events or circumstances
indicate that the carrying value may not be recoverable.
Mineral
Claims
- We
follow the full cost method of accounting for mineral properties. Accordingly,
all costs associated with acquisition, exploration and development of oil and
mineral reserves, including directly related overhead costs, are capitalized
and
are subject to ceiling tests to ensure the carrying value does not exceed the
fair market value.
All
capitalized costs of mineral properties subject to amortization and the
estimated future costs to develop proved reserves, are amortized using the
unit-of-production method using estimates of proved reserves. Investments in
unproved properties and major construction 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.
Asset
Retirement Obligations
- The
Company's policy is to accrue the liability for future reclamation costs of
its
mineral properties based on the current estimate of the future reclamation
costs
as determined by internal and external experts.
Revenue
Recognition
-
Revenues are reported on a gross revenue basis and are recorded at the time
services are provided or the commodity is sold. Sales of proved and unproved
properties are accounted for as adjustments of capitalized costs with no gain
or
loss recognized, unless such adjustments would significantly alter the
relationship between capitalized costs and proved reserves, in which case the
gain or loss is recognized in income. Abandonment of properties are accounted
for as adjustments of capitalized costs with no loss recognized.
Use
of Accounting Estimates
- The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Recent
Accounting Pronouncements
SFAS
123(R)
In
December 2004, the FASB issued its final standard on accounting for employee
stock options, FAS No. 123 (Revised 2004), "Share-Based Payment" ("FAS123(R)").
FAS 123(R) replaces FAS No. 123, "Accounting for Stock-Based Compensation” (“FAS
123"), and supersedes Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees”. FAS 123(R) requires companies to measure
compensation costs for all share-based payments, including grants of employee
stock options, based on the fair value of the awards on the grant date and
to
recognize such expense over the period during which an employee is required
to
provide services in exchange for the award. The pro forma disclosures previously
permitted under FAS 123 will no longer be an alternative to financial statement
recognition. FAS 123 (R) is effective for all awards granted, modified,
repurchased or cancelled after, and to unvested portions of previously issued
and outstanding awards vesting after, interim or annual periods, beginning
after
June 15, 2005, which for us will be the first quarter of fiscal 2006. We are
currently evaluating the effect of adopting FAS 123 (R) on our financial
position and results of operations, and we have not yet determined whether
the
adoption of FAS 123 (R) will result in expenses in amounts that are similar
to
the current pro forma disclosures under FAS 123.
-38-
The
Company has reviewed other current outstanding statements from the Financial
Accounting Standards Board and does not believe that any of those statements
will have a material adverse affect on the financial statements of the Company
when adopted.
Liquidity
and Capital Resources
During
the year ended December 31, 2005, the Company recorded a net gain of $8,841,500
and generated $3,156,200 of cash. Financing activities generated $4,176,600
primarily as a result of the exercise of warrants for the Company’s common stock
and third party debt, investing activities generated $5,714,300 and operating
activities consumed $6,057,700.
On
June
1, 2005, Enterra US Acquisitions Inc. (“Acquisitions”), a privately-held
Washington corporation organized by Enterra acquired all the outstanding stock
of RMG, for which Enterra paid $500,000 cash and issued $5,234,000 of Enterra
units (the "Enterra Initial Units"), net of the $266,000 adjustment for the
purchase of overriding royalty interests (effected May 1, 2005); and
Acquisitions issued $14,000,000 of Class D shares of Acquisitions. The Enterra
Initial Units and the Class D shares were issued pro rata to the RMG
shareholders. The Company’s and Crested's participation in the consideration
received was approximately $18,341,600. The Company’s consolidated subsidiary,
Yellowstone Fuels, Inc. (“YSFI”) also received approximately
$296,700.
During
the three months ended September 30, 2005, the Company and Crested sold all
of
the Enterra Initial Units they received as a result of the sale of RMG. As
a
result of the sale of these Enterra Initial Units, the Company recorded an
increase of $5,916,600 in cash from investing activities and a gain of
$1,038,500 from the sale of marketable securities. The Enterra Initial Units
received by YSFI are reflected on the Company’s consolidated balance sheet as
$77,100 as current assets - marketable securities. The Class D shares of
Acquisitions are carried as $13,803,200 at December 31, 2005 as investments
in
non-affiliates. The Company is required to hold the Class D shares of
Acquisitions for a period of one year from June 1, 2005. After the holding
period is satisfied, the Company can exchange these shares on a one for one
basis for units in Enterra which will then be saleable on the Toronto Stock
Exchange - Vancouver (“TSX-V”). The Company has valued the Class D shares of
Acquisitions as a derivative pursuant to SFAS 133 at December 31, 2005. The
initial carrying value of the Class D shares was $19.00 per share. Using the
risk free interest rate of 4.38% and a volatility of 45.14% at December 31,
2005
the Acquisition Class D shares have a value of $19.91 per share. The Company
therefore recorded a net gain on the derivative conversion right of the Class
D
shares of Acquisitions of $630,900. The Class D shares of Acquisitions will
be
revalued at each quarterly reporting period until they are converted to shares
of Enterra Trust at which time they will be accounted for as marketable
securities held for sale.
Although
the Company’s cash position increased by $3,156,200 during the year ended
December 31, 2005 it is anticipated that the Company may need to sell the
remaining Acquisition shares when converted to Enterra units as well as seek
industry partners or equity financing to fund mine exploration and development
costs and also fund reclamation and general and administrative
expenses.
We
believe that the current market prices for gold, uranium and molybdenum are
at
levels that warrant the exploration and development of the Company’s mineral
properties. Management of the Company anticipates these metals prices remaining
at levels which will allow the properties to be produced economically.
Management of the Company therefore believes that sufficient capital will be
available to develop its mineral properties from strategic industry partners,
debt financing, the sale of equity or a combination of the three. The successful
development and production of these properties would greatly enhance the
liquidity and financial position of the Company.
-39-
Capital
Resources
Sale
of Rocky Mountain Gas, Inc.
On
June
1, 2006, the 436,586 Class D shares of Acquisitions (not traded on any exchange)
owned by the Company will be exchangeable, on a one-for-one basis, for
additional Enterra units (the "Enterra Additional Units"); the Enterra
Additional Units will be tradable on the TSX at that time. Crested also owns
an
additional 245,759 of Class D shares of Acquisitions which will be available
for
sale on June 1, 2006. A substantial portion of any cash received by Crested
from
the sale of its Class D shares will likely be applied to its debt of $10,821,800
to the Company. The ultimate value of the Class D shares of Acquisitions will
not be determined until they are sold.
RMG’s
minority equity ownership of Pinnacle Gas Resources, Inc. (“Pinnacle”) was not
included in the disposition of RMG, but was assigned to the Company and Crested
in proportion to their ownership of RMG. The Company therefore received 65%
ownership of the Pinnacle equity and Crested 35%. Enterra is entitled to be
paid
an amount of up to (but not more than) $2,000,000, if proceeds from a future
disposition by the Company and Crested to a third party of their minority equity
interest in Pinnacle exceeds $10,000,000. Currently, we have no information
about whether or when Pinnacle might become a public company or might be
purchased by third parties. The value of the minority equity position upon
a
future disposition could be more or less than $10,000,000. The boards of
directors of the Company and Crested determined that the value of RMG’s minority
equity interest in Pinnacle is approximately $6,250,000, based only upon
Pinnacle’s sales of equity in 2004 and 2005 to its shareholders (RMG did not
participate in those sales). Management of the Company may sell some or all
of
its equity in Pinnacle at such time as Pinnacle is either sold or becomes a
public company.
Agreements
with Uranium Power Corp.
In
2005,
we received $500,000 cash from Uranium Power Corp. (“UPC”) under the December
2004 Purchase and Sale Agreement for our Wyoming uranium properties. Additional
cash payments are required of $1.6 million in 2006 and $3.1 million in 2007.
We
also have signed a Mining Venture Agreement with UPC, by which the initial
$500,000 of exploration costs on individual uranium properties is to be funded
by UPC. See Part 1, “Inactive Mining Properties - Uranium, UPC Purchase and Sale
Agreement” and “Mining Venture Agreement.”
Issuance
of senior convertible debentures
Additional
capital ($3,700,000) was received from the issuance of debentures on February
9,
2005. The $4,720,000 face amount of the debentures was paid in 2005 by issuing
stock in the Company (see Part 1, “Capital Activities in 2005 and First Quarter
2006 - $4,720,000 Loan Repayment - 2005”).
Other
During
the twelve months ended December 31, 2005, the Company received $3,318,400
from
the exercise of 910,362 warrants and $155,700 from the exercise of 64,325
employee options. An additional 438,545 shares underlying employee stock options
were issued to the employees by the surrender of 221,229 shares of the Company’s
common stock directly owned by the employees.
-40-
During
the first quarter of 2006, SGMI through IBK Capital of Toronto Canada, began
efforts to raise U.S. $1.3 to $1.6 million (none from U.S. residents) for
drilling and operational funds of the SGMI property. These funds are critical
to
the further delineation of the gold deposit in order that SGMI can raise
sufficient funds to place the property into production. No assurance can be
given that SGMI will be successful in its efforts to raise the $1.3 to $1.6
million.
The
Company and Crested have a line of credit with a commercial bank in the amount
of $750,000. The line of credit is secured by certain real estate holdings
and
equipment. This line credit is used for short term working capital needs
associated with operations. At December 31, 2005, the entire amount of $750,000
under the line of credit was available to the Company and Crested.
The
Company and Crested continue to pursue the settlement of a long standing
arbitration/litigation regarding the Sheep Mountain Partnership (“SMP”). The
litigation involves Nukem, Inc. (“Nukem”) and its subsidiary Cycle Resource
Investment Corp. of Danbury Connecticut. The case is currently on remand to
the
arbitration panel following Nukem’s third appeal to the Tenth Circuit Court of
Appeals. Prior to the remand, there was a $20 million judgment entered by the
U.S. District Court of Colorado in favor of the Company and Crested. The timing
and cost of achieving final resolution cannot be predicted. Management of the
Company and Crested believe that the ultimate outcome will be positive and
in
favor of the Company.
Capital
Requirements
The
capital requirements of the Company during 2006 remain its general and
administrative costs and expenses; permitting and development work on its gold
property, and the ongoing maintenance, exploration and potential development
of
its uranium and molybdenum properties.
As
a
result of the RMG disposition, USECC no longer directly holds coalbed methane
properties. The Company therefore is no longer liable to fund drilling programs
and lease holding costs related to those properties.
Maintaining
Mineral Properties
Sheep
Mountain Uranium Properties
As
stated
above, the mining agreement with UPC is contractually committed to fund the
majority of the expenses associated with maintaining the uranium properties
in
central Wyoming and performing exploration drilling on them. A budget of
$775,400 for the first half of the year ending December 31, 2006 has been
approved, relating to reclamation work at the Sheep Mountain properties,
exploration drilling, geological and engineering work, and other costs. UPC
has
agreed to fund the first $500,000 of all approved projects up to a total of
$10,000,000 and has advanced $400,000 against the 2006 approved budget. The
average care and maintenance costs associated with the Sheep Mountain uranium
mineral properties in Wyoming is approximately $200,000 per year of which UPC
is
required to pay 50% annually.
Plateau
Resources Limited Uranium Properties
Plateau
owns and maintains the Shootaring Canyon Uranium Mill (the “Shootaring Mill”).
Due to increases in the market price for uranium during the years ended December
31, 2004 and 2005, the Company reconsidered its prior decision to reclaim the
Shootaring Mill property. In March 2005, Plateau filed an application with
the
State of Utah to restart the Shootaring Mill. (See the Form 8-K report filed
March 31, 2005). If management’s projections of placing the Shootaring Mill into
production hold, reclamation on the property is not anticipated to commence
until some time in 2033.
-41-
It
is
anticipated $31 million will be required to modify the Shootaring Mill’s
tailings facility to Utah standards including posting additional reclamation
bonding, and complete other mill upgrades before production can begin.
Additionally, a circuit to process vanadium which is contained in almost all
of
the mineralized material found in nearby properties may be added to the
Shootaring Mill. When refurbished, the Shootaring Mill is projected to have
the
capacity to produce up to 1.5 million pounds of uranium concentrates annually
depending on the grade of material fed to the Shootaring Mill. The Company
and
Crested are currently considering placing their ownership and cash flow rights
in Plateau and other uranium assets into a newly formed entity, U.S. Uranium
Ltd. (“USUL”). In order to fund the refurbishment of the Mill and acquire
additional uranium properties from which to produce uranium bearing ores, USE
and Crested are seeking joint venture partners or equity
participants.
In
2003,
the Company sold its interests in the Ticaboo town site (“Ticaboo”) operations
in southern Utah to a non-affiliated entity, The Cactus Group ("Cactus"). The
Ticaboo property includes a motel, restaurant and lounge, convenience store,
recreational boat storage and service facility, and improved residential and
mobile home lots. Most of these properties had been acquired when the Shootaring
Mill was acquired in 1993. The Company carried the loan which had a balance
due
at December 2005 of approximately $3.0 million at 7.5% annual interest. Cactus
was to make payments of $24,000 per month until August 2008 at which time a
balloon note in the amount of $2.8 million was due. Cactus became in default
on
its cash payments as well as its contractual covenants to maintain the
properties and equipment during the fourth quarter of 2005.
On
February 27, 2006 the Company re-acquired by foreclosure sale the Ticaboo
properties. Management of the Company is evaluating the properties to determine
the costs of deferred maintenance and operations that may be necessary until
such time as the assets can be sold or leased. Until an actual detailed
inspection of the properties is made it is not possible to estimate what the
remedial costs and expenses may be. At the time of filing management of the
Company does not anticipate operating the Ticaboo properties. Management is
seeking a third party to either lease or purchase the properties. Until such
an
arrangement can be secured by the Company, the Company will be obligated for
minimal holding costs. The Company may spend an estimated $200,000 in
refurbishing costs on the properties.
Sutter
Gold Mining Inc. (SGMI) Properties
Because
of the recent increase in the price of gold, management of SGMI has decided
to
continue moving the project forward with production as the ultimate goal. No
extensive development work or mill construction will be initiated until such
time as funding from debt and or equity sources is in place. The goal of the
Company’s management is to have the SGMI properties be self supporting and
thereby not requiring any capital resource commitment from the Company. On
December 29, 2004, SGMC merged with Globemin Resources, Inc., a Canadian
company, and changed its name to Sutter Gold Mining Inc., (“SGMI”). SGMI is
traded on the TSX Venture Exchange. SGMI had sufficient capital to pay for
the
work done on the properties during calendar 2005. Additional financing is being
sought by SGMI. Until such financing is obtained, the Company may be required
to
fund standby costs at the SGMI properties and legal and accounting work
necessary to obtain additional equity financing. Management anticipates that
during the twelve months ended December 31, 2006, this cash commitment will
not
exceed $250,000.
-42-
Lucky
Jack Molybdenum Project
The
Company and Crested re-acquired the Lucky Jack molybdenum project, formerly
known as the Mt. Emmons molybdenum property, located near Crested Butte,
Colorado on February 28, 2006. The property was returned to the Company and
Crested by PD in accordance with a 1987 Amended Royalty Deed and Agreement
between USECC and Amax Inc. (“Amax”). The Lucky Jack Project includes a total of
25 patented and approximately 520 unpatented mining claims, which together
approximate 5,400 acres, or over 8 square miles of mining claims.
The
Company and Crested leased various patented and unpatented mining claims on
the
Mt. Emmons property to Amax in 1974. In the late 1970s, Amax delineated a large
deposit of molybdenum on the properties, reportedly containing approximately
155
million tons of mineralized material averaging 0.44% molybdenum disulfide
(MoS2).
In
1980, Amax constructed a water treatment plant at the Mt. Emmons property to
treat water flowing from old mine workings and for potential use in milling
operations. By 1983, Amax had reportedly spent an estimated $150 million in
the
acquisition of the property, securing water rights, extensive exploration,
ore
body delineation, mine planning, metallurgical testing and other activities
involving the mineral deposit. Amax was merged into Cyprus Minerals in 1992
to
form Cyprus Amax. PD then acquired the Mt. Emmons property in 1999 through
its
acquisition of Cyprus Amax. Thereafter, PD acquired additional water rights
to
mine and mill the deposit.
The
Company and Crested have decided to pursue permitting and development of the
property and are now engaged in the active pursuit of a sizable mining industry
partner to co-develop and mine the property. In order to do so the Company
and
Crested may have to obtain a mine feasibility study which is estimated will
cost
approximately $2.5 million. Of this total amount it is anticipated by management
that approximately $1.0 million will be spent during the year ended December
31,
2006.
Conveyance
of the property to the Company and Crested also includes the transfer of
ownership and operational responsibility of the mine water treatment plant
located on the properties. Operating costs for the water treatment plant are
expected to approximate $1 million annually. In an effort to assure continued
compliance, the Company and Crested have retained the technical expert and
contractor hired by PD on January 2, 2006 to operate the water treatment
plant.
On
October 31, 2005, PD filed a motion with the District Court to recover
attorney’s fees and expenses in the declaratory judgment action against the
Company and Crested. PD is claiming $4,050,200 in attorney’s fees and expenses
and $3,692,100 in costs incurred for the operation of the water treatment plant
for the last three years. These claims were not part of the initial litigation
with PD. The Company and Crested have filed a response with the Court denying
that USECC owes PD such monies. It is not known how or when the Court will
rule
on these issues. Management of the Company believes that no monies are due
to
PD.
The
Company and Crested expect to transfer the Lucky Jack molybdenum project to
a
new subsidiary, U.S. Moly Corp. in the near future.
-43-
Debt
Payments
During
the year ended December 31, 2005, the Company repaid $4,000,000 in debt plus
$720,000 in interest to certain investors through the issuance of 1,942,387
shares of the Company’s common stock. The sale of RMG also resulted in the
repayment by Enterra of approximately $3,214,000 to Petrobridge Investment
Management, a mezzanine credit facility. RMG’s wholly owned subsidiary, RMG I,
had used the Petrobridge loan to finance a portion of its purchase of assets
from Hi-Pro Production, a Gillette, Wyoming coal bed methane company. The
repayment of both the investor and Petrobridge debt did not consume any cash
of
the Company.
Debt
to a
third party lender, Geddes and Company of Phoenix, Arizona, in the amount of
$3,000,000 was completely retired with cash during the quarter ended September
30, 2005. Other cash payments on third party debt totaled $380,400. These cash
payments along with the non cash retirement of debt mentioned above resulted
in
a total reduction of debt during the year ended December 31, 2005 of
$10,594,400.
Debt
to
non-related parties at December 31, 2005 was $1,036,800. This debt consists
of
debt related to the purchase of vehicles and a corporate aircraft.
Reclamation
Costs
The
asset
retirement obligation on the Plateau uranium mining and milling properties
in
Utah at December 31, 2005 was $3,577,000. This liability is fully funded by
cash
investments that are recorded as long term restricted investments. Due to the
increased market price of uranium, the reclamation of this property has been
delayed significantly and is not anticipated to commence until 2033. The delay
until reclamation commences resulted in recognition of a reduction of asset
retirement obligation expense of $2,075,900.
The
asset
retirement obligation of the Sheep Mountain uranium properties in Wyoming at
December 31, 2005 is $2,302,800 and is covered by a reclamation bond which
is
secured by a pledge of certain real estate assets of the Company and Crested.
It
is anticipated that $233,200 of reclamation work on the Sheep Mountain
properties will be performed during 2006.
The
asset
retirement obligation for SGMI at December 31, 2005 is $22,400 which is covered
by a cash bond. It is not anticipated that any cash resources will be used
for
asset retirement obligations at SGMI during the year ending December 31,
2006.
Other
The
employees of the Company are not given raises on a regular basis. In
consideration of this and in appreciation of the work required to develop and
sell RMG, management of the Company accepted the recommendation of its
Compensation Committee to pay all employees and directors a bonus upon the
closing of the sale of RMG to Enterra. The board of directors has granted
similar bonuses in the past. In addition, bonuses may be paid to some of the
key
individuals involved over the past 14 years in the Nukem case once it is
resolved. See Part III of this Annual Report.
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.
-44-
Results
of Operations
Year
Ended December 31, 2005 Compared with the Year Ended December 31,
2004
During
the years ended December 31, 2005 and 2004, the only operating revenues recorded
by the Company were from real estate operations and management fees charged
for
management services provided for various subsidiary companies and fees
associated with the management of three oil wells in Montana which are owned
by
the Assiniboine and Sioux tribes. Real estate revenues increased $29,900 during
the year ended December 31, 2005 over those revenues from real estate recognized
during the year ended December 31, 2004. Management fee revenue increased by
$4,000 during the year ended December 31, 2005 as compared to the year ended
December 31, 2004. The increase in real estate revenues is a as a result of
increased rental rates on the Company’s rental properties. The increase in
management fees is a result of accounting and managerial services provided
to
RMG after the acquisition by Enterra.
Operating
costs and expenses incurred in operations during the year ended December 31,
2005 increased $1,117,700 over those costs and expenses recognized from
operations during the prior year. Expenses from real estate operations remained
constant during the year ended December 31, 2005 when compared with those
expenses incurred during the year ended December 31, 2004. Mineral holding
costs
increased during the year ended December 31, 2005 over those cost recorded
during the previous year by $256,300. The increase in mine holding costs were
as
a result of increased activity on the properties that the Company holds for
the
development of uranium and gold as well as work done on the molybdenum property
returned by Phelps Dodge (“PD”).
General
and administrative costs and expenses increased by $2,985,500 during the year
ended December 31, 2005 when compared with the general and administrative costs
and expenses recognized during the year ended December 31, 2004. The primary
reasons for these increases were: Increased labor costs associated with
additional professional staff to evaluate the Company and Crested’s mineral
properties and a bonus associated with the sale of RMG; increased professional
services associated with the Nukem arbitration hearing as well the litigation
with PD; costs associated with the adoption of Sarbanes Oxley; and work
performed on the SGMI property evaluations and associated increased general
and
administrative expenses of SGMI.
One
outside director of RMG was paid a bonus of $10,000 and another RMG director
was
paid a bonus of $5,000 for their work on the development of RMG, and the four
outside directors of USE were paid $5,000 each for a total bonus to the
directors of $35,000. The employees were paid a total bonus of $435,800 at
the
close of the sale of RMG. All employees of the Company participated in the
bonus
which was paid at the close of the sale of RMG. The bonus was paid in
consideration for the dedicated work put forth by the employees in the
development of RMG and due to the fact that many of the employees have not
received increases in compensation for a number of years.
Officers
of the Company, USE and RMG received the following bonuses: Mark Larsen,
President of RMG $140,000, officers of the Company and USE - Keith Larsen and
Scott Lorimer $40,000 each, and John L. Larsen, Daniel P. Svilar and Harold
F.
Herron $20,000 each. In addition to these Officers, Mr. Steve Youngbauer who
serves as Assistant General Counsel to Mr. Svilar, received a bonus of $40,000.
There were two additional members of John L. Larsen’s family who received
bonuses for a total compensation amount of bonuses to Mr. Larsen’s family of
$226,000. The total amount paid in bonuses to the directors, officers and
employees for extraordinary work in closing the Enterra purchase of RMG was
$470,800 which represents 2.5% of the total consideration received by the
Company and its affiliates from the sale of RMG to Enterra.
-45-
As
a
result of increased market prices for uranium the reclamation of these
properties was moved further out into the future which resulted in $2,075,900
being reversed out of asset retirement obligation expense. This reversal of
cost
was offset against the amount of reclamation liability accreted during the
year
ended December 31, 2005 which resulted in a net cost and expense reduction
of
$1,709,200.
During
the year ended December 31, 2005, other income and expenses resulted in a loss
of $484,000 while other income and expenses recognized during the year ended
December 31, 2004 resulted in income of $465,100. The primary changes in other
income during the year ended December 31, 2005 were (1) a gain of $1,311,200
recognized on the sale of assets, (2) a gain of $1,038,500 from the sale of
marketable securities, (3) a decrease of $538,600 in the revenues recorded
from
the sale of investments; (4) gain on the valuation of the derivative associated
with the Acquisitions Class D shares of $630,900 discussed above; (5) dividend
income of $44,700; (6) an increase of $69,400 in interest income over interest
income recognized during the previous year. These increases in other income
were
offset by a significant increase in interest expense of $3,458,900 over the
interest expense recognized during the previous year to a total of $4,032,200
in
interest expense during the year ended December 31, 2005.
The
increase in sale of assets during the year ended December 31, 2005 was as a
result of a cash payment of $500,000 and the receipt of 1,000,000 shares of
UPC
common stock valued at $337,800 received from UPC to enter into an agreement
described above in Capital Resources and the settlement of a claim on a real
estate property in Colorado. The gain on the sale of marketable securities
was
as a result of the Company and Crested selling 165,600 shares and 91,029 shares,
respectively of Enterra Initial Units. The decrease in of $538,600 in revenues
from the sale of investments is as a result of the Company selling fewer shares
of Ruby Mining Company (“Ruby”) shares which it holds as an investment. The
Company sold its interest in Ruby several years ago but still retains a portion
of the common stock. As of December 31, 2005 there was no book basis in the
shares.
Interest
expense increased from $573,300 during the twelve months ended December 31,
2004
by $3,458,900 to $4,032,200 during the twelve months ended December 31, 2005.
The reason for the increase in interest expense is related directly to the
senior convertible debentures which were issued in February 2005 in the amount
of $4,000,000 with $720,000 of prepaid interest (please see Capital Resources
above), and the debt to Geddes. Both of these debt instruments were retired
in
full during 2005. The Company recognized $164,600 in interest expense, paid
with
cash, and the amortization of $273,000 of the remaining discount taken on the
Geddes loan for total interest related to the Geddes loan of $437,600. The
senior convertible debentures had prepaid interest of $720,000 and a discount
on
the note of $1,029,800 due to the issue of warrants to the holder of the note
and a beneficial conversion factor of $1,669,500 for total interest expense
of
$3,419,300. The remaining interest of $175,300, which was paid during the year
ended December 31, 2005 was on various notes for equipment and the Company’s
aircraft.
Discontinued
operations, net of taxes, during the year ended December 31, 2005 was
$15,207,400. Actual consolidated income recognized by the Company for the sale
of RMG was $15,768,500 less a provision for income taxes of $235,000 and a
loss
from discontinued operations of $326,100. Of the pre tax net income, net of
the
loss from discontinued operations of $15,533,500, the Company recorded a gain
of
$10,177,600; Crested recorded $5,716,700, and YSFI recorded a loss on the
transaction of $360,800. These amounts are derived by the receipt of $500,000
cash and the Enterra Initial Units and the Class D shares of Acquisitions
discussed above under Liquidity and Capital Resources less the Company and
its
affiliates’ basis in the RMG ownership and less the closing costs of the RMG
sale.
-46-
All
previously reported operations of RMG are reported on this filing as
discontinued operations. During the year ended December 31, 2005, the Company
recorded a net loss of $326,100 from the discontinued RMG operations in
comparison to a net loss of $1,938,500 from the RMG operations during the year
ended December 31, 2004.
After
a
provision of alternative minimum taxes due on income recognized during the
year
ended December 31, 2005, the Company recognized a net gain of $8,841,500 or
$0.55 basic per share as compared to a net loss of $6,248,700 or a loss of
$0.48
basic per share for the Year ended December 31, 2004.
Year
ended December 31, 2004 Compared to the Year ended December 31,
2003
Operating
Revenues:
Management
fees and other revenues recognized by the Company increased during the year
ended December 31, 2004. This increase came as a result of the Company entering
into a purchase and sales agreement with Bell Coast Capital Corp. now named
Uranium Power Corp. (“UPC”), a British Columbia corporation (TSX-V “UCP-V”) for
the sale to UPC of an undivided 50% interest in the Sheep Mountain properties.
UPC paid $175,000 during the year ended December 31, 2004, the Company did
not
have any similar revenues during the year ended December 31, 2003.
Revenues
from real estate operations decreased during the year ended December 31, 2004
from those recorded during the year ended December 31, 2003 by $78,200. This
decrease was as a result of reduced lot sales at the Plateau operations in
Utah.
Operating
Costs and Expenses:
The
holding costs associated with the Company’s mineral properties during the year
ended December 31, 2004 remained constant with those costs recorded during
the
previous year. It is anticipated that these costs will increase during 2005
as
the Company moves forward with the permitting process relating to its uranium
and gold properties. Additionally the holding cost of the molybdenum property,
which the Company received back from Phelps Dodge, will increase these costs.
All costs associated with the acquisition of additional properties will be
capitalized but the permitting costs will be expensed.
Real
estate operating costs and general and administrative costs were reduced during
the year ended December 31, 2004 from those of the year ended December 31,
2003.
The reduction of real estate costs is insignificant, $7,400, and is related
to
the reduction of the Company’s involvement in the southern Utah property sold to
a third party which had previously been operated by Plateau. The reduction
in
general and administrative costs of $19,800 was due to the ongoing efforts
of
the Company’s management to reduce overhead and related expenses.
Other
Income and Expenses:
Other
Income and Expenses increased from net expenses of $311,500 during the year
ended December 31, 2003 to net income of $465,100 during the year ended December
31, 2004.
Due
to
the positive upward movement of the market prices for the minerals in which
the
Company is involved it has determined to retain its remaining mineral
development and extraction equipment. The determination to retain this equipment
is a direct cause of the reduction of $151,900 from the year ended December
31,
2003 to the year ended December 31, 2004 in the gain on the sale of
assets.
-47-
The
income recognized from the sale of investments is as a result of the liquidation
of common stock of a company, Ruby which the Company sold several years ago.
The
Company retained ownership of a portion of its former shares of common stock
in
Ruby and had no book basis in the shares. During the year ended December 31,
2004 the Company sold 832,500 shares of Ruby common stock and received $433,100.
The Company also received $152,700 from the sale of a piece of real estate
during the year ended December 31, 2004 which had no book value.
Interest
revenues recognized during the year ended December 31, 2004 decreased from
those
recognized during the year ended December 31, 2003 due to the reduced amount
of
cash invested in interest bearing accounts. Interest expenses decreased from
$799,100 during the twelve months ended December 31, 2003 by $225,800 to
$573,300 at December 31, 2004.
All
previously reported operations of RMG are reported on this filing as
discontinued operations. During the year ended December 31, 2004 the Company
recorded a net loss of $1,938,500 from the discontinued RMG operations in
comparison to a net loss of $2,060,400 from the RMG operations during the year
ended December 31, 2003.
The
Company recorded a net loss of $5,810,100 or $0.52 basic per share during the
year ended December 31, 2003 as compared to a net loss of $6,248,700 or a loss
of ($0.48) basic per share for the year ended December 31, 2004.
Future
Operations
Management
of the Company intends to take advantage of the opportunity presented by the
recent and future projected market prices for all the minerals that it is
involved with. The development of the Company’s mineral properties will require
large amounts of cash, which the Company will have to obtain from industry
or
equity partners. The holding costs of these properties is not beyond the
Company’s capital resources in the short term but to maintain the properties
long term additional financing will be required.
Effects
of Changes in Prices
Mineral
operations are significantly affected by changes in commodity prices. As prices
for a particular mineral increase, prices for prospects for that mineral also
increase, making acquisitions of such properties costly, and sales advantageous.
Conversely, a price decline facilitates acquisitions of properties containing
that mineral, but makes sales of such properties more difficult. Operational
impacts of changes in mineral commodity prices are common in the mining
industry.
Uranium
and Gold.
Changes
in the prices of uranium and gold will affect our operational decisions the
most. Currently, both gold and uranium have experienced an increase in price.
We
continually evaluate market trends and data and are seeking financing or a
joint
venture to place the Company’s gold and uranium properties in production.
Molybdenum.
The
price of molybdenum at December 31, 2005 was $28.00 per pound (Metal
Prices.com). Production from the Lucky Jack Project will have a very long life
and changes in prices of molybdenum would affect the revenues from that
property. A significant decrease in the current market price would have to
occur
prior to the time that the Mt. Emmons property would no longer be profitable.
In
addition to the market risk it is not known how long the permitting process
on
Mt. Emmons will take or how much it will cost.
-48-
Contractual
Obligations
The
Company has two divisions of contractual obligations as of December 31, 2005:
Debt to third parties of $1,036,800 and asset retirement obligations of
$5,902,200. The debt will be paid over a period of five to seven years and
the
retirement obligations will be retired during the next 34 years. The following
table shows the schedule of the payments on the debt, and the expenditures
for
budgeted asset retirement obligations:
|
Less
|
One
to
|
Three
to
|
More
than
|
|||||||||||||
|
than
one
|
Three
|
Five
|
Five
|
|||||||||||||
|
Total
|
Year
|
Years
|
Years
|
Years
|
||||||||||||
|
Long-term
debt obligations
|
$
|
1,036,800
|
$
|
156,500
|
$
|
876,300
|
$
|
4,000
|
$
|
--
|
||||||
|
Other
long-term liabilities
|
5,902,200
|
233,200
|
621,900
|
2,581,000
|
2,466,100
|
|||||||||||
|
Totals
|
$
|
6,939,000
|
$
|
389,700
|
$
|
1,498,200
|
$
|
2,585,000
|
$
|
2,466,100
|
||||||
ITEM
8. Financial Statements
Financial
statements meeting the requirements of Regulation S-X for the Company follow
immediately.
-49-
Report
of Independent Registered Public Accounting Firm
U.S.
Energy Corp. Board of Directors
We
have
audited the accompanying consolidated balance sheets of U.S. Energy Corp. and
subsidiaries as of December 31, 2005 and 2004 and the related consolidated
statements of operations, shareholders’ equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion of these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of U.S. Energy Corp. and subsidiaries
as of December 31, 2005 and 2004 and the results of their operations and their
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/
EPSTEIN WEBER & CONOVER, PLC
Scottsdale,
Arizona
March
3,
2006
-50-
Report
of Independent Registered Public Accounting Firm
Board
of
Directors and Shareholders
U.S.
Energy Corp.
We
have
audited the accompanying consolidated statements of operations, shareholders’
equity and cash flows for the year ended December 31, 2003, of U.S. Energy
Corp.
and subsidiaries. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion of the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of U.S.
Energy Corp. and subsidiaries for the year ended December 31, 2003, 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.
The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. As discussed in Note A to the financial statements,
the Company has experienced significant losses from operations and has a
substantial accumulated deficit. These factors raise substantial doubt about
the
ability of the Company to continue as a going concern. Management's plans in
regards to these matters are also described in Note A. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/
GRANT
THORNTON LLP
Oklahoma
City, Oklahoma
February
27, 2004
-51-
|
U.S.
ENERGY CORP. AND SUBSIDIARIES
|
|||||||
|
CONSOLIDATED
BALANCE SHEETS
|
|||||||
|
ASSETS
|
|||||||
|
December
31,
|
December
31,
|
||||||
|
2005
|
2004
|
||||||
|
CURRENT
ASSETS:
|
|||||||
|
Cash
and cash equivalents
|
$
|
6,998,700
|
$
|
3,842,500
|
|||
|
Marketable
securities, available for sale
|
328,700
|
--
|
|||||
|
Accounts
receivable
|
|||||||
|
Trade,
net of allowances of $32,300
|
|||||||
|
and
$111,300 respectively
|
251,400
|
797,500
|
|||||
|
Affiliates
|
14,100
|
66,200
|
|||||
|
Current
portion of long-term note receivable, net
|
--
|
49,500
|
|||||
|
Prepaid
expenses and other current assets
|
215,000
|
489,700
|
|||||
|
Inventories
|
32,700
|
176,100
|
|||||
|
Total
current assets
|
7,840,600
|
5,421,500
|
|||||
|
INVESTMENTS:
|
|||||||
|
Non-affiliated
companies
|
14,760,800
|
957,700
|
|||||
|
Marketable
securities, held-to-maturity
|
6,761,200
|
6,773,700
|
|||||
|
Other
|
54,900
|
78,600
|
|||||
|
Total
investments
|
21,576,900
|
7,810,000
|
|||||
|
PROPERTIES
AND EQUIPMENT:
|
|||||||
|
Land
|
716,600
|
576,300
|
|||||
|
Mining
claims
|
739,400
|
--
|
|||||
|
Buildings
and improvements
|
5,941,100
|
5,922,400
|
|||||
|
Machinery
and equipment
|
4,676,900
|
4,919,000
|
|||||
|
Proved
oil and gas properties, full cost method
|
1,773,600
|
5,569,000
|
|||||
|
Unproved
coal bed methane properties
|
|||||||
|
excluded
from amortization
|
--
|
5,101,900
|
|||||
|
Total
properties and equipment
|
13,847,600
|
22,088,600
|
|||||
|
Less
accumulated depreciation,
|
|||||||
|
depletion
and amortization
|
(7,481,800
|
)
|
(8,322,000
|
)
|
|||
|
Net
properties and equipment
|
6,365,800
|
13,766,600
|
|||||
|
OTHER
ASSETS:
|
|||||||
|
Note
receivable trade
|
20,800
|
2,971,800
|
|||||
|
Real
estate held for resale
|
1,819,700
|
--
|
|||||
|
Deposits
and other
|
482,900
|
733,800
|
|||||
|
Total
other assets
|
2,323,400
|
3,705,600
|
|||||
|
Total
assets
|
$
|
38,106,700
|
$
|
30,703,700
|
|||
The
accompanying notes are an integral part of these statements.
-52-
|
U.S.
ENERGY CORP. AND SUBSIDIARIES
|
|||||||
|
CONSOLIDATED
BALANCE SHEETS
|
|||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
December
31,
|
December
31,
|
||||||
|
2005
|
2004
|
||||||
|
CURRENT
LIABILITIES:
|
|||||||
|
Accounts
payable
|
$
|
433,000
|
$
|
1,751,300
|
|||
|
Accrued
compensation expense
|
177,100
|
181,700
|
|||||
|
Asset
retirement obligation
|
233,200
|
192,700
|
|||||
|
Current
portion of long-term debt
|
156,500
|
3,400,100
|
|||||
|
Other
current liabilities
|
232,400
|
830,100
|
|||||
|
Total
current liabilities
|
1,232,200
|
6,355,900
|
|||||
|
LONG-TERM
DEBT, net of current portion
|
880,300
|
3,780,600
|
|||||
|
ASSET
RETIREMENT OBLIGATIONS,
|
|||||||
|
net
of current portion
|
5,669,000
|
7,882,400
|
|||||
|
OTHER
ACCRUED LIABILITIES
|
1,400,500
|
1,654,400
|
|||||
|
DEFERRED
GAIN ON SALE OF ASSET
|
--
|
1,279,000
|
|||||
|
MINORITY
INTERESTS
|
1,767,500
|
871,100
|
|||||
|
COMMITMENTS
AND CONTINGENCIES
|
|||||||
|
FORFEITABLE
COMMON STOCK, $.01 par value
|
|||||||
|
442,740
shares issued, forfeitable until earned
|
2,599,000
|
2,599,000
|
|||||
|
PREFERRED
STOCK,
|
|||||||
|
$.01
par value; 100,000 shares authorized
|
|||||||
|
No
shares issued or outstanding
|
--
|
--
|
|||||
|
SHAREHOLDERS'
EQUITY:
|
|||||||
|
Common
stock, $.01 par value;
|
|||||||
|
unlimited
shares authorized; 18,825,134
|
|||||||
|
and
15,231,237 shares issued net of
|
|||||||
|
treasury
stock, respectively
|
188,200
|
152,300
|
|||||
|
Additional
paid-in capital
|
68,005,600
|
59,157,100
|
|||||
|
Accumulated
deficit
|
(40,154,100
|
)
|
(49,321,700
|
)
|
|||
|
Treasury
stock at cost,
|
|||||||
|
999,174
and 972,306 shares respectively
|
(2,892,900
|
)
|
(2,779,900
|
)
|
|||
|
Unrealized
loss on marketable securities
|
(98,100
|
)
|
--
|
||||
|
Unrealized
loss on hedging activity
|
--
|
(436,000
|
)
|
||||
|
Unallocated
ESOP contribution
|
(490,500
|
)
|
(490,500
|
)
|
|||
|
Total
shareholders' equity
|
24,558,200
|
6,281,300
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
38,106,700
|
$
|
30,703,700
|
|||
The
accompanying notes are an integral part of these statements.
-53-
|
U.S.
ENERGY CORP. AND SUBSIDIARIES
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||
|
Year
ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
OPERATING
REVENUES:
|
||||||||||
|
Real
estate operations
|
$
|
286,000
|
$
|
256,100
|
$
|
334,300
|
||||
|
Management
fees and other
|
563,500
|
559,500
|
301,200
|
|||||||
|
849,500
|
815,600
|
635,500
|
||||||||
|
OPERATING
COSTS AND EXPENSES:
|
||||||||||
|
Real
estate operations
|
306,300
|
295,500
|
302,900
|
|||||||
|
Mineral
holding costs
|
1,376,300
|
1,120,000
|
1,095,000
|
|||||||
|
Asset
retirement obligations
|
(1,709,200
|
)
|
346,700
|
366,700
|
||||||
|
General
and administrative
|
6,943,000
|
3,957,500
|
3,937,700
|
|||||||
|
Provision
for doubtful accounts
|
--
|
79,000
|
--
|
|||||||
|
6,916,400
|
5,798,700
|
5,702,300
|
||||||||
|
OPERATING
LOSS
|
(6,066,900
|
)
|
(4,983,100
|
)
|
(5,066,800
|
)
|
||||
|
OTHER
INCOME & (EXPENSES):
|
||||||||||
|
Gain
on sales of assets
|
1,311,200
|
46,300
|
198,200
|
|||||||
|
Gain
on sale of marketable securities
|
1,038,500
|
--
|
--
|
|||||||
|
Gain
(loss) on sale of investment
|
117,700
|
656,300
|
(32,400
|
)
|
||||||
|
Gain
from valuation of derivatives
|
630,900
|
--
|
--
|
|||||||
|
Dividend
income
|
44,700
|
--
|
--
|
|||||||
|
Interest
income
|
405,200
|
335,800
|
321,800
|
|||||||
|
Interest
expense
|
(4,032,200
|
)
|
(573,300
|
)
|
(799,100
|
)
|
||||
|
(484,000
|
)
|
465,100
|
(311,500
|
)
|
||||||
|
LOSS
BEFORE MINORITY INTEREST,
|
||||||||||
|
PROVISION
FOR INCOME TAXES,
|
||||||||||
|
DISCONTINUED
OPERATIONS AND
|
||||||||||
|
CUMULATIVE
EFFECT OF
|
||||||||||
|
ACCOUNTING
CHANGE
|
(6,550,900
|
)
|
(4,518,000
|
)
|
(5,378,300
|
)
|
||||
|
MINORITY
INTEREST IN LOSS OF
|
||||||||||
|
CONSOLIDATED
SUBSIDIARIES
|
185,000
|
207,800
|
13,000
|
|||||||
|
LOSS
BEFORE PROVISION FOR INCOME
|
||||||||||
|
TAXES,
DISCONTINUED OPERATIONS
|
||||||||||
|
AND
CUMULATIVE EFFECT OF
|
||||||||||
|
ACCOUNTING
CHANGE
|
(6,365,900
|
)
|
(4,310,200
|
)
|
(5,365,300
|
)
|
||||
|
PROVISION
FOR INCOME TAXES
|
--
|
--
|
--
|
|||||||
|
LOSS
BEFORE DISCONTINUED
|
||||||||||
|
OPERATIONS
AND CUMULATIVE
|
||||||||||
|
EFFECT
OF ACCOUNTING CHANGE
|
(6,365,900
|
)
|
(4,310,200
|
)
|
(5,365,300
|
)
|
||||
The
accompanying notes are an integral part of these statements.
-54-
|
U.S.
ENERGY CORP. AND SUBSIDIARIES
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||
|
Year
ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
DISCONTINUED
OPERATIONS, net of taxes
|
||||||||||
|
Gain
on sale of discontinued segment
|
||||||||||
|
net
of taxes of $235,000
|
$
|
15,533,500
|
$
|
--
|
$
|
--
|
||||
|
Loss
from discontinued operations
|
(326,100
|
)
|
(1,938,500
|
)
|
(2,060,400
|
)
|
||||
|
15,207,400
|
(1,938,500
|
)
|
(2,060,400
|
)
|
||||||
|
GAIN
(LOSS) BEFORE CUMULATIVE
|
||||||||||
|
EFFECT
OF ACCOUNTING CHANGE
|
$
|
8,841,500
|
$
|
(6,248,700
|
)
|
$
|
(7,425,700
|
)
|
||
|
CUMULATIVE
EFFECT OF
|
||||||||||
|
ACCOUNTING
CHANGE
|
--
|
--
|
1,615,600
|
|||||||
|
NET
GAIN (LOSS)
|
$
|
8,841,500
|
$
|
(6,248,700
|
)
|
$
|
(5,810,100
|
)
|
||
|
NET
GAIN (LOSS) PER SHARE BASIC
|
||||||||||
|
CONTINUED
OPERATIONS
|
$
|
(0.39
|
)
|
$
|
(0.33
|
)
|
$
|
(0.48
|
)
|
|
|
DISCONTINUED
OPERATIONS
|
0.94
|
(0.15
|
)
|
(0.18
|
)
|
|||||
|
CUMULATIVE
EFFECT OF
|
||||||||||
|
ACCOUNTING
CHANGE
|
--
|
--
|
0.14
|
|||||||
|
$
|
0.55
|
$
|
(0.48
|
)
|
$
|
(0.52
|
)
|
|||
|
NET
GAIN (LOSS) PER SHARE DILUTED
|
||||||||||
|
CONTINUED
OPERATIONS
|
$
|
(0.39
|
)
|
$
|
(0.33
|
)
|
$
|
(0.48
|
)
|
|
|
DISCONTINUED
OPERATIONS
|
0.94
|
(0.15
|
)
|
(0.18
|
)
|
|||||
|
CUMULATIVE
EFFECT OF
|
||||||||||
|
ACCOUNTING
CHANGE
|
--
|
--
|
0.14
|
|||||||
|
$
|
0.55
|
$
|
(0.48
|
)
|
$
|
(0.52
|
)
|
|||
|
BASIC
WEIGHTED AVERAGE
|
||||||||||
|
SHARES
OUTSTANDING
|
16,177,383
|
13,182,421
|
11,180,975
|
|||||||
|
DILUTED
WEIGHTED AVERAGE
|
||||||||||
|
SHARES
OUTSTANDING
|
16,177,383
|
13,182,421
|
11,180,975
|
|||||||
The
accompanying notes are an integral part of these statements.
-55-
|
U.S.
ENERGY CORP AND SUBSIDARIES
|
|||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
|||||||||||||||||||||||||
|
Additional
|
Unallocated
|
Total
|
|||||||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Accumulated
|
Treasury
Stock
|
ESOP
|
Shareholders'
|
||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Shares
|
Amount
|
Contribution
|
Equity
|
||||||||||||||||||
|
Balance
December 31, 2002
|
11,826,396
|
$
|
118,300
|
$
|
48,877,100
|
$
|
(37,262,900
|
)
|
959,725
|
$
|
(2,740,400
|
)
|
$
|
(490,500
|
)
|
$
|
8,501,600
|
||||||||
|
Funding
of ESOP
|
76,294
|
700
|
235,700
|
--
|
--
|
--
|
--
|
236,400
|
|||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||
|
to
outside directors
|
3,891
|
--
|
14,400
|
--
|
--
|
--
|
--
|
14,400
|
|||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||
|
by
release of forfeitable stock
|
78,286
|
800
|
434,400
|
--
|
--
|
--
|
--
|
435,200
|
|||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||
|
from
stock warrants
|
131,596
|
1,300
|
465,300
|
--
|
--
|
--
|
--
|
466,600
|
|||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||
|
in
stock compensation plan
|
100,000
|
1,000
|
309,000
|
--
|
--
|
--
|
--
|
310,000
|
|||||||||||||||||
|
Treasury
stock from sale
|
|||||||||||||||||||||||||
|
of
subsidiary
|
--
|
--
|
--
|
--
|
1,581
|
(4,200
|
)
|
--
|
(4,200
|
)
|
|||||||||||||||
|
Treasury
stock from payment
|
|||||||||||||||||||||||||
|
on
balance of note receivable
|
--
|
--
|
--
|
--
|
5,000
|
(20,500
|
)
|
--
|
(20,500
|
)
|
|||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||
|
to
outside consultants
|
121,705
|
1,200
|
581,600
|
--
|
--
|
--
|
--
|
582,800
|
|||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||
|
warrants
to outside consultants
|
--
|
--
|
886,300
|
--
|
--
|
--
|
--
|
886,300
|
|||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||
|
for
settlement of lawsuit
|
10,000
|
100
|
49,900
|
--
|
--
|
--
|
--
|
50,000
|
|||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||
|
in
payment of debt
|
211,109
|
2,100
|
497,900
|
--
|
--
|
--
|
--
|
500,000
|
|||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||
|
from
employee options (1)
|
265,421
|
2,700
|
609,600
|
--
|
--
|
--
|
--
|
612,300
|
|||||||||||||||||
|
Net
Loss
|
--
|
--
|
--
|
(5,810,100
|
)
|
--
|
--
|
--
|
(5,810,100
|
)
|
|||||||||||||||
|
Balance
December 31, 2003(2)
|
12,824,698
|
$
|
128,200
|
$
|
52,961,200
|
$
|
(43,073,000
|
)
|
966,306
|
$
|
(2,765,100
|
)
|
$
|
(490,500
|
)
|
$
|
6,760,800
|
||||||||
|
(1)Net
of 10,200 shares surrendered by employees for the exercise of 275,621
employee stock options.
(2)Total
Shareholders' Equity at December 31, 2003 does not include 465,880
shares
currently issued but forfeitable if certain conditions are not met
by the
recipients. "Basic and Diluted Weighted Average Shares Outstanding"
also
includes 814,496 shares of common stock held by majority-owned
subsidiaries, which, in consolidation, are treated as treasury
shares.
|
|||||||||||||||||||||||||
The
accompanying notes are an integral part of these statements.
-56-
|
U.S.
ENERGY CORP AND SUBSIDARIES
|
|||||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
|||||||||||||||||||||||||||||||
|
(continued)
|
|||||||||||||||||||||||||||||||
|
Accumulated
|
|||||||||||||||||||||||||||||||
|
Additional
|
Total
Other
|
Unallocated
|
Total
|
||||||||||||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Comprehensive
|
Accumulated
|
Comprehensive
|
Treasury
Stock
|
ESOP
|
Shareholders'
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Loss
|
Deficit
|
Loss
|
Shares
|
Amount
|
Contribution
|
Equity
|
||||||||||||||||||||||
|
Balance
December 31, 2003
|
12,824,698
|
$
|
128,200
|
$
|
52,961,200
|
--
|
$
|
(43,073,000
|
)
|
--
|
966,306
|
$
|
(2,765,100
|
)
|
$
|
(490,500
|
)
|
$
|
6,760,800
|
||||||||||||
|
Funding
of ESOP
|
70,439
|
700
|
207,800
|
--
|
--
|
--
|
--
|
--
|
--
|
208,500
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
by
release of forfeitable stock
|
23,140
|
200
|
121,700
|
--
|
--
|
--
|
1,000
|
5,700
|
--
|
127,600
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
from
stock warrants
|
125,000
|
1,300
|
249,800
|
--
|
--
|
--
|
--
|
--
|
--
|
251,100
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
in
stock compensation plan
|
50,000
|
500
|
127,900
|
--
|
--
|
--
|
--
|
--
|
--
|
128,400
|
|||||||||||||||||||||
|
Treasury
stock from payment
|
|||||||||||||||||||||||||||||||
|
on
balance of note receivable
|
--
|
--
|
--
|
--
|
--
|
--
|
5,000
|
(20,500
|
)
|
--
|
(20,500
|
)
|
|||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
to
retire debt
|
476,833
|
4,700
|
1,068,200
|
--
|
--
|
--
|
--
|
--
|
--
|
1,072,900
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
warrants
to RMG investors
|
--
|
--
|
291,500
|
--
|
--
|
--
|
--
|
--
|
--
|
291,500
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
to
RMG investors
|
882,239
|
8,900
|
1,803,700
|
--
|
--
|
--
|
--
|
--
|
--
|
1,812,600
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
to
purchase property
|
678,888
|
6,800
|
1,976,300
|
--
|
--
|
--
|
--
|
--
|
--
|
1,983,100
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
in
a private placement
|
100,000
|
1,000
|
349,000
|
--
|
--
|
--
|
--
|
--
|
--
|
350,000
|
|||||||||||||||||||||
|
Comprehensive
loss:
|
|||||||||||||||||||||||||||||||
|
Net
loss
|
--
|
--
|
--
|
$
|
(6,248,700
|
)
|
(6,248,700
|
)
|
--
|
--
|
--
|
--
|
(6,248,700
|
)
|
|||||||||||||||||
|
Other
comprehensive loss on
|
|||||||||||||||||||||||||||||||
|
hedging
activity
|
--
|
--
|
--
|
(436,000
|
)
|
(436,000
|
)
|
--
|
--
|
--
|
(436,000
|
)
|
|||||||||||||||||||
|
Comprehensive
loss
|
$
|
(6,684,700
|
)
|
||||||||||||||||||||||||||||
|
Balance
December 31, 2004(1)
|
15,231,237
|
$
|
152,300
|
$
|
59,157,100
|
$
|
(49,321,700
|
)
|
$
|
(436,000
|
)
|
972,306
|
$
|
(2,779,900
|
)
|
$
|
(490,500
|
)
|
$
|
6,281,300
|
|||||||||||
|
1)
Total
Shareholders' Equity at December 31, 2004 does not include 442,740
shares
currently issued but forfeitable if certain conditions are not met
by the
recipients. "Basic and Diluted Weighted Average Shares Outstanding” also
includes 814,496 shares of common stock held by majority-owned
subsidiaries, which, in consolidation, are treated as treasury
shares.
|
|||||||||||||||||||||||||||||||
The
accompanying notes are an integral part of these statements.
-57-
|
U.S.
ENERGY & AFFILIATES
|
|||||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
|||||||||||||||||||||||||||||||
|
(continued)
|
|||||||||||||||||||||||||||||||
|
Accumulated
|
|||||||||||||||||||||||||||||||
|
Additional
|
Total
Other
|
Unallocated
|
Total
|
||||||||||||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Comprehensive
|
Accumulated
|
Comprehensive
|
Treasury
Stock
|
ESOP
|
Shareholders’
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Gain
|
Deficit
|
Loss
|
Shares
|
Amount
|
Contribution
|
Equity
|
||||||||||||||||||||||
|
Balance
December 31, 2004
|
15,231,237
|
152,300
|
59,157,100
|
--
|
$
|
(49,321,700
|
)
|
$
|
(436,000
|
)
|
972,306
|
$
|
(2,779,900
|
)
|
$
|
(490,500
|
)
|
$
|
6,281,300
|
||||||||||||
|
Funding
of ESOP
|
56,494
|
500
|
262,100
|
--
|
--
|
--
|
--
|
--
|
--
|
262,600
|
|||||||||||||||||||||
|
Sale
of Rocky Mountain Gas
|
(4,132,300
|
)
|
--
|
326,100
|
--
|
--
|
--
|
--
|
(3,806,200
|
)
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
to
outside directors
|
11,475
|
100
|
35,500
|
--
|
--
|
--
|
--
|
--
|
--
|
35,600
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
from
stock warrants
|
910,362
|
9,100
|
3,309,300
|
--
|
--
|
--
|
--
|
--
|
--
|
3,318,400
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
in
stock compensation plan
|
60,000
|
600
|
254,100
|
--
|
--
|
--
|
--
|
--
|
--
|
254,700
|
|||||||||||||||||||||
|
Treasury
stock from the sale
|
|||||||||||||||||||||||||||||||
|
of
Rocky Mountain Gas
|
--
|
--
|
--
|
--
|
--
|
--
|
21,868
|
(92,500
|
)
|
--
|
(92,500
|
)
|
|||||||||||||||||||
|
Treasury
stock from payment
|
|||||||||||||||||||||||||||||||
|
on
balance of note receivable
|
--
|
--
|
--
|
--
|
--
|
--
|
5,000
|
(20,500
|
)
|
--
|
(20,500
|
)
|
|||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
to
retire debt
|
1,942,387
|
19,500
|
4,700,600
|
--
|
--
|
--
|
--
|
--
|
--
|
4,720,100
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
from
employee stock options
|
281,641
|
2,800
|
170,900
|
--
|
--
|
--
|
--
|
--
|
--
|
173,700
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
to
RMG investors
|
331,538
|
3,300
|
1,162,300
|
--
|
--
|
--
|
--
|
--
|
--
|
1,165,600
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
Warrants
for services
|
--
|
--
|
190,300
|
--
|
--
|
--
|
--
|
--
|
--
|
190,300
|
|||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||||
|
warrants
attached to
|
|||||||||||||||||||||||||||||||
|
company
debt
|
--
|
--
|
2,895,700
|
--
|
--
|
--
|
--
|
--
|
--
|
2,895,700
|
|||||||||||||||||||||
|
Comprehensive
gain:
|
|||||||||||||||||||||||||||||||
|
Net
gain
|
--
|
--
|
--
|
$
|
8,841,500
|
8,841,500
|
--
|
--
|
--
|
--
|
8,841,500
|
||||||||||||||||||||
|
Unrealized
loss on
|
|||||||||||||||||||||||||||||||
|
Marketable
securities
|
--
|
--
|
--
|
(98,100
|
)
|
--
|
(98,100
|
)
|
--
|
--
|
--
|
(98,100
|
)
|
||||||||||||||||||
|
Unrealized
gain on
|
|||||||||||||||||||||||||||||||
|
hedging
activity
|
--
|
--
|
--
|
436,000
|
--
|
436,000
|
--
|
--
|
--
|
436,000
|
|||||||||||||||||||||
|
Comprehensive
gain
|
$
|
9,179,400
|
|||||||||||||||||||||||||||||
|
Balance
December 31, 2005(1)
|
18,825,134
|
188,200
|
68,005,600
|
$
|
(40,154,100
|
)
|
$
|
(98,100
|
)
|
999,174
|
$
|
(2,892,900
|
)
|
$
|
(490,500
|
)
|
$
|
24,558,200
|
|||||||||||||
(1)Total
Shareholders' Equity at December 31, 2005 does not include 442,740 shares
currently issued but forfeitable if certain conditions are not met by the
recipients. "Basic and Diluted Weighted Average Shares Outstanding” also
includes 834,783 shares of common stock held by majority-owned subsidiaries,
which, in consolidation, are treated as treasury shares.
The
accompanying notes are an integral part of these statements.
-58-
|
U.S.
ENERGY CORP. AND SUBSIDIARIES
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||
|
Year
ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||
|
Net
gain (loss)
|
$
|
8,841,500
|
$
|
(6,248,700
|
)
|
$
|
(5,810,100
|
)
|
||
|
Adjustments
to reconcile net gain (loss)
|
||||||||||
|
to
net cash used in operating activities:
|
||||||||||
|
Minority
interest in loss of
|
||||||||||
|
consolidated
subsidiaries
|
(185,000
|
)
|
(397,700
|
)
|
(235,100
|
)
|
||||
|
Amortization
of deferred charge
|
--
|
343,400
|
--
|
|||||||
|
Depreciation,
depletion & amortization
|
386,300
|
381,700
|
454,300
|
|||||||
|
Subsequent
recognition and measurement
|
||||||||||
|
of
asset retirement obligations
|
(2,075,900
|
)
|
--
|
--
|
||||||
|
Accretion
of asset
|
||||||||||
|
retirement
obligations
|
366,700
|
346,700
|
366,700
|
|||||||
|
Amortization
of debt discount and
|
||||||||||
|
beneficial
conversion feature
|
3,168,700
|
263,700
|
537,700
|
|||||||
|
Noncash
interest expense
|
720,000
|
--
|
--
|
|||||||
|
Noncash
services
|
125,900
|
50,400
|
134,700
|
|||||||
|
Provision
for doubtful accounts
|
--
|
79,000
|
--
|
|||||||
|
Recognition
of deferred gain
|
--
|
(16,700
|
)
|
--
|
||||||
|
(Gain)
on sale of investment
|
(15,533,500
|
)
|
(656,300
|
)
|
--
|
|||||
|
(Gain)
on sale of assets
|
(1,311,200
|
)
|
(19,300
|
)
|
(198,900
|
)
|
||||
|
(Gain)
on sale marketable securities
|
(1,038,500
|
)
|
--
|
--
|
||||||
|
(Gain)
on valuation of derivatives
|
(630,900
|
)
|
--
|
--
|
||||||
|
Cumulative
effect of accounting change
|
--
|
--
|
(1,615,600
|
)
|
||||||
|
Lease
holding costs
|
--
|
--
|
50,000
|
|||||||
|
Noncash
compensation
|
688,500
|
336,900
|
893,500
|
|||||||
|
Net
changes in assets and liabilities:
|
||||||||||
|
Accounts
receivable
|
(166,000
|
)
|
(16,400
|
)
|
(676,000
|
)
|
||||
|
Other
assets
|
183,700
|
(83,100
|
)
|
1,430,600
|
||||||
|
Accounts
payable
|
(700
|
)
|
(67,800
|
)
|
(694,400
|
)
|
||||
|
Accrued
compensation expense
|
(4,600
|
)
|
1,700
|
--
|
||||||
|
Prepaid
drilling costs
|
--
|
--
|
(134,400
|
)
|
||||||
|
Reclamation
and other liabilities
|
407,300
|
(179,800
|
)
|
(393,200
|
)
|
|||||
|
NET
CASH USED IN
|
||||||||||
|
OPERATING
ACTIVITIES
|
(6,057,700
|
)
|
(5,882,300
|
)
|
(5,890,200
|
)
|
||||
The
accompanying notes are an integral part of these statements.
-59-
|
U.S.
ENERGY CORP. AND SUBSIDIARIES
|
|||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||||||||
|
(continued)
|
|||||||||||||
|
Year
ended December 31,
|
|||||||||||||
|
2005
|
2004
|
2003
|
|||||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||||||||
|
Proceeds
on sale of marketable securities
|
$
|
5,916,600
|
$
|
--
|
$
|
--
|
|||||||
|
Acquisition
of unproved mining claims
|
(710,900
|
)
|
--
|
--
|
|||||||||
|
Proceeds
on sale of investment
|
--
|
656,300
|
--
|
||||||||||
|
Proceeds
on sale of property and equipment
|
1,087,400
|
21,400
|
1,640,100
|
||||||||||
|
Sale
of RMG
|
(270,000
|
)
|
--
|
--
|
|||||||||
|
Net
change in restricted investments
|
13,600
|
21,900
|
3,037,500
|
||||||||||
|
Purchase
of property and equipment
|
(376,000
|
)
|
(93,400
|
)
|
(92,700
|
)
|
|||||||
|
Net
change in notes receivable
|
53,600
|
11,300
|
--
|
||||||||||
|
Net
change in investments in affiliates
|
--
|
(64,500
|
)
|
(187,600
|
)
|
||||||||
|
NET
CASH PROVIDED BY
|
|||||||||||||
|
INVESTING
ACTIVITIES
|
5,714,300
|
553,000
|
4,397,300
|
||||||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||||||||
|
Issuance
of common stock
|
3,492,100
|
601,100
|
1,078,900
|
||||||||||
|
Issuance
of subsidiary stock
|
--
|
856,000
|
230,000
|
||||||||||
|
Proceeds
from long term debt
|
4,064,900
|
3,311,600
|
2,600
|
||||||||||
|
Repayments
of long term debt
|
(3,380,400
|
)
|
(512,500
|
)
|
(678,100
|
)
|
|||||||
|
NET
CASH PROVIDED BY
|
|||||||||||||
|
FINANCING
ACTIVITIES
|
4,176,600
|
4,256,200
|
633,400
|
||||||||||
|
Net
cash (used in) provided by operating
|
|||||||||||||
|
activities
of discontinued operations
|
(453,500
|
)
|
1,330,700
|
216,600
|
|||||||||
|
Net
cash (used in) provided by investing
|
|||||||||||||
|
activities
of discontinued operations
|
(215,000
|
)
|
(5,628,500
|
)
|
2,566,700
|
||||||||
|
Net
cash (used in) provided by financing
|
|||||||||||||
|
activities
of discontinued operations
|
(8,500
|
)
|
5,128,600
|
420,000
|
|||||||||
|
NET
INCREASE (DECREASE) IN
|
|||||||||||||
|
CASH
AND CASH EQUIVALENTS
|
3,156,200
|
(242,300
|
)
|
2,343,800
|
|||||||||
|
CASH
AND CASH EQUIVALENTS
|
|||||||||||||
|
AT
BEGINNING OF PERIOD
|
3,842,500
|
4,084,800
|
1,741,000
|
||||||||||
|
CASH
AND CASH EQUIVALENTS
|
|||||||||||||
|
AT
END OF PERIOD
|
$
|
6,998,700
|
$
|
3,842,500
|
$
|
4,084,800
|
|||||||
|
SUPPLEMENTAL
DISCLOSURES:
|
|||||||||||||
|
Income
tax paid
|
$
|
235,000
|
$
|
--
|
$
|
--
|
|||||||
|
Interest
paid
|
$
|
257,900
|
$
|
1,065,400
|
$
|
799,100
|
|||||||
The
accompanying notes are an integral part of these statements.
-60-
|
U.S.
ENERGY CORP. AND SUBSIDIARIES
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||
|
(continued)
|
||||||||||
|
Year
ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
||||||||||
|
Issuance
of stock to satisfy debt
|
$
|
4,000,000
|
$
|
1,072,900
|
$
|
500,000
|
||||
|
Issuance
of stock warrants in
|
||||||||||
|
conjunction
with debt
|
$
|
2,781,200
|
$
|
291,500
|
$
|
--
|
||||
|
Issuance
of stock as conversion of
|
||||||||||
|
subsidiary
stock
|
$
|
595,900
|
$
|
--
|
$
|
--
|
||||
|
Acquisition
of assets
|
||||||||||
|
through
issuance of debt
|
$
|
113,400
|
$
|
--
|
$
|
26,300
|
||||
|
Issuance
of stock for services
|
$
|
100,000
|
$
|
--
|
$
|
582,800
|
||||
|
Issuance
of stock for conversion of
|
||||||||||
|
RMG
stock
|
$
|
569,700
|
$
|
--
|
$
|
--
|
||||
|
Foreclosure
of note receivable Cactus Group
|
$
|
2,926,400
|
$
|
--
|
$
|
--
|
||||
|
Satisfaction
of receivable - employee
|
||||||||||
|
with
stock in company
|
$
|
20,500
|
$
|
20,500
|
$
|
20,500
|
||||
|
Issuance
of stock for retired employees
|
$
|
--
|
$
|
--
|
$
|
435,200
|
||||
|
Issuance
of stock as deferred compensation
|
$
|
--
|
$
|
--
|
$
|
151,900
|
||||
|
Issuance
of stock warrants for services
|
$
|
--
|
$
|
--
|
$
|
563,400
|
||||
The
accompanying notes are an integral part of these statements.
-61-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
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
properties, the production of petroleum properties and marketing of minerals.
Principal mineral interests are in uranium, gold and molybdenum. The Company
is
pursuing various financing opportunities to put its uranium and gold properties
which are all in a shut down status into production. The Company also
historically participated in the development and production of coalbed methane
gas through a non consolidated investee, Rocky Mountain Gas, Inc. (“RMG”), which
was sold during the year ended December 31, 2005. (See Note L) 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 USECC
Joint Venture (“USECC”) discussed below and in Note D.
The
Company is engaged in the maintenance of two uranium properties, one in southern
Utah, and a second group of mining claims in Wyoming known as the Sheep Mountain
uranium properties. The Sheep Mountain properties were formally owned by a
partnership, Sheep Mountain Partners (“SMP”), which has been involved in
significant litigation. (See Note K) Sutter Gold Mining, Inc. ("SGMI"), a
Canadian corporation owned 65.4% by the Company at December 31, 2005, manages
the Company's interest in gold properties. The Company also owns 100% of the
outstanding stock of Plateau Resources Limited (“Plateau”), which was on standby
at December 31, 2005. The Company has applied with the State of Utah to change
the status of the permit on the mill from standby to operational.
Management's
Plan
The
Company recorded a net gain of $8,841,500 during the year ended December 31,
2005 and had working capital of $6,608,300 at December 31, 2005. These changes
in the financial condition of the Company are primarily as a result of the
sale
of RMG. (See Note L) At December 31, 2005, the Company on a consolidated basis
held 693,276 Class D shares of Enterra US Acquisitions Inc. (“Acquisitions”)
which are convertible on June 1, 2006 to units of Enterra Energy Trust
(“Enterra”). Of these consolidated shares the Company owns 436,586 shares and
Crested Corp. (“Crested”) and Yellowstone Fuels Inc. (“YSFI”) own 245,759 and
10,931 shares, respectively. These Class D shares of Acquisitions were valued
at
$13,803,200 at December 31, 2005. The Company may sell these shares after June
1, 2006 and intends on using the proceeds to pay its portion of mineral
exploration programs, general and administrative expenses and seek other
acquisitions. The Company also has other assets that are unencumbered that
could
be sold to generate cash.
The
Company plans on the following activities to increase its cash position and
improve earnings:
| · |
Seek
additional funding through either sale of equity or joint venture
partner
to place SGMI and uranium and other mineral properties into production
or
sell the properties to industry
partners.
|
· Raise
additional capital through a private placement or other types of equity or
debt
financings.
| · |
Convert
its shares of Acquisitions into units of Enterra which may be
sold.
|
· Successfully
conclude the litigation with Nukem. See Note K.
-62-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
Budgetary
projections made by the Company for calendar 2006 indicate that if these efforts
are successful and cost cutting procedures continue to be implemented, the
Company will have ample cash resources to fund its operations and commitments.
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%), Four Nines Gold, Inc. ("FNG") (50.9%), SGMI (65.4%), Crested
(71.0%), YSFI (35.9%), and the USECC Joint Venture ("USECC"), a consolidated
joint venture which is equally owned by USE and Crested, through which the
bulk
of their operations are conducted.
Investments
of less than 20% are accounted for by the cost method. All material
inter-company profits, transactions and balances have been eliminated. Because
of management control, YSFI is consolidated into the financial statements of
the
Company.
Cash
Equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. The Company maintains its cash
and
cash equivalents in bank deposit accounts which exceed federally insured limits.
At December 31, 2005, the Company had all 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.
Accounts
Receivable
The
majority of the Company's accounts receivable are due from industry partners
for
exploratory drilling programs, real estate rentals and management fees. 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 provides reserves for account
receivable balances when they become uncollectible, and payments subsequently
received on such receivables are credited to the allowance for doubtful
accounts.
Inventories
Inventories
consist of aviation fuel. Inventories are stated at lower of cost or market
using the average cost method.
Marketable
Securities
The
Company accounts for its marketable securities under Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities , which requires certain securities to be categorized
as either trading, available-for-sale or held-to-maturity. Based on the
Company's intent to invest in the securities at least through the minimum
holding period, the Company's available-for-sale securities are carried at
fair
value with net unrealized gain or (loss) recorded as a separate component of
shareholders' equity. Held-to-maturity securities are valued at amortized cost.
If a decline in fair value of held-to-maturity securities is determined to
be
other than temporary, the investment is written down to fair value.
-63-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
Properties
and Equipment
Land,
buildings, improvements, machinery and equipment are carried at cost.
Depreciation of buildings, improvements, machinery and equipment is provided
principally by the straight-line method over estimated useful lives ranging
from
3 to 45 years. Following is a breakdown of the lives over which assets are
depreciated.
|
Machinery
and equipment
|
||
|
Office
Equipment
|
3
to 5 years
|
|
|
Planes
|
10
years
|
|
|
Field
Tools and Hand Equipment
|
5
to 7 years
|
|
|
Vehicles
and Trucks
|
3
to 7 years
|
|
|
Heavy
Equipment
|
7
to 10 years
|
|
|
Buildings
and improvements
|
||
|
Service
Buildings
|
20
years
|
|
|
Corporate
Headquarters' Building
|
45
years
|
|
The
Company has $1,773,600 in proved oil and gas properties that are fully depleted.
From these properties the Company receives management fees based on the oil
produced.
Mineral
Properties
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 mineral 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).
Assets
Held for Resale
The
Company classifies Assets Held for Resale as assets that are not in production
and management has made the decision to dispose of the assets.
The
Company re-acquired by Foreclosure Sale the Ticaboo town site (“Ticaboo”)
located in southern Utah near Lake Powell subsequent to year end. Ticaboo
includes a motel, restaurant and lounge, convenience store, recreational boat
storage and service facility, and improved residential and mobile home lots.
Most of these properties had been acquired when the Shootaring Mill was acquired
in 1993.
-64-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
The
Company did not own Ticaboo at December 31, 2005 but the note was in default.
The Company therefore classified Ticaboo has an Asset Held for Resale. (See
Note
N) Management of the Company is evaluating the properties to determine the
costs
of maintenance that has not been done, and operations that may be necessary
until such time the decision to sell or lease the properties has been made.
The
Company has been approached by various third parties to purchase or lease
the
properties. The value of $1.8 is the cost basis of the asset after the
re-acquisition and the write off of the corresponding note receivable.
Management believes that the fair value of the assets received in foreclosure
approximates the carrying value of the note receivable.
Long-Lived
Assets
The
Company evaluates its long-lived assets for impairment when events or changes
in
circumstances indicate that the related carrying amount may not be recoverable.
If the sum of estimated future cash flows on an undiscounted basis is less
than
the carrying amount of the related asset, 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.
Fair
Value of Financial Instruments
The
carrying amount of cash equivalents, receivables, other current assets, accounts
payable and accrued expenses approximate fair value because of the short-term
nature of those instruments. The recorded amounts for short-term and long-term
debt approximate fair market value due to the variable nature of the interest
rates on the short term debt, and the fact that interest rates remain generally
unchanged from issuance of the long term debt.
The
fair
value of derivatives associated with the sale of RMG and the receipt of Enterra
Acquisition Class D shares is computed using the Black Scholes model and
the
volatility of the Enterra Trust units into which the Class D shares are to
automatically converted at June 30, 2006. At December 31, 2005 the volatility
of
the Enterra Trust units was 45.14% and the market price for those shares
was
$16.45 per unit. The value generated by the Black Scholes model for the Class
D
shares of Enterra Acquisitions was $19.91 per share and the gain recognized
on
the derivative at December 31, 2005 was $630,900. See Notes F and
L.
Asset
Retirement Obligations
SFAS
143
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for
Asset Retirement Obligation." The statement requires the Company to record
the
fair value of the reclamation liability on its shut down mining and gas
properties as of the date that the liability is incurred. The statement further
requires that the Company review the liability each quarter and determine
if a
change is estimate is required as well as accrete the total liability on
a
quarterly basis for the future liability. Final determinations are made during
the fourth quarter of each year.
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.
-65-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
At
December 31, 2003 and 2004, the price of uranium concentrates was $14.50
and
$20.75 per pound, respectively. During the twelve months ended December 31,
2005, the price of uranium increased dramatically to $36.25 per pound. These
increases in market prices are as a result of increased interest in the
expansion of nuclear power generation in India, China, Europe and the United
States. Additionally, due to historical low prices there is limited uranium
capacity to fill the growing demand. The lag time to start production facilities
is costly and lengthy. For these reasons the Company has rethought its prior
determination of reclaiming its Shootaring uranium mill in southern Utah
and its
Sheep Mountain uranium properties. The extension of the reclamation plan
caused
a reduction of $2,075,900 in the present value of the obligation. There is
no
remaining book basis for these uranium assets on the books of the Company.
As a
result of these changes in market conditions, a credit was made to earnings
during the year ended December 31, 2005 for the reduction of the carrying
value
of the obligations.
The
following is a reconciliation of the total liability for asset retirement
obligations:
|
Years
ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Beginning
balance
|
$
|
8,075,100
|
$
|
7,264,700
|
|||
|
Adjustment
to liability
|
--
|
463,700
|
|||||
|
Subsequent
recognition and measurement
|
(2,075,900
|
)
|
--
|
||||
|
Liability
settled
|
(463,700
|
)
|
--
|
||||
|
Accretion
expense
|
366,700
|
346,700
|
|||||
|
Ending
balance
|
$
|
5,902,200
|
$
|
8,075,100
|
|||
Revenue
Recognition
Revenues
from real estate operations are from the rental of office space in Riverton,
Wyoming. All these revenues are reported on a gross revenue basis and are
recorded at the time the service is provided.
Management
fees are for operating and overseeing oil production on the Fort Peck
Reservation in Montana and charges for services rendered to UPC and RMG.
The
charges to UPC are for overhead charges for drilling operations and the charges
to RMG are for accounting and administrative services after RMG was sold
to
Enterra. Management fees are recorded when the service is provided.
-66-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
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. SFAS 123 allowed the continued measurement of compensation cost
for
such plans using the intrinsic value based method prescribed by APB Opinion
No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), provided that
pro
forma disclosures are made 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 its options granted using the
Black-Scholes pricing model and the following weighted average
assumptions:
|
Year
Ended
|
|||||
|
December
31,
|
|||||
|
2005
|
2004
|
2003
|
|||
|
Risk
-free interest rate
|
4.38%
|
4.82%
|
5.61%
|
||
|
Expected
lives (years)
|
6.75
|
7.1
|
7.0
|
||
|
Expected
volatility
|
78.1%
|
50.79%
|
58.95%
|
||
|
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.
-67-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
If
the
Company had accounted for its stock-based compensation plans in accordance
with
SFAS 123, the Company's net gain/(loss) and pro forma net gain/(loss) per
common
share would have been reported as follows:
|
Year
Ended
|
||||||||||
|
December
31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Net
gain (loss) to common
|
$
|
8,841,500
|
$
|
(6,248,700
|
)
|
$
|
(5,810,100
|
)
|
||
|
shareholder
as reported
|
||||||||||
|
Deduct:
Total stock based
|
||||||||||
|
employee
expense
|
||||||||||
|
determined
under fair
|
||||||||||
|
value
based method
|
||||||||||
|
U.S.
Energy employee options
|
(3,617,900
|
)
(1)
|
(207,100
|
)
|
(652,900
|
)
|
||||
|
Subsidiary
employee options
|
(1,013,500
|
)
(2)
|
--
|
--
|
||||||
|
Pro
forma net loss
|
$
|
1,354,200
|
$
|
(6,455,800
|
)
|
$
|
(6,463,000
|
)
|
||
|
As
reported, Basic
|
$
|
0.55
|
$
|
(0.47
|
)
|
$
|
(0.52
|
)
|
||
|
As
reported, Diluted
|
$
|
0.55
|
$
|
(0.47
|
)
|
$
|
(0.52
|
)
|
||
|
Pro
forma, Basic
|
$
|
0.08
|
$
|
(0.49
|
)
|
$
|
(0.58
|
)
|
||
|
Pro
forma, Diluted
|
$
|
0.08
|
$
|
(0.49
|
)
|
$
|
(0.58
|
)
|
||
| (1) |
Includes
the accelerated vesting of 804,000 employee options which were exercisable
at $2.46 per share and would have vested at the rate of 268,000 shares
each on July 1, 2007, 2008 and 2009. Employees who hold the options
have a
21.7 year weighted average employment history with the Company and
do not
plan to retire. The options would not have been forfeited had they
not
been accelerated.
|
| (2) |
On
September 2, 2004, the Board of Directors of Crested adopted (and
the
shareholders approved) the 2004 Incentive Stock Option Plan (the
"2004
ISOP") for the benefit of Crested’s key employees. The 2004 ISOP reserves
for issuance shares of the Company’s common stock equal to 20% of the
Company’s shares of common stock issued and outstanding at any time and
has a term of 10 years. During the year ended December 31, 2005,
Crested
issued 1,700,000 options under this plan to employees of USE. These
options were valued for purposes of this footnote using a 4.38% Risk-free
interest rate, expected lives of 9.4 years and an expected volatility
of
107%.
|
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.
-68-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
Income
Taxes
The
Company accounts for income taxes under the provisions of Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes".
This
statement requires recognition of deferred income tax assets and liabilities
for
the expected future income tax consequences, based on enacted tax laws, of
temporary differences between the financial reporting and tax bases of assets,
liabilities and carry forwards.
SFAS
109
requires recognition of deferred tax assets for the expected future effects
of
all deductible temporary differences, loss carry forwards and tax credit
carry
forwards. Deferred tax assets are reduced, if deemed necessary, by a valuation
allowance for any tax benefits which, based on current circumstances, are
not
expected to be realized.
Net
Gain (Loss) Per Share
The
Company reports net gain (loss) 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 are computed based on the weighted average number of common shares
outstanding. Common shares held by the ESOP are included in the computation
of
earnings per share. Total shares held by the ESOP at December 31, 2005 were
455,125 shares which are allocated to participant accounts and 155,811 shares
held as collateral for loans to the Company. Diluted earnings per share is
computed based on the weighted average number of common shares outstanding
adjusted for the incremental shares attributed to outstanding options to
purchase common stock, if dilutive. Potential common shares relating to options
and warrants are excluded from the computation of diluted earnings (loss)
per
share, because they were antidilutive, totaled 5,928,102, 5,628,820, and
3,790,370 at December 31, 2005, 2004 and 2003, respectively.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the USA requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements, and the reported amounts of revenues
and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain
reclassifications have been made in the prior years financial statements
in
order to conform to the presentation for the current year.
-69-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
Recent
Accounting Pronouncements
SFAS
123(R)
In
December 2004, the FASB issued its final standard on accounting for employee
stock options, FAS No. 123 (Revised 2004), "Share-Based Payment" ("FAS123(R)").
FAS 123(R)
replaces
FAS No. 123, "Accounting for Stock-Based Compensation” (“FAS 123"), and
supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees”. FAS 123(R) requires companies to measure compensation
costs for all share-based payments, including grants of employee stock options,
based on the fair value of the awards on the grant date and to recognize
such
expense over the period during which an employee is required to provide services
in exchange for the award. The pro forma disclosures previously permitted
under
FAS 123 will no longer be an alternative to financial statement recognition.
FAS
123 (R) is effective for all awards granted, modified, repurchased or cancelled
after, and to unvested portions of previously issued and outstanding awards
vesting after, interim or annual periods, beginning after June 15, 2005,
which
for us will be the first quarter of fiscal 2006. We are currently evaluating
the
effect of adopting FAS 123 (R) on our financial position and results of
operations.
If no
additional options are granted during the year ended December 31, 2006 the
adoption of FAS 123(R) will have little effect on earnings.
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:
There
are
no related party disclosures related to these financial statements
D. USECC
JOINT VENTURE:
The
Company operates the Glen L. Larsen office complex; holds interests in various
mineral operations; and transacts all operating and payroll expenses through
a
joint venture with Crested, the USECC Joint Venture.
E. MARKETABLE
SECURITIES:
The
Company’s investments in available for sale securities consist of shares of
Uranium Power Corporation (“UPC’) and units of Enterra and are reported at their
fair values. Unrealized gains and losses are accumulated as a separate component
of shareholders’ equity and are reported as comprehensive losses.
The
Company's restricted held-to-maturity securities are collateral for 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,
2005 and 2004, the cost of debt securities was a reasonable approximation
of
fair market value.
-70-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
Investments
in marketable securities consist of the following at December 31.
Available-for-sale:
|
Gross
|
|||||||||||||
|
Unrealized
|
Market
|
||||||||||||
|
Cost
|
Loss
|
Value
|
|||||||||||
|
2005
|
|||||||||||||
|
UPC
Shares
|
$
|
337,800
|
$
|
(86,100
|
)
|
$
|
251,700
|
||||||
|
Enterra
Units
|
89,000
|
(12,000
|
)
|
77,000
|
|||||||||
|
$
|
426,800
|
$
|
(98,100
|
)
|
$
|
328,700
|
|||||||
|
The
Company received $5,916,000 during 2005 for the sale of Enterra
units
resulting in a realized a gain of
$1,038,500.
|
|||||||||||||
Held-to-maturity:
|
Amortized
|
Market
|
||||||
|
Cost
|
Value
|
||||||
|
2005
|
$
|
6,761,200
|
$
|
6,761,200
|
|||
|
2004
|
$
|
6,773,700
|
$
|
6,773,700
|
|||
|
Interest
income amounted to $278,500, $108,200 and $171,300 for the
years ended
December 31, 2005, 2004 and 2003,
respectively.
|
|||||||
In
addition, the Company received 693,276 shares of Enterra Series D Common
Stock as partial consideration for the sale of RMG. These securities
are
restricted until May 31, 2006 at such time they convert to marketable
Enterra
Units. There is no ready market for the Enterra Series D Common Stock
and the
Company is contractually restricted from transferring these securities.
The
Enterra Series D Common Stock is valued in the accompanying balance
sheet at
December 31, 2005 at $19.00 per share, representing the estimated fair
value of
the shares when acquired in June 2005. The $19.00 per share is based
upon the
value at the time of the marketable Enterra Units. The Company determined
that
the conversion feature of the Enterra Series D Common Stock is a derivative
in
that it is a put that is to be settled with Enterra Units. The Company
has
separately valued that derivative using the Black-Scholes option pricing
model.
The original value of the derivative was determined to be $3,466,400.
The value
of the derivative at December 31, 2005 was $630,900. The derivative
was
determined to be a fair value hedge and any change in value is recognized
in the
statement of operations. The net change in value and gain recorded in the
statement of operations was $630,900 for the year ended December 31,
2005.
-71-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
F. MINERAL
CLAIMS TRANSACTIONS:
Phelps
Dodge
During
prior years, the Company and Crested conveyed interests in mining claims
to Amax
Inc. (“Amax”) in exchange for cash, royalties and other consideration. Amax
merged with Cyprus Minerals (“Cyprus Amax”) which was purchased by Phelps Dodge
Mining Company (“PD”) in December 1999. The properties have not been placed into
production as of December 31, 2005.
Amax,
and
later Cyprus Amax, were required to pay the Company and Crested an annual
advance royalty of 50,000 (25,000 lbs. to each) pounds of molybdenum (or
its
cash equivalent). During fiscal 2000, Phelps Dodge assumed this
obligation.
Phelps
Dodge filed suit against the Company and Crested on June 19, 2002 regarding
these matters. On February 4, 2005, the U.S. District Court of Colorado entered
Findings of Fact and Conclusions of Law in a case involving the Company,
Crested
and PD authorizing the return of the Lucky Jack molybdenum project and
associated water treatment plant to the Company and Crested. (Please see
Note N
Subsequent Event)
Sutter
Gold Mining Inc.
Sutter
Gold Mining Company (“SGMC”) was established in 1991 to conduct operations on
mining leases and to produce gold from the Lincoln Project in
California.
SGMC
has
not generated any significant revenue. All acquisition and mine development
costs since inception were capitalized. SGMC put the property on a shut down
status and took an impairment on the associated assets due to the decline
in the
spot price for gold and the lack of adequate financing in prior periods.
During
fiscal 2000, a visitor’s center was developed and became operational. SGMC has
leased the visitor’s center to partially cover stand-by costs of the
property.
On
December 29, 2004, a majority of SGMC was acquired by SGMI ("SGMI") (formerly
Globemin Resources, Inc.) of Vancouver, B.C. SGMI is traded on the TSX Venture
Exchange. Approximately 90% of SGMI's common stock was exchanged for 40,190,647
shares of SGMI common stock. At December 31, 2004, the Company owned and
controlled 65.4% of the common stock of SGMI.
The
spot
market price for gold has recently risen to near term highs. Sustained prices
above $500 per ounce may allow SGMI to produce gold from the property on
an
economic basis. This conclusion is based on preliminary engineering analysis
completed on the property, although, economic reserves have not been delineated.
Management of SGMI is therefore pursuing the equity capital market and
non-affiliated investors to obtain sufficient capital to complete the
development of the mine, construct a mill and place the property into
production.
Sheep
Mountain Uranium Properties
On
December 8, 2004, the Company and Crested entered into a Purchase and Sale
Agreement Uranium Power Corp. (“UPC”), a British Columbia corporation for the
sale to UPC of an undivided 50% interest in the Sheep Mountain uranium
properties.
-72-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
The
initial purchase price for the 50% interest in the properties is $4,050,000
and
4,000,000 shares of common stock of UPC, payable by installments through
December 2007. As of December 31, 2005 UPC was current in its obligations
under
the purchase and sales agreement. During the year ended December 31, 2005
UPC
had paid $850,000 and had delivered 1,000,000 shares of its common stock
to the
Company and Crested. UPC will also contribute up to $10,000,000 to the joint
venture (at $500,000 for each of 20 exploration projects). USECC and UPC,
each
will be responsible for 50% of costs on each project in excess of $500,000.
UPC
funded $503,900 exploration projects during the year ended December 31,
2005.
USECC
and
UPC will each be responsible for paying 50% of (i) current and future Sheep
Mountain reclamation costs in excess of $1,600,000, and (ii) all costs to
maintain and hold the properties. USECC is responsible for the first $1,600,000
in reclamation costs on the properties.
Under
the
terms of the purchase and sale agreement the purchase price will be increased
by
$3,000,000 (in two $1,500,000 installments) after the uranium oxide price
(long
term indicator) is at or exceeds $30.00/lb for four consecutive weeks (the
“price benchmark”). This price benchmark was attained before April 29, 2006,
which resulted in which resulted in the two $1.5 million payments being required
on April 29 and October 29, 2006.
Should
UPC not make all its payments and deliver the stock required under the purchase
and sales agreement, it will forfeit all payments made and not earn any interest
in the properties. Closing of the agreement is required on or before December
29, 2007, with UPC’s last payment of the initial purchase price and the increase
in the cash portion. At the closing, the Company and Crested will convey
a 50%
ownership interest in the properties to UPC which will then be contributed
to a
joint venture. The Company and Crested will also contribute their remaining
50%
interest into the joint venture with UPC. The Company and Crested will then
own
50% of the joint venture and UPC will own the remaining 50% interest. The
joint
venture generally will cover uranium properties in Wyoming and other properties
identified in the Company's and Crested’s uranium property data base, but
excluding the Green Mountain area and Kennecott’s Sweetwater uranium mill, the
Shootaring Canyon uranium mill in southeast Utah (and properties within ten
miles of that mill), and properties acquired in connection with a future
joint
venture involving that mill.
The
terms
of the agreement with UPC were modified subsequent to December 31, 2005.
(Please
see Note N Subsequent Event)
Plateau
Resources Limited
During
fiscal 1994, the Company entered into an agreement with Consumers Power Company
to acquire all the issued and outstanding common stock of Plateau Resources
Limited (“Plateau”), a Utah corporation. Plateau owns a uranium processing mill,
the Shootaring Canyon Uranium Mill (“Shootaring Mill”) and support facilities
and certain other real estate assets through its wholly-owned subsidiary,
Canyon
Homesteads, Inc., in southeastern Utah. The Company paid nominal cash
consideration for the Plateau stock and agreed to assume all environmental
liabilities and reclamation bonding obligations. At December 31, 2005, Plateau
has a cash security in the amount of approximately $6.8 million to cover
reclamation and annual licensing of the properties (see Note K). The Company
and
Crested have agreed to divide equally the cash flows derived from operations
and
a portion of certain reclamation obligations.
-73-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
On
August
1, 2003, the Company and Crested effectively sold their interest in the Ticaboo
Town site in southern Utah 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. Cactus made all of its payments until the fourth quarter of the
year
ended December 31, 2005. Subsequent to the close of the year ended December
31,
2005 the Company foreclosed on the Ticaboo town site assets. (Please see
Note N
Subsequent Event)
The
Company and Crested are currently evaluating the best utilization of Plateau’s
assets. The price of uranium at December 31, 2005 was $36.25 per pound. In
response to the price of uranium increases application was made with the
State
of Utah on December 22, 2005 to change the status of the Shootaring Mill
from
standby to operational. Equity or Joint Venture partners are being sought
to
develop surrounding mine properties and place the Shootaring Mill in operating
status.
Rocky
Mountain Gas, Inc.
In
1999,
the Company and Crested organized Rocky Mountain Gas, Inc. (“RMG”) to enter into
the coalbed methane gas/natural gas business. RMG was engaged in the acquisition
of coalbed methane gas properties and the future exploration, development
and
production of methane gas from those properties.
On
June
1, 2005, Enterra US Acquisitions Inc. (“Acquisitions”) (a privately-held
Washington corporation organized by Enterra Energy Trust (“Enterra”) acquired
all the outstanding stock of RMG, for which Enterra paid $500,000 cash and
issued $5,234,000 of Enterra units (the "Enterra Initial Units"), net of
the
$266,000 adjustment for the purchase of overriding royalty interests (effected
May 1, 2005); and Acquisitions issued $14,000,000 of Class D shares of
Acquisitions. The Enterra Initial Units and the Class D shares were issued
pro
rata to the RMG shareholders. USE’s and Crested's participation in the
consideration received was approximately $18,341,600. USE’s consolidated
subsidiary, Yellowstone Fuels, Inc. (“YSFI”) also received approximately
$296,700.
The
Enterra Initial Units received by the Company and Crested were sold during
the
quarter ended September 30, 2005 resulting in a gain of $1,038,500. The Initial
Units received by YSFC are reflected on the Company’s consolidated balance sheet
as $77,100 in marketable securities and the Class D shares of Acquisitions
received by the Company, Crested and YSFI are carried as $13,803,200 as
investments in non-affiliates. The Company is required to hold the Class
D
shares of Acquisitions for a period of one year from June 1, 2005. After
the
holding period is satisfied, the Company can exchange these shares on a one
for
one basis for units in Enterra which will then be saleable on the Toronto
Stock
Exchange - Vancouver (“TSX-V”).
For
further discussion of the sale of RMG please see Note L, Discontinued
Operations.
-74-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
Pinnacle
On
June
23, 2003, a Subscription and Contribution Agreement was executed by RMG,
CCBM
and seven affiliates of Credit Suisse First Boston Private Equity (“CSFB
Parties”). Under the Agreement, RMG and CCBM contributed certain of their
respective interests, having an estimated fair value of approximately $7.5
million each, carried on RMG’s books at a cost of $957,600, comprised of (1)
leases in the Clearmont, Kirby, Arvada and Bobcat CBM project areas and (2)
oil
and gas reserves in the Bobcat project area, to a newly formed entity, Pinnacle
Gas Resources, Inc., a Delaware corporation (“Pinnacle”). In exchange for the
contribution of these assets, RMG and CCBM each received 37.5% of the common
stock of Pinnacle (“Pinnacle Common Stock”) as of the closing date and options
to purchase Pinnacle Common Stock (“Pinnacle Stock Options”). CFSB contributed
$5.0 million for 25% of the common stock of Pinnacle and agreed under certain
terms to fund additional acquisition and development programs.
Pinnacle
is a private corporation. At December 31, 2005, the Company owned 21% and
Crested owned 11.3% of the common stock of Pinnacle prior to redemption of
the
preferred shares held by CSFB and the exercise of outstanding warrants and
options to purchase common shares of Pinnacle. Although the Company owns
a
consolidated 32.3% of the outstanding common stock of Pinnacle, it does not
own
a controlling interest due to the redeemable preferred shares held by the
CSFB
parties. At such time as the redeemable preferred are converted to common
shares
the Company’s consolidated ownership interest will be below 20%. Pinnacle is
therefore accounted for using the cost method. 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
among Pinnacle, RMG and the other parties to the June 2003
transaction.
G.
DEBT
As
of
December 31, 2005 and 2004 the Company and its subsidiaries had current and
long
term liabilities associated with the comprehensive loss from hedging of coalbed
methane gas, deferred rents, leases, self funding of employee health insurance,
accrued holding costs of uranium properties and accrued retirement
costs.
|
Other
current liabilities:
|
|||||||
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Comprehensive
loss from hedging
|
$
|
--
|
$
|
436,000
|
|||
|
Employee
health insurance self funding
|
101,200
|
297,900
|
|||||
|
Deferred
rent
|
25,500
|
26,500
|
|||||
|
Accrued
expenses
|
36,100
|
--
|
|||||
|
Mineral
property lease
|
69,700
|
69,700
|
|||||
|
$
|
232,500
|
$
|
830,100
|
||||
|
Other
long term liabilities:
|
|||||||
|
Accrued
retirement costs
|
$
|
43,300
|
$
|
--
|
|||
|
Holding
costs of uranium property
|
1,357,200
|
1,654,400
|
|||||
|
$
|
1,400,500
|
$
|
1,654,400
|
||||
-75-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
The
Company has a $750,000 line of credit from a commercial bank. The line of
credit
has a variable interest rate (8.25% as of December 31, 2005). The weighted
average interest rate for the year ended December 31, 2005 was 7.15%. As
of
December 31, 2005, 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 of certain oil wells.
Long-term
Debt
The
components
of long-term debt as of December 31, 2005, and 2004 are as
follows:
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
USECC
installment notes - collateralized
|
|||||||
|
by equipment; interest at 5.25%
|
|||||||
|
to 9.0%, matures in 2006-2010
|
$
|
969,000
|
$
|
1,192,300
|
|||
|
SGMC
installment notes - collateralized
|
|||||||
|
by
certain properties, interest at
|
|||||||
|
8.0%
maturity 2009
|
37,900
|
46,500
|
|||||
|
PLATEAU
installment note - collateralized
|
|||||||
|
by
property, interest at 6.0%
|
29,900
|
--
|
|||||
|
USE
convertible note with Geddes - net of discount
|
|||||||
|
collateralized
by equipment coalbed methane
|
|||||||
|
leases
and 4,000,000 shares of RMG stock
|
|||||||
|
interest
at 10%, maturity 2006
|
--
|
3,000,000
|
|||||
|
Discount
for issuance of USE warrants
|
--
|
(315,800
|
)
|
||||
|
Amortization
of warrants discount
|
--
|
42,800
|
|||||
|
--
|
2,727,000
|
||||||
|
RMG
production related note with HPC - collateralized
|
|||||||
|
by
gas properties and production,
|
|||||||
|
interest
at 11.0%
|
--
|
3,700,000
|
|||||
|
Additional
borrowings
|
--
|
479,700
|
|||||
|
Discount
for issuance of USE warrants
|
--
|
(80,400
|
)
|
||||
|
Discount
for overriding royalty
|
--
|
(314,200
|
)
|
||||
|
Payment
of principal
|
--
|
(690,900
|
)
|
||||
|
Amortization
of warrant and royalty discount
|
--
|
120,600
|
|||||
|
|
-- |
3,214,800
|
|||||
|
1,036,800
|
7,180,600
|
||||||
|
Less
current portion
|
(156,500
|
)
|
(3,400,100
|
)
|
|||
|
$
|
880,300
|
$
|
3,780,500
|
||||
-76-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
HPC
Capital Management
On
February 9, 2005, USE closed a financing pursuant to a securities purchase
agreement with seven accredited investors for the issuance of $4,720,000
in face
amount of debentures maturing February 4, 2008, and three year warrants to
purchase common stock of the company. The face amount of the debentures included
simple annual interest at 6% ($720,000 in interest expense); the investors
paid
$4,000,000 for the debentures. A commission of 7% on the $4,000,000 was paid
by
the company to HPC Capital Management (a registered broker-dealer) in connection
with the transaction, and the company paid $20,000 of the investors’ counsel’s
legal fees, resulting in net proceeds to the company of $3,700,000. Net proceeds
were intended to be used by the Company for general working capital.
The
debentures were unsecured; the face amount of the debentures were payable
every
six months from February 4, 2005, in five installments of 20%, in cash or
in
restricted common stock of the Company at the lower of $2.43 per share (the
“set
price”) or 90% of the volume weighted average price of the company’s stock for
the 90 trading days prior to the repayment date. At
any
time, the debentures were convertible to restricted common stock of the company
at the set price. The fair market value of the Company’s common stock at closing
was $3.13 per share. The difference from the conversion set price and the
market
price at closing, $3.13 per share, resulted in a beneficial conversion feature
of $1,669,500 which was to be amortized over the life of the debenture.
The
Company issued warrants to the investors, expiring February 4, 2008, to purchase
971,193 shares of restricted common stock, at $3.63 per share (equal to 110%
of
the NASDAQ closing price for the Company’s stock on February 3, 2005). The
number of shares underlying the warrants equals 50% of the shares issuable
on
full conversion of the debentures at the set price (as if the debentures
were so
converted on February 4, 2005). If in any period of 20 consecutive trading
days
the Company’s stock price exceeds 200% of the warrants’ exercise price, on each
of the trading days, all of the warrants shall expire on the 30th
day
after the Company sends a call notice to the warrant holders. A discount
of
$1,029,800 was taken against the debenture balance as a result of the issuance
of these warrants. The discount was to be amortized over the life of the
debenture.
Warrants
to purchase 100,000 shares, at the same price and for the same term as the
warrants issued to the investors, have been issued to HPC Capital Management
as
additional compensation for its services in connection with the transaction
with
the investors.
The
Company agreed to file with the Securities and Exchange Commission a
registration statement to cover the future sale by the investors of the shares
issuable in payment and/or conversion of the debentures, and the shares issuable
on exercise of the warrants. The registration statement also covered the
future
sale by HPC Capital Management of the shares issuable on exercise of the
warrants issued to HPC in connection with the transaction.
HPC
converted the entire face value of the debenture of $4,720,000 for the issuance
of 1,942,387 shares of the Company’s common stock during the second and third
quarters of the year ended December 31, 2005. The entire amount of the warrant
discount and the beneficial conversion factor was expensed as of December
31,
2005.
-77-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
Geddes
On
July
30, 2004, the Company entered into a credit agreement with Geddes and Company
("Geddes"), based in Phoenix, Arizona, to borrow up to $3 million. Proceeds
from
the credit facility were used to acquire and develop gas properties, and
for
general corporate purposes of the Company. On May 26, 2005 the Company and
Geddes amended the credit agreement. The Company agreed to prepay the $3
million
plus interest in installment payments of $250,000 each through April 1, 2006.
The Company also agreed to deliver to Geddes 10,664 Enterra Acquisition shares
and 53,191 shares of the Company’s common stock valued at $225,000. At December
31, 2005, the entire debt to Geddes was retired and no further obligation
or
commitment was outstanding under the credit agreement.
H. INCOME
TAXES:
The
components of deferred taxes as of December 31, 2005 and 2004 are as
follows:
|
December
31,
|
|||||||
|
Deferred
tax assets:
|
2005
|
2004
|
|||||
|
Deferred
compensation
|
$
|
60,200
|
$
|
1,565,700
|
|||
|
Accrued
reclamation
|
782,900
|
--
|
|||||
|
Allowances
for bad debts
|
11,000
|
--
|
|||||
|
Tax
basis in excess of book (Pinnacle Stock)
|
1,799,400
|
--
|
|||||
|
Net
operating loss carry forwards
|
4,530,200
|
4,147,400
|
|||||
|
Tax
credits (AMT credit carryover)
|
135,000
|
--
|
|||||
|
Non-deductible
reserves and other
|
--
|
523,000
|
|||||
|
Tax
basis in excess of book basis
|
--
|
994,700
|
|||||
|
Total
deferred tax assets
|
7,318,700
|
7,230,800
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Book
basis in excess of tax basis
|
--
|
(1,397,900
|
)
|
||||
|
Book
basis in excess of tax basis
|
(214,500
|
)
|
--
|
||||
|
Accrued
reclamation
|
(1,083,600
|
)
|
--
|
||||
|
Development
and exploration costs
|
--
|
(109,400
|
)
|
||||
|
Total
deferred tax liabilities
|
(1,298,100
|
)
|
(1,507,300
|
)
|
|||
|
6,020,600
|
5,723,500
|
||||||
|
Valuation
allowance
|
(6,020,600
|
)
|
(5,723,500
|
)
|
|||
|
Net
deferred tax asset
|
$
|
--
|
$
|
--
|
|||
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.
-78-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
The
valuation allowance increased $297,100 for the year ended December 31, 2005
and
$3,563,500 for the year ended December 31, 2004. The increase in the valuation
allowance during 2005 includes the effect of the disposition of RMG and related
deferred tax assets and valuation allowances.
The
income tax provision is different from the amounts computed by applying the
statutory federal income tax rate to income from continuing operations before
taxes. The reasons for these differences are as follows:
|
Year
ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Expected
federal income tax expense (benefit)
|
$
|
(1,967,100
|
)
|
$
|
(2,133,800
|
)
|
$
|
(2,405,800
|
)
|
|
|
Net
operating loss not previously benefited
|
||||||||||
|
and
other
|
--
|
(1,429,700
|
)
|
363,700
|
||||||
|
Dividends
received deduction
|
(1,700,000
|
)
|
--
|
--
|
||||||
|
Interest
expense adjustment
|
1,190,400
|
--
|
--
|
|||||||
|
Valuation
Allowance
|
2,476,700
|
3,563,500
|
2,042,100
|
|||||||
|
Income
tax provision
|
$
|
--
|
$
|
--
|
$
|
--
|
||||
There
were no taxes payable at December 31, 2005 and 2004. Total taxes paid during
the
year ended December 31, 2005 was $235,000 for alternative minimum tax resulting
from the sale of RMG.
At
December 31, 2005, the Company had available, for federal income tax purposes,
net operating loss carry forwards (“NOL”) of approximately $13,324,200 which
will expire from 2006 to 2023. The Internal Revenue Code contains provisions
which may limit the NOL carry forwards available which can be used in a given
year when significant changes in Company ownership interests occur.
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:
During
the years ended December 31, 2004 and 2003 the Company had business activities
in coalbed methane gas property acquisition, exploration and production.
The
Company also had a reportable industry segment in commercial activities through
motel, real estate and airport operations. The Company sold RMG on June 1,
2005
which resulted in only one business segment, commercial activities. No
presentation of business segments is therefore made at December 31, 2005
as all
coalbed methane gas operations are accounted for as discontinued
operations.
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 until the 1998
ISOP
was replaced by the 2001 ISOP.
-79-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
During
the years ended December 31, 2005, 2004 and 2003 the following activity occurred
under the 1998 ISOP:
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
Grants
|
|||||||||||||||||||
|
Qualified
|
--
|
--
|
--
|
||||||||||||||||
|
Non-Qualified
|
--
|
--
|
--
|
||||||||||||||||
|
--
|
--
|
--
|
|||||||||||||||||
|
Price
of Grants
|
|||||||||||||||||||
|
High
|
--
|
--
|
--
|
||||||||||||||||
|
Low
|
--
|
--
|
--
|
||||||||||||||||
|
Exercised
|
|||||||||||||||||||
|
Qualified
|
142,907
|
--
|
77,832
|
||||||||||||||||
|
Non-Qualified
|
55,234
|
--
|
71,453
|
||||||||||||||||
|
198,141
|
(1) |
|
|
--
|
149,285
|
||||||||||||||
|
Total
Cash Received
|
$
|
-
|
--
|
$
|
364,200
|
||||||||||||||
|
Forfeitures/Cancellations
|
|||||||||||||||||||
|
Qualified
|
--
|
--
|
34,782
|
||||||||||||||||
|
Non-Qualified
|
--
|
--
|
64,233
|
||||||||||||||||
|
|
--
|
--
|
99,015
|
||||||||||||||||
| (1) All options were exercised by the surrender and cancellation of shares of common stock of the Company owned by the employees. | |||||||||||||||||||
In
December 2001, the Board of Directors adopted (and the shareholders approved)
the U.S. Energy Corp. 2001 Incentive Stock Option Plan (the "2001 ISOP") for
the
benefit of USE's key employees. The 2001 ISOP (amended in 2004 and approved
by
the shareholders) reserves for issuance shares of the Company’s common stock
equal to 20% of the Company’s shares of common stock issued and outstanding at
any time. The 2001 ISOP has a term of 10 years.
-80-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
During
the years ended December 31, 2005, 2004 and 2003, the following activity
occurred under the 2001 ISOP:
|
2005
|
2004
|
2003
|
||||||||
|
Grants
|
||||||||||
|
Qualified
|
--
|
--
|
--
|
|||||||
|
Non-Qualified
|
--
|
--
|
--
|
|||||||
|
|
-- |
--
|
--
|
|||||||
|
Price
of Grants
|
||||||||||
|
High
|
--
|
--
|
--
|
|||||||
|
Low
|
--
|
--
|
--
|
|||||||
|
Exercised
|
||||||||||
|
Qualified
|
142,907
|
--
|
77,832
|
|||||||
|
Non-Qualified
|
55,234
|
--
|
71,453
|
|||||||
|
198,141
|
--
|
149,285
|
||||||||
|
Total
Cash Received
|
$
|
--
|
--
|
$
|
364,200
|
|||||
|
Forfeitures/Cancellations
|
||||||||||
|
Qualified
|
--
|
--
|
34,782
|
|||||||
|
Non-Qualified
|
--
|
--
|
64,233
|
|||||||
|
|
-- |
--
|
99,015
|
|||||||
|
(1)
All
options were exercised by the surrender and cancellation of shares
of
common stock of the Company owned by the
employees.
|
||||||||||
-81-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
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.
The
following table represents the activity in employee options for the periods
covered by the Annual Report for the year ended December 31, 2005 that are
not
in employee stock option plans:
|
Year
ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Grants
|
||||||||||
|
Qualified
|
--
|
--
|
--
|
|||||||
|
Non-Qualified
|
--
|
--
|
10,000
|
|||||||
|
|
-- |
--
|
10,000
|
|||||||
|
Price
of Grants
|
||||||||||
|
High
|
--
|
--
|
$
|
2.90
|
||||||
|
Low
|
--
|
--
|
$
|
2.90
|
||||||
|
Exercised
|
||||||||||
|
Qualified
|
--
|
--
|
--
|
|||||||
|
Non-Qualified
|
--
|
--
|
--
|
|||||||
| -- |
--
|
--
|
||||||||
|
Total
Cash Received
|
--
|
--
|
--
|
|||||||
|
Forfeitures/Cancellations
|
||||||||||
|
Qualified
|
--
|
--
|
--
|
|||||||
|
Non-Qualified
|
--
|
10,000
|
10,000
|
|||||||
| -- |
10,000
|
10,000
|
||||||||
-82-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
A
summary
of the Employee Stock Option Plans activity in all plans for the year ended
December 31, 2005, 2004 and 2003 is as follows:
|
Year
ended December 31,
|
|||||||||||||||||||
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
||||||||||
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
||||||
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
||||||
|
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|||||||
|
Outstanding
at beginning
|
|||||||||||||||||||
|
of
the period
|
4,123,646
|
$
|
2.66
|
2,873,646
|
$
|
2.74
|
3,565,946
|
$
|
2.76
|
||||||||||
|
Granted
|
700,000
|
$
|
3.86
|
1,272,000
|
$
|
2.46
|
10,000
|
$
|
2.90
|
||||||||||
|
Forfeited
|
(65,000
|
)
|
$
|
2.46
|
(22,000
|
)
|
$
|
2.66
|
(426,679
|
)
|
$
|
3.17
|
|||||||
|
Exercised
|
(502,870
|
)
|
$
|
2.50
|
--
|
--
|
(275,621
|
)
|
$
|
2.35
|
|||||||||
|
Outstanding
at period end
|
4,255,776
|
$
|
2.88
|
4,123,646
|
$
|
2.66
|
2,873,646
|
$
|
2.74
|
||||||||||
|
Exercisable
at period end
|
4,017,776
|
$
|
2.90
|
2,863,646
|
$
|
2.74
|
2,873,646
|
$
|
2.74
|
||||||||||
|
Weighted
average fair
|
|||||||||||||||||||
|
value
of options
|
|||||||||||||||||||
|
granted
during
|
|||||||||||||||||||
|
the
period
|
$
|
3.64
|
$
|
1.66
|
$
|
0.87
|
|||||||||||||
The
following table summarized information about employee stock options outstanding
and exercisable at December 31, 2005:
|
|
Options
|
Weighted
|
|
Options
|
|
|||||||||||
|
|
outstanding
|
average
|
Weighted
|
exercisable
|
Weighted
|
|||||||||||
|
|
at
|
remaining
|
average
|
at
|
average
|
|||||||||||
|
Grant
Price
|
December
31,
|
contractual
|
esercise
|
December
31,
|
esercise
|
|||||||||||
|
Range
|
2005
|
Life
in years
|
price
|
2005
|
price
|
|||||||||||
|
$2.00
|
251,090
|
2.73
|
$
|
2.00
|
251,090
|
$
|
2.00
|
|||||||||
|
$2.01
- $2.25
|
468,668
|
5.93
|
$
|
2.25
|
468,668
|
$
|
2.25
|
|||||||||
|
$2.26
- $2.40
|
826,094
|
5.02
|
$
|
2.40
|
826,094
|
$
|
2.40
|
|||||||||
|
$2.41
- $2.46
|
1,142,675
|
8.5
|
$
|
2.46
|
904,675
|
$
|
2.46
|
|||||||||
|
$2.47
- $2.88
|
189,321
|
2.73
|
$
|
2.88
|
189,321
|
$
|
2.88
|
|||||||||
|
$2.89
- $3.86
|
700,000
|
9.78
|
$
|
3.86
|
700,000
|
$
|
3.86
|
|||||||||
|
$3.87
- $3.90
|
677,928
|
5.93
|
$
|
3.90
|
677,928
|
$
|
3.90
|
|||||||||
|
4,255,776
|
6.75
|
$
|
2.88
|
4,017,776
|
$
|
2.90
|
||||||||||
-83-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
Employee
Stock Ownership Plan
The
Board
of Directors of the Company adopted the U.S. Energy Corp. 1989 Employee Stock
Ownership Plan ("ESOP") in 1989, for the benefit of all the Company’s employees.
Employees become eligible to participate in the ESOP after one years of service
which must consist of at least 1,000 hours worked. After the employee becomes
a
participant in the plan he or she must have a minimum of 1,000 hours of service
in each plan year to be considered for allocations of funding from the Company.
Employees become 20% vested after three years of service and increase their
vesting by 20% each year thereafter until such time as they are fully vested
after eight years of service. An employee’s total compensation paid, which is
subject to federal income tax, up to a limit of $150,000 annually is the basis
for computing how much of the total annual funding is contributed into his
or
her personal account. An employee’s compensation divided by the total
compensation paid to all plan participants is the percentage that each
participant receives on an annual basis. The Company funds 10% of all eligible
compensation annually in the form of common stock and may fund up to an
additional 15% to the plan in common stock. As of December 31, 2005, all shares
of the Company’s stock that have been contributed to the ESOP have been
allocated. The estimated fair value of shares that are not vested is
approximately $129,900.
During
the year ended December 31, 2005 the Board of Directors of the Company
contributed 56,494 shares to the ESOP at the price of $4.65 for a total expense
of $262,600. This compares to contributions to the ESOP during the year ended
December 31, 2004 and 2003 of 70,439 and 76,294 shares to the ESOP at prices
of
$2.96 and $3.10 per share, respectively. The Company has expensed $262,600,
$208,500 and $236,400 during the years ended December 31, 2005, 2004, 2003
respectively related to these contributions.
During
prior years the Company loaned the ESOP $1,014,300 to purchase 125,000 shares
from the Company and 38,550 shares on the open market. The Company paid the
ESOP
2,350 shares as dividends on the shares the ESOP had purchased. During the
year
ended May 31, 1996, 10,089 of these shares were used to fund the Company's
annual funding commitment and reduce the loan to the Company by $87,300. During
a previous year the loans were also adjusted by $436,500 to reflect their value
at the time. The loans at December 31, 2005 are reflected as unallocated ESOP
contribution of $490,500 in the equity section of the accompanying Consolidated
Balance Sheets and are secured by 155,811 unallocated shares purchased under
the
loan.
-84-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
Warrants
to Others
As
of
December 31, 2005, there were 1,672,326 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, 2005 for warrants is
represented in the following table:
|
Year
ended December 31,
|
|||||||||||||||||||
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
|||||||||||||||||
|
Average
|
Average
|
Average
|
|||||||||||||||||
|
Exercise
|
Exercise
|
Exercise
|
|||||||||||||||||
|
Warrants
|
Price
|
Warrants
|
Price
|
Warrants
|
Price
|
||||||||||||||
|
Outstanding
at beginning
|
|||||||||||||||||||
|
of
the period
|
1,505,174
|
$
|
3.35
|
907,209
|
$
|
3.51
|
990,393
|
$
|
3.37
|
||||||||||
|
Granted
|
1,396,195
|
3.70
|
868,465
|
2.87
|
224,875
|
4.32
|
|||||||||||||
|
Forfeited
|
(316,968
|
)
|
3.41
|
(145,500
|
)
|
2.63
|
(176,463
|
)
|
3.67
|
||||||||||
|
Expired
|
(1,713
|
)
|
3.00
|
--
|
--
|
--
|
--
|
||||||||||||
|
Exercised
|
(910,362
|
)
|
3.65
|
(125,000
|
)
|
2.01
|
(131,596
|
)
|
3.55
|
||||||||||
|
Outstanding
at period end
|
1,672,326
|
$
|
3.47
|
1,505,174
|
$
|
3.35
|
907,209
|
$
|
3.51
|
||||||||||
|
Exercisable
at period end
|
1,642,326
|
$
|
3.49
|
1,044,152
|
$
|
3.43
|
831,724
|
$
|
3.41
|
||||||||||
|
Weighted
average fair
|
|||||||||||||||||||
|
value
of options
|
|||||||||||||||||||
|
granted
during
|
|||||||||||||||||||
|
the
period
|
$
|
1.37
|
$
|
0.79
|
$
|
0.93
|
|||||||||||||
The
following table summarized information about non employee warrants outstanding
and exercisable at December 31, 2005:
|
Options
|
Weighted
|
Options
|
||||||||||||||
|
outstanding
|
average
|
Weighted
|
exercisable
|
Weighted
|
||||||||||||
|
at
|
remaining
|
average
|
at
|
average
|
||||||||||||
|
Grant
Price
|
December
31,
|
contractual
|
exercise
|
December
31,
|
exercise
|
|||||||||||
|
Range
|
2005
|
Life
in years
|
price
|
2005
|
price
|
|||||||||||
|
$2.00
|
10,000
|
0.25
|
$
|
2.00
|
10,000
|
$
|
2.00
|
|||||||||
|
$2.25
- $2.40
|
40,000
|
5.48
|
$
|
2.33
|
40,000
|
$
|
2.33
|
|||||||||
|
$2.46
- $2.88
|
175,000
|
7.67
|
$
|
2.52
|
145,000
|
$
|
2.53
|
|||||||||
|
$3.00
- $3.30
|
323,113
|
2.07
|
$
|
3.06
|
323,113
|
$
|
3.06
|
|||||||||
|
$3.63
- $3.75
|
654,838
|
2.01
|
$
|
3.64
|
654,838
|
$
|
3.64
|
|||||||||
|
$3.81
- $3.86
|
225,000
|
6.48
|
$
|
3.85
|
225,000
|
$
|
3.85
|
|||||||||
|
$3.90
- $4.00
|
109,375
|
2.44
|
$
|
3.96
|
109,375
|
$
|
3.96
|
|||||||||
|
$4.23
- $4.30
|
135,000
|
1.23
|
$
|
4.26
|
135,000
|
$
|
4.26
|
|||||||||
|
1,672,326
|
3.25
|
$
|
3.47
|
1,642,326
|
$
|
3.49
|
||||||||||
-85-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
These
warrants are held by persons or entities other than employees, officers and
directors of the Company.
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
$171,100 of compensation expense for the year ended December 31, 2005 compared
to $216,800 and $284,700 for the years ended December 31, 2004 and 2003
respectively. The accompanying balance sheet at December 31, 2005 includes
a
deferred charge of $151,600 of which $112,500 is included in prepaid expenses.
A
schedule of total forfeitable shares for the Company is set forth in the
following table:
|
Number
of
|
Issue
|
Total
|
||||||||
|
Issue
Date
|
Shares
|
Price
|
Compensation
|
|||||||
|
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
|
)
|
|||||
|
Totals
|
||||||||||
|
Balance
at
|
||||||||||
|
December
31, 2003
|
465,880
|
$
|
2,726,600
|
|||||||
|
Shares
earned
|
(23,140
|
)
|
--
|
(127,600
|
)
|
|||||
|
Balance
at
|
||||||||||
|
December
31, 2004 and
|
||||||||||
|
December
31, 2005
|
442,740
|
$
|
2,599,000
|
|||||||
K. COMMITMENTS,
CONTINGENCIES AND OTHER:
LEGAL
PROCEEDINGS
Material
proceedings pending at December 31, 2005, and developments in those proceedings
from that date to the date this Annual Report is filed, are summarized below.
Other proceedings which were pending during the year have been settled or
otherwise immaterial.
Sheep
Mountain Partners Arbitration/Litigation
In
1991,
disputes arose between the Company, Crested 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 on July 2, 1991, the Company
and Crested filed a lawsuit against Nukem, CRIC and others in the U.S. District
Court of Colorado in Civil Action No. 91B1153. The Federal Court stayed the
arbitration proceedings and discovery proceeded against Nukem/CRIC. In February
1994, the parties agreed to consensual and binding arbitration of all of their
disputes over SMP before an arbitration panel (the "Panel").
-86-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
The
Panel
entered an Order and Award in April 1996, finding generally in favor of the
Company 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 three CIS republics, and also awarded SMP damages of
$31,355,100 against Nukem. Further legal proceedings ensued. On appeal, the
10th
Circuit Court of Appeals ("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 there from; and (ii) the damage award in favor of SMP against
Nukem.
As
a
result of further proceedings, the U.S. District Court appointed a Special
Master to conduct an accounting of the constructive trust. The U.S. District
Court adopted the Special Master’s report in part and rejected it in part, and
entered judgment on August 1, 2003 in favor of the Company and Crested and
against Nukem for $20,044,200. In early 2004, the parties appealed this judgment
to the CCA.
On
February 24, 2005, a three judge panel of the CCA vacated the judgment of the
U.S. District Court and remanded the case to the Panel for clarification of
its
1996 Orders and Award. In remanding this case, the CCA stated: "The arbitration
award in this case is silent as to the definition of 'purchase rights' and
the
'profits there from,' including the valuation of either. Also unstated in the
award is the duration of the constructive trust and whether and what costs
should be deducted when computing the value of the constructive trust. Further,
the arbitration panel failed to address whether prejudgment interest should
be
awarded on the value of the constructive trust. As a result, the district
court's valuation of the constructive trust was based upon extensive guesswork.
Therefore, a remand to the arbitration panel for clarification is necessary,
despite the long and tortured procedural history of this case."
The
Arbitration Panel (“Panel”) held a Status Conference Hearing in Denver, Colorado
on August 26, 2005 to consider the procedures, schedule and scope of the remand.
On August 26, 2005, the Panel directed the parties to make written submissions
to resolve the issues concerning the definition of the Constructive Trust and
its components (e.g. purchase rights).
The
Panel
issued a written order on August 31, 2005 confirming this directive. Nukem’s
request to present new facts and evidence on the issue of the Constructive
Trust
was rejected by the Panel. All submissions are specifically limited to the
facts
introduced into evidence before the Panel in the 1994 and 1995 hearings,
currently in the record. Initial submissions were due to the Panel on November
4, 2005 and reply submissions were due on December 6, 2005. A one day hearing
was held in New York City on December 20, 2005. On January 3, 2006 the Panel
entered an amended order requesting additional information concerning the CIS
contracts be submitted by the parties by February 3, 2006.
The
timing and ultimate outcome of this litigation cannot be predicted. We believe
that the ultimate outcome will not have an adverse affect on our financial
condition or results of operations.
Phelps
Dodge Litigation
The
Company and Crested are parties to 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
mineral properties on Lucky Jack Project (formerly the Mount Emmons molybdenum
properties), near Crested Butte, Colorado.
-87-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
The
litigation relates to agreements from 1974 when the Company and Crested leased
the mining claims to Amax Inc., PD’s predecessor company. The mining claims
cover one of the world’s largest and richest deposits of molybdenum, which was
discovered by Amax.
The
June
19, 2002 complaint filed by PD and MEMCO sought a determination that PD’s
acquisition of Cyprus Amax was not a sale. Under a 1986 agreement between the
Company, Crested and Amax, if Amax sold MEMCO or its interest in the mining
properties, the Company 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 Mineral Co. The Company and Crested’s
counter and cross-claims alleged that in 1999, PD formed a wholly-owned
subsidiary CAV Corporation, for the purpose of purchasing the controlling
interest in Cyprus Amax and its subsidiaries (including MEMCO) and making Cyprus
Amax a subsidiary of PD. Therefore, the Company and Crested asserted that the
acquisition of Cyprus Amax by PD was a sale of MEMCO and the properties that
triggered the obligation of Cyprus Amax to pay the Company and Crested the
$3.75
million plus interest.
The
other
issues in the litigation were whether the Company and Crested must, under terms
of a 1987 Royalty Deed, accept PD's and MEMCO's conveyance of the Lucky Jack
Project back to the Company and Crested, 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 sought
to
obligate the Company and Crested to assume the operating costs of the water
treatment plant. The Company and Crested asserted counterclaims against the
defendants, including a claim for nonpayment of advance royalties.
On
July
28, 2004, the Court entered an Order granting certain of PD's motions and
denying the Company and Crested’s counterclaims and cross-claims. The case was
tried in late 2004.
On
February 4, 2005, the Court entered Findings and Fact and Conclusions of Law
and
ordered that the conveyance of the Lucky Jack Project includes the transfer
of
ownership and operational responsibility for the Water Treatment Plant, and
that
PD does not owe the Company and Crested any advanced royalty
payments.
The
Company and Crested has filed a motion with the Court to amend the Order to
determine that the decreed water rights from the Colorado Supreme Court opinion
(decided in 2002, finding that the predecessor owners of the Lucky Jack Project
had rights to water to develop a mine), and any other appurtenant water rights,
be conveyed to the Company and Crested. The motion is pending.
PD,
the
Company and Crested have been engaged in settlement discussions in an attempt
to
resolve the remaining issues and avoid an appeal of the District Court’s
Judgment. In view of the ongoing discussions and in the interest of conserving
judicial and party resources, on April 5, 2005, the parties filed a Joint Motion
to Stay Ruling on Motion to Amend Judgment and to Extend Stay of Execution
Pending Appeal. On April 7, 2005, the Court granted the motion and entered
an
order staying the Company’s and Crested’s Motion to Amend Judgment until ten
days after filing of written notice by PD that settlement has not been achieved.
The parties have filed joint status reports which have stayed the parties’
various motions.
-88-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
On
October 31, 2005, PD filed a motion with the District Court to recover
attorney’s fees and expenses in the declaratory judgment action against the
Company and Crested. PD is claiming $4,050,200 in attorney’s fees and expenses
and $3,692,100 in costs incurred for the operation of the water treatment plant
for the last three years. These claims were not part of the initial litigation
with PD. The Company and Crested have filed a response with the Court denying
that USECC owes PD such monies. It is not known how or when the Court will
rule
on these issues. Management of the Company believes that no monies are due
to
PD. Resolution of these issues will not affect PD’s February 28, 2006 conveyance
of the Lucky Jack Project, and the water treatment plant, to the Company and
Crested.
Coastline
Capital Partners
On
May
16, 2005, Coastline Capital Partners (“Coastline”) filed a complaint against the
Company in Wyoming Federal District Court, Case No. 05-CV-0143-J for breach
of
contract. Coastline is claiming partial performance fees for a private placement
that was unsuccessful. Coastline and USE had entered into an engagement letter
on July 22, 2004. The Company filed an answer and counterclaims on June 22,
2005. The parties are conducting discovery in the case. A jury trial is
scheduled for April 3, 2006 on this matter.
ASSET
RETIREMENT OBLIGATIONS
Sheep
Mountain Uranium Properties
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 uranium properties. The reclamation obligations,
which are established by regulatory authorities, were reviewed by the Company
and the regulatory authorities and they jointly determined that the reclamation
liability was $2,302,800. The Company is self bonded for this obligation by
mortgaging certain of their real estate assets, including the Glen L. Larsen
building, and by posting cash bonds.
Sutter
Gold Mining Inc.
SGMI's
mineral properties are currently on shut down status and have never been in
production. There has been minimal surface disturbance on the Sutter properties.
Reclamation obligations consist of closing the mine entry and removal of a
mine
shop. The reclamation obligation to close the property has been set by the
State
of California at $22,400 which is covered by a cash reclamation bond. This
amount was recorded by SGMI as a reclamation liability as of December 31,
2005.
Plateau
Resources Limited
The
environmental and reclamation obligations acquired with the acquisition of
Plateau include obligations relating to the Shootaring Mill. As of December
31,
2005, the present value at 8% of the reclamation liability on the Plateau
properties was $3,577,000. Plateau holds a cash deposit for reclamation in
the
amount of approximately $6.8 million.
-89-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
401(K)
PLAN
The
Board
of Directors of USE adopted the U.S. Energy Corp. 401(K) Plan ("401(K)") in
2004, for the benefit of USE employees. The Company matches 50% of an employee’s
salary deferrals up to a maximum Company contribution per employee of $4,000
annually. The Company expensed $52,800 and $37,900 for the years ended December
31, 2005 and 2004, respectively related to these contributions.
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 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, 10,000 shares may be issued to each officer
each year. 100,000 shares were issued under the Plan during the year ended
December 31, 2003, as compensation for the year ended December 31, 2003 and
the
seven months ended December 31, 2002. During the years ended December 31, 2005
and 2004 additional shares of 60,000 and 50,000 respectively were issued to
the
officers. The Officers have agreed not to sell the shares granted under the
2001
Stock Award Plan and the Company has agreed to pay all taxes due on the shares
granted to the Officers.
The
Company and Crested are committed to pay the surviving spouse or dependant
children of certain of the 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. 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 $340,000 at December 31,
2005. Certain officers and employees have employment agreements with the Company
and Crested.
-90-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
On
October 20, 2005 the Board of Directors of the Company and Crested adopted
an
Executive Retirement Policy for the Chairman/CEO, Chairman Emeritus,
President/COO, CFO/Treasurer/V.P. Finance, Senior Vice President and General
Counsel. Under the terms of the Retirement Plan, the retired executive will
receive monthly installments in accordance with the normal bi-weekly payroll
practices of the Company in the amount of 50% of the greater of (i) that amount
of compensation the Executive Officer received as base cash pay on his/her
final
regular pay check or (ii) the average annual pay rate, less all bonuses, he/she
received over the last five years of his/her employment with Company. To be
eligible for this benefit, the executive officer must serve in one of the
designated executive offices for 15 years, reach the age of 60 and be an
employee of USE on December 31, 2010. The compensation expense for the year
ended December 31, 2005 was $43,300.
The
employees of the Company are not given raises on a regular basis. In
consideration of this and in appreciation of the work required to develop and
sell RMG, management of the Company accepted the recommendation of its
Compensation Committee to pay all employees and directors a bonus upon the
closing of the sale of RMG to Enterra. The board of directors has granted
similar bonuses in the past. In addition, bonuses may be paid to some of the
key
individuals involved over the past 14 years in the Nukem case once it is
resolved.
OPERATING
LEASES
The
Company is the lessor of portions of the office buildings and building
improvements that it owns. The Company occupies the majority of the main office
building. The leases are accounted for as operating leases and expire at various
periods through January, 2007, and provide for minimum monthly receipts of
$16,400 through December, 2006. All of the Company's leases are for two years
or
less.
The
total
costs of the office buildings and building improvements totaled $4,213,000
as of
December 31, 2005 and 2004 and accumulated depreciation amounted to $2,464,900
and $2,374,400 as of December 31, 2005 and 2004, respectively. Rental income
under the agreements was $238,200, $245,000 and $256,500 for the years ended
December 31, 2005, 2004 and 2003, respectively.
Future
minimum receipts for non-cancelable operating leases are as
follows:
|
Years
Ending
|
||||
|
December
31,
|
Amount
|
|||
|
2006
|
$
|
113,700
|
||
|
2007
|
$
|
12,500
|
||
L. DISCONTINUED
OPERATIONS:
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. Subsequent to December 31, 2005, the Company foreclosed on the
properties and received them back. At filing date, management of the Company
does not plan on operating the properties. The Company is seeking third party
management to operate the properties or another buyer for the property. See
Note
N.
-91-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
On
June
1, 2005, the Company and Crested closed on the sale of their interests in RMG
to
Enterra Energy Trust. The sale agreement states that the effective date of
the
sale to Enterra was April 1, 2005. Therefore, the revenues and expenditures
presented for 2005 as discontinued operations are for the three month period
ending March 31, 2005. The financial statements for all of the periods presented
have been revised to present these operations as discontinued.
|
Year
ending December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Gain
on sale of discontinued segment
|
||||||||||
|
Gain
|
$
|
15,768,500
|
$
|
--
|
$
|
--
|
||||
|
Taxes
paid
|
(235,000
|
)
|
--
|
--
|
||||||
|
$
|
15,533,500
|
$
|
--
|
$
|
--
|
|||||
|
Loss
from discontinued operations
|
||||||||||
|
Rocky
Mountain Gas
|
||||||||||
|
Revenues
|
$
|
1,110,100
|
$
|
3,826,100
|
$
|
201,900
|
||||
|
Expenditures
|
(1,309,000
|
)
|
(5,502,300
|
)
|
(2,373,100
|
)
|
||||
|
Other
|
(127,200
|
)
|
(262,300
|
)
|
460,600
|
|||||
|
$
|
(326,100
|
)
|
$
|
(1,938,500
|
)
|
$
|
(1,710,600
|
)
|
||
|
Canyon
Homesteads
|
||||||||||
|
Revenues
|
$
|
--
|
$
|
--
|
$
|
316,300
|
||||
|
Expenditures
|
--
|
--
|
(666,100
|
)
|
||||||
|
Other
|
--
|
--
|
--
|
|||||||
|
$
|
-- |
$
|
--
|
$
|
(349,800
|
)
|
||||
| Total loss from discontinued operations |
$
|
15,207,400
|
$
|
(1,938,500
|
)
|
$
|
(2,060,400
|
)
|
||
-92-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
M. SELECTED
QUARTERLY FINANCIAL DATA (Unaudited)
|
U.S.
ENERGY CORP.
|
|||||||||||||
|
SELECTED
QUARTERLY FINANCIAL DATA (Unaudited)
|
|||||||||||||
|
Three
Months Ended
|
|||||||||||||
|
December
31,
|
September
30,
|
June
30,
|
March
31,
|
||||||||||
|
2005
|
2005
|
2005
|
2005
|
||||||||||
|
(Restated)
|
(Restated)
|
(Restated)
|
(Restated)
|
||||||||||
|
Operating
revenues
|
$
|
157,500
|
$
|
167,100
|
$
|
183,500
|
$
|
341,400
|
|||||
|
Operating
loss
|
$
|
(980,400
|
)
|
$
|
(1,481,600
|
)
|
$
|
(2,420,900
|
)
|
$
|
(1,184,000
|
)
|
|
|
Gain
(loss) from continuing operations
|
$
|
(4,503,000
|
)
|
$
|
1,228,600
|
$
|
(1,819,100
|
)
|
$
|
(1,272,400
|
)
|
||
|
Discontinued
operations, net of tax
|
$
|
--
|
$
|
(188,100
|
)
|
$
|
15,721,600
|
$
|
(326,100
|
)
|
|||
|
Net
gain (loss)
|
$
|
(4,503,000
|
)
|
$
|
1,040,500
|
$
|
13,902,500
|
$
|
(1,598,500
|
)
|
|||
|
Gain
(loss) per share, basic
|
|||||||||||||
|
Continuing
operations
|
$
|
(0.26
|
)
|
$
|
0.06
|
$
|
(0.12
|
)
|
$
|
(0.09
|
)
|
||
|
Discontinued
operations
|
$
|
--
|
$
|
(0.01
|
)
|
$
|
1.02
|
$
|
(0.02
|
)
|
|||
|
$
|
(0.26
|
)
|
$
|
0.06
|
$
|
0.91
|
$
|
(0.11
|
)
|
||||
|
Basic
weighted average
|
|||||||||||||
|
shares
outstanding
|
17,624,085
|
17,229,336
|
15,352,966
|
14,398,093
|
|||||||||
|
Gain
(loss) per share, diluted
|
|||||||||||||
|
Continuing
operations
|
$
|
(0.25
|
)
|
$
|
0.07
|
$
|
(0.12
|
)
|
$
|
(0.09
|
)
|
||
|
Discontinued
operations
|
$
|
--
|
$
|
(0.01
|
)
|
$
|
1.00
|
$
|
(0.02
|
)
|
|||
|
$
|
(0.25
|
)
|
$
|
0.06
|
$
|
0.88
|
$
|
(0.11
|
)
|
||||
|
Diluted
weighted average
|
|||||||||||||
|
shares
outstanding
|
18,066,825
|
17,672,076
|
15,795,706
|
14,398,093
|
|||||||||
-93-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
|
U.S.
ENERGY CORP.
|
|||||||||||||
|
SELECTED
QUARTERLY FINANCIAL DATA (Unaudited)
|
|||||||||||||
|
Three
Months Ended
|
|||||||||||||
|
December
31,
|
September
30,
|
June
30,
|
March
31,
|
||||||||||
|
2004
|
2004
|
2004
|
2004
|
||||||||||
|
Operating
revenues
|
$
|
264,500
|
$
|
272,300
|
$
|
141,600
|
$
|
137,200
|
|||||
|
Operating
loss
|
$
|
(1,124,400
|
)
|
$
|
(1,147,500
|
)
|
$
|
(1,273,100
|
)
|
$
|
(1,438,100
|
)
|
|
|
Loss
from continuing operations
|
$
|
(982,800
|
)
|
$
|
(1,164,800
|
)
|
$
|
(863,400
|
)
|
$
|
(1,299,200
|
)
|
|
|
Discontinued
operations, net of tax
|
$
|
(277,600
|
)
|
$
|
(439,300
|
)
|
$
|
(745,800
|
)
|
$
|
(475,800
|
)
|
|
|
Net
loss
|
$
|
(1,260,400
|
)
|
$
|
(1,604,100
|
)
|
$
|
(1,609,200
|
)
|
$
|
(1,775,000
|
)
|
|
|
Loss
per share, basic
|
|||||||||||||
|
Continuing
operations
|
$
|
(0.07
|
)
|
$
|
(0.09
|
)
|
$
|
(0.07
|
)
|
$
|
(0.10
|
)
|
|
|
Discontinued
operations
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
$
|
(0.06
|
)
|
$
|
(0.04
|
)
|
|
|
$
|
(0.09
|
)
|
$
|
(0.12
|
)
|
$
|
(0.13
|
)
|
$
|
(0.14
|
)
|
||
|
Basic
weighted average
|
|||||||||||||
|
shares
outstanding
|
14,023,456
|
13,490,917
|
12,873,194
|
12,319,657
|
|||||||||
|
Loss
per share, diluted
|
|||||||||||||
|
Continuing
operations
|
$
|
(0.07
|
)
|
$
|
(0.09
|
)
|
$
|
(0.07
|
)
|
$
|
(0.11
|
)
|
|
|
Discontinued
operations
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
$
|
(0.06
|
)
|
$
|
(0.04
|
)
|
|
|
$
|
(0.09
|
)
|
$
|
(0.12
|
)
|
$
|
(0.13
|
)
|
$
|
(0.14
|
)
|
||
|
Diluted
weighted average
|
|||||||||||||
|
shares
outstanding
|
14,023,456
|
13,490,917
|
12,873,194
|
12,319,657
|
|||||||||
-94-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
|
U.S.
ENERGY CORP.
|
|||||||||||||
|
SELECTED
QUARTERLY FINANCIAL DATA (Unaudited)
|
|||||||||||||
|
Three
Months Ended
|
|||||||||||||
|
December
31,
|
September
30,
|
June
30,
|
March
31,
|
||||||||||
|
2003
|
2003
|
2003
|
2003
|
||||||||||
|
Operating
revenues
|
$
|
125,600
|
$
|
123,400
|
$
|
171,700
|
$
|
214,800
|
|||||
|
Operating
loss
|
$
|
(1,465,500
|
)
|
$
|
(1,836,100
|
)
|
$
|
(814,400
|
)
|
$
|
(950,800
|
)
|
|
|
Loss
earnings from continuing operations
|
$
|
(1,640,700
|
)
|
$
|
(1,782,100
|
)
|
$
|
(834,900
|
)
|
$
|
(1,107,600
|
)
|
|
|
Discontinued
operations, net of tax
|
$
|
(264,900
|
)
|
$
|
(199,600
|
)
|
$
|
(1,396,600
|
)
|
$
|
(199,300
|
)
|
|
|
Cumulate
effect of accounting change
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
1,615,600
|
|||||
|
Net
earnings (loss)
|
$
|
(1,905,600
|
)
|
$
|
(1,981,700
|
)
|
$
|
(2,231,500
|
)
|
$
|
308,700
|
||
|
(Loss)
earnings per Share, basic
|
|||||||||||||
|
Continuing
operations
|
$
|
(0.15
|
)
|
$
|
(0.16
|
)
|
$
|
(0.07
|
)
|
$
|
(0.10
|
)
|
|
|
Discontinued
operations
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
$
|
(0.13
|
)
|
$
|
(0.02
|
)
|
|
|
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
|
10,967,229
|
10,881,394
|
|||||||||
|
(Loss)
earnings per Share, diluted
|
|||||||||||||
|
Continuing
operations
|
$
|
(0.15
|
)
|
$
|
(0.16
|
)
|
$
|
(0.07
|
)
|
$
|
(0.10
|
)
|
|
|
Discontinued
operations
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
$
|
(0.13
|
)
|
$
|
(0.02
|
)
|
|
|
Cumulative
effect of
|
|||||||||||||
|
accounting
change
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
0.14
|
|||||
|
$
|
(0.17
|
)
|
$
|
(0.18
|
)
|
$
|
(0.20
|
)
|
$
|
0.03
|
|||
|
Diluted
weighted average
|
|||||||||||||
|
shares
outstanding
|
11,383,576
|
11,127,796
|
10,967,229
|
11,385,593
|
|||||||||
-95-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
N. SUBSEQUENT
EVENTS
Uranium
Power Corp
On
January 13, 2006, USECC amended their December 8, 2004 Purchase and Sale
Agreement with UPC. UPC has paid USECC $2,152,000 pursuant to the amendment.
| · |
The
original agreement required UPC to pay USECC $800,000 and issue 750,000
shares of UPC stock on June 29, 2006, and pay an additional $800,000
and
issue 750,000 more shares of UPC stock on December 29, 2006. UPC
has paid
the $1.6 million cash and the 1.5 million shares will be issued to
USE and
Crested in equal amounts of 750,000
shares.
|
| · |
The
original agreement required UPC to pay to USECC $1.5 million on April
29,
2006, and an additional $1.5 million on October 29, 2006. This payment
schedule has been extended one year, to require the payments on April
29,
2007 and October 29, 2007, provided that UPC is required to pay 50%
of all
money it raises after January 13, 2006 until the two $1.5 million
payments
are made, regardless of the one year extension.
|
| · |
The
amendment requires UPC to pay USECC the $152,011.89 outstanding balance
for the 2005 uranium property drilling program and an additional
$400,000
of $775,440 budgeted for the first half of the 2006 drilling program.
UPC
has paid this $552,011.89.
|
The
original agreement required UPC to pay a total of $4,050,000 and 4 million
shares of UPC stock. However, the cash portion was subject to increase by $3
million (in two $1.5 million installments) if the uranium oxide price (long
term
indicator) attained or exceeded $30.00/lb for four consecutive weeks. This
price
benchmark was achieved on June 20, 2005, which resulted in the two $1.5 million
payments being required on April 29 and October 29, 2006.
The
original agreement required two additional payments each of $800,000 cash and
750,000 UPC shares (total $1,600,000 cash and 1,500,000 UPC shares) due on
June
29, 2007 and December 29, 2007. These payment requirements have not been amended
and remain due in accordance with the original agreement.
As
provided for in the original agreement, UPC would own nothing in the properties
subject to the agreement if UPC fails to make any payments on time.
Plateau
- Ticaboo Property
On
February 27, 2006, Plateau Resources Limited (“Plateau”) re-acquired by
Foreclosure Sale the Ticaboo town site operations (“Ticaboo”) located in
southern Utah near Lake Powell. The Ticaboo property includes a motel,
restaurant and lounge, convenience store, recreational boat storage and service
facility, and improved residential and mobile home lots. Most of these
properties had been acquired when the Shootaring Mill was acquired in
1993.
Plateau
sold its interests in the Ticaboo town-site to The Cactus Group (“Cactus”), a
non-affiliated entity in 2003. Plateau carried the loan, which had a balance
due
on February 27, 2006 of approximately $3.0 million at 7.5% annual interest.
Total due by Cactus under the terms of the note including default interest
and
late charges was $3,772,000.
-96-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
USE
and
Plateau will evaluate the property and determine the costs associated with
the
returned properties including deferred maintenance and operations that may
be
necessary until such time as the assets can be sold or leased. Until an actual
detailed inspection of the properties is made it is not possible to estimate
what the remedial costs and expenses may be.
At
date
of filing this Annual Report, management of the Company determined that it
will
not operate the property. Management is seeking proposals from third parties
to
either manage or purchase the properties. As a result of receiving the
properties back the Company showed the remaining value of the note net of the
deferred gain on the sale of the properties as a long term asset of $1,819,700
at December 31, 2005. The Company has an appraisal and cost data which exceed
that amount.
Lucky
Jack Molybdenum Project
The
Company and Crested re-acquired the Lucky Jack molybdenum project, formerly
known as the Mt. Emmons molybdenum properties, located near Crested Butte,
Colorado on February 28, 2006. The property was returned to the Company and
Crested by Phelps Dodge Corporation (“PD”) in accordance with a 1987 Amended
Royalty Deed and Agreement between the Company, Crested and Amax Inc. (“Amax”).
The Lucky Jack project includes a total of 25 patented and approximately 520
unpatented mining claims, which together approximate 5,400 acres, or over 8
square miles of mining claims.
The
Company and Crested leased various patented and unpatented mining claims on
the
Lucky Jack project to Amax in 1974. In the late 1970s, Amax delineated a large
deposit of molybdenum on the properties, reportedly containing approximately
155
million tons of mineralized material averaging 0.44% molybdenum disulfide
(MoS2). In 1980, Amax constructed a water treatment plant at the Lucky Jack
project to treat water flowing from old mine workings and for potential use
in
milling operations. By 1983, Amax had reportedly spent an estimated $150 million
in the acquisition of the property, securing water rights, extensive
exploration, ore body delineation, mine planning, metallurgical testing and
other activities involving the mineral deposit. Amax was merged into Cyprus
Minerals in 1992 to form Cyprus Amax. PD then acquired the Lucky Jack project
in
1999 through its acquisition of Cyprus Amax. Thereafter, PD acquired additional
water rights to mine and mill the deposit.
Conveyance
of the property to the Company and Crested also includes the transfer of
ownership and operational responsibility of the mine water treatment plant
located on the properties. The water treatment permit issued under the Colorado
Discharge Permit System (“CDPS”) was assigned to the Company and Crested by the
Colorado Department of Health and Environment. Operating costs for the water
treatment plant are expected to approximate $1 million annually. In an effort
to
assure continued compliance, the Company and Crested have retained the technical
expert and contractor hired by PD on January 2, 2006 to operate the water
treatment plant. The Company and Crested will also evaluate the potential use
of
the water treatment plant in milling operations.
-97-
U.S.
ENERGY CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004 and 2003
(continued)
In
a
letter dated April 2, 2004, the Bureau of Land Management (the “BLM”) of the
United States Department of the Interior, estimated that there were about 23
million tons of mineable reserves containing 0.689% molybdenite, and that about
267 million pounds of molybdenum trioxide was recoverable. This report covered
only the high-grade mineralization which is only a portion of the total mineral
deposit delineated to date. The BLM relied on a mineral report prepared by
Western Mine Engineering (WME) for the U.S. Forest Service, which directed
and
administered the WME contract. WME’s analysis was based upon a price of $4.61
per pound of molybdic oxide and was used by BLM in determining that the nine
claims satisfied the patenting requirements that the mining claims contain
a
valuable mineral that could be mined profitably. At February 28, 2006, molybdic
oxide traded at $24.00 per pound. WME consulted a variety of sources in
preparation of its report, including a study prepared in 1990 by American Mine
Services, Inc. and a pre-feasibility report prepared by Behre Dolbear &
Company, Inc. of Denver, CO in 1998. In its 1992 patent application to the
BLM,
Amax stated that the size and grade of the Lucky Jack deposit was determined
to
approximate 220 million tons grading 0.366% molybdenite.
In
the
April 2, 2004 decision letter, the BLM issued patents on the nine additional
mining claims, for a total of 25 patented claims which consists of approximately
350 patented or “fee” acres. A lawsuit was filed by local governmental entities
and environmentalists in U.S. District Court of Colorado challenging BLM’s
issuance of the patents alleging BLM violated the 1872 Mining Law, applicable
regulations, and the Administrative Procedures Act by overruling their protests
to Lucky Jack mineral patent application, awarding the patents, and by conveying
the land to Lucky Jack. The case is High
Country Citizen’s Alliance, Town of Crested Butte, Colorado, and The Board of
County Commissioners of the County of Gunnison, Colorado v. Kathleen Clarke,
Director of the Bureau of Land Management et. al., Gale Norton, Secretary of
Interior, U.S. Department of the Interior; Phelps Dodge Corporation; Mt. Emmons
Mining Company.
USE and
Crested are not parties to this litigation.
On
January 12, 2005, U.S. District Court Judge Krieger dismissed the plaintiffs
appeal holding 1) that the plaintiffs had no right of appeal from a decision
to
issue a mineral patent because the 1872 Mining Law created no private cause
of
action for unrelated parties to challenge the issuance of a mineral patent
and
2) because the 1872 Mining Law implicitly precludes unrelated third parties
from
challenging mineral patent by judicial action, the Administrative Procedures
Act
does not constitute a waiver of sovereign immunity for purposes of this action.
Plaintiffs have filed an appeal of the U.S. District Court’s decision to the
10th
Circuit
Court of Appeals in Case No: 05-1085. Briefs have been filed by the parties
and
oral arguments were heard on January 9, 2006. The case is currently
pending.
The
Company and Crested have decided to pursue permitting and development of the
property and are now engaged in the active pursuit of a sizable mining industry
partner to co-develop and mine the property. The Company and Crested are
considering the commissioning of a full mining feasibility study of the property
in light of the fact that the price of molybdic oxide was at $24.00 per pound
according to Metal Prices.com on February 24, 2006. The Company and Crested
expect to transfer the Lucky Jack molybdenum project to a new subsidiary, U.S.
Moly Corp. in the near future.
-98-
REPORT
OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM ON SCHEDULE
Board
of
Directors and Shareholders
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. In our opinion, this
schedule presents fairly, in all material respects, the information to be set
forth therein.
/s/
GRANT
THORNTON LLP
Oklahoma
City, Oklahoma
February
27, 2004
-99-
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
|
||||||||||
|
December
31, 2003
|
$
|
27,800
|
--
|
--
|
$
|
27,800
|
|||||||
|
December
31, 2004
|
$
|
111,300
|
--
|
--
|
111,300
|
||||||||
|
December
31, 2005
|
$
|
111,300
|
--
|
--
|
$
|
111,300
|
|||||||
ITEM
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not
applicable.
ITEM
9A. Controls and Procedures
The
Company’s Principal Executive Officer and Principal Financial Officer have
reviewed and evaluated the effectiveness of the Company’s disclosure controls
and procedures (as defined in Exchange Act Rule 240.13a-15(e)) as of the end
of
the period covered by this report. Based on that evaluation, the Principal
Executive Officer and the Principal Financial Officer have concluded that the
Company’s current disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in reports it files
or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange commission’s
rules and forms. There was no change in the Company’s internal controls that
occurred during the further quarter of the period covered by this report that
has materially affected, or is reasonably likely to affect, the Company’s
internal controls over financial reporting.
ITEM
9B. Other Information
None
-100-
PART
III
In
the
event a definitive proxy statement containing the information being incorporated
by reference into this Part III is not filed within 120 days of December 31,
2005, we will file such information under cover of a Form 10-K/A.
ITEM
10. Directors and Executive officers of the Registrant.
The
information required by Item 10 with respect to directors and certain executive
officers is incorporated herein by reference to our Proxy Statement for the
Meeting of Shareholders to be held in June 2006, under the captions Proposal
1:
Election of Directors, Filing of Reports Under Section 16(a), and Business
Experience and Other Directorships of Directors and Nominees.
The
Company has adopted a Code of Ethics. A copy of the Code of Ethics will be
provided to any person without charge upon written request addressed to Daniel
P. Svilar, Secretary, 877 North 8th
West,
Riverton, Wyoming 82501.
Information
Concerning Executive Officers Who are Not Directors.
The
following are the three executive officers of USE as of the date of this Form
10-K; these persons devote their full time to the Company’s
business.
Mark
J. Larsen,
age 43,
was the President of RMG until it was sold on June 1, 2005. Mr. Larsen became
President and COO of the Company after June 1, 2005. He is the President of
U.S.
Moly Corp. Mr. Larsen graduated from the University of Wyoming with a Bachelors
Degree in Business Administration. Mr. Larsen is the son of John L. Larsen
who
serves as Chairman Emeritus and also the brother of Keith G. Larsen who is
the
CEO and Chairman. During the past five years, Mr. Larsen has not been involved
in any Reg. S-K Item 40(f) listed proceedings.
Robert
Scott Lorimer,
age 55,
has been the Chief Accounting Officer for both USE and Crested for more than
the
past five years. Mr. Lorimer also has been Chief Financial Officer for both
these companies since May 25, 1991, their Treasurer since December 14, 1990,
and
Vice President Finance since April 1998. He serves at the will of each board
of
directors. There are no understandings between Mr. Lorimer and any other person,
pursuant to which he was named as an officer, and he has no family relationship
with any of the other executive officers or directors of USE or Crested. During
the past five years, Mr. Lorimer has not been involved in any Reg. S-K Item
40(f) listed proceeding.
Daniel
P. Svilar,
age 77,
has been General Counsel for USE and Crested for more than the past five years.
He also has served as Corporate Secretary and a director of Crested, and
Assistant Secretary of USE. On March 25, 2002, Mr. Svilar was appointed
Corporate Secretary of USE. His positions of General Counsel to, and as officers
of the companies, are at the will of each board of directors. There are no
understandings between Mr. Svilar and any other person pursuant to which he
was
named as officer or General Counsel. He has no family relationships with any
of
the other executive officer or directors of USE or Crested. During the past
five
years, Mr. Svilar has not been involved in any Reg. S-K Item 401(f)
proceeding.
-101-
ITEM
11. Executive Compensation.
The
information required by Item 11 is incorporated herein by reference to the
proxy
Statement for the Meeting of Shareholders to be held in June 2006, under the
captions Executive Compensation and Director's Fees and Other
Compensation.
ITEM
12. Security Ownership Of Certain Beneficial Owners and Management and Related
Stockholders matters.
The
information required by Item 12 is incorporated herein by reference to the
Proxy
Statement for the Meeting of Shareholders to be held in June 2006, under the
caption "Principal Holders of Voting Securities."
ITEM
13. Certain Relationships and Related Transactions.
The
information required by Item 13 is incorporated herein by reference to the
Proxy
Statement for the Meeting of Shareholders to be held in June 2006, under the
caption Certain Relationships and Related Transactions.
ITEM
14. Principal Accountant Fees and Services
(1)
- (4)
Grant Thornton LLP billed us as follows for the year ended December 31, 2004.
Grant Thornton was dismissed as the Company’s audit firm in December 2004. The
information for 2004 includes fees paid to the new audit firm (Epstein, Weber
& Conover, PLC) in late 2004. EW&C billed us as follows for the audit of
the December 31, 2005 financial statements and other audit-related
work.
|
Year
ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Audit
fees (a)
|
$
|
103,830
|
$
|
115,300
|
|||
|
Audit-related
fees(b)
|
$
|
6,500
|
$
|
27,200
|
|||
|
Tax
fees(c )
|
$
|
$33,700
|
|||||
|
All
other fees(d)
|
$
|
$40,400
|
|||||
(a)
Includes
fees for audit of the annual financial statements and review of quarterly
financial information filed with the Securities and Exchange Commission
("SEC").
(b)
For
assurance and related services that were reasonably related to the performance
of the audit or review of the financial statements, which fees are not included
in the Audit Fees category.
(c)
For tax
compliance, tax advice, and tax planning services, relating to any and all
federal and state tax returns as necessary for the years ended December 31,
2004
and 2005.
(d)
For
services in respect of other reports required to be filed by the SEC and other
agencies.
-102-
(5)(i)
The audit committee approves the terms of engagement before we engage the audit
firm for audit and non-audit services, except as to engagements for services
outside the scope of the original terms, in which instances the services have
been provided pursuant to pre-approval policies and procedures, established
by
the audit committee. These pre-approval policies and procedures are detailed
as
to the category of service and the audit committee is kept informed of each
service provided. These policies and procedures, and the work performed pursuant
thereto, do not include any delegation to management of the audit committee's
responsibilities under the Securities Exchange Act of 1934.
This
approval process was used with respect to the engagement of Epstein Weber &
Conover for the audit of the 2005 financial statements and related services
for
the quarterly reviews of in 2005.
(5)(ii)
The percentage of services provided for Audit-Related Fees, Tax Fees and All
Other Fees for 2005 (and 2004), all provided pursuant to the audit committee’s
pre-approval policies and procedures, were: Audit-Related Fees 100% (66%);
Tax
Fees 0% (15%); and All Other Fees 0% (19%).
-103-
|
ITEM
15. Exhibits, Financial Statements, Schedules, Reports and Forms
8-K.
(a) Financial Statements and Exhibits (1) The following financial
statements are filed as a part of the Report in Item 8:
|
||||
|
Page
No.
|
||||
|
Consolidated
Financial Statements U.S. Energy Corp. and Subsidiaries
|
56
|
|||
|
Report
of Independent Registered Public Accounting Firm Epstein, Weber &
Conover
|
57
|
|||
|
Report
of (former) Independent Registered Public Accounting Firm Grant Thornton,
LLP
|
58
|
|||
|
Consolidated
Balance Sheets - December 31, 2005 and December 31, 2004
|
59-60
|
|||
|
Consolidated
Statement of Operations for the Years Ended December 31, 2005, 2004
and
2003,
|
61-62
|
|||
|
Consolidated
Statements of Shareholders' Equity for the Years Ended December 31,
2005,
2004 and 2003
|
63-66
|
|||
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2005, 2004
and
2003
|
67-69
|
|||
|
Notes
to Consolidated Financial Statements
|
70-115
|
|||
|
Report
of Independent Certified Public Accountants on Schedule
|
116
|
|||
|
Schedule
II - Valuation and Qualifying Accounts
|
117
|
|||
|
(2)
All other schedules have been omitted because the required information
in
inapplicable or is shown in the notes to financial
statements.
(3)
Exhibits
|
||||
|
Exhibit
No.
|
Title
of Exhibit
|
Sequential
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 October 14, 2005
|
[6]
|
||
|
4.1
|
Amendment
to USE 1998 Incentive Stock Option Plan
|
[11]
|
||
|
4.2
|
USE
2001 Incentive Stock Option Plan (amended in 2003) and Form of Stock
Option Agreement
|
[7]
|
||
|
4.3-4.10
|
[intentionally
left blank]
|
|||
-104-
|
4.11
|
Rights
Agreement, dated as of September 19, 2001, and amended as of September
30,
2005, between U.S. Energy Corp. and Computershare Trust Company,
Inc. as
Rights Agent. The Articles of Amendment of Articles of Incorporation
creating the Series A 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]
|
|
4.12-4.20
|
[intentionally
left blank]
|
|
|
4.21
|
USE
2001 Officers' Stock Compensation Plan
|
[18]
|
|
4.22-4.30
|
[intentionally
left blank]
|
|
|
10.1
|
Securities
Purchase Agreement for $4.72 million debentures (February
2005)
|
[8]
|
|
10.2
|
Form
of Debenture (February 2005)
|
[8]
|
|
10.2(a)
|
Form
of Warrant (February 2005)
|
[8]
|
|
10.3-
10.5
|
[intentionally
left blank]
|
|
|
10.6
|
Purchase
and Sale Agreement (without exhibits) - Bell Coast Capital, n/k/a/
Uranium
Power Corp. (December 2004)
|
[8]
|
|
10.6(a)
|
Amendment
to Purchase and Sale Agreement with Bell Coast Capital, n/k/a Uranium
Power Corp.
|
[13]
|
|
10.7
|
Mining
Venture Agreement (without exhibits) - Uranium Power Corp. (April
2005)
|
[8]
|
|
10.8
|
Pre-Acquisition
Agreement, (without exhibits) Enterra Energy Trust, Dated as of April
11,
2005
|
[8]
|
|
10.9
|
Amendment
to Pre-Acquisition Agreement
|
[10]
|
|
14.0
|
Code
of Ethics
|
[6]
|
|
21.1
|
Subsidiaries
of Registrant
|
[11]
|
|
31.1
|
Certification
under Rule 13a-14(a) Keith G. Larsen
|
*
|
|
31.2
|
Certification
under Rule 13a-14(a) Robert Scott Lorimer
|
*
|
|
32.1
|
Certification
under Rule 13a-14(b) Keith G. Larsen
|
*
|
|
32.2
|
Certification
under Rule 13a-14(b) Robert Scott Lorimer
|
*
|
|
*
Filed herewith
|
||
-105-
|
[1]
|
Intentionally
left blank.
|
|
[2]
|
Incorporated
by reference from the like-numbered exhibit to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 1990, filed September
14,
1990.
|
|
[3]
|
Intentionally
left blank.
|
|
[4]
|
Incorporated
by reference from the like-numbered exhibit to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 1992, filed September
14,
1991.
|
|
[5]
|
Intentionally
left blank.
|
|
[6]
|
Incorporated
by reference from exhibit (c)(2) to the Registrant's Form 8-K, filed
November 17, 2005.
|
|
[7]
|
Incorporated
by reference from exhibit 4.2 to the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2004, filed April 15,
2005.
|
|
[8]
|
Incorporated
by reference from like-numbered to the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2004, filed April 15,
2005.
|
|
[9]
|
Incorporated
by reference from the like-numbered exhibit to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 1998, filed September
14,
1998.
|
|
[10]
|
Incorporated
by reference from exhibit 2 to the Registrant’s Form 8-k, filed June 7,
2005.
|
|
[11]
|
Incorporated
by reference from the like-numbered exhibit to the Registrant's Annual
Report on Form 10-K for the year ended on May 31, 2001, filed August
29,
2001, and amended on June 18, 2002 and September 25,
2002.
|
|
[12]
|
Incorporated
by reference to exhibit number 4.1 to the Registrant's Form 8A/A,
filed
November 17, 2005
|
|
[13]
|
Incorporated
by reference from exhibit (b) to the Registrant’s Form 8-K filed January
17, 2006.
|
|
[14]
|
Incorporated
by reference from the like-numbered exhibit to the Registrant's Form
S-3
registration statement (SEC File No. 333-75864), filed December 21,
2001.
|
|
[15]
|
Intentionally
left blank.
|
|
[16]
|
Intentionally
left blank.
|
|
[17]
|
Intentionally
left blank.
|
|
[18]
|
Incorporated
by reference from the like-numbered exhibit to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 2002, filed September
13,
2002.
|
|
[19]
|
Intentionally
left blank.
|
|
[20]
|
Intentionally
left blank.
|
-106-
|
[21]
|
Intentionally
left blank.
|
|
[22]
|
Intentionally
left blank.
|
|
[23]
|
Intentionally
left blank.
|
|
[24]
|
Intentionally
left blank.
|
|
(b)
|
Reports
on Form 8-K. In the last quarter of 2004, the Registrant filed two
Reports
on Form 8-K, one on December 13, 2004 for an Item 1.01 event and
one on
December 22, 2004 for an Item 4.01
event.
|
|
(c)
|
See
paragraph a(3) above for exhibits.
|
|
(d)
|
Financial
statement schedules, see above. No other financial statements are
required
to be filed.
|
-107-
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
|
U.S.
ENERGY CORP. (Registrant)
|
|||
|
Date:
March 31, 2006
|
By:
|
/s/
Keith G. Larsen
|
||
|
KEITH
G. LARSEN, Chief Executive Officer
|
||||
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report
has been signed below by the following person on behalf of the Registrant
and in the capacities and on the dates indicated.
|
||||
|
Date:
March 31, 2006
|
By:
|
/s/
John L. Larsen
|
||
|
JOHN
L. LARSEN, Director
|
||||
|
Date:
March 31, 2006
|
By:
|
/s/
Keith G. Larsen
|
||
|
KEITH
G. LARSEN, Director
|
||||
|
Date:
March 31, 2006
|
By:
|
/s/
Harold F. Herron
|
||
|
HAROLD
F. HERRON, Director
|
||||
|
Date:
March 31, 2006
|
By:
|
/s/
Don C. Anderson
|
||
|
DON
C. ANDERSON, Director
|
||||
|
Date:
March 31, 2006
|
By:
|
/s/
H. Russell Fraser
|
||
|
H.
RUSSELL FRASER, Director
|
||||
|
Date:
March 31, 2006
|
By:
|
/s/
Michael T. Anderson
|
||
|
MICHAEL
T. ANDERSON, Director
|
||||
|
Date:
March 31, 2006
|
By:
|
/s/
Michael H. Feinstein
|
||
|
MICHAEL
H. FEINSTEIN, Director
|
||||
|
Date:
March 31, 2006
|
By:
|
/s/
Robert Scott Lorimer
|
|
|
|
ROBERT
SCOTT LORIMER
|
||||
|
Principal
Financial Officer/
|
||||
|
Chief
Accounting Officer
|
||||
-108-
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